10-Q 1 wwe-20180930x10q.htm 10-Q Q3 2018 Form 10Q

 



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

____________________

FORM 10-Q

____________________





 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______



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)



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    No 



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   Yes    No 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):





 

 

 

 

Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

Smaller reporting company  

Emerging growth company  



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.



Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    No 



At October 23, 2018 the number of shares outstanding of the Registrant’s Class A common stock, par value $.01 per share, was 43,415,411 and the number of shares outstanding of the Registrant’s Class B common stock, par value $.01 per share, was 34,609,438.

 





 

 


 

TABLE OF CONTENTS





 



Page #

Part I – FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements (unaudited)

Consolidated Statements of Operations for the three and nine months ended September 30, 2018 and 2017

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017

Consolidated Balance Sheets as of September 30, 2018 and December 31, 2017

Consolidated Statement of Stockholders’ Equity for the three and nine months ended September 30, 2018

Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017

Notes to Consolidated Financial Statements

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

32 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

47 

Item 4. Controls and Procedures

47 

Part II – OTHER INFORMATION

 

Item 1. Legal Proceedings

48 

Item 1A. Risk Factors

49 

Item 6. Exhibits

49 

Signatures

50 



 





 

 


 

WORLD WRESTLING ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Net revenues

 

$

188,391 

 

$

186,325 

 

$

657,654 

 

$

589,355 

Operating expenses

 

 

120,797 

 

 

111,804 

 

 

439,749 

 

 

401,222 

Marketing and selling expenses

 

 

23,507 

 

 

18,197 

 

 

73,100 

 

 

60,325 

General and administrative expenses

 

 

20,055 

 

 

15,909 

 

 

64,655 

 

 

59,464 

Depreciation and amortization

 

 

5,905 

 

 

6,435 

 

 

19,059 

 

 

19,680 

Operating income

 

 

18,127 

 

 

33,980 

 

 

61,091 

 

 

48,664 

Interest expense

 

 

3,581 

 

 

3,569 

 

 

11,828 

 

 

10,734 

Other income, net

 

 

3,446 

 

 

742 

 

 

3,285 

 

 

2,386 

Income before income taxes

 

 

17,992 

 

 

31,153 

 

 

52,548 

 

 

40,316 

(Benefit from) provision for income taxes

 

 

(15,598)

 

 

9,299 

 

 

(5,822)

 

 

12,489 

Net income

 

$

33,590 

 

$

21,854 

 

$

58,370 

 

$

27,827 

Earnings per share: basic

 

$

0.43 

 

$

0.28 

 

$

0.75 

 

$

0.36 

Earnings per share: diluted

 

$

0.37 

 

$

0.28 

 

$

0.66 

 

$

0.36 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

77,808 

 

 

76,957 

 

 

77,371 

 

 

76,620 

Diluted

 

 

90,760 

 

 

78,505 

 

 

87,944 

 

 

78,383 

Dividends declared per common share (Class A and B)

 

$

0.12 

 

$

0.12 

 

$

0.36 

 

$

0.36 



 

See accompanying notes to consolidated financial statements.

2


 

WORLD WRESTLING ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Net income

 

$

33,590 

 

$

21,854 

 

$

58,370 

 

$

27,827 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

53 

 

 

35 

 

 

(311)

 

 

112 

Unrealized holding gains (losses) on available-for-sale debt securities (net of tax expense (benefit) of $15 and $(29), and $(186) and $(66), respectively)

 

 

48 

 

 

(46)

 

 

(590)

 

 

(107)

Total other comprehensive income (loss)

 

 

101 

 

 

(11)

 

 

(901)

 

 

Comprehensive income

 

$

33,691 

 

$

21,843 

 

$

57,469 

 

$

27,832 



 

See accompanying notes to consolidated financial statements.

3


 

WORLD WRESTLING ENTERTAINMENT, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

(Unaudited)







 

 

 

 

 

 



 

 

 

 

 

 



 

As of



 

September 30,

 

December 31,



 

2018

 

2017

ASSETS

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

Cash and cash equivalents

 

$

126,117 

 

$

137,700 

Short-term investments, net

 

 

189,472 

 

 

159,744 

Accounts receivable (net of allowance for doubtful accounts and returns
   of $1,613 and $3,035, respectively)

 

 

84,367 

 

 

65,245 

Inventory

 

 

8,910 

 

 

8,332 

Prepaid expenses and other current assets

 

 

40,019 

 

 

19,961 

Total current assets

 

 

448,885 

 

 

390,982 

PROPERTY AND EQUIPMENT, NET

 

 

135,525 

 

 

131,325 

FEATURE FILM PRODUCTION ASSETS, NET

 

 

17,251 

 

 

22,300 

TELEVISION PRODUCTION ASSETS, NET

 

 

6,295 

 

 

7,292 

INVESTMENT SECURITIES

 

 

27,593 

 

 

27,367 

NON-CURRENT DEFERRED INCOME TAX ASSETS

 

 

18,803 

 

 

18,984 

OTHER ASSETS, NET

 

 

10,904 

 

 

16,257 

TOTAL ASSETS

 

$

665,256 

 

$

614,507 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

Current portion of long-term debt

 

$

5,088 

 

$

4,638 

Convertible debt

 

 

181,754 

 

 

 —

Accounts payable and accrued expenses

 

 

94,508 

 

 

77,738 

Deferred income

 

 

75,912 

 

 

55,818 

Total current liabilities

 

 

357,262 

 

 

138,194 

LONG-TERM DEBT

 

 

26,984 

 

 

30,958 

CONVERTIBLE DEBT

 

 

 —

 

 

177,900 

OTHER NON-CURRENT LIABILITIES

 

 

1,752 

 

 

14,496 

Total liabilities

 

 

385,998 

 

 

361,548 

COMMITMENTS AND CONTINGENCIES

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY:

 

 

 

 

 

 

Class A common stock: ($.01 par value; 180,000,000 shares authorized;
   43,411,787 and 42,498,452 shares issued and outstanding as of
   September 30, 2018 and December 31, 2017, respectively)

 

 

434 

 

 

425 

Class B convertible common stock: ($.01 par value; 60,000,000 shares authorized;
   34,609,438 and 34,609,438 shares issued and outstanding as of
   September 30, 2018 and December 31, 2017, respectively)

 

 

346 

 

 

346 

Additional paid-in capital

 

 

410,186 

 

 

422,208 

Accumulated other comprehensive income

 

 

1,470 

 

 

2,371 

Accumulated deficit

 

 

(133,178)

 

 

(172,391)

Total stockholders’ equity

 

 

279,258 

 

 

252,959 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

665,256 

 

$

614,507 



 

See accompanying notes to consolidated financial statements.

4


 

WORLD WRESTLING ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

(Unaudited)







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 



 

Common Stock

 

Additional

 

Other

 

 

 

 

 

 



 

Class A

 

Class B

 

Paid - in

 

Comprehensive

 

Accumulated

 

 

 



 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Income

 

Deficit

 

Total

Balance, December 31, 2017

 

42,498 

 

$

425 

 

34,609 

 

$

346 

 

$

422,208 

 

$

2,371 

 

$

(172,391)

 

$

252,959 

Cumulative effect of adopting ASC 606

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

10,086 

 

 

10,086 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

58,370 

 

 

58,370 

Other comprehensive income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

(901)

 

 

 —

 

 

(901)

Stock issuances, net

 

914 

 

 

 

 —

 

 

 —

 

 

1,765 

 

 

 —

 

 

 —

 

 

1,774 

Taxes paid related to net settlement upon vesting of equity awards

 

 —

 

 

 —

 

 —

 

 

 —

 

 

(50,720)

 

 

 —

 

 

 —

 

 

(50,720)

Cash dividends declared

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,363 

 

 

 —

 

 

(29,243)

 

 

(27,880)

Stock-based compensation

 

 —

 

 

 —

 

 —

 

 

 —

 

 

34,308 

 

 

 —

 

 

 —

 

 

34,308 

Other

 

 —

 

 

 —

 

 —

 

 

 —

 

 

1,262 

 

 

 —

 

 

 —

 

 

1,262 

Balance, September 30, 2018

 

43,412 

 

$

434 

 

34,609 

 

$

346 

 

$

410,186 

 

$

1,470 

 

$

(133,178)

 

$

279,258 



 

See accompanying notes to consolidated financial statements.

5


 

WORLD WRESTLING ENTERTAINMENT, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)







 

 

 

 

 

 



 

 

 

 

 

 



 

Nine Months Ended



 

September 30,



 

2018

 

2017

OPERATING ACTIVITIES:

 

 

 

 

 

 

Net income

 

$

58,370 

 

$

27,827 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Amortization and impairments of feature film production assets

 

 

5,856 

 

 

9,065 

Amortization of television production assets

 

 

20,534 

 

 

13,633 

Depreciation and amortization

 

 

24,091 

 

 

24,281 

Loss on equity investments, net

 

 

819 

 

 

 —

Services provided in exchange for equity instruments

 

 

(2,264)

 

 

(2,090)

Other amortization

 

 

4,667 

 

 

4,758 

Stock-based compensation

 

 

34,308 

 

 

17,962 

(Benefit from) provision for deferred income taxes

 

 

(2,750)

 

 

4,516 

Other non-cash adjustments

 

 

1,879 

 

 

383 

Cash (used in)/provided by changes in operating assets and liabilities:

 

 

 

 

 

 

Accounts receivable

 

 

(8,219)

 

 

(19,030)

Inventory

 

 

(578)

 

 

(1,948)

Prepaid expenses and other assets

 

 

(20,354)

 

 

(8,813)

Feature film production assets

 

 

(870)

 

 

(9,643)

Television production assets

 

 

(20,266)

 

 

(12,472)

Accounts payable, accrued expenses and other liabilities

 

 

9,059 

 

 

(5,851)

Deferred income

 

 

17,199 

 

 

(1,615)

Net cash provided by operating activities

 

 

121,481 

 

 

40,963 

INVESTING ACTIVITIES:

 

 

 

 

 

 

Purchases of property and equipment and other assets

 

 

(21,445)

 

 

(17,652)

Purchases of short-term investments

 

 

(82,064)

 

 

(123,806)

Proceeds from sales and maturities of short-term investments

 

 

50,833 

 

 

23,990 

Purchase of investment securities

 

 

(1,038)

 

 

(2,116)

Other

 

 

1,000 

 

 

 —

Net cash used in investing activities

 

 

(52,714)

 

 

(119,584)

FINANCING ACTIVITIES:

 

 

 

 

 

 

Repayment of long-term debt

 

 

(3,524)

 

 

(3,718)

Dividends paid

 

 

(27,880)

 

 

(27,601)

Proceeds from borrowings under credit facilities

 

 

 —

 

 

1,383 

Proceeds from borrowings on convertible notes, net of issuance costs

 

 

 —

 

 

14,534 

Proceeds from issuance of warrants

 

 

 —

 

 

1,460 

Purchase of convertible note hedge

 

 

 —

 

 

(2,558)

Taxes paid related to net settlement upon vesting of equity awards

 

 

(50,720)

 

 

(9,185)

Proceeds from issuance of stock

 

 

1,774 

 

 

1,493 

Net cash used in financing activities

 

 

(80,350)

 

 

(24,192)

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(11,583)

 

 

(102,813)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

137,700 

 

 

211,976 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

126,117 

 

$

109,163 

NON-CASH INVESTING AND FINANCING TRANSACTIONS:

 

 

 

 

 

 

Purchases of property and equipment recorded in accounts payable
and accrued expenses (See Note 12)

 

$

5,577 

 

$

4,648 



 



 

 

See accompanying notes to consolidated financial statements.

6


 

Table of Contents

WORLD WRESTLING ENTERTAINMENT, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

1. Basis of Presentation and Business Description

The accompanying consolidated financial statements include the accounts of WWE. “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. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

The accompanying consolidated financial statements are unaudited. All adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations, and cash flows at the dates and for the periods presented have been included. The results of operations of any interim period are not necessarily indicative of the results of operations for the full year. All intercompany balances are eliminated in consolidation.

Certain information and note disclosures normally included in annual financial statements have been condensed or omitted from these interim financial statements; these financial statements should be read in conjunction with the financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2017.

We are an integrated media and entertainment company, principally engaged in the production and distribution of content through various channels, including our premium over-the-top WWE Network, content rights agreements, pay-per-view event programming, filmed entertainment, live events,  licensing of various WWE themed products, and the sale of consumer products featuring our brands.  Our operations are organized around the following principal activities:

Media:

·

The Media segment reflects the production and monetization of long-form and short-form video content across various platforms, including WWE Network, pay television, digital and social media, as well as filmed entertainment. Across these platforms, revenues principally consist of content rights fees, subscriptions to WWE Network, and advertising and sponsorships.

Live Events:

·

Live events provide ongoing content for our media platforms. Live Event segment revenues consist primarily of ticket sales, including primary and secondary distribution, as well as the sale of travel packages associated with the Company’s global live events.

Consumer Products:

·

The Consumer Products segment engages in the merchandising of WWE branded products, such as video games, toys and apparel, through licensing arrangements and direct-to-consumer sales. Revenues principally consist of royalties and licensee fees related to WWE branded products, and sales of merchandise distributed at our live events and through eCommerce platforms.

In our prior reports filed with the Securities Exchange Commission ("SEC") through fiscal year 2017, we presented ten reportable segments consisting of Network, Television, Home Entertainment, Digital Media, Live Events, Licensing, Venue Merchandise, WWEShop, WWE Studios and Corporate and Other. Effective January 1, 2018, we present three reportable segments consisting of our Media, Live Events and Consumer Products segments as described above. See Note 3, Segment Information, for further details on our reportable segments.

In connection with the revisions to its reportable segments, the Company revised certain expense captions presented on the Consolidated Statements of Operations. Previously, we presented Cost of revenues and Selling, general and administrative expenses. Effective in 2018, we present Operating expenses, Marketing and selling expenses and General and administrative expenses. See Note 2, Significant Accounting Policies, for further details.

Regarding the segment presentation and expense caption revisions noted above, information presented for the three and nine months ended September 30, 2017 included in the Consolidated Financial Statements herein and elsewhere in this Quarterly Report has been revised to conform to the current period presentation. Such revisions have no impact on our consolidated financial condition, results of operations or cash flows for the periods presented.

 

7


 

Table of Contents

WORLD WRESTLING ENTERTAINMENT, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

2. Significant Accounting Policies

Our significant accounting policies are detailed in Note 2, Summary of Significant Accounting Policies, in the Notes to Consolidated Financial Statements within our Annual Report on Form 10-K for the year ended December 31, 2017. Refer to Note 4, Revenues, for revisions made to our revenue recognition policies resulting from our adoption of the new revenue recognition standard starting in 2018. The new revenue recognition standard primarily impacted the timing of our consumer product licensing and film distribution revenues where the Company had previously recorded revenues on a lag upon the receipt of licensing royalty statements and film participation statements. In addition to revising our policies for licensing and film distribution revenues, conforming wording changes were made to certain of our revenue recognition policies to align with the language in the new revenue recognition standard.

We also amended our income tax policy to specify the Company’s accounting treatment of taxes on Global Intangible Low-taxed Income (“GILTI”) provisions of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Company has elected to recognize the tax on GILTI as a period expense in the period the tax is incurred.

Operating Expenses

Operating expenses consist of our production costs associated with developing our content, costs associated with operating our WWE Network, venue rental and related costs associated with the staging of our live events, compensation costs for our talent, and material and related costs associated with our consumer product merchandise sales. In addition, operating expenses include certain business operating support function costs, including our talent development, data analytics, data engineering, business strategy and real estate and facilities functions, as these activities directly support the operations of our segments.

Included within Operating expenses are the following:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Amortization and impairment of feature film assets

 

$

2,331 

 

$

3,262 

 

$

5,856 

 

$

9,065 

Amortization of television production assets

 

 

7,716 

 

 

2,912 

 

 

20,534 

 

 

13,633 

Amortization of WWE Network content delivery and technology assets

 

 

1,572 

 

 

1,239 

 

 

5,030 

 

 

4,594 

Total amortization and impairment included in operating expenses

 

$

11,619 

 

$

7,413 

 

$

31,420 

 

$

27,292 

Costs to produce our live event programming are expensed when the event is first broadcast, and are not included in the amortization table noted above.

Marketing and Selling Expenses

Marketing and selling expenses consist of costs associated with the promotion and marketing of our services and products. These expenses include sponsorship and advertising costs, and the costs associated with our sales and marketing functions,  creative services functions and our international offices.

General and Administrative Expenses

General and administrative expenses include costs associated with our corporate administrative functions, including finance, investor relations, community relations, corporate communications, information technology, legal, human resources and our Board of Directors. The Company does not allocate these costs to its business segments, as they do not directly relate to revenue generating activities.

 

8


 

Table of Contents

WORLD WRESTLING ENTERTAINMENT, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

Recent Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” The new guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments in this update. The new guidance is effective for interim and annual reporting periods beginning after December 15, 2019 (fiscal 2020 for the Company), with early adoption permitted. The new guidance should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company expects to adopt the new guidance prospectively and does not expect the adoption to have a material impact on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”, which modifies the disclosure requirements on fair value measurements. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019 (fiscal 2020 for the Company). Upon the effective date, certain provisions are to be applied prospectively, while others are to be applied retrospectively to all periods presented. An entity is permitted to early adopt any removed or modified disclosures upon issuance of this ASU and delay adoption of the additional disclosures until their effective date. We are currently evaluating the impact of the amendments on our consolidated financial statement disclosures. Since the amendments impact only disclosure requirements, we do not expect the amendments to have an impact on our consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, “CompensationStock Compensation (Topic 718) Improvements to Nonemployee Share-Based Accounting.” The new guidance expands the scope of Topic 718, CompensationStock Compensation (which currently only includes share-based payments to employees and non-employee directors) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The new guidance supersedes Subtopic 505-50, Equity – Equity-Based payments to Non-Employees. The new guidance is effective for fiscal years beginning after December 15, 2018 (fiscal 2019 for the Company), including interim periods within that fiscal year, with early adoption permitted. The Company has elected to early adopt the new guidance as of June 30, 2018. Since the Company does not currently have any share-based payment awards to nonemployees, the early adoption of the guidance had no impact on our consolidated financial statements. The Company will apply the guidance prospectively.

In February 2018, the FASB issued ASU No. 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” that gives entities the option to reclassify to retained earnings tax effects related to items in accumulated other comprehensive income that the FASB refers to as having been stranded in accumulated other comprehensive income as a result of the enactment of the Tax Act. The new guidance also includes disclosure requirements regarding an entity’s accounting policy for releasing income tax effects from accumulated other comprehensive income. The new guidance is effective for fiscal years beginning after December 15, 2018 (fiscal 2019 for the Company), including interim periods within those years. Early adoption is permitted in any interim period and should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Act is recognized. The Company has elected to early adopt the new guidance during the first quarter of 2018 and elected not to reclassify any stranded tax effects due to the insignificance of the amount remaining in accumulated other comprehensive income. Therefore, the adoption of the new guidance had no impact on our consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, “Compensation - Stock Compensation (Topic 718) Scope of Modification Accounting,” which provides guidance on the various types of changes which would trigger modification accounting for share-based payment awards. In summary, an entity would not apply modification accounting if the fair value, vesting conditions, and classification of the awards are the same immediately before and after the modification. The guidance is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The amendments are applied prospectively to awards modified on or after the adoption date. The new guidance was adopted on January 1, 2018 with no impact on our consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business.” The amendments in this ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017. The new standard is applied prospectively to transactions occurring on or after the adoption date and no disclosures are required at transition. The new guidance was adopted on January 1, 2018 with no impact on our consolidated financial statements.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments,” which addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The guidance is effective for interim and annual periods beginning after December 15, 2017. The amendments in the ASU should be applied using a retrospective transition method to each period presented. The new guidance was adopted on January 1, 2018 and did not impact current period or prior period presented cash flow statements and had no impact on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which will supersede the existing guidance for lease accounting. This new standard will require lessees to recognize leases on their balance sheets, and leaves lessor accounting largely unchanged. The new standard requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The new guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, which for the Company will be effective for the fiscal year beginning January 1, 2019. In July 2018, the FASB issued two clarifying amendments to the lease guidance, which provide further Codification improvements and relieves the requirement to present prior comparative year results when adopting the new standard. Instead, companies can choose to recognize the cumulative-effect of applying the new standard to leased assets and liabilities as an adjustment to opening retained earnings in the year of adoption. Both amendments issued are effective in the same timeframe as ASU No. 2016-02. We intend to adopt the requirements of the new leasing standard via a cumulative-effect adjustment without restating prior periods. While we are evaluating the impact that the new guidance will have on our consolidated financial statements, we currently expect a gross-up of our consolidated balance sheet as we recognize right of use assets and lease liabilities. The extent of such gross-up remains to be determined once we complete a review of our existing lease contracts (we are primarily a lessee) and service contracts, which may contain embedded leases.

In January 2016, the FASB issued ASU No. 2016-01, “Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” as amended by ASU No. 2018-03, “Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities,” issued in February 2018. The new guidance requires that most equity investments be measured at fair value, with subsequent changes in fair value recognized in net income (other than those accounted for under equity method of accounting). Under the new guidance, entities will no longer be able to recognize unrealized holding gains and losses on equity securities classified today as available-for-sale in other comprehensive income. The Company's current available-for-sale securities are invested primarily in debt securities which are not subject to the new guidance, therefore, we will continue to record any unrealized gains or losses on these available-for-sale debt securities through accumulated other comprehensive income.  The new guidance also no longer allows the use of the cost method of accounting for equity securities without readily determinable fair values. However, for equity investments without readily determinable fair values, entities may elect a measurement alternative to fair value that will allow those investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. The new guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The new guidance was adopted on January 1, 2018 and the Company has elected to use the measurement alternative to measure our equity investments without readily determinable fair values and this guidance was applied prospectively. Refer to Note 10, Investment Securities and Short-Term Investments, for disclosures related to observable price change events related to our equity investments without readily determinable fair values that occurred during the current period. During the first quarter of 2018, the FASB provided clarifying guidance on the application of ASU 2016-01 through the issuance of ASU No. 2018-03. Among other things, the amendment clarifies that the adjustments made under the measurement alternative are intended to reflect the fair value of the security as of the date that the observable transaction for a similar security took place. The amendment also clarifies that an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair valuation method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that security and all identical or similar investments of the same issuer.  ASU No. 2018-03 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years beginning after June 15, 2018 with early adoption permitted so long as ASU No. 2016-01 has been adopted.  The Company has elected to early adopt the clarifying amendments in ASU No. 2018-03 as of January 1, 2018 and will apply the clarifying amendments to all interim periods within 2018. The adoption of the clarifying amendments had no impact to our consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” This standard supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition,” and most industry-specific guidance. The standard requires an entity to recognize revenue in an amount that reflects the consideration to which the entity expects to receive in exchange for goods or services. During 2016, the FASB issued additional interpretive guidance relating to the standard which covered the topics of principal versus agent considerations and identifying performance obligations and licensing.  The standard along with the

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

subsequent clarifications issued are effective for annual reporting periods beginning after December 15, 2017, and interim periods within those fiscal years. The new revenue guidance under Topic 606 was adopted on January 1, 2018 using the modified retrospective transition method. Under this transition method, we recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings on January 1, 2018. The comparative information presented has not been restated and continues to be reported under the accounting standards in effect for those periods. See Note 4, Revenues, for further details. 



3. Segment Information

In the first quarter of 2018, the Company revised its reportable segments to better reflect the way the Company now manages its business, including resource allocation and assessment. Over the past several years, the Company has evolved its business model, with an increasing share of revenue coming from the monetization of the Company’s video content across digital and direct-to-consumer platforms. As the business model evolved, management’s analysis of its business segment results and the decisions on resource allocations to its business segments also changed. These changes necessitated a change in the Company’s segment reporting to align with management’s operational view. To reflect management’s revised perspective, as discussed in Note 1, effective on January 1, 2018, the Company now classifies its operations into three reportable segments: Media, Live Events and Consumer Products. Segment information is prepared on the same basis that our chief operating decision maker manages the segments, evaluates financial results, and makes key operating decisions.

Additionally, concurrent with the aforementioned segment changes, certain business support functions including sales and marketing, our international offices, talent development and other business support functions previously reported in our Corporate and Other segment are now allocated to the three reportable segments based primarily on a percentage of revenue contribution. The remaining unallocated corporate expenses largely relate to corporate functions such as finance, legal, human resources, facilities and information technology. The Company does not allocate these costs to its business segments, as they do not directly relate to revenue generating activities. These unallocated corporate expenses will be shown, as applicable, as a reconciling item in tables where segment and consolidated results are both shown. Revenues from transactions between our operating segments are not material.

Beginning in the first quarter of 2018, the Company also changed its primary measure of segment performance from operating income before depreciation and amortization (“OIBDA”) to Adjusted OIBDA. The Company defines Adjusted OIBDA as operating income before depreciation and amortization, excluding stock-based compensation, certain impairment charges and other non-recurring material items. Adjusted OIBDA includes amortization expenses directly related to our revenue generating activities, including feature film and television production asset amortization, as well as the amortization of costs related to content delivery and technology assets utilized for our WWE Network. The Company believes the presentation of Adjusted OIBDA is relevant and useful for investors because it allows investors to view our segment performance in the same manner as the primary method used by management to evaluate segment performance and make decisions about allocating resources.  Additionally, we believe that Adjusted OIBDA provides a meaningful representation of operating cash flows generated by our segments, and is a primary measure used by media investors, analysts and peers for comparative purposes. The Company revised its financial information and disclosures for prior periods to reflect the segment disclosures as if the current measure of segment performance, Adjusted OIBDA, had been in effect throughout the periods presented.

We do not disclose assets by segment information. In general, assets of the Company are leveraged across its reportable segments and we do not provide assets by segment information to our chief operating decision maker, as that information is not typically used in the determination of resource allocation and assessing business performance of each reportable segment.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

The following tables present summarized financial information for each of the Company's reportable segments:







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Media

 

$

142,078 

 

$

130,723 

 

$

478,086 

 

$

389,141 

Live Events

 

 

26,723 

 

 

31,600 

 

 

109,808 

 

 

116,533 

Consumer Products

 

 

19,590 

 

 

24,002 

 

 

69,760 

 

 

83,681 

Total net revenues

 

$

188,391 

 

$

186,325 

 

$

657,654 

 

$

589,355 



 

 

 

 

 

 

 

 

 

 

 

 

Adjusted OIBDA:

 

 

 

 

 

 

 

 

 

 

 

 

Media

 

$

50,336 

 

$

49,439 

 

$

138,474 

 

$

92,347 

Live Events

 

 

120 

 

 

3,663 

 

 

18,458 

 

 

25,826 

Consumer Products

 

 

4,050 

 

 

7,838 

 

 

17,796 

 

 

29,317 

Corporate

 

 

(18,698)

 

 

(15,345)

 

 

(60,270)

 

 

(52,436)

Total Adjusted OIBDA

 

$

35,808 

 

$

45,595 

 

$

114,458 

 

$

95,054 



Reconciliation of Total Operating Income to Total Adjusted OIBDA







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Total operating income

 

$

18,127 

 

$

33,980 

 

$

61,091 

 

$

48,664 

Depreciation and amortization

 

 

5,905 

 

 

6,435 

 

 

19,059 

 

 

19,680 

Stock-based compensation

 

 

11,776 

 

 

5,180 

 

 

34,308 

 

 

17,962 

Other adjustments (1)

 

 

 —

 

 

 —

 

 

 —

 

 

8,748 

Total Adjusted OIBDA

 

$

35,808 

 

$

45,595 

 

$

114,458 

 

$

95,054 

(1)

Other adjustments for the nine months ended September 30, 2017 include $5,586 of non-recurring legal matters and other contractual obligations, and $3,162 of certain impairment charges related to our feature films.   





4. Revenues



Adoption of ASC Topic 606, “Revenue from Contracts with Customers”

On January 1, 2018, the Company adopted the new revenue recognition standard pursuant to ASC Topic 606 to all contracts using the modified retrospective method. The most significant impact relates to the acceleration in the timing of revenue recognition of our consumer product licensing and film distribution revenues. The licensing and film distribution revenues historically have not comprised a significant percentage of total consolidated revenues. In 2017, 2016 and 2015, total consumer product licensing and film distribution revenues represented 8.8%,  8.1% and 8.5% of total consolidated revenues, respectively. Prior to the adoption of the new revenue standard in 2018, we recorded revenues from our consumer product licensing arrangements and film distribution arrangements on a lag upon the receipt of statements from the licensee and/or film distributor. Under the new revenue recognition standard, revenues are recorded based on best estimates available in the period of sales or usage. Financial statements presented for the reporting periods beginning after January 1, 2018 are presented under ASC Topic 606, while prior period amounts presented are not adjusted and continue to be reported in accordance with our historical accounting under ASC Topic 605, Revenue Recognition. We do not expect the adoption of the new revenue standard to have a material impact to our annual consolidated financial statements on an ongoing basis, however, it will likely impact the revenues recorded in a specific quarter as compared to previously reported periods due to the lag reporting that was previously used in our consumer product licensing and film distribution arrangements.

Under the modified retrospective transition method, we recorded a net cumulative effect adjustment of $10,086 as an increase to opening retained earnings as of January 1, 2018. The cumulative effect impact of adopting Topic 606 related primarily to our consumer product licensing revenues.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

The impact to our Consolidated Statements of Operations for the three months ended September 30, 2018 as a result of applying ASC Topic 606 was a decrease to our Net revenues, Operating expenses and Operating income of $2,712,  $687 and $2,025, respectively. The impact to our Consolidated Statements of Operations for the nine months ended September 30, 2018 as a result of applying ASC Topic 606 was a decrease to our Net revenues, Operating expenses and Operating income of $11,194,  $3,482 and $7,712, respectively. The impact to our Consolidated Balance Sheet as of September 30, 2018 as a result of applying ASC Topic 606 was a decrease to our accumulated deficit and total liabilities of $4,185 and $2,875, respectively, and an increase to total assets of $1,310.



Revenue Recognition Policies

Under ASC Topic 606, most of our sales revenue continues to be recognized when products are shipped or as services are performed and was not materially impacted by the adoption of the new revenue recognition standard. Revenues are generally recognized when control of the promised goods or services is transferred to our customers either at a point in time or over time, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Most of our contracts have one performance obligation and all consideration is allocated to that performance obligation. Our revenues do not include material amounts of variable consideration. The variable consideration contained in our contracts relate primarily to sales or usage-based royalties earned on consumer product licensing contracts. The variability related to these sales or usage-based royalties will be resolved in the periods when the licensee generates sales related to the intellectual property license. As it relates to our Consumer Products segment, the Company accounts for shipping and handling activities as fulfillment activities.

We derive our revenues principally from the following sources: (i) content rights fees associated with the distribution of WWE’s media content, (ii) subscriptions to WWE Network, (iii) fees for viewing our pay-per-view programming, (iv) feature film distribution, (v) advertising and sponsorship sales, (vi) live event ticket sales, (vii) consumer product licensing royalties from the sale by third-party licensees of WWE branded merchandise, (viii) direct-to-consumer sales of merchandise at our live event venues, and (ix) direct-to-consumer sales of our merchandise through eCommerce platforms. The below describes our revenue recognition policies in further detail for each major revenue source of the Company.

·

Content rights fees:

Rights fees received from distributors of our programming, both domestically and internationally, are recorded when the program (functional intellectual property) has been delivered and control has been transferred to the distributor and the license period has begun. Any advance payments received from the distributors are deferred upon collection and recognized into revenue as content is delivered. Our typical distribution agreement is between one and five years in length and frequently provides for contractual increases over its term.

·

WWE Network Subscriptions:

Revenues from the sale of subscriptions to WWE Network are recognized ratably over each paid monthly membership period. Deferred revenues consist of subscription fees billed to members that have not been recognized and gift memberships that have not been redeemed.

·

Pay-per-view programming:

Revenues from our pay-per-view programming are recorded when the event is aired/performed and are based upon our initial estimate of the number of buys achieved. This initial estimate is based on preliminary buy information received from our pay-per-view distributors. These estimates are updated each reporting period based on the latest information available.

·

Feature film distribution:

We partner with distributors to co-distribute our films. In these arrangements, the third-party distribution partners control the distribution and marketing of our co-distributed films, and as a result, we recognize revenue on a net basis after the third-party distributor recoups distribution fees and expenses. An estimate of film distribution revenues is recorded in the period the films are exploited and exhibited based on best available information and final adjustments to the estimated amounts are recorded when final statements are received. The estimates are derived from the best available recent information of film performance from our distributors and represents the most likely amount of revenues expected. In certain arrangements, where worldwide film rights and interests are licensed in perpetuity to third-party distribution partners, we recognize revenue upon delivery and transfer of control of the completed film to the third-party.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

·

Advertising and sponsorships:

Through our sponsorship packages, we offer advertisers a full range of our promotional vehicles, including online and print advertising, on-air announcements and special appearances by our Superstars. We allocate the transaction price to all performance obligations contained within a sponsorship and advertising arrangement based upon their relative standalone selling price. Standalone selling prices are determined generally based on a rate card used to determine pricing for individual components. Revenues are recognized as each performance obligation is satisfied, which generally occurs when the sponsorship and advertising is aired, exhibited, performed or played on the applicable WWE platform. We are generally the principal in our advertising and sponsorship arrangements because we control the advertising and sponsorship inventory before it is transferred to our customers. Our control is evidenced by our sole ability to monetize the advertising and sponsorship inventory and being primarily responsible to our customers.

·

Live event ticket sales:

Revenues from our live event ticket sales are recognized upon the occurrence of the related live event.

·

Consumer product licensing royalties:

Licensing revenues consist principally of royalties or license fees related to various WWE themed products, such as video games, toys and apparel, which are created using WWE brands and marks (symbolic intellectual property). Revenues from our licensed products are recognized in the period of the underlying product sales based on estimates from licensees and adjustments to the estimated amounts are recorded when final statements are received. The estimates are derived from the best available recent information from our licensees of underlying sales performance and represents the most likely amount of revenues expected. Any upfront license fees or minimum guarantees received from the licensee are deferred upon collection and recognized into revenue over the contract term as the amounts are earned.

·

Direct-to-consumer venue merchandise sales:

Direct-to-consumer merchandise sales consist of sales of merchandise at our live events. Revenues are recognized at the point of sale, as control is transferred to the customer.

·

Direct-to-consumer eCommerce sales:

Direct-to-consumer eCommerce revenues consist of sales of merchandise on our websites, including through our WWEShop Internet storefront and on distribution platforms, including Amazon. Revenues are recognized at a point in time, as control is transferred to the customer upon shipment.

Payment Terms

Our revenues do not include material amounts of variable consideration, other than the sale or usage-based royalties earned related to our consumer product licensing and certain other content rights contracts. Our payment terms vary by the type of products or services offered, and may be subject to contractual payment terms, which may include advance payment requirements. The time between invoicing and when payment is due is not significant, generally within 30 to 60 days. We have elected the practical expedient to not adjust the total consideration within a contract to reflect a financing component when the duration of the financing is one year or less. Our contracts do not generally include a significant financing component. Our contracts with customers do not generally result in significant obligations associated with returns, refunds or warranties.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

Disaggregated Revenues

The following table presents our revenues disaggregated by primary revenue sources. Sales and usage-based taxes are excluded from revenues.





 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Net revenues:

 

 

 

 

 

 

 

 

 

 

 

 

Media Segment:

 

 

 

 

 

 

 

 

 

 

 

 

Network (including pay-per-view)

 

$

49,445 

 

$

48,221 

 

$

152,445 

 

$

145,671 

Core content rights fees (1)

 

 

65,912 

 

 

60,375 

 

 

197,590 

 

 

179,684 

Advertising and sponsorships

 

 

15,038 

 

 

12,991 

 

 

46,811 

 

 

35,473 

Other (2)

 

 

11,683 

 

 

9,136 

 

 

81,240 

 

 

28,313 

Total Media Segment net revenues

 

 

142,078 

 

 

130,723 

 

 

478,086 

 

 

389,141 

Live Events Segment:

 

 

 

 

 

 

 

 

 

 

 

 

North American ticket sales

 

 

22,426 

 

 

25,255 

 

 

85,711 

 

 

91,177 

International ticket sales

 

 

2,238 

 

 

5,081 

 

 

15,771 

 

 

19,006 

Advertising and sponsorships

 

 

400 

 

 

412 

 

 

1,520 

 

 

1,472 

Other (3)

 

 

1,659 

 

 

852 

 

 

6,806 

 

 

4,878 

Total Live Events Segment net revenues

 

 

26,723 

 

 

31,600 

 

 

109,808 

 

 

116,533 

Consumer Products Segment:

 

 

 

 

 

 

 

 

 

 

 

 

Consumer product licensing

 

 

8,559 

 

 

11,331 

 

 

28,608 

 

 

40,819 

eCommerce

 

 

6,786 

 

 

7,211 

 

 

23,304 

 

 

23,519 

Venue merchandise

 

 

4,245 

 

 

5,460 

 

 

17,848 

 

 

19,343 

Total Consumer Products Segment net revenues

 

 

19,590 

 

 

24,002 

 

 

69,760 

 

 

83,681 

Total net revenues

 

$

188,391 

 

$

186,325 

 

$

657,654 

 

$

589,355 



 

 

 

 

 

 

 

 

 

 

 

 

(1)

Core content rights fees consist primarily of licensing revenues earned from the distribution of our flagship programs, Raw and SmackDown Live, through global broadcast, pay television and digital platforms.

(2)

Other revenues within our Media segment reflect revenues earned from the distribution of other content, including, but not limited to, scripted,  reality and other in-ring programming, as well as theatrical and direct-to-home video releases.

(3)

Other revenues within our Live Events segment primarily consists of the sale of travel packages associated with the Company’s global live events and commissions earned through secondary ticketing.



Except for our WWE Network subscriptions revenues, which are recorded over time during the subscription term and our consumer product licensing revenues which are recorded over time during the licensing period, our other revenue streams identified in the table above are generally recognized at a point-in-time when the performance obligations are satisfied.

 

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

Remaining Performance Obligations

As of September 30, 2018, for contracts greater than one year, the aggregate amount of the transaction price allocated to remaining performance obligations is $3,476,806, comprised of our multi-year content distribution, consumer product licensing and sponsorship contracts. We will recognize rights fees related to our multi-year content distribution contracts as content is delivered to the distributors during the periods 2018 through 2028. We will recognize the revenues associated with the minimum guarantees on our multi-year consumer product licensing arrangements by the end of the licensing periods, which range from 2018 through 2024. For our multi-year sponsorship arrangements, we will recognize sponsorship revenues as the sponsorship obligations are satisfied during the periods 2018 through 2021. The transaction price related to these future obligations do not include any variable consideration, which generally consists of sales or usage-based royalties earned on consumer product licensing and certain other content rights contracts. The variability related to these sales or usage-based royalties will be resolved in the periods when the licensee generates sales related to the intellectual property license.

Contract Assets and Contract Liabilities (Deferred Revenues)

A contract asset results when goods or services have been transferred to the customer, but payment is contingent upon a future event, other than the passage of time (i.e. type of unbilled receivable). The Company does not have any material unbilled receivables, therefore, does not have any contract assets, only accounts receivable as disclosed on the face of our consolidated balance sheet.

We record deferred revenues (also referred to as contract liabilities under Topic 606) when cash payments are received or due in advance of our performance. Our deferred revenue balance primarily relates to advance payments received related to our content distribution rights agreements, our consumer product licensing agreements, and our sponsorship and advertising arrangements.  The Company’s deferred revenue (i.e. contract liabilities) as of September 30, 2018 and December 31, 2017 was $77,125 and $69,795, respectively.



The increase in the deferred revenue balance for the nine months ended September 30, 2018 of $7,330 is primarily driven by cash payments received or due in advance of satisfying our performance obligations. 

Contract Costs (Costs of Obtaining a Contract)

Except for certain multi-year television content arrangements, we generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within Marking and selling expenses within our Consolidated Statements of Operations. Capitalized commission fees of $2,231 and $2,242 at September 30, 2018 and December 31, 2017, respectively, relate primarily to incremental costs of obtaining our long-term television content arrangements and these costs are being amortized over the duration of the underlying content agreements on a straight-line basis to marketing and selling expense. The amount of amortization was $345 and $320, and $986 and $961 for the three and nine months ended September 30, 2018 and 2017, respectively, and there was no impairment in relation to the costs capitalized.



 

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WORLD WRESTLING ENTERTAINMENT, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

5. Earnings Per Share

For purposes of calculating basic and diluted earnings per share, we used the following weighted average common shares outstanding (in thousands):







 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 



 

Three Months Ended

 

Nine Months Ended



 

September 30,

 

September 30,



 

2018

 

2017

 

2018

 

2017

Net income

 

$

33,590 

 

$

21,854 

 

$

58,370 

 

$

27,827 



 

 

 

 

 

 

 

 

 

 

 

 

Weighted average basic common shares outstanding

 

 

77,808 

 

 

76,957 

 

 

77,371 

 

 

76,620 

Dilutive effect of restricted and performance stock units

 

 

1,620 

 

 

1,548 

 

 

2,010 

 

 

1,761 

Dilutive effect of convertible debt instruments

 

 

11,332 

 

 

 —

 

 

8,563 

 

 

 —

Dilutive effect of employee share purchase plan

 

 

 —

 

 

 —

 

 

 —

 

 

Weighted average dilutive common shares outstanding

 

 

90,760 

 

 

78,505 

 

 

87,944 

 

 

78,383 



 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.43 

 

$

0.28 

 

$

0.75 

 

$

0.36 

Diluted

 

$

0.37 

 

$

0.28 

 

$

0.66 

 

$

0.36 



 

 

 

 

 

 

 

 

 

 

 

 

Anti-dilutive shares (excluded from per-share calculations):

 

 

 

 

 

 

 

 

 

 

 

 

Net shares received on purchased call of convertible debt hedge

 

 

6,030 

 

 

 —

 

 

4,815 

 

 

 —

Outstanding restricted and performance stock units

 

 

 

 

 —

 

 

320 

 

 

 —

Effect of Convertible Notes and Related Convertible Note Hedge and Warrants

In connection with the issuance of the Convertible Notes, the Company entered into Convertible Note Hedge and Warrant transactions as described further in Note 13,  Convertible Debt. The collective impact of the Convertible Note Hedge and Warrants effectively eliminates any economic dilution that may occur from the actual conversion of the Convertible Notes between the conversion price of $24.91 per share and the strike price of the Warrants of $31.89 per share.

The denominator of our diluted earnings per share calculation for the three and nine months ended September 30, 2018 includes the effect of additional shares of common stock issued using the treasury stock method since the average price of our common stock exceeded the conversion price of the Convertible Notes of $24.91 per share. In addition, the denominator of our diluted earnings per share calculation for the three and nine months ended September 30, 2018 includes the additional shares issued related to the Warrants using the treasury stock method since the average price of our common stock exceeded the strike price of the Warrants of $31.89 per share. The dilution from the Convertible Notes and Warrants had a $0.05 and $0.07 impact on diluted earnings per share for the three and nine months ended September 30, 2018, respectively. There was no impact on diluted earnings per share during the three and nine months ended September 30, 2017 since the average price of our common stock did not exceed the conversion price of $24.91 during the periods. Prior to actual conversion, the Convertible Note Hedges are not considered for purposes of the calculation of diluted earnings per share, as their effect would be anti-dilutive.





6. Stock-based Compensation



Our 2016  Omnibus Incentive Plan (the “2016 Plan”) provides for the grant of incentive or non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, other stock-based awards and performance awards to eligible participants as determined by the Compensation Committee of the Board of Directors. Awards may be granted as incentives and rewards to encourage officers, employees, consultants, advisors and independent contractors of the Company and its affiliates and to non-employee directors of the Company to participate in our long-term success.

Stock-based compensation costs, which includes costs related to RSUs, PSUs, PSU-TSRs and the Company's qualified employee stock purchase plan, totaled $11,776 and $5,180, and $34,308 and $17,962 for the three and nine months ended September 30, 2018 and 2017, respectively.

 

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WORLD WRESTLING ENTERTAINMENT, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

Restricted Stock Units

The Company grants restricted stock units ("RSUs") to officers and employees under the 2016 Plan. Stock-based compensation costs associated with our RSUs are determined using the fair market value of the Company’s common stock on the date of the grant.  These costs are recognized over the requisite service period using the graded vesting method, net of estimated forfeitures. RSUs have a service requirement typically over a three and one-half year vesting schedule and vest in equal annual installments. We estimate forfeitures based on historical trends when recognizing compensation expense and adjust the estimate of forfeitures when they are expected to differ or as forfeitures occur. Unvested RSUs accrue dividend equivalents at the same rate as are paid on our shares of Class A common stock.  The dividend equivalents are subject to the same vesting schedule as the underlying RSUs.

The following table summarizes the RSU activity during the nine months ended September 30, 2018:







 

 

 

 

 



 

 

 

 

 



 

Units

 

Weighted-

Average

Grant-Date

Fair Value

Unvested at January 1, 2018

 

477,792 

 

$

18.33 

Granted

 

185,059 

 

$

36.92 

Vested

 

(208,396)

 

$

17.45 

Forfeited

 

(39,892)

 

$

24.62 

Dividend equivalents

 

3,771 

 

$

23.67 

Unvested at September 30, 2018

 

418,334 

 

$

26.44 





Performance Stock Units

The Company grants performance stock units (“PSUs”) to officers and employees under the 2016 Plan. Stock-based compensation costs associated with our PSUs are initially determined using the fair market value of the Company’s common stock on the date the awards are approved by our Compensation Committee (service inception date). The vesting of these PSUs are subject to certain performance conditions and a service requirement of typically three and one-half years. Until the performance conditions are met, stock compensation costs associated with these PSUs are re-measured each reporting period based upon the fair market value of the Company's common stock and the estimated performance attainment on the reporting date. The ultimate number of PSUs that are issued to an employee is the result of the actual performance of the Company at the end of the performance period compared to the performance conditions. Stock compensation costs for our PSUs are recognized over the requisite service period using the graded vesting method, net of estimated forfeitures. We estimate forfeitures based on historical trends when recognizing compensation expense and adjust the estimate of forfeitures when they are expected to differ or as forfeitures occur.  Unvested PSUs accrue dividend equivalents once the performance conditions are met at the same rate as are paid on our shares of Class A common stock. The dividend equivalents are subject to the same vesting schedule as the underlying PSUs.

The following table summarizes the PSU activity during the nine months ended September 30, 2018:







 

 

 

 

 



 

 

 

 

 



 

Units

 

Weighted-

Average

Grant-Date

Fair Value

Unvested at January 1, 2018

 

2,053,931 

 

$

21.37 

Granted

 

369,996 

 

$

96.34 

Achievement adjustment

 

100,753 

 

$

33.84 

Vested

 

(1,244,447)

 

$

19.76 

Forfeited

 

(162,682)

 

$

49.79 

Dividend equivalents

 

11,736 

 

$

22.97 

Unvested at September 30, 2018

 

1,129,287 

 

$

46.21 





During the nine months ended September 30, 2018,  we granted 369,996 PSUs,  which are subject to certain performance conditions.

 

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WORLD WRESTLING ENTERTAINMENT, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

During the year ended December 31, 2017, we granted 550,460 PSUs,  which were subject to performance conditions. During the first quarter of 2018,  it was determined that the performance conditions related to these PSUs were exceeded, which resulted in an increase of 100,753 PSUs in 2018 relating to the initial 2017 PSU grant.



Performance Stock Units with a Market Condition Tied to Relative Total Shareholder Return

During the first quarter of 2018, the Compensation Committee approved certain agreements to grant PSUs with a market condition (“PSU-TSRs”) where vesting is conditioned upon the total shareholder return performance of the Company’s stock relative to the performance of a peer group over five distinct performance periods from 2018 through 2024. The grant date fair value of the award was calculated using a Monte-Carlo simulation model which factors in the number of awards to be earned based on the achievement of the market condition. This model simulates the various stock price movements of the Company and peer group companies using certain assumptions, including the stock price of WWE and those of the peer group, stock price volatility, the risk-free interest rate, correlation coefficients, and expected dividend yield. The grant date fair value of the award totaled $16,168 and is being amortized as compensation cost over the requisite service period using the graded vesting method from March 2018 through July 2024. 

The following table summarizes the PSU-TSR activity during the nine months ended September 30, 2018:





 

 

 

 

 



 

 

 

 

 



 

Units

 

Weighted-

Average

Grant-Date

Fair Value

Unvested at January 1, 2018

 

 —

 

$

 —

Granted

 

340,971 

 

$

47.42 

Unvested at September 30, 2018

 

340,971 

 

$

47.42 

 

7. Property and Equipment

Property and equipment consisted of the following:







 

 

 

 

 

 



 

 

 

 

 

 



 

As of



 

September 30,

 

December 31,



 

2018

 

2017

Land, buildings and improvements

 

$

136,895 

 

$

134,052 

Equipment

 

 

115,305 

 

 

98,245 

Corporate aircraft

 

 

32,249 

 

 

31,277 

Vehicles

 

 

905 

 

 

905 



 

 

285,354 

 

 

264,479 

Less: accumulated depreciation and amortization

 

 

(149,829)

 

 

(133,154)

    Total

 

$

135,525 

 

$

131,325 



Depreciation expense for property and equipment totaled $5,682 and $6,151,  and $18,406 and $18,517 for the three and nine months ended September 30, 2018 and 2017, respectively.



During the second quarter of 2018, we recorded a non-cash abandonment charge of $1,693 to write off the carrying value of internal use software that we deemed will no longer be used by the Company and had no further alternative use. This charge is included as a component of Operating expenses on the Consolidated Statements of Operations and included within our Media segment results for the nine months ended September 30, 2018.

 

 

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WORLD WRESTLING ENTERTAINMENT, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share data)

(Unaudited)

 

8. Feature Film Production Assets, Net

Feature film production assets consisted of the following:







 

 

 

 

 

 



 

 

 

 

 

 



 

As of



 

September 30,

 

December 31,



 

2018

 

2017

In release

 

$

11,653 

 

$

15,869 

Completed but not released

 

 

3,041 

 

 

2,211 

In production

 

 

2,199 

 

 

3,107 

In development

 

 

358 

 

 

1,113 

    Total

 

$

17,251 

 

$

22,300 



Approximately 27% of “In release” film production assets are estimated to be amortized over the next 12 months, and approximately 63% of “In release” film production assets are estimated to be amortized over the next three years. We anticipate amortizing approximately 80% of our "In release" film production assets within four years as we receive revenues associated with television distribution of our licensed films. During the three and nine months ended September 30, 2018 and 2017, we amortized $884 and $2,346, and $2,192 and $4,987,  respectively, of feature film production assets.

We currently have three films designated as “Completed but not released” and have one film “In production.” We also have capitalized certain script development costs and pre-production costs for various other film projects designated as “In development.” Capitalized script development costs are evaluated at each reporting period for impairment and to determine if a project is deemed to be abandoned. During the three and nine months ended September 30, 2018 and 2017, we expensed $122 and $157, and $851 and $157,  respectively, related to previously capitalized development costs related to abandoned projects.

Unamortized feature film production assets are evaluated for impairment each reporting period. 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 and/or costs 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 using a discounted cash flows model. If fair value is less than unamortized cost, the film asset is written down to fair value.    

We recorded impairment charges of $1,325 and $759, and $2,813 and $3,921 related to our feature films during the three and nine months ended September 30, 2018 and 2017, respectively. These impairment charges represent the excess of the recorded net carrying value over the estimated fair value.



9. Television Production Assets, Net

Television production assets consisted of the following:







 

 

 

 

 

 



 

 

 

 

 

 



 

As of