Warner Music Group Corp. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended June 30, 2011, compared with the same periods in 2010; balance-sheet figures are as of June 30, 2011, compared with September 30, 2010. The company operates Recorded Music and Music Publishing businesses. Amounts below are in millions of dollars except per-share data.
After the reporting period, on July 20, 2011, Warner Music was acquired by an Access Industries affiliate and became a wholly owned subsidiary. Eligible public shares were converted to $8.25 cash per share. The shares were delisted, and the company filed to suspend its reporting obligations on August 2, 2011.
Financial performance and liquidity
| Metric | Three months ended June 30 | Nine months ended June 30 |
|---|---|---|
| Revenue | 2011: $686; 2010: $652 (+5%) | 2011: $2,157; 2010: $2,232 (-3%) |
| Operating income (loss) | 2011: $10; 2010: $(1) | 2011: $53; 2010: $70 (-24%) |
| OIBDA (company-defined non-GAAP) | 2011: $77; 2010: $64; margin 11% vs. 10% | 2011: $249; 2010: $263; margin 12% in both periods |
| Net loss attributable to Warner Music | 2011: $(46); 2010: $(55); diluted loss per share $(0.30) vs. $(0.37) | 2011: $(102); 2010: $(97); diluted loss per share $(0.68) vs. $(0.65) |
| Cash from operating activities | Not presented for the quarter | 2011: $(18); 2010: $100 |
Third-quarter revenue growth included digital revenue of $203, up 13%, representing 30% of consolidated revenue. For the nine-month period, digital revenue was $610, up 9%, or 28% of revenue. Reported revenue benefited from foreign exchange: excluding that impact, revenue declined 1% in the quarter and 4% for the nine months.
At June 30, cash and equivalents were $290, down from $439 at September 30, 2010. Current assets were $954 and current liabilities $1,584. Investing activities used $151, including $59 for business acquisitions, $58 for publishing rights and $34 in capital expenditures. Long-term debt was $1,952, versus $1,945 at September 30; net debt was $1,662, up $156. Total deficit was $289.
After the merger refinancing, pro forma debt as of June 30 would have been $2,123, including $1,069 of existing secured notes, $157 of new secured notes, $747 of senior unsecured notes and $150 of Holdings notes. The new $60 revolving facility was undrawn at closing. The company said it expected existing and anticipated cash sources to support operations over the next fiscal year.
Changes versus the prior comparable period
- Quarterly revenue rose 5% as Recorded Music and Music Publishing each grew 5%; growth in digital, licensing and concert promotion offset physical-sales declines. International revenue increased 16%, while U.S. revenue fell 8%.
- For the nine months, revenue fell 3%. Physical and other revenue decreased 12%; digital revenue increased 8% and licensing revenue 15%. Recorded Music revenue declined 4%, and Music Publishing declined 3%.
- Quarterly OIBDA increased 20%, helped by higher revenue, lower distribution and artist-and-repertoire costs, and a settlement benefit. Nine-month OIBDA fell 5%, while operating income fell 24%.
- Nine-month selling, general and administrative expense declined 5%, including lower marketing and distribution expense. The company recorded $28 of severance charges, compared with $20 in the prior-year period.
- Operating cash flow shifted from $100 provided to $18 used, reflecting operating results, working-capital timing, artist spending and higher severance payments. Cash interest paid was $176 versus $169.
Outlook, risks and unusual items
- Management targeted $50–$65 of cost savings over the next nine fiscal quarters, but cautioned that the savings might not be achieved in full or at all.
- Management cited digital distribution, streaming, licensing and expanded-rights/artist-services activity as opportunities, while noting digital and other new revenue had not yet offset physical-sales declines. It identified industry contraction, piracy, pricing and margin pressure, competition, reliance on a small number of digital retailers, foreign exchange, and hit-driven revenue volatility as risks.
- The May 2011 LimeWire settlement produced a $12 benefit to general and administrative expense, net of estimated artist royalties. Merger-related expense was approximately $5 for the quarter and $7 for the nine months.
- A digital-download pricing class action remained pending: on July 18, 2011, the court granted defendants’ motion to dismiss in part and denied it in part; discovery was to proceed. The company said it would defend the case and could not predict the outcome.
- Uncertain tax-position accruals rose to $31 from $10 at September 30, 2010. The company expected $21 to be paid within 12 months, with $17 expected to be reimbursed by Time Warner under the 2004 acquisition terms.
- The post-merger capital structure and ownership changed materially. New notes carry stated interest rates of 9.5%, 11.5% and 13.75%; the company also entered an Access management agreement providing for fees and expenses, with amounts not specified in this filing text.
Important facts for investors to verify
- Reconcile the post-merger debt, refinancing proceeds and transaction uses, and assess debt-service capacity against operating cash flow and the undrawn revolving facility.
- Track whether digital and licensing growth can offset continuing physical-sales and mechanical-publishing declines, including results excluding foreign-exchange effects.
- Review the progress and costs of the $50–$65 cost-savings plan, severance actions and Access management fees.
- Monitor the digital-pricing litigation, tax examinations and expected tax payments/reimbursements, as well as any other material contingencies.
- Consider that this filing reports pre-merger operating results; the acquisition, new financing, delisting and reporting-status changes occurred after June 30.