Published: December 13, 2004
Warner Music Group Reports 10 Month Results Ended September 2004
Continued Success of the Company's New Operating Plan Drives Solid Performance
Warner Music Group (WMG) today announced
financial results for the 10 month period ended September 2004. The
company is reporting results for a 10 month transition period due to the
change in 2004 of its fiscal year end from November 30 to September 30.
Highlights
Revenue for the period was $2.5 billion, up two percent from the 10 months
ended September 2003. Operating income increased to $7 million from a loss
of $197 million in the prior year period. Net loss improved to $136
million in 2004 from a net loss of $239 million in 2003. Operating income
before depreciation and amortization, OIBDA, increased to $219 million from
$75 million in the prior year. OIBDA includes certain restructuring and
other one-time costs of $26 million in 2004 and $39 million in 2003. In
fiscal year 2004, OIBDA replaced EBITDA as the Company's non-GAAP measure
of financial performance.
"Warner Music Group has continued to make significant progress on a number
of fronts since our last earnings announcement. The financial results
reflect the continued successful implementation of the restructuring plan
and the total commitment of our colleagues in positioning Warner Music
Group for success in a changing market," said Edgar Bronfman, Jr., Chairman
and CEO of Warner Music Group. "Now that the lion's share of the
restructuring has been completed, we can turn our entire focus to building
and developing the company's roster of recording artists and songwriters."
The restructuring program remains ahead of schedule. Based on results to
date, WMG forecasts at least $250 million of recurring annualized savings
will be realized by the end of 2005. Annualized cost savings implemented
through September 30, 2004 are approximately $240 million. Furthermore,
the cost to implement the program is now projected between $225 million and
$250 million, below the original budget of $310 million.
10 Months Ended September 2004
Total revenue was $2.5 billion for the 10 months ended September 2004, up
two percent, from the same 10 month period in the prior year. Excluding
favorable foreign exchange, total revenue declined 3% versus 2003.
International revenue increased six percent compared with the prior year,
while U.S. revenue was down slightly. Excluding favorable foreign
exchange, international revenue declined four percent.
Worldwide recorded music revenue increased one percent versus the same 10
month period in the prior year to $2.06 billion. Excluding favorable
foreign exchange, worldwide recorded music revenue decreased approximately
four percent. The results were driven primarily by lower sales volume
attributable to the timing and number of new releases as compared with the
prior year. International recorded music revenue was $1.09 billion and
increased five percent compared with the prior period. Excluding favorable
foreign exchange, international recorded music revenue declined five
percent. U.S. recorded music revenue declined approximately three percent
to $977 million. The company's major sellers in 2004 included albums by
Josh Groban, Green Day, Big & Rich, Twista, Jet and Michael Buble, among
others. Last year's major selling albums included multi-platinum hits from
Linkin Park, Sean Paul, Madonna and Metallica.
Worldwide publishing revenue increased to $505 million for the 10 months
ended September 2004, up eight percent versus 2003. Mechanical,
performance and synchronization revenues all increased, while print revenue
declined. Excluding favorable foreign exchange, worldwide publishing
revenue increased one percent, driven principally by the U.S. market which
grew four percent to $218 million. International publishing revenue
increased 11 percent to $287 million. Excluding favorable foreign
exchange, international music publishing revenue declined one percent.
OIBDA for the 10 month period ended September 30, 2004 was $219 million,
compared with $75 million for the 10 month period last year. The increase
in OIBDA was driven principally by cost savings associated with our
restructuring program and lower manufacturing costs. After factoring in
lower depreciation and amortization costs, operating income grew to $7
million for the 10 month period ended September 30, 2004, compared to a
loss of $197 million in the comparable period of last year.
Net loss improved to $136 million for the 10 month period ended September
30, 2004, compared to a net loss of $239 million for the same 10 month
period in the prior year. The improvement was due to the operating income
gains mentioned above, offset in part by higher interest expense
principally relating to acquisition-related debt.
Liquidity
Adjusted EBITDA, a measure calculated in accordance with the terms of the
company's credit agreement, was $378 million on a rolling 12 month basis
for the period ended September 30, 2004.
Cash flow from operations for the 10 months ended September 30, 2004 was
$407 million and cash on hand as of September 30, 2004 was $555 million.
As noted in the Company's October 4th press release, the Company returned
$350 million of capital to its equity investors on September 30, 2004 as
permitted by the Company's bond indenture and by an amendment to the
Company's credit agreement. $342 million of the $350 million return of
capital was paid subsequent to September 30, 2004 and reduced the cash
position accordingly.
On December 6, 2004, we amended our senior secured credit facility to make
certain changes. In particular, the changes:
-- Allow WMG Holdings Corp., the direct parent of WMG Acquisition Corp.,
the issuer of our outstanding notes, to incur permitted indebtedness that
accrues up to $35 million in cash interest in any fiscal year. Prior to
the change, any permitted indebtedness incurred by Holdings was required to
be pay-in-kind interest for at least the first five years.
-- Remove a constraint based upon a maximum leverage ratio at WMG
Acquisition Corp. that limited our ability to incur permitted indebtedness
at Holdings.
-- Adjust the method of calculating EBITDA (as defined in the credit
agreement) when measuring the leverage ratio of Holdings so that it is
consistent with the method of calculation used in the indenture for our
notes. In order for Holdings to incur permitted indebtedness under the
senior secured credit facility, it must show compliance with a leverage
ratio test on a pro forma basis for the incurrence of such indebtedness.
Note to Financial Information
As a result of the change in accounting basis that occurred relating to
Warner Music Group's acquisition from Time Warner Inc., financial
information for the 10 month period is separated into pre-acquisition and
post-acquisition periods. The attached selected financial information is,
therefore, for the three month pre-acquisition period ended February 29,
2004 and the seven month post-acquisition period ended September 30, 2004.
The selected pro forma financial information for the 10 months ended
September 2004 discussed above represents the mathematical addition of the
three month pre-acquisition period ended February 29, 2004 and the seven
month post-acquisition period ended September 30, 2004. This approach is
not consistent with GAAP, and may yield results that are not strictly
comparable on a period-to-period basis primarily due to (i) the impact of
required purchase accounting adjustments and (ii) the new basis of
accounting established on the closing date of the acquisition. We believe
this is the most meaningful way to present our results of operations. Such
results are not necessarily indicative of what the results for the
respective periods would have been had the acquisition not occurred. In
order to enhance comparability, unaudited selected financial information
for the comparable ten month period in the prior year is also attached.
Based on how our closing schedule occurred in 2003, the selected financial
information for the period ended September 30, 2003 consists of 43 weeks,
as compared to 44 weeks contained in the ten month period ended September
30, 2004.
About Warner Music Group
Warner Music Group, with its broad roster of new stars and legendary
artists, is the world's largest privately-held independent music company.
The company is home to a collection of the best-known record labels in the
music industry including Atlantic, Elektra, Lava, Maverick, Nonesuch,
Reprise, Rhino, Sire, Warner Bros. and Word. Warner Music International, a
leading company in national and international repertoire operates through
37 affiliates and numerous licensees in more than 50 countries. Warner
Music Group also includes Warner/Chappell Music, one of the world's leading
music publishers, with a catalog of more than one million copyrights
worldwide. For more information about Warner Music Group, visit our
corporate website at www.wmg.com.
"Safe Harbor" Statement under Private Securities Litigation Reform Act of
1995:
This communication includes forward-looking statements that reflect the
current views of Warner Music Group about future events and financial
performance. Words such as "estimates," "expects," "anticipates,"
"projects," "plans," "intends," "believes," "forecasts" and variations of
such words or similar expressions that predict or indicate future events or
trends, or that do not relate to historical matters, identify
forward-looking statements. Our expectations, beliefs and projections are
expressed in good faith and we believe there is a reasonable basis for
them. However, there can be no assurance that management's expectations,
beliefs and projections will result or be achieved. Investors should not
rely on forward-looking statements because they are subject to a variety of
risks, uncertainties, and other factors that could cause actual results to
differ materially from our expectations.
Note to bondholders: Warner Music Group will hold a 10 month earnings
update conference call for bondholders today, December 13, 2004 at 4:15pm
EST. Bondholders may participate in the conference call by dialing
888/398-1687 or
517/308-9013 and asking for the Warner Music Group earnings call.
Warner Music Group
(Otherwise known as WMG Acquisition Corp.)
Consolidated and Combined Balance Sheets
Successor Predecessor
September 30, November 30,
2004 2003
---------- ----------
(in millions)
Assets
Current assets:
Cash and equivalents $ 555 $ 144
Accounts receivable, less allowances
of $222 and $291 million 571 736
Inventories 65 61
Royalty advances expected to
be recouped within one year 223 245
Deferred tax assets 38 230
Other current assets 86 90
---------- ----------
Total current assets 1,538 1,506
Royalty advances expected to be
recouped after one year 223 266
Investments 8 10
Property, plant and equipment, net 189 221
Goodwill 978 -
Intangible assets subject to
amortization, net 1,937 2,431
Intangible assets not subject
to amortization 100 24
Other assets 117 26
---------- ----------
Total assets $ 5,090 $ 4,484
========== ==========
Liabilities and Shareholder's and Group Equity
Current liabilities:
Accounts payable $ 226 $ 285
Accrued royalties 1,003 959
Taxes and other withholdings, including
$3 million due to Time Warner-affiliated
companies in 2003 10 34
Current portion of long-term debt 12 -
Other current liabilities 432 367
---------- ----------
Total current liabilities 1,683 1,645
Long-term debt 1,828 120
Deferred tax liabilities, net 265 952
Other noncurrent liabilities 333 180
Due to WMG Parent Corp. 3 -
---------- ----------
Total liabilities 4,112 2,897
Shareholder's and group equity:
Common stock - -
Additional paid-in capital 1,076 -
Retained earnings (deficit) (104) -
Accumulated other comprehensive income, net 6 -
Group equity - 2,347
Due from Time Warner-affiliated companies, net - (760)
---------- ----------
Total shareholder's and group equity 978 1,587
---------- ----------
Total liabilities and shareholder's
and group equity $ 5,090 $ 4,484
========== ==========
Warner Music Group
(Otherwise known as WMG Acquisition Corp.)
Consolidated and Combined Statements of Operations
Successor Predecessor
Seven Months Three Months Ten Months
Ended Ended Ended
September 30, February 29, September 30,
2004 2004 2003
-------- -------- --------
(in millions)
Revenues $ 1,769 $ 779 $ 2,487
Costs and expenses:
Cost of revenues (a) (944) (415) (1,449)
Selling, general and
administrative expenses (a) (677) (319) (995)
Amortization of intangible
assets (104) (56) (201)
Loss on sale of physical
distribution assets - - (12)
Restructuring (costs) income,
net (26) - (27)
-------- -------- --------
Total costs and expenses (1,751) (790) (2,684)
-------- -------- --------
Operating income (loss) 18 (11) (197)
Interest expense, net (80) (2) (5)
Net investment-related
(losses) gains - - (17)
Equity in the losses of
equity-method investees, net (2) (2) (32)
Deal-related transaction and
other costs - - (7)
Loss on repayment of bridge loan (6) - -
Other expense, net (4) - (10)
-------- -------- --------
Loss before income taxes (74) (15) (268)
Income tax (expense) benefit (30) (17) 29
-------- -------- --------
Net loss $ (104) $ (32) $ (239)
======== ======== ========
(a) Includes depreciation
expense of: $ (36) $ (16) $ (71)
======== ======== ========
Warner Music Group
(Otherwise known as WMG Acquisition Corp.)
Consolidated and Combined Statements of Cash Flows
Successor Predecessor
Seven Months Three Months Ten Months
Ended Ended Ended
September 30, February 29, September 30,
2004 2004 2003
-------- -------- --------
(in millions)
Cash flows from operating
activities
Net loss $ (104) $ (32) $ (239)
Adjustments to reconcile net loss
to net cash provided by
(used in) operating activities:
Depreciation and amortization 140 72 272
Deferred taxes 8 (4) (79)
Loss on sale of
physical distribution assets - - 12
Loss on repayment of
bridge loan 6 - -
Non-cash interest expense 19 2 10
Net investment-related
losses (gains) - - 17
Equity in the losses of
equity-method investees,
including distributions 3 2 35
Changes in operating assets
and liabilities:
Accounts receivable (33) 387 275
Inventories (10) 6 24
Royalty advances 77 (4) 38
Accounts payable and
accrued liabilities (23) (109) (116)
Other balance sheet
changes 3 1 8
-------- -------- --------
Net cash provided by (used in)
operating activities 86 321 257
-------- -------- --------
Cash flows from investing
activities
Acquisition of Old WMG (2,638) - -
Other investments and
acquisitions (10) (2) (43)
Investment proceeds - 19 -
Capital expenditures (15) (3) (30)
-------- -------- --------
Net cash used in investing
activities (2,663) 14 (73)
-------- -------- --------
Cash flows from financing
activities
Borrowings 2,348 - 114
Financing costs of borrowings (99) - -
Debt repayments (631) (124) (101)
Capital contributions 1,250 262 132
Increase in amounts due to WMG
Parent Corp. 3 - -
Decrease (increase) in amounts
due from Time Warner-affiliated
companies - 194 (293)
Dividends paid (210) (342) -
Principal payments on
capital leases - - (3)
-------- -------- --------
Net cash provided by (used in)
financing activities 2,661 (10) (151)
-------- -------- --------
Effect of foreign currency
exchange rate changes on cash - 2 6
-------- -------- --------
Net increase in cash and
equivalents 84 327 39
Cash and equivalents at beginning
of period 471 144 41
-------- -------- --------
Cash and equivalents at
end of period $ 555 $ 471 $ 80
-------- -------- --------
Supplemental Disclosures Regarding Non-GAAP Financial Information
OIBDA
We evaluate our operating performance based on several factors, including
our primary financial measure of operating income (loss) before non-cash
depreciation of tangible assets, non-cash amortization of intangible
assets and non-cash impairment charges to reduce the carrying value of
goodwill and other intangible assets (which we refer to as "OIBDA").
We consider OIBDA to be an important indicator of the operational
strengths and performance of our businesses, including the ability to
provide cash flows to service debt. However, a limitation of the use of
OIBDA as a performance measure is that it does not reflect the periodic
costs of certain capitalized tangible and intangible assets used in
generating revenues in our businesses. Accordingly, OIBDA should be
considered in addition to, not as a substitute for, operating income
(loss), net income (loss) and other measures of financial performance
reported in accordance with accounting principles generally accepted in
the U.S. Note that OIBDA as defined above is different from Adjusted
EBITDA as defined below, which is presented herein as a covenant
compliance measure.
The following table reconciles OIBDA to operating income (loss) and
further provides the components from operating income (loss) to net loss.
(All figures in $ millions)
Combined
Seven Three Ten Ten
Months Months Months Months
Ended Ended Ended Ended
Sept. 30, Feb. 29, Sept. 30, Sept. 30,
2004 2004 2004 2003
---- ---- ---- ----
OIBDA 158 61 219 75
Depreciation expense: (36) (16) (52) (71)
Amortization expense (104) (56) (160) (201)
---- ---- ---- ----
Operating income (loss) 18 (11) 7 (197)
Interest expense, net (80) (2) (82) (5)
Net investment-related losses - - - (17)
Equity in the losses of
equity-method investees, net (2) (2) (4) (32)
Deal-related transaction
and other costs - - - (7)
Loss on repayment
of bridge loan (6) - (6) -
Other expense, net (4) - (4) (10)
---- ---- ---- ----
Loss before income taxes (74) (15) (89) (268)
Income tax (expense) benefit (30) (17) (47) 29
---- ---- ---- ----
Net loss (104) (32) (136) (239)
Adjusted EBITDA
Our borrowing arrangements, including the senior secured credit facility
and our outstanding notes, contain certain financial covenants which are
tied to ratios based on Adjusted EBITDA, which is defined under the
indenture governing the notes as "EBITDA." Adjusted EBITDA (as defined
in the indenture) differs from the term "EBITDA" as it is commonly used.
In addition to adjusting net income to exclude interest expense, income
taxes, and depreciation and amortization, Adjusted EBITDA (as defined in
indenture) also adjusts net income by excluding items or expenses not
typically excluded in the calculation of "EBITDA" such as (1) any
reasonable expenses or charges related to any issuance of securities,
investments permitted, permitted acquisitions, recapitalizations, asset
sales permitted or indebtedness permitted to be incurred; (2) the amount
of any restructuring charges or reserves; (3) any non-cash charges
(including any impairment); (4) any gain or loss resulting from hedging
currency exchange risks; (5) the amount of management, monitoring,
consulting and advisory fees paid to our Investors; and (6) any net
after-tax income or loss from discontinued operations.
Adjusted EBITDA is presented herein because it is a material component
of the covenants contained within the aforementioned credit agreement
and the indenture governing our notes. Non-compliance with those
covenants could result in the requirement to immediately repay all
amounts outstanding under those agreements which could have a material
adverse effect on our results of operations, financial position and cash
flow. Adjusted EBITDA does not represent net income or cash flow from
operations as those terms are defined by GAAP and does not necessarily
indicate whether cash flows will be sufficient to fund cash needs. While
Adjusted EBITDA and similar measures are frequently used as measures of
operations and the ability to meet debt service requirements, these terms
are not necessarily comparable to other similarly titled captions of
other companies due to the potential inconsistencies in the method of
calculation. Adjusted EBITDA does not reflect the impact of earnings or
charges resulting from matters that we may consider not to be indicative
of our ongoing operations. In particular, the definition of Adjusted
EBITDA in our borrowing arrangements allows us to add back certain
non-cash, extraordinary, unusual or non-recurring charges that are
deducted in calculating net income. However, these are expenses that
may recur, vary greatly and are difficult to predict.
Adjusted pro forma EBITDA as presented below is not a measure of the
performance of our business and should not be used by investors as an
indicator of performance for any future period. Further, our debt
instruments require that it be calculated for the most recent four
fiscal quarters. As a result, the measure can be disproportionately
affected by a particularly strong or weak quarter. Further, it may not
be comparable to the measure for any subsequent four-quarter period or
any complete fiscal year.
The following is a reconciliation of net loss, which is a GAAP measure
of our operating results to Adjusted EBITDA for the last 12 months ended
September 30, 2004. The terms and related calculations are defined in the
indenture governing our notes.
Pro-Forma
Twelve Months Ended
September 30,
2004
Net income (loss) $(1,250)
Interest expense, net 82
Income tax expense 112
Depreciation and amortization expense 268
Management fees (a) 6
Impairment of goodwill and intangible assets (b) 1019
Restructuring costs (c ) 34
Net investment-related losses (d) 9
Equity in the losses of equity-method
investees, net (e) 13
Deal-related transaction and other costs (f) 63
Loss on repayment of bridge loan (g) 6
Hedging and other foreign currency (gains) losses (h) 10
Non-cash compensation expense (i) 1
Cinram Agreement (j) 5
Adjusted EBITDA 378
Cost savings from Acquisition related
restructuring (k) 143
Adjusted pro forma EBITDA $ 521
(a) Reflects management fees paid to the Investors for management
advisory services.
(b) During the fourth quarter of 2003, in connection with Time Warner's
agreement to sell us, we recorded a $1.019 billion impairment charge.
The charge was necessary to reduce the carrying value of our
intangible assets to fair value, based on the consideration to be
exchanged in the transaction.
(c) Reflect costs associated with our Restructuring Plan and
pre-acquisition restructurings.
(d) Principally reflects the reduction of the carrying value of certain
investments in November 2003, including our interest in Telstar.
(e) Represents our share of the net income of investments in companies
accounted for using the equity method.
(f) In connection with our sale, we incurred approximately $63 million
of costs, as follows: Transaction costs, primarily legal, accounting
and investment banking fees-$23 million; loss on executive contractual
obligations-$25 million; and loss on pension curtailment-$15 million.
(g) Reflects loss incurred on the repayment of the bridge loan.
(h) Includes foreign currency hedging losses allocated to us by Time
Warner under Time Warner's foreign currency risk management program in
the amount of $10 million during the five-month period ended February
29, 2004 and certain foreign currency transaction losses arising from
inter-company transactions that are not expected to be settled.
(i) Reflects costs of stock-based compensation accounted for under FAS 123
and representative costs of services provided by employees of the
Investor Group who have filled in management roles on an interim
basis.
(j) Reflects adjustments to decrease cost of revenues in the amount of
$5 million for the October 2003 period in which the more favorable,
market-based pricing arrangements under the third-party Cinram
Agreements for manufacturing, packaging and physical distribution
services were not in effect.
(k) Reflects reduction in operating expenses from restructurings already
implemented for which the cost savings have not been fully reflected
in our Statement of Operations.
Copyright © 2012, MarketWire
Copyright © 2012, NewsBlaze,
Daily News
Search News
Daily News
