10-Q 1 wmg-10q_20150630.htm 10-Q wmg-10q_20150630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

¨

  

 

 

Accelerated filer

 

¨

 

 

 

 

 

Non-accelerated filer

 

x

  

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  ¨    No   x

There is no public market for the Registrant’s common stock. As of August 6, 2015 the number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding was 1,055. 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.

 

 

 

 

 


WARNER MUSIC GROUP CORP.

INDEX

 

 

 

 

Page
Number

Part I.

 

Financial Information

 

 

Item 1.

 

Financial Statements (Unaudited)

 

3

 

 

Consolidated Balance Sheets as of June 30, 2015 and September 30, 2014

 

3

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2015 and June 30, 2014

 

4

 

 

Consolidated Statement of Comprehensive Income for the Three and Nine Months Ended June 30, 2015 and June 30, 2014

 

5

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2015 and June 30, 2014

 

6

 

 

Consolidated Statement of Equity for the Nine Months Ended June 30, 2015

 

7

 

 

Notes to Consolidated Interim Financial Statements

 

8

 

 

Supplementary Information—Consolidating Financial Statements

 

20

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

33

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

60

Item 4.

 

Controls and Procedures

 

61

Part II.

 

Other Information

 

62

Item 1.

 

Legal Proceedings

 

62

Item 1A.

 

Risk Factors

 

62

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

62

Item 3.

 

Defaults Upon Senior Securities

 

63

Item 4.

 

Mine Safety Disclosures

 

63

Item 5.

 

Other Information

 

63

Item 6.

 

Exhibits

 

63

Signatures

 

 

 

64

2


ITEM 1.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

Warner Music Group Corp.

Consolidated Balance Sheets (Unaudited)

 

 

 

June 30,

 

 

September 30,

 

 

 

2015

 

 

2014

 

 

 

(in millions)

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and equivalents

 

$

168

 

 

$

157

 

Accounts receivable, net of allowances of $59 million and $65 million

 

 

343

 

 

 

383

 

Inventories

 

 

39

 

 

 

39

 

Royalty advances expected to be recouped within one year

 

 

119

 

 

 

102

 

Deferred tax assets

 

 

46

 

 

 

46

 

Prepaid and other current assets

 

 

58

 

 

 

55

 

Total current assets

 

 

773

 

 

 

782

 

Royalty advances expected to be recouped after one year

 

 

219

 

 

 

190

 

Property, plant and equipment, net

 

 

227

 

 

 

227

 

Goodwill

 

 

1,633

 

 

 

1,661

 

Intangible assets subject to amortization, net

 

 

2,597

 

 

 

2,884

 

Intangible assets not subject to amortization

 

 

120

 

 

 

120

 

Other assets

 

 

95

 

 

 

90

 

Total assets

 

$

5,664

 

 

$

5,954

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

151

 

 

$

215

 

Accrued royalties

 

 

1,111

 

 

 

1,132

 

Accrued liabilities

 

 

235

 

 

 

243

 

Accrued interest

 

 

48

 

 

 

60

 

Deferred revenue

 

 

247

 

 

 

219

 

Current portion of long-term debt

 

 

13

 

 

 

13

 

Other current liabilities

 

 

19

 

 

 

3

 

Total current liabilities

 

 

1,824

 

 

 

1,885

 

Long-term debt

 

 

2,983

 

 

 

3,017

 

Deferred tax liabilities, net

 

 

345

 

 

 

383

 

Other noncurrent liabilities

 

 

239

 

 

 

279

 

Total liabilities

 

$

5,391

 

 

$

5,564

 

Equity:

 

 

 

 

 

 

 

 

Common stock ($0.001 par value; 10,000 shares authorized; 1,055 shares issued and

   outstanding)

 

$

 

 

$

 

Additional paid-in capital

 

 

1,128

 

 

 

1,128

 

Accumulated deficit

 

 

(717

)

 

 

(649

)

Accumulated other comprehensive loss, net

 

 

(157

)

 

 

(108

)

Total Warner Music Group Corp. equity

 

 

254

 

 

 

371

 

Noncontrolling interest

 

 

19

 

 

 

19

 

Total equity

 

 

273

 

 

 

390

 

Total liabilities and equity

 

$

5,664

 

 

$

5,954

 

See accompanying notes

 

 

 

3


Warner Music Group Corp.

Consolidated Statements of Operations (Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(in millions)

 

Revenue

 

$

710

 

 

$

788

 

 

$

2,216

 

 

$

2,256

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of revenue

 

 

(373

)

 

 

(417

)

 

 

(1,136

)

 

 

(1,177

)

Selling, general and administrative expenses (a)

 

 

(251

)

 

 

(319

)

 

 

(799

)

 

 

(885

)

Amortization expense

 

 

(63

)

 

 

(67

)

 

 

(191

)

 

 

(199

)

Total costs and expenses

 

 

(687

)

 

 

(803

)

 

 

(2,126

)

 

 

(2,261

)

Operating income (loss)

 

 

23

 

 

 

(15

)

 

 

90

 

 

 

(5

)

Loss on extinguishment of debt

 

 

 

 

 

(141

)

 

 

 

 

 

(141

)

Interest expense, net

 

 

(45

)

 

 

(48

)

 

 

(136

)

 

 

(157

)

Other (expense) income

 

 

(17

)

 

 

4

 

 

 

(12

)

 

 

(3

)

Loss before income taxes

 

 

(39

)

 

 

(200

)

 

 

(58

)

 

 

(306

)

Income tax (expense) benefit

 

 

(4

)

 

 

16

 

 

 

(7

)

 

 

27

 

Net loss

 

 

(43

)

 

 

(184

)

 

 

(65

)

 

 

(279

)

Less: Income attributable to noncontrolling interest

 

 

(1

)

 

 

(1

)

 

 

(3

)

 

 

(3

)

Net loss attributable to Warner Music Group Corp.

 

$

(44

)

 

$

(185

)

 

$

(68

)

 

$

(282

)

 

(a) Includes depreciation expense of:

 

$

(14

)

 

$

(14

)

 

$

(42

)

 

$

(39

)

See accompanying notes

 

 

 

4


Warner Music Group Corp.

Consolidated Statements of Comprehensive Loss (Unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(in millions)

 

Net loss

 

$

(43

)

 

$

(184

)

 

$

(65

)

 

$

(279

)

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency adjustment

 

 

41

 

 

 

4

 

 

 

(49

)

 

 

(2

)

Other comprehensive income (loss), net of tax

 

 

41

 

 

 

4

 

 

 

(49

)

 

 

(2

)

Total comprehensive loss

 

 

(2

)

 

 

(180

)

 

 

(114

)

 

 

(281

)

Less: Income attributable to noncontrolling interest

 

 

(1

)

 

 

(1

)

 

 

(3

)

 

 

(3

)

Comprehensive loss attributable to Warner Music Group Corp.

 

$

(3

)

 

$

(181

)

 

$

(117

)

 

$

(284

)

See accompanying notes

 

 

 

5


Warner Music Group Corp.

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Nine Months

 

 

Nine Months

 

 

 

Ended

 

 

Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

 

(in millions)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(65

)

 

$

(279

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

 

141

 

Depreciation and amortization

 

 

233

 

 

 

238

 

Unrealized gains/losses and remeasurement of foreign denominated loans

 

 

19

 

 

 

(41

)

Deferred income taxes

 

 

(17

)

 

 

(47

)

Non-cash interest expense

 

 

8

 

 

 

11

 

Non-cash share-based compensation expense

 

 

 

 

 

5

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

16

 

 

 

67

 

Inventories

 

 

(3

)

 

 

(4

)

Royalty advances

 

 

(55

)

 

 

(24

)

Accounts payable and accrued liabilities

 

 

(86

)

 

 

(96

)

Royalty payables

 

 

35

 

 

 

11

 

Accrued interest

 

 

(12

)

 

 

(25

)

Deferred revenue

 

 

39

 

 

 

93

 

Other balance sheet changes

 

 

6

 

 

 

(9

)

Net cash provided by operating activities

 

 

118

 

 

 

41

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Acquisition of music publishing rights, net

 

 

(12

)

 

 

(20

)

Capital expenditures

 

 

(51

)

 

 

(46

)

Investments and acquisitions of businesses, net

 

 

(16

)

 

 

(26

)

Net cash used in investing activities

 

 

(79

)

 

 

(92

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from the Revolving Credit Facility

 

 

258

 

 

 

490

 

Repayment of the Revolving Credit Facility

 

 

(258

)

 

 

(490

)

Repayment of Acquisition Corp. Senior Term Loan Facility

 

 

(10

)

 

 

(7

)

Proceeds from issuance of Acquisition Corp. 5.625% Senior Secured Notes

 

 

 

 

 

275

 

Proceeds from issuance of Acquisition Corp. 6.750% Senior Notes

 

 

 

 

 

660

 

Repayment of Acquisition Corp. 11.5% Senior Notes

 

 

 

 

 

(765

)

Financing costs paid

 

 

 

 

 

(104

)

Deferred financing costs paid

 

 

 

 

 

(12

)

Distribution to noncontrolling interest holder

 

 

(3

)

 

 

(2

)

Repayment of capital lease obligations

 

 

(2

)

 

 

(2

)

Net cash (used in) provided by financing activities

 

 

(15

)

 

 

43

 

Effect of exchange rate changes on cash and equivalents

 

 

(13

)

 

 

(5

)

Net increase (decrease) in cash and equivalents

 

 

11

 

 

 

(13

)

Cash and equivalents at beginning of period

 

 

157

 

 

 

155

 

Cash and equivalents at end of period

 

$

168

 

 

$

142

 

See accompanying notes

 

6


Warner Music Group Corp.

Consolidated Statements of Equity (Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

Warner Music

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Accumulated

 

 

Comprehensive

 

 

Group Corp.

 

 

Noncontrolling

 

 

Total

 

 

 

Shares

 

 

Value

 

 

Capital

 

 

Deficit

 

 

Loss

 

 

Equity

 

 

Interest

 

 

Equity

 

 

 

(in millions, except share amounts)

 

Balance at September 30, 2014

 

 

1,055

 

 

$

 

 

$

1,128

 

 

$

(649

)

 

$

(108

)

 

$

371

 

 

$

19

 

 

$

390

 

Net (loss) income

 

 

 

 

 

 

 

 

 

 

 

(68

)

 

 

 

 

 

(68

)

 

 

3

 

 

 

(65

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(49

)

 

 

(49

)

 

 

 

 

 

(49

)

Distribution to noncontrolling interest

   holders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

(3

)

Balance at June 30, 2015

 

 

1,055

 

 

$

 

 

$

1,128

 

 

$

(717

)

 

$

(157

)

 

$

254

 

 

$

19

 

 

$

273

 

See accompanying notes

 

 

 

7


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 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”) in accordance with certain covenants contained in the agreements governing its outstanding indebtedness.

Acquisition of Parlophone Label Group

On July 1, 2013, the Company completed its acquisition of Parlophone Label Group (the “PLG Acquisition”).

The Company classifies its business interests into two fundamental operations: Recorded Music and Music Publishing. A brief description of these operations is presented below.

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 albums and promoting artists and their products.

In the United States, Recorded Music operations are conducted principally through the Company’s major record labels—Warner Bros. Records and Atlantic Records. 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, Elektra, Erato, FFRR, Fueled by Ramen, Nonesuch, Parlophone, Reprise, Roadrunner, Rykodisc, Sire, Warner Classics, Warner Music Nashville and Word.

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 records 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; various distribution centers and ventures operated internationally; and an 80% interest in Word, which specializes in the distribution of music products in the Christian retail marketplace.

8


In addition to the Company’s Recorded Music products being sold in physical retail outlets, Recorded Music products are also sold in physical form to online physical retailers such as Amazon.com, barnesandnoble.com and bestbuy.com and in digital form to online digital download services such as Apple’s iTunes and Google Play, and are offered by digital streaming services such as Apple Music, Deezer, Rhapsody, Spotify and YouTube, including digital radio services such as iHeart Radio, iTunes Radio and Pandora.

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 a record 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 online and mobile partners to test new concepts. The Company believes existing and new digital businesses will be a significant source of growth for at least the next several years 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 and management have permited 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 particular 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 include Warner/Chappell, 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 65,000 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, gospel and other Christian music. Warner/Chappell also administers the music and soundtracks of several third-party television and film producers and studios, including Lucasfilm, Ltd., Hallmark Entertainment and Disney Music Publishing. Through consistent and tactical talent investment, Warner Chappell has developed a broad array of talent across all genres. The Company’s production music library business includes Non-Stop Music, Groove Addicts Production Music Library, Carlin Recorded Music Library, 615 Music and Frank Gari Productions and Gari Communications, 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 of 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, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ended September 30, 2015.

The consolidated balance sheet at September 30, 2014 has been derived from the audited consolidated financial statements at that date but does not include all of 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, 2014 (File No. 001-32502).   

9


Basis of Consolidation

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

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

The Company maintains a 52-53 week fiscal year ending on the last Friday in each reporting period. As such, all references to June 30, 2015 and June 30, 2014 relate to the periods ended June 26, 2015 and June 27, 2014, respectively. For convenience purposes, the Company continues to date its financial statements as of June 30. The fiscal year ended September 30, 2014 ended on September 26, 2014. For convenience purposes, the Company continues to date its balance sheet as of September 30.

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.

New Accounting Pronouncements

During the first quarter of fiscal 2015, the Company adopted Accounting Standards Update (“ASU”) 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”). ASU 2013-11 requires an unrecognized tax benefit, or a portion of an unrecognized tax benefit, to be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The adoption of this standard did not have an impact on the Company’s financial statements, other than presentation.

During the first quarter of fiscal 2015, the Company adopted ASU 2014-17, Business Combinations (Topic 805): Pushdown Accounting (“ASU 2014-17”). This ASU provides acquired entities the option to apply pushdown accounting in their separate financial statements when an acquirer obtains control of them. ASU 2014-17 was effective upon issuance. This election to apply pushdown accounting is made for each individual change-in-control event. The adoption of this standard did not have an impact on the Company’s financial statements.

In May 2014, the FASB issued guidance codified in ASC 606, Revenue Recognition – Revenue from Contracts with Customers (“ASC 606”), which replaces the guidance in former ASC 605, Revenue Recognition and ASC 928, 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. ASC 606 is effective for annual periods beginning after December 15, 2016, and interim periods within those years. Early application is not permitted. The update may be applied using one of two methods: retrospective application to each prior reporting period presented, or retrospective application with the cumulative effect of initially applying the update recognized at the date of initial application. The Company is currently evaluating the transition method that will be elected and the impact of the update on its financial statements and disclosures.

In August 2014, the FASB issued ASU 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). This ASU will explicitly require management to assess an entity’s ability to continue as a going concern, and to provide related disclosure when substantial doubt exists. ASU 2014-15 will be effective in the first annual period ending after December 15, 2016, and interim periods thereafter. Earlier adoption is permitted. The adoption of this standard is not expected to have a significant impact on the Company’s financial statements, other than disclosure.

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). This ASU will require that debt issuance costs are presented as a direct deduction to the related debt in the liability section of the balance sheet, rather than presented as an asset. ASU 2015-03 will be effective for annual periods beginning after December 15, 2015, and interim periods within those years. Earlier adoption is permitted. The adoption of this standard is not expected to have a significant impact on the Company’s financial statements, other than presentation.

 

10


3. Comprehensive Loss

Comprehensive loss, which is reported in the accompanying consolidated statements of equity, consists of net (loss) income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net (loss) income. For the Company, the components of other comprehensive loss primarily consist of foreign currency translation losses and minimum pension liabilities. The following summary sets forth the changes in the components of accumulated other comprehensive loss, net of related taxes:

 

 

 

Foreign

 

 

Minimum

 

 

Accumulated

 

 

 

Currency

 

 

Pension

 

 

Other

 

 

 

Translation

 

 

Liability

 

 

Comprehensive

 

 

 

Loss

 

 

Adjustment

 

 

Loss, net

 

 

 

(in millions)

 

Balance at September 30, 2014

 

$

(98

)

 

$

(10

)

 

$

(108

)

Other comprehensive loss (a)

 

 

(49

)

 

 

 

 

 

(49

)

Amounts reclassified from accumulated other

   comprehensive income

 

 

 

 

 

 

 

 

 

Balance at June 30, 2015

 

$

(147

)

 

$

(10

)

 

$

(157

)

 

 

(a)

Foreign currency translation adjustments include intra-entity foreign currency transactions that are of a long-term investment nature of $32.2 million

 

 

4. 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, 2014

 

$

1,197

 

 

$

464

 

 

$

1,661

 

Acquisitions

 

 

3

 

 

 

 

 

 

3

 

Dispositions

 

 

 

 

 

 

 

 

 

Other adjustments

 

 

(31

)

 

 

 

 

 

(31

)

Balance at June 30, 2015

 

$

1,169

 

 

$

464

 

 

$

1,633

 

 

Other adjustments during the nine months ended June 30, 2015 represent foreign currency movements.

The Company performs its annual goodwill impairment test in accordance with FASB ASC Topic 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.

11


Intangible Assets

Intangible assets consist of the following:

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Average

 

June 30,

 

 

September 30,

 

 

 

Useful Life

 

2015

 

 

2014

 

 

 

 

 

(in millions)

 

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

 

 

Recorded music catalog

 

11 years

 

$

1,004

 

 

$

1,040

 

Music publishing copyrights

 

27 years

 

 

1,500

 

 

 

1,550

 

Artist and songwriter contracts

 

13 years

 

 

936

 

 

 

975

 

Trademarks

 

7 years

 

 

7

 

 

 

7

 

Total gross intangible asset subject to amortization

 

 

 

 

3,447

 

 

 

3,572

 

Accumulated amortization

 

 

 

 

(850

)

 

 

(688

)

Total net intangible assets subject to amortization

 

 

 

 

2,597

 

 

 

2,884

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

 

Trademarks and tradenames

 

Indefinite

 

 

120

 

 

 

120

 

Total net other intangible assets

 

 

 

$

2,717

 

 

$

3,004

 

 

5. Debt

Debt Capitalization

Long-term debt, including the current portion, consists of the following:

 

 

June 30,

 

 

September 30,

 

 

2015

 

 

2014

 

 

(in millions)

 

Revolving Credit Facility—Acquisition Corp. (a)

$

 

 

$

 

Senior Term Loan Facility due 2020—Acquisition Corp. (b)

 

1,285

 

 

 

1,294

 

5.625% Senior Secured Notes due 2022—Acquisition Corp.

 

275

 

 

 

275

 

6.00% Senior Secured Notes due 2021—Acquisition Corp.

 

450

 

 

 

450

 

6.25% Senior Secured Notes due 2021—Acquisition Corp. (c)

 

176

 

 

 

201

 

6.75% Senior Notes due 2022—Acquisition Corp.

 

660

 

 

 

660

 

13.75% Senior Notes due 2019—Holdings

 

150

 

 

 

150

 

Total debt

 

2,996

 

 

 

3,030

 

Less: current portion

 

13

 

 

 

13

 

Total long-term debt

$

2,983

 

 

$

3,017

 

 

(a)

Reflects $150 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $5 million and $11 million at June 30, 2015 and September 30, 2014, respectively. There were no loans outstanding under the Revolving Credit Facility at June 30, 2015 or September 30, 2014.

(b)

Principal amount of $1.290 billion and $1.300 billion less unamortized discount of $5 million and $6 million at June 30, 2015 and September 30, 2014, respectively. Of this amount, $13 million, representing the scheduled amortization of the Senior Term Loan Facility, was included in the current portion of long-term debt at June 30, 2015 and September 30, 2014.

(c)

Face amount of €158 million. Above amounts represent the dollar equivalent of such notes at June 30, 2015 and September 30, 2014.

    

2014 Debt Refinancing

On April 9, 2014, the Company completed a refinancing of part of its outstanding debt (the “2014 Refinancing”). In connection with the 2014 Refinancing, the Company issued $275 million in aggregate principal amount of its 5.625% Senior Secured Notes due 2022 (the “New Senior Secured Notes”) and $660 million in aggregate principal amount of its 6.750% Senior Notes due 2022 (the “New Unsecured Notes”).

12


In connection with the 2014 Refinancing, the Company used $869 million, to redeem or repurchase the Company’s previously outstanding $765 million 11.5% Senior Notes due 2018 and to pay tender/call premiums of $85 million and consent fees of approximately $19 million. The Company also paid approximately $3 million in accrued interest with respect to the notes redeemed or repurchased.

The Company recorded a loss on extinguishment of debt of approximately $141 million in the nine months ended June 30, 2014, which represents the difference between the redemption payment and the carrying value of the debt, which included the principal value of $765 million, less unamortized discounts of $13 million and unamortized debt issuance costs of $24 million.

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”), plus 2.00% per annum, 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, 1.00% per annum. 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 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”), plus 2.75% 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, plus, in each case, 1.75% per annum. The loans under the Senior Term Loan Facility are subject to a Term Loan LIBOR “floor” of 1.00%. 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.

Amortization and Maturity of Senior Term Loan Facility

The loans under the Senior Term Loan Facility amortize in equal quarterly installments due December, March, June and September in aggregate annual amounts equal to 1.00% of the original principal amount of the amended Senior Term Loan Facility, or $13 million per year, with the balance payable on maturity date of the Term Loans. The loans outstanding under the Senior Term Loan Facility mature on July 1, 2020.

Maturity of Revolving Credit Facility

The maturity date of the Revolving Credit Facility is April 1, 2019.

Maturities of Senior Notes and Senior Secured Notes

As of June 30, 2015, there are no scheduled maturities of notes until 2019, when $150 million is scheduled to mature. Thereafter, $1.561 billion is scheduled to mature.

Interest Expense, net

Total interest expense, net, was $45 million and $48 million for the three months ended June 30, 2015 and June 30, 2014, respectively. Total interest expense, net was $136 million and $157 million for the nine months ended June 30, 2015 and June 30, 2014, respectively. The weighted-average interest rate of the Company’s total debt was 5.6% at each of June 30, 2015, September 30, 2014 and June 30, 2014.

 

13


6. Restructuring

In conjunction with the PLG Acquisition, the Company undertook a plan to achieve cost savings (the “Restructuring Plan”), primarily through headcount reductions. The Restructuring Plan was approved by the CEO prior to the close of the PLG Acquisition. Under the Restructuring Plan, the Company currently expects to record an aggregate of approximately $75 million in restructuring costs, currently estimated to be made up of employee-related costs of $68 million, real estate costs of $5 million and other costs of $2 million. There were no restructuring costs incurred in the three months ended June 30, 2015 with respect to these actions. Total restructuring costs of $18 million were incurred in the three months ended June 30, 2014 with respect to these actions, which consisted of $15 million of employee-related costs and $3 million of real estate costs. Total restructuring costs of $2 million were incurred in the nine months ended June 30, 2015 with respect to these actions, which consist of $1 million of employee-related costs and $1 million of real estate costs. Total restructuring costs of $42 million were incurred in the nine months ended June 30, 2014 with respect to these actions, which consist of $37 million of employee-related costs, $4 million of real estate costs and $1 million of other costs. Total restructuring costs to date under the Restructuring Plan are $74 million, including total cash payments of $71 million. Employee-related costs include all cash compensation and other employee benefits paid to terminated employees. Real estate costs include costs that will continue to be incurred without economic benefit to us, such as, among others, operating lease payments for office space no longer being used and moving costs incurred during relocation, costs incurred to close a facility and IT costs to wire a new facility. The remainder of the Restructuring Plan is expected to be completed by the end of fiscal 2015.

Total restructuring activity is as follows:

 

 

 

Employee-

 

 

Real

 

 

 

 

 

 

 

 

 

 

 

related Costs

 

 

Estate Costs

 

 

Other

 

 

Total

 

 

 

(in millions)

 

Balance at September 30, 2014

 

$

12

 

 

$

1

 

 

$

 

 

$

13

 

Restructuring costs

 

 

1

 

 

 

1

 

 

 

 

 

 

2

 

Cash payments

 

 

(10

)

 

 

(2

)

 

 

 

 

 

(12

)

Balance at June 30, 2015

 

$

3

 

 

$

 

 

$

 

 

$

3

 

 

The restructuring accrual is recorded in other current liabilities on the consolidated balance sheet. These balances reflect estimated future cash outlays.

A summary of the charges in the consolidated statements of operations resulting from the Restructuring Plan is shown below:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

(in millions)

 

Selling, general and administrative expenses

 

$

 

 

$

18

 

 

$

2

 

 

$

42

 

Total restructuring expense

 

$

 

 

$

18

 

 

$

2

 

 

$

42

 

 

All of the above expenses were recorded in the Recorded Music reportable segment.

 

7. Commitments and Contingencies

Pricing of Digital Music Downloads

On December 20, 2005 and February 3, 2006, the Attorney General of the State of New York served the Company with requests for information in connection with an industry-wide investigation as to the pricing of digital music downloads. On February 28, 2006, the Antitrust Division of the U.S. Department of Justice served us with a Civil Investigative Demand, also seeking information relating to the pricing of digitally downloaded music. Both investigations were ultimately closed, but subsequent to the announcements of the investigations, more than thirty putative class action lawsuits were filed concerning the pricing of digital music downloads. The lawsuits were consolidated in the Southern District of New York. The consolidated amended complaint, filed on April 13, 2007, alleges conspiracy among record companies to delay the release of their content for digital distribution, inflate their pricing of CDs and fix prices for digital downloads. The complaint seeks unspecified compensatory, statutory and treble damages. On October 9, 2008, the District Court issued an order dismissing the case as to all defendants, including us. However, on January 12, 2010, the Second Circuit vacated the judgment of the District Court and remanded the case for further proceedings and on January 10, 2011, the Supreme Court denied the defendants’ petition for Certiorari.

14


Upon remand to the District Court, all defendants, including the Company, filed a renewed motion to dismiss challenging, among other things, plaintiffs’ state law claims and standing to bring certain claims. The renewed motion was based mainly on arguments made in defendants’ original motion to dismiss, but not addressed by the District Court. On July 18, 2011, the District Court granted defendants’ motion in part, and denied it in part. Notably, all claims on behalf of the CD-purchaser class were dismissed with prejudice. However, a wide variety of state and federal claims remain for the class of internet download purchasers. Plaintiffs filed an operative consolidated amended complaint on August 31, 2011. Pursuant to the terms of an August 15, 2011 stipulation and order, the case is currently in discovery. Disputes regarding the scope of discovery are ongoing. Plaintiffs filed a Class Certification brief on March 14, 2014. The Company’s reply date has not yet been set. The Company intends to defend against these lawsuits vigorously, but is unable to predict the outcome of these suits. Regardless of the merits of the claims, this and any related litigation could continue to be costly, and divert the time and resources of management. The potential outcomes of these claims that are reasonably possible cannot be determined at this time and an estimate of the reasonably possible loss or range of loss cannot presently be made.

Sirius XM

On September 11, 2013, the Company joined with Capitol Records, LLC, Sony Music Entertainment, UMG Recordings, Inc. and ABKCO Music & Records, Inc. in a lawsuit brought in California Superior Court against Sirius XM Radio Inc., alleging copyright infringement for Sirius XM’s use of pre-1972 sound recordings under California law.  A nation-wide settlement was reached on June 17, 2015 pursuant to which Sirius XM paid the plaintiffs, in the aggregate, $210 million on July 29, 2015 and the plaintiffs dismissed their lawsuit with prejudice.  The settlement resolves all past claims as to Sirius XM’s use of pre-1972 recordings owned or controlled by the plaintiffs and enables Sirius XM, without any additional payment, to reproduce, perform and broadcast such recordings in the United States through December 31, 2017.  As part of the settlement, Sirius XM has the right, to be exercised before December 31, 2017, to enter into a license with each plaintiff to reproduce, perform and broadcast its pre-1972 recordings from January 1, 2018 through December 31, 2022.  The royalty rate for each such license will be determined by negotiation or, if the parties are unable to agree, binding arbitration on a willing buyer/willing seller standard.  The allocation of the settlement proceeds among the plaintiffs has not yet been determined.  The Company intends to share its allocation of the settlement proceeds with its artists on the same basis as statutory revenue from Sirius XM is shared, i.e., the artist share of the Company’s allocation will be paid to artists by SoundExchange. The Company will record the settlement in its financial statements once it is realized, which is expected to be at the time the allocation to the Company can be reasonably determined.

Other Matters

In addition to the matters discussed above, the Company is involved in various litigation and regulatory proceedings arising in the normal course of business. Where it is determined, in consultation with counsel based on litigation and settlement risks, that a loss is probable and estimable in a given matter, the Company establishes an accrual. In none of the currently pending proceedings is the amount of accrual material. An estimate of the reasonably possible loss or range of loss in excess of the amounts already accrued cannot be made at this time due to various factors typical in contested proceedings, including (1) the results of ongoing discovery; (2) uncertain damage theories and demands; (3) a less than complete factual record; (4) uncertainty concerning legal theories and their resolution by courts or regulators; and (5) the unpredictable nature of the opposing party and its demands. However, the Company cannot predict with certainty the outcome of any litigation or the potential for future litigation. As such, the Company continuously monitors these proceedings as they develop and adjusts any accrual or disclosure as needed. Regardless of the outcome, litigation could have an adverse impact on the Company, including the Company’s brand value, because of defense costs, diversion of management resources and other factors and it could have a material effect on the Company’s results of operations for a given reporting period.

 

8. Derivative Financial Instruments

The Company uses derivative financial instruments, primarily foreign currency forward exchange contracts, for the purpose of managing foreign currency exchange risk by reducing the effects of fluctuations in foreign currency exchange rates.

15


The Company enters into foreign currency forward exchange contracts primarily to hedge the risk that unremitted or future royalties and license fees owed to its domestic companies for the sale, or anticipated sale, of U.S.-copyrighted products abroad may be adversely affected by changes in foreign currency exchange rates. The Company focuses on managing the level of exposure to the risk of foreign currency exchange rate fluctuations on its major currencies, which include the Euro, British pound sterling, Japanese yen, Canadian dollar, Swedish krona and Australian dollar. The foreign currency forward exchange contracts related to royalties are designated and qualify as cash flow hedges under the criteria prescribed in ASC 815. The Company records these contracts at fair value on its balance sheet and gains or losses on these contracts are deferred in equity (as a component of comprehensive loss). These deferred gains and losses are recognized in income in the period in which the related royalties and license fees being hedged are received and recognized in income. However, to the extent that any of these contracts are not considered to be perfectly effective in offsetting the change in the value of the royalties and license fees being hedged, any changes in fair value relating to the ineffective portion of these contracts are immediately recognized in income.

The Company may at times choose to hedge foreign currency risk associated with financing transactions such as third-party debt and other balance sheet items. The foreign currency forward exchange contracts related to balance sheet items denominated in foreign currency are reviewed on a contract-by-contract basis and are designated accordingly. If these foreign currency forward exchange contracts do not qualify for hedge accounting, then the Company records these contracts at fair value on its balance sheet and the related gains and losses are immediately recognized in the statement of operations where there is an equal and offsetting entry related to the underlying exposure.

The fair value of foreign currency forward exchange contracts is determined by using observable market transactions of spot and forward rates (i.e., Level 2 inputs) which is discussed further in Note 11. Additionally, netting provisions are provided for in existing International Swap and Derivative Association Inc. agreements in situations where the Company executes multiple contracts with the same counterparty. As a result, net assets or liabilities resulting from foreign exchange derivatives subject to these netting agreements are classified within other current assets or other current liabilities in the Company’s consolidated balance sheets.

The Company monitors its positions with, and the credit quality of, the financial institutions that are party to any of its financial transactions.

As of June 30, 2015, the Company had outstanding hedge contracts for the sale of $103 million and the purchase of $63 million of foreign currencies at fixed rates that will be settled by June 2016. As of June 30, 2015, the Company had less than $1 million of deferred gains or losses in comprehensive loss related to foreign exchange hedging. As of September 30, 2014, the Company had outstanding hedge contracts for the sale of $7 million of foreign currencies at fixed rates. As of September 30, 2014, the Company had less than $1 million of deferred gains or losses in comprehensive loss related to foreign exchange hedging.

The following is a summary of amounts recorded in the Consolidated Balance Sheet pertaining to the Company’s use of foreign currency derivatives at June 30, 2015 and September 30, 2014:

 

 

 

June 30,

 

 

September 30,

 

 

 

2015 (a)

 

 

2014 (b)

 

 

 

(in millions)

 

Other current assets

 

$

 

 

$

 

Other current liabilities

 

 

 

 

 

 

 

(a)

Includes less than $1 million of foreign exchange derivative contracts in asset and liability positions.

(b)

Includes less than $1 million of foreign exchange derivative contracts in asset and liability positions.

 

9. Segment Information

As discussed more fully in Note 1, 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.

16


The accounting policies of the Company’s business segments are the same as those described in the summary of significant accounting policies included elsewhere herein. 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.

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

Recorded

 

 

Music

 

 

expenses and

 

 

 

 

 

 

 

Music

 

 

Publishing

 

 

eliminations

 

 

Total

 

Three Months Ended

 

(in millions)

 

June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Revenues

 

$

592

 

 

$

123

 

 

$

(5

)

 

$

710

 

OIBDA

 

 

100

 

 

 

20

 

 

 

(20

)

 

 

100

 

Depreciation of property, plant and equipment

 

 

(10

)

 

 

(1

)

 

 

(3

)

 

 

(14

)

Amortization of intangible assets

 

 

(47

)

 

 

(16

)

 

 

 

 

 

(63

)

Operating income (loss)

 

 

43

 

 

 

3

 

 

 

(23

)

 

 

23

 

June 30, 2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 Revenues

 

$

656

 

 

$

137

 

 

$

(5

)

 

$

788

 

OIBDA

 

 

71

 

 

 

24

 

 

 

(29

)

 

 

66

 

Depreciation of property, plant and equipment

 

 

(9

)

 

 

(2

)

 

 

(3

)

 

 

(14

)

Amortization of intangible assets

 

 

(51

)

 

 

(16

)