wmg-10q_20190331.htm

 

 

 

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 March 31, 2019

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

 

 

 

 

Accelerated filer

 

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

 

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

 

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

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


 


 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class (a)

 

Trading

Symbol(s)

 

Name of each exchange on which registered

None

 

 

 

 

 

(a)

There is no public market for the Registrant’s common stock. As of May 7, 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.  

 

2


 

WARNER MUSIC GROUP CORP.

INDEX

 

 

 

 

Page
Number

Part I.

 

Financial Information

 

 

Item 1.

 

Financial Statements (Unaudited)

 

4

 

 

Consolidated Balance Sheets as of March 31, 2019 and September 30, 2018

 

4

 

 

Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2019 and March 31, 2018

 

5

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2019 and March 31, 2018

 

6

 

 

Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2019 and March 31, 2018

 

7

 

 

Consolidated Statements of (Deficit) Equity for the Three and Six Months Ended March 31, 2019 and March 31, 2018

 

8

 

 

Notes to Consolidated Interim Financial Statements

 

10

 

 

Supplementary Information—Consolidating Financial Statements

 

33

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

46

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

73

Item 4.

 

Controls and Procedures

 

74

Part II.

 

Other Information

 

 

Item 1.

 

Legal Proceedings

 

75

Item 1A.

 

Risk Factors

 

76

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

76

Item 3.

 

Defaults Upon Senior Securities

 

76

Item 4.

 

Mine Safety Disclosures

 

76

Item 5.

 

Other Information

 

76

Item 6.

 

Exhibits

 

77

Signatures

 

 

 

78

 

3


 

ITEM 1.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Warner Music Group Corp.

Consolidated Balance Sheets (Unaudited)

 

 

 

March 31,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

470

 

 

$

514

 

Accounts receivable, net of allowances of $20 million and $45 million

 

 

781

 

 

 

447

 

Inventories

 

 

65

 

 

 

42

 

Royalty advances expected to be recouped within one year

 

 

151

 

 

 

123

 

Prepaid and other current assets

 

 

57

 

 

 

50

 

Total current assets

 

 

1,524

 

 

 

1,176

 

Royalty advances expected to be recouped after one year

 

 

184

 

 

 

153

 

Property, plant and equipment, net

 

 

295

 

 

 

229

 

Goodwill

 

 

1,787

 

 

 

1,692

 

Intangible assets subject to amortization, net

 

 

1,802

 

 

 

1,851

 

Intangible assets not subject to amortization

 

 

153

 

 

 

154

 

Deferred tax assets, net

 

 

7

 

 

 

11

 

Other assets

 

 

150

 

 

 

78

 

Total assets

 

$

5,902

 

 

$

5,344

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

245

 

 

$

281

 

Accrued royalties

 

 

1,509

 

 

 

1,396

 

Accrued liabilities

 

 

409

 

 

 

423

 

Accrued interest

 

 

32

 

 

 

31

 

Deferred revenue

 

 

170

 

 

 

208

 

Other current liabilities

 

 

153

 

 

 

34

 

Total current liabilities

 

 

2,518

 

 

 

2,373

 

Long-term debt

 

 

2,990

 

 

 

2,819

 

Deferred tax liabilities, net

 

 

230

 

 

 

165

 

Other noncurrent liabilities

 

 

284

 

 

 

307

 

Total liabilities

 

$

6,022

 

 

$

5,664

 

Equity:

 

 

 

 

 

 

 

 

Common stock ($0.001 par value; 10,000 shares authorized; 1,060

   and 1,052 shares issued and outstanding at March 31, 2019

   and September 30, 2018, respectively)

 

$

 

 

$

 

Additional paid-in capital

 

 

1,128

 

 

 

1,128

 

Accumulated deficit

 

 

(1,043

)

 

 

(1,272

)

Accumulated other comprehensive loss, net

 

 

(225

)

 

 

(190

)

Total Warner Music Group Corp. deficit

 

 

(140

)

 

 

(334

)

Noncontrolling interest

 

 

20

 

 

 

14

 

Total equity

 

 

(120

)

 

 

(320

)

Total liabilities and equity

 

$

5,902

 

 

$

5,344

 

 

See accompanying notes

4


 

Warner Music Group Corp.

Consolidated Statements of Operations (Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in millions)

 

 

(in millions)

 

Revenue

 

$

1,090

 

 

$

963

 

 

$

2,293

 

 

$

2,008

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

(559

)

 

 

(488

)

 

 

(1,185

)

 

 

(1,057

)

Selling, general and administrative expenses (a)

 

 

(354

)

 

 

(337

)

 

 

(730

)

 

 

(670

)

Amortization expense

 

 

(55

)

 

 

(55

)

 

 

(109

)

 

 

(108

)

Total costs and expenses

 

 

(968

)

 

 

(880

)

 

 

(2,024

)

 

 

(1,835

)

Operating income

 

 

122

 

 

 

83

 

 

 

269

 

 

 

173

 

Loss on extinguishment of debt

 

 

 

 

 

(23

)

 

 

(3

)

 

 

(24

)

Interest expense, net

 

 

(36

)

 

 

(36

)

 

 

(72

)

 

 

(72

)

Other income (expense), net

 

 

29

 

 

 

(6

)

 

 

57

 

 

 

(2

)

Income before income taxes

 

 

115

 

 

 

18

 

 

 

251

 

 

 

75

 

Income tax expense

 

 

(48

)

 

 

(19

)

 

 

(98

)

 

 

(71

)

Net income (loss)

 

 

67

 

 

 

(1

)

 

 

153

 

 

 

4

 

Less: Income attributable to noncontrolling interest

 

 

 

 

 

(2

)

 

 

 

 

 

(3

)

Net income (loss) attributable to Warner Music Group Corp.

 

$

67

 

 

$

(3

)

 

$

153

 

 

$

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a) Includes depreciation expense of:

 

$

(14

)

 

$

(14

)

 

$

(28

)

 

$

(26

)

 

See accompanying notes

5


 

Warner Music Group Corp.

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in millions)

 

 

(in millions)

 

Net income (loss)

 

$

67

 

 

$

(1

)

 

$

153

 

 

$

4

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency adjustment

 

 

(10

)

 

 

9

 

 

 

(26

)

 

 

18

 

Deferred (loss) gain on derivative

 

 

(3

)

 

 

1

 

 

 

(9

)

 

 

2

 

Other comprehensive (loss) income, net of tax

 

 

(13

)

 

 

10

 

 

 

(35

)

 

 

20

 

Total comprehensive income

 

 

54

 

 

 

9

 

 

 

118

 

 

 

24

 

Less: Income attributable to noncontrolling interest

 

 

 

 

 

(2

)

 

 

 

 

 

(3

)

Comprehensive income attributable to Warner Music Group Corp.

 

$

54

 

 

$

7

 

 

$

118

 

 

$

21

 

 

See accompanying notes

6


 

Warner Music Group Corp.

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Six Months Ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

 

 

(in millions)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

153

 

 

$

4

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

137

 

 

 

134

 

Unrealized (gains) losses and remeasurement of foreign denominated loans

 

 

(24

)

 

 

11

 

Deferred income taxes

 

 

27

 

 

 

38

 

Loss on extinguishment of debt

 

 

3

 

 

 

24

 

Net gain on divestitures and investments

 

 

(32

)

 

 

(7

)

Non-cash interest expense

 

 

3

 

 

 

3

 

Equity-based compensation expense

 

 

14

 

 

 

27

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(90

)

 

 

(15

)

Inventories

 

 

13

 

 

 

1

 

Royalty advances

 

 

(61

)

 

 

(12

)

Accounts payable and accrued liabilities

 

 

(100

)

 

 

(100

)

Royalty payables

 

 

46

 

 

 

68

 

Accrued interest

 

 

1

 

 

 

(14

)

Deferred revenue

 

 

(19

)

 

 

(16

)

Other balance sheet changes

 

 

28

 

 

 

(10

)

Net cash provided by operating activities

 

 

99

 

 

 

136

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Acquisition of music publishing rights, net

 

 

(16

)

 

 

(5

)

Capital expenditures

 

 

(59

)

 

 

(29

)

Investments and acquisitions of businesses, net of cash received

 

 

(218

)

 

 

(6

)

Proceeds from the sale of investments

 

 

 

 

 

12

 

Net cash used in investing activities

 

 

(293

)

 

 

(28

)

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

)

 

 

 

Proceeds from issuance of Acquisition Corp. 5.50% Senior Notes

 

 

 

 

 

325

 

Proceeds from supplement of Acquisition Corp. Senior Term Loan Facility

 

 

 

 

 

320

 

Repayment of and redemption deposit for Acquisition Corp. 6.75% Senior Notes

 

 

 

 

 

(635

)

Call premiums paid and deposit on early redemption of debt

 

 

(2

)

 

 

(23

)

Deferred financing costs paid

 

 

(4

)

 

 

(9

)

Distribution to noncontrolling interest holder

 

 

(2

)

 

 

(2

)

Dividends paid

 

 

(31

)

 

 

(125

)

Net cash provided by (used in) financing activities

 

 

151

 

 

 

(149

)

Effect of exchange rate changes on cash and equivalents

 

 

(1

)

 

 

6

 

Net decrease in cash and equivalents

 

 

(44

)

 

 

(35

)

Cash and equivalents at beginning of period

 

 

514

 

 

 

647

 

Cash and equivalents at end of period

 

$

470

 

 

$

612

 

 

See accompanying notes

7


 

Warner Music Group Corp.

Consolidated Statements of (Deficit) Equity (Unaudited)

 

Six Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

153

 

 

 

 

 

 

153

 

 

 

 

 

 

153

 

Other comprehensive loss, net

   of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(35

)

 

 

(35

)

 

 

 

 

 

(35

)

Dividends

 

 

 

 

 

 

 

 

 

 

 

(63

)

 

 

 

 

 

(63

)

 

 

 

 

 

(63

)

Distribution to noncontrolling interest

   holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

Other

 

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

(3

)

Balance at March 31, 2019

 

 

1,060

 

 

$

 

 

$

1,128

 

 

$

(1,043

)

 

$

(225

)

 

$

(140

)

 

$

20

 

 

$

(120

)

 

 

Three Months Ended March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 December 31, 2018

 

 

1,060

 

 

$

 

 

$

1,128

 

 

$

(1,078

)

 

$

(212

)

 

$

(162

)

 

$

23

 

 

$

(139

)

Net income

 

 

 

 

 

 

 

 

 

 

 

67

 

 

 

 

 

 

67

 

 

 

 

 

 

67

 

Other comprehensive loss, net

   of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13

)

 

 

(13

)

 

 

 

 

 

(13

)

Dividends

 

 

 

 

 

 

 

 

 

 

 

(32

)

 

 

 

 

 

(32

)

 

 

 

 

 

(32

)

Distribution to noncontrolling interest

   holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

(3

)

Balance at March 31, 2019

 

 

1,060

 

 

$

 

 

$

1,128

 

 

$

(1,043

)

 

$

(225

)

 

$

(140

)

 

$

20

 

 

$

(120

)

 

 

Six Months Ended March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

3

 

 

 

4

 

Other comprehensive income, net

   of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

 

 

20

 

 

 

 

 

 

20

 

Dividends

 

 

 

 

 

 

 

 

 

 

 

(125

)

 

 

 

 

 

(125

)

 

 

 

 

 

(125

)

Distribution to noncontrolling interest

   holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

(2

)

Other

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

 

1,052

 

 

$

 

 

$

1,128

 

 

$

(778

)

 

$

(161

)

 

$

189

 

 

$

16

 

 

$

205

 

 

8


 

 

Three Months Ended March 31, 2018