Item 1. Financial Statements
ITEM 1. FINANCIAL STATEMENTS
Warner Music Group Corp.
Condensed Consolidated Balance Sheets
(In millions, except share amounts which are reflected in thousands)
(Unaudited)
December 31,
2022 September 30,
2022
Assets
Current assets:
Cash and equivalents $ 720 $ 584
Accounts receivable, net of allowances of $ 21 million and $ 19 million
1,004 984
Inventories 102 108
Royalty advances expected to be recouped within one year 405 372
Prepaid and other current assets 109 91
Total current assets 2,340 2,139
Royalty advances expected to be recouped after one year 546 503
Property, plant and equipment, net of accumulated depreciation of $ 489 million and $ 461 million
430 415
Operating lease right-of-use assets, net 220 226
Goodwill 1,951 1,920
Intangible assets subject to amortization, net 2,266 2,239
Intangible assets not subject to amortization 149 145
Deferred tax assets, net 29 29
Other assets 198 212
Total assets $ 8,129 $ 7,828
Liabilities and Equity
Current liabilities:
Accounts payable $ 220 $ 268
Accrued royalties 2,091 1,918
Accrued liabilities 477 457
Accrued interest 29 17
Operating lease liabilities, current 39 40
Deferred revenue 327 423
Other current liabilities 158 245
Total current liabilities 3,341 3,368
Long-term debt 3,946 3,732
Operating lease liabilities, noncurrent 234 241
Deferred tax liabilities, net 223 220
Other noncurrent liabilities 103 99
Total liabilities $ 7,847 $ 7,660
Equity:
Class A common stock, $ 0.001 par value; 1,000,000 shares authorized, 138,073 and 137,199 shares issued and outstanding as of December 31, 2022 and September 30, 2022, respectively
$ — $ —
Class B common stock, $ 0.001 par value; 1,000,000 shares authorized, 377,650 and 377,650 issued and outstanding as of December 31, 2022 and September 30, 2022, respectively
1 1
Additional paid-in capital 1,984 1,975
Accumulated deficit ( 1,439 ) ( 1,477 )
Accumulated other comprehensive loss, net ( 276 ) ( 347 )
Total Warner Music Group Corp. equity 270 152
Noncontrolling interest 12 16
Total equity 282 168
Total liabilities and equity $ 8,129 $ 7,828
See accompanying notes
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Warner Music Group Corp.
Condensed Consolidated Statements of Operations
(In millions, except share amounts which are reflected in thousands, and per share data)
(Unaudited)
Three Months Ended
December 31,
2022 2021
Revenue $ 1,488 $ 1,614
Costs and expenses:
Cost of revenue ( 761 ) ( 818 )
Selling, general and administrative expenses (a) ( 440 ) ( 497 )
Amortization expense ( 63 ) ( 60 )
Total costs and expenses ( 1,264 ) ( 1,375 )
Net gain on divestiture 41 —
Operating income 265 239
Interest expense, net ( 32 ) ( 30 )
Other (expense) income ( 61 ) 54
Income before income taxes 172 263
Income tax expense ( 48 ) ( 75 )
Net income 124 188
Less: Income attributable to noncontrolling interest ( 2 ) ( 1 )
Net income attributable to Warner Music Group Corp. $ 122 $ 187
Net income per share attributable to common stockholders:
Class A – Basic and Diluted $ 0.23 $ 0.36
Class B – Basic and Diluted $ 0.23 $ 0.36
Weighted average common shares:
Class A – Basic and Diluted 137,424 123,969
Class B – Basic and Diluted 377,650 390,952
(a) Includes depreciation expense: $ ( 21 ) $ ( 21 )
See accompanying notes
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Warner Music Group Corp.
Condensed Consolidated Statements of Comprehensive Income
(In millions)
(Unaudited)
Three Months Ended
December 31,
2022 2021
Net income $ 124 $ 188
Other comprehensive income (loss), net of tax:
Foreign currency adjustment 72 ( 25 )
Deferred (loss) gain on derivative financial instruments ( 1 ) 7
Other comprehensive income (loss), net of tax 71 ( 18 )
Total comprehensive income 195 170
Less: Income attributable to noncontrolling interest ( 2 ) ( 1 )
Comprehensive income attributable to Warner Music Group Corp.
$ 193 $ 169
See accompanying notes
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Warner Music Group Corp.
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
Three Months Ended
December 31,
2022 2021
Cash flows from operating activities
Net income $ 124 $ 188
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 84 81
Unrealized (gains) losses and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts 79 ( 36 )
Deferred income taxes ( 5 ) 19
Net loss (gain) on divestitures and investments ( 41 ) ( 11 )
Non-cash interest expense 2 1
Non-cash stock-based compensation expense 14 24
Changes in operating assets and liabilities:
Accounts receivable, net 7 ( 100 )
Inventories 13 12
Royalty advances ( 55 ) ( 177 )
Accounts payable and accrued liabilities ( 61 ) ( 2 )
Royalty payables 117 107
Accrued interest 12 16
Operating lease liabilities ( 2 ) ( 2 )
Deferred revenue ( 104 ) ( 50 )
Other balance sheet changes 25 59
Net cash provided by operating activities 209 129
Cash flows from investing activities
Acquisition of music publishing rights and music catalogs, net ( 33 ) ( 165 )
Capital expenditures ( 21 ) ( 34 )
Investments and acquisitions of businesses, net of cash received ( 8 ) ( 425 )
Proceeds from the sale of investments 10 —
Proceeds from divestitures 42 —
Net cash used in investing activities ( 10 ) ( 624 )
Cash flows from financing activities
Proceeds from issuance of 3.750 % Senior Secured Notes due 2029
— 535
Proceeds from incremental Senior Term Loan Facility 147 —
Deferred financing costs paid ( 2 ) ( 4 )
Distribution to noncontrolling interest holders ( 6 ) ( 1 )
Dividends paid ( 84 ) ( 78 )
Payment of deferred and contingent consideration ( 125 ) ( 4 )
Net cash (used in) provided by financing activities ( 70 ) 448
Effect of exchange rate changes on cash and equivalents 7 ( 2 )
Net increase (decrease) in cash and equivalents 136 ( 49 )
Cash and equivalents at beginning of period 584 499
Cash and equivalents at end of period $ 720 $ 450
See accompanying notes
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Warner Music Group Corp.
Condensed Consolidated Statements of Equity
(In millions, except share amounts which are reflected in thousands, and per share data)
(Unaudited)
Three Months Ended December 31, 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
Balance at September 30, 2022 137,199 $ — 377,650 $ 1 $ 1,975 $ ( 1,477 ) $ ( 347 ) $ 152 $ 16 $ 168
Net income — — — — — 122 — 122 2 124
Other comprehensive income, net of tax — — — — — — 71 71 — 71
Dividends ($ 0.16 per Class A and B share)
— — — — — ( 84 ) — ( 84 ) — ( 84 )
Stock-based compensation expense — — — — 9 — — 9 — 9
Distribution to noncontrolling interest holders — — — — — — — — ( 6 ) ( 6 )
Shares issued under the Plan 869 — — — — — — — — —
Shares issued under Omnibus Incentive Plan 5 — — — — — — — — —
Balance at December 31, 2022 138,073 $ — 377,650 $ 1 $ 1,984 $ ( 1,439 ) $ ( 276 ) $ 270 $ 12 $ 282
Three Months Ended December 31, 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
Balance at September 30, 2021 122,415 $ — 391,971 $ 1 $ 1,942 $ ( 1,710 ) $ ( 202 ) $ 31 $ 15 $ 46
Net income — — — — — 187 — 187 1 188
Other comprehensive loss, net of tax — — — — — — ( 18 ) ( 18 ) — ( 18 )
Dividends ($ 0.15 per Class A and B share)
— — — — — ( 78 ) — ( 78 ) — ( 78 )
Stock-based compensation expense — — — — 31 — — 31 — 31
Distribution to noncontrolling interest holders — — — — — — — — ( 1 ) ( 1 )
Conversion of Class B shares for Class A shares 4,671 — ( 4,671 ) — — — — — — —
Shares issued under Omnibus Incentive Plan 151 — — — — — — — — —
Other — — — — — — — — 4 4
Balance at December 31, 2021 127,237 $ — 387,300 $ 1 $ 1,973 $ ( 1,601 ) $ ( 220 ) $ 153 $ 19 $ 172
See accompanying notes
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Warner Music Group Corp.
Notes to Condensed Consolidated 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. We classify our business interests into two fundamental operations: Recorded Music and Music Publishing.
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 condensed 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 months ended December 31, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2023.
The consolidated balance sheet at September 30, 2022 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, 2022 (File No. 001-32502).
Change in Fiscal Year End
On September 29, 2022, the Board of Directors approved a change, effective for the 2023 fiscal year, to the Company’s fiscal year from a modified 52-53-week calendar, in which reporting periods ended on the last Friday of the calendar quarter, to a reporting calendar in which the reporting periods end on the last day of the calendar quarter. Effective for the 2023 fiscal year, the Company’s fiscal year will begin on October 1 and end on September 30 of each year.
Prior to the start of the 2023 fiscal year, the Company maintained a 52-53 week fiscal year ending on the last Friday in each reporting period. The fiscal year ended September 30, 2022 included 53 weeks, with the additional week falling in the fiscal quarter ended December 31, 2021. Accordingly, the results of operations for the three months ended December 31, 2021 reflect 14 weeks, or 98 days, compared to 92 days for the three months ended December 31, 2022. For the three months ended December 31, 2021, the revenue benefit of the additional week was approximately $ 73 million, primarily reflected in Recorded Music streaming revenue.
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.
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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 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
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 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. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date , which extended the period in which Topic 848 may be applied until December 31, 2024. These ASUs were effective upon issuance and may be applied prospectively to contract modifications and hedging relationships entered into or evaluated through December 31, 2024. 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. The potentially dilutive common shares did not have a dilutive effect on the Company’s EPS calculation for the three months ended December 31, 2022 and 2021, respectively.
The following table sets forth the calculation of basic and diluted net income per common share under the two-class method for the three months ended December 31, 2022 and 2021 (in millions, except share amounts, which are reflected in thousands, and per share data):
Three Months Ended December 31,
2022 2021
Class A Class B Class A Class B
Basic and Diluted EPS:
Numerator
Net income attributable to Warner Music Group Corp. $ 34 $ 88 $ 47 $ 140
Less: Net income attributable to participating securities ( 2 ) — ( 2 ) —
Net income attributable to common stockholders $ 32 $ 88 $ 45 $ 140
Denominator
Weighted average shares outstanding 137,424 377,650 123,969 390,952
Basic and Diluted EPS $ 0.23 $ 0.23 $ 0.36 $ 0.36
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4. Revenue Recognition
Disaggregation of Revenue
The Company’s revenue consists of the following categories, which aggregate into the segments – Recorded Music and Music Publishing:
Three Months Ended
December 31,
2022 2021
(in millions)
Revenue by Type
Digital $ 803 $ 870
Physical 133 195
Total Digital and Physical 936 1,065
Artist services and expanded-rights 206 232
Licensing 97 89
Total Recorded Music 1,239 1,386
Performance 45 38
Digital 149 133
Mechanical 14 14
Synchronization 39 42
Other 3 2
Total Music Publishing 250 229
Intersegment eliminations ( 1 ) ( 1 )
Total Revenues $ 1,488 $ 1,614
Revenue by Geographical Location
U.S. Recorded Music $ 539 $ 608
U.S. Music Publishing 133 115
Total U.S. 672 723
International Recorded Music 700 778
International Music Publishing 117 114
Total International 817 892
Intersegment eliminations ( 1 ) ( 1 )
Total Revenues $ 1,488 $ 1,614
Sales Returns and Uncollectible Accounts
Based on management’s analysis of sales returns, refund liabilities of $ 26 million and $ 19 million were established at December 31, 2022 and September 30, 2022, respectively.
Based on management’s analysis of estimated credit losses, reserves of $ 21 million and $ 19 million were established at December 31, 2022 and September 30, 2022, respectively.
Deferred Revenue
Deferred revenue increased by $ 103 million during the three months ended December 31, 2022 related to cash received from customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period. Revenues of $ 144 million were recognized during the three months ended December 31, 2022 related to the balance of deferred revenue at September 30, 2022. There were no other significant changes to deferred revenue during the reporting period.
Performance Obligations
For the three months ended December 31, 2022 and December 31, 2021, the Company recognized revenue of $ 27 million and $ 37 million, respectively, from performance obligations satisfied in previous periods.
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Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at December 31, 2022 are as follows:
Rest of FY23 FY24 FY25 Thereafter Total
(in millions)
Remaining performance obligations $ 547 $ 367 $ 5 $ 1 $ 920
Total $ 547 $ 367 $ 5 $ 1 $ 920
5. Acquisition of 300 Entertainment
On December 16, 2021, the Company purchased all outstanding shares of Theory Entertainment LLC d/b/a 300 Entertainment (“300 Entertainment”), an independent U.S. record label. The final consideration paid was determined to be $ 394 million, which reflects the base purchase price of $ 400 million, adjusted for, among other items, working capital. At December 31, 2022, the Company updated and finalized the purchase price allocation recorded at September 30, 2022, which resulted in a decrease to intangible assets of approximately $ 1 million and a net decrease to other acquired assets and liabilities of approximately $ 2 million, with a corresponding net increase to goodwill of approximately $ 3 million.
See Note 5, “Acquisition of 300 Entertainment,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022 for the preliminary purchase price allocation, valuation methodology, and other information related to the 300 Entertainment acquisition.
6. Comprehensive Income
Comprehensive income, which is reported in the accompanying condensed consolidated statements of 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, Derivatives and Hedging . The following summary sets forth the changes in the components of accumulated other comprehensive loss, net of related tax benefit of less than $ 1 million:
Foreign Currency Translation Loss (a) Minimum Pension Liability Adjustment Deferred Gains (Losses) On Derivative Financial Instruments Accumulated Other Comprehensive Loss, net
(in millions)
Balances at September 30, 2022 $ ( 358 ) $ ( 2 ) $ 13 $ ( 347 )
Other comprehensive income (loss) 72 — ( 1 ) 71
Balances at December 31, 2022 $ ( 286 ) $ ( 2 ) $ 12 $ ( 276 )
______________________________________
(a) Includes historical foreign currency translation related to certain intra-entity transactions.
7. Goodwill and Intangible Assets
Goodwill
The following analysis details the changes in goodwill for each reportable segment:
Recorded
Music Music
Publishing Total
(in millions)
Balances at September 30, 2022 $ 1,456 $ 464 $ 1,920
Acquisitions 3 — 3
Other adjustments (a) 28 — 28
Balances at December 31, 2022 $ 1,487 $ 464 $ 1,951
______________________________________
(a) Other adjustments during the three months ended December 31, 2022 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
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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 December 31,
2022 September 30,
2022
(in millions)
Intangible assets subject to amortization:
Recorded music catalog 12 years $ 1,379 $ 1,316
Music publishing copyrights 25 years 1,958 1,889
Artist and songwriter contracts 13 years 1,046 1,014
Trademarks 14 years 106 103
Other intangible assets 6 years 92 89
Total gross intangible assets subject to amortization 4,581 4,411
Accumulated amortization ( 2,315 ) ( 2,172 )
Total net intangible assets subject to amortization 2,266 2,239
Intangible assets not subject to amortization:
Trademarks and tradenames Indefinite 149 145
Total net intangible assets $ 2,415 $ 2,384
8. Debt
Debt Capitalization
Long-term debt, all of which was issued by Acquisition Corp., consists of the following:
December 31,
2022 September 30,
2022
(in millions)
Revolving Credit Facility (a) $ — $ —
Senior Term Loan Facility due 2028 1,295 1,145
2.750 % Senior Secured Notes due 2028 (€ 325 face amount)
346 318
3.750 % Senior Secured Notes due 2029
540 540
3.875 % Senior Secured Notes due 2030
535 535
2.250 % Senior Secured Notes due 2031 (€ 445 face amount)
474 435
3.000 % Senior Secured Notes due 2031
800 800
Total long-term debt, including the current portion $ 3,990 $ 3,773
Issuance premium less unamortized discount and unamortized deferred financing costs ( 44 ) ( 41 )
Total long-term debt, including the current portion, net $ 3,946 $ 3,732
______________________________________
(a) Reflects $ 300 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $ 4 million at both December 31, 2022 and September 30, 2022. There were no loans outstanding under the Revolving Credit Facility at December 31, 2022 or September 30, 2022.
The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp. As of December 31, 2022 Acquisition Corp. had issued and outstanding the 2.750 % Senior Secured Notes due 2028, the 3.750 % Senior Secured Notes due 2029, the 3.875 % Senior Secured Notes due 2030, the 2.250 % Senior Secured Notes due 2031 and the 3.000 % Senior Secured Notes due 2031 (together, the “Acquisition Corp. Notes”).
All of the Acquisition Corp. Notes are guaranteed by all of Acquisition Corp.’s domestic wholly-owned subsidiaries. The guarantee of the Acquisition Corp. Notes by Acquisition Corp.’s domestic wholly-owned subsidiaries is full, unconditional and joint and several. The secured notes are guaranteed on a senior secured basis.
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The Company and Holdings are holding companies that conduct substantially all of their business operations through Acquisition Corp. Accordingly, while Acquisition Corp. and its subsidiaries are not currently restricted from distributing funds to the Company and Holdings under the indentures for the Acquisition Corp. Notes or the credit agreements for the Acquisition Corp. Senior Credit Facilities, including the Revolving Credit Facility and the Senior Term Loan Facility, should Acquisition Corp.’s Total Indebtedness to EBITDA Ratio increase above 3.50 :1.00 and the term loans not achieve an investment grade rating, the covenants under the Revolving Credit Facility, which are currently suspended, will be reinstated and the ability of the Company and Holdings to obtain funds from their subsidiaries will be restricted by the Revolving Credit Facility. The Company was in compliance with its covenants under its outstanding notes, the Revolving Credit Facility and the Senior Term Loan Facility as of December 31, 2022 .
Fiscal 2023 Transactions
Senior Term Loan Facility Amendment
On November 1, 2022, Acquisition Corp. entered into a Seventh Incremental Commitment Amendment (the “Seventh Incremental Commitment Amendment”), with Credit Suisse AG, New York Branch, as Tranche H term lender, and Credit Suisse AG, as administrative agent, and acknowledged by the guarantors party thereto and WMG Holdings Corp., to the Senior Term Loan Credit Agreement, pursuant to which Acquisition Corp. borrowed additional term loans in the amount of $ 150 million for an aggregate principal amount outstanding under the Senior Term Loan Credit Agreement of $ 1,295 million. The Seventh Incremental Commitment Amendment was entered into to fund certain deferred payment obligations owing in respect of certain prior acquisitions, to pay fees and expenses relating thereto and for general corporate purposes.
Interest Rates
The loans under the Revolving Credit Facility bear interest at Acquisition Corp.’s election at a rate equal to (i) the rate for deposits in the borrowing currency in the London interbank market (adjusted for maximum reserves) for the applicable interest period (“Revolving LIBOR”) subject to a zero floor, plus 1.75 % per annum in the case of Initial Revolving Loans (as defined in the Revolving Credit Agreement), or 1.875 % per annum in the case of 2020 Revolving Loans (as defined in the Revolving Credit Agreement), or (ii) the base rate, which is the highest of (x) the corporate base rate established by the administrative agent from time to time, (y) 0.50 % in excess of the overnight federal funds rate and (z) the one-month Revolving LIBOR plus 1.0 % per annum, plus, in each case, 0.75 % per annum in the case of Initial Revolving Loans, or 0.875 % per annum in the case of 2020 Revolving Loans; provided that, in respect of 2020 Revolving Loans, the applicable margin with respect to such loans is subject to adjustment as set forth in the pricing grid in the Revolving Credit Agreement. Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.18 x at December 31, 2022, the applicable margin for Eurodollar loans would be 1.625 % instead of 1.875 % and the applicable margin for ABR loans would be 0.625 % instead of 0.875 % in the case of 2020 Revolving Loans. If there is a payment default at any time, then the interest rate applicable to overdue principal will be the rate otherwise applicable to such loan plus 2.0 % per annum. Default interest will also be payable on other overdue amounts at a rate of 2.0 % per annum above the amount that would apply to an alternative base rate loan.
The Tranche G loans under the Senior Term Loan Facility bear interest at Acquisition Corp.’s election at a rate equal to (i) the rate for deposits in U.S. dollars in the London interbank market (adjusted for maximum reserves) for the applicable interest period (“Term Loan LIBOR”) subject to a zero floor, plus 2.125 % per annum or (ii) the base rate, which is the highest of (x) the corporate base rate established by the administrative agent as its prime rate in effect at its principal office in New York City from time to time, (y) 0.50 % in excess of the overnight federal funds rate and (z) one-month Term Loan LIBOR, plus 1.00 % per annum, subject to a 1.00 % floor, plus, in each case, 1.125 % per annum. If there is a payment default at any time, then the interest rate applicable to overdue principal and interest will be the rate otherwise applicable to such loan plus 2.0 % per annum. Default interest will also be payable on other overdue amounts at a rate of 2.0 % per annum above the amount that would apply to an alternative base rate loan.
The Tranche H loans under the Senior Term Loan Facility bear interest at Acquisition Corp.’s election at a rate equal to (i) the forward-looking term rate based on the secured overnight financing rate as administered by the Federal Reserve Bank of New York for the applicable interest period (“Term SOFR”) subject to a 0.50 % floor, plus 3.00 % per annum or (ii) the base rate, which is the highest of (x) the corporate base rate established by the administrative agent as its prime rate in effect at its principal office in New York City from time to time, (y) 0.50 % in excess of the overnight federal funds rate and (z) one-month Term SOFR, plus 1.00 % per annum, subject to a 1.50 % floor, plus, in each case, 2.00 % per annum. If there is a payment default at any time, then the interest rate applicable to overdue principal and interest will be the rate otherwise applicable to such loan plus 2.0 % per annum. Default interest will also be payable on other overdue amounts at a rate of 2.0 % per annum above the amount that would apply to an alternative base rate loan.
The Company has entered into, and in the future may enter into, interest rate swaps to manage interest rate risk. Please refer to Note 12 of our condensed consolidated financial statements for further discussion.
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Maturity of Senior Term Loan Facility
The loans outstanding under the Senior Term Loan Facility mature on January 20, 2028.
Maturity of Revolving Credit Facility
The maturity date of the Revolving Credit Facility is April 3, 2025.
Maturities of Senior Secured Notes
As of December 31, 2022, there are no scheduled maturities of notes until 2028, when $ 346 million is scheduled to mature. Thereafter, $ 2.349 billion is scheduled to mature.
Interest Expense, net
Total interest expense, net was $ 32 million and $ 30 million for the three months ended December 31, 2022 and 2021, respectively. The weighted-average interest rate of the Company’s total debt was 3.7 % at December 31, 2022, 3.5 % at September 30, 2022 and 3.2 % at December 31, 2021.
9. Commitments and Contingencies
From time to time the Company is involved in claims and legal proceedings that arise in the ordinary course of business. The Company is currently subject to several such claims and legal proceedings. Based on currently available information, the Company does not believe that resolution of pending matters will have a material adverse effect on its financial condition, cash flows or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that the Company’s defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on the Company’s business, financial condition, cash flows and results of operations in a particular period. Any claims or proceedings against the Company, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors.
10. Equity
Stock-Based Compensation
The Company’s stock-based compensation plans are described in Note 13, “Stock-Based Compensation Plans,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022. Stock-based compensation consists primarily of restricted stock units (“RSUs”) granted to eligible employees and executives under the Omnibus Incentive Plan.
During the three months ended December 31, 2022, the Company approved the issuance of RSUs under the Omnibus Incentive Plan to eligible employees and executives. For accounting purposes, vesting of such RSUs commenced during the period. Non-cash stock-based compensation associated with these RSUs was $ 8 million which has been classified as a share-based compensation liability as of December 31, 2022 as further described below.
The Company recognized a total of $ 14 million of non-cash stock-based compensation expense for the three months ended December 31, 2022, of which $ 4 million was recorded to additional paid-in capital, and a remaining $ 10 million has been classified as a share-based compensation liability as of December 31, 2022. The share-based compensation liability represents awards under the Omnibus Incentive Plan where a total value is known and settlement will occur in a variable number of shares of Class A Common Stock and RSUs. During the three months ended December 31, 2022, $ 5 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, 2022. The Company recognized approximately $ 24 million of non-cash stock-based compensation expense for the three months ended December 31, 2021.
Common Stock
During the three months ended December 31, 2022, in connection with the Senior Management Free Cash Flow Plan (the “Plan”), the Company issued a total of approximately 869,000 shares of Class A Common Stock to settle a portion of a participant’s deferred equity units previously issued under the Plan.
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During the three months ended December 31, 2022, the Company satisfied the vesting of RSUs issued to employees by issuing approximately 5,000 shares of Class A Common Stock under the Omnibus Incentive Plan, which is net of shares used to settle employee income tax obligations.
11. Income Taxes
For the three months ended December 31, 2022, the Company recorded an income tax expense of $ 48 million. The income tax expense for the three months ended December 31, 2022 is higher than the expected tax expense at the statutory rate of 21% primarily due to U.S. state and local taxes, withholding taxes, foreign income taxed at rates higher than the U.S., and non-deductible executive compensation under IRC Section 162(m), offset by a deduction against foreign derived intangible income (“FDII”).
For the three months ended December 31, 2021, the Company recorded an income tax expense of $ 75 million. The income tax expense for the three months ended December 31, 2021 is higher than the expected tax benefit at the statutory tax rate of 21% primarily due to U.S. state and local taxes, withholding taxes, foreign income taxed at rates higher than the U.S., and non-deductible executive compensation under IRC Section 162(m), offset by a deduction against foreign derived intangible income (“FDII”).
The Company has determined that it is reasonably possible that the gross unrecognized tax benefits as of December 31, 2022 could decrease by up to approximately $ 1 million related to various ongoing audits and settlement discussions in various foreign jurisdictions during the next twelve months.
12. Derivative Financial Instruments
The Company uses derivative financial instruments, primarily foreign currency forward exchange contracts and interest rate swaps, for the purposes of managing foreign currency exchange rate risk and interest rate risk on expected future cash flows.
The Company’s hedged interest rate transactions as of December 31, 2022 are expected to be recognized within one year . The fair value of interest rate swaps is based on dealer quotes of market rates (i.e., Level 2 inputs) which is discussed further in Note 19, “Fair Value Measurements,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022. Interest income or expense related to interest rate swaps is recognized in interest income (expense), net in the same period as the related expense is recognized. The ineffective portions of interest rate swaps are recognized in other income (expense) in the period measured.
As of December 31, 2022, the Company had outstanding foreign currency forward exchange contracts for the sale of $ 337 million and the purchase of $ 197 million of foreign currencies at fixed rates that will be settled by September 2023.
As of December 31, 2022, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 12 million of unrealized deferred gains in comprehensive income related to the interest rate swaps. As of September 30, 2022, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 13 million of unrealized deferred gains in comprehensive income related to the interest rate swaps.
The Company recorded realized pre-tax losses of $ 1 million and unrealized pre-tax losses of $ 7 million related to its foreign currency forward exchange contracts in the condensed consolidated statement of operations as other expense for the three months ended December 31, 2022. The Company recorded realized pre-tax gains of $ 1 million and unrealized pre-tax gains of $ 2 million related to its foreign currency forward exchange contracts in the condensed consolidated statement of operations as other income for the three months ended December 31, 2021.
The unrealized pre-tax losses of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the three months ended December 31, 2022 were $ 2 million. The unrealized pre-tax gains of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the three months ended December 31, 2021 were $ 9 million.
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The following is a summary of amounts recorded in the consolidated balance sheets pertaining to the Company’s derivative instruments at December 31, 2022 and September 30, 2022:
December 31,
2022 (a) September 30,
2022 (b)
(in millions)
Other current assets $ 17 $ 2
Other current liabilities ( 8 ) —
Other noncurrent assets — 16
Other noncurrent liabilities — —
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(a) Includes $ 13 million and $ 20 million of foreign exchange derivative contracts which net to $ 1 million of current assets and $ 8 million of current liabilities, respectively, and $ 16 million of interest rate swaps in current asset positions.
(b) Includes $ 2 million and $ 16 million of interest rate swaps in current and noncurrent asset positions, respectively.
13. Segment Information
Based on the nature of its products and services, the Company classifies its business interests into two fundamental operations: Recorded Music and Music Publishing, which also represent the reportable segments of the Company. Information as to each of these operations is set forth below. The Company evaluates performance based on several factors, of which the primary financial measure is operating income (loss) before non-cash depreciation of tangible assets and non-cash amortization of intangible assets (“OIBDA”). The Company has supplemented its analysis of OIBDA results by segment with an analysis of operating income (loss) by segment.
The accounting policies of the Company’s business segments are the same as those described in Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022. The Company accounts for intersegment sales at fair value as if the sales were to third parties. While intercompany transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses recognized by the segment that is counterparty to the transaction) are eliminated in consolidation, and therefore, do not themselves impact consolidated results.
Recorded
Music Music
Publishing Corporate
expenses and
eliminations Total
Three Months Ended (in millions)
December 31, 2022
Revenues $ 1,239 $ 250 $ ( 1 ) $ 1,488
Operating income (loss) 283 49 ( 67 ) 265
Amortization of intangible assets 41 22 — 63
Depreciation of property, plant and equipment 13 1 7 21
OIBDA 337 72 ( 60 ) 349
December 31, 2021
Revenues $ 1,386 $ 229 $ ( 1 ) $ 1,614
Operating income (loss) 276 32 ( 69 ) 239
Amortization of intangible assets 40 20 — 60
Depreciation of property, plant and equipment 14 2 5 21
OIBDA 330 54 ( 64 ) 320
14. Additional Financial Information
Cash Interest and Taxes
The Company made interest payments of approximately $ 25 million and $ 13 million during the three months ended December 31, 2022 and 2021, respectively. The Company paid approximately $ 45 million and $ 29 million of income and withholding taxes, net of refunds, for the three months ended December 31, 2022 and 2021, respectively.
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Gain on Divestiture
During the three months ended December 31, 2022, the Company sold its interest in certain sound recording rights and recorded a pre-tax gain of $ 41 million which was recorded as a net gain on divestiture in the accompanying condensed consolidated statement of operations.
Dividends
The Company’s ability to pay dividends may be restricted by covenants in the credit agreement for the Revolving Credit Facility which are currently suspended but which will be reinstated if Acquisition Corp.’s Total Indebtedness to EBITDA Ratio increases above 3.50 :1.00 and the term loans do not achieve an investment grade rating.
The Company intends to pay quarterly cash dividends to holders of its Class A Common Stock and Class B Common Stock. The declaration of each dividend will continue to be at the discretion of the Company’s board of directors and will depend on the Company’s financial condition, earnings, liquidity and capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by Delaware law, general business conditions and any other factors that the Company’s board of directors deems relevant in making such a determination. Therefore, there can be no assurance that the Company will pay any dividends to holders of the Company’s common stock, or as to the amount of any such dividends.
On November 10, 2022, the Company’s board of directors declared a cash dividend of $ 0.16 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, which was paid to stockholders on December 1, 2022. The Company paid an aggregate of approximately $ 84 million, or $ 0.16 per share, in cash dividends to stockholders and participating security holders for the three months ended December 31, 2022.
Noncash Investment Activity
Noncash investing activities was approximately $ 125 million related to the acquisition of music publishing rights and music catalogs, net during the three months ended December 31, 2021.
15. Fair Value Measurements
The following tables show the fair value of the Company’s financial instruments that are required to be measured at fair value as of December 31, 2022 and September 30, 2022.
Fair Value Measurements as of December 31, 2022
(Level 1) (Level 2) (Level 3) Total
(in millions)
Other Current Assets:
Foreign Currency Forward Exchange Contracts (a) $ — $ 1 $ — $ 1
Interest Rate Swaps (d) — 16 — 16
Other Current Liabilities:
Foreign Currency Forward Exchange Contracts (a) — ( 8 ) — ( 8 )
Other Noncurrent Assets:
Equity Investments with Readily Determinable Fair Value (c) 25 — — 25
Other Noncurrent Liabilities:
Contractual Obligations (b) — — ( 1 ) ( 1 )
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Fair Value Measurements as of September 30, 2022
(Level 1) (Level 2) (Level 3) Total
(in millions)
Other Current Assets:
Interest Rate Swap (d) $ — $ 2 $ — $ 2
Other Noncurrent Assets:
Interest Rate Swap (d) — 16 — 16
Equity Investment with Readily Determinable Fair Value (c) 36 — — 36
Other Noncurrent Liabilities:
Contractual Obligations (b) — — ( 1 ) ( 1 )
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(a) The fair value of foreign currency forward exchange contracts is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay at their maturity dates for contracts involving the same currencies and maturity dates.
(b) This represents contingent consideration related to acquisitions. This is based on a probability weighted performance approach and it is adjusted to fair value on a recurring basis and any adjustments are typically included as a component of operating income in the condensed consolidated statements of operations. This amount was mainly calculated using unobservable inputs such as future earnings performance of the acquiree and the expected timing of payments.
(c) These represent equity investments with a readily determinable fair value. The Company has measured its investments to fair value in accordance with ASC 321, Investments—Equity Securities, based on quoted prices in active markets.
(d) The fair value of the interest rate swaps is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay as of December 31, 2022 for contracts involving the same attributes and maturity dates.
The following table reconciles the beginning and ending balances of net liabilities classified as Level 3:
Total
(in millions)
Balance at September 30, 2022 $ ( 1 )
Additions —
Reductions —
Payments —
Balance at December 31, 2022 $ ( 1 )
The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, inventories and property, plant and equipment, are not required to be re-measured to fair value on a recurring basis. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that impairment exists, the asset is written down to its fair value. In addition, an impairment analysis is performed at least annually for goodwill and indefinite-lived intangible assets.
Equity Investments Without Readily Determinable Fair Value
The Company evaluates its equity investments without readily determinable fair values for impairment if factors indicate that a significant decrease in value has occurred. The Company has elected to use the measurement alternative to fair value that will allow these investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. The Company did not record any impairment charges on these investments during the three months ended December 31, 2022 and 2021. In addition, there were no observable price changes events that were completed during the three months ended December 31, 2022 and 2021.
Fair Value of Debt
Based on the level of interest rates prevailing at December 31, 2022, the fair value of the Company’s debt was $ 3.542 billion. Based on the level of interest rates prevailing at September 30, 2022, the fair value of the Company’s debt was $ 3.181 billion. The fair value of the Company’s debt instruments is determined using quoted market prices from less active markets or by using quoted market prices for instruments with identical terms and maturities; both approaches are considered a Level 2 measurement.
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