Fox Corporation 10-Q Summary
Business context and reporting period
For the quarter and six months ended December 31, 2018 (Fox fiscal Q2 and first half of fiscal 2019), Fox reported combined carve-out results for news, sports and broadcast businesses then held by Twenty-First Century Fox (21CF). The figures are not necessarily representative of Fox’s results as a standalone company; certain 21CF corporate expenses were allocated to Fox. The planned separation and distribution were anticipated for March 19, 2019, ahead of 21CF’s merger with Disney.
Financial performance and position
| Metric (USD millions, except percentages) | Quarter 2018 | Quarter 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | 3,583 | 3,108 | 6,124 | 5,296 |
| Segment OIBDA | 445 | 473 | 1,206 | 1,146 |
| Net income | 24 | 882 | 639 | 1,282 |
| Net income attributable to Fox | 8 | 869 | 612 | 1,259 |
| Operating cash flow | Not stated quarterly | 36 | (35) |
Quarterly revenue rose 15%, while Segment OIBDA fell 6%; the corresponding six-month changes were revenue up 16% and OIBDA up 5%. Segment OIBDA margin was approximately 12.4% for the quarter versus 15.2% a year earlier, and 19.7% for the six months versus 21.6%. Net income attributable to Fox fell sharply in both periods, principally reflecting the prior-year tax benefit, alongside separation-related costs and investment losses.
At December 31, cash and cash equivalents were $1.951 billion, down from $2.500 billion at June 30. Current assets were $5.877 billion and current liabilities $1.241 billion. Total assets were $13.466 billion; the balance sheet reported no separate borrowings line at that date. Six-month investing cash flow was negative $251 million (prior year positive $239 million), and financing cash flow was negative $334 million (prior year negative $167 million). Cash declined $549 million during the period.
In January 2019, Fox issued approximately $6.8 billion of senior notes, with maturities from 2022 to 2049 and stated coupons of 3.666% to 5.576%. In March, it entered into a $1.0 billion revolving facility and a $1.7 billion bridge agreement; neither had borrowings outstanding as of March 18, 2019. The planned $8.5 billion dividend to 21CF was to be funded with the notes, available cash and, if needed, credit facilities. A possible Disney cash payment after the transaction was capped at $2 billion and dependent on the final transaction-tax estimate.
Material changes and segment trends
- Advertising and affiliate-fee revenue drove overall growth. Advertising benefited from Thursday Night Football on Fox, U.S. midterm political spending and, in the first half, FIFA World Cup broadcasts. Affiliate fees increased with contractual rate rises and renewals.
- Cable Network Programming revenue increased 9% for the quarter and 10% for the six months; OIBDA rose 12% and 11%, respectively, supported by affiliate fees and news-channel advertising. Costs included sports rights, MLB and other programming, direct-to-consumer launch costs, and election coverage.
- Television revenue rose 20% in both periods, but quarterly OIBDA turned to a $14 million loss from $62 million of income. Six-month OIBDA declined 16% to $157 million. Higher sports programming and production costs, including TNF and FIFA World Cup rights, weighed on results.
- Other, Corporate and Eliminations OIBDA was negative $60 million for the quarter and negative $103 million for the six months, including higher corporate costs.
Outlook, risks and unusual items
- Management expected Cable Network Programming affiliate-fee growth to meaningfully decelerate in the remaining six months of fiscal 2019 as prior-year contractual rate increases rolled into comparisons. No quantified company-wide earnings or revenue guidance is provided.
- Quarterly “Other, net” expense was $339 million, including $255 million of unrealized losses on the Roku investment and $38 million of separation and transaction costs. For the six months, “Other, net” expense was $200 million, including $72 million of unrealized investment losses and $78 million of transaction costs. These items, along with the prior-year $624 million provisional Tax Act benefit, materially affect year-over-year earnings comparisons.
- Firm contractual commitments were approximately $34 billion at December 31, 2018, up from $32 billion at June 30, primarily reflecting an expanded, multi-year MLB rights arrangement through the 2028 season. Management also cited plans to invest approximately $150 million to $200 million in standalone technical facilities.
- In February 2019, an arbitrator awarded approximately $129 million in punitive damages in litigation concerning profits from the television series Bones. Fox and other defendants sought to vacate the award; plaintiffs sought confirmation. Fox would bear a portion if sustained, and a court hearing was scheduled for April 29, 2019.
- Fox disclosed ongoing FOX News-related harassment and discrimination claims and investigations; it said amounts paid or reserved were not material to date, but potential liability could not be estimated. It also recorded a $45 million liability for the U.K. Newspaper Matters indemnity at December 31.
- Other risks include the costs and execution of becoming a standalone public company, reliance on 21CF transition services, advertising-market changes, affiliate and carriage renewals, sports-rights costs, regulation, and content and technology disruption. Fox stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Completion terms and actual cash impact of the separation, distribution, $8.5 billion dividend, and any Disney cash payment.
- Post-separation debt, interest expense, liquidity and covenant headroom after the senior-note issuance and any use of the revolving or bridge facilities.
- Whether affiliate-fee growth decelerates as management anticipated, and whether advertising gains from sports and political events recur.
- Final resolution and Fox’s share of the Bones award, plus developments in FOX News-related matters and other indemnity or tax contingencies.
- Standalone operating costs, including technical-facility investment and the impact of the $34 billion contractual commitment base.