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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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You should read the following discussion of our financial condition and results of operations together with the audited consolidated financial statements and notes to the financial statements included elsewhere in this Annual Report. This discussion contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed under 1A.—Risk Factors and other sections in this Annual Report.
Executive Overview
In 2012, we delivered growth in ticket sales, revenue and operating results. Our strategy remains focused on leveraging our leadership position in the live entertainment industry to reach fans through the live concert experience in order to sell more tickets and grow our sponsorship and advertising revenue, while continuing to optimize our cost structure. We believe as the leading, global live event and ticketing company that we are well-positioned to better serve artists, teams, fans and venues.
Our Concerts segment sold more tickets, even with slightly fewer events in 2012, which delivered higher revenue as compared to last year. Overall, we delivered higher attendance per show at our owned and/or operated amphitheaters and improved the ancillary net revenue per attendee at these venues. We continued to focus on festivals, including improvement of key European festival event profitability, expanding our portfolio of electronic dance music events, with the acquisition of the Creamfields brand, as well as investing in new festivals. We also were successful in expanding geographically, increasing the reach of our promotion activity in Australia with the acquisition of Coppel and adding offices in additional countries in Asia, either on our own or with strategic partners.
Our Ticketing segment sold more tickets this year as compared to last year driven primarily by increases in concerts and sports tickets. Overall, our revenue and operating results improved due to these higher ticket volumes along with higher resale market activity. During the year, we successfully completed the 2012 London Olympics as its official ticket seller. Investment in our ticketing platform is in the second year of the planned three-year development and we rolled out several enhancements to our clients during the year. We will continue to invest in a variety of initiatives aimed at improving the ticket buying process and overall fan and venue experience.
Our Artist Nation segment is focused on serving our existing artists as well as developing new relationships with top artists and extending our various services provided. We expect that our performance in this business will improve as we empower the next generation of the industry’s top managers to more effectively tap into the assets of our Ticketing, Concerts, and Sponsorship & Advertising platforms.
Our Sponsorship & Advertising segment again delivered growth in revenue and operating results driven by increased advertising revenue on our websites and the renewal and growth of sponsorships from brand relationships. Our extensive on-site and online reach, global venue distribution network, artist relationships and ticketing operations are the key to securing long-term sponsorship agreements with major brands and we continue to look for ways to expand these assets and to extend further internationally in new markets.
We continue to be optimistic about the long-term potential of our Company and we are focused on the key elements of our business model – expanding our concert platform to sell more tickets, driving conversion of ticket sales through social and mobile channels, growing our sponsorship and online revenue and selling more tickets for our Ticketmaster clients while driving reductions in the ticketing cost structure.
Segment Overview
Our reportable segments are Concerts, Ticketing, Artist Nation and Sponsorship & Advertising. Prior to 2012 we reported an eCommerce segment, which is now included in our Ticketing and Sponsorship & Advertising segments. Specifically, all online advertising and online sponsorships previously reported in the eCommerce segment are now reported in the Sponsorship & Advertising segment while all other activity has been included in the Ticketing segment. This change was made to be consistent with how the four key components of the business are now being managed.
The segment results for the prior periods have been reclassified to conform to the current year presentation.
Concerts
Our Concerts segment principally involves the global promotion of live music events in our owned and/or operated venues and in rented third-party venues, the operation and management of music venues and the production of music festivals across the world. While our Concerts segment operates year-round, we generally experience higher revenue during the second and third quarters due to the seasonal nature of shows at our outdoor amphitheaters and festivals, which primarily occur May through September. Revenue and related costs for events are generally deferred and recognized when the event occurs. All advertising costs for shows are expensed at the end of the year for any future events.
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To judge the health of our Concerts segment, we primarily monitor the number of confirmed events in our network of owned and/or operated and third-party venues, talent fees, average paid attendance and advance ticket sales. In addition, at our owned and/or operated venues, we monitor attendance, ancillary revenue per fan and premium seat sales. For business that is conducted in foreign markets, we also compare the operating results from our foreign operations to prior periods on a constant currency basis.
Ticketing
The Ticketing segment is primarily an agency business that sells tickets for events on behalf of our clients and retains a convenience charge and order processing fee for our services. We sell tickets through a combination of websites, telephone services and ticket outlets. Our ticketing sales are impacted by fluctuations in the availability of events for sale to the public, which may vary depending upon scheduling by our clients. Our Ticketing segment also manages our online activities including enhancements to our websites and bundling product offerings. Through our websites, we sell tickets to our own events as well as tickets for our ticketing clients and provide event information. Revenue related to ticketing service charges for our events where we control ticketing is deferred and recognized as the event occurs.
To judge the health of our Ticketing segment, we primarily review the number of tickets sold through our ticketing operations, average convenience charges and order processing fees, the number of client tickets renewed or added and the average royalty rate paid to clients who use our ticketing services. In addition, we review the number of visits to our websites, the overall number of customers in our database and the revenue related to the sale of other products on our websites. For business that is conducted in foreign markets, we also compare the operating results from our foreign operations to prior periods on a constant currency basis.
Artist Nation
The Artist Nation segment primarily provides management services to music artists in exchange for a commission on the earnings of these artists. Our Artist Nation segment also sells merchandise associated with music artists at live performances, to retailers and directly to consumers via the internet and provides other services to artists. Revenue earned from our Artist Nation segment is impacted to a large degree by the touring schedules of the artists we represent. Generally, we experience higher revenue during the second and third quarters as the period from May through September tends to be a popular time for touring events.
To judge the health of our Artist Nation segment, we primarily review the average annual earnings of each artist represented and the percentage of top artists on tour or with planned album releases as these activities tend to drive higher revenue. For business that is conducted in foreign markets, we compare the operating results from our foreign operations to prior periods on a constant currency basis.
Sponsorship & Advertising
Our Sponsorship & Advertising segment employs a sales force that creates and maintains relationships with sponsors through a combination of strategic, international, national and local opportunities that allow businesses to reach customers through our concert, venue, artist relationship and ticketing assets, including advertising on our websites. We work with our corporate clients to help create marketing programs that drive their business goals and connects their brands directly with fans and artists.
To judge the health of our Sponsorship & Advertising segment, we primarily review the average revenue per sponsor, the total revenue generated through sponsorship arrangements, percentage of expected revenue under contract and the online revenue received from sponsors advertising on our websites.
See further discussion of our segments in Item 1. Business—Our Business.
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Consolidated Results of Operations
| Year Ended December 31, | % Change | % Change | ||||||||||||||||||
| 2012 | 2011 | 2010 | 2012 vs 2011 | 2011 vs 2010 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenue | $ | 5,819,047 | $ | 5,383,998 | $ | 5,063,748 | 8 | % | 6 | % | ||||||||||
| Operating expenses: | ||||||||||||||||||||
| Direct operating expenses | 4,151,277 | 3,789,488 | 3,658,310 | 10 | % | 4 | % | |||||||||||||
| Selling, general and administrative expenses | 1,143,632 | 1,111,969 | 1,014,491 | 3 | % | 10 | % | |||||||||||||
| Depreciation and amortization | 429,557 | 343,018 | 321,666 | 25 | % | 7 | % | |||||||||||||
| Loss (gain) on sale of operating assets | (514 | ) | 978 | 374 | * | * | ||||||||||||||
| Corporate expenses | 113,364 | 112,157 | 110,252 | 1 | % | 2 | % | |||||||||||||
| Acquisition transaction expenses | 3,370 | 8,051 | 22,355 | * | * | |||||||||||||||
| Operating income (loss) | (21,639 | ) | 18,337 | (63,700 | ) | * | * | |||||||||||||
| Operating margin | (0.4 | )% | 0.3 | % | (1.3 | )% | ||||||||||||||
| Interest expense | 123,740 | 120,414 | 116,527 | |||||||||||||||||
| Loss (gain) on extinguishment of debt | (460 | ) | - | 21,315 | ||||||||||||||||
| Interest income | (4,170 | ) | (4,215 | ) | (3,771 | ) | ||||||||||||||
| Equity in earnings of nonconsolidated affiliates | (9,921 | ) | (7,742 | ) | (4,928 | ) | ||||||||||||||
| Other expense (income), net | 1,333 | 6,507 | (4,189 | ) | ||||||||||||||||
| Loss from continuing operations before income taxes | (132,161 | ) | (96,627 | ) | (188,654 | ) | ||||||||||||||
| Income tax expense (benefit) | 29,736 | (26,224 | ) | 15,154 | ||||||||||||||||
| Loss from continuing operations | (161,897 | ) | (70,403 | ) | (203,808 | ) | ||||||||||||||
| Loss from discontinued operations, net of tax | - | - | (4,228 | ) | ||||||||||||||||
| Net loss | (161,897 | ) | (70,403 | ) | (208,036 | ) | ||||||||||||||
| Net income attributable to noncontrolling interests | 1,330 | 12,613 | 20,354 | |||||||||||||||||
| Net loss attributable to common stockholders of Live Nation Entertainment, Inc. | $ | (163,227 | ) | $ | (83,016 | ) | $ | (228,390 | ) | |||||||||||
| Notes: | Acquisitions and dispositions significantly impact the comparability of the historical consolidated financial data reflected in this schedule of Consolidated Results of Operations. |
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| * | Percentages are not meaningful. |
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Key Operating Metrics
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| Concerts (1) | ||||||||||||
| Total estimated events: | ||||||||||||
| North America | 14,962 | 15,531 | 14,119 | |||||||||
| International | 7,000 | 6,720 | 6,971 | |||||||||
| Total estimated events | 21,962 | 22,251 | 21,090 | |||||||||
| Total estimated attendance (rounded): | ||||||||||||
| North America | 32,007,000 | 31,060,000 | 30,603,000 | |||||||||
| International | 16,750,000 | 15,742,000 | 16,659,000 | |||||||||
| Total estimated attendance | 48,757,000 | 46,802,000 | 47,262,000 | |||||||||
| Ancillary net revenue per attendee: | ||||||||||||
| North America amphitheaters | $ | 18.56 | $ | 18.11 | $ | 17.57 | ||||||
| International festivals | $ | 15.55 | $ | 16.62 | $ | 15.95 | ||||||
| Ticketing (2) (4) | ||||||||||||
| Number of tickets sold (in thousands): | ||||||||||||
| Concerts | 75,372 | 71,632 | 63,833 | |||||||||
| Sports | 28,760 | 27,055 | 22,074 | |||||||||
| Arts and theater | 19,961 | 21,891 | 18,462 | |||||||||
| Family | 15,970 | 14,248 | 11,469 | |||||||||
| Other (3) | 7,669 | 6,541 | 4,420 | |||||||||
| 147,732 | 141,367 | 120,258 | ||||||||||
| Gross value of tickets sold (in thousands) | $ | 9,146,254 | $ | 8,441,230 | $ | 7,466,957 | ||||||
| Number of customers in database (rounded) | 119,592,000 | 110,208,000 | 98,007,000 | |||||||||
| Sponsorship & Advertising | ||||||||||||
| Sponsorship revenue (in thousands) | $ | 191,773 | $ | 179,734 | $ | 161,653 | ||||||
| Online advertising revenue (in thousands) | $ | 56,148 | $ | 51,057 | $ | 38,493 |
| (1) | Events generally represent a single performance by an artist. Attendance generally represents the number of fans who were present at an event. Festivals are counted as one event in the quarter in which the festival begins but attendance is split over the days of the festival and can be split between quarters. Events and attendance metrics are estimated each quarter. |
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| (2) | The number and gross value of tickets sold includes primary tickets only and excludes tickets sold for the 2012 Olympics. These metrics include tickets sold during the period regardless of event timing except for our promoted concerts in our owned and/or operated venues and in certain European territories where these tickets are recognized as the concerts occur. The tickets sold listed above for 2010 do not include 7.1 million tickets with a gross value of $406.4 million for the pre-Merger period. Tickets sold for the full year ended December 31, 2010, including the pre-Merger period, were as follows: |
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| Concerts | 66,843 | |||
| Sports | 23,733 | |||
| Arts and theater | 19,709 | |||
| Family | 12,467 | |||
| Other | 4,651 | |||
| 127,403 | ||||
| (3) | Other category includes tickets for comedy shows, facility tours, donations, lectures, seminars and cinemas. |
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| (4) | The total number of tickets sold for the years ended December 31, 2012, 2011 and 2010 do not include 108 million, 135 million and 112 million, respectively, of tickets sold through our venue clients’ box offices for which we do not receive a fee. |
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Revenue
Our revenue increased $435.0 million, or 8%, during the year ended December 31, 2012 as compared to the prior year. The overall increase in revenue was primarily due to increases in our Concerts and Ticketing segments of $364.2 million and $54.7 million, respectively. Excluding the decreases of approximately $100.4 million related to the impact of changes in foreign exchange rates, revenue increased $535.4 million, or 10%.
Our revenue increased $320.3 million, or 6%, during the year ended December 31, 2011 as compared to the prior year. The overall increase in revenue was primarily due to increases in our Concerts, Ticketing, Artist Nation and Sponsorship & Advertising segments of $67.8 million, $194.6 million, $31.0 million and $30.6 million, respectively. The overall increase included incremental revenue of $77.3 million resulting from the timing of the Merger. Excluding the increases of approximately $132.9 million related to the impact of changes in foreign exchange rates, revenue increased $187.4 million, or 4%.
More detailed explanations of the changes for the years ended 2012 and 2011 are included in the applicable segment discussions contained herein.
Direct operating expenses
Our direct operating expenses increased $361.8 million, or 10% during the year ended December 31, 2012 as compared to the prior year. The overall increase in direct operating expenses was primarily due to increases in our Concerts and Ticketing segments of $328.5 million and $32.7 million, respectively. Excluding the decreases of approximately $77.4 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $439.2 million, or 12%.
Our direct operating expenses increased $131.2 million, or 4%, during the year ended December 31, 2011 as compared to the prior year. The overall increase in direct operating expenses was primarily due to increases in our Concerts, Ticketing and Artist Nation segments of $36.1 million, $69.6 million and $27.9 million, respectively. The overall increase included incremental direct operating expenses of $34.1 million resulting from the timing of the Merger. Excluding the increases of approximately $102.3 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $28.9 million, or 1%.
Direct operating expenses include artist fees, ticketing client royalties, show-related marketing and advertising expenses along with other costs.
More detailed explanations of the changes for the years ended 2012 and 2011 are included in the applicable segment discussions contained herein.
Selling, general and administrative expenses
Our selling, general and administrative expenses increased $31.7 million, or 3%, during the year ended December 31, 2012 as compared to the prior year. The overall increase in selling, general and administrative expenses was primarily due to an increase in our Concerts segment of $34.1 million. Excluding the decreases of approximately $15.1 million related to the impact of changes in foreign exchange rates, selling, general and administrative expenses increased $46.8 million, or 4%.
Our selling, general and administrative expenses increased $97.5 million, or 10%, during the year ended December 31, 2011 as compared to the prior year. The overall increase in selling, general and administrative expenses was primarily due to increases in our Ticketing and Artist Nation segments of $65.9 million and $19.2 million, respectively, driven by the incorporation of the Ticketmaster results after the completion of the Merger. Excluding the increases of approximately $17.6 million related to the impact of changes in foreign exchange rates, selling, general and administrative expenses increased $79.9 million, or 8%.
More detailed explanations of the changes for the years ended 2012 and 2011 are included in the applicable segment discussions contained herein.
Depreciation and amortization
Our depreciation and amortization increased $86.5 million, or 25%, during the year ended December 31, 2012 as compared to the prior year. The overall increase in depreciation and amortization was primarily due to increases in our Concerts and Artist Nation segments of $13.1 million and $65.3 million, respectively. During 2012, we recorded an impairment charge primarily related to client/vendor relationship intangible assets in the Artist Nation segment and revenue-generating contracts and client/vendor relationships in the Concerts segment. Excluding the decreases of approximately $2.4 million related to the impact of changes in foreign exchange rates, depreciation and amortization expense increased $88.9 million, or 26%.
Our depreciation and amortization increased $21.4 million, or 7%, during the year ended December 31, 2011 as compared to the prior year. The overall increase in depreciation and amortization was primarily due to increases in our Ticketing and Artist Nation segments of $19.1 million and $8.9 million, respectively, partially offset by a decrease in our Concerts segment of $6.7 million. During 2011, we recorded an impairment charge of $24.1 million related primarily to two amphitheaters, a music theater, a club and contract intangibles. Excluding the increases of approximately $3.4 million related to the impact of changes in foreign exchange rates, depreciation and amortization expense increased $18.0 million, or 6%.
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Acquisition transaction expenses
Acquisition transaction expenses were $3.4 million, $8.1 million and $22.4 million during the years ended December 31, 2012, 2011 and 2010, respectively. All years include current year acquisition costs that vary based on the size and number of acquisitions in the year. In addition, 2011 and 2010 expenses also include ongoing litigation costs relating to the Merger along with changes in the fair value of acquisition-related contingent consideration. The 2010 acquisition transaction expenses are higher primarily due to costs associated with the completion of the Merger.
Interest expense
Interest expense increased $3.3 million, or 3%, for the year ended December 31, 2012 as compared to the prior year primarily due to additional term loan B borrowings under our senior secured credit facility and the costs related to the issuance in 2012 of the 7% senior notes and redemption of the 10.75% senior notes.
Interest expense increased $3.9 million, or 3%, for the year ended December 31, 2011 as compared to the prior year primarily due to higher debt balances from the debt obtained in the Merger for a full year.
Our debt balances and weighted average cost of debt, excluding unamortized debt discounts and premiums were $1.776 billion and 5.2%, respectively, at December 31, 2012, and $1.732 billion and 6.0%, respectively, at December 31, 2011.
Loss on extinguishment of debt
We recorded a loss on extinguishment of debt of $21.3 million for the year ended December 31, 2010, related to the replacement of our two senior secured credit facilities and the redemption of our redeemable preferred stock in May 2010 with a new senior secured credit facility that provides for $1.2 billion in total credit availability.
Other (income) expense, net
Other expense of $6.5 million for the year ended December 31, 2011 includes the impact of changes in foreign exchange rates of $5.1 million in 2011_._
Other income of $4.2 million for the year ended December 31, 2010 includes the impact of changes in foreign exchange rates of $2.8 million in 2010.
Income taxes
Our 2012 effective tax rate of (22)% represented a net tax expense of $29.7 million on losses from continuing operations before tax of $132.2 million compared to our 2011 effective tax rate of 27% which represented a net tax benefit of $26.2 million on losses from continuing operations before tax of $96.6 million for the years ended December 31, 2012 and 2011, respectively. In 2012, income tax expense includes $19.5 million related to statutory expense for foreign entities, $3.9 million current tax expense for state and local income taxes, $4.0 million deferred state income tax primarily related to blended state rate changes and other tax expense of approximately $2.3 million. The net increase in 2012 tax expense as compared to 2011 is principally driven by the 2011 valuation allowance release of $39.5 million related to the 2011 federal tax consolidation of Front Line with the Company’s other domestic operations.
Our effective tax rate for 2011 was 27% as compared to an effective tax rate of (8)% for 2010. The higher net tax benefit in 2011 as compared to 2010 is principally driven by higher tax benefits recognized in 2011 related to the 2011 federal tax consolidation of Front Line with the Company’s other domestic operations.
Discontinued operations
For the year ended December 31, 2010, we reported $4.2 million of additional expense related to the 2009 sale of our U.K. theatrical business as a loss on disposal.
Net income attributable to noncontrolling interests
Net income attributable to noncontrolling interests decreased $11.3 million during the year ended December 31, 2012 as compared to the prior year primarily due to reduced operating results of various artist management businesses resulting from an impairment of a client/vendor relationship intangible.
Net income attributable to noncontrolling interests decreased $7.7 million during the year ended December 31, 2011 as compared to the prior year primarily due to reduced operating results for various entities, primarily internationally, along with the 2011 acquisitions of the remaining interests in Front Line and Vector partially offset by our acquisition of LN Ontario Concerts.
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Concerts Results of Operations
Our Concerts segment operating results were, and discussions of significant variances are, as follows:
| % Change | % Change | |||||||||||||||||||
| Year Ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||
| 2012 | 2011 | 2010 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenue | $ | 3,870,371 | $ | 3,506,188 | $ | 3,438,350 | 10 | % | 2 | % | ||||||||||
| Direct operating expenses | 3,274,951 | 2,946,410 | 2,910,334 | 11 | % | 1 | % | |||||||||||||
| Selling, general and administrative expenses | 569,570 | 535,500 | 524,672 | 6 | % | 2 | % | |||||||||||||
| Depreciation and amortization | 145,552 | 132,441 | 139,129 | 10 | % | (5 | )% | |||||||||||||
| Gain on sale of operating assets | (453 | ) | (880 | ) | (4,848 | ) | * | * | ||||||||||||
| Acquisition transaction expenses | 847 | (2,286 | ) | (2,424 | ) | * | * | |||||||||||||
| Operating loss | $ | (120,096 | ) | $ | (104,997 | ) | $ | (128,513 | ) | 14 | % | (18 | )% | |||||||
| Operating margin | (3.1 | )% | (3.0 | )% | (3.7 | )% | ||||||||||||||
| Adjusted operating income ** | $ | 31,364 | $ | 30,275 | $ | 15,366 | 4 | % | 97 | % |
| * | Percentages are not meaningful. |
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| ** | AOI is a non-GAAP financial disclosure and is discussed in more detail and reconciled to operating income (loss) below. |
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Year Ended 2012 Compared to Year Ended 2011
Concerts revenue increased $364.2 million, or 10%, during the year ended December 31, 2012 as compared to the prior year partially resulting from strategic priorities to grow owned and/or operated amphitheater and European festival profitability, expand our portfolio of electronic dance music and other new festivals and expand into new geographic markets. Excluding the decrease of $80.2 million related to the impact of changes in foreign exchange rates, revenue increased $444.4 million, or 13%, partially due to incremental revenue of $95.0 million resulting from acquisitions, primarily from the April 2012 acquisition of Coppel and the May 2012 acquisition of Cream. In addition, revenue increased due to current activity from global tours, more shows and higher per show attendance at our North America owned and/or operated amphitheaters, third-party stadiums and theaters and clubs and increased festival activity resulting from new events and higher attendance.
Concerts direct operating expenses increased $328.5 million, or 11%, during the year ended December 31, 2012 as compared to the prior year. Excluding the decrease of $70.1 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $398.6 million, or 14%, partially due to incremental direct operating expenses of $91.7 million from acquisitions as noted above. In addition, we incurred higher global touring costs and higher expenses associated with the increased number of events and festival activity noted above. We also incurred $6.9 million higher advertising costs in 2012 for future events than we did in the prior year.
Concerts selling, general and administrative expenses increased $34.1 million, or 6%, during the year ended December 31, 2012 as compared to the prior year. Excluding the decrease of $9.5 million related to the impact of changes in foreign exchange rates, selling, general and administrative expenses increased $43.6 million, or 8%, resulting primarily from incremental costs of $6.9 million from the acquisitions noted above and $12.4 million from expansion of our business in Asia and the opening of new venues, such as Ziggo Dome in the Netherlands. We also had higher legal defense costs from various cases and increased compensation costs related to improved performance and annual inflationary increases.
Concerts depreciation and amortization increased $13.1 million, or 10%, during the year ended December 31, 2012 as compared to the prior year. Excluding the decrease of $1.1 million related to the impact of changes in foreign exchange rates, depreciation and amortization increased $14.2 million, or 11%, primarily due to higher amortization associated with the impairment of intangible assets for revenue-generating contracts and additional definite-lived intangible amortization expense associated with recent acquisitions.
Concerts acquisition expenses increased $3.1 million during the year ended December 31, 2012 as compared to the prior year primarily due to costs associated with the acquisitions noted above partially offset by 2011 reductions in the fair value of acquisition-related contingent consideration.
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The increased operating loss for Concerts was primarily driven by higher costs incurred in 2012 for future events, increased compensation costs and higher amortization partially offset by the timing of global tours and the improved results of our owned and/or operated amphitheaters.
Year Ended 2011 Compared to Year Ended 2010
Concerts revenue increased $67.8 million, or 2%, during the year ended December 31, 2011 as compared to the prior year. Excluding the increase of $99.4 million related to the impact of changes in foreign exchange rates, revenue decreased $31.6 million, or 1%, primarily due to a decrease in events and attendance from our planned show reduction in amphitheaters and reduced global touring activity partially offset by increased shows and attendance in arenas and stadiums.
Concerts direct operating expenses increased $36.1 million, or 1%, during the year ended December 31, 2011 as compared to the prior year. Excluding the increase of $87.1 million related to the impact of changes in foreign exchange rates, direct operating expenses decreased $51.0 million, or 2%, primarily due to fewer amphitheater events and reduced global touring activity as noted above and the impairment of certain artist advances in 2010 partially offset by higher expenses associated with increased arena and stadium activity noted above and costs associated with investments in new festivals launched in 2011.
Concerts selling, general and administrative expenses increased $10.8 million, or 2%, during the year ended December 21, 2011 as compared to the prior year driven by an increase of $9.3 million related to the impact of changes in foreign exchange rates.
Concerts depreciation and amortization decreased $6.7 million, or 5%, during the year ended December 31, 2011 as compared to the prior year. Excluding the increase of $1.2 million related to the impact of changes in foreign exchange rates, depreciation and amortization decreased $7.9 million, or 6%, primarily due to an impairment charge of $31.2 million recorded in 2010 related to a club and a contract intangible compared to an impairment charge in 2011 of $24.1 million for two amphitheaters, a music theater, a club and contract intangibles.
Concerts gain on sale of operating assets was $0.9 million for the year ended December 31, 2011 as compared to $4.8 million for the prior year. The 2010 gain was driven by a $4.3 million gain on the sale of a music theater in Sweden and the final settlement received for the 2009 sale of a music theater in London.
The decreased operating loss for Concerts was primarily related to improved arena and stadium results and reduced artist costs partially offset by investments in new festivals and reduced results in certain other festivals.
Ticketing Results of Operations
Our Ticketing segment operating results were, and discussions of significant variances are, as follows:
| % Change | % Change | |||||||||||||||||||
| Year Ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||
| 2012 | 2011 | 2010 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenue | $ | 1,374,049 | $ | 1,319,343 | $ | 1,089,340 | 4 | % | 21 | % | ||||||||||
| Direct operating expenses | 651,055 | 618,382 | 513,311 | 5 | % | 20 | % | |||||||||||||
| Selling, general and administrative expenses | 434,310 | 428,364 | 362,416 | 1 | % | 18 | % | |||||||||||||
| Depreciation and amortization | 165,947 | 158,071 | 139,007 | 5 | % | 14 | % | |||||||||||||
| Loss (gain) on sale of operating assets | (225 | ) | (96 | ) | 5,186 | * | * | |||||||||||||
| Acquisition transaction expenses | 153 | 1,314 | 780 | * | * | |||||||||||||||
| Operating income | $ | 122,809 | $ | 113,308 | $ | 68,640 | 8 | % | 65 | % | ||||||||||
| Operating margin | 8.9 | % | 8.6 | % | 6.3 | % | ||||||||||||||
| Adjusted operating income ** | $ | 294,625 | $ | 279,045 | $ | 234,053 | 6 | % | 19 | % |
| * | Percentages are not meaningful. |
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| ** | AOI is a non-GAAP financial disclosure and is discussed in more detail and reconciled to operating income (loss) below. |
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Year Ended 2012 Compared to Year Ended 2011
Ticketing revenue increased $54.7 million, or 4%, during the year ended December 31, 2012 as compared to the prior year partially resulting from strategic priorities such as focusing on strong client renewals supported by the launch of new products, leveraging value-added client services and extending our mobile platforms, as well as growing our secondary, or resale, ticket sales. Excluding the decrease of $14.8 million related to the impact of changes in foreign exchange rates, revenue increased $69.5 million, or 5%, primarily due to higher primary ticket sales for concert and sporting events and fees for the 2012 Olympics, increased resale volume and $8.7 million in incremental revenue resulting from the acquisitions of TGLP in January 2011 and Serviticket in April 2011. These increases were partially offset by a reduction in primary and resale ticket sales associated with the National Hockey League strike in 2012.
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Ticketing direct operating expenses increased $32.7 million, or 5%, during the year ended December 31, 2012 as compared to the prior year. Excluding the decrease of $6.3 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $39.0 million, or 6%, primarily due to additional costs associated with the increase in ticket sales noted above and incremental direct operating expenses of $3.8 million resulting from the acquisitions noted above.
Ticketing selling, general and administrative expenses increased $5.9 million, or 1%, during the year ended December 31, 2012 as compared to the prior year. Excluding the decrease of $5.4 million related to the impact of changes in foreign exchange rates, selling, general and administrative expenses increased $11.3 million, or 3%, primarily due to increased headcount and other expenses associated with the investment in our technology platform and incremental costs of $7.2 million related to the acquisitions noted above and BigChampagne in December 2011. These increases were partially offset by an accrual in the third quarter of 2011 related to a legal settlement.
Ticketing depreciation and amortization increased $7.9 million, or 5%, during the year ended December 31, 2012 as compared to the prior year. Excluding the decrease of $1.3 million related to the impact of changes in foreign exchange rates, depreciation and amortization increased $9.2 million, or 6%, primarily due to increased amortization related to non-recoupable venue contract advances and higher depreciation from our investment in our technology platform.
The increase in operating income for Ticketing was primarily due to improved primary ticket sales and resale volume partially offset by costs associated with our investment to enhance our ticketing platform.
Year Ended 2011 Compared to Year Ended 2010
Ticketing revenue increased $230.0 million, or 21%, during the year ended December 31, 2011 as compared to the prior year. Excluding the increase of $25.1 million related to the impact of changes in foreign exchange rates, revenue increased $204.9 million, or 19%, primarily due to incremental revenue of $137.4 million resulting from the timing of our Merger and the acquisitions of Ticketnet, TGLP and Serviticket. In addition, we had increased upsell revenue and ticket sales internationally, primarily in Germany, Australia, Turkey and Sweden, fees related to ticketing services for the 2012 London Olympics, higher resale volume and the transition of the artist-related online business from the Artist Nation segment in 2011. Partially offsetting these increases was a reduction in fees due to the full year impact of the change to the contract with AEG, which was a requirement of the DOJ approval of the Merger, and a reduction of $3.7 million relating to our divestiture of Paciolan in 2010.
Ticketing direct operating expenses increased $105.1 million, or 20%, during the year ended December 31, 2011 as compared to the prior year. Excluding the increase of $12.1 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $93.0 million, or 18%, primarily due to incremental direct operating expenses of $62.0 million resulting from the timing of our Merger and the acquisitions noted above. We also had increased costs associated with the higher ticket sales internationally and the transition of the artist-related online business noted above, partially offset by lower domestic direct costs and a reduction of $1.7 million relating to our Paciolan divestiture.
Ticketing selling, general and administrative expenses increased $65.9 million, or 18%, during the year ended December 31, 2011 as compared to the prior year. Excluding the increase of $7.7 million related to the impact of changes in foreign exchange rates, selling, general and administrative expenses increased $58.2 million, or 16%, primarily due to incremental expenses of $39.9 million resulting from the timing of our Merger and the acquisitions noted above. We also increased operating costs related to our technology platform as we began the first year of development during 2011 and also transitioned the artist-related online business as noted above. Partially offsetting these increases were lower litigation settlement accruals and a reduction of $1.1 million relating to our Paciolan divestiture.
Ticketing depreciation and amortization increased $19.1 million, or 14%, during the year ended December 31, 2011 as compared to the prior year. Excluding the increase of $2.2 million related to the impact of changes in foreign exchange rates, depreciation and amortization increased $16.9 million, or 12%, primarily due to incremental depreciation and amortization of $11.6 million resulting from the timing of our Merger and the acquisitions noted above along with increased amortization resulting from the addition of technology definite-lived intangible assets from our Merger.
Ticketing gain on sale of operating assets was $0.1 million for the year ended December 31, 2011 as compared to a loss on sale of operating assets of $5.2 million for the prior year primarily due to the sale of Paciolan in March 2010.
The increase in operating income for Ticketing was primarily due to the impact from the Merger and other acquisitions, higher ticket sales, upsell revenue and earnings from the 2012 Olympics, partially offset by investments in our technology platform.
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Artist Nation Results of Operations
Our Artist Nation segment operating results were, and discussions of significant variances are, as follows:
| % Change | % Change | |||||||||||||||||||
| Year Ended December 31, | 2012 vs. 2011 | 2011 vs. 2010 | ||||||||||||||||||
| 2012 | 2011 | 2010 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenue | $ | 399,940 | $ | 393,129 | $ | 362,159 | 2 | % | 9 | % | ||||||||||
| Direct operating expenses | 263,896 | 260,884 | 233,016 | 1 | % | 12 | % | |||||||||||||
| Selling, general and administrative expenses | 99,786 | 113,199 | 93,995 | (12 | )% | 20 | % | |||||||||||||
| Depreciation and amortization | 115,696 | 50,412 | 41,520 | * | 21 | % | ||||||||||||||
| Loss (gain) on sale of operating assets | (42 | ) | 1,264 | 20 | * | * | ||||||||||||||
| Acquisition transaction expenses | 1,163 | (7,758 | ) | 6,277 | * | * | ||||||||||||||
| Operating loss | $ | (80,559 | ) | $ | (24,872 | ) | $ | (12,669 | ) | * | 96 | % | ||||||||
| Operating margin | (20.1 | )% | (6.3 | )% | (3.5 | )% | ||||||||||||||
| Adjusted operating income ** | $ | 38,134 | $ | 47,178 | $ | 46,553 | (19 | )% | 1 | % |
| * | Percentages are not meaningful. |
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| ** | AOI is a non-GAAP financial disclosure and is discussed in more detail and reconciled to operating income (loss) below. |
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Year Ended 2012 Compared to Year Ended 2011
Artist Nation revenue increased $6.8 million, or 2%, during the year ended December 31, 2012 as compared to the prior year. Excluding the decrease of $0.3 million related to the impact of changes in foreign exchange rates, revenue increased $7.1 million, or 2%, primarily due to increased sales of premium ticket packages and incremental revenue of $9.5 million resulting from the acquisition of T-Shirt Printers in October 2011. These increases were partially offset by reduced tour merchandise sales and the transition of the online fan club activity to the Ticketing segment in 2011.
Artist Nation direct operating expenses increased $3.0 million, or 1%, during the year ended December 31, 2012 as compared to the prior year. Excluding the decrease of $0.4 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $3.4 million, or 1%, primarily due to increased cost for premium ticket packages and incremental direct operating expenses of $8.4 million resulting from the acquisition noted above. These increases were partially offset by lower costs for tour merchandise due to reduced sales and the transition of the online fan club activity noted above.
Artist Nation selling, general and administrative expenses decreased $13.4 million, or 12%, during the year ended December 31, 2012 as compared to the prior year primarily due to $24.4 million of stock-based compensation expense recorded in the first quarter of 2011 related to the acquisition of the remaining interests in Front Line partially offset by incremental costs related to Irving Azoff leaving of $5.5 million and $1.9 million resulting from the acquisition above along with higher compensation-related costs related to the management business.
Artist Nation depreciation and amortization increased $65.3 million, or 130%, during the year ended December 31, 2012 as compared to the prior year primarily due to an impairment charge of $62.7 million related to certain client/vendor relationship intangibles in the management business based on current expectations related to future cash flows on this business.
Artist Nation loss on sale of operating assets decreased $1.3 million during the year ended December 31, 2012 as compared to the prior year primarily due to the sale of an artist management company in January 2011.
Artist Nation acquisition transaction expenses increased $10.0 million for the year ended December 31, 2012 as compared to the prior year primarily due to reductions in 2011 in the fair value of acquisition-related contingent consideration.
The increased operating loss for Artist Nation was driven by the impairment of certain client/vendor relationship intangibles in 2012 partially offset by lower stock-based compensation expense from the 2011 acquisitions of the remainder of Front Line.
Year Ended 2011 Compared to Year Ended 2010
Artist Nation revenue increased $31.0 million, or 9%, during the year ended December 31, 2011 as compared to the prior year. Excluding the increase of $2.1 million related to the impact of changes in foreign exchange rates, revenue increased $28.9 million, or 8%, primarily due to incremental revenue of $20.4 million resulting from the timing of our Merger, the 2011 acquisition of T-Shirt Printers and the 2010 acquisition of Sports Marketing and Entertainment, Inc. In addition, we generated higher management commissions and increased sales of premium ticket packages and merchandise.
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Artist Nation direct operating expenses increased $27.9 million, or 12%, during the year ended December 31, 2011 as compared to the prior year. Excluding the increase of $2.0 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $25.9 million, or 11%, primarily due to incremental direct operating expenses of $16.0 million resulting from the timing of our Merger and the acquisitions noted above as well as higher costs associated with premium ticket packages and merchandise sales.
Artist Nation selling, general and administrative expenses increased $19.2 million, or 20%, during the year ended December 31, 2011 as compared to the prior year primarily due to incremental stock-based compensation expense of $24.4 million related to the first quarter 2011 acquisition of the remaining interests in Front Line along with incremental selling, general and administrative expenses of $5.2 million resulting from the timing of our Merger and the acquisitions noted above. Partially offsetting these increases were declines in selling, general and administrative expenses resulting from the transition of the artist-related online businesses to Ticketing.
Artist Nation depreciation and amortization increased $8.9 million, or 21%, during the year ended December 31, 2011 as compared to the prior year primarily due to incremental amortization of definite-lived intangible assets resulting from our Merger and other acquisitions and the acceleration of amortization for a trade name being phased out.
Artist Nation loss on sale of operating assets of $1.3 million during the year ended December 31, 2011 is primarily due to the sale of an artist management company in January 2011.
Artist Nation acquisition transaction expenses decreased by $14.0 million for the year ended December 31, 2011 as compared to the prior year primarily due to decreases in the fair values of acquisition-related contingent consideration in 2011 relating to the timing of key artists tours as compared to 2010 increases in the fair value of acquisition-related contingent consideration relating to improved projections for several artist management businesses.
The increased operating loss for Artist Nation was driven by incremental stock-based compensation expense related to the acquisition of the remaining interests in Front Line.
Sponsorship & Advertising Results of Operations
Our Sponsorship & Advertising segment operating results were, and discussions of significant variances are, as follows:
| Year Ended December 31, | % Change 2012 vs. 2011 | % Change 2011 vs. 2010 | ||||||||||||||||||
| 2012 | 2011 | 2010 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Revenue | $ | 247,921 | $ | 230,791 | $ | 200,146 | 7 | % | 15 | % | ||||||||||
| Direct operating expenses | 34,738 | 33,682 | 28,512 | 3 | % | 18 | % | |||||||||||||
| Selling, general and administrative expenses | 38,198 | 32,787 | 30,707 | 17 | % | 7 | % | |||||||||||||
| Depreciation and amortization | 1,187 | 483 | 255 | * | 89 | % | ||||||||||||||
| Loss on sale of operating assets | - | - | 6 | * | * | |||||||||||||||
| Operating income | $ | 173,798 | $ | 163,839 | $ | 140,666 | 6 | % | 16 | % | ||||||||||
| Operating margin | 70.1 | % | 71.0 | % | 70.3 | % | ||||||||||||||
| Adjusted operating income ** | $ | 175,619 | $ | 165,081 | $ | 141,537 | 6 | % | 17 | % |
| * | Percentages are not meaningful. |
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| ** | AOI is a non-GAAP financial disclosure and is discussed in more detail and reconciled to operating income (loss) below. |
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Year Ended 2012 Compared to Year Ended 2011
Sponsorship & Advertising revenue increased $17.1 million, or 7%, during the year ended December 31, 2012 as compared to the prior year. Excluding the decrease of $5.0 million related to the impact of changes in foreign exchange rates, revenue increased $22.1 million, or 10%, resulting primarily from expansion of existing and new sponsorship agreements, online advertising growth and higher festival sponsorships driven by increased international festival activity.
Sponsorship & Advertising direct operating expense increased $1.1 million, or 3%, during the year ended December 31, 2012 as compared to the prior year. Excluding the decrease of $0.6 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $1.7 million, or 5%, primarily driven by higher costs associated with the increase in revenue.
Sponsorship & Advertising selling, general and administrative expenses increased $5.4 million, or 17%, during the year ended December 31, 2012 as compared to the prior year. Excluding the decrease of $0.2 million related to the impact of changes in foreign exchange rates, selling, general and administrative expenses increased $5.6 million, or 17%, primarily related to increased headcount and compensation costs to drive higher digital and sponsorship sales.
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The increased operating income was primarily due to higher sponsorship and online advertising activity, including increased international festival sponsorships, partially offset by increased headcount expenses to sell and manage the higher revenue.
Year Ended 2011 Compared to Year Ended 2010
Sponsorship & Advertising revenue increased $30.6 million, or 15%, during the year ended December 31, 2011 as compared to the prior year. Excluding the increase of $4.9 million related to the impact of changes in foreign exchange rates, revenue increased $25.7 million, or 13%, primarily due to new sponsorship relationships, renewal or expansion of existing arrangements, increased online advertising and expansion of our sponsorship operations to additional countries.
Sponsorship & Advertising direct operating expense increased $5.2 million, or 18%, during the year ended December 31, 2011 as compared to the prior year. Excluding the increase of $1.0 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $4.2 million, or 15%, primarily driven by higher fulfillment costs related to the increased revenue.
The increased operating income was primarily due to new sponsor and advertising relationships and higher international festival sponsorships.
Reconciliation of Segment Adjusted Operating Income (Loss)
AOI is a non-GAAP financial measure that we define as operating income (loss) before acquisition expenses (including transaction costs, changes in the fair value of accrued acquisition-related contingent consideration arrangements, Merger bonuses, payments under the Azoff Trust note and acquisition-related severance), depreciation and amortization (including goodwill impairment), loss (gain) on sale of operating assets and non-cash and certain stock-based compensation expense (including expense associated with grants of certain stock-based awards which were classified as liabilities). We use AOI to evaluate the performance of our operating segments. We believe that information about AOI assists investors by allowing them to evaluate changes in the operating results of our portfolio of businesses separate from non-operational factors that affect net income, thus providing insights into both operations and the other factors that affect reported results. AOI is not calculated or presented in accordance with GAAP. A limitation of the use of AOI as a performance measure is that it does not reflect the periodic costs of certain amortizing assets used in generating revenue in our business. Accordingly, AOI should be considered in addition to, and not as a substitute for, operating income (loss), net income (loss), and other measures of financial performance reported in accordance with GAAP. Furthermore, this measure may vary among other companies; thus, AOI as presented herein may not be comparable to similarly titled measures of other companies.
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The following table sets forth the computation of adjusted operating income (loss):
| Adjusted operating income (loss) | Non-cash and stock- based compensation expense | Loss (gain) on sale of operating assets | Depreciation and amortization | Acquisition expenses | Operating income (loss) | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| 2012 | ||||||||||||||||||||||||
| Concerts | $ | 31,364 | $ | 5,514 | $ | (453 | ) | $ | 145,552 | $ | 847 | $ | (120,096 | ) | ||||||||||
| Ticketing | 294,625 | 6,273 | (225 | ) | 165,947 | (179 | ) | 122,809 | ||||||||||||||||
| Artist Nation | 38,134 | 1,876 | (42 | ) | 115,696 | 1,163 | (80,559 | ) | ||||||||||||||||
| Sponsorship & Advertising | 175,619 | 634 | - | 1,187 | - | 173,798 | ||||||||||||||||||
| Other and Eliminations | (1,639 | ) | - | 206 | (1,654 | ) | - | (191 | ) | |||||||||||||||
| Corporate | (78,965 | ) | 22,766 | - | 2,829 | 12,840 | (117,400 | ) | ||||||||||||||||
| Total | $ | 459,138 | $ | 37,063 | $ | (514 | ) | $ | 429,557 | $ | 14,671 | $ | (21,639 | ) | ||||||||||
| 2011 | ||||||||||||||||||||||||
| Concerts | $ | 30,275 | $ | 5,995 | $ | (880 | ) | $ | 132,441 | $ | (2,284 | ) | $ | (104,997 | ) | |||||||||
| Ticketing | 279,045 | 5,607 | (96 | ) | 158,071 | 2,155 | 113,308 | |||||||||||||||||
| Artist Nation | 47,178 | 28,132 | 1,264 | 50,412 | (7,758 | ) | (24,872 | ) | ||||||||||||||||
| Sponsorship & Advertising | 165,081 | 763 | - | 483 | (4 | ) | 163,839 | |||||||||||||||||
| Other and Eliminations | 2,298 | - | 689 | (855 | ) | - | 2,464 | |||||||||||||||||
| Corporate | (85,972 | ) | 20,148 | 1 | 2,466 | 22,818 | (131,405 | ) | ||||||||||||||||
| Total | $ | 437,905 | $ | 60,645 | $ | 978 | $ | 343,018 | $ | 14,927 | $ | 18,337 | ||||||||||||
| 2010 | ||||||||||||||||||||||||
| Concerts | $ | 15,366 | $ | 11,603 | $ | (4,848 | ) | $ | 139,129 | $ | (2,005 | ) | $ | (128,513 | ) | |||||||||
| Ticketing | 234,053 | 12,241 | 5,186 | 139,007 | 8,979 | 68,640 | ||||||||||||||||||
| Artist Nation | 46,553 | 10,205 | 20 | 41,520 | 7,477 | (12,669 | ) | |||||||||||||||||
| Sponsorship & Advertising | 141,537 | 459 | 6 | 255 | 151 | 140,666 | ||||||||||||||||||
| Other and Eliminations | (250 | ) | - | 6 | (511 | ) | - | 255 | ||||||||||||||||
| Corporate | (74,444 | ) | 27,099 | 4 | 2,266 | 28,266 | (132,079 | ) | ||||||||||||||||
| Total | $ | 362,815 | $ | 61,607 | $ | 374 | $ | 321,666 | $ | 42,868 | $ | (63,700 | ) | |||||||||||
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Liquidity and Capital Resources
Our working capital requirements and capital for our general corporate purposes, including acquisitions and capital expenditures, are funded from operations or from borrowings under our senior secured credit facility described below. Our cash is centrally managed on a worldwide basis. Our primary short-term liquidity needs are to fund general working capital requirements, capital expenditures and debt service requirements while our long-term liquidity needs are primarily related to acquisitions and debt repayment. Our primary sources of funds for our short-term liquidity needs will be cash flows from operations and borrowings under our senior secured credit facility, while our long-term sources of funds will be from cash flows from operations, long-term bank borrowings and other debt or equity financing.
Our balance sheets reflect cash and cash equivalents of $1.0 billion at December 31, 2012 and $844.3 million at December 31, 2011. Included in the December 31, 2012 and 2011 cash and cash equivalents balance is $441.6 million and $373.9 million, respectively, of funds representing amounts equal to the face value of tickets sold on behalf of clients and the clients’ share of convenience and order processing charges, or client funds. We do not utilize client funds for our own financing or investing activities as the amounts are payable to clients. Our foreign subsidiaries hold approximately $473.5 million in cash and cash equivalents, excluding client cash. We do not intend to repatriate these funds, but would need to accrue and pay United States federal and state income taxes on any future repatriations, net of applicable foreign tax credits. We may from time to time enter into borrowings under our revolving credit facility. If the original maturity of these borrowings is ninety days or less, we present the borrowings and subsequent repayments on a net basis on the statement of cash flows to better represent our financing activities. Our balance sheets reflect current and long-term debt of $1.7 billion at December 31, 2012 and $1.7 billion at December 31, 2011. Our weighted-average cost of debt, excluding the debt discounts on our term loan and convertible notes, was 5.2% at December 31, 2012.
Our cash and cash equivalents are held in accounts managed by third-party financial institutions and consist of cash in our operating accounts and invested cash. Cash held in interest-bearing operating accounts in many cases exceeds the Federal Deposit Insurance corporation insurance limits. The invested cash is in interest-bearing funds consisting primarily of bank deposits and money market funds. While we monitor cash and cash equivalent balances in our operating accounts on a regular basis and adjust the balances as appropriate, these balances could be impacted if the underlying financial institutions fail. To date, we have experienced no loss or lack of access to our cash and cash equivalents; however, we can provide no assurances that access to our cash and cash equivalents will not be impacted by adverse conditions in the financial markets.
For our Concerts segment, we generally receive cash related to ticket revenue at our owned and/or operated venues in advance of the event, which is recorded in deferred revenue until the event occurs. With the exception of some upfront costs and artist deposits, which are recorded in prepaid expenses until the event occurs, we pay the majority of event-related expenses at or after the event.
We view our available cash as cash and cash equivalents, less ticketing-related client funds, less event-related deferred revenue, less accrued expenses due to artists and for cash collected on behalf of others for ticket sales, plus event-related prepaids. This is essentially our cash available to, among other things, repay debt balances, make acquisitions and finance capital expenditures.
Our intra-year cash fluctuations are impacted by the seasonality of our various businesses. Examples of seasonal effects include our Concerts and Artist Nation segments, which report the majority of their revenue in the second and third quarters. Cash inflows and outflows depend on the timing of event-related payments but the majority of the inflows generally occur prior to the event. See “—Seasonality” below. We believe that we have sufficient financial flexibility to fund these fluctuations and to access the global capital markets on satisfactory terms and in adequate amounts, although there can be no assurance that this will be the case, and capital could be less accessible and/or more costly given current economic conditions. We expect cash flow from operations and borrowings under our senior secured credit facility, along with other financing alternatives, to satisfy working capital, capital expenditures and debt service requirements for at least the succeeding year.
We may need to incur additional debt or issue equity to make other strategic acquisitions or investments. There can be no assurance that such financing will be available to us on acceptable terms or at all. We may make significant acquisitions in the near term, subject to limitations imposed by our financing documents and market conditions.
The lenders under our revolving loans and counterparties to our interest rate hedge agreements consist of banks and other third-party financial institutions. While we currently have no indications or expectations that such lenders and counterparties will be unable to fund their commitments as required, we can provide no assurances that future funding availability will not be impacted by adverse conditions in the financial markets. Should an individual lender default on its obligations, the remaining lenders would not be required to fund the shortfall, resulting in a reduction in the total amount available to us for future borrowings, but would remain obligated to fund their own commitments. Should any counterparty to our interest rate hedge agreements default on its obligations, we could experience higher interest rate volatility during the period of any such default.
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Sources of Cash
Liberty Media Subscription Agreement
In February 2011, we entered into a subscription agreement with Liberty Media. Pursuant to the subscription agreement, in February and June 2011, we sold to Liberty Media 1.8 million and 5.5 million shares, respectively, of our common stock for cash consideration of $18.8 million and $57.7 million, respectively.
May 2010 Senior Secured Credit Facility
In August 2012, we exercised a right, under the terms of our senior secured credit facility, to increase the term loan B borrowings by $100 million and entered into an Incremental Term Loan Joinder Agreement.
At December 31, 2012 our senior secured credit facility consists of (i) a $100 million term loan A with a maturity of five and one-half years, (ii) a $900 million term loan B with a maturity of six and one-half years and (iii) a $300 million revolving credit facility with a maturity of five years. In addition, subject to certain conditions, we have the right to increase such term loan facilities by up to $200 million in the aggregate. The five-year revolving credit facility provides for borrowings up to the amount of the facility with sublimits of up to (i) $150 million to be available for the issuance of letters of credit, (ii) $50 million to be available for swingline loans and (iii) $100 million to be available for borrowings in foreign currencies. The senior secured credit facility is secured by a first priority lien on substantially all of our domestic wholly-owned subsidiaries and on 65% of the capital stock of our wholly-owned foreign subsidiaries.
The interest rates per annum applicable to loans under the senior secured credit facility are, at our option, equal to either LIBOR plus 3.25% or a base rate plus 2.25%, subject to stepdowns based on our leverage ratio. The interest rate for the term loan B is subject to a LIBOR floor of 1.5% and a base rate floor of 2.5%. We are required to pay a commitment fee of 0.5% per year on the undrawn portion available under the revolving credit facility and variable fees on outstanding letters of credit.
For the term loan A, we are required to make quarterly payments ranging from $1.25 million to $10 million with the balance due at maturity in November 2015. For the term loan B, we are required to make quarterly payments of $2.25 million with the balance due at maturity in November 2016. We are also required to make mandatory prepayments of the loans under the credit agreement, subject to specified exceptions, from excess cash flow, and with the proceeds of asset sales, debt issuances and specified other events.
On June 29, 2012, we entered into Amendment No. 1 to our senior secured credit agreement to, among other things, (i) modify the definition of Consolidated EBITDA to increase our allowance for restructuring, nonrecurring or other unusual loss or expense, (ii) modify the Consolidated Total Leverage Ratio and (iii) modify the definition of Applicable Percentage for purposes of Revolving Loans, Swingline Loans, B/A Drawings, Letter of Credit Fees, Term A Loans and Term B Loans (as defined in the credit agreement) in the event that our Consolidated Total Leverage Ratio equals or exceeds 4.0x.
During the year ended December 31, 2012, we made principal payments totaling $18.5 million on these term loans. At December 31, 2012, the outstanding balances on the term loans, net of discount were $939.9 million. There were no borrowings under the revolving credit facility as of December 31, 2012. Based on our letters of credit of $63.9 million, $236.1 million was available for future borrowings.
7% Senior Notes
In August 2012, we issued $225 million of 7% senior notes due 2020. Interest on the notes is payable semi-annually in cash in arrears on March 1 and September 1 of each year, beginning on March 1, 2013, and the notes will mature on September 1, 2020. We may redeem some or all of the notes at any time prior to September 1, 2016 at a price equal to 100% of the aggregate principal amount, plus any accrued and unpaid interest to the date of redemption, plus a ‘make-whole’ premium using a discount rate equal to the Treasury Rate plus 50 basis points. We may also redeem up to 35% of the notes from the proceeds of certain equity offerings prior to September 1, 2015, at a price equal to 107% of the principal amount, plus any accrued and unpaid interest. In addition, on or after September 1, 2016, we may redeem at our option some or all of the notes at redemption prices that start at 103.5% of their principal amount, plus any accrued and unpaid interest to the date of redemption. We must make an offer to redeem the notes at 101% of the aggregate principal amount, plus accrued and unpaid interest to the repurchase date, if we experience certain defined changes of control. At December 31, 2012, the outstanding balance on the 7% senior notes was $225.0 million.
Borrowings under the 7% senior notes, along with the $100 million incremental term loan B, were primarily used to repay borrowings under the 10.75% senior notes, pay related fees and expenses and for general corporate purposes.
8.125% Senior Notes
In May 2010, we issued $250 million of 8.125% senior notes due 2018. Interest on the notes is payable semi-annually in cash in arrears on May 15 and November 15 of each year, beginning on November 15, 2010, and the notes will mature on May 15, 2018. We may redeem some or all of the notes at any time prior to May 15, 2014 at a price equal to 100% of the principal amount, plus any accrued and unpaid interest to the date of redemption, plus a ‘make-whole’ premium using a discount rate equal to the Treasury Rate plus 50 basis points. We may also redeem up to 35% of the notes from the proceeds of certain equity offerings prior to May 15, 2013, at a price equal to 108.125% of the principal amount, plus any accrued and unpaid interest. In addition, on or after May 15, 2014, we may redeem some or all of the notes at any time at redemption prices that start at 104.063% of the principal amount. We must also offer to redeem the notes at 101% of the aggregate principal amount, plus accrued and unpaid interest to the repurchase date, if we experience certain kinds of changes of control. Borrowings on the 8.125% senior notes were primarily used to partially repay the borrowings under our and Ticketmaster’s then existing credit facilities. At December 31, 2012, the outstanding balance on the 8.125% senior notes was $250.0 million.
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Other Debt
In June 2012, we entered into an additional debt agreement, where we borrowed $34.2 million of floating rate debt, primarily to fund our operations in Australia.
Debt Covenants
Our senior secured credit facility contains a number of covenants and restrictions that, among other things, require us to satisfy certain financial covenants and restrict our and our subsidiaries’ ability to incur additional debt, make certain investments and acquisitions, repurchase our stock and prepay certain indebtedness, create liens, enter into agreements with affiliates, modify the nature of our business, enter into sale-leaseback transactions, transfer and sell material assets, merge or consolidate, and pay dividends and make distributions (with the exception of subsidiary dividends or distributions to the parent company or other subsidiaries on at least a pro-rata basis with any noncontrolling interest partners). Non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the credit facility becoming immediately due and payable. The senior secured credit facility agreement has two covenants measured quarterly that relate to total leverage and interest coverage. The consolidated total leverage covenant requires us to maintain a ratio of consolidated total debt to consolidated EBITDA (both as defined in the credit agreement) of 4.5x over the trailing four consecutive quarters through December 2013. The total leverage ratio will reduce to 4.25x on March 31, 2014, 4.0x on March 31, 2015 and 3.75x on March 31, 2016. The consolidated interest coverage covenant requires us to maintain a minimum ratio of consolidated EBITDA to consolidated interest expense (both as defined in the credit agreement) of 3.0x over the trailing four consecutive quarters.
The indentures governing our 7% senior notes and the 8.125% senior notes contain covenants that limit, among other things, our ability and the ability of our restricted subsidiaries to incur certain additional indebtedness and issue preferred stock; make certain distributions, investments and other restricted payments; sell certain assets; agree to any restrictions on the ability of restricted subsidiaries to make payments to us; merge, consolidate or sell all of our assets; create certain liens; and engage in transactions with affiliates on terms that are not arm’s length. Certain covenants, including those pertaining to incurrence of indebtedness, restricted payments, asset sales, mergers and transactions with affiliates will be suspended during any period in which the notes are rated investment grade by both rating agencies and no default or event of default under the indentures has occurred and is continuing. The 7% senior notes and the 8.125% senior notes each contain two incurrence-based financial covenants, as defined, requiring a minimum fixed charge coverage ratio of 2.0 to 1.0 and a maximum secured indebtedness leverage ratio of 2.75 to 1.0.
Some of our other subsidiary indebtedness includes restrictions on entering into various transactions, such as acquisitions and disposals, and prohibits payment of ordinary dividends. They also have financial covenants including minimum consolidated EBITDA to consolidated net interest payable, minimum consolidated cash flow to consolidated debt service and maximum consolidated debt to consolidated EBITDA, all as defined in the applicable debt agreements.
As of December 31, 2012, we believe we were in compliance with all of our debt covenants. We expect to remain in compliance with all of our debt covenants throughout 2013.
Disposal of Assets
During the year ended December 31, 2012, we received $8.3 million of proceeds primarily related to the sale of an amphitheater in Ohio. During the year ended December 31, 2011, we received $7.4 million of proceeds primarily related to the sale of an amphitheater in Texas and a payment received in the first quarter of 2011 relating to the 2010 sale of a music theater in Sweden. During the year ended December 31, 2010, we received $35.8 million of proceeds primarily related to the sale of Paciolan and a music theater in Sweden.
Uses of Cash
Acquisitions
When we make acquisitions, the acquired entity may have cash on its balance sheet at the time of acquisition. All amounts discussed in this section are presented net of any cash acquired. During 2012, we used $75.6 million in cash primarily for acquisitions in our Concerts segment of Coppel in April 2012 and Cream in May 2012.
During 2011, we used $39.5 million in cash primarily for the acquisitions in our Artist Nation segment of interests in four artist management companies in the United Kingdom and the United States, the April 2011 acquisition in our Ticketing segment of Serviticket and the December 2011 acquisition of BigChampagne, the October 2011 acquisition in our Artist Nation segment of T-Shirt Printers and the December 2011 acquisition in our Concerts segment of LN-HS Concerts.
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During 2010, our cash increased by $491.5 million from acquisitions in our Concerts, Ticketing, Artist Nation and Sponsorship & Advertising segments, primarily related to Ticketmaster cash on hand at the time of the Merger partially offset by our acquisition of Ticketnet, a ticketing company in France.
Purchases of Intangibles
In 2012, we used $14.6 million in cash primarily related to the acquisition of the rights to a festival in Europe.
In 2011 and 2010, we used $2.6 million and $1.8 million, respectively, in cash primarily related to a naming rights agreement for a festival in Europe.
Capital Expenditures
Venue and ticketing operations are capital intensive businesses, requiring continual investment in our existing venues and ticketing system to address audience and artist expectations, technological industry advances and various federal, state and/or local regulations.
We categorize capital outlays between maintenance capital expenditures and revenue generating capital expenditures. Maintenance capital expenditures are associated with the renewal and improvement of existing venues and technology systems, web development and administrative offices. Revenue generating capital expenditures generally relate to the construction of new venues or major renovations to existing buildings or buildings that are being added to our venue network or the development of new online or ticketing tools or technology enhancements. Revenue generating capital expenditures can also include smaller projects whose purpose is to add revenue and/or improve operating income. Capital expenditures typically increase during periods when venues are not in operation since that is the time that such improvements can be completed.
Our capital expenditures, including accruals but excluding expenditures funded by outside parties such as landlords or replacements funded by insurance companies, consisted of the following:
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| (in thousands) | ||||||||||||
| Maintenance capital expenditures | $ | 62,962 | $ | 64,351 | $ | 47,471 | ||||||
| Revenue generating capital expenditures | 60,255 | 47,693 | 26,367 | |||||||||
| Total capital expenditures | $ | 123,217 | $ | 112,044 | $ | 73,838 | ||||||
Maintenance capital expenditures for 2012 decreased from the prior year primarily due to a reduction in venue-related projects and office renovations or relocations.
Revenue generating capital expenditures for 2012 increased from the prior year primarily related to our investment in technology and renovation and development of various venues.
Maintenance capital expenditures for 2011 increased from the prior year primarily due to expenditures relating to the integration of our financial systems and offices as a result of the Merger along with higher maintenance expenditures related to venues, ticketing technology and client ticketing equipment.
Revenue generating capital expenditures for 2011 increased from the prior year primarily related to the re-platforming of our ticketing system and website enhancements.
We currently expect capital expenditures to be approximately $120.0 million for the year ending December 31, 2013.
Contractual Obligations and Commitments
Firm Commitments
In addition to the scheduled maturities on our debt, we have future cash obligations under various types of contracts. We lease office space, certain equipment and many of the venues used in our concert operations under long-term operating leases. Some of our lease agreements contain renewal options and annual rental escalation clauses (generally tied to the consumer price index), as well as provisions for our payment of utilities and maintenance. We also have minimum payments associated with non-cancelable contracts related to our operations such as artist guarantee contracts. As part of our ongoing capital projects, we will enter into construction-related commitments for future capital expenditure work. The scheduled maturities discussed below represent contractual obligations as of December 31, 2012 and thus do not represent all expected expenditures for those periods.
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The scheduled maturities of our outstanding long-term debt, future minimum rental commitments under non-cancelable lease agreements, minimum payments under other non-cancelable contracts and capital expenditure commitments as of December 31, 2012 are as follows:
| Payments Due by Period | ||||||||||||||||||||
| Total | 2013 | 2014-2015 | 2016-2017 | 2018 and thereafter | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Long-term debt obligations, including current maturities: | ||||||||||||||||||||
| Term loans and revolving credit facility | $ | 955,000 | $ | 22,750 | $ | 81,750 | $ | 850,500 | $ | - | ||||||||||
| 7% senior notes | 225,000 | - | - | - | 225,000 | |||||||||||||||
| 8.125% senior notes | 250,000 | - | - | - | 250,000 | |||||||||||||||
| 2.875% convertible senior notes (1) | 220,000 | - | 220,000 | - | - | |||||||||||||||
| Other long-term debt | 125,660 | 39,300 | 42,268 | 26,180 | 17,912 | |||||||||||||||
| Estimated interest payments (2) | 424,854 | 92,245 | 166,182 | 108,249 | 58,178 | |||||||||||||||
| Non-cancelable operating leases (3) | 1,964,796 | 118,892 | 223,994 | 205,933 | 1,415,977 | |||||||||||||||
| Non-cancelable contracts (3) | 1,123,025 | 728,504 | 256,407 | 118,485 | 19,629 | |||||||||||||||
| Capital expenditures | 3,575 | 3,225 | 50 | 50 | 250 | |||||||||||||||
| Contingent consideration | 6,718 | 2,538 | 4,180 | - | - | |||||||||||||||
| Total | $ | 5,298,628 | $ | 1,007,454 | $ | 994,831 | $ | 1,309,397 | $ | 1,986,946 | ||||||||||
| (1) | July 15, 2014 represents the earliest redemption date for the holders of the 2.875% convertible senior notes. |
|---|
| (2) | Includes interest on the 2.875% convertible senior notes through July 2014. Does not include interest on the revolving credit facility as the balance was zero as of December 31, 2012**.** |
|---|
| (3) | Commitment amounts for non-cancelable operating leases and non-cancelable contracts which stipulate an increase in the commitment amount based on an inflationary index have been estimated using an inflation factor of 2.5% for North America, 3.1% for the United Kingdom and 2.1% for the Netherlands. |
|---|
During 2006, in connection with our acquisition of the Historic Theatre Group, we guaranteed obligations related to a lease agreement. In the event of default, we could be liable for obligations which have future lease payments (undiscounted) of approximately $23.1 million through the end of 2035 which are not reflected in the table above. The scheduled future minimum rentals for this lease for the years 2013 through 2017 are $1.6 million each year. The venues under the lease agreement were included in the sale of our North American theatrical business. The buyer assumed our obligations under the guaranty, however we remain contingently liable to the lessor. We believe that the likelihood of a material liability being triggered under this lease is remote, and no liability has been accrued for these contingent lease obligations as of December 31, 2012.
Aggregate minimum rentals of $87.3 million to be received in years 2013 through 2020 under non-cancelable subleases are excluded from the commitment amounts in the above table.
Guarantees of Third-Party Obligations
As of December 31, 2012 and 2011, we guaranteed the debt of third parties of approximately $12.7 million and $13.1 million for each of the respective periods, primarily related to maximum credit limits on employee and tour-related credit cards and obligations under a venue management agreement.
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Cash Flows
| Year Ended December 31, | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
| (in thousands) | ||||||||||||
| Cash provided by (used in): | ||||||||||||
| Operating activities | $ | 367,098 | $ | 135,705 | $ | 158,518 | ||||||
| Investing activities | $ | (203,791 | ) | $ | (152,017 | ) | $ | 452,987 | ||||
| Financing activities | $ | (19,891 | ) | $ | (44,379 | ) | $ | 49,086 |
Operating Activities
Year Ended 2012 Compared to Year Ended 2011
Cash provided by operating activities was $367.1 million for the year ended December 31, 2012, compared to $135.7 million for the year ended December 31, 2011. The $231.4 million increase in cash provided by operating activities resulted primarily from net changes in the event-related operating accounts which are dependent on the timing of ticket sales along with the size and number of events for upcoming periods. During 2012, we sold more tickets for future events than we did in 2011 which increased deferred revenue, partially offset by higher payments of prepaid event-related expenses for those future events. In addition, we collected more accounts receivable, had lower long-term artist-related payments and paid less accrued event-related expenses as compared to the same period in the prior year. Also contributing to the increase in cash provided by operating activities was $22.2 million in payments made in 2011 related to the acquisition of certain remaining equity interests in Front Line that were classified as liabilities.
Year Ended 2011 Compared to Year Ended 2010
Cash provided by operating activities was $135.7 million for the year ended December 31, 2011, compared to $158.5 million for the year ended December 31, 2010. The $22.8 million decrease in cash provided by operating activities resulted primarily from the net changes in the operating balance sheet accounts largely offset by the increase in the cash-related portion of net income. In 2011, we received less deferred revenue and increased accounts receivable and other assets partially offset by lower prepaid expenses as compared to the prior year. Also contributing to the decrease in cash provided by operating activities was $22.2 million in payments made in 2011 related to the acquisition of certain remaining equity interests in Front Line that were classified as liabilities.
Investing Activities
Year Ended 2012 Compared to Year Ended 2011
Cash used in investing activities was $203.8 million for the year ended December 31, 2012, compared to $152.0 million for the year ended December 31, 2011. The $51.8 million increase in cash used in investing activities is primarily due to higher payments for acquisitions, purchases of property, plant and equipment, primarily related to technology, and intangible assets partially offset by lower payments for investments made in nonconsolidated affiliates. See “—Uses of Cash” above for further discussion.
Year Ended 2011 Compared to Year Ended 2010
Cash used in investing activities was $152.0 million for the year ended December 31, 2011, compared to cash provided by investing activities of $453.0 million for the year ended December 31, 2010. The $605.0 million increase in cash used in investing activities was primarily due to $576.5 million of cash acquired in the Merger in 2010, less proceeds from the disposals of assets and an increase in purchases of property, plant and equipment.
Financing Activities
Year Ended 2012 Compared to Year Ended 2011
Cash used in financing activities was $19.9 million for the year ended December 31, 2012, compared to $44.4 million for the year ended December 31, 2011. The $24.5 million decrease in cash used in financing activities is primarily a result of net proceeds received in 2012 from the issuance of the 7% senior notes and increased term loan B borrowings, after repayment of the 10.75% senior notes and related costs, along with additional financing to fund Australian operations as compared to a net pay down in 2011 on the term loans. We also made less payments of deferred and contingent consideration in 2012 as compared to the same period in 2011. Also contributing to the decrease was cash used in 2011 for purchases of non-controlling interests for the remaining equity interests in Front Line. These decreases in cash used were partially offset by proceeds received in 2011 from the sale of common stock in connection with the subscription agreement with Liberty Media.
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Year Ended 2011 Compared to Year Ended 2010
Cash used in financing activities was $44.4 million for the year ended December 31, 2011, compared to cash provided by financing activities of $49.1 million for the year ended December 31, 2010. The $93.5 million increase in cash used in financing activities was primarily a result of net proceeds received in 2010 from the issuance of $250 million of 8.125% senior notes and our new senior secured credit facility, after repayment of the borrowings under the Live Nation and Ticketmaster credit facilities, payment of debt issuance costs and the redemption of preferred stock, as compared to only a net pay down in 2011 on the term loans. The increase was also a result of cash used for purchases of non-controlling interests, primarily related to the 2011 acquisition of the remaining equity interests in Front Line. These increases were partially offset by proceeds received in 2011 from the sale of common stock in connection with the subscription agreement with Liberty Media.
Seasonality
Our Concerts and Artist Nation segments typically experience higher operating income in the second and third quarters as our outdoor venues and international festivals are primarily used or occur during May through September, and our artists touring activity is higher. In addition, the timing of ticket on-sales and the tours of top-grossing acts can impact comparability of quarterly results year over year, although annual results may not be impacted. Our Ticketing segment sales are impacted by fluctuations in the availability of events for sale to the public, which vary depending upon scheduling by our clients.
Cash flows from our Concerts segment typically have a slightly different seasonality as payments are often made for artist performance fees and production costs in advance of the date the related event tickets go on sale. These artist fees and production costs are expensed when the event occurs. Generally, all costs related to events are expensed when the event occurs with the exception of advertising costs which are expensed either at the time of the event or annually for future shows. Once tickets for an event go on sale, we generally begin to receive payments from ticket sales in advance of when the event occurs for events at our owned and/or operated venues. We record these ticket sales as revenue when the event occurs.
We expect these trends to continue in the future. See Item 1A.—Risk Factors: Our operations are seasonal and our results of operations vary from quarter to quarter and year over year, so our financial performance in certain quarters may not be indicative of, or comparable to, our financial performance in subsequent quarters or years.
Market Risk
We are exposed to market risks arising from changes in market rates and prices, including movements in foreign currency exchange rates and interest rates.
Foreign Currency Risk
We have operations in countries throughout the world. The financial results of our foreign operations are measured in their local currencies. As a result, our financial results are affected by factors such as changes in foreign currency exchange rates or weak economic conditions in the foreign markets in which we have operations. Currently, we do not operate in any hyper-inflationary countries. Our foreign operations reported operating income of $114.1 million for the year ended December 31, 2012. We estimate that a 10% change in the value of the United States dollar relative to foreign currencies would change our operating income for the year ended December 31, 2012 by $11.4 million. As of December 31, 2012, our primary foreign exchange exposure included the Euro, British Pound and Canadian Dollar. This analysis does not consider the implication such currency fluctuations could have on the overall economic conditions of the United States or other foreign countries in which we operate or on the results of operations of our foreign entities.
We primarily use forward currency contracts in addition to options to reduce our exposure to foreign currency risk associated with short-term artist fee commitments. We also enter into forward currency contracts to minimize the risks and/or costs associated with changes in foreign currency rates on forecasted operating income and short-term intercompany loans. At December 31, 2012, we had forward currency contracts and options outstanding with a notional amount of $100.0 million.
Interest Rate Risk
Our market risk is also affected by changes in interest rates. We had $1.7 billion of total debt, net of unamortized discounts and premiums, outstanding as of December 31, 2012. Of the total amount, taking into consideration existing interest rate hedges, we had $854.1 million of fixed-rate debt and $885.9 million of floating-rate debt.
Based on the amount of our floating-rate debt as of December 31, 2012, each 25 basis point increase or decrease in interest rates would increase or decrease our annual interest expense and cash outlay by approximately $2.3 million when the floor rate is not applicable. This potential increase or decrease is based on the simplified assumption that the level of floating-rate debt remains constant with an immediate across-the-board increase or decrease as of December 31, 2012 with no subsequent change in rates for the remainder of the period.
At December 31, 2012, we have one interest rate cap agreement that is designated as a cash flow hedge for accounting purposes. The interest rate cap had a notional amount of $77.5 million at December 31, 2012, to limit our cash flow exposure to an interest rate of 4% per annum. This agreement expires on June 30, 2013. The fair value of this agreement at December 31, 2012 was a de minimis asset. This agreement was put in place to reduce the variability of a portion of the cash flows from the interest payments related to the May 2010 senior secured credit facility. The terms of the May 2010 senior secured credit facility require one or more interest rate protection agreements, with an effect of fixing or limiting the interest costs, for at least 50% of the consolidated total funded debt as of the closing date for at least three years. Upon the execution of this interest rate cap agreement, the existing interest rate protection agreements fully met this requirement.
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At December 31, 2012, we have an interest rate swap agreement that is designated as a cash flow hedge for accounting purposes. The interest rate swap had a notional amount of $15.6 million at December 31, 2012 to effectively convert a portion of our floating-rate debt to a fixed-rate basis and expires in May 2015. The fair value of this agreement at December 31, 2012 was a liability of $0.2 million. This agreement was put into place to reduce the variability of the cash flows from the interest payments related to certain financing.
Through our AMG subsidiary, we have two interest rate swap agreements with a $32.2 million aggregate notional amount that effectively convert a portion of our floating-rate debt to a fixed-rate basis. Both agreements expire in December 2015. Also, in connection with the financing of the redevelopment of the O2 Dublin, we have an interest rate swap agreement with a notional amount of $8.5 million that expires in December 2013 effectively converting a portion of our floating-rate debt to a fixed-rate basis. These interest rate swap agreements have not been designated as hedging instruments. Therefore, any change in fair value is recorded in earnings during the period of the change.
We currently have 2.875% convertible senior notes due 2027 with a principal amount of $220 million. Beginning with the period commencing on July 20, 2014 and ending on January 14, 2015, and for each of the interest periods commencing thereafter, we will pay contingent interest on the notes if the average trading price of the notes during the five consecutive trading days ending on the second trading day immediately preceding the first day of the applicable interest period equals or exceeds 120% of the principal amount of the notes. The contingent interest payable per note will equal 0.25% per year of the average trading price of such note during the applicable five trading-day reference period, payable in arrears.
Recent Accounting Pronouncements
Recently Adopted Pronouncements
In May 2011, the FASB issued guidance that improves comparability of fair value measurements presented and disclosed in financial statements. This guidance clarifies the application of existing fair value measurement requirements including (1) the application of the highest and best use and valuation premise concepts, (2) measuring the fair value of an instrument classified in a reporting entity’s stockholders’ equity, and (3) quantitative information required for fair value measurements categorized within Level 3. It also requires additional disclosure for Level 3 measurements regarding the sensitivity of the fair value to changes in unobservable inputs and any interrelationships between those inputs. We adopted this guidance on January 1, 2012 and the adoption of this guidance did not have a material effect on our financial position or results of operations.
In July 2012, the FASB issued guidance which gives companies the option to perform a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired, and in some cases, bypass the two-step impairment test. This guidance is effective for annual and interim indefinite-lived intangible asset impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption of the new guidance is permitted. We adopted this guidance on October 1, 2012.
Recently Issued Pronouncements
In February 2013, the FASB issued guidance which requires companies to disclose additional information about reclassification adjustments, including (1) changes in accumulated other comprehensive income balances by component and (2) significant items reclassified out of accumulated other comprehensive income. The new disclosure requirements are to be applied prospectively and are effective for interim and annual periods beginning after December 15, 2012. We will adopt this guidance on January 1, 2013 and the adoption of this standard will not have a material effect on our financial position or results of operations.
Critical Accounting Policies and Estimates
The preparation of our financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenue and expenses during the reporting period. On an ongoing basis, we evaluate our estimates that are based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The result of these evaluations forms the basis for making judgments about the carrying values of assets and liabilities and the reported amount of revenue and expenses that are not readily apparent from other sources. Because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such difference could be material. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. The following narrative describes these critical accounting estimates, the judgments and assumptions and the effect if actual results differ from these assumptions.
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Consolidation
We consolidate entities in which we own more than 50% of the voting common stock and control operations and also variable interest entities for which we are the primary beneficiary. Investments in nonconsolidated affiliates in which we own more than 20% of the voting common stock or otherwise exercise significant influence over operating and financial policies, but not control of the nonconsolidated affiliate, are accounted for using the equity method of accounting. Investments in nonconsolidated affiliates in which we own less than 20% of the voting common stock are accounted for using the cost method of accounting. Intercompany accounts among the consolidated businesses have been eliminated in consolidation. Net income (loss) attributable to noncontrolling interests is reflected in the statements of operations for consolidated affiliates.
Allowance for Doubtful Accounts
We evaluate the collectability of our accounts receivable based on a combination of factors. Generally, we record specific reserves to reduce the amounts recorded to what we believe will be collected when a customer’s account ages beyond typical collection patterns, or we become aware of a customer’s inability to meet its financial obligations.
We believe that the credit risk with respect to trade receivables is limited due to the large number and the geographic diversification of our customers.
Business Combinations
We account for our business combinations under the acquisition method of accounting. Identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree are recognized and measured as of the acquisition date at fair value. Additionally, contingent consideration is recorded at fair value on the acquisition date and classified as a liability. Goodwill is recognized to the extent by which the aggregate of the acquisition-date fair value of the consideration transferred and any noncontrolling interests in the acquiree exceeds the recognized basis of the identifiable assets acquired, net of assumed liabilities. Determining the fair value of assets acquired, liabilities assumed and noncontrolling interests requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash flows, discount rates and asset lives among other items.
Property, Plant and Equipment
We test for possible impairment of property, plant and equipment whenever events or circumstances change, such as a significant reduction in operating cash flow or a dramatic change in the manner that the asset is intended to be used indicate that the carrying amount of the asset may not be recoverable. If indicators exist, we compare the estimated undiscounted future cash flows related to the assets to the carrying amount of those assets. If the carrying value is greater than the estimated undiscounted future cash flows, the cost basis of the asset is reduced to reflect the current fair value. We use various assumptions in determining the current fair market value of these assets, including future expected cash flows and discount rates, as well as future salvage values and other fair value measures. Our impairment loss calculations require us to apply judgment in estimating future cash flows, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.
If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to future impairment losses that could be material to our results of operations.
Intangibles
We test for possible impairment of definite-lived intangible assets whenever events or circumstances change, such as a significant reduction in operating cash flow or a dramatic change in the manner in which the asset is intended to be used which may indicate that the carrying amount of the asset may not be recoverable. When specific assets are determined to be unrecoverable, the cost basis of the asset is reduced to reflect the current fair value.
We test for possible impairment of indefinite-lived intangible assets on at least an annual basis. Based on facts and circumstances, we perform either a qualitative or a quantitative assessment for impairment. If a qualitative assessment is performed, and the existence of events and circumstances indicate that it is more likely than not that an indefinite-lived intangible asset is impaired, then we perform the quantitative impairment test by comparing the fair value with the carrying amount. When specific assets are determined to be impaired, the cost basis of the asset is reduced to reflect the current fair value.
We use various assumptions in determining the current fair market value of these definite-lived and indefinite-lived assets, including future expected cash flows and discount rates, as well as other fair value measures. For intangibles related to artist rights, we use assumptions about future revenue and operating income for the rights acquired. These projections are based on information about the artists’ past results and expectations about future results. Our impairment loss calculations require us to apply judgment in estimating future cash flows, including forecasting useful lives of the assets and selecting the discount rate that reflects the risk inherent in future cash flows.
If actual results are not consistent with our assumptions and judgments used in estimating future cash flows and asset fair values, we may be exposed to future impairment losses that could be material to our results of operations.
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Goodwill
We review goodwill for impairment annually, as of October 1, using a three-step process. The first step is a qualitative evaluation as to whether it is more likely than not that the fair value of any of our reporting units are less than its carrying value using an assessment of relevant events and circumstances. Examples of such events and circumstances include financial performance, industry and market conditions, macroeconomic conditions, reporting unit-specific events, historical results of goodwill impairment testing and the timing of the last performance of a quantitative assessment. If any reporting units are concluded to be more likely than not impaired, a second step is performed for that reporting unit. This second step, used to quantitatively screen for potential impairment, compares the fair value of the reporting unit with its carrying amount, including goodwill. The third step, employed for any reporting unit that fails the second step, is used to measure the amount of any potential impairment and compares the implied fair value of the reporting unit’s goodwill with the carrying amount of goodwill. If a reporting unit’s carrying value is negative, we do not follow this three step process. In this case, a qualitative evaluation is performed to determine whether it is more likely than not that the reporting unit’s goodwill is impaired. If it is, the third step discussed above is performed to measure the amount of any potential impairment.
The second and third steps that we use to evaluate goodwill for impairment involve the determination of the fair value of our reporting units. Inherent in such fair value determinations are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations, and assumptions about our strategic plans with regard to our operations. Due to the uncertainties associated with such estimates, actual results could differ from such estimates.
In developing fair values for our reporting units, we may employ a market multiple or a discounted cash flow methodology, or a combination thereof. The market multiple methodology compares us to similar companies on the basis of risk characteristics to determine its risk profile relative to the comparable companies as a group. This analysis generally focuses on quantitative considerations, which include financial performance and other quantifiable data, and qualitative considerations, which include any factors which are expected to impact future financial performance. The most significant assumptions affecting the market multiple methodology are the market multiples and control premium. A control premium represents the value an investor would pay above noncontrolling interest transaction prices in order to obtain a controlling interest in the respective company.
The discounted cash flow methodology establishes fair value by estimating the present value of the projected future cash flows to be generated from the reporting unit. The discount rate applied to the projected future cash flows to arrive at the present value is intended to reflect all risks of ownership and the associated risks of realizing the stream of projected future cash flows. The discounted cash flow methodology uses our projections of financial performance. The most significant assumptions used in the discounted cash flow methodology are the discount rate, the attrition rate and expected future revenue and operating margins, which vary among reporting units.
We also test goodwill for impairment in other periods if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Revenue Recognition
Revenue from the promotion and production of an event is recognized after the performance occurs upon settlement of the event. Revenue related to larger global tours is recognized after the performance occurs; however, any profits related to these tours, primarily related to music tour production and tour management services, is recognized after minimum revenue thresholds, if any, have been achieved. Revenue collected in advance of the event is recorded as deferred revenue until the event occurs. Revenue collected from sponsorships and other revenue, which is not related to any single event, is classified as deferred revenue and generally amortized over the operating season or the term of the contract.
Revenue from our ticketing operations primarily consists of convenience and order processing fees charged at the time a ticket for an event is sold and is recorded on a net basis (net of the face value of the ticket). For tickets sold for events at our owned and/or operated venues in the United States, and where we control the tickets internationally, this revenue is recognized after the performance occurs upon settlement of the event. Revenue for these ticket fees collected in advance of the event is recorded as deferred revenue until the event occurs. These fees will be shared between our Ticketing segment and our Concerts segment. For tickets sold for events at third-party venues, this revenue is recognized at the time of the sale and is recorded by our Ticketing segment.
For multiple element contracts, we allocate consideration to the multiple elements based on the relative fair selling price of each separate element which are determined using vendor specific objective evidence, third-party evidence or our best estimate in order to assign relative fair values.
We account for taxes that are externally imposed on revenue producing transactions on a net basis, as a reduction of revenue.
Litigation Accruals
We are currently involved in certain legal proceedings and, as required, have accrued our estimate of the probable costs for the resolution of these claims. Management’s estimates used have been developed in consultation with counsel and are based upon an analysis of potential results, assuming a combination of litigation and settlement strategies. It is possible, however, that future results of operations for any particular period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to these proceedings.
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Non-cash and Stock-Based Compensation
We follow the fair value recognition provisions of the FASB guidance for stock compensation. In accordance with this guidance, we continue to use the Black-Scholes option pricing model to estimate the fair value of our stock options at the date of grant. Judgment is required in estimating the amount of stock-based awards expected to be forfeited prior to vesting. If actual forfeitures differ significantly from these estimates, non-cash compensation expense could be materially impacted.
Income Taxes
We account for income taxes using the liability method in accordance with the FASB guidance for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting bases and tax bases of assets and liabilities and are measured using the enacted tax rates expected to apply to taxable income in the periods in which the deferred tax asset or liability is expected to be realized or settled. Deferred tax assets are reduced by valuation allowances if we believe it is more likely than not that some portion or the entire asset will not be realized. As all earnings from our continuing foreign operations are permanently reinvested and not distributed, our income tax provision does not include additional United States taxes on those foreign operations. It is not practical to determine the amount of federal and state income taxes, if any, that might become due in the event that the earnings were distributed.
The FASB guidance for income taxes prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest amount of benefit that is greater than 50% likely of being realized upon ultimate settlement.
Ratio of Earnings to Fixed Charges
The ratio of earnings to fixed charges is as follows:
| Year Ended December 31, | ||||||||
| 2012 | 2011 | 2010 | 2009 | 2008 | ||||
| * | * | * | * | * |
| * | For the years ended December 31, 2012, 2011, 2010, 2009 and 2008, fixed charges exceeded earnings from continuing operations before income taxes and fixed charges by $142.1 million, $104.4 million, $193.6 million, $116.5 million and $358.6 million, respectively. |
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The ratio of earnings to fixed charges was computed on a total company basis. Earnings represent income from continuing operations before income taxes less equity in undistributed net income (loss) of nonconsolidated affiliates plus fixed charges. Fixed charges represent interest, amortization of debt discount and premium and the estimated interest portion of rental charges. Rental charges exclude variable rent expense for events in third-party venues.
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