Fox Corp: Form 10-Q for the period ended Dec 31, 2018

Readers should carefully review this document and the other documents filed by Fox Corporation with the Securities and Exchange Commission (the “SEC”). This section should be read together with the unaudited interim combined financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q as well as the audited combined financial statements for the year ended June 30, 2018 and other disclosure included in the Form 10 as amended and filed with the SEC on January 7, 2019 (the “Form 10”).

INTRODUCTION

The Proposed Distribution

On June 20, 2018, Twenty-First Century Fox, Inc. (“Twenty-First Century Fox” or “21CF”), The Walt Disney Company (“Disney”), TWDC Holdco 613 Corp., a wholly-owned subsidiary of Disney (“New Disney”), and certain other subsidiaries of Disney entered into an Amended and Restated Merger Agreement and Plan of Merger, dated June 20, 2018 (the “21CF Disney Merger Agreement”), pursuant to which, among other things, 21CF will merge with and into a subsidiary of New Disney (the “21CF Merger”), Disney will merge with and into a subsidiary of New Disney (the “Disney Merger,” and together with the 21CF Merger, the “mergers”), and each of Disney and 21CF will become wholly-owned subsidiaries of New Disney. A condition to the consummation of the mergers includes the consummation of the Distribution (as defined below).

In connection with the 21CF Disney Merger Agreement and prior to the Distribution, 21CF and its wholly owned subsidiary, Fox Corporation (“FOX” or the “Company”), expect to enter into a separation agreement (the “Separation Agreement”), which will become effective on March 19, 2019. Pursuant to the Separation Agreement, 21CF will, among other things, engage in the separation (the “Separation”), whereby it will transfer to FOX a portfolio of 21CF’s news, sports and broadcast businesses, including FOX News, FOX Business, FOX Broadcasting Company (the “FOX Network”), FOX Sports, FOX Television Stations Group, and sports cable networks FS1, FS2, FOX Deportes and Big Ten Network (collectively, the “FOX business”), and certain other assets, and FOX will assume from 21CF certain liabilities associated with such businesses and certain other liabilities. 21CF will retain all assets and liabilities not transferred to FOX, including the Twentieth Century Fox film and television studios and certain cable and international television businesses. Following the Separation and prior to the completion of the mergers, 21CF will distribute all of the issued and outstanding common stock of FOX to 21CF’s stockholders (other than holders that are subsidiaries of 21CF) on a pro rata basis (the “Distribution”), in accordance with the Amended and Restated Distribution Agreement and Plan of Merger, dated as of June 20, 2018, by and between 21CF and 21CF Distribution Merger Sub, Inc. The Separation and Distribution are anticipated to be completed on March 19, 2019 as part of the series of transactions contemplated by the 21CF Disney Merger Agreement (collectively, the “Transactions”). Following the completion of the Separation and Distribution, FOX will become a standalone public company.

Immediately prior to the Distribution, FOX will pay to 21CF a dividend in the amount of $8.5 billion (the “Dividend”), in immediately available funds. FOX has incurred indebtedness (See Note 5 – Borrowings to the accompanying Unaudited Combined Financial Statements of FOX) that will be, together with available cash, sufficient to fund the Dividend, which cash will be replenished and/or indebtedness will be reduced after the mergers by the amount of the Cash Payment (as defined below), if any.

At the open of business on the business day immediately following the date of the Distribution, if the final estimate of the taxes in respect of the Separation and Distribution and divestitures (as well as certain taxes related to the operations of the FOX business from and after January 1, 2018 through the closing of the Transactions) (collectively, the “Transaction Tax”), is lower than $8.5 billion, Disney will make a cash payment to FOX (the “Cash Payment”), which Cash Payment will be the amount obtained by subtracting the final estimate of the Transaction Tax from $8.5 billion, up to a maximum Cash Payment of $2 billion. After the completion of the mergers, FOX will promptly replenish its cash used, and/or reduce the indebtedness incurred, to fund the Dividend by the amount of the Cash Payment, if any.

In connection with the Transactions, the Company expects to enter into certain other related agreements which govern certain aspects of the Company’s relationship with 21CF and Disney following the Separation and which will become effective on March 19, 2019. These include (i) a tax matters agreement, (ii) intellectual property license agreements, (iii) a studio lot lease and management agreement, (iv) transition services agreements, (v) commercial agreements and (vi) an employee matters agreement.

In addition, as a result of the Separation and Distribution, FOX will obtain a tax basis in its assets equal to their respective fair market values, which is expected to result in additional annual tax deductions, principally over the next 15 years.

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 occurred during the three and six months ended December 31, 2018 and 2017 that the Company believes are important in understanding its results of operations and financial condition or to disclose known trends.
• Results of Operations - This section provides an analysis of the Company’s results of operations for the three and six months ended December 31, 2018 and 2017. This analysis is presented on both a combined 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 six months ended December 31, 2018 and 2017, as well as a discussion of the Company’s commitments that existed as of December 31, 2018. Included 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 is a news, sports and entertainment company, which manages and reports its businesses in the following segments:

• Cable Network Programming, which principally consists of the production and licensing of news and sports content distributed primarily through cable television systems, direct broadcast satellite operators, telecommunication companies and online video distributors (collectively, multi-channel video programming distributors), primarily in the U.S.
• Television, which principally consists of the acquisition, marketing and distribution of broadcast network programming nationally under the FOX brand and the operation of 28 full power broadcast television stations, including 11 duopolies, in the U.S. (of these stations, 17 are affiliated with the FOX Network, nine are affiliated with MyNetworkTV, one is affiliated with both The CW Television Network and MyNetworkTV and one is an independent station).
• Other, Corporate and Eliminations, which principally consists of corporate overhead costs, intracompany eliminations and the FOX Studios lot. The FOX Studios lot, located in Los Angeles, California, provides television and film production services along with office space, studio operation services and includes all operations of the facility.

Fiscal 2019 Affiliate Fee Outlook

The Company expects the pace of growth of Cable Network Programming affiliate fee revenue to meaningfully decelerate over the remaining six months of the fiscal year compared to the prior year, as the Company lapses prior year contractual rate increases from affiliate agreement renewals.

RESULTS OF OPERATIONS

Results of Operations—For the three and six months ended December 31, 2018 versus the three and six months ended December 31, 2017

The following table sets forth the Company’s operating results for the three and six months ended December 31, 2018, as compared to the three and six months ended December 31, 2017:

(in millions, except %)

** not meaningful

Overview – The Company’s revenues increased 15% and 16% for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018, primarily due to higher advertising and affiliate fee revenues. The increase in advertising revenue was primarily due to the broadcast of National Football League (“NFL”) *Thursday Night Football (“*TNF”) on the FOX Network and higher political advertising revenue due to the U.S. midterm elections at the FOX Television Stations Group. The increase in affiliate fee revenue was primarily attributable to higher average rates per subscriber across all networks, led by contractual rate increases on existing affiliate agreements and from affiliate agreement renewals.

Operating expenses increased 20% and 19% for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018, primarily due to higher sports programming rights amortization and production costs, including the addition of TNF, partially offset by lower entertainment programming rights amortization as a result of the mix of programming in the current year as compared to the prior year at the Television Segment.

Selling, general and administrative expenses increased 6% and 10% for the three and six months ended December 31, 2018, respectively, as compared to corresponding periods of fiscal 2018, primarily due to the increase in revenues which is used to allocate on a pro rata basis certain general corporate expenses from 21CF. The corporate allocations recorded to Selling, general and administrative expenses increased approximately $15 million and $40 million for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018 (See Note 8 – Related Party Transactions and 21CF Investment to the accompanying Unaudited Combined Financial Statements of FOX under the heading “Corporate Allocations and 21CF Investment” for additional information).

Interest expense – Interest expense increased $9 million and $18 million for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018, primarily due to a bridge commitment letter which was entered into during fiscal 2018 (see Note 1 – Description of Business and Basis of Presentation to the audited combined financial statements in the Form 10 for additional information).

Other, net – See Note 12 – Additional Financial Information to the accompanying Unaudited Combined Financial Statements of FOX under the heading “Other, net.”

Income tax (expense) benefit – The Company’s tax provision and related effective tax rate of 26% for the six months ended December 31, 2018 was higher than the statutory rate of 21% primarily due to state taxes.

The Company’s effective income tax rate for the three and six months ended December 31, 2017 included a provisional $624 million tax benefit as a result of the Tax Cuts and Jobs Act (the “Tax Act”) (as described in Note 1 – Description of Business and Basis of Presentation to the accompanying Unaudited Combined Financial Statements of FOX under the heading “U.S. Tax Reform”).

Net income – Net income decreased 97% and 50% for the three and six months ended December 31, 2018, respectively, as compared to corresponding periods of fiscal 2018, primarily due to the absence of an income tax benefit resulting from the Tax Act in the prior year (as described above), higher costs related to the Separation and Distribution and unrealized losses on investments (See Note 12 – Additional Financial Information to the accompanying Unaudited Combined Financial Statements of FOX under the heading “Other, net”). Improved operating results partially offset the decreases in net income for the six months ended December 31, 2018.

Segment Analysis

The Company’s operating segments have been determined in accordance with the Company’s internal management structure, which is organized based on operating activities. The Company evaluates performance based upon several factors, of which the primary financial measure is segment operating income before depreciation and amortization, or Segment OIBDA. Due to the integrated nature of these operating segments, estimates and judgments are made in allocating certain assets, revenues and expenses.

Segment OIBDA is defined as Revenues less Operating expenses and Selling, general and administrative expenses. Segment OIBDA does not include: Amortization of cable distribution investments, Depreciation and amortization, Impairment and restructuring charges, Interest expense, Other, net and Income tax (expense) benefit. Management believes that Segment OIBDA is an appropriate measure for evaluating the operating performance of the Company’s business segments because it is the primary measure used by the Company’s chief operating decision maker to evaluate the performance of and allocate resources to the Company’s businesses.

Management believes that information about Total Segment OIBDA assists all users of the Company’s Unaudited Combined Financial Statements by allowing them to evaluate changes in the operating results of the Company’s portfolio of businesses separate from non-operational factors that affect net income, thus providing insight into both operations and the other factors that affect reported results. Total Segment OIBDA provides management, investors and equity analysts a measure to analyze the operating performance of the Company’s business and its enterprise value against historical data and competitors’ data, although historical results, including Segment OIBDA and Total Segment OIBDA, may not be indicative of future results (as operating performance is highly contingent on many factors, including customer tastes and preferences).

Total Segment OIBDA may be considered a non-GAAP measure and should be considered in addition to, not as a substitute for, net income, cash flow and other measures of financial performance reported in accordance with GAAP. In addition, this measure does not reflect cash available to fund requirements and excludes items, such as depreciation and amortization and impairment charges, which are significant components in assessing the Company’s financial performance.

The following table reconciles Income before income tax (expense) benefit to Total Segment OIBDA for the three and six months ended December 31, 2018, as compared to the three and six months ended December 31, 2017:

(in millions, except %)

** not meaningful

The following table sets forth the computation of Total Segment OIBDA for the three and six months ended December 31, 2018, as compared to the three and six months ended December 31, 2017:

(in millions, except %)

The following tables set forth the Company’s Revenues and Segment OIBDA for the three and six months ended December 31, 2018, as compared to the three and six months ended December 31, 2017:

(in millions, except %)

(in millions, except %)

** not meaningful

***Cable Network Programming (***44% and 46% of the Company’s combined revenues in the first six months of fiscal 2019 and 2018, respectively.)

(in millions, except %)

Revenues at the Cable Network Programming segment increased for the three and six months ended December 31, 2018, as compared to the corresponding periods of fiscal 2018, primarily due to higher affiliate fee and advertising and other revenues. The increase in affiliate fee revenue was primarily attributable to higher average rates per subscriber across all networks, led by contractual rate increases on existing affiliate agreements and from affiliate agreement renewals. The average number of subscribers remained relatively consistent for the three and six months ended December 31, 2018, as compared to the corresponding periods of fiscal 2018. The increase in advertising and other revenues was primarily due to advertising revenue resulting from higher pricing at the news channels.

Cable Network Programming Segment OIBDA increased for the three and six months ended December 31, 2018, as compared to the corresponding periods of fiscal 2018, primarily due to the revenue increases noted above partially offset by higher expenses. Operating expenses increased principally due to higher sports programming rights amortization and production costs, including Major League Baseball (“MLB”) costs at FS1, launch costs incurred for the Company’s direct-to-consumer initiatives and higher costs related to news coverage associated with the U.S. midterm elections. Also contributing to the increase for the six months ended December 31, 2018 was the addition of the Fédération Internationale de Football Association (“FIFA”) World Cup and Big Ten programming costs at FS1.

Television (56% and 54% of the Company’s combined revenues for the first six months of fiscal 2019 and 2018, respectively)

(in millions, except %)

** not meaningful

Revenues at the Television segment increased for the three and six months ended December 31, 2018, as compared to the corresponding periods of fiscal 2018, primarily due to higher advertising, affiliate fee and other revenues. The increase in advertising revenue was primarily due to the broadcast of more NFL games due to the addition of TNF and higher political advertising revenue due to the U.S. midterm elections, partially offset by two fewer broadcasts of MLB World Series games in the current year. Also contributing to the increase in advertising revenue for the six months ended December 31, 2018 was the broadcast of a portion of the FIFA World Cup matches in the current year. Affiliate fee revenue increased 25% and 24% for the three and six months ended December 31, 2018, respectively, as compared to the corresponding periods of fiscal 2018, primarily due to contractual rate increases on existing affiliate agreements and from affiliate agreement renewals. Other revenue increased 93% and 42% for the three and six months ended December

31, 2018, respectively, as compared to the corresponding periods of fiscal 2018, primarily due to higher SVOD revenue at the FOX Network.

Television Segment OIBDA decreased for the three and six months ended December 31, 2018, as compared to the corresponding periods of fiscal 2018, as the revenue increases noted above were more than offset by higher expenses. Operating expenses increased primarily due to higher sports programming rights amortization and production costs, including TNF, partially offset by lower entertainment programming rights amortization as a result of the mix of programming in the current year as compared to the prior year. Also contributing to the increase in operating expenses for the six months ended December 31, 2018 was the addition of the FIFA World Cup.

LIQUIDITY AND CAPITAL RESOURCES

Current Financial Condition

Historically, 21CF provided capital, cash management and other treasury services to the Company and 21CF will continue to provide treasury services to the Company until the Distribution. Prior to December 31, 2017, substantially all of the cash balances were swept to 21CF on a daily basis and the Company received capital from 21CF for the Company’s cash needs. Effective January 1, 2018, the Company ceased participating in 21CF’s capital and cash management accounts. The Company’s combined Total assets as of December 31, 2018 and June 30, 2018 included $2.0 billion and $2.5 billion, respectively, in Cash and cash equivalents, which reflects $600 million, which was contributed by 21CF in accordance with the 21CF Disney Merger Agreement, plus all net cash generated beginning January 1, 2018 by the Company’s business and assets. In accordance with the Separation Agreement, at the time of the Separation and Distribution, the Company will be entitled to such cash amounts reduced by (i) applicable operational taxes, (ii) 30% of all cash dividends declared by 21CF from December 13, 2017 through the Distribution, (iii) 30% of all unallocated shared overhead and corporate costs from December 13, 2017 through the Distribution, (iv) an allocated amount of shared overhead corporate costs consistent with 21CF’s historical approach to such allocation, and (v) certain other expenses related to the Separation and Distribution. The obligations described in clauses (i) - (v) are not fully reflected in the $2.0 billion and $2.5 billion in Cash and cash equivalents as of December 31, 2018 and June 30, 2018, respectively. The remaining amount of these contractual obligations was approximately $800 million in the aggregate, which was settled in March 2019.

The Company’s principal source of liquidity is internally generated funds which are highly dependent upon the continuation of affiliate agreements and the state of the advertising markets. In January 2019, the Company issued approximately $6.8 billion of senior notes. In addition, the Company has an unused five-year $1.0 billion unsecured revolving credit facility, an unused $1.7 billion 364-Day Bridge Term Loan Agreement and has access to the worldwide capital markets, subject to market conditions. (See Note 5 - Borrowings to the accompanying Unaudited Combined Financial Statements of FOX).

The principal uses of cash that affect the Company’s liquidity position include the following: the payment of the Dividend, the acquisition of rights and related payments for entertainment and sports programming; operational expenditures including marketing and promotional expenses; expenses related to operating the technical facilities of the cable network and broadcaster and investing approximately $150 million to $200 million in establishing stand-alone technical facilities; employee and facility costs; capital expenditures; acquisitions; and interest and dividend payments.

In addition to the acquisitions, sales and possible acquisitions disclosed elsewhere, the Company has evaluated, and expects to continue to evaluate, possible acquisitions and dispositions of certain businesses and assets. Such transactions may be material and may involve cash, the Company’s securities or the assumption of additional indebtedness.

Sources and Uses of Cash

Net cash provided by (used in) operating activities for the six months ended December 31, 2018 and 2017 was as follows (in millions):

The change in net cash provided by (used in) operating activities during the six months ended December 31, 2018, as compared to the corresponding period of fiscal 2018, is primarily due to higher cash receipts from political advertising revenue due to the U.S. midterm elections at the FOX Television Stations Group.

Net cash (used in) provided by investing activities for the six months ended December 31, 2018 and 2017 was as follows (in millions):

The change in net cash (used in) provided by investing activities during the six months ended December 31, 2018, as compared to the corresponding period of fiscal 2018, was primarily due to the absence of cash received from the Federal Communications Commission’s completed reverse auction for broadcast spectrum and the investments in Caffeine, Inc. and Caffeine Studio, LLC (See Note 2 - Acquisitions, Disposals and Other Transactions to the accompanying Unaudited Combined Financial Statements of FOX).

Net cash used in financing activities for the six months ended December 31, 2018 and 2017 was as follows (in millions):

The increase in net cash used in financing activities during the six months ended December 31, 2018, as compared to the corresponding period of fiscal 2018, was primarily due to net transfers to 21CF of $312 million in the six months ended December 31, 2018 as compared to net transfers to 21CF of $130 million in the six months ended December 31, 2017. The nature of activities included in net transfers to 21CF includes financing activities, capital transfers, cash sweeps, other treasury services and corporate expenses. Prior to December 31, 2017, the majority of the cash balances were swept to 21CF on a daily basis and the Company received capital from 21CF for the Company’s cash needs. Effective January 1, 2018, the Company ceased participating in 21CF’s capital and cash management accounts.

Debt Instruments

In January 2019, the Company issued approximately $6.8 billion of senior notes (See Note 5 - Borrowings to the accompanying Unaudited Combined Financial Statements of FOX).

Revolving Credit Agreement

In March 2019, the Company entered into an unsecured $1.0 billion revolving credit facility with a maturity date of March 2024 (See Note 5 – Borrowings to the accompanying Unaudited Combined Financial Statements of FOX).

Bridge Credit Agreement

In March 2019, the Company entered into an unsecured $1.7 billion 364-Day Bridge Term Loan Agreement (See Note 5 – Borrowings to the accompanying Unaudited Combined Financial Statements of FOX).

Commitments, Contingent Guarantees and Contingencies

See Note 9 - Commitments and Contingencies to the accompanying Unaudited Combined Financial Statements of FOX.

Recent Accounting Pronouncements

See Note 1 - Description of Business and Basis of Presentation to the accompanying Unaudited Combined Financial Statements of FOX under the heading “Recently Adopted and Recently Issued Accounting Guidance and U.S. Tax Reform.”

Caution Concerning Forward-Looking Statements

This document contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical or current fact are “forward-looking statements” for purposes of federal and state securities laws, including any statements regarding (i) future earnings, revenues or other measures of the Company’s financial performance; (ii) the Company’s plans, strategies and objectives for future operations; (iii) proposed new programming or other offerings; (iv) future economic conditions or performance; and (v) assumptions underlying any of the foregoing.

Forward-looking statements may include, among others, the words “may,” “will,” “should,” “likely,” “anticipates,” “expects,” “intends,” “plans,” “projects,” “believes,” “estimates,” “outlook” or any other similar words.

Although the Company’s management believes that the expectations reflected in any of the Company’s forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any forward-looking statements. The Company’s future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in our filings with the SEC. Important factors that could cause the Company’s actual results, performance and achievements to differ materially from those estimates or projections contained in the Company’s forward-looking statements include, but are not limited to, government regulation, economic, strategic, political and social conditions and the following factors:

• recent and future changes in technology, including alternative methods for the delivery and storage of digital content, and in consumer behavior, including changes in when, where and how they consume content;
• changes in the Company’s strategies and initiatives and the acceptance thereof by consumers, distributors of the Company’s content, affiliates, advertisers and other parties with which the Company does business;
• the highly competitive nature of the industry in which the Company’s businesses operate;
• declines in advertising expenditures due to various factors such as the economic prospects of advertisers or the economy in general, technological developments and changes in consumer behavior, and shifts in advertisers’ spending toward digital and mobile offerings and away from more traditional media;
• the loss of affiliate or carriage agreements or arrangements where the Company makes its content available for viewing through online video platforms;
• the popularity of the Company’s content, including special sports events, and the continued popularity of the sports franchises, leagues and teams for which the Company has acquired programming rights;
• the Company’s ability to renew programming rights, particularly sports programming rights, on sufficiently favorable terms;
• damage to the Company’s brands or reputation;
• a degradation, failure or misuse of the Company’s network and information systems and other technology relied on by the Company;
• content piracy and signal theft and the Company’s ability to protect its intellectual property rights;
• the loss of key personnel;
• the effect of labor disputes, including labor disputes involving professional sports leagues whose games or events the Company has the right to broadcast;
• changes in tax, federal communications or other laws, regulations, practices or the interpretations thereof;
• the impact of any investigations or fines from governmental authorities, including FCC rules and policies and FCC decisions regarding revocation, renewal or grant of station licenses;
• the failure or destruction of satellites and transmitter facilities the Company depends on to distribute its programming;
• lower than expected valuations associated with one of the Company’s reporting units, indefinite-lived intangible assets, investments or long-lived assets;
• changes in U.S. GAAP or other applicable accounting standards and policies;
• the Company’s lack of operating history as a standalone, publicly traded company;
• increased costs in connection with the Company operating as a standalone, publicly traded company following the Distribution and the loss of synergies the Company enjoyed from operating as part of 21CF;
• the Company’s reliance on 21CF to provide the Company various services under the transition services agreements, including broadcast operations, sports production, information and technology, and other services, and the risk that 21CF does not properly perform the services under this agreement;
• the Company’s ability to secure additional capital on acceptable terms;
• the Company’s ability to benefit from any additional annual tax deductions expected to result from the Company obtaining a tax basis in its assets equal to their respective fair market values in connection with the Separation and Distribution;
• the impact of any payments the Company is required to make or liabilities it is required to assume under the Separation Agreement and any indemnification arrangements entered into in connection with the Separation and Distribution; and
• the other risks and uncertainties detailed in Part II., Item 1A. “Risk Factors” in this Quarterly Report on Form 10-Q and in the section entitled “Risk Factors” included in the Company’s Information Statement filed as Exhibit 99.1 to the Form 10.

Forward-looking statements in this Quarterly Report on Form 10-Q speak only as of the date hereof, and forward-looking statements in documents that are incorporated by reference hereto speak only as of the date of those documents. The Company does not undertake any obligation to update or release any revisions to any forward-looking statement made herein or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events or to conform such statements to actual results or changes in our expectations, except as required by law.

The Company has exposure to one type of market risk: changes in stock prices.

Stock Prices

The Company has a common stock investment in a publicly traded company that is subject to market price volatility. Information on the Company’s investment with exposure to stock price risk is presented below:

(in millions)

(a) This investment is recorded at fair value each reporting period and, beginning July 1, 2018, any associated unrealized gains and losses are recorded to net income (See Note 1 – Description of Business and Basis of Presentation to the accompanying Unaudited Combined Financial Statements of FOX under the heading “Recently Adopted and Recently Issued Accounting Guidance and U.S. Tax Reform”).

Concentrations of Credit Risk

See Note 4 – Fair Value to the accompanying Unaudited Combined Financial Statements of FOX under the heading “Concentrations of Credit Risk.”

(a) Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective in recording, processing, summarizing and reporting on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act and were effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

(b) Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the Company’s second quarter of fiscal 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

There have been no material changes to the risk factors described in the section titled “Risk Factors” previously disclosed in the Form 10.