|
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2015March 31, 2016
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-15839
ACTIVISION BLIZZARD, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 95-4803544 |
|
|
|
(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
|
|
|
3100 Ocean Park Boulevard, Santa Monica, CA |
| 90405 |
|
|
|
(Address of principal executive offices) |
| (Zip Code) |
(310) 255-2000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer x |
| Accelerated Filer o |
|
|
|
Non-accelerated filer o |
| Smaller reporting company o |
|
|
|
(Do not check if a smaller reporting company) |
|
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant’s Common Stock outstanding at November 3, 2015May 2, 2016 was 731,183,860.738,227,641.
|
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
| 3 | |
|
|
|
| ||
|
|
|
| ||
|
|
|
| Condensed Consolidated Balance Sheets at | 4 |
|
|
|
| 5 | |
|
|
|
| 6 | |
|
|
|
| 7 | |
|
|
|
| 8 | |
|
|
|
| 9 | |
|
|
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| |
|
|
|
| ||
|
|
|
| ||
|
|
|
| ||
|
|
|
| ||
|
|
|
| ||
|
|
|
| ||
|
|
|
| ||
|
| |
| ||
|
| |
CERTIFICATIONS |
|
This Quarterly Report on Form 10-Q contains, or incorporates by reference, certain forward-lookingforward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements consist of any statement other than a recitation of historical facts and include, but are not limited to: (1) projections of revenues, expenses, income or loss, earnings or loss per share, cash flow or other financial items; (2) statements of our plans and objectives, including those relating to product releases; (3) statements of future financial or operating performance; (4) statements relating to our proposedthe acquisition of King Digital Entertainment plc (the “Acquisition”); (5) statements relating to the outcome orand expected impact of pending or threatened litigation;that transaction, including without limitation, the expected impact on Activision Blizzard, Inc.’s future financial results; and (6)(5) statements of assumptions underlying such statements. Activision Blizzard, Inc. (“Activision Blizzard”) generally uses words such as “outlook,” “forecast,” “will,” “could,” “should,” “would,” “to be,” “plan,” “plans,” “believes,” “may,” “might,” “expects,” “intends,” “intends as,” “anticipates,” “estimate,” “future,” “positioned,” “potential,” “project,” “remain,” “scheduled,” “set to,” “subject to,” “upcoming” and other similar expressions to help identify forward-lookingforward-looking statements. Forward-lookingForward-looking statements are subject to business and economic risk,risks, reflect management’s current expectations, estimates and projections about our business, and are inherently uncertain and difficult to predict. Our
The Company cautions that a number of important factors could cause Activision Blizzard, Inc.’s actual results could differ materially. Risks and uncertainties that may affect our future results and other future circumstances to differ materially from those expressed in any forward-looking statements. Such factors include, but are not limited to: uncertainties as to whether and when Activision Blizzard, Inc. will be able to realize the anticipated financial results from the acquisition of King Digital Entertainment plc; the integration of King Digital Entertainment plc being more difficult, time-consuming, or costly than expected; the diversion of management time and attention to issues relating to the operations and integration of King Digital Entertainment plc; sales levels of ourActivision Blizzard, Inc.’s titles; increasing concentration of revenuesrevenue among a small number of titles; ourActivision Blizzard, Inc.’s ability to predict consumer preferences, including interest in specific genres, such as first-person action, massively multiplayer online, “toys to life” and music-based games, and preferences among hardware platforms; the amount of our debt and the limitations imposed by the covenants in the agreements governing our debt; the adoption rate and availability of new hardware (including peripherals) and related software, particularly during console transitions;software; counterparty risks relating to customers, licensees, licensors, and manufacturers; maintenance of relationships with key personnel, customers, financing providers, licensees, licensors, manufacturers, vendors, and third-party developers, including the ability to attract, retain and develop key personnel and developers that can create high quality titles; changing business models, including digital delivery of content and the increased prevalence of free-to-play games; product delays or defects; competition, including from used games and other forms of entertainment; rapid changes in technology and industry standards; possible declines in software pricing; product returns and price protection; the identification of suitable future acquisition opportunities and potential challenges associated with geographic expansion; the seasonal and cyclical nature of the interactive entertainment market; litigation risks and associated costs; protection of proprietary rights; shifts in consumer spending trends; capital market risks; applicable regulations; domestic and international economic, financial, and political conditions and policies; tax rates and foreign exchange rates; the impact of the current macroeconomic environment; uncertainties as to the timing of the Acquisition; uncertainties as to whether we will be able to consummate the Acquisition; the integration of King Digital Entertainment plc being more difficult, time-consuming or costly than expected; the possibility that we may be unable to achieve expected synergies and operating efficiencies in connection with the Acquisition within the expected time-frames or at all; and the other factors identified in “Risk Factors” included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2014 or in “Cautionary Statement Regarding Forward-Looking Statements” from our Current Report on Form 8-K filed on November 3, 2015. The forward-looking statements contained herein are based upon information available to us as of the date of this Quarterly Report on Form 10-Q and we assume no obligation to update any such forward-looking statements. Although these forward-looking statements are believed to be true when made, they may ultimately prove to be incorrect. These statements are not guarantees of our future performance and are subject to risks, uncertainties and other factors, some of which are beyond our control and may cause actual results to differ materially from current expectations.
Activision Blizzard, Inc.’s names, abbreviations thereof, logos, and product and service designators are all either the registered or unregistered trademarks or trade names of Activision Blizzard.Blizzard, Inc. All other product or service names are the property of their respective owners.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Amounts in millions, except share data)
|
| At September 30,
|
| At December 31,
|
| At March 31, 2016
|
| At December 31, | |||||
Assets |
|
|
|
|
|
|
|
| |||||
Current assets: |
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 4,365 |
| $ | 4,848 |
| $ | 2,872 |
| $ | 1,823 | |
Short-term investments |
| 154 |
| 10 | |||||||||
Accounts receivable, net of allowances of $216 and $383, at September 30, 2015 and December 31, 2014, respectively |
| 503 |
| 659 | |||||||||
Accounts receivable, net of allowances of $175 and $343, at March 31, 2016 and December 31, 2015, respectively |
| 383 |
| 679 | |||||||||
Inventories, net |
| 238 |
| 123 |
| 103 |
| 128 | |||||
Software development |
| 342 |
| 452 |
| 296 |
| 336 | |||||
Intellectual property licenses |
| 27 |
| 5 | |||||||||
Deferred income taxes, net |
| 373 |
| 368 | |||||||||
Other current assets |
| 307 |
| 444 |
| 354 |
| 421 | |||||
Total current assets |
| 6,309 |
| 6,909 |
| 4,008 |
| 3,387 | |||||
Long-term investments |
| 9 |
| 9 | |||||||||
Cash in escrow |
| — |
| 3,561 | |||||||||
Software development |
| 73 |
| 20 |
| 114 |
| 80 | |||||
Intellectual property licenses |
| — |
| 18 | |||||||||
Property and equipment, net |
| 200 |
| 157 |
| 246 |
| 189 | |||||
Deferred income taxes, net |
| 362 |
| 275 | |||||||||
Other assets |
| 171 |
| 85 |
| 316 |
| 177 | |||||
Intangible assets, net |
| 24 |
| 29 |
| 2,484 |
| 482 | |||||
Trademark and trade names |
| 433 |
| 433 | |||||||||
Goodwill |
| 7,083 |
| 7,086 |
| 9,772 |
| 7,095 | |||||
Total assets |
| $ | 14,302 |
| $ | 14,746 |
| $ | 17,302 |
| $ | 15,246 | |
|
|
|
|
|
|
|
|
| |||||
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
| |||||
Current liabilities: |
|
|
|
|
|
|
|
| |||||
Accounts payable |
| $ | 309 |
| $ | 325 |
| $ | 150 |
| $ | 284 | |
Deferred revenues |
| 907 |
| 1,797 |
| 1,207 |
| 1,702 | |||||
Accrued expenses and other liabilities |
| 394 |
| 592 |
| 901 |
| 625 | |||||
Current portion of long-term debt |
| 64 |
| — | |||||||||
Total current liabilities |
| 1,610 |
| 2,714 |
| 2,322 |
| 2,611 | |||||
Long-term debt, net |
| 4,078 |
| 4,324 |
| 5,777 |
| 4,074 | |||||
Deferred income taxes, net |
| 110 |
| 114 |
| 57 |
| 10 | |||||
Other liabilities |
| 515 |
| 361 |
| 798 |
| 483 | |||||
Total liabilities |
| 6,313 |
| 7,513 |
| 8,954 |
| 7,178 | |||||
Commitments and contingencies (Note 12) |
|
|
|
| |||||||||
|
|
|
|
| |||||||||
Commitments and contingencies (Note 13) |
|
|
|
| |||||||||
Shareholders’ equity: |
|
|
|
|
|
|
|
| |||||
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,159,620,225 and 1,150,605,926 shares issued at September 30, 2015 and December 31, 2014, respectively |
| — |
| — | |||||||||
Common stock, $0.000001 par value, 2,400,000,000 shares authorized, 1,166,683,743 and 1,163,179,140 shares issued at March 31, 2016 and December 31, 2015, respectively |
| — |
| — | |||||||||
Additional paid-in capital |
| 10,209 |
| 9,924 |
| 10,343 |
| 10,242 | |||||
Less: Treasury stock, at cost, 428,676,471 shares at September 30, 2015 and December 31, 2014 |
| (5,613) |
| (5,762) | |||||||||
Less: Treasury stock, at cost, 428,676,471 shares at March 31, 2016 and December 31, 2015 |
| (5,591) |
| (5,637) | |||||||||
Retained earnings |
| 3,937 |
| 3,374 |
| 4,239 |
| 4,096 | |||||
Accumulated other comprehensive loss |
| (544) |
| (303) |
| (643) |
| (633) | |||||
Total shareholders’ equity |
| 7,989 |
| 7,233 |
| 8,348 |
| 8,068 | |||||
Total liabilities and shareholders’ equity |
| $ | 14,302 |
| $ | 14,746 |
| $ | 17,302 |
| $ | 15,246 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in millions, except per share data)
|
| For the Three Months Ended March 31,
| ||||||||||||||||
|
| For the Three Months Ended
|
| For the Nine Months Ended
|
| 2016 |
| 2015 | ||||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
|
|
|
| ||||||
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Product sales |
| $ | 425 |
| $ | 337 |
| $ | 1,736 |
| $ | 1,693 |
| $ | 645 |
| $ | 784 |
Subscription, licensing and other revenues |
| 565 |
| 416 |
| 1,576 |
| 1,140 |
| 810 |
| 494 | ||||||
Total net revenues |
| 990 |
| 753 |
| 3,312 |
| 2,833 |
| 1,455 |
| 1,278 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cost of sales - product costs |
| 195 |
| 156 |
| 560 |
| 568 |
| 247 |
| 209 | ||||||
Cost of sales - online |
| 56 |
| 56 |
| 161 |
| 170 |
| 64 |
| 53 | ||||||
Cost of sales - software royalties and amortization |
| 81 |
| 34 |
| 314 |
| 136 |
| 144 |
| 148 | ||||||
Cost of sales - intellectual property licenses |
| 5 |
| 7 |
| 12 |
| 20 |
| 36 |
| 3 | ||||||
Product development |
| 159 |
| 131 |
| 453 |
| 387 |
| 175 |
| 145 | ||||||
Sales and marketing |
| 189 |
| 221 |
| 445 |
| 465 |
| 168 |
| 92 | ||||||
General and administrative |
| 109 |
| 140 |
| 297 |
| 342 |
| 160 |
| 86 | ||||||
Total costs and expenses |
| 794 |
| 745 |
| 2,242 |
| 2,088 |
| 994 |
| 736 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Operating income |
| 196 |
| 8 |
| 1,070 |
| 745 |
| 461 |
| 542 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Interest and other expense, net |
| 51 |
| 51 |
| 151 |
| 152 | ||||||||||
Interest and other expense (income), net |
| 52 |
| 50 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income (loss) before income tax expense (benefit) |
| 145 |
| (43) |
| 919 |
| 593 | ||||||||||
Income before income tax expense |
| 409 |
| 492 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income tax expense (benefit) |
| 18 |
| (20) |
| 186 |
| 119 | ||||||||||
Income tax expense |
| 73 |
| 98 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income (loss) |
| $ | 127 |
| $ | (23) |
| $ | 733 |
| $ | 474 | ||||||
Net income |
| $ | 336 |
| $ | 394 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Earnings (loss) per common share |
|
|
|
|
|
|
|
| ||||||||||
Earnings per common share |
|
|
|
| ||||||||||||||
Basic |
| $ | 0.17 |
| $ | (0.03) |
| $ | 0.99 |
| $ | 0.65 |
| $ | 0.45 |
| $ | 0.54 |
Diluted |
| $ | 0.17 |
| $ | (0.03) |
| $ | 0.98 |
| $ | 0.64 |
| $ | 0.45 |
| $ | 0.53 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Weighted-average number of shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic |
| 730 |
| 718 |
| 727 |
| 714 |
| 735 |
| 723 | ||||||
Diluted |
| 739 |
| 718 |
| 736 |
| 725 |
| 746 |
| 731 | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Dividends per common share |
| $ | — |
| $ | — |
| $ | 0.23 |
| $ | 0.20 |
| $ | 0.26 |
| $ | 0.23 |
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Amounts in millions)
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| ||||
Net income (loss) |
| $ | 127 |
| $ | (23) |
| $ | 733 |
| $ | 474 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation adjustment |
| 5 |
| (206) |
| (240) |
| (230) |
| ||||
Unrealized gains (losses) on forward contracts designated as hedges, net of deferred income taxes of $0 million for the periods ended September 30, 2015 and 2014 |
| (3) |
| 5 |
| 3 |
| 5 |
| ||||
Unrealized losses on investments, net of deferred income taxes of $0 million for the periods ended September 30, 2015 and 2014 |
| (1) |
| — |
| (4) |
| — |
| ||||
Total other comprehensive income (loss) |
| $ | 1 |
| $ | (201) |
| $ | (241) |
| $ | (225) |
|
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income (loss) |
| $ | 128 |
| $ | (224) |
| $ | 492 |
| $ | 249 |
|
|
| For the Three Months Ended |
| ||||
|
| 2016 |
| 2015 |
| ||
Net income |
| $ | 336 |
| $ | 394 |
|
|
|
|
|
|
| ||
Other comprehensive loss: |
|
|
|
|
| ||
Foreign currency translation adjustment |
| (5) |
| (330) |
| ||
Unrealized gains (losses) on forward contracts designated as hedges, net of tax |
| (5) |
| 14 |
| ||
Total other comprehensive loss |
| $ | (10) |
| $ | (316) |
|
|
|
|
|
|
| ||
Comprehensive income |
| $ | 326 |
| $ | 78 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts in millions)
|
| For the Nine Months Ended September 30, |
|
| For the Three Months Ended March 31,
|
| ||||||||
|
| 2015 |
| 2014 |
|
| 2016
|
| 2015
|
| ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 733 |
| $ | 474 |
|
| $ | 336 |
| $ | 394 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
| ||||
Deferred income taxes |
| (22) |
| (57) |
|
| (63) |
| (3) |
| ||||
Provision for inventories |
| 16 |
| 33 |
|
| 11 |
| 6 |
| ||||
Depreciation and amortization |
| 65 |
| 61 |
|
| 107 |
| 20 |
| ||||
Amortization of capitalized software development costs and intellectual property licenses1 |
| 303 |
| 131 |
| |||||||||
Amortization of capitalized software development costs and intellectual property licenses(1) |
| 150 |
| 142 |
| |||||||||
Amortization of debt discount and debt financing costs |
| 5 |
| 5 |
|
| 4 |
| 2 |
| ||||
Stock-based compensation expense2 |
| 71 |
| 74 |
| |||||||||
Stock-based compensation expense(2) |
| 34 |
| 23 |
| |||||||||
Excess tax benefits from stock awards |
| (33) |
| (29) |
|
| (28) |
| (14) |
| ||||
Changes in operating assets and liabilities: |
|
|
|
|
| |||||||||
Changes in operating assets and liabilities, net of effect from business acquisitions: |
|
|
|
|
| |||||||||
Accounts receivable, net |
| 142 |
| (193) |
|
| 459 |
| 438 |
| ||||
Inventories |
| (135) |
| (90) |
|
| 14 |
| 10 |
| ||||
Software development and intellectual property licenses |
| (249) |
| (253) |
|
| (130) |
| (77) |
| ||||
Other assets |
| 158 |
| 59 |
|
| 83 |
| 108 |
| ||||
Deferred revenues |
| (833) |
| (54) |
|
| (508) |
| (567) |
| ||||
Accounts payable |
| (7) |
| (83) |
|
| (184) |
| (208) |
| ||||
Accrued expenses and other liabilities |
| (51) |
| 19 |
|
| 24 |
| (65) |
| ||||
Net cash provided by operating activities |
| 163 |
| 97 |
|
| 309 |
| 209 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
| ||||
Proceeds from maturities of available-for-sale investments |
| 15 |
| 21 |
| |||||||||
Purchases of available-for-sale investments |
| (144) |
| — |
| |||||||||
Acquisition of business, net of cash acquired |
| (4,588) |
| — |
| |||||||||
Release of cash in escrow |
| 3,561 |
| — |
| |||||||||
Capital expenditures |
| (95) |
| (90) |
|
| (27) |
| (21) |
| ||||
Increase in restricted cash |
| (15) |
| (11) |
| |||||||||
Decrease (increase) in restricted cash |
| (14) |
| 5 |
| |||||||||
Net cash used in investing activities |
| (239) |
| (80) |
|
| (1,068) |
| (16) |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
| ||||
Proceeds from issuance of common stock to employees |
| 82 |
| 160 |
|
| 24 |
| 27 |
| ||||
Tax payment related to net share settlements on restricted stock rights |
| (36) |
| (41) |
|
| (11) |
| (3) |
| ||||
Excess tax benefits from stock awards |
| 33 |
| 29 |
|
| 28 |
| 14 |
| ||||
Dividends paid |
| (170) |
| (147) |
| |||||||||
Proceeds from debt financing |
| 2,550 |
| — |
| |||||||||
Repayment of long-term debt |
| (250) |
| (375) |
|
| (750) |
| (250) |
| ||||
Proceeds received from shareholder lawsuit settlement |
| 202 |
| — |
| |||||||||
Net cash used in financing activities |
| (139) |
| (374) |
| |||||||||
Payment of debt discount and financing costs |
| (34) |
| — |
| |||||||||
Net cash provided by (used in) financing activities |
| 1,807 |
| (212) |
| |||||||||
|
|
|
|
|
| |||||||||
Effect of foreign exchange rate changes on cash and cash equivalents |
| (268) |
| (248) |
|
| 1 |
| (364) |
| ||||
Net decrease in cash and cash equivalents |
| (483) |
| (605) |
| |||||||||
|
|
|
|
|
| |||||||||
Net increase (decrease) in cash and cash equivalents |
| 1,049 |
| (383) |
| |||||||||
|
|
|
|
|
| |||||||||
Cash and cash equivalents at beginning of period |
| 4,848 |
| 4,410 |
|
| 1,823 |
| 4,848 |
| ||||
|
|
|
|
|
| |||||||||
Cash and cash equivalents at end of period |
| $ | 4,365 |
| $ | 3,805 |
|
| $ | 2,872 |
| $ | 4,465 |
|
1(1) Excludes deferral and amortization of stock-based compensation expense.
2(2) Includes the net effects of capitalization, deferral, and amortization of stock-based compensation expense.
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
For the NineThree Months Ended September 30, 2015March 31, 2016
(Unaudited)
(Amounts and shares in millions, except per share data)
|
| Common Stock |
| Treasury Stock |
| Additional |
| Retained |
| Accumulated |
| Total |
|
| Common Stock |
| Treasury Stock |
| Additional Paid-In |
| Retained |
| Accumulated Other Comprehensive |
| Total Shareholders’ |
| ||||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Equity |
|
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Equity |
| ||||||||||||
Balance at December 31, 2014 |
| 1,151 |
| $ | — |
| (429) |
| $ | (5,762) |
| $ | 9,924 |
| $ | 3,374 |
| $ | (303) |
| $ | 7,233 |
| |||||||||||||||||||||||
Balance at December 31, 2015 |
| 1,163 |
| $ | — |
| (429) |
| $ | (5,637) |
| $ | 10,242 |
| $ | 4,096 |
| $ | (633) |
| $ | 8,068 |
| |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Components of comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| 733 |
| — |
| 733 |
|
| — |
| — |
| — |
| — |
| — |
| 336 |
| — |
| 336 |
| ||||||||||||
Other comprehensive income (loss) |
| — |
| — |
| — |
| — |
| — |
| — |
| (241) |
| (241) |
| |||||||||||||||||||||||||||||
Other comprehensive loss |
| — |
| — |
| — |
| — |
| — |
| — |
| (10) |
| (10) |
| |||||||||||||||||||||||||||||
Issuance of common stock pursuant to employee stock options |
| 6 |
| — |
| — |
| — |
| 82 |
| — |
| — |
| 82 |
|
| 2 |
| — |
| — |
| — |
| 24 |
| — |
| — |
| 24 |
| ||||||||||||
Issuance of common stock pursuant to restricted stock rights |
| 4 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
|
| 4 |
| — |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||||||||
Restricted stock surrendered for employees’ tax liability |
| (1) |
| — |
| — |
| — |
| (36) |
| — |
| — |
| (36) |
|
| (2) |
| — |
| — |
| — |
| (56) |
| — |
| — |
| (56) |
| ||||||||||||
Tax benefit associated with employee stock awards |
| — |
| — |
| — |
| — |
| 31 |
| — |
| — |
| 31 |
|
| — |
| — |
| — |
| — |
| 27 |
| — |
| — |
| 27 |
| ||||||||||||
Stock-based compensation expense related to employee stock options and restricted stock rights |
| — |
| — |
| — |
| — |
| 73 |
| — |
| — |
| 73 |
|
| — |
| — |
| — |
| — |
| 30 |
| — |
| — |
| 30 |
| ||||||||||||
Dividends ($0.23 per common share) |
| — |
| — |
| — |
| — |
| — |
| (170) |
| — |
| (170) |
| |||||||||||||||||||||||||||||
Indemnity on tax attributes assumed in connection with the Purchase Transaction (see Note 9) |
| — |
| — |
| — |
| 82 |
| — |
| — |
| — |
| 82 |
| |||||||||||||||||||||||||||||
Shareholder lawsuit settlement in connection with the Purchase Transaction (see Note 12) |
| — |
| — |
| — |
| 67 |
| 135 |
| — |
| — |
| 202 |
| |||||||||||||||||||||||||||||
Stock-based compensation assumed in acquisition (see Note 14) |
| — |
| — |
| — |
| — |
| 76 |
| — |
| — |
| 76 |
| |||||||||||||||||||||||||||||
Dividends ($0.26 per common share) |
| — |
| — |
| — |
| — |
| — |
| (193) |
| — |
| (193) |
| |||||||||||||||||||||||||||||
Indemnity on tax attributes assumed in connection with the Purchase Transaction (see Note 10) |
| — |
| — |
| — |
| 46 |
| — |
| — |
| — |
| 46 |
| |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Balance at September 30, 2015 |
| 1,160 |
| $ | — |
| (429) |
| $ | (5,613) |
| $ | 10,209 |
| $ | 3,937 |
| $ | (544) |
| $ | 7,989 |
| |||||||||||||||||||||||
Balance at March 31, 2016 |
| 1,167 |
| $ | — |
| (429) |
| $ | (5,591) |
| $ | 10,343 |
| $ | 4,239 |
| $ | (643) |
| $ | 8,348 |
|
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
ACTIVISION BLIZZARD, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Description of Business and Basis of Consolidation and Presentation
Activision Blizzard, Inc. (“Activision Blizzard”) is a leading global developer and publisher of interactive entertainment. The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries. We currently offer games for video game consoles, personal computers (“PC”), and handheld, mobile, and tablet devices. We maintain significant operations in the United States (“U.S.”), Canada, the United Kingdom (“U.K.”), France, Germany, Ireland, Italy, Sweden, Spain, the Netherlands, Australia, South Korea, and China.
The Business Combination and Share Repurchase
Activision Blizzard is the result of the 2008 business combination (“Business Combination”) by and among the Company (then known as Activision, Inc.), Sego Merger Corporation, a wholly-owned subsidiary of Activision, Inc., Vivendi S.A. (“Vivendi”), VGAC LLC, a wholly-owned subsidiary of Vivendi, and Vivendi Games, Inc. (“Vivendi Games”), a wholly-owned subsidiary of VGAC LLC. As a result of the consummation of the Business Combination, Activision, Inc. was renamed Activision Blizzard, Inc. and Vivendi became a majority shareholder of Activision Blizzard.
On October 11, 2013,As of March 31, 2016, we repurchasedhad approximately 429738 million shares of our common stock pursuant to a stock purchase agreement (the “Stock Purchase Agreement”) we entered into with Vivendiissued and outstanding. At that date: (i) ASAC II LP (“ASAC”), an exempted limited partnership established under the laws of the Cayman Islands, acting by its general partner, ASAC II LLC. Pursuant to the termsheld 172 million shares, or approximately 23% of the Stock Purchase Agreement, we acquired all of the capital stock of Amber Holding Subsidiary Co., a Delaware corporation and wholly-owned subsidiary of Vivendi (“New VH”), which was the direct owner of approximately 429 millionoutstanding shares of our common stock, for a cash payment of $5.83 billion, or $13.60 per share, before taking into account the benefit to the Company of certain tax attributes of New VH assumed in the transaction (collectively, the “Purchase Transaction”). Immediately following the completionand (ii) our other stockholders held approximately 77% of the Purchase Transaction, ASAC purchased from Vivendi 172 millionoutstanding shares of our common stock, pursuant to the Stock Purchase Agreement, for a cash payment of $2.34 billion, or $13.60 per share (the “Private Sale”).stock. Robert A. Kotick, our Chief Executive Officer, and Brian G. Kelly, Chairman of our Board of Directors, are affiliates of ASAC II LLC. Refer to Note 6LLC, the general partner of the Notes to Condensed Consolidated Financial Statements for information regarding the financing of the Purchase Transaction.ASAC.
On May 28, 2014, Vivendi sold approximately 41 million shares, or approximately 50% of its then-current holdings, of our common stock in a registered public offering. Vivendi received proceeds of approximately $850 million from that sale; the Company did not receive any proceeds.
As of September 30, 2015, we had approximately 731 million shares of common stock issued and outstanding. At that date: (i) Vivendi held 41 million shares, or approximately 6% of the outstanding shares of our common stock; (ii) ASAC held 172 million shares, or approximately 24% of the outstanding shares of our common stock; and (iii) our other stockholders held approximately 70% of the outstanding shares of our common stock. The common stock of Activision Blizzard is traded on The NASDAQ Stock Market under the ticker symbol “ATVI.”
OperatingThe King Acquisition
On November 2, 2015, we and King Digital Entertainment plc (“King”), a leading interactive mobile entertainment company, entered into a Transaction Agreement (the “Transaction Agreement”) under the terms of which we would acquire King (the “King Acquisition”) and King would become a wholly-owned subsidiary of the Company. On February 23, 2016 we completed the King Acquisition as further described in Note 14 of the Notes to the Condensed Consolidated Financial Statements. Our Condensed Consolidated Financial Statements include the operations of King commencing on February 23, 2016.
Reportable Segments
Based upon our organizational structure, we conduct our business through three reportable operating segments as follows:
(i) Activision Publishing, Inc.
Activision Publishing, Inc. (“Activision”) is a leading global developer and publisher of interactive software products and content. Activision delivers content to a broad range of gamers, ranging from children to adults, and from core gamers to mass-market consumers, to “value” buyers seeking budget-priced software, in a variety of geographies. Activision develops, gamesmarkets, and sells products through retail channels or digital downloads, which are principally based on our internally-developed intellectual properties, including games in the Call of Duty®, and Skylanders® and Guitar Hero® franchises, and to a lesser extent, based onas well as some licensed intellectual properties. Additionally, we have established a long-term alliance with Bungie to publish its game universe, Destiny. Activision sells games through both retail and digital online channels. Activision currently offers games that operate on the Microsoft Corporation (“Microsoft”) Xbox One (“Xbox One”) and Xbox 360 (“Xbox 360”), Nintendo Co. Ltd. (“Nintendo”) Wii U (“Wii U”) and Wii (“Wii”), and Sony Computer Entertainment, Inc. (“Sony”) PlayStation®PlayStation 4 (“PS4”) and PlayStation 3 (“PS3”) console systems (Xbox One, Wii U, and PS4 are collectively referred to as “next-generation”; Xbox 360, Wii, and PS3 are collectively referred to as “prior-generation”);systems; the PC; the Nintendo 3DS, Nintendo Dual Screen, and Sony PlayStation Vita handheld game systems; and mobile and tablet devices.
(ii) Blizzard Entertainment, Inc.
Blizzard Entertainment, Inc. (“Blizzard”) is a leader in online PC gaming, including the subscription-based massively multi-player online role-playing game category in terms of both subscriber base and revenues generated through its World of Warcraft® franchise, which it develops, hosts and supports.Warcraft® franchise. Blizzard also develops, markets, and sells role-playing action and strategy games for the PC, console, mobile and tablet platforms, including games in the multiple-award winning Diablo®, StarCraft®, and Hearthstone®: Heroes of Warcraft™, and Heroes of the Storm™ franchises. In addition, Blizzard maintains a proprietary online game-relatedgaming service, Battle.net®.Battle.net®, which facilitates digital distribution and online social connectivity across all Blizzard games. Blizzard distributes its products and generates revenues worldwide through various means, including: subscriptions; sales of prepaid subscription cards; value-added services, such as in-game purchases and services; retail sales of physical “boxed” products; online download sales of PC products; purchases and downloads via third-party console, mobile and tablet platforms; and licensing of software to third-party or related-partyrelated party companies that distribute World of Warcraft, Diablo, StarCraft and Hearthstone: Heroes of WarcraftBlizzard products. In addition, Blizzard is the creator of Heroes of the Storm™, a free-to-play online hero brawler released on June 2, 2015.
(iii) Activision Blizzard DistributionKing Digital Entertainment
King Digital Entertainment is a leading interactive mobile entertainment company that develops and distributes games on mobile platforms such as Android and iOS, and on online and social platforms such as Facebook and king.com websites. King has four category-leading free-to-play franchises: Candy Crush™, Farm Heroes™, Bubble Witch™, and Pet Rescue™, where monetization occurs through players purchasing in-game virtual currency which can be used in-game to buy virtual items.
(iv) Other
We also engage in other businesses that do not represent reportable segments, including:
· The Activision Blizzard Media Networks (“Media Networks”) business that is devoted to eSports that builds on our competitive gaming efforts by creating ways to deliver the best-in-class fan experience across games, platforms, and geographies with a long-term strategy of monetization through advertising, sponsorships, tournaments, and premium content.
· The Activision Blizzard Studios (“Studios”) business that is devoted to creating original film and television content based on our extensive library of iconic and globally-recognized intellectual properties.
· The Activision Blizzard Distribution (“Distribution”) business that consists of operations in Europe thatwhich provide warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.
Basis of Consolidation and Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (the “SEC”) and accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim reporting. Accordingly, certain notes or other information that are normally required by U.S. GAAP have been condensed or omitted if they substantially duplicate the disclosures contained in the annual audited consolidated financial statements. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2014.2015.
The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for the fair statement of our financial position and results of operations in accordance with U.S. GAAP have been included in the accompanying unaudited condensed consolidated financial statements. Actual results could differ from these estimates and assumptions.
The accompanying condensed consolidated financial statements include the accounts and operations of the Company. All intercompany accounts and transactions have been eliminated.
The Company considers events or transactions that occur after the balance sheet date, but before the financial statements are issued, to provide additional evidence relative to certain estimates or to identify matters that require additional disclosures.
Summary of Significant Accounting Policies
During the three months ended March 31, 2016, there were no significant changes to our accounting policies but we did expand the accounting policy disclosure for revenue recognition to include virtual currency as noted below. Refer to Note 2 contained in our Annual Report on Form 10-K for the year ended December 31, 2015 for our full summary of significant accounting policies.
Microtransaction Revenues
Microtransaction revenues are derived from the sale of virtual goods and currencies to our players to enhance their gameplay experience. Proceeds from the sales of virtual goods and currencies are initially recorded in deferred revenues. Proceeds from the sales of virtual currencies are recognized as a player uses the virtual goods purchased with the virtual currency. We categorize our virtual goods as either consumable or durable. Consumable virtual goods represent goods that can be consumed by a specific player action; accordingly, we recognize revenues from the sale of consumable virtual goods as the goods are consumed. Durable virtual goods represent goods that are accessible to the player over an extended period of time. We recognize revenues from the sale of durable virtual goods ratably over the period of time the goods are available to the player, generally the estimated service period of the game.
Supplemental Cash Flow Information: Non-cash investing and financing activities
As of September 30, 2015 and 2014, the CompanyMarch 31, 2016, we had accrued capital expenditureswithholding tax payments related to net share settlements on restricted stock rights of $16$45 million and $4 million, respectively, recorded within “Accounts Payable” and “Accrued expenses and other liabilities.” Additionally, we had non-cash purchase price consideration of $89 million related to vested and unvested stock options and awards that were assumed and replaced with Activision Blizzard equity or deferred cash awards in the King Acquisition. Refer to Note 14 for further discussion.
2. Inventories, Net
Our inventories, net consist of the following (amounts in millions):
|
| At September 30, 2015 |
| At December 31, 2014 |
|
| At March 31, 2016 |
| At December 31, 2015 |
| ||||
Finished goods |
| $ | 174 |
| $ | 112 |
|
| $ | 75 |
| $ | 101 |
|
Purchased parts and components |
| 64 |
| 11 |
|
| 28 |
| 27 |
| ||||
Inventories, net |
| $ | 238 |
| $ | 123 |
|
| $ | 103 |
| $ | 128 |
|
At September 30, 2015March 31, 2016 and December 31, 2014,2015, inventory reserves were $41$59 million and $52$54 million, respectively.
3. Software Development and Intellectual Property Licenses
The following table summarizes the components of our capitalized software development costs and intellectual property licenses (amounts in millions):
|
| At September 30, |
| At December 31, |
|
| At March 31, 2016 |
| At December 31, |
| ||||
Internally-developed software costs |
| $ | 249 |
| $ | 262 |
|
| $ | 271 |
| $ | 266 |
|
Payments made to third-party software developers |
| 166 |
| 210 |
|
| 139 |
| 150 |
| ||||
Total software development costs |
| $ | 415 |
| $ | 472 |
|
| $ | 410 |
| $ | 416 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Intellectual property licenses |
| $ | 27 |
| $ | 23 |
|
| $ | 12 |
| $ | 30 |
|
Amortization of capitalized software development costs and intellectual property licenses was the following (amounts in millions):
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| ||||
Amortization of capitalized software development costs and intellectual property licenses |
| $ | 80 |
| $ | 35 |
| $ | 312 |
| $ | 143 |
|
|
| For the Three Months Ended March 31, |
| ||||
|
| 2016 |
| 2015 |
| ||
Amortization of capitalized software development costs and intellectual property licenses |
| $ | 150 |
| $ | 147 |
|
4. Intangible Assets, Net
Intangible assets, net consist of the following (amounts in millions):
|
| At September 30, 2015 |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| At March 31, 2016 |
| ||||||||||||
|
| Estimated useful |
| Gross carrying |
| Accumulated |
| Net carrying |
|
| Estimated useful |
| Gross carrying |
| Accumulated |
| Net carrying |
| ||||||
Acquired definite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
License agreements and other |
| 3 - 10 years |
| $ | 98 |
| $ | (93) |
| $ | 5 |
| ||||||||||||
Internally-developed franchises |
| 11 - 12 years |
| 309 |
| (290) |
| 19 |
|
| 3 - 11 years |
| $ | 1,154 |
| $ | (328) |
| $ | 826 |
| |||
Developed software |
| 3 - 5 years |
| 595 |
| (16) |
| 579 |
| |||||||||||||||
Customer base |
| 2 years |
| 617 |
| (33) |
| 584 |
| |||||||||||||||
Trade names |
| 7 - 10 years |
| 54 |
| (1) |
| 53 |
| |||||||||||||||
Other |
| 1 - 8 years |
| 18 |
| (9) |
| 9 |
| |||||||||||||||
Total definite-lived intangible assets |
|
|
| $ | 407 |
| $ | (383) |
| $ | 24 |
|
|
|
| $ | 2,438 |
| $ | (387) |
| $ | 2,051 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Acquired indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Activision trademark |
| Indefinite |
|
|
|
|
| 386 |
|
| Indefinite |
|
|
|
|
| 386 |
| ||||||
Acquired trade names |
| Indefinite |
|
|
|
|
| 47 |
|
| Indefinite |
|
|
|
|
| 47 |
| ||||||
Total indefinite-lived intangible assets |
|
|
|
|
|
|
| $ | 433 |
|
|
|
|
|
|
|
| $ | 433 |
| ||||
Total intangible assets, net |
|
|
|
|
|
|
| $ | 2,484 |
|
|
| At December 31, 2015 |
| |||||||||
|
| Estimated useful |
| Gross carrying |
| Accumulated |
| Net carrying |
| |||
Acquired definite-lived intangible assets: |
|
|
|
|
|
|
|
|
| |||
License agreements and other |
| 1 - 10 years |
| $ | 116 |
| $ | (93) |
| $ | 23 |
|
Internally-developed franchises |
| 11 years |
| 309 |
| (298) |
| 11 |
| |||
Developed software |
| 5 years |
| 15 |
| — |
| 15 |
| |||
Total definite-lived intangible assets |
|
|
| $ | 440 |
| $ | (391) |
| $ | 49 |
|
|
|
|
|
|
|
|
|
|
| |||
Acquired indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
| |||
Activision trademark |
| Indefinite |
|
|
|
|
| 386 |
| |||
Acquired trade names |
| Indefinite |
|
|
|
|
| 47 |
| |||
Total indefinite-lived intangible assets |
|
|
|
|
|
|
| $ | 433 |
| ||
Total intangible assets, net |
|
|
|
|
|
|
| $ | 482 |
|
|
| At December 31, 2014 |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
|
| Estimated useful |
| Gross carrying |
| Accumulated |
| Net carrying |
| |||
|
|
|
|
|
|
|
|
|
| |||
Acquired definite-lived intangible assets: |
|
|
|
|
|
|
|
|
| |||
License agreements and other |
| 3 - 10 years |
| $ | 98 |
| $ | (92) |
| $ | 6 |
|
Internally-developed franchises |
| 11 - 12 years |
| 309 |
| (286) |
| 23 |
| |||
Total definite-lived intangible assets |
|
|
| $ | 407 |
| $ | (378) |
| $ | 29 |
|
|
|
|
|
|
|
|
|
|
| |||
Acquired indefinite-lived intangible assets: |
|
|
|
|
|
|
|
|
| |||
Activision trademark |
| Indefinite |
|
|
|
|
| 386 |
| |||
Acquired trade names |
| Indefinite |
|
|
|
|
| 47 |
| |||
Total indefinite-lived intangible assets |
|
|
|
|
|
|
| $ | 433 |
|
The balances of Intangible assets, net presented in the table above at March 31, 2016, does not include license agreement intangible assets that were fully amortized at December 31, 2015, and hence, have been removed from the March 31, 2016 balances as presented. Amortization expense of intangible assets was $2$82 million and $5$1 million for the three and nine months ended September 30,March 31, 2016 and 2015, respectively. Amortization expense of intangible assets was $2 million and $5 million for the three and nine months ended September 30, 2014, respectively.
At September 30, 2015,March 31, 2016, future amortization of definite-lived intangible assets is estimated as follows (amounts in millions):
2015 (remaining three months) |
| $ | 7 |
| ||||
2016 |
| 8 |
| |||||
2016 (remaining nine months) |
| $ | 624 |
| ||||
2017 |
| 4 |
|
| 778 |
| ||
2018 |
| 3 |
|
| 361 |
| ||
2019 |
| 2 |
|
| 201 |
| ||
2020 |
| 66 |
| |||||
Thereafter |
| 21 |
| |||||
Total |
| $ | 24 |
|
| $ | 2,051 |
|
5.Goodwill
The changes in the carrying amount of goodwill by operating segment for the three months ended March 31, 2016 are as follows (amounts in millions):
|
| Activision |
| Blizzard |
| King |
| Other |
| Total |
| |||||
Balance at December 31, 2015 |
| $ | 6,905 |
| $ | 178 |
| $ | — |
| $ | 12 |
| $ | 7,095 |
|
Additions through acquisition |
| — |
| — |
| 2,678 |
| — |
| 2,678 |
| |||||
Other |
| (1) |
| — |
| — |
| — |
| (1) |
| |||||
Balance at March 31, 2016 |
| $ | 6,904 |
| $ | 178 |
| $ | 2,678 |
| $ | 12 |
| $ | 9,772 |
|
Other includes tax benefits credited to goodwill for tax deductions resulting from the exercise of stock options that were outstanding and vested at the consummation of the Business Combination and included in the purchase price of the Company, to the extent that the tax deduction did not exceed the fair value of those options. Conversely, to the extent that the tax deduction did exceed the fair value of those options, the tax benefit is credited to additional paid-in capital. Other also includes the impact to goodwill from changes in foreign exchange rates.
The addition to goodwill through acquisition is attributed to the King Acquisition (see Note 14 of the Notes to Condensed Consolidated Financial Statements).
6. Fair Value Measurements
Financial Accounting Standards Board (“FASB”) literature regarding fair value measurements for financial and non-financial assets and liabilities establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy requires entities to maximize the use of “observable inputs” and minimize the use of “unobservable inputs.” The three levels of inputs used to measure fair value are as follows:
•· Level 1—Quoted prices in active markets for identical assets or liabilities;
•· Level 2—Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets or liabilities in active markets or other inputs that are observable or can be corroborated by observable market data; and
•· Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities, including certain pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
Fair Value Measurements on a Recurring Basis
The table below segregates all financial assets that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date (amounts in millions):
|
|
|
| Fair Value Measurements at September 30, 2015 |
|
|
| ||||||||
|
| As of September |
| Quoted |
| Significant |
| Significant |
| Balance Sheet Classification |
| ||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
| ||||
Recurring fair value measurements: |
|
|
|
|
|
|
|
|
|
|
| ||||
Money market funds |
| $ | 4,229 |
| $ | 4,229 |
| $ | — |
| $ | — |
| Cash and cash equivalents |
|
Foreign government treasury bills |
| 31 |
| 31 |
| — |
| — |
| Cash and cash equivalents |
| ||||
U.S. treasuries and government agency securities |
| 129 |
| 129 |
| — |
| — |
| Short-term investments |
| ||||
Foreign currency forward contracts designated as hedges |
| 3 |
| — |
| 3 |
| — |
| Other current assets |
| ||||
Auction rate securities (“ARS”) |
| 9 |
| — |
| — |
| 9 |
| Long-term investments |
| ||||
Total recurring fair value measurements |
| $ | 4,401 |
| $ | 4,389 |
| $ | 3 |
| $ | 9 |
|
|
|
|
|
|
| Fair Value Measurements at December 31, 2014 |
|
|
|
|
|
| Fair Value Measurements at March 31, 2016 |
|
|
| ||||||||||||||||
|
| As of December |
| Quoted |
| Significant |
| Significant |
| Balance Sheet Classification |
|
| As of March |
| Quoted |
| Significant |
| Significant |
| Balance Sheet Classification |
| ||||||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Recurring fair value measurements: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Money market funds |
| $ | 4,475 |
| $ | 4,475 |
| $ | — |
| $ | — |
| Cash and cash equivalents |
|
| $ | 2,622 |
| $ | 2,622 |
| $ | — |
| $ | — |
| Cash and cash equivalents |
|
Foreign government treasury bills |
| 40 |
| 40 |
| — |
| — |
| Cash and cash equivalents |
|
| 35 |
| 35 |
| — |
| — |
| Cash and cash equivalents |
| ||||||||
ARS |
| 9 |
| — |
| — |
| 9 |
| Long-term investments |
| |||||||||||||||||||
Foreign currency forward contracts not designated as hedges |
| 8 |
| — |
| 8 |
| — |
| Other current assets |
| |||||||||||||||||||
Auction rate securities (“ARS”) |
| 9 |
| — |
| — |
| 9 |
| Other assets |
| |||||||||||||||||||
Total recurring fair value measurements |
| $ | 4,524 |
| $ | 4,515 |
| $ | — |
| $ | 9 |
|
|
|
| $ | 2,674 |
| $ | 2,657 |
| $ | 8 |
| $ | 9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||
Foreign currency forward contracts designated as hedges |
| $ | (9) |
| $ | — |
| $ | (9) |
| $ | — |
| Accrued expenses and other liabilities |
|
|
|
|
| Fair Value Measurements at December 31, 2015 |
|
|
| ||||||||
|
| As of |
| Quoted Identical |
| Significant |
| Significant |
| Balance Sheet Classification |
| ||||
Financial Assets: |
|
|
|
|
|
|
|
|
|
|
| ||||
Recurring fair value measurements: |
|
|
|
|
|
|
|
|
|
|
| ||||
Money market funds |
| $ | 1,613 |
| $ | 1,613 |
| $ | — |
| $ | — |
| Cash and cash equivalents |
|
Foreign government treasury bills |
| 34 |
| 34 |
| — |
| — |
| Cash and cash equivalents |
| ||||
Foreign currency forward contracts not designated as hedges |
| 11 |
| — |
| 11 |
| — |
| Other current assets |
| ||||
ARS |
| 9 |
| — |
| — |
| 9 |
| Other assets |
| ||||
Total recurring fair value measurements |
| $ | 1,667 |
| $ | 1,647 |
| $ | 11 |
| $ | 9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
| ||||
Foreign currency forward contracts designated as hedges |
| $ | (4) |
| $ | — |
| $ | (4) |
| $ | — |
| Accrued expenses and other liabilities |
|
The following tables provide a reconciliation ofARS represented the beginning and ending balances of our financial assets classified as Levelonly level 3 investment held by major categories (amountsthe Company. There were no changes in millions) at September 30, 2015 and 2014, respectively:
|
| Level 3 |
| ||||
|
| ARS |
| Total financial assets at |
| ||
Balance at December 31, 2014 |
| $ | 9 |
| $ | 9 |
|
Total unrealized gains included in other comprehensive income |
| — |
| — |
| ||
Balance at September 30, 2015 |
| $ | 9 |
| $ | 9 |
|
|
| Level 3 |
| ||||
|
| ARS |
| Total financial assets at |
| ||
Balance at December 31, 2013 |
| $ | 9 |
| $ | 9 |
|
Total unrealized gains included in other comprehensive income |
| — |
| — |
| ||
Balance at September 30, 2014 |
| $ | 9 |
| $ | 9 |
|
(a) Fair value measurements have been estimated using an income-approach model. When estimating the fair value we consider both observable market data and non-observable factors, including credit quality, duration, insurance wraps, collateral composition, maximum rate formulas, comparable trading instruments, andof these investments for the likelihood of redemption. Significant assumptions used in the analysis include estimates for interest rates, spreads, cash flow timing and amounts, and holding periods of the securities. At September 30, 2015, assets measured at fair value using significant unobservable inputs (Level 3), all of which were ARS, represent less than 1% of our financial assets measured at fair value on a recurring basis.three months ended March 31, 2016.
Foreign Currency Forward Contracts
The Company transacts business in various foreign currencies and has significant international sales and expenses denominated in foreign currencies, subjecting us to foreign currency risk. In addition, the Company transacts intercompany business in various foreign currencies other than its functional currency, subjecting us to variability in the functional currency-equivalent cash flows. To mitigate our foreign currency risk resulting from our foreign currency-denominated monetary assets, liabilities and earnings and our foreign currency risk related to functional currency-equivalent cash flows resulting from our intercompany transactions, we periodically enter into currency derivative contracts, principally forward contracts. We report the fair value of these contracts within “Other current assets,” “Accrued expense and other liabilities,” “Other assets,” or “Other liabilities,” as applicable, in our condensed consolidated balance sheets based on the prevailing exchange rates of the various hedged currencies as of the end of the relevant period.
We do not hold or purchase any foreign currency forward contracts for trading or speculative purposes.
Foreign Currency Forward Contracts Not Designated as Hedges
For foreign currency forward contracts entered into to mitigate risk from foreign currency-denominated monetary assets, liabilities, and earnings that are not designated as hedging instruments in accordance with FASB Accounting StandardsStandard Codification (“ASC”) Topic 815, changes in the estimated fair value of these derivatives are recorded within “General and administrative expenses” and “Interest and other expense (income), net” in our condensed consolidated statements of operations, depending onconsistent with the nature of the underlying transactions. These forward contracts generally have a maturity of less than one year.
At September 30, 2015 there were noMarch 31, 2016, the gross notional amount of outstanding foreign currency forward contracts not designated as hedges. hedges was approximately $376 million. The fair value of these foreign currency forward contracts was $8 million as of March 31, 2016, and recorded in “Other current assets” in our condensed consolidated balance sheet.
At December 31, 2014, there was one2015, the gross notional amount of outstanding foreign currency forward contractcontracts not designated as a hedge; the notional amounthedges was approximately $489 million. The fair value of thatthese foreign currency forward contractcontracts was $11 million as of December 31, 2015, and the fair value was not material. recorded in “Other current assets” in our condensed consolidated balance sheet.
For the three and nine months ended September 30,March 31, 2016 and 2015, and 2014, pre-tax net losses related togains associated with these forward contracts were not material.
Foreign Currency Forward Contracts Designated as Hedges
For foreign currency forward contracts entered into to hedge forecasted intercompany cash flows that are subject to foreign currency risk and which we designated as cash flow hedges in accordance with ASC Topic 815, we assess the effectiveness of these cash flow hedges at inception and on an ongoing basis to determine if the hedges are effective at providing offsetting changes in cash flows of the hedged items. We record the effective portion of changes in the estimated fair value of these derivatives in “Accumulated other comprehensive income (loss)” and subsequently reclassify the related amount of accumulated other comprehensive income (loss) to earnings within “General and administrative expense” when the hedged item impacts earnings. Cash flows from these foreign currency forward contracts are classified in the same category as the cash flows associated with the hedged item in the condensed consolidated statements of cash flows. We measure hedge ineffectiveness, if any, and if it is determined that a derivative has ceased to be a highly effective hedge, we will discontinue hedge accounting for the derivative.
The gross notional amount of all outstanding foreign currency forward contracts designated as cash flow hedges was approximately $336$449 million at September 30, 2015March 31, 2016 and $78$381 million at September 30, 2014. At December 31, 2014, there were no outstanding foreign currency forward contracts designated as cash flow hedges.2015. These foreign currency forward contracts have remaining maturities of 1512 months or less. During the three and nine months ended September 30,March 31, 2016 and 2015, and 2014, there was no ineffectiveness relating to these hedges. At September 30, 2015, $3March 31, 2016, $9 million of net unrealized gainslosses related to these contracts are expected to be reclassified into earnings within the next twelve months.
During the three months ended March 31, 2016 and 2015, the amount pre-tax net realized losses reclassified out of “Accumulated other comprehensive income (loss)” due to maturity of these contracts was not material.
Fair Value Measurements on a Non-Recurring Basis
We measure the fair value of certain assets on a non-recurring basis, generally annually or when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable.
For the three and nine months ended September 30,March 31, 2016 and 2015, and 2014, there were no impairment charges related to assets that are measured on a non-recurring basis.
6.7. Debt
The proceeds from the credit facilities and the unsecured senior notes, as described below, were used to fund the Purchase Transaction disclosed in Note 1 of the Notes to Condensed Consolidated Financial Statements.
Credit Facilities
Term Loan. On October 11, 2013, in connection and simultaneously with the Purchase Transaction, we entered into a credit agreement (the “Credit Agreement”) for a $2.5 billion secured term loan facility maturing in October 2020 (the “Term Loan”), and a $250 million secured revolving credit facility maturing in October 2018 (the “Revolver” and, together with the Term Loan, the “Credit Facilities”“Original Revolver”). A portion of the Original Revolver cancould be used to issue letters of credit of up to $50 million, subject to the availability of the Original Revolver. To date, we have not drawn on the Revolver and there were no letters of credit issued and outstanding under the Revolver at either September 30, 2015 or December 31, 2014.
Borrowings under the Term Loan and the Revolver bear interest, payable on a quarterly basis, at an annual rate equal to an applicable margin plus, at our option, (A) a base rate determined by reference to the highest of (a) the interest rate in effect determined by the administrative agent as its “prime rate,” (b) the federal funds rate plus 0.5%, and (c) the London InterBank Offered Rate (“LIBOR”) for an interest period of one month plus 1.00%, or (B) LIBOR. LIBOR borrowings under the Term Loan are subject to a LIBOR floor of 0.75%. At September 30, 2015,March 31, 2016, the Credit FacilitiesTerm Loan bore interest at 3.25%. In certain circumstances, our applicable interest rate under the Credit FacilitiesTerm Loan will increase.
In addition to paying interest on outstanding principal balances under the Credit Facilities,Term Loan, we arewere required to pay the lenders a commitment fee on unused commitments under the Original Revolver. Commitment fees are recorded within “Interest and other expense (income), net” on the condensed consolidated statement of operations. We are also required to pay customary letter of credit fees, if any, and agency fees.
The terms of the Credit Agreement require quarterly principal repayments of 0.25% of the Term Loan’s original principal amount, with the balance due on the maturity date. On February 11, 2014, we made a voluntary repayment of $375 million on our Term Loan. This repayment satisfied the required quarterly principal repayments for the entire term of the Credit Agreement. On February 11, 2015, we made an additional voluntary repayment of $250 million on our Term Loan. On February 25, 2016 and March 31, 2016, we made additional voluntary repayments of $500 million and $250 million, respectively, on our Term Loan.
Tranche A Term Loans. In conjunction with the King Acquisition, the Company entered into three Amendments to the Credit Agreement (the “Amendments”). The Amendments, among other things, provided for incremental term loans in the form of Tranche A Term Loans in an aggregate principal amount of approximately $2.3 billion. The proceeds were issued and provided on February 23, 2016, upon successful closing of the King Acquisition and were used to fund the King Acquisition. On March 31, 2016, we entered into a fourth amendment to the Credit Agreement which provided for an incremental Tranche A Term Loan in the aggregate principal amount of $250 million, of which the total proceeds from the incremental borrowing were used to make the voluntary prepayment on our Term Loan discussed above.
The Tranche A Term Loans are scheduled to mature on October 11, 2020 and bear interest, at the Company’s option, at either (a) a base rate equal to the highest of (i) the federal funds rate, plus 0.5%, (ii) the prime commercial lending rate of Bank of America, N.A. and (iii) the LIBOR for an interest period of one month beginning on such day plus 1.00%, or (b) LIBOR, in each case, plus an applicable interest margin. LIBOR is subject to a floor of 0% and the base rate is subject to an effective floor of 1.00%. The applicable interest margin for Tranche A Term Loans ranges from 1.50% to 2.25% for LIBOR borrowings and from 0.50% to 1.25% for base rate borrowings and is determined by reference to a pricing grid based on the Company’s Consolidated Total Net Debt Ratio (as defined in the Credit Agreement).
The Tranche A Term Loans require quarterly principal payments of 0.625% of the stated principal amount of the Tranche A Term Loans commencing June 30, 2016, with increases to 1.250% starting on June 30, 2019 and 3.125% starting on June 30, 2020, with the remaining balance payable on the Tranche A Term Loans’ scheduled maturity date of October 11, 2020. Voluntary prepayments of the Tranche A Term Loans are permitted at any time, in minimum principal amounts, without premium or penalty.
The Tranche A Term Loans are subject to a financial maintenance covenant requiring the Company to maintain a maximum Consolidated Total Net Debt Ratio (as defined in the Credit Agreement) of 4.00 to 1.00, which will decrease to 3.50 to 1.00 (I) after the sixth full fiscal quarter after the Tranche A Term Loans are made or (II) if the Collateral Suspension occurs prior to the date falling 18 months after the Tranche A Term Loans are made, on the later of (x) the last day of the fourth full fiscal quarter after the Tranche A Term Loans are made and (y) the last day of the fiscal quarter in which the Collateral Suspension occurs.
The Tranche A Term Loans are secured by the same collateral and guaranteed by the same guarantors that secure and guarantee the Term Loan. The other terms of the Tranche A Term Loans are also generally the same as the terms of the Term Loan. At March 31, 2016, the Tranche A Term Loans bore interest at 2.43%. In certain circumstances, our applicable interest rate under the Tranche A Term Loans will increase.
2015 Revolving Credit Facility. As part of the Amendments, upon the closing of the King Acquisition, the Company’s Original Revolver under the Credit Agreement in an aggregate principal amount of $250 million was replaced with a new revolving credit facility under the Credit Agreement in the same aggregate principal amount (the “2015 Revolving Credit Facility,” and, together with the Term Loan and Tranche A Term Loans, the “Credit Facilities”).
Borrowings under the 2015 Revolving Credit Facility may be borrowed, repaid and re-borrowed by the Company and are available for working capital and other general corporate purposes. Up to $50 million of the 2015 Revolving Credit Facility may be used for letters of credit.
The 2015 Revolving Credit Facility is scheduled to mature on October 11, 2020. Borrowings under the 2015 Revolving Credit Facility bear interest, at the Company’s option, under the same terms as the Tranche A Term Loans. Additionally, the 2015 Revolving Credit Facility is subject to the same financial maintenance covenant and is secured by the same collateral and guaranteed by the same guarantors that secure and guarantee the Tranche A Term Loans. The other terms of the 2015 Revolving Credit Facility are generally the same as the terms of the Original Revolver. To date, we have not drawn on the 2015 Revolving Credit Facility.
The Credit Facilities are guaranteed by certain of the Company’s U.S. subsidiaries, whose assets represent approximately 69%68% of our consolidated total assets. The Credit Agreement contains customary covenants that place restrictions in certain circumstances on, among other things, the incurrence of debt, granting of liens, payment of dividends, sales of assets, and mergers and acquisitions. If our obligations under the Revolver exceed 15% of the total facility amount as of the end of any fiscal quarter (subject to certain exclusions for letters of credit), we are also subject to certain financial covenants. A violation of any of these covenants could result in an event of default under the Credit Agreement. Upon the occurrence of such event of default or certain other customary events of default, payment of any outstanding amounts under the Credit Agreement may be accelerated, and the lenders’ commitments to extend credit under the Credit Agreement may be terminated. In addition, an event of default under the Credit Agreement could, under certain circumstances, permit the holders of other outstanding unsecured debt, including the debt holders described below, to accelerate the repayment of such obligations. The Company was in compliance with the terms of the Credit Facilities as of September 30, 2015.March 31, 2016.
Unsecured Senior Notes
On September 19, 2013, we issued, at par, $1.5 billion of 5.625% unsecured senior notes due September 2021 (the “2021 Notes”) and $750 million of 6.125% unsecured senior notes due September 2023 (the “2023 Notes” and, together with the 2021 Notes, the “Notes”) in a private offering to qualified institutional buyers made in accordance with Rule 144A under the Securities Act of 1933, as amended.
The Notes are general senior obligations of the Company and rank pari passu in right of payment to all of the Company’s existing and future senior indebtedness, including the Credit Facilities described above. The Notes are guaranteed on a senior basis by certain of our U.S. subsidiaries. The Notes and related guarantees are not secured and are effectively subordinated to any of the Company’s existing and future indebtedness that is secured, including the Credit Facilities. The Notes contain customary covenants that place restrictions in certain circumstances on, among other things, the incurrence of debt, granting of liens, payment of dividends, sales of assets, and mergers and acquisitions. The Company was in compliance with the terms of the Notes as of September 30, 2015.March 31, 2016.
Interest on the Notes is payable semi-annually in arrears on March 15 and September 15 of each year. As of September 30, 2015March 31, 2016 and December 31, 2014,2015, we had interest payable of $5 million and $38 million, respectively, related to the Notes, recorded within “Accrued expenses and other liabilities” in our condensed consolidated balance sheet.
We may redeem the 2021 Notes on or after September 15, 2016 and the 2023 Notes on or after September 15, 2018, in whole or in part on any one or more occasions, at specified redemption prices, plus accrued and unpaid interest. At any time prior to September 15, 2016, with respect to the 2021 Notes, and at any time prior to September 15, 2018, with respect to the 2023 Notes, we may also redeem some or all of the Notes by paying a “make-whole premium,” plus accrued and unpaid interest. Further, upon the occurrence of one or more qualified equity offerings, we may also redeem up to 35% of the aggregate principal amount of each of the 2021 Notes and 2023 Notes outstanding with the net cash proceeds from such offerings. The Notes are repayable, in whole or in part and at the option of the holders, upon the occurrence of a change in control and a ratings downgrade, at a purchase price equal to 101% of principal, plus accrued and unpaid interest. These redemption options are considered clearly and closely related to the Notes and are not accounted for separately upon issuance.
Fees associated with the closing of the Term Loan, Tranche A Term Loans, and the Notes are recorded as debt discount, which reducereduces their respective the carrying value of the Term Loanvalues, and the Notes. The debt discount is amortized over thetheir respective terms of the Term Loan and the Notes.terms. Amortization expense related to the debt discount is recorded within “Interest and other expense (income), net” in our condensed consolidated statement of operations.
In connection with the debt financing for the King Acquisition, we incurred $38 million of issuance costs that were capitalized and recorded within “Long-term debt, net” in our condensed consolidated balance sheet. The amortization of these capitalized costs was not material to our condensed consolidated statement of operations for the three months ended March 31, 2016.
We reclassified and presented unamortized deferred financing costs associated with the Term Loan, Tranche A Term Loans, and the Notes as a reduction of their respective gross carrying amounts for all periods presented in accordance with a recent accounting standard that became effective during the period. Refer to Note 15 for further discussion of the recent accounting standard that became effective during the period.
A summary of our debt is as follows (amounts in millions):
|
| At September 30, 2015 |
|
| At March 31, 2016 |
| ||||||||||||||
|
| Gross Carrying |
| Unamortized |
| Net Carrying |
|
| Gross Carrying Amount |
| Unamortized |
| Net Carrying |
| ||||||
Term Loan |
| $ | 1,869 |
| $ | (9) |
| $ | 1,860 |
|
| $ | 1,119 |
| $ | (8) |
| $ | 1,111 |
|
Tranche A Term Loans |
| 2,550 |
| (38) |
| 2,512 |
| |||||||||||||
2021 Notes |
| 1,500 |
| (21) |
| 1,479 |
|
| 1,500 |
| (21) |
| 1,479 |
| ||||||
2023 Notes |
| 750 |
| (11) |
| 739 |
|
| 750 |
| (11) |
| 739 |
| ||||||
Total debt |
| $ | 5,919 |
| $ | (78) |
| $ | 5,841 |
| ||||||||||
Less: current portion of long-term debt |
| (64) |
| — |
| (64) |
| |||||||||||||
Total long-term debt |
| $ | 4,119 |
| $ | (41) |
| $ | 4,078 |
|
| $ | 5,855 |
| $ | (78) |
| $ | 5,777 |
|
|
| At December 31, 2014 |
|
| At December 31, 2015 |
| ||||||||||||||
|
| Gross Carrying |
| Unamortized |
| Net Carrying |
|
| Gross Carrying |
| Unamortized |
| Net Carrying |
| ||||||
Term Loan |
| $ | 2,119 |
| $ | (10) |
| $ | 2,109 |
|
| $ | 1,869 |
| $ | (11) |
| $ | 1,858 |
|
2021 Notes |
| 1,500 |
| (23) |
| 1,477 |
|
| 1,500 |
| (22) |
| 1,478 |
| ||||||
2023 Notes |
| 750 |
| (12) |
| 738 |
|
| 750 |
| (12) |
| 738 |
| ||||||
Total long-term debt |
| $ | 4,369 |
| $ | (45) |
| $ | 4,324 |
|
| $ | 4,119 |
| $ | (45) |
| $ | 4,074 |
|
For the three and nine months ended September 30,March 31, 2016 and 2015, interest expense was $48$53 million and $145$49 million, respectively, amortization of the debt discount for the Credit Facilities and Notes was $1$4 million and $4$1 million, respectively, and commitment fees for the Original Revolver and the 2015 Revolving Credit Facility were not material. For the three and nine months ended September 30, 2014, interest expense was $50 million and $150 million, respectively, amortization of the debt discount for the Credit Facilities and Notes was $1 million and $4 million, respectively, and commitment fees for the Revolver were not material.
As of September 30, 2015,March 31, 2016, the scheduled maturities and contractual principal repayments of our debt for each of the five succeeding years are as follows (amounts in millions):
| ||||
|
|
| ||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
|
|
For the year ending December 31, |
|
|
| |
2016 (remaining nine months) |
| $ | 48 |
|
2017 |
| 64 |
| |
2018 |
| 64 |
| |
2019 |
| 112 |
| |
2020 |
| 3,381 |
| |
Thereafter |
| 2,250 |
| |
Total |
| $ | 5,919 |
|
As of September 30, 2015March 31, 2016 and December 31, 2014,2015, the carrying value of the Term Loan and Tranche A Term Loans approximates the fair value, based on Level 2 inputs (observable market prices in less than active markets), as the interest rate is variable over the selected interest period and is similar to current rates at which we can borrow funds. Based on Level 2 inputs, the fair values of the 2021 Notes and 2023 Notes were $1,579$1,577 million, and $799$804 million, respectively, as of September 30, 2015March 31, 2016. Based on Level 2 inputs, the fair values of the 2021 Notes and $1,5862023 Notes were $1,571 million and $810$795 million, respectively, as of December 31, 2014.2015.
Deferred Financing CostsDebt Repayments
Costs incurredOn February 2, 2016, the Board of Directors authorized debt repayments of up to obtain$1.5 billion of our long-termoutstanding debt are recorded as deferred financing costs within “Other assets — non-current” induring 2016. As of March 31, 2016, we have made prepayments to reduce our condensed consolidated balance sheets and are amortized over the terms of the respective debt agreements using a straight-line basis for costs related to the Revolver and the interest earned method for costs related to the Term Loan and the Notes. Amortization expense related to the deferred financing costs is recorded within “Interest and other investment income (expense), net” in our condensed consolidated statements of operations. For the three and nine months ended September 30, 2015 and 2014, this amount was not material.total outstanding term loans by $500 million.
7.8. Accumulated Other Comprehensive Income (Loss)
The components of accumulated other comprehensive income (loss) at September 30,March 31, 2016 and 2015, and 2014, were as follows (amounts in millions):
|
| For the Nine Months Ended September 30, 2015 |
| ||||||||||
|
| Foreign currency |
| Unrealized gain |
| Unrealized gain |
| Total |
| ||||
Balance at December 31, 2014 |
| $ | (304) |
| $ | — |
| $ | 1 |
| $ | (303) |
|
Other comprehensive income (loss) before reclassifications |
| (240) |
| 8 |
| (4) |
| (236) |
| ||||
Amounts reclassified from accumulated other comprehensive income (loss) |
| — |
| (5) |
| — |
| (5) |
| ||||
Balance at September 30, 2015 |
| $ | (544) |
| $ | 3 |
| $ | (3) |
| $ | (544) |
|
|
| For the Three Months Ended March 31, 2016 |
| ||||||||||
|
| Foreign currency |
| Unrealized gain |
| Unrealized gain |
| Total |
| ||||
Balance at December 31, 2015 |
| $ | (630) |
| $ | (4) |
| $ | 1 |
| $ | (633) |
|
Other comprehensive loss before reclassifications |
| (5) |
| (6) |
| — |
| (11) |
| ||||
Amounts reclassified from accumulated other comprehensive income (loss) |
| — |
| 1 |
| — |
| 1 |
| ||||
Balance at March 31, 2016 |
| $ | (635) |
| $ | (9) |
| $ | 1 |
| $ | (643) |
|
|
| For the Nine Months Ended September 30, 2014 |
|
| For the Three Months Ended March 31, 2015 |
| ||||||||||||||||||||
|
| Foreign currency |
| Unrealized gain |
| Unrealized gain |
| Total |
|
| Foreign currency |
| Unrealized gain |
| Unrealized gain |
| Total |
| ||||||||
Balance at December 31, 2013 |
| $ | 67 |
| $ | — |
| $ | 1 |
| $ | 68 |
| |||||||||||||
Balance at December 31, 2014 |
| $ | (304) |
| $ | — |
| $ | 1 |
| $ | (303) |
| |||||||||||||
Other comprehensive income (loss) before reclassifications |
| (230) |
| 7 |
| — |
| (223) |
|
| (330) |
| 14 |
| — |
| (316) |
| ||||||||
Amounts reclassified from accumulated other comprehensive income (loss) |
| — |
| (2) |
| — |
| (2) |
|
| — |
| — |
| — |
| — |
| ||||||||
Balance at September 30, 2014 |
| $ | (163) |
| $ | 5 |
| $ | 1 |
| $ | (157) |
| |||||||||||||
Balance at March 31, 2015 |
| $ | (634) |
| $ | 14 |
| $ | 1 |
| $ | (619) |
|
Income taxes were not provided for foreign currency translation items as these are considered indefinite investments in non-U.S. subsidiaries.
8.9. Operating Segments and Geographic Region
Our operating segments are consistent with our internal organizational structure, the manner in which our operations are reviewed and managed by our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), the manner in which we assess operating performance and allocate resources, and the availability of separate financial information. Currently, we conduct our business throughhave three reportable operating segments: Activision, Blizzard and Distributionsegments (see Note 1 of the Notes to Condensed Consolidated Financial Statements). We do not aggregate operating segments.
The CODM reviews segment performance exclusive of the impact of the change in deferred revenues and related cost of sales with respect to certain of our online-enabled games, stock-based compensation expense, amortization of intangible assets as a result of purchase price accounting, and fees and other expenses (including legal fees, costs, expenses and accruals) related to the Purchase Transactionfinancings and related debt financings.acquisitions. The CODM does not review any information regarding total assets on an operating segment basis, and accordingly, no disclosure is made with respect thereto. Information on the operating segments and reconciliations of total net revenues and total segment operating income to consolidated net revenues from external customers and consolidated income before income tax expense for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 are presented below (amounts in millions):
|
| For the Three Months Ended March 31, |
| ||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||
|
| Net revenues |
| Income from operations before income |
| ||||||||
Activision |
| $ | 360 |
| $ | 303 |
| $ | 99 |
| $ | 66 |
|
Blizzard |
| 294 |
| 352 |
| 86 |
| 139 |
| ||||
King |
| 207 |
| — |
| 67 |
| — |
| ||||
Other (1) |
| 47 |
| 48 |
| — |
| (1) |
| ||||
Segments total |
| 908 |
| 703 |
| 252 |
| 204 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Reconciliation to consolidated net revenues / consolidated income before income tax expense: |
|
|
|
|
|
|
|
|
| ||||
Net effect from deferral of net revenues and related cost of sales |
| 547 |
| 575 |
| 369 |
| 362 |
| ||||
Stock-based compensation expense |
| — |
| — |
| (44) |
| (23) |
| ||||
Amortization of intangible assets |
| — |
| — |
| (82) |
| (1) |
| ||||
Fees and other expenses related to acquisitions (2) |
| — |
| — |
| (34) |
| — |
| ||||
Consolidated net revenues / operating income |
| $ | 1,455 |
| $ | 1,278 |
| $ | 461 |
| $ | 542 |
|
Interest and other expense (income), net |
|
|
|
|
| 52 |
| 50 |
| ||||
Consolidated income before income tax expense |
|
|
|
|
| $ | 409 |
| $ | 492 |
|
|
| Three Months Ended September 30, |
| ||||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| ||||
|
| Net revenues |
| Income (loss) from operations before |
| ||||||||
Activision |
| $ | 591 |
| $ | 704 |
| $ | 122 |
| $ | 95 |
|
Blizzard |
| 369 |
| 388 |
| 128 |
| 164 |
| ||||
Distribution |
| 80 |
| 78 |
| 1 |
| 1 |
| ||||
Operating segments total |
| 1,040 |
| 1,170 |
| 251 |
| 260 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Reconciliation to consolidated net revenues / consolidated income (loss) before income tax expense (benefit): |
|
|
|
|
|
|
|
|
| ||||
Net effect from deferral of net revenues and related cost of sales |
| (50) |
| (417) |
| (26) |
| (180) |
| ||||
Stock-based compensation expense |
| — |
| — |
| (28) |
| (22) |
| ||||
Amortization of intangible assets |
| — |
| — |
| (1) |
| (2) |
| ||||
Fees and other expenses related to the Purchase Transaction and related debt financings |
| — |
| — |
| — |
| (48) |
| ||||
Consolidated net revenues / operating income |
| $ | 990 |
| $ | 753 |
| $ | 196 |
| $ | 8 |
|
Interest and other expense, net |
|
|
|
|
| 51 |
| 51 |
| ||||
Consolidated income (loss) before income tax expense (benefit) |
|
|
|
|
| $ | 145 |
| $ | (43) |
|
(1) Other includes other income and expenses from operating segments managed outside the reportable segments, including our Media Networks, Studios, and Distribution businesses. Other also includes unallocated corporate income and expenses.
|
| Nine Months Ended September 30, |
| ||||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| ||||
|
| Net revenues |
| Income from operations before income |
| ||||||||
Activision |
| $ | 1,208 |
| $ | 1,193 |
| $ | 244 |
| $ | 66 |
|
Blizzard |
| 1,106 |
| 1,189 |
| 383 |
| 548 |
| ||||
Distribution |
| 189 |
| 218 |
| — |
| (1) |
| ||||
Operating segments total |
| 2,503 |
| 2,600 |
| 627 |
| 613 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Reconciliation to consolidated net revenues / consolidated income before income tax expense: |
|
|
|
|
|
|
|
|
| ||||
Net effect from deferral of net revenues and related cost of sales |
| 809 |
| 233 |
| 517 |
| 260 |
| ||||
Stock-based compensation expense |
| — |
| — |
| (70) |
| (76) |
| ||||
Amortization of intangible assets |
| — |
| — |
| (4) |
| (4) |
| ||||
Fees and other expenses related to the Purchase Transaction and related debt financings |
| — |
| — |
| — |
| (48) |
| ||||
Consolidated net revenues / operating income |
| $ | 3,312 |
| $ | 2,833 |
| $ | 1,070 |
| $ | 745 |
|
Interest and other expense, net |
|
|
|
|
| 151 |
| 152 |
| ||||
Consolidated income before income tax expense |
|
|
|
|
| $ | 919 |
| $ | 593 |
|
(2) Reflects fees and other expenses related to the King Acquisition, inclusive of related debt financings.
Geographic information presented below for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 is based on the location of the selling entity.paying customer. Net revenues from external customers by geographic region were as follows (amounts in millions):
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
|
| For the Three Months Ended March 31, |
| ||||||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
|
| 2016 |
| 2015 |
| ||||||
Net revenues by geographic region: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
North America |
| $ | 495 |
| $ | 350 |
| $ | 1,750 |
| $ | 1,384 |
| |||||||
Americas |
| $ | 753 |
| $ | 704 |
| |||||||||||||
Europe |
| 367 |
| 316 |
| 1,219 |
| 1,172 |
|
| 521 |
| 464 |
| ||||||
Asia Pacific |
| 128 |
| 87 |
| 343 |
| 277 |
|
| 181 |
| 110 |
| ||||||
Total consolidated net revenues |
| $ | 990 |
| $ | 753 |
| $ | 3,312 |
| $ | 2,833 |
|
| $ | 1,455 |
| $ | 1,278 |
|
The Company’s net revenues in the U.S. were 46%49% and 45%53% of consolidated net revenues for the three months ended September 30,March 31, 2016 and 2015, and 2014, respectively. The Company’s net revenues in the U.K. were 13%11% and 14%12% of consolidated net revenues for the three months ended September 30,March 31, 2016 and 2015, and 2014, respectively. The Company’s net revenues in France were 7% and 19% of consolidated net revenues for the three months ended September 30, 2015 and 2014, respectively. No other country’s net revenues exceeded 10% of consolidated net revenues for the three months ended September 30, 2015March 31, 2016 and 2014.2015.
The Company’s net revenues in the U.S. were 50% and 46% of consolidated net revenues for the nine months ended September 30, 2015 and 2014, respectively. The Company’s net revenues in the U.K. were 13% and 14% of consolidated net revenues for the nine months ended September 30, 2015 and 2014, respectively. The Company’s net revenues in France were 8% and 16% of consolidated net revenues for the nine months ended September 30, 2015 and 2014, respectively. No other country’s net revenues exceeded 10% of consolidated net revenues for the nine months ended September 30, 2015 and 2014.
Net revenues by platform were as follows (amounts in millions):
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| ||||
Net revenues by platform: |
|
|
|
|
|
|
|
|
| ||||
Console |
| $ | 420 |
| $ | 270 |
| $ | 1,737 |
| $ | 1,402 |
|
Online1 |
| 195 |
| 205 |
| 687 |
| 601 |
| ||||
PC |
| 164 |
| 165 |
| 427 |
| 447 |
| ||||
Mobile and other2 |
| 131 |
| 35 |
| 272 |
| 165 |
| ||||
Total Activision Blizzard net revenues |
| 910 |
| 675 |
| 3,123 |
| 2,615 |
| ||||
Distribution |
| 80 |
| 78 |
| 189 |
| 218 |
| ||||
Total consolidated net revenues |
| $ | 990 |
| $ | 753 |
| $ | 3,312 |
| $ | 2,833 |
|
|
| For the Three Months Ended March 31, |
| ||||
|
| 2016 |
| 2015 |
| ||
Net revenues by platform: |
|
|
|
|
| ||
Console |
| $ | 765 |
| $ | 758 |
|
PC(1) |
| 400 |
| 386 |
| ||
Mobile and ancillary(2) |
| 243 |
| 86 |
| ||
Other(3) |
| 47 |
| 48 |
| ||
Total consolidated net revenues |
| $ | 1,455 |
| $ | 1,278 |
|
1(1) Revenues from online consist ofNet revenues from all World of Warcraft products, including subscriptions, boxed products, expansion packs, licensing royalties, and value-added services.PC includes revenues that were historically shown as “Online.”
2(2) RevenuesNet revenues from mobile and other includeancillary includes revenues from handheld, mobile and tablet devices, as well as non-platform specific game relatedgame-related revenues such as standalone sales of toys and accessories products from theour Skylanders franchise and other physical merchandise and accessories.
(3) Net revenues from Other include revenues from our Media Networks, Studios, and Distribution businesses.
Long-lived assets by geographic region at September 30, 2015March 31, 2016 and December 31, 20142015 were as follows (amounts in millions):
|
| At September 30, 2015 |
| At December 31, 2014 |
|
| At March 31, 2016 |
| At December 31, 2015 |
| ||||
Long-lived assets1 by geographic region: |
|
|
|
|
| |||||||||
North America |
| $ | 153 |
| $ | 122 |
| |||||||
Long-lived assets(1) by geographic region: |
|
|
|
|
| |||||||||
Americas |
| $ | 141 |
| $ | 138 |
| |||||||
Europe |
| 38 |
| 29 |
|
| 94 |
| 42 |
| ||||
Asia Pacific |
| 9 |
| 6 |
|
| 11 |
| 9 |
| ||||
Total long-lived assets by geographic region |
| $ | 200 |
| $ | 157 |
|
| $ | 246 |
| $ | 189 |
|
1(1) The only long-lived assets that we classify by region are our long-term tangible fixed assets, which only include property, plant, and equipment assets; all other long-term assets are not allocated by location.
9.10. Income Taxes
The Company accounts for its provision for income taxes in accordance with ASC 740, Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the interim period, taking into account year-to-date amounts and projected results for the full year. The provision for income taxes represents federal, foreign, state, and local income taxes. Our effective tax rate differs from the statutory U.S. income tax rate due to the effect of state and local income taxes, tax rates in foreign jurisdictions and certain nondeductible expenses. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in the mix of income by tax jurisdiction (as taxes are levied at relatively lower statutory rates in foreign regions and relatively higher statutory rates in the U.S.); research and development credits; changes in enacted tax laws and regulations, rulings and interpretations thereof, including with respect to tax credits, state and local income taxes; developments in tax audits and other matters; and certain nondeductible expenses. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.
The income tax expense of $18$73 million for the three months ended September 30, 2015March 31, 2016 reflects an effective tax rate of 13%18%, which is lower than the effective tax rate of 46%20% for the three months ended September 30, 2014.March 31, 2015. This decrease is primarily due tothe result of an incremental tax benefit included in the three months ended September 30, 2014, from a lower estimated effective annual tax rate in 2015March 31, 2016 due to the mix of foreign earnings taxed at relatively lower statutory rates as compared to domestic earnings and the net benefit related to the settlement of a historical audit, partially offset by certain non-tax benefitednondeductible costs incurred during the prior year quarter.
The income tax expense of $186 million for the nine months ended September 30, 2015 reflects an effective tax rate of 20%, which is comparable to the effective tax rate of 20% for the nine months ended September 30, 2014.
The effective tax rates of 13% and 20%18% for the three and nine months ended September 30, 2015, respectively,March 31, 2016 differed from the U.S. statutory rate of 35%, primarily due to the tax benefit from foreign earnings taxed at relatively lower statutory rates, the net benefit related to the settlement of a historical audit, recognition of federal and California research and development credits, and federal domestic production deductions, and favorable return to provision adjustments, partially offset by certain nondeductible costs incurred during the quarter and increases to the Company’s reserve for uncertain tax positions.
The overall effective income tax rate for the year could be different from the effective tax rate for the three and nine months ended September 30, 2015 and will be dependent, in part, on our profitability for the remainder of the year, as well as the other factors described above.
The Internal Revenue Service (“IRS”) is currently examining Activision Blizzard’s federal tax returns for the 20082009 through 2011 tax years. During the second quarter of 2015, the Company transitioned the review of its transfer pricing methodology from the advanced pricing agreement review process to the IRS examination team. Their review could result in a different allocation of profits and losses under the Company’s transfer pricing agreements. Such allocation could have a positive or negative impact on our provision for uncertain tax positions for the period in which such a determination is reached and the relevant periods thereafter. In addition, as part of the purchase price accounting, the Company assumed $77 million of uncertain tax positions primarily related to the transfer pricing of King tax years occurring prior to the King Acquisition. The Company is currently in negotiations with the relevant jurisdictions and the taxing authorities which could result in a different allocation of profits and losses between the relevant jurisdictions.
In addition, Vivendi Games’ tax year 2008 remains open to examination by the major taxing authorities. In addition, Vivendi Games’ tax return for the 2008 tax year is before the Appeals function of the IRS and is under examination by the IRS and several state taxing authorities. While Vivendi Games’ results for the period January 1, 2008 through July 9, 2008 are included in the consolidated federal and certain foreign, state and local income tax returns filed by Vivendi or its affiliates, Vivendi Games’ results for the period July 10, 2008 through December 31, 2008 are included in the consolidated federal and certain foreign, state, and local income tax returns filed by Activision Blizzard. Additionally, the Company has several state and non-U.S. audits pending.
The final resolution of the Company’s global tax disputes is uncertain. There is significant judgment required in the analysis of disputes, including the probability determination and estimation of the potential exposure. Based on current information, in the opinion of the Company’s management, the ultimate resolution of these matters are not expected to have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, an unfavorable resolution of the Company’s global tax disputes could have a material adverse effect on our business and results of operations in the period in which the matters are ultimately resolved.
In 2013, in connection with the Purchase Transaction,a share repurchase from Vivendi (the “Purchase Transaction”), we assumed certain tax attributes, of New VH, generally consisting of New VH’s net operating loss (“NOL”) carryforwards of approximately $760 million, which represent a potential future tax benefit of approximately $266 million. The utilization of such NOL carryforwards will be subject to certain annual limitations and will begin to expire in 2021. The Company also obtained indemnification from Vivendi against losses attributable to the disallowance of claimed utilization of such NOL carryforwards of up to $200 million in unrealized tax benefits in the aggregate, limited to taxable years ending on or prior to December 31, 2016. No benefit for these tax attributes or indemnification was recorded upon the close of the Purchase Transaction, as the benefit from these tax attributes did not meet the “more-likely-than-not” standard.share repurchase. For the ninethree months ended September 30, 2015,March 31, 2016, we utilized $248$184 million of the NOL, which resulted in a tax benefit of $87$64 million, reduced by $5 million for return to provision adjustments, and a corresponding reserve of $82$64 million was established as the position did not meet the “more-likely-than-not” standard.established. As of September 30, 2015,March 31, 2016, an indemnification asset of $149$171 million has been recorded in “Other Assets,” and, correspondingly, the same amount has been recorded as a reduction to the consideration paid for the shares repurchased in “Treasury Stock” (see Note 1 of the Notes to Condensed Consolidated Financial Statements for details about the share repurchase).
10.11. Computation of Basic/Diluted Earnings Per Common Share
The following table sets forth the computation of basic and diluted earnings per common share (amounts in millions, except per share data):
|
| For the Three Months Ended |
| For the Nine Months Ended |
|
| For the Three Months Ended March 31, |
| ||||||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
|
| 2016 |
| 2015 |
| ||||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Consolidated net income (loss) |
| $ | 127 |
| $ | (23) |
| $ | 733 |
| $ | 474 |
| |||||||
Consolidated net income |
| $ | 336 |
| $ | 394 |
| |||||||||||||
Less: Distributed earnings to unvested stock-based awards that participate in earnings |
| — |
| — |
| (4) |
| (5) |
|
| (2) |
| (4) |
| ||||||
Less: Undistributed earnings allocated to unvested stock-based awards that participate in earnings |
| (2) |
| — |
| (6) |
| (7) |
|
| (1) |
| (3) |
| ||||||
Numerator for basic and diluted earnings (loss) per common share — income (loss) available to common shareholders |
| $ | 125 |
| $ | (23) |
| $ | 723 |
| $ | 462 |
|
| $ | 333 |
| $ | 387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Denominator for basic earnings per common share - weighted-average common shares outstanding |
| 730 |
| 718 |
| 727 |
| 714 |
|
| 735 |
| 723 |
| ||||||
Effect of potential dilutive common shares under the treasury stock method: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Employee stock options and awards |
| 9 |
| — |
| 9 |
| 11 |
|
| 11 |
| 8 |
| ||||||
Denominator for diluted earnings per common share - weighted-average common shares outstanding plus dilutive common shares under the treasury stock method |
| 739 |
| 718 |
| 736 |
| 725 |
|
| 746 |
| 731 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic earnings (loss) per common share |
| $ | 0.17 |
| $ | (0.03) |
| $ | 0.99 |
| $ | 0.65 |
|
| $ | 0.45 |
| $ | 0.54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Diluted earnings (loss) per common share |
| $ | 0.17 |
| $ | (0.03) |
| $ | 0.98 |
| $ | 0.64 |
|
| $ | 0.45 |
| $ | 0.53 |
|
Certain of our unvested restricted stock rights (including certain restricted stock units restricted stock awards and performance shares) met the definition of participating securities as they participate in earnings based on their rights to dividends or dividend equivalents. Therefore, we are required to use the two-class method in our computation of basic and diluted earnings per common share. For the three and nine months ended September 30,March 31, 2016 and 2015, on a weighted-average basis, we had outstanding unvested restricted stock rights with respect to 84 million and 9 million shares of common stock, respectively, that are participating in earnings. For the three and nine months ended September 30, 2014, on a weighted-average basis, we had outstanding unvested restricted stock rights with respect to 14 million and 1610 million shares of common stock, respectively, that are participating in earnings.
Certain of our employee-related restricted stock rights and options are contingently issuable upon the satisfaction of pre-defined performance measures. These shares are included in the weighted-average dilutive common shares only if the performance measures are met as of the end of the reporting period. Approximately 4 million shares are not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2015 as their respective performance measures had not yet been met. Approximately 510 million and 4 million shares are not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2014March 31, 2016 and 2015, respectively, as their respective performance measures had not yet been met.
Potential common shares are not included in the denominator of the diluted earnings per common share calculation when the inclusion of such shares would be anti-dilutive, such as in a period in which a net loss is recorded.anti-dilutive. Therefore, options to acquire 16 million shares of common stock were not included in the calculation of diluted earnings per common share for the three and nine months ended September 30,March 31, 2016 and 2015 and options to acquire 10 million and 1 million shares of common stock were not included in the calculation of diluted earnings per common share for the three and nine months ended September 30, 2014, as the effect of their inclusion would be anti-dilutive.
11.12. Capital Transactions
Repurchase Program
On February 3, 2015, our Board of Directors authorized a stock repurchase program under which we may repurchase up to $750 million of our common stock during the two-year period from February 9, 2015 through February 8, 2017. As of September 30, 2015,March 31, 2016, we have not repurchased any shares under this program.
Dividends
On February 2, 2016, our Board of Directors declared a cash dividend of $0.26 per common share, payable on May 11, 2016, to shareholders of record at the close of business on March 30, 2016. As such, we have included $195 million of dividends payable in “Accrued expense and other liabilities” on our condensed consolidated balance sheet as of March 31, 2016.
On February 3, 2015, our Board of Directors declared a cash dividend of $0.23 per common share, payable on May 13, 2015, to shareholders of record at the close of business on March 30, 2015. On May 13, 2015, we made an aggregate cash dividend payment of $167 million to such shareholders, and on May 29, 2015, we made related dividend equivalent payments of $3 million to certain holders of restricted stock rights.
On February 6, 2014, our Board of Directors declared a cash dividend of $0.20 per common share, payable on May 14, 2014, to shareholders of record at the close of business on March 19, 2014. On May 14, 2014, we made an aggregate cash dividend payment of $143 million to such shareholders, and on May 30, 2014, we made related dividend equivalent payments of $4 million to certain holders of restricted stock rights.
12.13. Commitments and Contingencies
Legal Proceedings
We are subject to various legal proceedings and claims. SEC regulations govern disclosure of legal proceedings in periodic reports and FASB ASC Topic 450 governs the disclosure of loss contingencies and accrual of loss contingencies in respect of litigation and other claims. We record an accrual for a potential loss when it is probable that a loss will occur and the amount of the loss can be reasonably estimated. When the reasonable estimate of the potential loss is within a range of amounts, the minimum of the range of potential loss is accrued, unless a higher amount within the range is a better estimate than any other amount within the range. Moreover, even if an accrual is not required, we provide additional disclosure related to litigation and other claims when it is reasonably possible (i.e., more than remote) that the outcomes of such litigation and other claims include potential material adverse impacts on us.
The outcomes of legal proceedings and other claims are subject to significant uncertainties, many of which are outside of our control. There is significant judgment required in the analysis of these matters, including the probability determination and whether a potential exposure can be reasonably estimated. In making these determinations, we, in consultation with outside counsel, examine the relevant facts and circumstances on a quarterly basis assuming, as applicable, a combination of settlement and litigated outcomes and strategies. Moreover, legal matters are inherently unpredictable and the timing of development of factors on which reasonable judgments and estimates can be based can be slow. As such, there can be no assurance that the final outcome of any legal matter will not materially and adversely affect our business, financial condition, results of operations, profitability, cash flows or liquidity.
Purchase Transaction MattersKing Initial Public Offering (the “King IPO”) Matter
In prior periods,Beginning on March 17, 2015, purported securities class action lawsuits were filed in the Company reported on litigation relatedSuperior Court of the State of California, County of San Francisco, against King, certain of its directors and executive officers and underwriters of the King IPO. The lawsuits were brought by purported shareholders of King seeking to represent a class consisting of all those who purchased stock pursuant and/or traceable to the Purchase Transaction. DuringRegistration Statement and Prospectus issued in connection with the period ended June 30, 2015, the casesKing IPO. The lawsuits were resolvedconsolidated. Plaintiffs assert claims under Sections 11, 12(a)(2) and dismissed with prejudice. As part15 of the resolutionSecurities Act of 1933, as amended, and seek unspecified damages and other relief. The court has set a trial date of May 1, 2017. The Company has not recorded a liability in relation to these lawsuits and believes that the claims we received a settlement payment of $202 million in July 2015 from Vivendi, ASAC,are without merit and our insurers. We recordedintends to defend the settlement within “Shareholders’ equity” in our condensed consolidated balance sheet as of September 30, 2015.lawsuits vigorously.
Other Matters
In addition, we are party to routine claims, suits, investigations, audits and other proceedings arising from the ordinary course of business, including with respect to intellectual property rights, contractual claims, labor and employment matters, regulatory matters, tax matters, unclaimed property matters, compliance matters, and collection matters. In the opinion of management, after consultation with legal counsel, such routine claims and lawsuits are not significant and we do not expect them to have a material adverse effect on our business, financial condition, results of operations, or liquidity.
13.14. Related Party TransactionsAcquisitions
TransactionsKing Digital Entertainment plc
On February 23, 2016 (the “King Closing Date”) we completed the King Acquisition under the terms of the Transaction Agreement, purchasing all of the outstanding shares of King for $18.00 cash per share. As a result, King became a wholly owned subsidiary of Activision Blizzard. King is a leading interactive entertainment company that develops and distributes games on mobile platforms such as Android and iOS, and on online and social platforms such as Facebook and king.com websites. King’s results of operations since the King Closing Date are included in our condensed consolidated financial statements.
We made this acquisition because we believe that the addition of King’s highly-complementary mobile business will position the Company as a global leader in interactive entertainment across mobile, console and PC platforms, as well as positioning us for future growth.
The aggregate purchase price of the King Acquisition was approximately $5.8 billion, which was paid on the King Closing Date and funded primarily with Vivendi$3.6 billion of existing cash and Its Affiliates$2.2 billion of cash from new debt issued by the Company. The total aggregate purchase price for King was comprised of (amounts in millions):
Cash consideration for outstanding King common stock and vested equity options and awards (1) | $ | 5,730 | ||
Fair value of King’s existing vested and unvested stock options and awards assumed (2) | 98 | |||
Total purchase price | $ | 5,828 |
(1) Represents the cash consideration paid based on $18.00 per share to common stock holders of King and the fair value of King’s existing vested options and awards that were cash settled at the King Closing Date for the portion of the fair value related to pre-combination services. No future services are required.
(2) Represents the fair value of King’s existing vested and unvested stock options and awards that were assumed and replaced with Activision Blizzard equity or deferred cash awards. The purchase price includes the portion of fair value related to pre-combination services. The fair value of the options and awards assumed was determined using binomial-lattice and Monte Carlo models with the following assumptions: (a) volatility of 36%, (b) time varying risk free interest rates based on the U.S. Treasury yield curves, (c) an expected life ranging from approximately 0.1 years to 7.6 years, and (d) an expected dividend yield of 0.9%. See additional discussion under “Stock-Based Compensation” below.
The Company identified and recorded assets acquired and liabilities assumed at their estimated fair values at the King Closing Date, and allocated the remaining value of approximately $2.7 billion to goodwill. The values assigned to certain acquired assets and liabilities are preliminary, are based on information available as of the date of this Quarterly Report on Form 10-Q, and may be adjusted as further information becomes available during the measurement period of up to 12 months from the date of the King Acquisition. Additional information may become available subsequently and may result in changes in the values allocated to various assets and liabilities, including, the fair value of identified intangible assets, deferred income taxes, and contingent liabilities. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in material adjustments to goodwill.
The preliminary purchase price allocation was as follows (amounts in millions):
February 23, 2016 | Estimated useful lives | |||||
Tangible assets and liabilities assumed: | ||||||
Cash and cash equivalents | $ | 1,151 | ||||
Accounts receivable | 162 | |||||
Other current assets | 72 | |||||
Property and equipment | 57 | 2 - 7 years | ||||
Deferred income tax assets, net | 27 | |||||
Other assets | 47 | |||||
Accounts payable | (9) | |||||
Accrued expense and other liabilities | (272) | |||||
Other liabilities | (113) | |||||
Deferred income tax liabilities, net | (52) | |||||
Intangible assets | ||||||
Internally-developed franchises | 845 | 3 - 5 years | ||||
Customer base | 609 | 2 years | ||||
Developed software | 580 | 3 - 4 years | ||||
Trademark | 46 | 7 years | ||||
Goodwill | 2,678 | |||||
Total purchase price | $ | 5,828 |
During the three months ended March 31, 2016 the Company incurred $34 million of expenses related to the King Acquisition which are included within “General and administrative” in the condensed consolidated statements of operations. In connection with the debt financing that occurred on the King Closing Date, we incurred $38 million of issuance costs that were capitalized and recorded within “Long-term debt, net” on our condensed consolidated balance sheet. The amortization of these capitalized costs was not material to our condensed consolidated statement of operations for the three months ended March 31, 2016.
Stock-Based Compensation
In connection with the King Acquisition, a majority of the outstanding King options and awards that were unvested as of the King Closing Date were converted into equivalent options and awards, with respect to shares of the Company’s common stock, using an equity award exchange ratio calculated in accordance with the Transaction Agreement. As a result, replacement equity options and awards of 10 million and 3 million, respectively, were issued in connection with the King Acquisition. The portion of the fair value related to pre-combination services of $76 million was included in the purchase price while the remaining fair value will be recognized over the remaining service periods. As of March 31, 2016, the future expense for the converted King unvested options and awards was approximately $88 million, which will be recognized over a weighted average service period of approximately 2.1 years.
The remaining portion of outstanding unvested awards that were assumed were replaced with deferred cash awards. The cash proceeds were placed in an escrow-like account with the cash releases to occur based on the awards’ original vesting schedule upon future service being rendered. The cash associated with these awards is recorded in “Other current assets” and “Other assets” in our condensed consolidated balance sheet. The portion of the fair value related to pre-combination services of $22 million was included in the purchase price while the remaining fair value of approximately $9 million will be recognized over the remaining service periods. A portion of the cash proceeds placed in an escrow-like account were released to award holders but the amount was not material.
Identifiable Intangible Assets Acquired and Goodwill
The preliminary fair values of the identifiable intangible assets acquired from King were estimated using an income approach, with the exception of the customer base which was estimated using a cost approach. The fair value of the intangibles using the income approach was determined with the following key assumptions: (a) a weighted average cost of capital of 13%, (b) long-term revenue decay rates ranging from 0% to 65%, and (c) royalty rates ranging from 0.5% to 8%. The fair value of the intangibles using the cost approach was based on amounts that would be required to replace the asset (i.e. replacement cost).
The Internally-developed franchises, Customer base, Developed software, and Trademark intangible assets will be amortized to “Cost of Sales - intellectual property licenses,” “Sales and marketing,” “Cost of sales - software royalties and amortization,” and “General and administrative,” respectively. The intangible assets will be amortized over their estimated useful lives in proportion to the economic benefits received.
The $2.7 billion of goodwill recognized is primarily attributable to the benefits the Company expects to derive from accelerated expansion as an interactive entertainment provider in the mobile sector, future franchises and technology, as well as the management team’s proven ability to create future games and franchises. Approximately $620 million of the goodwill is expected to be deductible for tax purposes in the U.S.
Contingent Liabilities Assumed
As parta result of the Business Combination in 2008,King Acquisition we entered into various transactionsassumed contingent liabilities related to contingent consideration associated with King’s previous acquisitions of Nonstop Games Oy and agreements, including cash management services agreements,Z2Live, Inc. The remaining contingent consideration for Non Stop Games Oy is linked to amounts generated from games launched by Nonstop Games over a tax sharing agreement and an investor agreement, with Vivendi and its subsidiaries. In connection with the consummationspecified period. The range of the Purchase Transaction, we terminatedpotential undiscounted amount of all future payments that the cash management arrangements with Vivendi and amended our investor agreement with them. We are also partyCompany could be required to make under the contingent consideration arrangement is from $0 million up to $84 million. The remaining contingent consideration for Z2Live, Inc. is linked to amounts generated from specific games launched within a numberdefined period. The potential range of agreements with subsidiaries and other affiliates of Vivendi, including music licensing and distribution arrangements and promotional arrangements, none of which were impacted byundiscounted future payments that the Purchase Transaction. None of these services, transactions and agreements with Vivendi and its affiliates were material, either individually or inCompany could be required to make under the aggregate,contingent consideration arrangement is from $0 million up to the consolidated financial statements as a whole. As discussed in Note 1$75 million. The fair value of the Notes to Condensed Consolidated Financial Statements, on May 28, 2014, Vivendi sold 41 million shares, reducing its ownership interest below 10%contingent consideration arrangement at the King Closing date for Nonstop Games Oy and Z2Live, Inc., and is no longer considered a related party.was immaterial.
Transactions with ASAC’s AffiliatesKing Net Revenue and Earnings
PursuantThe amount of net revenue and earnings attributable to King in the Stock Purchase Agreement,Company’s condensed consolidated statement of operations during the three months ended March 31, 2016 are included in the table below. The amounts presented represent the net revenues and earnings after adjustments for purchase price accounting, inclusive of amortization of intangible assets, share-based payments, and deferral of revenues and related cost of sales.
For the Three Months Ended | ||||
(in millions) | March 31, 2016 | |||
Net revenues | $ | 183 | ||
Net loss | $ | (50) |
Pro Forma Financial Information
The unaudited financial information in the table below summarizes the combined results of operations of the Company and eachKing, on a pro forma basis, as though the acquisition had occurred on January 1, 2015. The pro forma financial information presented includes the effects of Mr. Kotick,adjustments related to amortization charges from acquired intangible assets, employee compensation from replacement equity awards issued in the Company’s Chief Executive Officer,King Acquisition and Mr. Kelly, the Company’s Chairmanprofit sharing bonus plan established as part of the Board of Directors, entered into waiverKing Acquisition, and acknowledgment letters (together,interest expense from the “Waivers”), which provide,new debt, among other things, (i)adjustments. We also adjusted for Activision Blizzard and King non-recurring acquisition related costs of approximately $60 million for the three months ended March 31, 2016. The pro forma financial information as presented below is for informational purposes only and is not necessarily indicative of the results of operations that would have been achieved if the Purchase Transaction, Private Sale,King Acquisition, and any public offerings by Vivendi and restructurings by Vivendi and its subsidiaries contemplated byborrowings undertaken to finance the Stock Purchase Agreement and other transaction documents, shall not (or shall be deemed not to) constitute a “change in control” (or similar term) under their respective employment arrangements, including their employment agreements withKing Acquisition, had taken place at the Company,beginning of the Company’s 2008 Incentive Plan or any award agreements in respect of awards granted thereunder, or any Other Benefit Plans and Arrangements (as defined in the Waivers), (ii) (A) that the shares of our common stock acquired by ASAC and held or controlled by the ASAC Investors (as defined in the Waivers) in connection with the Transactions (as defined in the Waivers) will not be included in or count toward, (B) that the ASAC Investors will not be deemedearliest period presented, nor does it intend to be a groupprojection of future results.
|
| For the Three Months Ended March 31, |
| ||||
(in millions) |
| 2016 |
| 2015 |
| ||
|
|
|
|
|
| ||
Net revenues |
| $ | 1,735 |
| $ | 1,848 |
|
Net income |
| $ | 329 |
| $ | 380 |
|
Basic earnings per common share |
| $ | 0.44 |
| $ | 0.52 |
|
Diluted earnings per common share |
| $ | 0.44 |
| $ | 0.51 |
|
Major League Gaming, Inc.
On December 22, 2015, we acquired the business of Major League Gaming, Inc. (“MLG”), for purposesan aggregate purchase price of $46 million in cash. MLG is a leader in creating and (C) any changes instreaming premium live gaming events, organizing professional competitions, and running competitive gaming leagues. MLG’s business operates under our Media Networks operating segment.
The values assigned to the composition in the Board of Directors of the Company, in connection with oracquired assets and liabilities were finalized during the one-year period followingthree months ended March 31, 2016, and the consummation offinal purchase price allocation for MLG remained unchanged from the Transactions will not contribute towards, a determination that a “changeamounts disclosed in control” or similar term has occurred with respect to Messrs. Kotick and Kelly’s employment arrangements with the Company, and (iii)Note 23 contained in our Annual Report on Form 10-K for the waiver by Messrs. Kotick and Kelly of their rights to change in control payments or benefits under their employment agreements withyear ended December 31, 2015. Pro forma financial information has not been presented as the Company, the Company’s 2008 Incentive Plan or any award agreements in respect of awards granted thereunder, and any Other Benefit Plans and Arrangements (in each case, with respect to all current and future grants, awards, benefits or entitlements) in connection with or asacquisition did not have a consequence of the Transactions.
Also pursuant to the Stock Purchase Agreement,material impact on October 11, 2013, we, ASAC and, for the limited purposes set forth therein, Messrs. Kotick and Kelly entered into the Stockholders Agreement. The Stockholders Agreement contains various agreements among the parties regarding voting rights, transfer rights, and a standstill agreement, among other things. In connection with the settlement of the litigation related to the Purchase Transaction, the parties to the Stockholders Agreement amended that agreement on May 28, 2015.our consolidated financial statements.
14.15. Recently issued accounting pronouncements
Revenue recognition
In May 2014, the FASB issued new accounting guidance related to revenue recognition. The new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for fiscal years and interim periods within those years beginning January 1, 2018after December 15, 2017, and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are evaluating the adoption method as well as the impact of this new accounting guidance on our financial statements.
Stock-based compensation
In June 2014, the FASB issued new guidance related to stock compensation. The new standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. TheWe adopted this new standard is effective for fiscal years beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted.January 1, 2016, and applied it prospectively. The adoption of this guidance willdid not have a material impact on the Company’sour condensed consolidated financial statements.
Consolidations
In February 2015, the FASB issued new guidance related to consolidations. The new standard amends certain requirements for determining whether a variable interest entity must be consolidated. TheWe adopted this new standard is effective for fiscal years beginning after December 15, 2015. Earlyas of January 1, 2016. The adoption is permitted. We are evaluating theof this guidance did not have a material impact if any, of adopting this new accounting guidance on our condensed consolidated financial statements.
Debt Issuance Costs
In April 2015, the FASB issued new guidance related to the presentation of debt issuance costs in financial statements. The new standard requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effectiveWe adopted this change in accounting principle as of January 1, 2016, and applied it retrospectively for annual reporting periods beginning after December 15, 2015. The new guidance will be applied retrospectively to each prior period presented. The adoption of this guidance willdid not have a material impact on our condensed consolidated financial statements.
Internal-Use Software
In April 2015, the FASB issued new guidance related to internal-use software. The new standard relates to a customer’s accounting for fees paid in cloud computing arrangements. The amendment provides guidance for customers to determine whether such arrangements include software licenses. If a cloud arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. We adopted this standard as of January 1, 2016, and applied it prospectively. The new standard is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted. We are evaluatingof this guidance did not have a material impact on the impact, if any, of adopting this new accounting guidance on ourCompany’s condensed consolidated financial statements.
Inventory
In July 2015, the FASB issued new guidance related to the measurement of inventory which requires inventory within the scope of the guidance to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new standard is effective for fiscal years beginning after December 15, 2016 and should be applied prospectively. Early adoption is permitted. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements.
15.Subsequent events
The AcquisitionBusiness Combinations
On November 2,In September 2015, we and King Digital Entertainment plc,the FASB issued new guidance related to business combinations. The new standard requires that the cumulative impact of a leading interactive mobile entertainment company incorporated undermeasurement period adjustment, including the laws of Ireland (“King”), entered intoimpact on prior periods, made to provisional amounts recorded at the acquisition date as a Transaction Agreement (the “Transaction Agreement”) under the terms of which we will acquire King (the “Acquisition”) and King will become a wholly-owned subsidiaryresult of the Company. Atbusiness combination, be recognized in the effective timereporting period the adjustment is identified. The standard also requires separate presentation on the face of the Acquisition, King shareholders will become entitled to receive $18.00income statement, or disclosure in cashthe notes, of the portion of the amount recorded in exchange for each King share they then hold. We expect to transfer approximately $5.9 billion in considerationcurrent period earnings by line item. Prior to the existing King shareholders and share based award holders through a combinationissuance of the net proceeds from $2.3 billionstandard, such adjustments to provisional amounts were recognized retrospectively. We adopted this new standard as of committed incremental term loans, our offshore cash,January 1, 2016, and approximately $200 millionapplied it prospectively. No measurement period adjustments occurred as of our share based awardsand for the replacement of share based awards held by current employees and directors of King.
The transaction is subject to customary closing conditions, including the approval by King’s shareholders, Irish High Court sanctioning, as well as certain regulatory approvals, and is expected to close by Spring of calendar yearthree months ended March 31, 2016.
Amendment to Credit AgreementFinancial Instruments
In conjunction withJanuary 2016, the Acquisition,FASB issued new guidance related to the Company entered intorecognition and measurement of financial assets and financial liabilities. The new standard, amongst other things, generally requires companies to measure investments in other entities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The new standard is effective for fiscal years beginning after December 15, 2017 and the guidance should be applied by means of a First Amendment (the “Amendment”), which amendscumulative-effect adjustment to the Credit Agreement, datedbalance sheet as of October 11, 2013.the beginning of the fiscal year of adoption. The Amendment, amongamendments related to equity investments without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. We are evaluating the impact of this new accounting guidance on our financial statements.
Leases
In February 2016, the FASB issued new guidance related to the accounting for leases. The new standard will replace all current U.S. GAAP guidance on this topic. The new standard, amongst other things, providesrequires a lessee to classify a lease as either a finance or operating lease in which lessees will need to recognize a right-of-use asset and a lease liability for Incremental Term Loanstheir leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. Classification will be based on criteria that are largely similar to those applied in current lease accounting. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and will require application of the new guidance at the beginning of the earliest comparative period presented. We are evaluating the impact of this new accounting guidance on our financial statements.
Share-Based Payments
In March 2016, the FASB issued new guidance in an effort to simplify accounting for share-based payments. The new standard, amongst other things:
· will require that all excess tax benefits and tax deficiencies be recorded as income tax expense or benefit in the formstatement of Tranche B-2 Term Loansoperations and that the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur;
· will require excess tax benefits from share-based payments to be reported as operating activities on the statement of cash flows; and
· permits an aggregate principal amountaccounting policy election to either estimate the number of approximately $2.3 billion. The proceeds of the Tranche B-2 Term Loans will be usedawards that are expected to fund the Acquisition.vest using an estimated forfeiture rate, as currently required, or account for forfeitures when they occur.
The Tranche B-2 Term Loans will mature on the date thatnew standard is seveneffective for fiscal years and six monthsbeginning after the date of the initial funding of the Tranche B-2 Term Loans and will bear interest, at an annual rate equal to an applicable interest margin plus, at our option, (A) a base rate determined by reference to the highest of (a) the interest rate in effect determined by the administrative agent as its “prime rate,” (b) the federal funds rate plus 0.5%, and (c) the London InterBank Offered Rate (“LIBOR”) rate for an interest period of one month plus 1.00%, or (B) LIBOR. LIBOR borrowings under the Tranche B-2 Term Loan will be subject to a LIBOR floor of 0.75% and base rate will be subject to a floor of 1.75%. The applicable interest margin for Tranche B-2 Term Loans will be 3.00% for LIBOR borrowings and 2.00% for base rate borrowings. Voluntary prepayments of the Tranche B-2 Term Loans are permitted at any time, in minimum principal amounts, without premium or penalty, subject to a 1.00% premium payable in connection with certain repricing transactions within the first six months after the date of the initial funding of the Tranche B-2 Term Loans. The Tranche B-2 Term Loans will be secured by the same collateral and guaranteed by the same guarantors as the existing Term Loan. The other terms of the Tranche B-2 Term Loans are also generally the same as the terms of the existing Term Loan.
Commitment Letter
In conjunction with the Acquisition, the Company also entered into a commitment letter (the “Commitment Letter”) with Bank of America, N.A. and Goldman Sachs Bank USA (the “Debt Financing Sources”). Pursuant to the Commitment Letter, subject to customary conditions, the Debt Financing Sources committed to provide the Company with the Tranche B-2 Term Loans on such modified terms as set forth therein (Tranche B-2 Term Loans as so modified, the “Tranche A Term Loans”) in the same aggregate principal amount and for the same purpose as the original Tranche B-2 Term Loans. The Tranche A Term Loans will be effected via, and subject to the passing of, a second amendment to the Credit Agreement and will mature on October 11, 2020.
Cash Confirmation
Under the Irish Takeover Rules, no financing condition to the AcquisitionDecember 15, 2016. Early adoption is permitted. As is customary, we have executed and delivered a cash confirmation representation letter toWe are evaluating the impact of this new accounting guidance on our financial advisor, in which we have given various representations, warranties and undertakings in relation to the sources and availability of the funding. In conjunction with the representation letter the Company has segregated $3.56 billion in cash in separate bank accounts, where the cash is not accessible to the Company for operating cash needs, as its use has been administratively restricted for use in the consummation of the Acquisition.
All information included in the accompanying unaudited Condensed Consolidated Financial Statements and notes to Condensed Consolidated Financial Statements in this report reflects only our results, and does not reflect any impact of the proposed Acquisition, Amendment to the Credit Agreement, Commitment Letter, or Cash Confirmation.statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Business Overview
Activision Blizzard, Inc. is a leading global developer and publisher of interactive entertainment. The terms “Activision Blizzard,” the “Company,” “we,” “us,” and “our” are used to refer collectively to Activision Blizzard, Inc. and its subsidiaries.
Activision Blizzard is the result of the 2008 business combination (“Business Combination”) by and among the Company (then known as Activision, Inc.), Sego Merger Corporation, a wholly-owned subsidiary of Activision, Inc., Vivendi S.A. (“Vivendi”), VGAC LLC, a wholly-owned subsidiary of Vivendi, and Vivendi Games, Inc. (“Vivendi Games”), a wholly-owned subsidiary of VGAC LLC. As a result of the consummation of the Business Combination, Activision, Inc. was renamed Activision Blizzard, Inc.
As of March 31, 2016, we had approximately 738 million shares of common stock issued and outstanding. At that date: (i) ASAC II LP (“ASAC”), an exempted limited partnership established under the laws of the Cayman Islands, held 172 million shares, or approximately 23% of the outstanding shares of our common stock, and (ii) our other stockholders held approximately 77% of the outstanding shares of our common stock. Robert A. Kotick, our Chief Executive Officer, and Brian G. Kelly, Chairman of our Board of Directors, are affiliates of ASAC II LLC, the general partner of ASAC.
The common stock of Activision Blizzard is traded on The NASDAQ Stock Market under the ticker symbol “ATVI.”
OperatingThe King Acquisition
On November 2, 2015, we and King Digital Entertainment, a leading interactive mobile entertainment company (“King”), entered into a Transaction Agreement (the “Transaction Agreement”) under the terms of which we would acquire King (the “King Acquisition”) and King would become a wholly-owned subsidiary of the Company. On February 23, 2016, (the “King Closing Date”) we completed the King Acquisition under the terms of the Transaction Agreement and purchased all of the outstanding shares of King for $18.00 cash per share. The aggregate purchase price of King was approximately $5.8 billion, which was paid on the King Closing Date and funded with $3.6 billion of existing cash and $2.2 billion of cash from new debt issued by the Company. King’s results of operations since the King Closing Date are included in our condensed consolidated financial statements.
We made this acquisition because we believe that the addition of King’s highly-complementary mobile business positions the Company as a global leader in interactive entertainment across mobile, console, and PC platforms, as well as positioning us for future growth.
Reportable Segments
Based upon our organizational structure, we conduct our business through three reportable operating segments, as follows:Activision Publishing, Inc., Blizzard Entertainment, Inc., and King Digital Entertainment.
(i) Activision Publishing, Inc.
Activision Publishing, Inc. (“Activision”) is a leading global developer and publisher of interactive software products and content. Activision delivers content to a broad range of gamers, ranging from children to adults, and from core gamers to mass-market consumers, to “value” buyers seeking budget-priced software, in a variety of geographies. Activision develops, gamesmarkets, and sells products through retail channels or digital downloads, which are principally based on our internally-developed intellectual properties, including games in the Call of Duty®, and Skylanders®, and Guitar Hero® franchises, and to a lesser extent, based onas well as some licensed intellectual properties. Additionally, we have established a long-term alliance with Bungie to publish its game universe, Destiny. Activision sells games through both retail and digital online channels. Activision currently offers games that operate on the Microsoft Corporation (“Microsoft”) Xbox One (“Xbox One”) and Xbox 360 (“Xbox 360”), Nintendo Co. Ltd. (“Nintendo”) Wii U (“Wii U”) and Wii (“Wii”), and Sony Computer Entertainment, Inc. (“Sony”) PlayStation®PlayStation 4 (“PS4”) and PlayStation 3 (“PS3”) console systems (Xbox One, Wii U, and PS4 are collectively referred to as “next-generation”; Xbox 360, Wii, and PS3 are collectively referred to as “prior-generation”);systems; the personal computer (“PC”);PC; the Nintendo 3DS, Nintendo Dual Screen, and Sony PlayStation Vita handheld game systems; and mobile and tablet devices.
(ii) Blizzard Entertainment, Inc.
Blizzard Entertainment, Inc. (“Blizzard”) is a leader in online PC gaming, including the subscription-based massively multi-player online role-playing game category in terms of both subscriber base and revenues generated through its World of Warcraft® franchise, which it develops, hosts and supports. franchise. Blizzard also develops, markets, and sells role-playing action and strategy games for the PC, console, mobile, and tablet platforms, including games in the multiple-award winning Diablo®Diablo®, StarCraft®StarCraft®, and Hearthstone®Hearthstone®: Heroes of Warcraft™, and Heroes of the Storm™ franchises. In addition, Blizzard maintains a proprietary online game-relatedgaming service, Battle.net®., which facilitates digital distribution and online social connectivity across all Blizzard games. Blizzard distributes its products and generates revenues worldwide through various means, including: subscriptions; sales of prepaid subscription cards; value-added services, such as in-game purchases and services; retail sales of physical “boxed” products; online download sales of PC products; purchases and downloads via third-party console, mobile, and tablet platforms; and licensing of software to third-party or related-partyrelated party companies that distribute World of Warcraft, Diablo and StarCraftBlizzard products. In addition, Blizzard is the creator of Heroes of the Storm™, a free-to-play online hero brawler released on June 2, 2015.
(iii) Activision Blizzard DistributionKing Digital Entertainment plc
Our distribution segmentKing Digital Entertainment is a leading interactive mobile entertainment company that develops and distributes games on mobile platforms such as Android and iOS along with games that can be played on Facebook and king.com websites. King has four category-leading free-to-play franchises: Candy Crush™, Farm Heroes™, Bubble Witch™, and Pet Rescue™, where monetization occurs through players purchasing in-game virtual currency which can be used in-game to buy virtual items.
(iv) Other
We also engage in other businesses that do not represent reportable segments, including:
· The Activision Blizzard Media Networks (“Media Networks”) business that is devoted to eSports that builds on our competitive gaming efforts by creating ways to deliver the best-in-class fan experience across games, platforms, and geographies with a long-term strategy of monetization through advertising, sponsorships, tournaments, and premium content.
· The Activision Blizzard Studios (“Studios”) business that is devoted to creating original film and television content based on our extensive library of iconic and globally-recognized intellectual properties.
· The Activision Blizzard Distribution (“Distribution”) business that consists of operations in Europe thatwhich provide warehousing, logistical, and sales distribution services to third-party publishers of interactive entertainment software, our own publishing operations, and manufacturers of interactive entertainment hardware.
Business Highlights
For the three months ended September 30, 2015,March 31, 2016, Activision Blizzard had net revenues of $990 million,$1.5 billion, as compared to net revenues of $753 million$1.3 billion for the same period in 2014.2015. For the three months ended September 30, 2015,March 31, 2016, Activision Blizzard had earnings per diluted share of $0.17, as compared to loss per diluted share of $(0.03) for the same period in 2014.
For the nine months ended September 30, 2015, Activision Blizzard had net revenues of $3.3 billion, as compared to net revenues of $2.8 billion for the same period in 2014. For the nine months ended September 30, 2015, Activision Blizzard had earnings per diluted share of $0.98,$0.45, as compared to earnings per diluted share of $0.64$0.53 for the same period in 2014.2015.
For the three and nine months ended September 30, 2015, digital online channel revenues were 64% and 54%, respectively,March 31, 2016, as a result of consolidatedthe King Acquisition, our net revenues and net income include $183 million and $(50) million from King’s operations, respectively, after adjustments for purchase price accounting, inclusive of amortization of intangible assets, share-based payments, and deferral of revenues and related cost of sales. Our earnings under accounting principles generally accepted in the United States of America (“U.S. GAAP”) are expected to be down versus prior-year as compared to 67%the expected results will be impacted by accounting charges associated with the King Acquisition, which include, among other things, integration and 48% foracquisition-related costs, the threeamortization of intangible assets resulting from purchase price accounting adjustments, share-based payments, and nine months ended September 30, 2014, respectively.
For the three and nine months ended September 30, 2015, non-GAAP digital online channel revenues were 67% and 74%, respectively,related tax impact from the King Acquisition. The majority of consolidated net revenues, as compared to 43% and 58% forthese GAAP accounting charges will not impact the three and nine months ended September 30, 2014, respectively.economics or operating cash flows of our business, although they will have a material impact on our 2016 GAAP results.
On February 3, 2015,2, 2016, our Board of Directors declared a cash dividend of $0.23$0.26 per common share, payable on May 13, 2015,11, 2016, to shareholders of record at the close of business on March 30, 2015. On May 13, 2015, we made an aggregate cash dividend payment of $167 million to such shareholders, and on May 29, 2015, we made related dividend equivalent cash payments of $3 million to certain holders of restricted stock rights.2016.
Activision Blizzard 2015Recent and Upcoming Product Releases
We have recently released the following titles and games, among other titles:
· OnKing released Candy Crush Jelly Saga™, the latest installment in the Candy Crush franchise, in January 11, 2015, Activision entered open beta for Call of Duty Online, a free-to-play game available in China.2016.
· Activision released Call of Duty: Advanced Warfare HavocBlack Ops III Awakening (“Havoc”), the first downloadable content pack for Call of Duty: Advanced WarfareBlack Ops III, on the Xbox One and Xbox 360 platformsPS4 on January 27, 2015February 2, 2016 and on other platforms on February 26, 2015.March 3, 2016.
•· Activision released Call of Duty: Advanced Warfare AscendanceBlack Ops III Eclipse (“Ascendance”), the second downloadable content pack for Call of Duty: Advanced WarfareBlack Ops III, on the Xbox OnePS4 on April 19, 2016, and Xbox 360 platforms on March 31, 2015 andis expected to be released on other platforms on April 30, 2015.in May 2016.
· On April 2, 2015,26, 2016, Blizzard released Blackrock Mountain™Whispers of the Old Gods™, an additionthe third expansion to Hearthstone: Heroes of Warcraft content and on April 14, 2015, Hearthstone: Heroes of Warcraft was released on iOS and Android smartphones.
· On April 7, 2015, Blizzard launched the WoW™ Token System, which enables World of Warcraft players to exchange game-time tokens, purchased at $20, to other players for in-game gold, which provides players with a secure method for purchasing gold in-game.
· On April 23, 2015, Blizzard released the action role-playing game Diablo III: Reaper of Souls™ in China.
· On May 19, 2015, Activision released House of Wolves, the second expansion to Destiny.
· On June 2, 2015, Blizzard released Heroes of the Storm, its free-to-play online team brawler.
· Activision released Call of Duty: Advanced Warfare Supremacy (“Supremacy”), the third downloadable content pack for Call of Duty: Advanced Warfare on the Xbox One and Xbox 360 platforms on June 2, 2015 and on other platforms on July 2, 2015.
· Activision released Call of Duty: Advanced Warfare Reckoning (“Reckoning”), the fourth downloadable content pack for Call of Duty: Advanced Warfare on the Xbox One and Xbox 360 platforms on August 4, 2015 and on other platforms on September 3, 2015.
· On August 24, 2015, Blizzard released The Grand Tournament™, the latest expansion to Hearthstone: Heroes of Warcraft.
· On September 15, 2015, Activision releasedMay 24, 2016, Blizzard expects to release The Taken KingOverwatch™, the third expansion to Destiny.
· On September 20, 2015, Activision released Skylanders Superchargers, the latest title in the Skylanders franchise.
· On October 20, 2015, Activision released Guitar Hero Live, bringing back the franchise that had previously reached over 40 million players in North America and Europe.
· On October 27, 2015, Blizzard began closed beta testing for Overwatch™, its upcoming team-based first-person shooter.
·Monthly Active Users (“MAUs”) On November 6, 2015, Activision released Call
We monitor MAUs as a key measure of Duty: Black Ops III, the latestoverall size of our user base and its regular engagement with our portfolio of games. MAUs are the number of individuals who played a particular game in a given month. We calculate average MAUs in a period by adding the total number of MAUs in each of the months in a given period and dividing by the number of months in the Callperiod. An individual who plays two of Duty franchise series.our games would be counted as two users. In addition, due to technical limitations for Activision and King MAUs, an individual who plays the same game on two platforms or devices in the relevant period would be counted as two users. For Blizzard MAUs, an individual who plays the same game on two platforms or devices in the relevant period would be counted as one user.
The number of MAUs for a given period can be significantly impacted by the timing of new content releases, since new releases can cause a temporary surge in MAUs. Accordingly, although we believe that overall trending in the number of MAUs can be a meaningful performance metric, period-to-period fluctuations may not be indicative of longer-term trends. The following table details our average MAUs on a sequential quarterly basis for our reportable segments (amounts in millions):
|
| March 31, 2016 |
| December 31, |
| September 30, |
| June 30, 2015 |
| March 31, 2015 |
|
Activision |
| 55 |
| 55 |
| 46 |
| 45 |
| 50 |
|
Blizzard |
| 26 |
| 26 |
| 28 |
| 29 |
| 21 |
|
King |
| 463 |
| 449 |
| 474 |
| 501 |
| 550 |
|
Total |
| 544 |
| 530 |
| 548 |
| 575 |
| 621 |
|
· In November 2015, Blizzard expectsAverage MAUs increased by 14 million, or 3%, for the quarter ended March 31, 2016 as compared to the quarter ended December 31, 2015. Activision’s and Blizzard’s average MAUs were flat quarter-over-quarter, and the increase in King’s average MAUs was primarily due to the release of Starcraft II: LegacyCandy Crush Jelly Saga.
Average MAUs decreased by 77 million, or 12%, for the quarter ended March 31, 2016 as compared to the quarter ended March 31, 2015. Activision’s and Blizzard’s average MAUs grew year-over-year, given the strength of the Void™,franchise portfolio, and King’s average MAUs declined year-over-year due to the third installmentperformance of the real-team strategy game.more mature titles.
Management’s Overview of Business Trends
Console Platform Transition
In November 2013, Sony released the PS4 and Microsoft released the Xbox One, their respective next-generation game consoles and entertainment systems. According to The NPD Group and GfK Chart-Track in North America and Europe, as of September 30, 2015, the combined installed base of PS4 and Xbox One hardware was approximately 32 million units, representing growth of approximately 118% over the combined installed base of approximately 15 million as of September 30, 2014. While the combined installed base of PS3 and Xbox 360 hardware was approximately 123 million units as of September 30, 2015, at the comparable point in their release cycle, the prior-generation platforms had only 22 million units installed.
When new console platforms are announced or introduced into the market, consumers reduce their purchases of game console software products for prior-generation console platforms in anticipation of new platforms becoming available. During these periods, sales of the game console software products we publish slow or even decline until the new platforms introduced achieve wide consumer acceptance, which we believe will have largely occurred with respect to the next-generation platforms by the end of 2015. In prior cycles, as the next-generation installed base grew, software sales declines abated and software sales grew.
During platform transitions, we simultaneously incur costs to develop and market new titles for prior-generation video game platforms and to develop and market products for next-generation platforms. We continually monitor console hardware sales and manage our product delivery on each of the prior- and next-generation platforms in a manner we believe to be most effective to maximize our revenue opportunities and achieve the desired return on our investments in product development.
Digital Online Channel Revenues
We provide our products through both retail and digital distribution channels. Many of our video games that are available through retailers as physical “boxed” software products are also available digitally (from our websites and from websites and digital distribution channels owned by third parties). In addition, we offer players digital downloadable content as add-ons to our products (e.g., new multi-player content packs)packs or in-game microtransaction purchases), generally for a one-time fee. We also offer subscription-based services and other value-added services for World of Warcraft, all of which are digitally delivered and micro-transactions across our various video games. We have also introduced games based on some of our most successful franchises which operate online on a free-to-play model with micro-transactions.hosted by Battle.net.
We currently define sales via digital online channels as revenues from digitally distributeddigitally-distributed subscriptions, licensing royalties, value-added services, downloadable content, micro-transactions,microtransaction purchases, and products. This definition may differ from that used by our competitors or other companies.
According to Activision Blizzard internal estimates, overall industry digital gaming revenues for the ninethree months ended September 30, 2015March 31, 2016 increased by approximately 21%19% as compared to the same period in 2014.2015, with mobile growth at 27%. The primary drivers of the increase in digital gaming revenues were increases in micro-transactionsmicrotransaction purchases and consumer purchases of full games via digital channels. In addition to increasing microtransaction purchases within free-to-play games, the increase includes microtransaction purchases within purchased game software, as publishers offer increasingly new opportunities for monetization within their games to extend and enlarge the monetization cycle. Digital revenues are an important part of our business, and we continue to focus on and develop products, such as downloadable content, that can be delivered via digital online channels. The amount of our digital revenues in any period may fluctuate depending, in part, on the timing and nature of our specific product releases. Our sales of digital downloadable content are driven in part by sales of, and engagement by players in, our retail products. As such, lower revenues in our retail distribution channels in the current year may impact our revenues through digital online channels in the subsequent year.
For the three months ended September 30, 2015,March 31, 2016, revenues through digital online channels increased by $125$345 million, as compared to the same period in 2014,2015, and represented 64% of our total consolidated net revenues, as compared to 67%45% for the same period in 2014.2015. On a non-GAAP basis (which excludes the impact of deferred revenues), revenues through digital online channels for the three months ended September 30, 2015March 31, 2016 increased by $192$259 million, as compared to the same period in 2014,2015, and represented 67%88% of our total non-GAAP net revenues, as compared to 43%76% for the same period in 2014.2015.
ForRefer to the nine months ended September 30, 2015, revenues throughreconciliation of GAAP and non-GAAP digital online channels increased by $421 million, as compared to the same period in 2014, and represented 54% of our total consolidated netchannel revenues as compared to 48% for the same period in 2014. On a non-GAAP basis (which excludes the impact of deferred revenues), revenues through digital online channels for the nine months ended September 30, 2015 increased by $333 million, as compared to the same period in 2014, and represented 74% of our total non-GAAP net revenues, as compared to 58% for the same period in 2014.under “Non-GAAP Financial Measures” below.
Conditions in the Retail Distribution ChannelsConcentration of Top Titles
ConditionsThe concentration of retail revenues among key titles has continued as a trend in the retail distribution channels of theoverall interactive entertainment industry continued to be challenging during the first nine months of 2015. In North America and Europe, retail sales of video games declined by 8%, as compared to the same period in 2014, accordingsoftware industry. According to The NPD Group, and GfK Chart-Track. However, the increase in digitally distributed games, including full-game downloads, add-on content, and free-to-play games, has offsettop 10 titles accounted for 33% of the negative trendsretail sales in the retail distribution channels.U.S. interactive entertainment industry in 2015. Similarly, a significant portion of our revenues has historically been derived from video games based on a few popular franchises and these video games were responsible for a disproportionately high percentage of our profits. For example, the Call of Duty, World of Warcraft, Skylanders, and Destiny franchises combined accounted for 71% of our consolidated net revenues, and a significantly higher percentage of our operating income, for 2015. As a result, successful competition against these titles can significantly impact our performance. Notably, the toys-to-life category has become more competitive with a new entrant competing directly with us and other incumbents.
We are continually exploring additional investments in existing and future franchises. During 2015, we released Heroes of the Storm, as well as Call of Duty Online in China. In the fourth quarter of 2015,we released Overwatch into closed beta with an anticipated game release of May 24, 2016. There is no guarantee that these franchises will become key franchises.
Additionally, on February 23, 2016, we completed the toys-to-life game category has seenKing Acquisition, diversifying our portfolio of key franchises and increasing competition from newour presence in the mobile market. In this market, participants.we see similar concentration of key titles accounting for a disproportionate amount of digital sales. According to the U.S. ranking for the Apple App Store, per App Annie Intelligence, seven titles remained in the top 10 ranking of gross sales for all four quarters during 2015.
Please referOverall, we do expect that a limited number of popular franchises will continue to produce a disproportionately high percentage of our, and the reconciliation between GAAPindustry’s, revenues and non-GAAP financial measures laterprofits in this document for further discussions of digital and retail online channels.the near future.
The Business Combination and Share Repurchase
Activision Blizzard is the result of the 2008 business combination (“Business Combination”) by and among the Company (then known as Activision, Inc.), Sego Merger Corporation, a wholly-owned subsidiary of Activision, Inc., Vivendi S.A. (“Vivendi”), VGAC LLC, a wholly-owned subsidiary of Vivendi, and Vivendi Games, Inc. (“Vivendi Games”), a wholly-owned subsidiary of VGAC LLC. As a result of the consummation of the Business Combination, Activision, Inc. was renamed Activision Blizzard, Inc. and Vivendi became a majority shareholder of Activision Blizzard.
On October 11, 2013, we repurchased approximately 429 million shares of our common stock, pursuant to a stock purchase agreement (the “Stock Purchase Agreement”) we entered into with Vivendi and ASAC II LP (“ASAC”), an exempted limited partnership established under the laws of the Cayman Islands, acting by its general partner, ASAC II LLC. Pursuant to the terms of the Stock Purchase Agreement, we acquired all of the capital stock of Amber Holding Subsidiary Co., a Delaware corporation and wholly-owned subsidiary of Vivendi (“New VH”), which was the direct owner of approximately 429 million shares of our common stock, for a cash payment of $5.83 billion, or $13.60 per share, before taking into account the benefit to the Company of certain tax attributes of New VH assumed in the transaction (collectively, the “Purchase Transaction”). Immediately following the completion of the Purchase Transaction, ASAC purchased from Vivendi 172 million shares of our common stock, pursuant to the Stock Purchase Agreement, for a cash payment of $2.34 billion, or $13.60 per share (the “Private Sale”). Robert A. Kotick, our Chief Executive Officer, and Brian G. Kelly, Chairman of our Board of Directors, are affiliates of ASAC II LLC. Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements for information regarding the financing of the Purchase Transaction.
On May 28, 2014, Vivendi sold approximately 41 million shares, or approximately 50% of its then-current holdings, of our common stock in a registered public offering. Vivendi received proceeds of approximately $850 million from that sale; the Company did not receive any proceeds.
As of September 30, 2015, we had approximately 731 million shares of common stock issued and outstanding. At that date: (i) Vivendi held 41 million shares, or approximately 6% of the outstanding shares of our common stock; (ii) ASAC held 172 million shares, or approximately 24% of the outstanding shares of our common stock; and (iii) our other stockholders held approximately 70% of the outstanding shares of our common stock. The common stock of Activision Blizzard is traded on The NASDAQ Stock Market under the ticker symbol “ATVI.”
Consolidated Statements of Operations Data
The following table sets forth consolidated statements of operations data for the periods indicated in dollars and as a percentage of total net revenues (amounts in millions):
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||||
|
| 2015 |
| 2014 |
| 2015 |
| 2014 |
| ||||||||||||
Net revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Product sales |
| $ | 425 |
| 43% |
| $ | 337 |
| 45% |
| $ | 1,736 |
| 52% |
| $ | 1,693 |
| 60% |
|
Subscription, licensing and other revenues |
| 565 |
| 57 |
| 416 |
| 55 |
| 1,576 |
| 48 |
| 1,140 |
| 40 |
| ||||
Total net revenues |
| 990 |
| 100 |
| 753 |
| 100 |
| 3,312 |
| 100 |
| 2,833 |
| 100 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Costs and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Cost of sales - product costs |
| 195 |
| 20 |
| 156 |
| 21 |
| 560 |
| 17 |
| 568 |
| 20 |
| ||||
Cost of sales - online |
| 56 |
| 6 |
| 56 |
| 7 |
| 161 |
| 5 |
| 170 |
| 6 |
| ||||
Cost of sales - software royalties and amortization |
| 81 |
| 8 |
| 34 |
| 5 |
| 314 |
| 10 |
| 136 |
| 5 |
| ||||
Cost of sales - intellectual property licenses |
| 5 |
| — |
| 7 |
| 1 |
| 12 |
| — |
| 20 |
| 1 |
| ||||
Product development |
| 159 |
| 16 |
| 131 |
| 17 |
| 453 |
| 14 |
| 387 |
| 14 |
| ||||
Sales and marketing |
| 189 |
| 19 |
| 221 |
| 29 |
| 445 |
| 13 |
| 465 |
| 16 |
| ||||
General and administrative |
| 109 |
| 11 |
| 140 |
| 19 |
| 297 |
| 9 |
| 342 |
| 12 |
| ||||
Total costs and expenses |
| 794 |
| 80 |
| 745 |
| 99 |
| 2,242 |
| 68 |
| 2,088 |
| 74 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Operating income |
| 196 |
| 20 |
| 8 |
| 1 |
| 1,070 |
| 32 |
| 745 |
| 26 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Interest and other expense, net |
| 51 |
| 5 |
| 51 |
| 7 |
| 151 |
| 4 |
| 152 |
| 5 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income (loss) before income tax expense (benefit) |
| 145 |
| 15 |
| (43) |
| (6) |
| 919 |
| 28 |
| 593 |
| 21 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Income tax expense (benefit) |
| 18 |
| 2 |
| (20) |
| (3) |
| 186 |
| 6 |
| 119 |
| 4 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income (loss) |
| $ | 127 |
| 13% |
| $ | (23) |
| (3)% |
| $ | 733 |
| 22% |
| $ | 474 |
| 17% |
|
|
| For the Three Months Ended March 31, |
| ||||||||
|
| 2016 |
| 2015 |
| ||||||
Net revenues |
|
|
|
|
|
|
|
|
| ||
Product sales |
| $ | 645 |
| 44% |
| $ | 784 |
| 61% |
|
Subscription, licensing and other revenues |
| 810 |
| 56 |
| 494 |
| 39 |
| ||
Total net revenues |
| 1,455 |
| 100 |
| 1,278 |
| 100 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Costs and expenses: |
|
|
|
|
|
|
|
|
| ||
Cost of sales - product costs |
| 247 |
| 17 |
| 209 |
| 16 |
| ||
Cost of sales - online |
| 64 |
| 4 |
| 53 |
| 4 |
| ||
Cost of sales - software royalties and amortization |
| 144 |
| 10 |
| 148 |
| 12 |
| ||
Cost of sales - intellectual property licenses |
| 36 |
| 2 |
| 3 |
| — |
| ||
Product development |
| 175 |
| 12 |
| 145 |
| 11 |
| ||
Sales and marketing |
| 168 |
| 12 |
| 92 |
| 7 |
| ||
General and administrative |
| 160 |
| 11 |
| 86 |
| 7 |
| ||
Total costs and expenses |
| 994 |
| 68 |
| 736 |
| 57 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Operating income |
| 461 |
| 32 |
| 542 |
| 43 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Interest and other expense (income), net |
| 52 |
| 4 |
| 50 |
| 4 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Income before income tax expense |
| 409 |
| 28 |
| 492 |
| 39 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Income tax expense |
| 73 |
| 5 |
| 98 |
| 8 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Net income |
| $ | 336 |
| 23% |
| $ | 394 |
| 31% |
|
Operating Segment Results
Our operating segments are consistent with our internal organizational structure, the manner in which our operations are reviewed and managed by our Chief Executive Officer, who is our Chief Operating Decision Maker (“CODM”), the manner in which we assess operating performance and allocate resources, and the availability of separate financial information. We do not aggregate operating segments.
The CODM reviews segment performance exclusive of the impact of the change in deferred revenues and related cost of sales with respect to certain of our online-enabled games, stock-based compensation expense, amortization of intangible assets as a result of purchase price accounting, and fees and other expenses (including legal fees, costs, expenses and accruals) related to the Purchase Transactionfinancings and related debt financings.acquisitions. The CODM does not review any information regarding total assets on an operating segment basis, and accordingly, no disclosure is made with respect thereto. Information on the operating segments and reconciliations of total segment net revenues and total segment operating income to consolidated net revenues from external customers and consolidated income before income tax expense for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 are presented in the table below (amounts in millions):
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| 2015 |
| 2014 |
| Increase / |
| 2015 |
| 2014 |
| Increase / |
|
| For the Three Months Ended March 31, |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| Increase / |
| |||||||||
Segment net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Activision |
| $ | 591 |
| $ | 704 |
| $ | (113) |
| $ | 1,208 |
| $ | 1,193 |
| $ | 15 |
|
| $ | 360 |
| $ | 303 |
| $ | 57 |
|
Blizzard |
| 369 |
| 388 |
| (19) |
| 1,106 |
| 1,189 |
| (83) |
|
| 294 |
| 352 |
| (58) |
| |||||||||
Distribution |
| 80 |
| 78 |
| 2 |
| 189 |
| 218 |
| (29) |
| ||||||||||||||||
Operating segment net revenues total |
| 1,040 |
| 1,170 |
| (130) |
| 2,503 |
| 2,600 |
| (97) |
| ||||||||||||||||
King |
| 207 |
| — |
| 207 |
| ||||||||||||||||||||||
Other (1) |
| 47 |
| 48 |
| (1) |
| ||||||||||||||||||||||
Segments net revenues total |
| 908 |
| 703 |
| 205 |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Reconciliation to consolidated net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Net effect from deferral of net revenues |
| (50) |
| (417) |
|
|
| 809 |
| 233 |
|
|
|
| 547 |
| 575 |
|
|
| |||||||||
Consolidated net revenues |
| $ | 990 |
| $ | 753 |
|
|
| $ | 3,312 |
| $ | 2,833 |
|
|
|
| $ | 1,455 |
| $ | 1,278 |
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Segment income (loss) from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Segments income (loss) from operations: |
|
|
|
|
|
|
| ||||||||||||||||||||||
Activision |
| $ | 122 |
| $ | 95 |
| $ | 27 |
| $ | 244 |
| $ | 66 |
| $ | 178 |
|
| $ | 99 |
| $ | 66 |
| $ | 33 |
|
Blizzard |
| 128 |
| 164 |
| (36) |
| 383 |
| 548 |
| (165) |
|
| 86 |
| 139 |
| (53) |
| |||||||||
Distribution |
| 1 |
| 1 |
| — |
| — |
| (1) |
| 1 |
| ||||||||||||||||
Operating segment income from operations total |
| 251 |
| 260 |
| (9) |
| 627 |
| 613 |
| 14 |
| ||||||||||||||||
King |
| 67 |
| — |
| 67 |
| ||||||||||||||||||||||
Other (1) |
| — |
| (1) |
| 1 |
| ||||||||||||||||||||||
Segments income from operations total |
| 252 |
| 204 |
| 48 |
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Reconciliation to consolidated operating income (loss) before consolidated income tax expense (benefit): |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Reconciliation to consolidated operating income before consolidated income tax expense: |
|
|
|
|
|
|
| ||||||||||||||||||||||
Net effect from deferral of net revenues and related cost of sales |
| (26) |
| (180) |
|
|
| 517 |
| 260 |
|
|
|
| 369 |
| 362 |
|
|
| |||||||||
Stock-based compensation expense |
| (28) |
| (22) |
|
|
| (70) |
| (76) |
|
|
|
| (44) |
| (23) |
|
|
| |||||||||
Amortization of intangible assets |
| (1) |
| (2) |
|
|
| (4) |
| (4) |
|
|
|
| (82) |
| (1) |
|
|
| |||||||||
Fees and other expenses related to the Purchase Transaction and related debt financings |
| — |
| (48) |
|
|
| — |
| (48) |
|
|
| ||||||||||||||||
Fees and other expenses related to acquisitions (2) |
| (34) |
| — |
|
|
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Consolidated operating income |
| 196 |
| 8 |
|
|
| 1,070 |
| 745 |
|
|
|
| 461 |
| 542 |
|
|
| |||||||||
Interest and other expense, net |
| 51 |
| 51 |
|
|
| 151 |
| 152 |
|
|
| ||||||||||||||||
Interest and other expense (income), net |
| 52 |
| 50 |
|
|
| ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Consolidated income (loss) before income tax expense (benefit) |
| $ | 145 |
| $ | (43) |
|
|
| $ | 919 |
| $ | 593 |
|
|
| ||||||||||||
Consolidated income before income tax expense |
| $ | 409 |
| $ | 492 |
|
|
|
(1) Other includes other income and expenses from operating segments managed outside the reportable segments, including our Media Networks, Studios, and Distribution businesses. Other also includes unallocated corporate income and expenses.
(2) Reflects fees and other expenses related to the King Acquisition, inclusive of related debt financings.
Segment Net Revenues
Activision
Activision’s net revenues decreasedincreased for the three months ended September 30, 2015,March 31, 2016, as compared to 2014,2015, primarily due to revenues from the release of Destiny in September 2014 with no comparable release in the current quarter. The decrease was partially offset by revenues from the release of The Taken King, an expansion pack to Destiny,higher revenues from Skylanders Superchargers, which was released in the current quarter while Skylanders Trap TeamCall of Duty: Black Ops III, the comparable prior year title,which was released in the fourth quarter of 2014, and revenues from Call of Duty: Advanced Warfare’s new digital content known as “supply drops,” introduced in March 2015, which provide additional content such as customized weapons and character gear.
Activision’s net revenues increased for the nine months ended September 30, 2015, as compared to 2014, primarily due to higher revenues from the Call of Duty franchise, specifically from Call of Duty: Advanced Warfare and its digital content, including expansion packs and supply drops, as compared to Call of Duty: Ghosts in the prior year, and revenues from Skylanders Superchargers, which was released in the current quarter while Skylanders Trap TeamAdvanced Warfare, the comparable prior year title,which was released in the fourth quarter of 2014. These increases wereThe increase was partially offset by lower revenues from the Destiny franchise, driven by prior year revenues from the release of Destiny in September 2014 with no comparable release in the current year, and lower revenues from titles based on licensed intellectual property, as compared to releases during the nine months ended September 30, 2014, including The Amazing Spider-ManSkylanders franchise.TM 2 and TransformersTM: Rise of the Dark Spark, with no corresponding releases during the nine months ended September 30,2015.
Blizzard
Blizzard’s net revenues decreased for the three months ended September 30, 2015,March 31, 2016, as compared to 2014,2015, primarily due to lower revenues from the Diablo franchise in the current quarter World of Warcraft due to the release of Diablo III: Reaper of Souls on console in the prior year quarter with no comparable release in the current quartera smaller subscriber base and lower revenues from WorldHeroes of Warcraftthe Storm due to a smaller subscriber base.the prior year including revenues from the release of the Founders’ Pack. These decreases were partially offset by higher revenuesincreased revenue from Hearthstone: Heroes of Warcraftand the release of which was benefited by its latest expansion, The Grand Tournament, and revenues from Heroes of the Storm. In addition to already having been released on PC, iPad, and Android tablets in the prior year, Hearthstone: Heroes of Warcraft was releasedrelease on iPhone and Android smartphones in April 2015, which contributed to the current period revenue increase.
Blizzard’s net revenues decreased for the nine months ended September 30, 2015, as compared to 2014, primarily due to revenues included in the nine months ended September 30, 2014 from Diablo III: Reaper of Souls and Diablo III: Reaper of Souls - Ultimate Evil EditionTM, which were released in March 2014 on PC and in August 2014 on console, respectively, and lower revenues from World of Warcraft due to a smaller subscriber base. The decreases were partially offset by higher revenues during the nine months ended September 30, 2015 from Hearthstone: Heroes of Warcraft and revenues from Heroes of the Storm.
At September 30, 2015, the global subscriber* base for World of Warcraft was approximately 5.5 million subscribers, compared to approximately 5.6 million subscribers at June 30, 2015, and approximately 7.4 million subscribers at September 30, 2014. There were no material shifts in the East vs. West subscriber mix in the current quarter, with general stability throughout World of Warcraft’s global subscriber base. Going forward, Blizzard expects to continue delivering new game content in all regions that is intended to further appeal to the gaming community, however there could be further volatility in the subscriber numbers.2015.
DistributionKing
Distribution’sKing’s net revenues remained flat forrepresent the three months ended September 30, 2015, as compared to the comparable period in 2014.
Distribution’s net revenues decreased for the nine months ended September 30, 2015, as compared to the comparable period in 2014, primarily due to a decline in revenues from the distributionKing Closing Date through March 31, 2016. The revenues were primarily driven by the Candy Crush franchise, which included the release of next-generation hardware, which was introduced Candy Crush Jelly Saga in the fourth quarter of 2013.January 2016.
Segment Income from Operations
Activision
Activision’s operating income increased for the three and nine months ended September 30, 2015,March 31, 2016, as compared to 2014,2015, primarily due to higher revenues and an increased percentage of revenues coming from online digital channels, which typically have higher margins, the timing of the release of Skylanders Superchargers on September 20, 2015, as previously described, and lower overall sales and marketing spend on titles released.margins. This is partially offset by higher product development spending from increased sales and marketing spending for the Guitar Hero release, with no comparable spending in the prior year.bonuses to studio personnel.
Blizzard
Blizzard’s operating income decreased for the three months ended September 30, 2015,March 31, 2016, as compared to 2014,2015, primarily due to lower revenues and lower capitalized software development costs.
Blizzard’s operating income decreased for the nine months ended September 30, 2015, primarily due toas well as higher spending on sales and marketing spending for its releases, including Hearthstone: Heroes of Warcraft activity to support current and the release of its latest expansion, The Grand Tournament, and Heroes of the Storm;upcoming releases. These were partially offset by lower product development costs due to capitalization of software development costs; and higher amortizationcosts associated with the timing of capitalized software costs.title releases.
King
King’s operating income represents the operating income from the King Closing Date through March 31, 2016.
Foreign Exchange Impact
Changes in foreign exchange rates had a negative impact of $85 million and $239$14 million on Activision Blizzard’s segment net revenues for the three and nine months ended September 30, 2015, respectively,March 31, 2016, as compared to the same periods in the previous year. The changes are primarily due to changes in the value of the United States (“U.S.”) dollar relative to the euro and British pound.
* World of Warcraft subscribers include individuals who have paid a subscription fee or have an active prepaid card to play World of Warcraft, as well as those who have purchased the game and are within their free month of access. Internet Game Room players who have accessed the game over the last thirty days are also counted as subscribers. The above definition excludes all players under free promotional subscriptions, expired or canceled subscriptions, and expired prepaid cards. Subscribers in licensees’ territories are defined along the same rules.
Non-GAAP Financial Measures
The analysis of revenues by distribution channel is presented both on a GAAP (including the impact from the change in deferred revenues) and non-GAAP (excluding the impact from the change in deferred revenues) basis. We use this non-GAAP measure internally when evaluating our operating performance,performance; when planning, forecasting, and analyzing future periods,periods; and when assessing the performance of our management team. We believe this is appropriate because this non-GAAP measure enables an analysis of performance based on the timing of actual transactions with our customers, which is consistent with the way the Company is measured by investment analysts and industry data sources, and facilitates comparison of operating performance between periods. In addition, excluding the impact from the change in deferred net revenues provides a much more timely indication of trends in our sales and other operating results. While we believe that this non-GAAP measure is useful in evaluating our business, this information should be considered as supplemental in nature and is not meant to be considered in isolation from, as a substitute for, or as more important than, the related financial information prepared in accordance with GAAP. In addition, this non-GAAP financial measure may not be the same as any non-GAAP measure presented by another company. This non-GAAP financial measure has limitations in that it does not reflect all of the items associated with our GAAP revenues. We compensate for the limitations resulting from the exclusion of the change in deferred revenues by considering the impact of that item separately and by considering our GAAP, as well as non-GAAP, revenues.
The following table provides reconciliation between GAAP and non-GAAP net revenues by distribution channel for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 (amounts in millions):
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
|
| For the Three Months Ended March 31, |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
|
| 2015 |
| 2014 |
| Increase / |
| 2015 |
| 2014 |
| Increase / |
|
| 2016 |
| 2015 |
| Increase / (decrease) |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
GAAP net revenues by distribution channel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Digital online channels (1) |
| $ | 926 |
| $ | 581 |
| $ | 345 |
| |||||||||||||||||||
Retail channels |
| $ | 281 |
| $ | 171 |
| $ | 110 |
| $ | 1,344 |
| $ | 1,257 |
| $ | 87 |
|
| 482 |
| 649 |
| (167) |
| |||
Digital online channels (1) |
| 629 |
| 504 |
| 125 |
| 1,779 |
| 1,358 |
| 421 |
| ||||||||||||||||
Total Activision and Blizzard |
| 910 |
| 675 |
| 235 |
| 3,123 |
| 2,615 |
| 508 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Distribution |
| 80 |
| 78 |
| 2 |
| 189 |
| 218 |
| (29) |
| ||||||||||||||||
Other (2) |
| 47 |
| 48 |
| (1) |
| ||||||||||||||||||||||
Total consolidated GAAP net revenues |
| 990 |
| 753 |
| 237 |
| 3,312 |
| 2,833 |
| 479 |
|
| 1,455 |
| 1,278 |
| 177 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Change in deferred net revenues (2) |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Change in deferred net revenues (3) |
|
|
|
|
|
|
| ||||||||||||||||||||||
Digital online channels (1) |
| (129) |
| (43) |
| (86) |
| ||||||||||||||||||||||
Retail channels |
| (18) |
| 416 |
| (434) |
| (876) |
| (388) |
| (488) |
|
| (418) |
| (532) |
| 114 |
| |||||||||
Digital online channels (1) |
| 68 |
| 1 |
| 67 |
| 67 |
| 155 |
| (88) |
| ||||||||||||||||
Total changes in deferred net revenues |
| 50 |
| 417 |
| (367) |
| (809) |
| (233) |
| (576) |
|
| (547) |
| (575) |
| 28 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Non-GAAP net revenues by distribution channel |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Digital online channels (1) |
| 797 |
| 538 |
| 259 |
| ||||||||||||||||||||||
Retail channels |
| 263 |
| 587 |
| (324) |
| 468 |
| 869 |
| (401) |
|
| 64 |
| 117 |
| (53) |
| |||||||||
Digital online channels (1) |
| 697 |
| 505 |
| 192 |
| 1,846 |
| 1,513 |
| 333 |
| ||||||||||||||||
Total Activision and Blizzard |
| 960 |
| 1,092 |
| (132) |
| 2,314 |
| 2,382 |
| (68) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Distribution |
| 80 |
| 78 |
| 2 |
| 189 |
| 218 |
| (29) |
| ||||||||||||||||
Total non-GAAP net revenues (3) |
| $ | 1,040 |
| $ | 1,170 |
| $ | (130) |
| $ | 2,503 |
| $ | 2,600 |
| $ | (97) |
| ||||||||||
Other (2) |
| 47 |
| 48 |
| (1) |
| ||||||||||||||||||||||
Total non-GAAP net revenues (4) |
| $ | 908 |
| $ | 703 |
| $ | 205 |
|
(1) We define revenues from digital online channels as revenues from digitally distributeddigitally-distributed subscriptions, licensing royalties, value-added services, downloadable content, micro-transactions, and products.
(2) Net revenues from Other include revenues from our Media Networks, Studios, and Distribution businesses.
(3) We have determined that some of our titles’ online functionality represents an essential component of gameplay and as a result, represents a more-than-inconsequentialmore-than inconsequential separate deliverable. As such, we recognize revenues attributed to these titles over the estimated service periods, which range from five months toare generally less than one year. In the table above, we present the amount of net revenues for each period as a result of this accounting treatment.
(3)(4) Total non-GAAP net revenues presented also represents our total operating segment net revenues.
Retail Channel Net Revenues
The increase in GAAP net revenues from retail channels for the three months ended September 30, 2015, as compared to 2014, was primarily due to revenues from Skylanders Superchargers, which was released in the current quarter, while Skylanders Trap Team, the comparable prior year title, was released in the fourth quarter of 2014, and higher revenues recognized from the Call of Duty franchise. This was partially offset by lower revenues recognized from Diablo III: Reaper of Souls and Diablo III: Reaper of Souls - Ultimate Evil Edition, which were released in March 2014 on PC and in August 2014 on console, respectively.
The increase in GAAP net revenues from retail channels for the nine months ended September 30, 2015, as compared to 2014, was primarily due to revenues from Skylanders Superchargers, which was released in the current quarter, while Skylanders Trap Team, the comparable prior year title, was released in the fourth quarter of 2014, revenues recognized from Destiny and its associated expansion packs, and revenues recognized from the World of Warcraft franchise, primarily associated with the release of World of Warcraft: Warlords of DraenorTMin November 2014. These were partially offset by lower revenues recognized from the Call of Duty franchise, lower revenues recognized from the Diablo franchise due to the timing of title releases, and lower revenues from The Amazing Spider-Man 2, which was released during the nine months ended September 30, 2014, with no comparable releases in the nine months ended September 30, 2015.
The decrease in non-GAAP net revenues from retail channels for the three months ended September 30, 2015, as compared to 2014, was primarily due to lower revenues from Destiny, which launched in September 2014, and from the Diablo franchise due to the timing of title releases. This was partially offset by revenues from Skylanders Superchargers, which released in the current quarter while Skylanders Trap Team, the comparable prior year title, was released in the fourth quarter of 2014 and revenues from the release of The Taken King, an expansion pack to Destiny.
The decrease in non-GAAP net revenues from retail channels for the nine months ended September 30, 2015, as compared to 2014, was primarily due to revenues from titles released during the nine months ended September 30, 2014 with no corresponding release in the current period, including Destiny, which was released in September 2014, Diablo III: Reaper of Souls and Diablo III: Reaper of Souls - Ultimate Evil Edition which were released in 2014, and from titles based on licensed intellectual property, including The Amazing Spider-Man 2 and Transformers: Rise of the Dark Spark. These decreases were partially offset by revenues from Skylanders Superchargers, which was released in the current quarter, while Skylanders Trap Team, the comparable prior year title, was released in the fourth quarter of 2014, revenues from the release of The Taken King, an expansion pack to Destiny, and higher revenues from the Call of Duty franchise.
Digital Online Channel Net Revenues
The increase in GAAP net revenues from digital online channels for the three and nine months ended September 30, 2015,March 31, 2016, as compared to 2014,2015, was primarily due to: new revenues from King titles following the King Closing Date, primarily driven by the Candy Crush franchise; higher revenues recognized from Hearthstone: Heroes of Warcraft; higher revenues recognized from Destiny and its associated expansion packs; higher revenues recognized fromCall of Duty: Advanced WarfareBlack Ops III, which was released in the fourth quarter of 2015, and its digital content, released during the three months ended September 30, 2015, as compared to Call of Duty: Ghosts and its digital content released during the prior period, including revenues recognized from Call of Duty: Advanced Warfare’sWarfare new digital content known as “supply drops;” and revenues recognized from Heroes of the Storm , which was released on June 2, 2015 with no comparable release duringin the prior periods. Additionally, for the nine months ended September 30, 2015, as compared to 2014, the increase was due tofourth quarter of 2014; and higher revenues recognized from the WorldDestiny franchise due to the strong digital performance of Warcraft franchise, primarily associated withDestiny: The Taken King, which was released in September 2015, and in-game microtransaction purchases which were debuted in Destiny in the releasefourth quarter of World of Warcraft: Warlords of Draenor in November 2014. These increases were2015. The increase was partially offset by lower revenues recognized from the Diablo franchise World of Warcraft due to the timing of title releases.a smaller subscriber base.
The increase in non-GAAP net revenues from digital online channels for the three and nine months ended September 30, 2015,March 31, 2016, as compared to 2014,2015, was primarily due to:to new revenues from Destiny King titles following the King Closing Date, and its associated expansion packs, including The Taken King which was released in September 2014;higher revenues from Hearthstone: Heroes of Warcraft; higher revenues fromCall of Duty: Advanced WarfareBlack Ops III and its digital content, released during the three and nine months ended September 30, 2015, as compared to Call of Duty: Ghosts and its digital content released during the same period in 2014, including revenues from Call of Duty: Advanced Warfare’s Warfarenew digital “supply drops;” and revenues from Heroes of the Storm which. The increase was released on June 2, 2015 with no comparable release during the prior periods. These were partially offset by lower revenues from World of Warcraft, primarily due to a decline in thesmaller subscriber base and lower revenues from Heroes of the Storm due to the prior year including revenues from the release of the Founders’ Pack.
Retail Channel Net Revenues
The decrease in GAAP net revenues from retail channels for the three months ended March 31, 2016, as compared to 2015, was primarily due to lower revenues recognized from the DiabloDestiny franchise as Destiny debuted in the third quarter of 2014, with no comparable full-game release in 2015, and lower revenues from the Skylanders franchise. This was partially offset by higher revenues recognized from Call of Duty: Black Ops III, which was released in the fourth quarter of 2015, as compared to Call of Duty: Advanced Warfare, which was released in the fourth quarter of 2014.
The decrease in non-GAAP net revenues from retail channels for the three months ended March 31, 2016, as compared to 2015, was primarily due to lower revenues from the timingSkylanders franchise. This was partially offset by higher revenues from Call of title releases.Duty: Black Ops III as compared to Call of Duty: Advanced Warfare.
Consolidated Results
Net Revenues by Geographic Region
The following table details our consolidated net revenues by geographic region for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 (amounts in millions):
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
|
| For the Three Months Ended March 31, |
| |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
| 2015 |
| 2014 |
| Increase / |
| 2015 |
| 2014 |
| Increase / |
|
| 2016 |
| 2015 |
| Increase / |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Geographic region net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
North America |
| $ | 495 |
| $ | 350 |
| $ | 145 |
| $ | 1,750 |
| $ | 1,384 |
| $ | 366 |
| ||||||||||
Americas |
| $ | 753 |
| $ | 704 |
| $ | 49 |
| |||||||||||||||||||
Europe |
| 367 |
| 316 |
| 51 |
| 1,219 |
| 1,172 |
| 47 |
|
| 521 |
| 464 |
| 57 |
| |||||||||
Asia Pacific |
| 128 |
| 87 |
| 41 |
| 343 |
| 277 |
| 66 |
|
| 181 |
| 110 |
| 71 |
| |||||||||
Consolidated net revenues |
| $ | 990 |
| $ | 753 |
| $ | 237 |
| $ | 3,312 |
| $ | 2,833 |
| $ | 479 |
|
| $ | 1,455 |
| $ | 1,278 |
| $ | 177 |
|
The increase/(decrease) in deferred revenues recognized by geographic region for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 was as follows (amounts in millions):
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| 2015 |
| 2014 |
| Increase / |
| 2015 |
| 2014 |
| Increase / |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Increase/(decrease) in deferred revenues recognized by geographic region: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
North America |
| $ | (45) |
| $ | (274) |
| $ | 229 |
| $ | 502 |
| $ | 136 |
| $ | 366 |
|
Europe |
| (11) |
| (135) |
| 124 |
| 298 |
| 102 |
| 196 |
| ||||||
Asia Pacific |
| 6 |
| (8) |
| 14 |
| 9 |
| (5) |
| 14 |
| ||||||
Total impact on consolidated net revenues |
| (50) |
| (417) |
| 367 |
| 809 |
| 233 |
| 576 |
| ||||||
North America
|
| For the Three Months Ended March 31, |
| |||||||
|
|
|
| |||||||
|
| 2016 |
| 2015 |
| Increase / |
| |||
|
|
|
|
|
|
|
| |||
Increase/(decrease) in deferred revenues recognized by geographic region: |
|
|
|
|
|
|
| |||
Americas |
| $ | 293 |
| $ | 350 |
| $ | (57) |
|
Europe |
| 194 |
| 196 |
| (2) |
| |||
Asia Pacific |
| 60 |
| 29 |
| 31 |
| |||
Total impact on consolidated net revenues |
| 547 |
| 575 |
| (28) |
| |||
NetIn all regions, net revenues increased in North America for the three and nine months ended September 30, 2015,March 31, 2016, as compared to 2014.2015. This was mainlyprimarily due toto: new revenues from King titles following the King Closing Date, with the revenues primarily driven by the Candy Crush franchise; higher revenues recognized from Destiny and its expansion packs, revenues from Skylanders Superchargers, which was released in the current quarter, while Skylanders Trap TeamCall of Duty: Black Ops III, the comparable prior year title,which was released in the fourth quarter of 2014, revenues recognized from Hearthstone: Heroes of Warcraft 2015, and its associated expansions and adventures, and revenues recognized from the World of Warcraft franchise, primarily associated with World of Warcraft: Warlords of Draenor and value-added services. Additionally, for the three months ended September 30, 2015, the increase was due to higher revenues recognized from the Call of Duty franchise. These increases were partially offset by lower revenues recognized from the Diablo franchise due to the timing of title releases and lower revenues from The Amazing Spider-Man 2, which was released in 2014, with no comparable releases in the current periods.
The increase in deferred revenues recognized for the three and nine months ended September 30, 2015,digital content, as compared to 2014, was primarily attributed to recognition of deferred revenues from Destiny, from World of Warcraft, primarily associated with World of Warcraft: Warlords of Draenor and value-added services, and from the Diablo franchise. For the nine months ended September 30, 2015, these increases were partially offset by lower deferred revenues recognized from the Call of Duty franchise.
Europe
Net revenues increased in Europe for the three months ended September 30, 2015, as compared to 2014. The increase was mainly due to revenues from Skylanders Superchargers, which was released in the current quarter, while Skylanders Trap TeamDuty: Advanced Warfare, the comparable prior year title,which was released in the fourth quarter of 2014. This increase was partially offset by lower revenues recognized from the Diablo franchise.
Net revenues increased in Europe for the nine months ended September 30, 2015, as compared to 2014. The increase was mainly due to higher revenues recognized from Destiny2014; and its expansion packs, revenues from Skylanders Superchargers, which was released in the current quarter, while Skylanders Trap Team, the comparable prior year title, was released in the fourth quarter of 2014, higher revenues recognized from Hearthstone: Heroes of Warcraftand its associated expansions and adventures, and from the launch of Heroes of the Storm in 2015.. These increases were partially offset byby: lower revenues recognized from the Destiny franchise as Destiny debuted in September 2014 and had no comparable full-game release in 2015; lower revenues recognized from World of Warcraft due to a smaller subscriber base and the release of World of Warcraft: Warlords of Draenor® in November 2014 with no comparable release in 2015; lower revenues from the Skylanders franchise; and lower revenues recognized from the Diablo III franchise Calldue to the timing of Duty franchise, and from the Distribution segment.title releases.
The increaseIn Americas and Europe, the decrease in deferred revenues recognized for the three and nine months ended September 30, 2015,March 31, 2016, as compared to 2014,2015, was primarily attributed to recognition oflower deferred revenues recognized from the Destiny franchise due to the timing of the full game release and lower deferred revenues recognized from World of Warcraft, primarily associated with World of Warcraft: Warlords of Draenor and value-added services. For the nine months ended September 30, 2015, these increases wereThis was partially offset by lowerincreased deferred revenues recognized from the Call of Duty franchise.
Asia Pacific
Net revenues increased in Asia Pacific for the three and nine months ended September 30, 2015, as compared to 2014. The increase was mainly due to revenues recognized from Hearthstone: Heroes of Warcraftand its associated expansions and adventures. Additionally, for the nine months ended September 30, 2015, the increase was due to revenues recognized from Destiny and its expansion packs..
DeferredIn Asia Pacific, the increase in deferred revenues recognized increased for the three and nine months ended September 30, 2015,March 31, 2016, as compared to 2014,2015, was primarily dueattributed to increased deferred revenues recognized from Destiny and its expansion packs. This increase was partially offset by decreased deferred revenues recognized from Hearthstone: Heroes of Warcraft.
Foreign Exchange Impact
Changes in foreign exchange rates had a negative impact of $85 million and $295$21 million on our consolidated net revenues for the three and nine months ended September 30, 2015, respectively,March 31, 2016, as compared to the same periodsperiod in the previous year. The changes are primarily due to changes in the value of the U.S. dollar relative to the euro and British pound.
Net Revenues by Platform
The following tables detail our net revenues by platform and as a percentage of total consolidated net revenues for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 (amounts in millions):
|
| Three Months |
| % of total |
| Three Months |
| % of total |
| Increase/ |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Platform net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Online (1) |
| $ | 195 |
| 20 | % |
| $ | 205 |
| 27 | % |
| $ | (10) |
|
PC |
| 164 |
| 17 |
|
| 165 |
| 22 |
|
| (1) |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Next-generation (PS4, Xbox One, Wii U) |
| 245 |
| 25 |
|
| 109 |
| 14 |
|
| 136 |
| |||
Prior-generation (PS3, Xbox 360, Wii) |
| 175 |
| 18 |
|
| 161 |
| 21 |
|
| 14 |
| |||
Total Console |
| 420 |
| 42 |
|
| 270 |
| 36 |
|
| 150 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Mobile and other (2) |
| 131 |
| 13 |
|
| 35 |
| 5 |
|
| 96 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total Activision Blizzard |
| 910 |
| 92 |
|
| 675 |
| 90 |
|
| 235 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Distribution |
| 80 |
| 8 |
|
| 78 |
| 10 |
|
| 2 |
| |||
Total consolidated net revenues |
| $ | 990 |
| 100 | % |
| $ | 753 |
| 100 | % |
| $ | 237 |
|
|
| Three Months |
| % of total |
| Three Months |
| % of total |
| Increase/ |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Platform net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Console |
| $ | 765 |
| 53 | % |
| $ | 758 |
| 59 | % |
| $ | 7 |
|
PC (1) |
| 400 |
| 27 |
|
| 386 |
| 30 |
|
| 14 |
| |||
Mobile and ancillary (2) |
| 243 |
| 17 |
|
| 86 |
| 7 |
|
| 157 |
| |||
Other (3) |
| 47 |
| 3 |
|
| 48 |
| 4 |
|
| (1) |
| |||
Total consolidated net revenues |
| $ | 1,455 |
| 100 | % |
| $ | 1,278 |
| 100 | % |
| $ | 177 |
|
|
| Nine Months |
| % of total |
| Nine Months |
| % of total |
| Increase/ |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
Platform net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Online (1) |
| $ | 687 |
| 21 | % |
| $ | 601 |
| 21 | % |
| $ | 86 |
|
PC |
| 427 |
| 13 |
|
| 447 |
| 16 |
|
| (20) |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Next-generation (PS4, Xbox One, Wii U) |
| 996 |
| 30 |
|
| 353 |
| 12 |
|
| 643 |
| |||
Prior-generation (PS3, Xbox 360, Wii) |
| 741 |
| 22 |
|
| 1,049 |
| 37 |
|
| (308) |
| |||
Total Console |
| 1,737 |
| 52 |
|
| 1,402 |
| 49 |
|
| 335 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Mobile and other (2) |
| 272 |
| 8 |
|
| 165 |
| 6 |
|
| 107 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Total Activision Blizzard |
| 3,123 |
| 94 |
|
| 2,615 |
| 92 |
|
| 508 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Distribution |
| 189 |
| 6 |
|
| 218 |
| 8 |
|
| (29) |
| |||
Total consolidated net revenues |
| $ | 3,312 |
| 100 | % |
| $ | 2,833 |
| 100 | % |
| $ | 479 |
|
The increase/(decrease) in deferred revenues recognized by platform for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 was as follows (amounts in millions):
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
| 2015 |
| 2014 |
| Increase / |
| 2015 |
| 2014 |
| Increase / |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Increase/(decrease) in deferred revenues recognized by platform: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Online (1) |
| $ | 40 |
| $ | (4) |
| $ | 44 |
| $ | 165 |
| $ | (36) |
| $ | 201 |
|
PC |
| (4) |
| 69 |
| (73) |
| (52) |
| (18) |
| (34) |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Next-generation (PS4, Xbox One, Wii U) |
| (88) |
| (359) |
| 271 |
| 365 |
| (214) |
| 579 |
| ||||||
Prior-generation (PS3, Xbox 360, Wii) |
| 8 |
| (123) |
| 131 |
| 363 |
| 513 |
| (150) |
| ||||||
Total console |
| (80) |
| (482) |
| 402 |
| 728 |
| 299 |
| 429 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Mobile and other (2) |
| (6) |
| — |
| (6) |
| (32) |
| (12) |
| (20) |
| ||||||
Total impact on consolidated net revenues |
| $ | (50) |
| $ | (417) |
| $ | 367 |
| $ | 809 |
| $ | 233 |
| $ | 576 |
|
|
| For the Three Months Ended March 31, |
| |||||||
|
|
|
|
|
|
|
| |||
|
| 2016 |
| 2015 |
| Increase / |
| |||
|
|
|
|
|
|
|
| |||
Increase/(decrease) in deferred revenues recognized by platform: |
|
|
|
|
|
|
| |||
Console |
| $ | 437 |
| $ | 526 |
| $ | (89) |
|
PC (1) |
| 99 |
| 50 |
| 49 |
| |||
Mobile and ancillary (2) |
| 11 |
| (1) |
| 12 |
| |||
Total impact on consolidated net revenues |
| $ | 547 |
| $ | 575 |
| $ | (28) |
|
(1) Revenues from online consists of Net revenues from all World of Warcraft products, including subscriptions, boxed products, expansion packs, licensing royalties, and value-added services.PC includes revenues that were historically shown as “Online.”
(2) Revenues Net revenues from mobile and otherancillary includes revenues from handheld, tablet,mobile, and mobiletablet devices, as well as non-platform specific game-related revenues such as standalone sales of toys and accessories products from our Skylanders franchise and other physical merchandise and accessories.
(3) Net revenues from Other include revenues from our Media Networks, Studios, and Distribution businesses.
(4) The percentages of total are presented as calculated. Therefore the sum of these percentages, as presented, may differ due to the impact of rounding.
Net revenues from onlineconsole remained relatively flat for the three months ended March 31, 2016, as compared to 2015, primarily due to higher revenues recognized from Call of Duty: Black Ops III, which was released in the fourth quarter of 2015, and its digital content, as compared to Call of Duty: Advanced Warfare, which was released in the fourth quarter of 2014, and revenues recognized from Guitar Hero® Live, which was released in the fourth quarter of 2015 with no comparable release in 2014. These increases were offset by lower revenues recognized from the Destiny franchise as Destiny debuted in the third quarter of 2014 with no comparable full-game release in 2015, and lower revenues from the Diablo III franchise due to the timing of title releases.
Net revenues from PC increased for the three months ended March 31, 2016, as compared to 2015, primarily due to higher revenues recognized from Hearthstone: Heroes of Warcraft, revenues recognized from StarCraft II: Legacy of the Void™ which was released in the fourth quarter of 2015, and new revenues from King titles following the King Closing Date. These were partially offset by lower revenues recognized from World of Warcraft due to a smaller subscriber base and the release of World of Warcraft: Warlords of Draenor in the fourth quarter of 2014 with no comparable release in 2015.
Net revenues from mobile and ancillary increased for the three months ended March 31, 2016, as compared to 2015, primarily due to new revenues from King titles following the King Closing Date, primarily driven by the Candy Crush franchise, and higher revenues recognized from the release of Hearthstone: Heroes of Warcraft on iPhone and Android smartphones in April 2015. These were partially offset by lower revenues from the Skylanders franchise.
Deferred revenues recognized from console decreased for the three months ended September 30, 2015,March 31, 2016, as compared to 2014,2015, primarily due to lower World of Warcraft subscriber levels.
Netdeferred revenues recognized from online increased for the nine months ended September 30, 2015, as compared to 2014, primarilyDestiny franchise due to the recognitiontiming of previously deferred revenues from the expansion pack World of Warcraft: Warlords of Draenor, which was released in November 2014,full game release and from associated value-added services including a paid character boost. This was partially offset by lower subscriptions revenues.
Net revenues from PC decreased for the three and nine months ended September 30, 2015, as compared to 2014, primarily due to lower revenues recognized from the Diablo III: ReaperIII franchise due to the timing of Soulstitle releases.
Deferred revenues recognized from PC increased for the three months ended March 31, 2016, as compared to 2015, primarily due to higher deferred revenues recognized from Hearthstone: Heroes of Warcraft, which was released in March 2014. This was partially offset bydeferred revenues recognized from Heroes of the Storm, which had no comparable title release duringlaunched in the prior periods,second quarter of 2015, and deferred revenues recognized from Hearthstone: HeroesStarCraft II: Legacy of Warcraftthe Void, which was first launched on PC in March 2014.
Net revenues from next-generation consoles increased for the three and nine months ended September 30, 2015, as compared to 2014. The increase was primarily attributable to an increase in the number of titles released for the next-generation console platforms, as well as increasing consumer adoption of the PS4 and Xbox One. Since the introduction of the PS4 and Xbox One in the fourth quarter of 2013, we have released the following titles, among others, on next-generation consoles:2015. These were partially offset by lower deferred revenues recognized from CallWorld of Duty: Ghosts and Skylanders SWAP Force™ in the fourth quarter of 2013; The Amazing Spider-Man 2 and Transformers: Rise of the Dark Spark in the second quarter of 2014; Diablo III: Reaper of Souls — Ultimate Evil Edition and Destiny in the third quarter of 2014, and Call of Duty: Advanced Warfare and Skylanders Trap Team in the fourth quarter of 2014. Additionally, in 2015, we have released multiple expansions or map packs for Destiny and Call of Duty: Advanced Warfare on the next-generation consoles and, in September 2015, released Skylanders SuperchargersWarcraft.
NetDeferred revenues recognized from prior-generation consolesmobile and ancillary increased for the three months ended September 30, 2015,March 31, 2016, as compared to 2014,2015, primarily due to revenues from the release of Skylanders Superchargers, while Skylanders Trap Team, the comparable prior year title, was not released until the fourth quarter of 2014. This increase was partially offset by lowerhigher deferred revenues recognized from the Call of Duty franchise and from the transition of players from prior-generation to next-generation platforms.
Net revenues from prior-generation consoles decreased for the nine months ended September 30, 2015, as compared to 2014, primarily due to lower revenues recognized from the Call of Duty and Diablo franchises and from the transition of players from prior-generation to next-generation platforms. These decreases were partially offset by revenues recognized from the Destiny franchise, as well as revenues from the release of Skylanders Superchargers.
Net revenues from mobile and other increased for the three and nine months ended September 30, 2015, as compared to 2014, primarily due to toy sales with the release of Skylanders Superchargers in September 2015, while Skylanders Trap Team, the comparable title from the prior year, was not released until the fourth quarter of 2014, and an increase in mobile and tablet platform revenues from the release of Hearthstone: Heroes of Warcraft on iPad and Android tablets in April and December 2014, respectively, along with the release of the title on iPhone and Android smartphones in April 2015.
Deferred revenues recognized for online increased for the three and nine months ended September 30, 2015, as compared to 2014, primarily due to the recognition of deferred revenues from World of Warcraft: Warlords of Draenor and from value-added services revenues for World of Warcraft, including paid character boosts.
Deferred revenues recognized for PC decreased for the three months ended September 30, 2015, as compared to 2014, primarily due to the recognition of deferred revenues during the prior period from Diablo III: Reaper of Souls, released in March 2014, and from Hearthstone: Heroes of Warcraft and its associated expansion packs and adventures.
Deferred revenues recognized for PC decreased for the nine months ended September 30, 2015, as compared to 2014, primarily due to deferral of revenues from Heroes of the Storm and from Hearthstone: Heroes of Warcraft. This was partially offset by additional deferrals of revenue from King titles, most notably the recognition of deferred revenues from Diablo III: Reaper of Souls in the prior period following its release in March 2014.Candy Crush franchise.
The increase in deferred revenues recognized for next-generation consoles for the three and nine months ended September 30, 2015, as compared to 2014, was due to the increased number of titles released for next-generation console platforms, as well as increasing consumer adoption of the PS4 and Xbox One, as discussed above.
The increase in deferred revenues recognized for prior-generation consoles for the three months ended September 30, 2015, as compared to 2014, was primarily due to the recognition of deferred revenues on Destiny, which was released in September 2014, without a comparable release in the current period.
The decrease in deferred revenues recognized for prior-generation consoles for the nine months ended September 30, 2015, as compared to 2014, was primarily due to increasing consumer adoption of next-generation console platforms, partially offset by recognition of deferred revenues on Destiny, which was released in September 2014, without a comparable release in the current period.
Costs and Expenses
Cost of Sales
The following tables detail the components of cost of sales in dollars and as a percentage of total consolidated net revenues for the three and nine months ended September 30,March 31, 2016 and 2015 and 2014 (amounts in millions):
|
| Three Months |
| % of |
| Three Months |
| % of |
| Increase |
| Three Months |
| % of |
| Three Months |
| % of |
| Increase |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Product costs |
| $ | 195 |
| 20% |
| $ | 156 |
| 21% |
| $ | 39 |
| $ | 247 |
| 17% |
| $ | 209 |
| 16% |
| $ | 38 |
|
Online |
| 56 |
| 6 |
| 56 |
| 7 |
| — |
| 64 |
| 4 |
| 53 |
| 4 |
| 11 |
| ||||||
Software royalties and amortization |
| 81 |
| 8 |
| 34 |
| 5 |
| 47 |
| 144 |
| 10 |
| 148 |
| 12 |
| (4) |
| ||||||
Intellectual property licenses |
| 5 |
| — |
| 7 |
| 1 |
| (2) |
| 36 |
| 2 |
| 3 |
| — |
| 33 |
| ||||||
Total cost of sales |
| $ | 337 |
| 34% |
| $ | 253 |
| 34% |
| $ | 84 |
| $ | 491 |
| 33% |
| $ | 413 |
| 32% |
| $ | 78 |
|
Costs of sales — product costs includes the cost of goods produced and sold during the reporting period along with platform provider fees. Cost of sales — online includes costs to operate our games, such as customer service, internet bandwidth fees, and our payment provider fees. Cost of sales — software royalties and amortization includes the amortization of capitalized software costs and royalties. Cost of sales — intellectual property licenses includes the costs and amortization associated with intellectual property licenses expensed over the expected benefit period.
|
| Nine Months |
| % of |
| Nine Months |
| % of |
| Increase | |||
|
|
|
|
|
|
|
|
|
|
| |||
Product costs |
| $ | 560 |
| 17% |
| $ | 568 |
| 20% |
| $ | (8) |
Online |
| 161 |
| 5 |
| 170 |
| 6 |
| (9) | |||
Software royalties and amortization |
| 314 |
| 10 |
| 136 |
| 5 |
| 178 | |||
Intellectual property licenses |
| 12 |
| — |
| 20 |
| 1 |
| (8) | |||
Total cost of sales |
| $ | 1,047 |
| 32% |
| $ | 894 |
| 32% |
| $ | 153 |
Total cost of sales for the three months ended September 30, 2015March 31, 2016, increased as compared to the same period in 2014,2015, reflective of the increase in consolidated net revenues. Cost of sales — product costs increased primarily due to higher product sales, primarilythe mobile platform fees associated with the launch ofrevenues from King, along with products costs from Skylanders Superchargers Guitar Hero Live, which had no comparable costs in the current quarter,prior year. These were partially offset by andecreases in product costs due to the relative increase in Activision’s revenues coming from the digital online channel, revenues, which havehas relatively lower product costs. costs, and lower product costs from the Skylanders franchise due to lower franchise revenues.
Cost of sales—software royaltiessales — online increased primarily due to increased expenditures to support our growing online activity across our titles and amortizationthe online costs associated with supporting the revenues from King titles.
Cost of sales — intellectual property licenses increased primarily due to the amortization of capitalized software costs forinternally-developed franchise intangible assets acquired in the release of Skylanders Superchargers, while Skylanders Trap Team, the comparable prior year title, was not released until the fourth quarter of 2014, and software costsKing Acquisition, along with intellectual properly license fees associated with Blizzard product releases.
Totalcontent in Guitar Hero Live, which had no comparable cost of sales forin the nine months ended September 30, 2015 increased as compared to the same period in 2014, reflective of the increase in consolidated net revenues. Cost of sales—software royalties and amortization increased primarily due to the amortization of deferred royalties for Destiny and its expansion packs and amortization of capitalized software associated with the release of Skylanders Superchargers, while Skylanders Trap Team, the comparable prior year title, was not released until the fourth quarter of 2014, and software costs associated with Blizzard product releases.year.
Product Development (amounts in millions)
|
| September 30, |
| % of |
| September 30, |
| % of |
| Increase | |||
|
|
|
|
|
|
|
|
|
|
| |||
Three Months Ended |
| $ | 159 |
| 16% |
| $ | 131 |
| 17% |
| $ | 28 |
Nine Months Ended |
| $ | 453 |
| 14% |
| $ | 387 |
| 14% |
| $ | 66 |
|
| Three Months |
| % of |
| Three Months |
| % of |
| Increase |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Product development |
| $ | 175 |
| 12% |
| $ | 145 |
| 11% |
| $ | 30 |
|
Product development costs increased for the three and nine months ended September 30, 2015,March 31, 2016, as compared to 2014,2015, primarily from product development costs associated with King’s titles, along with increased product development costs from the Call of Duty franchise, primarily related to support our future title releases, a decrease in costs capitalized, and increasedstudio personnel bonuses. These were partially offset by decreased Blizzard product development costs.costs due to the timing of cost capitalizations.
Sales and Marketing (amounts in millions)
|
| September 30, |
| % of |
| September 30, |
| % of |
| Increase | |||
|
|
|
|
|
|
|
|
|
|
| |||
Three Months Ended |
| $ | 189 |
| 19% |
| $ | 221 |
| 29% |
| $ | (32) |
Nine Months Ended |
| $ | 445 |
| 13% |
| $ | 465 |
| 16% |
| $ | (20) |
|
| Three Months |
| % of |
| Three Months |
| % of |
| Increase |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Sales and marketing |
| $ | 168 |
| 12% |
| $ | 92 |
| 7% |
| $ | 76 |
|
Sales and marketing costs decreasedincreased for the three and nine months ended September 30, 2015,March 31, 2016, as compared to 2014,2015, primarily driven by lowerthe amortization of the customer base intangible assets acquired in the King Acquisition, sales and marketing spending as compared to the prior periods, on the Skylanders and Destiny franchises and higher spending in the prior periods related to the Diablo franchise to support the title releases in the prior period.King’s titles, and increased spending on sales and marketing activity to support current and upcoming Blizzard releases. These decreasesincreases were partially offset by marketing spending to support our other title releases in the current period, specifically, the launch of Heroes of the Storm in June 2015 and subsequent additional promotion of the title, additional spendinglower spend on Hearthstone: Heroes of Warcraft, and marketing for the re-launch of Guitar Hero Live.
General and Administrative (amounts in millions)
|
| September 30, |
| % of |
| September 30, |
| % of |
| Increase | |||
|
|
|
|
|
|
|
|
|
|
| |||
Three Months Ended |
| $ | 109 |
| 11% |
| $ | 140 |
| 19% |
| $ | (31) |
Nine Months Ended |
| $ | 297 |
| 9% |
| $ | 342 |
| 12% |
| $ | (45) |
|
| Three Months |
| % of |
| Three Months |
| % of |
| Increase |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
General and administrative |
| $ | 160 |
| 11% |
| $ | 86 |
| 7% |
| $ | 74 |
|
General and administrative expenses decreasedincreased for the three and nine months ended September 30, 2015,March 31, 2016, as compared to 2014,2015, primarily due to higher professional and transaction related fees (including legal fees,associated with the King Acquisition, which closed on February 23, 2016, and King’s general and administrative costs, expenses, and accruals) in the prior year. Additionally, the decrease was due to higher foreign currency transaction gains during the nine months ended September 30, 2015 as compared to the comparable period in 2014.included following that closing.
Interest and Other Expense (Income), Net (amounts in millions)
|
| September 30, |
| % of |
| September 30, |
| % of |
| Increase | |||
Three Months Ended |
| $ | 51 |
| 5% |
| $ | 51 |
| 7% |
| $ | — |
Nine Months Ended |
| $ | 151 |
| 4% |
| $ | 152 |
| 5% |
| $ | (1) |
|
| Three Months |
| % of |
| Three Months |
| % of |
| Increase |
| |||
|
|
|
|
|
|
|
|
|
|
|
| |||
Interest and other expense (income), net |
| $ | 52 |
| 4% |
| $ | 50 |
| 4% |
| $ | 2 |
|
Interest and other expense (income), net, did not significantly change for the three and nine months ended September 30, 2015,March 31, 2016, as compared to the same periods in 2014.2015.
Income Tax Expense (amounts in millions)
|
| September 30, |
| % of pretax |
| September 30, |
| % of pretax |
| Increase | |||
Three Months Ended |
| $ | 18 |
| 13% |
| $ | (20) |
| 46% |
| $ | 38 |
Nine Months Ended |
| $ | 186 |
| 20% |
| $ | 119 |
| 20% |
| $ | 67 |
|
| Three Months |
| % of pretax |
| Three Months |
| % of pretax |
| Increase |
| |||
Income tax expense |
| $ | 73 |
| 18% |
| $ | 98 |
| 20% |
| $ | (25) |
|
The Company accounts for its provision for income taxes in accordance with ASC 740, Income Taxes, which requires an estimate of the annual effective tax rate for the full year to be applied to the interim period, taking into account year-to-date amounts and projected results for the full year. The provision for income taxes represents federal, foreign, state, and local income taxes. Our effective tax rate differs from the statutory U.S. income tax rate due to the effect of state and local income taxes, tax rates in foreign jurisdictions and certain nondeductible expenses. Our effective tax rate could fluctuate significantly from quarter to quarter based on recurring and nonrecurring factors including, but not limited to: variations in the estimated and actual level of pre-tax income or loss by jurisdiction; changes in the mix of income by tax jurisdiction (as taxes are levied at relatively lower statutory rates in foreign regions and relatively higher statutory rates in the U.S.); research and development credits; changes in enacted tax laws and regulations, rulings and interpretations thereof, including with respect to tax credits, state and local income taxes; developments in tax audits and other matters; and certain nondeductible expenses. Changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of the change.
The income tax expense of $18$73 million for the three months ended September 30, 2015March 31, 2016 reflects an effective tax rate of 13%18%, which is lower than the effective tax rate of 46%20% for the three months ended September 30, 2014.March 31, 2015. This decrease is primarily due tothe result of an incremental tax benefit included in the three months ended September 30, 2014, from a lower estimated effective annual tax rate in 2015March 31, 2016 due to the mix of foreign earnings taxed at relatively lower statutory rates as compared to domestic earnings and the net benefit related to the settlement of a historical audit, partially offset by certain non-tax benefitednondeductible costs incurred during the prior year quarter.
The income tax expense of $186 million for the nine months ended September 30, 2015 reflects an effective tax rate in 2015 of 20%, which is comparable to the effective tax rate of 20% for the nine months ended September 30, 2014.
The effective tax ratesrate of 13% and 20%18% for the three and nine months ended September 30, 2015, respectively,March 31, 2016 differed from the U.S. statutory rate of 35%, primarily due to the tax benefit from foreign earnings taxed at relatively lower statutory rates, the net benefit related to the settlement of a historical audit, recognition of federal and California research and development credits, and federal domestic production deductions, and favorable return to provision adjustments, partially offset by certain nondeductible costs incurred during the quarter and increases to the Company’s reserve for uncertain tax positions.
The overall effective income tax rate for the year could be different from the effective tax rate for the three and nine months ended September 30, 2015 and will be dependent, in part, on our profitability for the remainder of the year, as well as the other factors described above.
The Internal Revenue Service (“IRS”) is currently examining Activision Blizzard’s federal tax returns for the 20082009 through 2011 tax years. During the second quarter of 2015, the Company transitioned the review of its transfer pricing methodology from the advanced pricing agreement review process to the IRS examination team. Their review could result in a different allocation of profits and losses under the Company’s transfer pricing agreements. Such allocation could have a positive or negative impact on our provision for uncertain tax positions for the period in which such a determination is reached and the relevant periods thereafter. In addition, as part of the purchase price accounting, the Company assumed $77 million of uncertain tax positions primarily related to the transfer pricing of King tax years occurring prior to the King Acquisition. The Company is currently in negotiations with the relevant jurisdictions and the taxing authorities which could result in a different allocation of profits and losses between the relevant jurisdictions.
In addition, Vivendi Games’ tax year 2008 remains open to examination by the major taxing authorities. In addition, Vivendi Games’ tax return for the 2008 tax year is before the Appeals function of the IRS and is under examination by the IRS and several state taxing authorities. While Vivendi Games’ results for the period January 1, 2008 through July 9, 2008 are included in the consolidated federal and certain foreign, state, and local income tax returns filed by Vivendi or its affiliates, Vivendi Games’ results for the period July 10, 2008 through December 31, 2008 are included in the consolidated federal and certain foreign, state, and local income tax returns filed by Activision Blizzard. Additionally, the Company has several state and non-U.S. audits pending.
The final resolution of the Company’s global tax disputes is uncertain. There is significant judgment required in the analysis of disputes, including the probability determination and estimation of the potential exposure. Based on current information, in the opinion of the Company’s management, the ultimate resolution of these matters are not expected to have a material adverse effect on the Company’s consolidated financial position, liquidity or results of operations. However, an unfavorable resolution of the Company’s global tax disputes could have a material adverse effect on our business and results of operations in the period in which the matters are ultimately resolved.
In 2013, in connection with the Purchase Transaction,a share repurchase from Vivendi (the “Purchase Transaction”), we assumed certain tax attributes, of New VH, generally consisting of New VH’s net operating loss (“NOL”) carryforwards of approximately $760 million, which represent a potential future tax benefit of approximately $266 million. The utilization of such NOL carryforwards will be subject to certain annual limitations and will begin to expire in 2021. The Company also obtained indemnification from Vivendi against losses attributable to the disallowance of claimed utilization of such NOL carryforwards of up to $200 million in unrealized tax benefits in the aggregate, limited to taxable years ending on or prior to December 31, 2016. No benefit for these tax attributes or indemnification was recorded upon the close of the Purchase Transaction, as the benefit from these tax attributes did not meet the “more-likely-than-not” standard.share repurchase. For the ninethree months ended September 30, 2015,March 31, 2016, we utilized $248$184 million of the NOL, which resulted in a tax benefit of $87$64 million, reduced by $5 million for return to provision adjustments, and a corresponding reserve of $82$64 million was established as the position did not meet the “more-likely-than-not” standard.established. As of September 30, 2015,March 31, 2016, an indemnification asset of $149$171 million has been recorded in “Other Assets,” and, correspondingly, the same amount has been recorded as a reduction to the consideration paid for the shares repurchased in “Treasury Stock” (see Note 1 of the Notes to Condensed Consolidated Financial Statements for details about the share repurchase).
Liquidity and Capital Resources
Sources of Liquidity (amounts in millions)
|
| September 30, 2015 |
| December 31, 2014 |
| Increase |
| March 31, 2016 |
| December 31, 2015 |
| Increase |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents |
| $ | 4,365 |
| $ | 4,848 |
| $ | (483) |
| $ | 2,872 |
| $ | 1,823 |
| $ | 1,049 |
|
Short-term investments |
| 154 |
| 10 |
| 144 |
| 16 |
| 8 |
| 8 |
| ||||||
|
| $ | 4,519 |
| $ | 4,858 |
| $ | (339) |
| $ | 2,888 |
| $ | 1,831 |
| $ | 1,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Percentage of total assets |
| 32% |
| 33% |
|
|
| 17% |
| 12% |
|
|
|
|
| For the Nine Months Ended September 30, |
| For the Three Months Ended March 31, |
| ||||||||||||||
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| 2015 |
| 2014 |
| Increase |
| 2016 |
| 2015 |
| Increase |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash flows provided by operating activities |
| $ | 163 |
| $ | 97 |
| $ | 66 |
| $ | 309 |
| $ | 209 |
| $ | 100 |
|
Cash flows used in investing activities |
| (239) |
| (80) |
| (159) |
| (1,068) |
| (16) |
| (1,052) |
| ||||||
Cash flows used in financing activities |
| (139) |
| (374) |
| 235 | |||||||||||||
Cash flows provided by (used in) financing activities |
| 1,807 |
| (212) |
| 2,019 |
| ||||||||||||
Effect of foreign exchange rate changes |
| (268) |
| (248) |
| (20) |
| 1 |
| (364) |
| 365 |
| ||||||
Net decrease in cash and cash equivalents |
| $ | (483) |
| $ | (605) |
| $ | 122 | ||||||||||
Net increase (decrease) in cash and cash equivalents |
| $ | 1,049 |
| $ | (383) |
| $ | 1,432 |
|
Cash Flows Provided By Operating Activities
The primary drivers of cash flows provided by operating activities typically include the collection of customer receivables generated by the sale of our products and digital and subscription revenues, partially offset by payments to vendors for the manufacturing, distribution, and marketing of our products, payments for customer service support for our subscribers,gamers, payments to third-party developers and intellectual property holders, payments for interest on our debt, payments for software development, payments for tax liabilities, and payments to our workforce.
Cash flows provided by operating activities were higher for the ninethree months ended September 30, 2015,March 31, 2016, as compared to the same period in 2014,2015, primarily due to higher net income for the period and adjustments to net income for non-cash charges, including amortization of capitalized software development costs,intangible assets and adjustments to deferred income taxes associated with the King Acquisition, along with increased operating cash flows from King’s operations. These were partially offset by changes in our working capital accounts.operating assets and liabilities.
Cash Flows Used In Investing Activities
The primary drivers of cash flows used in investing activities typically include the net effect of purchases and sales/maturities of short-term investments, capital expenditures, and changes in restricted cash balances.balances, and cash used for acquisitions.
Cash flows used in investing activities were $239$1.1 billion for the three months ended March 31, 2016, as compared to $16 million for the ninethree months ended September 30, 2015, as compared to $80 million for the nine months ended September 30, 2014.March 31, 2015. The increase in the cash used was primarily due to $144 million of purchases of available-for-sale investmentsthe $2.2 billion cash outflow for the nine months ended September 30, 2015, with no corresponding purchases duringKing Acquisition in excess of the prior year.cash already in escrow, net of the $1.15 billion cash acquired.
Cash Flows Used InProvided By (Used In) Financing Activities
The primary drivers of cash flows used in financing activities typically include the proceeds from, and repayments of, our long-term debt, and transactions involving our common stock, such as the issuance of shares of common stock to employees, the repurchase of our common stock and the payment of dividends.
Cash flows used inprovided by financing activities were lowerhigher during the ninethree months ended September 30, 2015,March 31, 2016, as compared to the same period in 2014,2015, primarily due to $202 million$2.6 billion of proceeds received from debt financing. These were partially offset by higher partial repayment of our Term Loan in the settlement2016 of the litigation related$750 million, as compared to the Purchase Transaction, and the lower$250 million partial repayment of our Term Loan in 2015, and payment of $250 million, as compared to the $375 million partial repayment of our Term Loan in 2014. These were partially offset by lower proceeds from stock options exercised by our employeesdebt discount and the higher cash dividend payment made during the nine months ended September 30, 2015, as compared to 2014.
Effect of Foreign Exchange Rate Changes
Changes in foreign exchange rates had a negative impact of $268 million and $248 million on our cash and cash equivalents for the nine months ended September 30, 2015 and 2014, respectively. The change is primarily due to changes in the value of the U.S. dollar relative to the euro and British pound.financing costs.
Other Liquidity and Capital Resources
Our primary sources of liquidity are typically cash and cash equivalents, investments, and cash flows provided by operating activities. In addition, as described below, we have availability of $250 million, subject to certain restrictions, under a secured revolving credit facility. With our cash and cash equivalents and short-term investments of $4.5$2.9 billion at September 30, 2015,March 31, 2016, and expected cash flows provided by operating activities, we believe that we have sufficient liquidity to meet daily operations in the foreseeable future. We also believe that we have sufficient working capital ($4.71.7 billion at September 30, 2015)March 31, 2016) to finance our operational and financing requirements for at least the next twelve months, including: purchases of inventory and equipment; the development, production, marketing, and sale of new products; provision of customer service for our subscribers; acquisition of intellectual property rights for future products from third parties; and payments related to debt obligations.
As of September 30, 2015March 31, 2016 and December 31, 2014,2015, the amount of cash and cash equivalents held outside of the U.S. by our foreign subsidiaries was $3.5$1.3 billion and $3.6$0.5 billion, respectively. If these funds arethe cash and cash equivalents held outside of the U.S. is needed in the future for our operations in the U.S., we would accrue and pay the required U.S. taxes to repatriate these funds. However, our intent is to permanently reinvest these funds outside of the U.S. and our current plans do not demonstrate a need to repatriate them to fund our U.S. operations. As further described below under “Subsequent Events”, on November 2, 2015, we and King Digital Entertainment plc (“King”) entered into an agreement under the terms of which we will acquire King and will fund the cash consideration payable thereunder with a combination of cash and cash equivalents held outside of the U.S., as well as the net proceeds from a committed incremental term loan in the amount of $2.3 billion.
Debt
Unsecured Notes
On September 19, 2013, we issued, at par, $1.5 billion of 5.625% unsecured senior notes due September 2021 (the “2021 Notes”) and $750 million of 6.125% unsecured senior notes due September 2023 (the “2023 Notes” and, together with the 2021 Notes, the “Notes”). Interest on the Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing on March 15, 2014. As of September 30, 2015,March 31, 2016, the Notes had a carrying value of $2.25 billion.
We may redeem the 2021 Notes on or after September 15, 2016 and the 2023 Notes on or after September 15, 2018, in whole or in part on any one or more occasions, at specified redemption prices, plus accrued and unpaid interest. At any time prior to September 15, 2016, with respect to the 2021 Notes, and at any time prior to September 15, 2018, with respect to the 2023 Notes, we may also redeem some or all of the Notes by paying a “make-whole premium,” plus accrued and unpaid interest. In addition, upon the occurrence of one or more qualified equity offerings, we may also redeem up to 35% of the aggregate principal amount of each of the 2021 Notes and 2023 Notes outstanding with the net cash proceeds from such offerings. The Notes are repayable, in whole or in part and at the option of the holders, upon the occurrence of a change in control and a ratings downgrade, at a purchase price equal to 101% of principal, plus accrued and unpaid interest.
Credit Facilities
Term Loan. On October 11, 2013, we entered into a credit agreement (the “Credit Agreement”) for a $2.5 billion secured term loan facility maturing in October 2020 (the “Term Loan”), and a $250 million secured revolving credit facility maturing in October 2018 (the “Revolver” and, together with the Term Loan, the “Credit Facilities”“Original Revolver”). A portion of the Original Revolver cancould be used to issue letters of credit of up to $50 million, subject to the availability of the Original Revolver. To date, we have not drawn on the Revolver and there were no letters of credit issued and outstanding under the Revolver at either September 30, 2015 or December 31, 2014.
As of September 30, 2015,March 31, 2016, the outstanding balance of our Term Loan was $1.9$1.1 billion. Borrowings under the Term Loan and Revolver bear interest at an annual rate equal to an applicable margin plus, at our option, (A) a base rate determined by reference to the highest of (a) the interest rate in effect determined by the administrative agent as its “prime rate,” (b) the federal funds rate plus 0.5%, and (c) the London InterBank Offered Rate (“LIBOR”) for an interest period of one month plus 1.00%, or (B) LIBOR. Further, LIBOR borrowings under the Term Loan are subject to a LIBOR floor of 0.75%. At September 30, 2015,March 31, 2016, the Term Loan bore interest at 3.25%. In certain circumstances, our interest rate under the Credit FacilitiesTerm Loan will increase.
In addition to paying interest on outstanding principal balances under the Credit Facilities,Term Loan, we arewere required to pay the lenders a commitment fee on unused commitments under the Original Revolver. We are also required to pay customary letter of credit fees and agency fees.
The terms of the Credit Agreement requiresrequire quarterly principal repayments of 0.25% of the Term Loan’s original principal amount, with the balance due on the maturity date. On February 11, 2014, we made a voluntary partial repayment of $375 million on our Term Loan. This repayment satisfied the required quarterly principal repayments for the entire term of the Credit Agreement. On February 11, 2015, we made an additional voluntary principal repayment this time in the amount of $250 million whichon our Term Loan. On February 25, 2016 and March 31, 2016, we made additional voluntary repayments of $500 million and $250 million, respectively, on our Term Loan. The 2016 repayments reduced the balance due on the maturity date. The 2015 repayment reduced the Term Loan’s outstanding principal balance to $1.9 billion and based on this reduced balance, we expect our expected future contractual interest payments in the future will be reduced by approximately $8$16 million annually, based on the interest rate of 3.25% at September 30, 2015.March 31, 2016. Amounts borrowed under the Term Loan and repaid may not be re-borrowed.
Tranche A Term Loans. In conjunction with the King Acquisition, the Company entered into three Amendments to the Credit Agreement (the “Amendments”). The Amendments, among other things, provided for incremental term loans in the form of Tranche A Term Loans in an aggregate principal amount of approximately $2.3 billion. The proceeds were issued and provided on February 23, 2016, upon successful closing of the King Acquisition and were used to fund the King Acquisition. On March 31, 2016, we entered into a fourth amendment to the Credit Agreement which provided for an incremental Tranche A Term Loan in the aggregate principal amount of $250 million, of which the total proceeds from the incremental borrowing were used to make the voluntary prepayment on our Term Loan discussed above.
The Tranche A Term Loans are scheduled to mature on October 11, 2020 and bear interest, at the Company’s option, at either (a) a base rate equal to the highest of (i) the federal funds rate, plus 0.5%, (ii) the prime commercial lending rate of Bank of America, N.A., and (iii) the LIBOR for an interest period of one month beginning on such day plus 1.00%, or (b) LIBOR, in each case, plus an applicable interest margin. LIBOR is subject to a floor of 0% and the base rate is subject to an effective floor of 1.00%. The applicable interest margin for Tranche A Term Loans ranges from 1.50% to 2.25% for LIBOR borrowings and from 0.50% to 1.25% for base rate borrowings and is determined by reference to a pricing grid based on the Company’s Consolidated Total Net Debt Ratio (as defined in the Credit Agreement).
The Tranche A Term Loans require quarterly principal payments of 0.625% of the stated principal amount of the Tranche A Term Loans commencing on June 30, 2016, with increases to 1.250% starting on June 30, 2019 and 3.125% starting on June 30, 2020, with the remaining balance payable on the Tranche A Term Loans’ scheduled maturity date of October 11, 2020. Voluntary prepayments of the Tranche A Term Loans are permitted at any time, in minimum principal amounts, without premium or penalty.
The Tranche A Term Loans are subject to a financial maintenance covenant requiring the Company to maintain a maximum Consolidated Total Net Debt Ratio (as defined in the Credit Agreement) of 4.00 to 1.00, which will decrease to 3.50 to 1.00 (I) after the sixth full fiscal quarter after the Tranche A Term Loans are made or (II) if the Collateral Suspension occurs prior to the date falling 18 months after the Tranche A Term Loans are made, on the later of (x) the last day of the fourth full fiscal quarter after the Tranche A Term Loans are made and (y) the last day of the fiscal quarter in which the Collateral Suspension occurs.
The Tranche A Term Loans are secured by the same collateral and guaranteed by the same guarantors that secure and guarantee the Term Loan. The other terms of the Tranche A Term Loans are also generally the same as the terms of the Term Loan. At March 31, 2016, the Tranche A Term Loans bore interest at 2.43%. In certain circumstances, our applicable interest rate under the Tranche A Term Loans will increase.
2015 Revolving Credit Facility. As part of the Amendments, upon the closing of the King Acquisition, the Company’s Original Revolver under the Credit Agreement in an aggregate principal amount of $250 million was replaced with a new revolving credit facility under the Credit Agreement in the same aggregate principal amount (the “2015 Revolving Credit Facility,” and, together with the Term Loan and Tranche A Term Loans, the “Credit Facilities”).
Borrowings under the 2015 Revolving Credit Facility may be borrowed, repaid, and re-borrowed by the Company and are available for working capital and other general corporate purposes. Up to $50 million of the 2015 Revolving Credit Facility may be used for letters of credit.
The 2015 Revolving Credit Facility is scheduled to mature on October 11, 2020. Borrowings under the 2015 Revolving Credit Facility bear interest, at the Company’s option, under the same terms as the Tranche A Term Loans. Additionally, the 2015 Revolving Credit Facility is subject to the same financial maintenance covenant and is secured by the same collateral and guaranteed by the same guarantors that secure and guarantee the Tranche A Term Loans. The other terms of the 2015 Revolving Credit Facility are generally the same as the terms of the Original Revolver. To date, we have not drawn on the 2015 Revolving Credit Facility.
Fees associated with the closing of the Term Loan, Tranche A Term Loans, and the Notes are recorded as debt discount, which reduces their respective the carrying values, and is amortized over their respective terms. Amortization expense is recorded within “Interest and other expense (income), net” in our condensed consolidated statement of operations.
In connection with the debt financing for the King Acquisition, we incurred $38 million of issuance costs that were capitalized and recorded within “Long term debt, net” in our condensed consolidated balance sheet. The amortization of these capitalized costs was not material to our condensed consolidated statement of operations for the three months ended March 31, 2016.
Agreements governing our indebtedness, including the indenture governing the Notes and the Credit Agreement, impose operating and financial restrictions on our activities under certain conditions. These restrictions may require us to comply with or maintain certain financial tests and ratios. In addition, the indenture and the Credit Agreement limit or prohibit our ability to, among other things: incur additional debt or make additional guarantees; pay distributions or dividends and repurchase stock; make other restricted payments, including without limitation, certain restricted investments; create liens; enter into agreements that restrict dividends from subsidiaries; engage in transactions with affiliates; and enter into mergers, consolidations or sales of substantially all of our assets.
In addition, if, in the future, we borrow under the Revolver, as described in Note 6 of the Notes to Condensed Consolidated Financial Statements, we may be required, during certain periods where outstanding revolving loans exceed a certain threshold, to maintain a maximum senior secured net leverage ratio calculated pursuant to a financial maintenance covenant under the Credit Agreement.
The Company was in compliance with the terms of the Notes and Credit Facilities as of September 30, 2015.March 31, 2016.
Debt Repayments
On February 2, 2016, the Board of Directors authorized net debt repayments of up to $1.5 billion of our outstanding debt during 2016. As further described below under “Subsequent Events”, on November 2, 2015,of March 31, 2016, we and King entered into an agreement under the terms of which we will acquire King and will fund the cash consideration payable thereunder with the net proceeds from a committed incrementalhave made prepayments to reduce our total outstanding term loan in the amount of $2.3 billion, as well as offshore cash, and, as such, entered into the Amendment (as defined below), which amends the Credit Agreement.loans by $500 million.
Capital Expenditures
For the year ending December 31, 2015,2016, we anticipate total capital expenditures of approximately $115$155 million, primarily for computer hardware and software purchases. During the first ninethree months of 2015,2016, we made aggregate capital expenditures of $95$27 million.
Off-balanceOff-Balance Sheet Arrangements
At September 30, 2015March 31, 2016 and December 31, 2014,2015, Activision Blizzard had no significant relationships with unconsolidated entities or financial parties, often referred to as “structured finance” or “special purpose” entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes, that have or are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Subsequent Events
The Acquisition
On November 2, 2015, we and King, a leading interactive mobile entertainment company, entered into a Transaction Agreement (the “Transaction Agreement”) under the terms of which we will acquire King (the “Acquisition”) and King will become a wholly-owned subsidiary of the Company. At the effective time of the Acquisition, King shareholders will become entitled to receive $18.00 in cash in exchange for each King share they then hold. We expect to transfer approximately $5.9 billion in consideration to the existing King shareholders and share based award holders through a combination of the net proceeds from $2.3 billion of committed incremental term loans, our offshore cash, and approximately $200 million of our share based awards for the replacement of share based awards held by current employees and directors of King.
The transaction is subject to customary closing conditions, including the approval by King’s shareholders, sanction of the Irish High Court, as well as certain regulatory approvals, and is expected to close by Spring of calendar year 2016.
Amendment to Credit Agreement
In conjunction with the Acquisition, the Company entered into a First Amendment (the “Amendment”), which amends the Credit Agreement, dated as of October 11, 2013. The Amendment, among other things, provides for Incremental Term Loans in the form of Tranche B-2 Term Loans in an aggregate principal amount of approximately $2.3 billion. The proceeds of the Tranche B-2 Term Loans will be used to fund the Acquisition.
The Tranche B-2 Term Loans will mature on the date that is seven years and six months after the date of the initial funding of the Tranche B-2 Term Loans and will bear interest, at an annual rate equal to an applicable interest margin plus, at our option, (A) a base rate determined by reference to the highest of (a) the interest rate in effect determined by the administrative agent as its “prime rate,” (b) the federal funds rate plus 0.5%, and (c) the London InterBank Offered Rate (“LIBOR”) rate for an interest period of one month plus 1.00%, or (B) LIBOR. LIBOR borrowings under the Tranche B-2 Term Loan will be subject to a LIBOR floor of 0.75% and base rate will be subject to a floor of 1.75%. The applicable interest margin for Tranche B-2 Term Loans will be 3.00% for LIBOR borrowings and 2.00% for base rate borrowings. Voluntary prepayments of the Tranche B-2 Term Loans are permitted at any time, in minimum principal amounts, without premium or penalty, subject to a 1.00% premium payable in connection with certain repricing transactions within the first six months after the date of the initial funding of the Tranche B-2 Term Loans. The Tranche B-2 Term Loans will be secured by the same collateral and guaranteed by the same guarantors as the existing Term Loan. The other terms of the Tranche B-2 Term Loans are also generally the same as the terms of the existing Term Loan.
Commitment Letter
In conjunction with the Acquisition, the Company also entered into a commitment letter (the “Commitment Letter”) with Bank of America, N.A. and Goldman Sachs Bank USA (the “Debt Financing Sources”). Pursuant to the Commitment Letter, subject to customary conditions, the Debt Financing Sources committed to provide the Company with the Tranche B-2 Term Loans on such modified terms as set forth therein (Tranche B-2 Term Loans as so modified, the “Tranche A Term Loans”) in the same aggregate principal amount and for the same purpose as the original Tranche B-2 Term Loans. The Tranche A Term Loans will be effected via, and subject to the passing of, a second amendment to the Credit Agreement and will mature on October 11, 2020.
Cash Confirmation
Under the Irish Takeover Rules, no financing condition to the Acquisition is permitted. As is customary, we have executed and delivered a cash confirmation representation letter to our financial advisor, in which we have given various representations, warranties and undertakings in relation to the sources and availability of the funding. In conjunction with the representation letter the Company has segregated $3.56 billion in cash in separate bank accounts, where the cash is not accessible to the Company for operating cash needs, as its use has been administratively restricted for use in the consummation of the Acquisition.
All information included in the accompanying unaudited Condensed Consolidated Financial Statements and notes to Condensed Consolidated Financial Statements in this report reflects only our results, and does not reflect any impact of the proposed Acquisition, Amendment to the Credit Agreement, Commitment Letter, or Cash Confirmation.
Financial Disclosure
We maintain internal control over financial reporting, which generally includes those controls relating to the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). We also are focused on our “disclosure controls and procedures,” which as defined by the Securities and Exchange Commission (the “SEC”), are generally those controls and procedures designed to ensure that financial and non-financial information required to be disclosed in our reports filed with the SEC is reported within the time periods specified in the SEC’s rules and forms, and that such information is communicated to management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure.
Our Disclosure Committee, which operates under the Board of Directors-approved Disclosure Committee Charter and Disclosure Controls & Procedures Policy, includes senior management representatives and assists executive management in its oversight of the accuracy and timeliness of our disclosures, as well as in implementing and evaluating our overall disclosure process. As part of our disclosure process, senior finance and operational representatives from all of our corporate divisions and business units prepare quarterly reports regarding their current-quarter operational performance, future trends, subsequent events, internal controls, changes in internal controls, and other accounting and disclosure relevant information. These quarterly reports are reviewed by certain key corporate finance executives. These corporate finance representatives also conduct quarterly interviews on a rotating basis with the preparers of selected quarterly reports. The results of the quarterly reports and related interviews are reviewed by the Disclosure Committee. Finance representatives also conduct interviews with our senior management team, our legal counsel and other appropriate personnel involved in the disclosure process, as appropriate. Additionally, senior finance and operational representatives provide internal certifications regarding the accuracy of information they provide that is utilized in the preparation of our periodic public reports filed with the SEC. Financial results
and other financial information also are reviewed with the Audit Committee of the Board of Directors on a quarterly basis. As required by applicable regulatory requirements, the principal executive and financial officers review and make various certifications regarding the accuracy of our periodic public reports filed with the SEC, our disclosure controls and procedures, and our internal control over financial reporting. With the assistance of the Disclosure Committee, we will continue to assess and monitor, and make refinements to, our disclosure controls and procedures, and our internal control over financial reporting.
Critical Accounting Policies and Estimates
Our condensed consolidated financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates, judgments, and assumptions. We believe that the estimates, judgments, and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments, and assumptions are made. These estimates, judgments, and assumptions can affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments, or assumptions and actual results, our financial statements will be affected. The accounting policies that reflect our more significant estimates, judgments, and assumptions, and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results, include the following:
· Revenue Recognition including Revenue Arrangements with Multiple Deliverables
· Allowances for Returns, Price Protection, Doubtful Accounts, and Inventory Obsolescence
· Software Development Costs and Intellectual Property Licenses
· Income Taxes
· Fair Value Estimates (including Business Combinations and Assessment of Impairment of Assets)
· Stock-Based Compensation
During the ninethree months ended September 30, 2015,March 31, 2016, there were no significant changes to the above critical accounting policies and estimates.estimates but we did expand the accounting policy disclosure for revenue recognition to include virtual currency as noted below. Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2014,2015, for a more complete discussion of our critical accounting policies and estimates.
Microtransaction Revenues
Microtransaction revenues are derived from the sale of virtual goods and currencies to our players to enhance their gameplay experience. Proceeds from the sales of virtual goods and currencies are initially recorded in deferred revenues. Proceeds from the sales of virtual currencies are recognized as a player uses the virtual goods purchased with the virtual currency. We categorize our virtual goods as either consumable or durable. Consumable virtual goods represent goods that can be consumed by a specific player action; accordingly, we recognize revenues from the sale of consumable virtual goods as the goods are consumed. Durable virtual goods represent goods that are accessible to the player over an extended period of time. We recognize revenues from the sale of durable virtual goods ratably over the period of time the goods are available to the player, generally the estimated service period of the game.
Recently Issued Accounting Pronouncements
Revenue recognition
In May 2014, the FASB issued new accounting guidance related to revenue recognition. The new standard will replace all current U.S. GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition standard provides a unified model to determine when and how revenue is recognized. The core principle is that a company should recognize revenue upon the transfer of promised goods or services to customers in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective
for fiscal years and interim periods within those years beginning January 1, 2018after December 15, 2017 and can be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. We are evaluating the adoption method as well as the impact of this new accounting guidance on our financial statements.
Stock-based compensation
In June 2014, the FASB issued new guidance related to stock compensation. The new standard requires that a performance target that affects vesting, and that could be achieved after the requisite service period, be treated as a performance condition. As such, the performance target should not be reflected in estimating the grant date fair value of the award. This update further clarifies that compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. TheWe adopted this new standard is effective for fiscal years beginning after December 15, 2015 and can be applied either prospectively or retrospectively to all awards outstanding as of the beginning of the earliest annual period presented as an adjustment to opening retained earnings. Early adoption is permitted.January 1, 2016, and applied it prospectively. The adoption of this guidance willdid not have a material impact on the Company’sour condensed consolidated financial statements.
Consolidations
In February 2015, the FASB issued new guidance related to consolidations. The new standard amends certain requirements for determining whether a variable interest entity must be consolidated. TheWe adopted this new standard is effective for fiscal years beginning after December 15, 2015. Earlyas of January 1, 2016. The adoption is permitted. We are evaluating theof this guidance did not have a material impact if any, of adopting this new accounting guidance on our condensed consolidated financial statements.
Debt Issuance Costs
In April 2015, the FASB issued new guidance related to the presentation of debt issuance costs in financial statements. The new standard requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effectiveWe adopted this change in accounting principle as of January 1, 2016, and applied it retrospectively for annual reporting periods beginning after December 15, 2015. The new guidance will be applied retrospectively to each prior period presented. The adoption of this guidance willdid not have a material impact on our condensed consolidated financial statements.
Internal-Use Software
In April 2015, the FASB issued new guidance related to internal-use software. The new standard relates to a customer’s accounting for fees paid in cloud computing arrangements. The amendment provides guidance for customers to determine whether such arrangements include software licenses. If a cloud arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. We adopted this standard as of January 1, 2016, and applied it prospectively. The new standard is effective for fiscal years beginning after December 15, 2015. Early adoption is permitted. We are evaluatingof this guidance did not have a material impact on the impact, if any, of adopting this new accounting guidance on ourCompany’s condensed consolidated financial statements.
Inventory
In July 2015, the FASB issued new guidance related to the measurement of inventory which requires inventory within the scope of the guidance to be measured at the lower of cost and net realizable value. Net realizable value is defined as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. The new standard is effective for fiscal years beginning after December 15, 2016, and should be applied prospectively. Early adoption is permitted. We are evaluating the impact, if any, of adopting this new accounting guidance on our financial statements.
Business Combinations
In September 2015, the FASB issued new guidance related to business combinations. The new standard requires that the cumulative impact of a measurement period adjustment, including the impact on prior periods, made to provisional amounts recorded at the acquisition date as a result of the business combination, be recognized in the reporting period the adjustment is identified. The standard also requires separate presentation on the face of the income statement, or disclosure in the notes, of the portion of the amount recorded in current period earnings by line item. Prior to the issuance of the standard, such adjustments to provisional amounts were recognized retrospectively. We adopted this new standard as of January 1, 2016, and applied it prospectively. No measurement period adjustments occurred as of and for the three months ended March 31, 2016.
Financial Instruments
In January 2016, the FASB issued new guidance related to the recognition and measurement of financial assets and financial liabilities. The new standard, amongst other things, generally requires companies to measure investments in other entities, except those accounted for under the equity method, at fair value and recognize any changes in fair value in net income, and simplifies the impairment assessment of equity investments without readily determinable fair values. The new standard is effective for fiscal years beginning after December 15, 2017, and the guidance should be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity investments without readily determinable fair values (including disclosure requirements) should be applied prospectively to equity investments that exist as of the date of adoption. We are evaluating the impact of this new accounting guidance on our financial statements.
Leases
In February 2016, the FASB issued new guidance related to the accounting for leases. The new standard will replace all current U.S. GAAP guidance on this topic. The new standard, amongst other things, requires a lessee to classify a lease as either a finance or operating lease in which lessees will need to recognize a right-of-use asset and a lease liability for their leases. The liability will be equal to the present value of lease payments. The asset will be based on the liability, subject to adjustment, such as for initial direct costs. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. Classification will be based on criteria that are largely similar to those applied in current lease accounting. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and will require application of the new guidance at the beginning of the earliest comparative period presented. We are evaluating the impact of this new accounting guidance on our financial statements.
Share-Based Payments
In March 2016, the FASB issued new guidance in an effort to simplify accounting for share-based payments. The new standard, amongst other things:
· will require that all excess tax benefits and tax deficiencies be recorded as income tax expense or benefit in the statement of operations and that the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur;
· will require excess tax benefits from share-based payments to be reported as operating activities on the statement of cash flows; and
· permits an accounting policy election to either estimate the number of awards that are expected to vest using an estimated forfeiture rate, as currently required, or account for forfeitures when they occur.
The new standard is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. We are evaluating the impact of this new accounting guidance on our financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the potential loss arising from fluctuations in market rates and prices. Our market risk exposures primarily include fluctuations in foreign currency exchange rates and interest rates.
Foreign Currency Exchange Rate Risk
We transact business in many different foreign currencies and may be exposed to financial market risk resulting from fluctuations in foreign currency exchange rates. Revenues and related expenses generated from our international operations are generally denominated in their respective local currencies. Primary currencies include euros, British pounds, Australian dollars, South Korean won and Swedish krona. To the extent the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency-denominated transactions results in reduced revenues, operating expenses, net income, and cash flows from our international operations. Similarly, our revenues, operating expenses, net income, and cash flows will increase for our international operations if the U.S. dollar weakens against foreign currencies. Since we have significant international sales, but incur the majority of our costs in the U.S., the impact of foreign currency fluctuations, particularly the strengthening of the U.S. dollar may have an asymmetric and disproportional impact on our business. We monitor currency volatility throughout the year.
To mitigate our foreign currency risk resulting from our foreign currency-denominated monetary assets, liabilities, and earnings and our foreign currency risk related to functional currency-equivalent cash flows resulting from our intercompany transactions, we periodically enter into currency derivative contracts, principally forward contracts. The counterparties for our currency derivative contracts are large and reputable commercial or investment banks.
We assess the nature of these derivatives in accordance with FASB Accounting Standard Codification (“ASC”) Topic 815 to determine whether such derivatives should be designated as hedging instruments. The fair value of foreign currency contracts are estimated based on the prevailing exchange rates of the various hedged currencies as of the end of the period. We report the fair value of these contracts within “Other current assets,” “Accrued expense and other liabilities,” “Other assets,” or “Other liabilities,” as applicable, in our condensed consolidated balance sheetsCondensed Consolidated Balance Sheets based on the prevailing exchange rates of the various hedged currencies as of the end of the relevant period.
We do not hold or purchase any foreign currency forward contracts for trading or speculative purposes.
Foreign Currency Forward Contracts Not Designated as Hedges
For foreign currency forward contracts entered into to mitigate risk from foreign currency-denominated monetary assets, liabilities, and earnings that are not designated as hedging instruments in accordance with FASB Accounting Standards Codification (“ASC”) Topicunder ASC 815, changes in the estimated fair value of these derivatives are recorded within “General and administrative expenses” and “Interest and other expense (income), net” in our condensed consolidated statements of operations, depending onconsistent with the nature of the underlying transactions. These forward contracts generally have a maturity of less than one year.
At September 30, 2015 there were noMarch 31, 2016, the gross notional amount of outstanding foreign currency forward contracts not designated as hedges. hedges was approximately $376 million. The fair value of these foreign currency forward contracts was $8 million as of March 31, 2016, and recorded in “Other current assets” in our condensed consolidated balance sheet.
At December 31, 2014, there was one2015, the gross notional amount of outstanding foreign currency forward contractcontracts not designated as a hedge; the notional amounthedges was approximately $489 million. The fair value of thatthese foreign currency forward contractcontracts was $11 million as of December 31, 2015, and the fair value was not material. recorded in “Other current assets” in our condensed consolidated balance sheet.
For the three and nine months ended September 30,March 31, 2016 and 2015, and 2014, pre-tax net losses related togains associated with these forward contracts were not material.
Foreign Currency Forward Contracts Designated as Hedges
For foreign currency forward contracts entered into to hedge forecasted intercompany cash flows that are subject to foreign currency risk and which we designated as cash flow hedges in accordance with ASC Topic 815, we assess the effectiveness of these cash flow hedges at inception and on an ongoing basis to determine if the hedges are effective at providing offsetting changes in cash flows of the hedged items. We record the effective portion of changes in the estimated fair value of these derivatives in “Accumulated other comprehensive income (loss)” and subsequently reclassify the related amount of accumulated other comprehensive income (loss) to earnings within “General and administrative expense” when the hedged item impacts earnings. Cash flows from these foreign currency forward contracts are classified in the same category as the cash flows associated with the hedged item in the condensed consolidated statements of cash flows. We measure hedge ineffectiveness, if any, and if it is determined that a derivative has ceased to be a highly effective hedge, we will discontinue hedge accounting for the derivative.
The gross notional amount of all outstanding foreign currency forward contracts designated as cash flow hedges was approximately $336$449 million at September 30, 2015March 31, 2016 and $78$381 million at September 30, 2014. At December 31, 2014, there were no outstanding foreign currency forward contracts designated as cash flow hedges. The outstanding2015. These foreign currency forward contracts have remaining maturities of 1512 months or less. During the three and nine months ended September 30,March 31, 2016 and 2015, there was no ineffectiveness relating to these hedges. At September 30, 2015, $3March 31, 2016, $9 million of net unrealized gainslosses related to these contracts are expected to be reclassified into earnings within the next twelve months.
During the three months ended March 31, 2016 and 2015, the amount pre-tax net realized losses reclassified out of “Accumulated other comprehensive income (loss)” due to maturity of these contracts was not material.
In the absence of the hedging activities described above, for the ninethree months ended September 30, 2015,March 31, 2016, a hypothetical adverse foreign currency exchange rate movement of 10% would have resulted in potential declines of our net income of approximately $82$36 million. This sensitivity analysis assumes a parallel adverse shift of all foreign currency exchange rates against the U.S. dollar; however, all foreign currency exchange rates do not always move in such manner and actual results may differ materially.
Interest Rate Risk
Our exposure to market rate risk for changes in interest rates relates primarily to our investment portfolio and variable rate debt under the Credit Facilities. We do not currently use derivative financial instruments to manage interest rate risk. As of September 30, 2015,March 31, 2016, a hypothetical interest rate change on our variable rate debt of one percent (100 basis points) would change interest expense on an annual basis by approximately $19$37 million. Because we have a 0.75% LIBOR floor in our Term Loan and Tranche A Term Loan, our interest expense will only increase ifincreases when the underlying interest rate increases toand it is at a level that exceeds the LIBOR floor. This estimate does not include the effects of other actions that we may take in the future to mitigate this risk or any changes in our financial structure.
Our investment portfolio consists primarily of money market funds and government securities with high credit quality and short average maturities. Because short-term securities mature relatively quickly and must be reinvested at the then-current market rates, interest income on a portfolio consisting of cash, cash equivalents or short-term securities is more subject to market fluctuations than a portfolio of longer-term securities. Conversely, the fair value of such a portfolio is less sensitive to market fluctuations than a portfolio of longer-term securities. At September 30, 2015,March 31, 2016, our $4.37$2.87 billion of cash and cash equivalents were comprised primarily of money market funds. At September 30, 2015, our $154 million of short-term investments included $129 million of U.S. treasury and government-sponsored agency debt securities and $25 million of restricted cash. We also had $9 million in auction rate securities at fair value classified as long-term investments at September 30, 2015. The Company has determined that, based on the composition of our investment portfolio as of September 30, 2015,March 31, 2016, there was no material interest rate risk exposure to the Company’s consolidated financial condition, results of operations or liquidity as of that date.
Item 4. Controls and Procedures
Definition and Limitations of Disclosure Controls and Procedures.
Our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) are designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. A control system, no matter how well designed and operated, can provide only reasonable assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in our periodic reports. Inherent limitations to any system of disclosure controls and procedures include, but are not limited to, the possibility of human error and the circumvention or overriding of such controls by one or more persons. In addition, we have designed our system of controls based on certain assumptions, which we believe are reasonable, about the likelihood of future events, and our system of controls may therefore not achieve its desired objectives under all possible future events.
Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our disclosure controls and procedures at September 30, 2015,March 31, 2016, the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at September 30, 2015,March 31, 2016, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized, and reported on a timely basis, and (ii) accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
Changes in Internal Control Over Financial Reporting.
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated any changes in our internal control over financial reporting at September 30, 2015,March 31, 2016, the end of the period covered by this report. Based on this evaluation, the principal executive officer and principal financial officer concluded that, at September 30, 2015,March 31, 2016, there have not been any changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Year-End Assessment of Internal Control over Financial Reporting.
On February 23, 2016, we completed our acquisition of King Digital Entertainment plc. The acquired business constituted approximately 7 percent of total assets and 13 percent of net revenues of the consolidated financial statement amounts as of and for the three months ended March 31, 2016. We are in the process of evaluating the existing controls and procedures of the acquired business and integrating the acquired business into our internal control over financial reporting. In accordance with SEC Staff guidance permitting a company to exclude an acquired business from management’s assessment of the effectiveness of internal control over financial reporting for the year in which the acquisition is contemplated, we expect to exclude the acquired business from our assessment of the effectiveness of internal control over financial reporting as of December 31, 2016.
We are subject to various legal proceedings and claims. SEC regulations govern disclosure of legal proceedings in periodic reports and ASCFinancial Accounting Standards Board Accounting Standards Codification (“ASC”) Topic 450 governs the disclosure of loss contingencies and accrual of loss contingencies in respect of litigation and other claims. We record an accrual for a potential loss when it is probable that a loss will occur and the amount of the loss can be reasonably estimated. When the reasonable estimate of the potential loss is within a range of amounts, the minimum of the range of potential loss is accrued, unless a higher amount within the range is a better estimate than any other amount within the range. Moreover, even if an accrual is not required, we provide additional disclosure related to litigation and other claims when it is reasonably possible (i.e., more than remote) that the outcomes of such litigation and other claims include potential material adverse impacts on us.
The outcomes of legal proceedings and other claims are subject to significant uncertainties, many of which are outside of our control. There is significant judgment required in the analysis of these matters, including the probability determination and whether a potential exposure can be reasonably estimated. In making these determinations, we, in consultation with outside counsel, examine the relevant facts and circumstances on a quarterly basis assuming, as applicable, a combination of settlement and litigated outcomes and strategies. Moreover, legal matters are inherently unpredictable and the timing of development of factors on which reasonable judgments and estimates can be based can be slow. As such, there can be no assurance that the final outcome of any legal matter will not materially and adversely affect our business, financial condition, results of operations, profitability, cash flows or liquidity.
Purchase Transaction MattersKing Initial Public Offering (the “King IPO”) Matter
In prior periods,Beginning on March 17, 2015, purported securities class action lawsuits were filed in the Company reported on litigation relatedSuperior Court of the State of California, County of San Francisco, against King, certain of its directors and executive officers and underwriters of the King IPO. The lawsuits were brought by purported shareholders of King seeking to represent a class consisting of all those who purchased stock pursuant and/or traceable to the Purchase Transaction. DuringRegistration Statement and Prospectus issued in connection with the period ended June 30, 2015, the casesKing IPO. The lawsuits were resolvedconsolidated. Plaintiffs assert claims under Sections 11, 12(a)(2) and dismissed with prejudice. As part15 of the resolutionSecurities Act of 1933, as amended, and seek unspecified damages and other relief. The court has set a trial date of May 1, 2017. The Company has not recorded a liability in relation to these lawsuits and believes that the claims we received a settlement payment of $202 million in July 2015 from Vivendi, ASAC,are without merit and our insurers. We recordedintends to defend the settlement within “Shareholders’ equity” in our condensed consolidated balance sheet as of September 30, 2015.lawsuits vigorously.
Other Matters
In addition, we are party to routine claims, suits, investigations, audits, and other proceedings arising from the ordinary course of business, including with respect to intellectual property rights, contractual claims, labor and employment matters, regulatory matters, tax matters, unclaimed property matters, compliance matters, and collection matters. In the opinion of management, after consultation with legal counsel, such routine claims and lawsuits are not significant and we do not expect them to have a material adverse effect on our business, financial condition, results of operations, or liquidity.
Various risks associated with our business are described in Part I, Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2014. In addition, the Company wishes to caution the reader that the following additional important risk could cause our actual results to differ materially from those stated in forward-looking statements contained in this document and elsewhere.2015.
We may fail to complete the proposed acquisition of King Digital Entertainment plc and, even if the acquisition is successfully completed, the anticipated benefits to our stockholders may not be realized.Item 5.Other Information
On November 2, 2015, we and King, a leading interactive mobile entertainment company incorporatedMay 9, 2016, the Company received notice from ASAC II LLC (the “General Partner”), the general partner of ASAC II LP (“ASAC”), an exempted limited partnership established under the laws of Ireland, entered into a Transaction Agreement under the terms of which we will acquire King (the “Acquisition”) and King will become a wholly-owned subsidiaryCayman Islands, pursuant to Section 3.04(b) of the Company. AtStockholders Agreement, dated October 11, 2013, by and among the effective timeCompany, ASAC, and, for the limited purposes set forth in Section 3.01(c) and Section 3.07 thereof, Robert A. Kotick and Brian G. Kelly, as amended, that ASAC intends to distribute all shares allocable to the limited partners of ASAC on June 8, 2016, in accordance with the Acquisition, King shareholders will become entitled to receive $18.00 in cash in exchange for each King share they then hold. The transaction is subject to customary closing conditions, including the approval by King’s shareholders, sanction of the Irish High Court, as well as certain regulatory approvals, and is expected to close by Spring of calendar year 2016.
There can be no assurance that King’s stockholders, the Irish High Court or the relevant regulators will approve the Acquisition. If the transaction is unable to be consummated, then we will not receive the expected benefits of the transaction. Moreover, uncertainty arising during the pendency of the proposed Acquisition, including as a result of any delays in obtaining needed approval, might hamper King’s ability to retain key employees or could result in our or King’s employees losing focus on operations or other matters, which could adversely impact the combined company. Failure to complete, or delays in completing, the proposed Acquisition for any reason could negatively impact King’s relationships with customers, its stock price and its future business and financial results.
Furthermore, evenwaterfall set forth in the event thatAmended and Restated Limited Partnership Agreement of ASAC. On May 9, 2016, ASAC, the proposed Acquisition is successfully completed, there can be no assurance that the anticipated benefits to our stockholders will be realized if King’s business fails to perform as expected, the businesses of Activision BlizzardGeneral Partner and King are not successfully integrated or the integration process results in a loss of or failure to attract, motivate or retain employees, the loss of consumers or customers, the disruption to either or both companies’ ongoing business, higher than expected integration costs or an overall post-completion integration process that takes longer than originally anticipated. Failure to complete or realize the benefits of the Acquisition could negatively impact our stock price and our future business and financial results after the Acquisition.
Additional risks associatedcertain other parties filed with the Acquisition are described in “Cautionary Statement Regarding Forward-Looking Statements” from our Current Report on Form 8-K filed on NovemberSecurities and Exchange Commission Amendment No. 3 2015.to a Schedule 13D containing further information.
The exhibits listed on the accompanying Exhibit Index are hereby incorporated by reference into this Quarterly Report on Form 10-Q.
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.
Date: November 6, 2015May 9, 2016
ACTIVISION BLIZZARD, INC.
/s/ DENNIS DURKIN |
| /s/ STEPHEN WEREB |
|
|
|
Dennis Durkin |
| Stephen Wereb |
Chief Financial Officer and |
| Chief Accounting Officer and |
Principal Financial Officer of |
| Principal Accounting Officer of |
Activision Blizzard, Inc. |
| Activision Blizzard, Inc. |
Exhibit Number |
| Exhibit |
|
|
|
|
|
|
2.1 |
| Transaction Agreement, dated November 2, 2015, by and among King Digital Entertainment plc, ABS Partners C.V. and Activision Blizzard, Inc. (incorporated by reference to Exhibit 2.1 of the Company’s Form 8-K, filed November 3, 2015). |
|
|
|
2.2 |
| Appendix I to the Rule 2.5 Announcement (Conditions Appendix) (incorporated by reference to Exhibit 2.2 of the Company’s Form 8-K, filed November 3, 2015). |
|
|
|
2.3 |
| Expenses Reimbursement Agreement, dated November 2, 2015, by and between King Digital Entertainment plc and Activision Blizzard, Inc. (incorporated by reference to Exhibit 2.3 of the Company’s Form 8-K, filed November 3, 2015). |
|
|
|
2.4 |
| Form of Voting Undertaking executed by certain shareholders of King Digital Entertainment plc. (incorporated by reference to Exhibit 2.4 of the Company’s Form 8-K, filed November 3, 2015). |
|
|
|
3.1 |
| Third Amended and Restated Certificate of Incorporation of Activision Blizzard, Inc., dated June 5, 2014 (incorporated by reference to Exhibit 3.1 of the Company’s Form 8-K, filed June 6, 2014). |
|
|
|
3.2 |
|
|
|
|
|
10.1 |
| |
|
| |
|
|
|
10.2 | Notice of Assignment of Hirshberg Employment Agreement to Activision Blizzard, Inc. dated December 22, 2011 (incorporated by reference to Exhibit 10.97 of the Company’s Form 10-K for the year ended December 31, 2011). | |
|
|
|
| Amendment, dated as of October 15, 2015, to Employment Agreement between Eric Hirshberg and Activision Publishing, Inc. | |
10.4* |
| Notice of Stock Option Award, dated as of |
|
|
|
10.5 |
| |
|
| |
|
| |
|
|
|
31.1 |
| Certification of Robert A. Kotick pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
31.2 |
| Certification of Dennis Durkin pursuant to Rule 13a-14(a) under the Securities and Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.1 |
| Certification of Robert A. Kotick pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
32.2 |
| Certification of Dennis Durkin pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101.INS |
| XBRL Instance Document. |
|
|
|
101.SCH |
| XBRL Taxonomy Extension Schema Document. |
|
|
|
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document. |
101.LAB |
| XBRL Taxonomy Extension Labels Linkbase Document. |
|
|
|
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document. |
|
|
|
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document. |
*Indicates a management contract or compensatory plan, contract or arrangement in which a director or executive officer of the Company participates.
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets at September 30, 2015March 31, 2016 and December 31, 2014,2015, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30,March 31, 2016 and March 31, 2015, and September 30, 2014, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30,March 31, 2016 and March 31, 2015, and September 30, 2014, (iv) Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2015March 31, 2016 and September 30, 2014;March 31, 2015; (v) Condensed Consolidated Statement of Changes in Shareholders’ Equity for the ninethree months ended September 30, 2015;March 31, 2016; and (vi) Notes to Condensed Consolidated Financial Statements.