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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 2013, we continued to deliver growth in revenue, ticket sales, number of fans attending our concerts and operating results. Our revenue increased 11% compared to 2012 driven by an increase in our Concerts segment’s event activity as well as higher sales in our Sponsorship & Advertising segment. The Ticketing segment revenue was also up for the year, despite the revenue received in 2012 related to the London Olympics, driven by strong primary ticket sales in North America for concerts and sporting events as well as higher revenue from our resale business. Ticket sales for the year grew as a result of our strategy to drive attendance in our concert venues, expand our concert portfolio, and grow our core ticketing business, which resulted in an improvement to our operating results over 2012. We are currently in the process of re-platforming our Ticketmaster ticketing system in order to provide state-of-the-art technology services which will result in an improved experience for our fans and better tools and information resources for our venue clients. Once it is complete and rolled out to our clients, this re-platforming will also allow us to improve the efficiency of our ticketing systems and processes and therefore lead to cost reductions in ticketing. 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 that as the leading, global live event and ticketing company we are well-positioned to serve artists, teams, fans and venues.
Our Concerts segment delivered a 17% increase in revenue compared to last year through increased amphitheater and arena attendance as well as acquisitions. The number of fans was up 19% globally, driven by the higher amphitheater activity, more events in newer markets like Australia, as well as the growth in our festival and arena businesses in both North America and Europe. Our overall Concerts operating results increased for the year due to improved profitability from this higher activity across the portfolio. In addition, our Concerts operating results were impacted positively by a $24.8 million gain recognized on the disposal of operating assets related to a theater in New York and a $14.1 million insurance recovery for storm damage to one of our venues from Hurricane Sandy. We will continue to look for expansion opportunities, both domestically and internationally, as well as ways to market our events more effectively in order to continue to expand our fan base and geographic reach and to sell more tickets.
Our Ticketing segment revenue for the year increased 2% compared to last year due to higher ticket sales for concert and sporting events in the United States as well as an increase in our resale business. Overall, the number of tickets sold during the year increased 1% due largely to higher ticket sales domestically. Tickets sold through our mobile applications nearly doubled as compared to last year as we implemented new features in 2013 that are expected to drive further expansion of mobile ticket transactions. Globally for the year, 14% of our total tickets were sold via mobile devices. Ticketing operating results for the year were driven by strong domestic ticket sales, including those for our owned or operated venues, as well as increased activity in our resale business. Despite the increased revenue and ticket sales, our overall operating income was down due to higher costs from investments in our technology platforms and increased amortization of non-recoupable ticketing advances in 2013. We will continue to invest in a variety of initiatives aimed at improving the ticket buying process and overall fan and venue client experience.
Our Artist Nation segment revenue decreased 12% for the year as compared to last year primarily due to the decision in July of this year by the Concerts segment to expand their premium ticket packages and no longer outsource VIP ticket sales to Artist Nation. Lower amortization in 2013, primarily due to a $62.7 million impairment of intangibles recognized in 2012, partially offset by higher compensation expenses led to a year-over-year improvement in operating results for the segment. Our Artist Nation segment is focused on serving our existing artists as well as developing new relationships with top artists and extending the various services we provide.
Our Sponsorship & Advertising segment revenue increased 15% over the prior year driven by higher sponsorship revenue generated from festivals and custom events as well as higher online advertising revenue. Overall operating income improved 10% for the year driven by the higher sales. An increase in custom events in North America, which have higher direct costs, as well as higher fixed costs for Sponsorship & Advertising led to the slight reduction in operating margins. 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 expand these assets while extending further into new markets internationally.
Overall, our net loss for the year was impacted by a loss on extinguishment of debt of $36.3 million due to the redemption of our 8.125% senior notes through the issuance of additional notes under our existing 7% senior notes and the refinancing of and amendment to our senior secured credit facility. Partially offsetting the loss on extinguishment of debt was a reduction of interest expense for the year resulting from the redemptions of our 10.75% senior notes in 2012 and our 8.125% senior notes in 2013 through the issuance of 7% senior notes in both years.
We continue to be optimistic about the long-term potential of our company and are focused on the key elements of our business model - expand our concert platform, drive conversion of ticket sales through social and mobile channels, grow our sponsorship and online revenue, sell more tickets for our Ticketmaster clients, both primary and secondary, while driving reductions in the ticketing cost structure and continue to align our artist management group with our other core businesses.
Segment Overview
Our reportable segments are Concerts, Ticketing, Artist Nation and Sponsorship & Advertising.
Concerts
Our Concerts segment principally involves the global promotion of live music events in our owned 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 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 incurred during the year for shows in future years are expensed at the end of the year.
To judge the health of our Concerts segment, we primarily monitor the number of confirmed events in our network of owned or operated and third-party venues, talent fees, average paid attendance and advance ticket sales. In addition, at our owned or operated venues, we monitor attendance, ancillary revenue per fan and premium ticket 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 its clients and retains a convenience charge and order processing fee for its services. We sell tickets through websites, telephone, mobile apps 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 are recognized when the ticket is sold except for our own events where we control ticketing and then the revenue is deferred and recognized as the event occurs.
To judge the health of our Ticketing segment, we primarily review the gross transaction value and the number of tickets sold through our ticketing operations, average convenience charges and order processing fees, the number of clients 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, the number of tickets sold via mobile apps and through our secondary offerings along with 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. Revenue earned from our Artist Nation segment is impacted to a large degree by the touring schedules of the artists we represent and 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 annual commissions earned for 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 also 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. We also develop, book and produce custom events or programs for our client’s specific brands which are typically experienced exclusively by the client’s consumers. These custom events can involve live music events with talent and media, using both online and traditional outlets. We typically experience higher revenue in the second and third quarters as a large portion of sponsorships are typically associated with our outdoor venues and festivals which are primarily used in or occur during May through September.
To judge the health of our Sponsorship & Advertising segment, we primarily review the average revenue per sponsor, the total revenue generated through sponsorship arrangements, the percentage of expected revenue under contract and the online revenue received from sponsors advertising 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.
Consolidated Results of Operations
| Year Ended December 31, | % Change 2013 vs 2012 | % Change 2012 vs 2011 | |||||||||||||
| 2013 | 2012 | 2011 | |||||||||||||
| (in thousands) | |||||||||||||||
| Revenue | $ | 6,478,547 | $ | 5,819,047 | $ | 5,383,998 | 11% | 8% | |||||||
| Operating expenses: | |||||||||||||||
| Direct operating expenses | 4,680,507 | 4,151,277 | 3,789,488 | 13% | 10% | ||||||||||
| Selling, general and administrative expenses | 1,226,892 | 1,143,632 | 1,111,969 | 7% | 3% | ||||||||||
| Depreciation and amortization | 368,923 | 429,557 | 343,018 | (14)% | 25% | ||||||||||
| (Gain) loss on disposal of operating assets | (38,259 | ) | (514 | ) | 978 | * | * | ||||||||
| Corporate expenses | 94,385 | 113,364 | 112,157 | (17)% | 1% | ||||||||||
| Acquisition transaction expenses | 6,439 | 3,370 | 8,051 | * | * | ||||||||||
| Operating income (loss) | 139,660 | (21,639 | ) | 18,337 | * | * | |||||||||
| Operating margin | 2.2 | % | (0.4 | )% | 0.3 | % | |||||||||
| Interest expense | 111,659 | 123,740 | 120,414 | ||||||||||||
| Loss (gain) on extinguishment of debt | 36,269 | (460 | ) | — | |||||||||||
| Interest income | (5,071 | ) | (4,170 | ) | (4,215 | ) | |||||||||
| Equity in earnings of nonconsolidated affiliates | (856 | ) | (9,921 | ) | (7,742 | ) | |||||||||
| Other expense, net | 2,796 | 1,333 | 6,507 | ||||||||||||
| Loss before income taxes | (5,137 | ) | (132,161 | ) | (96,627 | ) | |||||||||
| Income tax expense (benefit) | 30,878 | 29,736 | (26,224 | ) | |||||||||||
| Net loss | (36,015 | ) | (161,897 | ) | (70,403 | ) | |||||||||
| Net income attributable to noncontrolling interests | 7,363 | 1,330 | 12,613 | ||||||||||||
| Net loss attributable to common stockholders of Live Nation Entertainment, Inc. | $ | (43,378 | ) | $ | (163,227 | ) | $ | (83,016 | ) |
| * | Percentages are not meaningful. |
Key Operating Metrics
| Year Ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| Concerts (1) | |||||||||||
| Total estimated events: | |||||||||||
| North America | 15,582 | 14,942 | 15,526 | ||||||||
| International | 7,270 | 6,996 | 6,718 | ||||||||
| Total estimated events | 22,852 | 21,938 | 22,244 | ||||||||
| Total estimated fans (rounded): | |||||||||||
| North America | 38,009,000 | 32,079,000 | 31,060,000 | ||||||||
| International (2) | 21,527,000 | 17,915,000 | 16,803,000 | ||||||||
| Total estimated fans | 59,536,000 | 49,994,000 | 47,863,000 | ||||||||
| Ancillary net revenue per attendee: | |||||||||||
| North America amphitheaters | $ | 18.44 | $ | 18.56 | $ | 18.11 | |||||
| International festivals | $ | 17.69 | $ | 15.55 | $ | 16.62 | |||||
| Ticketing (3) | |||||||||||
| Number of tickets sold (in thousands): | |||||||||||
| Concerts | 76,524 | 75,372 | 71,632 | ||||||||
| Sports | 30,059 | 28,760 | 27,055 | ||||||||
| Arts and theater | 19,112 | 19,961 | 21,891 | ||||||||
| Family | 16,628 | 15,970 | 14,248 | ||||||||
| Other (4) | 6,529 | 7,669 | 6,541 | ||||||||
| 148,852 | 147,732 | 141,367 | |||||||||
| Gross transaction value of tickets sold (in thousands) | $ | 9,352,673 | $ | 9,146,254 | $ | 8,441,230 | |||||
| Number of customers in database (rounded) | 129,585,000 | 119,592,000 | 110,208,000 | ||||||||
| Sponsorship & Advertising | |||||||||||
| Sponsorship revenue (in thousands) | $ | 212,869 | $ | 191,773 | $ | 179,734 | |||||
| Online advertising revenue (in thousands) | $ | 71,823 | $ | 56,148 | $ | 51,057 |
| (1) | Events generally represent a single performance by an artist. Fans generally represent the number of people who attend an event. Festivals are counted as one event in the quarter in which the festival begins but number of fans is based on the days the person was present at the festival and thus can be reported in multiple quarters. Events and fan attendance metrics are estimated each quarter. |
| (2) | In prior years, estimated fans for international festivals was based on the number of fans who purchased a ticket. In 2013, we are reporting estimated fans for international festivals based on the number of fans who attend the festival to be consistent with all other events. Prior period amounts have been adjusted to reflect the current period presentation. This adjustment resulted in increases in estimated fans of approximately 1.2 million and 1.1 million for the years ended December 31, 2012 and 2011, respectively. |
| (3) | The number and gross transaction 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 events in our owned or operated venues and in certain European territories where these tickets are reported as the events occur. The total number of tickets sold reported above for 2013, 2012 and 2011 excludes approximately 250 million, 255 million and 256 million, respectively, of tickets sold using our Ticketmaster systems, through season seat packages and our venue clients’ box offices, for which we do not receive a fee. |
| (4) | Other category includes tickets for comedy shows, facility tours, donations, lectures, seminars and cinemas. |
Revenue
Our revenue increased $659.5 million, or 11%, during the year ended December 31, 2013 as compared to the prior year. The overall increase in revenue was primarily due to an increase in our Concerts segment of $646.8 million. Excluding the decrease of approximately $3.9 million related to the impact of changes in foreign exchange rates, revenue increased $663.4 million, or 11%. The impact of changes in foreign exchanges rates was not significant to the segments.
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 decrease of approximately $100.4 million related to the impact of changes in foreign exchange rates, revenue increased $535.4 million, or 10%.
More detailed explanations of these changes are included in the applicable segment discussions below.
Direct operating expenses
Our direct operating expenses increased $529.2 million, or 13%, during the year ended December 31, 2013 as compared to the prior year. The overall increase in direct operating expenses was primarily due to an increase in our Concerts segment of $555.0 million. Excluding the decrease of approximately $3.2 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $532.4 million, or 13%. The impact of changes in foreign exchanges rates was not significant to the segments.
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 decrease of approximately $77.4 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $439.2 million, or 12%.
Direct operating expenses include artist fees, event production costs, ticketing client royalties, show-related marketing and advertising expenses, along with other costs.
More detailed explanations of these changes are included in the applicable segment discussions below.
Selling, general and administrative expenses
Our selling, general and administrative expenses increased $83.3 million, or 7%, during the year ended December 31, 2013 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 $63.0 million. Excluding the decrease of approximately $0.3 million related to the impact of changes in foreign exchange rates, selling, general and administrative expenses increased $83.6 million, or 7%. The impact of changes in foreign exchanges rates was not significant to the segments.
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 decrease 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%.
More detailed explanations of these changes are included in the applicable segment discussions below.
Depreciation and amortization
Depreciation and amortization decreased $60.6 million, or 14%, during the year ended December 31, 2013 as compared to the prior year. The overall decrease in depreciation and amortization was primarily due to decreases in our Concerts and Artist Nation segments of $13.2 million and $73.1 million, respectively, offset partially by an increase in our Ticketing segment of $24.9 million. There was no significant impact of changes in foreign exchange rates on 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. Excluding the decrease 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%.
More detailed explanations of these changes are included in the applicable segment discussions below.
Gain on disposal of operating assets
Gain on disposal of operating assets for the year ended December 31, 2013 was $38.3 million consisting primarily of a $24.8 million gain recognized in our Concerts segment from the May 2013 sale of a theater in New York. In addition, we recognized a gain in our Concerts segment of $14.1 million in connection with insurance recoveries for storm damage sustained to an amphitheater located in New York.
Corporate expenses
Corporate expenses decreased $19.0 million, or 17%, during the year ended December 31, 2013 as compared to the prior year primarily from a reduction in stock-based compensation and expense related to payments on the Trust Note due to the resignation of an executive on December 31, 2012.
Acquisition transaction expenses
Acquisition transaction expenses were $6.4 million, $3.4 million and $8.1 million during the years ended December 31, 2013, 2012 and 2011, respectively. All years include current year acquisition costs that vary based on the size and number of acquisitions in the year and ongoing litigation costs relating to the Merger. In addition, 2011 was reduced by changes in the fair-value of acquisition-related contingent consideration.
Interest expense
Interest expense decreased $12.1 million, or 10%, during the year ended December 31, 2013 as compared to the prior year primarily due to lower interest cost driven by the August 2012 redemption of the 10.75% senior notes and the August 2013 redemption of the 8.125% senior notes offset by the interest costs from the 7% senior notes issued in August 2012 and 2013.
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.
Our debt balances and weighted-average cost of debt, excluding unamortized debt discounts of $24.0 million and including debt premium of $8.6 million, were $1.8 billion and 4.3%, respectively, at December 31, 2013.
Loss (gain) on extinguishment of debt
We recorded a loss on extinguishment of debt of $36.3 million for the year ended December 31, 2013 in connection with the refinancing of the term loans under our senior secured credit facility and the redemption of our 8.125% senior notes in August 2013. These obligations were paid with proceeds from incremental term loans under our amended senior secured credit facility and the issuance of additional 7% senior notes.
Equity in earnings of nonconsolidated affiliates
Equity in earnings of nonconsolidated affiliates decreased $9.1 million during the year ended December 31, 2013 as compared to the prior year primarily due to impairment charges of $9.2 million recorded in 2013 related to investments in a concert promoter located in Europe and an ecommerce business.
Other expense, net
Other expense includes the impact of changes in foreign exchange rates of $2.8 million and $5.1 million in net losses for 2013 and 2011, respectively, and a net gain of $1.4 million for 2012.
Income taxes
For 2013, we had a net tax expense of $30.9 million on a loss before income taxes of $5.1 million compared to a net tax expense of $29.7 million on a loss before income taxes of $132.2 million for 2012. In 2013, income tax expense primarily included $27.8 million related to tax expense for foreign entities and $3.9 million current tax expense for state and local income taxes. The net increase in 2013 tax expense as compared to 2012 is principally due to higher earnings attributable to the 2012 acquisitions of foreign entities.
Our 2012 effective tax rate of (22)% represented a net tax expense of $29.7 million on a loss before income taxes of $132.2 million compared to our 2011 effective tax rate of 27% which represented a net tax benefit of $26.2 million on a loss before income taxes of $96.6 million for the years ended December 31, 2012 and 2011, respectively. In 2012, income tax expense included $19.5 million related to tax 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 federal tax consolidation in 2011 of Front Line with the Company’s other domestic operations.
Net income attributable to noncontrolling interests
Net income attributable to noncontrolling interests increased $6.0 million during the year ended December 31, 2013 as compared to the prior year primarily due to improved operating results from certain artist management businesses driven by an impairment in 2012 offset partially by lower operating results from certain concert promotion businesses.
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 certain artist management businesses resulting from an impairment of a client/vendor relationship intangible in 2012.
Concerts Results of Operations
Our Concerts segment operating results were, and discussions of significant variances are, as follows:
| Year Ended December 31, | % Change 2013 vs 2012 | % Change 2012 vs 2011 | |||||||||||||
| 2013 | 2012 | 2011 | |||||||||||||
| (in thousands) | |||||||||||||||
| Revenue | $ | 4,517,191 | $ | 3,870,371 | $ | 3,506,188 | 17% | 10% | |||||||
| Direct operating expenses | 3,829,991 | 3,274,951 | 2,946,410 | 17% | 11% | ||||||||||
| Selling, general and administrative expenses | 632,614 | 569,570 | 535,500 | 11% | 6% | ||||||||||
| Depreciation and amortization | 132,386 | 145,552 | 132,441 | (9)% | 10% | ||||||||||
| Gain on disposal of operating assets | (38,927 | ) | (453 | ) | (880 | ) | * | * | |||||||
| Acquisition transaction expenses | 723 | 847 | (2,286 | ) | * | * | |||||||||
| Operating loss | $ | (39,596 | ) | $ | (120,096 | ) | $ | (104,997 | ) | 67% | (14)% | ||||
| Operating margin | (0.9 | )% | (3.1 | )% | (3.0 | )% | |||||||||
| Adjusted operating income ** | $ | 60,326 | $ | 31,364 | $ | 30,275 | 92% | 4% |
| * | Percentages are not meaningful. |
| ** | AOI is defined and reconciled to operating income (loss) below. |
Year Ended 2013 Compared to Year Ended 2012
Concerts revenue increased $646.8 million, or 17%, during the year ended December 31, 2013 as compared to the prior year partially due to incremental revenue of $144.7 million from the acquisitions of various festival promoters. In addition, revenue increased due to more shows and higher average attendance in our arenas globally and North America owned or operated amphitheaters, increased shows in third-party stadiums globally and expansion of premium ticket package sales. These increases were partially offset by less global touring activity.
Concerts direct operating expenses increased $555.0 million, or 17%, during the year ended December 31, 2013 as compared to the prior year partially due to incremental direct operating expenses of $162.1 million from acquisitions. In addition, we incurred higher expenses associated with the additional shows and tickets sold as discussed above. These increases were partially offset by reduced global touring activity.
Concerts selling, general and administrative expenses increased $63.0 million, or 11%, during the year ended December 31, 2013 as compared to the prior year primarily due to higher compensation costs associated with improved operating results and increased headcount along with incremental expenses of $8.4 million from the acquisitions noted above.
Concerts depreciation and amortization decreased $13.2 million, or 9%, during the year ended December 31, 2013 as compared to the prior year primarily due to higher impairments of intangible assets in 2012. We recorded impairment charges of $8.6 million in 2013 primarily associated with venue management and leasehold intangible assets as compared to impairment charges of $26.9 million in 2012 primarily related to revenue-generating contract intangibles. In each case, it was determined that the estimated undiscounted cash flows associated with the respective intangible asset was less than its carrying value. This decrease was partially offset by additional amortization associated with recent acquisitions and $6.7 million of accelerated amortization recorded in 2013 resulting from a change in the estimated life of certain venue management and leasehold intangible assets.
Concerts gain on disposal of operating assets of $38.9 million for the year ended December 31, 2013 is primarily due to a $24.8 million gain on sale of a theater in New York and a $14.1 million insurance recovery for storm damage to an amphitheater in New York during Hurricane Sandy in 2012.
The decreased operating loss for Concerts for the year ended December 31, 2013 was primarily driven by more shows and higher average attendance, reduced amortization expense and the gain on disposal of operating assets. These increases were partially offset by higher compensation costs related to the improved operating results.
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. 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 $105.4 million resulting from acquisitions in 2012 of a concert promoter in Australia and a festival promoter in the United Kingdom. In addition, revenue increased due to higher activity from global tours, more shows and higher per show attendance at our North America owned 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 $6.8 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 along with 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 primarily due to higher amortization associated with impairments of intangible assets, additional definite-lived intangible amortization of $7.1 million associated with recent acquisitions and $3.7 million related to the acceleration of amortization resulting from a change in the estimated useful life of a venue management and leasehold intangible asset. In 2012, we recorded impairment charges of $26.9 million primarily related to revenue-generating contract intangibles as compared to $14.1 million of impairment charges recorded in 2011 related to client/vendor relationships, revenue-generating contracts and venue management and leasehold intangibles. In each case, it was determined that the estimated undiscounted cash flows associated with the respective intangible asset was less than its carrying value. These increases were partially offset by lower depreciation due to $10.0 million of property, plant and equipment impairment charges recorded in 2011 for two amphitheaters, a theater and a club. There were no significant impairment charges for property, plant and equipment recorded during 2012.
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.
The increased operating loss for Concerts was primarily driven by higher advertising costs incurred in 2012 for future events, increased compensation costs and higher amortization partially offset by the improved results of our owned or operated amphitheaters and our global tours.
Ticketing Results of Operations
Our Ticketing segment operating results were, and discussions of significant variances are, as follows:
| Year Ended December 31, | % Change 2013 vs 2012 | % Change 2012 vs 2011 | |||||||||||||
| 2013 | 2012 | 2011 | |||||||||||||
| (in thousands) | |||||||||||||||
| Revenue | $ | 1,407,817 | $ | 1,374,049 | $ | 1,319,343 | 2% | 4% | |||||||
| Direct operating expenses | 672,221 | 651,055 | 618,382 | 3% | 5% | ||||||||||
| Selling, general and administrative expenses | 442,788 | 434,310 | 428,364 | 2% | 1% | ||||||||||
| Depreciation and amortization | 190,801 | 165,947 | 158,071 | 15% | 5% | ||||||||||
| Gain on disposal of operating assets | (4 | ) | (225 | ) | (96 | ) | * | * | |||||||
| Acquisition transaction expenses | 245 | 153 | 1,314 | * | * | ||||||||||
| Operating income | $ | 101,766 | $ | 122,809 | $ | 113,308 | (17)% | 8% | |||||||
| Operating margin | 7.2 | % | 8.9 | % | 8.6 | % | |||||||||
| Adjusted operating income ** | $ | 298,121 | $ | 294,625 | $ | 279,045 | 1% | 6% |
| * | Percentages are not meaningful. |
| ** | AOI is defined and reconciled to operating income (loss) below. |
Year Ended 2013 Compared to Year Ended 2012
Ticketing revenue increased $33.8 million, or 2%, during the year ended December 31, 2013 as compared to the same period of the prior year primarily due to higher domestic primary and resale ticket volumes partially offset by a reduction in fees associated with the 2012 Olympics and lower domestic primary ticket fees resulting from the mix of fee structures on certain domestic primary ticket arrangements.
Ticketing direct operating expenses increased $21.2 million, or 3%, during the year ended December 31, 2013 as compared to the same period of the prior year primarily due to costs related to the higher ticket volumes discussed above. These increases were partially offset by a reduction in expenses associated with the 2012 Olympics and the change in fee structure noted above.
Ticketing selling, general and administrative expenses increased $8.5 million, or 2%, during the year ended December 31, 2013 as compared to the same period of the prior year primarily due to increased compensation costs driven by the re-platforming of our ticketing systems and increased costs associated with the renewal of the National Football League and National Hockey League ticketing agreements. These increases were partially offset by legal settlements received from insurance carriers.
Ticketing depreciation and amortization increased $24.9 million, or 15%, during the year ended December 31, 2013 as compared to the same period of the prior year primarily due to higher amortization of non-recoupable contract advances.
Ticketing operating income decreased for the year ended December 31, 2013 primarily due to increased compensation expenses associated with the re-platforming of our ticketing systems, increased amortization noted above and the reduction associated with the 2012 Olympics. These increases were partially offset by increases in primary and resale ticket volumes noted above.
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. 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 primarily from acquisitions in 2011 of smaller ticketing companies located in Spain and Washington D.C. These increases were partially offset by a reduction in primary and resale ticket sales associated with the National Hockey League strike in 2012.
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 acquisitions.
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 acquisitions. 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, 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.
Artist Nation Results of Operations
Our Artist Nation segment operating results were, and discussions of significant variances are, as follows:
| Year Ended December 31, | % Change 2013 vs 2012 | % Change 2012 vs 2011 | |||||||||||||
| 2013 | 2012 | 2011 | |||||||||||||
| (in thousands) | |||||||||||||||
| Revenue | $ | 352,947 | $ | 399,940 | $ | 393,129 | (12)% | 2% | |||||||
| Direct operating expenses | 218,113 | 263,896 | 260,884 | (17)% | 1% | ||||||||||
| Selling, general and administrative expenses | 103,304 | 99,786 | 113,199 | 4% | (12)% | ||||||||||
| Depreciation and amortization | 42,613 | 115,696 | 50,412 | (63)% | * | ||||||||||
| Loss (gain) on disposal of operating assets | 665 | (42 | ) | 1,264 | * | * | |||||||||
| Acquisition transaction expenses | 3 | 1,163 | (7,758 | ) | * | * | |||||||||
| Operating loss | $ | (11,751 | ) | $ | (80,559 | ) | $ | (24,872 | ) | 85% | * | ||||
| Operating margin | (3.3 | )% | (20.1 | )% | (6.3 | )% | |||||||||
| Adjusted operating income ** | $ | 32,084 | $ | 38,134 | $ | 47,178 | (16)% | (19)% |
| * | Percentages are not meaningful. |
| ** | AOI is defined and reconciled to operating income (loss) below. |
Year Ended 2013 Compared to Year Ended 2012
Artist Nation revenue decreased $47.0 million, or 12%, during the year ended December 31, 2013 as compared to the prior year primarily from the decision in July of this year by the Concerts segment to expand their premium ticket packages and no longer outsource VIP ticket sales to Artist Nation along with a reduction in management revenue for the departure of certain artist managers. This decrease was partially offset by incremental revenue of $5.2 million resulting from the acquisition of a production services company in July 2012 along with several artist management companies.
Artist Nation direct operating expenses decreased $45.8 million, or 17%, during the year ended December 31, 2013 as compared to the prior year primarily due to a reduction in costs associated with the VIP ticket sales decline discussed above.
Artist Nation depreciation and amortization decreased $73.1 million, or 63%, during the year ended December 31, 2013 as compared to the prior year primarily due to higher impairments of intangible assets in 2012 in the management business. We recorded impairment charges, primarily associated with client/vendor relationship intangible assets, of $2.0 million in 2013 compared to $62.7 million in 2012.
The decreased operating loss for Artist Nation for the year ended December 31, 2013 was primarily driven by the lower amortization expense.
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 primarily due to increased sales of VIP tickets and incremental revenue of $9.5 million resulting from the acquisition of a merchandising company located in Australia 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 primarily due to higher costs for VIP 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 certain of the remaining interests in Front Line partially offset by incremental costs of $5.5 million related to the departure of a former executive, $1.9 million resulting from the acquisition above and higher compensation-related costs related to the management business.
Artist Nation depreciation and amortization increased $65.3 million 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 $8.9 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.
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 2013 vs 2012 | % Change 2012 vs 2011 | |||||||||||||
| 2013 | 2012 | 2011 | |||||||||||||
| (in thousands) | |||||||||||||||
| Revenue | $ | 284,692 | $ | 247,921 | $ | 230,791 | 15% | 7% | |||||||
| Direct operating expenses | 45,021 | 34,738 | 33,682 | 30% | 3% | ||||||||||
| Selling, general and administrative expenses | 45,618 | 38,198 | 32,787 | 19% | 17% | ||||||||||
| Depreciation and amortization | 2,351 | 1,187 | 483 | * | * | ||||||||||
| Acquisition transaction expenses | 64 | — | — | * | * | ||||||||||
| Operating income | $ | 191,638 | $ | 173,798 | $ | 163,839 | 10% | 6% | |||||||
| Operating margin | 67.3 | % | 70.1 | % | 71.0 | % | |||||||||
| Adjusted operating income ** | $ | 194,807 | $ | 175,619 | $ | 165,081 | 11% | 6% |
| * | Percentages are not meaningful. |
| ** | AOI is defined and reconciled to operating income (loss) below. |
Year Ended 2013 Compared to Year Ended 2012
Sponsorship & Advertising revenue increased $36.8 million, or 15%, during the year ended December 31, 2013 as compared to the prior year due to growth in online advertising, new sponsorship agreements globally, expansion of existing sponsorship arrangements and increased custom events. In addition, incremental revenue of $4.3 million resulting from sponsorships associated with recent acquisitions of festival promoters contributed to the increase.
Sponsorship & Advertising direct operating expenses increased $10.3 million, or 30%, during the year ended December 31, 2013 as compared to the prior year primarily driven by increased revenue and, in certain cases, higher fulfillment costs related to custom events.
Sponsorship & Advertising selling, general and administrative expenses increased $7.4 million, or 19%, during the year ended December 31, 2013 as compared to the prior year primarily due to higher compensation costs associated with improved performance and increased headcount to drive additional digital and sponsorship sales.
The increased operating income for the year ended December 31, 2013 was primarily due to higher online advertising and new sponsorship agreements globally partially offset by increased compensation costs.
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 activity.
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 primarily related to increased compensation costs due to additional headcount to drive digital and sponsorship sales.
The increased operating income was primarily due to higher sponsorship and online advertising activity, including increased 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, payments under the Trust Note and acquisition-related severance), depreciation and amortization (including goodwill impairment), loss (gain) on disposal 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.
The following table sets forth the reconciliation of adjusted operating income (loss) to operating income (loss):
| Adjusted operating income (loss) | Non-cash and stock- based compensation expense | (Gain) Loss on disposal of operating assets | Depreciation and amortization | Acquisition expenses | Operating income (loss) | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| 2013 | |||||||||||||||||||||||
| Concerts | $ | 60,326 | $ | 5,740 | $ | (38,927 | ) | $ | 132,386 | $ | 723 | $ | (39,596 | ) | |||||||||
| Ticketing | 298,121 | 5,313 | (4 | ) | 190,801 | 245 | 101,766 | ||||||||||||||||
| Artist Nation | 32,084 | 554 | 665 | 42,613 | 3 | (11,751 | ) | ||||||||||||||||
| Sponsorship & Advertising | 194,807 | 754 | — | 2,351 | 64 | 191,638 | |||||||||||||||||
| Other and Eliminations | (1,829 | ) | — | 7 | (1,839 | ) | — | 3 | |||||||||||||||
| Corporate | (78,331 | ) | 16,054 | — | 2,611 | 5,404 | (102,400 | ) | |||||||||||||||
| Total | $ | 505,178 | $ | 28,415 | $ | (38,259 | ) | $ | 368,923 | $ | 6,439 | $ | 139,660 | ||||||||||
| 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 |
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 financings. We may from time to time engage in open market purchases of our outstanding debt securities or redeem or otherwise repay such debt.
Our balance sheet reflects cash and cash equivalents of $1.3 billion at December 31, 2013 and $1.0 billion at December 31, 2012. Included in the December 31, 2013 and 2012 cash and cash equivalents balance is $538.4 million and $441.6 million, respectively, of cash received that includes the face value of tickets sold on behalf of clients and the clients’ share of convenience and order processing charges, or client cash. We generally do not utilize client cash for our own financing or investing activities as the amounts are payable to clients on a regular basis. Our foreign subsidiaries held approximately $475.5 million in cash and cash equivalents, excluding client cash, at December 31, 2013. We do not intend to repatriate these funds, but if we did, we 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 in the statement of cash flows to better represent our financing activities. Our balance sheet reflects current and long-term debt of $1.8 billion at December 31, 2013 and $1.7 billion at December 31, 2012. Our weighted-average cost of debt, excluding the debt discounts and including the debt premium on our term loans and notes, was 4.3% at December 31, 2013.
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 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 cash, less event-related deferred revenue, less accrued expenses due to artists and 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 flows from operations and borrowings under our senior secured credit facility, along with other financing alternatives, to satisfy working capital requirements, 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 agreements 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.
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.
Senior Secured Credit Facility
In August 2013, we amended our existing senior secured credit facility. The amended senior secured credit facility provides for (i) a $115 million term loan A, (ii) a $950 million term loan B and (iii) a $335 million revolving credit facility. The amendment to the senior secured credit facility provided the existing term loan A and term loan B lenders with an option to convert their outstanding principal amounts into the new term loans. In addition, subject to certain conditions, we have the right to increase such facilities by at least $450 million or a greater amount so long as the senior secured leverage ratio calculated on a pro-forma basis (as defined in the credit agreement) is no greater than 3.25x. The 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) $150 million to be available for borrowings in Euros or British Pounds and (iv) $50 million to be available for borrowings in one or more other approved currencies. The amended senior secured credit facility is secured by a first priority lien on substantially all of our tangible and intangible personal property and the domestic subsidiaries that are guarantors, and by a pledge of substantially all of the shares of stock, partnership interests and limited liability company interests of our direct and indirect domestic subsidiaries and 65% of each class of capital stock of any first-tier foreign subsidiaries.
The interest rates per annum applicable to revolving credit facility loans and term loan A under the amended senior secured credit facility are, at our option, equal to either LIBOR plus 2.25% or a base rate plus 1.25%, subject to stepdowns based on our net leverage ratio. The interest rates per annum applicable to term loan B are, at our option, equal to either LIBOR plus 2.75% or a base rate plus 1.75%, subject to a LIBOR floor of 0.75% and a base rate floor of 1.75%. We are required to pay a commitment fee of 0.5% per year on the undrawn portion available under the revolving credit facility, subject to stepdowns based on our net leverage ratio, and variable fees on outstanding letters of credit.
For the term loan A, we are required to make quarterly payments increasing over time from $1.4 million to $13.8 million with the balance due at maturity in August 2018. For the term loan B, we are required to make quarterly payments of $2.4 million with the balance due at maturity in August 2020. The revolving credit facility matures in August 2018. 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.
During the year ended December 31, 2013, we made principal payments totaling $487.0 million primarily to lenders electing not to convert their outstanding term loans in connection with the August 2013 amendment. At December 31, 2013, the outstanding balances on the amended term loans, net of discounts, were $1.0 billion. There were no borrowings under the revolving credit facility as of December 31, 2013. Based on our letters of credit of $68.1 million, $266.9 million was available for future borrowings.
7% Senior Notes
In August 2013, we issued an additional $200 million principal amount of notes under the indenture governing our existing 7% senior notes due 2020 with a $9.0 million premium, which increased the total principal amount of such notes outstanding to $425 million. Interest on the notes is payable semi-annually in cash in arrears on March 1 and September 1 of each year 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 any accrued and unpaid interest to the repurchase date, if we experience certain defined changes of control.
Proceeds from the issuance of the additional 7% senior notes and refinancing of our senior secured credit facility, excluding the outstanding principal amounts for lenders who elected to convert their outstanding term loans, of $802.2 million were used to repay $472.5 million principal amount of our outstanding borrowings under our then existing senior secured credit facility, to repay all of our outstanding 8.125% senior notes due 2018 with a principal amount of $250 million and to pay the related ‘make-whole’ premium on these senior notes and total accrued interest and fees of $35.3 million along with related fees and expenses for the refinancing of $22.0 million, leaving $22.4 million in additional cash for general corporate purposes. We recorded $36.3 million as a loss on extinguishment of debt related to this refinancing.
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 amended senior secured credit facility contains a number of covenants and restrictions that, among other things, requires us to satisfy certain financial covenants and restricts 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 amended senior secured credit facility agreement has one covenant, measured quarterly, that relates to total leverage. The consolidated total leverage covenant requires us to maintain a ratio of consolidated total funded debt to consolidated EBITDA (both as defined in the amended credit agreement) of 5.25x over the trailing four consecutive quarters through September 30, 2014. The consolidated total leverage ratio will reduce to 5.0x on December 31, 2014, 4.75x on December 31, 2015 and 4.50x on December 31, 2016.
The indenture governing our 7% senior notes contains 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 arms-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 indenture has occurred and is continuing. The 7% senior notes contain two incurrence-based financial covenants, as defined, requiring a minimum fixed charge coverage ratio of 2.0x and a maximum secured indebtedness leverage ratio of 3.25x.
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, 2013, 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 2014.
Disposals of Assets
During 2013 we received $82.6 million of proceeds primarily related to the sale of a theater in New York and insurance recoveries for storm damage sustained to an amphitheater located in New York. During 2012, we received $8.3 million of proceeds primarily related to the sale of an amphitheater in Ohio. During 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 theater in Sweden. These proceeds are presented net of any cash included in the businesses sold.
Stock Option Exercises
During 2013, we received $85.1 million of proceeds from the exercise of stock options. There were no significant stock option exercises during 2012 and 2011.
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 2013, we used $93.5 million of cash for acquisitions primarily for controlling interests in a festival promoter based in Los Angeles, California and a festival promoter in the United Kingdom, both in our Concerts segment, along with the acquisition in our Artist Nation segment of an artist management business based in Ireland.
During 2012, we used $75.6 million of cash primarily for acquisitions in our Concerts segment of a concert promoter in Australia and two festival promoters based in United Kingdom and Los Angeles, CA.
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 and the acquisition of a merchandising company
located in Australia, acquisitions in our Ticketing segment of a ticketing company located in Spain and a technology developer and the acquisition in our Concerts segment of a business that promotes events in Southern California.
Intangibles
During 2012, we used $14.6 million of cash primarily related to the purchase of rights to a festival in Europe. There was no significant use of cash to purchase intangible assets during 2013 and 2011.
Purchases of Noncontrolling Interests
During 2013, we used $50.9 million of cash primarily related to the acquisition of the remaining equity interest in a company that owns The O2 Dublin.
During 2011, we used $47.6 million of cash primarily related to the acquisition of the remaining equity interest in Front Line.
Deferred and Contingent Consideration
We used $10.6 million and $23.8 million of cash to settle deferred and contingent consideration liabilities for certain past acquisitions during 2012 and 2011, respectively. There were no significant payments during 2013.
Capital Expenditures
Venue and ticketing operations are capital intensive businesses, requiring continual investment in our existing venues and ticketing systems in order 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, major renovations to existing buildings or buildings that are being added to our venue network, the development of new online or ticketing tools and technology enhancements. Revenue generating capital expenditures can also include smaller projects whose purpose is to increase 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, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (in thousands) | |||||||||||
| Maintenance capital expenditures | $ | 59,645 | $ | 62,962 | $ | 64,351 | |||||
| Revenue generating capital expenditures | 56,732 | 60,255 | 47,693 | ||||||||
| Total capital expenditures | $ | 116,377 | $ | 123,217 | $ | 112,044 |
Maintenance capital expenditures for 2013 decreased from the prior year primarily due to a reduction in venue-related projects.
Revenue generating capital expenditures for 2013 decreased from the prior year primarily due to the timing of expenditures related to the re-platforming of our ticketing system and other ticketing products. Excluded from revenue generating capital expenditures in 2013 is the use of $18.5 million of insurance proceeds to restore an amphitheater in New York that sustained storm damage.
Maintenance capital expenditures for 2012 decreased from the prior year primarily due to a reduction in venue-related projects and office renovations.
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.
We currently expect capital expenditures to be approximately $130 million for the year ending December 31, 2014.
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 and client ticketing agreements. 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, 2013 and thus do not represent all expected expenditures for those periods.
The scheduled maturities of our outstanding long-term debt (excluding unamortized debt discounts and premium), future minimum rental commitments under non-cancelable lease agreements, minimum payments under other non-cancelable contracts, capital expenditure commitments and expected payments of contingent consideration liabilities as of December 31, 2013 are as follows:
| Payments Due by Period | |||||||||||||||||||
| 2019 and | |||||||||||||||||||
| Total | 2014 | 2015-2016 | 2017-2018 | thereafter | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Long-term debt obligations, including current maturities: | |||||||||||||||||||
| Term loans and revolving credit facility | $ | 1,061,188 | $ | 18,125 | $ | 44,875 | $ | 98,063 | $ | 900,125 | |||||||||
| 7% senior notes | 425,000 | — | — | — | 425,000 | ||||||||||||||
| 2.875% convertible senior notes (1) | 220,000 | 220,000 | — | — | — | ||||||||||||||
| Other long-term debt | 118,097 | 47,864 | 50,454 | 3,281 | 16,498 | ||||||||||||||
| Estimated interest payments (2) | 446,582 | 76,526 | 134,572 | 128,734 | 106,750 | ||||||||||||||
| Non-cancelable operating leases (3) | 2,280,565 | 119,371 | 248,382 | 220,685 | 1,692,127 | ||||||||||||||
| Non-cancelable contracts (3) | 1,360,114 | 864,519 | 303,169 | 162,436 | 29,990 | ||||||||||||||
| Capital expenditures | 8,061 | 7,736 | 50 | 25 | 250 | ||||||||||||||
| Contingent consideration | 6,954 | 2,946 | 4,008 | — | — | ||||||||||||||
| Total | $ | 5,926,561 | $ | 1,357,087 | $ | 785,510 | $ | 613,224 | $ | 3,170,740 |
| (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, 2013. |
| (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 2.4% for North America, 3.3% for the United Kingdom and 1.8% 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 $21.5 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 2014 through 2018 are $1.6 million each year. The venues under the lease agreement were included in the sale of our North American theatrical business in 2008. 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, 2013.
Aggregate minimum rentals of $85.7 million to be received in years 2014 through 2023 under non-cancelable subleases are excluded from the commitment amounts in the above table.
Guarantees of Third-Party Obligations
As of December 31, 2013 and 2012, we guaranteed the debt of third parties of approximately $13.1 million and $12.7 million, respectively, primarily related to maximum credit limits on employee and tour-related credit cards and obligations under a venue management agreement.
Cash Flows
| Year Ended December 31, | |||||||||||
| 2013 | 2012 | 2011 | |||||||||
| (in thousands) | |||||||||||
| Cash provided by (used in): | |||||||||||
| Operating activities | $ | 417,472 | $ | 367,098 | $ | 135,705 | |||||
| Investing activities | $ | (143,663 | ) | $ | (203,791 | ) | $ | (152,017 | ) | ||
| Financing activities | $ | 32,984 | $ | (19,891 | ) | $ | (44,379 | ) |
Operating Activities
Year Ended 2013 Compared to Year Ended 2012
Cash provided by operating activities was $417.5 million for the year ended December 31, 2013, compared to $367.1 million for the year ended December 31, 2012. The $50.4 million increase in cash provided by operating activities resulted primarily from an increase in the cash-related portion of net income driven by our improved operating results this year. In addition, we had higher collections of accounts receivable and also benefited from increases in accrued expenses in 2013 as compared to the prior year.
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 in 2012 as compared to 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.
Investing Activities
Year Ended 2013 Compared to Year Ended 2012
Cash used in investing activities was $143.7 million for the year ended December 31, 2013, compared to $203.8 million for the year ended December 31, 2012. The $60.1 million decrease in cash used in investing activities is primarily due to higher proceeds received from the disposal of operating assets in 2013 as compared to the prior year. See “—Sources of Cash” and “—Uses of Cash ” above for further discussion.
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 was primarily due to higher payments for acquisitions and purchases of intangible assets along with purchases of property, plant and equipment, primarily related to technology, in 2012 as compared to the prior year.
Financing Activities
Year Ended 2013 Compared to Year Ended 2012
Cash provided by financing activities was $33.0 million for the year ended December 31, 2013, compared to cash used in financing activities of $19.9 million for the year ended December 31, 2012. The $52.9 million increase in cash provided by financing activities is primarily a result of higher proceeds from the exercise of stock options partially offset by higher purchases of non-controlling interests in 2013 as compared to the prior year.
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 was 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 lower payments of deferred and contingent consideration in 2012 as compared to 2011. Also contributing to the decrease was cash used in 2011 for purchases of noncontrolling interests for certain of 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.
Seasonality
Our Concerts, Artist Nation and Sponsorship & Advertising segments typically experience higher operating income in the second and third quarters as our outdoor venues and festivals are primarily used in or occur during May through September, and our artist touring activity is higher. In addition, the timing of the on-sale of tickets 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 for global tours in advance of the date the related event tickets go on sale. These artist fees and production costs are expensed when the event occurs. Once tickets for an event go on sale, we generally begin to receive payments from ticket sales at our owned or operated venues in advance of when the event occurs. 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 could be 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 $122.6 million for the year ended December 31, 2013. 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, 2013 by $12.3 million. As of December 31, 2013, our primary foreign exchange exposure included the Euro, British Pound, Australian Dollar 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 may enter into forward currency contracts to minimize the risks and/or costs associated with changes in foreign currency rates on forecasted operating income. At December 31, 2013, we had forward currency contracts and options outstanding with a notional amount of $96.0 million.
Interest Rate Risk
Our market risk is also affected by changes in interest rates. We had $1.8 billion of total debt, net of unamortized discounts and premium, outstanding as of December 31, 2013. Of the total amount, taking into consideration existing interest rate hedges, we had $742.9 million of fixed-rate debt and $1.1 billion of floating-rate debt.
Based on the amount of our floating-rate debt as of December 31, 2013, each 25 basis point increase or decrease in interest rates would increase or decrease our annual interest expense and cash outlay by approximately $2.7 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, 2013 with no subsequent change in rates for the remainder of the period.
At December 31, 2013, 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 $10.4 million at December 31, 2013, 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, 2013 was a liability of $0.1 million. This agreement was put into place to reduce the variability of the cash flows from the interest payments related to certain financing.
We have two interest rate swap agreements with a $28.9 million aggregate notional amount at December 31, 2013, that effectively convert a portion of our floating-rate debt to a fixed-rate basis. Both agreements expire in December 2015. 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 February 2013, the FASB issued guidance which requires companies to disclose additional information about reclassifications out of AOCI, including changes in AOCI balances by component and significant items reclassified out of AOCI. The new disclosure requirements are applied prospectively and are effective for interim and annual periods beginning after December 15, 2012. We adopted this guidance on January 1, 2013.
In July 2013, the FASB issued guidance that requires a liability related to an unrecognized tax benefit to be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if certain criteria are met. The guidance is effective for interim and annual periods beginning after December 15, 2013 and are applied prospectively to unrecognized tax benefits that exist at the effective date. Early adoption and retrospective application of the new guidance are permitted. This guidance is consistent with our present practice and will not have a material impact on our financial position.
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.
Consolidation
We consolidate entities in which we own more than 50% of the voting common stock and control operations and also VIEs 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.
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
The Company tests for possible impairment of property, plant and equipment whenever events or circumstances change, such as a current period operating cash flow loss combined with a history of, or projected, operating cash flow losses or a significant adverse 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. 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
The Company tests for possible impairment of definite-lived intangible assets whenever events or circumstances change, such as a current period operating cash flow loss combined with a history of, or projected, operating cash flow losses or a significant adverse 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 intangible 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.
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 is 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 our 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 or when we change our operating segments or reporting units.
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.
Revenue Recognition
Revenue from the promotion and production of an event is recognized after the show occurs. Revenue related to larger global tours is recognized after the show 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 or operated venues in the United States, and where we control the tickets internationally, revenue is recognized after the show occurs. Revenue for these ticket service charges collected in advance of the event is recorded as deferred revenue until the event occurs. These service charges 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.
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.
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, | ||||||||
| 2013 | 2012 | 2011 | 2010 | 2009 | ||||
| * | * | * | * | * |
| * | For the years ended December 31, 2013, 2012, 2011, 2010 and 2009, fixed charges exceeded earnings from continuing operations before income taxes and fixed charges by $6.0 million, $142.1 million, $104.4 million, $193.6 million and $116.5 million, respectively. |
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, premium and expense and the estimated interest portion of rental charges. Rental charges exclude variable rent expense for events in third-party venues.
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