Warner Music Group Corp. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2013; comparisons are with the periods ended June 30, 2012. Amounts are in U.S. dollars, millions, unless stated otherwise. Warner Music operates Recorded Music and Music Publishing businesses. Its common stock is not publicly traded and is owned by Access Industries affiliates.
Financial performance and position
- Third-quarter revenue: $663, up 2% from $651. Operating income was $8, versus $7; OIBDA was $69, up 5%, with a 10% margin, unchanged year over year. Net loss attributable to Warner Music Group was $63, compared with $32.
- Nine-month revenue: $2,107, up 3% from $2,049. Operating income rose to $116 from $68; OIBDA increased 19% to $297, and its margin improved to 14% from 12%. Net loss attributable to Warner Music Group widened to $141 from $94.
- Revenue mix: Nine-month Recorded Music revenue rose 4% to $1,745; Music Publishing revenue fell 2% to $377. Digital revenue after eliminations grew 16% to $793 and represented 38% of consolidated revenue, versus 33%. Physical revenue declined 5% to $667.
- Cash flow and liquidity: Nine-month operating cash flow was $147, versus $107; investing cash flow was negative $76 and financing cash flow negative $260. Cash fell by $200 from September 30, 2012 to $102. Current assets were $667 and current liabilities $1,556. The $150 revolving facility had $25 drawn and approximately $1 of letters of credit outstanding at quarter-end.
- Debt and equity: Debt totaled $2,066, down from $2,206 at September 30, 2012; cash-adjusted net debt was $1,964, up from $1,904. Warner Music Group equity was $776, down from $927. The reported weighted-average debt interest rate was 8.1% at June 30, 2013, versus 10.5% at June 30, 2012.
Material changes and notable items
- Recorded Music growth reflected digital sales and artist services, more than offsetting physical declines. Publishing was pressured by mechanical and synchronization revenue declines, partly offset by digital growth. Foreign exchange reduced reported revenue growth.
- On November 1, 2012, the company refinanced its 9.5% secured notes due 2016. The nine-month results include an $85 debt-extinguishment loss, primarily related to that refinancing; interest expense declined to $149 from $169.
- On June 21, 2013, the company redeemed portions of its 2021 secured notes, recording a $2 extinguishment loss. On July 1, after quarter-end, it completed the Parlophone Label Group acquisition for £487 million, subject to a working-capital adjustment, and drew $820 million under a delayed-draw term loan to fund the acquisition, related costs, and general corporate purposes.
- Management estimated potential PLG cost synergies of approximately $70, with actions expected over 12 months and benefits expected over 24 months; achievement is not assured. The post-acquisition debt balance is not reported in the June 30 balance sheet.
- Management stated that existing cash sources were expected to support operations over the next fiscal year and that operations and revolver borrowings should fund foreseeable debt service, working capital, and capital expenditures. No specific revenue or earnings guidance was provided.
Risks, contingencies, and other disclosures
- Key business risks include continued physical-market decline, piracy, competition, pricing and margin pressure, dependence on hit releases and a limited number of digital retailers, foreign-exchange exposure, and uncertainty around digital business models and PLG integration and synergies.
- Leverage remains substantial. The company reported a 3.98x pro forma leverage ratio under its revolving-credit definition, incorporating specified transactions and adjustments; the facility’s stated maximum is 6.00x when revolver borrowings exceed $30. The company said it was in compliance with debt covenants at June 30, 2013.
- Pending matters include a digital-download pricing class action, for which potential loss could not be estimated, and artist royalty-calculation suits, for which the company recorded an immaterial reserve while settlement discussions continued. Other litigation accruals were described as not material.
- Management said disclosure controls were effective and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Review the PLG acquisition accounting, final purchase-price adjustment, $820 million loan terms, resulting debt and liquidity, and whether projected synergies are realized.
- Track digital and streaming growth against continued physical declines, and assess whether revenue growth translates into sustainable margins and cash flow.
- Reconcile reported net losses with operating improvement, including the refinancing charge, tax effects, and other non-operating items.
- Check covenant headroom and debt-service capacity using the debt agreements’ defined EBITDA and leverage calculations, which include adjustments and projected savings.
- Monitor outcomes and any reserve changes for the download-pricing and artist royalty litigation. The filing’s cover-page checkbox on required Exchange Act filings appears inconsistent with its accompanying statement that required reports were filed; verify the filed original.