UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2018
OR
|
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 001-32502
Warner Music Group Corp.
(Exact name of Registrant as specified in its charter)
|
Delaware |
|
13-4271875 |
|
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
1633 Broadway
New York, NY 10019
(Address of principal executive offices)
(212) 275-2000
(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 ☐ No ☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|
Large accelerated filer |
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☐ |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☒ |
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Smaller reporting company |
|
☐ |
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Emerging growth company |
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☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒
There is no public market for the Registrant’s common stock. As of February 5, 2019, the number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding was 1,060. All of the Registrant’s common stock is owned by affiliates of Access Industries, Inc. The Registrant has filed all Exchange Act reports for the preceding 12 months.
INDEX
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Page |
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Part I. |
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Financial Information |
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Item 1. |
|
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3 |
|
|
|
|
Consolidated Balance Sheets as of December 31, 2018 and September 30, 2018 |
|
3 |
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|
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4 |
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5 |
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6 |
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7 |
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8 |
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|
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Supplementary Information—Consolidating Financial Statements |
|
30 |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
39 |
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Item 3. |
|
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58 |
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Item 4. |
|
|
59 |
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Part II. |
|
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60 |
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Item 1. |
|
|
60 |
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Item 1A. |
|
|
60 |
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Item 2. |
|
|
60 |
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Item 3. |
|
|
60 |
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Item 4. |
|
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61 |
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Item 5. |
|
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61 |
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Item 6. |
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62 |
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63 |
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2
Warner Music Group Corp.
Consolidated Balance Sheets (Unaudited)
|
|
|
December 31, |
|
|
September 30, |
|
||
|
|
|
2018 |
|
|
2018 |
|
||
|
|
|
(in millions) |
|
|||||
|
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and equivalents |
|
$ |
548 |
|
|
$ |
514 |
|
|
Accounts receivable, net of allowances of $21 million and $45 million |
|
|
789 |
|
|
|
447 |
|
|
Inventories |
|
|
66 |
|
|
|
42 |
|
|
Royalty advances expected to be recouped within one year |
|
|
136 |
|
|
|
123 |
|
|
Prepaid and other current assets |
|
|
53 |
|
|
|
50 |
|
|
Total current assets |
|
|
1,592 |
|
|
|
1,176 |
|
|
Royalty advances expected to be recouped after one year |
|
|
166 |
|
|
|
153 |
|
|
Property, plant and equipment, net |
|
|
268 |
|
|
|
229 |
|
|
Goodwill |
|
|
1,793 |
|
|
|
1,692 |
|
|
Intangible assets subject to amortization, net |
|
|
1,839 |
|
|
|
1,851 |
|
|
Intangible assets not subject to amortization |
|
|
153 |
|
|
|
154 |
|
|
Deferred tax assets, net |
|
|
10 |
|
|
|
11 |
|
|
Other assets |
|
|
125 |
|
|
|
78 |
|
|
Total assets |
|
$ |
5,946 |
|
|
$ |
5,344 |
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
179 |
|
|
$ |
281 |
|
|
Accrued royalties |
|
|
1,551 |
|
|
|
1,396 |
|
|
Accrued liabilities |
|
|
495 |
|
|
|
423 |
|
|
Accrued interest |
|
|
24 |
|
|
|
31 |
|
|
Deferred revenue |
|
|
182 |
|
|
|
208 |
|
|
Other current liabilities |
|
|
162 |
|
|
|
34 |
|
|
Total current liabilities |
|
|
2,593 |
|
|
|
2,373 |
|
|
Long-term debt |
|
|
2,998 |
|
|
|
2,819 |
|
|
Deferred tax liabilities, net |
|
|
219 |
|
|
|
165 |
|
|
Other noncurrent liabilities |
|
|
275 |
|
|
|
307 |
|
|
Total liabilities |
|
$ |
6,085 |
|
|
$ |
5,664 |
|
|
Equity: |
|
|
|
|
|
|
|
|
|
Common stock ($0.001 par value; 10,000 shares authorized; 1,060 and 1,052 shares issued and outstanding at December 31, 2018 and September 30, 2018, respectively) |
|
$ |
— |
|
|
$ |
— |
|
|
Additional paid-in capital |
|
|
1,128 |
|
|
|
1,128 |
|
|
Accumulated deficit |
|
|
(1,078 |
) |
|
|
(1,272 |
) |
|
Accumulated other comprehensive loss, net |
|
|
(212 |
) |
|
|
(190 |
) |
|
Total Warner Music Group Corp. deficit |
|
|
(162 |
) |
|
|
(334 |
) |
|
Noncontrolling interest |
|
|
23 |
|
|
|
14 |
|
|
Total equity |
|
|
(139 |
) |
|
|
(320 |
) |
|
Total liabilities and equity |
|
$ |
5,946 |
|
|
$ |
5,344 |
|
See accompanying notes
3
Consolidated Statements of Operations (Unaudited)
|
|
|
Three Months Ended |
|
|||||
|
|
|
December 31, |
|
|||||
|
|
|
2018 |
|
|
2017 |
|
||
|
|
|
(in millions) |
|
|||||
|
Revenue |
|
$ |
1,203 |
|
|
$ |
1,045 |
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
(626 |
) |
|
|
(569 |
) |
|
Selling, general and administrative expenses (a) |
|
|
(376 |
) |
|
|
(333 |
) |
|
Amortization expense |
|
|
(54 |
) |
|
|
(53 |
) |
|
Total costs and expenses |
|
|
(1,056 |
) |
|
|
(955 |
) |
|
Operating income |
|
|
147 |
|
|
|
90 |
|
|
Loss on extinguishment of debt |
|
|
(3 |
) |
|
|
(1 |
) |
|
Interest expense, net |
|
|
(36 |
) |
|
|
(36 |
) |
|
Other income, net |
|
|
28 |
|
|
|
4 |
|
|
Income before income taxes |
|
|
136 |
|
|
|
57 |
|
|
Income tax expense |
|
|
(50 |
) |
|
|
(52 |
) |
|
Net income |
|
|
86 |
|
|
|
5 |
|
|
Less: Income attributable to noncontrolling interest |
|
|
— |
|
|
|
(1 |
) |
|
Net income attributable to Warner Music Group Corp. |
|
$ |
86 |
|
|
$ |
4 |
|
|
|
|
|
|
|
|
|
|
|
|
(a) Includes depreciation expense of: |
|
$ |
(14 |
) |
|
$ |
(12 |
) |
See accompanying notes
4
Consolidated Statements of Comprehensive Income (Unaudited)
|
|
|
Three Months Ended |
|
|||||
|
|
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December 31, |
|
|||||
|
|
|
2018 |
|
|
2017 |
|
||
|
|
|
(in millions) |
|
|||||
|
Net income |
|
$ |
86 |
|
|
$ |
5 |
|
|
Other comprehensive (loss) income, net of tax: |
|
|
|
|
|
|
|
|
|
Foreign currency adjustment |
|
|
(16 |
) |
|
|
9 |
|
|
Deferred (loss) gain on derivative |
|
|
(6 |
) |
|
|
1 |
|
|
Other comprehensive (loss) income, net of tax |
|
|
(22 |
) |
|
|
10 |
|
|
Total comprehensive income |
|
|
64 |
|
|
|
15 |
|
|
Less: Income attributable to noncontrolling interest |
|
|
— |
|
|
|
(1 |
) |
|
Comprehensive income attributable to Warner Music Group Corp. |
|
$ |
64 |
|
|
$ |
14 |
|
See accompanying notes
5
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
Three Months Ended |
|
|||||
|
|
|
December 31, |
|
|||||
|
|
|
2018 |
|
|
2017 |
|
||
|
|
|
(in millions) |
|
|||||
|
Cash flows from operating activities |
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
86 |
|
|
$ |
5 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
68 |
|
|
|
65 |
|
|
Unrealized (gains) losses and remeasurement of foreign denominated loans |
|
|
(13 |
) |
|
|
5 |
|
|
Deferred income taxes |
|
|
11 |
|
|
|
42 |
|
|
Loss on extinguishment of debt |
|
|
3 |
|
|
|
1 |
|
|
Net gain on divestitures and investments |
|
|
(15 |
) |
|
|
(7 |
) |
|
Non-cash interest expense |
|
|
2 |
|
|
|
1 |
|
|
Equity-based compensation expense |
|
|
12 |
|
|
|
18 |
|
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(88 |
) |
|
|
(93 |
) |
|
Inventories |
|
|
13 |
|
|
|
2 |
|
|
Royalty advances |
|
|
(28 |
) |
|
|
(5 |
) |
|
Accounts payable and accrued liabilities |
|
|
(92 |
) |
|
|
(23 |
) |
|
Royalty payables |
|
|
92 |
|
|
|
141 |
|
|
Accrued interest |
|
|
(7 |
) |
|
|
(16 |
) |
|
Deferred revenue |
|
|
(5 |
) |
|
|
(3 |
) |
|
Other balance sheet changes |
|
|
53 |
|
|
|
3 |
|
|
Net cash provided by operating activities |
|
|
92 |
|
|
|
136 |
|
|
Cash flows from investing activities |
|
|
|
|
|
|
|
|
|
Acquisition of music publishing rights, net |
|
|
(5 |
) |
|
|
(1 |
) |
|
Capital expenditures |
|
|
(26 |
) |
|
|
(16 |
) |
|
Investments and acquisitions of businesses, net of cash received |
|
|
(207 |
) |
|
|
(1 |
) |
|
Proceeds from the sale of investments |
|
|
— |
|
|
|
12 |
|
|
Net cash used in investing activities |
|
|
(238 |
) |
|
|
(6 |
) |
|
Cash flows from financing activities |
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Acquisition Corp. 3.625% Senior Notes |
|
|
287 |
|
|
|
— |
|
|
Repayment of Acquisition Corp. 4.125% Senior Secured Notes |
|
|
(40 |
) |
|
|
— |
|
|
Repayment of Acquisition Corp. 4.875% Senior Secured Notes |
|
|
(30 |
) |
|
|
— |
|
|
Repayment of Acquisition Corp. 5.625% Senior Secured Notes |
|
|
(27 |
) |
|
|
— |
|
|
Call premiums paid on early redemption of debt |
|
|
(2 |
) |
|
|
— |
|
|
Deferred financing costs paid |
|
|
(4 |
) |
|
|
(1 |
) |
|
Distribution to noncontrolling interest holder |
|
|
(2 |
) |
|
|
(2 |
) |
|
Net cash provided by (used in) financing activities |
|
|
182 |
|
|
|
(3 |
) |
|
Effect of exchange rate changes on cash and equivalents |
|
|
(2 |
) |
|
|
2 |
|
|
Net increase in cash and equivalents |
|
|
34 |
|
|
|
129 |
|
|
Cash and equivalents at beginning of period |
|
|
514 |
|
|
|
647 |
|
|
Cash and equivalents at end of period |
|
$ |
548 |
|
|
$ |
776 |
|
See accompanying notes
6
Consolidated Statements of (Deficit) Equity (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Total |
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Warner Music |
|
|
|
|
|
|
|
|
|
|||
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Group Corp. |
|
|
Noncontrolling |
|
|
Total |
|
|||||||||||
|
|
|
Shares |
|
|
Value |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
Deficit |
|
|
Interest |
|
|
Equity |
|
||||||||
|
|
|
(in millions, except share amounts) |
|
|||||||||||||||||||||||||||||
|
Balance at September 30, 2018 |
|
|
1,052 |
|
|
$ |
— |
|
|
$ |
1,128 |
|
|
$ |
(1,272 |
) |
|
$ |
(190 |
) |
|
$ |
(334 |
) |
|
$ |
14 |
|
|
$ |
(320 |
) |
|
Cumulative effect of ASC 606 adoption |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
139 |
|
|
|
— |
|
|
|
139 |
|
|
|
11 |
|
|
|
150 |
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
86 |
|
|
|
— |
|
|
|
86 |
|
|
|
— |
|
|
|
86 |
|
|
Other comprehensive loss, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(22 |
) |
|
|
(22 |
) |
|
|
— |
|
|
|
(22 |
) |
|
Dividends |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(31 |
) |
|
|
— |
|
|
|
(31 |
) |
|
|
— |
|
|
|
(31 |
) |
|
Distribution to noncontrolling interest holders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
Other |
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Balance at December 31, 2018 |
|
|
1,060 |
|
|
$ |
— |
|
|
$ |
1,128 |
|
|
$ |
(1,078 |
) |
|
$ |
(212 |
) |
|
$ |
(162 |
) |
|
$ |
23 |
|
|
$ |
(139 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
Total |
|
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
Warner Music |
|
|
|
|
|
|
|
|
|
|||
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Accumulated |
|
|
Comprehensive |
|
|
Group Corp. |
|
|
Noncontrolling |
|
|
Total |
|
|||||||||||
|
|
|
Shares |
|
|
Value |
|
|
Capital |
|
|
Deficit |
|
|
Loss |
|
|
Equity |
|
|
Interest |
|
|
Equity |
|
||||||||
|
|
|
(in millions, except share amounts) |
|
|||||||||||||||||||||||||||||
|
Balance at September 30, 2017 |
|
|
1,055 |
|
|
$ |
— |
|
|
$ |
1,128 |
|
|
$ |
(654 |
) |
|
$ |
(181 |
) |
|
$ |
293 |
|
|
$ |
15 |
|
|
$ |
308 |
|
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
— |
|
|
|
4 |
|
|
|
1 |
|
|
|
5 |
|
|
Other comprehensive income, net of tax |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
|
|
10 |
|
|
|
— |
|
|
|
10 |
|
|
Distribution to noncontrolling interest holders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
(2 |
) |
|
Balance at December 31, 2017 |
|
|
1,055 |
|
|
$ |
— |
|
|
$ |
1,128 |
|
|
$ |
(650 |
) |
|
$ |
(171 |
) |
|
$ |
307 |
|
|
$ |
14 |
|
|
$ |
321 |
|
See accompanying notes
7
Notes to Consolidated Interim Financial Statements (Unaudited)
1. Description of Business
Warner Music Group Corp. (the “Company”) was formed on November 21, 2003. The Company is the direct parent of WMG Holdings Corp. (“Holdings”), which is the direct parent of WMG Acquisition Corp. (“Acquisition Corp.”). Acquisition Corp. is one of the world’s major music-based content companies.
Acquisition of Warner Music Group by Access Industries
Pursuant to an Agreement and Plan of Merger, dated as of May 6, 2011 (the “Merger Agreement”), by and among the Company, AI Entertainment Holdings LLC (formerly Airplanes Music LLC), a Delaware limited liability company (“Parent”) and an affiliate of Access Industries, Inc. (“Access”), and Airplanes Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), on July 20, 2011 (the “Merger Closing Date”), Merger Sub merged with and into the Company with the Company surviving as a wholly owned subsidiary of Parent (the “Merger”). In connection with the Merger, the Company delisted its common stock from the NYSE. The Company continues voluntarily to file with the SEC current and periodic reports that would be required to be filed with the SEC pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as provided for in certain covenants contained in the instruments covering its outstanding indebtedness.
Recorded Music Operations
The Company’s Recorded Music business primarily consists of the discovery and development of artists and the related marketing, distribution and licensing of recorded music produced by such artists. The Company plays an integral role in virtually all aspects of the recorded music value chain from discovering and developing talent to producing music and promoting artists and their products.
In the United States, Recorded Music operations are conducted principally through the Company’s major record labels— Warner Bros. Records and Atlantic Records. In October 2018, the Company launched Elektra Music Group in the United States as a standalone label group, which comprises the Elektra, Fueled by Ramen and Roadrunner labels. The Company’s Recorded Music operations also include Rhino, a division that specializes in marketing the Company’s music catalog through compilations and reissuances of previously released music and video titles. The Company also conducts its Recorded Music operations through a collection of additional record labels, including Asylum, Big Beat, Canvasback, East West, Erato, FFRR, Nonesuch, Parlophone, Reprise, Sire, Spinnin’, Warner Classics and Warner Music Nashville.
Outside the United States, Recorded Music activities are conducted in more than 50 countries through various subsidiaries, affiliates and non-affiliated licensees. Internationally, the Company engages in the same activities as in the United States: discovering and signing artists and distributing, marketing and selling their recorded music. In most cases, the Company also markets and distributes the music of those artists for whom the Company’s domestic record labels have international rights. In certain smaller markets, the Company licenses the right to distribute the Company’s records to non-affiliated third-party record labels. The Company’s international artist services operations include a network of concert promoters through which it provides resources to coordinate tours for the Company’s artists and other artists as well as management companies that guide artists with respect to their careers.
The Company’s Recorded Music distribution operations include Warner-Elektra-Atlantic Corporation (“WEA Corp.”), which markets and sells music and video products to retailers and wholesale distributors; Alternative Distribution Alliance (“ADA”), which distributes the products of independent labels to retail and wholesale distributors; and various distribution centers and ventures operated internationally.
The Company’s Recorded Music products are sold in digital form to an expanded universe of digital partners, including digital streaming services such as Amazon, Apple Music, Deezer, Napster, Soundcloud, Spotify, Tencent and YouTube, digital radio services such as iHeart Radio, Pandora and Sirius XM and digital download services such as Apple’s iTunes and Google Play. In addition, Recorded Music products are sold in physical retail outlets and in physical form to online physical retailers such as Amazon.com and bestbuy.com
The Company has integrated the exploitation of digital content into all aspects of its business, including artist and repertoire (“A&R”), marketing, promotion and distribution. The Company’s business development executives work closely with A&R departments to ensure that while music is being produced, digital assets are also created with all distribution channels in mind, including streaming services, social networking sites, online portals and music-centered destinations. The Company also works side
8
by side with its digital partners to test new concepts. The Company believes existing and new digital businesses will be a significant source of growth and will provide new opportunities to successfully monetize its assets and create new revenue streams. The proportion of digital revenues attributed to each distribution channel varies by region and proportions may change as the roll out of new technologies continues. As an owner of music content, the Company believes it is well positioned to take advantage of growth in digital distribution and emerging technologies to maximize the value of its assets.
The Company has diversified its revenues beyond its traditional businesses by entering into expanded-rights deals with recording artists in order to partner with artists in other aspects of their careers. Under these agreements, the Company provides services to and participates in artists’ activities outside the traditional recorded music business such as touring, merchandising and sponsorships. The Company has built artist services capabilities and platforms for exploiting this broader set of music-related rights and participating more widely in the monetization of the artist brands it helps create.
The Company believes that entering into expanded-rights deals and enhancing its artist services capabilities in areas such as concert promotion, merchandising and management have permitted it to diversify revenue streams and capitalize on other revenue opportunities. This provides for improved long-term relationships with artists and allows the Company to more effectively connect artists and fans.
Music Publishing Operations
While recorded music is focused on exploiting a recording of a composition, music publishing is an intellectual property business focused on the exploitation of the composition itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rightsholders, the Company’s Music Publishing business garners a share of the revenues generated from use of the composition.
The Company’s Music Publishing operations are conducted principally through Warner/Chappell, its global Music Publishing company, headquartered in Los Angeles with operations in over 50 countries through various subsidiaries, affiliates and non-affiliated licensees. The Company owns or controls rights to more than one million musical compositions, including numerous pop hits, American standards, folk songs and motion picture and theatrical compositions. Assembled over decades, its award-winning catalog includes over 70,000 songwriters and composers and a diverse range of genres including pop, rock, jazz, classical, country, R&B, hip-hop, rap, reggae, Latin, folk, blues, symphonic, soul, Broadway, techno, alternative and gospel. Warner/Chappell also administers the music and soundtracks of several third-party television and film producers and studios. The Company has an extensive production music library collectively branded as Warner/Chappell Production Music.
2. Summary of Significant Accounting Policies
Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended December 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2019.
The consolidated balance sheet at September 30, 2018 has been derived from the audited consolidated financial statements at that date but does not include all the information and notes required by U.S. GAAP for complete financial statements.
For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 (File No. 001-32502).
Basis of Consolidation
The accompanying financial statements present the consolidated accounts of all entities in which the Company has a controlling voting interest and/or variable interest required to be consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated.
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation (“ASC 810”), requires the Company first evaluate its investments to determine if any investments qualify as a variable interest entity (“VIE”). A VIE is consolidated if the Company is deemed to be the primary beneficiary of the VIE, which is the party involved with the VIE that has both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right
9
to receive benefits that could potentially be significant to the VIE. If an entity is not deemed to be a VIE, the Company consolidates the entity if the Company has a controlling voting interest.
The Company maintains a 52-53 week fiscal year ending on the last Friday in each reporting period. As such, all references to December 31, 2018 and December 31, 2017 relate to the periods ended December 28, 2018 and December 29, 2017, respectively. For convenience purposes, the Company continues to date its financial statements as of December 31. The fiscal year ended September 30, 2018 ended on September 28, 2018.
The Company has performed a review of all subsequent events through the date the financial statements were issued and has determined that no additional disclosures are necessary.
Income Taxes
At the end of each interim period, the Company makes its best estimate of the effective tax rate expected to be applicable for the full fiscal year and uses that rate to provide for income taxes on a current year-to-date basis before discrete items.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). In accordance with ASC Topic 740, Income Taxes (“ASC 740”) the Company recorded the impacts in the period of enactment.
New Accounting Pronouncements
Adoption of New Revenue Recognition Standard
In May 2014, the FASB issued guidance codified in ASC 606, Revenue from Contracts with Customers (“ASC 606”), which replaces the guidance in former ASC 605, Revenue Recognition and ASC 928-605, Entertainment – Music. The amendment was the result of a joint effort by the FASB and the International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and international financial reporting standards ("IFRS"). The joint project clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and IFRS.
The Company adopted ASC 606 on October 1, 2018, using the modified retrospective method to all contracts not completed as of the date of adoption. The reported results as of and for the three-month period ended December 31, 2018 reflect the application of the new standard, while the reported results for the three-month period ending December 31, 2017 have not been adjusted to reflect the new standard and were prepared under prior revenue recognition accounting guidance.
The adoption of ASC 606 resulted in a change in the timing of revenue recognition in the Company’s Music Publishing segment as well as international broadcast rights within Recorded Music. Under the new revenue recognition rules, revenue is recorded based on best estimates available in the period of sale or usage whereas revenue was previously recorded when cash was received for both the licensing of publishing rights and international Recorded Music broadcast fees. Additionally, for certain licenses where the consideration is fixed and the intellectual property being licensed is static, revenue is recognized at the point in time when control of the licensed content is transferred to the customer. As a result of adopting ASC 606, the Company recorded a decrease to the opening accumulated deficit of approximately $139 million, net of tax, as of October 1, 2018. The Company also reclassified $28 million from accounts receivable to other current liabilities related to estimated refund liabilities for our physical sales.
10
The following table provides the cumulative effect of the changes made to the opening balance sheet, as of October 1, 2018, from the adoption of ASC 606 and which primarily relates to the accrual of licensing revenue in the period of sale or usage.
|
|
|
September 30, |
|
|
Impact of |
|
|
October 1, |
|
|||
|
|
|
2018 |
|
|
Adoption |
|
|
2018 |
|
|||
|
|
|
(in millions) |
|
|||||||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
447 |
|
|
$ |
257 |
|
|
$ |
704 |
|
|
Total current assets |
|
|
1,176 |
|
|
|
257 |
|
|
|
1,433 |
|
|
Other assets |
|
|
78 |
|
|
|
15 |
|
|
|
93 |
|
|
Total assets |
|
$ |
5,344 |
|
|
$ |
272 |
|
|
$ |
5,616 |
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued royalties |
|
|
1,396 |
|
|
|
79 |
|
|
|
1,475 |
|
|
Accrued liabilities |
|
|
423 |
|
|
|
(1 |
) |
|
|
422 |
|
|
Deferred revenue |
|
|
208 |
|
|
|
(27 |
) |
|
|
181 |
|
|
Other current liabilities |
|
|
34 |
|
|
|
33 |
|
|
|
67 |
|
|
Total current liabilities |
|
|
2,373 |
|
|
|
84 |
|
|
|
2,457 |
|
|
Deferred tax liabilities, net |
|
|
165 |
|
|
|
37 |
|
|
|
202 |
|
|
Other noncurrent liabilities |
|
|
307 |
|
|
|
1 |
|
|
|
308 |
|
|
Total liabilities |
|
|
5,664 |
|
|
|
122 |
|
|
|
5,786 |
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Deficit |
|
|
(1,272 |
) |
|
|
139 |
|
|
|
(1,133 |
) |
|
Non-controlling interest |
|
|
14 |
|
|
|
11 |
|
|
|
25 |
|
|
Total equity |
|
|
(320 |
) |
|
|
150 |
|
|
|
(170 |
) |
|
Total liabilities and equity |
|
$ |
5,344 |
|
|
$ |
272 |
|
|
$ |
5,616 |
|
The disclosure of the impact of adoption on our consolidated statement of operations and consolidated statement of cash flows for the three months ended December 31, 2018 and the consolidated balance sheet as of December 31, 2018 are as follows (in millions):
|
|
|
December 31, 2018 |
|
|||||||||
|
|
|
As Reported |
|
|
Balances without adoption of ASC 606 |
|
|
Effect of Change |
|
|||
|
|
|
(in millions) |
|
|||||||||
|
Revenues |
|
$ |
1,203 |
|
|
$ |
1,183 |
|
|
$ |
20 |
|
|
Cost and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue |
|
|
(626 |
) |
|
|
(624 |
) |
|
|
(2 |
) |
|
Operating income |
|
|
147 |
|
|
|
129 |
|
|
|
18 |
|
|
Income before income taxes |
|
|
136 |
|
|
|
118 |
|
|
|
18 |
|
|
Income tax expense |
|
|
(50 |
) |
|
|
(43 |
) |
|
|
(7 |
) |
|
Net income |
|
|
86 |
|
|
|
75 |
|
|
|
11 |
|
|
Less: Income attributable to noncontrolling interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net income attributable to Warner Music Group Corp. |
|
$ |
86 |
|
|
$ |
75 |
|
|
$ |
11 |
|
11
|
|
December 31, 2018 |
|
||||||||||
|
|
|
As Reported |
|
|
Balances without adoption of ASC 606 |
|
|
Effect of Change |
|
|||
|
|
|
(in millions) |
|
|||||||||
|
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
789 |
|
|
$ |
499 |
|
|
$ |
290 |
|
|
Total current assets |
|
|
1,592 |
|
|
|
1,302 |
|
|
|
290 |
|
|
Other assets |
|
|
125 |
|
|
|
110 |
|
|
|
15 |
|
|
Deferred tax assets, net |
|
|
10 |
|
|
|
10 |
|
|
|
— |
|
|
Total assets |
|
$ |
5,946 |
|
|
$ |
5,641 |
|
|
$ |
305 |
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued royalties |
|
|
1,551 |
|
|
|
1,471 |
|
|
|
80 |
|
|
Accrued liabilities |
|
|
495 |
|
|
|
496 |
|
|
|
(1 |
) |
|
Deferred revenue |
|
|
182 |
|
|
|
211 |
|
|
|
(29 |
) |
|
Other current liabilities |
|
|
162 |
|
|
|
115 |
|
|
|
47 |
|
|
Total current liabilities |
|
|
2,593 |
|
|
|
2,496 |
|
|
|
97 |
|
|
Deferred tax liabilities, net |
|
|
219 |
|
|
|
175 |
|
|
|
44 |
|
|
Other noncurrent liabilities |
|
|
275 |
|
|
|
271 |
|
|
|
4 |
|
|
Total liabilities |
|
|
6,085 |
|
|
|
5,940 |
|
|
|
145 |
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Deficit |
|
|
(1,078 |
) |
|
|
(1,227 |
) |
|
|
149 |
|
|
Non-controlling interest |
|
|
23 |
|
|
|
12 |
|
|
|
11 |
|
|
Total equity |
|
|
(139 |
) |
|
|
(299 |
) |
|
|
160 |
|