Warner Music Group Corp. [WMG] Filings

10-Q 1 wmg-20220630.htm 10-Q wmg-20220630

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, 2022


☐			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)

___________________________________________________________________________________________

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, $0.001 par value per share

WMG

The Nasdaq Stock Market LLC

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 ☒

As of August 3, 2022, there were 137,198,864 shares of Class A Common Stock and 377,650,449 shares of Class B Common Stock of the registrant outstanding.

WARNER MUSIC GROUP CORP.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED JUNE 30, 2022

TABLE OF CONTENTS


		Page Number
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets as of June 30, 2022 and September 30, 2021	1
	Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2022 and June 30, 2021	2
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2022 and June 30, 2021	3
	Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2022 and June 30, 2021	4
	Consolidated Statements of Equity for the Three and Nine Months Ended June 30, 2022 and June 30, 2021	5
	Notes to Consolidated Interim Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	57
Item 4.	Controls and Procedures	58
Part II.	Other Information
Item 1.	Legal Proceedings	59
Item 1A.	Risk Factors	59
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	59
Item 3.	Defaults Upon Senior Securities	59
Item 4.	Mine Safety Disclosures	59
Item 5.	Other Information	59
Item 6.	Exhibits	60
Signatures		61

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Warner Music Group Corp.

Consolidated Balance Sheets (Unaudited)


	June 30, 2022		September 30, 2021
	(in millions, except share data)
Assets
Current assets:
Cash and equivalents	$	345	$	499
Accounts receivable, net of allowances of $21 million and $20 million	970		839
Inventories	93		99
Royalty advances expected to be recouped within one year	409		373
Prepaid and other current assets	84		86
Total current assets	1,901		1,896
Royalty advances expected to be recouped after one year	500		457
Property, plant and equipment, net of accumulated depreciation of $462 million and $419 million	403		364
Operating lease right-of-use assets, net	239		268
Goodwill	1,932		1,830
Intangible assets subject to amortization, net	2,345		2,017
Intangible assets not subject to amortization	149		154
Deferred tax assets, net	22		31
Other assets	208		194
Total assets	$	7,699	$	7,211
Liabilities and Equity
Current liabilities:
Accounts payable	$	265	$	302
Accrued royalties	1,971		1,880
Accrued liabilities	395		461
Accrued interest	29		14
Operating lease liabilities, current	39		43
Deferred revenue	197		348
Other current liabilities	227		102
Total current liabilities	3,123		3,150
Long-term debt	3,785		3,346
Operating lease liabilities, noncurrent	255		287
Deferred tax liabilities, net	241		207
Other noncurrent liabilities	123		175
Total liabilities	$	7,527	$	7,165
Equity:
Class A common stock, $0.001 par value; 1,000,000,000 shares authorized, 137,198,864 and 122,414,827 shares issued and outstanding as of June 30, 2022 and September 30, 2021, respectively	$	—	$	—
Class B common stock, $0.001 par value; 1,000,000,000 shares authorized, 377,650,449 and 391,970,996 issued and outstanding as of June 30, 2022 and September 30, 2021, respectively	1		1
Additional paid-in capital	1,975		1,942
Accumulated deficit	(1,542)		(1,710)
Accumulated other comprehensive loss, net	(278)		(202)
Total Warner Music Group Corp. equity	156		31
Noncontrolling interest	16		15
Total equity	172		46
Total liabilities and equity	$	7,699	$	7,211

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Operations (Unaudited)


	Three Months Ended June 30,				Nine Months Ended June 30,
	2022		2021		2022		2021
	(in millions, except share and per share data)
Revenue	$	1,432	$	1,340	$	4,422	$	3,925
Costs and expenses:
Cost of revenue	(766)		(681)		(2,281)		(1,990)
Selling, general and administrative expenses (a)	(451)		(437)		(1,392)		(1,256)
Amortization expense	(69)		(60)		(198)		(170)
Total costs and expenses	(1,286)		(1,178)		(3,871)		(3,416)
Operating income	146		162		551		509
Loss on extinguishment of debt	—		(12)		—		(12)
Interest expense, net	(32)		(30)		(94)		(93)
Other income (expense)	50		(18)		96		—
Income before income taxes	164		102		553		404
Income tax expense	(39)		(41)		(148)		(127)
Net income	125		61		405		277
Less: Income attributable to noncontrolling interest	(1)		—		(2)		(1)
Net income attributable to Warner Music Group Corp.	$	124	$	61	$	403	$	276

Net income per share attributable to common stockholders:
Class A – Basic and Diluted	$	0.24	$	0.12	$	0.77	$	0.53
Class B – Basic and Diluted	$	0.24	$	0.12	$	0.77	$	0.53
Weighted average common shares:
Class A – Basic and Diluted	137,164,878		116,890,959		132,494,389		108,245,599
Class B – Basic and Diluted	377,650,449		397,461,268		382,178,087		404,933,311

(a) Includes depreciation expense:	$	(18)	$	(19)	$	(59)	$	(57)

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Comprehensive Income (Unaudited)


	Three Months Ended June 30,				Nine Months Ended June 30,
	2022		2021		2022		2021
	(in millions)
Net income	$	125	$	61	$	405	$	277
Other comprehensive (loss) income, net of tax:
Foreign currency adjustment	(52)		12		(102)		19
Deferred gain on derivative financial instruments	5		3		26		9
Other comprehensive (loss) income, net of tax	(47)		15		(76)		28
Total comprehensive income	78		76		329		305
Less: Income attributable to noncontrolling interest	(1)		—		(2)		(1)
Comprehensive income attributable to Warner Music Group Corp.	$	77	$	76	$	327	$	304

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Cash Flows (Unaudited)


	Nine Months Ended June 30,
	2022		2021
	(in millions)
Cash flows from operating activities
Net income	$	405	$	277
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	257		227
Unrealized (gains) losses and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts	(107)		17
Deferred income taxes	37		27
Loss on extinguishment of debt	—		12
Net loss (gain) on divestitures and investments	33		(26)
Non-cash interest expense	4		3
Non-cash stock-based compensation expense	35		33
Changes in operating assets and liabilities:
Accounts receivable, net	(156)		(48)
Inventories	(2)		2
Royalty advances	(93)		(202)
Accounts payable and accrued liabilities	(103)		(62)
Royalty payables	162		172
Accrued interest	15		1
Operating lease liabilities	(6)		(3)
Deferred revenue	(145)		(27)
Other balance sheet changes	—		7
Net cash provided by operating activities	336		410
Cash flows from investing activities
Acquisition of music publishing rights and music catalogs, net	(178)		(459)
Capital expenditures	(97)		(58)
Investments and acquisitions of businesses, net of cash received	(499)		(49)
Proceeds from the sale of investments	11		—
Net cash used in investing activities	(763)		(566)
Cash flows from financing activities
Proceeds from issuance of 3.750% Senior Secured Notes due 2029	535		—
Proceeds from issuance of 3.000% Senior Secured Notes due 2031	—		244
Proceeds from increase supplement to Senior Term Loan Facility	—		325
Repayment of 5.500% Senior Notes due 2026	—		(325)
Deferred financing costs paid	(5)		(8)
Call premiums paid on early redemption of debt	—		(8)
Distribution to noncontrolling interest holders	(5)		(6)
Dividends paid	(235)		(187)
Cash paid to settle contingent consideration	(4)		—
Taxes paid related to net share settlement of restricted stock units	(6)		—
Net cash provided by financing activities	280		35
Effect of exchange rate changes on cash and equivalents	(7)		10
Net decrease in cash and equivalents	(154)		(111)
Cash and equivalents at beginning of period	499		553
Cash and equivalents at end of period	$	345	$	442

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Equity (Unaudited)


Nine Months Ended June 30, 2022
	Class A Common Stock			Class B Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Warner Music Group Corp. Equity		Non-controlling Interest		Total Equity

	Shares	Value		Shares	Value
	(in millions, except share and per share data)
Balance at September 30, 2021	122,414,827	$	—	391,970,996	$	1	$	1,942	$	(1,710)	$	(202)	$	31	$	15	$	46
Net income	—	—		—	—		—		403		—		403		2		405
Other comprehensive loss, net of tax	—	—		—	—		—		—		(76)		(76)		—		(76)
Dividends ($0.45 per share)	—	—		—	—		—		(235)		—		(235)		—		(235)
Stock-based compensation expense	—	—		—	—		39		—		—		39		—		39
Distribution to noncontrolling interest holders	—	—		—	—		—		—		—		—		(5)		(5)
Vesting of restricted stock units, net of shares withheld for employee taxes	276,565	—		—	—		(6)		—		—		(6)		—		(6)
Conversion of Class B shares to Class A shares	14,320,547	—		(14,320,547)	—		—		—		—		—		—		—
Shares issued under Omnibus Incentive Plan	186,925	—		—	—		—		—		—		—		—		—
Other	—	—		—	—		—		—		—		—		4		4
Balance at June 30, 2022	137,198,864	$	—	377,650,449	$	1	$	1,975	$	(1,542)	$	(278)	$	156	$	16	$	172


Three Months Ended June 30, 2022
	Class A Common Stock			Class B Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Warner Music Group Corp. Equity		Non-controlling Interest		Total Equity

	Shares	Value		Shares	Value
	(in millions, except share and per share data)
Balance at March 31, 2022	137,198,372	$	—	377,650,449	$	1	$	1,971	$	(1,587)	$	(231)	$	154	$	19	$	173
Net income	—	—		—	—		—		124		—		124		1		125
Other comprehensive loss, net of tax	—	—		—	—		—		—		(47)		(47)		—		(47)
Dividends ($0.15 per share)	—	—		—	—		—		(79)		—		(79)		—		(79)
Stock-based compensation expense	—	—		—	—		4		—		—		4		—		4
Distribution to noncontrolling interest holders	—	—		—	—		—		—		—		—		(4)		(4)


Shares issued under Omnibus Incentive Plan	492	—		—	—		—		—		—		—		—		—

Balance at June 30, 2022	137,198,864	$	—	377,650,449	$	1	$	1,975	$	(1,542)	$	(278)	$	156	$	16	$	172


Nine Months Ended June 30, 2021
	Class A Common Stock			Class B Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Warner Music Group Corp. Equity (Deficit)		Non-controlling Interest		Total Equity (Deficit)

	Shares	Value		Shares	Value
	(in millions, except share and per share data)
Balance at September 30, 2020	88,578,361	$	—	421,450,000	$	1	$	1,907	$	(1,749)	$	(222)	$	(63)	$	18	$	(45)
Net income	—	—		—	—		—		276		—		276		1		277
Other comprehensive income, net of tax	—	—		—	—		—		—		28		28		—		28
Dividends ($0.36 per share)	—	—		—	—		—		(187)		—		(187)		—		(187)
Stock-based compensation expense	—	—		—	—		27		—		—		27		—		27
Distribution to noncontrolling interest holders	—	—		—	—		—		—		—		—		(6)		(6)
Exchange of Class B shares for Class A shares	19,234,103	—		(19,234,106)	—		—		—		—		—		—		—
Shares issued under the Plan	4,321,259	—		—	—		—		—		—		—		—		—
Conversion of Class B shares	4,754,626	—		(4,754,626)	—		—		—		—		—		—		—
Shares issued under Omnibus Incentive Plan	33,205	—		—	—		—		—		—		—		—		—
Other	—	—		—	—		—		—		—		—		1		1
Balance at June 30, 2021	116,921,554	$	—	397,461,268	$	1	$	1,934	$	(1,660)	$	(194)	$	81	$	14	$	95


Three Months Ended June 30, 2021
	Class A Common Stock			Class B Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Warner Music Group Corp. Equity		Non-controlling Interest		Total Equity

	Shares	Value		Shares	Value
	(in millions, except share and per share data)
Balance at March 31, 2021	116,921,411	$	—	397,461,268	$	1	$	1,924	$	(1,659)	$	(209)	$	57	$	16	$	73
Net income	—	—		—	—		—		61		—		61		—		61
Other comprehensive income, net of tax	—	—		—	—		—		—		15		15		—		15
Dividends ($0.12 per share)	—	—		—	—		—		(62)		—		(62)		—		(62)
Stock-based compensation expense	—	—		—	—		10		—		—		10		—		10
Distribution to noncontrolling interest holders	—	—		—	—		—		—		—		—		(3)		(3)


Shares issued under Omnibus Incentive Plan	143	—		—	—		—		—		—		—		—		—
Other	—	—		—	—		—		—		—		—		1		1
Balance at June 30, 2021	116,921,554	$	—	397,461,268	$	1	$	1,934	$	(1,660)	$	(194)	$	81	$	14	$	95

See accompanying notes

Warner Music Group Corp.

Notes to Consolidated Interim Financial Statements (Unaudited)

1. Description of Business

Warner Music Group Corp. (the “Company”) was formed on November 21, 2003. The Company is the direct parent of WMG Holdings Corp. (“Holdings”), which is the direct parent of WMG Acquisition Corp. (“Acquisition Corp.”). Acquisition Corp. is one of the world’s major music entertainment companies.

Initial Public Offering

On June 5, 2020, the Company completed an initial public offering (“IPO”) of Class A common stock of the Company, par value $0.001 per share (“Class A Common Stock”). The Company listed these shares on the NASDAQ stock market under the ticker symbol “WMG.” The offering consisted entirely of secondary shares sold by Access Industries, LLC (collectively with its affiliates, “Access”) and certain related selling stockholders.

Access continues to hold all of the Class B common stock of the Company, par value $0.001 per share (“Class B Common Stock”), representing approximately 98% of the total combined voting power of the Company’s outstanding common stock and approximately 73% of the economic interest as of June 30, 2022. As a result, the Company is a “controlled company” within the meaning of the corporate governance standards of NASDAQ.

Recorded Music Operations

Our Recorded Music business primarily consists of the discovery and development of recording artists and the related marketing, promotion, distribution, sale and licensing of music created by such recording artists. We play an integral role in virtually all aspects of the recorded music value chain from discovering and developing talent to producing, distributing and selling music to marketing and promoting recording artists and their music.

Music Publishing Operations

While Recorded Music is focused on marketing, promoting, distributing and licensing a particular recording of a musical composition, Music Publishing is an intellectual property business focused on generating revenue from uses of the musical composition itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rightsholders, our Music Publishing business shares the revenues generated from use of the musical compositions with the songwriter or other rightsholders.

2. Summary of Significant Accounting Policies

Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2022.

The consolidated balance sheet at September 30, 2021 has been derived from the audited consolidated financial statements at that date but does not include all the information and notes required by U.S. GAAP for complete financial statements.

For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (File No. 001-32502).

Basis of Consolidation

The accompanying financial statements present the consolidated accounts of all entities in which the Company has a controlling voting interest and/or variable interest required to be consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated.

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation (“ASC 810”) requires the Company first evaluate its investments to determine if any investments qualify as a variable interest entity (“VIE”). A VIE is consolidated if the Company is deemed to be the primary beneficiary of the VIE, which is the party involved with the VIE that has both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. If an entity is not deemed to be a VIE, the Company consolidates the entity if the Company has a controlling voting interest.

The Company maintains a 52-53 week fiscal year ending on the last Friday in each reporting period. The fiscal year ended September 30, 2022 includes 53 weeks, and the fiscal year ended September 30, 2021 included 52 weeks. The additional week in fiscal year 2022 fell in the fiscal quarter ended December 31, 2021. Accordingly, the results of operations for the nine months ended June 30, 2022 reflect 40 weeks compared to 39 weeks for the nine months ended June 30, 2021.

All references to June 30, 2022 and June 30, 2021 relate to the periods ended July 1, 2022 and June 25, 2021, respectively, and both periods include 13 weeks. For convenience purposes, the Company continues to date its third-quarter financial statements as of June 30. The fiscal year ended September 30, 2021 ended on September 24, 2021.

The Company has performed a review of all subsequent events through the date the financial statements were issued and has determined that no additional disclosures are necessary.

Common Stock

On February 28, 2020, the Company amended its certificate of incorporation to increase its authorized capital stock to 2,100,000,000 shares, consisting of 1,000,000,000 shares of Class A Common Stock, 1,000,000,000 shares of Class B Common Stock, and 100,000,000 shares of preferred stock, par value $1.00 per share. In addition, the February 28, 2020 amendment to the Company’s certificate of incorporation also gave effect to the reclassification and 477,242.614671815-for-1 stock split of the Company’s existing common stock outstanding into 510,000,000 shares of Class B Common Stock. Upon completion of the IPO and the exercise in full of the underwriters’ option to purchase additional shares, 88,550,000 shares of Class A Common Stock, 421,450,000 shares of Class B Common Stock and no shares of preferred stock were outstanding.

In connection with the IPO, the Company’s board of directors and stockholders approved the Warner Music Group Corp. 2020 Omnibus Incentive Plan, or the “Omnibus Incentive Plan.” The Omnibus Incentive Plan provides for the grant of incentive common stock, stock options, restricted stock, restricted stock units (“RSUs”), performance awards and stock appreciation rights to employees, consultants and directors. The aggregate number of shares of common stock available for issuance under the Omnibus Incentive Plan is 31,169,099 shares of Class A Common Stock over the 10-year period from the date of adoption, including up to 1,000,000 shares of our Class A Common Stock in connection with the IPO.

Since the IPO, a total of 528,057 shares of Class A Common Stock have been issued under the Omnibus Incentive Plan. During the three and nine months ended June 30, 2022, 492 and 463,490 shares, respectively, were issued. During the three and nine months ended June 30, 2021, 143 and 33,205 shares, respectively, were issued.

During the nine months ended June 30, 2022, the Company satisfied the vesting of RSUs issued to employees in fiscal 2021 in connection with the IPO by issuing 276,565 shares of Class A Common Stock under the Omnibus Incentive Plan, which is net of shares used to settle employee income tax obligations.

During the nine months ended June 30, 2022, an aggregate of 14,320,547 shares of Class B Common Stock were converted to Class A Common Stock. In connection with the Senior Management Free Cash Flow Plan (the “Plan”), a remaining Plan participant redeemed a portion of vested Class B equity units of the LLC holding company, WMG Management Holdings, LLC (“Management LLC”). These Class B equity units were redeemed in exchange for a total of 510,165 shares of Class B Common Stock, which shares of Class B Common Stock converted to shares of Class A Common Stock upon the exchange. Additionally, during the nine months ended June 30, 2022, Access converted 13,810,382 shares of Class B Common Stock to the same number of shares of Class A Common Stock, which is reflected as a conversion of Class B Common Stock in the consolidated statements of equity for the nine months ended June 30, 2022.

Earnings per Share

The consolidated statements of operations present basic and diluted earnings per share (“EPS”). The Company utilizes the two-class method to report earnings per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings. Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders.

Stock-Based Compensation

The Company accounts for stock-based payments in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”). Stock-based compensation consists primarily of restricted stock units (“RSUs”) granted to eligible employees and executives under the Omnibus Incentive Plan. The Company measures compensation expense for RSUs based on the fair value of the award on the date of grant. The grant date fair value is based on the closing market price of the Company’s Class A Common Stock on the date of grant. The Company accounts for forfeitures as they occur. Stock-based compensation is recognized on a straight-line basis over the requisite service period, which is generally four years except for certain one-year awards issued in connection with the IPO, which vested in January 2022.

The Company also grants unvested restricted stock to the Company’s directors. The Company recognizes stock-based compensation expense equal to the grant date fair value of the restricted stock, based on the closing stock price on grant date, on a straight-line basis over the requisite service period of the awards, which is generally one year.

The Company also recognizes stock-based compensation under the Plan. The awards outstanding under the Plan are equity-classified.

The Company recognized approximately $5 million and $35 million of non-cash stock-based compensation expense for the three and nine months ended June 30, 2022, respectively, of which $4 million and $30 million was recorded to additional paid-in capital, and a remaining $5 million has been classified as a share-based compensation liability as of June 30, 2022. The share-based compensation liability represents executive awards that have not yet been granted under the Omnibus Incentive Plan, where a total value is known and settlement will occur in a variable number of RSUs. During the three and nine months ended June 30, 2022, $9 million was reclassified from share-based compensation liability to additional paid-in capital, representing the grant date fair value of RSUs granted which were previously classified as a share-based compensation liability as of September 30, 2021. The Company recognized approximately $12 million and $33 million of non-cash stock-based compensation expense for the three and nine months ended June 30, 2021, respectively.

Income Taxes

The Company uses the estimated annual effective tax rate method in computing its interim tax provision. Certain items, including those deemed to be unusual and infrequent are excluded from the estimated annual effective tax rate. In such cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This ASU eliminates certain exceptions to the general principles in ASC 740, Income Taxes. Specifically, it eliminates the exception to (1) the incremental approach for intraperiod tax allocation when there is a loss from continuing operations, and income or a gain from other items; (2) the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 also simplifies U.S. GAAP by making other changes. The Company adopted ASU 2019-12 in the first quarter of fiscal 2022 and this adoption did not have a material impact on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models used to separately account for embedded conversion features as a component of equity. Instead, the entity will account for the convertible debt or convertible preferred stock securities as a single unit of account, unless the conversion feature requires bifurcation and recognition as derivatives. Additionally, the guidance requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares. The Company adopted ASU 2020-06 in the first quarter of fiscal year 2022 and this adoption did not have any impact on the Company’s consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendment provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which clarified that certain optional expedients and exceptions in Topic 848 apply to derivative instruments that are affected by the discounting transition due to reference rate reform. These ASUs were effective upon issuance and may be applied prospectively to contract modifications and hedging relationships entered into or evaluated through December 31, 2022. The discontinuation of LIBOR will impact the Senior Term Loan Facility and Revolving Credit Facility as well as a pay-fixed receive-variable interest rate swap which will be outstanding as of the effective date of the discontinuation. The Company is in the process of evaluating the effect that the adoption of these standards will have on its consolidated financial statements, but does not expect it will have a material effect.

3. Earnings per Share

The Company utilizes the two-class method to report earnings per share. Basic earnings per share is computed by dividing net income available to each class of stock by the weighted average number of outstanding common shares for each class of stock. Diluted earnings per share is computed by dividing net income available to each class of stock by the weighted average number of outstanding common shares, plus dilutive potential common shares, which is calculated using the treasury-stock method. Under the treasury-stock method, potential common shares are excluded from the computation of EPS in periods in which they have an anti-dilutive effect. The potentially dilutive common shares did not have a dilutive effect on the Company’s EPS calculation for the three and nine months ended June 30, 2022 and 2021, respectively.

The Company allocates dividends declared to Class A Common Stock and Class B Common Stock based on timing and amounts actually declared for each class of stock and the undistributed earnings are allocated to Class A Common Stock and Class B Common Stock pro rata on a basic weighted average shares outstanding basis since the two classes of stock participate equally on a per share basis upon liquidation.

The Class B Common Stock issued to Management LLC for the exercise of the vested deferred equity units is included in the basic weighted average number of outstanding shares of Class B Common Stock. Upon issuance to the participants in the Plan, the Class B Common Stock will be converted into Class A Common Stock and included in the basic weighted average number of outstanding shares of Class A Common Stock. Since the shares expected to satisfy the vested portion of the deferred equity units are already included in the basic weighted average number of outstanding common shares, there is no potential dilutive effect associated with the vested portion of these stock-based compensation awards. Refer to Note 2 for a description of current period activity.

The following table sets forth the calculation of basic and diluted net income per common share under the two-class method for the three and nine months ended June 30, 2022 and 2021 (in millions, except share and per share data):


	Three Months Ended June 30,
	2022				2021
	Class A		Class B		Class A		Class B
Basic and Diluted EPS:
Numerator
Net income attributable to Warner Music Group Corp.	$	34	$	90	$	15	$	46
Less: Net income attributable to participating securities	(2)		—		(1)		—
Net income attributable to common stockholders	$	32	$	90	$	14	$	46
Denominator
Weighted average shares outstanding	137,164,878		377,650,449		116,890,959		397,461,268
Basic and Diluted EPS	$	0.24	$	0.24	$	0.12	$	0.12

	Nine Months Ended June 30,
	2022				2021
	Class A		Class B		Class A		Class B
Basic and Diluted EPS:
Numerator
Net income attributable to Warner Music Group Corp.	$	108	$	295	$	61	$	215
Less: Net income attributable to participating securities	(5)		—		(4)		—
Net income attributable to common stockholders	$	103	$	295	$	57	$	215
Denominator
Weighted average shares outstanding	132,494,389		382,178,087		108,245,599		404,933,311
Basic and Diluted EPS	$	0.77	$	0.77	$	0.53

Warner Music Group Corp. [WMG] Filings
10-Q	[2022-08-09]
10-Q	[2022-05-10]
10-Q	[2022-02-08]
10-K	[2021-11-23]
10-Q	[2021-08-03]
10-Q	[2021-05-04]
10-Q	[2021-02-01]
10-K	[2020-11-23]
10-Q	[2020-08-04]
10-Q	[2020-05-07]
S-1	[2020-02-06]
10-Q	[2020-01-31]
10-K	[2019-11-27]
10-Q	[2019-08-06]
10-Q	[2019-05-07]
10-Q	[2019-02-05]
10-K	[2018-12-20]
10-Q	[2018-08-07]
10-Q	[2018-05-07]
10-Q	[2018-02-02]
10-K	[2017-12-05]
10-Q	[2017-08-08]
10-Q	[2017-05-08]
10-Q	[2017-02-07]
10-K	[2016-12-08]
10-Q	[2016-08-04]
10-Q	[2016-05-06]
10-Q	[2016-02-04]
10-K	[2015-12-10]
10-Q	[2015-08-06]
10-Q	[2015-05-11]
10-Q	[2015-02-12]
10-K	[2014-12-11]
10-Q	[2014-08-07]
10-Q	[2014-05-08]
10-Q	[2014-02-06]
10-K	[2013-12-12]
10-Q	[2013-08-08]
10-Q	[2013-05-14]
10-Q	[2013-02-14]
10-K	[2012-12-13]
10-Q	[2012-08-09]
10-Q	[2012-05-15]
10-Q	[2012-02-09]