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2: EX-10.1 First Supplemental Indenture HTML 57K
3: EX-10.2 Fifth Supplemental Indenture HTML 58K
4: EX-31.1 Certification of Chief Executive Officer HTML 25K
5: EX-31.2 Certification of Chief Financial Officer HTML 25K
6: EX-32.1 Section 1350 Certification of Chief Executive HTML 22K
Officer
7: EX-32.2 Section 1350 Certification of Chief Financial HTML 22K
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43: R3 Consolidated Balance Sheets (Unaudited) HTML 22K
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61: R5 Consolidated Statements of Comprehensive Income HTML 49K
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42: R7 Basis of Presentation and Other Information HTML 32K
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62: R10 Fair Value Measurements HTML 52K
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(Registrant’s telephone number, including area code)
____________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,”“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated
filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
On October 24, 2014, there were 200,659,004
outstanding shares of the registrant’s common stock, $0.01 par value per share, including 1,224,678 shares of unvested restricted stock awards and excluding 408,024 shares held in treasury.
For
periods prior to May 6, 2010, Ticketmaster means Ticketmaster Entertainment LLC and its predecessor companies (including without limitation Ticketmaster Entertainment, Inc.); for periods on and after May 6, 2010, Ticketmaster means the Ticketmaster ticketing business of the Company
NOTE 1—BASIS OF PRESENTATION AND OTHER INFORMATION
Preparation of Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance
with GAAP for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, they include all normal and recurring accruals and adjustments necessary to present fairly the results of the interim periods shown.
The financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2013 Annual Report on Form 10-K filed with the SEC on February 24, 2014, as amended by the Form 10-K/A filed with the SEC on June 30,
2014.
Seasonality
Due to the seasonal nature of shows at outdoor amphitheaters and festivals, which primarily occur from May through September, the Company experiences higher revenue for the Concerts and Sponsorship & Advertising segments during the second and third quarters. The Artist Nation segment’s revenue is impacted, to a large degree, by the touring schedules of artists it represents and generally the Company experiences higher revenue in this segment during the second and third quarters as the period from May through September tends to be a popular time for touring events. The Ticketing segment’s sales are impacted by fluctuations in the availability of events for sale to the public, which vary
depending upon scheduling by its clients. The Company’s seasonality also results in higher balances in cash and cash equivalents, accounts receivable, prepaid expenses, accrued expenses and deferred revenue at different times in the year. Therefore, the results to date are not necessarily indicative of the results expected for the full year.
Cash and Cash Equivalents
Included in the September 30, 2014 and December 31, 2013 cash and cash equivalents balance is $531.7 million and $538.4 million, respectively, of cash
received that includes the face value of tickets sold on behalf of ticketing clients and the clients’ share of convenience and order processing charges.
Acquisitions
During the first nine months of 2014, the Company completed its acquisition of three California-based artist management businesses and several other smaller acquisitions. These acquisitions were accounted for as business combinations under the acquisition method of accounting and were not significant either on an individual basis or in the aggregate.
Recently Issued Pronouncements
In April 2014, the FASB issued guidance that raises the threshold for a
disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance is effective for disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014 and interim periods within that year. This guidance is applied prospectively and early adoption is permitted. The Company will adopt this guidance on January 1, 2015 and will apply it prospectively to disposals occurring on or after January 1, 2015.
In
May 2014, the FASB issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP. The new standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective for annual and interim periods beginning after December 15, 2016, and early adoption of the standard is not permitted. The guidance should be applied retrospectively, either to each prior period presented in the financial statements, or only to the most current reporting period presented in the financial statements with a cumulative-effect adjustment as of the date
of adoption. The Company will adopt this standard on January 1, 2017, and is currently assessing which implementation method it will apply and the impact its adoption will have on its financial position and results of operations.
In June 2014, the FASB issued guidance that requires a performance target in a share-based payment that affects vesting, and that could be achieved after the requisite service period, be accounted for as a performance condition. The guidance is effective for annual periods beginning after December 15, 2015 and interim periods within that year, and early adoption is
permitted. The guidance should be applied on a prospective basis to awards that are granted or modified on or after the effective date. The guidance may be applied on a modified retrospective basis for performance targets outstanding on or after the beginning of the first annual period presented as of the date of adoption. The Company does not currently expect to grant these type of awards, but will adopt this guidance on January 1, 2016 and will apply it prospectively to any awards granted on or after January 1, 2016 that include these terms.
NOTE 2—LONG-LIVED ASSETS
Property,
Plant and Equipment
In the fourth quarter of 2012, an amphitheater in New York that is operated by the Company sustained substantial damage during Hurricane Sandy. During the three and nine months ended September 30, 2013, the Company received partial insurance recoveries and recorded gains of $2.0 million and $14.6 million, respectively, as a component of gain on disposal of operating assets in the Concerts segment representing the proceeds received in excess of the carrying value of the assets. The
Company received the final insurance recovery in the second quarter of 2014 and recorded a gain of $3.2 million during the nine months ended September 30, 2014, as a component of gain on disposal of operating assets in the Concerts segment.
Definite-lived Intangible Assets
The Company has definite-lived intangible assets which are amortized over the shorter of either the lives of the respective agreements or the period of time the assets are expected to contribute to the Company’s future cash flows. The amortization is
recognized on either a straight-line or expected cash flows basis.
The following table presents the changes in the gross carrying amount and accumulated amortization of definite-lived intangible assets for the nine months ended September 30, 2014:
Other
includes net downs of fully amortized or impaired assets and $0.6 million of reclassifications of certain assets from indefinite-lived intangible assets.
Included in the current year acquisitions amount above of $53.6 million are client/vendor relationships primarily associated with the acquisitions of three California-based artist management businesses during the first nine months of 2014.
Amortization of definite-lived intangible assets for the three months ended September 30, 2014 and 2013 was $39.7 million and $42.9 million, respectively, and for the nine months ended September 30, 2014 and 2013 was $107.6 million
and $124.5 million, respectively. For the three and nine months ended September 30, 2013, the Company recorded $3.8 million and $9.0 million, respectively, for acceleration of amortization primarily related to changes in estimates of certain venue management and leasehold intangible assets in the Concerts segment due to the reduction in the lease term of a theater.
Amortization related to nonrecoupable ticketing contract advances for the three months ended September 30, 2014
and 2013 was $21.1 million and $18.8 million, respectively, and for the nine months ended September 30, 2014 and 2013 was $50.1 million and $42.7 million, respectively.
As acquisitions and dispositions occur in the future and the valuations of intangible assets for recent acquisitions are completed, amortization may vary. Therefore, the expense to date is not necessarily indicative of the expense expected for the
full year.
Indefinite-lived Intangibles
The Company has indefinite-lived intangible assets which consist primarily of trade names. During 2014, the Company made a decision to rebrand certain of its markets that were not using the Ticketmaster trade name. In connection with the rebranding, it was determined that an indefinite-lived intangible asset for a certain market was fully impaired since the transition to the Ticketmaster trade name was substantially completed for that market during the third quarter. The fair value of the asset was calculated using a relief-from royalty method. For the nine months ended September 30,
2014, the Company recorded an impairment charge of $6.0 million as a component of depreciation and amortization in the Ticketing segment. See Note 4—Fair Value Measurements for further discussion of the inputs used to determine the fair value. There were no impairment charges recorded for the nine months ended September 30, 2013.
The following table presents the changes in the carrying amount of goodwill in each of the Company’s reportable segments for the nine months ended September 30, 2014:
The
previously reported total balance has been reduced by $13.0 million due to the net down of fully impaired goodwill related to the Company’s non-core events business which was sold in 2008.
Included in the current year acquisitions amount above of $46.7 million is goodwill primarily associated with the acquisition of two California-based artist management businesses.
The Company is in the process of finalizing its acquisition accounting for recent acquisitions which could result in a change to the associated
purchase price allocations, including goodwill.
The Company has investments in various affiliates which are not consolidated and are accounted for under the equity method of accounting. The Company records its investments in these entities on the balance sheets as investments in nonconsolidated affiliates reported as part of other long-term assets. The
Company’s interests in these operations are recorded in the statements of operations as equity in earnings of nonconsolidated affiliates. The Company’s investment in Venta de Boletos por Computadora S.A. de C.V., a 33% owned ticketing distribution services company in Mexico, was considered significant on an individual basis at December 31, 2013.
Summarized unaudited income statement information for the Company’s nonconsolidated affiliate noted above is as follows (at 100%):
Net
income attributable to the common stockholders of the equity investee
$
10,081
$
15,050
Long-lived Asset Disposals
In May 2013, the Company completed the sale of a theatrical theater in New York. During the third
quarter of 2013, a contingent liability related to the sale was resolved resulting in an additional $7.0 million gain on disposal of operating assets.
The table below summarizes the asset and liability values at the time of sale for the nine months ended September 30, 2013 for significant disposals and the resulting gain recorded. There were no significant disposals of long-lived assets in the nine months ended September 30, 2014.
Divested
Asset
Segment
Gain
on Disposal of
Operating
Assets
Current
Assets
Noncurrent
Assets
Current
Liabilities
Noncurrent
Liabilities
(in
thousands)
2013 Divestiture
New
York theatrical theater
Concerts
$
(28,880
)
$
—
$
35,785
$
—
$
3,636
NOTE
3—LONG-TERM DEBT
In May 2014, the Company issued $250 million of 5.375% senior notes due 2022 and $275 million of 2.5% convertible senior notes due 2019 and paid related fees and expenses of $9.9 million. In July 2014, the holders of $29.3 million of aggregate outstanding principal of the 2.875% convertible senior notes exercised their right to redeem their notes for cash and in late September 2014, pursuant to the
Company’s option under the indenture governing the notes, the Company redeemed the remainder of these notes using the net proceeds noted above. In addition to redeeming the $220 million principal amount of these notes, the Company paid total accrued interest of $1.1 million and related fees and expenses of $0.2 million for the redemption, leaving $293.8 million in additional cash available for general corporate purposes. The loss on extinguishment of debt related to the redemption
of the 2.875% convertible senior notes was not significant.
Future maturities of long-term debt at September 30, 2014 are as follow:
(in
thousands)
2014
$
11,330
2015
46,312
2016
50,187
2017
48,886
2018
330,567
Thereafter
1,615,060
Total
2,102,342
Debt
discount
(34,793
)
Debt premium
7,607
Total, including premium and discount
$
2,075,156
5.375% Senior Notes
In May 2014, the Company issued $250
million of 5.375% senior notes due 2022. Interest on the notes is payable semi-annually in cash in arrears on June 15 and December 15, beginning December 15, 2014, and the notes will mature on June 15, 2022. The Company may redeem some or all of the notes at any time prior to June 15, 2017 at a price equal to 100% of the principal amount, plus any accrued and unpaid interest to the date of redemption, plus a ‘make-whole’ premium. The Company may also redeem up to 35% of the aggregate principal
amount of the notes from the proceeds of certain equity offerings prior to June 15, 2017, at a price equal to 105.375% of the principal amount, plus any accrued and unpaid interest. In addition, on or after June 15, 2017, the Company may redeem at its option some or all of the notes at redemption prices that start at 104.0313% of their principal amount, plus any accrued and unpaid interest to the date of redemption. The Company 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 it experiences certain defined changes of control.
In May 2014, the Company issued $275 million of convertible senior notes due 2019. The notes pay interest semiannually in arrears on May 15 and November 15 at a rate of 2.5% per annum, beginning on November 15, 2014. The notes will mature on May 15, 2019, and may not be
redeemed by the Company prior to the maturity date. The notes will be convertible, under certain circumstances, until November 15, 2018, and on or after such date without condition, at an initial conversion rate of 28.8363 shares of the Company’s common stock per $1,000 principal amount of notes, subject to adjustment, which represents a 52.5% conversion premium based on the last reported sale price for the Company’s common stock of $22.74 on May
19, 2014. Upon conversion, the notes may be settled in shares of common stock or, at the Company’s election, cash or a combination of cash and shares of common stock. Assuming the Company fully settles the notes in shares, the maximum number of shares that could be issued to satisfy the conversion is currently 7.9 million.
If the Company experiences a fundamental change, as defined in the indenture governing the notes, the holders of the 2.5% convertible senior notes may require the
Company to purchase for cash all or a portion of their notes, subject to specified exceptions, at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest, if any.
The carrying amount of the equity component of the notes is $22.0 million and the principal amount of the liability component (face value of the notes) is $275 million. As of September 30, 2014, the remaining amortization period for the debt discount was approximately 4.3 years and the value of the notes, if converted and fully settled in shares, did not exceed the principal amount of the notes. As of September 30,
2014, the effective interest rate on the liability component of the notes was 5.0%. The following table summarizes the amount of pre-tax interest cost recognized on the notes:
The following table shows the fair value of the Company’s financial assets that have been adjusted to fair value on a non-recurring basis which had a significant impact on the Company’s results of operations for the nine months ended September 30, 2014:
Fair
Value Measurement
at
Fair Value Measurements Using
Total
Description
September
30
Level 1
Level 2
Level 3
Losses
(in
thousands)
2014 Impairments
Indefinite-lived intangible assets, net
$
—
$
—
$
—
$
—
$
5,963
2014
Total
$
5,963
For
the nine months ended September 30, 2014, the Company recorded an impairment charge related to indefinite-lived intangible assets of $6.0 million as a component of depreciation and amortization. The Company made a decision to rebrand certain of its markets that were not using the Ticketmaster trade name. In connection with the rebranding, it was determined that an indefinite-lived intangible asset for a certain market was fully impaired since the transition to the Ticketmaster trade name was substantially completed for that market during the third quarter. The fair value of this asset was calculated using a relief-from
royalty method. The relief-from royalty method applied a royalty rate to the projected earnings attributable to the indefinite-lived intangible asset. The projected earnings for this non-recurring fair value measurement are considered Level 3 inputs as defined in the FASB guidance.
The Company’s outstanding debt held by third-party financial institutions is carried at cost, adjusted for any premium or discount. The Company’s debt is not publicly traded and the carrying amounts typically approximate fair value for the Company’s debt that accrues interest at a variable rate. The estimated fair values of the 7% senior notes,
the 5.375% senior
notes and the 2.5% convertible senior notes were $452.9 million, $249.4 million and $283.9 million, respectively, at September 30, 2014. The estimated fair values of the 7% senior notes and the 2.875% convertible senior notes were $461.9
million and $223.0 million, respectively, at December 31, 2013. The estimated fair value of the Company’s third-party fixed-rate debt is based on quoted market prices in active markets for the same or similar debt, which are considered to be Level 2 inputs as defined in the FASB guidance. The Company had fixed-rate debt held by noncontrolling interest partners with a face value of $31.3 million and $34.6 million at September 30, 2014 and December 31,
2013, respectively. The Company is unable to determine the fair value of this debt.
NOTE 5—COMMITMENTS AND CONTINGENT LIABILITIES
Ticketing Fees Consumer Class Action Litigation
In October 2003, a putative representative action was filed in the Superior Court of California challenging Ticketmaster’s charges to online customers for shipping fees and alleging that its failure to disclose on its website that the charges contain a profit component is unlawful. The complaint asserted a claim for violation
of California’s Unfair Competition Law (“UCL”) and sought restitution or disgorgement of the difference between (i) the total shipping fees charged by Ticketmaster in connection with online ticket sales during the applicable period, and (ii) the amount that Ticketmaster actually paid to the shipper for delivery of those tickets. In August 2005, the plaintiffs filed a first amended complaint, then pleading the case as a putative class action and adding the claim that Ticketmaster’s website disclosures in respect of its ticket order processing fees constitute false advertising in violation of California’s False Advertising Law. On this new claim, the amended complaint seeks restitution or disgorgement of the entire amount of order processing fees charged by Ticketmaster during the applicable period. In April 2009, the Court granted the plaintiffs’
motion for leave to file a second amended complaint adding new claims that (a) Ticketmaster’s order processing fees are unconscionable under the UCL, and (b) Ticketmaster’s alleged business practices further violate the California Consumer Legal Remedies Act. Plaintiffs later filed a third amended complaint, to which Ticketmaster filed a demurrer in July 2009. The Court overruled Ticketmaster’s demurrer in October 2009.
The plaintiffs filed a class certification motion in August 2009, which Ticketmaster opposed. In February 2010, the Court granted certification of a class on the first and second causes of action, which allege that Ticketmaster misrepresents/omits the fact of a profit component in Ticketmaster’s shipping and order processing fees. The class would consist of California consumers who purchased tickets through Ticketmaster’s website
from 1999 to present. The Court denied certification of a class on the third and fourth causes of action, which allege that Ticketmaster’s shipping and order processing fees are unconscionably high. In March 2010, Ticketmaster filed a Petition for Writ of Mandate with the California Court of Appeal, and plaintiffs also filed a Motion for Reconsideration of the Superior Court’s class certification order. In April 2010, the Superior Court denied plaintiffs’ Motion for Reconsideration of the Court’s class certification order, and the Court of Appeal denied Ticketmaster’s Petition for Writ of Mandate. In June 2010, the Court of Appeal granted the plaintiffs’ Petition for Writ of Mandate and ordered the Superior Court to vacate its February 2010 order denying plaintiffs’ motion to certify a national class and enter a new order granting plaintiffs’ motion to certify a nationwide class on the first and second claims. In September 2010, Ticketmaster filed its Motion for Summary
Judgment on all causes of action in the Superior Court, and that same month plaintiffs filed their Motion for Summary Adjudication of various affirmative defenses asserted by Ticketmaster. In November 2010, Ticketmaster filed its Motion to Decertify Class.
In December 2010, the parties entered into a binding agreement providing for the settlement of the litigation and the resolution of all claims therein. In September 2011, the Court declined to approve the settlement in its then-current form. Litigation continued, and in September 2011, the Court granted in part and denied in part Ticketmaster’s Motion for Summary Judgment. The parties reached a new settlement in September 2011, which was preliminarily approved, but in September 2012 the Court declined to grant final approval. In June 2013, the parties reached a revised settlement, which was preliminarily approved by the Court in April 2014. Ticketmaster and its parent, Live
Nation, have not acknowledged any violations of law or liability in connection with the matter.
As of September 30, 2014, the Company had accrued $35.1 million, its best estimate of the probable costs associated with the settlement referred to above. This liability includes an estimated redemption rate. Any difference between the Company’s estimated redemption rate and the actual redemption rate it experiences will impact the final settlement amount; however, the Company does not expect this difference to be material.
From time to time, the Company is involved in other legal proceedings arising in the ordinary course of its business, including proceedings and claims based upon violations of antitrust laws, intellectual property rights and tortious interference, which could cause the Company to incur significant expenses. The Company has also been the subject of personal injury and wrongful death claims relating to accidents at its venues in connection with its operations. As required, the Company has accrued its
estimate of the probable settlement or other losses for the resolution of any outstanding claims. These estimates have been developed in consultation with counsel and are based upon an analysis of potential results, including, in some cases, estimated redemption rates for the settlement offered, 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 the Company’s assumptions or the effectiveness of its strategies related to these proceedings.
NOTE 6—CERTAIN RELATIONSHIPS AND RELATED-PARTY TRANSACTIONS
Transactions Involving Directors
Relationship
with Microsoft
The Company has a non-employee director who became an executive officer of Microsoft Corporation as of September 2, 2014. The director receives directors’ fees, stock options and restricted stock awards on the same basis as other non-employee members of the Company’s board of directors. From time to time, the Company purchases software licenses, advertising and other products from and provides sponsorship and advertising opportunities to Microsoft and its subsidiaries in the ordinary course of business on an arm’s-length
basis. The Company did not have any material transactions with Microsoft during September 2014.
Other Related Parties
The Company conducts certain transactions in the ordinary course of business with companies that are owned, in part or in total, by various members of management of the Company’s subsidiaries or companies over which it has significant influence. These transactions primarily relate to venue rentals, concession services, equipment rentals, ticketing, marketing and other services.
The
following table sets forth expenses incurred and revenue earned from these companies for services rendered or provided in relation to these business ventures. None of these transactions were with directors or executive officers of the Company.
The Company calculates interim effective tax rates in accordance with the FASB guidance for income taxes and applies the estimated annual effective tax rate to year-to-date pretax income (or loss) at the end of each interim period to compute a year-to-date tax expense (or benefit). This guidance requires departure from effective tax rate computations when losses incurred within tax jurisdictions cannot be carried back and future profits associated with operations in those tax jurisdictions cannot be assured beyond any reasonable doubt. Accordingly, the Company has calculated and applied an expected annual effective tax rate of approximately 19% for 2014
(as compared to 20% in the prior year), excluding significant, unusual or extraordinary items, for ordinary income associated with operations for which the Company currently expects to have annual taxable income, which are principally outside of the United States. The Company has not recorded tax benefits associated with losses from operations for which future taxable income cannot be reasonably assured. As required by this guidance, the Company also includes the tax effects of significant, unusual or extraordinary items in income tax expense (benefit) in the interim period in which they occur.
Income tax benefit was $0.5
million for the nine months ended September 30, 2014. The components that contributed to this income tax benefit primarily consisted of $14.5 million attributable to the release of valuation allowances related to deferred tax liabilities associated with acquisitions during 2014. This benefit is partially offset by income tax expense of $9.6 million based on the expected annual rate pertaining to ordinary income and $4.5 million of state and local tax expense.
Historically, the Company has reinvested all foreign earnings in its continuing foreign operations. The Company currently believes that the majority of its undistributed foreign earnings that are not currently subject to United States federal income tax will be indefinitely reinvested in its foreign operations.
The tax years 2005 through 2013 remain open to examination by the major tax jurisdictions to which the Company is subject.
NOTE
8—EQUITY
The following table shows the reconciliation of the carrying amount of stockholders’ equity attributable to Live Nation Entertainment, Inc., equity attributable to noncontrolling interests, total equity and also redeemable noncontrolling interests for the nine months ended September 30, 2014:
During the first nine months of 2014, the Company issued 2.0 million shares of common stock in connection with stock option exercises and vestings of restricted stock awards, net of shares withheld for taxes.
Redeemable Noncontrolling Interests
The Company is subject to put arrangements arising from business combinations where the holders of the noncontrolling interests can require the Company to repurchase their shares at specified dates in the future or within specified periods in the
future. Certain of these puts can be exercised earlier upon the occurrence of triggering events as specified in the agreements. The exercise dates for these puts range from January 2015 to December 2019. The redemption amounts for these puts are either at fair value at the time of exercise or a variable amount based on a formula linked to earnings. In accordance with the FASB guidance for business combinations, the redeemable noncontrolling interests are recorded at their fair value at acquisition date. As these put arrangements are not currently redeemable, the Company accretes up to the estimated redemption value over the period from the date of issuance to the earliest redemption date of the individual puts, with the offset recorded to additional paid-in capital. Decreases in accretion are only recognized to the extent that increases had been previously recognized. The
estimated redemption values that are based on a formula linked to future earnings are computed using projected cash flows each reporting period which take into account the current expectations regarding profitability and the timing of revenue-generating events.
Accumulated Other Comprehensive Income (Loss)
The following table presents changes in the components of AOCI, net of taxes, for the nine months ended September 30, 2014:
The calculation of diluted net income per common share includes the effects of the assumed exercise of any outstanding stock options and warrants, the assumed vesting of shares of restricted stock awards and the assumed conversion of the 2.5% convertible senior notes and the 2.875% convertible senior notes where dilutive. The following table shows securities excluded from the calculation of diluted net income per common share because such securities are anti-dilutive:
The
increase in stock-based compensation expense for the nine months ended September 30, 2014 as compared to the same period of 2013 is due primarily to 2.3 million options and 0.7 million shares of restricted stock granted to management and directors during the first nine months of 2014, which will generally vest over one to four years. In addition, the Company granted other equity awards to employees during 2014, with a grant in the first quarter vesting over four years and
a grant in the second quarter vesting at issuance. During the three and nine months ended September 30, 2014, the Company recorded stock-based compensation expense for these other awards of $1.7 million and $7.1 million, respectively, as a component of selling, general and administrative expenses.
As of September 30, 2014, there was $60.4 million of total unrecognized compensation cost related to stock-based compensation arrangements for stock options, restricted stock
awards and other equity awards. This cost is expected to be recognized over a weighted-average period of 2.6 years.
The Company’s reportable segments are Concerts, Ticketing, Artist Nation and Sponsorship & Advertising. The Concerts segment involves the promotion of live music events globally in the Company’s owned or operated
venues and in rented third-party venues, the production of music festivals and the operation and management of music venues. The Ticketing segment involves the management of the Company’s global ticketing operations including providing ticketing software and services to clients and online access for customers relating to ticket and event information and is responsible for the Company’s primary websites, www.livenation.com and www.ticketmaster.com.
The Artist Nation segment provides management services to artists and other services including merchandise sales. The Sponsorship & Advertising segment manages the development of strategic sponsorship programs in addition to the sale of international, national and local sponsorships and placement of advertising including signage, promotional programs and banner ads in the Company’s owned or operated venues and on its primary websites.
Revenue and expenses earned and charged between segments are eliminated in consolidation. Corporate expenses and all line items below operating income are managed on a total company basis. The Company’s
capital expenditures include accruals and expenditures funded by outside parties such as landlords or replacements funded by insurance companies.
The Company manages its working capital on a consolidated basis. Accordingly, segment assets are not reported to, or used by, the Company’s management to allocate resources to or assess performance of the segments, and therefore, total segment assets have not been presented.
For the nine months ended September 30, 2013, the previously reported capital expenditures amount in the Concerts segment has been increased by $21.9
million to include partial insurance recoveries received in connection with storm damage to an amphitheater in New York during Hurricane Sandy. The expenditures had previously been reported net of these recoveries.
The following table presents the results of operations for the Company’s reportable segments for the three and nine months ended September 30, 2014 and 2013:
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
“Live Nation” (which may be referred to as the “Company,”“we,”“us” or “our”) means Live Nation Entertainment, Inc. and its subsidiaries, or one of our segments or subsidiaries, as the context requires. You should read the following discussion of our financial condition and results of operations together with the unaudited consolidated financial statements and notes to the financial statements included elsewhere in this quarterly report.
Special
Note About Forward-Looking Statements
Certain statements contained in this quarterly report (or otherwise made by us or on our behalf from time to time in other reports, filings with the SEC, news releases, conferences, internet postings or otherwise) that are not statements of historical fact constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, notwithstanding that such statements are not specifically identified. Forward-looking statements include, but are not limited to, statements about our financial position, business strategy, competitive position, potential growth opportunities, potential operating performance improvements, the effects of competition, the effects of future legislation or regulations and plans and objectives of our management for future operations. We have based our forward-looking
statements on our beliefs and assumptions based on information available to us at the time the statements are made. Use of the words “may,”“should,”“continue,”“plan,”“potential,”“anticipate,”“believe,”“estimate,”“expect,”“intend,”“outlook,”“could,”“target,”“project,”“seek,”“predict,” or variations of such words and similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.
Forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those set forth below under
Part II Item 1A.—Risk Factors, in Part I Item IA.—Risk Factors of our 2013 Annual Report on Form 10-K, as well as other factors described herein or in our annual, quarterly and other reports we file with the SEC (collectively, “cautionary statements”). Based upon changing conditions, should any one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results may vary materially from those described in any forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the applicable cautionary statements. We do not intend to update these forward-looking statements, except as required by applicable law.
Executive Overview
In the third
quarter of 2014, our overall revenue increased 11% as compared to last year driven by an increase in the number of concert events and fans principally due to more stadium shows in North America along with growth in our Ticketing resale business. Our operating income for the quarter improved by 19% resulting from higher revenue in all four of our reporting segments. For the first nine months, our overall revenue is up 9% due to an increase in fans attending our concerts across all major venue types in North America and the significant impact of our TM+ product in our resale business. Operating income for the first nine months has risen by 2%, again resulting
from stronger revenue in Concerts and Ticketing, partially offset by gains from disposal of operating assets recorded last year. We believe that by leveraging our leadership position in the entertainment industry to reach fans through the live concert experience, we will sell more tickets which will then grow our sponsorship and advertising revenue. As the leading global live event and ticketing company, we believe that we are well-positioned to provide the best service to artists, teams, fans and venues and therefore drive growth across all our businesses.
Our Concerts segment revenue for the quarter increased 11% as compared to last year largely due to an increase in the number of stadium shows as well as more fans attending our festivals. All of the revenue increase was driven by our North America business which had sell-out stadium tours as well as increased arena and festival
attendance. Due to a lack of touring content in our international markets, we had less arena shows and fewer fans attending events internationally. Overall, attendance grew by 4% in the third quarter. Our overall Concerts operating results improved by 12% for the quarter due largely to our successful stadium tours, partially offset by an adjustment in the third quarter of 2013 from the sale of a theatrical theater in New York that occurred in the second quarter last year and higher insurance recoveries in 2013 for storm damage sustained to an amphitheater, also in New York. 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 quarter increased 8% as compared to last year largely due to growth of our primary and resale businesses in North America. Overall, the total number of tickets sold during the quarter decreased 3% due to a lack of touring activity in Europe. In our resale business, gross transaction value of resale tickets sold increased by 63% in the third quarter of 2014 due in large part to the success of our new TM+ product which drove significant growth in concert and professional sports ticket sales. Ticketing operating results for the quarter were up 9% compared to last year due to the revenue growth in the period. For the first nine months, our resale gross transaction value increased by over 40%, driven by concert and sports ticket sales on TM+ as well as increased resale activity in our international markets. Through the third quarter
of 2014,
19% of our total tickets were sold via mobile and tablet devices as we continue to implement new features that are driving further expansion of mobile ticket transactions. We continue to invest in a variety of initiatives aimed at improving the ticket buying process and the overall fan and venue client experience.
Our Artist Nation segment revenue increased 18% for the quarter as compared to last year primarily due to increased artist management commissions. Operating results for the Artist Nation segment improved significantly in the quarter, partially due to the timing of artist
activity, but also due to more managers and artists in the Company along with continued alignment between artist managers and the rest of the Live Nation organization to deliver more services to these artists. Our Artist Nation segment is focused on serving its existing artists as well as developing new relationships with top artists and extending the various services it provides.
Our Sponsorship & Advertising segment revenue increased by 4% for the quarter as compared to last year driven by growth in online sales and expansion of existing sponsorships. Overall, operating income is up 4% due to increased revenue as well as improved margins on our sponsorships in the quarter compared to third quarter last year when we had several clients with larger
activation programs. 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 plan to expand these assets while extending further into new markets internationally.
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, deliver fans more events offering an integrated inventory of primary and secondary tickets together, drive cost efficiencies and continue to align our artist management group
with our other core businesses.
Our History
We were incorporated in Delaware on August 2, 2005 in preparation for the contribution and transfer by Clear Channel of substantially all of its entertainment assets and liabilities to us. We completed our separation from Clear Channel on December 21, 2005, and became a publicly traded company on the New York Stock Exchange trading under the symbol “LYV.”
On January 25, 2010, we merged with Ticketmaster. Effective on the date of the merger, Ticketmaster became a wholly-owned subsidiary of Live Nation and Live Nation, Inc. changed its name to Live Nation Entertainment, Inc.
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 generally experience higher revenue during the second and third quarters due to the seasonal nature of shows at our outdoor amphitheaters and festivals, which primarily occur from May through September. Revenue and related costs for events are generally deferred and recognized when the event occurs. All advertising costs for shows are expensed at the end of the year for any future events.
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
Our Ticketing segment is primarily an agency business that sells tickets for events on behalf of its clients and retains a fixed fee or a percentage of the total 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 bundled product offerings. Through our websites, we sell tickets to our own events as well as tickets for our ticketing clients and provide event information. Revenue related to ticketing service charges for our events where we control ticketing is deferred and recognized as the event occurs.
To judge the health of our Ticketing segment, we primarily review the 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 websites and the revenue related to the sale of other products on our websites.
For business that is conducted in foreign markets, we also compare the operating results from our foreign operations to prior periods on a constant currency basis.
Artist Nation
Our 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 connect their brands directly with fans and artists. We also develop, book and produce custom events or programs for our clients’ specific brands which are typically experienced exclusively by the clients’ 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 from 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.
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 fan was present at the festival and thus can be reported across multiple quarters. Events and fan attendance metrics are estimated each quarter.
(2)
The number of tickets sold includes primary tickets only. This metric includes 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 the three months ended September 30, 2014 and 2013 excludes approximately 71 million and 75 million, respectively, and for the nine months ended September 30, 2014 and 2013 excludes approximately 206 million and 214 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.
Our revenue increased $239.8 million, or 11%, during the three months ended September 30,
2014 as compared to the same period of the prior year. The overall increase in revenue was primarily due to increases in our Concerts, Ticketing and Artist Nation segments of $198.5 million, $29.3 million and $19.9 million, respectively. Excluding the increase of approximately $20.9 million related to the impact of changes in foreign exchange rates, revenue increased $218.9 million, or 10%. The impact of foreign exchange rates was significant only to the Concerts segment.
Our revenue increased
$429.7 million, or 9%, during the nine months ended September 30, 2014 as compared to the same period of the prior year. The overall increase in revenue was primarily due to increases in our Concerts, Ticketing and Artist Nation segments of $326.6 million, $91.8 million and $21.6 million, respectively. Excluding the increase of approximately $37.6 million related to the impact of changes in foreign exchange rates, revenue increased $392.1 million,
or 8%. The impact of foreign exchange rates was significant only to the Concerts and Sponsorship & Advertising segments.
More detailed explanations of these changes are included in the applicable segment discussions below.
Direct operating expenses
Our direct operating expenses increased $177.8 million, or 10%, during the three months ended September 30, 2014 as compared to the same period of the prior year. The overall increase in direct operating expenses was primarily due to increases in our Concerts and Ticketing
segments of $170.2 million and $21.0 million, respectively. Excluding the increase of approximately $18.1 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $159.7 million, or 9%. The impact of foreign exchange rates was significant only to the Concerts segment.
Our direct operating expenses increased $306.8 million, or 9%, during the nine months ended September 30,
2014 as compared to the same period of the prior year. The overall increase in direct operating expenses was primarily due to increases in our Concerts and Ticketing segments of $274.6 million and $61.8 million, respectively. Excluding the increase of approximately $30.7 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $276.1 million, or 8%. The impact of foreign exchange rates was significant only to the Concerts segment.
Direct operating expenses include artist fees, event production costs, ticketing client royalties and 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 $24.7 million, or 8%, during the three months ended September 30, 2014 as compared to the same period of the prior year. The overall increase in selling, general and administrative expenses was primarily due to increases in our Concerts and Artist Nation segments of $16.4 million
and $6.1 million, respectively. Excluding the increase of approximately $2.4 million related to the impact of changes in foreign exchange rates, selling, general and administrative expenses increased $22.3 million, or 7%. The impact of foreign exchange rates was not significant to the segments individually.
Our selling, general and administrative expenses increased $77.8 million, or 9%, during the nine months ended September 30,
2014 as compared to the same period of the prior year. The overall increase in selling, general and administrative expenses was primarily due to increases in our Concerts, Ticketing and Artist Nation segments of $36.4 million, $12.6 million and $23.4 million, respectively. Excluding the increase of approximately $8.7 million related to the impact of changes in foreign exchange rates, selling, general and administrative expenses increased $69.1 million, or 8%. The impact of foreign exchange rates was significant only to the Concerts segment.
More
detailed explanations of these changes are included in the applicable segment discussions below.
Depreciation and amortization
Our depreciation and amortization increased $5.2 million, or 6%, during the three months ended September 30, 2014 as compared to the same period of the prior year. The overall increase in depreciation and amortization was primarily due to an increase in our Ticketing segment of $6.4 million partially offset by a decrease in our Concerts segments of $2.7 million. Excluding the increase
of approximately $0.6 million related to the impact of changes in foreign exchange rates, depreciation and amortization increased $4.6 million, or 5%. The impact of foreign exchange rates was not significant to the segments individually.
Our depreciation and amortization decreased $0.9 million during the nine months ended September 30, 2014 as compared to the same period of the prior year. The overall decrease in depreciation and amortization was primarily due to decreases in our Concerts and Artist Nation segments
of $11.7 million and $5.0 million, respectively, partially offset by an increase in our
Ticketing segment of $13.8 million. Excluding the increase of approximately $1.6 million related to the impact of changes in foreign exchange rates, depreciation and amortization decreased $2.5 million, or 1%. The impact of foreign
exchange rates was not significant to the segments individually.
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 three months ended September 30, 2014 was $1.7 million consisting primarily of a $1.6 million gain recognized in our Ticketing segment from the July 2014 sale of an ecommerce business. Gain on disposal of operating assets for the three months ended September 30, 2013 was
$9.1 million consisting primarily of the resolution during that quarter of a $7.0 million contingent liability related to the May 2013 sale of a theatrical theater in New York in our Concerts segment. In addition, we recognized a gain of $2.0 million last year in connection with additional insurance recoveries for storm damage to an amphitheater in New York in our Concerts segment.
Gain on disposal of operating assets for the nine months ended September 30, 2014 was $5.0 million consisting primarily of a $3.2 million gain recognized during the second quarter of 2014 in our Concerts segment in connection with the final insurance recovery for storm damage sustained to an amphitheater in New York.
In addition, we recognized a $1.6 million gain in our Ticketing segment in connection with the July 2014 sale of an ecommerce business. Gain on disposal of operating assets for the nine months ended September 30, 2013 was $42.9 million consisting primarily of a $28.9 million gain recognized from the May 2013 sale of a theatrical theater in New York in our Concerts segment. In addition, we recognized a gain of $14.6 million last year in connection with insurance recoveries for storm damage sustained to an amphitheater in New York in our Concerts segment.
Corporate expenses
Corporate expenses increased $4.6 million, or 7%,
during the nine months ended September 30, 2014 as compared to the same period of the prior year primarily due to higher compensation-related costs driven by annual salary increases and higher headcount.
Interest expense
Interest expense decreased $1.3 million, or 4%, and $7.4 million, or 8%, during the three and nine months ended September 30, 2014, respectively, as compared
to the same periods of the prior year primarily due to the interest cost reduction realized from the August 2013 redemption of the 8.125% senior notes partially offset by additional interest cost from the 7% senior notes issued in August 2013 and the 5.375% senior notes and the 2.5% convertible senior notes issued in May 2014.
Our debt balances and weighted-average cost of debt, excluding unamortized debt discounts of $34.8 million and including debt premium of $7.6 million, were $2.1 billion and 4.3%, respectively, at September 30, 2014.
Loss on extinguishment of debt
For
the three and nine months ended September 30, 2013, we recorded a loss on extinguishment of debt of $36.3 million in connection with the refinancing of term loans under our senior secured credit facility and redemption of our 8.125% senior notes in August 2013.
Equity in losses (earnings) of nonconsolidated affiliates
Equity in losses (earnings) of nonconsolidated affiliates increased to earnings of $2.2 million for the three months ended September 30, 2014 as compared
to a loss of $2.4 million for the three months ended September 30, 2013. The increase is primarily due to the impairment of an investment in the Concerts segment during the third quarter of 2013. There were no significant impairments of investments during the comparable period of 2014.
Equity in earnings of nonconsolidated affiliates increased $3.1 million during the nine months ended September 30, 2014
as compared to the same period of the prior year primarily due to the impairment of an investment in the Concerts segment in the third quarter of 2013. There were no significant impairments of investments during the comparable period of 2014.
Other expense (income), net
Other expense (income), net was an expense of $12.6 million and $11.1 million for the three and nine months ended September 30, 2014, respectively, and includes the impact of foreign exchange rate losses of $12.3 million and $14.6 million, respectively. In addition, the nine-month
period includes $4.7 million of income primarily from the dissolution of an artist management business.
Other expense (income), net was income of $5.3 million and expense of $2.2 million for the three and nine months ended September 30, 2013, respectively, and includes the impact of foreign exchange rate gains of $4.4 million and foreign exchange rate losses of $3.4 million, respectively.
Income tax expense (benefit) for the nine months ended September 30, 2014 and 2013 was a benefit of $0.5 million and expense of $26.4 million, respectively. The decrease in income taxes results primarily from a decrease in earnings in taxable foreign locations and deferred tax benefits of $14.5 million attributable to the release of valuation allowances primarily due to deferred tax liabilities associated with acquisitions in 2014. These benefits were partially offset by state and local taxes of $4.5 million.
Net
income attributable to noncontrolling interests
Net income attributable to noncontrolling interests increased $4.0 million during the three months ended September 30, 2014 as compared to the same period of the prior year primarily due to improved operating results from certain North America concert businesses.
Net income attributable to noncontrolling interests increased $9.3 million during the nine months ended September 30, 2014
as compared to the same period of the prior year primarily due to improved operating results from certain artist management businesses.
Concerts Results of Operations
Our Concerts segment operating results were, and discussions of significant variances are, as follows:
Three
Months Ended September 30,
% Change
Nine Months Ended September 30,
% Change
2014
2013
2014
2013
(in
thousands)
(in thousands)
Revenue
$
1,925,462
$
1,726,986
11%
$
3,760,118
$
3,433,527
10%
Direct
operating expenses
1,658,028
1,487,856
11%
3,145,174
2,870,584
10%
Selling,
general and administrative expenses
186,415
170,005
10%
503,221
466,840
8%
Depreciation
and amortization
30,155
32,821
(8)%
84,864
96,591
(12)%
Gain
on disposal of operating assets
(112
)
(9,035
)
*
(3,347
)
(43,497
)
*
Acquisition
transaction expenses
1,109
745
*
1,892
1,292
*
Operating
income
$
49,867
$
44,594
12%
$
28,314
$
41,717
(32)%
Operating
margin
2.6
%
2.6
%
0.8
%
1.2
%
Adjusted
operating income **
$
82,773
$
70,736
17%
$
117,279
$
100,182
17%
_______
*
Percentages
are not meaningful.
**
AOI is defined and reconciled to operating income (loss) below.
Three Months
Concerts revenue increased $198.5 million, or 11%, during the three months ended September 30, 2014 as compared to the same period of the prior year. Excluding the increase of $17.7 million related to the impact of changes in foreign exchange rates, revenue
increased $180.8 million, or 10%, primarily due to more shows and higher average attendance in North America from several successful stadium tours along with increases in our amphitheaters. This growth was partially offset by fewer shows and lower attendance in our international arenas due to the cyclical nature of artist tours. Revenue was also impacted by incremental revenue from acquisitions of $41.9 million, driven by a festival promoter business acquired in December 2013.
Concerts direct operating expenses increased $170.2 million, or 11%, during the three months ended September 30,
2014 as compared to the same period of the prior year. Excluding the increase of $17.0 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $153.2 million, or 10%, primarily due to higher expenses associated with the increased show activity discussed above partially offset by decreased expenses related to fewer international arena shows. In addition, we incurred incremental expenses of $44.9 million associated with the acquisitions noted above.
Concerts selling, general and administrative expenses increased $16.4 million, or 10%,
during the three months ended September 30, 2014 as compared to the same period of the prior year. Excluding the increase of $1.3 million related to the impact of changes in foreign exchange rates, selling, general and administrative expenses increased $15.1 million, or 9%, primarily due to a reduction in rent expense during the third quarter of 2013 from the recognition of an incentive payment for early termination of a venue lease along with higher compensation costs.
Concerts depreciation and amortization decreased $2.7 million, or 8%, during the three months ended September 30, 2014 as compared to the same period of the prior year primarily from the acceleration of amortization in 2013 associated with a change in the estimated life of certain venue management and leasehold intangible assets. This decrease was partially offset by incremental depreciation and amortization of $1.7 million related to the acquisition of a festival promotion business.
Concerts gain on disposal of operating assets of $9.0
million for the three months ended September 30, 2013 was primarily due to the resolution of a $7.0 million contingent liability related to the sale of a theatrical theater in New York along with proceeds received in connection with an insurance recovery for storm damage to an amphitheater in New York during Hurricane Sandy in 2012.
The increased operating income for Concerts for the three months ended September 30, 2014 was primarily driven by the increased stadium activity in North America.
Nine Months
Concerts
revenue increased $326.6 million, or 10%, during the nine months ended September 30, 2014 as compared to the same period of the prior year. Excluding the increase of $31.9 million related to the impact of changes in foreign exchange rates, revenue increased $294.7 million, or 9%, primarily from more shows and higher attendance at our North America amphitheaters and strong stadium tours along with increased global touring activity. These increases were partially offset
by fewer shows in our international arenas and stadiums. Revenue was also impacted by incremental revenue from acquisitions of $47.8 million, primarily from festival promoter businesses acquired.
Concerts direct operating expenses increased $274.6 million, or 10%, during the nine months ended September 30, 2014 as compared to the same period of the prior year. Excluding the increase of $28.3 million related to the impact of changes in foreign exchange rates, direct operating expenses increased $246.3
million, or 9%, primarily due to higher expenses associated with the increased show and global touring activity discussed above. In addition, we incurred incremental expenses of $50.5 million from the acquisitions noted above.
Concerts selling, general and administrative expenses increased $36.4 million, or 8%, during the nine months ended September 30, 2014 as compared to the same period of the prior year. Excluding the increase of $5.6 million related to the impact of changes in foreign
exchange rates, selling, general and administrative expenses increased $30.8 million, or 7%. We incurred higher compensation costs driven by annual salary increases and additional headcount along with a reduction in rent expense during 2013 due to the recognition of an incentive payment for early termination of a venue lease. In addition, we incurred incremental expenses of $7.9 million from the acquisitions noted above.
Concerts depreciation and amortization decreased $11.7 million, or 12%, during the nine months ended September 30, 2014
as compared to the same period of the prior year primarily from the acceleration of amortization recorded in 2013 associated with a change in the estimated life of certain venue management and leasehold intangible assets.
Concerts gain on disposal of operating assets of $3.3 million for the nine months ended September 30, 2014 consists primarily of the final insurance recovery for storm damage to an amphitheater in New York during Hurricane Sandy in 2012. Concerts gain on disposal of operating assets of $43.5 million for the nine months ended September 30,
2013 was primarily due to a $28.9 million gain on the sale of a theatrical theater in New York and $14.6 million related to the insurance recovery discussed above.
The decreased operating income for Concerts for the nine months ended September 30, 2014 was primarily driven by the lower gain on disposal of operating assets and higher selling, general and administrative expenses discussed above partially offset by increased amphitheater and stadium activity in North America.
Our Ticketing segment operating results were, and discussions of significant variances are, as follows:
Three Months Ended September 30,
% Change
Nine
Months Ended September 30,
% Change
2014
2013
2014
2013
(in
thousands)
(in thousands)
Revenue
$
386,131
$
356,809
8%
$
1,111,592
$
1,019,771
9%
Direct
operating expenses
187,548
166,509
13%
543,408
481,592
13%
Selling,
general and administrative expenses
113,483
112,940
—
339,385
326,799
4%
Depreciation
and amortization
55,521
49,150
13%
142,472
128,648
11%
Gain
on disposal of operating assets
(1,584
)
(27
)
*
(1,701
)
(47
)
*
Acquisition
transaction expenses
695
221
*
758
245
*
Operating
income
$
30,468
$
28,016
9%
$
87,270
$
82,534
6%
Operating
margin
7.9
%
7.9
%
7.9
%
8.1
%
Adjusted
operating income **
$
85,829
$
80,282
7%
$
232,400
$
217,440
7%
_______
*
Percentages
are not meaningful.
**
AOI is defined and reconciled to operating income (loss) below.
Three Months
Ticketing revenue increased $29.3 million, or 8%, during the three months ended September 30, 2014 as compared to the same period of the prior year primarily due to higher domestic resale fees driven by growth in concert and professional sports ticket sales as a result of the continuing success of our TM+ resale product. Despite a slight decline
in primary ticket sales in the quarter, primary ticket revenue improved largely due to a favorable mix of tickets sold in North America.
Ticketing direct operating expenses increased $21.0 million, or 13%, during the three months ended September 30, 2014 as compared to the same period of the prior year primarily due to increased primary ticket royalties and higher costs associated with the increased resale ticket sales discussed above.
Ticketing depreciation and amortization increased $6.4 million, or 13%,
during the three months ended September 30, 2014 as compared to the same period of the prior year primarily due to higher amortization associated with the impairment of an indefinite-lived intangible asset. In the third quarter of 2014, we recorded an impairment charge of $6.0 million associated with an indefinite-lived intangible trade name in connection with the decision to rebrand certain markets that were not currently using the Ticketmaster trade name.
The increase in Ticketing operating income for the three months ended September 30, 2014 is primarily due to higher domestic resale ticket fees
offset by higher amortization.
Nine Months
Ticketing revenue increased $91.8 million, or 9%, during the nine months ended September 30, 2014 as compared to the same period of the prior year primarily due to increased domestic primary ticket volume and fees along with higher domestic resale ticket fees driven by growth in concert and professional sports ticket sales with the continued success of our TM+ product.
Ticketing direct operating expenses increased $61.8 million,
or 13%, during the nine months ended September 30, 2014 as compared to the same period of the prior year primarily due to higher costs associated with the increased ticket sales discussed above.
Ticketing selling, general and administrative expenses increased $12.6 million, or 4%, during the nine months ended September 30, 2014 as compared to the same period of the prior year. Excluding the increase of $2.4
million related to the impact of changes in foreign exchange rates, selling, general and administrative expenses increased $10.2 million, or 3%, primarily due to higher compensation costs associated with annual salary increases and higher headcount.
Ticketing depreciation and amortization increased $13.8 million, or 11%, during the nine months ended September 30, 2014 as compared to the same period of the prior year primarily due to increased depreciation from our continued investment in
our technology platform and higher amortization associated with the impairment of an indefinite-lived intangible asset. In the third quarter of 2014, we recorded an impairment charge of $6.0 million associated with an indefinite-lived intangible asset as discussed above.
The increase in Ticketing operating income for the nine months ended September 30, 2014 is primarily due to increased domestic primary and resale ticket revenue partially offset by higher compensation costs and increased depreciation and amortization.
Artist Nation Results of Operations
Our
Artist Nation segment operating results were, and discussions of significant variances are, as follows:
Three Months Ended September 30,
% Change
Nine
Months Ended September 30,
% Change
2014
2013
2014
2013
(in
thousands)
(in thousands)
Revenue
$
130,935
$
111,060
18%
$
282,653
$
261,070
8%
Direct
operating expenses
75,642
69,231
9%
164,960
169,563
(3)%
Selling,
general and administrative expenses
35,400
29,348
21%
95,222
71,862
33%
Depreciation
and amortization
10,498
10,736
(2)%
25,934
30,906
(16)%
Loss
on disposal of operating assets
—
2
*
34
681
*
Acquisition
transaction expenses
247
(57
)
*
435
88
*
Operating
income (loss)
$
9,148
$
1,800
*
$
(3,932
)
$
(12,030
)
67%
Operating
margin
7.0
%
1.6
%
(1.4
)%
(4.6
)%
Adjusted
operating income **
$
21,880
$
12,655
73%
$
30,242
$
20,110
50%
_______
*
Percentages
are not meaningful.
**
AOI is defined and reconciled to operating income (loss) below.
Three Months
Artist Nation revenue increased $19.9 million, or 18%, during the three months ended September 30, 2014 as compared to the same period of the prior year primarily due to higher management commissions driven by the timing of the clients’ earnings and the expansion of tour production management. In addition, we recognized incremental revenue of $6.3
million resulting from recent acquisitions of artist management companies.
Artist Nation direct operating expenses increased $6.4 million, or 9%, during the three months ended September 30, 2014 as compared to the same period of the prior year primarily due to additional costs associated with tour production discussed above.
Artist Nation selling, general and administrative expenses increased $6.1 million, or 21%, during the three
months ended September 30, 2014 as compared to the same period of the prior year primarily due to higher compensation and non-cash compensation expenses in the management business along with incremental selling, general and administrative expenses of $2.0 million resulting from the acquisitions noted above. These increases were partially offset by lower expenses in the merchandise business.
The increased operating income for Artist Nation for the three months ended September 30, 2014 was primarily driven by the increase in management commissions and the acquisitions of various artist management businesses partially offset by increased management compensation expenses.
Artist Nation revenue increased $21.6 million, or 8%, during the nine months ended September 30, 2014 as compared to the same period of the prior year. Excluding the increase of $1.8 million related to the impact of changes in foreign exchange rates, revenue increased $19.8 million, or 8%, partially due to incremental revenue of $15.9 million
resulting from the acquisition or prospective consolidation of various artist management companies. In addition, revenue increased due to higher management commissions and the expansion of tour production management. These increases were partially offset by reductions in VIP ticket sales due to the July 2013 decision by the Concerts segment to expand their premium ticket packages and no longer outsource this service to Artist Nation.
Artist Nation direct operating expenses decreased $4.6 million, or 3%, during the nine months ended September 30, 2014 as compared to the same period of the prior year. Excluding the increase
of $1.4 million related to the impact of changes in foreign exchange rates, direct operating expenses decreased $6.0 million, or 4%, primarily due to a reduction in costs associated with the VIP ticket sales discontinuation partially offset by increased costs related to the tour production activity as discussed above.
Artist Nation selling, general and administrative expenses increased $23.4 million, or 33%, during the nine months ended September 30, 2014 as compared
to the same period of the prior year primarily due to higher compensation and non-cash compensation expenses in the management business along with incremental expenses of $5.8 million resulting from the acquisitions noted above.
Artist Nation depreciation and amortization decreased $5.0 million, or 16%, during the nine months ended September 30, 2014 as compared to the same period of the prior year resulting from lower amortization from certain intangible assets in the management business that became fully amortized in 2013.
The decreased operating loss for Artist Nation for the nine
months ended September 30, 2014 was primarily driven by the acquisition or prospective consolidation of various artist management companies, the addition or expansion of services to clients and lower amortization partially offset by higher compensation in the management business.
Sponsorship & Advertising Results of Operations
Our Sponsorship & Advertising segment operating results were, and discussions of significant variances are, as follows:
Three
Months Ended September 30,
% Change
Nine Months Ended September 30,
% Change
2014
2013
2014
2013
(in
thousands)
(in thousands)
Revenue
$
114,614
$
110,217
4%
$
230,905
$
221,604
4%
Direct
operating expenses
13,534
15,112
(10)%
31,593
35,287
(10)%
Selling,
general and administrative expenses
13,098
11,979
9%
37,263
32,626
14%
Depreciation
and amortization
1,264
(56
)
*
3,207
682
*
Operating
income
$
86,718
$
83,182
4%
$
158,842
$
153,009
4%
Operating
margin
75.7
%
75.5
%
68.8
%
69.0
%
Adjusted
operating income **
$
88,330
$
83,334
6%
$
163,114
$
154,253
6%
_______
*
Percentages
are not meaningful.
**
AOI is defined and reconciled to operating income (loss) below.
Three Months
Sponsorship & Advertising revenue increased $4.4 million, or 4%, during the three months ended September 30, 2014 as compared to the same period of the prior year. Excluding the increase of $1.8 million related to the impact of changes in foreign exchange
rates, revenue increased $2.6 million, or 2%, primarily due to incremental revenue of $3.7 million from the acquisition of a festival business, higher domestic online advertising and international venue sponsorships partially offset by lower international festival sponsorships.
Sponsorship & Advertising direct operating expenses decreased $1.6 million, or 10%, during the three months ended September 30, 2014 as compared to the same period of the prior year driven by lower fulfillment costs on certain sponsorship
programs and decreased costs associated with the reduction in international festival sponsorships.
Sponsorship & Advertising selling, general and administrative expenses increased $1.1 million, or 9%, during the three months ended September 30, 2014 as compared to the same period of the prior year primarily due to higher compensation costs from increased headcount to drive additional sales along
with annual salary increases.
The increase in Sponsorship operating income for the three months ended September 30, 2014 was primarily driven by the recent acquisition of a festival business and higher international venue sponsorships and domestic online advertising.
Nine Months
Sponsorship & Advertising revenue increased $9.3 million, or 4%, during the nine months ended September 30, 2014 as compared to the same period
of the prior year. Excluding the increase of $3.0 million related to the impact of changes in foreign exchange rates, revenue increased $6.3 million, or 3%, primarily due to incremental revenue of $4.3 million from the acquisition of various festival businesses and new, or expansion of existing, sponsorship agreements. These increases were partially offset by lower international festival sponsorships.
Sponsorship & Advertising direct operating expenses decreased $3.7 million, or 10%, during the nine months ended
September 30, 2014 as compared to the same period of the prior year driven by lower fulfillment costs on certain sponsorship agreements and decreased costs associated with the reduction in international festival sponsorships.
Sponsorship & Advertising selling, general and administrative expenses increased $4.6 million, or 14%, during the nine months ended September 30, 2014 as compared to the same period of the prior year primarily related to higher compensation costs from increased headcount to drive additional sales in future periods.
The
increased operating income for the nine months ended September 30, 2014 was primarily due to recent acquisitions of festivals and improved results on certain sponsorship programs partially offset by lower results from international festival sponsorships and increased compensation costs.
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 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. 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.
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 $1.4 billion at September 30, 2014 and $1.3 billion at December 31, 2013. Included in the September 30, 2014 and December 31, 2013 cash and cash equivalents balances are $531.7 million and $538.4 million,
respectively, of cash received that includes the face value of tickets sold on behalf of ticketing 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 $326.9 million in cash and cash equivalents, excluding client cash, at September 30, 2014. We generally 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 90 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. The outstanding balance on the revolving credit facility was repaid in the second quarter of 2013 and we have not made any subsequent borrowings against the revolving credit facility. Our balance sheet reflects total debt of $2.1 billion and $1.8 billion at September 30, 2014 and December 31, 2013, respectively. 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 September 30,
2014.
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
Senior Secured Credit Facility
At September 30, 2014, our senior secured credit facility consists of (i) a $115 million term loan A, (ii) a $950 million term loan B and (iii) a $335 million revolving credit facility. 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, (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 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 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 ranging 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 nine months ended September 30, 2014, we made principal payments totaling $12.9 million on these term loans. At September 30,
2014, the outstanding balances on these term loans, net of discounts, were $1.0 billion. There were no borrowings under the revolving credit facility as of September 30, 2014. Based on our letters of credit of $66.0 million, $269.0 million was available for future borrowings as of that same date.
5.375% Senior Notes
In May 2014, we issued $250 million of 5.375% senior notes due 2022. Interest on the notes is payable semi-annually in cash in arrears on June 15 and December 15, beginning December 15, 2014, and the notes will mature in June 2022. We may redeem some or all of the
notes at any time prior to June 15, 2017 at a price equal to 100% of the principal amount, plus any accrued and unpaid interest to the date of redemption, plus a ‘make-whole’ premium. We may also redeem up to 35% of the aggregate principal amount of the notes from the proceeds of certain equity offerings prior to June 15, 2017, at a price equal to 105.375% of the principal amount, plus any accrued and unpaid interest. In addition, on or after June 15, 2017, we may redeem at our option some or all of the notes at redemption prices that start at 104.0313% 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.
2.5% Convertible Senior Notes
In May 2014, we issued $275 million of convertible senior notes due 2019. The notes pay interest semiannually in arrears on May 15 and November 15 at a rate of 2.5% per annum, beginning on November 15, 2014. The notes will mature in May 2019 and may not be redeemed by us prior to the maturity date. The notes will be convertible, under certain circumstances, until November 15, 2018, and on or after such date without condition,
at an initial conversion rate of 28.8363 shares of our common stock per $1,000 principal amount of notes, subject to adjustment, which represents a 52.5% conversion premium based on the last reported sale price for our common stock of $22.74 on May 19, 2014. Upon conversion, the notes may be settled in shares of common stock or, at our election, cash or a combination of cash and shares of common stock. Assuming we fully settled the notes in shares, the maximum number of shares that could be issued to satisfy the conversion is currently 7.9 million.
If we experience a fundamental change, as defined in the indenture
governing the notes, the holders of the 2.5% convertible senior notes may require us to purchase for cash all or a portion of their notes, subject to specified exceptions, at a price equal to 100% of the principal amount of the notes plus accrued and unpaid interest, if any.
In July 2014, the holders of $29.3 million in aggregate outstanding principal of the 2.875% convertible senior notes exercised their right to redeem their notes for cash and in late September 2014, pursuant to our option under the indenture
governing the notes, we redeemed the remaining outstanding notes using the net proceeds from the issuances of our 5.375% senior notes and our 2.5% convertible senior notes. In addition to redeeming the principal amount of $220 million of the notes, we paid total accrued interest of $1.1 million and related fees and expenses of $0.2 million for the redemption, leaving $293.8 million in additional cash available for general corporate purposes. The loss on extinguishment of debt related to the redemption of the 2.875% convertible senior notes was not significant.
Debt Covenants
Our 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 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 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 indentures governing our 7% senior notes and 5.375% senior notes contain covenants that limit, among other
things, our ability and the ability of our restricted subsidiaries to incur certain additional indebtedness and issue preferred stock, make certain distributions, investments and other restricted payments, sell certain assets, agree to any restrictions on the ability of restricted subsidiaries to make payments to us, merge, consolidate or sell all of our assets, create certain liens, and engage in transactions with affiliates on terms that are not arm’s-length. Certain covenants, including those pertaining to incurrence of indebtedness, restricted payments, asset sales, mergers and transactions with affiliates will be suspended during any period in which the notes are rated investment grade by both rating agencies and no default or event of default under the indenture
has occurred and is continuing. The 7% senior notes and the 5.375% 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 for the 7% senior notes and 3.50x for the 5.375% senior notes.
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 September 30, 2014,
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 the nine months ended September 30, 2013, we received $83.1 million of proceeds primarily related to the sale of a theatrical theater in New York and a partial insurance recovery for storm damage sustained to an amphitheater in New York. There were no significant proceeds received from disposals of operating assets for the nine months ended September 30, 2014.
Stock
Option Exercises
During the nine months ended September 30, 2014 and 2013, we received $14.1 million and $80.6 million, respectively, of proceeds from the exercise of stock options.
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 the nine months ended September 30, 2014, we used $48.5 million of cash primarily for three acquisitions of artist management businesses in our Artist Nation segment. During the nine months ended September 30, 2013, we used $26.4 million of cash primarily for the acquisition in our Concerts segment of a controlling interest in a festival promoter in May 2013.
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:
Maintenance
capital expenditures during the first nine months of 2014 increased from the same period of the prior year primarily due to the timing of venue-related projects.
We currently expect capital expenditures to be approximately $135 million for the full year 2014.
Cash used in operating activities was $13.8 million for the nine months ended September 30, 2014, compared to cash provided by operating activities of $264.5 million for the nine months ended September 30, 2013. The $278.4 million decrease 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 partially offset by an increase
in the cash-related portion of net income. During the first nine months of 2014, we made higher payments for event-related expenses and experienced a larger increase in accounts receivable as compared to the same period of the prior year.
Investing Activities
Cash used in investing activities was $159.7 million for the nine months ended September 30, 2014, compared to $42.5 million for the nine months ended September 30, 2013. The $117.2
million increase in cash used in investing activities is primarily due to lower proceeds received from the disposal of operating assets and higher payments for acquisitions as compared to the same period of the prior year. See “—Sources of Cash ” and “—Uses of Cash ” above for further discussion.
Financing Activities
Cash provided by financing activities was $251.3 million for the nine months ended September 30, 2014, compared to $83.7 million for the nine months ended September 30, 2013.
The $167.6 million increase in cash provided by financing activities is primarily a result of higher net proceeds from the issuance of long-term debt in 2014 from the 5.375% senior notes
and 2.5% convertible senior notes partially offset by lower proceeds from the exercise of stock options in 2014 as compared to the same period of the prior year.
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 from 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.
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 $67.0 million for the nine months ended September 30, 2014. 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 nine months ended September 30, 2014 by $6.7 million. As of September 30, 2014, 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 September 30, 2014, we had forward currency contracts and options outstanding with a notional amount of $58.7 million.
Interest
Rate Risk
Our market risk is also affected by changes in interest rates. We had $2.1 billion of total debt, net of unamortized discounts and premiums, outstanding as of September 30, 2014. Of the total amount, taking into consideration existing interest rate hedges, we had $1.0 billion of fixed-rate debt and $1.1 billion of floating-rate debt.
Based on the amount of our floating-rate debt as of September 30, 2014, 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 September 30, 2014 with no subsequent change in rates for the remainder of the period.
At September 30, 2014, 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 $8.0 million at September 30, 2014, 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 September 30,
2014 was de minimus. 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 $26.4 million aggregate notional amount at September 30, 2014, 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 change.
For
the years ended December 31, 2013, 2012, 2011 and 2010, fixed charges exceeded earnings from continuing operations before income taxes and fixed charges by $6.0 million, $142.1 million, $104.4 million and $193.6 million, respectively.
The ratio of earnings to fixed charges was computed on a total company basis. Earnings represent income 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.
Recent
Accounting Pronouncements
Recently Issued Pronouncements
In April 2014, the FASB issued guidance that raises the threshold for a disposal to qualify as a discontinued operation and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a discontinued operation. The guidance is effective for disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014 and interim periods within that year. This guidance is applied prospectively and early adoption is permitted. We will adopt this guidance on January 1, 2015 and will apply it prospectively to disposals
occurring on or after January 1, 2015.
In May 2014, the FASB issued a comprehensive new revenue recognition standard that will supersede nearly all existing revenue recognition guidance under GAAP. The new standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle of the guidance is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective for annual and interim periods beginning after December 15, 2016, and early adoption of the standard is not permitted. The guidance should be applied retrospectively, either to each prior period presented in the financial statements,
or only to the most current reporting period presented in the financial statements with a cumulative-effect adjustment as of the date of adoption. We will adopt this standard on January 1, 2017, and are currently assessing which implementation method we will apply and the impact its adoption will have on our financial position and results of operations.
In June 2014, the FASB issued guidance that requires a performance target in a share-based payment that affects vesting, and that could be achieved after the requisite service period, be accounted for as a performance condition. The guidance is effective for annual periods beginning after December 15, 2015 and interim periods within that year, and early adoption is permitted. The guidance should be applied on a prospective basis to awards that are granted or modified on or after
the effective date. The guidance may be applied on a modified retrospective basis for performance targets outstanding on or after the beginning of the first annual period presented as of the date of adoption. We do not currently expect to grant these type of awards, but will adopt this guidance on January 1, 2016 and will apply it prospectively to any awards granted on or after January 1, 2016 that include these terms.
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 accounting estimates involved in business combinations, impairment of long-lived assets and goodwill, revenue recognition, litigation accruals and income taxes 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. These critical accounting
estimates, the judgments and assumptions and the effect if actual results differ from these assumptions are described in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our Annual Report on Form 10-K filed with the SEC on February 24, 2014.
There have been no changes to our critical accounting policies during the
nine months ended September 30, 2014.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Required information is within Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Market Risk.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that
material information relating to our company, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to other members of senior management and our board of directors.
Based on their evaluation as of September 30, 2014, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) are effective to ensure that (1) the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended,
is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (2) the information we are required to disclose in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or internal controls will prevent all possible errors and fraud. Our disclosure controls and procedures are, however, designed to provide reasonable assurance of achieving their objectives, and our Chief Executive Officer and Chief Financial Officer have concluded that our financial controls and procedures are effective at that reasonable assurance level.
Changes in Internal Control Over
Financial Reporting
There has been no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Information regarding our legal proceedings can be found in Part I Financial Information—Item
1. Financial Statements—Note 5—Commitments and Contingent Liabilities.
Item 1A. Risk Factors
While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. Part 1, Item 1A of our 2013 Annual Report on Form 10-K filed with the SEC on February 24, 2014, describes some of the risks and uncertainties associated with our business which have the potential to materially affect our business, financial condition or results of operations. We do not believe that there have been any material changes
to the risk factors previously disclosed in our 2013 Annual Report on Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 5. Other Information
None.
Item 6. Exhibits
The information in the Exhibit Index of this Quarterly Report on Form
10-Q is incorporated into this Item 6 by reference.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on October 30, 2014.
First
Supplemental Indenture, entered into as of August 27, 2014, among Live Nation Entertainment, Inc., Ticketstoday, LLC, the Existing Guarantors defined therein, and The Bank of New York Mellon Trust Company, N.A., as trustee.
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10.2
Fifth
Supplemental Indenture, entered into as of August 27, 2014, among Live Nation Entertainment, Inc., Ticketstoday, LLC, the Existing Guarantors defined therein, and The Bank of New York Mellon Trust Company, N.A., as trustee.
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31.1
Certification
of Chief Executive Officer
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31.2
Certification of Chief Financial Officer
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32.1
Section
1350 Certification of Chief Executive Officer
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32.2
Section 1350 Certification of Chief Financial Officer
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101.INS
XBRL
Instance Document
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101.SCH
XBRL Taxonomy Schema Document
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101.CAL
XBRL
Taxonomy Calculation Linkbase Document
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101.DEF
XBRL Taxonomy Definition Linkbase Document
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101.LAB
XBRL
Taxonomy Label Linkbase Document
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101.PRE
XBRL Taxonomy Presentation Linkbase Document
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45
Dates Referenced Herein and Documents Incorporated by Reference