SEC Filing | Warner Music Inc.

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wmg-20200331

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, 2020


☐			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 (State or other jurisdiction of incorporation or organization)		13-4271875 (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, 2020, the registrant had no shares of Class A common stock, par value $0.001 per share, and 510,000,000 shares of Class B common stock, par value $0.001 per share, outstanding. 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.

WARNER MUSIC GROUP CORP.

INDEX


		Page Number
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets as of March 31, 2020 and September 30, 2019	1
	Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2020 and March 31, 2019	2
	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended March 31, 2020 and March 31, 2019	3
	Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2020 and March 31, 2019	4
	Consolidated Statements of Deficit for the Three and Six Months Ended March 31, 2020 and March 31, 2019	5
	Notes to Consolidated Interim Financial Statements	7
	Supplementary Information—Consolidating Financial Statements	26
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	39
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	68
Item 4.	Controls and Procedures	68
Part II.	Other Information
Item 1.	Legal Proceedings	70
Item 1A.	Risk Factors	70
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 3.	Defaults Upon Senior Securities	71
Item 4.	Mine Safety Disclosures	71
Item 5.	Other Information	71
Item 6.	Exhibits	72
Signatures			73

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Warner Music Group Corp.

Consolidated Balance Sheets (Unaudited)


	March 31, 2020		September 30, 2019
	(in millions, except share data)
Assets
Current assets:
Cash and equivalents	$	484	$	619
Accounts receivable, net of allowances of $21 million and $17 million	763		775
Inventories	65		74
Royalty advances expected to be recouped within one year	189		170
Prepaid and other current assets	82		53
Total current assets	1,583		1,691
Royalty advances expected to be recouped after one year	232		208
Property, plant and equipment, net	294		300
Operating lease right-of-use assets, net	281		—
Goodwill	1,761		1,761
Intangible assets subject to amortization, net	1,644		1,723
Intangible assets not subject to amortization	151		151
Deferred tax assets, net	55		38
Other assets	123		145
Total assets	$	6,124	$	6,017
Liabilities and Deficit
Current liabilities:
Accounts payable	$	246	$	260
Accrued royalties	1,591		1,567
Accrued liabilities	564		492
Accrued interest	34		34
Operating lease liabilities, current	39		—
Deferred revenue	167		180
Other current liabilities	91		286
Total current liabilities	2,732		2,819
Long-term debt	2,983		2,974
Operating lease liabilities, noncurrent	312		—
Deferred tax liabilities, net	154		172
Other noncurrent liabilities	228		321
Total liabilities	$	6,409	$	6,286
Equity:
Common A stock ($0.001 par value; 1,000,000,000 shares authorized; 0 and 0 shares issued and outstanding as of March 31, 2020 and September 30, 2019, respectively)	$	—	$	—
Common B stock ($0.001 par value; 1,000,000,000 shares authorized; 510,000,000 and 505,830,022 issued and outstanding as of March 31, 2020 and September 30, 2019, respectively)	1		1
Additional paid-in capital	1,127		1,127
Accumulated deficit	(1,166)		(1,177)
Accumulated other comprehensive loss, net	(268)		(240)
Total Warner Music Group Corp. deficit	(306)		(289)
Noncontrolling interest	21		20
Total deficit	(285)		(269)
Total liabilities and deficit	$	6,124	$	6,017

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Operations (Unaudited)


	Three Months Ended March 31,						Six Months Ended March 31,
	2020		2019		2020		2019
	(in millions, except share and per share data)
Revenue	$	1,071	$	1,090	$	2,327	$	2,293
Costs and expenses:
Cost of revenue	(535)		(559)		(1,200)		(1,185)
Selling, general and administrative expenses (a)	(538)		(354)		(917)		(730)
Amortization expense	(47)		(55)		(94)		(109)
Total costs and expenses	(1,120)		(968)		(2,211)		(2,024)
Operating (loss) income	(49)		122		116		269
Loss on extinguishment of debt	—		—		—		(3)
Interest expense, net	(33)		(36)		(66)		(72)
Other (expense) income	(4)		29		(9)		57
(Loss) income before income taxes	(86)		115		41		251
Income tax benefit (expense)	12		(48)		7		(98)
Net (loss) income	(74)		67		48		153
Less: Income attributable to noncontrolling interest	—		—		(2)		—
Net (loss) income attributable to Warner Music Group Corp.	$	(74)	$	67	$	46	$	153

(a) Includes depreciation expense:	$	(14)	$	(14)	$	(38)	$	(28)

Net (loss) income per share attributable to Warner Music Group Corp.’s stockholders:
Basic and Diluted	$	(0.15)	$	0.13	$	0.09	$	0.30
Weighted average common shares:
Basic and Diluted	501,991,944		501,991,944		501,991,944		501,991,944

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Comprehensive Income (Unaudited)


	Three Months Ended March 31,						Six Months Ended March 31,
	2020		2019		2020		2019
	(in millions)
Net (loss) income	$	(74)	$	67	$	48	$	153
Other comprehensive loss, net of tax:
Foreign currency adjustment	(15)		(10)		(8)		(26)
Deferred loss on derivative financial instruments	(23)		(3)		(20)		(9)
Other comprehensive loss, net of tax	(38)		(13)		(28)		(35)
Total comprehensive (loss) income	(112)		54		20		118
Less: Income attributable to noncontrolling interest	—		—		(2)		—
Comprehensive (loss) income attributable to Warner Music Group Corp.	$	(112)	$	54	$	18	$	118

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Cash Flows (Unaudited)


	Six Months Ended March 31,
	2020		2019
	(in millions)
Cash flows from operating activities
Net income	$	48	$	153
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	132		137
Unrealized gains and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts	(7)		(24)
Deferred income taxes	(31)		27
Loss on extinguishment of debt	—		3
Net loss (gain) on divestitures and investments	15		(32)
Non-cash interest expense	3		3
Equity-based compensation expense	160		14
Changes in operating assets and liabilities:
Accounts receivable, net	6		(90)
Inventories	9		13
Royalty advances	(47)		(61)
Accounts payable and accrued liabilities	(109)		(100)
Royalty payables	38		46
Accrued interest	—		1
Operating lease liabilities	(2)		—
Deferred revenue	(14)		(19)
Other balance sheet changes	(37)		28
Net cash provided by operating activities	164		99
Cash flows from investing activities
Acquisition of music publishing rights and music catalogs, net	(18)		(16)
Capital expenditures	(28)		(59)
Investments and acquisitions of businesses, net of cash received	(5)		(218)

Net cash used in investing activities	(51)		(293)
Cash flows from financing activities
Proceeds from issuance of Acquisition Corp. 3.625% Senior Secured 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 and deposit on early redemption of debt	—		(2)
Deferred financing costs paid	—		(4)
Distribution to noncontrolling interest holder	(1)		(2)
Dividends paid	(244)		(31)
Net cash (used in) provided by financing activities	(245)		151
Effect of exchange rate changes on cash and equivalents	(3)		(1)
Net decrease in cash and equivalents	(135)		(44)
Cash and equivalents at beginning of period	619		514
Cash and equivalents at end of period	$	484	$	470

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Deficit (Unaudited)


Six Months Ended March 31, 2020
	Class A Common Stock				Class B Common Stock						Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Warner Music Group Corp. Deficit		Noncontrolling Interest	Total Deficit

	Shares	Value		Shares	Value
	(in millions, except share and per share data)
Balance at September 30, 2019	—	$	—	505,830,022	$	1	$	1,127	$	(1,177)	$	(240)	$	(289)	$	20	$	(269)
Cumulative effect of ASC 842 adoption	—	—		—	—		—		7		—		7		—		7
Cumulative effect of ASC 718 accounting policy change	—	—		—	—		—		33		—		33		—		33
Net income	—	—		—	—		—		46		—		46		2		48
Other comprehensive loss, net of tax	—	—		—	—		—		—		(28)		(28)		—		(28)
Dividends ($0.15 per share)	—	—		—	—		—		(75)		—		(75)		—		(75)
Distribution to noncontrolling interest holders	—	—		—	—		—		—		—		—		(1)		(1)
Other	—	—		4,169,978	—		—		—		—		—		—		—
Balance at March 31, 2020	—	$	—	510,000,000	$	1	$	1,127	$	(1,166)	$	(268)	$	(306)	$	21	$	(285)


Three Months Ended March 31, 2020
	Class A Common Stock				Class B Common Stock						Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Warner Music Group Corp. Deficit		Noncontrolling Interest	Total Deficit

	Shares	Value		Shares	Value
	(in millions, except share and per share data)
Balance at December 31, 2019	—	$	—	510,000,000	$	1	$	1,127	$	(1,088)	$	(230)	$	(190)	$	21	$	(169)

Cumulative effect of ASC 718 accounting policy change	—	—		—	—		—		33		—		33		—		33
Net loss	—	—		—	—		—		(74)		—		(74)		—		(74)
Other comprehensive loss, net of tax	—	—		—	—		—		—		(38)		(38)		—		(38)
Dividends ($0.07 per share)	—	—		—	—		—		(37)		—		(37)		—		(37)
Distribution to noncontrolling interest holders	—	—		—	—		—		—		—		—		—		—
Other	—	—		—	—		—		—		—		—		—		—
Balance at March 31, 2020	—	$	—	510,000,000	$	1	$	1,127	$	(1,166)	$	(268)	$	(306)	$	21	$	(285)


Six Months Ended March 31, 2019
	Class A Common Stock				Class B Common Stock						Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Warner Music Group Corp. Deficit		Noncontrolling Interest	Total Deficit

	Shares	Value		Shares	Value
	(in millions, except share and per share data)
Balance at September 30, 2018	—	$	—	501,991,944	$	1	$	1,127	$	(1,272)	$	(190)	$	(334)	$	14	$	(320)
Cumulative effect of ASC 606 adoption	—	—		—	—		—		139		—