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FOXA > SEC Filings for FOXA > Form 10-Q on 6-Nov-2013All Recent SEC Filings

Show all filings for TWENTY-FIRST CENTURY FOX, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for TWENTY-FIRST CENTURY FOX, INC.


6-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This document contains statements that constitute "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Section 27A of the Securities Act of 1933, as amended. The words "expect," "estimate," "anticipate," "predict," "believe" and similar expressions and variations thereof are intended to identify forward-looking statements. These statements appear in a number of places in this document and include statements regarding the intent, belief or current expectations of Twenty-First Century Fox, Inc., its directors or its officers with respect to, among other things, trends affecting Twenty-First Century Fox, Inc.'s financial condition or results of operations. The readers of this document are cautioned that any forward-looking statements are not guarantees of future performance and involve risks and uncertainties. More information regarding these risks, uncertainties and other factors is set forth under the heading Part II "Other Information," Item 1A "Risk Factors" in this report. Twenty-First Century Fox, Inc. does not ordinarily make projections of its future operating results and undertakes no obligation (and expressly disclaims any obligation) to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Readers should carefully review this document and the other documents filed by Twenty-First Century Fox, Inc. with the Securities and Exchange Commission (the "SEC"). This section should be read together with the unaudited consolidated financial statements of Twenty-First Century Fox, Inc. and related notes set forth elsewhere herein and Twenty-First Century Fox, Inc.'s Annual Report on Form 10-K for the fiscal year ended June 30, 2013 as filed with the SEC on August 19, 2013 (the "2013 Form 10-K").

INTRODUCTION

On June 28, 2013 Twenty-First Century Fox, Inc. and its subsidiaries (formerly known as News Corporation) (together, "Twenty-First Century Fox" or the "Company") completed the separation of its business into two independent publicly traded companies (the "Separation") by distributing to its stockholders all of the outstanding shares of the new News Corporation ("News Corp"). The Company retained its interests in a global portfolio of media and entertainment assets spanning six continents. News Corp holds the Company's former businesses including newspapers, information services and integrated marketing services, digital real estate services, book publishing, digital education and sports programming and pay-TV distribution in Australia. The Company completed the Separation by distributing to its stockholders one share of News Corp Class A common stock for every four shares of the Company's Class A common stock held on June 21, 2013, and one share of News Corp Class B common stock for every four shares of the Company's Class B common stock held on June 21, 2013. The Company's stockholders received cash in lieu of fractional shares. Following the Separation, the Company does not beneficially own any shares of News Corp Class A common stock or News Corp Class B common stock.

Effective June 28, 2013, the Separation qualified for discontinued operations treatment in accordance with ASC 205-20, "Discontinued Operations" ("ASC 205-20"), and accordingly the Company deconsolidated News Corp's balance sheet as of June 30, 2013, and presented its results for the three months ended September 30, 2012 as discontinued operations on the unaudited statements of operations and cash flows. The footnotes to the financial statements have also been revised accordingly. Management's discussion and analysis of financial condition and results of operations describes the Company giving effect to the Separation, except where stated otherwise.

Management's discussion and analysis of financial condition and results of operations is intended to help provide an understanding of the Company's financial condition, changes in financial condition and results of operations. This discussion is organized as follows:

Overview of the Company's Business - This section provides a general description of the Company's businesses, as well as developments that have occurred to date during fiscal 2014 that the Company believes are important in understanding its results of operations and financial condition or to disclose known trends.


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Results of Operations - This section provides an analysis of the Company's results of operations for the three months ended September 30, 2013 and 2012. This analysis is presented on both a consolidated and a segment basis. In addition, a brief description is provided of significant transactions and events that impact the comparability of the results being analyzed.

Liquidity and Capital Resources - This section provides an analysis of the Company's cash flows for the three months ended September 30, 2013 and 2012. Included in the discussion of outstanding debt is a discussion of the amount of financial capacity available to fund the Company's future commitments and obligations, as well as a discussion of other financing arrangements.

OVERVIEW OF THE COMPANY'S BUSINESS

The Company has realigned its reporting segments following the Separation and the Other segment has been renamed; Other, Corporate and Eliminations. This segment includes costs not directly associated with an operating segment, such as corporate overhead and eliminations.

The Company is a diversified global media and entertainment company, which manages and reports its businesses in the following five segments:

Cable Network Programming, which principally consists of the production and licensing of programming distributed through cable television systems, direct broadcast satellite operators and telecommunication companies primarily in the U.S., Latin America, Europe and Asia.

Television, which principally consists of the broadcasting of network programming in the U.S. and the operation of 28 full power broadcast television stations, including 10 duopolies, in the U.S. (of these stations, 18 are affiliated with the FOX Broadcasting Company ("FOX") and 10 are affiliated with Master Distribution Service, Inc. ("MyNetworkTV")).

Filmed Entertainment, which principally consists of the production and acquisition of live-action and animated motion pictures for distribution and licensing in all formats in all entertainment media worldwide, and the production and licensing of television programming worldwide.

Direct Broadcast Satellite Television, which consists of the distribution of programming services via satellite, cable and broadband directly to subscribers in Italy, Germany and Austria.

Other, Corporate and Eliminations, which principally consists of corporate overhead and eliminations and other businesses.

Television and Cable Network Programming

The Company's television operations primarily consist of FOX, MyNetworkTV and the 28 television stations owned by the Company.

The television operations derive revenues primarily from the sale of advertising and to a lesser extent retransmission consent revenue. Adverse changes in general market conditions for advertising may affect revenues. The U.S. television broadcast environment is highly competitive and the primary methods of competition are the development and acquisition of popular programming. Program success is measured by ratings, which are an indication of market acceptance, with the top rated programs commanding the highest advertising prices. FOX is a broadcast network that airs original programming and MyNetworkTV is a programming distribution service that airs original and off-network programming. FOX and MyNetworkTV compete with broadcast networks, such as ABC, CBS, NBC and The CW Television Network, independent television stations, cable and Direct Broadcast Satellite Television program services, as well as other media, including DVDs, Blu-rays, video games, print and the Internet for audiences, programming and advertising revenues. In addition, FOX and MyNetworkTV compete with the other broadcast networks and other programming distribution services to secure affiliations with independently owned television stations in markets across the U.S. ABC, NBC and CBS each broadcasts a greater number of hours of programming than FOX and,


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accordingly, may be able to designate or change time periods in which programming is to be broadcast with greater flexibility than FOX. In addition, future technological developments may affect competition within the television marketplace.

U.S. law governing retransmission consent revenue provides a mechanism for the television stations owned by the Company to seek and obtain payment from multi-channel video programming distributors who carry the Company's broadcast signals. Retransmission consent revenue consists of per subscriber-based compensatory fees paid to the Company by cable and satellite distribution systems that distribute the Company's television stations affiliated with FOX and MyNetworkTV. The Company also receives compensation from independently-owned television stations that are affiliated with FOX and MyNetworkTV.

The television stations owned and operated by the Company compete for programming, audiences and advertising revenues with other television stations and cable systems in their respective coverage areas and, in some cases, with respect to programming, with other station groups, and in the case of advertising revenues, with other local and national media. The competitive position of the television stations owned by the Company is largely influenced by the quality and strength of FOX and MyNetworkTV programming, and, in particular, their respective prime-time viewership.

The Company's U.S. cable network programming operations primarily consist of the Fox News Channel ("FOX News"), Fox Sports 1, FX Networks, LLC ("FX"), FXX, Regional Sports Networks ("RSNs"), the National Geographic Channels and the Big Ten Network. The Company's international cable networks consist of the Fox International Channels ("FIC") and STAR. FIC produces and distributes entertainment, lifestyle, factual, sports, and movie channels through distribution channels in Europe, Africa, Asia and Latin America using several brands, including Fox, Fox Crime, Fox Life, FX, Fox Sports and National Geographic Channel. STAR's owned and affiliated channels are distributed in the following countries and regions: India; Greater China; Indonesia; the rest of South East Asia; Pakistan; the Middle East and Africa; the United Kingdom and Europe; and North America.

Generally, the Company's cable networks, which target various demographics, derive a majority of their revenues from monthly affiliate fees received from cable television systems and direct broadcast satellite operators based on the number of their subscribers. Affiliate fee revenues are net of the amortization of cable distribution investments (capitalized fees paid to U.S. multi-channel video programming distributors to typically facilitate the carriage of a domestic cable network). The Company defers the cable distribution investments and amortizes the amounts on a straight-line basis over the contract period. Cable television and direct broadcast satellite are currently the predominant means of distribution of the Company's program services in the U.S. Internationally, distribution technology varies region by region.

The Company's cable networks compete for carriage on cable television systems, direct broadcast satellite systems and other distribution systems with other program services. A primary focus of competition is for distribution of the Company's cable network channels that are not already distributed by particular cable television or direct broadcast satellite systems. For such program services, distributors make decisions on the use of bandwidth based on various considerations, including amounts paid by programmers for launches, subscription fees payable by distributors and appeal to the distributors' subscribers.

The most significant operating expenses of the Television segment and the Cable Network Programming segment are the acquisition and production expenses related to programming and the expenses related to operating the technical facilities of the broadcaster or cable network. Other expenses include promotional expenses related to improving the market visibility and awareness of the broadcaster or cable network and its programming. Additional expenses include sales commissions paid to the in-house advertising sales force, as well as salaries, employee benefits, rent and other routine overhead expenses.

National sports programming is obtained through license agreements with professional or collegiate sports leagues or organizations. The Company's current licenses with the National Football League ("NFL"),


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Major League Baseball ("MLB"), college football conferences, National Association of Stock Car Auto Racing ("NASCAR"), Ultimate Fighting Championship ("UFC") and United States Golf Association ("USGA") are secured by long-term agreements.

While the Company seeks to ensure compliance with federal indecency laws and related Federal Communications Commission ("FCC") regulations, the definition of "indecency" is subject to interpretation and there can be no assurance that the Company will not broadcast programming that is ultimately determined by the FCC to violate the prohibition against indecency. Such programming could subject the Company to regulatory review or investigation, fines, adverse publicity or other sanctions, including the loss of station licenses.

Filmed Entertainment

The Filmed Entertainment segment derives revenue from the production and distribution of live-action and animated motion pictures and television series. In general, motion pictures produced or acquired for distribution by the Company are exhibited in U.S. and foreign theaters, followed by home entertainment, including sale and rental of DVDs and Blu-rays, video-on-demand and pay-per-view television, on-line and mobile distribution, premium subscription television, network television and basic cable and syndicated television exploitation. Television series initially produced for the networks and first-run syndication are generally licensed to domestic and international markets concurrently and subsequently released in seasonal DVD and Blu-ray box sets and made available via digital distribution platforms. More successful series are later syndicated in domestic markets. The length of the revenue cycle for television series will vary depending on the number of seasons a series remains in active production and, therefore, may cause fluctuations in operating results. License fees received for television exhibition (including international and U.S. premium television and basic cable television) are recorded as revenue in the period that licensed films or programs are available for such exhibition, which may cause substantial fluctuations in operating results.

The revenues and operating results of the Filmed Entertainment segment are significantly affected by the timing of the Company's theatrical and home entertainment releases, the number of its original and returning television series that are aired by television networks and cable channels and the number of its television series in off-network syndication. Theatrical and home entertainment release dates are determined by several factors, including timing of vacation and holiday periods and competition in the marketplace. The distribution windows for the release of motion pictures theatrically and in various home entertainment products and services (including subscription rentals, rental kiosks and Internet streaming services), have been compressing and may continue to change in the future. A further reduction in timing between theatrical and home entertainment releases could adversely affect the revenues and operating results of this segment.

The Company enters into arrangements with third parties to co-produce many of its theatrical productions. These arrangements, which are referred to as co-financing arrangements, take various forms. The parties to these arrangements include studio and non-studio entities, both domestic and foreign. In several of these agreements, other parties control certain distribution rights. The Filmed Entertainment segment records the amounts received for the sale of an economic interest as a reduction of the cost of the film, as the investor assumes full risk for that portion of the film asset acquired in these transactions. The substance of these arrangements is that the third-party investors own an interest in the film and, therefore, receive a participation based on the respective third-party investor's interest in the profits or losses incurred on the film. Consistent with the requirements of Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 926 "Entertainment-Films" ("ASC 926"), the estimate of a third-party investor's interest in profits or losses on the film is based on total estimated ultimate revenues.

Operating costs incurred by the Filmed Entertainment segment include:
exploitation costs, primarily theatrical prints and advertising and home entertainment marketing and manufacturing costs; amortization of capitalized production, overhead and interest costs; and participations and talent residuals. Selling, general and administrative expenses include salaries, employee benefits, rent and other routine overhead.


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The Company competes with other film studios, such as Disney, CBS Television Studios, Sony, Universal, Warner Bros. and other independent film producers in the production and distribution of motion pictures, DVDs and Blu-rays. As a producer and distributor of television programming, the Company competes with studios, television production groups and independent producers and syndicators, such as Disney, Sony, NBC Universal, Warner Bros. and CBS Television Studios, to sell programming both domestically and internationally. The Company also competes to obtain creative talent and story properties, which are essential to the success of the Company's filmed entertainment businesses.

Direct Broadcast Satellite Television

The Direct Broadcast Satellite Television ("DBS") segment's operations consist of SKY Italia and the Company's majority-owned subsidiary Sky Deutschland AG ("Sky Deutschland"), which provide basic and premium services via satellite, cable and broadband directly to subscribers in Italy (in the case of SKY Italia) and Germany and Austria (in the case of Sky Deutschland). The DBS segment derives revenues principally from subscriber fees. The Company believes that the quality and variety of programming, audio and interactive programming including personal video recorders, quality of picture including high definition channels, access to service, customer service and price are the key elements for gaining and maintaining market share. The DBS segment's competition includes companies that offer video, audio, interactive programming, telephony, data and other information and entertainment services, including broadcasters of free-to-air television channels, broadband Internet providers, digital terrestrial transmission ("DTT") services, wireless companies and companies that are developing new media technologies.

The DBS segment's most significant operating expenses are those related to the acquisition of entertainment, movie and sports programming and subscribers and the expenses related to operating the technical facilities. Operating expenses related to sports programming are generally recognized over the course of the related sport season, which may cause fluctuations in the operating results of this segment.

The continued challenging economic environment in Europe has contributed to a reduction in consumer spending and has posed challenges for subscriber retention and growth. If this trend continues, it could have a material effect on the operating results of the DBS segment.

Other, Corporate and Eliminations

The Other, Corporate and Eliminations segment consists primarily of corporate overhead and eliminations and other businesses.

Other Business Developments

In September 2013, the Company acquired the 22% interest it did not already own in Latin America Pay Television ("LAPTV"), an entity that distributes premium and basic television channels in Latin America, for approximately $75 million in cash. As a result of this transaction, the Company now owns 100% of LAPTV. The transaction is accounted for as an equity transaction in the unaudited consolidated financial statements.

In November 2013, the Company sold its remaining 12% interest in Phoenix Satellite Television Holdings Ltd. ("Phoenix") for approximately $210 million. The Company expects to record a gain on the sale of this investment.


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RESULTS OF OPERATIONS

Results of Operations-For the three months ended September 30, 2013 versus the three months ended September 30, 2012

The following table sets forth the Company's operating results for the three months ended September 30, 2013 as compared to the three months ended September 30, 2012.

                                                    For the three months ended September 30,
                                               2013                   2012                 % Change
                                                             (in millions, except %)
Revenues:
Affiliate Fees                             $       2,102          $       1,748                     20  %
Subscription                                       1,305                    780                     67  %
Advertising                                        1,665                  1,583                      5  %
Content                                            1,912                  1,776                      8  %
Other                                                 77                    116                    (34 )%

Total Revenues                                     7,061                  6,003                     18  %
Operating expenses                                (4,447 )               (3,515 )                   27  %
Selling, general and administrative               (1,018 )                 (920 )                   11  %
Depreciation and amortization                       (313 )                 (174 )                   80  %
Impairment charges                                    -                     (35 )                   **
Equity earnings of affiliates                         92                    129                    (29 )%
Interest expense, net                               (272 )                 (261 )                    4  %
Interest income                                        8                     15                    (47 )%
Other, net                                           (35 )                1,369                     **

Income before income tax expense                   1,076                  2,611                    (59 )%
Income tax expense                                  (300 )                 (304 )                   (1 )%

Income from continuing operations                    776                  2,307                    (66 )%
Income (loss) from discontinued
operations, net of tax                               487                    (20 )                   **

Net income                                         1,263                  2,287                    (45 )%
Less: Net income attributable to
noncontrolling interests                              (8 )                  (54 )                  (85 )%

Net income attributable to
Twenty-First Century Fox, Inc.
stockholders                               $       1,255          $       2,233                    (44 )%

** not meaningful

Overview - The Company's revenues increased 18% for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013, primarily due to increases in subscription, affiliate and content revenues. The increase in subscription revenues was due to the effect of the consolidation of Sky Deutschland of approximately $480 million and higher subscription revenues at Sky Italia of approximately $40 million. The increase in affiliate revenues was attributable to higher average rates per subscriber across most cable channels, higher retransmission consent revenues, and the acquisition of Eredivisie Media & Marketing CV ("EMM") and SportsTime Ohio and the consolidation of Fox Sports Asia (formerly ESPN Star Sports) (collectively the "Acquisitions"). The higher content revenues were due to increased digital distribution revenue as a result of additional content made available, higher revenues from delivery of new shows and increased syndication sales. The strengthening of the U.S. dollar against local currencies resulted in a revenue decrease of approximately $29 million for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013.


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Operating expenses increased 27% for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013, primarily due to increased operating expenses at the DBS, Cable Network Programming and Filmed Entertainment segments of $427 million, $274 million and $268 million, respectively. The increase at the DBS segment was primarily the result of the consolidation of Sky Deutschland and the increase at the Cable Network Programming segment was primarily due to higher programming costs, the launch of new channels and the Acquisitions. The increase at the Filmed Entertainment segment was primarily due to higher theatrical marketing costs, production amortization and participation costs.

Selling, general and administrative expenses increased 11% for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013, primarily due to increases at the Cable Network Programming and DBS segments of approximately $59 million and $39 million, respectively. The increase at the Cable Network Programming segment was primarily due to the Acquisitions. The increase at the DBS segment was primarily due to the consolidation of Sky Deutschland.

Depreciation and amortization increased 80% for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013, primarily due to the amortization of acquired identifiable intangible assets resulting from the consolidation of Sky Deutschland.

Impairment charges - During the three months ended September 30, 2013, the Company recorded nil impairment charges.

During the three months ended September 30, 2012, the Company recorded a $35 million non-cash impairment charge related to its assets held for sale to reduce the carrying value of these assets to estimated fair value less cost to sell. This business was sold in fiscal 2013.

Equity earnings of affiliates - Equity earnings of affiliates decreased $37 million for the three months ended September 30, 2013 as compared to the corresponding period of fiscal 2013, primarily due to lower results at the DBS . . .

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