WORLD WRESTLING ENTERTAINMENT, INC. A discussion regarding our financial condition and results of operations for fiscal 2019 compared to fiscal 2018 is presented below. Discussions of fiscal 2018 items and year-to-year comparisons between fiscal 2018 and fiscal 2017 that are not included in this Form 10-K can be found under Item 7 of Part II of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2018 , as filed with theSEC onFebruary 7, 2019 .
You should read the following discussion in conjunction with the audited consolidated financial statements and related notes included elsewhere in this report.
Our operations are organized around the following principal activities:
Media:
?The Media segment reflects the production and monetization of long-form and short-form media content across various platforms, including WWE Network, broadcast and pay television, digital and social media, as well as filmed entertainment. Across these platforms, revenues principally consist of content rights fees, subscriptions to WWE Network, and advertising and sponsorships.
Live Events:
?Live events provide ongoing content for our media platforms. Live Event segment revenues consist primarily of ticket sales, including primary and secondary distribution, revenues from events for which we receive a fixed fee, as well as the sale of travel packages associated with the Company's global live events.
Consumer Products:
?The Consumer Products segment engages in the merchandising of WWE branded products, such as video games, toys and apparel, through licensing arrangements and direct-to-consumer sales. Revenues principally consist of royalties and licensee fees related to WWE branded products, and sales of merchandise distributed at our live events and through eCommerce platforms.
Results of Operations
The Company presents Adjusted OIBDA as the primary measure of segment profit
(loss). The Company defines Adjusted OIBDA as operating income before
depreciation and amortization, excluding stock-based compensation, certain
impairment charges and other non-recurring material items. Adjusted OIBDA
includes amortization and depreciation expenses directly related to our revenue
generating activities, including feature film and television production asset
amortization, amortization of costs related to content delivery and technology
assets utilized for our WWE Network, as well as amortization of right-of-use
assets related to finance leases of equipment used to produce and broadcast our
live events. The Company believes the presentation of Adjusted OIBDA is relevant
and useful for investors because it allows investors to view our segment
performance in the same manner as the primary method used by management to
evaluate segment performance and make decisions about allocating resources.
Additionally, we believe that Adjusted OIBDA is a primary measure used by media
investors, analysts and peers for comparative purposes.
Adjusted OIBDA is a non-GAAP financial measure and may be different than
similarly-titled non-GAAP financial measures used by other companies. A
limitation of Adjusted OIBDA is that it excludes depreciation and amortization,
which represents the periodic charge for certain fixed assets and intangible
assets used in generating revenues for our business. Additionally, Adjusted
OIBDA excludes stock-based compensation, a non-cash expense that may vary
between periods with limited correlation to underlying operating performance, as
well as other non-recurring material items. Adjusted OIBDA should not be
regarded as an alternative to operating income or net income as an indicator of
operating performance, or to the statement of cash flows as a measure of
liquidity, nor should it be considered in isolation or as a substitute for
financial measures prepared in accordance with GAAP. We believe that operating
income is the most directly comparable GAAP financial measure to Adjusted OIBDA.
Certain business support functions including sales and marketing, our
international offices and talent development are allocated to the three
reportable segments based primarily on a percentage of revenue contribution. The
remaining unallocated corporate expenses largely relate to corporate functions
such as finance, legal, human resources, facilities and information technology.
The Company does not allocate these costs to its business segments, as they do
not directly relate to revenue generating activities. These unallocated
corporate expenses will be shown, as applicable, as a reconciling item in tables
where segment and consolidated results are both shown.
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Year Ended
(dollars in millions)
Summary
The following tables present our consolidated results followed by our Adjusted
OIBDA results:
Increase
2019 2018 (decrease)
Net revenues
Media $ 743.1 $ 683.4 9 %
Live Events 125.6 144.2 (13) %
Consumer Products 91.7 102.6 (11) %
Total net revenues (1) 960.4 930.2 3 %
Operating expenses
Media 475.7 430.2 11 %
Live Events 103.1 108.9 (5) %
Consumer Products 59.4 70.1 (15) %
Total operating expenses (2) 638.2 609.2 5 %
Marketing and selling expenses
Media 64.0 68.3 (6) %
Live Events 14.8 18.7 (21) %
Consumer Products 5.9 9.0 (34) %
Total marketing and selling expenses (3) 84.7 96.0 (12) %
General and administrative expenses 86.9 85.4 2 %
Depreciation and amortization 34.1 25.1 36 %
Operating income 116.5 114.5 2 %
Interest expense 26.1 15.4 69 %
Other income, net 4.3 6.9 (38) %
Income before income taxes 94.7 106.0 (11) %
Provision for income taxes 17.6 6.4 175 %
Net income $ 77.1 $ 99.6 (23) %
(1)Our consolidated net revenues increased by $30.2 million , or 3%, in 2019 as
compared to 2018. This increase was primarily driven by increased Media revenues
of $59.7 million , which includes $78.8 million in incremental revenues
associated with the October 2019 renewal of our key domestic distribution
agreements of our flagship programs, Raw and SmackDown, as well as the
contractual escalations associated with our prior distribution agreements,
partially offset by a decrease of $14.7 million resulting from a 6% decline in
average paid subscribers on WWE Network. The increase in Media revenues was
partially offset by a decline of $18.6 million in Live Events revenues primarily
due to the staging of 56 fewer events and lower average attendance per event,
coupled with a $10.9 million reduction in Consumer Products revenues due to
fewer orders on our eCommerce platforms and lower merchandise sales resulting
from fewer events. For further analysis, refer to Management's Discussion and
Analysis of our business segments.
(2)Our consolidated operating expenses increased by $29.0 million , or 5%, in
2019 as compared to 2018. This increase was primarily driven by $35.3 million of
higher costs associated with business support functions, coupled with strategic
investments to support our content creation, partially offset by lower
management incentive and stock compensation costs. For further analysis, refer
to Management's Discussion and Analysis of our business segments.
(3)Our consolidated marketing and selling expenses decreased by $11.3 million ,
or 12%, in 2019 as compared to 2018. This decrease was primarily driven by $8.0
million of lower costs associated with business support functions, coupled with
a decline in management incentive compensation costs. For further analysis,
refer to Management's Discussion and Analysis of our business segments.
2019 2018
Reconciliation of Operating Income to Adjusted OIBDA % of Rev % of Rev Operating income$ 116.5 12 %$ 114.5 12 % Depreciation and amortization 34.1 4 % 25.1 3 % Stock-based compensation 29.4 3 % 39.3 4 % Other adjustments - - % - - % Adjusted OIBDA$ 180.0 19 %$ 178.9 19 % 25
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Increase
2019 2018 (decrease)
Adjusted OIBDA
Media $ 224.1 $ 210.6 6 %
Live Events 9.4 20.5 (54) %
Consumer Products 28.5 28.4 0 %
Corporate (82.0) (80.6) 2 %
Total Adjusted OIBDA
Media
The following tables present the performance results and key drivers for our Media segment (dollars in millions, except where noted):
Increase
2019 2018 (decrease)
Net Revenues
Network (including pay-per-view) $ 184.6 $ 199.3 (7) %
Core content rights fees (1) 348.6 269.8 29 %
Advertising and sponsorship 72.4 69.6 4 %
Other (2) 137.5 144.7 (5) %
Total net revenues $ 743.1 $ 683.4 9 %
Operating Metrics
Number of paid WWE Network subscribers at period end 1,391,000 1,528,100 (9) %
Domestic 997,300 1,116,200 (11) %
International (3) 393,700 411,900 (4) %
Number of average paid WWE Network subscribers 1,550,000 1,651,800 (6) %
Domestic 1,128,800 1,205,400 (6) %
International (3) 421,200 446,400 (6) %
(1)Core content rights fees consist primarily of licensing revenues earned from
the distribution of our flagship programs, Raw and SmackDown, as well as our NXT
programming, through global broadcast, pay television and digital platforms.
(2)Other revenues within our Media segment reflect revenues earned from the distribution of other WWE content, including, but not limited to, certain live in-ring programming content in international markets, scripted, reality and other programming, as well as theatrical and direct-to-home video releases.
(3)Metrics reflect subscribers who are direct customers of WWE Network and estimated subscribers under licensed partner agreements, which have different economic terms for WWE Network.
2019 2018
Reconciliation of Operating Income to Adjusted OIBDA % of Rev % of Rev Operating income$ 190.8 26 %$ 173.1 25 % Depreciation and amortization 12.6 2 % 11.9 2 % Stock-based compensation 20.7 3 % 25.6 4 % Other adjustments - - % - - % Adjusted OIBDA$ 224.1 30 %$ 210.6 31 % Media revenues increased by$59.7 million , or 9%, in 2019 as compared to 2018. Core content rights fees increased by$78.8 million , or 29%, driven by theOctober 2019 renewal of our key domestic distribution agreements of our flagship programs, Raw and SmackDown, coupled with the contractual escalations associated with our prior distribution agreements. This increase was partially offset by a decline in Network revenues, which includes revenues generated by WWE Network subscriptions and pay-per-view, of$14.7 million , or 7%, primarily due to a decline in average paid subscribers. During the year endedDecember 31, 2019 , WWE Network had an average of 1,550,000 paid subscribers, compared to an average of 1,651,800 subscribers in 2018. The subscription pricing of WWE Network atDecember 31, 2019 is$9.99 per month with no minimum commitment. Other revenues within the Media segment decreased by$7.2 million , or 5%, as the prior year included the distribution of Mixed Match Challenge on Facebook Watch, partially offset by a$6.0 million increase inWWE Studios revenues in the current year reflective of both the timing of our film delivery and the performance of our released films. 26
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Media Adjusted OIBDA as a percentage of revenues was essentially unchanged in 2019 as compared to 2018, as additional costs of$35.4 million associated with business support functions, coupled with strategic investments to support our content creation was mostly offset by increased revenues driven by the renewal of our key domestic distribution agreements and a reduction in management incentive compensation costs.
Live Events
The following tables present the performance results and key drivers for our Live Events segment (dollars in millions, except where noted):
Increase
2019 2018 (decrease)
Net Revenues
North American ticket sales $ 93.8 $ 105.4 (11) %
International ticket sales 19.0 22.3 (15) %
Advertising and sponsorship 2.1 2.1 - %
Other (1) 10.7 14.4 (26) %
Total net revenues $ 125.6 $ 144.2 (13) %
Operating Metrics (2)
Total live event attendance 1,548,500 1,950,700 (21) %
Number of North American events 260 310 (16) %
Average North American attendance 5,100 5,200 (2) %
Average North American ticket price (dollars) $ 64.21 $ 60.53 6 %
Number of international events 50 56 (11) %
Average international attendance 4,500 6,200 (27) %
Average international ticket price (dollars) $ 81.18 $ 74.87 8 %
(1)Other revenues within our Live Events segment primarily consists of the sale of travel packages associated with the Company's global live events and commissions earned through secondary ticketing, as well as revenues from events for which the Company receives a fixed fee. (2)Metrics above exclude the events for our NXT brand. This is our developmental brand that typically conducts their events in smaller venues with lower ticket prices. We conducted 186 NXT events with paid attendance of 138,800 and average ticket prices of$41.74 in 2019 as compared to 183 events with paid attendance of 147,000 and average ticket prices of$43.85 in 2018. 2019
2018
Reconciliation of Operating Income to Adjusted OIBDA % of Rev
% of Rev
Operating income $ 7.7 6 % $ 16.6 12 %
Depreciation and amortization - - % - - %
Stock-based compensation 1.7 1 % 3.9 3 %
Other adjustments - - % - - %
Adjusted OIBDA $ 9.4 7 % $ 20.5 14 %
Live events revenues, which include revenues from ticket sales and travel
packages, decreased by $18.6 million , or 13%, in 2019 as compared to 2018.
Revenues from our North American ticket sales decreased by $11.6 million , or
11%, as the impact of 50 fewer events and a 2% decline in average attendance
reduced revenues by $17.0 million . This decrease was partially offset by the
impact of a 6% increase in average ticket prices driven by changes in the mix of
venues, which contributed $4.9 million in incremental revenues during the
current year. Revenues from our International ticket sales decreased by $3.3
million , or 15%, which was primarily driven by the impact of six fewer events
and a 27% decline in average attendance, partially offset by an 8% increase in
average ticket prices. The change in ticket prices and average attendance in the
current year were due, in part, to changes in the mix of venues and territories.
Additionally, other revenues decreased by $3.7 million , or 26%, as the prior
year included our Super ShowDown event in Australia .
Live Events Adjusted OIBDA as a percentage of revenues decreased in 2019 as
compared to 2018. This decrease was primarily driven by the impact of reduced
revenues, primarily driven by the decline in ticket sales, as discussed above,
partially offset by a decrease in costs of $4.4 million associated with business
support functions coupled with a reduction in management incentive compensation
costs.
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Consumer Products
The following tables present the performance results and key drivers for our Consumer Products segment (dollars in millions, except where noted):
Increase
2019 2018 (decrease)
Net Revenues
Consumer product licensing $ 43.2 $ 46.0 (6) %
eCommerce 29.9 34.9 (14) %
Venue merchandise 18.6 21.7 (14) %
Total net revenues $ 91.7 $ 102.6 (11) %
Operating Metrics
Average eCommerce revenue per order (dollars) $ 47.36 $ 43.91 8 %
Number of eCommerce orders 619,700 786,800 (21) %
Venue merchandise domestic per capita spending
(dollars) $ 10.00 $ 9.80 2 %
2019 2018
Reconciliation of Operating Income to Adjusted
OIBDA % of Rev % of Rev
Operating income $ 26.4 29 % $ 23.4 23 %
Depreciation and amortization - - % - - %
Stock-based compensation 2.1 2 % 5.0 5 %
Other adjustments - - % - - %
Adjusted OIBDA $ 28.5 31 % $ 28.4 28 %
Consumer Products revenues decreased by $10.9 million , or 11%, in 2019 as
compared to 2018. eCommerce revenues decreased by $5.0 million , or 14%,
primarily due to a 21% decline in the volume of online merchandise orders. Venue
merchandise revenues decreased by $3.1 million , or 14%, primarily driven by the
decline in number of events in the current year. Consumer product licensing
revenues decreased by $2.8 million , or 6%, primarily driven by lower royalties
from the sale of our video games.
Consumer Products Adjusted OIBDA as a percentage of revenues increased in 2019
as compared to 2018. This increase was primarily driven by a reduction in costs
of $3.7 million associated with business support functions, coupled with a
decline in management incentive compensation costs.
Corporate
The remaining unallocated corporate expenses largely relate to corporate
administrative functions, including finance, investor relations, community
relations, corporate communications, information technology, legal, human
resources and our Board of Directors. The Company does not allocate these costs
to its business segments, as they do not directly relate to revenue generating
activities.
2019 2018
Reconciliation of Operating Income (Loss) to
Adjusted OIBDA % of Rev % of Rev
Operating income (loss) $ (108.4) (11) % $ (98.6) (11) %
Depreciation and amortization 21.5 2 % 13.2 1 %
Stock-based compensation 4.9 1 % 4.8 1 %
Other adjustments - - % - - %
Adjusted OIBDA $ (82.0) (9) % $ (80.6) (9) %
Corporate Adjusted OIBDA as a percentage of total revenues was flat in 2019 as compared to 2018.
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Depreciation and Amortization
(dollars in millions)
Increase
2019 2018 (decrease)
Depreciation and amortization
Depreciation and amortization expense increased by$9.0 million , or 36%, in 2019 as compared to 2018, primarily driven by additional expenses of$6.0 million associated with the Company's workplace strategy plan. Interest Expense (dollars in millions) Increase 2019 2018 (decrease) Interest expense$ 26.1 $ 15.4 69 % Interest expense increased by$10.7 million in 2019 as compared to 2018, primarily driven by expense of$8.2 million associated with the Company's new global headquarters lease, which commenced onJuly 1, 2019 and is accounted for as a finance lease. The remaining portion of interest expense relates primarily to interest and amortization associated with our convertible notes, our debt facilities, other finance leases, mortgage and aircraft financing. Other Income, Net (dollars in millions) Increase 2019 2018 (decrease)
Other income, net
Other income, net decreased by$2.6 million in 2019 as compared to 2018. The current year activity is primarily comprised of interest income and rental income, partially offset by a net loss of$3.2 million in our equity investments. The prior year activity is primarily comprised of interest income and rental income, coupled with a net gain of$0.9 million in our equity investments. Income Taxes (dollars in millions) Increase 2019 2018 (decrease)
Provision for income taxes
19 % 6 %
The increase in the effective tax rate in 2019 as compared to 2018 was primarily
driven by a decrease in the excess tax benefits related to the Company's
share-based compensation awards at vesting. This discrete tax item resulted in a
tax benefit of $9.4 million in the current year as compared to $22.5 million in
the prior year. The tax benefit is driven by the change in the Company's stock
price between when the Company granted the awards and the subsequent vesting
date.
Discrete tax items, including the aforementioned excess tax benefits, resulted
in a net tax benefit of $7.9 million in the current year as compared to $22.7
million during the prior year. Excluding these items, our effective tax rate was
28% in the current year as compared to 27% in the prior year.
?
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Liquidity and Capital Resources
We had cash and cash equivalents and short-term investments of$250.5 million and$359.1 million as ofDecember 31, 2019 and 2018, respectively. Our short-term investments consist primarily ofU.S. Treasury securities, corporate bonds, municipal bonds, including pre-refunded municipal bonds, and government agency bonds. Our debt balance totaled$214.4 million and$213.9 million as ofDecember 31, 2019 and 2018, respectively, and includes the carrying value of$188.7 and$183.1 million related to our convertible senior notes due 2023 as ofDecember 31, 2019 and 2018, respectively. We believe that our existing cash and cash equivalents and investment balances and cash generated from operations will be sufficient to meet our operating requirements for at least the next twelve months, inclusive of dividend payments, debt service, film and television production activities, capital expenditures and for any discretionary repurchases of shares of our common stock under a$500.0 million share repurchase program that was authorized by our Board of Directors inFebruary 2019 . Repurchases may be made at management's discretion from time to time in accordance with all applicable securities and other laws and regulations. The extent to which WWE repurchases its shares, and the timing of such repurchases, will depend upon a variety of factors, including liquidity, capital needs of the business, market conditions, regulatory requirements and other corporate considerations. Repurchases under this program may be funded from one or a combination of existing cash balances and free cash flow. The repurchase program does not obligate the Company to repurchase any minimum dollar amount or number of shares and may be modified, suspended or discontinued at any time. We repurchased 1,398,385 shares of our common stock in the open market for an aggregate cost of$83.4 million during the year endedDecember 31, 2019 . All repurchases were made using available cash resources. As it relates to our Convertible Notes, which pursuant to the terms are currently convertible, we believe that if note holders elected to convert their notes within the next twelve months, the Company has sufficient means to settle the Convertible Notes using any combination of existing cash and cash equivalents and investment balances, borrowings under our Amended and Restated Revolving Credit Facility, cash generated from operations or through the issuance of shares.
Debt Summary and Borrowing Capacity
The Company has$215.0 million aggregate principal amount of 3.375% convertible senior notes (the "Convertible Notes") dueDecember 15, 2023 , Refer to Note 12, Convertible Debt, and Note 3, Earnings Per Share, in the Notes to Consolidated Financial Statements for further information on the Convertible Notes, including the dilutive nature of the Convertible Notes. OnMay 24, 2019 , the Company entered into an amended and restated$200.0 million senior unsecured revolving credit facility with a syndicated group of banks, withJPMorgan Chase Bank, N.A . acting as Administrative Agent (the "Amended and Restated Revolving Credit Facility"). The Amended and Restated Revolving Credit Facility replaces the previous$100.0 million revolving credit facility and, among other things, extends the maturity date fromJuly 29, 2021 toMay 24, 2024 . As ofDecember 31, 2019 , the Company was in compliance with the provisions of our Amended and Restated Revolving Credit Facility, there were no amounts outstanding, and the Company had available capacity under the terms of the facility of$200.0 million . InSeptember 2016 , the Company acquired land and a building located inStamford, Connecticut adjacent to our production facility. In connection with the acquisition, we assumed future obligations under a loan agreement, in the principal amount of$23.0 million , which loan is secured by a mortgage on the property. Pursuant to the loan agreement, the assets ofWWE Real Estate , a subsidiary of the Company, represent collateral for the underlying mortgage, therefore these assets will not be available to satisfy debts and obligations due to any other creditors of the Company. As ofDecember 31, 2019 and 2018, the amounts outstanding of the mortgage were$22.5 million and$22.9 million , respectively. In 2013, the Company entered into a$31.6 million promissory note (the "Aircraft Note") withCitizens Asset Finance, Inc. , for the purchase of a 2007 Bombardier Global 5000 aircraft and refurbishments. InAugust 2017 , the Aircraft Note was assigned toFifth Third Equipment Finance Company . The Aircraft Note is secured by a first priority perfected security interest in the purchased aircraft. As ofDecember 31, 2019 and 2018, the amounts outstanding under the Aircraft Note were$3.2 million and$8.0 million , respectively.
Cash Flows from Operating Activities
Cash generated from operating activities was$121.7 million for the year endedDecember 31, 2019 , compared to$186.7 million for the year endedDecember 31, 2018 . The$65.0 million decrease in the current year was driven by lower operating performance, coupled with the timing of collections associated with our Crown Jewel event which was held inOctober 2019 and the payout of management incentive compensation in the current year related to the Company's performance in the prior year. During 2019, the Company spent$7.9 million on feature film production activities, compared to$1.2 million in 2018. In 2019, we received$0.7 million in incentives related to feature film productions, as compared to$1.2 million in 2018. We anticipate spending approximately$10 million to$15 million on feature film production during the year endingDecember 31, 2020 . 30
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We received$13.5 million in non-film related incentives associated with television production activities in 2019, as compared to$12.8 million in 2018. During the year endingDecember 31, 2020 , we anticipate receiving approximately$10 million to$15 million on non-film related incentives. During 2019, the Company spent$26.4 million to produce non-live event programming for television, including Total Divas Season 9, Miz & Mrs. Season 2, and Total Bellas Seasons 5, and various programs for WWE Network, as compared to$30.5 million spent in 2018, which included programming for television, including Total Divas Season 8, Total Bellas Seasons 3 and 4, Miz and Mrs., and various programs for WWE Network. We anticipate spending approximately$25 million to$35 million to produce additional non-live event content during the year endingDecember 31, 2020 . Our accounts receivable represents a significant portion of our current assets and relate principally to a limited number of distributors and licensees that produce consumer products containing our intellectual property. AtDecember 31, 2019 , our largest receivable balance from customers was 49% of our gross accounts receivable. Changes in the financial condition or operations of our distributors, customers or licensees may result in increased delayed payments or non-payments which would adversely impact our cash flows from operating activities and/or our results of operations. We believe credit risk with respect to accounts receivable is limited due to the generally high credit quality of the Company's major customers.
Cash Flows from Investing Activities
Cash used in investing activities was$35.8 million for the year endedDecember 31, 2019 , as compared to$66.1 million for the year endedDecember 31, 2018 . During the current year, we purchased$124.3 million of short-term investments and received proceeds from the maturities of our short-term investments of$157.5 million , as compared to purchases of$94.9 million and proceeds of$61.4 million in the prior year. Capital expenditures in 2019 increased by$36.8 million as compared to 2018 in support of the Company's workplace and technology related strategic initiatives. Capital expenditures for the year endingDecember 31, 2020 are estimated to range between$180 million and$220 million , with a large portion of this spend associated with the buildout of the Company's new global headquarters space inStamford, Connecticut .
Cash Flow from Financing Activities
Cash used in financing activities was$162.9 million for the year endedDecember 31, 2019 , as compared to$90.9 million for the year endedDecember 31, 2018 . The Company paid$83.4 million in 2019 for stock repurchases under its approved stock repurchase program. The Company made employee payroll withholding tax payments of$30.2 million and$50.8 million during 2019 and 2018, respectively, related to net settlement upon vesting of employee equity awards. The Company made dividend payments of$37.4 million and$37.2 million during the years endedDecember 31, 2019 and 2018, respectively. Additionally, we made repayments of$8.4 million against our finance lease obligations during the current year. Contractual Obligations
We have entered into various contracts under which we have commitments to make contractually required payments, including:
?Scheduled principal and fixed interest payments under our secured loan in connection with our corporate aircraft financing.
?Scheduled principal and fixed interest payments under our assumed mortgage in
connection with an owned building in
?Convertible notes with fixed semi-annual interest payments.
?Various operating leases for facilities, sales offices and equipment with terms generally ranging from one to ten years.
?Finance lease for the Company's new headquarters building with an accounting lease term of 30 years in addition to finance leases of certain equipment utilized in our television production operations with contractual terms generally five years or less (refer to Note 8, Leases, in the Notes to Consolidated Financial Statements for further information).
?Service contracts with certain vendors and independent contractors, including our talent with terms ranging from one to twenty years.
?Service agreement obligations related to WWE Network (excluding future performance-based payments which are variable in nature).
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Our aggregate minimum payment obligations under these contracts as of
After
2020 2021 2022 2023 2024 2024 Total
Long-term debt $ 4.6 $ 1.4 $ 1.4 $ 1.4 $ 1.4 $ 20.8 $ 31.0
Convertible debt (1) 7.3 7.2 7.2 222.0 - - 243.7
Operating leases (2) 7.5 6.3 3.4 1.9 1.6 2.7 23.4
Finance leases (2) (3) 8.3 20.9 19.3 19.3 19.2 636.3 723.3
Service contracts and talent
commitments 28.8 18.4 12.0 0.3 0.3 0.2 60.0
Total commitments $ 56.5 $ 54.2 $ 43.3 $ 244.9 $ 22.5 $ 660.0 $ 1,081.4
(1)Convertible debt obligations assume that no notes are converted prior to the
December 15, 2023 maturity date. See Note 11, Convertible Debt, in the Notes to
the Consolidated Financial Statements for additional information.
(2)Operating and finance lease obligations disclosed in the table above are presented on an undiscounted basis. See Note 8, Leases, in the Notes to the Consolidated Financial Statements for the discounted amounts which include the amounts for imputed interest.
(3)Finance lease payments include
Our Consolidated Balance Sheet at
Seasonality
Our operating results are not materially affected by seasonal factors; however, we may produce several large-scale premier events throughout the year, including WrestleMania, which result in increased revenues and expenses during the periods in which these events occur. WrestleMania typically occurs late in our first quarter or early second quarter, while certain other large-scale premier events may not have set recurring dates. Revenues from our licensing and direct sale of consumer products, including our internet sites, varies from period to period depending on the volume and extent of licensing agreements and marketing and promotion programs entered into during any particular period of time, as well as the commercial success of the media exposure of our characters and brand. The timing of these events, as well as the continued introduction of new product offerings and revenue generating outlets can and will cause fluctuations in quarterly revenues and earnings.
Inflation
During 2019, 2018 and 2017, inflation did not have a material effect on our business.
Off-Balance Sheet Arrangements
As of
Critical Accounting Estimates
The preparation of our consolidated financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses, and the related disclosure of contingent assets and contingent liabilities. We base our estimates on our historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making estimates about the carrying values of assets and liabilities. The accuracy of these estimates and the likelihood of future changes depend on a range of possible outcomes and a number of underlying variables, many of which are beyond our control. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following judgments and estimates are critical in the preparation of our consolidated financial statements.
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Revenue Recognition with Multiple Performance Obligations
Most of our contracts have one performance obligation and all consideration is allocated to that performance obligation. In contracts that have multiple performance obligations which may include the production of live events, content broadcast rights, and advertising and sponsorship rights, we allocate the transaction price to each identified performance obligation based upon their relative standalone selling price. The standalone selling prices are determined using observable standalone selling prices when available as well as estimates of standalone selling prices using adjusted market assessment and expected cost plus margin approaches to estimate the price for individual components. Judgement is required to determine the standalone selling prices and estimating the portion of the transaction price allocated to each performance obligation.
Feature Film Production Assets, Net
Feature film production assets are recorded at the cost of production, including production overhead and net of production incentives. The costs for an individual film are amortized in the proportion that revenues bear to management's estimates of the ultimate revenue expected to be recognized from exploitation, exhibition or sale. Unamortized feature film production assets are evaluated for impairment each reporting period. We review and revise estimates of ultimate revenue and participation costs at each reporting period to reflect the most current information available. If estimates for a film's ultimate revenue and/or costs are revised and indicate a significant decline in a film's profitability, or if events or circumstances change that indicate we should assess whether the fair value of a film is less than its unamortized film costs, we calculate the film's estimated fair value using a discounted cash flow model. If fair value is less than unamortized cost, the film asset is written down to fair value. Impairment charges are recorded as an increase in amortization expense included in operating expenses in the consolidated financial statements. Our estimate of ultimate revenues for feature films includes revenues from all sources for ten years from the date of a film's initial release. We estimate the ultimate revenues based on industry and Company specific trends, the historical performance of similar films, the star power of the lead actors, and the genre of the film. Prior to the release of a feature film and throughout its life, we revise our estimates of revenues based on expected future results, actual results and other known factors affecting the various distribution markets.
During the years ended
As ofDecember 31, 2019 , we had$15.9 million (net of accumulated amortization and impairment charges) in capitalized film production costs, which includes 27 released films, three films in production, and two films in development. No assurance can be given that additional unfavorable changes to revenue and cost estimates will not occur, which, in turn, may result in additional impairment charges that might materially affect our results of operations and financial condition.
Television Production Assets, Net
Television production assets consist primarily of non-live event episodic television series we have produced for distribution through a variety of platforms, including on our WWE Network. Amounts capitalized include development costs, production costs, production overhead, and employee salaries. Costs to produce episodic programming for television or distribution on WWE Network are amortized in the proportion that revenues bear to management's estimates of the ultimate revenue expected to be recognized from exploitation, exhibition or sale. Costs to produce our live event programming are expensed when the event is first broadcast and are not included in the capitalized costs or in the related amortization. Unamortized television production assets are evaluated for impairment each reporting period. If conditions indicate a potential impairment, and the estimated future cash flows are not sufficient to recover the unamortized asset, the asset is written down to fair value. In addition, if we determine that a program will not likely air, we will expense the remaining unamortized asset. During the years endedDecember 31, 2019 , 2018 and 2017, we expensed$30.0 million ,$29.6 million and$21.1 million , respectively, related to the amortization of television production assets. As ofDecember 31, 2019 and 2018, we had$4.2 million and$7.5 million , respectively, in capitalized television production costs. We did not record any impairments related to our television production assets during the years endedDecember 31, 2019 , 2018 and 2017. 33
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Allowance for Doubtful Accounts
Our accounts receivable represent a significant portion of our current assets and relate principally to a limited number of distributors and licensees that produce consumer products containing our intellectual property. Adverse changes in general economic conditions and/or contraction in global credit markets could precipitate liquidity problems among our key distributors, increasing our exposure to bad debts which could negatively impact our results of operations and financial condition. We estimate the collectibility of our receivables and establish allowances for the amount of account receivable that we estimate to be uncollectible. We base these allowances on our historical collection experience, the length of time our account receivable are outstanding and the financial condition of individual customers. Changes in the financial condition of a single major customer, either adverse or positive, could impact the amount and timing of any additional allowances or reductions that may be required. AtDecember 31, 2019 , our largest receivable balance from customers was 49% of our gross accounts receivable. AtDecember 31, 2018 , our largest receivable balance from customers was 30% of our gross accounts receivable. As ofDecember 31, 2019 and 2018, our allowance for doubtful accounts was$0.8 million and$0.7 million , respectively. Income Taxes Deferred tax liabilities and assets are recognized for the expected future tax consequences of events that have been reflected in the consolidated financial statements. Deferred tax liabilities and assets are determined based on the differences between the book and tax basis of particular assets and liabilities, using tax rates in effect for the years in which the differences are expected to reverse. A valuation allowance is provided to offset deferred tax assets if, based upon the available evidence, it is more-likely-than-not that some or all of the deferred tax assets will not be realized. In evaluating our ability to recover deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax assets valuation allowance, which would reduce the provision for income taxes. As ofDecember 31, 2019 and 2018, our deferred tax assets (net of valuation reserve) were$7.2 million and$17.1 million , respectively. The decrease in our net deferred tax asset balance in 2019 was primarily driven by 100% bonus depreciation, the change in valuation of various equity investments and method changes related to the new revenue recognition standard, partially offset by the impact of the adoption of the new lease standard. We believe that it is more likely than not that we will have sufficient taxable income in the future to realize these deferred tax assets and as such have not recorded a valuation allowance to reduce the net carrying value. If we determine it is more likely than not that we will not have sufficient taxable income to realize these assets, we may need to record a valuation allowance in the future. We use a two-step approach in recognizing and measuring uncertain tax positions. The first step is to evaluate tax positions taken or expected to be taken in a tax return by assessing whether they are more likely than not sustainable, based solely on their technical merits, upon examination, and including resolution of any related appeals or litigation process. The second step is to measure the associated tax benefit of each position, as the largest amount that we believe is more likely than not realizable. Differences between the amount of tax benefits taken or expected to be taken in our income tax returns and the amount of tax benefits recognized in our financial statements represent our unrecognized income tax benefits, which we record as a liability. Our policy is to include interest and penalties related to unrecognized income tax benefits as a component of income tax expense. AtDecember 31, 2019 , our unrecognized tax benefits including interest and penalties totaled$0.3 million .
Recent Accounting Pronouncements
The information set forth under Note 2 to the Consolidated Financial Statements under the caption "Summary of Significant Accounting Policies - Recent Accounting Pronouncements, is incorporated herein by reference.
Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain statements that are forward-looking and are not based on historical facts. When used in this Form 10-K and our otherSEC filings, our press releases and comments made in earnings calls, investor presentations or otherwise to the public, the words "may," "will," "could," "anticipate," "plan," "continue," "project," "intend," "estimate," "believe," "expect" and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. These statements relate to our future plans, objectives, expectations and intentions and are not historical facts and accordingly involve known and unknown risks and uncertainties and other factors that may cause the actual results or the performance by us to be materially different from future results or performance expressed or implied by such forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Form 10-K and our otherSEC filings, in press releases, earnings calls and other statements made by our authorized officers: (i) risks relating to entering, maintaining and renewing major distribution agreements; (ii) risks relating to a rapidly evolving media landscape; (iii) risks relating to WWE Network, including the risk that we are unable to attract, retain and renew subscribers; (iv) our need to continue to develop creative and entertaining programs and events; (v) our need to retain 34
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or continue to recruit key performers; (vi) the risk of a decline in the popularity of our brand of sports entertainment, including as a result of changes in the social and political climate; (vii) the possible unexpected loss of the services ofVincent K. McMahon ; (viii) possible adverse changes in the regulatory atmosphere and related private sector initiatives; (ix) the highly competitive, rapidly changing and increasingly fragmented nature of the markets in which we operate and/or our inability to compete effectively, especially against competitors with greater financial resources or marketplace presence; (x) uncertainties associated with international markets including possible disruptions and reputational risks; (xi) our difficulty or inability to promote and conduct our live events and/or other businesses if we do not comply with applicable regulations; (xii) our dependence on our intellectual property rights, our need to protect those rights, and the risks of our infringement of others' intellectual property rights; (xiii) risks relating to the complexity of our rights agreements across distribution mechanisms and geographical areas; (xiv) the risk of substantial liability in the event of accidents or injuries occurring during our physically demanding events including, without limitation, claims alleging traumatic brain injury; (xv) exposure to risks relating to large public events as well as travel to and from such events; (xvi) risks inherent in our feature film business; (xvii) a variety of risks as we expand into new or complementary businesses and/or make strategic investments and/or acquisitions; (xviii) risks related to our computer systems and online operations; (xix) risks relating to privacy norms and regulations; (xx) risks relating to a possible decline in general economic conditions and disruption in financial markets; (xxi) risks relating to our accounts receivable; (xxii) risks relating to our indebtedness including our convertible notes; (xxiii) potential substantial liabilities if litigation is resolved unfavorably; (xxiv) our potential failure to meet market expectations for our financial performance; (xxv) through his beneficial ownership of a substantial majority of our Class B common stock, our controlling stockholder,Vincent K. McMahon , exercises control over our affairs, and his interests may conflict with the holders of our Class A common stock; (xxvi) a substantial number of shares are eligible for sale byMr. McMahon and members of his family or trusts established for their benefit, and the sale, or the perception of possible sales, of those shares could lower our stock price; and (xxvii) risks related to the volatility of our Class A common stock. In addition, our dividend is dependent on a number of factors, including, among other things, our liquidity and historical and projected cash flow, strategic plan (including alternative uses of capital), our financial results and condition, contractual and legal restrictions on the payment of dividends (including under our revolving credit facility), general economic and competitive conditions and such other factors as our Board of Directors may consider relevant. Forward-looking statements made by the Company speak only as of the date made, are subject to change without any obligation on the part of the Company to update or revise them, and undue reliance should not be placed on these statements. For more information about risks and uncertainties associated with the Company's business, please refer to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Risk Factors" sections of this Form 10-K and our otherSEC filings.
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