Warner Music Group Corp. quarterly report, Q1 FY2014

Warner Music Group Corp. — Form 10-Q Summary

Business context and reporting period

Warner Music Group is a privately held, Access Industries-controlled music company with Recorded Music and Music Publishing operations. This filing covers the first fiscal quarter ended December 31, 2013; the company states that its operating period ended December 27, 2013. Results are unaudited and in U.S. dollars.

Financial performance and position

Metric	Q1 FY2014	Q1 FY2013
Revenue	$815 million	$769 million
OIBDA (company-defined, non-GAAP)	$93 million	$112 million
Operating income	$15 million	$51 million
Net loss attributable to WMG	$37 million	$80 million
Net cash used in operating activities	$52 million	$10 million

Revenue rose 6% reported (7% excluding unfavorable foreign exchange). OIBDA margin fell to about 11% from 15%; operating margin fell to about 2% from 7%. Net loss margin improved to about 5% negative from 10% negative, partly because the prior-year quarter included an $83 million debt-extinguishment loss.
Recorded Music revenue was $691 million, up 5%, but segment OIBDA declined to $93 million from $114 million. Music Publishing revenue rose 10% to $128 million and OIBDA rose to $19 million from $16 million.
Cash used in investing was $26 million, including $12 million of capital expenditures, $10 million for publishing rights and $4 million for business acquisitions. Financing provided $54 million, principally from net revolver borrowings.
At December 31, cash was $129 million and total debt was $2.926 billion, producing reported net debt of $2.797 billion. At September 30, cash was $155 million, debt $2.867 billion and net debt $2.712 billion. Weighted-average debt interest rate was 6.8%.
Current assets were $938 million versus current liabilities of $2.076 billion. The $150 million revolver had $55 million drawn and approximately $11 million of letters of credit outstanding.

Material changes versus the prior comparable period

The July 2013 Parlophone Label Group (PLG) acquisition contributed $74 million of current-quarter revenue, including an operating loss of $23 million with acquisition-related professional and integration costs. Excluding PLG, revenue declined $28 million, or 4%, and Recorded Music revenue declined $40 million.
Physical revenue fell 9% overall to $273 million; digital revenue rose 8% to $276 million after intersegment eliminations. Streaming growth was offset by declines in downloads and mobile revenue. Artist services and expanded-rights revenue increased 40% to $84 million, principally from European concert-promotion timing.
Costs and expenses grew faster than revenue: cost of revenues increased 8%, SG&A 12%, and intangible amortization 38% to $66 million, reflecting the acquisition and its larger amortizable asset base. Current-quarter SG&A included $7 million of restructuring expense and $17 million of acquisition-related professional and integration costs.
Operating cash use increased to $52 million from $10 million, which management attributed mainly to lower OIBDA and higher receivables, partly offset by lower cash interest payments. Management notes that the first fiscal quarter is seasonally a use of operating cash.

Outlook, commentary, risks and unusual items

Management expects existing liquidity sources to support existing operations over the next fiscal year. It expects approximately $70 million of PLG cost savings and synergies; $7 million had been realized by the filing, with the remaining benefits expected over the following 21 months. The company cautions that savings are not assured.
The PLG restructuring plan is expected to total approximately $85 million; $29 million had been incurred to date, including $7 million in the quarter, and completion was expected by fiscal 2015 year-end. Separately, total PLG integration and other nonrecurring costs were estimated at approximately $77 million.
The company reported covenant compliance at quarter-end. Its disclosed leverage ratio was 4.45x under the credit agreement’s adjusted, pro forma calculation; the revolver’s maximum was 6.00x when applicable borrowings exceeded $30 million. The covenant measure includes specified add-backs and projected savings and is not a GAAP performance measure.
Key business risks include continued physical-market decline, piracy, changing digital distribution and pricing, reliance on major digital services, artist and release-schedule uncertainty, foreign exchange exposure, acquisition integration and substantial leverage. Management cited digital and streaming growth as opportunities but said the timing of an industry recovery is uncertain.
Five artist royalty-related putative class actions reached a proposed $11.5 million settlement amount, before fees and administration costs; preliminary approval was granted January 23, 2014, with final approval scheduled for October 2, 2014. A separate digital-download pricing class action remained in discovery; the company could not estimate a reasonably possible loss range. Other pending matters had no material accruals reported.
The PLG purchase-price allocation remained preliminary, including the working-capital adjustment. Management identified no goodwill impairment indicators in the quarter. The company reported effective disclosure controls and no material change in internal control over financial reporting.

Important facts for investors to verify

Whether PLG delivers the targeted savings and synergies, and how remaining restructuring and integration costs affect earnings and cash flow.
Underlying Recorded Music trends excluding PLG, especially physical sales, downloads, streaming growth and the impact of release schedules.
Quarterly working-capital and cash-flow seasonality, revolver availability, debt service needs and continued covenant headroom.
Final PLG purchase-price and working-capital adjustments, and the status and financial outcome of the artist settlement and other litigation.
The filing states there is no public market for WMG common stock; all outstanding common shares are owned by Access affiliates.