See accompanying notes to consolidated financial
statements.
10
Table of Contents
TKO GROUP HOLDINGS, INC.
Notes to Consolidated Financial Statements
(Unaudited)
1. DESCRIPTIO
N OF BUSINESS
TKO Group Holdings, Inc. (the “Company” or “TKO”) was incorporated as a Delaware corporation in March 2023, under the name New Whale Inc., and was formed for the purpose of facilitating the
business combination of the Ultimate Fighting Championship (“UFC”) and World Wrestling Entertainment, LLC (f/k/a World Wrestling Entertainment, Inc.) (“WWE”) businesses under TKO Operating Company, LLC (f/k/a Zuffa
Parent, LLC) (“Zuffa” or “TKO OpCo”), which owns and operates the UFC and WWE businesses (the “Transactions”), as contemplated within the Transaction Agreement, dated as of April 2, 2023, by and among
Endeavor Group Holdings, Inc. (“Endeavor” or “EGH”), Endeavor Operating Company, LLC, TKO OpCo, WWE, TKO, and Whale Merger Sub Inc. (the “Transaction Agreement”). On September 12, 2023, the Transactions were
completed with the newly-formed TKO combining the UFC and WWE businesses. See Note 4, Acquisition of WWE, for further details. Under the terms of the
Transaction Agreement, (A) EGH and/or its subsidiaries received (1) a 51.0% controlling non-economic voting interest in TKO on a fully-diluted basis and (2) a 51.0% economic interest in the operating subsidiary on a fully diluted basis, TKO OpCo, which owns
all of the assets of the UFC and WWE businesses, and (B) the stockholders of WWE received (1) a 49.0% voting interest in TKO on a fully diluted basis and (2) a 100% economic
interest in TKO, which in turn holds a 49.0% economic interest in TKO OpCo on a fully-diluted basis.
TKO OpCo is the accounting acquirer and predecessor to TKO. Financial results
and information included in the accompanying consolidated financial statements include (1) prior to the consummation of the Transactions, financial results and information of Zuffa and its consolidated subsidiaries, which includes UFC and its
subsidiaries, and (2) after the consummation of the Transactions, financial results and information of TKO Group Holdings, Inc., and its consolidated subsidiaries, which includes UFC and WWE and their respective subsidiaries.
Unless the context suggests otherwise, references to the
“Company” or “TKO” refer to Zuffa and its consolidated subsidiaries prior to the consummation of the Transactions and to TKO Group Holdings, Inc. and its consolidated subsidiaries after the consummation of the
Transactions.
TKO is a premium sports and entertainment company
which operates leading combat sports and sports entertainment brands. The Company monetizes its brands through four principal activities: Media rights and content, Live
events, Sponsorship and Consumer products licensing.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The accompanying interim consolidated financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of America (“GAAP”) and pursuant to the rules and regulations of the SEC for reporting interim financial information and should be read in conjunction with
the Company’s consolidated financial statements and accompanying footnotes in our Annual Report on Form 10-K for the year ended December 31, 2023 (the “Annual Report”). Certain information and note disclosures normally included in the annual financial statements have been
condensed or omitted from these interim financial statements. The interim consolidated financial statements as of March 31, 2024 and for the three months ended March 31, 2024 and 2023 are unaudited; however, in the opinion of management, such interim consolidated financial statements reflect all adjustments, consisting solely of normal and
recurring adjustments, necessary for a fair statement of its financial position, results of operations and cash flows for the interim periods presented. 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.
TKO is the sole managing member of TKO
OpCo and maintains a controlling financial interest in TKO OpCo. As sole managing member, the Company operates and controls all of the business affairs of TKO OpCo. As a result, the Company is the primary beneficiary and thus consolidates the
financial results of TKO OpCo and reports a non-controlling interest representing the economic interest in TKO OpCo held by the other members of TKO OpCo. As of March 31,
2024, the Company owned 47.9% of TKO OpCo.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying disclosures.
Significant accounting policies that contain subjective management estimates and
assumptions include those related to revenue recognition, the allowance for doubtful accounts, content cost amortization and impairment, the fair value of acquired assets and
liabilities associated with acquisitions, the fair value of the Company’s reporting units and the
assessment of goodwill, other intangible assets and long-lived assets for impairment, determination of useful lives of intangible assets and long-lived assets acquired, the fair value of equity-based compensation, leases, income taxes and
contingencies.
Management evaluates these estimates using historical experience and other factors,
including the general economic environment and actions it may take in the future. The Company adjusts such estimates when facts and circumstances dictate. However, these estimates may involve significant uncertainties and judgments and cannot be
determined with precision. In addition, these estimates are based on management's best judgment at a point in time and as such, these estimates may ultimately differ from actual results. Changes in estimates resulting from weakness in the economic
environment or other factors beyond the Company's control could be material and would be reflected in the Company's consolidated financial statements in future periods.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Issued Accounting Pronouncements
In August 2023, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2023-05, Business Combinations – Joint Venture Formations (Subtopic 805-60): Recognition and Initial Measurement. This ASU requires that a joint venture apply a new basis of accounting upon formation. The amendments in this update are effective prospectively for all joint venture
formations with a formation date on or after January 1, 2025, with an option to apply the amendments retrospectively. Early adoption is permitted in any interim or annual period in which financial statements have not yet been issued. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements.
In October 2023, the FASB issued ASU 2023-06, Disclosure
Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. This ASU amends the ASC to
incorporate certain disclosure requirements from SEC Release No. 33-10532, Disclosure Update and Simplification, which was issued in 2018. The effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-X or
Regulation S-K becomes effective, with early adoption prohibited. If, by June 30, 2027, the SEC has not removed the applicable requirement from Regulation S-X or Regulation S-K, the pending content of the related amendment will be removed from
the ASC and will not become
effective. The Company is in the process
of assessing the impact of this ASU on its consolidated financial statements.
In November 2023, the FASB issued ASU 2023-07,
Improvements to Reportable Segment
Disclosures. This ASU improves reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The
amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. The update should be applied retrospectively to all
prior periods presented in the financial statements. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax
Disclosures. This ASU requires that an entity annually disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a
quantitative threshold (if the effect of those reconciling items is equal to or greater than 5 percent of the amount computed by multiplying pretax income or loss by the applicable statutory income tax rate) as well as income taxes paid
disaggregated by jurisdiction. The amendments in this Update are effective for all entities for fiscal years beginning after December 15, 2024. Early adoption is permitted. The Company is in the process of assessing the impact of this ASU on its
consolidated financial statements.
In March 2024, the FASB issued ASU 2024-02, Codification Improvements –
Amendments to Remove References to the Concepts Statements. This ASU amends the Accounting Standards Codification (“ASC”) to remove references to various FASB Concepts Statements to simplify the ASC and draw a distinction between authoritative and
nonauthoritative literature. The amendments in this update apply to all reporting entities within the scope of the affected accounting guidance, and are effective for public entities for fiscal years beginning after December 15, 2024. Early adoption
is permitted in any interim or annual period in which financial statements have not yet been issued. The Company is in the process of assessing the impact of this ASU on its consolidated financial statements.
4. ACQUISITION OF WWE
Transactions Overview
On September
12, 2023 (the “Closing Date”), the transaction between EGH and WWE was completed with the newly-formed TKO combining the UFC and WWE businesses. Under the terms of the Transaction Agreement, (A) EGH and its subsidiaries received (1) a 51.0% controlling non-economic voting interest in TKO on a fully-diluted basis and (2) a 51.0% economic interest on a fully-diluted basis in the operating subsidiary, TKO OpCo, which owns all of the assets of the UFC and WWE businesses, and (B) the stockholders of WWE received (1) a 49.0% voting interest in TKO on a fully-diluted basis and (2) a 100% economic
interest in TKO, which in turn holds a 49.0% economic interest in TKO OpCo on a fully-diluted
basis.
WWE
is an integrated media and entertainment company that has been involved in the sports entertainment business for four decades. WWE is principally engaged in the production
and distribution of unique and creative content through various channels, including content rights agreements for its flagship programs, Raw and SmackDown, premium live event programming, monetization across social media outlets, live events, and licensing of various
WWE-themed products.
The Transactions have been accounted for as a reverse acquisition of WWE using the acquisition method of accounting in accordance with the guidance
of ASC 805, Business Combinations (“ASC 805”), with TKO OpCo, the legal acquiree, treated as the accounting acquirer. Based on this determination, the Company has allocated the preliminary purchase price to the fair value of WWE’s identifiable assets and liabilities as of the Closing Date, with
the excess preliminary purchase price recorded as goodwill. The goodwill was assigned entirely to the WWE segment and is not deductible for tax purposes.
The weighted average life
of finite-lived intangible assets acquired was 20.3
years, which consisted of trademarks and trade names with a weighted average life of 25.0 years, customer relationships with a weighted
average life of 11.3 years and other intangible assets with a weighted average life of 3.6 years.
In connection with the
Transactions, the Company incurred transaction costs of
$0.5 million and $5.4
million for the three months ended March 31, 2024 and 2023, respectively, which were expensed as incurred and included in selling, general and administrative expenses in the consolidated
statements of
operations.
Consideration Transferred
The fair value of the consideration transferred in the reverse acquisition was $8,432.1 million, which consisted of 83,161,123 shares of TKO Class A
common stock valued at $8,061.8 million, Replacement
Awards (as defined below) valued at $49.3 million and
$321.0 million of deferred consideration which was
paid on September 29, 2023 to former WWE shareholders in the form of a special
dividend.
Pursuant to the Transactions, awards of WWE RSUs and PSUs outstanding immediately
prior to the completion of the Transactions were converted into awards of TKO RSUs or PSUs, as applicable, on the same terms and conditions as were applicable immediately
prior to the Closing Date (the “Replacement Awards”). The portion of the fair-value-based measure of the Replacement Awards that is attributable to
pre-combination vesting is purchase consideration and is valued at approximately $49.3 million.
Preliminary Allocation of Purchase Price
The purchase price is allocated to the underlying WWE assets acquired and liabilities
assumed based on their estimated fair values on the Closing Date, with any excess purchase price recorded as goodwill. Goodwill
is primarily attributable to the synergies that are expected to arise as a result of the Transactions and other intangible assets that do not qualify for separate recognition. The purchase price allocation
reflects preliminary fair value estimates, including measurement period adjustments, based on management analysis, including preliminary work performed by third-party
valuation specialists. The estimated fair value of assets acquired and liabilities assumed are preliminary and subject to change as purchase price allocations are
finalized, which is expected within one year of the Closing Date. The effects of measurement period adjustments made during the three months ended March 31, 2024 were not material to the Company’s consolidated financial statements.
The fair value of the
nonredeemable non-controlling interest of $4,521.8 million was calculated as EGH’s 51.9% ownership interest in TKO OpCo’s net assets. TKO OpCo’s net assets differ from TKO combined net assets primarily due to the net deferred tax liabilities
for which the non-controlling interest does not have economic rights.
5. REVENUE
The Company derives its revenue principally from the following sources: (i) media
rights and content fees associated with the distribution of content, (ii) ticket sales at live events and site fees, (iii) sponsorship and advertising sales, and (iv) consumer product licensing.
Disaggregated Revenue
The following table presents the
Company’s revenue disaggregated by primary revenue sources (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
2023 |
Revenue: |
|
|
|
|
|
|
UFC Segment: |
|
|
|
|
|
|
Media rights and content |
|
$ |
214,462
|
|
$ |
224,062
|
Live events |
|
|
35,277
|
|
|
31,390
|
Sponsorship |
|
|
48,603
|
|
|
38,057
|
Consumer products licensing |
|
|
14,648
|
|
|
13,221
|
Total UFC Segment revenue |
|
|
312,990
|
|
|
306,730
|
WWE Segment: |
|
|
|
|
|
|
Media rights and content |
|
|
221,107
|
|
|
— |
Live events |
|
|
50,192
|
|
|
— |
Sponsorship |
|
|
13,815
|
|
|
— |
Consumer products licensing |
|
|
31,607
|
|
|
— |
Total WWE Segment revenue |
|
|
316,721
|
|
|
— |
Total revenue |
|
$ |
629,711
|
|
$ |
306,730
|
Remaining Performance Obligations
The transaction price related to
the Company’s future performance obligations does not include any variable consideration
related to sales or usage-based royalties. 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.
The following table presents the aggregate amount of the transaction price allocated to remaining performance obligations for contracts greater than one year for their initial term prior to opt-out
provisions with unsatisfied or partially satisfied performance obligations as of March 31, 2024 (in thousands):
|
|
|
|
Remainder of 2024 |
|
$ |
1,541,246
|
2025 |
|
|
2,141,149
|
2026 |
|
|
1,222,433
|
2027 |
|
|
1,156,324
|
2028 |
|
|
1,108,766
|
Thereafter |
|
|
961,283
|
Total remaining performance obligations |
|
$ |
8,131,201
|
Revenue from Prior Period Performance Obligations
The Company did not recognize any significant revenue from performance obligations satisfied in prior periods during the three months ended March 31, 2024 and 2023, respectively.
Contract Liabilities (Deferred Revenues)
The Company records deferred revenue when cash payments are received or due in advance
of the Company’s performance. The Company’s deferred revenue balance primarily relates to advance payments received related to its content distribution rights agreements, consumer product licensing agreements and sponsorship arrangements, as well as memberships for the Company’s subscription services. Deferred revenue is included in the current liabilities section and in other long-term liabilities in the consolidated balance
sheets.
The following table presents the Company’s deferred revenue as of March 31, 2024 and December 31, 2023 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
|
|
|
|
|
|
|
As of |
|
|
December 31, |
|
|
|
|
|
|
|
Foreign |
|
March 31, |
Description |
|
2023 |
|
Additions |
|
Deductions |
|
Exchange |
|
2024 |
Deferred revenue - current |
|
$ |
118,992
|
|
$ |
356,498
|
|
$ |
(363,728)
|
|
$ |
20
|
|
$ |
111,782
|
Deferred revenue - non-current |
|
|
672 |
|
|
— |
|
|
(168) |
|
|
— |
|
|
504 |
6. SUPPLEMENTARY DATA
Property, Buildings and
Equipment, net
Property, buildings and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
March 31, |
|
December 31, |
|
|
2024 |
|
2023 |
Buildings and improvements |
|
$ |
402,613
|
|
$ |
394,481
|
Office, computer and other equipment |
|
|
132,290
|
|
|
126,082
|
Land and land improvements |
|
|
80,919
|
|
|
80,919
|
Furniture and fixtures |
|
|
75,572
|
|
|
74,862
|
Construction in progress |
|
|
28,805
|
|
|
20,389
|
|
|
|
720,199
|
|
|
696,733
|
Less: accumulated depreciation |
|
|
(108,443)
|
|
|
(88,317)
|
Total Property, buildings and equipment, net |
|
$ |
611,756
|
|
$ |
608,416
|
Depreciation expense for
property, buildings and equipment totaled $20.3 million and $3.5 million for the three months
ended March 31, 2024 and 2023, respectively.
Allowance for Doubtful Accounts
The changes in the
allowance for doubtful accounts are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
Charged to |
|
|
|
|
|
|
|
As of |
|
|
December 31, |
|
Costs and |
|
|
|
|
Foreign |
|
March 31, |
|
|
2023 |
|
Expenses |
|
Deductions |
|
Exchange |
|
2024 |
Three Months Ended March 31, 2024 |
|
$ |
1,093
|
|
$ |
150
|
|
$ |
(52)
|
|
$ |
— |
|
$ |
1,191
|
Film and Television Content Costs
The following table
presents the Company’s unamortized content costs, which are included as a component of other assets in the consolidated balance sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Predominantly Monetized Individually |
|
Predominantly Monetized as a Film Group |
|
|
As of |
|
As of |
|
|
March 31, |
|
December 31, |
|
March 31, |
|
December 31, |
|
|
2024 |
|
2023 |
|
2024 |
|
2023 |
Licensed and acquired program rights |
|
$ |
— |
|
$ |
— |
|
$ |
22,425
|
|
$ |
21,413
|
Produced programming: |
|
|
|
|
|
|
|
|
|
|
|
|
In release |
|
|
2,014
|
|
|
1,410
|
|
|
1,914
|
|
|
2,049
|
Completed but not released |
|
|
2 |
|
|
2,045 |
|
|
— |
|
|
— |
In production |
|
|
639
|
|
|
1,350
|
|
|
754
|
|
|
819
|
Total film and television costs |
|
$ |
2,655
|
|
$ |
4,805
|
|
$ |
25,093
|
|
$ |
24,281
|
As of March 31, 2024, substantially all of the “completed but not
released” content costs that are monetized individually are estimated to be amortized over the next 12 months and approximately
77% of the “in release” content costs monetized individually are estimated to be amortized over the next three
years.
As of March 31, 2024, substantially all of the
“licensed and acquired program rights” and “in release” content costs monetized as a film group are estimated to be amortized over the next three
years.
Amortization and impairment of content costs, which are included as a component of
direct operating costs in the consolidated statement of operations, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
2023 |
Content production amortization expense - assets monetized individually |
|
$ |
3,224
|
|
$ |
— |
Content production amortization expense - assets monetized as a film group |
|
|
4,504 |
|
|
3,914 |
Content production impairment charges (1) |
|
|
— |
|
|
— |
Total amortization and impairment of content costs |
|
$ |
7,728
|
|
$ |
3,914
|
|
(1) |
|
Unamortized content costs are
evaluated for impairment whenever events or changes in circumstances indicate that the fair value of a film predominantly monetized on its own or a film group may be less than its amortized costs. If conditions indicate a potential impairment, and
the estimated future cash flows are not sufficient to recover the unamortized costs, the asset is written down to fair value. In addition, if we determine that content will not likely air, we will expense the remaining unamortized
costs. |
Other current assets
The following
is a summary of other current assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
March 31, |
|
December 31, |
|
|
2024 |
|
2023 |
Prepaid taxes |
|
$ |
89,488
|
|
$ |
57,885
|
Prepaid event and production-related costs |
|
|
24,240
|
|
|
15,382
|
Amounts due from the Group (Note 18) |
|
|
16,017
|
|
|
11,599
|
Assets held for sale |
|
|
7,500 |
|
|
7,500 |
Prepaid insurance |
|
|
5,244
|
|
|
8,145
|
Other |
|
|
21,904
|
|
|
20,644
|
Total |
|
$ |
164,393
|
|
$ |
121,155
|
Accrued Liabilities
The following
is a summary of accrued liabilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
March 31, |
|
December 31, |
|
|
2024 |
|
2023 |
Legal settlements (Note 16) |
|
$ |
200,000
|
|
$ |
— |
Event and production-related costs |
|
|
51,888
|
|
|
51,015
|
Interest |
|
|
41,221
|
|
|
41,634
|
Payroll-related costs |
|
|
36,477
|
|
|
100,982
|
Legal and professional fees |
|
|
28,724
|
|
|
18,730
|
Accrued capital expenditures |
|
|
24,060
|
|
|
29,550
|
Other |
|
|
23,302
|
|
|
25,452
|
Total |
|
$ |
405,672
|
|
$ |
267,363
|
7. GOODWILL AND INTANGIBLE ASSETS
Goodwill
The changes in the carrying value of Goodwill are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
UFC (1) |
|
WWE (2) |
|
Total |
Balance — December 31, 2023 |
|
$ |
2,602,639
|
|
$ |
5,063,846
|
|
$ |
7,666,485
|
Foreign exchange and other |
|
|
— |
|
|
(337) |
|
|
(337) |
Balance — March 31, 2024 |
|
$ |
2,602,639
|
|
$ |
5,063,509
|
|
$ |
7,666,148
|
|
(1) |
|
Reflects goodwill resulting from the Company’s election to apply pushdown accounting to reflect EGH’s new basis of accounting in the UFC’s assets and liabilities,
including goodwill, which occurred during 2016. |
|
(2) |
|
Based on preliminary fair values acquired through the business acquisition of WWE. See Note 4, Acquisition of
WWE, for further information. |
There were no dispositions or impairments to goodwill during the three months ended March 31, 2024 and 2023.
Intangible Assets, net
The following table summarizes information relating to the
Company’s identifiable intangible assets as of March 31, 2024 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life |
|
|
|
|
Accumulated |
|
|
|
|
(in years) |
|
Gross Amount |
|
Amortization |
|
Carrying Value |
Trademarks and trade names |
|
|
22.8 |
|
$ |
2,891,826
|
|
$ |
(346,342)
|
|
$ |
2,545,484
|
Customer relationships |
|
|
5.4 |
|
|
1,255,010
|
|
|
(429,059) |
|
|
825,951
|
Other (1) |
|
|
3.4 |
|
|
145,588
|
|
|
(34,002)
|
|
|
111,586
|
Total intangible assets |
|
|
|
|
$ |
4,292,424
|
|
$ |
(809,403)
|
|
$ |
3,483,021
|
|
(1) |
|
Other intangible assets as of March 31, 2024 primarily consisted of talent roster, internally
developed software and content library assets acquired through the business combination with WWE in September 2023. See Note 4, Acquisition
of WWE, for further information. |
The
following table summarizes information relating to the Company’s identifiable intangible assets as of December 31, 2023 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
|
|
|
|
|
|
|
|
Estimated Useful Life |
|
|
|
|
Accumulated |
|
|
|
|
(in years) |
|
Gross Amount |
|
Amortization |
|
Carrying Value |
Trademarks and trade names |
|
|
22.8 |
|
$ |
2,891,826
|
|
$ |
(314,685)
|
|
$ |
2,577,141
|
Customer relationships |
|
|
5.5 |
|
|
1,254,210
|
|
|
(388,640) |
|
|
865,570
|
Other (1) |
|
|
3.4 |
|
|
145,438
|
|
|
(24,486)
|
|
|
120,952
|
Total intangible assets |
|
|
|
|
$ |
4,291,474
|
|
$ |
(727,811)
|
|
$ |
3,563,663
|
|
(1) |
|
Other
intangible assets as of December 31, 2023 primarily consisted of talent roster, internally developed software and content library assets acquired through the business combination with WWE in September 2023. See Note 4, Acquisition of WWE, for further
information. |
Amortization of intangible assets was
$81.6 million and $11.7 million during
the three months ended March 31, 2024 and 2023, respectively, which is recognized within depreciation and amortization in the consolidated statements of operations.
8. INVESTMENTS
The following is a summary of the Company’s investments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
March 31, |
|
December 31, |
|
|
2024 |
|
2023 |
Equity method investments |
|
$ |
3,461
|
|
$ |
3,775
|
Nonmarketable equity investments without readily determinable fair values |
|
|
12,532
|
|
|
12,617
|
Total investment securities |
|
$ |
15,993
|
|
$ |
16,392
|
Equity
Method Investments
The Company has an approximately 7% ownership stake in Monkey Spirit, LLC, which owns the IP license to distribute Howler Head branded products and beverages (together, “Howler Head”). The Company recognized equity losses of $0.3 million for each of the three months ended March 31, 2024 and 2023, and the investment balance was $3.0
million and $3.3 million as of March 31, 2024 and December 31, 2023, respectively.
The Company recognized equity earnings of $0.3 million and equity losses of $0.1 million for
the three months ended March 31, 2024 and 2023, respectively, from other equity method investments, which had a balance of $0.5 million as of
March 31, 2024 and December 31, 2023. During the three months ended March 31, 2024, the Company received distributions of $0.3 million from
these equity method investments.
Nonmarketable Equity Investments Without Readily Determinable Fair Values
As of March 31, 2024 and
December 31, 2023, the Company held various investments in nonmarketable equity instruments of private companies.
The Company did
not record any impairment charges on these investments during the three months ended March 31, 2024 and 2023. In addition, there were
no observable price change events that were completed during the three months ended March 31, 2024 and 2023.
The fair value measurements of the Company’s equity investments and
nonmarketable equity investments without readily determinable fair values are classified within Level 3 as significant unobservable inputs are used as part of the determination of fair value. Significant unobservable inputs may include variables
such as near-term prospects of the investees, recent financing activities of the investees, and the investees' capital structure, as well as other economic variables, which reflect assumptions market participants would use in pricing these assets.
For equity investments without readily determinable fair values, the Company has elected to use the measurement alternative to fair value that will allow these investments to be recorded at cost, less impairment, and adjusted for subsequent
observable price changes.
9. DEBT
The following is a summary of the Company’s outstanding debt (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
March 31, |
|
December 31, |
|
|
2024 |
|
2023 |
First Lien Term Loan (due April 2026) |
|
$ |
2,721,016
|
|
$ |
2,728,766
|
Secured Commercial Loans |
|
|
31,467
|
|
|
31,867
|
Total principal |
|
|
2,752,483
|
|
|
2,760,633
|
Unamortized discount |
|
|
(7,498) |
|
|
(8,367) |
Unamortized debt issuance cost |
|
|
(14,303)
|
|
|
(15,951)
|
Total debt |
|
|
2,730,682
|
|
|
2,736,315
|
Less: Current portion of long-term debt |
|
|
(22,321)
|
|
|
(22,367)
|
Total long-term debt |
|
$ |
2,708,361
|
|
$ |
2,713,948
|
First Lien Term Loan (due April 2026)
As of March 31, 2024 and December 31, 2023, the Company had $2.7 billion and $2.7 billion, respectively, outstanding under a credit agreement dated August 18, 2016 (as
amended and/or restated, the “Credit Agreement”), by and among Zuffa Guarantor, LLC, UFC Holdings, LLC, as borrower, the lenders party hereto and Goldman Sachs Bank USA, as Administrative Agent, which was entered into in connection
with the acquisition of Zuffa by EGH in 2016. The facilities under the Credit Agreement consist of (i) a first lien secured term loan (the “First Lien Term Loan”) and (ii) a secured revolving credit facility in an aggregate principal
amount of $205.0 million, letters of credit in an aggregate face amount not in excess of $40.0
million and swingline loans in an aggregate principal amount not in excess of $15.0 million (collectively, the “Revolving Credit Facility,” and, together with
the First Lien Term Loan, the “Credit Facilities”). The Credit Facilities are secured by liens on substantially all of the assets of Zuffa Guarantor, LLC, UFC Holdings, LLC and certain subsidiaries thereof.
Payments under the First Lien Term Loan include
1% principal amortization that is payable in equal quarterly installments, with any remaining balance payable on the final maturity date of April 29, 2026. In June 2023, the
Company amended the terms of the First
Lien Term Loan to replace the adjusted LIBOR reference rate with Term Secured Overnight Financing Rate
(“SOFR”) and provide for a credit spread adjustment (as defined in the Credit Agreement). The First Lien Term Loan accrues interest at an annual interest rate of adjusted SOFR plus 2.75-3.00%, which totaled 8.34% as of March 31, 2024.
The Credit Facilities contain a financial covenant that requires the Company to
maintain a First Lien Leverage Ratio of Consolidated First Lien Debt to Consolidated EBITDA as defined in the Credit Agreement of no more than 6.5-to-1. The Company is only
required to meet the First Lien Leverage Ratio if the sum of outstanding borrowings under the Revolving Credit Facility plus outstanding letters of credit exceeding $10.0
million that are not cash collateralized exceeds thirty-five percent of the capacity of the Revolving Credit Facility as measured on a quarterly basis, as defined in the
Credit Agreement. This covenant did not apply as of March 31, 2024 and December 31, 2023, as the Company had no borrowings outstanding under the Revolving Credit Facility.
The Company had no outstanding letters of credit as of March 31, 2024 and December 31, 2023, respectively.
The Credit Facilities restrict the ability of certain subsidiaries of the Company to
make distributions and other payments to the Company. These restrictions include exceptions for, among other things, (1) amounts necessary to make tax payments, (2) a limited annual amount for employee equity repurchases, (3) distributions required
to fund certain parent entities, (4) other specific allowable situations and (5) a general restricted payment basket, which generally provides for no restrictions as long as the Total Leverage Ratio (as defined in the Credit Agreement) is less than
5.0x.
The estimated fair values of the Company’s First Lien Term Loan
are based on quoted market values for the debt. As of March 31, 2024 and December 31, 2023, the face amount of the Company’s First Lien Term Loan approximates its fair value.
Secured Commercial Loans
As of March 31, 2024 and December 31, 2023, the Company had $31.5 million and $31.9 million, respectively, of secured loans outstanding, which were entered into in
October 2018 in order to finance the purchase of a building and its adjacent land (the “Secured Commercial Loans”). The Secured Commercial Loans have identical terms except one of the Loan Agreements is secured by a deed of trust for
the UFC’s headquarters building located at 6650 S. Torrey Pines Drive, Las Vegas, Nevada and underlying land and the other Loan Agreement is secured by a deed of trust for a building located at 6650 El Camino Road, Las Vegas, Nevada and its
adjacent land. In May 2023, the parties amended the terms of the Secured Commercial Loans to replace the adjusted LIBOR reference rate with SOFR and bear interest at a rate of SOFR plus 1.70%. Principal amortization of 4% is payable in monthly installments with any remaining balance payable on the final maturity date of November 1, 2028.
The Secured Commercial Loans
contain a financial covenant that requires the Company to maintain a Debt Service Coverage Ratio of consolidated debt to Adjusted EBITDA as defined in the applicable loan agreements of no more than 1.15-to-1 as measured on an annual basis. As of March 31, 2024 and December 31, 2023, the Company was in compliance with its financial debt covenant under the Secured Commercial Loans.
10. FINANCIAL INSTRUMENTS
In October 2018, in connection with the Secured
Commercial Loans, the Company entered into a swap for $40.0 million notional effective November 1, 2018 with a termination date of
November 1, 2028. The swap required the Company to pay a fixed rate of 4.99% and receive the
total of LIBOR + 1.62%, which totaled 3.97% as of December 31, 2018. The Company entered into
this swap to hedge certain of its interest rate risks on its variable rate debt. The Company monitors its positions with, and the credit quality of, the financial institutions that are party to its financial transactions. The Company has designated
the interest rate swap as a cash flow hedge, and all changes in fair value are recognized in other comprehensive income until the hedged interest payments affect earnings.
In May 2023, the Company amended its Secured Commercial Loans and associated interest
rate swap to replace the LIBOR reference rate with Term SOFR. The swap requires the Company to pay a fixed rate of 4.99% and receive
the total of SOFR + 1.70%, which totaled 7.02% as of March 31, 2024.
Prior to the May 2023 amendment the fair value of the swap was based on commonly
quoted monthly LIBOR rates. Subsequent to this amendment, the fair value of the swap is based on commonly quoted monthly Term SOFR rates. Both the LIBOR and Term SOFR reference rates are considered observable inputs representing a Level 2
measurement within the fair value hierarchy. The fair value of the swap was $0.9 million and
$0.3 million as of March 31, 2024 and December 31,
2023, respectively, and was included in other assets in the consolidated balance sheets. The total change in fair value of the swap’s
asset position included in accumulated other comprehensive income was an increase of $0.6 million and $0.5
million for the three months ended March 31, 2024 and 2023,
respectively. The
Company reclassified less than $0.1 million and $0.1 million during the three months ended March 31, 2024 and 2023, respectively, representing the amortization of the cash flow hedge fair
value to net income.
11. NON-CONTROLLING INTERESTS
Nonredeemable Non-Controlling Interest in TKO OpCo
In connection with the business acquisition of WWE
described in Note 4, Acquisition of WWE, on September 12, 2023, the Company became the sole managing member of TKO OpCo and, as a result, consolidates the
financial results of TKO OpCo. The Company reports a non-controlling interest representing the economic interest in TKO OpCo held by the other members of TKO OpCo. TKO OpCo’s operating agreement provides that holders of membership interests
in TKO OpCo (“Common Units”) may, from time to time, require TKO OpCo to redeem all or a portion of their Common Units (and an equal number of shares of TKO Class B common stock) for cash or, at the Company’s option, for shares
of TKO Class A common stock on a one-for-one basis. In connection with any redemption or exchange, the Company will receive a corresponding number of Common Units, increasing the total ownership interest in TKO OpCo. Changes in the ownership
interest in TKO OpCo while the Company retains its controlling interest in TKO OpCo will be accounted for as equity transactions. As such, future redemptions or direct exchanges of Common Units in TKO OpCo by the other members of TKO OpCo will
result in a change in ownership and reduce the amount recorded as non-controlling interest and increase additional paid-in capital.
Redeemable Non-Controlling Interest in the UFC
In July 2018, the Company
received an investment of $9.7 million by third parties (the “Russia Co-Investors”) in a newly formed subsidiary of the Company (the “Russia
Subsidiary”) that was formed to expand the Company’s existing UFC business in Russia and certain other countries in the Commonwealth of Independent States. The terms of this investment provide the Russia Co-Investors with a put option
to sell their ownership in the Russia Subsidiary five years and six months after the consummation of the investment. The purchase price of the put option is the greater of the total investment amount, defined as the Russia Co-Investors’ cash
contributions less cash distributions, or fair value. As of March 31, 2024 and December 31, 2023, the estimated redemption value was $11.2 million.
The changes in carrying
value of the redeemable non-controlling interest for the three months ended March 31, 2024 were as follows (in thousands):
|
|
|
|
|
|
|
|
Balance — December 31, 2023 |
|
$ |
11,594
|
Net income attributable to non-controlling interest holders |
|
|
760 |
Balance — March 31, 2024 |
|
$ |
12,354
|
12. EQUITY-BASED COMPENSATION
Equity-based compensation expense, which is included within direct
operating costs and selling, general and administrative expenses on the Company’s consolidated statements of operations, consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
2023 |
EGH 2021 Plan |
|
$ |
2,790
|
|
$ |
5,795
|
Replacement Awards under WWE 2016 Plan |
|
|
8,622 |
|
|
— |
TKO 2023 Plan |
|
|
18,813
|
|
|
— |
Equity-based compensation expense |
|
$ |
30,225
|
|
$ |
5,795
|
EGH 2021 Plan
The terms of each award, including vesting and forfeiture, are
determined by the administrator of the EGH 2021 Plan. Key grant terms include one or more of the following: (a) time-based vesting over a two- to
five-year period; (b) market-based vesting conditions at graduated levels upon the Company’s attainment of certain market price per share
thresholds; and (c) expiration dates (if applicable). Granted awards may include time-based vesting conditions only, market-based vesting conditions only, or both.
The following table summarizes the RSU award activity under the EGH 2021 Plan for the three months ended March 31, 2024:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Vested RSUs |
|
Market / Market and Time
Vested RSUs |
|
|
Units |
|
Weighted- Average
Grant-Date Fair Value |
|
Units |
|
Weighted- Average
Grant-Date Fair Value |
Outstanding at January 1, 2024 |
|
605,610
|
|
$ |
25.74
|
|
5,115
|
|
$ |
24.65
|
Granted |
|
— |
|
$ |
— |
|
— |
|
$ |
— |
Released |
|
(92,121)
|
|
$ |
22.33
|
|
— |
|
$ |
— |
Forfeited |
|
(893) |
|
$ |
21.73 |
|
— |
|
$ |
— |
Outstanding at March 31, 2024 |
|
512,596
|
|
$ |
26.36
|
|
5,115
|
|
$ |
24.65
|
The following table summarizes the stock option award activity under the
EGH 2021 Plan for the three months ended March 31, 2024:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options |
|
|
Units |
|
Weighted-Average Exercise
Price |
Outstanding at January 1, 2024 |
|
286,836
|
|
$ |
26.04
|
Granted |
|
— |
|
$ |
— |
Exercised |
|
— |
|
$ |
— |
Forfeited or expired |
|
— |
|
$ |
— |
Outstanding at March 31, 2024 |
|
286,836
|
|
$ |
26.04
|
Vested and exercisable at March 31, 2024 |
|
191,224
|
|
$ |
26.04 |
Replacement Awards
The following table summarizes the RSU award activity under the WWE 2016
Plan for the three months ended March 31, 2024:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Vested RSUs |
|
|
Units |
|
Weighted- Average
Grant-Date Fair Value |
Outstanding at January 1, 2024 |
|
701,090
|
|
$ |
100.65
|
Vested |
|
(24,167) |
|
$ |
100.65
|
Forfeited |
|
(95,182)
|
|
$ |
100.65
|
Outstanding at March 31, 2024 |
|
581,741
|
|
$ |
100.65
|
The following table summarizes the PSU award activity under the WWE 2016
Plan for the three months ended March 31, 2024:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Vested PSUs |
|
|
Units |
|
Weighted- Average
Grant-Date Fair Value |
Outstanding at January 1, 2024 |
|
327,403
|
|
$ |
93.84
|
Vested |
|
(6,447) |
|
$ |
100.65
|
Forfeited |
|
(3,580)
|
|
$ |
100.65
|
Outstanding at March 31, 2024 |
|
317,376
|
|
$ |
95.40 |
TKO 2023 Plan
The terms of each award, including vesting and
forfeiture, are determined by the administrator of the TKO 2023 Plan. Key grant terms include time-based vesting over a six-month to four-year period.
During the first quarter of 2024, WWE entered into an Independent Services Contractor and Merchandising Agreement (the “DJ Services
Agreement”) with Dwayne Johnson, a member of the Company’s board of directors, pursuant to which Mr. Johnson agreed to provide to WWE certain promotional and other services. See Note
18, Related Party Transactions, for further discussion. As consideration for Mr. Johnson’s services provided under the
DJ Services Agreement, the Company granted Mr. Johnson RSUs for an
aggregate value of $30.0 million. Subject to certain forfeiture and acceleration events, the RSUs granted to Mr. Johnson vest as follows: 25% on the date granted, 25% upon completion of certain services, 25% on December 31, 2024, and the remaining 25% in
equal monthly installments from January 31, 2025 through December 31, 2025. The Company will record the expense associated with these awards based on the timing of services provided by Mr. Johnson through January 2028. During the three months ended
March 31, 2024, the Company recorded equity-based compensation expenses of approximately $9.0 million associated with these RSUs, which are
included within direct operating costs in the Company’s consolidated statement of operations. The units associated with these awards are included in the table below.
The following table summarizes the RSU award activity under the TKO 2023
Plan for the three months ended March 31, 2024:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time Vested RSUs |
|
|
Units |
|
Weighted- Average
Grant-Date Fair Value |
Outstanding at January 1, 2024 |
|
935,536
|
|
$ |
91.23
|
Granted |
|
991,718
|
|
$ |
80.03 |
Vested |
|
(96,558)
|
|
$ |
77.41
|
Forfeited |
|
(819) |
|
$ |
86.13 |
Outstanding at March 31, 2024 |
|
1,829,877
|
|
$ |
85.89
|
13. EARNINGS PER SHARE
Earnings per share is calculated utilizing net
loss available to common stockholders of the Company during the three months ended March 31,
2024, divided by the weighted average number of shares of TKO Class A common stock outstanding during the same period. Diluted EPS is calculated by dividing the net loss available to common stockholders by the diluted weighted average shares outstanding during the same period. The Company’s
outstanding equity-based compensation awards under its equity-based compensation arrangements (refer to Note 12, Equity-based Compensation) were anti-dilutive during the
period.
The following table presents the computation of
net loss per share and weighted average number of shares of the Company’s common stock
outstanding for the period presented (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2024 |
Basic and diluted net loss per share |
|
|
|
Numerator |
|
|
|
Net loss attributable to TKO Group Holdings, Inc. |
|
$ |
(103,840)
|
|
|
|
|
Denominator |
|
|
|
Weighted average Class A Common Shares outstanding - Basic and diluted |
|
|
82,351,654
|
|
|
|
|
Basic and diluted net loss per share |
|
$ |
(1.26) |
|
|
|
|
Securities that are anti-dilutive this period |
|
|
|
Unvested RSUs |
|
|
2,411,618
|
Unvested PSUs |
|
|
317,376
|
TKO Class B Common Shares |
|
|
89,616,891
|
14. INCOME TAXES
TKO Group Holdings, Inc. was incorporated as a Delaware corporation in March 2023. As
the sole managing member of TKO OpCo, TKO Group Holdings, Inc. operates and controls all the business and affairs of UFC and WWE. TKO Group Holdings, Inc. is subject to corporate income taxes on its share of taxable income of TKO OpCo. TKO OpCo is
treated as a partnership for U.S. federal income tax purposes and is therefore generally not subject to U.S. corporate income tax, other than entity-level income taxes in certain U.S. state and local jurisdictions. TKO OpCo’s foreign
subsidiaries are subject to entity-level taxes, and TKO OpCo’s U.S. subsidiaries are subject to foreign withholding taxes on sales in certain foreign jurisdictions which are included as a component of foreign current taxes.
As discussed in Note 4,
Acquisition of WWE, the Transactions are accounted for as a reverse acquisition of WWE using the acquisition method of accounting in accordance with ASC
805. As a result, TKO recorded a fair value step-up on the acquired WWE net assets in the amount of $3.3 billion and deferred tax
liabilities in the amount of $379.8 million, all of which was recorded through goodwill as of the Closing Date.
In accordance with ASC 740, each interim period is considered integral to the annual
period and tax expense is generally determined using an estimate of the annual effective income tax rate ("AETR"). The Company records income tax expense each quarter using the estimated AETR to provide for income taxes on a current year-to-date
basis, adjusted for discrete items that are noted in the relevant period. During the three months ended March 31, 2024, the Company treated the legal settlement related to UFC antitrust lawsuits of $335.0 million, as described in Note 16, Commitments and Contingencies, discretely. In accordance with the authoritative guidance for
accounting for income taxes in interim periods, the Company computed its income tax provision for the three months ended March 31, 2024 and 2023, adjusted for discrete items as noted.
The (benefit from) provision for income taxes for the three months ended March 31,
2024 and 2023 was a benefit of $25.5 million and
provision of $3.6 million, respectively, based on pretax loss of $275.1 million and pretax income of $91.8 million, respectively. The effective tax rate was 9.3% and 3.9% for the three months ended March 31, 2024 and 2023, respectively. The tax benefit for the three months ended March 31, 2024 differs from tax expense in the same period in 2023 primarily due to the legal settlement related
to UFC antitrust lawsuits of $335.0 million that resulted in a $39.6 million discrete tax benefit recognized in the period ended March 31, 2024. Any tax balances reflected on the Company’s consolidated balance sheets as of March 31, 2024 will
be adjusted accordingly to reflect the actual financial results for the year ending December 31, 2024.
The Company’s effective tax rate
differs from the U.S. federal statutory rate primarily due to state and local income taxes, non-controlling interest, withholding taxes in foreign jurisdictions that are not
based on net income, and increased income subject to tax in foreign jurisdictions which differ from the U.S. federal statutory income tax rate.
As of March 31, 2024 and December 31, 2023, the Company had unrecognized tax benefits
of $5.4 million and $5.5 million, respectively, for which the Company is unable to make a
reasonable and reliable estimate of the period in which these liabilities will be settled with the respective tax authorities.
The Company records valuation allowances against its net deferred tax assets when it
is more likely than not that all, or a portion, of a deferred tax asset will not be realized. The Company evaluates the realizability of its deferred tax assets by assessing the likelihood that its deferred tax assets will be recovered based on all
available positive and negative evidence, including historical results, reversals of deferred tax liabilities, estimates of future taxable income, tax planning strategies and results of operations.
Other Matters
On August 16, 2022, the United States enacted the Inflation Reduction Act of 2022
("IRA"). The IRA, in addition to other provisions, creates a 15% corporate alternative minimum tax ("CAMT") on adjusted financial statement income for applicable corporations. The CAMT is effective for tax years beginning after December 31, 2022.
For the three months ended March 31, 2024 and the year ended December 31, 2023, the Company was not subject to CAMT. The Company will continue to assess the potential tax
effects of the CAMT on the Company’s consolidated financial statements.
In December 2022, the Organization for
Economic Co-operation and Development ("OECD") proposed Global Anti-Base Erosion Rules, which provides for changes to numerous long-standing tax principles including the adoption of a global minimum tax rate of 15% for multinational enterprises
("GloBE rules"). Various jurisdictions have adopted or are in the process of enacting legislation to adopt GloBE rules and other countries are expected to adopt GloBE rules in the future. While changes in tax laws in the various countries in which the Company operates can negatively impact the Company’s results of operations and financial position in future periods, the Company’s impact related
to the adoption of the GLoBE rules, effective January 1, 2024, was not material to the Company’s consolidated financial position.
15. RESTRUCTURING CHARGES
Beginning in the third quarter of 2023, the Company implemented an ongoing cost
reduction program, primarily related to realizing synergy opportunities and integrating the combined operations of WWE and UFC, which resulted in the recording of termination benefits for a workforce reduction of certain employees and contract termination costs for independent contractors in the WWE segment and Corporate. As a result, the Company recorded restructuring charges of $11.6 million for the three months ended March 31, 2024, inclusive of $2.4 million of
equity-based compensation expenses, which are accrued in accrued liabilities and additional
paid-in-capital on the consolidated balance sheets, respectively. These restructuring charges are recorded within direct operating costs and selling, general and administrative expenses in the consolidated statements of
operations.
Changes in the Company’s restructuring liability through March 31, 2024 were as follows (in thousands):
|
|
|
|
|
|
|
|
Balance — December 31, 2023 |
|
$ |
9,725
|
Restructuring charges (excluding equity-based compensation expense) |
|
|
9,235 |
Payments |
|
|
(10,693)
|
Balance — March 31, 2024 |
|
$ |
8,267
|
16. COMMITMENTS AND CONTINGENCIES
The Company is involved in legal proceedings, claims and governmental investigations
arising in the normal course of business. The types of allegations that arise in connection with such legal proceedings vary in nature, but can include contract, employment, tax and intellectual property matters. The Company evaluates all cases and
records liabilities for losses from legal proceedings when the Company determines that it is probable that the outcome will be unfavorable and the amount, or potential range, of loss can be reasonably estimated. While any outcome related to
litigation or such governmental proceedings cannot be predicted with certainty, management believes that the outcome of these matters, except as otherwise may be discussed below, individually or in the aggregate, will not have a material adverse
effect on the Company’s financial position, results of operations or cash flows.
UFC Legal Proceedings
Five related class-action lawsuits were filed against Zuffa between December 2014 and March 2015 by a total of eleven former UFC fighters. The lawsuits, which
were substantially identical, were transferred to the United States District Court for the District of Nevada and consolidated into a single action in June 2015,
captioned Le et al. v. Zuffa, LLC, No. 2:15-cv-1045-RFB-BNW (D. Nev.) (the “Le” case). The lawsuit
alleged that Zuffa violated Section 2 of the Sherman Act by monopsonizing an alleged market for the services of elite professional MMA athletes. The fighter plaintiffs
claimed that Zuffa’s alleged conduct injured them by artificially depressing the compensation they received for their services, and they sought treble damages under the antitrust laws, as well as attorneys’ fees and costs, and, in some instances, injunctive relief. On August 9, 2023, the district court certified
the lawsuit as a damages class action, encompassing the period from December 16, 2010 to June 30, 2017. The fighter plaintiffs in the Le case abandoned their claim for
injunctive relief, so the only relief the fighter plaintiffs would have sought at trial was damages. On June 24, 2021, another lawsuit, Johnson et al. v.
Zuffa, LLC et al., No. 2:21-cv-1189-RFB-BNW (D. Nev.) (the “Johnson” case), was filed by a putative class of former UFC fighters and covering the period from July 1, 2017 to the present and
alleged substantially similar claims to the Le case and sought injunctive relief. On March 13, 2024, TKO OpCo, and certain of its affiliates, including Endeavor, reached an agreement to settle all
claims asserted in both class action lawsuits (Le and Johnson) for an aggregate amount of $335.0 million payable by the Company and its subsidiaries in installments over an
agreed-upon period of time with $200.0 million expected to be due within the next twelve months
from March 31, 2024 and $135.0 million expected to be due in April 2025. During the three months ended March 31, 2024, the Company recorded a charge of $335.0 million, which is included as a component of selling, general and administrative expenses in
the consolidated statements of operations. The terms have
been memorialized in a long form agreement and will be submitted to the court for approval. The
Company anticipates that the settlement amount will be deductible for tax purposes.
WWE Legal Proceedings
As announced in June 2022, a Special
Committee of independent members of WWE’s board of directors (the “Special Committee”) was formed to investigate alleged misconduct by WWE’s then-Chief Executive Officer, Vincent K. McMahon (the “Special Committee
Investigation”). Mr. McMahon initially resigned from all positions held with WWE on July 22, 2022 but remained a stockholder with a controlling interest and served as Executive Chairman of WWE’s board of directors from January 9, 2023
through September 12, 2023, at which time Mr. McMahon became Executive Chair of the Board of Directors of the Company. Although the Special Committee investigation is complete and, in January 2024, Mr. McMahon
resigned from his position as Executive Chair and member of TKO’s Company’s Board of Directors, as well as other positions, employment and otherwise, at TKO and its subsidiaries,
WWE has received, and may receive in the future, regulatory,
investigative and enforcement inquiries, subpoenas, demands and/or other claims and complaints arising from, related to, or in connection with these matters. On July 17, 2023, federal law enforcement agents
executed a search warrant and served a federal grand jury subpoena on Mr. McMahon. No charges have been brought in these investigations. WWE has received voluntary and compulsory legal demands for documents, including from federal law enforcement
and regulatory agencies, concerning the investigation and related subject matters.
On January 25,
2024, a former WWE employee filed a lawsuit against WWE, Mr. McMahon and another former WWE executive in the United States District Court for the District of Connecticut alleging, among other things, that she was sexually assaulted by Mr.
McMahon and asserting claims under the Trafficking Victims Protection Act.
On November 17,
2023, a purported former stockholder of WWE, Laborers’ District Council and Contractors’ Pension Fund of Ohio
(“Laborers”), filed a verified class action complaint on behalf of itself and similarly situated former WWE stockholders in the Court of Chancery of the State of Delaware (“Delaware Court”), captioned Laborers District Council and Contractors’ Pension Fund of Ohio v. McMahon,
C.A. No. 2023-1166-JTL (“Laborers Action”). On November 20, 2023, another purported former WWE stockholder, Dennis Palkon, filed a verified class action complaint on behalf of himself and similarly situated former WWE stockholders in the Delaware Court, captioned Palkon v. McMahon, C.A. No. 2023-1175-JTL (“Palkon Action”). The Laborers and Palkon Actions allege breach of fiduciary duty claims against former WWE directors Vincent K. McMahon, Nick Khan, Paul Levesque, George A. Barrios, Steve Koonin,
Michelle D. Wilson, and Frank A. Riddick III (collectively, the “Individual Defendants”), arising out of the Transactions.
On April 24, 2024, the City of Pontiac Reestablished General Employees’ Retirement System (“Pontiac”), a purported former stockholder of WWE, filed another verified class action complaint on
behalf of itself and similarly situated former WWE stockholders in the Delaware Court captioned City of Pontiac
Reestablished General Employees’ Retirement System v. McMahon, C.A. No. 2024-0432 (“Pontiac Action”). The Pontiac Action similarly alleges breach of fiduciary duty claims against the
Individual Defendants, and adds claims against WWE and TKO for denying stockholders their appraisal rights under DGCL § 262, as well as claims against EGH for aiding
and abetting the alleged breaches of fiduciary duties and for civil conspiracy to violate DGCL § 262. On May 2, 2024, the Court entered an order consolidating the Laborers, Palkon and Pontiac actions under the caption In re World Wrestling Entertainment, Inc. Merger Litigation, C.A. No. 2023-1166-JTL (“Consolidated
Action”). The Consolidated Action is in the early stages, and the parties agreed that TKO, WWE and EGH will not be required to respond to the complaints until a lead plaintiff is appointed and the lead plaintiff designates an operative pleading.
On January 4, 2024, Pontiac filed an action in the Delaware Court seeking certain books
and records related to the Transactions under Section 220 of the DGCL (the “Pontiac 220 Action”). On February 12, 2024, the court entered an order vacating the case schedule and staying the Pontiac 220 Action. On April 2, 2024, Pontiac voluntarily dismissed its complaint.
17. SEGMENT INFORMATION
Prior to the acquisition of WWE, the Company operated as a single reportable segment.
Subsequent to the acquisition of WWE and effective September 12, 2023, the Company identified two reportable segments: UFC and WWE, to align with how the Company’s
chief operating decision maker (the “CODM”), the Chief Executive Officer, manages the businesses, evaluates financial results, and makes key operating decisions. The UFC segment consists entirely of the operations of the
Company’s UFC business which was the sole reportable segment prior to the acquisition of WWE, while the WWE segment consists entirely of the operations of the WWE business acquired on September 12, 2023.
The Company also reports the results for the “Corporate” group. The
Corporate group reflects operations not allocated to the UFC or WWE segments and primarily consists of general and administrative expenses. These expenses relate largely to corporate activities, including information technology, facilities, legal,
human resources, finance, accounting, treasury, investor relations, corporate communications, community relations and compensation to TKO’s management and board of directors, which support both reportable segments. Corporate expenses also
include service fees paid by the Company to Endeavor related to certain corporate activities as well as certain revenue generating activities under the services agreement dated as of September 12, 2023, by and
between EGH and TKO OpCo (the “Services Agreement”).
All prior period amounts related to the segment change have been retrospectively
reclassified to conform to the new presentation.
The profitability measure employed by the Company’s CODM for allocating
resources and assessing operating performance is Adjusted EBITDA. The Company defines Adjusted EBITDA as net income, excluding income taxes, net interest expense, depreciation and amortization, equity-based compensation, merger and acquisition
costs, certain legal costs, restructuring, severance and impairment charges, and certain other items when applicable. Adjusted EBITDA includes amortization expenses directly related to supporting the operations of the Company’s segments,
including content production asset amortization. The Company believes the presentation of Adjusted EBITDA is relevant and useful for investors because it allows investors to view the Company’s segment performance in the same manner as the
Company’s CODM to evaluate segment performance and make decisions about allocating resources. Additionally,
the Company
believes that Adjusted EBITDA is a primary measure used by media investors, analysts and peers for comparative purposes.
The Company does not disclose assets by
segment information. The Company does not provide assets by segment information to the Company’s CODM, as that information is not typically used in the determination of resource allocation and assessing business performance of each reportable
segment. A significant portion of the Company’s assets following the Transactions represent goodwill and intangible assets arising from the Transactions.
The following tables present summarized financial information for each of the
Company’s reportable segments (in thousands):
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
2023 |
UFC |
|
$ |
312,990
|
|
$ |
306,730
|
WWE |
|
|
316,721
|
|
|
— |
Total consolidated revenue |
|
$ |
629,711
|
|
$ |
306,730
|
Reconciliation of segment profitability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
2023 |
UFC |
|
$ |
195,083
|
|
$ |
186,257
|
WWE |
|
|
140,213
|
|
|
— |
Corporate |
|
|
(53,136)
|
|
|
(13,649)
|
Total Adjusted EBITDA |
|
|
282,160
|
|
|
172,608
|
Reconciling items: |
|
|
|
|
|
|
Equity (earnings) losses of affiliates |
|
|
(50) |
|
|
263 |
Interest expense, net |
|
|
(64,466)
|
|
|
(53,908)
|
Depreciation and amortization |
|
|
(107,161) |
|
|
(15,152) |
Equity-based compensation expense |
|
|
(30,225)
|
|
|
(5,795)
|
Merger and acquisition costs |
|
|
(520) |
|
|
(5,415) |
Certain legal costs (1) |
|
|
(345,199)
|
|
|
(442)
|
Restructuring, severance and impairment |
|
|
(9,235) |
|
|
— |
Other adjustments |
|
|
(386)
|
|
|
(316)
|
(Loss) income before income taxes and equity losses of affiliates |
|
$ |
(275,082)
|
|
$ |
91,843
|
|
(1) |
|
During the three months ended March 31, 2024, certain legal costs included a legal settlement related to UFC antitrust lawsuits of $335.0 million. Of this amount, $200.0 million is
included as a component of accrued liabilities (see Note 6, Supplementary
Data) and $135.0 million is included as a component of other long-term liabilities in our consolidated balance sheets as of March 31,
2024. |
18. RELATED PARTY TRANSACTIONS
EGH and its
subsidiaries
EGH and its subsidiaries (collectively, the “Group”), which collectively own approximately 52.1% of the voting interest in TKO as described in Note 1, Description of Business, provide various services to the Company and, upon consummation of the Transactions, such services are
provided pursuant to the Services Agreement. Revenue and expenses associated with such
services are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
2023 |
Event and other licensing revenues earned from the Group |
|
$ |
5,902
|
|
$ |
3,420
|
Expenses incurred with the Group included in direct operating costs (1) |
|
|
4,849 |
|
|
4,416 |
Expenses incurred with the Group included in selling, general and administrative expenses (2) |
|
|
7,451
|
|
|
6,352
|
Net expense resulting from Group transactions included within net income (loss) |
|
$ |
(6,398) |
|
$ |
(7,348) |
|
(1) |
|
These expenses primarily consist of production and consulting services as well as commissions paid to the Group. |
|
(2) |
|
These expenses primarily consist of service fees paid to the Group. The Company believes that these service fees are a reasonable allocation of costs related to
representation, executive leadership, back-office and corporate functions and other services provided by the Group. |
Outstanding amounts due to and from the Group were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
|
|
|
March 31, |
|
December 31, |
|
Classification |
|
2024 |
|
2023 |
Amounts due from the Group |
Other current assets |
|
$ |
16,017
|
|
$ |
11,599
|
Amounts due to the Group |
Other current liabilities |
|
|
(9,219) |
|
|
(5,473) |
The Company also reimburses the Group for third party costs they incur on the Company’s behalf. The Company reimbursed
$3.3 million of such costs during the three months ended March 31, 2024. There were no costs reimbursed during the three months ended March 31, 2023.
Vincent McMahon
Vincent K.
McMahon, who served as Executive Chair of the Company’s Board of Directors until
January 26, 2024, previously
controlled a significant portion of the voting power of the issued and outstanding shares of
the Company’s common stock.
Mr. McMahon has
agreed to make future payments to certain counterparties personally. In accordance with the SEC’s Staff Accounting Bulletin Topic 5T, Miscellaneous Accounting, Accounting for Expenses or Liabilities
Paid by Principal Stockholders (“Topic 5T”), the Company concluded that these amounts should be recognized by the Company as expenses in the period in which they become probable and estimable.
As of December 31, 2023, total liabilities of $1.5 million are included within accrued expenses in our consolidated balance sheets related to future payments owed by Mr. McMahon to certain counterparties.
During the three months ended March 31, 2024, Mr. McMahon made payments of $1.5 million associated with these liabilities to certain counterparties directly. Since these liabilities existed when Mr. McMahon controlled a significant
portion of the voting power of the Company’s common stock, these payments are considered non-cash capital contributions and are included as principal stockholder contributions in our
consolidated statements of stockholders’ equity.
In connection with and/or arising from the investigation conducted by a Special Committee of the former WWE board of directors, Mr. McMahon has agreed
to reimburse the Company for additional costs incurred in connection with and/or arising from the same matters.
Dwayne Johnson
Dwayne Johnson (also known by his stage name “The Rock”)
is an actor, film producer, entrepreneur and professional wrestler who has provided talent related services to WWE for decades. Mr. Johnson is represented by talent agency William Morris Endeavor, an affiliate of TKO. On January 23, 2024, the
Company’s board of directors appointed Mr. Johnson as a WWE director designee on the TKO Board.
On January 22, 2024, WWE and Mr. Johnson entered into
the DJ Services Agreement, pursuant to which Mr. Johnson agreed to provide to WWE certain promotional and other services. WWE also entered into
an IP Assignment Agreement with certain affiliates of Mr. Johnson, pursuant to which WWE assigned to Mr. Johnson (via one of his affiliates) “The Rock” trademark and certain related trademarks, service marks, ring names, taglines and
other intellectual property assets (the “Assigned IP”).
Under the
terms of the DJ Services Agreement, Mr. Johnson further agreed to license the Assigned IP and Mr. Johnson’s name, likeness and certain
other intellectual property rights to WWE for use in connection with certain categories of licensed products related to professional wrestling for up to 10 years, subject to certain earlier termination rights.
As discussed
in Note 12, Equity-based Compensation, as consideration for Mr. Johnson’s services pursuant to the DJ Services Agreement, and in respect of the intellectual property grants and licenses made by Mr. Johnson and his affiliates in connection therewith, Mr. Johnson received an RSU award for an aggregate value of $30.0 million. During the three months ended March 31, 2024, the Company
recorded equity-based compensation expense of $9.0 million associated with this award, which is included within direct operating costs in our consolidated statements of operations.
Mr. Johnson also receives annual royalties from WWE and will be entitled to receive
royalties in connection with the sale of licensed products that utilize the Assigned IP and his name, likeness and other intellectual property rights in accordance with the DJ
Services Agreement. For the three months ended March 31,
2024, the Company paid $0.1 million of royalties that were earned by Mr. Johnson. In addition,
Mr. Johnson is entitled to reimbursement for certain travel
expenses associated with delivering services under the DJ Services Agreement, of which $1.9 million was incurred by the Company during
the three months ended March 31, 2024, and is included as a component of selling, general and administrative expenses in our consolidated statements of operations. As of March 31, 2024, $1.7 million of these costs are payable to Mr. Johnson and are included as a component of accrued liabilities in our consolidated balance sheets.
19. SUBSEQUENT
EVENTS
Stock Purchase Agreement
On April 4, 2024, WME IMG, LLC (“WME
IMG”), an indirect subsidiary of Endeavor entered into a stock purchase agreement with Mr. McMahon, pursuant to which WME IMG
agreed to purchase 1,642,970 shares of TKO Class A common stock held by Mr. McMahon at a per share price of $89.01 for an aggregate amount of $146.2 million (the “Endeavor Share Purchase”). The Endeavor Share Purchase closed on April 9,
2024.
On April 7, 2024, TKO entered into a stock purchase agreement with Mr. McMahon,
pursuant to which TKO agreed to purchase 1,853,724 shares of TKO Class A common stock held by Mr. McMahon at a per share price of
$89.01 for an aggregate amount of $165.0 million (the “TKO Share Purchase”). The
TKO Share Purchase closed on April 10, 2024, and the Company retired the shares of TKO Class A common stock purchased in the TKO Share Purchase. The Company funded the TKO Share Repurchase with approximately
$150.0 million of borrowings under the Revolving Credit Facility and with cash on hand.
Following the transactions, Endeavor owns approximately 53.6% and TKO owns approximately 46.4% of
TKO OpCo.
Amendment to the Credit Agreement
On May 1, 2024, the Company entered into an amendment to the Credit Agreement, which extended the Revolving Credit Facility’s maturity by twelve months to October 29, 2025.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with the information set forth in our unaudited consolidated financial statements and related notes included elsewhere in this
Quarterly Report and with our audited financial statements and related notes included in our 2023 Annual Report. The historical financial data discussed below reflects our
historical results of operations and financial position and relates to periods prior to the Transactions. As a result, the following discussion does not reflect the significant impact that such events will have on us. This discussion contains
forward-looking statements based upon management’s current plans, expectations and beliefs that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a result of various known and unknown factors, including those set forth under Part I, Item 1A.
“Risk Factors” of our 2023 Annual Report or in other sections of the 2023 Annual Report and this Quarterly Report.
Overview
TKO is a premium sports and
entertainment company which operates leading combat sports and sports entertainment brands. The Company monetizes its brands through four principal activities: Media
rights and content, Live events, Sponsorship and Consumer products licensing.
TKO was formed through the combination of
Zuffa Parent, LLC (n/k/a TKO Operating Company, LLC) which owns and operates the Ultimate Fighting Championship
(“UFC”), a preeminent combat sports brand and a subsidiary of Endeavor Group Holdings, Inc. (“Endeavor”), a
global sports and entertainment company, and World Wrestling Entertainment, Inc. (n/k/a/ World Wrestling Entertainment, LLC)
(“WWE”), a renowned sports entertainment business. The Transactions unite two complementary sports and sports entertainment brands in a single company supported by Endeavor’s capabilities in premium IP ownership, talent representation, live events and experiences. For additional information regarding the terms of the Transactions, see Note 4, Acquisition of WWE, to our unaudited consolidated
financial statements included in this Quarterly Report.
Segments
As of March 31, 2024, we operated our business under two reportable segments, UFC and WWE. In addition, we also report results for the “Corporate” group, which incurs expenses that are not allocated to the business
segments.
UFC
The UFC segment reflects the business operations of UFC. Revenue from our UFC
segment principally consists of media rights fees associated with the distribution of its programming content; ticket sales and site fees associated with the business’s global live events; sponsorships; and consumer product licensing
agreements of UFC-branded products.
WWE
The WWE segment
reflects the business operations of WWE. Revenue from our WWE segment principally consists of media rights fees associated with the distribution of its programming content; ticket sales and site fees associated with the business’s global live
events; sponsorships; and consumer product licensing agreements of WWE-branded products.
Corporate
Corporate reflects operations not allocated to the UFC or WWE segments and
primarily consists of general and administrative expenses. These expenses relate largely to corporate activities, including information technology, facilities, legal, human resources, finance, accounting, treasury, investor relations, corporate
communications, community relations and compensation to TKO’s management and board of directors, which support both reportable segments. Corporate expenses also include service fees paid by the Company to Endeavor under the Services Agreement, inclusive of fees paid for revenue producing services related to the
segments.
Components of Our Operating Results
Revenue
TKO
primarily generates revenue via domestic and international media rights fees, ticket sales and site fees at our live events, sponsorships, and consumer products
licensing.
Direct Operating Costs
TKO’s direct operating costs primarily include costs associated with
our athletes and talent, production, marketing, venue costs related to our live events, and commissions and direct costs with distributors, as well as certain service fees paid to Endeavor.
Selling, General and Administrative
TKO’s selling, general and administrative expenses primarily include personnel costs as well as rent, travel, professional service and legal
costs, legal settlements and certain service fees paid to Endeavor.
Provision for Income
Taxes
TKO Group Holdings,
Inc. was incorporated as a Delaware corporation in March
2023. As the sole managing member of TKO OpCo, TKO Group Holdings, Inc. operates and controls all the business and affairs of UFC and WWE. TKO Group Holdings, Inc. is subject to
corporate income taxes on its share of taxable income of TKO OpCo. TKO OpCo is treated as a partnership for U.S. federal income tax purposes and is therefore generally not subject to U.S. corporate income tax.
TKO OpCo’s foreign subsidiaries are subject to entity-level taxes. TKO OpCo’s U.S.
subsidiaries are subject to withholding taxes on sales in certain foreign jurisdictions which are included as a component of foreign current taxes. TKO OpCo is subject to
entity-level income taxes in certain U.S. state and local jurisdictions.
RESULTS
OF OPERATIONS
(dollars in millions, except where noted)
The following is a discussion of our
consolidated results of operations for the three months ended March 31, 2024 and 2023. This information is derived from our accompanying consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
2023 |
Net revenues |
|
|
|
|
|
|
Revenue |
|
$ |
629.7
|
|
$ |
306.7
|
Operating expenses: |
|
|
|
|
|
|
Direct operating costs |
|
|
201.0
|
|
|
89.2
|
Selling, general and administrative expenses |
|
|
531.9 |
|
|
56.3 |
Depreciation and amortization |
|
|
107.1
|
|
|
15.2
|
Total operating expenses |
|
|
840.0
|
|
|
160.7
|
Operating (loss) income |
|
|
(210.3)
|
|
|
146.0
|
Other expenses: |
|
|
|
|
|
|
Interest expense, net |
|
|
(64.5)
|
|
|
(53.9)
|
Other expense, net |
|
|
(0.3) |
|
|
(0.3) |
(Loss) income before income taxes and equity losses of affiliates |
|
|
(275.1)
|
|
|
91.8
|
(Benefit from) provision for income taxes |
|
|
(25.5) |
|
|
3.6 |
(Loss) income before equity losses of affiliates |
|
|
(249.6)
|
|
|
88.2
|
Equity (earnings) losses of affiliates, net of tax |
|
|
(0.1) |
|
|
0.3 |
Net (loss) income |
|
|
(249.5)
|
|
|
87.9
|
Less: Net (loss) income attributable to non-controlling interests |
|
|
(145.7) |
|
|
0.3 |
Less: Net income attributable to TKO Operating Company, LLC prior to the Transactions |
|
|
— |
|
|
87.6
|
Net loss attributable to TKO Group Holdings, Inc. |
|
$ |
(103.8) |
|
$ |
— |
Revenue
Revenue
increased by $323.0 million, or 105%, to $629.7 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023.
|
· |
|
UFC revenue
increased by $6.3 million, or 2%. This increase was primarily driven by $10.6 million of higher sponsorship revenue from new sponsors and increases in fees from
renewals compared to the prior year period. Additionally, the increase in revenue was due to $3.9 million of greater live event revenue from having one incremental event as well as $1.4 million of increased
consumer products licensing revenue from greater video game royalties. These increases were partially offset by $9.6 million of lower media rights and content revenue from holding one fewer numbered event, which more than offset revenue
associated with holding two additional Fight Night events compared to the prior year period. |
|
· |
|
WWE contributed
revenue of $316.7 million for the three months ended March 31, 2024. This revenue was driven by $221.1 million of media rights and content primarily associated with domestic and international rights fees for WWE’s
flagship programs, Raw, SmackDown and NXT, and premium live event programming, as well as $50.2 million of live events revenue which was primarily driven by hosting 47 events with live ticketed audiences. The contribution of revenue was also driven by |
$31.6 million of consumer products
licensing related to the sale of WWE-branded products and $13.8 million of sponsorship revenue from the sale of advertising. |
Direct Operating Costs
Direct operating costs
increased by $111.8 million or
125% to $201.0 million for the three
months ended March 31, 2024 compared to the three months ended March 31, 2023.
|
· |
|
UFC direct operating
costs decreased by $6.9 million, or 8%. This decrease was primarily due to reduced costs of
$6.3 million from lower production, marketing and athlete costs as well as a decline in
direct costs of revenue due to having one fewer numbered event, which more than offset the costs associated with holding two additional Fight
Night events compared to the prior year period. |
|
· |
|
WWE contributed direct operating costs of $115.4
million for the three months ended March 31, 2024. These costs were primarily driven by talent and production-related costs associated with WWE’s premium live events and weekly television
programming, and event-related costs associated with 47 live events during the period, as
well as $6.0 million of charges associated with restructuring activities related to the Transactions. |
|
· |
|
Corporate direct operating
costs increased by $3.3 million. This increase was primarily related to service fees paid to Endeavor for various operational functions that
support revenue generating activities pursuant to the Services Agreement. |
Selling,
General and Administrative Expenses
Selling, general and administrative expenses increased by $475.6 million, or 845%, to $531.9 million for the three months ended March
31, 2024 compared to the three months ended March 31, 2023.
|
· |
|
UFC selling, general and
administrative expenses decreased by $2.7 million, or 7%. This decrease was primarily driven by lower travel expenses from holding one fewer numbered event and
one fewer international event compared to the prior year period. |
|
· |
|
WWE contributed selling, general and administrative expenses of $88.1 million for the three months ended March 31, 2024. These expenses were primarily driven by cost of personnel, including $4.9 million of charges associated with restructuring activities related to the Transactions, as well as travel and other operating expenses. |
|
· |
|
Corporate selling, general
and administrative expenses increased by $390.2 million. This increase was primarily due to higher legal costs
of $341.8 million, including a legal
settlement related to UFC antitrust lawsuits of $335.0 million, as well as $23.7 million of higher cost of personnel and other operating expenses, including TKO executive compensation
and other public company expenses following the Transactions. The acquisition of WWE contributed $24.7 million of expenses to Corporate, which was primarily driven by personnel costs, including $0.7 million of charges associated with restructuring activities related to the Transactions, as well as other
operating expenses. |
Depreciation and Amortization
Depreciation and amortization increased $91.9 million for the three months ended March 31, 2024 compared to the three months ended
March 31, 2023. The increase was primarily due to $91.8 million of expenses associated with
the acquisition of WWE.
Interest Expense, Net
Interest expense,
net increased $10.6 million, or
20%, to $64.5 million for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. The increase was primarily driven by higher interest rates on variable rate debt slightly offset by lower indebtedness.
(Benefit from) Provision for Income Taxes
For the
three months ended March 31, 2024, TKO recorded a benefit from income taxes of $25.5 million compared to a provision of $3.6 million for the three months ended March 31, 2023. This change was primarily related to the legal
settlement for UFC antitrust lawsuits of
$335.0 million that resulted in a $39.6 million discrete tax benefit that was recognized in the current year period.
Net (Loss) Income Attributable to Non-Controlling Interests
Net
(loss) income attributable to non-controlling interests was a loss of $145.7 million and income of $0.3 million for the three
months ended March 31, 2024 and 2023, respectively. The change was primarily due to the change in the amount of report net loss for the three months ended March 31, 2024 as compared to the reported net income
for the three months ended March 31, 2023 as well as the effect of the Transactions.
Segment Results of Operations
As of March 31, 2024, we classified our business into two reportable segments: UFC and
WWE. Our chief operating decision maker evaluates the performance of our segments based on segment Revenue and segment Adjusted EBITDA. Management believes segment Adjusted
EBITDA is indicative of operational performance and ongoing profitability, and Adjusted EBITDA is used to evaluate the operating performance of our segments and for planning
and forecasting purposes, including the allocation of resources and capital. Segment operating results reflect earnings before corporate expenses. These segment results of operations should be read in conjunction with our discussion of the Company’s consolidated results of operations included above.
The following tables set forth Revenue and Adjusted EBITDA for each of our segments for the three months ended March 31, 2024 and 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
2023 |
Revenue: |
|
|
|
|
|
|
UFC |
|
$ |
313.0 |
|
$ |
306.7 |
WWE |
|
|
316.7
|
|
|
— |
Total Revenue |
|
$ |
629.7
|
|
$ |
306.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
2023 |
Adjusted EBITDA: |
|
|
|
|
|
|
UFC |
|
$ |
195.1 |
|
$ |
186.3 |
WWE |
|
|
140.2
|
|
|
— |
Corporate |
|
|
(53.1) |
|
|
(13.7) |
Total Adjusted EBITDA |
|
$ |
282.2
|
|
$ |
172.6
|
UFC
The following table sets forth our UFC segment results for the
three months ended March 31, 2024 and 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
2023 |
|
Revenue |
|
|
|
|
|
|
|
Media rights and content |
|
$ |
214.5 |
|
$ |
224.1 |
|
Live events |
|
|
35.3
|
|
|
31.4
|
|
Sponsorship |
|
|
48.6 |
|
|
38.0 |
|
Consumer products licensing |
|
|
14.6
|
|
|
13.2
|
|
Total Revenue |
|
$ |
313.0
|
|
$ |
306.7
|
|
|
|
|
|
|
|
|
|
Direct operating costs |
|
$ |
82.3 |
|
$ |
89.2 |
|
Selling, general and administrative expenses |
|
$ |
35.6
|
|
$ |
31.2
|
|
Adjusted EBITDA |
|
$ |
195.1 |
|
$ |
186.3 |
|
Adjusted EBITDA margin |
|
|
62
|
% |
|
61
|
% |
|
|
|
|
|
|
|
|
Operating Metrics |
|
|
|
|
|
|
|
Number of events |
|
|
|
|
|
|
|
Numbered events |
|
|
3
|
|
|
4
|
|
Fight Nights |
|
|
8 |
|
|
6 |
|
Total events |
|
|
11
|
|
|
10
|
|
|
|
|
|
|
|
|
|
Location of events |
|
|
|
|
|
|
|
United States |
|
|
9 |
|
|
7 |
|
International |
|
|
2
|
|
|
3
|
|
Total events |
|
|
11 |
|
|
10 |
|
WWE
The following table sets forth our WWE segment results for the
three months ended March 31, 2024:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
2023 |
Revenue |
|
|
|
|
|
|
Media rights and content |
|
$ |
221.1 |
|
$ |
— |
Live events |
|
|
50.2
|
|
|
— |
Sponsorship |
|
|
13.8 |
|
|
— |
Consumer products licensing |
|
|
31.6
|
|
|
— |
Total Revenue |
|
$ |
316.7
|
|
$ |
— |
|
|
|
|
|
|
|
Direct operating costs |
|
$ |
100.4 |
|
$ |
— |
Selling, general and administrative expenses |
|
$ |
76.1
|
|
$ |
— |
Adjusted EBITDA |
|
$ |
140.2 |
|
$ |
— |
Adjusted EBITDA margin |
|
|
44
|
% |
|
— |
|
|
|
|
|
|
|
Operating Metrics |
|
|
|
|
|
|
Number of events |
|
|
|
|
|
|
Premium live events |
|
|
2
|
|
|
N/A |
Televised events |
|
|
25 |
|
|
N/A |
Non-televised events |
|
|
20
|
|
|
N/A |
Total events |
|
|
47 |
|
|
N/A |
|
|
|
|
|
|
|
Location of events |
|
|
|
|
|
|
United States |
|
|
45
|
|
|
N/A |
International |
|
|
2 |
|
|
N/A |
Total events |
|
|
47
|
|
|
N/A |
Corporate
Corporate expenses relate largely to corporate
activities, including information technology, facilities, legal, human resources, finance, accounting, treasury, investor relations, corporate communications, community relations and compensation to TKO’s management and board of directors,
which support both reportable segments. Corporate expenses also include service fees paid by the Company to Endeavor related to
corporate activities as well as revenue generating activities under the Services Agreement.
The following table displays results for Corporate for the three months ended March 31, 2024 and 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
2023 |
Adjusted EBITDA |
|
$ |
(53.1)
|
|
$ |
(13.7)
|
Adjusted EBITDA for the three months ended March 31, 2024 decreased
by $39.4 million, or 288%, compared to the three months ended March 31, 2023. The acquisition of WWE contributed corporate
expenses of $20.5 million, primarily driven by the cost of personnel and other general and administrative expenses. The remaining decrease
of $18.9 million was driven by increases
in cost of personnel, including TKO executive compensation following the Transactions, and other general and administrative expenses, including public company expenses following the Transactions.
NON-GAAP FINANCIAL MEASURES
Adjusted EBITDA is a non-GAAP financial measure and is defined as net income, excluding income taxes, net interest expense, depreciation and amortization, equity-based compensation, merger and acquisition costs,
certain legal costs, restructuring, severance and impairment charges, and certain other items when applicable. Adjusted EBITDA margin is a non-GAAP financial measure defined as Adjusted EBITDA divided by Revenue.
TKO management believes that Adjusted EBITDA and Adjusted EBITDA margin are useful to investors as these measures eliminate the significant level
of non-cash depreciation and amortization expense that results from its capital investments and intangible assets, and improve comparability by eliminating the significant level of interest expense associated with TKO’s debt
facilities, as well as income taxes which may not be comparable with other companies based on TKO’s tax and corporate structure.
Adjusted EBITDA and Adjusted EBITDA margin are used as the primary bases to
evaluate TKO’s consolidated operating performance.
Adjusted EBITDA and Adjusted EBITDA margin have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of TKO’s results as reported under GAAP. Some of
these limitations are:
|
· |
|
they do not
reflect every cash expenditure, future requirements for capital expenditures, or contractual commitments; |
|
· |
|
Adjusted EBITDA does not reflect the significant interest expense or the cash requirements necessary to service interest or principal payments on TKO’s debt; |
|
· |
|
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced or require improvements in the future, and Adjusted EBITDA and
Adjusted EBITDA margin do not reflect any cash requirement for such replacements or improvements; and |
|
· |
|
they are not
adjusted for all non-cash income or expense items that are reflected in TKO’s statements of cash flows. |
TKO
management compensates for these limitations by using Adjusted EBITDA and Adjusted EBITDA margin along with other comparative tools, together
with GAAP measurements, to assist in the evaluation of TKO’s operating performance.
Adjusted EBITDA and Adjusted EBITDA margin should not be
considered substitutes for the reported results prepared in accordance with GAAP and should not be considered in isolation or as alternatives to net income as indicators of TKO’s financial performance, as measures of discretionary cash
available to it to invest in the growth of its business or as measures of cash that will be available to TKO to meet its obligations. Although TKO uses Adjusted EBITDA and Adjusted EBITDA margin as financial measures to assess the performance of its
business, such use is limited because it does not include certain material costs necessary to operate TKO’s business. TKO’s presentation of Adjusted EBITDA and Adjusted EBITDA margin should not be construed as indications that its
future results will be unaffected by unusual or nonrecurring items. These non-GAAP financial measures, as determined and presented by TKO, may not be comparable to related or similarly titled measures reported by other companies. Set forth
below are reconciliations of TKO’s most directly comparable financial measures calculated in accordance with GAAP to these non-GAAP financial measures on a consolidated basis.
Adjusted EBITDA and Adjusted EBITDA Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
2024 |
|
2023 |
Reconciliation of Net (Loss) Income to Adjusted EBITDA |
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(249.5) |
|
|
$ |
87.9 |
|
(Benefit from) provision for income taxes |
|
|
(25.5)
|
|
|
|
3.6
|
|
Interest expense, net |
|
|
64.5 |
|
|
|
53.9 |
|
Depreciation and amortization |
|
|
107.1
|
|
|
|
15.2
|
|
Equity-based compensation expense (1) |
|
|
30.2 |
|
|
|
5.8 |
|
Merger and acquisition costs (2) |
|
|
0.5
|
|
|
|
5.4
|
|
Certain legal costs (3) |
|
|
345.2 |
|
|
|
0.4 |
|
Restructuring, severance and impairment (4) |
|
|
9.2
|
|
|
|
— |
|
Other adjustments |
|
|
0.5 |
|
|
|
0.4 |
|
Total Adjusted EBITDA |
|
$ |
282.2
|
|
|
$ |
172.6
|
|
Net (loss) income margin |
|
|
(40) |
% |
|
|
29 |
% |
Adjusted EBITDA margin |
|
|
45
|
% |
|
|
56
|
% |
|
(1) |
|
Equity-based compensation represents non-cash compensation expense for awards issued under Endeavor’s 2021 Plan subsequent to its April 28, 2021 IPO, for the Replacement Awards (as defined in Note 4, Acquisition of WWE, to our unaudited consolidated financial statements in the Quarterly Report) and for awards issued under the 2023 Incentive Award Plan. For
the three months ended March 31, 2024, equity-based compensation includes $9.0 million of expense associated with certain services provided by an independent contractor in the WWE segment and
$2.4 million of expense associated with accelerated
vesting of the Replacement Awards related to the workforce reduction of certain employees in the WWE segment and Corporate. |
|
(2) |
|
Includes certain costs of professional fees and bonuses related
to the Transactions and payable contingent on the closing of the Transactions. |
|
(3) |
|
Includes costs related to certain litigation matters including antitrust lawsuits for UFC and WWE and matters where Mr. McMahon has agreed to make future payments to certain counterparties
personally. For the three months ended March 31, 2024, these costs include the settlement of UFC antitrust
lawsuits for $335.0 million, as described in Note
16, Commitments and Contingencies, to our unaudited consolidated financial statements in this
Quarterly Report. |
|
(4) |
|
Includes costs resulting from the Company’s cost reduction program during the three months ended March 31, 2024, as described in Note 15, Restructuring Charges, to our unaudited consolidated financial statements in this Quarterly Report. |
Liquidity and Capital Resources
Sources and Uses of Cash
Cash flows from operations are used to fund TKO’s day-to-day operations, revenue-generating
activities, and routine capital expenditures, as well as service its long-term debt.
Credit Facilities
As of March 31, 2024, there is currently outstanding an aggregate of $2.7 billion of first lien term loans under a credit agreement dated August 18, 2016 (as amended and/or restated, the “Credit
Agreement”), by and among Zuffa Guarantor, LLC, UFC Holdings, LLC, as borrower, the lenders party hereto and Goldman Sachs Bank USA, as Administrative Agent, which was entered into in connection with the acquisition of Zuffa by EGH in
2016. The facilities under the Credit Agreement consist of (i) a first lien secured term loan (the “First Lien Term Loan”) and (ii) a secured revolving credit facility in an aggregate principal amount of $205.0 million,
letters of credit in an aggregate face amount not in excess of $40.0 million and swingline loans in an aggregate principal amount not in excess of $15.0 million (collectively, the “Revolving Credit Facility”, and, together with the
First Lien Term Loan, the “Credit Facilities”). The Credit Facilities are secured by liens on substantially all of the assets of Zuffa Guarantor, LLC, UFC Holdings, LLC and certain subsidiaries thereof.
Following a repricing under the Credit Facilities in January 2021, term loan
borrowings under the Credit Facilities bore interest at a variable interest rate equal to either, at its option, adjusted LIBOR or the ABR plus, in each case, an applicable margin. LIBOR term loans
accrue interest at a rate equal to an adjusted LIBOR plus 2.75%-3.00%, depending on the First Lien Leverage Ratio (as defined in the Credit Agreement), in each case with a LIBOR floor of 0.75%. ABR term loans accrue interest at a rate equal to (i) the highest of (a) the Federal Funds Effective Rate plus 0.5%, (b) the prime rate, (c) adjusted LIBOR for a
one-month interest period plus 1.00% and (d) 1.75%, plus (ii) 1.75%-2.00%. In June 2023, the parties amended the terms of the First Lien Term Loan to replace the adjusted LIBOR reference rate with Term Secured Overnight Financing Rate (“SOFR”)
plus a credit spread adjustment (as defined in the Credit Agreement). The term loans under the Credit Facilities include 1% principal amortization payable in equal quarterly installments and mature on April 29, 2026.
As of March 31, 2024, the Company had the option to borrow
incremental term loans in an aggregate amount equal to at least $455.0 million, subject to market demand, and may be able to borrow additional funds depending on its First
Lien Leverage Ratio. The Credit Agreement includes certain mandatory prepayment provisions relating to, among other things, the incurrence of additional debt.
The Revolving Credit Facility has $205.0 million of total borrowing capacity and letter of credit and swingline loan sub-limits of up to $40.0 million and $15.0 million, respectively. Revolving loan borrowings under the Credit Facilities bear interest at a variable interest rate equal to either, at
TKO’s option, adjusted LIBOR or ABR plus, in each case, an applicable margin. LIBOR revolving loans accrue interest at a rate equal to an adjusted LIBOR plus 3.50-4.00%, depending on the First Lien Leverage Ratio, in each case with a LIBOR
floor of 0.00%. ABR revolving loans accrue interest at a rate equal to (i) the highest of (a) the Federal Funds Effective Rate plus 0.50%, (b) the prime rate, (c) adjusted LIBOR for a one-month interest period plus 1.00% and (d) 1.00%, plus (ii)
2.50-3.00%, depending on the First Lien Leverage Ratio. In April 2023, the parties amended the terms of the Revolving Credit Facility
to replace adjusted LIBOR reference rate used for the facility with SOFR plus 2.75-3.00%.
The Company pays a commitment fee of 0.25-0.50%, based on the First Lien Leverage Ratio and letter of credit fees of 0.125%.
As of March 31, 2024, the Company had no borrowings outstanding under the Revolving Credit Facility and no outstanding letters of credit. In April 2024, the Company borrowed $150.0 million under the Revolving Credit Facility to fund certain share repurchases that occurred during the
second quarter of 2024. In May 2024, the Company entered into an amendment to the Credit Agreement, which extended the Revolving Credit Facility’s maturity by twelve months to
October 29, 2025.
The Revolving Credit Facility is subject to a financial covenant if
greater than 35% of the borrowing capacity of the Revolving Credit Facility (excluding cash collateralized letters of credit and non-cash collateralized letters of credit of up to $10.0 million) is utilized at the end of any fiscal quarter. This
covenant was not applicable on March 31, 2024, as the Company had no borrowings outstanding under
the Revolving
Credit Facility.
The Credit Agreement contains certain restrictive covenants around indebtedness, liens, fundamental changes, guarantees, investments, asset sales and transactions with
affiliates.
The borrower’s obligations under the Credit Facilities are guaranteed by certain of TKO OpCo’s indirect wholly owned domestic restricted
subsidiaries, subject to certain exceptions.
Restrictions on
Dividends
The Credit
Agreement contains restrictions on TKO’s ability to make distributions and other payments from the respective credit groups.
These restrictions on dividends include exceptions for, among other things, (1) amounts necessary to make tax payments, (2) a limited annual amount for employee equity repurchases, (3) distributions required to fund certain parent entities, (4)
other specific allowable situations and (5) a general restricted payment basket, which generally provides for no restrictions as long as the Total Leverage Ratio (as defined
in the Credit Agreement) is less than 5.0x.
Other Debt
In October 2018, UFC entered into a $28.0 million Loan Agreement and a $12.0
million Loan Agreement in order to finance the purchase of a building and its adjacent land (the “Secured Commercial Loans”). The Secured Commercial Loans have identical terms except the $28.0 million Loan Agreement is secured by a
deed of trust for UFC’s headquarters building and underlying land in Las Vegas and the $12.0 million Loan Agreement is secured by a deed of trust for the acquired building and its adjacent land, also located in Las Vegas. The Secured
Commercial Loans bore interest at a rate of LIBOR + 1.62% (with a LIBOR floor of 0.88%). In
May 2023, the parties amended the terms of the Secured Commercial Loans to replace the adjusted LIBOR reference rate with SOFR, and
bear interest at a rate of SOFR plus 1.70%. Principal amortization of 4% is payable in monthly installments with any remaining balance payable on the final maturity date of November 1, 2028.
The applicable loan agreements
each contain a financial covenant that requires UFC to maintain a Debt Service Coverage Ratio as defined in the applicable loan
agreements of no more than 1.15-to-1 as measured on an annual basis (the “Secured Commercial Loan Covenant”). As of
March 31, 2024, UFC was in compliance with the Secured Commercial Loan Covenant.
Cash Flows Overview
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
(in millions) |
|
2024 |
|
2023 |
Net cash provided by operating activities |
|
$ |
59.3
|
|
$ |
69.7
|
Net cash used in investing activities |
|
$ |
(36.2) |
|
$ |
(4.6) |
Net cash used in financing activities |
|
$ |
(10.6)
|
|
$ |
(109.6)
|
Operating activities decreased from $69.7 million
of cash provided in the three months ended March 31, 2023 to $59.3 million of cash provided in the three months ended March 31, 2024. Cash provided in the three months ended March 31, 2024 was primarily
due to a decrease in net income for the period of $337.4 million, which included certain
non-cash items, including depreciation and amortization of $91.9 million and equity-based compensation of $24.4 million, partially offset by an increase in accrued and other liabilities of $283.3 million primarily due to the settlement of UFC
antitrust lawsuits for $335.0 million and the timing of bonus payments.
Investing activities decreased from $4.6 million of cash used in the three months ended March 31, 2023 to $36.2 million of cash
used in the three months ended March 31, 2024. Cash used in the three months ended March 31, 2024 primarily reflects payments for
property, buildings and equipment and investments in affiliates. Cash used in the three months ended March 31, 2023 primarily reflects payments for property, buildings and equipment.
Financing activities decreased from $109.6 million of cash used in
the three months ended March 31, 2023 to $10.6 million
of cash used in the three months ended March 31, 2024. Cash used in the three months ended March 31, 2024 primarily reflects net payments on debt of $10.0 million. Cash used in the three months ended March 31, 2023 primarily reflects
distributions to Endeavor and subsidiaries of $101.4 million and net payments on debt of $8.2 million.
Future Sources and Uses of
Liquidity
TKO’s sources of liquidity are (1) cash on hand,
(2) cash flows from operations and (3) available borrowings under the Credit Facilities (which borrowings would be subject to certain restrictive covenants contained
therein). Based on its current expectations, TKO believes that these sources of liquidity will be sufficient to fund its working capital requirements and to meet its commitments, including long-term debt service, for at least the next 12
months.
TKO expects that its primary liquidity needs will be cash
to (1) provide capital to facilitate organic growth of its business, (2) pay operating expenses, including cash compensation to its employees, athletes and talent, (3) fund capital expenditures, (4) pay interest and principal when due on the Credit Facilities, (5) pay
income taxes, (6) reduce its outstanding indebtedness under the Credit Facilities, (7) fund the legal settlements described in Note 16, Commitments and Contingencies, to our unaudited consolidated financial statements included in this Quarterly Report, and (8) make distributions to members and, in accordance with the Company’s dividend
policy, to TKO stockholders.
TKO expects to refinance the Credit Facilities prior to the maturity of the outstanding loans in 2026. It currently anticipates being able to secure funding for such refinancing at favorable terms; however, its
ability to do so may be impacted by many factors, including TKO’s growth and other factors specific to its business as well as macro-economic factors beyond its control.
Recent Accounting Pronouncements
See Note
3, Recent Accounting Pronouncements, to our unaudited consolidated
financial statements included in this Quarterly Report for further information on certain accounting standards that have been recently adopted or that have not yet been
required to be implemented and may be applicable to our future operations.
Critical Accounting Estimates
For a description of our policies
regarding our critical accounting estimates, see “Critical Accounting Estimates” in our 2023 Annual Report. During the three months ended March 31, 2024, there were no significant changes in our critical accounting policies and
estimates or the application or the results of the application of those policies to our unaudited consolidated financial statements from those previously disclosed in the 2023 Annual Report.
Item
3. Quantitative and Qualitative Disclosures about Market Risk
TKO is exposed to market risks in the ordinary course of its business. Market risk represents the risk of loss that may impact TKO’s financial position due to adverse changes in financial
market prices and rates.
Interest Rate Risk
Our exposure to changes in interest rates relates primarily to the floating interest component on our long-term debt. The Credit Facilities bear interest at floating rates and we regularly monitor and manage interest rate risks. Holding debt levels constant as of March 31, 2024, a 1% increase in the effective interest rates would have increased our annual interest expense by approximately $27 million.
Foreign Currency Risk
We have operations in several countries outside of the United States, and certain of our operations are conducted in foreign currencies, principally the British Pound and the Brazilian Real. The value of these
currencies fluctuates relative to the U.S. dollar. These changes could adversely affect the U.S. dollar equivalent of TKO’s non-U.S. dollar revenue and operating costs and expenses
and reduce international demand for its content and services, all of which could negatively affect TKO’s business, financial condition and results of operations in a given period or in
specific territories.
Holding other variables constant (such as interest rates and debt levels), if the U.S. dollar appreciated by 10% against the foreign currencies used by TKO’s operations in the three months ended March 31, 2024, revenues would have decreased by approximately $1.2 million and operating income would have increased by approximately $0.2 million.
We regularly review our foreign exchange exposures that may have a material impact on our business and from time to time use foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of potential adverse fluctuations in foreign
currency exchange rates arising from these exposures. TKO does not enter into foreign exchange contracts or other derivatives for speculative purposes.
Credit Risk
TKO maintains its cash and cash equivalents with various major banks and other high quality financial institutions, and
its deposits at these institutions exceed insured limits. Market conditions can impact the viability of these institutions and the failure of any of the financial institutions where we maintain our cash and cash equivalents or any inability to access or delays in our ability to
access our funds could adversely affect our business and financial position.
Item 4.
Controls and Procedures
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating our disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must
reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Evaluation of Disclosure Controls and Procedures
The Company’s management has evaluated, with the participation of the
Chief Executive
Officer and the Chief
Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on this evaluation, the Chief Executive Officer and
Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of
March 31, 2024.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended March 31, 2024 that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, we may be involved in claims and proceedings arising in the course of
our business. The outcome of any such claims or proceedings, regardless of the merits, is inherently uncertain. For a description of our legal proceedings, refer to Note 16, Commitments and Contingencies, to
our unaudited consolidated financial statements included elsewhere in this Quarterly Report, which is incorporated herein by
reference.
Item 1A. Risk Factors
Our business, financial condition and operating results can be affected by a number of factors, whether currently known or unknown, including but not limited to those described as risk factors, any one or more of which could, directly or indirectly, cause our actual operating results and financial condition to vary
materially from past, or anticipated future, operating results and financial condition. For a discussion of these potential risks and uncertainties, see Part I, Item 1A. "Risk Factors" in our
2023 Annual Report. Any of these factors, in whole or in part, could materially and adversely affect our business, financial condition,
operating results and the price of our common stock. There have been no material changes in our risk factors to those included in our
2023 Annual Report.
Item 6.
Exhibits
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Exhibit Number |
Description |
Form |
File No. |
Exhibit |
Filing Date |
Filed/Furnished Herewith |
2.1# |
Transaction
Agreement, dated April 2, 2023, by and among Endeavor Group Holdings, Inc., Endeavor Operating Company, LLC, Zuffa Parent, LLC, World Wrestling Entertainment, Inc., New Whale Inc., and Whale Merger Sub Inc. |
424(b)(3) |
333-271893 |
Annex A |
08/22/2023 |
|
3.1 |
Amended
and Restated Certificate of Incorporation of TKO Group Holdings, Inc. |
S-8 |
333-274480 |
4.1 |
09/12/2023 |
|
3.2 |
Amended
and Restated Bylaws of TKO Group Holdings, Inc. |
S-8 |
333-274480 |
4.2 |
09/12/2023 |
|
4.1 |
Registration
Rights Agreement, dated as of September 12, 2023, by and among TKO Group Holdings, Inc., Endeavor Group Holdings, Inc. and Vincent K. McMahon. |
8-K |
001-41797 |
4.1 |
09/12/2023 |
|
4.2 |
Indenture
between World Wrestling Entertainment, Inc. and U.S. Bank National Association, as trustee, dated December 16, 2016. |
8-K |
001-16131 |
4.1 |
12/16/2016 |
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4.3 |
Form
of 3.375% Convertible Senior Note due 2023. |
8-K |
001-16131 |
4.1 |
12/16/2016 |
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4.4 |
First
Supplemental Indenture, among World Wrestling Entertainment, Inc., New Whale Inc. and U.S. Bank Trust Company, National Association, as trustee. |
8-K |
001-16131 |
4.2 |
09/12/2023 |
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10.1# |
Fourth
Refinancing Agreement, dated as of May 1, 2024, among Zuffa Guarantor, LLC, UFC Holdings, LLC, the lenders party thereto and Goldman Sachs Bank USA, as administrative agent. |
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* |
10.2 |
Amendment
No. 1, dated as of January 23, 2024, to the Governance Agreement, dated as of September 12, 2023, by and among Endeavor Group Holdings, Inc., Endeavor Operating Company, LLC, January Capital Sub, LLC, January Capital HoldCo, LLC, TKO Operating Company,
LLC, TKO Group Holdings, Inc., and Vincent K. McMahon. |
10-K |
001-41797 |
10.3 |
02/27/2024 |
|
10.3 |
Amended
and Restated Non-Employee Director Compensation Policy. |
10-K |
001-41797 |
10.16 |
02/27/2024 |
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10.4#^ |
Independent
Contractor Services and Merchandising Agreement, dated as of January 22, 2024, by and among World Wrestling Entertainment, LLC, 7 Bucks Entertainment, Inc., DJIP, LLC and Tag-Team Enterprises, Inc. |
10-K |
001-41797 |
10.29 |
02/27/2024 |
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10.5#^ |
IP
Assignment Agreement, dated as of January 22, 2024, by and among DJIP, LLC, Tag-Team Enterprises, Inc., 7 Bucks Entertainment, Inc., World Wrestling Entertainment, LLC and TKO Group Holdings, Inc. |
10-K |
001-41797 |
10.30 |
02/27/2024 |
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10.6^ |
Award
Agreement, dated as of January 22, 2024, by and between TKO Group Holdings, Inc. and Dwayne Johnson. |
10-K |
001-41797 |
10.31 |
02/27/2024 |
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10.7 |
Term
Employment Agreement, dated as of January 12, 2024, by and between TKO Group Holdings, Inc. and Seth Krauss. |
8-K |
001-41797 |
10.1 |
01/12/2024 |
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10.8 |
Term
Employment Agreement, dated as of January 21, 2024, by and between TKO Group Holdings, Inc. and Mark Shapiro. |
8-K |
001-41797 |
10.1 |
01/23/2024 |
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10.9 |
TKO
Stock Purchase Agreement, dated April 7, 2024. by and between TKO Group Holdings, Inc. and Vincent K. McMahon. |
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* |
31.1 |
Certification
of Principal Executive Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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* |
31.2 |
Certification
of Principal Financial Officer Pursuant to Rules 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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* |
32.1 |
Certification
of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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** |
32.2 |
Certification
of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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** |
101.INS |
Inline XBRL Instance Document – the instance document does not appear
in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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* |
101.SCH |
Inline XBRL Taxonomy Extension Schema Document. |
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* |
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase
Document. |
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* |
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase
Document. |
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* |
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase
Document. |
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* |
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase
Document. |
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* |
104 |
Cover Page Interactive Data File – formatted as Inline
XBRL and contained in Exhibit 101. |
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* |
* Filed herewith.
** Furnished herewith.
# Annexes, schedules and/or exhibits have been omitted pursuant to Item 601(a)(5) of
Regulation S-K. The Registrant undertakes to furnish supplemental copies of any of the omitted schedules or similar attachments upon request by the SEC.
^ Certain portions of this exhibit (indicated by “[***]”) have been
omitted pursuant to Item 601(b)(10)(iv) of Regulation S-K. The Registrant undertakes to furnish unredacted versions of the exhibit upon request by the SEC.
SIGNATURES
Pursuant to
the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
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TKO GROUP HOLDINGS, INC. |
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Date: |
May 8, 2024 |
By: |
/s/ ANDREW SCHLEIMER |
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Andrew Schleimer |
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Chief Financial
Officer |
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(principal financial officer and authorized |
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signatory) |
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Date: |
May 8, 2024 |
By: |
/s/ SHANE KAPRAL |
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Shane Kapral |
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Chief Accounting Officer |
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(principal accounting officer and authorized |
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signatory) |
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