UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________
FORM 10-K
____________________
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the year ended December 31, 2012 | ||
or | ||
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
Commission file number 001-16131
WORLD WRESTLING ENTERTAINMENT, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 04-2693383 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1241 East Main Street
Stamford, CT 06902
(203) 352-8600
(Address, including zip code, and telephone number, including area code,
of Registrant’s principal executive offices)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT
Class A Common Stock, $.01 par value per share | New York Stock Exchange |
(Title of each class) | (Name of each exchange on which registered) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x
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. Yes x No o
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 to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
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 definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer | o | Accelerated filer | x | Non-accelerated filer | o | Smaller reporting company | o | ||
(Do not check if a 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 o No x
Aggregate market value of the common stock held by non-affiliates of the Registrant at June 30, 2012 using our closing price on June 30, 2012 was $221,420,672.
As of February 28, 2013, the number of shares outstanding of the Registrant's Class A common stock, par value $0.01 per share, was 29,309,891 and the number of shares outstanding of the Registrant's Class B common stock, par value $0.01 per share, was 45,500,830 shares. Portions of the Registrant's definitive proxy statement for the 2013 Annual Meeting of Stockholders are incorporated by reference in Part III of this Form 10-K.
TABLE OF CONTENT
Page | |||||
PART I | |||||
Item 1. | Business | ||||
Item 1A. | Risk Factors | ||||
Item 1B. | Unresolved Staff Comments | ||||
Item 2. | Properties | ||||
Item 3. | Legal Proceedings | ||||
Item 4. | Mine Safety Disclosures | ||||
PART II | |||||
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer of Purchases of Equity Securities | ||||
Item 6. | Selected Financial Data | ||||
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk | ||||
Item 8. | Financial Statements and Supplementary Data | ||||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures | ||||
Item 9A. | Controls and Procedures | ||||
Item 9B. | Other Information | ||||
PART III | |||||
Item 10. | Directors, Executive Officers and Corporate Governance | * | |||
Item 11. | Executive Compensation | * | |||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | * | |||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | * | |||
Item 14. | Principal Accountant Fees and Services | * | |||
PART IV | |||||
Item 15. | Exhibits and Financial Statement Schedules | ||||
* Incorporated by reference from the Registrant’s Proxy Statement for the 2013 Annual Meeting of Stockholders (the “Proxy Statement”).
PART I
Item 1. Business
WWE is an integrated media and entertainment company. We have been involved in the sports entertainment business for over 30 years, and have developed WWE into one of the most popular brands in global entertainment today. We develop unique and creative content centered around our talent and present it via television, online and at our live events. At the heart of our success are the athletic and entertainment skills and appeal of our Superstars and our consistently innovative and multi-faceted storylines across our brands. Anchored by these brands, we are able to leverage our content and talent across virtually all media outlets. Our live and televised events, consumer products, digital media and feature film outlets provide significant cross-promotion and marketing opportunities that reinforce our brands while effectively reaching our fans.
We continually evaluate additional opportunities to monetize new and existing content, including the potential creation of a WWE network. In support of this initiative, during 2011 and 2012, the Company increased staffing levels and expanded our content production capabilities. We believe that executing this strategy could have the potential to transform our business.
"WWE" refers to World Wrestling Entertainment, Inc. and its subsidiaries, unless the context otherwise requires. References to "we," "us," "our" and the "Company" refer to WWE and its subsidiaries. The initials "WWE" and our stylized and highly distinctive scratch logo are two of our trademarks. This report also contains other WWE trademarks and trade names as well as those of other companies. All trademarks and trade names appearing in this report are the property of their respective holders.
Our operations are centered around the following four business segments:
Live and Televised Entertainment
• | Revenues consist principally of ticket sales to live events, sales of merchandise at these live events, television rights fees, integrated sponsorships fees, and fees for viewing our pay-per-view and video-on-demand programming. |
Consumer Products
• | Revenues consist principally of direct sales of WWE produced home entertainment (DVD/Blu-ray), magazine publishing and royalties or license fees related to various WWE themed products such as video games, toys and apparel. |
Digital Media
• | Revenues consist principally of advertising sales on our websites, rights fees received for digital content, sale of merchandise on our website through our WWEShop internet storefront and sales of various broadband and mobile content. |
WWE Studios
• | Revenues consist of amounts earned from the distribution of filmed entertainment. |
Live and Televised Entertainment
(represents 73%, 70% and 69% of our net revenues in 2012, 2011 and 2010, respectively)
Live Events
Our two brands, RAW and SmackDown allow us to perform in numerous domestic markets and take advantage of the strong international demand for our events. Live events and television programming are our principal creative content and production activities. Our creative team develops compelling and complex characters and weaves them into dynamic storylines that combine physical and emotional elements. Storylines are usually played out in the ring and unfold on our weekly television shows, and culminate in our monthly pay-per-view events.
In 2012, we produced 248 live events throughout North America, entertaining approximately 1,500,000 fans at an average ticket price of $45.39. We hold many of our live events at major arenas across the country. In addition to providing content for our
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television and pay-per-view programming, these events provide us with a real-time assessment of the popularity of our storylines and characters.
In 2012, we produced 66 live events internationally, reaching approximately 395,000 fans at an average ticket price of $74.15. These events were spread over several international tours throughout Europe, the Middle East, Asia, Latin America and Australia.
Live events net revenues were $103.7 million, $104.7 million and $104.6 million, representing 21%, 22% and 22% of total net revenues in 2012, 2011 and 2010, respectively.
Venue Merchandise
Our venue merchandise business consists of the design, sourcing, marketing and distribution of numerous WWE-branded products, such as t-shirts, caps and other novelty items, all of which feature our Superstars, Divas and/or logos. These items are offered for sale at our live events.
Venue merchandise net revenues were $18.8 million, $18.3 million and $18.4 million, representing 4% of total net revenues in each of 2012, 2011 and 2010.
Pay-Per-View Programming
WWE is the world’s pre-eminent provider of pay-per-view programming for over 30 years. In 2012, WWE televised 12 live pay-per-view events which ranked among the highest selling live event programs in the industry. WWE’s annual crown jewel, WrestleMania, has historically achieved more than one million buys per event worldwide. On April 1, 2012, WWE celebrated the 28th Anniversary of WrestleMania in Miami, Florida before a sold-out crowd with millions watching at home. WrestleMania XXVIII achieved approximately 1.3 million buys and generated $30.1 million in pay-per-view revenue.
WWE produced 12 domestic pay-per-view programs in 2012 and 13 programs in 2011. The suggested domestic retail price for all pay-per-view events in 2012 was $44.95, with the exception of WrestleMania which had a suggested domestic retail price of $54.95. Consistent with industry practices, we share the revenues with cable systems and satellite providers such as DirecTV, and pay service fees to iNDEMAND and TVN. Average revenue per buy was $20.60 in 2012 and $19.94 in 2011.
Our international pay-per-view partners include BSkyB in the United Kingdom, SKY Deutschland in Germany, SKY Perfect TV! in Japan, SKY Italia in Italy and Main Event in Australia, among many others.
Pay-per-view net revenues were $83.6 million, $78.3 million and $70.2 million, representing 17%, 16% and 15% of total net revenues in 2012, 2011 and 2010, respectively.
Television Rights Fees
Relying on our in-house production capabilities at our technologically advanced, high definition, production facility, we produce 6.5 hours of original weekly domestic television programming. This programming is distributed domestically, internationally and via WWE.com. Our domestic programs are: RAW on USA Network and replayed on mun2 and Universal HD; and SmackDown on Syfy and replayed on mun2; WWE Main Event on Ion and Saturday Morning Slam on The CW. NXT and WWE Superstars are available on WWE.com and distributed to more than 100 countries internationally. WWE’s TV programs reach approximately 12 million viewers in the United States during the average week. USA Network and the Syfy Channel are owned by NBC Universal.
RAW is a live primetime program broadcasted on the USA Network which ranks among the most watched regularly scheduled programs on primetime cable television. RAW is the longest weekly episodic program in primetime TV history and anchors USA, helping make it consistently the top-rated cable network. RAW also airs in replays on mun2 and Universal HD. Beginning in 2012, RAW expanded to a third hour.
The two-hour SmackDown airs on Syfy in primetime on Fridays. SmackDown is on average Syfy’s most-watched program each week. SmackDown is the second longest running weekly episodic program in primetime TV history, only behind RAW. SmackDown also airs in replays on mun2.
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WWE Main Event, was added to WWE's programming line-up in October 2012. The one-hour original series airs Wednesdays on Ion TV, showcasing live events featuring the WWE Superstars and Divas of RAW and SmackDown.
Saturday Morning Slam was added to WWE's programming line-up in August 2012. The half-hour weekly program airs as part of The CW's Vortexx, a kids' television block, reaching 114 million U.S. television households. The program features in-ring action, WWE Superstar profiles, behind-the-scenes footage and an exclusive WWE match every week as well as highlights from WWE's Be a STAR anti-bullying campaign and other community initiatives.
NXT and WWE Superstars airs on WWE.com domestically and are distributed on television in various international markets.
Each year, more than 8,000 hours of WWE’s television programming can be seen in more than 145 countries and 30 languages around the world. Our broadcast partners include: BSkyB in the UK; Ten Sports in India, and J SPORTS in Japan, among many others.
Television rights fee net revenues were $139.5 million, $131.5 million and $127.0 million, representing 29%, 27% and 27% of total net revenues in 2012, 2011 and 2010, respectively.
WWE Classics On Demand
WWE Classics On Demand is a Subscription Video On Demand (SVOD) service that offers highly-rated and best-selling classic television shows, pay-per-view events, specials and original programming for a monthly subscription fee. Most of this material is drawn from WWE's 100,000 hour video library and includes other leading wrestling brands. WWE owns and controls the content from the vast libraries of such promotions as WCW, ECW and AWA. WWE Classics On Demand subscribers have access to approximately 50 hours of content each month.
WWE Classics On Demand is currently distributed with 18 of the top 20 cable operators in the United States, making WWE Classics On Demand available to approximately 75 percent of video-on-demand enabled subscribers. Major North American distributors currently include: Comcast Communications, Cox Communications, Charter Communications, Cablevision, Mediacom, and Verizon Communications, among others.
WWE Classics On Demand net revenues were $4.1 million in 2012, $4.6 million in 2011 and $4.6 million in 2010, representing 1% of total net revenues in each period.
Sponsorship Sales
We provide sponsorships in the US domestic market and Canada to meet the needs of our advertisers. Through these sponsorships, we offer advertisers a full range of our promotional vehicles, including internet and print advertising, arena signage, on-air announcements and pay-per-view sponsorship.
Sponsorship net revenues were $1.4 million, $1.1 million and $5.9 million, in 2012, 2011 and 2010, respectively.
Consumer Products
(represents 18%, 20% and 20% of our net revenues in 2012, 2011 and 2010, respectively)
Licensing
We have established a worldwide licensing program using our marks and logos, copyrighted works and characters on a large variety of retail products, including toys, video games, apparel and books. Currently, we have relationships with more than 200 licensees worldwide that provide products for sale at major retailers. To maintain the distinctive style and quality of our intellectual property and brand, we retain creative approval over the design, packaging, advertising and promotional materials associated with these products.
Video games and toys are the largest components of our licensing program. We have a comprehensive, multi-year licensing agreement with Mattel, Inc. as our master toy licensee, covering all global territories. Our former video game licensee, THQ, Inc. ("THQ") filed for bankruptcy in 2012. In February 2013, the Company reached an agreement with THQ to terminate our license
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agreement. Concurrent with the effectiveness of the termination of our license with THQ, we entered into a new multi-year agreement with Take-Two Interactive Software, Inc. ("Take-Two") to publish future video games. See Note 20 to the Consolidated Financial Statements included in this report for additional information.
Music is an integral part of the entertainment experience surrounding WWE’s live events, television programs and pay-per-views. We compose and record most of our music, including our Superstar entrance themes, in our recording studio. In addition to our own composed music, we license music performed by popular artists. Music links the WWE brand to all media platforms including television, film, radio, video games, live events and other emerging digital technologies.
WWE programming and WWE.com have music woven in from up-and-coming artists, thus maintaining our commitment to developing artists and providing a platform to an audience to which they might not be exposed through traditional record company marketing.
Licensing net revenues, including music, were $46.3 million, $54.4 million and $51.7 million, representing 10%, 11% and 11% of total net revenues in 2012, 2011 and 2010, respectively.
Home Video
In 2012, we released 35 new home video productions and shipped approximately 3.8 million DVD and Blu-ray units, including catalog titles released in prior years. Gaiam Inc. is our domestic home video distributor. Outside the United States, third-party licensees distribute our home video productions.
Home video net revenues were $33.0 million, $30.4 million and $32.1 million, representing 7%, 6% and 7% of total net revenues in 2012, 2011 and 2010, respectively.
Magazine Publishing
The magazine division of WWE publishes WWE Magazine, WWE Kids magazine and several special magazines.
The flagship title, WWE Magazine, is a global men’s lifestyle publication with licensed editions in the UK, Mexico, Greece and Turkey among other countries. Every issue is filled with features, photos, exclusive interviews and access that fans will not see on television. In the US, WWE Magazine reaches more than 4.6 million readers every month.
Our WWE Kids magazine was launched in April 2008 and published ten issues in 2012. WWE Kids also has licensed editions in the UK, Mexico, Greece and Turkey.
Magazine publishing net revenues were $6.0 million, $7.7 million and $11.0 million, representing 1%, 2% and 2% of total net revenues in 2012, 2011 and 2010, respectively.
Digital Media
(represents 7%, 6% and 6% of our net revenues in 2012, 2011 and 2010, respectively)
WWE.com
WWE utilizes the Internet to promote our brands, create a community experience among our fans, market and distribute our online content and digital products and sell online advertising. Our primary website, WWE.com, attracted an average of 12.4 million monthly unique visitors worldwide during 2012. These visitors viewed an average of more than 352 million pages and approximately 27.8 million video streams per month. WWE wallpapers, ringtones, voicetones and videos are available through our mobile partnerships.
WWE currently has regional websites spanning 23 countries worldwide, allowing fans to experience WWE in their native language with a concentration on local events and shows. Some of the countries in which we have regional websites include China, France, Germany, India, Japan, Poland, Portugal, Spain and Russia. Local sales agencies sell advertising on WWE.com in more than nine countries.
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WWE currently streams its video content on Hulu.com, YouTube.com, and other select video portals. The wide range of content includes full length episodes of SmackDown, NXT and WWE Superstars.
WWE.com net revenues were $19.7 million, $12.5 million and $14.9 million, representing 4%, 3% and 3% of total net revenues in 2012, 2011 and 2010, respectively.
WWEShop
WWEShop is our e-commerce storefront. WWEShop processed approximately 307,000 orders during 2012 as compared to 330,000 in 2011.
WWEShop net revenues were $14.8 million, $15.6 million and $14.0 million, representing 3% of total net revenues in 2012, 2011 and 2010, respectively.
WWE Studios
(represents 2%, 4% and 4% of our net revenues in 2012, 2011 and 2010, respectively)
Established in 2002 and re-branded in 2008, WWE Studios creates a diversified mix of filmed entertainment for the WWE fan base, as well as broader audiences, by means of strategic production, distribution and acquisition partnerships. WWE movies frequently cast well-known actors and actresses in lead roles supported by WWE Superstars, such as John Cena and Triple H.
WWE Studios released four feature films: See No Evil, The Marine, The Condemned, and 12 Rounds and two direct-to-DVD films, Behind Enemy Lines and The Marine 2, by utilizing third-party distribution partners (“Licensed films”). Beginning in 2010, WWE Studios started self-distributing films, with the releases of Legendary and Knucklehead. During 2011, WWE Studios released four films under this self-distribution model; The Chaperone, That’s What I Am, Inside Out and The Reunion. In 2012, WWE Studios released the final two films under this self-distribution model, Bending the Rules and Barricade. In addition, WWE Studios released, The Day, an acquisition from the 2011 Toronto International Film Festival starring Shawn Ashmore and Dominic Monaghan; and re-issued No Holds Barred the 1989 film starring Hulk Hogan.
WWE Studios recently co-produced and co-financed two wide-release theatrical feature films; Dead Man Down with IM Global starring Colin Farrell and featuring WWE Superstar Wade Barrett in a supporting role; and The Call with Troika Pictures starring Halle Berry with WWE Superstar David Otunga in a supporting role. In addition, WWE Studios recently joined with 20th Century Fox to co-produce and co-finance two direct-to-DVD installments of previous franchises; The Marine 3: Homefront starring WWE Superstar The Miz, and 12 Rounds 2: Reloaded starring WWE Superstar Randy Orton. These film projects, as well as No One Lives which was co-produced with Pathe Pictures and stars Luke Evans and WWE Superstar Brodus Clay, will be released during 2013.
With its strong WWE fan base and its content creation and distribution partners, WWE Studios continues to build its brand recognition and increase its reach on all platforms. WWE Studios’ movies can be seen in theatres, or are available for purchase or rental through major retail and distribution channels including Walmart, Netflix and DirecTV.
WWE Studios net revenues were $7.9 million, $20.9 million and $19.6 million, representing 2%, 4% and 4% of total net revenues in 2012, 2011 and 2010, respectively.
We have substantial capitalized film costs. The accounting for our film business in accordance with generally accepted accounting principles entails significant judgment used to develop estimates of expected future revenues from films. If expected revenue for one or more of our films does not materialize because audience demand does not meet expectations, our estimated revenues may not be sufficient to recoup our investment in the film. If actual revenues are lower than our estimated revenues or if costs are higher than expected, or if other conditions indicate our film assets may not be recoverable, we calculate the estimated fair value of the film. If the unamortized cost of the film is greater than the estimated fair value, we are required to record an impairment charge and write down the capitalized costs of the film to the estimated fair value. During the years ended December 31, 2012, and 2011, we recorded aggregate impairment charges of $1.2 million and $23.4 million, respectively related to several
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of our feature films. No impairment charge was recorded during 2010. See Note 7 to the Consolidated Financial Statements included in this report for further discussion.
International
Revenues generated outside of North America across all our business segments were $118.1 million for 2012, $133.4 million for 2011 and $135.3 million for 2010. Revenues generated from international sources accounted for 24% of total revenues generated in 2012, 28% in 2011 and 28% in 2010. Revenues generated in the United Kingdom, our largest international market, were $34.0 million, $33.2 million and $33.9 million for 2012, 2011 and 2010, respectively. The Company had approximately $0.1 million in property and equipment located outside the United States as of December 31, 2012.
See Note 17 to the Consolidated Financial Statements included in this report for additional information by segment and by geographic area.
Creative Development and Production
Headed by our Chairman and Chief Executive Officer, Vincent K. McMahon, our creative team develops compelling and complex characters and weaves them into dynamic storylines that combine physical and emotional elements. Storylines are usually played out in the ring and unfold on our weekly television shows, and culminate in our monthly pay-per-view events. We voluntarily designate the suitability of each of our television shows using standard industry ratings, and all of our programming carries a PG rating.
Our success is due primarily to the continuing popularity of our Superstars and Divas. We currently have approximately 135 Superstars and Divas under exclusive contracts, ranging from multi-year guaranteed contracts with established Superstars to developmental contracts with our Superstars in training. Our Superstars and Divas are highly trained and motivated independent contractors, whose compensation is tied to the revenue that they help generate. We own the rights to substantially all of our characters and exclusively license the rights we do not own through agreements with our Superstars and Divas. We continually seek to identify, recruit and develop additional talent for our business.
Competition
While we believe that we have a loyal fan base, the entertainment industry is highly competitive and subject to fluctuations in popularity, which are not easy to predict. For our live, television, pay-per-view and movie audiences, we face competition from professional and college sports as well as from other forms of live, filmed and televised entertainment and other leisure activities. We compete with entertainment companies, professional and college sports leagues and other makers of branded apparel and merchandise for the sale of our branded merchandise. As we continue to expand into the highly competitive digital media market we face increased competition from websites offering paid and free web-based and wireless content. Many companies with whom we compete have greater financial resources than we do.
Trademarks and Copyrights
Intellectual property is material to all aspects of our operations, and we expend substantial cost and effort in an attempt to maintain and protect our intellectual property and to maintain compliance vis-à-vis other parties’ intellectual property. We have a large portfolio of registered and unregistered trademarks and service marks worldwide and maintain a large catalog of copyrighted works, including copyrights in our television programming, music, photographs, books, magazines and apparel art. A principal focus of our efforts is to protect the intellectual property relating to our originally created characters portrayed by our performers, which encompasses images, likenesses, names and other identifying indicia of these characters. We also own a large number of internet website domain names and operate a network of developed, content-based sites, which facilitate and contribute to the exploitation of our intellectual property worldwide.
We vigorously seek to enforce our intellectual property rights by, among other things, searching the internet to ascertain unauthorized use of our intellectual property, seizing goods that feature unauthorized use of our intellectual property and seeking restraining orders and/or damages in court against individuals or entities infringing our intellectual property rights. Our failure to curtail piracy, infringement or other unauthorized use of our intellectual property rights effectively, or our infringement of others’ intellectual property rights, could adversely affect our operating results.
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Financial Information about Segments
See Note 17 to Notes to Consolidated Financial Statements, which is included elsewhere in this Form 10-K, for financial information about each of our segments.
Employees
As of February 2013, we had approximately 721 employees. This headcount excludes our Superstars, who are independent contractors. Our in-house production staff is supplemented with contract personnel for our television production. We believe that our relationships with our employees are good. None of our employees are represented by a union.
Regulation
Live Events
In various states in the United States and some foreign jurisdictions, athletic commissions and other applicable regulatory agencies require us to obtain licenses for promoters, medical clearances and/or other permits or licenses for performers and/or permits for events in order for us to promote and conduct our live events. If we fail to comply with the regulations of a particular jurisdiction, we may be prohibited from promoting and conducting our live events in that jurisdiction. The inability to present our live events over an extended period of time or in a number of jurisdictions could lead to a decline in the various revenue streams generated from our live events, which could adversely affect our operating results.
Television Programming
The production of television programming by independent producers is not directly regulated by the federal or state governments, but the marketplace for television programming in the United States and internationally is substantially affected by government regulations applicable to, as well as social and political influences on, television stations, television networks and cable and satellite television systems and channels. We voluntarily designate the suitability of each of our television shows using standard industry ratings, and all of our programming carries a PG rating. Changes in governmental policy and private-sector perceptions could further restrict our program content and adversely affect our levels of viewership and operating results.
Available Information
Copies of our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, are available free of charge on our website at http://corporate.wwe.com as soon as reasonably practicable after such reports are filed with or furnished to the Securities and Exchange Commission (“SEC”). Our reports are also available free of charge on the SEC’s website, http://www.sec.gov. The public may read and copy any materials filed by the Company with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. None of the information on any of our websites is part of this Annual Report on Form 10-K. Our Corporate Governance Guidelines, Code of Business Conduct and charters of our Audit, Compensation and our Governance and Nominating Committees are also available on our website. A copy of any of these documents will be mailed to any stockholder without charge upon request to us at 1241 East Main Street, Stamford, CT 06902, Attn: Investor Relations Department.
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Item 1A. Risk Factors
There are inherent risks and uncertainties associated with our business that could adversely affect our operating performance and financial condition. Set forth below are descriptions of those risks and uncertainties that we currently believe to be material, but the risks and uncertainties described below are not the only risks and uncertainties that could affect our business. See the discussion under “Cautionary Statement for Purposes of the ‘Safe Harbor’ Provisions of the Private Securities Litigation Reform Act of 1995” in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, in this Annual Report on Form 10-K.
The Company has begun and anticipates that it will continue to increase content production for distribution on various platforms, including the potential creation of a WWE network and these efforts could have a material adverse effect on our operating results.
The Company has invested significant capital and operating expenses to develop sufficient infrastructure and programming, and anticipates that it will continue to incur such expenses in the future. The failure to enter into distribution agreements for this content and to realize revenues sufficient to cover such expenses could have a material adverse effect on our operating results.
Our failure to maintain or renew key agreements could adversely affect our ability to distribute television and pay-per-view programming which could adversely affect our operating results.
Our television programming is distributed by broadcast and cable networks, and our pay-per-view programming is distributed by pay-per-view providers. Because our revenues are generated, directly and indirectly, from this distribution of our programming, any failure to maintain or renew arrangements with distributors, the failure of distributors to continue to provide services to us or the failure to enter into new distribution opportunities could adversely affect our operating results. We regularly engage in negotiations relating to substantial agreements covering the distribution of our television programming by carriers located in the United States and abroad. Over the past several years we have expanded our relationship with NBC Universal and they currently distribute a majority of our domestic television programming.
Our failure to continue to develop creative and entertaining programs and events would likely lead to a decline in the popularity of our brand of entertainment and could adversely affect our operating results.
The creation, marketing and distribution of our live and televised entertainment, including our pay-per-view events, as well as additional derivative programming, is at the core of our business. The production of compelling live and televised content is critical to our ability to generate revenues across our media platforms and product outlets. Our failure to continue to create popular live events and televised programming would likely lead to a decline in our television ratings and attendance at our live events, which would adversely affect our operating results.
Our failure to retain or continue to recruit key performers could lead to a decline in the appeal of our storylines and the popularity of our brand of entertainment, which could adversely affect our operating results.
Our success depends, in large part, upon our ability to recruit, train and retain athletic performers who have the physical presence, acting ability and charisma to portray characters in our live events and televised programming. We cannot guarantee that we will be able to continue to identify, train and retain these performers in the future. Additionally, we cannot guarantee that we will be able to retain our current performers during the terms of their contracts or when their contracts expire. Our failure to attract and retain key performers, an increase in the costs required to attract and retain such performers, or a serious or untimely injury to, or the death of, or unexpected or premature loss or retirement for any reason of, any of our key performers could lead to a decline in the appeal of our storylines and the popularity of our brand of entertainment, which could adversely affect our operating results.
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The unexpected loss of the services of Vincent K. McMahon could adversely affect our ability to create popular characters and creative storylines or could otherwise adversely affect our operating results.
In addition to serving as Chairman of our Board of Directors and Chief Executive Officer, Mr. McMahon leads the creative team that develops the storylines and the characters for our televised programming and live events. Mr. McMahon, from time to time, has also been an important member of our cast of performers. The loss of Mr. McMahon due to unexpected retirement, disability, death or other unexpected termination for any reason could have a material adverse effect on our ability to create popular characters and creative storylines or could otherwise adversely affect our operating results.
A decline in general economic conditions or disruption of financial markets may, among other things, reduce the discretionary income of consumers or erode advertising markets, which could adversely affect our business.
Our operations are affected by general economic conditions, which affect consumers’ disposable income. The demand for entertainment and leisure activities tends to be highly sensitive to the level of consumers’ disposable income. Declines in general economic conditions could reduce the level of discretionary income that our fans and potential fans have to spend on our live and televised entertainment and consumer products, which could adversely affect our revenues. Volatility and disruption of financial markets could limit our clients’, licensees’ and distributors’ ability to obtain adequate financing to maintain operations and result in a decrease in sales volume that could have a negative impact on our business, financial condition and results of operations. Our television partners derive revenues from the sale of advertising. We also sell advertising directly on our website and in our magazines and, depending upon the distribution methods used to monetize additional content, we may have additional advertising to sell. Softness in the advertising markets, due to a weak economic environment or otherwise, could adversely affect our revenues or the financial viability of our distributors.
Our accounts receivable represent a significant portion of our current assets and relate principally to a limited number of distributors and licensees, increasing our exposure to bad debts and could potentially have a material adverse affect on our results of operations.
A substantial portion of our accounts receivable are from distributors of our pay-per-view, television, home video and magazine products and licensees who produce consumer products containing our intellectual trademarks. The concentration of our accounts receivable across a limited number of distributors subjects us to individual credit risk with respect to such parties. Additionally, adverse changes in general economic conditions and/or contraction in global credit markets could precipitate liquidity problems among our debtors, including our key distributors and/or licensees. This could increase our exposure to losses from bad debts and have a material adverse effect on our business, financial condition and results of operations.
On December 19, 2012, our former video game licensee THQ declared bankruptcy. As a result, the Company reserved $1.7 million as bad debt for amounts that were due the Company from THQ at December 31, 2012. The amounts reserved primarily related to sponsorship agreements and various services WWE provided to THQ in support of the release of WWE '13.
As a result of THQ's bankruptcy, the Company will not be able to collect and recognize a portion of anticipated royalties due in the first quarter of approximately $4.0 million to $5.0 million, and does not believe that this loss will have a material adverse effect on the Company's business, financial condition or results of operations.
A decline in the popularity of our brand of sports entertainment, including as a result of changes in the social and political climate, could adversely affect our business.
Our operations are affected by consumer tastes and entertainment trends, which are unpredictable and subject to change and may be affected by changes in the social and political climate. Our programming is created to evoke a passionate response from our fans. Changes in our fans’ tastes or a material change in the perceptions of our business partners, including our distributors and licensees, whether as a result of the social and political climate or otherwise, could adversely affect our operating results.
11
Changes in the regulatory atmosphere and related private sector initiatives could adversely affect our business.
While the production of television programming by independent producers is not directly regulated by the federal or state governments in the United States, the marketplace for television programming in the United States is affected significantly by government regulations applicable to, as well as social and political influences on, television stations, television networks and cable and satellite television systems and channels. We voluntarily designate the suitability of each of our television shows using standard industry ratings, and all of our programming currently has a PG rating. Domestic and foreign governmental and private-sector initiatives relating to the content of media programming are announced from time to time. Any failure by us to meet these governmental policies and private-sector expectations could restrict our program content and adversely affect our levels of viewership and operating results.
The markets in which we operate are highly competitive, rapidly changing and increasingly fragmented, and we may not be able to compete effectively, especially against competitors with greater financial resources or marketplace presence, which could adversely affect our operating results.
For our live, television and pay-per-view audiences, we face competition from professional and college sports, as well as from other forms of live and televised entertainment and other leisure activities in a rapidly changing and increasingly fragmented marketplace. The manner in which audio/video content is distributed and viewed is constantly changing. While we attempt to distribute our content across all platforms, our failure to continue to do so effectively (including, for example only, our emphasizing a distribution platform that in time lessens in importance or becomes obsolete or our loss of, or other inability to procure, carriage on an important platform) could adversely affect our operating results. For the sale of our consumer products, we compete with entertainment companies, professional and college sports leagues and other makers of branded apparel and merchandise. Many of the companies with whom we compete have greater financial resources than we do.
Our failure to compete effectively could result in a significant loss of viewers, venues, distribution channels or performers and fewer entertainment and advertising dollars spent on our form of sports entertainment, any of which could adversely affect our operating results.
We face uncertainties associated with international markets, which could adversely affect our operating results and impair our business strategy.
Cultural norms vary in the markets in which we operate and our products' conformance to the local norms could affect our sales, viewership and success in the markets. Our production of live events overseas subjects us to the risks involved in foreign travel and local regulations, including regulations requiring us to obtain visas for our performers. In addition, these live events and the licensing of our television and consumer products in international markets expose us to some degree of currency risk. International operations may be subject to political instability inherent in varying degrees in those markets. These risks could adversely affect our operating results and impair our ability to pursue our business strategy as it relates to international markets.
We may be prohibited from promoting and conducting our live events if we do not comply with applicable regulations, which could lead to a decline in the various revenue streams generated from our live events, which could adversely affect our operating results.
In the United States and some foreign jurisdictions, athletic commissions and other applicable regulatory agencies require us to obtain licenses for promoters, medical clearances and/or other permits or licenses for performers and/or permits for events in order for us to promote and conduct our live events. In the event that we fail to comply with the regulations of a particular jurisdiction, we may be prohibited from promoting and conducting our live events in that jurisdiction. The inability to present our live events over an extended period of time or in a number of jurisdictions could lead to a decline in the various revenue streams generated from our live events, which could adversely affect our operating results.
Because we depend upon our intellectual property rights, our inability to protect those rights, or our infringement of others’ intellectual property rights, could adversely affect our business.
Our inability to protect our large portfolio of trademarks, service marks, copyrighted material and characters, trade names and other intellectual property rights from piracy, counterfeiting or other unauthorized use could negatively affect our business.
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Intellectual property is material to all aspects of our operations, and we expend substantial cost and effort in an attempt to maintain and protect our intellectual property and to maintain compliance vis-à-vis other parties’ intellectual property. We have a large portfolio of registered and unregistered trademarks and service marks worldwide and maintain a large catalog of copyrighted works, including copyrights to our television programming, music, photographs, books, magazines and apparel art. A principal focus of our efforts is to protect the intellectual property relating to our originally created characters portrayed by our performers, which encompasses images, likenesses, names and other identifying indicia of these characters. We also own a large number of Internet website domain names and operate a network of developed, content-based sites, which facilitate and contribute to the exploitation of our intellectual property worldwide.
Our failure to curtail piracy, infringement or other unauthorized use of our intellectual property rights effectively, or our infringement of others’ intellectual property rights, could adversely affect our operating results.
We could incur substantial liabilities if litigation is resolved unfavorably.
In the ordinary course of business we become subject to various complaints and litigation matters. The outcome of litigation is inherently difficult to assess and quantify, and the defense against such claims or actions can be costly. Any adverse judgment significantly in excess of our insurance coverage could adversely affect our financial condition or results of operations.
We could incur substantial liability in the event of accidents or injuries occurring during our physically demanding events.
We hold numerous live events each year. This schedule exposes our performers and our employees who are involved in the production of those events to the risk of travel and performance-related accidents, the consequences of which may not be fully covered by insurance. The physical nature of our events exposes our performers to the risk of serious injury or death. Although our performers, as independent contractors, are responsible for maintaining their own health, disability and life insurance, we self-insure medical costs for our performers for injuries that they incur while performing. We also self-insure a substantial portion of any other liability that we could incur relating to such injuries. Liability to us resulting from any death or serious injury sustained by one of our performers while performing, to the extent not covered by our insurance, could adversely affect our business, financial condition and operating results.
Our live events entail other risks inherent in public live events, which could lead to disruptions to our business as well as liability to other parties, any of which could adversely affect our financial condition or results of operations.
We hold numerous live events each year, both domestically and internationally. Certain risks are inherent in large events of this type as well as the travel to and from them. Although we believe we take appropriate safety and financial precautions in connection with our events, possible difficulties could occur including air and land travel interruption or accidents, the spread of illness, injuries resulting from building problems or other equipment malfunction, violence, local labor strikes and other "force majeure" type events. These issues could result in canceled events and other disruptions to our business as well as liability to other parties, any of which could adversely affect our financial condition or results of operations.
We continue to face certain risks relating to our feature film business, which could result in higher production costs and asset impairment charges, which could adversely affect our financial condition or our results of operations.
We have substantial capitalized film costs. The accounting for our film business in accordance with generally accepted accounting principles entails significant judgment used to develop estimates of expected future revenues from films. If expected revenue for one or more of our films does not materialize because audience demand does not meet expectations, our estimated revenues may not be sufficient to recoup our investment in the film. If actual revenues are lower than our estimated revenues or if costs are higher than expected, we may be required to record an impairment charge and write down the capitalized costs of the film. No assurance can be given that we will not record additional impairment charges in future periods. In addition capitalized film costs are reflected net of certain production tax incentives granted by various governmental authorities. Our ability to realize these credits may be limited by changes in the legislation governing the incentives and/or the economic environment. The inability to realize these credits would have the effect of increasing our overall production costs.
13
We could face a variety of risks if we expand into new and complementary business and make certain investments.
We have entered into new or complementary businesses in the past and may do so again in the future, including the potential creation of a WWE Network. In addition, we regularly review acquisitions and investments and in 2012 made an investment in an early stage business in the amount of $5.0 million. Risks of expansion may include, among other risks: potential diversion of management’s attention and other resources, including available cash, from our existing businesses; unanticipated liabilities or contingencies; reduced earnings due to increased amortization, impairment charges and other costs; competition from other companies with more experience in such businesses; and possible additional regulatory requirements and compliance costs which could affect our business, financial condition and operating results.
We face various risks relating to our computer systems and online operations, which could have a negative impact on our financial condition or our results of operations.
The Company faces the risk of a security breach or disruption, whether through external cyber intrusion or from persons with access to systems inside our organization. Although the Company makes significant efforts to maintain the security of its computer systems, and it has implemented various measures to manage the risk of a security breach or disruption, there can be no assurance that these security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging or that the Company would be promptly aware of them. The Company and certain of its third party service providers receive personal information through web services, and in many instances this information is subject to the Company's privacy policies. Personal information received by our service providers includes credit card information in certain instances, most notably WWEShop, the Company's internet retail operations. The Company expends significant effort to ensure compliance with its privacy policy and to ensure that our service providers safeguard credit card information including contractually requiring those providers to remain compliant with applicable PCI Data Security Standards. However, a significant security breach or other disruption involving the Company's computer systems could: disrupt the proper functioning of these systems and therefore the Company's operations; result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information; require significant management attention and resources to remedy the damages that could result; subject the Company to litigation; or damage its reputation, any or all of which could have a negative impact on its financial condition or results of operations.
Through his beneficial ownership of a substantial majority of our Class B common stock, Mr. McMahon can exercise control over our affairs, and his interests may conflict with the holders of our Class A common stock.
We have Class A common stock and Class B common stock. The holders of Class A common stock generally have rights identical to holders of Class B common stock, except that holders of Class A common stock are entitled to one vote per share, and holders of Class B common stock are entitled to ten votes per share. Holders of both classes of common stock generally will vote together as a single class on all matters presented to stockholders for their vote or approval, except as otherwise required by applicable Delaware law.
A substantial majority of the issued and outstanding shares of Class B common stock is owned beneficially by Vincent K. McMahon. Mr. McMahon controls approximately 83% of the voting power of the issued and outstanding shares of our common stock. Through his beneficial ownership of a substantial majority of our Class B common stock, Mr. McMahon effectively can exercise control over our affairs, and his interest could conflict with the holders of our Class A common stock. In addition, the voting power of Mr. McMahon through his ownership of our Class B common stock could discourage others from initiating potential mergers, takeovers or other change of control transactions. As a result, the market price of our Class A common stock could decline.
To the extent the Company’s dividend distributions represent a return of capital for tax purposes, shareholders will recognize an increased capital gain upon a subsequent sale of the Company’s Common Stock.
The Company’s aggregate dividend distributions paid in 2012 were in excess of its current and accumulated earnings and profits calculated under applicable Internal Revenue Code (“IRC”) provisions. Under the IRC, distributions in excess of both the Company’s current earnings and profits and the Company’s accumulated earnings and profits constitute a return of capital and reduce the stockholder’s adjusted tax basis in its Common Stock. If a stockholder’s adjusted basis in its Common Stock is reduced to zero, these excess distributions thereafter constitute a capital gain to the stockholder.
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Our dividend is significant and is affected by a number of factors.
Our Board of Directors regularly evaluates the Company’s Common Stock dividend policy and determines the dividend rate each quarter. The level of dividends will continue to be influenced by many factors, including, among other things, our liquidity and historical and projected cash flow, our strategic plan (including alternative uses of capital), our financial results and condition, contractual and legal restrictions on the payment of dividends (including under our revolving credit facility), general economic and competitive conditions and such other factors as our Board of Directors may consider relevant from time to time. We cannot assure our stockholders that dividends will be paid in the future, or that, if paid, dividends will be at the same amount or with the same frequency as in the past. Any reduction in our dividend payments could have a negative effect on our stock price.
A substantial number of shares are eligible for sale by Mr. McMahon and members of his family or trusts established for their benefit, and the sale of those shares could lower our stock price.
All of the issued and outstanding shares of Class B common stock are held by Vincent McMahon and other members of the McMahon family and trusts set up for these family members. Sales of substantial amounts of these shares, or the perception that such sales could occur, may lower the prevailing market price of our Class A common stock. If any sales or transfers of Class B common stock were to occur to persons outside of the McMahon family, the shares would automatically convert into Class A common stock.
Our Class A common stock has a relatively small public "float."
Historically, as a result of our relatively small public float, our Class A common stock has been less liquid than the common stock of companies with broader public ownership, and the trading prices for our Class A common stock have been more volatile than generally may be the case for more widely-held common stock. Among other things, trading of a relatively small volume of our Class A common stock may have a greater impact on the trading price of our Class A common stock than would be the case if our public float were larger.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We have executive offices, television and music recording studios, post-production operations and warehouses at locations in or near Stamford, Connecticut. We also have sales offices in New York, Los Angeles, Atlanta and Chicago and have international offices in London, Tokyo, Shanghai, Istanbul and Mumbai. We own two of the buildings in which our executive and administrative offices, our television and music recording studios and our production operations are located. We lease space for our sales offices, WWE Studios office and other facilities.
In order to allow for future growth, starting in 2011, we began expanding our content production facilities. We leased additional space in Norwalk and Stamford, Connecticut and commenced construction on owned facilities to accommodate the expansion.
15
Our principal properties consist of the following:
Facility | Location | Square Feet | Owned/Leased | Expiration Date of Lease | |||||
Corporate offices | Stamford, CT | 114,300 | Owned | — | |||||
Warehouse space | Norwalk, CT | 66,000 | Leased | November 2016 | |||||
Corporate offices and production facilities | Stamford, CT | 37,000 | Leased | Various through January 2015 | |||||
Production facility | Stamford, CT | 90,000 | Owned | — | |||||
Studio space | Stamford, CT | 8,000 | Leased | Various through November 2015 | |||||
WWE Studios office | Los Angeles, CA | 19,000 | Leased | April 2020 | |||||
Sales offices | Various | 25,000 | Leased | Various through October 2015 | |||||
Warehouse space | Stamford, CT | 5,600 | Leased | May, 2015 | |||||
All of the facilities listed above are utilized in our Live and Televised Entertainment, Consumer Products and Digital Media segments, with the exception of the WWE Studios office in Los Angeles, which focuses on our WWE Studios segment.
Item 3. Legal Proceedings
We are involved in several suits and claims that we consider to be in the ordinary course of our business. By its nature, the outcome of litigation is not known but the Company does not currently expect its pending litigation to have a material adverse effect on our financial condition, results of operations or liquidity. We may from time to time become a party to other legal proceedings.
Item 4. Mine Safety Disclosures
Not Applicable
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our Class A common stock trades on the New York Stock Exchange, under the symbol "WWE".
The following table sets forth the high and the low sale prices per share of our Class A common stock as reported by the New York Stock Exchange and the dividends paid per share of Class A and Class B common stock for the periods indicated:
Fiscal Year 2012
Quarter Ended | ||||||||||||||||||||
March 31 | June 30 | September 30 | December 31 | Full Year | ||||||||||||||||
Class A common stock price per share: | ||||||||||||||||||||
High | $ | 9.95 | $ | 9.04 | $ | 8.96 | $ | 8.88 | $ | 9.95 | ||||||||||
Low | $ | 8.67 | $ | 7.44 | $ | 7.54 | $ | 7.50 | $ | 7.44 | ||||||||||
Class A dividends paid per share | $ | 0.12 | $ | 0.12 | $ | 0.12 | $ | 0.12 | $ | 0.48 | ||||||||||
Class B dividends paid per share | $ | 0.12 | $ | 0.12 | $ | 0.12 | $ | 0.12 | $ | 0.48 | ||||||||||
Fiscal Year 2011
Quarter Ended | ||||||||||||||||||||
March 31 | June 30 | September 30 | December 31 | Full Year | ||||||||||||||||
Class A common stock price per share: | ||||||||||||||||||||
High | $ | 14.39 | $ | 12.93 | $ | 10.33 | $ | 10.80 | $ | 14.39 | ||||||||||
Low | $ | 11.50 | $ | 8.88 | $ | 8.67 | $ | 8.70 | $ | 8.67 | ||||||||||
Class A dividends paid per share | $ | 0.36 | $ | 0.12 | $ | 0.12 | $ | 0.12 | $ | 0.72 | ||||||||||
Class B dividends paid per share | $ | 0.24 | $ | 0.12 | $ | 0.12 | $ | 0.12 | $ | 0.60 | ||||||||||
There were 8,980 holders of record of Class A common stock and five holders of record of Class B common stock on February 27, 2013. Vincent K. McMahon, Chairman of the Board of Directors and Chief Executive Officer, controls approximately 83% of the voting power of the issued and outstanding shares of our common stock. Through the beneficial ownership of a substantial majority of our Class B common stock, Mr. McMahon can effectively exercise control over our affairs.
Our Class B common stock is fully convertible into Class A common stock, on a one for one basis, at any time at the option of the holder. The two classes are entitled to equal per share dividends and distributions and vote together as a class with each share of Class B entitled to ten votes and each share of Class A entitled to one vote, except when separate class voting is required by applicable law. If, at any time, any shares of Class B common stock are beneficially owned by any person other than Vincent McMahon, Linda McMahon, any descendant of either of them, any entity which is wholly owned and is controlled by any combination of such persons or any trust, all the beneficiaries of which are any combination of such persons, each of those shares will automatically convert into shares of Class A common stock.
From February 2008 until April 2011, the Board of Directors authorized quarterly cash dividends of $0.36 per share on all Class A common shares. The quarterly dividend on all Class A and Class B shares held by members of the McMahon family and their respective trusts remained at $0.24 per share for a period of three years due to a waiver received from the McMahon family. This waiver expired after the declaration of the March 2011 dividend. Beginning with the second quarter of 2011 dividend payment, the Company has paid quarterly dividends of $0.12 per share on all Class A and Class B shares.
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Our Board of Directors regularly evaluates the Company’s Common Stock dividend policy and determines the dividend rate each quarter. The level of dividends will continue to be influenced by many factors, including, among other things, our liquidity and historical and projected cash flow, our strategic plan (including alternative uses of capital), our financial results and condition, contractual and legal restrictions on the payment of dividends (including under our revolving credit facility), general economic and competitive conditions and such other factors as our Board of Directors may consider relevant from time to time. We cannot assure our stockholders that dividends will be paid in the future, or that, if paid, dividends will be at the same amount or with the same frequency as in the past. Any reduction in our dividend payments could have a negative effect on our stock price.
In 2011, the Company entered into a $200 million revolving credit facility. The revolving credit facility restricts our ability to pay dividends if a default or event of default has occurred and is continuing thereunder, if our consolidated leverage ratio (as calculated under the revolving credit facility) exceeds 2.5:1.0 or if our consolidated fixed charge coverage ratio (as calculated under the revolving credit facility) does not exceed 1.25:1.0. As of December 31, 2012, we are in compliance with the provisions of the revolving credit facility and are not restricted from paying dividends to our stockholders.
Cumulative Total Return Chart
Set forth below is a line graph comparing, for the period commencing December 31, 2007 and ended December 31, 2012, the cumulative total return on our Class A common stock compared to the cumulative total return of the Russell 2000 Index and S&P Movies and Entertainment Index, a published industry index. The graph assumes the investment of $100 at the close of trading as of December 31, 2007 in our Class A common stock, the Russell 2000 Index and the S&P Movies and Entertainment Index and the reinvestment of all dividends.
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Item 6. Selected Financial Data
The following selected consolidated financial data has been derived from our consolidated financial statements. You should read the selected financial data in conjunction with our consolidated financial statements and related notes and the information set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained elsewhere in this report.
Financial Highlights: (in millions)
For the year ended December 31, | ||||||||||||||||||||
2012 (1) | 2011 (2) | 2010 | 2009 (3) | 2008 | ||||||||||||||||
Net revenues | $ | 484.0 | $ | 483.9 | $ | 477.7 | $ | 475.2 | $ | 526.5 | ||||||||||
Operating income | $ | 43.2 | $ | 37.0 | $ | 82.3 | $ | 77.1 | $ | 70.3 | ||||||||||
Net income | $ | 31.4 | $ | 24.8 | $ | 53.5 | $ | 50.3 | $ | 45.4 | ||||||||||
Earnings per share, basic | $ | 0.42 | $ | 0.33 | $ | 0.72 | $ | 0.68 | $ | 0.62 | ||||||||||
Earnings per share, diluted | $ | 0.42 | $ | 0.33 | $ | 0.71 | $ | 0.68 | $ | 0.62 | ||||||||||
Dividends paid per Class A share | $ | 0.48 | $ | 0.72 | $ | 1.44 | $ | 1.44 | $ | 1.44 | ||||||||||
Dividends paid per Class B share | $ | 0.48 | $ | 0.60 | $ | 0.96 | $ | 0.96 | $ | 0.96 | ||||||||||
As of December 31, | ||||||||||||||||||||
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||||||||
Cash, cash equivalents and short-term investments | $ | 152.4 | $ | 155.8 | $ | 166.9 | $ | 208.2 | $ | 177.3 | ||||||||||
Total assets | $ | 381.4 | $ | 378.6 | $ | 415.7 | $ | 440.6 | $ | 429.4 | ||||||||||
Total debt | $ | — | $ | 1.6 | $ | 2.8 | $ | 3.9 | $ | 4.9 | ||||||||||
Total stockholders’ equity | $ | 294.7 | $ | 295.1 | $ | 316.7 | $ | 337.0 | $ | 360.0 | ||||||||||
____________________
(1) | Operating income includes $8.2 million of costs incurred associated with our emerging content and distribution efforts, including a potential network, offset by the impact of a $4.4 million tax benefit relating to previously unrecognized tax benefits. |
(2) | Operating income includes impairment charges on our feature films of $23.4 million (See Note 7 to the Consolidated Financial Statements) and $4.0 million associated with our emerging content and distribution efforts, including a potential network. Results for 2011 do not include amounts for management incentive compensation since the Company did not meet performance targets. |
(3) | Operating income includes a charge of $7.4 million relating to an allowance recorded against a receivable due from a former distribution partner. |
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the audited consolidated financial statements and related notes included elsewhere in this report.
Background
The following analysis outlines all material activities contained within each of our reportable segments.
Live and Televised Entertainment
• | Revenues consist principally of ticket sales to live events, sales of merchandise at these live events, television rights fees, integrated sponsorships fees, and fees for viewing our pay-per-view and video-on-demand programming. |
Consumer Products
• | Revenues consist principally of the direct sales of WWE produced home entertainment (DVD/Blue-ray), magazine publishing, and royalties or license fees related to various WWE themed products such as video games, toys and apparel. |
Digital Media
• | Revenues consist principally of advertising sales on our websites, rights fees received for digital content, sale of merchandise on our website through our WWEShop internet storefront and sales of various broadband and mobile content. |
WWE Studios
• | Revenues consist of amounts earned from the distribution of filmed entertainment. |
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Results of Operations
Year Ended December 31, 2012 compared to Year Ended December 31, 2011
(dollars in millions)
Summary
Net Revenues | 2012 | 2011 | increase(decrease) | ||||||||
Live and Televised Entertainment | $ | 353.8 | $ | 340.0 | 4 | % | |||||
Consumer Products | 87.8 | 94.9 | (7 | )% | |||||||
Digital Media | 34.5 | 28.1 | 23 | % | |||||||
WWE Studios | 7.9 | 20.9 | (62 | )% | |||||||
Total | 484.0 | 483.9 | — | % | |||||||
Profit Contribution | |||||||||||
Live and Televised Entertainment | 135.2 | 130.7 | 3 | % | |||||||
Consumer Products | 53.8 | 56.1 | (4 | )% | |||||||
Digital Media | 14.2 | 9.5 | 49 | % | |||||||
WWE Studios | (3.6 | ) | (27.6 | ) | 87 | % | |||||
Total | 199.6 | 168.7 | 18 | % | |||||||
Profit contribution margin | 41 | % | 35 | % | |||||||
Selling, general and administrative expenses | 136.4 | 116.7 | 17 | % | |||||||
Depreciation and amortization | 20.0 | 15.0 | 33 | % | |||||||
Operating income | 43.2 | 37.0 | 17 | % | |||||||
Investment income, net | 2.2 | 2.1 | 5 | % | |||||||
Interest expense | (1.7 | ) | (0.6 | ) | 183 | % | |||||
Other expense, net | (1.0 | ) | (1.6 | ) | (38 | )% | |||||
Income before income taxes | 42.7 | 36.9 | 16 | % | |||||||
Provision for income taxes | 11.3 | 12.1 | (7 | )% | |||||||
Net income | $ | 31.4 | $ | 24.8 | 27 | % | |||||
The comparability of our results for 2012 was positively impacted by the recognition of approximately $4.4 million in previously unrecognized tax benefits. We also incurred $8.2 million in operating expenses associated with our emerging content and distribution efforts and recorded a $1.2 million impairment charge relating to our two feature films Bending the Rules and Barricade in 2012 compared to $4.0 million in operating expenses associated with our emerging content and distribution effort and $23.4 million in impairment charges for nine feature films in 2011. Additionally, 2012 results reflect the return to more normalized levels of management incentive compensation, which resulted in increased expense of $9.8 million before taxes in 2012 compared to 2011.
Our Live and Televised Entertainment segment revenues increased primarily due to the increased revenues in our pay-per-view and television rights business of 7% and 6%, respectively. Our Consumer Products segment experienced a 7% decline in revenues reflecting declines in our licensing business and magazine publishing business. Our Digital Media segment experienced a 23% increase in revenues, driven by incremental fees from new agreements entered into with YouTube and Hulu. Our WWE Studios segment reflected a $13.0 million decrease in revenue primarily due to the timing and number of film releases.
21
Live and Televised Entertainment
The following chart provides performance results and key drivers for our Live and Televised Entertainment segment:
Revenues- Live and Televised Entertainment (dollars in millions except where noted) | 2012 | 2011 | increase (decrease) | ||||||||
Live events | $ | 103.7 | $ | 104.7 | (1 | )% | |||||
North America | $ | 72.1 | 64.9 | 11 | % | ||||||
International | $ | 31.6 | 39.8 | (21 | )% | ||||||
Total live event attendance | 1,854,100 | 1,976,500 | (6 | )% | |||||||
Number of North American events | 248 | 241 | 3 | % | |||||||
Average North American attendance | 5,900 | 6,000 | (2 | )% | |||||||
Average North American ticket price (dollars) | $ | 45.39 | $ | 42.11 | 8 | % | |||||
Number of international events | 66 | 80 | (18 | )% | |||||||
Average international attendance | 6,000 | 6,700 | (10 | )% | |||||||
Average international ticket price (dollars) | $ | 74.15 | $ | 68.74 | 8 | % | |||||
Venue merchandise | $ | 18.8 | $ | 18.3 | 3 | % | |||||
Domestic per capita spending (dollars) | $ | 10.66 | $ | 10.39 | 3 | % | |||||
Pay-per-view | $ | 83.6 | $ | 78.3 | 7 | % | |||||
Number of pay-per-view events | 12 | 13 | (8 | )% | |||||||
Number of buys of pay-per-views | 4,023,000 | 3,842,100 | 5 | % | |||||||
Average revenue per buy (dollars) | $ | 20.60 | $ | 19.94 | 3 | % | |||||
Domestic retail price WrestleMania (dollars) | $ | 54.95 | $ | 54.95 | — | % | |||||
Domestic retail price, excluding WrestleMania (dollars) | $ | 44.95 | $ | 44.95 | — | % | |||||
Television rights fees | $ | 139.5 | $ | 131.5 | 6 | % | |||||
Domestic | $ | 88.9 | $ | 80.3 | 11 | % | |||||
International | $ | 50.6 | $ | 51.2 | (1 | )% | |||||
Other | $ | 8.2 | $ | 7.2 | 14 | % | |||||
Total | $ | 353.8 | $ | 340.0 | 4.1 | % | |||||
Ratings: | |||||||||||
Average weekly household ratings for RAW | 3.3 | 3.6 | (8 | )% | |||||||
Average weekly household ratings for SmackDown | 2.1 | 1.9 | 11 | % | |||||||
Average weekly household ratings for Main Event | 0.8 | N/A | |||||||||
Average weekly household ratings for Saturday Morning Slam | 0.7 | N/A | |||||||||
Profit Contribution-Live and Televised Entertainment (dollars in millions) | 2012 | 2011 | increase (decrease) | ||||||||
Live events | $ | 29.2 | $ | 28.7 | 2 | % | |||||
Venue merchandise | 7.8 | 8.1 | (4 | )% | |||||||
Pay per view | 46.0 | 40.7 | 13 | % | |||||||
Television rights | 57.3 | 55.9 | 3 | % | |||||||
Other | (5.1 | ) | (2.7 | ) | 89 | % | |||||
Total | $ | 135.2 | $ | 130.7 | 3 | % | |||||
Profit contribution margin | 38 | % | 38 | % | |||||||
22
Live events revenues decreased $1.0 million in 2012 as compared to 2011 primarily due to seven fewer events held during 2012. Our international live events business decreased $8.2 million, primarily driven by fourteen fewer events held during 2012. Average attendance at our international events declined 10% to 6,000 attendees and international ticket prices increased by 8% in 2012 as compared to 2011. Our North American live events business increased by $7.2 million during 2012, primarily due to the strong performance of our annual WrestleMania event held during 2012 which generated $3.3 million more in ticket sales than the prior year event. Average ticket prices for our North America events increased by 8% to $45.39. We also experienced an increase in event sponsorship revenues of $1.0 million. Cost of revenue for live events decreased by $1.5 million, primarily due to lower venue related expenses which was partially offset by additional sponsorship expenses. The live events profit contribution margin increased to 28% from 27% in 2011.
Venue merchandise revenues increased $0.5 million in 2012 as compared to 2011. This increase is primarily due to a 3% increase in North America events held in 2012 as compared to 2011. Cost of revenue for venue merchandise increased $0.8 million from 2011, driven by increased costs of materials due to product mix. As a result, venue merchandise profit contribution margin decreased to 41% from 44% in 2011.
Pay-per-view revenues increased $5.3 million from 2011, primarily due to a 5% increase in total buys and a 3% increase in average revenue per buy. The growth in buys for 2012 events was predominantly due to an increase in buys for our WrestleMania and SummerSlam events, which was partially offset by the elimination of one event in the current year. The increase in the average revenue per buy is attributable to incremental fees charged for viewing our events in high definition, which was implemented in 2008. Cost of revenues for pay-per-view remained flat from 2011, driven primarily by increases in talent expenses which was offset by lower production costs partially driven by the receipt of television production tax credits associated with a prior year event. The pay-per-view profit contribution margin increased to 55% from 52% in 2011.
Television rights fees increased $8.0 million in 2012 compared to 2011. Domestically, television rights fees increased by $8.6 million, primarily due to incremental license fees from the production and distribution of new programs and contractual increases from our existing programs. An additional hour of our RAW program was licensed to USA Network and debuted in July 2012. Moreover, during 2012, we began production of two new original series, the WWE Main Event and Saturday Morning Slam, which air on ION Television Network and The CW Network, respectively. This was partially offset by the absence of rights fees from our WWE Superstars program, which moved to WWE.com in April 2011. Internationally, our television rights fees decreased by $0.6 million, primarily due to the expiration and non-renewal of our South Korea distribution agreement. Television rights cost of revenues increased by $6.6 million in 2012 due to higher direct costs for staff related expenses, including the reset of management incentive compensation as compared to 2011. As a result, television rights fee profit contribution margin decreased to 41% from 43% in 2011.
23
Consumer Products
The following chart provides performance results and key drivers for our Consumer Products segment (dollars in millions):
Revenues-Consumer Products | 2012 | 2011 | increase (decrease) | ||||||||
Licensing | $ | 46.3 | $ | 54.4 | (15 | )% | |||||
Home video | $ | 33.0 | $ | 30.4 | 9 | % | |||||
Gross units shipped | 3,775,800 | 3,300,000 | 14 | % | |||||||
Magazine publishing | $ | 6.0 | $ | 7.7 | (22 | )% | |||||
Net units sold | 2,003,500 | 2,344,800 | (15 | )% | |||||||
Other | $ | 2.5 | $ | 2.4 | 4 | % | |||||
Total | $ | 87.8 | $ | 94.9 | (7 | )% | |||||
Profit Contribution-Consumer Products | 2012 | 2011 | increase (decrease) | ||||||||
Licensing | $ | 36.0 | $ | 40.3 | (11 | )% | |||||
Home video | 16.7 | 15.1 | 11 | % | |||||||
Magazine publishing | 0.7 | 0.2 | 250 | % | |||||||
Other | 0.4 | 0.5 | (20 | )% | |||||||
Total | $ | 53.8 | $ | 56.1 | (4 | )% | |||||
Profit contribution margin | 61 | % | 59 | % | |||||||
Licensing revenues decreased $8.1 million in 2012 as compared 2011, as weaker performance in our video game category was offset in part by increases in our collectibles category. Our video game licensing revenues decreased $7.8 million in 2012, primarily due to one fewer release, WWE All Stars, which was originally released in March 2011 and was not refreshed in 2012. In addition, we experienced a 22% decline in unit shipments of our franchise video game release in 2012 compared to unit shipments of our comparable video game release in 2011. The decline in unit shipments of our annual franchise video game release was due to difficult trends in our international markets, broader industry challenges and a reduction in the number of gaming platforms that supported our franchise video game. Licensing cost of revenues decreased $3.8 million from 2011, primarily due to lower talent expense driven by the mix of products sold. The licensing profit contribution margin increased to 78% compared to 74% in 2011.
On December 19, 2012, our former video game licensee THQ declared bankruptcy. In February 2013, the Company and THQ reached an agreement to terminate its video game license, which agreement was approved by the U.S. Bankruptcy Court on February 19, 2013. In connection with this termination, the Company waived its rights to the pre-petition amounts due under its license agreement with THQ, and THQ agreed to transfer certain intellectual property rights and to pay post-petition royalties to WWE by March 31, 2013.
In connection with the THQ license termination, the Company will recognize approximately $8.0 million of revenue during the first quarter of 2013 relating to the unrecognized portion of an advance received when the Company entered into the license agreement with THQ in 2009. As a result of THQ's bankruptcy, the Company will not be able collect and recognize a portion of anticipated royalties due in the first quarter of approximately $4.0 million to $5.0 million, and does not believe that this loss will have a material adverse effect on the Company's business, financial condition or results of operations. Additionally, upon termination of the agreement with THQ, the Company entered into a multi-year agreement with Take-Two to be the Company's video game licensee. Take-Two will assume distribution of our existing catalog of videogames, as well as develop, publish and distribute new titles, effective with the release of the Company's annual franchise game WWE2K14 in late 2013.
Magazine publishing revenues decreased $1.7 million in 2012 as compared to 2011, driven by weaker newsstand demand as a result of the continued overall decline in the magazine publishing industry. Net units sold decreased by 15%, partially due to a decline in the number of issues published. We published twelve issues of WWE Magazine, ten issues of WWE Kids magazine and three special issues in 2012 as compared to twelve, ten and six, respectively, in 2011. Magazine publishing cost of revenues
24
decreased by $2.2 million, primarily as a result of a 29% decrease in unit production. Publishing profit contribution margin increased to 12% in 2012 from 3% in 2011.
Home video revenues increased $2.6 million in 2012 as compared to 2011 primarily due to a 14% increase in units shipped and improved sell-through rates at retail, which were partially offset by a 15% decline in average sales price per unit. We released 35 titles in 2012 compared to 28 titles in 2011. Additionally, we experienced growth in international markets and digital sales of $0.6 million and $0.3 million, respectively. Home video cost of revenues increased by $1.0 million from 2011 due to higher costs associated with duplication. Home video profit contribution margin increased to 51% from 50% in 2011.
Digital Media
The following chart provides performance results for our Digital Media segment (dollars in millions, except average revenues per order):
Revenues-Digital Media | 2012 | 2011 | increase (decrease) | ||||||||
WWE.com | $ | 19.7 | $ | 12.5 | 58 | % | |||||
WWEShop | 14.8 | 15.6 | (5 | )% | |||||||
Total | $ | 34.5 | $ | 28.1 | 23 | % | |||||
Average WWEShop revenues per order (dollars) | $ | 47.66 | $ | 47.16 | 1 | % | |||||
Profit Contribution-Digital Media | 2012 | 2011 | increase (decrease) | ||||||||
WWE.com | $ | 10.6 | $ | 6.5 | 63 | % | |||||
WWEShop | 3.6 | 3.0 | 20 | % | |||||||
Total | $ | 14.2 | $ | 9.5 | 49 | % | |||||
Profit contribution margin | 41 | % | 34 | % | |||||||
WWE.com revenues increased $7.2 million in 2012 as compared to 2011, primarily driven by new programming agreements with YouTube and Hulu. Additionally, advertising revenue increased $1.5 million from the prior year. WWE.com cost of revenues increased $3.1 million in 2012 due to increased expenses related to the production and distribution of this new content. WWE.com profit contribution margin increased to 54% from 52% in 2011.
WWEShop revenues decreased $0.8 million in 2012 compared to 2011, as a 7% decrease in the number of orders processed was offset slightly by a 1% increase in average revenues per order. WWEShop cost of revenues decreased by $1.4 million in 2012, primarily due to decreased costs of material as a result of product mix. WWEShop profit contribution margin increased to 24% from 19% in 2011.
25
WWE Studios
The following table provides detailed information on our WWE Studios’ segment (in millions):
Feature Film Production Assets-net as of Dec 31, 2012 | For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
Inception to-date | Revenue | Profit (Loss) | |||||||||||||||||||||||||||||||||||
Title | Release Date | Production Costs* | Revenue | Profit (Loss) | 2012 | 2011 | 2012 | 2011 | |||||||||||||||||||||||||||||
Self - Distributed films | |||||||||||||||||||||||||||||||||||||
Barricade | Sept 2012 | $ | 4.0 | $ | 0.8 | $ | 0.8 | $ | (3.5 | ) | $ | 0.8 | $ N/A | $ | (1.3 | ) | $ | (2.2 | ) | ||||||||||||||||||
No Holds Barred | July 2012 | — | — | 0.4 | 0.1 | 0.4 | N/A | 0.1 | N/A | ||||||||||||||||||||||||||||
Bending the Rules | Mar 2012 | 5.5 | $ | 0.8 | 0.9 | (4.7 | ) | 0.9 | N/A | (1.5 | ) | (3.2 | ) | ||||||||||||||||||||||||
The Reunion | Oct 2011 | 6.9 | 1.7 | 2.1 | (4.7 | ) | (0.3 | ) | 2.4 | (0.5 | ) | (4.2 | ) | ||||||||||||||||||||||||
Inside Out | Sept 2011 | 5.1 | 1.3 | 1.6 | (3.8 | ) | (0.5 | ) | 2.1 | (0.6 | ) | (3.2 | ) | ||||||||||||||||||||||||
That's What I Am | April 2011 | 4.7 | 0.4 | 0.9 | (5.0 | ) | — | 0.9 | (0.1 | ) | (4.9 | ) | |||||||||||||||||||||||||
The Chaperone | Mar 2011 | 5.8 | 0.7 | 4.2 | (3.8 | ) | 0.2 | 4.0 | 0.1 | (3.9 | ) | ||||||||||||||||||||||||||
Knucklehead | Oct 2010 | 6.4 | 0.7 | 4.3 | (4.1 | ) | 0.1 | 0.7 | (0.1 | ) | (2.9 | ) | |||||||||||||||||||||||||
Legendary | Sept 2010 | 5.3 | 1.5 | 6.6 | (2.1 | ) | 0.3 | 1.0 | (0.2 | ) | (0.3 | ) | |||||||||||||||||||||||||
43.7 | 7.9 | 21.8 | (31.6 | ) | 1.9 | 11.1 | (4.1 | ) | (24.8 | ) | |||||||||||||||||||||||||||
Licensed films | |||||||||||||||||||||||||||||||||||||
Marine 2 | Dec 2009 | 2.3 | 0.5 | 2.6 | 0.7 | 0.4 | 1.1 | — | 0.3 | ||||||||||||||||||||||||||||
12 Rounds | Mar 2009 | 19.7 | 4.3 | 12.6 | (2.8 | ) | 3.6 | 5.6 | 0.1 | (2.8 | ) | ||||||||||||||||||||||||||
BELC 3 | Jan 2009 | 2.5 | 0.2 | 2.6 | 0.3 | 0.3 | 0.6 | 0.2 | — | ||||||||||||||||||||||||||||
The Condemned | May 2007 | 17.5 | — | 10.9 | (6.5 | ) | 0.1 | 0.5 | 0.1 | 0.4 | |||||||||||||||||||||||||||
The Marine | Oct 2006 | 20.2 | 0.1 | 38.3 | 15.4 | 1.1 | 1.8 | 0.8 | 1.3 | ||||||||||||||||||||||||||||
See No Evil | May 2006 | 10.4 | 0.3 | 7.2 | (2.8 | ) | 0.2 | 0.2 | 0.1 | (1.2 | ) | ||||||||||||||||||||||||||
Other | — | — | 0.3 | 0.2 | 0.3 | — | 0.2 | — | |||||||||||||||||||||||||||||
72.6 | 5.4 | 74.5 | 4.5 | 6.0 | 9.8 | 1.5 | (2.0 | ) | |||||||||||||||||||||||||||||
Completed but not released | 7.9 | 7.9 | — | — | — | — | — | — | |||||||||||||||||||||||||||||
In production | 2.0 | 2.0 | — | — | — | — | — | — | |||||||||||||||||||||||||||||
In development | 0.6 | 0.6 | — | (4.1 | ) | — | — | (1.0 | ) | (0.8 | ) | ||||||||||||||||||||||||||
Total | $ | 126.8 | $ | 23.8 | 84,000 | $ | 96.3 | 84,000 | $ | (31.2 | ) | — | $ | 7.9 | $ | 20.9 | $ | (3.6 | ) | $ | (27.6 | ) | |||||||||||||||
* Production costs are presented net of the associated benefit of production incentives. | |
Revenue recognition for our feature films varies depending on the method of distribution and the extent of control the Company exercises over the distribution and related expenses. We exercise significant control over our self-distributed films and as a result, we record distribution revenue and related expenses on a gross basis in our financial statements. Third-party distribution partners control the distribution and marketing of our licensed films, and as a result, we recognize revenue on a net basis after the third-party distributor recoups distribution fees and expenses and results have been reported to us. This typically occurs in periods subsequent to the initial release of the film.
At December 31, 2012, the Company had $23.8 million (net of accumulated amortization and impairment charges) of feature film production assets capitalized on our Consolidated Balance Sheet. We review and revise estimates of ultimate revenue and participation costs at each reporting period to reflect the most current information available. If estimates for a film’s ultimate revenue are revised and indicate a significant decline in a film’s profitability or if events or circumstances change that indicate we should assess whether the fair value of a film is less than its unamortized film costs, we calculate the film's estimated fair value
26
using a discounted cash flow model. We updated ultimate revenue projections during the year ended December 31, 2012, noting lower than expected home video revenue for our feature films Bending the Rules and Barricade. As a result of the decline in expected profitability of these releases, we prepared a discounted cash flow analysis to determine the fair value of the associated feature film production assets. This resulted in impairment charges, representing the excess of the recorded net carrying value over the estimated fair value, of $1.2 million for the year ended December 31, 2012. During 2011, we recorded impairment charges of $23.4 million, of which $19.4 million related to self-distributed films and $4.0 related to licensed films.
During 2012, the Company entered into an agreement to co-distribute the feature film, The Day, domestically. This film was released via a limited theatrical release in August and on DVD in November 2012. The Company intends to recognize revenue generated by this film in a manner similar to how it recognizes revenue for its licensed films; on a net basis, after distribution fees and expenses have been recouped and expenses and results have been reported to us. In 2012, the Company did not record any revenue associated with this release.
WWE Studios revenues decreased $13.0 million in 2012 compared to 2011 as there was a $9.2 million decrease in revenue for our self-distributed films and a $3.8 million decrease in revenue for our licensed films in 2012. The decrease in revenue associated with our self-distributed films was attributable to the relative performance and timing of releases from our movie portfolio as three films were released in 2012 compared to four in the prior year. The decrease in revenue associated with licensed films is primarily attributable to the age of our film library, with the most recent film released in 2009.
WWE Studios cost of revenues decreased $37.0 million in 2012 as compared to 2011. The decrease is primarily due to a $22.2 million reduction in impairment charges. Additionally, amortization of production assets decreased $8.8 million and distribution expenses decreased $6.0 million due to lower revenues and timing of the film releases in 2012 as compared to 2011.
Selling, General & Administrative Expenses
The following table presents the amounts and percent change of certain significant overhead items (dollars in millions):
2012 | 2011 | increase (decrease) | |||||||||
Staff related | $ | 59.3 | $ | 56.6 | 5 | % | |||||
Management incentive compensation | 11.9 | 4.3 | 177 | % | |||||||
Legal, accounting and other professional | 18.4 | 15.9 | 16 | % | |||||||
Travel and entertainment expenses | 5.8 | 4.9 | 18 | % | |||||||
Advertising, marketing and promotion | 5.4 | 5.3 | 2 | % | |||||||
Corporate insurance | 3.9 | 3.5 | 11 | % | |||||||
Bad debt | 2.5 | (0.7 | ) | 457 | % | ||||||
All other | 29.2 | 26.9 | 9 | % | |||||||
Total SG&A | $ | 136.4 | $ | 116.7 | 17 | % | |||||
SG&A as a percentage of net revenues | 28 | % | 24 | % | |||||||
Selling, general and administrative expenses increased 17% in 2012 compared to 2011. Management incentive compensation, including bonus and stock compensation, increased $7.6 million to reflect amounts expected to be paid based on the Company's operating performance. The 2011 results reflect the expensing of previously issued stock compensation and minimal incentive compensation as the Company did not meet performance targets in 2011. Staff related expenses in 2012 increased primarily due to the hiring of staff to create new programming to support our emerging content and distribution efforts, including the full year impact of employees hired in the previous year. The $2.5 million increase in legal, accounting and other professional fees in 2012 is primarily due to $1.5 million in consulting costs related to the potential network. Selling, general and administrative expenses includes $8.2 million in operating expenses associated with our emerging content and distribution efforts including a potential network during 2012 compared to $4.0 million the prior year.
27
Depreciation and Amortization
(dollars in millions)
2012 | 2011 | increase (decrease) | |||||||||
Depreciation and amortization | $ | 20.0 | $ | 15.0 | 33 | % | |||||
Depreciation expense for 2012 reflects higher property and equipment balances due to purchases associated with the expansion of our content and distribution efforts.
Investment and Other Income (Expense)
(dollars in millions)
2012 | 2011 | increase (decrease) | |||||||||
Investment income, net | $ | 2.2 | $ | 2.1 | 5 | % | |||||
Interest expense | (1.7 | ) | (0.6 | ) | 183 | % | |||||
Other expense, net | (1.0 | ) | (1.6 | ) | (38 | )% | |||||
Interest expense for 2012 includes the full year impact of amortization of loan origination costs and fee on the unused portion of our revolving credit facility, which was established in September 2011. Other expense, net for 2012 includes realized foreign exchange gains and losses, and certain non-income state taxes.
Income Taxes
(dollars in millions)
2012 | 2011 | increase (decrease) | |||||||||
Provision for income taxes | $ | 11.3 | $ | 12.1 | (7 | )% | |||||
Effective tax rate | 26 | % | 33 | % | |||||||
The 2012 and 2011 effective tax rate was positively impacted by a $4.4 million and $0.6 million benefit, respectively, from recognition of previously unrecognized tax benefits. The 2012 benefit primarily relates to the settlement of various audits, including the State of Connecticut, the IRS, and other state and local jurisdictions. The 2011 benefit primarily relates to the statute of limitations expiring in jurisdictions in which the Company had taken uncertain tax positions.
28
Year Ended December 31, 2011 compared to Year Ended December 31, 2010
(dollars in millions)
Summary
Net Revenues | 2011 | 2010 | increase (decrease) | ||||||||
Live and Televised Entertainment | $ | 340.0 | $ | 331.8 | 2 | % | |||||
Consumer Products | 94.9 | 97.4 | (3 | )% | |||||||
Digital Media | 28.1 | 28.9 | (3 | )% | |||||||
WWE Studios | 20.9 | 19.6 | 7 | % | |||||||
Total | 483.9 | 477.7 | 1 | % | |||||||
Profit Contribution | |||||||||||
Live and Televised Entertainment | 130.7 | 134.4 | (3 | )% | |||||||
Consumer Products | 56.1 | 55.7 | 1 | % | |||||||
Digital Media | 9.5 | 12.9 | (26 | )% | |||||||
WWE Studios | (27.6 | ) | 0.4 | (7,000 | )% | ||||||
Total | 168.7 | 203.4 | (17 | )% | |||||||
Profit contribution margin | 35 | % | 43 | % | |||||||
Selling, general and administrative expenses | 116.7 | 109.4 | 7 | % | |||||||
Depreciation and amortization | 15.0 | 11.7 | 28 | % | |||||||
Operating income | 37.0 | 82.3 | (55 | )% | |||||||
Investment income, net | 2.1 | 2.0 | 5 | % | |||||||
Interest expense | (0.6 | ) | (0.3 | ) | 100 | % | |||||
Other expense, net | (1.6 | ) | (2.0 | ) | (20 | )% | |||||
Income before income taxes | 36.9 | 82.0 | (55 | )% | |||||||
Provision for income taxes | 12.1 | 28.5 | (58 | )% | |||||||
Net income | $ | 24.8 | $ | 53.5 | (54 | )% | |||||
Our Live and Televised Entertainment segment revenues increased primarily due to the increased revenues in our pay-per-view and television rights businesses of 12% and 4%, respectively. Our Consumer Products segment experienced a 5% increase in licensing revenue, reflecting an increase in sales of both toys and video games as compared to 2010. Our WWE Studios segment reflected a $1.3 million increase in revenue primarily due to the release of four self-distributed films in 2011 compared to two self-distributed films in 2010.
Profit contribution was negatively impacted by a $23.4 million impairment charge recorded in 2011 relating to our WWE Studios’ business.
In 2011, we expanded efforts to create new programs in anticipation of increased distribution opportunities. As a result, we have incurred expenses associated with our emerging content and distribution efforts, including increased staffing to create new programs and legal and consulting fees of approximately $4 million.
29
Live and Televised Entertainment
The following chart provides performance results and key drivers for our Live and Televised Entertainment segment:
Revenues- Live and Televised Entertainment (dollars in millions except where noted) | 2011 | 2010 | increase (decrease) | ||||||||
Live events | $ | 104.7 | $ | 104.6 | — | % | |||||
North America | 64.9 | $ | 64.7 | — | % | ||||||
International | 39.8 | $ | 39.9 | — | % | ||||||
Total live event attendance | 1,976,500 | 2,155,700 | (8 | )% | |||||||
Number of North American events | 241 | 253 | (5 | )% | |||||||
Average North American attendance | 6,000 | 6,300 | (5 | )% | |||||||
Average North American ticket price (dollars) | $ | 42.11 | $ | 39.46 | 7 | % | |||||
Number of international events | 80 | 74 | 8 | % | |||||||
Average international attendance | 6,700 | 7,800 | (14 | )% | |||||||
Average international ticket price (dollars) | $ | 68.74 | $ | 66.47 | 3 | % | |||||
Venue merchandise | $ | 18.3 | $ | 18.4 | (1 | )% | |||||
Domestic per capita spending (dollars) | $ | 10.39 | $ | 9.80 | 6 | % | |||||
Pay-per-view | $ | 78.3 | $ | 70.2 | 12 | % | |||||
Number of pay-per-view events | 13 | 13 | — | % | |||||||
Number of buys of pay-per-views | 3,842,100 | 3,631,100 | 6 | % | |||||||
Average revenue per buy (dollars) | $ | 19.94 | $ | 18.32 | 9 | % | |||||
Domestic retail price WrestleMania (dollars) | $ | 54.95 | $ | 54.95 | — | % | |||||
Domestic retail price, excluding WrestleMania (dollars) | $ | 44.95 | $ | 44.95 | — | % | |||||
Television rights fees | $ | 131.5 | $ | 127.0 | 4 | % | |||||
Domestic | $ | 80.3 | $ | 81.6 | (2 | )% | |||||
International | $ | 51.2 | $ | 45.4 | 13 | % | |||||
Other | $ | 7.2 | $ | 11.6 | (38 | )% | |||||
Total | $ | 340.0 | $ | 331.8 | 2 | % | |||||
Ratings: | |||||||||||
Average weekly household ratings for RAW | 3.6 | 3.5 | 2.9 | % | |||||||
Average weekly household ratings for SmackDown | 1.9 | 1.8 | 5.6 | % | |||||||
Average weekly household ratings for WWE Superstars | N/A | 1.1 | |||||||||
Average weekly household rating for NXT | N/A | 1.0 | |||||||||
Profit Contribution-Live and Televised Entertainment (dollars in millions) | 2011 | 2010 | increase (decrease) | ||||||||
Live events | $ | 28.7 | $ | 27.4 | 5 | % | |||||
Venue merchandise | 8.1 | 8.0 | 1 | % | |||||||
Pay per view | 40.7 | 39.8 | 2 | % | |||||||
Television rights | 55.9 | 57.3 | (2 | )% | |||||||
Other | (2.7 | ) | 1.9 | (242 | )% | ||||||
Total | $ | 130.7 | $ | 134.4 | (3 | )% | |||||
Profit contribution margin | 38 | % | 41 | % | |||||||
30
Live events revenues were essentially unchanged as compared to 2010. In our North America live events business, we experienced an increase in sponsorship revenues of $1.2 million, which was offset by a decrease in revenues of $0.8 million due to 12 fewer events. Cost of revenue for live events decreased by $1.2 million, reflecting decreases in talent-related expenses of $1.5 million due to the twelve fewer North American events. The live events profit contribution margin increased to 27% from 26% in 2010.
Venue merchandise revenues were essentially unchanged as compared to 2010, as the impact of 8% lower domestic attendance in 2011 was offset by a 6% increase in per capita merchandise spending by our fans at domestic events. The venue merchandise profit contribution margin increased to 44% from 43% in 2010.
Pay-per-view revenues increased by $8.1 million in 2011 as compared to 2010, reflecting a 6% increase in total buys in addition to a 6% increase in average revenues per buy. The increase in the total number of buys was primarily driven by the performance of our annual WrestleMania event. In 2011, we recorded $24.2 million in revenue from approximately 1.1 million buys for WrestleMania XXVII as compared to $19.0 million from approximately 0.9 million buys for WrestleMania XXVI in 2010. The increase in revenues per buy was driven by the higher percentage of domestic buys, which generate a higher price per buy, as compared to 2010. Cost of revenues for pay-per-view increased by $7.2 million, primarily due to increases in production costs, talent expense and advertising expenses related to initiatives designed to increase revenue. The pay-per-view profit contribution margin decreased to 52% from 57% in 2010.
Television rights fees increased by $4.5 million in 2011 as compared to 2010, primarily due to increases in international markets, partially offset by a decrease in overall domestic revenues. Internationally, our television rights fees increased by $5.8 million, primarily due to a new agreement with a Canadian television distributor, and renewals and contractual increases with other international television distributors. Domestically, television rights fees decreased by $1.3 million, due primarily to the absence of rights fees for our NXT and WWE Superstars programs, which moved to WWE.com in October 2010 and April 2011, respectively. During 2011, we made a strategic decision to withhold several hours of these programs so we could distribute the content on existing and future platforms. This decrease was partially offset by increased sponsorship revenues and contractual rights fee increases charged to our domestic television distributors for our RAW and SmackDown programs. Television rights cost of revenues increased by $5.9 million primarily due to increased television sponsorship costs of $2.7 million and increased production costs of $3.2 million due to increased staffing and three additional televised events in 2011 as compared to 2010. The television rights fee profit contribution margin decreased to 43% from 45% in 2010.
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Consumer Products
The following chart provides performance results and key drivers for our Consumer Products segment (dollars in millions):
Revenues- Consumer Products | 2011 | 2010 | increase (decrease) | ||||||||
Licensing | $ | 54.4 | $ | 51.7 | 5 | % | |||||
Magazine publishing | $ | 7.7 | $ | 11.0 | (30 | )% | |||||
Net units sold | 2,344,800 | 3,068,000 | (24 | )% | |||||||
Home video | $ | 30.4 | $ | 32.1 | (5 | )% | |||||
Gross units shipped | 3,300,000 | 3,559,100 | (7 | )% | |||||||
Other | $ | 2.4 | $ | 2.6 | (8 | )% | |||||
Total | $ | 94.9 | $ | 97.4 | (3 | )% | |||||
Profit Contribution-Consumer Products | 2011 | 2010 | increase (decrease) | ||||||||
Licensing | $ | 40.3 | $ | 38.4 | 5 | % | |||||
Magazine publishing | 0.2 | 0.7 | (71 | )% | |||||||
Home video | 15.1 | 16.0 | (6 | )% | |||||||
Other | 0.5 | 0.6 | (17 | )% | |||||||
Total | $ | 56.1 | $ | 55.7 | 1 | % | |||||
Profit contribution margin | 59 | % | 57 | % | |||||||
Licensing revenues increased by $2.7 million in 2011 as compared to 2010, driven by the improved performance of our toy and video game categories. Our toy category licensing revenues increased by $1.1 million driven by Mattel’s increased product offerings. Our video game category licensing revenues increased by $8.0 million, driven by the release of our WWE All Stars video game, for which we did not have a corresponding release in 2010. In addition, during 2011 we increased the royalty rate we receive from our video game licensee. Offsetting these increases was a $4.2 million decline in our novelties and collectibles categories, driven by softness in the international market and the absence of a successful product launch by a licensee that drove collectibles licensing revenues in 2010. Licensing cost of revenues increased by $0.8 million as compared to 2010. The licensing profit contribution margin was 74% in both 2011 and 2010.
Magazine publishing revenues decreased $3.3 million in 2011 as compared to 2010, driven by weaker newsstand demand as a result of an overall decline in the magazine publishing industry. Net units sold decreased by 24%, while sell-through rates improved slightly. We published 12 issues of WWE Magazine in 2011 as compared to 13 issues in 2010, 10 issues of WWE Kids magazine and 6 special issues in both 2011 and 2010. Magazine publishing cost of revenues decreased by $2.8 million, primarily as a result of a 25% decrease in production. Publishing profit contribution decreased to a profit of $0.2 million in 2011 from a profit of $0.7 million in 2010.
Home video revenues decreased $1.7 million in 2011 as compared to 2010, driven by a 7% decrease in units shipped. This decrease was offset by favorable sell-through rates experienced during 2011 as compared to 2010. We released 28 titles in 2011 as compared to 29 in 2010. Home video cost of revenues decreased by $0.8 million due to decreased duplication costs. Home video profit contribution margin was 50% in both 2011 and 2010.
32
Digital Media
The following chart provides performance results for our Digital Media segment (dollars in millions, except average revenues per order):
Revenues- Digital Media | 2011 | 2010 | increase (decrease) | ||||||||
WWE.com | $ | 12.5 | $ | 14.9 | (16 | )% | |||||
WWEShop | 15.6 | 14.0 | 11 | % | |||||||
Total | $ | 28.1 | $ | 28.9 | (3 | )% | |||||
Average WWEShop revenues per order (dollars) | $ | 47.16 | $ | 47.13 | |||||||
Profit Contribution-Digital Media | 2011 | 2010 | increase (decrease) | ||||||||
WWE.com | $ | 6.5 | $ | 9.7 | (33 | )% | |||||
WWEShop | 3.0 | 3.2 | (6 | )% | |||||||
Total | $ | 9.5 | $ | 12.9 | (26 | )% | |||||
Profit contribution margin | 34 | % | 45 | % | |||||||
WWE.com revenues decreased $2.4 million in 2011 as compared to 2010, primarily due to a decrease in online advertising of $2.9 million. WWE.com cost of revenues increased by $0.8 million in 2011, driven by increased expenses related to streaming and sponsorships, in addition to $0.3 million less benefit from production tax incentives as compared to 2010. WWE.com profit contribution margin decreased to 52% in 2011 from 65% in 2010.
WWEShop revenues increased $1.6 million in 2011 as compared to 2010, driven by a 13% increase in the number of orders processed. WWEShop cost of revenues increased by $1.8 million in 2010, primarily due to increased material costs of $0.7 million and increased shipping charges of $0.6 million, both driven by the increased revenue and number of orders. WWEShop profit contribution margin decreased to 19% in 2011 from 23% in 2010, primarily due to increased discounts and promotional offers.
33
WWE Studios
The following table provides detailed information on our WWE Studios’ segment (in millions):
Feature Film Production Assets-net as of Dec 31, 2011 | For the Year Ended December 31, | ||||||||||||||||||||||||||||||||||||
Inception to-date | Revenue | Profit (Loss) | |||||||||||||||||||||||||||||||||||
Title | Release Date | Production Costs* | Revenue | Profit (Loss) | 2011 | 2010 | 2011 | 2010 | |||||||||||||||||||||||||||||
Self - Distributed films | |||||||||||||||||||||||||||||||||||||
The Reunion | Oct 2011 | $ | 6.9 | $ | 1.9 | $ | 2.4 | $ | (4.2 | ) | $ | 2.4 | $ N/A | $ | (4.2 | ) | $ N/A | ||||||||||||||||||||