Invesco Currencyshares British Pound Sterling Trust
119
IMMY
Imprimis Pharmaceuticals
57
ACFN
Acorn Energy
8
SCIA
Sci Engineered Materials
5
VICA
Rafina Innovations
3
CLTH
Cleantech Biofuels
2
ALRS
Alerus Financial
0
GFMH
Goliath Film & Media Holdings
0
WMG 2019-06-30
Content
Item 1. Financial Statements and Supplementary Data
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits and Financial Statement Schedules
Exhibits
EX-31.1
q32019ex311.htm
EX-31.2
q32019ex312.htm
EX-32.1
q32019ex321.htm
EX-32.2
q32019ex322.htm
Warner Music Group Earnings 2019-06-30
WMG 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
10-Q 1 q3201910qdocument.htm 10-Q Document
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, 2019
OR
☐
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
13-4271875
(State or other jurisdiction of
incorporation or organization)
(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)
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 x
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 x 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
x
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 x
Securities registered pursuant to Section 12(b) of the Act:
Title of each class (a)
Trading
Symbol(s)
Name of each exchange on which registered
None
(a)
There is no public market for the Registrant’s common stock. As of August 6, 2019, the number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding was 1,060. All of the Registrant’s common stock is owned by affiliates of Access Industries, Inc. The Registrant has filed all Exchange Act reports for the preceding 12 months.
ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Warner Music Group Corp.
Consolidated Balance Sheets (Unaudited)
June 30, 2019
September 30, 2018
(in millions)
Assets
Current assets:
Cash and equivalents
$
541
$
514
Accounts receivable, net of allowances of $21 million and $45 million
744
447
Inventories
67
42
Royalty advances expected to be recouped within one year
171
123
Prepaid and other current assets
57
50
Total current assets
1,580
1,176
Royalty advances expected to be recouped after one year
209
153
Property, plant and equipment, net
296
229
Goodwill
1,772
1,692
Intangible assets subject to amortization, net
1,780
1,851
Intangible assets not subject to amortization
153
154
Deferred tax assets, net
7
11
Other assets
158
78
Total assets
$
5,955
$
5,344
Liabilities and Equity
Current liabilities:
Accounts payable
$
208
$
281
Accrued royalties
1,577
1,396
Accrued liabilities
448
423
Accrued interest
18
31
Deferred revenue
170
208
Other current liabilities
123
34
Total current liabilities
2,544
2,373
Long-term debt
3,006
2,819
Deferred tax liabilities, net
236
165
Other noncurrent liabilities
302
307
Total liabilities
$
6,088
$
5,664
Equity:
Common stock ($0.001 par value; 10,000 shares authorized; 1,060
and 1,052 shares issued and outstanding at June 30, 2019
and September 30, 2018, respectively)
$
—
$
—
Additional paid-in capital
1,128
1,128
Accumulated deficit
(1,061
)
(1,272
)
Accumulated other comprehensive loss, net
(219
)
(190
)
Total Warner Music Group Corp. deficit
(152
)
(334
)
Noncontrolling interest
19
14
Total equity
(133
)
(320
)
Total liabilities and equity
$
5,955
$
5,344
See accompanying notes
3
Warner Music Group Corp.
Consolidated Statements of Operations (Unaudited)
Three Months Ended June 30,
Nine Months Ended June 30,
2019
2018
2019
2018
(in millions)
(in millions)
Revenue
$
1,058
$
958
$
3,351
$
2,966
Costs and expenses:
Cost of revenue
(577
)
(531
)
(1,762
)
(1,588
)
Selling, general and administrative expenses (a)
(372
)
(343
)
(1,102
)
(1,013
)
Amortization expense
(51
)
(56
)
(160
)
(164
)
Total costs and expenses
(1,000
)
(930
)
(3,024
)
(2,765
)
Operating income
58
28
327
201
Loss on extinguishment of debt
(4
)
(7
)
(7
)
(31
)
Interest expense, net
(36
)
(33
)
(108
)
(105
)
Other (expense) income, net
(16
)
394
41
392
Income before income taxes
2
382
253
457
Income tax benefit (expense)
12
(61
)
(86
)
(132
)
Net income
14
321
167
325
Less: Income attributable to noncontrolling interest
(1
)
(1
)
(1
)
(4
)
Net income attributable to Warner Music Group Corp.
$
13
$
320
$
166
$
321
(a) Includes depreciation expense of:
$
(15
)
$
(15
)
$
(43
)
$
(41
)
See accompanying notes
4
Warner Music Group Corp.
Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended June 30,
Nine Months Ended June 30,
2019
2018
2019
2018
(in millions)
(in millions)
Net income
$
14
$
321
$
167
$
325
Other comprehensive income (loss), net of tax:
Foreign currency adjustment
9
(31
)
(17
)
(13
)
Deferred loss on derivative
(3
)
(3
)
(12
)
(1
)
Other comprehensive income (loss), net of tax
6
(34
)
(29
)
(14
)
Total comprehensive income
20
287
138
311
Less: Income attributable to noncontrolling interest
(1
)
(1
)
(1
)
(4
)
Comprehensive income attributable to Warner Music Group Corp.
$
19
$
286
$
137
$
307
See accompanying notes
5
Warner Music Group Corp.
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended June 30,
2019
2018
(in millions)
Cash flows from operating activities
Net income
$
167
$
325
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
203
205
Unrealized gains on remeasurement of foreign denominated loans
(6
)
(6
)
Deferred income taxes
25
105
Loss on extinguishment of debt
7
31
Net gain on divestitures and investments
(27
)
(385
)
Non-cash interest expense
5
5
Equity-based compensation expense
28
52
Changes in operating assets and liabilities:
Accounts receivable, net
(50
)
(43
)
Inventories
12
(1
)
Royalty advances
(107
)
—
Accounts payable and accrued liabilities
(94
)
(84
)
Royalty payables
117
113
Accrued interest
(13
)
(22
)
Deferred revenue
(17
)
—
Other balance sheet changes
(1
)
(30
)
Net cash provided by operating activities
249
265
Cash flows from investing activities
Acquisition of music publishing rights, net
(24
)
(11
)
Capital expenditures
(82
)
(40
)
Investments and acquisitions of businesses, net of cash received
(234
)
(14
)
Proceeds from the sale of investments
—
516
Net cash (used in) provided by investing activities
(340
)
451
Cash flows from financing activities
Proceeds from issuance of Acquisition Corp. 3.625% Senior Secured Notes
514
—
Repayment of Acquisition Corp. 4.125% Senior Secured Notes
(40
)
—
Repayment of Acquisition Corp. 4.875% Senior Secured Notes
(30
)
—
Repayment of Acquisition Corp. 5.625% Senior Secured Notes
(247
)
—
Proceeds from issuance of Acquisition Corp. 5.50% Senior Notes
—
325
Proceeds from supplement of Acquisition Corp. Senior Term Loan Facility
—
320
Repayment of and redemption deposit for Acquisition Corp. 6.75% Senior Notes
—
(635
)
Call premiums paid and deposit on early redemption of debt
(5
)
(23
)
Deferred financing costs paid
(7
)
(12
)
Distribution to noncontrolling interest holder
(3
)
(3
)
Dividends paid
(63
)
(425
)
Net cash provided by (used in) financing activities
119
(453
)
Effect of exchange rate changes on cash and equivalents
(1
)
(5
)
Net increase in cash and equivalents
27
258
Cash and equivalents at beginning of period
514
647
Cash and equivalents at end of period
$
541
$
905
See accompanying notes
6
Warner Music Group Corp.
Consolidated Statements of (Deficit) Equity (Unaudited)
Nine Months Ended June 30, 2019
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Warner Music
Group Corp.
Deficit
Noncontrolling
Interest
Total
Equity
Common Stock
Shares
Value
(in millions, except share amounts)
Balance at September 30, 2018
1,052
$
—
$
1,128
$
(1,272
)
$
(190
)
$
(334
)
$
14
$
(320
)
Cumulative effect of ASC 606 adoption
—
—
—
139
—
139
11
150
Net income
—
—
—
166
—
166
1
167
Other comprehensive loss, net of tax
—
—
—
—
(29
)
(29
)
—
(29
)
Dividends
—
—
—
(94
)
—
(94
)
—
(94
)
Distribution to noncontrolling interest holders
—
—
—
—
—
—
(3
)
(3
)
Other
8
—
—
—
—
—
(4
)
(4
)
Balance at June 30, 2019
1,060
$
—
$
1,128
$
(1,061
)
$
(219
)
$
(152
)
$
19
$
(133
)
Three Months Ended June 30, 2019
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Warner Music
Group Corp.
Deficit
Noncontrolling
Interest
Total
Equity
Common Stock
Shares
Value
(in millions, except share amounts)
Balance at March 31, 2019
1,060
$
—
$
1,128
$
(1,043
)
$
(225
)
$
(140
)
$
20
$
(120
)
Net income
—
—
—
13
—
13
1
14
Other comprehensive income, net of tax
—
—
—
—
6
6
—
6
Dividends
—
—
—
(31
)
—
(31
)
—
(31
)
Distribution to noncontrolling interest holders
—
—
—
—
—
—
(1
)
(1
)
Other
—
—
—
—
—
—
(1
)
(1
)
Balance at June 30, 2019
1,060
$
—
$
1,128
$
(1,061
)
$
(219
)
$
(152
)
$
19
$
(133
)
7
Nine Months Ended June 30, 2018
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Warner Music
Group Corp.
Equity
Noncontrolling
Interest
Total
Equity
Common Stock
Shares
Value
(in millions, except share amounts)
Balance at September 30, 2017
1,055
$
—
$
1,128
$
(654
)
$
(181
)
$
293
$
15
$
308
Net income
—
—
—
321
—
321
4
325
Other comprehensive loss, net of tax
—
—
—
—
(14
)
(14
)
—
(14
)
Dividends
—
—
—
(425
)
—
(425
)
—
(425
)
Distribution to noncontrolling interest holders
—
—
—
—
—
—
(3
)
(3
)
Other
(3
)
—
—
—
—
—
—
—
Balance at June 30, 2018
1,052
$
—
$
1,128
$
(758
)
$
(195
)
$
175
$
16
$
191
Three Months Ended June 30, 2018
Additional
Paid-in
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Loss
Total
Warner Music
Group Corp.
Equity
Noncontrolling
Interest
Total
Equity
Common Stock
Shares
Value
(in millions, except share amounts)
Balance at March 31, 2018
1,052
$
—
$
1,128
$
(778
)
$
(161
)
$
189
$
16
$
205
Net income
—
—
—
320
—
320
1
321
Other comprehensive loss, net of tax
—
—
—
—
(34
)
(34
)
—
(34
)
Dividends
—
—
—
(300
)
—
(300
)
—
(300
)
Distribution to noncontrolling interest holders
—
—
—
—
—
—
(1
)
(1
)
Balance at June 30, 2018
1,052
$
—
$
1,128
$
(758
)
$
(195
)
$
175
$
16
$
191
See accompanying notes
8
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-based content companies.
Acquisition of Warner Music Group by Access Industries
Pursuant to an Agreement and Plan of Merger, dated as of May 6, 2011 (the “Merger Agreement”), by and among the Company, AI Entertainment Holdings LLC (formerly Airplanes Music LLC), a Delaware limited liability company (“Parent”) and an affiliate of Access Industries, Inc. (“Access”), and Airplanes Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), on July 20, 2011 (the “Merger Closing Date”), Merger Sub merged with and into the Company with the Company surviving as a wholly owned subsidiary of Parent (the “Merger”). In connection with the Merger, the Company delisted its common stock from the NYSE. The Company continues voluntarily to file with the SEC current and periodic reports that would be required to be filed with the SEC pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as provided for in certain covenants contained in the instruments covering its outstanding indebtedness.
Recorded Music Operations
The Company’s Recorded Music business primarily consists of the discovery and development of artists and the related marketing, distribution and licensing of recorded music produced by such artists. The Company plays an integral role in virtually all aspects of the recorded music value chain from discovering and developing talent to producing music and promoting artists and their products.
In the United States, Recorded Music operations are conducted principally through the Company’s major record labels— Warner Records and Atlantic Records. In October 2018, the Company launched Elektra Music Group in the United States as a standalone label group, which comprises the Elektra, Fueled by Ramen and Roadrunner labels. The Company’s Recorded Music operations also include Rhino, a division that specializes in marketing the Company’s music catalog through compilations and reissuances of previously released music and video titles. The Company also conducts its Recorded Music operations through a collection of additional record labels, including Asylum, Big Beat, Canvasback, East West, Erato, FFRR, Nonesuch, Parlophone, Reprise, Sire, Spinnin’, Warner Classics and Warner Music Nashville.
Outside the United States, Recorded Music activities are conducted in more than 50 countries through various subsidiaries, affiliates and non-affiliated licensees. Internationally, the Company engages in the same activities as in the United States: discovering and signing artists and distributing, marketing and selling their recorded music. In most cases, the Company also markets and distributes the music of those artists for whom the Company’s domestic record labels have international rights. In certain smaller markets, the Company licenses the right to distribute the Company’s records to non-affiliated third-party record labels. The Company’s international artist services operations include a network of concert promoters through which it provides resources to coordinate tours for the Company’s artists and other artists as well as management companies that guide artists with respect to their careers.
The Company’s Recorded Music distribution operations include Warner-Elektra-Atlantic Corporation (“WEA Corp.”), which markets and sells music and video products to retailers and wholesale distributors; Alternative Distribution Alliance (“ADA”), which distributes the products of independent labels to retail and wholesale distributors; and various distribution centers and ventures operated internationally.
The Company’s Recorded Music products are sold in digital form to an expanded universe of digital partners, including digital streaming services such as Amazon, Apple Music, Deezer, Napster, Soundcloud, Spotify, Tencent and YouTube, digital radio services such as iHeart Radio, Pandora and Sirius XM and digital download services such as Apple’s iTunes and Google Play. In addition, Recorded Music products are sold in physical retail outlets and in physical form to online physical retailers such as Amazon.com and bestbuy.com
9
The Company has integrated the exploitation of digital content into all aspects of its business, including artist and repertoire (“A&R”), marketing, promotion and distribution. The Company’s business development executives work closely with A&R departments to ensure that while music is being produced, digital assets are also created with all distribution channels in mind, including streaming services, social networking sites, online portals and music-centered destinations. The Company also works side by side with its digital partners to test new concepts. The Company believes existing and new digital businesses will be a significant source of growth and will provide new opportunities to successfully monetize its assets and create new revenue streams. The proportion of digital revenues attributed to each distribution channel varies by region and proportions may change as the roll out of new technologies continues. As an owner of music content, the Company believes it is well positioned to take advantage of growth in digital distribution and emerging technologies to maximize the value of its assets.
The Company has diversified its revenues beyond its traditional businesses by entering into expanded-rights deals with recording artists in order to partner with artists in other aspects of their careers. Under these agreements, the Company provides services to and participates in artists’ activities outside the traditional recorded music business such as touring, merchandising and sponsorships. The Company has built artist services capabilities and platforms for exploiting this broader set of music-related rights and participating more widely in the monetization of the artist brands it helps create.
The Company believes that entering into expanded-rights deals and enhancing its artist services capabilities in areas such as concert promotion, merchandising and management have permitted it to diversify revenue streams and capitalize on other revenue opportunities. This provides for improved long-term relationships with artists and allows the Company to more effectively connect artists and fans.
Music Publishing Operations
While recorded music is focused on exploiting a recording of a composition, music publishing is an intellectual property business focused on the exploitation of the composition itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rightsholders, the Company’s Music Publishing business garners a share of the revenues generated from use of the composition.
The Company’s Music Publishing operations are conducted principally through Warner Chappell Music, its global Music Publishing company, headquartered in Los Angeles with operations in over 50 countries through various subsidiaries, affiliates and non-affiliated licensees. The Company owns or controls rights to more than one million musical compositions, including numerous pop hits, American standards, folk songs and motion picture and theatrical compositions. Assembled over decades, its award-winning catalog includes over 70,000 songwriters and composers and a diverse range of genres including pop, rock, jazz, classical, country, R&B, hip-hop, rap, reggae, Latin, folk, blues, symphonic, soul, Broadway, techno, alternative and gospel. Warner Chappell Music also administers the music and soundtracks of several third-party television and film producers and studios. The Company has an extensive production music library collectively branded as Warner Chappell Production Music.
2. Summary of Significant Accounting Policies
Interim Financial Statements
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“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 month periods ended June 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2019.
The consolidated balance sheet at September 30, 2018 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, 2018 (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.
10
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. As such, all references to June 30, 2019 and June 30, 2018 relate to the periods ended June 28, 2019 and June 29, 2018, respectively. For convenience purposes, the Company continues to date its financial statements as of June 30. The fiscal year ended September 30, 2018 ended on September 28, 2018.
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.
Income Taxes
At the end of each interim period, the Company makes its best estimate of the effective tax rate expected to be applicable for the full fiscal year and uses that rate to provide for income taxes on a current year-to-date basis before discrete items.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). In accordance with ASC Topic 740, Income Taxes (“ASC 740”) the Company recorded the impacts in the period of enactment.
New Accounting Pronouncements
Adoption of New Revenue Recognition Standard
In May 2014, the FASB issued guidance codified in ASC 606, Revenue from Contracts with Customers (“ASC 606”), which replaces the guidance in former ASC 605, Revenue Recognition and ASC 928-605, Entertainment – Music. The amendment was the result of a joint effort by the FASB and the International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for U.S. GAAP and international financial reporting standards ("IFRS"). The joint project clarifies the principles for recognizing revenue and develops a common revenue standard for U.S. GAAP and IFRS.
The Company adopted ASC 606 on October 1, 2018, using the modified retrospective method to all contracts not completed as of the date of adoption. The reported results as of and for the three and nine months ended June 30, 2019 reflect the application of the new standard, while the reported results for the three and nine months ended June 30, 2018 have not been adjusted to reflect the new standard and were prepared under prior revenue recognition accounting guidance.
The adoption of ASC 606 resulted in a change in the timing of revenue recognition in the Company’s Music Publishing segment as well as international broadcast rights within Recorded Music. Under the new revenue recognition rules, revenue is recorded based on best estimates available in the period of sale or usage whereas revenue was previously recorded when cash was received for both the licensing of publishing rights and international Recorded Music broadcast fees. Additionally, for certain licenses where the consideration is fixed and the intellectual property being licensed is static, revenue is recognized at the point in time when control of the licensed content is transferred to the customer. As a result of adopting ASC 606, the Company recorded a decrease to the opening accumulated deficit of approximately $139 million, net of tax, as of October 1, 2018. The Company also reclassified $28 million from accounts receivable to other current liabilities related to estimated refund liabilities for our physical sales.
11
The following table provides the cumulative effect of the changes made to the opening balance sheet, as of October 1, 2018, from the adoption of ASC 606 and which primarily relates to the accrual of licensing revenue in the period of sale or usage.
September 30, 2018
Impact of
Adoption
October 1, 2018
(in millions)
Assets
Accounts receivable, net
$
447
$
257
$
704
Total current assets
1,176
257
1,433
Other assets
78
15
93
Total assets
$
5,344
$
272
$
5,616
Liabilities and Equity
Accrued royalties
1,396
79
1,475
Accrued liabilities
423
(1
)
422
Deferred revenue
208
(27
)
181
Other current liabilities
34
33
67
Total current liabilities
2,373
84
2,457
Deferred tax liabilities, net
165
37
202
Other noncurrent liabilities
307
1
308
Total liabilities
5,664
122
5,786
Equity:
Accumulated Deficit
(1,272
)
139
(1,133
)
Noncontrolling interest
14
11
25
Total equity
(320
)
150
(170
)
Total liabilities and equity
$
5,344
$
272
$
5,616
The disclosure of the impact of adoption on the consolidated statement of operations for the three and nine months ended June 30, 2019, the consolidated balance sheet as of June 30, 2019, and the consolidated statement of cash flows for the nine months ended June 30, 2019 are as follows (in millions):
Three Months Ended June 30, 2019
Nine Months Ended June 30, 2019
As
Reported
Balances
without
adoption
of ASC
606
Effect of
Change
As
Reported
Balances
without
adoption
of ASC
606
Effect of
Change
(in millions)
(in millions)
Revenue
$
1,058
$
1,057
$
1
$
3,351
$
3,322
$
29
Cost and expenses:
Cost of revenue
(577
)
(558
)
(19
)
(1,762
)
(1,765
)
3
Operating income
58
76
(18
)
327
295
32
Income before income taxes
2
20
(18
)
253
221
32
Income tax benefit (expense)
12
17
(5
)
(86
)
(75
)
(11
)
Net income
14
37
(23
)
167
146
21
Less: Income attributable to noncontrolling interest
(1
)
—
(1
)
(1
)
(3
)
2
Net income attributable to Warner Music Group Corp.
$
13
$
37
$
(24
)
$
166
$
143
$
23
12
June 30, 2019
As Reported
Balances
without
adoption
of ASC
606
Effect of
Change
(in millions)
Assets
Accounts receivable, net
$
744
$
465
$
279
Total current assets
1,580
1,301
279
Other assets
158
143
15
Deferred tax assets, net
7
7
—
Total assets
$
5,955
$
5,661
$
294
Liabilities and Equity
Accounts payable
208
209
(1
)
Accrued royalties
1,577
1,501
76
Accrued liabilities
448
449
(1
)
Deferred revenue
170
199
(29
)
Other current liabilities
123
95
28
Total current liabilities
2,544
2,471
73
Deferred tax liabilities, net
236
189
47
Other noncurrent liabilities
302
298
4
Total liabilities
6,088
5,964
124
Equity:
Accumulated deficit
(1,061
)
(1,221
)
160
Noncontrolling interest
19
9
10
Total equity
(133
)
(303
)
170
Total liabilities and equity
$
5,955
$
5,661
$
294
June 30, 2019
As Reported
Balances
without
adoption
of ASC
606
Effect of
Change
(in millions)
Cash flows from operating activities
Net income
$
167
$
146
$
21
Deferred income taxes
25
15
10
Changes in operating assets and liabilities:
Accounts receivable, net
(50
)
(28
)
(22
)
Accounts payable and accrued liabilities
(94
)
(96
)
2
Royalty advances
(107
)
(104
)
(3
)
Deferred revenue
(17
)
(15
)
(2
)
Other balance sheet changes
(1
)
5
(6
)
Net cash provided by operating activities
249
249
—
Effect of exchange rate changes on cash and equivalents
(1
)
(1
)
—
Net decrease in cash and equivalents
27
27
—
Cash and equivalents at beginning of period
514
514
—
Cash and equivalents at end of period
$
541
$
541
$
—
13
Recently Adopted Accounting Pronouncements
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This ASU will require that equity investments, except those investments under the equity method of accounting, are measured at fair value with changes in fair value recognized in net income. The Company may elect to measure equity investments that do not have a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable prices. The Company adopted ASU 2016-01 on October 1, 2018 and has elected to use the measurement alternative to measure our equity investments without readily determinable fair values. This guidance was applied prospectively and did not have a significant impact on the Company’s financial statements. For the nine months ended June 30, 2019, there were no observable price change events that were completed related to our equity investments without readily determinable fair values.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments ("ASU 2016-15"). This ASU provides specific guidance of how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. ASU 2016-15 is effective for annual periods beginning after December 15, 2017, and interim periods within those years. The Company adopted ASU 2016-15 in the first quarter of fiscal 2019 and this adoption did not have a significant impact on the Company’s financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory ("ASU 2016-16"). This ASU requires the recognition of current and deferred income taxes for intra-entity asset transfers when the transaction occurs. ASU 2016-16 is effective for annual periods beginning after December 15, 2017, and interim periods within those years. The Company adopted ASU 2016-16 in the first quarter of fiscal 2019 and this adoption did not have a significant impact on the Company’s financial statements.
In January of 2017, the FASB issued ASU 2017-01, Business Combinations (“ASU 2017-01”), to clarify the definition of a business, which establishes a process to determine when an integrated set of assets and activities can be deemed a business combination. The Company adopted ASU 2017-01 in the first quarter of fiscal 2019 and this adoption did not have a significant impact on the Company’s financial statements.
In February 2018, FASB issued ASU 2018-02, Income Statement – Reporting Comprehensive Income (“ASU 2018-02”). This ASU allows a reclassification from accumulated other comprehensive income to accumulated deficit for stranded tax effects resulting from the Tax Act. ASU 2018-02 is effective for all entities for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The Company adopted ASU 2018-02 in the first quarter of fiscal 2019 and this adoption did not have a significant impact on the Company’s financial statements.
Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which established a new ASC Topic 842 (ASC 842). This ASU establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations. ASU 2016-02 will be effective for annual periods beginning after December 15, 2018, and interim periods within those years. Earlier adoption is permitted. In July 2018, the FASB issued ASU 2018-11, Leases - Targeted Improvements (“ASU 2018-11”), which allows for retrospective application with the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Under this option, entities would not need to apply ASC 842 (along with its disclosure requirements) to the comparative prior periods presented.
Upon adoption, the Company expects that most of our operating leases will be recognized as operating lease liabilities and ROU assets on our consolidated balance sheet. The Company continues to evaluate the impact of the adoption of this standard on its financial statements and disclosures and expects to elect the optional transition method that allows for a cumulative-effect adjustment upon adoption.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). This ASU improves certain aspects of the hedge accounting model including making more risk management strategies eligible for hedge accounting and simplifying the assessment of hedge effectiveness. ASU 2017-12 is effective for all annual periods beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted and requires a prospective adoption with a cumulative-effect adjustment to accumulated deficit as of the beginning of the fiscal year of adoption for existing hedging relationships. The Company is evaluating the impact of the adoption of this standard on its financial statements and disclosures.
14
3. Revenue Recognition
For our operating segments, Recorded Music and Music Publishing, the Company accounts for a contract when it has legally enforceable rights and obligations and collectability of consideration is probable. The Company identifies the performance obligations and determines the transaction price associated with the contract, which is then allocated to each performance obligation, using management’s best estimate of standalone selling price for arrangements with multiple performance obligations. Revenue is recognized when, or as, control of the promised services or goods is transferred to our customers, and in an amount that reflects the consideration the Company is contractually due in exchange for those services or goods. An estimate of variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Certain of our arrangements include licenses of intellectual property with consideration in the form of sales- and usage-based royalties. Royalty revenue is recognized when the subsequent sale or usage occurs using the best estimates available of the amounts that will be received by the Company.
Disaggregation of Revenue
Our revenue consists of the following categories, which aggregate into our segments - Recorded Music and Music Publishing (in millions):
For the Three Months Ended June 30,
2019 vs. 2018
2019
2018
$ Change
% Change
Revenue by Type
Digital
$
584
$
519
$
65
13
%
Physical
95
130
(35
)
-27
%
Total Digital and Physical
679
649
30
5
%
Artist services and expanded-rights
158
85
73
86
%
Licensing
76
68
8
12
%
Total Recorded Music
913
802
111
14
%
Performance
36
51
(15
)
-29
%
Digital
65
59
6
10
%
Mechanical
13
17
(4
)
-24
%
Synchronization
29
28
1
4
%
Other
4
4
—
—
%
Total Music Publishing
147
159
(12
)
-8
%
Intersegment eliminations
(2
)
(3
)
1
-33
%
Total Revenue
$
1,058
$
958
$
100
10
%
Revenue by Geographical Location
U.S. Recorded Music
$
395
$
356
$
39
11
%
U.S. Music Publishing
71
69
2
3
%
Total U.S.
466
425
41
10
%
International Recorded Music
518
446
72
16
%
International Music Publishing
76
90
(14
)
-16
%
Total International
594
536
58
11
%
Intersegment eliminations
(2
)
(3
)
1
-33
%
Total Revenue
$
1,058
$
958
$
100
10
%
15
For the Nine Months Ended June 30,
2019 vs. 2018
2019
2018
$ Change
% Change
Revenue by Type
Digital
$
1,744
$
1,491
$
253
17
%
Physical
456
500
(44
)
-9
%
Total Digital and Physical
2,200
1,991
209
10
%
Artist services and expanded-rights
458
264
194
73
%
Licensing
229
242
(13
)
-5
%
Total Recorded Music
2,887
2,497
390
16
%
Performance
135
153
(18
)
-12
%
Digital
195
169
26
15
%
Mechanical
41
55
(14
)
-25
%
Synchronization
89
90
(1
)
-1
%
Other
10
9
1
11
%
Total Music Publishing
470
476
(6
)
-1
%
Intersegment eliminations
(6
)
(7
)
1
-14
%
Total Revenue
$
3,351
$
2,966
$
385
13
%
Revenue by Geographical Location
U.S. Recorded Music
$
1,236
$
1,061
$
175
16
%
U.S. Music Publishing
219
220
(1
)
—
%
Total U.S.
1,455
1,281
174
14
%
International Recorded Music
1,651
1,436
215
15
%
International Music Publishing
251
256
(5
)
-2
%
Total International
1,902
1,692
210
12
%
Intersegment eliminations
(6
)
(7
)
1
-14
%
Total Revenue
$
3,351
$
2,966
$
385
13
%
Recorded Music
Recorded Music mainly involves selling, marketing, distribution and licensing of recorded music produced by our artists. Recorded Music revenues are derived from four main sources, which include digital, physical, artist services and expanded rights and licensing.
Digital revenues are generated from the expanded universe of digital partners, including digital streaming services and digital download services. These licenses typically contain a single performance obligation, which is ongoing access to all intellectual property in an evolving content library, predicated on: (1)the business practice and contractual ability to remove specific content without a requirement to replace the content and without impact to minimum royalty guarantees and (2)the contracts not containing a specific listing of content subject to the license. Digital licensing contracts are generally long-term with consideration in the form of sales- and usage-based royalties that are typically received monthly. Certain contracts contain non-recoupable fixed fees or minimum guarantees, which are recoupable against royalties. Upon contract inception, the Company will assess whether a shortfall or breakage is expected (i.e., where the minimum guarantee will not be recouped through royalties) in order to determine timing of revenue recognition for the fixed fee or minimum guarantee.
For fixed fee and minimum guarantee contracts where breakage is expected, the total transaction price (fixed fee or minimum guarantee) is typically recognized on a straight-line basis over the contractual term. The Company updates its assessment of the transaction price each reporting period to see if anticipated royalty earnings exceed the minimum guarantee. For contracts where breakage is not expected, royalties are recognized as revenue as sales or usage occurs based upon the licensee’s usage reports and, when these reports are not available, historical data, industry information and other relevant trends.
Additionally, for certain licenses where the consideration is fixed and the intellectual property being licensed is static, revenue is recognized at the point in time when control of the licensed content is transferred to the customer.
16
Physical revenues are generated from the sale of physical products such as CDs, vinyl and DVDs. Revenues from the sale of physical Recorded Music products are recognized upon transfer of control to the customer, which typically occurs once the product has been shipped and the ability to direct use and obtain substantially all of the benefit from the asset have been transferred. In accordance with industry practice and as is customary in many territories, certain products, such as CDs and DVDs, are sold to customers with the right to return unsold items. Revenues from such sales are generally recognized upon shipment based on gross sales less a provision for future estimated returns.
Artist services and expanded-rights revenues are generated from artist services businesses and participations in expanded-rights associated with artists, including sponsorship, fan clubs, artist websites, merchandising, touring, concert promotion, ticketing, and artist and brand management. Artist services and expanded-rights contracts are generally short term. Revenue is recognized as or when services are provided (e.g., at time of an artist’s event) assuming collectability is probable. In some cases, the Company is reliant on the artist to report revenue generating activities. For certain artist services and expanded-rights contracts, collectability is not considered probable until notification is received from the artist’s management.
Licensing revenues represent royalties or fees for the right to use sound recordings in combination with visual images such as in films or television programs, television commercials and videogames. In certain territories, the Company may also receive royalties when sound recordings are performed publicly through broadcast of music on television, radio and cable, and in public spaces such as shops, workplaces, restaurants, bars and clubs. Licensing contracts are generally short term. For fixed fee contracts, revenue is recognized at the point in time when control of the licensed content is transferred to the customer. Royalty based contracts are recognized as the underlying sales or usage occurs.
Music Publishing
Music Publishing acts as a copyright owner and/or administrator of the musical compositions and generates revenues related to the exploitation of musical compositions (as opposed to recorded music). Music publishers generally receive royalties from the use of the composition in public performances, digital and physical recordings and in combination with visual images. Music publishing revenues are derived from five main sources: mechanical, performance, synchronization, digital and other.
Performance revenues are received when the composition is performed publicly through broadcast of music on television, radio and cable, live performance at a concert or other venue (e.g., arena concerts and nightclubs), and performance of music in staged theatrical productions. Digital revenues are generated with respect to the compositions being embodied in recordings sold in digital streaming services, digital download services and digital performance. Mechanical revenues are generated with respect to the compositions embodied in recordings sold in any physical format or configuration such as CDs, vinyl and DVDs. Synchronization revenues represent the right to use the composition in combination with visual images such as in films or television programs, television commercials and videogames as well as from other uses such as in toys or novelty items and merchandise. Other revenues represent earnings for use in printed sheet music and other uses. Digital and synchronization revenue recognition is similar for both Recorded Music and Music Publishing, therefore refer to the discussion within Recorded Music.
Included in these revenue streams, excluding synchronization and other, are licenses with music societies (e.g., ASCAP, BMI, SESAC, GEMA), which are long term contracts containing a single performance obligation, which is ongoing access to all intellectual property in an evolving content library. The most common form of consideration for these contracts is sales and usage-based royalties. The music societies submit usage reports, typically with payment for royalties due, often on a quarterly or bi-annual reporting period, in arears. Royalties are recognized as the sale or usage occurs based upon usage reports and, when these reports are not available, royalties are estimated based on historical data, such as recent royalties reported, Company specific information with respect to changes in repertoire, industry information and other relevant trends. Also included in these revenue streams are smaller, short term contracts for specified content, which generally involve a fixed fee. For fixed fee contracts, revenue is recognized at the point in time when control of the license is transferred to the customer.
The Company excludes from the measurement of transaction price all taxes assessed by governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers.
Sales Returns and Uncollectible Accounts
In accordance with practice in the recorded music industry and as customary in many territories, certain physical revenue products (such as CDs and DVDs) are sold to customers with the right to return unsold items. Revenues from such sales are recognized when the products are shipped based on gross sales less a provision for future estimated returns.
17
In determining the estimate of physical product sales that will be returned, management analyzes vendor sales of product, historical return trends, current economic conditions, changes in customer demand and commercial acceptance of the company's products. Based on this information, management reserves a percentage of each dollar of physical product sales that provide the customer with the right of return and records an asset for the value of the returned goods and liability for the amounts expected to be refunded.
Similarly, management evaluates accounts receivables to determine if they will ultimately be collected. In performing this evaluation, significant judgments and estimates are involved, including an analysis of specific risks on a customer-by-customer basis for larger accounts and customers and a receivables aging analysis that determines the percent that has historically been uncollected by aged category. The time between the Company issuance of an invoice and payment due date is not significant; customer payments that are not collected in advance of the transfer of promised services or goods are generally due no later than 30 days from invoice date. Based on this information, management provides a reserve for the estimated amounts believed to be uncollectible.
Based on management’s analysis of sales returns, refund liabilities of $25 million were established at June 30, 2019 and refund liabilities of $28 million were established at September 30, 2018.
Based on management’s analysis of uncollectible accounts, reserves of $21 million and $17 million were established at June 30, 2019 and September 30, 2018, respectively.
Principal versus Agent Revenue Recognition
The Company reports revenue on a gross or net basis based on management’s assessment of whether the Company acts as a principal or agent in the transaction. The determination of whether the Company acts as a principal or an agent in a transaction is based on an evaluation of whether the Company controls the good or service before transfer to the customer. When the Company concludes that it controls the good or service before transfer to the customer, the Company is considered a principal in the transaction and records revenue on a gross basis. When the Company concludes that it does not control the good or service before transfer to the customer but arranges for another entity to provide the good or service, the Company acts as an agent and records revenue on a net basis in the amount it earns for its agency service.
In the normal course of business, the Company acts as an intermediary with respect to certain payments received from third parties. For example, the Company distributes music content on behalf of third-party record labels. Based on the above guidance, the Company records the distribution of content on behalf of third-party record labels on a gross basis, subject to the terms of the contract, as the Company controls the content before transfer to the customer. Conversely, recorded music compilations distributed by other record companies where the Company has a right to participate in the profits are recorded on a net basis.
Deferred Revenue
Deferred revenue principally relates to fixed fees and minimum guarantees received in advance of the Company’s performance or usage by the licensee. Reductions in deferred revenue are a result of the Company’s performance under the contract or usage by the licensee.
Deferred revenue increased $247 million during the nine months ended June 30, 2019 related to cash received from our customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period. Revenues of $142 million were recognized during the nine months ended June 30, 2019 related to the balance of deferred revenue at October 1, 2018. There were no other significant changes to deferred revenue during the reporting period.
Performance Obligations
The Company recognized revenue of $10 million and $45 million from performance obligations satisfied in previous periods for the three and nine month periods ended June 30, 2019, respectively.
Wholly and partially unsatisfied performance obligations represent future revenues not yet recorded under long term intellectual property licensing contracts. Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at June 30, 2019 are as follows (in millions):
Rest of FY19
FY20
FY21
Thereafter
Total
(in millions)
Remaining performance obligations
$
51
$
138
$
94
$
7
$
290
Total
$
51
$
138
$
94
$
7
$
290
18
4. Acquisition of EMP
On October 10, 2018, Warner Music Group Germany Holding GmbH (“WMG Germany”), a limited liability company under the laws of Germany and an indirect subsidiary of Warner Music Group Corp., closed its previously announced acquisition (the “Acquisition”) of certain shares of E.M.P. Merchandising Handelsgesellschaft mbH, a limited liability company under the laws of Germany, all of the share capital of MIG Merchandising Investment GmbH, a limited liability company under the laws of Germany (“MIG”), certain shares of Large Popmarchandising BVBA, a limited liability company under the laws of Belgium (“Large”), and each of EMP Merchandising Handelsgesellschaft mbH and MIG’s direct and indirect subsidiaries (the “Subsidiaries” and, together with EMP Merchandising Handelsgesellschaft mbH, MIG and Large, “EMP”) from funds associated with Sycamore Partners, pursuant to the Sale and Purchase Agreement, dated as of September 11, 2018, by and between SP Merchandising Holding GmbH & Co. KG, a limited partnership under the laws of Germany, and WMG Germany (“Acquisition Agreement”). The cash consideration paid at closing of the Acquisition was approximately €166 million, which reflects an agreed enterprise value of EMP of approximately €155 million (equivalent to approximately $180 million), as adjusted for, among other items, net debt and estimates of working capital of EMP. The final purchase price paid was determined to be €165 million after finalization of purchase price adjustments, including working capital and other items.
The Acquisition was accounted for in accordance with ASC 805, using the acquisition method of accounting. The assets and liabilities of the Company, including identifiable intangible assets, have been measured at their fair value primarily using Level 3 inputs (see Note 13 for additional information on fair value inputs). Determining the fair value of the assets acquired and liabilities assumed requires judgment and involved the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset useful lives and market multiples, among other items. The use of different estimates and judgments could yield materially different results.
The excess of the purchase price, over the fair value of net assets acquired, including the amount assigned to identifiable intangible assets and deferred tax adjustments, has been recorded to goodwill. The resulting goodwill has been allocated to our Recorded Music reportable segment. The recognized goodwill will not be deductible for income tax purposes. Any impairment charges made in future periods associated with goodwill will not be tax deductible.
The table below presents (i) the preliminary estimate of the Acquisition consideration as it relates to the acquisition of EMP by WMG Germany and (ii) the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of October 10, 2018 (in millions):
Purchase Price
€
155
Working Capital
10
Final Purchase Price
€
165
Foreign Currency Rate at October 10, 2018
1.15
Final Purchase Price in U.S. dollars
$
190
Fair value of assets acquired and liabilities assumed
Cash and equivalents
$
7
Accounts receivable, net
3
Inventories
37
Other current assets
5
Property plant and equipment
32
Intangible assets
81
Accounts payable
(18
)
Other current liabilities
(11
)
Deferred revenue
(7
)
Deferred tax liabilities
(25
)
Other noncurrent liabilities
(3
)
Fair value of assets acquired and liabilities assumed
101
Goodwill recorded
89
Total purchase price allocated
$
190
At June 30, 2019, the Company updated the preliminary allocation recorded at December 31, 2018 based on revised estimates of fair value, which resulted in an increase in property plant and equipment, intangibles, deferred tax liabilities and a decrease to goodwill and resulted in a $2 million benefit to amortization in the quarter due to the update in the useful lives of the intangibles. The acquisition accounting is subject to revision based on final determinations of fair value and allocations of purchase price to the identifiable assets and liabilities acquired, including the determination of the final working capital adjustment pursuant to the mechanism set forth in the Acquisition Agreement.
19
Pro Forma Financial Information
The following unaudited pro forma information has been presented as if the Acquisition occurred on October 1, 2017. This information is based on historical results of operations, adjusted to give effect to pro forma events that are (i) directly attributable to the Acquisition; (ii) factually supportable; and (iii) expected to have a continuing impact on the Company’s combined results. The pro forma information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the Acquisition had taken place at the beginning of fiscal 2018.
Three Months Ended June 30, 2019
Three Months Ended June 30, 2018
Nine Months Ended June 30, 2019
Nine Months Ended June 30, 2018
(in millions)
(in millions)
Revenue
$
1,058
$
1,011
$
3,356
$
3,153
Operating income
58
29
327
201
Net income attributable to Warner
Music Group
$
13
$
321
$
166
$
320
Actual results related to EMP included in the Consolidated Statements of Operations for the three months ended June 30, 2019 consist of revenues of $59 million and operating income of $4 million. Actual results related to EMP included in the Consolidated Statements of Operations for the nine months ended June 30, 2019 relate to the transition period from October 10, 2018 to June 30, 2019 and consist of revenues of $186 million and operating income of $8 million.
5. Comprehensive Income
Comprehensive income, which is reported in the accompanying consolidated statements of (deficit) equity, consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income. For the Company, the components of other comprehensive income primarily consist of foreign currency translation gains and losses, minimum pension liabilities, and deferred gains and losses on financial instruments designated as hedges under ASC 815, which include foreign exchange contracts. The following summary sets forth the changes in the components of accumulated other comprehensive loss, net of related taxes of approximately $1 million:
Foreign
Currency
Translation
Loss (a)
Minimum
Pension
Liability
Adjustment
Deferred Losses
On Derivative
Financial
Instruments
Accumulated
Other
Comprehensive
Loss, net
(in millions)
Balance at September 30, 2018
$
(184
)
$
(9
)
$
3
$
(190
)
Other comprehensive loss
(17
)
—
(12
)
(29
)
Balance at June 30, 2019
$
(201
)
$
(9
)
$
(9
)
$
(219
)
__________________________
(a)Includes historical foreign currency translation related to certain intra-entity transactions.
20
6. Goodwill and Intangible Assets
Goodwill
The following analysis details the changes in goodwill for each reportable segment:
Recorded
Music
Music
Publishing
Total
(in millions)
Balance at September 30, 2018
$
1,228
$
464
$
1,692
Acquisitions (a)
89
—
89
Divestitures
—
—
—
Other adjustments (b)
(9
)
—
(9
)
Balance at June 30, 2019
$
1,308
$
464
$
1,772
_______________________
(a)
Relates to the acquisition of EMP during the nine months ended June 30, 2019.
(b)
Other adjustments during the nine months ended June 30, 2019 represent foreign currency movements.
The Company performs its annual goodwill impairment test in accordance with ASC 350, Intangibles—Goodwill and other (“ASC 350”) during the fourth quarter of each fiscal year as of July 1. The Company may conduct an earlier review if events or circumstances occur that would suggest the carrying value of the Company’s goodwill may not be recoverable. No indicators of impairment were identified during the current period that required the Company to perform an interim assessment or recoverability test.
Intangible Assets
Intangible assets consist of the following:
Weighted
Average
Useful Life
June 30, 2019
September 30, 2018
(in millions)
Intangible assets subject to amortization:
Recorded music catalog
10 years
$
861
$
870
Music publishing copyrights
26 years
1,555
1,540
Artist and songwriter contracts
13 years
853
864
Trademarks
18 years
52
12
Other intangible assets
7 years
58
26
Total gross intangible asset subject to amortization
3,379
3,312
Accumulated amortization
(1,599
)
(1,461
)
Total net intangible assets subject to amortization
1,780
1,851
Intangible assets not subject to amortization:
Trademarks and tradenames
Indefinite
153
154
Total net intangible assets
$
1,933
$
2,005
As of June 30, 2019, the Company disposed of $7 million of gross intangible assets that were fully amortized.
21
7. Debt
Debt Capitalization
Long-term debt, all of which was issued by Acquisition Corp., consists of the following:
June 30, 2019
September 30, 2018
(in millions)
Revolving Credit Facility (a)
$
—
$
—
Senior Term Loan Facility due 2023 (b)
1,313
1,310
5.625% Senior Secured Notes due 2022 (c)
—
246
5.000% Senior Secured Notes due 2023 (d)
298
297
4.125% Senior Secured Notes due 2024 (e)
349
399
4.875% Senior Secured Notes due 2024 (f)
218
247
3.625% Senior Secured Notes due 2026 (g)
507
—
5.500% Senior Notes due 2026 (h)
321
320
Total debt (i)
$
3,006
$
2,819
_______________________
(a)
Reflects $180 million of commitments under the Revolving Credit Facility available at both June 30, 2019 and September 30, 2018, less letters of credit outstanding of approximately $13 million at June 30, 2019 and $8 million at September 30, 2018. There were no loans outstanding under the Revolving Credit Facility at June 30, 2019 or September 30, 2018.
(b)
Principal amount of $1.326 billion less unamortized discount of $3 million and unamortized deferred financing costs of $10 million and $12 million at June 30, 2019 and September 30, 2018, respectively.
(c)
On May 16, 2019, Acquisition Corp. redeemed the remaining $221 million of its outstanding 5.625% Senior Notes due 2022. The Company recorded a loss on extinguishment of debt of approximately $4 million as a result of the debt redemption, which represents the premium paid on early redemption and unamortized deferred financing costs.
(d)
Principal amount of $300 million less unamortized deferred financing costs of $2 million at both June 30, 2019 and September 30, 2018.
(e)
Face amount of €311 million and €345 million at June 30, 2019 and September 30, 2018 respectively. Above amounts represent the dollar equivalent of such note at June 30, 2019 and September 30, 2018. Principal amount of $353 million and $402 million at June 30, 2019 and September 30, 2018, respectively, less unamortized deferred financing costs of $4 million and $3 million at June 30, 2019 and September 30, 2018, respectively.
(f)
Principal amount of $220 million and $250 million less unamortized deferred financing costs of $2 million and $3 million at June 30, 2019 and September 30, 2018, respectively.
(g)
Face amount of €445 million at June 30, 2019. Above amounts represent the dollar equivalent of such note at June 30, 2019. Principal amount of $506 million, an additional issuance premium of $8 million, less unamortized deferred financing costs of $7 million at June 30, 2019.
(h)
Principal amount of $325 million and $325 million less unamortized deferred financing costs of $4 million and $5 million at June 30, 2019 and September 30, 2018, respectively.
(i)
Principal amount of debt of $3.030 billion and $2.851 billion, an additional issuance premium of $8 million and nil, less unamortized discount of $3 million and $4 million and unamortized deferred financing costs of $29 million and $28 million at June 30, 2019 and September 30, 2018, respectively.
December 2017 Senior Term Loan Credit Agreement Amendment
On December 6, 2017, Acquisition Corp. entered into an amendment (the “December 2017 Senior Term Loan Credit Agreement Amendment”) to the Senior Term Loan Credit Agreement, dated November 1, 2012, among Acquisition Corp., the guarantors party thereto, the lenders party thereto and Credit Suisse AG, as administrative agent, governing Acquisition Corp.’s senior secured term loan facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto, to, among other things, reduce the pricing terms of its outstanding term loans, change certain incurrence thresholds governing the ability to incur debt and liens, change certain EBITDA add-backs and increase the thresholds above which the excess cash flow sweep is triggered. The Company recorded a loss on extinguishment of debt of approximately $1 million, which represented the discount and unamortized deferred financing costs related to the prior tranche of debt of the lenders that was replaced.
22
New Revolving Credit Agreement
On January 31, 2018, the Company entered into a new revolving credit agreement (the “Revolving Credit Agreement”) for its Revolving Credit Facility and terminated its existing revolving credit agreement (the “Old Revolving Credit Agreement”). The Revolving Credit Agreement differs from the Old Revolving Credit Agreement in that it, among other things, reduces the interest rate margin applicable to the loans, extends the maturity date thereunder, provides for the option to increase the commitments under the Company’s then existing revolving credit agreement, provides for greater flexibility to amend and extend the Company’s then existing revolving credit agreement and create additional tranches thereunder, provides for greater flexibility over future amendments, increases the springing financial maintenance covenant to 4.75:1.00 and provides that the covenant shall not be tested unless at the end of a fiscal quarter the outstanding amount of loans and drawings under letters of credit which have not been reimbursed exceeds $54 million and aligns the other negative covenants with those of the Senior Term Loan Credit Agreement. References to “Revolving Credit Facility” below in this Note 7 are to our new revolving credit facility.
March 2018 Senior Term Loan Credit Agreement Amendment
On March 14, 2018, Acquisition Corp. incurred $320 million of supplemental term loans (the “Supplemental Term Loans”) pursuant to an increase supplement (the “March 2018 Senior Term Loan Credit Agreement Supplement”) to the Senior Term Loan Credit Agreement, dated November 1, 2012, among Acquisition Corp., the guarantors party thereto, the lenders party thereto and Credit Suisse AG, as administrative agent, governing Acquisition Corp.’s senior secured term loan facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto (as amended, the “Senior Term Loan Credit Agreement”). The principal amount outstanding under the Senior Term Loan Credit Agreement including the Supplemental Term Loans is $1.326 billion.
Notes Offering
On March 14, 2018, Acquisition Corp. issued $325 million in aggregate principal amount of its 5.500% Senior Notes due 2026. Acquisition Corp. used the net proceeds to pay the consideration in the tender offer for its 6.750% Senior Notes due 2022 (the “6.750% Senior Notes”) and to redeem the remaining 6.750% Senior Notes as described below.
Tender Offer and Notes Redemption
On March 14, 2018, Acquisition Corp. accepted for purchase in connection with the tender offer for the 6.750% Senior Notes that had been validly tendered and not validly withdrawn at or prior to 5:00 p.m., New York City time on March 13, 2018 (the “Expiration Time”) thereby reducing the aggregate principal amount of the 6.750% Senior Notes by $523 million. Acquisition Corp. then issued a notice of redemption on March 14, 2018 with respect to the remaining $112 million of 6.750% Senior Notes outstanding that were not accepted for payment pursuant to the tender offer. Following payment of the 6.750% Senior Notes tendered at or prior to the Expiration Time, Acquisition Corp. deposited with the Trustee funds of $119 million to satisfy all obligations under the applicable indenture governing the 6.750% Senior Notes, including call premiums and interest through the date of redemption on April 15, 2018, for the remaining 6.750% Senior Notes not accepted for purchase in the tender offer. On April 15, 2018, Acquisition Corp. redeemed the remaining outstanding 6.750% Senior Notes. The Company recorded a loss on extinguishment of debt in connection with the tender offer of approximately $23 million as a result of the partial debt redemption, which represents the premium paid on early redemption and unamortized deferred financing costs in March 2018. The Company incurred an additional loss on extinguishment of approximately $5 million in April 2018 related to the redemption on the remaining 6.750% Senior Notes, which represents the premium paid on early redemption and unamortized deferred financing costs.
June 2018 Senior Term Loan Credit Agreement Amendment
On June 7, 2018, Acquisition Corp. entered into an amendment (the “June 2018 Senior Term Loan Credit Agreement Amendment”) to the Senior Term Loan Credit Agreement, dated November 1, 2012, among Acquisition Corp., the guarantors party thereto, the lenders party thereto and Credit Suisse AG, as administrative agent, governing Acquisition Corp.’s senior secured term loan facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto, to, among other things, reduce the pricing terms of its outstanding term loans, change certain incurrence thresholds governing the ability to incur debt and liens and exclude from the definition of “Senior Secured Indebtedness” certain liens that have junior lien priority on the collateral in relation to the outstanding term loans and the relevant guarantees, as applicable. The Company recorded a loss on extinguishment of debt of approximately $2 million, which represented the discount and unamortized deferred financing costs related to the prior tranche of debt of the lenders that was replaced.
23
3.625% Senior Secured Notes Offerings
On October 9, 2018, Acquisition Corp. issued and sold €250 million in aggregate principal amount of 3.625% Senior Secured Notes due 2026 (the “3.625% Secured Notes”). Net proceeds of the offering were used to pay the purchase price of the acquisition of EMP, to redeem €34.5 million of the 4.125% Secured Notes (as described below), purchase $30 million of the Company’s 4.875% Senior Secured Notes (as described above) on the open market, and to redeem $26.55 million of the 5.625% Senior Secured Notes (as described below).
On April 30, 2019, Acquisition Corp. issued and sold €195 million in aggregate principal amount of additional 3.625% Senior Secured Notes due 2026 (the "Additional Notes"). The Additional Notes and the 3.625% Secured Notes were treated as the same series for all purposes under the indenture that governs the 3.625% Secured Notes and the Additional Notes. Net proceeds of the offering were used to redeem all of the 5.625% Secured Notes due 2022.
Partial Redemption of 4.125% Senior Secured Notes
On October 12, 2018, Acquisition Corp. redeemed €34.5 million aggregate principal amount of its 4.125% Senior Secured Notes due 2024 (the “4.125% Secured Notes”) using a portion of the proceeds from the offering of the 3.625% Secured Notes described above. The redemption price for the 4.125% Secured Notes was approximately €36.17 million, equivalent to 103% of the principal amount of the 4.125% Secured Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was October 12, 2018. Following the partial redemption of the 4.125% Secured Notes, €310.5 million of the 4.125% Secured Notes remain outstanding. The Company recorded a loss on extinguishment of debt of approximately $2 million, which represents the premium paid on early redemption and unamortized deferred financing costs related to the partial redemption of this note.
Open Market Purchase
On October 9, 2018, Acquisition Corp. purchased, in the open market, $30 million aggregate principal amount of its outstanding 4.875% Senior Secured Notes due 2024 (the “4.875% Secured Notes”). The acquired notes were subsequently retired. Following retirement of the acquired notes, $220 million of the 4.875% Secured Notes remain outstanding. The Company recorded a loss on extinguishment of debt of less than $1 million, which represents the unamortized deferred financing costs related to the open market purchase.
Redemption of 5.625% Senior Secured Notes
On November 5, 2018, Acquisition Corp. redeemed $26.55 million aggregate principal amount of its 5.625% Senior Secured Notes due 2022 (the “5.625% Secured Notes”). The redemption price for the 5.625% Secured Notes was approximately $27.38 million, equivalent to 102.813% of the principal amount of the 5.625% Secured Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was November 5, 2018. Following the partial redemption of the 5.625% Secured Notes, $220.95 million of the 5.625% Secured Notes remain outstanding. The Company recorded a loss on extinguishment of debt of approximately $1 million, which represents the premium paid on early redemption and unamortized deferred financing co