Reservoir Media, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2023, ended September 30, 2022; filed November 8, 2022. Comparisons are with the corresponding 2021 periods, with prior-year figures revised for disclosed accounting corrections.
Business context and results
Reservoir is an independent music company with Music Publishing and Recorded Music segments, representing more than 140,000 compositions and 36,000 sound recordings. Six-month growth reflected catalog acquisitions, including Tommy Boy, and growth in digital and other revenue streams.
- Revenue: Q2 revenue was $33.3 million, up 10%; six-month revenue was $57.5 million, up 23%. Q2 Music Publishing revenue rose 9% and Recorded Music rose 11%; six-month increases were 18% and 35%, respectively.
- Profitability: Q2 operating income was $6.6 million, down 15%, and net income attributable to Reservoir was $4.5 million, up 2%; diluted EPS was $0.07 versus $0.08. Six-month operating income was $7.9 million, roughly flat, while net income attributable to Reservoir rose 54% to $4.6 million and diluted EPS was $0.07 versus $0.06.
- Margins and non-GAAP measures: Q2 OIBDA was $12.0 million, down 5%, with a 36% margin versus 41%. Six-month OIBDA rose 11% to $18.6 million, while margin declined to 32% from 36%. Adjusted EBITDA was $12.8 million for Q2, up 1%, and $20.3 million for six months, up 19%.
- Cash flow: Six-month operating cash flow was $11.6 million, compared with $1.5 million. Catalog purchases used $15.8 million, versus $125.7 million in the prior-year period. Cash at September 30 was $18.8 million.
- Debt and liquidity: The company reported $282.6 million drawn under its secured facility, or $278.0 million net of deferred financing costs, with $67.4 million of remaining availability. The facility matures October 2024. Management reported covenant compliance: leverage of 5.7x, fixed-charge coverage of 5.5x, and senior debt-to-library value below 47.5%. Management believes available liquidity and operating cash flows will support operations for the next 12 months.
Material changes and unusual items
- Q2 revenue growth included higher digital revenue; Recorded Music synchronization and neighboring-rights revenue also increased. Physical Recorded Music revenue fell against a stronger prior-year release schedule.
- A July 2022 Copyright Royalty Board ruling affirmed higher U.S. mechanical royalty rates for 2018–2022. The company updated its royalty estimate, recognizing $3.4 million of revenue in the six-month period for obligations related to prior performance periods. Related writer royalty costs weighed on Music Publishing margins.
- Noncash gains on interest-rate swaps were $2.9 million in Q2 and $4.5 million for six months, compared with $0.7 million and $1.2 million, respectively. These gains helped lift reported net income; interest expense also increased, which management attributed to higher debt balances and LIBOR rates.
- The company corrected previously disclosed, nonmaterial accounting errors involving royalties from pre-acquisition catalog usage. The 2021 comparative financial statements were revised; the filing says the corrections did not change reported EPS.
Outlook, risks, and contingencies
- The filing provides no numerical revenue or earnings guidance. Management expects liquidity to be sufficient for existing operations over the next 12 months and says it may pursue debt refinancing or maturity extensions, subject to market conditions and other factors.
- Interest-rate exposure remains relevant despite swaps covering portions of borrowings; the facility and swaps reference LIBOR, with transition to a replacement rate anticipated. Foreign-exchange movements, particularly in sterling, affected reported results.
- Management cites continuing uncertainty about COVID-19 effects on revenue, cash flow, and asset estimates. Other risks include music-industry changes, piracy, acquisition execution, and covenant compliance.
- A new New York headquarters lease commenced November 3, 2022, after quarter-end: approximately $8.4 million total commitment over 130 months, with an approximately $5.8 million lease asset and liability recognized at commencement.
- Disclosure controls were deemed ineffective due to previously identified material weaknesses involving segregation of duties, accounting resources, and risk assessment. Remediation efforts were ongoing. The company reported no legal proceedings it believes would have a material adverse effect and no material risk-factor changes from its latest annual report.
Most important facts for investors to verify
- How much revenue growth is recurring or organic versus acquisition-related and the one-time mechanical-royalty estimate update.
- Whether Music Publishing margin pressure and higher administration costs persist, and how cash flow compares with catalog investment needs.
- Debt, interest costs, swap coverage, covenant headroom, and refinancing plans before the October 2024 maturity.
- Progress remediating internal-control weaknesses and the implications of the revised prior-period financial statements.