What changed in this filing

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Item 1. Financial Statements

2020-08-04 compared with 2020-05-07 · 304 added, 559 removed, 687 unchanged (56% of the section changed)

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

FINANCIAL STATEMENTS

Warner Music Group Corp.

Consolidated Balance Sheets (Unaudited)

March 31, 2020 September 30, 2019

June 30, 2020 September 30, 2019

(in millions, except share data)

30 unchanged sentences

Total liabilities $ 6,169 $ 6,286

Common A stock ($ 0.001 par value;

1,000,000,000 shares authorized;

0 and 0 shares issued and outstanding as of March 31, 2020 and September 30, 2019, respectively)

Common B stock ($ 0.001 par value;

1,000,000,000 shares authorized;

510,000,000 and 505,830,022 issued and outstanding as of March 31, 2020 and September 30, 2019, respectively)

Class A common stock, $ 0.001 par value;

1,000,000,000 shares authorized, 77,000,000 and 0 shares issued and outstanding as of June 30, 2020 and September 30, 2019, respectively

Class B common stock, $ 0.001 par value;

1,000,000,000 shares authorized, 433,000,000 and 505,830,022 issued and outstanding as of June 30, 2020 and September 30, 2019, respectively

Additional paid-in capital 1,899 1,127

10 unchanged sentences

Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

11 unchanged sentences

(Loss) income before income taxes ( 468 ) 2 ( 427 ) 253

Income tax benefit (expense) 12 ( 48 ) 7 ( 98 )

Income tax (expense) benefit ( 51 ) 12 ( 44 ) ( 86 )

Net (loss) income ( 519 ) 14 ( 471 ) 167

5 unchanged sentences

Net (loss) income per share attributable to Warner Music Group Corp.’s stockholders:

Basic and Diluted $ ( 0.15 ) $ 0.13 $ 0.09 $ 0.30

Class A – Basic and Diluted $ ( 1.03 ) $ — $ ( 1.09 ) $ —

Class B – Basic and Diluted $ ( 1.03 ) $ 0.03 $ ( 0.94 ) $ 0.33

Weighted average common shares:

Basic and Diluted 501,991,944 501,991,944 501,991,944 501,991,944

Class A – Basic and Diluted 20,307,692 — 6,769,231 —

Class B – Basic and Diluted 483,796,267 501,991,944 495,926,718 501,991,944

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Comprehensive Income (Unaudited)

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

Three Months Ended

March 31, Six Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

1 unchanged sentence

Net (loss) income $ ( 519 ) $ 14 $ ( 471 ) $ 167

Other comprehensive loss, net of tax:

Other comprehensive income (loss), net of tax:

Foreign currency adjustment 17 9 9 ( 17 )

Deferred loss on derivative financial instruments ( 2 ) ( 3 ) ( 22 ) ( 12 )

Other comprehensive loss, net of tax ( 38 ) ( 13 ) ( 28 ) ( 35 )

Other comprehensive income (loss), net of tax 15 6 ( 13 ) ( 29 )

Total comprehensive (loss) income ( 504 ) 20 ( 484 ) 138

5 unchanged sentences

Consolidated Statements of Cash Flows (Unaudited)

Six Months Ended

Nine Months Ended

(in millions)

Cash flows from operating activities

Net income $ 48 $ 153

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

Net (loss) income $ ( 471 ) $ 167

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

Depreciation and amortization 194 203

Unrealized gains and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts

Unrealized losses (gains) and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts

Deferred income taxes ( 34 ) 25

2 unchanged sentences

Non-cash interest expense 4 5

Equity-based compensation expense 160 14

Non-cash stock-based compensation expense 600 28

Changes in operating assets and liabilities:

29 unchanged sentences

Effect of exchange rate changes on cash and equivalents 1 ( 1 )

Net decrease in cash and equivalents ( 135 ) ( 44 )

Net (decrease) increase in cash and equivalents ( 87 ) 27

Cash and equivalents at beginning of period 619 514

3 unchanged sentences

Consolidated Statements of Deficit (Unaudited)

Six Months Ended March 31, 2020

Nine Months Ended June 30, 2020

Common Stock Class B

3 unchanged sentences

Comprehensive

Deficit Noncontrolling

Deficit Non-controlling

Interest Total

5 unchanged sentences

— — — — — 33 — 33 — 33

Net income — — — — — 46 — 46 2 48

Net loss — — — — — ( 474 ) — ( 474 ) 3 ( 471 )

Other comprehensive loss, net of tax — — — — — — ( 13 ) ( 13 ) — ( 13 )

2 unchanged sentences

Distribution to noncontrolling interest holders — — — — — — — — ( 6 ) ( 6 )

Modification of stock-based compensation plan — — — — 769 — — 769 — 769

Stock-based compensation expense — — — — 3 — — 3 — 3

Shares listed through IPO 77,000,000 — ( 77,000,000 ) — — — — — — —

Other — — 4,169,978 — — 1 — 1 — 1

Balance at March 31, 2020 — $ — 510,000,000 $ 1 $ 1,127 $ ( 1,166 ) $ ( 268 ) $ ( 306 ) $ 21 $ ( 285 )

Three Months Ended March 31, 2020

Balance at June 30, 2020 77,000,000 $ — 433,000,000 $ 1 $ 1,899 $ ( 1,685 ) $ ( 253 ) $ ( 38 ) $ 17 $ ( 21 )

Three Months Ended June 30, 2020

Common Stock Class B

3 unchanged sentences

Comprehensive

Deficit Noncontrolling

Deficit Non-controlling

Interest Total

1 unchanged sentence

(in millions, except share and per share data)

Balance at December 31, 2019 — $ — 510,000,000 $ 1 $ 1,127 $ ( 1,088 ) $ ( 230 ) $ ( 190 ) $ 21 $ ( 169 )

Balance at March 31, 2020 — $ — 510,000,000 $ 1 $ 1,127 $ ( 1,166 ) $ ( 268 ) $ ( 306 ) $ 21 $ ( 285 )

Cumulative effect of ASC 718 accounting policy change

1 unchanged sentence

Net loss — — — — — ( 520 ) — ( 520 ) 1 ( 519 )

Other comprehensive loss, net of tax — — — — — — ( 38 ) ( 38 ) — ( 38 )

Dividends ($ 0.07 per share)

— — — — — ( 37 ) — ( 37 ) — ( 37 )

Other comprehensive income, net of tax — — — — — — 15 15 — 15

Distribution to noncontrolling interest holders — — — — — — — — ( 5 ) ( 5 )

Modification of stock-based compensation plan — — — — 769 — — 769 — 769

Stock-based compensation expense — — — — 3 — — 3 — 3

Shares listed through IPO 77,000,000 — ( 77,000,000 ) — — — — — — —

Other — — — — — 1 — 1 — 1

Balance at March 31, 2020 — $ — 510,000,000 $ 1 $ 1,127 $ ( 1,166 ) $ ( 268 ) $ ( 306 ) $ 21 $ ( 285 )

Six Months Ended March 31, 2019

Balance at June 30, 2020 77,000,000 $ — 433,000,000 $ 1 $ 1,899 $ ( 1,685 ) $ ( 253 ) $ ( 38 ) $ 17 $ ( 21 )

Nine Months Ended June 30, 2019

Common Stock Class B

3 unchanged sentences

Comprehensive

Deficit Noncontrolling

Deficit Non-controlling

Interest Total

9 unchanged sentences

Other — — 3,838,078 — — — — — ( 4 ) ( 4 )

Balance at March 31, 2019 — $ — 505,830,022 $ 1 $ 1,127 $ ( 1,043 ) $ ( 225 ) $ ( 140 ) $ 20 $ ( 120 )

Three Months Ended March 31, 2019

Balance at June 30, 2019 — $ — 505,830,022 $ 1 $ 1,127 $ ( 1,061 ) $ ( 219 ) $ ( 152 ) $ 19 $ ( 133 )

Three Months Ended June 30, 2019

Common Stock Class B

3 unchanged sentences

Comprehensive

Deficit Noncontrolling

Deficit Non-controlling

Interest Total

1 unchanged sentence

(in millions, except share and per share data)

Balance at December 31, 2018 — $ — 505,830,022 $ 1 $ 1,127 $ ( 1,078 ) $ ( 212 ) $ ( 162 ) $ 23 $ ( 139 )

Balance at March 31, 2019 — $ — 505,830,022 $ 1 $ 1,127 $ ( 1,043 ) $ ( 225 ) $ ( 140 ) $ 20 $ ( 120 )

Net income — — — — — 13 — 13 1 14

Other comprehensive loss, net of tax — — — — — — ( 13 ) ( 13 ) — ( 13 )

Other comprehensive income, net of tax — — — — — — 6 6 — 6

Dividends ($ 0.06 per share)

2 unchanged sentences

Other — — — — — — — — ( 1 ) ( 1 )

Balance at March 31, 2019 — $ — 505,830,022 $ 1 $ 1,127 $ ( 1,043 ) $ ( 225 ) $ ( 140 ) $ 20 $ ( 120 )

Balance at June 30, 2019 — $ — 505,830,022 $ 1 $ 1,127 $ ( 1,061 ) $ ( 219 ) $ ( 152 ) $ 19 $ ( 133 )

See accompanying notes

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Acquisition of Warner Music Group by Access Industries

(“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”).

Pursuant to the 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., 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 New York Stock Exchange (the “NYSE”).

The Company continues to voluntarily file with the U.S.

The Company continued to voluntarily file with the U.S.

Securities and Exchange Commission (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”) as provided for in certain covenants contained in the instruments covering its outstanding indebtedness.

All of the Company’s common stock is owned by affiliates of Access.

On February 6, 2020, the Company filed a Form S-1 registration statement with the SEC for an initial public offering (“IPO”).

The completion of the proposed IPO will depend on, among other things, the SEC review process and customary regulatory approvals, as well as market conditions.

There can be no assurance that the proposed IPO will occur.

Initial Public Offering

On June 5, 2020, the Company completed an initial public offering (“IPO”) of 77,000,000 shares of Class A common stock of the Company, par value $ 0.001 per share (“Class A Common Stock”) at a public offering price of $ 25 per share.

The Company listed these shares on the NASDAQ stock market under the ticker symbol “WMG.” The offering consisted entirely of secondary shares sold by Access Industries, LLC (“Access”) and certain related selling stockholders.

On July 7, 2020, the Company completed the sale of an additional 11,550,000 shares of Class A Common Stock from the selling stockholders to the underwriters of the Company’s IPO pursuant to the exercise by the underwriters of their option to purchase additional shares of Class A Common Stock.

The Company did not receive any of the proceeds of the IPO or exercise of the underwriters’ option.

Following the completion of the IPO and the exercise in full of the underwriters’ option to purchase additional shares, Access and its affiliates hold an aggregate of 421,450,000 shares of Class B common stock of the Company, par value $ 0.001 per share (“Class B Common Stock”), representing approximately 99 % of the total combined voting power of the Company’s outstanding common stock and approximately 83 % of the economic interest.

As a result, the Company is a “controlled company” within the meaning of the corporate governance standards of NASDAQ.

Risk Factors — Risks Related to Our Controlling Stockholder.

Recorded Music Operations

4 unchanged sentences

Our Recorded Music business also includes Rhino Entertainment, a division that specializes in marketing our recorded music catalog through compilations, reissuances of previously released music and video titles and releasing previously unreleased material from our vault.

We also conduct our Recorded Music business through a collection of additional record labels including Asylum, Big Beat, Canvasback, East West, Erato, FFRR, Nonesuch, Parlophone, Reprise, Sire, Spinnin’, Warner Classics and Warner Music Nashville.

Outside the United States, our Recorded Music business is conducted in more than 70 countries through various subsidiaries, affiliates and non-affiliated licensees.

1 unchanged sentence

discovering and signing artists and distributing, selling, marketing and promoting their music.

In most cases, we also market, promote, distribute and sell the music of those recording artists for whom our domestic record labels have international rights.

In most cases, we also market, promote, distribute and sell the

music of those recording artists for whom our domestic record labels have international rights.

In certain smaller markets, we license the right to distribute and sell our music to non-affiliated third-party record labels.

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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 six months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2020.

Operating results for the three and nine months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2020.

The consolidated balance sheet at September 30, 2019 has been derived from the audited consolidated financial statements at that date but does not include all the information and notes required by U.S.

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The Company maintains a 52-53 week fiscal year ending on the last Friday in each reporting period.

As such, all references to March 31, 2020 and March 31, 2019 relate to the periods ended March 27, 2020 and March 29, 2019, respectively.

For convenience purposes, the Company continues to date its second-quarter financial statements as of March 31.

As such, all references to June 30, 2020 and June 30, 2019 relate to the periods ended June 26, 2020 and June 28, 2019, respectively, except for subsequent event activity referred to in Note 15 and elsewhere.

For convenience purposes, the Company continues to date its third-quarter financial statements as of June 30.

The fiscal year ended September 30, 2019 ended on September 27, 2019.

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.

Common Stock and Earnings per Share

On February 28, 2020, the Company amended its certificate of incorporation to increase its authorized capital stock to 2,100,000,000 shares, consisting of 1,000,000,000 shares of Class A common stock, par value $ 0.001 per share, 1,000,000,000 shares of Class B common stock, par value $ 0.001 per share, and 100,000,000 shares of preferred stock, par value $ 1.00 per share.

On February 28, 2020, the Company amended its certificate of incorporation to increase its authorized capital stock to 2,100,000,000 shares, consisting of 1,000,000,000 shares of Class A Common Stock, 1,000,000,000 shares of Class B Common Stock, and 100,000,000 shares of preferred stock, par value $ 1.00 per share.

In addition, the February 28, 2020 amendment to the Company’s certificate of incorporation also gave effect to the reclassification and 477,242.614671815 -for-1 stock split of the Company’s existing common stock outstanding into 510,000,000 shares of Class B Common Stock.

This stock split has been retrospectively presented throughout the interim financial statements.

Upon completion of the IPO and as of June 30, 2020, 77,000,000 shares of Class A Common Stock were outstanding, 433,000,000 shares of Class B Common Stock were outstanding and no shares of preferred stock were outstanding.

In connection with the IPO, the Company’s board of directors and stockholders approved the Warner Music Group Corp.

2020 Omnibus Incentive Plan, or the “Omnibus Incentive Plan.” The aggregate number of shares of common stock available for issuance under the Omnibus Incentive Plan is 31,169,099 shares of Class A Common Stock over the 10 -year period from the date of adoption, including up to 1,000,000 shares of our Class A Common Stock that would be issued upon vesting of equity awards that we expect to grant, subject to certain conditions, in connection with the IPO.

No shares under the Omnibus Incentive Plan have been issued as of June 30, 2020.

Earnings per Share

The consolidated statements of operations present basic and diluted earnings per share (“EPS”).

Basic and diluted earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of outstanding common shares less shares issued for the exercise of the deferred equity units.

The deferred equity units are mandatorily redeemable and as such are excluded from the denominator of the basic and diluted EPS calculation.

The Company did not have any dilutive securities for the three and six months ended March 31, 2020 and March 31, 2019.

Share-Based Compensation

The Company accounts for share-based payments as required by ASC 718, Compensation—Stock Compensation (“ASC 718”).

Under the recognition provision of ASC 718, the Company’s liability classified share-based compensation costs are measured each reporting date until settlement.

In February 2020, the Company filed a Form S-1 registration statement with the SEC for a proposed IPO, which required a change in accounting policy during the quarter from the intrinsic value method to fair value method in determining the basis of measurement of its share-based compensation liability.

Prior to the completion of the IPO, basic and diluted earnings (loss) per share were computed by dividing net income (loss) available to common stockholders by the weighted average number of outstanding common shares less shares issued for the exercise of the deferred equity units since these units were mandatorily redeemable in cash.

As such, the deferred equity units were excluded from the denominator of the basic and diluted EPS calculation prior to the IPO completion.

Subsequent to the completion of the IPO, the Company utilizes the two-class method to report earnings (loss) per share.

The two-class method is an earnings (loss) allocation formula that determines earnings (loss) per share for each class of common stock according to dividends declared and participation rights in undistributed earnings (losses).

Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders.

Since there was a loss for the three and nine months ended June 30, 2020, no earnings were allocated to our participating securities or our post-modification deferred equity units that are no longer mandatorily redeemable.

Stock-Based Compensation

The Company accounts for stock-based payments as required by ASC 718, Compensation—Stock Compensation (“ASC 718”).

Under the recognition provision of ASC 718, the Company’s liability classified stock-based compensation costs are measured each reporting date until settlement.

In February 2020, the Company filed a Form S-1 registration statement with the SEC in connection with the IPO, which required a change in accounting policy during the three months ended March 31, 2020 from the intrinsic value method to fair value method in determining the basis of measurement of its stock-based compensation liability.

In determining fair value, the Company utilized an option pricing model for those awards with an option-like pay-off, which includes various inputs for volatility, term to exit, discount for lack of marketability, expected dividend yield and risk-free rates.

1 unchanged sentence

The Company continued to use an income approach using a discounted cash flow model to determine its per-share value input within the model.

As a result of this change in accounting policy, the Company recorded a decrease to its share-based compensation liability of $ 38 million, which resulted in a decrease of $ 33 million, net of tax, to accumulated deficit as of March 31, 2020.

As a result of this change in accounting policy, the Company recorded a decrease to its stock-based compensation liability of $ 38 million as of March 31, 2020, which resulted in a decrease of $ 33 million, net of tax, to accumulated deficit for the nine months ended June 30, 2020.

Upon completion of the IPO in June 2020, the Senior Management Free Cash Flow Plan (the “Plan”) was amended to remove the cash-settlement feature on all future redemptions.

As a result, all awards previously issued under the Plan will require settlement in Class A Common Stock.

The participants in such plan were also allowed to sell a pro rata portion, consistent with Access’s percentage reduction in shares of Class B Common Stock as a result of the IPO, of their vested profits interests and acquired units of the LLC holding company, WMG Management Holdings, LLC (“Management LLC”), in the IPO through a “tag-along right.”

Under the provision of ASC 718, the Company determined the Plan was modified as of June 3, 2020, and as such, converted the awards from liability-classified to equity-classified.

Prior to conversion, the Company performed a final measurement of its stock-based compensation liability under the fair value method, which resulted in non-cash stock-based compensation expense of $ 437 million recognized in selling, general and administrative expense within our statements of operations for the three and nine months ended June 30, 2020.

The final measurement utilized the IPO listing price of $ 25 per share as the per-share value input within its fair value model.

Upon modification of the Plan, the Company reclassified a $ 769 million stock-based compensation liability to additional-paid in capital, which included $ 57 million associated with the awards settled through the IPO tag-along right on June 5, 2020.

In addition, the Company recognized approximately $ 3 million of stock-based compensation expense for the period of June 3, 2020 through June 30, 2020 for its unvested share awards that were granted prior to the IPO, which will be recognized over the remaining vesting period based on the fair value under the post-modification terms of the Plan.

The Company uses the estimated annual effective tax rate method in computing its interim tax provision.

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Leases are classified as either finance or operating, with classification affecting the pattern of expense recognition in the statement of operations.

In July 2018, the FASB issued ASU 2018-11, Leases – Targeted

Improvements (“ASU 2018-11”), which allows for retrospective application with the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements (“ASU 2018-11”), which allows for retrospective application with the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

Under this option, entities do not need to apply ASC 842 (along with its disclosure requirements) to the comparative prior periods presented.

28 unchanged sentences

The Company is evaluating the impact of the adoption of this standard on its consolidated financial statements.

Earnings per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to each class of stock by the weighted average number of outstanding common shares for each class of stock.

Diluted earnings (loss) per share is computed by dividing net income (loss) available to each class of stock by the weighted average number of outstanding common shares, plus dilutive potential common shares, which is calculated using the treasury-stock method.

Under the treasury-stock method, potential common shares are excluded from the computation of EPS in periods in which they have an anti-dilutive effect.

The potential dilutive effects of our deferred equity units and the Class B Common Stock have been excluded from the Class A Common Stock diluted earnings (loss) per share calculation since their effects would be anti-dilutive due to the net loss attributable to Class A Common Stock for the three and nine months ended June 30, 2020.

The Company did not have any dilutive securities for the three and nine months ended June 30, 2019.

In computing earnings (loss) per share subsequent to the completion of our IPO, the Company has allocated dividends declared to Class A Common Stock and Class B Common Stock based on timing and amounts actually declared for each class of stock and the undistributed earnings (losses) have been allocated to Class A Common Stock and Class B Common Stock pro rata on a basic weighted average shares outstanding basis since the two classes of stock participate equally on a per share basis upon liquidation.

The Company declared two dividends of $ 37.5 million each, a total amount of $ 75 million during the nine months ended June 30, 2020, on December 26, 2019 and March 25, 2020, respectively, which were allocated solely to Class B Common Stock as there was no outstanding Class A Common Stock at the time these dividends were declared.

While Class A and Class B Common Stock have the same dividend rights, the allocation of all dividends declared prior to the IPO to Class B Common Stock has resulted in a different earnings (loss) per share for the two classes of common stock for the nine months ended June 30, 2020.

Subsequent to the completion of the IPO, and modification of our stock-based compensation awards as described in Note 2, the Class B Common Stock issued to Management LLC for the exercise of the vested deferred equity units is included in the basic weighted average number of outstanding shares of Class B Common Stock.

Upon issuance to the participants in the Plan, the Class B Common Stock will be converted into Class A Common Stock and included in the basic weighted average number of outstanding shares of Class A Common Stock.

Since the shares expected to satisfy the vested portion of the deferred equity units are already included in the basic weighted average number of outstanding common shares, there is no potential dilutive effect associated with the vested portion of these stock-based compensation awards.

The following table sets forth the calculation of basic and diluted net income (loss) per common share under the two-class method for the three and nine months ended June 30, 2020:

Three Months Ended

June 30, 2020 Nine Months Ended

June 30, 2020

Class A Class B Class A Class B

(in millions, except share and per share data)

Basic and Diluted EPS:

Net loss attributable to common stockholders $ ( 21 ) $ ( 499 ) $ ( 7 ) $ ( 467 )

Weighted average shares outstanding 20,307,692 483,796,267 6,769,231 495,926,718

Basic and Diluted EPS $ ( 1.03 ) $ ( 1.03 ) $ ( 1.09 ) $ ( 0.94 )

The Company’s basic and diluted net income per common share for the three and nine months ended June 30, 2019, prior to the use of a two-class method, was $ 0.03 and $ 0.33 , respectively.

The Company did not have any dilutive securities for the three and nine months ended June 30, 2019.

Revenue Recognition

7 unchanged sentences

The Company’s revenue consists of the following categories, which aggregate into the segments – Recorded Music and Music Publishing:

For the Three Months Ended

March 31, For the Six Months Ended

Three Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

(in millions) (in millions)

(in millions)

Revenue by Type

77 unchanged sentences

Based on this information, management provides a reserve for the estimated amounts believed to be uncollectible.

Based on management’s analysis of sales returns, refund liabilities of $ 23 million and $ 23 million were established at March 31, 2020 and September 30, 2019, respectively.

Based on management’s analysis of uncollectible accounts, reserves of $ 21 million and $ 17 million were established at March 31, 2020 and September 30, 2019, respectively.

Based on management’s analysis of sales returns, refund liabilities of $ 22 million and $ 23 million were established at June 30, 2020 and September 30, 2019, respectively.

Based on management’s analysis of uncollectible accounts, reserves of $ 21 million and $ 17 million were established at June 30, 2020 and September 30, 2019, respectively.

Principal versus Agent Revenue Recognition

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Reductions in deferred revenue are a result of the Company’s performance under the contract or usage by the licensee.

Deferred revenue increased by $ 172 million during the six months ended March 31, 2020 related to cash received from customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period.

Revenues of $ 100 million were recognized during the six months ended March 31, 2020 related to the balance of deferred revenue at September 30, 2019.

Deferred revenue increased by $ 309 million during the nine months ended June 30, 2020 related to cash received from customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period.

Revenues of $ 138 million were recognized during the nine months ended June 30, 2020 related to the balance of deferred revenue at September 30, 2019.

There were no other significant changes to deferred revenue during the reporting period.

Performance Obligations

The Company recognized revenue of $ 30 million and $ 35 million from performance obligations satisfied in previous periods for the six months ended March 31, 2020 and March 31, 2019, respectively.

The Company recognized revenue of $ 35 million and $ 45 million from performance obligations satisfied in previous periods for the nine months ended June 30, 2020 and June 30, 2019, respectively.

Wholly and partially unsatisfied performance obligations represent future revenues not yet recorded under long-term intellectual property licensing contracts containing fixed fees, advances and minimum guarantees.

Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at March 31, 2020 are as follows:

Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at June 30, 2020 are as follows:

Rest of FY20 FY21 FY22 Thereafter Total

2 unchanged sentences

Total $ 206 $ 838 $ 65 $ — $ 1,109

Comprehensive Income

Comprehensive income, which is reported in the accompanying consolidated statements of deficit, consists of net income and other gains and losses affecting equity that, under U.S.

Comprehensive Income (Loss)

Comprehensive income (loss), which is reported in the accompanying consolidated statements of deficit, consists of net income and other gains and losses affecting equity that, under U.S.

GAAP, are excluded from net income.

For the Company, the components of other comprehensive income primarily consist of foreign currency translation gains and losses, minimum pension liabilities, and deferred gains and losses on financial instruments designated as hedges under ASC 815, Derivatives and Hedging , which include foreign exchange contracts.

For the Company, the components of other comprehensive income (loss) primarily consist of foreign currency translation gains and losses, minimum pension liabilities, and deferred gains and losses on financial instruments designated as hedges under ASC 815, Derivatives and Hedging , which include foreign exchange contracts.

The following summary sets forth the changes in the components of accumulated other comprehensive loss, net of related tax benefit of approximately $ 7 million:

2 unchanged sentences

Balance at September 30, 2019 $ ( 218 ) $ ( 14 ) $ ( 8 ) $ ( 240 )

Other comprehensive loss ( 8 ) — ( 20 ) ( 28 )

Balance at March 31, 2020 $ ( 226 ) $ ( 14 ) $ ( 28 ) $ ( 268 )

Other comprehensive income (loss) 9 — ( 22 ) ( 13 )

Balance at June 30, 2020 $ ( 209 ) $ ( 14 ) $ ( 30 ) $ ( 253 )

______________________________________

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Fixed payments are recognized as lease expense on a straight-line basis over the lease term.

For leases with a term of one year or less (“short-term leases”), the lease payments are recognized in the consolidated statement of operations on a straight-line basis over the lease term.

For leases with a term of one year or less (“short-term leases”), the lease payments are recognized in the consolidated statements of operations on a straight-line basis over the lease term.

ASC 842 requires that only limited types of variable payments be included in the determination of lease payments, which affects lease classification and measurement.

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The landlord for both leases is an affiliate of Access.

As of March 31, 2020, the aggregate lease liability related to these leases was $ 139 million.

As of June 30, 2020, the aggregate lease liability related to these leases was $ 137 million.

There are no restrictions or covenants, such as those relating to dividends or incurring additional financial obligations, relating to our lease portfolio, and residual value guarantees are not significant.

1 unchanged sentence

Three Months Ended

March 31, 2020 Six Months Ended

March 31, 2020

June 30, 2020 Nine Months Ended

June 30, 2020

(in millions)

5 unchanged sentences

Supplemental cash flow information related to leases was as follows:

Six Months Ended

March 31, 2020

Nine Months Ended

June 30, 2020

(in millions)

18 unchanged sentences

Less imputed interest ( 73 )

As of March 31, 2020, there have been no leases entered into that have not yet commenced.

As of June 30, 2020, there have been no leases entered into that have not yet commenced.

Goodwill and Intangible Assets

5 unchanged sentences

Other adjustments 9 — 9

Balance at March 31, 2020 $ 1,297 $ 464 $ 1,761

Balance at June 30, 2020 $ 1,306 $ 464 $ 1,770

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(a) Other adjustments during the nine months ended June 30, 2020 represent foreign currency movements

The Company performs its annual goodwill impairment test in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”) during the fourth quarter of each fiscal year as of July 1.

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Intangible assets consist of the following:

Weighted-Average Useful Life March 31,

Weighted-Average Useful Life June 30,

2020 September 30,

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(a) Reflects $ 180 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $ 13 million at both March 31, 2020 and September 30, 2019.

There were no loans outstanding under the Revolving Credit Facility at March 31, 2020 or September 30, 2019.

(a) Reflects $ 300 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $ 13 million at both June 30, 2020 and September 30, 2019.

There were no loans outstanding under the Revolving Credit Facility at June 30, 2020 or September 30, 2019.

On April 3, 2020, Acquisition Corp.

entered into an amendment to the Revolving Credit Facility which, among other things, increased the commitments under the Revolving Credit Facility from an aggregate principal amount of $ 180 million to an aggregate principal amount of $ 300 million.

For a more detailed description of the changes effected by the amendment, see Note 14.

(b) Principal amount of $ 1.326 billion at both March 31, 2020 and September 30, 2019 less unamortized discount of $ 3 million and $ 3 million and unamortized deferred financing costs of $ 8 million and $ 10 million at March 31, 2020 and September 30, 2019, respectively.

(c) Principal amount of $ 300 million less unamortized deferred financing costs of $ 2 million at both March 31, 2020 and September 30, 2019, respectively.

(d) Face amount of € 311 million at both March 31, 2020 and September 30, 2019.

Above amounts represent the dollar equivalent of such note at March 31, 2020 and September 30, 2019.

Principal amount of $ 342 million and $ 340 million less unamortized deferred financing costs of $ 3 million and $ 4 million at March 31, 2020 and September 30, 2019, respectively.

(e) Principal amount of $ 220 million less unamortized deferred financing costs of $ 2 million at both March 31, 2020 and September 30, 2019, respectively.

(f) Face amount of € 445 million at both March 31, 2020 and September 30, 2019.

Above amounts represent the dollar equivalent of such note at March 31, 2020 and September 30, 2019.

Principal amount of $ 491 million and $ 487 million at March 31, 2020 and September 30, 2019, respectively, an additional issuance premium of $ 7 million, less unamortized deferred financing costs of $ 6 million at both March 31, 2020 and September 30, 2019.

(g) Principal amount of $ 325 million less unamortized deferred financing costs of $ 4 million at both March 31, 2020 and September 30, 2019.

(h) Principal amount of debt of $ 3.004 billion and $ 2.998 billion, an additional issuance premium of $ 7 million and $ 8 million, less unamortized discount of $ 3 million and $ 3 million and unamortized deferred financing costs of $ 25 million and $ 29 million at March 31, 2020 and September 30, 2019, respectively.

(b) Principal amount of $ 1.326 billion at both June 30, 2020 and September 30, 2019 less unamortized discount of $ 3 million and $ 3 million and unamortized deferred financing costs of $ 8 million and $ 10 million at June 30, 2020 and September 30, 2019, respectively.

(c) Principal amount of $ 300 million less unamortized deferred financing costs of $ 2 million at both June 30, 2020 and September 30, 2019, respectively.

On June 16, 2020, Acquisition Corp.

announced a cash tender offer to purchase any and all of the 5.000 % Senior Secured Notes due 2023 (the “ 5.000 % Senior Secured Notes”).

On June 30, 2020, Acquisition Corp.

announced that $ 244 million of the aggregate principal amount outstanding had tendered and been accepted in the tender offer.

Also on June 30, 2020, Acquisition Corp.

issued a notice of redemption calling the remaining outstanding 5.000 % Senior Secured Notes not tendered in the tender offer.

An additional $ 295,000 was accepted in the tender offer on July 14, 2020 and the remainder of the 5.000 % Senior Secured Notes were redeemed on August 1, 2020.

(d) Face amount of € 311 million at both June 30, 2020 and September 30, 2019.

Above amounts represent the dollar equivalent of such note at June 30, 2020 and September 30, 2019.

Principal amount of $ 349 million and $ 340 million less unamortized deferred financing costs of $ 3 million and $ 4 million at June 30, 2020 and September 30, 2019, respectively.

2020, Acquisition Corp.

redeemed all of the outstanding aggregate principal amount, or € 311 million, of its 4.125 % Senior Secured Notes due 2024 (the “ 4.125 % Senior Secured Notes”).

(e) Principal amount of $ 220 million less unamortized deferred financing costs of $ 2 million at both June 30, 2020 and September 30, 2019, respectively.

On June 30, 2020, Acquisition Corp.

redeemed all of the outstanding aggregate principal amount, or $ 220 million, of its 4.875 % Senior Secured Notes due 2024 (the “ 4.875 % Senior Secured Notes”).

(f) Face amount of € 445 million at both June 30, 2020 and September 30, 2019.

Above amounts represent the dollar equivalent of such note at June 30, 2020 and September 30, 2019.

Principal amount of $ 499 million and $ 487 million at June 30, 2020 and September 30, 2019, respectively, an additional issuance premium of $ 7 million, less unamortized deferred financing costs of $ 5 million at both June 30, 2020 and September 30, 2019.

(g) Principal amount of $ 325 million less unamortized deferred financing costs of $ 3 million at both June 30, 2020 and September 30, 2019.

(h) Principal amount of debt of $ 3.019 billion and $ 2.998 billion, an additional issuance premium of $ 7 million and $ 8 million, less unamortized discount of $ 3 million and $ 3 million and unamortized deferred financing costs of $ 23 million and $ 29 million at June 30, 2020 and September 30, 2019, respectively.

The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp.

As of June 30, 2020 Acquisition Corp.

had issued and outstanding the 3.625 % Senior Secured Notes due 2026 and the 5.500 % Senior Notes due 2026 (together, the “Acquisition Corp.

On June 29, 2020, Acquisition Corp.

issued the 2.750 % Senior Secured Notes due 2028 and the 3.875 % Senior Secured Notes due 2030 (the “Secured Notes”).

See Note 15 for further information.

The Acquisition Corp.

Notes are guaranteed by the Company and, in addition, are guaranteed by all of Acquisition Corp.’s domestic wholly-owned subsidiaries.

The secured notes are guaranteed on a senior secured basis and the unsecured notes are guaranteed on an unsecured senior basis.

The Company’s guarantee of the Acquisition Corp.

Notes is full and unconditional.

The guarantee of the Acquisition Corp.

Notes by Acquisition Corp.’s domestic wholly-owned subsidiaries is full, unconditional and joint and several.

The Company and Holdings are holding companies that conduct substantially all of their business operations through Acquisition Corp.

Accordingly, the ability of the Company and Holdings to obtain funds from their subsidiaries is restricted by the indentures for the Acquisition Corp.

Notes and the Secured Notes, as well as the credit agreements for the Acquisition Corp.

Senior Credit Facilities, including the Revolving Credit Facility and the Senior Term Loan Facility.

Recent Transactions

Revolving Credit Agreement Amendment

On April 3, 2020, Acquisition Corp.

entered into an amendment (the “Second Amendment”) to the Revolving Credit Agreement, dated January 31, 2018 (as amended by the amendment dated October 9, 2019), among Acquisition Corp., the several banks and other financial institutions party thereto and Credit Suisse AG, as administrative agent, governing Acquisition Corp.’s senior secured revolving credit facility (the “Revolving Credit Facility”) with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto.

The Second Amendment (among other changes) (i) increases the commitments under the Revolving Credit Facility from an aggregate principal amount of $ 180 million to an aggregate principal amount of $ 300 million, (ii) extends the final maturity date of the Revolving Credit Facility from January 31, 2023 to April 3, 2025, (iii) reduces the interest margin applicable to the loans upon achievement of certain leverage ratios based on a leverage-based pricing grid, (iv) reduces the commitment fee based on a leverage-based pricing grid and limits commitment fees to be paid only on unused amounts of commitments, (v) increases the maximum letter of credit exposure permitted under the Revolving Credit Facility from $ 50 million to $ 90 million, (vi) increases the springing financial maintenance covenant from a Senior Secured Indebtedness to EBITDA Ratio of 4.75 :1.00 to a Senior Secured Indebtedness to EBITDA Ratio of 5.00 :1.00 and provides that the covenant shall not be tested unless at the end of a fiscal quarter the outstanding amount of loans and drawings under letters of credit which have not been reimbursed exceeds $ 105 million, (vii) adds covenant suspension upon achievement of an investment grade rating or a Total Indebtedness to EBITDA Ratio of 3.25 :1.00, and (viii) adds certain exceptions and increases certain baskets in connection with Acquisition Corp.’s negative covenants, including those related to the incurrence of indebtedness, liens and restricted payments.

The Company incurred approximately $ 1 million in financing fees associated with the Second Amendment which were capitalized and will be amortized over the amended term of the Revolving Credit Facility.

Redemption of 4.125 % Senior Secured Notes

On June 30, 2020, Acquisition Corp.

redeemed all of the outstanding aggregate principal amount, or € 311 million, of the 4.125 % Senior Secured Notes.

Redemption of 4.875 % Senior Secured Notes

On June 30, 2020, Acquisition Corp.

redeemed all of the outstanding aggregate principal amount, or $ 220 million, of the 4.875 % Senior Secured Notes.

Tender Offer for 5.000 % Senior Secured Notes

On June 16, 2020, Acquisition Corp.

announced a cash tender offer to purchase any and all of the 5.000 % Senior Secured Notes.

On June 30, 2020, Acquisition Corp.

announced that $ 244 million of the aggregate principal amount outstanding had tendered and been accepted in the tender offer.

On June 30, 2020, Acquisition Corp.

issued a notice of redemption calling the remaining outstanding 5.000 % Senior Secured Notes not tendered in the tender offer for redemption on August 1, 2020.

An additional $ 295,000 tendered and was accepted in the tender offer on July 14, 2020, and the remainder was redeemed on August 1, 2020.

Historical Transactions

3.625 % Senior Secured Notes Offerings

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issued and sold € 250 million in aggregate principal amount of 3.625 % Senior Secured Notes due 2026 (the “ 3.625 % Secured Notes”).

Net proceeds of the offering were used to pay the purchase price of the acquisition of EMP, to redeem € 34.5 million of the 4.125 % Secured Notes (as described below), purchase $ 30 million of the Company’s 4.875 % Senior Secured Notes (as described above) on the open market and to redeem $ 26.55 million of the 5.625 % Senior Secured Notes (as described below).

Net proceeds of the offering were used to pay the purchase price of the acquisition of EMP, to redeem € 34.5 million of the 4.125 % Secured Notes (as described below), purchase $ 30 million of Acquisition Corp.’s 4.875 % Senior Secured Notes (as described above) on the open market and to redeem $ 26.55 million of the 5.625 % Senior Secured Notes (as described below).

On April 30, 2019, Acquisition Corp.

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Following the partial redemption of the 4.125 % Secured Notes, € 311 million of the 4.125 % Secured Notes remain outstanding.

The Company recorded a loss on extinguishment of debt of approximately $ 2 million, which represents the premium paid on early redemption and unamortized deferred financing costs related to the partial redemption of this note.

The Company recorded a loss on extinguishment of debt of approximately $ 2 million for the nine months ended June 30, 2019, which represents the premium paid on early redemption and unamortized deferred financing costs related to the partial redemption of this note.

Open Market Purchase

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Following retirement of the acquired notes, $ 220 million of the 4.875 % Secured Notes remain outstanding.

The Company recorded a loss on extinguishment of debt of less than $ 1 million, which represents the unamortized deferred financing costs related to the open market purchase.

The Company recorded a loss on extinguishment of debt of less than $ 1 million for the nine months ended June 30, 2019, which represents the unamortized deferred financing costs related to the open market purchase.

Redemption of 5.625 % Senior Secured Notes

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The Company recorded a loss on extinguishment of debt of approximately $ 1 million, which represents the premium paid on early redemption and unamortized deferred financing costs related to the partial redemption of this note.

On April 16, 2019, the Company issued a conditional notice of redemption for all of its 5.625 % Secured Notes due 2022 currently outstanding.

On April 16, 2019, Acquisition Corp.

issued a conditional notice of redemption for all of its 5.625 % Secured Notes due 2022 currently outstanding.

Settlement of the called 5.625 % Secured Notes occurred on May 16, 2019.

The Company recorded a loss on extinguishment of debt of approximately $ 4 million, which represents the premium paid on early redemption and unamortized deferred financing costs.

The Company recorded a loss on extinguishment of debt of approximately $ 4 million for the three and nine months ended June 30, 2019, which represents the premium paid on early redemption and unamortized deferred financing costs.

Interest Rates

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provided that, in respect of 2020 Revolving Loans, the applicable margin with respect to such loans is subject to adjustment as set forth in the pricing grid in the Revolving Credit Agreement.

Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.22 x at March 31, 2020, the applicable margin for Eurodollar loans would be 1.625 % instead of 1.875 % and the applicable margin for ABR loans would be 0.625 % instead of 0.875 % in the case of 2020 Revolving Loans.

Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.11 x at June 30, 2020, the applicable margin for Eurodollar loans would be 1.625 % instead of 1.875 % and the applicable margin for ABR loans would be 0.625 % instead of 0.875 % in the case of 2020 Revolving Loans.

If there is a payment default at any time, then the interest rate applicable to overdue principal will be the rate otherwise applicable to such loan plus 2.0 % per annum.

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Maturity of Revolving Credit Facility

As of March 31, 2020, the maturity date of the Revolving Credit Facility was January 31, 2023.

On April 3, 2020, Acquisition Corp.

entered into an amendment to the Revolving Credit Facility which, among other things, extended the final maturity date of the Revolving Credit Facility from January 31, 2023 to April 3, 2025.

For a more detailed description of the changes effected by the amendment, see Note 14.

The maturity date of the Revolving Credit Facility is April 3, 2025.

Maturities of Senior Notes and Senior Secured Notes

As of March 31, 2020, there are no scheduled maturities of notes until 2023, when $ 300 million is scheduled to mature.

Thereafter, $ 1.378 billion is scheduled to mature.

As of June 30, 2020, there are no scheduled maturities of notes until 2023, when $ 300 million is scheduled to mature, all of which was tendered or redeemed as discussed above.

Thereafter, $ 1.394 billion is scheduled to mature of which $ 569 million was redeemed and refinanced with new senior secured notes.

Refer to Note 15 for further information.

Interest Expense, net

Total interest expense, net was $ 33 million and $ 36 million for the three months ended March 31, 2020 and March 31, 2019, respectively.

Total interest expense was $ 66 million and $ 72 million for the six months ended March 31, 2020 and March 31, 2019.

The weighted-average interest rate of the Company’s total debt was 4.2 % at March 31, 2020, 4.3 % at September 30, 2019 and 4.7 % at March 31, 2019.

Total interest expense, net was $ 32 million and $ 36 million for the three months ended June 30, 2020 and June 30, 2019, respectively.

Total interest expense, net was $ 98 million and $ 108 million for the nine months ended June 30, 2020 and June 30, 2019.

The weighted-average interest rate of the Company’s total debt was 4.0 % at June 30, 2020, 4.3 % at September 30, 2019 and 4.5 % at June 30, 2019.

Commitments and Contingencies

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Consequently, the Company released its $ 33 million valuation allowance at September 30, 2019 relating to such deferred tax assets and recognized a corresponding U.S.

tax benefit of $ 33 million during the quarter ended December 31, 2019.

tax benefit of $ 33 million during the three months ended December 31, 2019.

The Company will continue to weigh the evidence including the projections of sufficient future taxable income, foreign source income and the reversal of future taxable temporary differences to assess the future realization of our foreign tax credits.

For the three and six months ended March 31, 2020, the Company recorded an income tax benefit of $ 12 million and $ 7 million, respectively.

The income tax benefit of $ 12 million for the three months ended March 31, 2020 is lower than the expected tax benefit at the statutory tax rate of 21 % primarily due to non-deductible expenses of our Senior Management Free Cash Flow Plan.

The income tax benefit of $ 7 million for the six months ended March 31, 2020 is lower than the expected tax at the statutory tax rate of 21 % primarily due to tax benefit of the valuation allowance release relating to foreign tax credit carryforwards and FDII, offset by

non-deductible expenses of our Senior Management Free Cash Flow Plan, U.S.

state and local taxes, foreign income taxed at rates higher than the U.S.

statutory tax rate, withholding taxes and foreign losses with no tax benefit.

For the three and six months ended March 31, 2019, the Company recorded an income tax expense of $ 48 million and $ 98 million, respectively.

The income tax expense for the three and six months ended March 31, 2019 is higher than the expected tax at the statutory tax rate of 21 % primarily due to GILTI, non-deductible expenses of our Senior Management Free Cash Flow Plan, U.S.

As a result of the IPO in the three months ended June 30, 2020, the Company is subject to limitation on the deductibility of executive compensation under Internal Revenue Code (“IRC”) Section 162(m).

For the three and nine months ended June 30, 2020, the Company recorded an income tax expense of $ 51 million and $ 44 million, respectively.

The income tax expense of $ 51 million for the three months ended June 30, 2020 is higher than the expected tax benefit at the statutory tax rate of 21 % primarily due to non-deductible expenses of the Plan, non-deductible transaction costs and non-deductible executive compensation under IRC Section 162(m).

The income tax expense of $ 44 million for the nine months ended June 30, 2020 is higher than the expected tax benefit at the statutory tax rate of 21 % primarily due to non-deductible expenses of the Plan, non-deductible transaction costs and non-deductible executive compensation under IRC Section 162(m), offset by the tax benefit of the valuation allowance release relating to foreign tax credit carryforwards.

For the three and nine months ended June 30, 2019, the Company recorded an income tax benefit of $ 12 million and expense of $ 86 million, respectively.

The income tax benefit for the three months ended June 30, 2019 is lower than the expected tax at the statutory tax rate of 21 % primarily due to a change in components of forecasted income that resulted in a decrease of the GILTI impact and higher foreign tax credit utilization.

The income tax expense for the nine months ended June 30, 2019 is higher than the expected tax at the statutory tax rate of 21 % primarily due to GILTI, non-deductible expenses of the Plan, U.S.

state and local taxes, foreign income taxed at rates higher than the U.S.

statutory tax rate, withholding taxes and foreign losses with no tax benefit offset by the tax benefit of a reduction in foreign income tax rates.

The Company has determined that it is reasonably possible that the gross unrecognized tax benefits as of March 31, 2020 could decrease by up to approximately $ 1 million related to various ongoing audits and settlement discussions in various foreign jurisdictions during the next twelve months.

statutory tax rate, income withholding taxes, foreign losses with no tax benefit offset by the tax benefit of a reduction in foreign income tax rates.

The Company has determined that it is reasonably possible that the gross unrecognized tax benefits as of June 30, 2020 could decrease by up to approximately $ 2 million related to various ongoing audits and settlement discussions in various foreign jurisdictions during the next twelve months.

Derivative Financial Instruments

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In prior periods, certain foreign currency forward exchange contracts were designated and qualified as cash flow hedges under the criteria prescribed in ASC 815.

The Company recorded these contracts at fair value on its balance sheet and gains or losses on these contracts were deferred in equity (as a component of comprehensive loss).

The Company recorded these contracts at fair value on its balance sheet and gains or losses

on these contracts were deferred in equity (as a component of comprehensive income (loss)).

These deferred gains and losses were recognized in income in the period in which the related royalties and license fees being hedged were received and recognized in income.

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The interest rate swap instruments 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).

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 income (loss)).

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 14.

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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’s hedged interest rate transactions as of March 31, 2020 are expected to be recognized within 4 years.

The Company’s hedged interest rate transactions as of June 30, 2020 are expected to be recognized within 4 years.

The fair value of interest rate swaps is based on dealer quotes of market rates (i.e., Level 2 inputs) which is discussed further in Note 14.

Interest income or expense related to interest rate swaps is recognized in interest income, net in the same period as the related expense is recognized.

The ineffective portions of interest rate swaps are recognized in other income/(expense), net in the period measured.

Interest income or expense related to interest rate swaps is recognized in interest income (expense), net in the same period as the related expense is recognized.

The ineffective portions of interest rate swaps are recognized in other income (expense) in the period measured.

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 March 31, 2020, the Company had outstanding hedge contracts for the sale of $ 243 million and the purchase of $ 142 million of foreign currencies at fixed rates that will be settled by September 2020.

As of March 31, 2020, the Company had no unrealized deferred gains or losses in comprehensive loss related to foreign exchange hedging.

As of June 30, 2020, the Company had outstanding hedge contracts for the sale of $ 121 million and the purchase of $ 61 million of foreign currencies at fixed rates that will be settled by September 2020.

As of June 30, 2020, the Company had no unrealized deferred gains or losses in comprehensive loss related to foreign exchange hedging.

As of September 30, 2019, the Company had no outstanding hedge contracts and no deferred gains or losses in comprehensive loss related to foreign exchange hedging.

As of March 31, 2020, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 28 million of unrealized deferred losses in comprehensive income related to the interest rate swaps.

As of June 30, 2020, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 30 million of unrealized deferred losses in comprehensive income related to the interest rate swaps.

As of September 30, 2019, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 8 million of unrealized deferred losses in comprehensive income related to the interest rate swaps.

The Company recorded realized pre-tax losses of $ 2 million and unrealized pre-tax gains of $ 3 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other (expense) income for the six months ended March 31, 2020.

The Company recorded realized pre-tax gains of $ 1 million and unrealized pre-tax gains of $ 4 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other income for the six months ended March 31, 2019.

The unrealized pre-tax losses of the Company’s foreign exchange forward contracts recorded in other comprehensive income were $ 2 million for the six months ended March 31, 2019.

The unrealized pre-tax losses of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the six months ended March 31, 2020 were $ 25 million.

The following is a summary of amounts recorded in the consolidated balance sheets pertaining to the Company’s derivative instruments at March 31, 2020 and September 30, 2019:

The Company recorded realized pre-tax losses of $ 2 million and no unrealized pre-tax gains or losses related to its foreign currency forward exchange contracts in the consolidated statement of operations as other (expense) income for the nine months ended June 30, 2020.

The Company recorded realized pre-tax gains of $ 2 million and unrealized pre-tax gains of $ 2 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other income for the nine months ended June 30, 2019.

The unrealized pre-tax losses of the Company’s foreign exchange forward contracts recorded in other comprehensive income were $ 1 million for the nine months ended June 30, 2019.

The unrealized pre-tax losses of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the nine months ended June 30, 2020 were $ 29 million.

The following is a summary of amounts recorded in the consolidated balance sheets pertaining to the Company’s derivative instruments at June 30, 2020 and September 30, 2019:

2020 (a) September 30,

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(a) $ 8 million and $ 5 million of foreign exchange derivative contracts in asset and liability positions, respectively, and $ 36 million of interest rate swaps in liability positions.

(a) $ 2 million and $ 2 million of foreign exchange derivative contracts in current asset and liability positions, respectively, and $ 40 million of interest rate swaps in noncurrent liability positions.

(b) $ 2 million and $ 13 million of interest rate swaps in asset and liability positions, respectively.

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Three Months Ended (in millions)

March 31, 2020

June 30, 2020

Revenues $ 861 $ 149 $ — $ 1,010

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OIBDA ( 119 ) 33 ( 285 ) ( 371 )

March 31, 2019

June 30, 2019

Revenues $ 913 $ 147 $ ( 2 ) $ 1,058

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eliminations Total

Six Months Ended (in millions)

March 31, 2020

Nine Months Ended (in millions)

June 30, 2020

Revenues $ 2,852 $ 488 $ ( 3 ) $ 3,337

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OIBDA 198 114 ( 435 ) ( 123 )

March 31, 2019

June 30, 2019

Revenues $ 2,887 $ 470 $ ( 6 ) $ 3,351

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Cash Interest and Taxes

The Company made interest payments of approximately $ 21 million and $ 28 million during the three months ended March 31, 2020 and March 31, 2019, respectively.

The Company made interest payments of approximately $ 65 million and $ 70 million during the six months ended March 31, 2020 and March 31, 2019, respectively.

The Company paid approximately $ 20 million and $ 11 million of income and withholding taxes, net of refunds, for the three months ended March 31, 2020 and March 31, 2019, respectively.

The Company paid approximately $ 40 million and $ 18 million of income and withholding taxes, net of refunds, during the six months ended March 31, 2020 and March 31, 2019, respectively.

The Company’s ability to pay dividends is restricted by covenants in the indentures governing its notes and in the credit agreements for the Senior Term Loan Facility and the Revolving Credit Facility.

In the first quarter of fiscal year 2019, the Company instituted a regular quarterly dividend policy whereby it intends to pay a modest regular quarterly dividend in each of the first three fiscal quarters and a variable dividend for the fourth fiscal quarter in an amount commensurate with cash expected to be generated from operations in such fiscal year, in each case, after taking into account other potential uses for cash, including acquisitions, investment in our business and repayment of indebtedness.

The declaration of each dividend will continue to be at the discretion of the Company’s board of directors.

On March 25, 2020, the Company’s board of directors declared a cash dividend of $ 37.5 million which was paid to stockholders on April 17, 2020 and recorded as an accrual as of March 31, 2020.

On September 23, 2019, the Company’s board of directors declared a cash dividend of $ 206 million which was paid to stockholders on October 4, 2019 and recorded as an accrual as of September 30, 2019.

On March 26, 2019, the Company’s board of directors declared a cash dividend of $ 31.25 million which was accrued as of March 31, 2019 and paid to stockholders on April 5, 2019.

The Company made interest payments of approximately $ 43 million and $ 50 million during the three months ended June 30, 2020 and June 30, 2019, respectively.

The Company made interest payments of approximately $ 108 million and $ 120 million during the nine months ended June 30, 2020 and June 30, 2019, respectively.

The Company paid approximately $ 18 million and $ 22 million of income and withholding taxes, net of refunds, for the three months ended June 30, 2020 and June 30, 2019, respectively.

The Company paid approximately $ 58 million and $ 40 million of income and withholding taxes, net of refunds, during the nine months ended June 30, 2020 and June 30, 2019, respectively.

The Company’s ability to pay dividends may be restricted by covenants in certain of the indentures governing its notes and in the credit agreements for the Senior Term Loan Facility and the Revolving Credit Facility.

In the first quarter of fiscal year 2019, the Company instituted a regular quarterly dividend policy whereby it intended to pay a modest regular quarterly dividend in each of the first three fiscal quarters and a variable dividend for the fourth fiscal quarter in an amount commensurate with cash expected to be generated from operations in such fiscal year, in each case, after taking into account other potential uses for cash, including acquisitions, investment in our business and repayment of indebtedness.

In connection with the IPO, the Company amended its dividend policy whereby it intends to pay quarterly cash dividends of $ 0.12 per share to holders of its Class A Common Stock and Class B Common Stock.

The Company expects to pay the first dividend under this policy in September 2020.

The declaration of each dividend will continue to be at the discretion of the Company’s board of directors and will depend on the Company’s financial condition, earnings, liquidity and capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by Delaware law, general business conditions and any other factors that the Company’s board of directors deems relevant in making such a determination.

Therefore, there can be no assurance that the Company will pay any dividends to holders of the Company’s common stock, or as to the amount of any such dividends.

Prior to the completion of the IPO, the Company’s board of directors declared cash dividends to common stockholders of $ 37.5 million on each of December 16, 2019 and March 25, 2020, $ 206 million on September 23, 2019, and $ 31.25 million on June 28, 2019.

Dividends were recorded as an accrual as of the end of periods in which they were declared and paid to stockholders in the quarterly reporting period subsequent to declaration.

Depreciation Expense

During the six months ended March 31, 2020, the Company recorded depreciation expense of $ 38 million, which included a one-time charge of $ 10 million representing the difference between the net book value of a building and its expected recoverable value.

During the nine months ended June 30, 2020, the Company recorded depreciation expense of $ 53 million, which included a one-time charge of $ 10 million representing the difference between the net book value of a building and its expected recoverable value.

COVID-19 Pandemic

On March 11, 2020, the COVID-19 outbreak was declared a global pandemic by the World Health Organization.

Government-imposed mandates limiting public assembly and requiring that non-essential businesses close have adversely impacted the Company’s operations, including touring and physical product distribution, for the three and six months ended March 31, 2020.

It is unclear how long the government-imposed mandates and restrictions will last and to what extent the global pandemic will impact demand for the Company’s music and related services, even after federal, state, local and foreign governmental restrictions are lifted over time.

It is unclear how long government-imposed mandates and restrictions will last and to what extent the global pandemic will impact demand for the Company’s music and related services, even as federal, state, local and foreign governmental start to lift restrictions.

The Company is not presently aware of any events or circumstances arising from the global pandemic that would require us to update any estimates, judgments or materially revise the carrying value of our assets or liabilities.

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Actual results could differ from estimates, and any such differences may be material to our consolidated financial statements.

Termination of Access Management Agreement

Prior to the IPO, the Company and Holdings were party to a management agreement with Access (the “Management Agreement”), pursuant to which Access provided the Company and its subsidiaries with financial, investment banking, management, advisory and other services.

As a result of the completion of the IPO, the Management Agreement terminated in accordance with its terms and the Company paid to Access a one-time termination fee and a fee for transaction services in an aggregate amount of $ 60 million.

The Company recorded these fees in June 2020 and they appear within selling, general and administrative expenses in the consolidated statements of operations for both the three and nine months ended June 30, 2020.

Fair Value Measurements

9 unchanged sentences

The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques.

In accordance with the fair value hierarchy, described above, the following tables show the fair value of the Company’s financial instruments that are required to be measured at fair value as of March 31, 2020 and September 30, 2019.

Fair Value Measurements as of March 31, 2020

Fair Value Measurements as of June 30, 2020

(Level 1) (Level 2) (Level 3) Total

2 unchanged sentences

Foreign Currency Forward Exchange Contracts (a) $ — $ 1 $ — $ 1

Other Current Liabilities:

Foreign Currency Forward Exchange Contracts (a) — ( 1 ) — ( 1 )

Other Noncurrent Assets:

1 unchanged sentence

Other Noncurrent Liabilities:

Interest Rate Swap (c) — ( 36 ) — ( 36 )

Interest Rate Swaps (c) — ( 40 ) — ( 40 )

Total $ — $ 2 $ — $ 2

14 unchanged sentences

This is based on a probability weighted performance approach and it is adjusted to fair value on a recurring basis and any adjustments are included as a component of operating income in the statement of operations.

These amounts were mainly calculated using unobservable inputs such as future earnings performance of the Company’s various acquisitions and the expected timing of the payment.

(c) The fair value of the interest rate swaps is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay as of March 31, 2020 for contracts involving the same attributes and maturity dates.

These amounts were mainly

calculated using unobservable inputs such as future earnings performance of the Company’s various acquisitions and the expected timing of the payment.

(c) The fair value of the interest rate swaps is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay as of June 30, 2020 for contracts involving the same attributes and maturity dates.

(d) The fair value of equity method investment represents an equity method investment acquired in fiscal 2019 whereby the Company has elected the fair value option under ASC 825, Financial Instruments (“ASC 825”).

3 unchanged sentences

Balance at September 30, 2019 $ ( 9 )

Balance at March 31, 2020 $ —

Balance at June 30, 2020 $ —

The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, inventories, and property, plant and equipment, are not required to be re-measured to fair value on a recurring basis.

5 unchanged sentences

The Company has elected to use the measurement alternative to fair value that will allow these investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes.

The Company did not record any impairment charges on these investments during the three and six months ended March 31, 2020.

In addition, there were no observable price changes events that were completed during the three and six months ended March 31, 2020.

The Company did not record any impairment charges on these investments during the three and nine months ended June 30, 2020.

In addition, there were no observable price changes events that were completed during the three and nine months ended June 30, 2020.

Fair Value of Debt

Based on the level of interest rates prevailing at March 31, 2020, the fair value of the Company’s debt was $ 2.890 billion.

Based on the level of interest rates prevailing at June 30, 2020, the fair value of the Company’s debt was $ 3.043 billion.

Based on the level of interest rates prevailing at September 30, 2019, the fair value of the Company’s debt was $ 3.080 billion.

2 unchanged sentences

Subsequent Events

On April 3, 2020, Acquisition Corp.

WARNER MUSIC GROUP CORP.

Supplementary Information

Consolidating Financial Statements

The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp.

As of March 31, 2020 Acquisition Corp.

had issued and outstanding the 5.000 % Senior Secured Notes due 2023, the 4.125 % Senior Secured Notes due 2024, the 4.875 % Senior Secured Notes due 2024, the 3.625 % Senior Secured Notes due 2026 and the 5.500 % Senior Notes due 2026 (together, the “Acquisition Corp.

The Acquisition Corp.

Notes are guaranteed by the Company and, in addition, are guaranteed by all of Acquisition Corp.’s domestic wholly-owned subsidiaries.

The secured notes are guaranteed on a senior secured basis and the unsecured notes are guaranteed on an unsecured senior basis.

The Company’s guarantee of the Acquisition Corp.

Notes is full and unconditional.

The guarantee of the Acquisition Corp.

Notes by Acquisition Corp.’s domestic wholly-owned subsidiaries is full, unconditional and joint and several.

The following condensed consolidating financial statements are also presented for the information of the holders of the Acquisition Corp.

Notes and present the results of operations, financial position and cash flows of (i) Acquisition Corp., which is the issuer of the Acquisition Corp.

Notes, (ii) the guarantor subsidiaries of Acquisition Corp., (iii) the non-guarantor subsidiaries of Acquisition Corp.

and (iv) the eliminations necessary to arrive at the information for Acquisition Corp.

on a consolidated basis.

Investments in consolidated subsidiaries are presented under the equity method of accounting.

There are no restrictions on Acquisition Corp.’s ability to obtain funds from any of its wholly-owned subsidiaries through dividends, loans or advances.

The Company and Holdings are holding companies that conduct substantially all of their business operations through Acquisition Corp.

Accordingly, the ability of the Company and Holdings to obtain funds from their subsidiaries is restricted by the indentures for the Acquisition Corp.

Notes and the credit agreements for the Acquisition Corp.

Senior Credit Facilities, including the Revolving Credit Facility and the Senior Term Loan Facility.

Consolidating Balance Sheet (Unaudited)

March 31, 2020

(issuer) Guarantor

Subsidiaries Non-

Subsidiaries Eliminations WMG

Consolidated WMG

Eliminations Warner

(in millions)

Current assets:

Cash and equivalents $ — $ 271 $ 213 $ — $ 484 $ — $ — $ — $ 484

Accounts receivable, net — 322 441 — 763 — — — 763

Inventories — 11 54 — 65 — — — 65

Royalty advances expected to be recouped within one year

— 123 66 — 189 — — — 189

Prepaid and other current assets — 17 65 — 82 — — — 82

Total current assets — 744 839 — 1,583 — — — 1,583

Due from (to) parent companies 454 ( 655 ) 201 — — — — — —

Investments in and advances to consolidated subsidiaries 2,293 2,813 — ( 5,106 ) — 692 692 ( 1,384 ) —

Royalty advances expected to be recouped after one year — 151 81 — 232 — — — 232

Property, plant and equipment, net — 194 100 — 294 — — — 294

Operating lease right-of-use assets, net — 208 73 — 281 — — — 281

Goodwill — 1,369 392 — 1,761 — — — 1,761

Intangible assets subject to amortization, net — 855 789 — 1,644 — — — 1,644

Intangible assets not subject to amortization — 71 80 — 151 — — — 151

Deferred tax assets, net — 47 8 — 55 — — — 55

Other assets 3 92 28 — 123 — — — 123

Total assets $ 2,750 $ 5,889 $ 2,591 $ ( 5,106 ) $ 6,124 $ 692 $ 692 $ ( 1,384 ) $ 6,124

Liabilities and Equity

Current liabilities:

Accounts payable $ 1 $ 153 $ 92 $ — $ 246 $ — $ — $ — $ 246

Accrued royalties — 773 818 — 1,591 — — — 1,591

Accrued liabilities — 367 197 — 564 — — — 564

Accrued interest 34 — — — 34 — — — 34

Operating lease liabilities, current — 22 17 — 39 — — — 39

Deferred revenue — 56 111 — 167 — — — 167

Other current liabilities — 42 49 — 91 — — — 91

Total current liabilities 35 1,413 1,284 — 2,732 — — — 2,732

Long-term debt 2,983 — — — 2,983 — — — 2,983

Operating lease liabilities, noncurrent — 252 60 — 312 — — — 312

Deferred tax liabilities, net — — 154 — 154 — — — 154

Other noncurrent liabilities 38 95 96 ( 1 ) 228 — — — 228

Total liabilities 3,056 1,760 1,594 ( 1 ) 6,409 — — — 6,409

Total Warner Music Group Corp.

(deficit) equity ( 306 ) 4,125 980 ( 5,105 ) ( 306 ) 692 692 ( 1,384 ) ( 306 )

Noncontrolling interest — 4 17 — 21 — — — 21

Total equity ( 306 ) 4,129 997 ( 5,105 ) ( 285 ) 692 692 ( 1,384 ) ( 285 )

Total liabilities and equity $ 2,750 $ 5,889 $ 2,591 $ ( 5,106 ) $ 6,124 $ 692 $ 692 $ ( 1,384 ) $ 6,124

Consolidating Balance Sheet

September 30, 2019

(issuer) Guarantor

Subsidiaries Non-

Subsidiaries Eliminations WMG

Consolidated WMG

Eliminations Warner

(in millions)

Current assets:

Cash and equivalents $ — $ 386 $ 233 $ — $ 619 $ — $ — $ — $ 619

Accounts receivable, net — 334 441 — 775 — — — 775

Inventories — 11 63 — 74 — — — 74

Royalty advances expected to be recouped within one year

— 112 58 — 170 — — — 170

Prepaid and other current assets — 12 41 — 53 — — — 53

Total current assets — 855 836 — 1,691 — — — 1,691

Due from (to) parent companies 458 ( 531 ) 73 — — — — — —

Investments in and advances to consolidated subsidiaries 2,272 2,567 — ( 4,839 ) — 878 878 ( 1,756 ) —

Royalty advances expected to be recouped after one year — 137 71 — 208 — — — 208

Property, plant and equipment, net — 200 100 — 300 — — — 300

Goodwill — 1,370 391 — 1,761 — — — 1,761

Intangible assets subject to amortization, net — 884 839 — 1,723 — — — 1,723

Intangible assets not subject to amortization — 71 80 — 151 — — — 151

Deferred tax assets, net — 30 8 — 38 — — — 38

Other assets 7 115 23 — 145 — — — 145

Total assets $ 2,737 $ 5,698 $ 2,421 $ ( 4,839 ) $ 6,017 $ 878 $ 878 $ ( 1,756 ) $ 6,017

Liabilities and Equity

Current liabilities:

Accounts payable $ — $ 160 $ 100 $ — $ 260 $ — $ — $ — $ 260

Accrued royalties 4 813 750 — 1,567 — — — 1,567

Accrued liabilities — 266 226 — 492 — — — 492

Accrued interest 34 — — — 34 — — — 34

Deferred revenue — 42 138 — 180 — — — 180

Other current liabilities — 221 65 — 286 — — — 286

Total current liabilities 38 1,502 1,279 — 2,819 — — — 2,819

Long-term debt 2,974 — — — 2,974 — — — 2,974

Deferred tax liabilities, net — — 172 — 172 — — — 172

Other noncurrent liabilities 14 200 107 — 321 — — — 321

Total liabilities 3,026 1,702 1,558 — 6,286 — — — 6,286

Total Warner Music Group Corp.

(deficit) equity ( 289 ) 3,992 847 ( 4,839 ) ( 289 ) 878 878 ( 1,756 ) ( 289 )

Noncontrolling interest — 4 16 — 20 — — — 20

Total equity ( 289 ) 3,996 863 ( 4,839 ) ( 269 ) 878 878 ( 1,756 ) ( 269 )

Total liabilities and equity $ 2,737 $ 5,698 $ 2,421 $ ( 4,839 ) $ 6,017 $ 878 $ 878 $ ( 1,756 ) $ 6,017

Consolidating Statement of Operations (Unaudited)

For The Three Months Ended March 31, 2020

(issuer) Guarantor

Subsidiaries Non-

Subsidiaries Eliminations WMG

Consolidated WMG

Eliminations Warner

(in millions)

Revenue $ — $ 484 $ 662 $ ( 75 ) $ 1,071 $ — $ — $ — $ 1,071

Costs and expenses:

Cost of revenue — ( 248 ) ( 369 ) 82 ( 535 ) — — — ( 535 )

Selling, general and administrative expenses — ( 360 ) ( 171 ) ( 7 ) ( 538 ) — — — ( 538 )

Amortization of intangible assets — ( 21 ) ( 26 ) — ( 47 ) — — — ( 47 )

Total costs and expenses — ( 629 ) ( 566 ) 75 ( 1,120 ) — — — ( 1,120 )

Operating (loss) income — ( 145 ) 96 — ( 49 ) — — — ( 49 )

Interest (expense) income, net ( 31 ) 1 ( 3 ) — ( 33 ) — — — ( 33 )

Equity gains from equity method investments ( 46 ) 62 — ( 16 ) — ( 75 ) ( 75 ) 150 —

Other (expense) income, net ( 9 ) 3 2 — ( 4 ) — — — ( 4 )

Income (loss) before income taxes ( 86 ) ( 79 ) 95 ( 16 ) ( 86 ) ( 75 ) ( 75 ) 150 ( 86 )

Income tax benefit (expense) 12 20 ( 19 ) ( 1 ) 12 — — — 12

Net (loss) income ( 74 ) ( 59 ) 76 ( 17 ) ( 74 ) ( 75 ) ( 75 ) 150 ( 74 )

Income attributable to noncontrolling interest — — — — — — — — —

Net (loss) income attributable to Warner Music Group Corp.

$ ( 74 ) $ ( 59 ) $ 76 $ ( 17 ) $ ( 74 ) $ ( 75 ) $ ( 75 ) $ 150 $ ( 74 )

Consolidating Statement of Operations (Unaudited)

For The Three Months Ended March 31, 2019

(issuer) Guarantor

Subsidiaries Non-

Subsidiaries Eliminations WMG

Consolidated WMG

Eliminations Warner

(in millions)

Revenue $ — $ 461 $ 672 $ ( 43 ) $ 1,090 $ — $ — $ — $ 1,090

Costs and expenses:

Cost of revenue — ( 214 ) ( 391 ) 46 ( 559 ) — — — ( 559 )

Selling, general and administrative expenses — ( 186 ) ( 166 ) ( 2 ) ( 354 ) — — — ( 354 )

Amortization of intangible assets — ( 25 ) ( 30 ) — ( 55 ) — — — ( 55 )

Total costs and expenses — ( 425 ) ( 587 ) 44 ( 968 ) — — — ( 968 )

Operating income — 36 85 1 122 — — — 122

Loss on extinguishment of debt — — — — — — — — —

Interest (expense) income, net ( 31 ) 1 ( 6 ) — ( 36 ) — — — ( 36 )

Equity gains from equity method investments 130 34 — ( 164 ) — 67 67 ( 134 ) —

Other income (expense), net 16 51 ( 38 ) — 29 — — — 29

Income before income taxes 115 122 41 ( 163 ) 115 67 67 ( 134 ) 115

Income tax expense ( 48 ) ( 49 ) ( 26 ) 75 ( 48 ) — — — ( 48 )

Net income 67 73 15 ( 88 ) 67 67 67 ( 134 ) 67

Income attributable to noncontrolling interest — — — — — — — — —

Net income attributable to Warner Music Group Corp.

$ 67 $ 73 $ 15 $ ( 88 ) $ 67 $ 67 $ 67 $ ( 134 ) $ 67

Consolidating Statement of Operations (Unaudited)

For The Six Months Ended March 31, 2020

(issuer) Guarantor

Subsidiaries Non-

Subsidiaries Eliminations WMG

Consolidated WMG

Eliminations Warner

(in millions)

Revenue $ — $ 1,058 $ 1,466 $ ( 197 ) $ 2,327 $ — $ — $ — $ 2,327

Costs and expenses:

Cost of revenue — ( 555 ) ( 816 ) 171 ( 1,200 ) — — — ( 1,200 )

Selling, general and administrative expenses — ( 537 ) ( 406 ) 26 ( 917 ) — — — ( 917 )

Amortization of intangible assets — ( 43 ) ( 51 ) — ( 94 ) — — — ( 94 )

Total costs and expenses — ( 1,135 ) ( 1,273 ) 197 ( 2,211 ) — — — ( 2,211 )

Operating (loss) income — ( 77 ) 193 — 116 — — — 116

Interest (expense) income, net ( 62 ) 1 ( 5 ) — ( 66 ) — — — ( 66 )

Equity gains from equity method investments 108 148 — ( 256 ) — 45 45 ( 90 ) —

Other (expense) income, net ( 7 ) 4 ( 6 ) — ( 9 ) — — — ( 9 )

Income before income taxes 39 76 182 ( 256 ) 41 45 45 ( 90 ) 41

Income tax benefit (expense) 7 19 ( 42 ) 23 7 — — — 7

Net income 46 95 140 ( 233 ) 48 45 45 ( 90 ) 48

Income attributable to noncontrolling interest — — ( 2 ) — ( 2 ) — — — ( 2 )

Net income attributable to Warner Music Group Corp.

$ 46 $ 95 $ 138 $ ( 233 ) $ 46 $ 45 $ 45 $ ( 90 ) $ 46

Consolidating Statement of Operations (Unaudited)

For The Six Months Ended March 31, 2019

(issuer) Guarantor

Subsidiaries Non-

Subsidiaries Eliminations WMG

Consolidated WMG

Eliminations Warner

(in millions)

Revenue $ — $ 942 $ 1,526 $ ( 175 ) $ 2,293 $ — $ — $ — $ 2,293

Costs and expenses:

Cost of revenue — ( 437 ) ( 896 ) 148 ( 1,185 ) — — — ( 1,185 )

Selling, general and administrative expenses — ( 375 ) ( 383 ) 28 ( 730 ) — — — ( 730 )

Amortization of intangible assets — ( 50 ) ( 59 ) — ( 109 ) — — — ( 109 )

Total costs and expenses — ( 862 ) ( 1,338 ) 176 ( 2,024 ) — — — ( 2,024 )

Operating income — 80 188 1 269 — — — 269

Loss on extinguishment of debt ( 3 ) — — — ( 3 ) — — — ( 3 )

Interest (expense) income, net ( 62 ) 2 ( 12 ) — ( 72 ) — — — ( 72 )

Equity gains from equity method investments 302 143 — ( 445 ) — 153 153 ( 306 ) —

Other income (expense), net 14 70 ( 27 ) — 57 — — — 57

Income before income taxes 251 295 149 ( 444 ) 251 153 153 ( 306 ) 251

Income tax expense ( 98 ) ( 94 ) ( 50 ) 144 ( 98 ) — — — ( 98 )

Net income 153 201 99 ( 300 ) 153 153 153 ( 306 ) 153

Income attributable to noncontrolling interest — — — — — — — — —

Net income attributable to Warner Music Group Corp.

$ 153 $ 201 $ 99 $ ( 300 ) $ 153 $ 153 $ 153 $ ( 306 ) $ 153

Consolidating Statement of Comprehensive Income (Unaudited)

For The Three Months Ended March 31, 2020

(issuer) Guarantor

Subsidiaries Non-

Subsidiaries Eliminations WMG

Consolidated WMG

Eliminations Warner

(in millions)

Net (loss) income $ ( 74 ) $ ( 59 ) $ 76 $ ( 17 ) $ ( 74 ) $ ( 75 ) $ ( 75 ) $ 150 $ ( 74 )

Other comprehensive loss, net of tax:

Foreign currency adjustment ( 15 ) — 15 ( 15 ) ( 15 ) ( 15 ) ( 15 ) 30 ( 15 )

Deferred loss on derivative financial instruments ( 23 ) — ( 23 ) 23 ( 23 ) ( 23 ) ( 23 ) 46 ( 23 )

Other comprehensive loss, net of tax ( 38 ) — ( 8 ) 8 ( 38 ) ( 38 ) ( 38 ) 76 ( 38 )

Total comprehensive (loss) income ( 112 ) ( 59 ) 68 ( 9 ) ( 112 ) ( 113 ) ( 113 ) 226 ( 112 )

Income attributable to noncontrolling interest — — — — — — — — —

Comprehensive (loss) income attributable to Warner Music Group Corp.

$ ( 112 ) $ ( 59 ) $ 68 $ ( 9 ) $ ( 112 ) $ ( 113 ) $ ( 113 ) $ 226 $ ( 112 )

Consolidating Statement of Comprehensive Income (Unaudited)

For The Three Months Ended March 31, 2019

(issuer) Guarantor

Subsidiaries Non-

Subsidiaries Eliminations WMG

Consolidated WMG

Eliminations Warner

(in millions)

Net income $ 67 $ 73 $ 15 $ ( 88 ) $ 67 $ 67 $ 67 $ ( 134 ) $ 67

Other comprehensive (loss) income, net of tax:

Foreign currency adjustment ( 10 ) — 10 ( 10 ) ( 10 ) ( 13 ) ( 13 ) 26 ( 10 )

Deferred loss on derivative financial instruments ( 3 ) — — — ( 3 ) ( 3 ) ( 3 ) 6 ( 3 )

Other comprehensive (loss) income, net of tax ( 13 ) — 10 ( 10 ) ( 13 ) ( 16 ) ( 16 ) 32 ( 13 )

Total comprehensive income 54 73 25 ( 98 ) 54 51 51 ( 102 ) 54

Income attributable to noncontrolling interest — — — — — — — — —

Comprehensive income attributable to Warner Music Group Corp.

$ 54 $ 73 $ 25 $ ( 98 ) $ 54 $ 51 $ 51 $ ( 102 ) $ 54

Consolidating Statement of Comprehensive Income (Unaudited)

For The Six Months Ended March 31, 2020

(issuer) Guarantor

Subsidiaries Non-

Subsidiaries Eliminations WMG

Consolidated WMG

Eliminations Warner

(in millions)

Net income $ 46 $ 95 $ 140 $ ( 233 ) $ 48 $ 45 $ 45 $ ( 90 ) $ 48

Other comprehensive loss, net of tax:

Foreign currency adjustment ( 8 ) — 8 ( 8 ) ( 8 ) 28 28 ( 56 ) ( 8 )

Deferred loss on derivative financial instruments ( 20 ) — ( 20 ) 20 ( 20 ) ( 8 ) ( 8 ) 16 ( 20 )

Other comprehensive loss, net of tax ( 28 ) — ( 12 ) 12 ( 28 ) 25 25 ( 50 ) ( 28 )

Total comprehensive income 18 95 128 ( 221 ) 20 70 70 ( 140 ) 20

Income attributable to noncontrolling interest — — ( 2 ) — ( 2 ) — — — ( 2 )

Comprehensive income attributable to Warner Music Group Corp.

$ 18 $ 95 $ 126 $ ( 221 ) $ 18 $ 70 $ 70 $ ( 140 ) $ 18

Consolidating Statement of Comprehensive Income (Unaudited)

For The Six Months Ended March 31, 2019

(issuer) Guarantor

Subsidiaries Non-

Subsidiaries Eliminations WMG

Consolidated WMG

Eliminations Warner

(in millions)

Net income $ 153 $ 201 $ 99 $ ( 300 ) $ 153 $ 153 $ 153 $ ( 306 ) $ 153

Other comprehensive (loss) income, net of tax:

Foreign currency adjustment ( 26 ) — 26 ( 26 ) ( 26 ) ( 29 ) ( 29 ) 58 ( 26 )

Deferred loss on derivative financial instruments ( 9 ) — ( 2 ) 2 ( 9 ) ( 9 ) ( 9 ) 18 ( 9 )

Other comprehensive (loss) income, net of tax ( 35 ) — 24 ( 24 ) ( 35 ) ( 38 ) ( 38 ) 76 ( 35 )

Total comprehensive income 118 201 123 ( 324 ) 118 115 115 ( 230 ) 118

Income attributable to noncontrolling interest — — — — — — — — —

Comprehensive income attributable to Warner Music Group Corp.

$ 118 $ 201 $ 123 $ ( 324 ) $ 118 $ 115 $ 115 $ ( 230 ) $ 118

Consolidating Statement of Cash Flows (Unaudited)

For The Six Months Ended March 31, 2020

(issuer) Guarantor

Subsidiaries Non-

Subsidiaries Eliminations WMG

Consolidated WMG

Eliminations Warner

(in millions)

Cash flows from operating activities

Net income $ 46 $ 95 $ 140 $ ( 233 ) $ 48 $ 45 $ 45 $ ( 90 ) $ 48

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

Depreciation and amortization — 74 58 — 132 — — — 132

Unrealized gains and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts

6 ( 3 ) ( 10 ) — ( 7 ) — — — ( 7 )

Deferred income taxes — — ( 31 ) — ( 31 ) — — — ( 31 )

Net loss on investments — 15 — — 15 — — — 15

Non-cash interest expense 3 — — — 3 — — — 3

Equity-based compensation expense — 160 — — 160 — — — 160

Equity gains, including distributions ( 108 ) ( 148 ) — 256 — ( 45 ) ( 45 ) 90 —

Changes in operating assets and liabilities:

Accounts receivable, net — 11 ( 5 ) — 6 — — — 6

Inventories — — 9 — 9 — — — 9

Royalty advances — ( 26 ) ( 21 ) — ( 47 ) — — — ( 47 )

Accounts payable and accrued liabilities — 80 ( 166 ) ( 23 ) ( 109 ) — — — ( 109 )

Royalty payables — ( 42 ) 80 — 38 — — — 38

Accrued interest — — — — — — — — —

Operating lease liabilities — ( 2 ) — — ( 2 ) — — — ( 2 )

Deferred revenue — 13 ( 27 ) — ( 14 ) — — — ( 14 )

Other balance sheet changes 4 ( 18 ) ( 23 ) — ( 37 ) — — — ( 37 )

Net cash (used in) provided by operating activities ( 49 ) 209 4 — 164 — — — 164

Cash flows from investing activities

Acquisition of music publishing rights and music catalogs, net — ( 12 ) ( 6 ) — ( 18 ) — — — ( 18 )

Capital expenditures — ( 18 ) ( 10 ) — ( 28 ) — — — ( 28 )

Investments and acquisitions of businesses, net of cash received — ( 1 ) ( 4 ) — ( 5 ) — — — ( 5 )

Advances from issuer 49 — — ( 49 ) — — — — —

Net cash provided by (used in) investing activities 49 ( 31 ) ( 20 ) ( 49 ) ( 51 ) — — — ( 51 )

Cash flows from financing activities

Dividend by Acquisition Corp.

to Holdings Corp.

— ( 244 ) — — ( 244 ) — — — ( 244 )

Distribution to noncontrolling interest holder — — ( 1 ) — ( 1 ) — — — ( 1 )

Change in due (from) to issuer — ( 49 ) — 49 — — — — —

Net cash used in financing activities — ( 293 ) ( 1 ) 49 ( 245 ) — — — ( 245 )

Effect of exchange rate changes on cash and equivalents — — ( 3 ) — ( 3 ) — — — ( 3 )

Net decrease in cash and equivalents — ( 115 ) ( 20 ) — ( 135 ) — — — ( 135 )

Cash and equivalents at beginning of period — 386 233 — 619 — — — 619

Cash and equivalents at end of period $ — $ 271 $ 213 $ — $ 484 $ — $ — $ — $ 484

Consolidating Statement of Cash Flows (Unaudited)

For The Six Months Ended March 31, 2019

(issuer) Guarantor

Subsidiaries Non-

Subsidiaries Eliminations WMG

Consolidated WMG

Eliminations Warner

(in millions)

Cash flows from operating activities

Net income $ 153 $ 201 $ 99 $ ( 300 ) $ 153 $ 153 $ 153 $ ( 306 ) $ 153

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

Depreciation and amortization — 68 69 — 137 — — — 137

Unrealized gains and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts

( 20 ) ( 5 ) — 1 ( 24 ) — — — ( 24 )

Deferred income taxes — — 27 — 27 — — — 27

Loss on extinguishment of debt 3 — — — 3 — — — 3

Net gain on investments — ( 30 ) ( 2 ) — ( 32 ) — — — ( 32 )

Non-cash interest expense 3 — — — 3 — — — 3

Equity-based compensation expense — 14 — — 14 — — — 14

Equity gains, including distributions ( 302 ) ( 143 ) — 445 — ( 153 ) ( 153 ) 306 —

Changes in operating assets and liabilities:

Accounts receivable, net — ( 16 ) ( 74 ) — ( 90 ) — — — ( 90 )

Inventories — 4 9 — 13 — — — 13

Royalty advances — ( 37 ) ( 24 ) — ( 61 ) — — — ( 61 )

Accounts payable and accrued liabilities — 218 ( 172 ) ( 146 ) ( 100 ) — — — ( 100 )

Royalty payables 6 ( 93 ) 133 — 46 — — — 46

Accrued interest 1 — — — 1 — — — 1

Deferred revenue — ( 44 ) 25 — ( 19 ) — — — ( 19 )

Other balance sheet changes 4 41 ( 17 ) — 28 — — — 28

Net cash (used in) provided by operating activities ( 152 ) 178 73 — 99 — — — 99

Cash flows from investing activities

Acquisition of music publishing rights, net — ( 11 ) ( 5 ) — ( 16 ) — — — ( 16 )

Capital expenditures — ( 50 ) ( 9 ) — ( 59 ) — — — ( 59 )

Investments and acquisitions of businesses, net of cash received — ( 26 ) ( 192 ) — ( 218 ) — — — ( 218 )

Proceeds from the sale of investments — — — — — — — — —

Advances from issuer ( 24 ) — — 24 — — — — —

Net cash used in investing activities ( 24 ) ( 87 ) ( 206 ) 24 ( 293 ) — — — ( 293 )

Cash flows from financing activities

Dividend by Acquisition Corp.

to Holdings Corp.

— ( 31 ) — — ( 31 ) — — — ( 31 )

Proceeds from issuance of Acquisition Corp.

3.625% Senior Notes due 2026 287 — — — 287 — — — 287

Repayment of Acquisition Corp.

4.125% Senior Secured Notes ( 40 ) — — — ( 40 ) — — — ( 40 )

Repayment of Acquisition Corp.

4.875% Senior Secured Notes ( 30 ) — — — ( 30 ) — — — ( 30 )

Repayment of Acquisition Corp.

5.625% Senior Secured Notes ( 27 ) — — — ( 27 ) — — — ( 27 )

Call premiums paid on and redemption deposit for early redemption of debt ( 2 ) — — — ( 2 ) — — — ( 2 )

Deferred financing costs paid ( 4 ) — — — ( 4 ) — — — ( 4 )

Distribution to noncontrolling interest holder — ( 1 ) ( 1 ) — ( 2 ) — — — ( 2 )

Change in due to (from) issuer — 24 — ( 24 ) — — — — —

Net cash provided by (used in) financing activities 184 ( 8 ) ( 1 ) ( 24 ) 151 — — — 151

Effect of exchange rate changes on cash and equivalents — — ( 1 ) — ( 1 ) — — — ( 1 )

Net increase (decrease) in cash and equivalents 8 83 ( 135 ) — ( 44 ) — — — ( 44 )

Cash and equivalents at beginning of period — 169 345 — 514 — — — 514

Cash and equivalents at end of period $ 8 $ 252 $ 210 $ — $ 470 $ — $ — $ — $ 470

Underwriters’ Option to Purchase Additional Shares of Class A Common Stock

In connection with the Company’s initial public offering, the underwriters exercised their option to purchase 11,550,000 additional shares of Class A Common Stock from certain selling stockholders on July 2, 2020, which settled on July 7, 2020.

As a result, there are 421,450,000 shares of Class B Common Stock issued and outstanding and 88,550,000 shares of Class A Common Stock issued and outstanding as of August 4, 2020.

3.875 % Senior Secured Notes and 2.750 % Senior Secured Notes Offerings

On June 29, 2020, Acquisition Corp.

issued and sold $ 535 million in aggregate principal amount of 3.875 % Senior Secured Notes due 2030 (the “ 3.875 % Senior Secured Notes”) and € 325 million in aggregate principal amount of 2.750 % Senior Secured Notes due 2028 (the “ 2.750 % Senior Secured Notes”).

Net proceeds of the offerings were used to redeem € 311 million of the 4.125 % Senior Secured Notes and $ 220 million of the 4.875 % Senior Secured Notes (as described below), constituting the redemption of all of the outstanding aggregate principal amount of the 4.125 % Senior Secured Notes and the 4.875 % Senior Secured Notes, and the remaining proceeds were used towards the tender offer for $ 300 million aggregate principal amount of 5.000 % Senior Secured Notes, $ 244 million of which was tendered and accepted on June 29, 2020 and $ 295,000 of which was tendered and accepted on July 14, 2020.

The remainder of the 5.000 % Senior Secured Notes not tendered in the tender offer were redeemed on August 1, 2020 (as described below).

Interest on the 3.875 % Senior Secured Notes will accrue at the rate of 3.875 % per annum and will be payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2021.

Interest on the 2.750 % Senior Secured Notes will accrue at the rate of 2.750 % per annum and will be payable semi-annually in arrears on January 15 and July 15, commencing on January 15, 2021.

The 3.875 % Senior Secured Notes and the 2.750 % Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis by each of Acquisition Corp.’s existing direct or indirect wholly-owned domestic restricted subsidiaries and by any such subsidiaries that guarantee obligations of Acquisition Corp.

under its existing credit facilities, subject to customary exceptions.

The indentures governing the 3.875 % Senior Secured Notes and the 2.750 % Senior Secured Notes (collectively, the “New Secured Notes Indenture”) do not contain many of the restrictive covenants, certain events of default and other related provisions contained in the indentures previously governing the 4.125 % Senior Secured Notes and 4.875 % Senior Secured Notes.

The New Secured Notes Indenture contains covenants limiting, among other things, Acquisition Corp.’s ability and the ability of most of its subsidiaries to create liens and consolidate, merge, sell or otherwise dispose of all or substantially all of its assets.

Redemption of 4.125 % Senior Secured Notes and 4.875 % Senior Secured Notes

On June 30, 2020, Acquisition Corp.

redeemed in full all of the outstanding aggregate principal amount of the 4.125 % Senior Secured Notes and 4.875 % Senior Secured Notes, equal to € 311 million aggregate principal amount of the 4.125 % Senior Secured Notes and $ 220 million aggregate principal amount of the 4.875 % Senior Secured Notes, using a portion of the proceeds from the offering of 3.875 % Senior Secured Notes and 2.750 % Senior Secured Notes described above.

The redemption price for the 4.125 % Senior Secured Notes was approximately € 322 million, equivalent to 103.094 % of the principal amount of the 4.125 % Senior Secured Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was June 30, 2020.

The redemption price for the 4.875 % Senior Secured Notes was approximately $ 230 million, equivalent to 103.656 % of the principal amount of the 4.875 % Senior Secured Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was June 30, 2020.

The Company expects to record a loss on extinguishment of debt of approximately $ 23 million in the fourth quarter of fiscal year 2020 as a result of these redemptions, which represents the premium paid on early redemption and unamortized deferred financing costs.

Tender Offer and Redemption of 5.000 % Senior Secured Notes

On June 16, 2020, Acquisition Corp.

announced a cash tender offer to purchase any and all of the 5.000 % Senior Secured Notes.

On June 30, 2020, Acquisition Corp.

announced that $ 244 million of the aggregate principal amount of $ 300 million outstanding had tendered and been accepted in the tender offer.

Also on June 30, 2020, Acquisition Corp.

issued a notice of redemption calling the remaining outstanding 5.000 % Senior Secured Notes not tendered in the tender offer for redemption on August 1, 2020.

An additional $ 295,000 tendered and was accepted in the tender offer on July 14, 2020 and Acquisition Corp.

redeemed all 5.000 % Senior Secured Notes that were not tendered and accepted for purchase in the tender offer and consent solicitation on August 1, 2020 at the then-applicable redemption price of 101.250 %.

The Company expects to record a loss on extinguishment of debt of approximately $ 7 million in the fourth quarter of fiscal year 2020 as a result of this tender offer and redemption, which represents the premium to tender and unamortized deferred financing costs.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements