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Download Services Such As Apple’S Itunes and Google Play UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File Number 001-32502 Warner Music Group Corp. (Exact name of Registrant as specified in its charter) Delaware 13-4271875 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1633 Broadway New York, NY 10019 (Address of principal executive offices) (212) 275-2000 (Registrant’s telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No x Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer x Smaller reporting company ☐ Emerging growth company ☐ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No x Securities registered pursuant to Section 12(b) of the Act: Trading Title of each class (a) Symbol(s) Name of each exchange on which registered None (a) There is no public market for the Registrant’s common stock. As of August 6, 2019, the number of shares of the Registrant’s common stock, par value $0.001 per share, outstanding was 1,060. All of the Registrant’s common stock is owned by affiliates of Access Industries, Inc. The Registrant has filed all Exchange Act reports for the preceding 12 months. 1 WARNER MUSIC GROUP CORP. INDEX Page Number Part I. Financial Information Item 1. Financial Statements (Unaudited) 3 Consolidated Balance Sheets as of June 30, 2019 and September 30, 2018 3 Consolidated Statements of Operations for the Three and Nine Months Ended June 30, 2019 and June 30, 2018 4 Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended June 30, 2019 and June 30, 2018 5 Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2019 and June 30, 2018 6 Consolidated Statements of (Deficit) Equity for the Three and Nine Months Ended June 30, 2019 and June 30, 2018 7 Notes to Consolidated Interim Financial Statements 9 Supplementary Information—Consolidating Financial Statements 32 Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 46 Item 3. Quantitative and Qualitative Disclosures About Market Risk 72 Item 4. Controls and Procedures 73 Part II. Other Information Item 1. Legal Proceedings 75 Item 1A. Risk Factors 75 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 76 Item 3. Defaults Upon Senior Securities 76 Item 4. Mine Safety Disclosures 76 Item 5. Other Information 76 Item 6. Exhibits 77 Signatures 78 2 ITEM 1. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Warner Music Group Corp. Consolidated Balance Sheets (Unaudited) June 30, 2019 September 30, 2018 (in millions) Assets Current assets: Cash and equivalents $ 541 $ 514 Accounts receivable, net of allowances of $21 million and $45 million 744 447 Inventories 67 42 Royalty advances expected to be recouped within one year 171 123 Prepaid and other current assets 57 50 Total current assets 1,580 1,176 Royalty advances expected to be recouped after one year 209 153 Property, plant and equipment, net 296 229 Goodwill 1,772 1,692 Intangible assets subject to amortization, net 1,780 1,851 Intangible assets not subject to amortization 153 154 Deferred tax assets, net 7 11 Other assets 158 78 Total assets $ 5,955 $ 5,344 Liabilities and Equity Current liabilities: Accounts payable $ 208 $ 281 Accrued royalties 1,577 1,396 Accrued liabilities 448 423 Accrued interest 18 31 Deferred revenue 170 208 Other current liabilities 123 34 Total current liabilities 2,544 2,373 Long-term debt 3,006 2,819 Deferred tax liabilities, net 236 165 Other noncurrent liabilities 302 307 Total liabilities $ 6,088 $ 5,664 Equity: Common stock ($0.001 par value; 10,000 shares authorized; 1,060 and 1,052 shares issued and outstanding at June 30, 2019 and September 30, 2018, respectively) $ — $ — Additional paid-in capital 1,128 1,128 Accumulated deficit (1,061) (1,272) Accumulated other comprehensive loss, net (219) (190) Total Warner Music Group Corp. deficit (152) (334) Noncontrolling interest 19 14 Total equity (133) (320) Total liabilities and equity $ 5,955 $ 5,344 See accompanying notes 3 Warner Music Group Corp. Consolidated Statements of Operations (Unaudited) Three Months Ended Nine Months Ended June 30, June 30, 2019 2018 2019 2018 (in millions) (in millions) Revenue $ 1,058 $ 958 $ 3,351 $ 2,966 Costs and expenses: Cost of revenue (577) (531) (1,762) (1,588) Selling, general and administrative expenses (a) (372) (343) (1,102) (1,013) Amortization expense (51) (56) (160) (164) Total costs and expenses (1,000) (930) (3,024) (2,765) Operating income 58 28 327 201 Loss on extinguishment of debt (4) (7) (7) (31) Interest expense, net (36) (33) (108) (105) Other (expense) income, net (16) 394 41 392 Income before income taxes 2 382 253 457 Income tax benefit (expense) 12 (61) (86) (132) Net income 14 321 167 325 Less: Income attributable to noncontrolling interest (1) (1) (1) (4) Net income attributable to Warner Music Group Corp. $ 13 $ 320 $ 166 $ 321 (a) Includes depreciation expense of: $ (15) $ (15) $ (43) $ (41) See accompanying notes 4 Warner Music Group Corp. Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended Nine Months Ended June 30, June 30, 2019 2018 2019 2018 (in millions) (in millions) Net income $ 14 $ 321 $ 167 $ 325 Other comprehensive income (loss), net of tax: Foreign currency adjustment 9 (31) (17) (13) Deferred loss on derivative (3) (3) (12) (1) Other comprehensive income (loss), net of tax 6 (34) (29) (14) Total comprehensive income 20 287 138 311 Less: Income attributable to noncontrolling interest (1) (1) (1) (4) Comprehensive income attributable to Warner Music Group Corp. $ 19 $ 286 $ 137 $ 307 See accompanying notes 5 Warner Music Group Corp. Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended June 30, 2019 2018 (in millions) Cash flows from operating activities Net income $ 167 $ 325 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 203 205 Unrealized gains on remeasurement of foreign denominated loans (6) (6) Deferred income taxes 25 105 Loss on extinguishment of debt 7 31 Net gain on divestitures and investments (27) (385) Non-cash interest expense 5 5 Equity-based compensation expense 28 52 Changes in operating assets and liabilities: Accounts receivable, net (50) (43) Inventories 12 (1) Royalty advances (107) — Accounts payable and accrued liabilities (94) (84) Royalty payables 117 113 Accrued interest (13) (22) Deferred revenue (17) — Other balance sheet changes (1) (30) Net cash provided by operating activities 249 265 Cash flows from investing activities Acquisition of music publishing rights, net (24) (11) Capital expenditures (82) (40) Investments and acquisitions of businesses, net of cash received (234) (14) Proceeds from the sale of investments — 516 Net cash (used in) provided by investing activities (340) 451 Cash flows from financing activities Proceeds from issuance of Acquisition Corp. 3.625% Senior Secured Notes 514 — Repayment of Acquisition Corp. 4.125% Senior Secured Notes (40) — Repayment of Acquisition Corp. 4.875% Senior Secured Notes (30) — Repayment of Acquisition Corp. 5.625% Senior Secured Notes (247) — Proceeds from issuance of Acquisition Corp. 5.50% Senior Notes — 325 Proceeds from supplement of Acquisition Corp. Senior Term Loan Facility — 320 Repayment of and redemption deposit for Acquisition Corp. 6.75% Senior Notes — (635) Call premiums paid and deposit on early redemption of debt (5) (23) Deferred financing costs paid (7) (12) Distribution to noncontrolling interest holder (3) (3) Dividends paid (63) (425) Net cash provided by (used in) financing activities 119 (453) Effect of exchange rate changes on cash and equivalents (1) (5) Net increase in cash and equivalents 27 258 Cash and equivalents at beginning of period 514 647 Cash and equivalents at end of period $ 541 $ 905 See accompanying notes 6 Warner Music Group Corp. Consolidated Statements of (Deficit) Equity (Unaudited) Nine Months Ended June 30, 2019 Accumulated Total Common
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