SEC Filing | Warner Music Inc.

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wmg-20200630

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 June 30, 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

Trading
Symbol(s)

Name of each exchange on which registered

Class A Common Stock

WMG

The Nasdaq Stock Market LLC

As of August 4, 2020, there were 88,550,000 shares of Class A common stock and 421,450,000 shares of Class B common stock of the registrant outstanding. 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 June 3 0 , 2020 and September 30, 2019	1
	Consolidated Statements of Operations for the Three and Nine Months Ended June 3 0 , 2020 and Ju ne 3 0 , 2019	2
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended June 30, 2020 and June 30, 2019	3
	Consolidated Statements of Cash Flows for the Nine Months Ended June 3 0 , 2020 and June 3 0 , 2019	4
	Consolidated Statements of Deficit for the Three and Nine Months Ended June 3 0 , 2020 and June 3 0 , 2019	5
	Notes to Consolidated Interim Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	60
Item 4.	Controls and Procedures	61
Part II.	Other Information
Item 1.	Legal Proceedings	62
Item 1A.	Risk Factors	62
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70
Item 3.	Defaults Upon Senior Securities	70
Item 4.	Mine Safety Disclosures	70
Item 5.	Other Information	70
Item 6.	Exhibits	71
Signatures			73

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Warner Music Group Corp.

Consolidated Balance Sheets (Unaudited)


	June 30, 2020		September 30, 2019
	(in millions, except share data)
Assets
Current assets:
Cash and equivalents	$	532	$	619
Accounts receivable, net of allowances of $21 million and $17 million	732		775
Inventories	59		74
Royalty advances expected to be recouped within one year	188		170
Prepaid and other current assets	71		53
Total current assets	1,582		1,691
Royalty advances expected to be recouped after one year	230		208
Property, plant and equipment, net	310		300
Operating lease right-of-use assets, net	278		—
Goodwill	1,770		1,761
Intangible assets subject to amortization, net	1,624		1,723
Intangible assets not subject to amortization	152		151
Deferred tax assets, net	57		38
Other assets	145		145
Total assets	$	6,148	$	6,017
Liabilities and Deficit
Current liabilities:
Accounts payable	$	205	$	260
Accrued royalties	1,630		1,567
Accrued liabilities	346		492
Accrued interest	22		34
Operating lease liabilities, current	40		—
Deferred revenue	182		180
Other current liabilities	100		286
Total current liabilities	2,525		2,819
Long-term debt	3,000		2,974
Operating lease liabilities, noncurrent	306		—
Deferred tax liabilities, net	157		172
Other noncurrent liabilities	181		321
Total liabilities	$	6,169	$	6,286
Deficit:
Class A common stock, $0.001 par value; 1,000,000,000 shares authorized, 77,000,000 and 0 shares issued and outstanding as of June 30, 2020 and September 30, 2019, respectively	$	—	$	—
Class B common stock, $0.001 par value; 1,000,000,000 shares authorized, 433,000,000 and 505,830,022 issued and outstanding as of June 30, 2020 and September 30, 2019, respectively	1		1
Additional paid-in capital	1,899		1,127
Accumulated deficit	(1,685)		(1,177)
Accumulated other comprehensive loss, net	(253)		(240)
Total Warner Music Group Corp. deficit	(38)		(289)
Noncontrolling interest	17		20
Total deficit	(21)		(269)
Total liabilities and deficit	$	6,148	$	6,017

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Operations (Unaudited)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2020		2019		2020		2019
	(in millions, except share and per share data)
Revenue	$	1,010	$	1,058	$	3,337	$	3,351
Costs and expenses:
Cost of revenue	(527)		(577)		(1,727)		(1,762)
Selling, general and administrative expenses (a)	(869)		(372)		(1,786)		(1,102)
Amortization expense	(47)		(51)		(141)		(160)
Total costs and expenses	(1,443)		(1,000)		(3,654)		(3,024)
Operating (loss) income	(433)		58		(317)		327
Loss on extinguishment of debt	—		(4)		—		(7)
Interest expense, net	(32)		(36)		(98)		(108)
Other (expense) income	(3)		(16)		(12)		41
(Loss) income before income taxes	(468)		2		(427)		253
Income tax (expense) benefit	(51)		12		(44)		(86)
Net (loss) income	(519)		14		(471)		167
Less: Income attributable to noncontrolling interest	(1)		(1)		(3)		(1)
Net (loss) income attributable to Warner Music Group Corp.	$	(520)	$	13	$	(474)	$	166

(a) Includes depreciation expense:	$	(15)	$	(15)	$	(53)	$	(43)

Net (loss) income per share attributable to Warner Music Group Corp.’s stockholders:
Class A – Basic and Diluted	$	(1.03)	$	—	$	(1.09)	$	—
Class B – Basic and Diluted	$	(1.03)	$	0.03	$	(0.94)	$	0.33
Weighted average common shares:
Class A – Basic and Diluted	20,307,692		—		6,769,231		—
Class B – Basic and Diluted	483,796,267		501,991,944		495,926,718		501,991,944

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)


	Three Months Ended June 30,						Nine Months Ended June 30,
	2020		2019		2020		2019
	(in millions)
Net (loss) income	$	(519)	$	14	$	(471)	$	167
Other comprehensive income (loss), net of tax:
Foreign currency adjustment	17		9		9		(17)
Deferred loss on derivative financial instruments	(2)		(3)		(22)		(12)
Other comprehensive income (loss), net of tax	15		6		(13)		(29)
Total comprehensive (loss) income	(504)		20		(484)		138
Less: Income attributable to noncontrolling interest	(1)		(1)		(3)		(1)
Comprehensive (loss) income attributable to Warner Music Group Corp.	$	(505)	$	19	$	(487)	$	137

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended June 30,
	2020		2019
	(in millions)
Cash flows from operating activities
Net (loss) income	$	(471)	$	167
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization	194		203
Unrealized losses (gains) and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts	14		(6)
Deferred income taxes	(34)		25
Loss on extinguishment of debt	—		7
Net loss (gain) on divestitures and investments	2		(27)
Non-cash interest expense	4		5
Non-cash stock-based compensation expense	600		28
Changes in operating assets and liabilities:
Accounts receivable, net	45		(50)
Inventories	16		12
Royalty advances	(41)		(107)
Accounts payable and accrued liabilities	(113)		(94)
Royalty payables	60		117
Accrued interest	(12)		(13)
Operating lease liabilities	(2)		—
Deferred revenue	11		(17)
Other balance sheet changes	14		(1)
Net cash provided by operating activities	287		249
Cash flows from investing activities
Acquisition of music publishing rights and music catalogs, net	(28)		(24)
Capital expenditures	(48)		(82)
Investments and acquisitions of businesses, net of cash received	(11)		(234)

Net cash used in investing activities	(87)		(340)
Cash flows from financing activities
Proceeds from issuance of Acquisition Corp. 3.625% Senior Secured Notes	—		514
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	—		(247)
Call premiums paid and deposit on early redemption of debt	—		(5)
Deferred financing costs paid	(1)		(7)
Distribution to noncontrolling interest holder	(6)		(3)
Dividends paid	(281)		(63)
Net cash (used in) provided by financing activities	(288)		119
Effect of exchange rate changes on cash and equivalents	1		(1)
Net (decrease) increase in cash and equivalents	(87)		27
Cash and equivalents at beginning of period	619		514
Cash and equivalents at end of period	$	532	$	541

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Deficit (Unaudited)


Nine Months Ended June 30, 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		Non-controlling 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 loss	—	—		—	—		—		(474)		—		(474)		3		(471)
Other comprehensive loss, net of tax	—	—		—	—		—		—		(13)		(13)		—		(13)
Dividends ($0.15 per share)	—	—		—	—		—		(75)		—		(75)		—		(75)
Distribution to noncontrolling interest holders	—	—		—	—		—		—		—		—		(6)		(6)
Modification of stock-based compensation plan	—	—		—	—		769		—		—		769		—		769
Stock-based compensation expense	—	—		—	—		3		—		—		3		—		3
Shares listed through IPO	77,000,000	—		(77,000,000)	—		—		—		—		—		—		—
Other	—	—		4,169,978	—		—		1		—		1		—		1
Balance at June 30, 2020	77,000,000	$	—	433,000,000	$	1	$	1,899	$	(1,685)	$	(253)	$	(38)	$	17	$	(21)


Three Months Ended June 30, 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		Non-controlling Interest	Total Deficit

	Shares	Value		Shares	Value
	(in millions, except share and per share data)
Balance at March 31, 2020	—	$	—	510,000,000	$	1	$	1,127	$	(1,166)	$	(268)	$	(306)	$	21	$	(285)

Cumulative effect of ASC 718 accounting policy change	—	—		—	—		—		—		—		—		—		—
Net loss	—	—		—	—		—		(520)		—		(520)		1		(519)
Other comprehensive income, net of tax	—	—		—	—		—		—		15		15		—		15

Distribution to noncontrolling interest holders	—	—		—	—		—		—		—		—		(5)		(5)
Modification of stock-based compensation plan	—	—		—	—		769		—		—		769		—		769
Stock-based compensation expense	—	—		—	—		3		—		—		3		—		3
Shares listed through IPO	77,000,000	—		(77,000,000)	—		—		—		—		—		—		—
Other	—	—		—	—		—		1		—		1		—		1
Balance at June 30, 2020	77,000,000	$	—	433,000,000	$	1	$	1,899	$	(1,685)	$	(253)	$	(38)	$	17	$	(21)


Nine Months Ended June 30, 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	Non-controlling 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	$