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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the information set forth in our unaudited consolidated financial statements and related notes included elsewhere in this Quarterly Report and with our audited financial statements and related notes included in the Prospectus. The historical financial data discussed below reflects our historical results of operations and financial position and relates to periods prior to the Transactions (as defined below). As a result, the following discussion does not reflect the significant impact that such events will have on us. This discussion contains forward-looking statements based upon management’s current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various known and unknown factors, including those set forth under Part II, Item 1A. “Risk Factors” and in other sections of this Quarterly Report.
Overview
TKO is a premium sports and entertainment company which operates leading combat sports and sports entertainment brands. The Company monetizes its media and content properties through four principal activities: Media rights and content, Live events, Sponsorship and Consumer products licensing.
TKO was formed through the combination of Zuffa Parent, LLC (n/k/a TKO Operating Company, LLC) which owns and operates the Ultimate Fighting Championship (“UFC”), a preeminent combat sports brand and a subsidiary of Endeavor Group Holdings, Inc. (“Endeavor”), a global sports and entertainment company, and World Wrestling Entertainment, Inc. (n/k/a/ World Wrestling Entertainment, LLC) (“WWE”), a renowned sports entertainment business. The Transactions unite two complementary, market leading sports and sports entertainment brands in a single company supported by Endeavor’s capabilities in premium IP ownership, talent representation, live events and experiences. For additional information regarding the terms of the Transactions, see Note 3, Acquisition of WWE, to our unaudited consolidated financial statements included in this Quarterly Report.
Segments
As of September 30, 2023, we operated our business under two reportable segments, UFC and WWE. In addition, we also report results for the “Corporate” group, which incurs expenses that are not allocated to the business segments.
UFC:
The UFC segment reflects the business operations of UFC. Revenue from our UFC segment principally consists of media rights fees associated with the distribution of its programming content; ticket sales and site fees associated with the business’s global live events; sponsorships; and consumer product licensing agreements of UFC-branded products.
WWE:
The WWE segment reflects the business operations of WWE. Revenue from our WWE segment principally consists of media rights fees associated with the distribution of its programming content; ticket sales and site fees associated with the business’s global live events; sponsorships; and consumer product licensing agreements of WWE-branded products.
Corporate:
Corporate reflects operations not allocated to the UFC or WWE segments and primarily consists of general and administrative expenses. These expenses relate largely to corporate activities, including information technology, facilities, legal, human resources, finance, accounting, treasury, investor relations, corporate communications, community relations and compensation to TKO’s management and board of directors, which support both reportable segments. Corporate expenses also include management fees paid by the Company to Endeavor under the Services Agreement.
Components of Our Operating Results
Revenue
TKO primarily generates revenue via domestic and international media rights fees, ticket sales and site fees at our live events, sponsorships, and consumer products licensing.
Direct Operating Costs
TKO’s direct operating costs primarily include costs associated with our athletes and talent, production, marketing, and venue costs related to its live events, as well as commissions and direct costs with distributors.
Selling, General and Administrative
TKO’s selling, general and administrative expenses primarily include personnel costs as well as rent, travel, professional service costs and management fees paid to Endeavor.
Provision for Income Taxes
TKO was incorporated as a Delaware corporation in March 2023. As the sole managing member of TKO OpCo, TKO operates and controls all the business and affairs of UFC and WWE. TKO is subject to corporate income taxes on its share of taxable income of TKO OpCo. TKO OpCo is treated as a partnership for U.S. federal income tax purposes and is therefore generally not subject to U.S. corporate income tax. TKO OpCo’s foreign subsidiaries are subject to entity-level taxes. TKO OpCo’s U.S. subsidiaries are subject to withholding taxes on sales in certain foreign jurisdictions which are included as a component of foreign current taxes. TKO OpCo is subject to entity-level income taxes in certain U.S. state and local jurisdictions.
RESULTS OF OPERATIONS
(dollars in millions, except where noted)
The following is a discussion of our consolidated results of operations for the three and nine months ended September 30, 2023 and 2022. This information is derived from our accompanying consolidated financial statements prepared in accordance with GAAP.
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||
| Revenue | $ | 449.1 | $ | 340.7 | $ | 1,061.0 | $ | 868.4 | ||||
| Operating expenses: | ||||||||||||
| Direct operating costs | 130.3 | 99.6 | 302.3 | 243.5 | ||||||||
| Selling, general and administrative expenses | 193.2 | 56.5 | 313.0 | 155.7 | ||||||||
| Depreciation and amortization | 31.7 | 15.0 | 61.9 | 45.0 | ||||||||
| Total operating expenses | 355.2 | 171.1 | 677.2 | 444.2 | ||||||||
| Operating income | 93.9 | 169.6 | 383.8 | 424.2 | ||||||||
| Other expenses: | ||||||||||||
| Interest expense, net | (60.6) | (35.3) | (172.4) | (90.8) | ||||||||
| Other (expense) income, net | (0.7) | 0.4 | (1.6) | (0.4) | ||||||||
| Income before income taxes and equity (earnings) losses of affiliates | 32.6 | 134.7 | 209.8 | 333.0 | ||||||||
| Provision for income taxes | 11.2 | 5.0 | 17.7 | 12.5 | ||||||||
| Income before equity (earnings) losses of affiliates | 21.4 | 129.7 | 192.1 | 320.5 | ||||||||
| Equity (earnings) losses of affiliates, net of tax | (0.6) | — | 0.3 | — | ||||||||
| Net income | 22.0 | 129.7 | 191.8 | 320.5 | ||||||||
| Less: Net (loss) income attributable to non-controlling interests | (22.5) | 0.6 | (21.7) | 1.6 | ||||||||
| Less: Net income attributable to TKO Operating Company, LLC prior to the Transactions | 66.4 | 129.1 | 235.4 | 318.9 | ||||||||
| Net loss attributable to TKO Group Holdings, Inc. | $ | (21.9) | $ | — | $ | (21.9) | $ | — |
Revenue
Revenue increased by $108.4 million, or 32%, to $449.1 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
UFC revenue increased by $56.8 million, or 17%. This increase was primarily driven by $31.2 million of increased media rights and content from domestic and international rights fees resulting from increases in contractual revenues as well as higher fees associated with international renewals and two additional Fight Night events compared to the prior period. Additionally, the increase in revenue was due to $12.7 million of greater live event revenue from having nine events with live audiences compared to eight events in the same prior year period and higher site fees, as well as $12.2 million of higher sponsorship from new sponsors and increases in fees from renewals.
WWE contributed revenue of $51.6 million for the period from September 12, 2023 through September 30, 2023 following its acquisition.
Revenue increased by $192.6 million, or 22%, to $1,061.0 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
UFC revenue increased by $141.0 million, or 16%. This increase was primarily driven by $81.0 million of increased media rights and content from domestic and international rights fees resulting from increases in contractual revenues as well as higher fees associated with international renewals and one additional pay-per-view (“PPV”) event and one additional Fight Night event compared to the same prior year period. Additionally, the increase in revenue was due to $35.8 million of greater live event revenue from having 21 events with live audiences compared to 17 events in the prior year and higher site fees, as well as $21.1 million of higher sponsorship from new sponsors and increases in fees from renewals.
WWE contributed revenue of $51.6 million for the period from September 12, 2023 through September 30, 2023 following its acquisition.
Direct Operating Costs
Direct operating costs increased by $30.7 million or 31% to $130.3 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.
UFC direct operating costs increased by $18.1 million, or 18%. This increase was primarily due to higher costs of $15.7 million from different athlete matchups, as well as higher production costs associated with having two additional Fight Night events and two additional international events than in the same prior year period and direct costs associated with the increase in revenue described above. The increase was also driven by greater marketing and venue expenses due to having nine events with live audiences compared to eight events in the same prior year period.
WWE contributed direct operating costs of $12.6 million for the period from September 12, 2023 through September 30, 2023 following its acquisition.
Direct operating costs increased by $58.8 million or 24% to $302.3 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.
UFC direct operating costs increased by $46.2 million, or 19%. This increase was primarily due to higher costs of $37.5 million from different athlete matchups, as well as higher production costs associated with having one additional PPV event, one additional Fight Night event and four additional international events than in the same prior year period, and direct costs associated with the increase in revenue described above. The increase was also driven by greater marketing and venue expenses due to having 21 events with live audiences compared to 17 events in the same prior year period.
WWE contributed direct operating costs of $12.6 million for the period from September 12, 2023 through September 30, 2023 following its acquisition.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $136.7 million, or 242%, to $193.2 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. This increase was primarily due to $67.5 million of professional fees and bonuses incurred by Zuffa related to the Transactions during the current year period. Additionally, WWE contributed selling, general and administrative expenses of $64.5 million, which included $31.6 million of charges associated with restructuring activities, for the period from September 12, 2023 through September 30, 2023 primarily associated with the Transactions. The remaining increase was primarily due to higher costs for UFC consisting of increased travel expenses associated with having two additional Fight Night events and two additional international events than in the same prior year period, as well as higher cost of personnel and other operating expenses.
Selling, general and administrative expenses increased by $157.3 million, or 101%, to $313.0 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. This increase was primarily due to $82.5 million of professional fees and bonuses incurred by Zuffa related to the Transactions during the current year period. Additionally, WWE contributed selling, general and administrative expenses of $64.5 million, which included $31.6 million of charges associated with restructuring activities for the period from September 12, 2023 through September 30, 2023 primarily associated with the Transactions. The remaining increase was largely due to higher costs for UFC consisting of increased travel expenses associated with having one additional PPV event, one additional Fight Night event and four additional international events than in the same prior year period, as well as higher cost of personnel and other operating expenses.
Depreciation and Amortization
Depreciation and amortization increased $16.7 million, or 111%, to $31.7 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase was primarily due to $16.4 million of expenses associated with the acquisition of WWE.
Depreciation and amortization increased $16.9 million, or 38%, to $61.9 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase was primarily due to $16.4 million of expenses associated with the acquisition of WWE.
Interest Expense, Net
Interest expense, net increased $25.3 million, or 72%, to $60.6 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase was primarily driven by significantly higher interest rates on variable rate debt slightly offset by lower indebtedness.
Interest expense, net increased $81.6 million, or 90%, to $172.4 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase was primarily driven by significantly higher interest rates on variable rate debt slightly offset by lower indebtedness.
Other (Expense) Income, Net
Other (expense) income, net for the three months ended September 30, 2023 and 2022 was primarily driven by $0.7 million and $0.4 million, respectively, of foreign currency transaction losses and gains.
Other (expense) income, net for the nine months ended September 30, 2023 and 2022 was primarily driven by $1.6 million and $0.4 million, respectively, of foreign currency transaction losses.
Provision for Income Taxes
For the three months ended September 30, 2023, TKO recorded a provision for income taxes of $11.2 million compared to a provision of $5.0 million for the three months ended September 30, 2022. This was primarily related to an increase in federal U.S. tax due to TKO’s new corporate structure as a result of the Transactions.
For the nine months ended September 30, 2023, TKO recorded a provision for income taxes of $17.7 million compared to a provision of $12.5 million for the nine months ended September 30, 2022. This was primarily related to an increase in federal U.S. tax due to TKO’s new corporate structure as a result of the Transactions.
Equity (Earnings) Losses of Affiliates, Net of Tax
Equity earnings of affiliates for the three months ended September 30, 2023 were primarily due to earnings related to our investment in Howler Head.
Equity losses of affiliates for the nine months ended September 30, 2023 were primarily due to losses related to our investment in Howler Head.
Net (Loss) Income Attributable to Non-Controlling Interests
Net (loss) income attributable to non-controlling interests was a loss of $22.5 million and income of $0.6 million for the three months ended September 30, 2023 and 2022, respectively.
Net (loss) income attributable to non-controlling interests was a loss of $21.7 million and income of $1.6 million for the nine months ended September 30, 2023 and 2022, respectively.
Segment Results of Operations
As of September 30, 2023, we classified our business into two reportable segments: UFC and WWE. Our chief operating decision maker evaluates the performance of our segments based on segment Revenue and segment Adjusted EBITDA. Management believes segment Adjusted EBITDA is indicative of operational performance and ongoing profitability, and Adjusted EBITDA is used to evaluate the operating performance of our segments and for planning and forecasting purposes, including the allocation of resources and capital. Segment operating results reflect earnings before corporate expenses. These segment results of operations should be read in conjunction with our discussion of the Company’s consolidated results of operations included above.
The following tables set forth Revenue and Adjusted EBITDA for each of our segments for the three and nine months ended September 30, 2023:
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||
| Revenue: | ||||||||||||
| UFC | $ | 397.5 | $ | 340.7 | $ | 1,009.4 | $ | 868.4 | ||||
| WWE | 51.6 | — | 51.6 | — | ||||||||
| Total Revenue | $ | 449.1 | $ | 340.7 | $ | 1,061.0 | $ | 868.4 |
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||
| Adjusted EBITDA: | ||||||||||||
| UFC | $ | 238.3 | $ | 204.5 | $ | 612.8 | $ | 526.5 | ||||
| WWE | 22.0 | — | 22.0 | — | ||||||||
| Corporate | (20.6) | (14.0) | (48.9) | (38.5) | ||||||||
| Total Adjusted EBITDA | $ | 239.7 | $ | 190.5 | $ | 585.9 | $ | 488.0 |
UFC
The following table sets forth our UFC segment results for the three and nine months ended September 30, 2023:
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, | September 30, | ||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||
| Revenue | |||||||||||||
| Media rights and content | $ | 266.7 | $ | 235.5 | $ | 702.5 | $ | 621.5 | |||||
| Live events | 51.9 | 39.2 | 115.6 | 79.8 | |||||||||
| Sponsorship | 63.8 | 51.6 | 148.0 | 126.9 | |||||||||
| Consumer products licensing | 15.1 | 14.4 | 43.3 | 40.2 | |||||||||
| Total Revenue | $ | 397.5 | $ | 340.7 | $ | 1,009.4 | $ | 868.4 | |||||
| Direct operating costs | $ | 117.7 | $ | 99.6 | $ | 289.7 | $ | 243.5 | |||||
| Selling, general and administrative expenses | $ | 42.0 | $ | 36.6 | $ | 106.5 | $ | 98.5 | |||||
| Adjusted EBITDA | $ | 238.3 | $ | 204.5 | $ | 612.8 | $ | 526.5 | |||||
| Adjusted EBITDA margin | 60 | % | 60 | % | 61 | % | 61 | % | |||||
| Operating Metrics | |||||||||||||
| Number of events | |||||||||||||
| Numbered events | 4 | 4 | 11 | 10 | |||||||||
| Fight Nights | 9 | 7 | 23 | 22 | |||||||||
| Total events | 13 | 11 | 34 | 32 | |||||||||
| Location of events | |||||||||||||
| United States | 9 | 9 | 26 | 28 | |||||||||
| International | 4 | 2 | 8 | 4 | |||||||||
| Total events | 13 | 11 | 34 | 32 |
WWE
The following table sets forth our WWE segment results for the three and nine months ended September 30, 2023:
| Three Months Ended | Nine Months Ended | ||||||||||||
| September 30, | September 30, | ||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||
| Revenue | |||||||||||||
| Media rights and content | $ | 37.3 | $ | — | $ | 37.3 | $ | — | |||||
| Live events | 5.4 | — | 5.4 | — | |||||||||
| Sponsorship | 2.6 | — | 2.6 | — | |||||||||
| Consumer products licensing | 6.3 | — | 6.3 | — | |||||||||
| Total Revenue | $ | 51.6 | $ | — | $ | 51.6 | $ | — | |||||
| Direct operating costs | $ | 10.5 | $ | — | $ | 10.5 | $ | — | |||||
| Selling, general and administrative expenses | $ | 19.1 | $ | — | $ | 19.1 | $ | — | |||||
| Adjusted EBITDA | $ | 22.0 | $ | — | $ | 22.0 | $ | — | |||||
| Adjusted EBITDA margin | 43 | % | N/A | 43 | % | N/A | |||||||
| Operating Metrics | |||||||||||||
| Number of events | |||||||||||||
| Premium live events | — | N/A | — | N/A | |||||||||
| Televised events | 5 | N/A | 5 | N/A | |||||||||
| Non-televised events | 5 | N/A | 5 | N/A | |||||||||
| Total events | 10 | N/A | 10 | N/A | |||||||||
| Location of events | |||||||||||||
| United States | 10 | N/A | 10 | N/A | |||||||||
| International | — | N/A | — | N/A | |||||||||
| Total events | 10 | N/A | 10 | N/A |
Corporate
Corporate expenses relate largely to corporate activities, including information technology, facilities, legal, human resources, finance, accounting, treasury, investor relations, corporate communications, community relations and compensation to TKO’s management and board of directors, which support both reportable segments. Corporate expenses also include management fees paid by the Company to Endeavor under the Services Agreement.
The following table displays results for Corporate for the three and nine months ended September 30, 2023:
| Three Months Ended | Nine Months Ended | |||||||||||
| September 30, | September 30, | |||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||
| Adjusted EBITDA | $ | (20.6) | $ | (14.0) | $ | (48.9) | $ | (38.5) |
Adjusted EBITDA for the three months ended September 30, 2023 decreased by $6.6 million, or 47%, compared to the three months ended September 30, 2022. This decrease was driven by an increase in cost of personnel and other general and administrative expenses.
Adjusted EBITDA for the nine months ended September 30, 2023 decreased by $10.4 million, or 27%, compared to the nine months ended September 30, 2022. This decrease was driven by an increase in cost of personnel and other general and administrative expenses.
NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA is a non-GAAP financial measure and is defined as net income, excluding income taxes, net interest expense, depreciation and amortization, equity-based compensation, merger and acquisition costs, certain legal costs, restructuring, severance and impairment charges, and certain other items when applicable. Adjusted EBITDA margin is a non-GAAP financial measure defined as Adjusted EBITDA divided by Revenue.
TKO management believes that Adjusted EBITDA is useful to investors as it eliminates the significant level of non-cash depreciation and amortization expense that results from its capital investments and intangible assets, and improves comparability by eliminating the significant level of interest expense associated with TKO’s debt facilities, as well as income taxes which may not be comparable with other companies based on TKO’s tax and corporate structure.
Adjusted EBITDA and Adjusted EBITDA margin are used as the primary bases to evaluate TKO’s consolidated operating performance.
Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of TKO’s results as reported under GAAP. Some of these limitations are:
they do not reflect every cash expenditure, future requirements for capital expenditures, or contractual commitments;
Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on TKO’s debt;
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and Adjusted EBITDA and Adjusted EBITDA margin do not reflect any cash requirement for such replacements or improvements; and
they are not adjusted for all non-cash income or expense items that are reflected in TKO’s statements of cash flows.
TKO management compensates for these limitations by using Adjusted EBITDA and Adjusted EBITDA margin along with other comparative tools, together with GAAP measurements, to assist in the evaluation of TKO’s operating performance.
Adjusted EBITDA and Adjusted EBITDA margin should not be considered substitutes for the reported results prepared in accordance with GAAP and should not be considered in isolation or as alternatives to net income as indicators of TKO’s financial performance, as measures of discretionary cash available to it to invest in the growth of its business or as measures of cash that will be available to TKO to meet its obligations. Although TKO uses Adjusted EBITDA and Adjusted EBITDA margin as financial measures to assess the performance of its business, such use is limited because it does not include certain material costs necessary to operate TKO’s business. TKO’s presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed as indications that its future results will be unaffected by unusual or nonrecurring items. These non-GAAP financial measures, as determined and presented by TKO, may not be comparable to related or similarly titled measures reported by other companies. Set forth below are reconciliations of TKO’s most directly comparable financial measures calculated in accordance with GAAP to these non-GAAP financial measures on a consolidated basis.
Adjusted EBITDA and Adjusted EBITDA Margin
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||
| Reconciliation of Net Income to Adjusted EBITDA | ||||||||||||||||
| Net income | $ | 22.0 | $ | 129.7 | $ | 191.8 | $ | 320.5 | ||||||||
| Provision for income taxes | 11.2 | 5.0 | 17.7 | 12.5 | ||||||||||||
| Interest expense, net | 60.6 | 35.3 | 172.4 | 90.8 | ||||||||||||
| Depreciation and amortization | 31.7 | 15.0 | 61.9 | 45.0 | ||||||||||||
| Equity-based compensation expense (1) | 24.6 | 5.6 | 36.1 | 18.1 | ||||||||||||
| Merger and acquisition costs (2) | 67.5 | — | 82.5 | — | ||||||||||||
| Certain legal costs (3) | 6.3 | 0.3 | 6.8 | 0.6 | ||||||||||||
| Restructuring, severance and impairment (4) | 15.1 | — | 15.1 | — | ||||||||||||
| Other adjustments (5) | 0.7 | (0.4) | 1.6 | 0.5 | ||||||||||||
| Total Adjusted EBITDA | $ | 239.7 | $ | 190.5 | $ | 585.9 | $ | 488.0 | ||||||||
| Net income margin | 5 | % | 38 | % | 18 | % | 37 | % | ||||||||
| Adjusted EBITDA margin | 53 | % | 56 | % | 55 | % | 56 | % |
(1)Equity-based compensation represents primarily non-cash compensation expense for awards issued under EGH’s 2021 Plan subsequent to its April 28, 2021 IPO, for the Replacement Awards and for awards issued under the 2023 Incentive Award Plan. For the three and nine months ended September 30, 2023, equity-based compensation includes $16.5 million of expense associated with accelerated vesting of the Replacement Awards related to the workforce reduction of certain employees in the WWE segment and Corporate.
(2)Includes certain costs of professional fees and bonuses related to the Transactions and payable contingent on the closing of the Transactions.
(3)Includes costs related to certain litigation matters including matters where Mr. McMahon has agreed to make future payments to certain counterparties personally.
(4)Includes costs resulting from the Company’s cost reduction program during the three and nine months ended September 30, 2023, as described in Note 16, Restructuring Charges, to our unaudited consolidated financial statements.
(5)For the three months ended September 30, 2023 and 2022, other adjustments was comprised primarily of losses of $0.7 million and gains of $0.4 million, respectively, on foreign exchange transactions. For the nine months ended September 30, 2023 and 2022, other adjustments was comprised primarily of losses of $1.6 million and $0.4 million, respectively, on foreign exchange transactions.
Liquidity and Capital Resources
Sources and Uses of Cash
Cash flows from operations are used to fund TKO’s day-to-day operations, revenue-generating activities, and routine capital expenditures, as well as service its long-term debt.
Credit Facilities
As of September 30, 2023, there is currently outstanding an aggregate of $2.7 billion of first lien term loans under a credit agreement dated August 18, 2016 (as amended and/or restated, the “Credit Agreement”), by and among Zuffa Guarantor, LLC, UFC Holdings, LLC, as borrower, the lenders party hereto and Goldman Sachs Bank USA, as Administrative Agent, which was entered into in connection with the acquisition of Zuffa by EGH in 2016. The facilities under the Credit Agreement consist of (i) a first lien secured term loan (the “First Lien Term Loan”) and (ii) a secured revolving credit facility in an aggregate principal amount of $205.0 million, letters of credit in an aggregate face amount not in excess of $40.0 million and swingline loans in an aggregate principal amount not in excess of $15.0 million (collectively, the “Revolving Credit Facility”, and, together with the First Lien Term Loan, the “Credit Facilities”). The Credit Facilities are secured by liens on substantially all of the assets of Zuffa Guarantor, LLC, UFC Holdings, LLC and certain subsidiaries thereof.
Following a repricing under the Credit Facilities in January 2021, term loan borrowings under the Credit Facilities bore interest at a variable interest rate equal to either, at its option, adjusted LIBOR or the ABR plus, in each case, an applicable margin. LIBOR term loans accrue interest at a rate equal to an adjusted LIBOR plus 2.75%-3.00%, depending on the First Lien Leverage Ratio (as defined in the Credit Agreement), in each case with a LIBOR floor of 0.75%. ABR term loans accrue interest at a rate equal to (i) the highest of (a) the Federal Funds Effective Rate plus 0.5%, (b) the prime rate, (c) adjusted LIBOR for a one-month interest period plus 1.00% and (d) 1.75%, plus (ii) 1.75%-2.00%. In June 2023, the parties amended the terms of the First Lien Term Loan to replace the adjusted LIBOR reference rate with Term Secured Overnight Financing Rate (“SOFR”) plus a credit spread adjustment (as defined in the Credit
Agreement). The term loans under the Credit Facilities include 1% principal amortization payable in equal quarterly installments and mature on April 29, 2026. In December 2022, the Company repaid $50.0 million of term loans under the Credit Facilities.
As of September 30, 2023, the Company had the option to borrow incremental term loans in an aggregate amount equal to at least $455.0 million, subject to market demand, and may be able to borrow additional funds depending on its First Lien Leverage Ratio. The Credit Agreement includes certain mandatory prepayment provisions relating to, among other things, the incurrence of additional debt.
The Revolving Credit Facility has $205.0 million of total borrowing capacity and letter of credit and swingline loan sub-limits of up to $40.0 million and $15.0 million, respectively. Revolving loan borrowings under the Credit Facilities bear interest at a variable interest rate equal to either, at TKO’s option, adjusted LIBOR or ABR plus, in each case, an applicable margin. LIBOR revolving loans accrue interest at a rate equal to an adjusted LIBOR plus 3.50-4.00%, depending on the First Lien Leverage Ratio, in each case with a LIBOR floor of 0.00%. ABR revolving loans accrue interest at a rate equal to (i) the highest of (a) the Federal Funds Effective Rate plus 0.50%, (b) the prime rate, (c) adjusted LIBOR for a one-month interest period plus 1.00% and (d) 1.00%, plus (ii) 2.50-3.00%, depending on the First Lien Leverage Ratio. In April 2023, the parties amended the terms of the Revolving Credit Facility to replace adjusted LIBOR reference rate used for the facility with SOFR. The Company pays a commitment fee Revolving Credit Facility of 0.25-0.50%, based on the First Lien Leverage Ratio and letter of credit fees of 0.125%. As of September 30, 2023, the Company had no borrowings outstanding under the Revolving Credit Facility and $10.0 million outstanding letters of credit. The Revolving Credit Facility matures on October 29, 2024.
The Revolving Credit Facility is subject to a financial covenant if greater than 35% of the borrowing capacity of the Revolving Credit Facility (excluding cash collateralized letters of credit and non-cash collateralized letters of credit of up to $10.0 million) is utilized at the end of any fiscal quarter. This covenant was not applicable on September 30, 2023, as the Company had no borrowings outstanding under the Revolving Credit Facility.
The Credit Agreement contains certain restrictive covenants around indebtedness, liens, fundamental changes, guarantees, investments, asset sales and transactions with affiliates.
The borrower’s obligations under the Credit Facilities are guaranteed by certain of TKO OpCo’s indirect wholly owned domestic restricted subsidiaries, subject to certain exceptions.
Restrictions on Dividends
The Credit Agreement contains restrictions on TKO’s ability to make distributions and other payments from the respective credit groups. These restrictions on dividends include exceptions for, among other things, (1) amounts necessary to make tax payments, (2) a limited annual amount for employee equity repurchases, (3) distributions required to fund certain parent entities, (4) other specific allowable situations and (5) a general restricted payment basket, as defined in the Credit Agreement.
Other Debt
In October 2018, UFC entered into a $28.0 million Loan Agreement and a $12.0 million Loan Agreement in order to finance the purchase of a building and its adjacent land (the “Secured Commercial Loans”). The Secured Commercial Loans have identical terms except the $28.0 million Loan Agreement is secured by a deed of trust for UFC’s headquarters building and underlying land in Las Vegas and the $12.0 million Loan Agreement is secured by a deed of trust for the acquired building and its adjacent land, also located in Las Vegas. The Secured Commercial Loans bear interest at a rate of LIBOR + 1.62% (with a LIBOR floor of 0.88%) and principal amortization of 4% is payable in monthly installments with any remaining balance payable on the final maturity date of November 1, 2028. In May 2023, the parties amended the terms of the Secured Commercial Loans to replace the adjusted LIBOR reference rate with SOFR.
The applicable loan agreements each contain a financial covenant that requires UFC to maintain a Debt Service Coverage Ratio of consolidated debt to Adjusted EBITDA as defined in the applicable loan agreements of no more than 1.15-to-1 as measured on an annual basis (the “Secured Commercial Loan Covenant”). As of September 30, 2023, UFC was in compliance with the Secured Commercial Loan Covenant.
Cash Flows Overview
| Nine Months Ended | ||||||
| September 30, | ||||||
| 2023 | 2022 | |||||
| Net cash provided by operating activities | $ | 247.7 | $ | 376.8 | ||
| Net cash provided by (used in) investing activities | $ | 47.6 | $ | (9.8) | ||
| Net cash used in financing activities | $ | (285.3) | $ | (822.1) |
Operating activities decreased from $376.8 million of cash provided in the nine months ended September 30, 2022 to $247.7 million of cash provided in the nine months ended September 30, 2023. Cash provided in the nine months ended September 30, 2023 was primarily due to net income for the period of $191.8 million, which included non-cash items totaling $128.3 million, offset by the increase in accounts receivable of $46.3 million and the decrease in deferred revenues of $39.8 million due to timing of events and customer payments. Cash provided in the nine months ended September 30, 2022 was primarily due to net income for the period of $320.5 million, which included non-cash items totaling $85.8 million, offset by the increase in accounts receivable of $27.1 million and the decrease in deferred revenues of $10.9 million due to timing of events and customer payments.
Investing activities increased from $9.8 million of cash used in the nine months ended September 30, 2022 to $47.6 million of cash provided in the nine months ended September 30, 2023. Cash provided in the nine months ended September 30, 2023 primarily reflects $381.2 million of cash acquired from WWE as part of the Transactions partially offset by the payment of $321.0 million of deferred compensation in the form of a dividend to former WWE shareholders. Cash used in the nine months ended September 30, 2022 primarily reflects payments for property and equipment.
Financing activities increased from $822.1 million of cash used in the nine months ended September 30, 2022 to $285.3 million of cash used in the nine months ended September 30, 2023. Cash used in the nine months ended September 30, 2023 primarily reflects distributions to Endeavor and subsidiaries of $260.5 million and net payments on debt of $24.5 million. Cash used in the nine months ended September 30, 2022 primarily reflects distributions to Endeavor and subsidiaries of $794.7 million and net payments on debt of $24.5 million.
Future Sources and Uses of Liquidity
TKO’s sources of liquidity are (1) cash on hand, (2) cash flows from operations and (3) available borrowings under the Credit Facilities (which borrowings would be subject to certain restrictive covenants contained therein). Based on its current expectations, TKO believes that these sources of liquidity will be sufficient to fund its working capital requirements and to meet its commitments, including long-term debt service, for at least the next 12 months.
TKO expects that its primary liquidity needs will be cash to (1) provide capital to facilitate organic growth of its business, (2) pay operating expenses, including cash compensation to its employees, athletes and talent, (3) fund capital expenditures, (4) pay interest and principal when due on the Credit Facilities, (5) pay income taxes, (6) reduce its outstanding indebtedness under the Credit Facilities and (7) as may become applicable, make distributions to TKO stockholders, pursuant to the Company’s dividend policy.
TKO expects to refinance the Credit Facilities prior to the maturity of the outstanding loans in 2026. It currently anticipates being able to secure funding for such refinancing at favorable terms; however, its ability to do so may be impacted by many factors, including TKO’s growth and other factors specific to its business as well as macro-economic factors beyond its control.
Recent Accounting Pronouncements
See Note 2, Summary of Significant Accounting Policies, to our unaudited consolidated financial statements included in this Quarterly Report, under the captions “Recently Adopted Accounting Pronouncements” and “Recently Issued Accounting Pronouncements,” for further information on certain accounting standards that have been recently adopted or that have not yet been required to be implemented and may be applicable to our future operations.
Critical Accounting Estimates
The preparation of our consolidated financial statements requires us to make assumptions, estimates or judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates and judgments on historical experience and other assumptions that we believe are reasonable under the circumstances. These assumptions, estimates or judgments, however, are both subjective and subject to change, and actual results may differ from our assumptions and estimates.
We believe the following estimates related to certain of our critical accounting policies could potentially produce materially different results if we were to change underlying assumptions, estimates or judgments. See Note 2, Summary of Significant Accounting Policies, to our unaudited consolidated financial statements included in this Quarterly Report for a summary of our significant accounting policies.
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