Warner Music(WMG) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS (Unaudited) Presents unaudited condensed consolidated financial statements, including balance sheets, operations, comprehensive income, cash flows, equity, and detailed notes Condensed Consolidated Balance Sheets Total assets and equity increased, while liabilities also rose, primarily due to debt and accrued royalties | Metric | March 31, 2023 (in millions) | September 30, 2022 (in millions) | Change (in millions) | | :--------------------------------- | :----------------------------- | :------------------------------- | :------------------- | | Total Assets | $8,010 | $7,828 | $182 | | Total Liabilities | $7,744 | $7,660 | $84 | | Total Warner Music Group Corp. Equity | $252 | $152 | $100 | | Cash and equivalents | $601 | $584 | $17 | | Accounts receivable, net | $1,017 | $984 | $33 | | Goodwill | $1,960 | $1,920 | $40 | | Accrued royalties | $2,057 | $1,918 | $139 | | Long-term debt | $3,986 | $3,732 | $254 | | Deferred revenue | $311 | $423 | $(112) | Condensed Consolidated Statements of Operations Revenue increased slightly, but net income significantly decreased due to higher costs and expenses | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :----------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $1,399 | $1,376 | $2,887 | $2,990 | | Total costs and expenses | $(1,275) | $(1,210) | $(2,539) | $(2,585) | | Operating income | $124 | $166 | $389 | $405 | | Net income attributable to Warner Music Group Corp. | $34 | $92 | $156 | $279 | | Class A – Basic and Diluted EPS | $0.06 | $0.18 | $0.30 | $0.53 | | Class B – Basic and Diluted EPS | $0.06 | $0.18 | $0.30 | $0.53 | - Net income attributable to Warner Music Group Corp. decreased by 63% for the three months ended March 31, 2023, and by 44% for the six months ended March 31, 2023, compared to the prior year periods[12] Condensed Consolidated Statements of Comprehensive Income Total comprehensive income decreased, influenced by foreign currency adjustments and derivative financial instruments | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income | $37 | $92 | $161 | $280 | | Foreign currency adjustment | $19 | $(25) | $91 | $(50) | | Deferred (loss) gain on derivative financial instruments | $(4) | $14 | $(5) | $21 | | Total comprehensive income attributable to Warner Music Group Corp. | $49 | $81 | $242 | $250 | Condensed Consolidated Statements of Cash Flows Operating cash flow increased, investing cash flow significantly decreased, and financing activities shifted to net cash usage | Metric (in millions) | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | Change (in millions) | | :------------------------------------ | :-------------------------- | :-------------------------- | :------------------- | | Net cash provided by operating activities | $203 | $173 | $30 | | Net cash used in investing activities | $(51) | $(649) | $598 | | Net cash (used in) provided by financing activities | $(143) | $363 | $(506) | | Cash and equivalents at end of period | $601 | $385 | $216 | - Cash used in investing activities decreased significantly by $598 million, primarily due to reduced investments and acquisitions and proceeds from divestitures[17] - Financing activities shifted from providing $363 million in cash to using $143 million, mainly due to higher payments for deferred consideration and dividends, and reduced debt issuance proceeds[17] Condensed Consolidated Statements of Equity Total equity increased, driven by net income and other comprehensive income, partially offset by dividends | Metric (in millions) | Balance at Sep 30, 2022 | Net Income | Other Comprehensive Income | Dividends Paid | Stock-based Compensation | Balance at Mar 31, 2023 | | :--------------------------------- | :---------------------- | :--------- | :------------------------- | :------------- | :----------------------- | :---------------------- | | Total Warner Music Group Corp. Equity | $152 | $156 | $86 | $(167) | $25 | $252 | - The company paid $0.32 per share in dividends for the six months ended March 31, 2023[18] Notes to Condensed Consolidated Financial Statements Details business, accounting policies, financial instruments, and segment performance, with updates on fiscal year, restructuring, and debt - The company changed its fiscal year from a 52-53-week calendar to a reporting calendar ending on the last day of the calendar quarter, effective for the 2023 fiscal year. The prior year's six-month period included an additional week, contributing approximately $73 million in revenue, primarily from Recorded Music streaming[29][30] - A restructuring plan was announced in March 2023, aiming to reduce headcount by approximately 270 people (4% of total headcount), incurring $41 million in severance costs. This is expected to generate $20 million in cost savings in FY23 and $49 million annually in FY24[70][71][138] - Executive transition costs for the former CEO and departing CFO amounted to approximately $3 million in severance, plus $12 million in non-cash stock-based compensation expense for the former CEO due to accelerated vesting[79][141][142] Description of Business Warner Music Group operates in Recorded Music and Music Publishing, focusing on artist development, marketing, and intellectual property - The company's business is classified into two fundamental operations: Recorded Music and Music Publishing[24] - Recorded Music involves discovering and developing artists, and marketing, promoting, distributing, selling, and licensing their music[25] - Music Publishing focuses on generating revenue from the use of musical compositions, promoting, placing, marketing, and administering the creative output of songwriters[26] Summary of Significant Accounting Policies Interim financial statements follow U.S. GAAP, with a fiscal year-end change impacting comparability and recent ASU adoptions - Interim financial statements are prepared under U.S. GAAP for interim information, not full annual disclosures[27] - Effective for fiscal year 2023, the company changed its fiscal year end to September 30, from a modified 52-53-week calendar. The six months ended March 31, 2022, included an extra week, boosting revenue by approximately $73 million, primarily in Recorded Music streaming[29][30] - The company adopted ASU 2020-04 and ASU 2021-01 regarding Reference Rate Reform (LIBOR transition) and is evaluating ASU 2023-01 for leases under common control, not expecting a material financial impact from the former[37][38] Earnings per Share Basic and diluted EPS for both Class A and Class B common stock decreased for the three and six months ended March 31, 2023 | Metric | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income attributable to Warner Music Group Corp. | $34 | $92 | $156 | $279 | | Class A – Basic and Diluted EPS | $0.06 | $0.18 | $0.30 | $0.53 | | Class B – Basic and Diluted EPS | $0.06 | $0.18 | $0.30 | $0.53 | Revenue Recognition Details revenue breakdown by segment and type, highlighting digital revenue and an increase in deferred revenue from fixed fees | Revenue Type (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Digital | $796 | $804 | $1,599 | $1,674 | | Physical | $118 | $122 | $251 | $317 | | Artist services and expanded-rights | $131 | $141 | $337 | $373 | | Licensing | $98 | $80 | $195 | $169 | | Total Recorded Music | $1,143 | $1,147 | $2,382 | $2,533 | | Performance (Music Publishing) | $45 | $36 | $90 | $74 | | Digital (Music Publishing) | $146 | $127 | $295 | $260 | | Mechanical (Music Publishing) | $16 | $13 | $30 | $27 | | Synchronization (Music Publishing) | $46 | $50 | $85 | $92 | | Other (Music Publishing) | $4 | $4 | $7 | $6 | | Total Music Publishing | $257 | $230 | $507 | $459 | | Total Revenues | $1,399 | $1,376 | $2,887 | $2,990 | - Deferred revenue increased by $225 million during the six months ended March 31, 2023, from cash received for fixed fees and minimum guarantees[43] | Remaining Performance Obligations (in millions) | Rest of FY23 | FY24 | FY25 | Thereafter | Total | | :------------------------------------ | :----------- | :--- | :--- | :--------- | :---- | | Total | $350 | $450 | $6 | $2 | $808 | Acquisition of 300 Entertainment The 300 Entertainment acquisition, finalized in December 2021, saw a minor goodwill adjustment in Q1 FY23 - The acquisition of 300 Entertainment was finalized for $394 million, with a net increase of approximately $3 million to goodwill during the three months ended December 31, 2022[46] Comprehensive Income Changes in accumulated other comprehensive loss reflect foreign currency translation gains and deferred losses on derivatives | Component (in millions) | Balances at Sep 30, 2022 | Other Comprehensive Income (Loss) | Balances at Mar 31, 2023 | | :-------------------------------- | :----------------------- | :-------------------------------- | :----------------------- | | Foreign Currency Translation Loss | $(358) | $91 | $(267) | | Deferred (Losses) On Derivative Financial Instruments | $13 | $(5) | $8 | | Accumulated Other Comprehensive Loss, net | $(347) | $86 | $(261) | Goodwill and Intangible Assets Goodwill increased due to foreign currency and acquisitions, with no impairment indicators identified | Metric (in millions) | Balances at Sep 30, 2022 | Acquisitions | Other Adjustments (FX) | Balances at Mar 31, 2023 | | :------------------- | :----------------------- | :----------- | :--------------------- | :----------------------- | | Goodwill | $1,920 | $3 | $37 | $1,960 | | Intangible Asset Type (in millions) | March 31, 2023 (Net) | September 30, 2022 (Net) | | :---------------------------------- | :------------------- | :----------------------- | | Intangible assets subject to amortization | $2,232 | $2,239 | | Intangible assets not subject to amortization | $150 | $145 | | Total net intangible assets | $2,382 | $2,384 | - No indicators of goodwill impairment were identified during the current period[51] Debt Total long-term debt increased due to new facilities, with the weighted-average interest rate rising to 4.0% | Debt Type (in millions) | March 31, 2023 | September 30, 2022 | | :------------------------------------ | :------------- | :----------------- | | Senior Term Loan Facility due 2028 | $1,295 | $1,145 | | 2.750% Senior Secured Notes due 2028 | $354 | $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 | $486 | $435 | | 3.000% Senior Secured Notes due 2031 | $800 | $800 | | Term Loan Mortgage | $19 | $0 | | Total long-term debt, net | $3,986 | $3,732 | - Acquisition Corp. borrowed an additional $150 million under the Senior Term Loan Facility in November 2022 to fund deferred payment obligations for prior acquisitions and for general corporate purposes[57] - A new $19 million Term Loan Mortgage, secured by real estate, was entered into in January 2023, bearing interest at 30-day SOFR plus 1.40%[58] - The Revolving Credit Agreement was amended in March 2023 to replace LIBOR-based rates with SOFR-based rates, with no material financial impact[59][260] - The weighted-average interest rate of the company's total debt increased to 4.0% at March 31, 2023, from 3.5% at September 30, 2022[69] Restructuring A March 2023 restructuring plan involves headcount reductions and $41 million in severance costs, primarily in Recorded Music - A restructuring plan was announced in March 2023, targeting a 4% headcount reduction (approx. 270 people)[70] - Total non-recurring restructuring charges of $41 million for severance costs were incurred and recorded in the Recorded Music segment for the three and six months ended March 31, 2023[70][71] Commitments and Contingencies The company is involved in routine legal proceedings, not expecting a material adverse effect on its financials - The company is involved in ordinary course legal proceedings but does not expect a material adverse effect on its financial condition, cash flows, or results of operations[72] Equity Non-cash stock-based compensation expense includes significant amounts related to CEO separation and new CEO PSUs | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | | Total non-cash stock-based compensation expense | $21 | $35 | $30 | - $12 million of non-cash stock-based compensation expense was recognized for the former CEO's separation agreement due to accelerated vesting[79] - Approximately $1 million in non-cash stock-based compensation was recognized for market-based performance share units (PSUs) issued to the newly appointed CEO[80] Income Taxes Income tax expense decreased due to lower pre-tax income, with the effective tax rate higher than statutory due to various factors | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense | $21 | $34 | $69 | $109 | - The income tax expense is higher than the statutory rate of 21% due to U.S. state and local taxes, withholding taxes, higher foreign income tax rates, and non-deductible executive compensation, partially offset by a deduction against foreign derived intangible income (FDII)[83][84] Derivative Financial Instruments The company uses foreign currency forwards and interest rate swaps to manage market risks, with associated realized and unrealized losses - The company uses foreign currency forward exchange contracts and interest rate swaps to manage market risks[86] - As of March 31, 2023, outstanding foreign currency forward contracts included $304 million for sale and $167 million for purchase of foreign currencies[88] - A $500 million pay-fixed receive-variable interest rate swap was outstanding as of March 31, 2023, with $8 million of unrealized deferred gains[88] | Derivative Impact (in millions) | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------------------------ | :-------------------------- | :-------------------------- | | Realized pre-tax losses (FX contracts) | $(2) | $3 (gains) | | Unrealized pre-tax losses (Interest rate swaps) | $(7) | $28 (gains) | Segment Information Performance is evaluated by Recorded Music and Music Publishing segments, with OIBDA trends detailed for both three and six-month periods | Segment Performance (3 Months Ended Mar 31, in millions) | 2023 | 2022 | % Change | | :--------------------------------------- | :--- | :--- | :------- | | Recorded Music Revenues | $1,143 | $1,147 | 0% | | Recorded Music Operating income | $151 | $189 | -20% | | Recorded Music OIBDA | $203 | $250 | -19% | | Music Publishing Revenues | $257 | $230 | 12% | | Music Publishing Operating income | $52 | $38 | 37% | | Music Publishing OIBDA | $75 | $61 | 23% | | Segment Performance (6 Months Ended Mar 31, in millions) | 2023 | 2022 | % Change | | :--------------------------------------- | :--- | :--- | :------- | | Recorded Music Revenues | $2,382 | $2,533 | -6% | | Recorded Music Operating income | $434 | $465 | -7% | | Recorded Music OIBDA | $540 | $580 | -7% | | Music Publishing Revenues | $507 | $459 | 10% | | Music Publishing Operating income | $101 | $70 | 44% | | Music Publishing OIBDA | $147 | $115 | 28% | Additional Financial Information Details cash interest payments, income taxes paid, a divestiture gain, and declared cash dividends | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Cash interest payments | $50 | $44 | $75 | $57 | | Income and withholding taxes paid | $72 | $37 | $117 | $66 | - A pre-tax gain of $41 million was recorded from the divestiture of certain sound recording rights during the six months ended March 31, 2023[100] - The company declared and paid a cash dividend of $0.16 per share in March 2023, totaling $83 million for the quarter and $167 million for the six months[103] Fair Value Measurements Fair value of financial instruments, including debt, is primarily determined using Level 2 inputs, with total debt fair value increasing | Financial Instrument (in millions) | March 31, 2023 Fair Value | September 30, 2022 Fair Value | | :--------------------------------- | :------------------------ | :-------------------------- | | Foreign Currency Forward Exchange Contracts (net) | $(4) | $0 | | Interest Rate Swap (net) | $11 | $18 | | Equity Investments with Readily Determinable Fair Value | $9 | $36 | | Total Debt (Fair Value) | $3,628 | $3,181 | - The fair value of the company's debt increased to $3.628 billion at March 31, 2023, from $3.181 billion at September 30, 2022[111] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Analyzes financial performance, condition, and liquidity, covering consolidated and segment results, and factors impacting operations Introduction and Business Overview Overview of Warner Music Group's operations, key performance measures, and recent events like fiscal year change and restructuring - Warner Music Group Corp. is a major music entertainment company with two core operations: Recorded Music and Music Publishing[119][123] - The company uses OIBDA (Operating Income Before Depreciation and Amortization) and constant currency measures to evaluate operating performance[121][122] - Key revenue sources for Recorded Music include digital, physical, artist services & expanded-rights, and licensing. Music Publishing revenues come from digital, performance, mechanical, synchronization, and other sources[133][136] - The fiscal year-end change for FY2023 means the six months ended March 31, 2022, included an extra week (27 vs. 26 weeks), contributing approximately $73 million in revenue, primarily from Recorded Music streaming[137] - A restructuring plan initiated in March 2023 aims to reduce headcount by approximately 270 people (4% of total), incurring $41 million in severance costs, with expected annual cost savings of $49 million in FY2024[138][139][140] - Executive transition costs, including severance and non-cash stock-based compensation, were approximately $15 million for the three and six months ended March 31, 2023, related to the former CEO and departing CFO[141][142] - The company suspended operations in Russia on March 10, 2022, due to the Russia-Ukraine conflict, noting that Russian operations do not constitute a material portion of its business[143] Results of Operations (Three Months Ended March 31, 2023 Compared with Three Months Ended March 31, 2022) Total revenues increased slightly, but consolidated OIBDA and net income decreased due to restructuring and higher expenses | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | $ Change | % Change | | :----------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Total Revenues | $1,399 | $1,376 | $23 | 2% | | Recorded Music Revenues | $1,143 | $1,147 | $(4) | 0% | | Music Publishing Revenues | $257 | $230 | $27 | 12% | | Total Digital Revenues (after eliminations) | $942 | $931 | $11 | 1% | | Operating Income | $124 | $166 | $(42) | -25% | | OIBDA | $207 | $255 | $(48) | -19% | | Net income attributable to Warner Music Group Corp. | $34 | $92 | $(58) | -63% | - Total revenues increased by 2% despite $38 million of unfavorable currency exchange fluctuations[146] - Consolidated OIBDA decreased by 19% due to $41 million in restructuring costs, increased non-cash stock-based compensation, and executive transition costs[163] Consolidated Results (Three Months) Total revenues increased, but operating income and net income decreased due to higher costs and foreign currency losses | Metric (in millions) | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | $ Change | % Change | | :----------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Total Revenues | $1,399 | $1,376 | $23 | 2% | | Total Digital Revenues | $942 | $931 | $11 | 1% | | Cost of revenues | $721 | $697 | $24 | 3% | | Selling, general and administrative expenses | $452 | $444 | $8 | 2% | | Operating income | $124 | $166 | $(42) | -25% | | Net income attributable to Warner Music Group Corp. | $34 | $92 | $(58) | -63% | - General and administrative expense increased by $24 million, primarily due to $14 million in higher non-cash stock-based compensation (related to CEO separation) and $3 million in Executive Transition Costs[158] - Selling and marketing expense decreased by $17 million, or 9%, due to lower variable marketing spend[159] - Other expense increased significantly to $31 million, primarily due to $20 million in foreign currency losses on Euro-denominated debt and $13 million in currency exchange losses on intercompany loans[168] Business Segment Results (Three Months) Recorded Music revenues were flat with decreased OIBDA, while Music Publishing revenues and OIBDA increased | Segment (3 Months Ended Mar 31, in millions) | 2023 Revenue | 2022 Revenue | % Change Revenue | 2023 OIBDA | 2022 OIBDA | % Change OIBDA | | :----------------------------------------- | :----------- | :----------- | :--------------- | :--------- | :--------- | :--------------- | | Recorded Music | $1,143 | $1,147 | 0% | $203 | $250 | -19% | | Music Publishing | $257 | $230 | 12% | $75 | $61 | 23% | - Recorded Music digital revenue decreased by $8 million, with streaming revenue down $3 million (impacted by $20 million unfavorable FX) due to a lighter release schedule and slowdown in ad-supported revenue. Licensing revenue increased by $18 million[149] - Music Publishing digital revenue increased by $19 million (15%), driven by streaming growth and digital deal renewals. Performance revenue increased by $9 million (25%) due to timing of collection society payments and COVID recovery[151] - Recorded Music OIBDA decreased by $47 million, primarily due to $41 million in restructuring costs and revenue mix[180] - Music Publishing OIBDA increased by $14 million due to strong operating performance[187] Results of Operations (Six Months Ended March 31, 2023 Compared with Six Months Ended March 31, 2022) Total revenues and consolidated OIBDA decreased, impacted by currency fluctuations, prior year's extra week, and restructuring | Metric (in millions) | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | $ Change | % Change | | :----------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Total Revenues | $2,887 | $2,990 | $(103) | -3% | | Recorded Music Revenues | $2,382 | $2,533 | $(151) | -6% | | Music Publishing Revenues | $507 | $459 | $48 | 10% | | Total Digital Revenues (after eliminations) | $1,894 | $1,933 | $(39) | -2% | | Operating Income | $389 | $405 | $(16) | -4% | | OIBDA | $556 | $575 | $(19) | -3% | | Net income attributable to Warner Music Group Corp. | $156 | $279 | $(123) | -44% | - Total revenues decreased by 3%, including a $122 million unfavorable impact from currency exchange fluctuations and the effect of an additional week in the prior year[193] - Consolidated OIBDA decreased by 3%, impacted by lower revenues and $41 million in restructuring costs, partially offset by a $41 million net gain on divestiture[215] Consolidated Results (Six Months) Total revenues, operating income, and net income decreased, influenced by foreign currency and a divestiture gain | Metric (in millions) | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | $ Change | % Change | | :----------------------------------- | :-------------------------- | :-------------------------- | :------- | :------- | | Total Revenues | $2,887 | $2,990 | $(103) | -3% | | Total Digital Revenues | $1,894 | $1,933 | $(39) | -2% | | Cost of revenues | $1,482 | $1,515 | $(33) | -2% | | Selling, general and administrative expenses | $892 | $941 | $(49) | -5% | | Operating income | $389 | $405 | $(16) | -4% | | Net income attributable to Warner Music Group Corp. | $156 | $279 | $(123) | -44% | - Selling and marketing expense decreased by $43 million (11%) due to lower variable marketing spend[210] - A net gain of $41 million on divestiture was recorded from the sale of certain sound recording rights[213] - Other expense increased to $92 million, primarily due to $88 million in foreign currency losses on Euro-denominated debt, contrasting with gains in the prior year[220] Business Segment Results (Six Months) Recorded Music revenues and OIBDA decreased, while Music Publishing revenues and OIBDA significantly increased | Segment (6 Months Ended Mar 31, in millions) | 2023 Revenue | 2022 Revenue | % Change Revenue | 2023 OIBDA | 2022 OIBDA | % Change OIBDA | | :----------------------------------------- | :----------- | :----------- | :--------------- | :--------- | :--------- | :--------------- | | Recorded Music | $2,382 | $2,533 | -6% | $540 | $580 | -7% | | Music Publishing | $507 | $459 | 10% | $147 | $115 | 28% | - Recorded Music digital revenue decreased by $75 million, with streaming revenue down $59 million (4%), impacted by $55 million unfavorable FX, a lighter release schedule, and the additional week in the prior year[196] - Music Publishing digital revenue increased by $35 million (13%), driven by streaming growth and digital deal renewals. Performance revenue increased by $16 million (22%) due to collection society payments and COVID recovery[198] - Recorded Music OIBDA decreased by $40 million, impacted by lower revenues and $41 million in restructuring costs, partially offset by the net gain on divestiture[233] - Music Publishing OIBDA increased by $32 million due to strong operating performance and favorable foreign currency exchange rates[242] Financial Condition and Liquidity Net debt increased, operating cash flow improved, investing cash flow decreased, and financing activities shifted to net cash usage | Metric (in millions) | March 31, 2023 | September 30, 2022 | | :------------------- | :------------- | :----------------- | | Total debt (net) | $3,986 | $3,732 | | Cash and equivalents | $601 | $584 | | Net debt | $3,385 | $3,148 | | Cash Flow (in millions) | 6 Months Ended Mar 31, 2023 | 6 Months Ended Mar 31, 2022 | | :---------------------- | :-------------------------- | :-------------------------- | | Operating activities | $203 | $173 | | Investing activities | $(51) | $(649) | | Financing activities | $(143) | $363 | - The $30 million increase in cash provided by operating activities was primarily due to timing of A&R investments and other working capital movements[250] - Cash used in investing activities decreased by $598 million, mainly due to lower investments and acquisitions and proceeds from divestitures[251] - The company expects its primary liquidity sources to be sufficient for the next twelve months, including funding for a financial transformation initiative with upfront costs of approximately $235 million and expected annual run-rate savings of $35-$40 million[255][256] - The weighted-average interest rate on outstanding indebtedness decreased from 10.5% in 2011 to 4.0% as of March 31, 2023[257] - The company was in compliance with all debt covenants under its outstanding notes, Revolving Credit Facility, and Senior Term Loan Facility as of March 31, 2023[265] | Adjusted EBITDA (in millions) | 12 Months Ended Mar 31, 2023 | 12 Months Ended Mar 31, 2022 | 3 Months Ended Mar 31, 2023 | 3 Months Ended Mar 31, 2022 | | :---------------------------- | :--------------------------- | :--------------------------- | :-------------------------- | :-------------------------- | | Adjusted EBITDA | $1,235 | $1,210 | $308 | $282 | | Senior Secured Indebtedness | $3,736 | N/A | N/A | N/A | | Leverage Ratio | 3.03x | N/A | N/A | N/A | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Discusses exposure to foreign currency and interest rate risks, and strategies using derivatives, with hypothetical impact analysis - The company is exposed to foreign currency exchange rate risk and interest rate risk[278] - Foreign currency forward exchange contracts are used to manage foreign currency risk; a hypothetical 10% U.S. dollar depreciation would decrease their fair value by $14 million[279][280] - 80% of the company's debt was effectively at a fixed rate as of March 31, 2023, through an interest rate swap, to manage interest rate risk on variable-rate debt[281] - A 25 basis point increase in interest rates would hypothetically decrease the fair value of fixed-rate debt by approximately $36 million[282] - Inflation has not had a material effect on the business to date, but significant inflationary pressures could adversely affect results if not offset by price increases[283] ITEM 4. CONTROLS AND PROCEDURES Disclosure controls and procedures were effective, with no material changes in internal control over financial reporting - The company's disclosure controls and procedures were deemed effective as of March 31, 2023, ensuring timely and accurate reporting[288] - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2023[289] PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The company is involved in routine legal proceedings, not expecting a material adverse effect on its financial condition or operations - The company is involved in routine legal proceedings and does not expect a material adverse effect on its financial condition or operations[291] ITEM 1A. RISK FACTORS No material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for FY2022 - No material changes to risk factors since the Annual Report on Form 10-K for FY2022[292] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Not applicable - Not applicable[293] ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable - Not applicable[294] ITEM 4. MINE SAFETY DISCLOSURES Not applicable - Not applicable[295] ITEM 5. OTHER INFORMATION Details the CFO succession plan, including severance, bonus eligibility, and RSU award for Eric Levin - The company is planning for the succession of its Chief Financial Officer, Eric Levin, whose employment will continue until January 15, 2024[296][297] - Under the separation agreement, Mr. Levin will receive $1,000,000 in cash severance, a $57,602.57 net cash payment, eligibility for FY2023 and prorated FY2024 annual bonuses (target $1,000,000 each), and a $1,000,000 RSU award[298] ITEM 6. EXHIBITS Lists key exhibits filed, including credit agreement amendments and executive separation agreements - Key exhibits include the Fourth Amendment to Credit Agreement, Employment Separation Agreement and Release for Stephen Cooper, and Mutual Separation Agreement and Release with Eric Levin[301] Signatures The report was signed by the Chief Executive Officer and Chief Financial Officer on May 9, 2023 - The report was signed by Robert Kyncl (CEO) and Eric Levin (CFO) on May 9, 2023[306]