Warner Music Group Corp. 10-Q

ITEM 1. FINANCIAL STATEMENTS Warner Music Group Corp. Consolidated Balance Sheets (Unaudited) June 30, 2020 September 30, 2019 (in millions, except share data) Assets Current assets: Cash and equivalents $ 532 $ 619 Accounts receivable, net of allowances of $ 21 million and $ 17 million 732 775 Inventories 59 74 Royalty advances expected to be recouped within one year 188 170 Prepaid and other current assets 71 53 Total current assets 1,582 1,691 Royalty advances expected to be recouped after one year 230 208 Property, plant and equipment, net 310 300 Operating lease right-of-use assets, net 278 — Goodwill 1,770 1,761 Intangible assets subject to amortization, net 1,624 1,723 Intangible assets not subject to amortization 152 151 Deferred tax assets, net 57 38 Other assets 145 145 Total assets $ 6,148 $ 6,017 Liabilities and Deficit Current liabilities: Accounts payable $ 205 $ 260 Accrued royalties 1,630 1,567 Accrued liabilities 346 492 Accrued interest 22 34 Operating lease liabilities, current 40 — Deferred revenue 182 180 Other current liabilities 100 286 Total current liabilities 2,525 2,819 Long-term debt 3,000 2,974 Operating lease liabilities, noncurrent 306 — Deferred tax liabilities, net 157 172 Other noncurrent liabilities 181 321 Total liabilities $ 6,169 $ 6,286 Deficit: 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 1 1 Additional paid-in capital 1,899 1,127 Accumulated deficit ( 1,685 ) ( 1,177 ) Accumulated other comprehensive loss, net ( 253 ) ( 240 ) Total Warner Music Group Corp. deficit ( 38 ) ( 289 ) Noncontrolling interest 17 20 Total deficit ( 21 ) ( 269 ) Total liabilities and deficit $ 6,148 $ 6,017 See accompanying notes 1 Warner Music Group Corp. Consolidated Statements of Operations (Unaudited) Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (in millions, except share and per share data) Revenue $ 1,010 $ 1,058 $ 3,337 $ 3,351 Costs and expenses: Cost of revenue ( 527 ) ( 577 ) ( 1,727 ) ( 1,762 ) Selling, general and administrative expenses (a) ( 869 ) ( 372 ) ( 1,786 ) ( 1,102 ) Amortization expense ( 47 ) ( 51 ) ( 141 ) ( 160 ) Total costs and expenses ( 1,443 ) ( 1,000 ) ( 3,654 ) ( 3,024 ) Operating (loss) income ( 433 ) 58 ( 317 ) 327 Loss on extinguishment of debt — ( 4 ) — ( 7 ) Interest expense, net ( 32 ) ( 36 ) ( 98 ) ( 108 ) Other (expense) income ( 3 ) ( 16 ) ( 12 ) 41 (Loss) income before income taxes ( 468 ) 2 ( 427 ) 253 Income tax (expense) benefit ( 51 ) 12 ( 44 ) ( 86 ) Net (loss) income ( 519 ) 14 ( 471 ) 167 Less: Income attributable to noncontrolling interest ( 1 ) ( 1 ) ( 3 ) ( 1 ) Net (loss) income attributable to Warner Music Group Corp. $ ( 520 ) $ 13 $ ( 474 ) $ 166 (a) Includes depreciation expense: $ ( 15 ) $ ( 15 ) $ ( 53 ) $ ( 43 ) Net (loss) income per share attributable to Warner Music Group Corp.’s stockholders: 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: 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 2 Warner Music Group Corp. Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (in millions) Net (loss) income $ ( 519 ) $ 14 $ ( 471 ) $ 167 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 income (loss), net of tax 15 6 ( 13 ) ( 29 ) Total comprehensive (loss) income ( 504 ) 20 ( 484 ) 138 Less: Income attributable to noncontrolling interest ( 1 ) ( 1 ) ( 3 ) ( 1 ) Comprehensive (loss) income attributable to Warner Music Group Corp. $ ( 505 ) $ 19 $ ( 487 ) $ 137 See accompanying notes 3 Warner Music Group Corp. Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended June 30, 2020 2019 (in millions) Cash flows from 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 losses (gains) and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts 14 ( 6 ) Deferred income taxes ( 34 ) 25 Loss on extinguishment of debt — 7 Net loss (gain) on divestitures and investments 2 ( 27 ) Non-cash interest expense 4 5 Non-cash stock-based compensation expense 600 28 Changes in operating assets and liabilities: Accounts receivable, net 45 ( 50 ) Inventories 16 12 Royalty advances ( 41 ) ( 107 ) Accounts payable and accrued liabilities ( 113 ) ( 94 ) Royalty payables 60 117 Accrued interest ( 12 ) ( 13 ) Operating lease liabilities ( 2 ) — Deferred revenue 11 ( 17 ) Other balance sheet changes 14 ( 1 ) Net cash provided by operating activities 287 249 Cash flows from investing activities Acquisition of music publishing rights and music catalogs, net ( 28 ) ( 24 ) Capital expenditures ( 48 ) ( 82 ) Investments and acquisitions of businesses, net of cash received ( 11 ) ( 234 ) Net cash used in investing activities ( 87 ) ( 340 ) Cash flows from financing activities Proceeds from issuance of Acquisition Corp. 3.625 % Senior Secured Notes — 514 Repayment of Acquisition Corp. 4.125 % Senior Secured Notes — ( 40 ) Repayment of Acquisition Corp. 4.875 % Senior Secured Notes — ( 30 ) Repayment of Acquisition Corp. 5.625 % Senior Secured Notes — ( 247 ) Call premiums paid and deposit on early redemption of debt — ( 5 ) Deferred financing costs paid ( 1 ) ( 7 ) Distribution to noncontrolling interest holder ( 6 ) ( 3 ) Dividends paid ( 281 ) ( 63 ) Net cash (used in) provided by financing activities ( 288 ) 119 Effect of exchange rate changes on cash and equivalents 1 ( 1 ) Net (decrease) increase in cash and equivalents ( 87 ) 27 Cash and equivalents at beginning of period 619 514 Cash and equivalents at end of period $ 532 $ 541 See accompanying notes 4 Warner Music Group Corp. Consolidated Statements of Deficit (Unaudited) Nine Months Ended June 30, 2020 Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Warner Music Group Corp. Deficit Non-controlling Interest Total Deficit Shares Value Shares Value (in millions, except share and per share data) Balance at September 30, 2019 — $ — 505,830,022 $ 1 $ 1,127 $ ( 1,177 ) $ ( 240 ) $ ( 289 ) $ 20 $ ( 269 ) Cumulative effect of ASC 842 adoption — — — — — 7 — 7 — 7 Cumulative effect of ASC 718 accounting policy change — — — — — 33 — 33 — 33 Net loss — — — — — ( 474 ) — ( 474 ) 3 ( 471 ) Other comprehensive loss, net of tax — — — — — — ( 13 ) ( 13 ) — ( 13 ) Dividends ($ 0.15 per share) — — — — — ( 75 ) — ( 75 ) — ( 75 ) 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 June 30, 2020 77,000,000 $ — 433,000,000 $ 1 $ 1,899 $ ( 1,685 ) $ ( 253 ) $ ( 38 ) $ 17 $ ( 21 ) Three Months Ended June 30, 2020 Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Warner Music Group Corp. Deficit Non-controlling Interest Total Deficit Shares Value Shares Value (in millions, except share and per share data) 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 — — — — — — — — — — Net loss — — — — — ( 520 ) — ( 520 ) 1 ( 519 ) 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 June 30, 2020 77,000,000 $ — 433,000,000 $ 1 $ 1,899 $ ( 1,685 ) $ ( 253 ) $ ( 38 ) $ 17 $ ( 21 ) 5 Nine Months Ended June 30, 2019 Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Warner Music Group Corp. Deficit Non-controlling Interest Total Deficit Shares Value Shares Value (in millions, except share and per share data) Balance at September 30, 2018 — $ — 501,991,944 $ 1 $ 1,127 $ ( 1,272 ) $ ( 190 ) $ ( 334 ) $ 14 $ ( 320 ) Cumulative effect of ASC 606 adoption — — — — — 139 — 139 11 150 Net income — — — — — 166 — 166 1 167 Other comprehensive loss, net of tax — — — — — — ( 29 ) ( 29 ) — ( 29 ) Dividends ($ 0.19 per share) — — — — — ( 94 ) — ( 94 ) — ( 94 ) Distribution to noncontrolling interest holders — — — — — — — — ( 3 ) ( 3 ) Other — — 3,838,078 — — — — — ( 4 ) ( 4 ) Balance at June 30, 2019 — $ — 505,830,022 $ 1 $ 1,127 $ ( 1,061 ) $ ( 219 ) $ ( 152 ) $ 19 $ ( 133 ) Three Months Ended June 30, 2019 Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Warner Music Group Corp. Deficit Non-controlling Interest Total Deficit Shares Value Shares Value (in millions, except share and per share data) 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 income, net of tax — — — — — — 6 6 — 6 Dividends ($ 0.06 per share) — — — — — ( 31 ) — ( 31 ) — ( 31 ) Distribution to noncontrolling interest holders — — — — — — — — ( 1 ) ( 1 ) Other — — — — — — — — ( 1 ) ( 1 ) Balance at June 30, 2019 — $ — 505,830,022 $ 1 $ 1,127 $ ( 1,061 ) $ ( 219 ) $ ( 152 ) $ 19 $ ( 133 ) See accompanying notes 6 Warner Music Group Corp. Notes to Consolidated Interim Financial Statements (Unaudited) 1. Description of Business Warner Music Group Corp. (the “Company”) was formed on November 21, 2003. The Company is the direct parent of WMG Holdings Corp. (“Holdings”), which is the direct parent of WMG Acquisition Corp. (“Acquisition Corp.”). Acquisition Corp. is one of the world’s major music entertainment companies. Acquisition of Warner Music Group by Access Industries 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 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. 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. See Item 1A. Risk Factors — Risks Related to Our Controlling Stockholder. Recorded Music Operations Our Recorded Music business primarily consists of the discovery and development of recording artists and the related marketing, promotion, distribution, sale and licensing of music created by such recording artists. We play an integral role in virtually all aspects of the recorded music value chain from discovering and developing talent to producing, distributing and selling music to marketing and promoting recording artists and their music. In the United States, our Recorded Music business is conducted principally through our major record labels—Atlantic Records and Warner Records. In October 2018, we launched Elektra Music Group in the United States as a standalone label group, which comprises the Elektra, Fueled by Ramen and Roadrunner labels. 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’ Records, 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. Internationally, we engage in the same activities as in the United States: discovering and signing artists and distributing, selling, marketing and promoting their music. In most cases, we also market, promote, distribute and sell the 7 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. Our Recorded Music business’ distribution operations include Warner-Elektra-Atlantic Corporation (“WEA Corp.”), which markets, distributes and sells music and video products to retailers and wholesale distributors; Alternative Distribution Alliance (“ADA”), which markets, distributes and sells the products of independent labels to retail and wholesale distributors; and various distribution centers and ventures operated internationally. In addition to our music being sold in physical retail outlets, our music is also sold in physical form to online physical retailers, such as Amazon.com, barnesandnoble.com and bestbuy.com, and distributed in digital form to an expanded universe of digital partners, including streaming services such as those of Amazon, Apple, Deezer, SoundCloud, Spotify, Tencent Music Entertainment Group and YouTube, radio services such as iHeart Radio and SiriusXM and download services. We have integrated the marketing of digital content into all aspects of our business, including artist and repertoire (“A&R”) and distribution. Our business development executives work closely with A&R departments to ensure that while music is being produced, digital assets are also created with all distribution channels in mind, including streaming services, social networking sites, online portals and music-centered destinations. We also work side-by-side with our online and mobile partners to test new concepts. We believe existing and new digital businesses will be a significant source of growth and will provide new opportunities to successfully monetize our assets and create new revenue streams. The proportion of digital revenues attributable to each distribution channel varies by region and proportions may change as the introduction of new technologies continues. As one of the world’s largest music entertainment companies, we believe we are well positioned to take advantage of growth in digital distribution and emerging technologies to maximize the value of our assets. We have diversified our revenues beyond our traditional businesses by entering into expanded-rights deals with recording artists in order to partner with such artists in other aspects of their careers. Under these agreements, we provide services to and participate in recording artists’ activities outside the traditional recorded music business such as touring, merchandising and sponsorships. We have built and acquired artist services capabilities and platforms for marketing and distributing this broader set of music-related rights and participating more widely in the monetization of the artist brands we help create. We believe that entering into expanded-rights deals and enhancing our artist services capabilities in areas such as merchandising, VIP ticketing, fan clubs, concert promotion and management has permitted us to diversify revenue streams and capitalize on other revenue opportunities. This provides for improved long-term relationships with our recording artists and allows us to more effectively connect recording artists and fans. Music Publishing Operations While Recorded Music is focused on marketing, promoting, distributing and licensing a particular recording of a musical composition, Music Publishing is an intellectual property business focused on generating revenue from uses of the musical composition itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rightsholders, our Music Publishing business garners a share of the revenues generated from use of the musical compositions. The operations of our Music Publishing business are conducted principally through Warner Chappell Music, our global music publishing company headquartered in Los Angeles, with operations in over 70 countries through various subsidiaries, affiliates and non-affiliated licensees and sub-publishers. We own or control rights to more than 1.4 million musical compositions, including numerous pop hits, American standards, folk songs and motion picture and theatrical compositions. Assembled over decades, our award-winning catalog includes over 80,000 songwriters and composers and a diverse range of genres including pop, rock, jazz, classical, country, R&B, hip-hop, rap, reggae, Latin, folk, blues, symphonic, soul, Broadway, techno, alternative and gospel. Warner Chappell Music also administers the music and soundtracks of several third-party television and film producers and studios. We have an extensive production music catalog collectively branded as Warner Chappell Production Music. 2. Summary of Significant Accounting Policies Interim Financial Statements The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2020. 8 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. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019 (File No. 001-32502). Basis of Consolidation The accompanying financial statements present the consolidated accounts of all entities in which the Company has a controlling voting interest and/or variable interest required to be consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation (“ASC 810”) requires the Company first evaluate its investments to determine if any investments qualify as a variable interest entity (“VIE”). A VIE is consolidated if the Company is deemed to be the primary beneficiary of the VIE, which is the party involved with the VIE that has both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. If an entity is not deemed to be a VIE, the Company consolidates the entity if the Company has a controlling voting interest. The Company maintains a 52-53 week fiscal year ending on the last Friday in each reporting period. As such, all references to June 30, 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 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”). 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. 9 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. For awards with an equity-like pay-off, inputs for discount of lack of marketability and non-performance risk were considered. 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 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. Income Taxes The Company uses the estimated annual effective tax rate method in computing its interim tax provision. Certain items, including those deemed to be unusual and infrequent are excluded from the estimated annual effective tax rate. In such cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions. New Accounting Pronouncements Recently Adopted Accounting Pronouncements In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which established a new ASC Topic 842 (“ASC 842”) that introduces a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. 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. Under this option, entities do not need to apply ASC 842 (along with its disclosure requirements) to the comparative prior periods presented. The Company adopted ASU 2016-02 on October 1, 2019, using the modified retrospective transition method provided by ASU 2018-11. The adoption of ASU 2016-02 resulted in the recognition of operating lease liabilities of $ 366 million and ROU assets of $ 297 million, which is net of the historical deferred rent liability balance of $ 69 million, primarily related to real estate leases. The Company also recorded a decrease to opening accumulated deficit of $ 7 million, net of taxes, related to previously deferred gains related to sale-leaseback transactions. Upon transition, the Company adopted the “package of three” practical expedient provided by ASC 842 and therefore has not (1) reassessed whether any expired or existing contracts are or contain a lease, (2) reassessed the lease classification for expired or existing leases and (3) reassessed initial direct costs for any existing leases. Rather, the Company will retain the conclusions reached for these items under ASC 840. 10 In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). This ASU improves certain aspects of the hedge accounting model including making more risk management strategies eligible for hedge accounting and simplifying the assessment of hedge effectiveness. ASU 2017-12 is effective for all annual periods beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted and requires a prospective adoption with a cumulative-effect adjustment to accumulated deficit as of the beginning of the fiscal year of adoption for existing hedging relationships. The Company adopted ASU 2017-12 in the first quarter of fiscal 2020 and this adoption did not have a significant impact on the Company’s financial statements. Accounting Pronouncements Not Yet Adopted In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. ASU 2016-13 will be effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years. Earlier adoption is permitted. The Company is evaluating the impact of the adoption of this standard on its consolidated financial statements. In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This ASU eliminates certain exceptions to the general principles in ASC 740, Income Taxes . Specifically, it eliminates the exception to (1) the incremental approach for intraperiod tax allocation when there is a loss from continuing operations, and income or a gain from other items; (2) the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 also simplifies U.S. GAAP by making other changes. ASU 2019-12 will be effective for the annual periods beginning after December 15, 2021, and for interim periods beginning after December 15, 2022. Earlier adoption is permitted. The Company is evaluating the impact of the adoption of this standard on its consolidated financial statements. 3. 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. 11 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: Numerator Net loss attributable to common stockholders $ ( 21 ) $ ( 499 ) $ ( 7 ) $ ( 467 ) Denominator 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. 4. Revenue Recognition For our operating segments, Recorded Music and Music Publishing, the Company accounts for a contract when it has legally enforceable rights and obligations and collectability of consideration is probable. The Company identifies the performance obligations and determines the transaction price associated with the contract, which is then allocated to each performance obligation, using management’s best estimate of standalone selling price for arrangements with multiple performance obligations. Revenue is recognized when, or as, control of the promised services or goods is transferred to the Company’s customers, and in an amount that reflects the consideration the Company is contractually due in exchange for those services or goods. An estimate of variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Certain of the Company’s arrangements include licenses of intellectual property with consideration in the form of sales- and usage-based royalties. Royalty revenue is recognized when the subsequent sale or usage occurs using the best estimates available of the amounts that will be received by the Company. 12 Disaggregation of Revenue The Company’s revenue consists of the following categories, which aggregate into the segments – Recorded Music and Music Publishing: Three Months Ended June 30, Nine Months Ended June 30, 2020 2019 2020 2019 (in millions) Revenue by Type Digital $ 630 $ 584 $ 1,889 $ 1,744 Physical 51 95 329 456 Total Digital and Physical 681 679 2,218 2,200 Artist services and expanded-rights 124 158 427 458 Licensing 56 76 207 229 Total Recorded Music 861 913 2,852 2,887 Performance 27 36 114 135 Digital 90 65 237 195 Mechanical 8 13 38 41 Synchronization 22 29 92 89 Other 2 4 7 10 Total Music Publishing 149 147 488 470 Intersegment eliminations — ( 2 ) ( 3 ) ( 6 ) Total Revenues $ 1,010 $ 1,058 $ 3,337 $ 3,351 Revenue by Geographical Location U.S. Recorded Music $ 358 $ 395 $ 1,191 $ 1,236 U.S. Music Publishing 74 71 242 219 Total U.S. 432 466 1,433 1,455 International Recorded Music 503 518 1,661 1,651 International Music Publishing 75 76 246 251 Total International 578 594 1,907 1,902 Intersegment eliminations — ( 2 ) ( 3 ) ( 6 ) Total Revenues $ 1,010 $ 1,058 $ 3,337 $ 3,351 Recorded Music Recorded Music mainly involves selling, marketing, distribution and licensing of recorded music produced by the Company’s recording artists. Recorded Music revenues are derived from four main sources, which include digital, physical, artist services and expanded-rights and licensing. Digital revenues are generated from the expanded universe of digital partners, including digital streaming services and download services. These licenses typically contain a single performance obligation, which is ongoing access to all intellectual property in an evolving content library, predicated on: (1) the business practice and contractual ability to remove specific content without a requirement to replace the content and without impact to minimum royalty guarantees and (2) the contracts not containing a specific listing of content subject to the license. Digital licensing contracts are generally long-term with consideration in the form of sales- and usage-based royalties that are typically received monthly. Certain contracts contain non-recoupable fixed fees or minimum guarantees, which are recoupable against royalties. Upon contract inception, the Company will assess whether a shortfall or breakage is expected (i.e., where the minimum guarantee will not be recouped through royalties) in order to determine timing of revenue recognition for the fixed fee or minimum guarantee. For fixed fee and minimum guarantee contracts where breakage is expected, the total transaction price (fixed fee or minimum guarantee) is recognized proportionately over the contract term using an appropriate measure of progress which is typically based on the Company’s digital partner’s subscribers or streaming activity as these are measures of access to an evolving catalog, or on a straight-line basis. The Company updates its assessment of the transaction price each reporting period to see if anticipated royalty earnings exceed the minimum guarantee. For contracts where breakage is not expected, royalties are recognized as revenue as sales or usage occurs based upon the licensee’s usage reports and, when these reports are not available, revenue is based on historical data, industry information and other relevant trends. 13 Additionally, for certain licenses where the consideration is fixed and the intellectual property being licensed is static, revenue is recognized at the point in time when control of the licensed content is transferred to the customer. Physical revenues are generated from the sale of physical products such as vinyl, CDs and DVDs. Revenues from the sale of physical Recorded Music products are recognized upon transfer of control to the customer, which typically occurs once the product has been shipped and the ability to direct use and obtain substantially all of the benefit from the asset have been transferred. In accordance with industry practice and as is customary in many territories, certain products, such as CDs and DVDs, are sold to customers with the right to return unsold items. Revenues from such sales are generally recognized upon shipment based on gross sales less a provision for future estimated returns. Artist services and expanded-rights revenues are generated from artist services businesses and participations in expanded-rights associated with artists, including sponsorship, fan clubs, artist websites, merchandising, touring, concert promotion, ticketing and artist and brand management. Artist services and expanded-rights contracts are generally short term. Revenue is recognized as or when services are provided (e.g., at time of an artist’s event) assuming collectability is probable. In some cases, the Company is reliant on the artist to report revenue generating activities. For certain artist services and expanded-rights contracts, collectability is not considered probable until notification is received from the artist’s management. Licensing revenues represent royalties or fees for the right to use sound recordings in combination with visual images such as in films or television programs, television commercials and video games. In certain territories, the Company may also receive royalties when sound recordings are performed publicly through broadcast of music on television, radio and cable and in public spaces such as shops, workplaces, restaurants, bars and clubs. Licensing contracts are generally short term. For fixed-fee contracts, revenue is recognized at the point in time when control of the licensed content is transferred to the customer. Royalty based contracts are recognized as the underlying sales or usage occurs. Music Publishing Music Publishing acts as a copyright owner and/or administrator of the musical compositions and generates revenues related to the exploitation of musical compositions (as opposed to recorded music). Music publishers generally receive royalties from the use of the musical compositions in public performances, digital and physical recordings and in combination with visual images. Music publishing revenues are derived from five main sources: mechanical, performance, synchronization, digital and other. Performance revenues are received when the musical composition is performed publicly through broadcast of music on television, radio and cable, live performance at a concert or other venue (e.g., arena concerts and nightclubs) and performance of musical compositions in staged theatrical productions. Digital revenues are generated with respect to the musical compositions being embodied in recordings licensed to digital streaming services and digital download services and for digital performance. Mechanical revenues are generated with respect to the musical compositions embodied in recordings sold in any physical format or configuration such as vinyl, CDs and DVDs. Synchronization revenues represent the right to use the composition in combination with visual images such as in films or television programs, television commercials and video games as well as from other uses such as in toys or novelty items and merchandise. Other revenues represent earnings for use in printed sheet music and other uses. Digital and synchronization revenue recognition is similar for both Recorded Music and Music Publishing, therefore refer to the discussion within Recorded Music. Included in these revenue streams, excluding synchronization and other, are licenses with performing rights organizations or collecting societies (e.g., ASCAP, BMI, SESAC and GEMA), which are long-term contracts containing a single performance obligation, which is ongoing access to all intellectual property in an evolving content library. The most common form of consideration for these contracts is sales- and usage-based royalties. The collecting societies submit usage reports, typically with payment for royalties due, often on a quarterly or biannual reporting period, in arrears. Royalties are recognized as the sale or usage occurs based upon usage reports and, when these reports are not available, royalties are estimated based on historical data, such as recent royalties reported, company-specific information with respect to changes in repertoire, industry information and other relevant trends. Also included in these revenue streams are smaller, short-term contracts for specified content, which generally involve a fixed fee. For fixed-fee contracts, revenue is recognized at the point in time when control of the license is transferred to the customer. The Company excludes from the measurement of transaction price all taxes assessed by governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. Sales Returns and Uncollectible Accounts In accordance with practice in the recorded music industry and as customary in many territories, certain physical revenue products (such as CDs and DVDs) are sold to customers with the right to return unsold items. Revenues from such sales are recognized when the products are shipped based on gross sales less a provision for future estimated returns. 14 In determining the estimate of physical product sales that will be returned, management analyzes vendor sales of product, historical return trends, current economic conditions, changes in customer demand and commercial acceptance of the Company’s products. Based on this information, management reserves a percentage of each dollar of physical product sales that provide the customer with the right of return and records an asset for the value of the returned goods and liability for the amounts expected to be refunded. Similarly, management evaluates accounts receivables to determine if they will ultimately be collected. In performing this evaluation, significant judgments and estimates are involved, including an analysis of specific risks on a customer-by-customer basis for larger accounts and customers and a receivables aging analysis that determines the percent that has historically been uncollected by aged category. The time between the Company’s issuance of an invoice and payment due date is not significant; customer payments that are not collected in advance of the transfer of promised services or goods are generally due no later than 30 days from invoice date. 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 $ 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 The Company reports revenue on a gross or net basis based on management’s assessment of whether the Company acts as a principal or agent in the transaction. The determination of whether the Company acts as a principal or an agent in a transaction is based on an evaluation of whether the Company controls the good or service before transfer to the customer. When the Company concludes that it controls the good or service before transfer to the customer, the Company is considered a principal in the transaction and records revenue on a gross basis. When the Company concludes that it does not control the good or service before transfer to the customer but arranges for another entity to provide the good or service, the Company acts as an agent and records revenue on a net basis in the amount it earns for its agency service. In the normal course of business, the Company acts as an intermediary with respect to certain payments received from third parties. For example, the Company distributes music content on behalf of third-party record labels. Based on the above guidance, the Company records the distribution of content on behalf of third-party record labels on a gross basis, subject to the terms of the contract, as the Company controls the content before transfer to the customer. Conversely, recorded music compilations distributed by other record companies where the Company has a right to participate in the profits are recorded on a net basis. Deferred Revenue Deferred revenue principally relates to fixed fees and minimum guarantees received in advance of the Company’s performance or usage by the licensee. Reductions in deferred revenue are a result of the Company’s performance under the contract or usage by the licensee. 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 $ 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 June 30, 2020 are as follows: Rest of FY20 FY21 FY22 Thereafter Total (in millions) Remaining performance obligations $ 206 $ 838 $ 65 $ — $ 1,109 Total $ 206 $ 838 $ 65 $ — $ 1,109 15 5. 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 (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: Foreign Currency Translation Loss (a) Minimum Pension Liability Adjustment Deferred Gains (Losses) On Derivative Financial Instruments Accumulated Other Comprehensive Loss, net (in millions) Balance at September 30, 2019 $ ( 218 ) $ ( 14 ) $ ( 8 ) $ ( 240 ) Other comprehensive income (loss) 9 — ( 22 ) ( 13 ) Balance at June 30, 2020 $ ( 209 ) $ ( 14 ) $ ( 30 ) $ ( 253 ) ______________________________________ (a) Includes historical foreign currency translation related to certain intra-entity transactions. 6. Leases The Company’s lease portfolio consists operating real estate leases for its corporate offices and, to a lesser extent, storage and other equipment. Under ASC 842, a contract is or contains a lease when (1) an explicitly or implicitly identified asset has been deployed in the contract and (2) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract. The Company determines if an arrangement is or contains a lease at inception of the contract. For all leases (finance and operating), other than those that qualify for the short-term recognition exemption, the Company will recognize on the balance sheet a lease liability for its obligation to make lease payments arising from the lease and a corresponding ROU asset representing its right to use the underlying asset over the period of use based on the present value of lease payments over the lease term as of the lease commencement date. ROU assets are adjusted for initial direct costs, lease payments made and incentives. As the rates implicit in our leases are not readily determinable, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. This rate is based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments. The lease term used to calculate the lease liability will include options to extend or terminate the lease when the option to extend or terminate is at the Company’s discretion and it is reasonably certain that the Company will exercise the option. 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 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. Variable lease costs, if any, are recognized as incurred and such costs are excluded from lease balances recorded on the consolidated balance sheet. The initial measurement of the lease liability and ROU asset are determined based on both the fixed lease payments and any variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate). The Company initially measures these variable lease payments using the index or rate at lease commencement (i.e., the spot or gross index or rate applied to the base rental amount). All other variable lease payments are recognized in the period in which the payments are incurred. The Company’s operating ROU assets are included in operating lease right-of-use assets and the Company’s current and non-current operating lease liabilities are included in operating lease liabilities, current and operating lease liabilities, noncurrent, respectively, in the Company’s balance sheet. Operating lease liabilities are amortized using the effective interest method. That is, in each period, the liability will be increased to reflect the interest that is accrued on the related liability by using the appropriate discount rate and decreased by the lease payments made during the period. The subsequent measurement of the ROU asset is linked to the amount recognized as the lease liability. Accordingly, the ROU asset is measured as the lease liability adjusted by (1) accrued or prepaid rents (i.e., the aggregate difference between the cash payment and straight-line lease cost), (2) remaining unamortized initial direct costs and lease incentives, and (3) impairments of the ROU asset. Operating lease costs are included in Selling, general and administrative expenses. 16 For lease agreements that contain both lease and non-lease components, the Company has elected the practical expedient provided by ASC 842 that permits the accounting for these components as a single lease component (rather than separating the lease from the non-lease components and accounting for the components individually). The Company enters into operating leases for buildings, office equipment, production equipment, warehouses, and other types of equipment. Our leases have remaining lease terms of 1 year to 11 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year. Among the Company’s operating leases are its leases for the Ford Factory Building, located at 777 S. Santa Fe Avenue in Los Angeles, California, and for 27 Wrights Lane, Kensington, London. The landlord for both leases is an affiliate of Access. 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. The components of lease expense were as follows: Three Months Ended June 30, 2020 Nine Months Ended June 30, 2020 (in millions) Lease Cost Operating lease cost $ 14 $ 40 Short-term lease cost — — Variable lease cost 2 7 Sublease income — — Total lease cost $ 16 $ 47 Supplemental cash flow information related to leases was as follows: Nine Months Ended June 30, 2020 (in millions) Cash paid for amounts included in the measurement of operating lease liabilities $ 41 Right-of-use assets obtained in exchange for operating lease obligations 12 Supplemental balance sheet information related to leases was as follows: June 30, 2020 (in millions) Operating Leases Operating lease right-of-use assets $ 278 Operating lease liabilities, current $ 40 Operating lease liabilities, noncurrent 306 Total operating lease liabilities $ 346 Weighted Average Remaining Lease Term Operating leases 8 years Weighted Average Discount Rate Operating leases 4.57 % 17 Maturities of lease liabilities were as follows: Years Operating Leases (in millions) 2020 $ 27 2021 54 2022 51 2023 48 2024 47 Thereafter 192 Total lease payments 419 Less imputed interest ( 73 ) Total $ 346 As of June 30, 2020, there have been no leases entered into that have not yet commenced. 7. Goodwill and Intangible Assets Goodwill The following analysis details the changes in goodwill for each reportable segment: Recorded Music Music Publishing Total (in millions) Balance at September 30, 2019 $ 1,297 $ 464 $ 1,761 Acquisitions — — — Other adjustments 9 — 9 Balance at June 30, 2020 $ 1,306 $ 464 $ 1,770 ______________________________________ (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. The Company may conduct an earlier review if events or circumstances occur that would suggest the carrying value of the Company’s goodwill may not be recoverable. No indicators of impairment were identified during the current period that required the Company to perform an interim assessment or recoverability test. 18 Intangible Assets Intangible assets consist of the following: Weighted-Average Useful Life June 30, 2020 September 30, 2019 (in millions) Intangible assets subject to amortization: Recorded music catalog 10 years $ 863 $ 855 Music publishing copyrights 26 years 1,567 1,539 Artist and songwriter contracts 13 years 850 841 Trademarks 18 years 54 53 Other intangible assets 7 years 64 59 Total gross intangible asset subject to amortization 3,398 3,347 Accumulated amortization ( 1,774 ) ( 1,624 ) Total net intangible assets subject to amortization 1,624 1,723 Intangible assets not subject to amortization: Trademarks and tradenames Indefinite 152 151 Total net intangible assets $ 1,776 $ 1,874 8. Debt Debt Capitalization Long-term debt, all of which was issued by Acquisition Corp., consists of the following: June 30, 2020 September 30, 2019 (in millions) Revolving Credit Facility (a) $ — $ — Senior Term Loan Facility due 2023 (b) 1,315 1,313 5.000 % Senior Secured Notes due 2023 (c) 298 298 4.125 % Senior Secured Notes due 2024 (d) 346 336 4.875 % Senior Secured Notes due 2024 (e) 218 218 3.625 % Senior Secured Notes due 2026 (f) 501 488 5.500 % Senior Notes due 2026 (g) 322 321 Total long-term debt, including the current portion (h) $ 3,000 $ 2,974 ______________________________________ (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. (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. See Note 15. (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. On June 30, 19 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”). See Note 15. (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”). See Note 15. (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. Notes”). 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. See Note 15. 20 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. See Note 15. 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. See Note 15. Historical Transactions 3.625 % Senior Secured Notes Offerings On October 9, 2018, Acquisition Corp. 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 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. issued and sold € 195 million in aggregate principal amount of additional 3.625 % Senior Secured Notes due 2026 (the “Additional Notes”). The Additional Notes and the 3.625 % Secured Notes were treated as the same series for all purposes under the indenture that governs the 3.625 % Secured Notes and the Additional Notes. Net proceeds of the offering were used to redeem all of the 5.625 % Secured Notes due 2022. Partial Redemption of 4.125 % Senior Secured Notes On October 12, 2018, Acquisition Corp. redeemed € 34.5 million aggregate principal amount of its 4.125 % Senior Secured Notes due 2024 (the “ 4.125 % Secured Notes”) using a portion of the proceeds from the offering of the 3.625 % Secured Notes described above. The redemption price for the 4.125 % Secured Notes was approximately € 36.17 million, equivalent to 103 % of the principal amount of the 4.125 % Secured Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was October 12, 2018. 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 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 On October 9, 2018, Acquisition Corp. purchased, in the open market, $ 30 million aggregate principal amount of its outstanding 4.875 % Senior Secured Notes due 2024 (the “ 4.875 % Secured Notes”). The acquired notes were subsequently retired. 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 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 On November 5, 2018, Acquisition Corp. redeemed $ 26.55 million aggregate principal amount of its 5.625 % Senior Secured Notes due 2022 (the “ 5.625 % Secured Notes”). The redemption price for the 5.625 % Secured Notes was approximately $ 27.38 million, equivalent to 102.813 % of the principal amount of the 5.625 % Secured Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was November 5, 2018. Following the partial redemption of the 5.625 % Secured Notes, $ 220.95 million of the 5.625 % Secured Notes remain outstanding. 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, 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 for the three and nine months ended June 30, 2019, which represents the premium paid on early redemption and unamortized deferred financing costs. 21 Interest Rates The loans under the Revolving Credit Facility bear interest at Acquisition Corp.’s election at a rate equal to (i) the rate for deposits in the borrowing currency in the London interbank market (adjusted for maximum reserves) for the applicable interest period (“Revolving LIBOR”) subject to a zero floor, plus 1.75 % per annum in the case of Initial Revolving Loans (as defined in the Revolving Credit Agreement), or 1.875 % per annum in the case of 2020 Revolving Loans (as defined in the Revolving Credit Agreement), or (ii) the base rate, which is the highest of (x) the corporate base rate established by the administrative agent from time to time, (y) 0.50 % in excess of the overnight federal funds rate and (z) the one-month Revolving LIBOR plus 1.0 % per annum, plus, in each case, 0.75 % per annum in the case of Initial Revolving Loans, or 0.875 % per annum in the case of 2020 Revolving Loans; 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 3.11 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. Default interest will also be payable on other overdue amounts at a rate of 2.0 % per annum above the amount that would apply to an alternative base rate loan. The loans under the Senior Term Loan Facility bear interest at Acquisition Corp.’s election at a rate equal to (i) the rate for deposits in U.S. dollars in the London interbank market (adjusted for maximum reserves) for the applicable interest period (“Term Loan LIBOR”) subject to a zero floor, plus 2.125 % per annum or (ii) the base rate, which is the highest of (x) the corporate base rate established by the administrative agent as its prime rate in effect at its principal office in New York City from time to time, (y) 0.50 % in excess of the overnight federal funds rate and (z) one-month Term Loan LIBOR, plus 1.00 % per annum, plus, in each case, 1.125 % per annum. If there is a payment default at any time, then the interest rate applicable to overdue principal and interest will be the rate otherwise applicable to such loan plus 2.0 % per annum. Default interest will also be payable on other overdue amounts at a rate of 2.0 % per annum above the amount that would apply to an alternative base rate loan. The Company has entered into, and in the future may enter into, interest rate swaps to manage interest rate risk. Please refer to Note 11 of our consolidated financial statements for further discussion. Maturity of Senior Term Loan Facility The loans outstanding under the Senior Term Loan Facility mature on November 1, 2023. Maturity of Revolving Credit Facility The maturity date of the Revolving Credit Facility is April 3, 2025. Maturities of Senior Notes and Senior Secured Notes 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 $ 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. 9. Commitments and Contingencies From time to time the Company is involved in claims and legal proceedings that arise in the ordinary course of business. The Company is currently subject to several such claims and legal proceedings. Based on currently available information, the Company does not believe that resolution of pending matters will have a material adverse effect on its financial condition, cash flows or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that the Company’s defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on the Company’s business, financial condition, cash flows and results of operations in a particular period. Any claims or proceedings against the Company, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors. 22 10. Income Taxes On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”). The Tax Act significantly revised the U.S. federal corporate income tax provisions, including, but not limited to, an income inclusion of global intangible low-taxed income (“GILTI”), a deduction against foreign-derived intangible income (“FDII”) and a new minimum tax, the base erosion anti-abuse tax (“BEAT”). GILTI, FDII and BEAT were effective for the Company’s fiscal year ending September 30, 2019. The Company has elected to recognize the GILTI impact in the specific period in which it occurs. As a result of final regulations regarding the interest expense allocation rules issued by the Internal Revenue Service in December 2019, the Company concluded that it is more likely than not that the entire amount of the Company’s deferred tax assets relating to foreign tax credit carryforwards will be realized. 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 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. 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, 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. 11. Derivative Financial Instruments The Company uses derivative financial instruments, primarily foreign currency forward exchange contracts and interest rate swaps, for the purposes of managing foreign currency exchange rate risk and interest rate risk on expected future cash flows. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates. The Company enters into foreign currency forward exchange contracts primarily to hedge the risk that unremitted or future royalties and license fees owed to its U.S. companies for the sale or licensing of U.S.-based music and merchandise abroad may be adversely affected by changes in foreign currency exchange rates. The Company focuses on managing the level of exposure to the risk of foreign currency exchange rate fluctuations on its major currencies, which include the Euro, British pound sterling, Japanese yen, Canadian dollar, Swedish krona, Australian dollar, Brazilian real, Korean won and Norwegian krone. The Company also may at times choose to hedge foreign currency risk associated with financing transactions such as third-party debt and other balance sheet items. The Company’s foreign currency forward exchange contracts have not been designated as hedges under the criteria prescribed in ASC 815. The Company records these contracts at fair value on its balance sheet and the related gains and losses are immediately recognized in the consolidated statement of operations where there is an offsetting entry related to the underlying exposure. 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 23 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. However, to the extent that any of these contracts were not considered to be perfectly effective in offsetting the change in the value of the royalties and license fees being hedged, any changes in fair value relating to the ineffective portion of these contracts were immediately recognized in the consolidated statement of operations. The Company has entered into, and in the future may enter into, interest rate swaps to manage interest rate risk. These instruments may offset a portion of changes in income or expense, or changes in fair value of the Company’s long-term debt. 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 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. Additionally, netting provisions are provided for in existing International Swap and Derivative Association Inc. agreements in situations where the Company executes multiple contracts with the same counterparty. As a result, net assets or liabilities resulting from foreign exchange derivatives subject to these netting agreements are classified within other current assets or other current liabilities in the Company’s consolidated balance sheets. The Company’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 (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 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 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 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 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, 2019 were $ 15 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: June 30, 2020 (a) September 30, 2019 (b) (in millions) Other current assets $ 1 $ — Other current liabilities ( 1 ) — Other noncurrent assets — 2 Other noncurrent liabilities ( 40 ) ( 13 ) 24 ______________________________________ (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. 12. Segment Information As discussed more fully in Note 1, based on the nature of its products and services, the Company classifies its business interests into two fundamental operations: Recorded Music and Music Publishing, which also represent the reportable segments of the Company. Information as to each of these operations is set forth below. The Company evaluates performance based on several factors, of which the primary financial measure is operating income (loss) before non-cash depreciation of tangible assets and non-cash amortization of intangible assets (“OIBDA”). The Company has supplemented its analysis of OIBDA results by segment with an analysis of operating income (loss) by segment. The accounting policies of the Company’s business segments are the same as those described in the summary of significant accounting policies included elsewhere herein. The Company accounts for intersegment sales at fair value as if the sales were to third parties. While intercompany transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses recognized by the segment that is counterparty to the transaction) are eliminated in consolidation, and therefore, do not themselves impact consolidated results. Recorded Music Music Publishing Corporate expenses and eliminations Total Three Months Ended (in millions) June 30, 2020 Revenues $ 861 $ 149 $ — $ 1,010 Operating income (loss) ( 160 ) 14 ( 287 ) ( 433 ) Amortization of intangible assets 30 17 — 47 Depreciation of property, plant and equipment 11 2 2 15 OIBDA ( 119 ) 33 ( 285 ) ( 371 ) June 30, 2019 Revenues $ 913 $ 147 $ ( 2 ) $ 1,058 Operating income (loss) 85 18 ( 45 ) 58 Amortization of intangible assets 34 17 — 51 Depreciation of property, plant and equipment 12 1 2 15 OIBDA 131 36 ( 43 ) 124 Recorded Music Music Publishing Corporate expenses and eliminations Total Nine Months Ended (in millions) June 30, 2020 Revenues $ 2,852 $ 488 $ ( 3 ) $ 3,337 Operating income (loss) 67 58 ( 442 ) ( 317 ) Amortization of intangible assets 89 52 — 141 Depreciation of property, plant and equipment 42 4 7 53 OIBDA 198 114 ( 435 ) ( 123 ) June 30, 2019 Revenues $ 2,887 $ 470 $ ( 6 ) $ 3,351 Operating income (loss) 382 67 ( 122 ) 327 Amortization of intangible assets 109 51 — 160 Depreciation of property, plant and equipment 31 4 8 43 OIBDA 522 122 ( 114 ) 530 25 13. Additional Financial Information Cash Interest and Taxes 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. Dividends 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 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 nine months ended June 30, 2020. 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. The Company’s estimates may change, however, as new events occur and additional information is obtained, and any such changes will be recognized in the consolidated financial statements. 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. 26 14. Fair Value Measurements ASC 820, Fair Value Measurement (“ASC 820”) defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition to defining fair value, ASC 820 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are: • Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. • Level 2—inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. 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 June 30, 2020 and September 30, 2019. Fair Value Measurements as of June 30, 2020 (Level 1) (Level 2) (Level 3) Total (in millions) Other Current Assets: Foreign Currency Forward Exchange Contracts (a) $ — $ 1 $ — $ 1 Other Current Liabilities: Foreign Currency Forward Exchange Contracts (a) — ( 1 ) — ( 1 ) Other Noncurrent Assets: Equity Method Investment (d) — 42 — 42 Other Noncurrent Liabilities: Interest Rate Swaps (c) — ( 40 ) — ( 40 ) Total $ — $ 2 $ — $ 2 Fair Value Measurements as of September 30, 2019 (Level 1) (Level 2) (Level 3) Total (in millions) Other Current Liabilities: Contractual Obligations (b) $ — $ — $ ( 9 ) $ ( 9 ) Other Noncurrent Assets: Equity Method Investment (d) — 40 — 40 Interest Rate Swap — 2 — 2 Other Noncurrent Liabilities: Interest Rate Swap — ( 13 ) — ( 13 ) Total $ — $ 29 $ ( 9 ) $ 20 ______________________________________ (a) The fair value of foreign currency forward exchange contracts is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay at their maturity dates for contracts involving the same currencies and maturity dates. (b) This represents purchase obligations and contingent consideration related to the Company’s various acquisitions. 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 27 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”). The valuation is based upon quoted prices in active markets and model-based valuation techniques to determine fair value. The following table reconciles the beginning and ending balances of net assets and liabilities classified as Level 3: Total (in millions) Balance at September 30, 2019 $ ( 9 ) Additions — Reductions 7 Payments 2 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. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that impairment exists, the asset is written down to its fair value. In addition, an impairment analysis is performed at least annually for goodwill and indefinite-lived intangible assets. Equity Investments Without Readily Determinable Fair Value The Company evaluates its equity investments without readily determinable fair values for impairment if factors indicate that a significant decrease in value has occurred. 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 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 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. The fair value of the Company’s debt instruments is determined using quoted market prices from less active markets or by using quoted market prices for instruments with identical terms and maturities; both approaches are considered a Level 2 measurement. 15. Subsequent Events 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). 28 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. 29