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Item 7. Management’s Discussion and Analysis

2020-11-23 compared with 2019-11-27 · 488 added, 434 removed, 541 unchanged (63% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

This Annual Report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act, and Section 21E of the Exchange Act.

Actual results and the timing of events could differ materially from those projected in forward-looking statements due to a number of factors, including those described under “Item 1A.

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See “Special Note Regarding Forward-Looking Statements.”

You should read the following discussion of our results of operations and financial condition with the audited financial statements included elsewhere in this Annual Report for the fiscal year ended September 30, 2019 .

You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and related notes thereto included elsewhere in this Annual Report.

The Company was formed on November 21, 2003.

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is one of the world’s major music entertainment companies.

On June 5, 2020, the Company completed an IPO of 77,000,000 shares of Class A Common Stock at a public offering price of $25 per share.

The offering consisted entirely of secondary shares sold by 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.

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

Following completion of the IPO and the exercise in full of the underwriters’ option to purchase additional shares, Access and its affiliates held an aggregate of 421,450,000 shares of Class B Common Stock, representing approximately 99% of the total combined voting power of the Company’s outstanding common stock and approximately 83% of the economic interest.

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

Risk Factors — Risks Related to Our Controlling Stockholder.

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

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and its consolidated subsidiaries, except where otherwise indicated.

Management’s discussion and analysis of results of operations and financial condition (“MD&A”) is provided as a supplement to the audited financial statements and footnotes included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations.

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided as a supplement to the consolidated financial statements and related notes thereto included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations.

MD&A is organized as follows:

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Accordingly, OIBDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss) attributable to Warner Music Group Corp.

and other measures of financial performance reported in accordance with United States generally accepted accounting principles (“U.S.

measures of financial performance reported in accordance with United States generally accepted accounting principles (“U.S.

In addition, our definition of OIBDA may differ from similarly titled measures used by other companies.

A reconciliation of consolidated OIBDA to operating income (loss) and net income (loss) attributable to Warner Music Group Corp.

is provided in our “Results of Operations.”

is provided in “—Results of Operations.”

Use of Constant Currency

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We are one of the world’s leading music entertainment companies.

Our renowned family of iconic record labels, including Atlantic Records, Warner Records, Elektra Records and Parlophone Records, is home to many of the most popular and influential recording artists.

In addition, Warner Chappell Music, our global music publishing business, boasts an extraordinary catalog that includes timeless standards and contemporary hits, representing works by over 80,000 songwriters and composers, with a global collection of more than 1.4 million musical compositions.

Our renowned family of iconic record labels, including Atlantic Records, Warner Records, Elektra Records and Parlophone Records, is home to many of the world’s most popular and influential recording artists.

We classify our business interests into two fundamental operations:

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

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

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

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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 such as Apple’s iTunes and Google Play.

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 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.

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.

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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.

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.

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• Artist services and expanded-rights :

the rightsholder receives revenues with respect to our artist services businesses and our participation in expanded rights associated with our recording artists, including sponsorship, fan clubs, artist websites, merchandising, touring, concert promotion, ticketing and artist and brand management;

the rightsholder receives revenues with respect to our artist services businesses and our participation in expanded rights associated with our recording artists, including merchandising, touring, concert promotion, ticketing, sponsorship, fan clubs, artist websites and artist and brand management;

• Licensing :

the rightsholder receives 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;

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The principal costs associated with our Recorded Music business are as follows:

• A&R costs :

the costs associated with (i) paying royalties to recording artists, producers, songwriters, other copyright holders and trade unions;

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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 60 countries through various subsidiaries, affiliates and non-affiliated licensees.

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.

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 one 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.

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Music Publishing revenues are derived from five main sources:

the rightsholder receives revenues if 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 music in staged theatrical productions;

• Performance:

the rightsholder receives revenues if the musical composition is performed publicly through broadcast of music on television, radio and cable and in retail locations (e.g.

bars and restaurants), live performance at a concert or other venue (e.g., arena concerts and nightclubs), and performance of music in staged theatrical productions;

the rightsholder receives revenues with respect to musical compositions embodied in recordings distributed in streaming services, download services and other digital music services;

• Mechanical:

the rightsholder receives revenues with respect to musical compositions embodied in recordings sold in any physical format or configuration such as vinyl, CDs and DVDs;

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The principal costs associated with our Music Publishing business are as follows:

• A&R costs :

the costs associated with (i) paying royalties to songwriters, co-publishers and other copyright holders in connection with income generated from the uses of their works and (ii) signing and developing songwriters;

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Factors Affecting Results of Operations and Comparability

COVID-19 Pandemic

In January 2020, a new strain of coronavirus, COVID-19, was identified in Wuhan, China.

On March 11, 2020, the World Health Organization declared a global pandemic.

The global pandemic and governmental responses thereto have disrupted physical and manufacturing supply chains and required the closures of physical retailers, resulting in declines in our physical revenue streams.

Additionally, stay-at-home orders, limited indoor and outdoor gatherings and other restrictions have negatively affected our business in other ways, such as, making it impossible to hold live concert tours, adversely impacting our concert promotion business and the sale of merchandise, delaying the release of new recordings and disrupting the production and release of motion pictures and television programs, which has negatively affected licensing revenue in our Recorded Music business and synchronization revenue in our Music Publishing business.

However, the disruption from the COVID-19 pandemic may accelerate growth of other revenue streams such as fitness and interactive gaming (including augmented reality and virtual reality).

Our results of operations, cash flows and financial condition at and for the fiscal year ended September 30, 2020 were adversely affected by the global pandemic.

In addition to the impact resulting from the business disruption, the Company recognized charges of $17 million impacting OIBDA and a total of $22 million impacting net income for the fiscal year ended September 30, 2020.

Initial Public Offering

On June 5, 2020, we completed an IPO of 77,000,000 shares of Class A Common Stock, par value $0.001 per share at a public offering price of $25 per share.

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

The sale of shares through the offering consisted entirely of secondary shares sold by Access.

We did not receive any proceeds resulting from the sale and listing of shares.

As a result, we incurred one-time costs associated with the IPO of approximately $89 million for the fiscal year ended September 30, 2020, $60 million of which relates to the Management Agreement as defined below.

Going forward, our results of operations will include expenses associated with being a public company, including auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’ fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses.

For the fiscal year ended September 30, 2020, costs associated with being a public company were approximately $4 million.

Senior Management Free Cash Flow Plan

On June 5, 2020, we amended our Senior Management Free Cash Flow Plan (the “Plan”), which pays annual bonuses to certain executives based on our free cash flow and offers participants the opportunity to share in the appreciation of the value of our common stock, to remove the cash-settlement feature of the awards issued previously under the Plan.

Our results of operations were adversely impacted by a non-cash stock-based compensation charge of $593 million for the fiscal year ended September 30, 2020 which reflects the mark-to-market adjustment through the modification date of the Plan for the change in value of our common stock upon consummation of the IPO.

We incurred non-cash stock-based compensation charges associated with mark-to-market adjustments of $42 million and $43 million for the fiscal years ended September 30, 2019 and September 30, 2018, respectively.

Subsequent to the amendment, the awards issued under the Plan will no longer be adjusted for changes in the value of our common stock.

We will continue to incur non-cash stock-based compensation expense for awards that were unvested as of the modification date of the Plan and for any future awards that may be issued under the Plan.

Acquisition of EMP

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In May 2014, the FASB issued guidance codified in ASC 606, Revenue from Contracts with Customers (“ASC 606”), which replaces the guidance in former ASC 605, Revenue Recognition and ASC 928-605, Entertainment — Music .

The adoption of ASC 606 resulted in a change in the timing of revenue recognition in our Music Publishing business as well as international broadcast rights within our Recorded Music business.

We adopted ASC 606 in fiscal 2019, which resulted in a change in the timing of revenue recognition in our Music Publishing business as well as international broadcast rights within our Recorded Music business.

Under the new revenue recognition rules, revenue is recorded based on best estimates available in the period of sale or usage whereas revenue was previously recorded when cash was received for both the licensing of music publishing rights and international recorded music broadcast fees.

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See “Critical Accounting Policies.”

Acquisition of Spinnin’ Records

On September 7, 2017, we acquired Spinnin’ Records, one of the world’s most successful and important dance and electronic music companies.

Based in the Netherlands, over the past two decades the label signed and nurtured a fantastic roster of pioneering recording artists and built prominent music publishing and artist management businesses.

Sale of Non-Core Assets

During the fiscal year ended September 30, 2017, we completed the divestiture of certain assets related to the acquisition in July 2013 (the “PLG Acquisition”) of PLG.

The cash received for these sales was $73 million .

The net gain recognized for these sales was $6 million .

Other Business Models to Drive Incremental Revenue

Artist Services and Expanded-Rights Deals

As the recorded music industry has continued to transition to a business model through which the majority of revenues are generated from streaming, for many years we have signed recording artists to expanded-rights deals.

Under our expanded-rights deals, we participate in the recording artist’s revenue streams, other than from recorded music sales, such as touring, merchandising and

sponsorships.

In addition to signing recording artists to expanded-rights deals, we have continued to make strategic investments to expand our Recorded Music business and open up new opportunities for our recording artists, including the acquisition of EMP.

Artist services and expanded-rights recorded music revenue, which includes revenue from expanded-rights deals as well as revenue from our artist services business, represented approximately 14% , 10% and 11% of our total revenues during the years ended September 30, 2019 , September 30, 2018 and September 30, 2017 , respectively.

Artist services and expanded-rights revenue will fluctuate from period to period depending upon recording artists’ touring schedules, among other things.

Margins for the various artist services and expanded-rights revenue streams can vary significantly as well.

The overall impact on margins will, therefore, depend on the composition of the various revenue streams in any particular period.

For instance, participation in revenue from touring under our expanded-rights deals typically flows straight through to operating income with little associated cost.

Revenue from some of our artist services businesses such as management and revenue from participation in touring and sponsorships under our expanded-rights deals are all high margin, while revenue under our expanded-rights deals and revenue from some of our artist services businesses such as merchandising tend to be lower margin than our traditional revenue streams in our Recorded Music business.

Management Agreement

Upon completion of the Merger, the Company and Holdings entered into a management agreement with Access, dated as of the Merger Closing Date (the “Management Agreement”), pursuant to which Access provides the Company and its subsidiaries with financial, investment banking, management, advisory and other services.

Pursuant to the Management Agreement, the Company pays to Access an annual fee equal to the greater of (i) a base amount, which is the sum of (x) $6 million and (y) 1.5% of the aggregate amount of Acquired EBITDA (as defined in the Management Agreement) and was approximately $9 million for the fiscal year ended September 30, 2019 , and (ii) 1.5% of the EBITDA (as defined in the indenture governing the redeemed WMG Holdings Corp.

13.75% Senior Notes due 2019) of the Company for the applicable fiscal year, plus expenses.

The fee is paid quarterly based on the base amount, with a true-up payment for the fourth quarter for any excess of the annual fee above the base amount.

The Company and Holdings agreed to indemnify Access and certain of its affiliates against all liabilities arising out of performance of the Management Agreement.

Such costs incurred by the Company were approximately $11 million , $16 million and $9 million for the fiscal years ended September 30, 2019 , September 30, 2018 and September 30, 2017 , respectively.

The fiscal year ended September 30, 2019 included the annual base fee of $9 million and an increase of $2 million calculated pursuant to the Management Agreement.

The fiscal year ended September 30, 2018 included the annual base fee of $9 million and an increase of $7 million calculated pursuant to the Management Agreement.

Upon completion of the Merger, the Company and Holdings entered into a management agreement with Access, dated as of the Merger Closing Date (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.

Prior to the termination of the Management Agreement, the Company incurred costs associated with the Management Agreement of approximately $7 million, $11 million and $16 million for the fiscal years ended September 30, 2020, September 30, 2019 and September 30, 2018, respectively.

Such amounts have been included as a component of selling, general and administrative expenses in the accompanying consolidated statements of operations.

RESULTS OF OPERATIONS

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For the Fiscal Year Ended

September 30,

September 30, 2020 vs.

2019 2019 vs.

2020 2019 2018 $ Change % Change $ Change % Change

Revenue by Type

Total Physical and Digital

Digital $ 2,568 $ 2,343 $ 2,019 $ 225 10 % $ 324 16 %

Physical 434 559 630 (125) -22 % (71) -11 %

Total Digital and Physical 3,002 2,902 2,649 100 3 % 253 10 %

Artist services and expanded-rights 525 629 389 (104) -17 % 240 62 %

Licensing 283 309 322 (26) -8 % (13) -4 %

Total Recorded Music 3,810 3,840 3,360 (30) -1 % 480 14 %

Performance 142 183 212 (41) -22 % (29) -14 %

Digital 337 271 237 66 24 % 34 14 %

Mechanical 48 55 72 (7) -13 % (17) -24 %

Synchronization 119 120 119 (1) -1 % 1 1 %

Other 11 14 13 (3) -21 % 1 8 %

Total Music Publishing 657 643 653 14 2 % (10) -2 %

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Music Publishing 325 300 294 25 8 % 6 2 %

1,934 1,956 1,754 (22) -1 % 202 12 %

International Recorded Music 2,201 2,184 1,900 17 1 % 284 15 %

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Total Revenues

Total revenues decreased by $12 million, or 0%, to $4,463 million for the fiscal year ended September 30, 2020 from $4,475 million for the fiscal year ended September 30, 2019.

Prior to intersegment eliminations, Recorded Music revenues represented 85% and 86% of total revenues for the fiscal years ended September 30, 2020 and September 30, 2019, respectively.

Prior to intersegment eliminations, Music Publishing revenues represented 15% and 14% of total revenues for the fiscal years ended September 30, 2020 and September 30, 2019, respectively.

Prior to intersegment eliminations, U.S.

and international revenues represented 43% and 57% of total revenues for the fiscal year ended September 30, 2020 and 44% and 56% of total revenues for the fiscal year ended September 30, 2019, respectively.

Total digital revenues after intersegment eliminations increased by $293 million, or 11%, to $2,903 million for the fiscal year ended September 30, 2020 from $2,610 million for the fiscal year ended September 30, 2019.

Total digital revenues represented 65% and 58% of consolidated revenues for the fiscal years ended September 30, 2020 and September 30, 2019, respectively.

The increase in digital revenue as a percentage of consolidated revenue is due to the continued growth in streaming revenue, which was largely uninterrupted by COVID-19, and the decrease in total consolidated revenue due to the business interruption impact of COVID-19.

Prior to intersegment eliminations, total digital revenues for the fiscal year ended September 30, 2020 were comprised of U.S.

revenues of $1,479 million and international revenues of $1,426 million, or 51% and 49% of total digital revenues, respectively.

Prior to intersegment eliminations, total digital revenues for the fiscal year ended September 30, 2019 were comprised of U.S.

revenues of $1,382 million and international revenues of $1,232 million, or 53% and 47% of total digital revenues, respectively.

Recorded Music revenues decreased by $30 million, or 1%, to $3,810 million for the fiscal year ended September 30, 2020 from $3,840 million for the fiscal year ended September 30, 2019.

Recorded Music revenues were $1,609 million and $1,656 million, or 42% and 43% of consolidated Recorded Music revenues for the fiscal years ended September 30, 2020 and September 30, 2019, respectively.

International Recorded Music revenues were $2,201 million and $2,184 million, or 58% and 57% of consolidated Recorded Music revenues for the fiscal years ended September 30, 2020 and September 30, 2019, respectively.

The overall decrease in Recorded Music revenue was driven by decreases in physical, artist services and expanded-rights, and licensing revenue partially offset by increases in digital revenue.

Physical revenue decreased by $125 million primarily due to the continued shift from physical revenue to digital revenue, timing of releases, prior-year success of Johnny Hallyday and impact of the COVID-19 business interruption resulting in lower physical sales, offset by current year release success in Japan.

Artist services and expanded-rights revenue decreased by $104 million primarily due to a decrease in touring activity and tour related merchandising resulting from COVID-19 business interruption related tour postponements and cancellations, partially offset by higher e-commerce merchandising revenue.

Licensing revenue decreased by $26 million primarily due to the impact of COVID-19, which resulted in lower broadcast fees, synchronization revenue due to lower advertising, television and film deal activity, partially offset by $5 million of licensing settlements.

Digital revenue increased by $225 million as a result of the continued growth in streaming services and strength of releases, which included new releases from Roddy Ricch, YoungBoy Never Broke Again and Dua Lipa, as well as carryover success from Ed Sheeran, Tones and I, Hamilton, Lizzo, Cardi B, and Young Thug.

Revenue from streaming services grew by $274 million or 13% to $2,403 million for the fiscal year ended September 30, 2020 from $2,129 million for the fiscal year ended September 30, 2019.

Streaming revenue growth was partially offset by a decline in download and other digital revenues of $49 million to $165 million for the fiscal year ended September 30, 2020 from $214 million for the fiscal year ended September 30, 2019 due to the continued shift to streaming services.

Music Publishing revenues increased by $14 million, or 2%, to $657 million for the fiscal year ended September 30, 2020 from $643 million for the fiscal year ended September 30, 2019.

Music Publishing revenues were $325 million, or 49% of consolidated Music Publishing revenues for the fiscal year ended September 30, 2020, and $300 million, or 47% of consolidated Music Publishing revenues for the fiscal year ended September 30, 2019.

International Music Publishing revenues were $332 million, or 51% of consolidated Music Publishing revenues for the fiscal year ended September 30, 2020, and $343 million, or 53% of consolidated Music Publishing revenues for the fiscal year ended September 30, 2019.

The overall increase in Music Publishing revenue was mainly driven by an increase in digital revenue of $66 million or 24%, partially offset by decreases in performance revenue of $41 million or 22%, mechanical revenue of $7 million, synchronization revenue of $1 million and other revenue of $3 million .

The increase in digital revenue mainly reflects the continued shift to streaming services.

The decreases in Music Publishing performance revenue and mechanical revenue are primarily due to COVID-19 related business interruption and the timing of distributions.

Total revenues increased by $470 million, or 12%, to $4,475 million for the fiscal year ended September 30, 2019 from $4,005 million for the fiscal year ended September 30, 2018, which includes an increase of $240 million, or 6%, due to the acquisition of EMP and $28 million, or 1%, due to the adoption of the new revenue recognition standard, ASC 606, in October 2018.

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Prior to intersegment eliminations, total digital revenues for the fiscal year ended September 30, 2019 were comprised of U.S.

revenues of $1,382 million and international revenues of $1,232 million , or 53% and 47% of total digital revenues, respectively.

$1,382 million and international revenues of $1,232 million, or 53% and 47% of total digital revenues, respectively.

Prior to intersegment eliminations, total digital revenues for the fiscal year ended September 30, 2018 were comprised of U.S.

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The increase in digital revenue includes an $14 million increase resulting from the adoption of ASC 606 and increases in streaming revenue driven by the continued growth in streaming services, partially offset by decreases in download revenue.

Total revenues increased by $429 million, or 12%, to $4,005 million for the fiscal year ended September 30, 2018 from $3,576 million for the fiscal year ended September 30, 2017.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 84% and 16% of revenues for each of the fiscal years ended September 30, 2018 and the fiscal year ended September 30, 2017.

Prior to intersegment eliminations, U.S.

and international revenues represented 44% and 56% of total revenues for each of the fiscal years ended September 30, 2018 and September 30, 2017.

Total digital revenues after intersegment eliminations increased by $382 million, or 20%, to $2,252 million for the fiscal year ended September 30, 2018 from $1,870 million for the fiscal year ended September 30, 2017.

Total digital revenues represented 56% and 52% of consolidated revenues for the fiscal year ended September 30, 2018 and September 30, 2017, respectively.

Prior to intersegment eliminations, total digital revenues for the fiscal year ended September 30, 2018 were comprised of U.S.

revenues of $1,169 million and international revenues of $1,087 million, or 52% and 48% of total digital revenues, respectively.

Prior to intersegment eliminations, total digital revenues for the fiscal year ended September 30, 2017 were comprised of U.S.

revenues of $1,005 million and international revenues of $874 million, or 53% and 47% of total digital revenues, respectively.

Recorded Music revenues increased by $340 million, or 11%, to $3,360 million for the fiscal year ended September 30, 2018 from $3,020 million for the fiscal year ended September 30, 2017.

Recorded Music revenues were $1,460 million and $1,329 million, or 43% and 44% of consolidated Recorded Music revenues for the fiscal year ended September 30, 2018 and September 30, 2017, respectively.

International Recorded Music revenues were $1,900 million and $1,691 million, or 57% and 56% of consolidated Recorded Music revenues for the fiscal years ended September 30, 2018 and September 30, 2017, respectively.

The overall increase in Recorded Music revenue was driven by increases in digital revenue, licensing revenue and artist services and expanded-rights revenue, partially offset by a decrease in physical revenue.

Digital revenue increased by $327 million as

a result of the continued growth in streaming services, and a strong release schedule.

Revenue from streaming services grew by $391 million to $1,733 million for the fiscal year ended September 30, 2018 from $1,342 million for the fiscal year ended September 30, 2017.

Digital revenue growth was partially offset by download and other digital declines of $64 million to $286 million for the fiscal year ended September 30, 2018 from $350 million for the fiscal year ended September 30, 2017.

Licensing revenue increased by $46 million primarily due to higher broadcast fee income, revenue from recent acquisitions and increased synchronization activity.

Artist services and expanded-rights revenue increased by $4 million primarily due to the favorable impact of foreign currency exchange rates of $13 million and higher merchandise revenue, partially offset by certain concert promotion business divestitures and the timing of tours.

Physical revenue decreased by $37 million primarily due to underlying market decline as consumption shifts from physical to digital products.

Music Publishing revenues increased by $81 million, or 14%, to $653 million for the fiscal year ended September 30, 2018 from $572 million for the fiscal year ended September 30, 2017.

Music Publishing revenues were $294 million and $258 million, or 45% of consolidated Music Publishing revenues for each of the fiscal years ended September 30, 2018 and September 30, 2017.

International Music Publishing revenues were $359 million and $314 million, or 55% of consolidated Music Publishing revenues for each of the fiscal years ended September 30, 2018 and September 30, 2017.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $50 million, performance revenue of $15 million, synchronization revenue of $7 million and mechanical revenue of $7 million.

The increase in digital revenue was due to an increase in streaming of $60 million, partially offset by download and other digital declines of $10 million.

Performance revenue increased due to higher distributions.

Synchronization revenue increased due to increased television and commercial income.

The increase in mechanical revenue was attributable to the timing of distributions.

Revenue by Geographical Location

revenue decreased by $22 million, or 1%, to $1,934 million for the fiscal year ended September 30, 2020 from $1,956 million for the fiscal year ended September 30, 2019.

Recorded Music revenue decreased by $47 million or 3%.

The primary drivers were the decreases in U.S.

Recorded Music physical revenue and U.S artist services and expanded rights revenue.

These decreases were partially offset by increases in U.S digital revenue, which increased by $64 million due to the continued growth in streaming services, and U.S licensing revenue, which increased by $10 million primarily due to licensing settlements despite the impact of COVID-19 interruptions.

streaming revenue increased by $91 million, partially offset by a $27 million decline in download revenue.

artist services and expanded-rights revenue decreased by $63 million, or 36%, driven by the impact of COVID-19 business interruptions, which resulted in tour postponements and cancellations and decreased physical retail and tour-related merchandising revenues.

physical revenue decreased by $58 million due to the shift from physical to digital formats, impact of COVID-19 and timing of releases.

Music Publishing revenue increased by $25 million or 8%.

This was primarily driven by the increase in U.S.

Music Publishing digital revenue of $33 million due to the continued growth in streaming services partially offset by a decrease in performance revenue of $6 million and synchronization revenue of $2 million due to COVID-19.

International revenue increased by $6 million, or 0%, to $2,533 million for the fiscal year ended September 30, 2020 from $2,527 million for the fiscal year ended September 30, 2019.

Excluding the unfavorable impact of foreign currency exchange rates, International revenue increased by $35 million or 1%.

International Recorded Music revenue increased $17 million primarily due to an

increase in digital revenue of $161 million partially offset by decreases in artist services and expanded-rights revenue of $41 million, physical revenue of $67 million and licensing revenue of $36 million.

International Recorded Music digital revenue increased due to a $183 million increase in streaming services revenue, partially offset by a $22 million decline in download and other digital revenue.

The increase in international Recorded Music streaming revenue was due to the continued growth in streaming services internationally.

International Recorded Music artist services and expanded-rights revenue decreased primarily due to the impact of COVID-19 business interruptions, which resulted in tour postponements and cancellations, in contrast to strong touring in the prior year.

This was offset by an increase in merchandise revenue, which reflects a decrease in physical retail and tour related merchandising offset by growth in EMP e-commerce merchandise revenue.

International Recorded Music physical revenue decreased due to the continued shift from physical revenue to digital revenue, impact of COVID-19, timing of releases, and the prior-year physical success of Johnny Hallyday.

International Recorded Music licensing revenue decreased due to the impact of COVID-19.

International Music Publishing revenue decreased $11 million or 3%.

This was primarily driven by decreases in international Music Publishing performance revenue of $35 million and mechanical revenue of $7 million, both due to the impact of COVID-19 and timing of distributions, other revenue of $3 million partially offset by increases in digital revenue of $33 million, primarily due to growth in streaming, and synchronization revenue of $1 million.

revenue increased by $202 million, or 12%, to $1,956 million for the fiscal year ended September 30, 2019 from $1,754 million for the fiscal year ended September 30, 2018.

20 unchanged sentences

This was primarily driven by decreases in international Music Publishing performance revenue of $26 million and mechanical revenue of $5 million both due to lost administration rights and lower market share, partially offset by the increase in digital revenue of $12 million primarily due to growth in streaming and the adoption of ASC 606.

revenue increased by $167 million, or 11%, to $1,754 million for the fiscal year ended September 30, 2018 from $1,587 million for the fiscal year ended September 30, 2017.

Recorded Music revenue increased by $131 million or 10%.

driver was the increase in U.S.

Recorded Music digital revenue, which increased by $144 million due to the continued growth in streaming services and strong release performance.

licensing revenue increased by $9 million due to higher broadcast fee income and increased synchronization activity.

These increases were partially offset by a decline in U.S.

physical revenue of $16 million due to the shift from physical revenue to digital revenue and a decline in artist services and expanded-rights revenue of $6 million.

Music Publishing revenues increased by $36 million or 14%.

This was primarily driven by the increase in U.S.

Music Publishing digital revenue of $20 million due to an increase in streaming revenue of $32 million from the continued growth in streaming services, partially offset by declines in download and other digital revenue of $12 million.

mechanical revenue and U.S.

performance revenue increased by $8 million and $3 million, respectively, due to higher distributions.

U.S synchronization revenue increased by $4 million due to increased film and commercial income.

International revenue increased by $254 million, or 13%, to $2,259 million for the fiscal year ended September 30, 2018 from $2,005 million for the fiscal year ended September 30, 2017.

Excluding the favorable impact of foreign currency exchange rates, international revenue increased by $163 million or 8%.

International Recorded Music revenue increased $209 million primarily due to increases in digital revenue of $183 million, licensing revenue of $37 million and artist services and expanded-rights revenue of $10 million, partially offset by a decrease in physical revenue of $21 million.

International Recorded Music digital revenue increased due to a $211 million increase in streaming services revenue, partially offset by a $28 million decline in download and other digital revenue.

The increase in international Recorded Music streaming revenue was due to the continued growth in streaming services internationally and strong release performance from WANIMA in Japan.

International Recorded Music licensing revenue increased due to revenue from recent acquisitions, higher broadcast fee income and the favorable impact of foreign currency exchange rates of $10 million.

International Recorded Music artist services and expanded-rights revenue increased due to the favorable impact of foreign currency exchange rates of $13 million, partially offset by successful tours in France in the prior fiscal year with no comparable tours in the current fiscal year and divestment of certain concert promotion businesses in the prior year.

International Recorded Music physical revenue decreased due to the continued shift from physical to digital revenue, partially offset by the favorable impact of foreign currency exchange rates of $27 million.

International Music Publishing revenue increased $45 million primarily due to increases in digital revenue of $30 million, in performance revenue of $12 million and in synchronization revenue of $3 million.

Cost of revenues

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For the Fiscal Year Ended

September 30,

September 30, 2020 vs.

2019 2019 vs.

2020 2019 2018 $ Change % Change $ Change % Change

Artist and repertoire costs $ 1,560 $ 1,574 $ 1,471 $ (14) -1 % $ 103 7 %

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Total cost of revenues $ 2,333 $ 2,401 $ 2,171 $ (68) -3 % $ 230 11 %

Our cost of revenues decreased by $68 million, or 3%, to $2,333 million for the fiscal year ended September 30, 2020 from $2,401 million for the fiscal year ended September 30, 2019.

Expressed as a percentage of revenues, cost of revenues decreased to 52% for the fiscal year ended September 30, 2020 from 53% for the fiscal year ended September 30, 2019.

Artist and repertoire costs decreased by $14 million, or 1%, to $1,560 million for the fiscal year ended September 30, 2020 from $1,574 million for the fiscal year ended September 30, 2019.

Artist and repertoire costs as a percentage of revenues remained constant at 35% for each of the fiscal years ended September 30, 2020 and September 30, 2019.

Product costs decreased by $54 million, or 7%, to $773 million for the fiscal year ended September 30, 2020 from $827 million for the fiscal year ended September 30, 2019.

Product costs as a percentage of revenues decreased to 17% for the fiscal year ended September 30, 2020 from 18% for the fiscal year ended September 30, 2019.

The overall decrease in product costs primarily relates to revenue mix due to lower physical and artist-services and expanded rights revenues, partially offset by increases in our third party distributed label revenue.

Our cost of revenues increased by $230 million, or 11%, to $2,401 million for the fiscal year ended September 30, 2019 from $2,171 million for the fiscal year ended September 30, 2018.

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The overall increase in product costs relate to the acquisition of EMP of $116 million as well as revenue mix related to increasing artist services and expanded-rights revenues, which were partially offset by $82 million related to the divestment of a concert promotion business in Italy.

Our cost of revenues increased by $240 million, or 12%, to $2,171 million for the fiscal year ended September 30, 2018 from $1,931 million for the fiscal year ended September 30, 2017.

Expressed as a percentage of revenues, cost of revenues remained flat at 54% for each of the fiscal years ended September 30, 2018 and September 30, 2017.

Artist and repertoire costs increased by $168 million, or 13%, to $1,471 million for the fiscal year ended September 30, 2018 from $1,303 million for the fiscal year ended September 30, 2017.

Artist and repertoire costs as a percentage of revenues increased to 37% for the fiscal year ended September 30, 2018 from 36% for the fiscal year ended September 30, 2017.

The increase was primarily driven by the mix of revenue and increased investment in artists and songwriters.

Product costs increased by $72 million, or 12%, to $700 million for the fiscal year ended September 30, 2018 from $628 million for the fiscal year ended September 30, 2017.

Product costs as a percentage of revenues remained flat at 18% for each of the fiscal years ended September 30, 2018 and September 30, 2017.

Selling, general and administrative expenses

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For the Fiscal Year Ended

September 30,

September 30, 2020 vs.

2019 2019 vs.

2020 2019 2018 $ Change % Change $ Change % Change

General and administrative expense (1) $ 1,434 $ 764 $ 814 $ 670 88 % $ (50) -6 %

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$ 2,169 $ 1,510 $ 1,411 $ 659 44 % $ 99 7 %

______________________________________

(1) Includes depreciation expense of $71 million, $61 million and $55 million for the fiscal years ended September 30, 2020, September 30, 2019 and September 30, 2018, respectively.

Total selling, general and administrative expense increased by $659 million, or 44%, to $2,169 million for the fiscal year ended September 30, 2020 from $1,510 million for the fiscal year ended September 30, 2019.

Expressed as a percentage of revenues, selling, general and administrative expenses increased to 49% for the fiscal year ended September 30, 2020 from 34% for the fiscal year ended September 30, 2019.

This is primarily due to the $559 million of increased expense associated with non-cash stock-based compensation, the one-time management agreement termination fee and IPO related expenses totaling $89 million and a one-time charge within depreciation expense of $10 million related to our Los Angeles, California headquarters relocation.

Excluding non-cash stock-based compensation expense, the one-time management agreement termination fee and IPO related expenses, and one-time

charge within depreciation expense, selling, general and administrative expense as a percentage of revenue remained constant at 33% for each of the fiscal years ended September 30, 2020 and September 30, 2019.

General and administrative expenses increased by $670 million, or 88%, to $1,434 million for the fiscal year ended September 30, 2020 from $764 million for the fiscal year ended September 30, 2019.

The increase in general and administrative expense was primarily due to higher expense associated with non-cash stock-based compensation of $559 million, the one-time management agreement termination fee and IPO related expenses totaling $89 million, a one-time charge within depreciation expense of $10 million, costs associated with transformation initiatives of $19 million and costs associated with COVID-19 business interruption of $17 million, partially offset by lower overhead due to active cost management efforts.

Expressed as a percentage of revenue, general and administrative expense increased to 32% for the fiscal year ended September 30, 2020 from 17% for the fiscal year ended September 30, 2019.

Excluding non-cash stock-based compensation expense, the one-time management agreement termination fee and IPO related expenses, and the one-time charge within depreciation expense, general and administrative expense as a percentage of revenue remained constant at 16% for each of the fiscal years ended September 30, 2020 and September 30, 2019.

Selling and marketing expense increased by $8 million, or 1%, to $640 million for the fiscal year ended September 30, 2020 from $632 million for the fiscal year ended September 30, 2019.

Expressed as a percentage of revenues, selling and marketing expense remained constant at 14% for each of the fiscal years ended September 30, 2020 and September 30, 2019.

Distribution expense decreased by $19 million, or 17%, to $95 million for the fiscal year ended September 30, 2020 from $114 million for the fiscal year ended September 30, 2019.

Expressed as a percentage of revenues, distribution expense decreased to 2% for the fiscal year ended September 30, 2020 from 3% for the fiscal year ended September 30, 2019 mainly due to revenue mix, specifically declines in physical and artist services and expanded rights revenue.

Total selling, general and administrative expense increased by $99 million, or 7%, to $1,510 million for the fiscal year ended September 30, 2019 from $1,411 million for the fiscal year ended September 30, 2018.

Expressed as a percentage of revenues, selling, general and administrative expenses decreased to 34% for the fiscal year ended September 30, 2019 from 35% for the fiscal year ended September 30, 2018.

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Excluding the acquisition of EMP, distribution expense was flat at 2%.

Total selling, general and administrative expense increased by $189 million, or 16%, to $1,411 million for the fiscal year ended September 30, 2018 from $1,222 million for the fiscal year ended September 30, 2017.

Expressed as a percentage of revenues,

selling, general and administrative expenses increased to 35% for the fiscal year ended September 30, 2018 from 34% for the fiscal year ended September 30, 2017.

General and administrative expenses increased by $130 million, or 19%, to $814 million for the fiscal year ended September 30, 2018 from $684 million for the fiscal year ended September 30, 2017.

The increase in general and administrative expense was primarily due to increases in other employee related compensation expense, including severance and restructuring costs, of $78 million, and an increase in facilities cost due to an overlap in terms on the lease of our new Los Angeles, California headquarters with our existing office leases of $16 million.

The increase was also due to an increase in expense associated with the Senior Management Free Cash Flow Plan of $6 million, which is primarily related to compensation costs associated with higher dividend payments in the 2018 fiscal year.

Expressed as a percentage of revenue, general and administrative expense increased to 20% for the fiscal year ended September 30, 2018 from 19% for the fiscal year ended September 30, 2017.

Selling and marketing expense increased by $58 million, or 12%, to $530 million for the fiscal year ended September 30, 2018 from $472 million for the fiscal year ended September 30, 2017.

Expressed as a percentage of revenues, selling and marketing expense remained flat at 13% for each of the fiscal years ended September 30, 2018 and September 30, 2017.

Distribution expense increased by $1 million, or 2%, to $67 million for the fiscal year ended September 30, 2018 from $66 million for the fiscal year ended September 30, 2017.

Expressed as a percentage of revenues, distribution expense remained flat at 2% for each of the fiscal years ended September 30, 2018 and September 30, 2017.

Reconciliation of Net Income Attributable to Warner Music Group Corp.

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For the Fiscal Year Ended

September 30,

Net income attributable to Warner Music Group Corp.

September 30, 2020 vs.

2019 2019 vs.

2020 2019 2018 $ Change % Change $ Change % Change

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

$ (475) $ 256 $ 307 $ (731) — % $ (51) -17 %

Income attributable to noncontrolling interest 5 2 5 3 — % (3) -60 %

Income tax expense (benefit)

Income (loss) before income taxes

Other (income) expense

Net (loss) income (470) 258 312 (728) — % (54) -17 %

Income tax expense 23 9 130 14 — % (121) -93 %

(Loss) income before income taxes (447) 267 442 (714) — % (175) -40 %

Other expense (income) 57 (60) (394) 117 — % 334 -85 %

Interest expense, net 127 142 138 (15) -11 % 4 3 %

Loss on extinguishment of debt 34 7 31 27 — % (24) -77 %

Operating income

Operating (loss) income (229) 356 217 (585) — % 139 64 %

Amortization expense 190 208 206 (18) -9 % 2 1 %

Depreciation expense 71 61 55 10 16 % 6 11 %

OIBDA $ 32 $ 625 $ 478 $ (593) -95 % $ 147 31 %

Our OIBDA decreased by $593 million, or 95%, to $32 million for the fiscal year ended September 30, 2020 as compared to $625 million for the fiscal year ended September 30, 2019 primarily as a result of higher selling, general and administrative expenses.

Expressed as a percentage of total revenue, OIBDA margin decreased to 1% for the fiscal year ended September 30, 2020 from 14% for the fiscal year ended September 30, 2019.

Excluding non-cash stock-based compensation expense, the one-time management agreement termination fee and IPO related expenses, as a percentage of total revenue, OIBDA margin increased to 16% for the fiscal year ended September 30, 2020 from 15% for the fiscal year ended September 30, 2019.

Our OIBDA increased by $147 million, or 31%, to $625 million for the fiscal year ended September 30, 2019 as compared to $478 million for the fiscal year ended September 30, 2018 primarily as a result of higher revenues and lower general and administrative expenses.

Expressed as a percentage of total revenues, OIBDA increased to 14% for the fiscal year ended September 30, 2019 from 12% for the fiscal year ended September 30, 2018 largely due to $15 million related to the transition in timing of revenues and related costs resulting from the adoption of ASC 606, $18 million related to the acquisition of EMP, which is a lower-margin business, and lower general and administrative expenses.

Our OIBDA increased by $5 million, or 1%, to $478 million for the fiscal year ended September 30, 2018 as compared to $473 million for the fiscal year ended September 30, 2017 primarily as a result of higher revenue, partially offset by higher general

and administrative expenses.

Expressed as a percentage of total revenues, OIBDA decreased to 12% for the fiscal year ended September 30, 2018 from 13% for the fiscal year ended September 30, 2017.

Depreciation expense

Our depreciation expense increased by $10 million, or 16%, to $71 million for the fiscal year ended September 30, 2020 from $61 million for the fiscal year ended September 30, 2019, primarily due to a one-time charge of $10 million representing the difference between the net book value of a building and its recoverable value.

The building was exited as part of our Los Angeles, California headquarters relocation.

Our depreciation expense increased by $6 million, or 11%, to $61 million for the fiscal year ended September 30, 2019 from $55 million for the fiscal year ended September 30, 2018, primarily due to increased assets from the EMP acquisition in October 2018 and our new Los Angeles, California headquarters placed into service in April 2019.

Our depreciation expense increased by $5 million, or 10%, to $55 million for the fiscal year ended September 30, 2018 from $50 million for the fiscal year ended September 30, 2017, primarily due to an increase in technology and facilities capital spending.

Amortization expense

Amortization expense decreased by $18 million, or 9%, to $190 million for the fiscal year ended September 30, 2020 from $208 million for the fiscal year ended September 30, 2019, primarily due to certain intangible assets becoming fully amortized.

Amortization expense increased by $2 million, or 1%, to $208 million for the fiscal year ended September 30, 2019 from $206 million for the fiscal year ended September 30, 2018, primarily due to an increase in amortizable intangible assets related to the acquisition of EMP in October 2018, offset by the impact of foreign currency exchange rates.

Amortization expense increased by $5 million, or 3%, to $206 million for the fiscal year ended September 30, 2018 from $201 million for the fiscal year ended September 30, 2017, primarily due to an increase in amortizable intangible assets and the impact of foreign currency exchange rates.

Operating income

Operating (loss) income

Our operating income decreased by $585 million to a loss of $229 million for the fiscal year ended September 30, 2020 from income of $356 million for the fiscal year ended September 30, 2019.

The decrease in operating income was due to the factors that led to the decrease in OIBDA.

Our operating income increased by $139 million to $356 million for the fiscal year ended September 30, 2019 from $217 million for the fiscal year ended September 30, 2018.

The increase in operating income was due to the factors that led to the increase in OIBDA.

Our operating income decreased by $5 million to $217 million for the fiscal year ended September 30, 2018 from $222 million for the fiscal year ended September 30, 2017.

The decrease in operating income was primarily due to higher general and administrative expenses as noted above, partially offset by higher revenue.

Loss on extinguishment of debt

We recorded a loss on extinguishment of debt in the amount of $7 million for the fiscal year ended September 30, 2019 , which represents the unamortized deferred financing costs related to the redemption of the 4.125% Senior Secured Notes (as defined later in this Annual Report) and 5.625% Senior Secured Notes (as defined later in this Annual Report), in addition to the open market purchase of the 4.875% Senior Secured Notes (as defined later in this Annual Report).

We recorded a loss on extinguishment of debt in the amount of $34 million for the fiscal year ended September 30, 2020, which represents the premiums paid for early redemption and unamortized deferred financing costs in connection with the redemption of the 4.125%, 4.875% and 5.00% Senior Secured Notes (as defined later in this Annual Report) and the partial repayment of the Senior Term Loan Facility (as defined later in this Annual Report).

We recorded a loss on extinguishment of debt in the amount of $7 million for the fiscal year ended September 30, 2019, which represents the unamortized deferred financing costs related to the redemption of a portion of the 4.125% Senior Notes and all of the 5.625% Senior Notes, in addition to the open market purchases of the 4.875% Senior Notes.

Please refer to Note 10 of our consolidated financial statements for further discussion.

We recorded a loss on extinguishment of debt in the amount of $31 million for the fiscal year ended September 30, 2018, which represents the premium paid on early redemption and unamortized deferred financing costs related to the June 2018 Senior Term Loan Credit Agreement Amendment (as defined later in this Annual Report), the redemption of the 6.75% Senior Notes (as defined later in this Annual Report) and the December 2017 Senior Term Loan Credit Agreement Amendment (as defined later in this

Annual Report).

We recorded a loss on extinguishment of debt in the amount of $7 million for the fiscal year ended September 30, 2019, which represents the unamortized deferred financing costs related to the redemption of the 4.125% Senior Secured Notes (as defined later in this Annual Report) and 5.625% Senior Secured Notes (as defined later in this Annual Report), in addition to the open market purchase of the 4.875% Senior Secured Notes (as defined later in this Annual Report).

1 unchanged sentence

Interest expense, net

Our interest expense, net decreased by $15 million, or 11% to $127 million for the fiscal year ended September 30, 2020 from $142 million for the fiscal year ended September 30, 2019.

This was primarily driven by a decline in LIBOR rates as well as lower interest rates as a result of refinancing transactions and redemption activity.

Our interest expense, net increased by $4 million, or 3% to $142 million for the fiscal year ended September 30, 2019 from $138 million for the fiscal year ended September 30, 2018.

This was primarily driven by the higher debt balance from the issuance of the 3.625% Secured Notes (as defined later in this Annual Report) during the current year, offset by lower interest rates as a result of refinancing transactions and redemption activity.

Our interest expense, net, decreased by $11 million, or 7% to $138 million for the fiscal year ended September 30, 2018 from $149 million for the fiscal year ended September 30, 2017.

This was primarily due to lower interest rates as a result of refinancing transactions and interest income on higher cash balances during the year.

Other (income) expense, net

Other expense (income)

Other expense (income) decreased by $117 million to other expense of $57 million for the fiscal year ended September 30, 2020 from other income of $60 million for the fiscal year ended September 30, 2019.

Other expense for the fiscal year ended September 30, 2020 primarily includes the non-cash unrealized loss on the remeasurement of our Euro-denominated debt of $56 million, $4 million loss on hedging activity and losses on investments of $7 million, partially offset by an unrealized gain of $9 million on the mark-to-market of an equity method investment.

Other expense (income) for the fiscal year ended September 30, 2019 includes non-cash unrealized foreign exchange currency gains on the remeasurement of our Euro-denominated debt of $43 million, unrealized gain of $19 million on the mark-to-market of an equity method investment, partially offset by the impact of other movements in foreign exchange rates.

Other (income) expense, net decreased by $334 million to other income of $60 million for the fiscal year ended September 30, 2019 from other income of $394 million for the fiscal year ended September 30, 2018.

1 unchanged sentence

Other (income) expense, net for the fiscal year ended September 30, 2018 includes the gain on the Spotify share sale, net of estimated artist share and other related costs, of $382 million, gain on investments of $7 million and foreign currency gains on our Euro-denominated debt of $4 million.

Other (income) expense, net, increased by $434 million to other income of $394 million for the fiscal year ended September 30, 2018 from other expense of $40 million for the fiscal year ended September 30, 2017.

Other (income) expense, net for the fiscal year ended September 30, 2018, includes the gain on the Spotify share sale, net of estimated artist share and other related costs of $382 million, gain on investments of $7 million and foreign currency gains on our Euro-denominated debt of $4 million.

Other (income) expense, net for the fiscal year ended September 30, 2017, includes currency exchange loss on our Euro-denominated debt of $27 million, loss on investments of $21 million, partially offset by foreign currency exchange gains on intercompany loans and derivative liabilities of $5 million.

Income tax expense (benefit)

Income tax expense

Our income tax expense increased by $14 million to $23 million for the fiscal year ended September 30, 2020 from $9 million for the fiscal year ended September 30, 2019.

The net increase of $14 million in income tax expense primarily relates to a greater release of a U.S.

deferred tax valuation allowance in the fiscal year ended September 30, 2019.

Our income tax expense decreased by $121 million to $9 million for the fiscal year ended September 30, 2019 from $130 million for the fiscal year ended September 30, 2018.

1 unchanged sentence

deferred tax valuation allowance and higher tax expense of $77 million in fiscal 2018 as a result of the gain on the sale of the Spotify shares in the fiscal year ended September 30, 2018.

Our income tax expense (benefit) increased by $281 million to $130 million for the fiscal year ended September 30, 2018 compared to an income tax benefit of $151 million for the fiscal year ended September 30, 2017.

The net increase of $281 million in income tax expense primarily relates to higher pre-tax income as a result of the gain on the Spotify share sale of $77 million and U.S.

tax expense of $23 million for the reduction of our net U.S.

deferred tax assets as a result of the change in the U.S.

corporate statutory tax rate, as compared to a U.S.

tax benefit of $125 million related to the reversal of a significant portion of our U.S.

deferred tax valuation allowance and a $59 million benefit related to foreign currency losses on intra-entity loans.

Net (loss) income

Our net income decreased by $728 million to a loss of $470 million for the fiscal year ended September 30, 2020 from income of $258 million for the fiscal year ended September 30, 2019 as a result of the factors described above.

Our net income decreased by $54 million to $258 million for the fiscal year ended September 30, 2019 from $312 million for the fiscal year ended September 30, 2018 as a result of the factors described above.

Our net income increased by $163 million, to $312 million for the fiscal year ended September 30, 2018 from $149 million for the fiscal year ended September 30, 2017 as a result of the factors described above.

The increase in income was primarily driven by the factors described above.

Noncontrolling interest

There was $5 million of income attributable to noncontrolling interests for the fiscal year ended September 30, 2020.

There was $2 million of income attributable to noncontrolling interests for the fiscal year ended September 30, 2019.

There was $2 million of income attributable to noncontrolling interests for the fiscal year ended September 30, 2019 primarily due to the adoption of ASC 606.

There was $5 million of income attributable to noncontrolling interests for the fiscal year ended September 30, 2018.

Net income attributable to noncontrolling interests was $5 million for the fiscal year ended September 30, 2018 and $6 million for the fiscal year ended September 30, 2017.

Business Segment Results

Revenue, operating income (loss) and OIBDA by business segment are as follows (in millions):

Revenues, operating income (loss) and OIBDA by business segment were as follows (in millions):

For the Fiscal Year Ended

September 30,

September 30, 2020 vs.

2019 2019 vs.

2020 2019 2018 $ Change % Change $ Change % Change

Recorded Music

Revenues $ 3,810 $ 3,840 $ 3,360 $ (30) -1 % $ 480 14 %

Operating income 175 439 307 (264) -60 % 132 43 %

OIBDA 349 623 480 (274) -44 % 143 30 %

Music Publishing

Revenues 657 643 653 14 2 % (10) -2 %

Operating income 81 92 84 (11) -12 % 8 10 %

OIBDA 157 166 159 (9) -5 % 7 4 %

Corporate expenses and eliminations

Revenue elimination

Revenue eliminations (4) (8) (8) 4 -50 % — — %

Operating loss (485) (175) (174) (310) — % (1) 1 %

Operating income

OIBDA (474) (164) (161) (310) — % (3) 2 %

Revenues 4,463 4,475 4,005 (12) — % 470 12 %

Operating (loss) income (229) 356 217 (585) — % 139 64 %

OIBDA 32 625 478 (593) -95 % 147 31 %

Recorded Music

Recorded Music revenues decreased by $30 million, or 1%, to $3,810 million for the fiscal year ended September 30, 2020 from $3,840 million for the fiscal year ended September 30, 2019.

Recorded Music revenues were $1,609 million and $1,656 million, or 42% and 43% of consolidated Recorded Music revenues, for the fiscal years ended September 30, 2020 and September 30, 2019, respectively.

International Recorded Music revenues were $2,201 million and $2,184 million, or 58% and 57% of consolidated Recorded Music revenues, for the fiscal years ended September 30, 2020 and September 30, 2019, respectively.

The overall decrease in Recorded Music revenue was driven by decreases in physical, artist services and expanded-rights and licensing revenue, partially offset by an increase in digital revenue as described in the “Total Revenues” and “Revenue by Geographical Location” sections above.

Recorded Music revenues increased by $480 million, or 14%, to $3,840 million for the fiscal year ended September 30, 2019 from $3,360 million for the fiscal year ended September 30, 2018.

Recorded Music revenues were $1,656 million and $1,460 million , or 43% of consolidated Recorded Music revenues, for the fiscal year ended September 30, 2019 and September 30, 2018 ,

respectively.

Recorded Music revenues were $1,656 million and $1,460 million, or 43% of consolidated Recorded Music revenues, for the fiscal year ended September 30, 2019 and September 30, 2018, respectively.

International Recorded Music revenues were $2,184 million and $1,900 million, or 57% of consolidated Recorded Music revenues, for each of the fiscal years ended September 30, 2019 and September 30, 2018, respectively.

The overall increase in Recorded Music revenue was driven by increases in digital revenue and artist services and expanded-rights revenue, partially offset by a decrease in physical revenue and licensing revenue as described in the “Total Revenues” and “Revenue by Geographical Location” sections above.

Recorded Music revenues increased by $340 million, or 11%, to $3,360 million for the fiscal year ended September 30, 2018 from $3,020 million for the fiscal year ended September 30, 2017.

International Recorded Music revenues were $1,900 million and $1,691 million, or 57% and 56% of consolidated Recorded Music revenues for each of the fiscal years ended September 30, 2018 and September 30, 2017, respectively.

The overall increase in Recorded Music revenue was mainly driven by streaming revenue growth as described in the “Total Revenues” and “Revenue by Geographical Location” sections above.

Cost of revenues

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For the Fiscal Year Ended

September 30,

September 30, 2020 vs.

2019 2019 vs.

2020 2019 2018 $ Change % Change $ Change % Change

Artist and repertoire costs $ 1,148 $ 1,178 $ 1,054 $ (30) -3 % $ 124 12 %

1 unchanged sentence

Total cost of revenues $ 1,919 $ 2,005 $ 1,754 $ (86) -4 % $ 251 14 %

Recorded Music cost of revenues decreased by $86 million, or 4%, to $1,919 million for the fiscal year ended September 30, 2020 from $2,005 million for the fiscal year ended September 30, 2019.

Expressed as a percentage of Recorded Music revenue, cost of revenues decreased from 50% for the fiscal year ended September 30, 2020 from 52% for the fiscal year ended September 30, 2019.

Artist and repertoire costs as a percentage of revenue decreased to 30% for the fiscal year ended September 30, 2020 from 31% for the fiscal year ended September 30, 2019.

The decrease is primarily attributable to revenue mix and lower artist related costs, including a decrease in spending.

Product costs as a percentage of revenue decreased to 20% for the fiscal year ended September 30, 2020 from 22% for the fiscal year ended September 30, 2019.

The decrease in product costs primarily relates to revenue mix due to lower physical and artist-services and expanded rights revenues, partially offset by increases in our third party distributed label revenue.

Recorded Music cost of revenues increased by $251 million, or 14%, to $2,005 million for the fiscal year ended September 30, 2019 from $1,754 million for the fiscal year ended September 30, 2018.

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The increase in product costs is primarily due to the acquisition of EMP, partially offset by a concert promotion business divestment in Italy.

Recorded Music cost of revenues increased by $162 million, or 10%, to $1,754 million for the fiscal year ended September 30, 2018 from $1,592 million for the fiscal year ended September 30, 2017.

Artist and repertoire costs as a percentage of revenue decreased to 31% for the fiscal year ended September 30, 2018 from 32% for the fiscal year ended September 30, 2017 primarily due to a shift in revenue mix toward higher-margin digital revenues from lower-margin physical revenues internationally and a benefit for advance recoveries of $10 million.

Product costs as a percentage of revenue remained flat at 21% for each of the fiscal years ended September 30, 2018 and September 30, 2017.

Expressed as a percentage of Recorded Music revenues, cost of revenues decreased to 52% for the fiscal year ended September 30, 2018 from 53% for the fiscal year ended September 30, 2017.

Selling, general and administrative expense

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For the Fiscal Year Ended

September 30,

September 30, 2020 vs.

2019 2019 vs.

2020 2019 2018 $ Change % Change $ Change % Change

General and administrative expense (1) $ 875 $ 522 $ 573 $ 353 68 % $ (51) -9 %

3 unchanged sentences

$ 1,597 $ 1,257 $ 1,161 $ 340 27 % $ 96 8 %

______________________________________

(1) Includes depreciation expense of $55 million, $45 million, and $35 million for the fiscal years ended September 30, 2020, September 30, 2019 and September 30, 2018, respectively.

Recorded Music selling, general and administrative expense increased by $340 million, or 27%, to $1,597 million for the fiscal year ended September 30, 2020 from $1,257 million for the fiscal year ended September 30, 2019.

The increase in general and administrative expense was primarily due to higher non-cash stock-based compensation expense of $359 million and a one-time charge within depreciation expense of $10 million related to our Los Angeles, California headquarters relocation, partially offset by lower overhead from active cost management efforts.

The decrease in distribution expense was primarily due to lower physical and artist services and expanded rights revenues.

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense increased to 42% for the fiscal year ended September 30, 2020 from 33% for the fiscal year ended September 30, 2019.

Excluding non-cash stock-based compensation expense and the one-time charge within depreciation expense, selling, general and administrative expense as a percentage of Recorded Music revenue decreased to 31% for the fiscal year ended September 30, 2020 from 32% for the fiscal year ended September 30, 2019.

Recorded Music selling, general and administrative expense increased by $96 million, or 8%, to $1,257 million for the fiscal year ended September 30, 2019 from $1,161 million for the fiscal year ended September 30, 2018.

The decrease in Recorded Music general and administrative expense was primarily due to lower expense associated with the Senior Management Free Cash Flow Plan of $21 million and decreases in severance and restructuring costs of $44 million, partially offset by higher employee related costs.

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Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense decreased to 33% for the fiscal year ended September 30, 2019 from 35% for the fiscal year ended September 30, 2018.

Recorded Music selling, general and administrative expense increased by $152 million, or 15%, to $1,161 million for the fiscal year ended September 30, 2018 from $1,009 million for the fiscal year ended September 30, 2017.

The increase in Recorded Music general and administrative expense was primarily due to increases in other employee related compensation including severance and restructuring costs of $63 million and an increase in facilities cost due to an overlap in terms on the lease of our new Los Angeles, California headquarters with our existing office leases of $15 million.

The increase was also due to an increase in expense of $1 million associated with the Senior Management Free Cash Flow Plan, which is primarily related to compensation costs associated with higher dividend payments in the 2018 fiscal year.

Selling and marketing expense increased in line with the increase in revenue.

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense increased to 35% for the fiscal year ended September 30, 2018 from 33% for the fiscal year ended September 30, 2017.

Operating income and OIBDA

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For the Fiscal Year Ended

September 30,

September 30, 2020 vs.

2019 2019 vs.

2020 2019 2018 $ Change % Change $ Change % Change

Operating income $ 175 $ 439 $ 307 $ (264) -60 % $ 132 43 %

Depreciation and amortization 174 184 173 (10) -5 % 11 6 %

OIBDA $ 349 $ 623 $ 480 $ (274) -44 % $ 143 30 %

Recorded Music OIBDA decreased by $274 million, or 44%, to $349 million for the fiscal year ended September 30, 2020 from $623 million for the fiscal year ended September 30, 2019 primarily as a result of higher general and administrative expenses.

Expressed as a percentage of Recorded Music revenues, Recorded Music OIBDA margin decreased to 9% for the fiscal year ended September 30, 2020 from 16% for the fiscal year ended September 30, 2019.

Excluding non-cash stock-based compensation expense, OIBDA as a percentage of Recorded Music revenue increased to 19% for the fiscal year ended September 30, 2020 from 17% for the fiscal year ended September 30, 2019.

Recorded Music operating income decreased by $264 million to $175 million for the fiscal year ended September 30, 2020 from $439 million for the fiscal year ended September 30, 2019 due to the factors that led to the increase in Recorded Music OIBDA noted above.

Excluding non-cash stock-based compensation expense and the one-time charge within depreciation expense, Recorded Music operating income increased by $105 million due to lower total cost of revenues, amortization expense, distribution expense, and general and administrative expense.

Recorded Music OIBDA increased by $143 million, or 30%, to $623 million for the fiscal year ended September 30, 2019 from $480 million for the fiscal year ended September 30, 2018 primarily as a result of higher Recorded Music revenues, $18 million related to the acquisition of EMP which is a lower-margin business and lower general and administrative expenses.

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Recorded Music operating income increased by $132 million to $439 million for the fiscal year ended September 30, 2019 from $307 million for the fiscal year ended September 30, 2018 due to the factors that led to the increase in Recorded Music OIBDA noted above.

Recorded Music OIBDA increased by $29 million, or 6%, to $480 million for the fiscal year ended September 30, 2018 from $451 million for the fiscal year ended September 30, 2017 primarily as a result of higher Recorded Music revenues, partially offset by higher general and administrative expenses.

Expressed as a percentage of Recorded Music revenues, Recorded Music OIBDA decreased to 14% for the fiscal year ended September 30, 2018 from 15% for the fiscal year ended September 30, 2017.

Recorded Music operating income increased by $24 million to $307 million for the fiscal year ended September 30, 2018 from $283 million for the fiscal year ended September 30, 2017 due to the increase in revenue, partially offset by higher general and administrative expenses as noted above.

Music Publishing

Music Publishing revenues increased by $14 million, or 2%, to $657 million for the fiscal year ended September 30, 2020 from $643 million for the fiscal year ended September 30, 2019.

Music Publishing revenues were $325 million and $300 million, or 49% and 47%, of Music Publishing revenues for the fiscal years ended September 30, 2020 and September 30, 2019, respectively.

International Music Publishing revenues were $332 million and $343 million, or 51% and 53%, of Music Publishing revenues for the fiscal years ended September 30, 2020 and September 30, 2019, respectively.

The overall increase in Music Publishing revenue was mainly driven by digital revenue growth, partially offset by lower performance revenue, mechanical revenue, synchronization revenue and other revenue, as described in the “Total Revenues” and “Revenue by Geographical Location” sections above.

Music Publishing revenues decreased by $10 million, or 2%, to $643 million for the fiscal year ended September 30, 2019 from $653 million for the fiscal year ended September 30, 2018.

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The overall decrease in Music Publishing revenue was mainly driven by a decrease in revenues associated with lost administrative rights and lower market share, partially offset by the increase in digital revenue and the impact of the adoption of ASC 606, as described in the “Total Revenues” and “Revenue by Geographical Location” sections above.

Music Publishing revenues increased by $81 million, or 14%, to $653 million for the fiscal year ended September 30, 2018 from $572 million for the fiscal year ended September 30, 2017.

Music Publishing revenues were $294 million and $258 million, or 45% of Music Publishing revenues for each of the fiscal years ended September 30, 2018 and September 30, 2017.

International Music Publishing revenues were $359 million and $314 million, or 55% of Music Publishing revenues for each of the fiscal years ended September 30, 2018 and September 30, 2017.

The overall increase in Music Publishing revenue was mainly driven by the increase in digital revenue as described in the “Total Revenues” and “Revenue by Geographical Location” sections above.

Cost of revenues

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For the Fiscal Year Ended

September 30,

September 30, 2020 vs.

2019 2019 vs.

2020 2019 2018 $ Change % Change $ Change % Change

Artist and repertoire costs $ 418 $ 404 $ 425 $ 14 3 % $ (21) -5 %

Total cost of revenues $ 418 $ 404 $ 425 $ 14 3 % $ (21) -5 %

Music Publishing cost of revenues increased by $14 million, or 3%, to $418 million for the fiscal year ended September 30, 2020 from $404 million for the fiscal year ended September 30, 2019.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues increased to 64% for the fiscal year ended September 30, 2020 from 63% for the fiscal year ended September 30, 2019.

Music Publishing cost of revenues decreased by $21 million, or 5%, to $404 million for the fiscal year ended September 30, 2019 from $425 million for the fiscal year ended September 30, 2018.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues decreased to 63% for the fiscal year ended September 30, 2019 from 65% for the fiscal year ended September 30, 2018, primarily due to the adoption of ASC 606, which resulted in a shift in the timing of recognition of revenues and certain related costs from a cash to an accrual basis.

Music Publishing cost of revenues increased by $70 million, or 20%, to $425 million for the fiscal year ended September 30, 2018 from $355 million for the fiscal year ended September 30, 2017 due to revenue mix and increased A&R investment costs.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues increased to 65% for the fiscal year ended September 30, 2018 from 62% for the fiscal year ended September 30, 2017.

Selling, general and administrative expense

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For the Fiscal Year Ended

September 30,

September 30, 2020 vs.

2019 2019 vs.

2020 2019 2018 $ Change % Change $ Change % Change

General and administrative expense (1) $ 85 $ 76 $ 74 $ 9 12 % $ 2 3 %

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$ 87 $ 78 $ 76 $ 9 12 % $ 2 3 %

______________________________________

(1) Includes depreciation expense of $5 million, $5 million and $7 million for the fiscal year ended September 30, 2020, September 30, 2019 and September 30, 2018, respectively.

Music Publishing selling, general and administrative expense increased by $9 million, or 12%, to $87 million for the fiscal year ended September 30, 2020 as compared to $78 million for the fiscal year ended September 30, 2019.

The increase in general and administrative expense was primarily due to an increase in facilities costs.

Expressed as a percentage of Music Publishing revenues, Music Publishing selling, general and administrative expense remained flat at 12% for each of the fiscal years ended September 30, 2019 and September 30, 2018 .

The increase in general and administrative expense was primarily due to higher employee-related costs and restructuring costs, partially offset by active cost management efforts.

Expressed as a percentage of Music Publishing revenues, Music Publishing selling, general and administrative expense increased to 13% for the fiscal year ended September 30, 2020 from 12% for the fiscal year ended September 30, 2019.

Music Publishing selling, general and administrative expense increased by $2 million, or 3%, to $78 million for the fiscal year ended September 30, 2019 as compared to $76 million for the fiscal year ended September 30, 2018.

The increase in general and administrative expense was due to an increase in compensation expense of $3 million and facilities costs of $2 million.

The increase in general and administrative expense was primarily due to an increase in facilities costs.

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For the Fiscal Year Ended

September 30,

September 30, 2020 vs.

2019 2019 vs.

2020 2019 2018 $ Change % Change $ Change % Change

Operating income $ 81 $ 92 $ 84 $ (11) -12 % $ 8 10 %

Depreciation and amortization 76 74 75 2 3 % (1) -1 %

OIBDA $ 157 $ 166 $ 159 $ (9) -5 % $ 7 4 %

Music Publishing OIBDA decreased by $9 million, or 5%, to $157 million for the fiscal year ended September 30, 2020 from $166 million for the fiscal year ended September 30, 2019.

Expressed as a percentage of Music Publishing revenues, Music Publishing OIBDA margin decreased to 24% for the fiscal year ended September 30, 2020 from 26% for the fiscal year ended September 30, 2019.

The decrease was primarily due to higher artist and repertoire costs and general and administrative expenses.

Music Publishing operating income decreased by $11 million to $81 million for the fiscal year ended September 30, 2020 from $92 million for the fiscal year ended September 30, 2019 due to the factors that led to the decrease in Music Publishing OIBDA noted above.

Music Publishing OIBDA increased by $7 million, or 4%, to $166 million for the fiscal year ended September 30, 2019 from $159 million for the fiscal year ended September 30, 2018.

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Music Publishing operating income increased by $8 million to $92 million for the fiscal year ended September 30, 2019 from $84 million for the fiscal year ended September 30, 2018 due to the factors that led to the increase in Music Publishing OIBDA noted above.

Music Publishing OIBDA increased by $7 million, or 5%, to $159 million for the fiscal year ended September 30, 2018 from $152 million for the fiscal year ended September 30, 2017 as a result of higher Music Publishing revenue, partially offset by higher artist and repertoire costs and higher general and administrative costs, as noted above.

Expressed as a percentage of Music Publishing revenues, Music Publishing OIBDA margin decreased to 24% for the fiscal year ended September 30, 2018 from 27% for the fiscal year ended September 30, 2017.

Music Publishing operating income increased by $3 million to $84 million for the fiscal year ended September 30, 2018 from $81 million for the fiscal year ended September 30, 2017 due to the factors that led to the increase in Music Publishing OIBDA noted above.

Corporate Expenses and Eliminations

Our OIBDA loss from corporate expenses and eliminations increased by $3 million to $164 million for the fiscal year ended September 30, 2019 from $161 million for the fiscal year ended September 30, 2018 , which includes higher corporate related costs, partially offset by a decrease of $15 million in variable compensation associated with the Senior Management Free Cash Flow Plan.

Our OIBDA loss from corporate expenses and eliminations increased by $31 million to $161 million for the fiscal year ended September 30, 2018 from $130 million for the fiscal year ended September 30, 2017 due to costs associated with our U.S.

shared services and other transformation initiatives of $16 million, an increase in our annual Access management fee of $7 million, an increase in variable compensation expense of $5 million associated with the Senior Management Free Cash Flow Plan, which is associated with higher compensation costs on dividend payments in the 2018 fiscal year.

Our operating loss from corporate expenses and eliminations increased by $32 million to $174 million for the fiscal year ended September 30, 2018 from $142 million for the fiscal year ended September 30, 2017 due to the factors that led to the increase in operating loss noted above.

Our operating loss from corporate expenses and eliminations increased by $310 million to $485 million for the fiscal year ended September 30, 2020 from $175 million for the fiscal year ended September 30, 2019 which includes an increase in non-cash stock-based compensation expense of $200 million, the one-time management agreement termination fee and IPO related expenses totaling $89 million and higher costs related to transformation initiatives of $19 million.

Our OIBDA loss from corporate expenses and eliminations increased by $310 million to $474 million for the fiscal year ended September 30, 2020 from $164 million for the fiscal year ended September 30, 2019, due to the operating loss factors noted above.

Our operating loss from corporate expenses and eliminations increased by $1 million to $175 million for the fiscal year ended September 30, 2019 from $174 million for the fiscal year ended September 30, 2018, which includes higher corporate related costs, partially offset by a decrease of $15 million in non-cash stock-based compensation expense associated with the Senior Management Free Cash Flow Plan.

FINANCIAL CONDITION AND LIQUIDITY

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The following table summarizes our historical cash flows (in millions).

The financial data for fiscal years ended September 30, 2019 , September 30, 2018 and September 30, 2017 have been derived from our audited financial statements included elsewhere herein.

For the Fiscal Year Ended September 30,

The financial data for fiscal years ended September 30, 2020, September 30, 2019 and September 30, 2018 have been derived from our consolidated financial statements included elsewhere herein.

Fiscal Year Ended September 30,

2020 2019 2018

Cash provided by (used in):

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Cash provided by operating activities was $463 million for the fiscal year ended September 30, 2020 compared to $400 million for the fiscal year ended September 30, 2019 and $425 million for the fiscal year ended September 30, 2018.

The primary driver of the $25 million decrease in cash provided by operating activities during the current year was due to an increase in royalty advances and royalty payments, partially offset by an OIBDA increase of $147 million .

The primary driver of the $63 million increase in cash provided by operating activities during the current year was due to timing of working capital partially offset by higher taxes paid and increased cash A&R investments in the current year.

The decrease in results from operating activities for the fiscal year ended September 30, 2019 compared to the fiscal year ended September 30, 2018 reflected timing of royalty payments, partially offset by improved operating performance.

Investing Activities

Cash used in investing activities was $376 million for the fiscal year ended September 30, 2019 , compared to cash provided by investing activities of $405 million for the fiscal year ended September 30, 2018 and cash used in investing activities of $126 million for the fiscal year ended September 30, 2017 .

Cash used in investing activities of $376 million for the fiscal year ended September 30, 2019 consisted of $183 million related to the acquisition of EMP, net of cash and equivalents acquired, $48 million relating to the acquisition of investments, $104 million relating to capital expenditures and $41 million to acquire music publishing rights and music catalogs.

Cash used in investing activities was $219 million for the fiscal year ended September 30, 2020 compared to $376 million for the fiscal year ended September 30, 2019 and cash provided by investing activities of $405 million for the fiscal year ended September 30, 2018.

Cash used in investing activities of $219 million for the fiscal year ended September 30, 2020 consisted of $81 million related to an acquisition, net of cash and equivalents acquired, $13 million relating to other investments, $85 million relating to capital expenditures, including investment in transformation initiatives, and $40 million to acquire music publishing rights and music catalogs.

Cash used in investing activities of $376 million for the fiscal year ended September 30, 2019 consisted of $183 million related to the acquisition of EMP, net of cash and equivalents acquired, $48 million relating to other investments, $104 million relating to capital expenditures, including investment in transformation initiatives, and $41 million to acquire music publishing rights and music catalogs.

Cash provided by investing activities of $405 million for the fiscal year ended September 30, 2018 consisted of $516 million of proceeds from sale of investments which includes the Spotify share sale of $504 million, partially offset by $74 million of capital expenditures, which has increased due to costs incurred related to the build-out of our new Los Angeles, California headquarters of $28 million, $23 million of investments and acquisitions and $14 million to acquire music publishing rights.

Cash used in investing activities of $126 million for the fiscal year ended September 30, 2017 consisted of $139 million of business investments and acquisitions, including the Spinnin’ Records acquisition in September 2017, $16 million to acquire music publishing rights and $44 million of capital expenditures, partially offset by $73 million of proceeds from divestitures.

Financing Activities

Cash provided by financing activities was $88 million for the fiscal year ended September 30, 2019 compared to cash used in financing activities of $955 million for the fiscal year ended September 30, 2018 and $128 million for the fiscal year ended September 30, 2017 .

Cash used in financing activities was $316 million for the fiscal year ended September 30, 2020 compared to cash provided by financing activities of $88 million for the fiscal year ended September 30, 2019 and cash used in financing activities of $955 million for the fiscal year ended September 30, 2018.

The $316 million of cash used in financing activities for the fiscal year ended September 30, 2020 consisted of the tender for and repayment of Acquisition Corp.’s 5.000% Senior Secured Notes due 2023 of $300 million, repayment of Acquisition Corp.’s 4.875% Senior Secured Notes due 2024 of $220 million, repayment of Acquisition Corp.’s 4.125% Senior Secured Notes due 2024 of $349 million, partial repayment of Acquisition Corp.’s Senior Term Loan Facility due 2023 of $506 million, call premiums paid on and redemption deposits for early redemption of the aforementioned Senior Secured Notes of $23 million, dividends paid of $344 million and distributions to noncontrolling interest holders of $7 million, partially offset by the proceeds from the issuance of Acquisition Corp.’s 3.875% Senior Secured Notes due 2030 of $535 million, proceeds from the issuance of Acquisition Corp.’s 2.750% Senior Secured Notes due 2028 of $365 million, and proceeds from the issuance of Acquisition Corp.’s 3.000% Senior Secured Notes due 2031 of $550 million.

Proceeds from issuance of Senior Secured Notes were offset by deferred financing costs paid of $17 million.

The $88 million of cash provided by financing activities for the fiscal year ended September 30, 2019 consisted of proceeds of $514 million from the issuance of Acquisition Corp.’s 3.625% Secured Notes due 2026, partially offset by deferred financing costs paid of $7 million, the repayment of Acquisition Corp.’s 5.625% Secured Notes due 2022 of $247 million including call premiums paid of $5 million, partial repayment of Acquisition Corp.’s 4.125% Secured Notes due 2024 of $40 million and 4.875% Secured Notes due 2024 of $30 million, for an aggregate $185 million, dividends paid of $94 million and distributions to noncontrolling interest holders of $3 million.

The $955 million of cash used in financing activities for the fiscal year ended September 30, 2018 consisted of the repayment of and deposit for Acquisition Corp.’s 6.750% Senior Notes (as defined below) of $635 million, special cash dividends paid of $925 million, call premiums paid on and redemption deposit for early redemption of $23 million, deferred financing costs paid of $12 million and a distribution to our non-controlling interest holders of $5 million, partially offset by proceeds from issuance of Acquisition Corp.’s Senior Notes (as defined below) of $325 million and proceeds from the issuance of Acquisition Corp.’s Senior Term Loan Facility of $320 million.

The $128 million of cash used in financing activities for the fiscal year ended September 30, 2017 consisted of the repayment of Acquisition Corp.’s 6.000% Senior Secured Notes due 2021 of $450 million, repayment of Acquisition Corp.’s 6.250% Senior Secured Notes due 2021 of $173 million, repayment of Acquisition Corp.’s 5.625% Secured Notes (as defined below) of $28 million, call premiums paid on early redemption of $27 million, deferred financing costs paid of $13 million, special cash dividends paid of $84 million and a distribution to our non-controlling interest holders of $5 million, partially offset by proceeds from issuance of Acquisition Corp.’s 4.125% Secured Notes (as defined below) of €345 million, proceeds from issuance of Acquisition Corp.’s 4.875% Senior Secured Notes (as defined below) of $250 million and proceeds from the amendment of Acquisition Corp.’s Senior Term Loan Facility of $22 million.

There were no drawdowns on the Revolving Credit Facility during the fiscal years ended September 30, 2020, September 30, 2019 and September 30, 2018.

Our primary sources of liquidity are the cash flows generated from our subsidiaries’ operations, available cash and equivalents and funds available for drawing under our Revolving Credit Facility.

These sources of liquidity are needed to fund our debt service requirements, working capital requirements, capital expenditure requirements, strategic acquisitions and investments, and any dividends, prepayments of debt or repurchases or retirement of our outstanding debt or notes in open market purchases, privately negotiated purchases or otherwise, we may elect to pay or make in the future.

We believe that our existing sources of cash will be sufficient to support our existing operations over the next twelve months.

In August 2019, we announced that we were beginning a financial transformation initiative to upgrade our information technology and finance infrastructure over the next two years, including related systems and processes, for which we expect our capital expenditures to be between $30 million and $40 million, approximately two-thirds of which is expected to be incurred in the 2020 fiscal year and the remainder of which is expected to be incurred in the 2021 fiscal year.

We expect that our cash flows from operations will be sufficient to fund our capital expenditures.

Debt Financing

These sources of liquidity are needed to fund our debt service requirements, working capital requirements, capital expenditure requirements, strategic acquisitions and investments, and dividends, prepayments of debt, repurchases or retirement of our outstanding debt or notes or repurchases of our outstanding equity securities in open market purchases, privately negotiated purchases or otherwise, we may elect to pay or make in the future.

We believe that our primary sources of liquidity will be sufficient to support our existing operations over the next twelve months.

In August 2019, we announced that we were beginning a financial transformation initiative to upgrade our information technology and finance infrastructure over the next two years, including related systems and processes, for which we currently expect upfront costs to be approximately $120 million, which includes capital expenditures of approximately $40 million to $50 million (approximately half of which was incurred in the 2020 fiscal year and the remainder of which is largely expected to be incurred in fiscal 2021).

There has been a slight delay in the timing of the transformation initiative as a result of COVID-19 business interruption but it is still expected to be completed over the next year.

Annualized run-rate savings from the financial transformation initiative are expected to be between approximately $35 million and $40 million once fully implemented.

We expect that our primary sources of liquidity will be sufficient to fund these expenditures.

Debt Capital Structure

Since Access acquired us in 2011, we have sought to extend the maturity dates on our outstanding indebtedness, reduce interest expense and improve our debt ratings.

For example, our S&P corporate credit rating has improved from B in 2017 to BB- in 2019.

In addition, our weighted-average interest rate on our outstanding indebtedness has decreased from 10.5% in 2011 to 4.3% in 2019.

For example, our S&P corporate credit rating has improved from B in 2017 to BB in 2020 with a stable outlook, and our Moody’s corporate family rating has improved from B1 in 2016 to Ba3 in 2020.

In addition, our weighted-average interest rate on our outstanding indebtedness has decreased from 10.5% in 2011 to 3.7% as of September 30, 2020.

Our nearest-term maturity date is in 2023.

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From time to time, we may incur additional indebtedness for, among other things, working capital, repurchasing, redeeming or tendering for existing indebtedness and acquisitions or other strategic transactions.

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”) as further described below.

Net proceeds of the offerings were used to redeem €311 million of the 4.125% Senior Secured Notes due 2024 (the “4.125% Senior Secured Notes”) and $220 million of the 4.875% Senior Secured Notes due 2024 (the “4.875% Senior Secured Notes”) on June 30, 2020, 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.

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 recorded a loss on extinguishment of debt of approximately $24 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.

The remaining proceeds of the offerings were used towards the tender offer for $300 million aggregate principal amount of 5.000% Senior Secured Notes due 2023 (the “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.

The Company recorded a loss on extinguishment of debt of approximately $6 million for the fiscal year ended 2020 as a result of this tender offer and redemption, which represents the premium to tender and unamortized deferred financing costs.

Additionally, on August 12, 2020, Acquisition Corp.

issued and sold $550 million in aggregate principal amount of 3.000% Senior Secured Notes due 2031 (the “3.000% Senior Secured Notes”) as further described below.

Net proceeds of the offering were used to repay a portion of the Senior Term Loan Facility.

The Company recorded a loss on extinguishment of debt of approximately $4 million for the fiscal year ended 2020 which represented unamortized discount and unamortized deferred financing cost associated with the portion of the term loan repaid.

On November 2, 2020, Acquisition Corp.

issued and sold an additional $250 million in aggregate principal amount of 3.000% Senior Secured Notes.

Revolving Credit Facility

On January 31, 2018, Acquisition Corp.

entered into the Revolving Credit Agreement (as defined below) for a senior secured revolving credit facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto (the “Revolving Credit Facility”).

The final maturity of the Revolving Credit Facility is January 31, 2023.

entered into the revolving credit agreement (as amended by the amendment dated October 9, 2019 and as further amended, amended and restated or otherwise modified from time to time, the “Revolving Credit Agreement”) for a senior secured revolving credit facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto (the “Revolving Credit Facility”).

On April 3, 2020, Acquisition Corp.

entered into an amendment to the Revolving Credit Agreement (the “Second Amendment”) which, among other things, extended the final maturity of the Revolving Credit Facility from January 31, 2023 to April 3, 2025.

For a more detailed description of the changes effected by the Second Amendment, see Note 10 to our consolidated financial statements included elsewhere herein.

Acquisition Corp.

is the borrower (the “Revolving Borrower”) under the Revolving Credit Agreement which provides for a revolving credit facility in the amount of up to $180 million (the “Commitments”) and includes a $50 million letter of credit sub-facility.

is the borrower under the Revolving Credit Agreement which provides for a revolving credit facility in the amount of up to $300 million and includes a $90 million letter of credit sub-facility.

Amounts are available under the Revolving Credit Facility in U.S.

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The Revolving Credit Agreement permits loans for general corporate purposes and may also be utilized to issue letters of credit.

Borrowings under the Revolving Credit Agreement bear interest at the Revolving Borrower’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”) plus 1.75% per annum 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) the overnight federal funds rate plus 0.5% and (z) the one-month Revolving LIBOR plus 1.00% per annum, plus, in each case, 0.75% per annum.

Borrowings under the Revolving Credit Agreement 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”) plus 1.875% per annum, 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) the overnight federal funds rate plus 0.5% and (z) the one-month Revolving LIBOR plus 1.00% per annum, plus, in each case, 0.875% per annum;

provided that, for each of clauses (i) and (ii), the applicable margin with respect to such loans is subject to adjustment upon achievement of certain leverage ratios as set forth in a leverage-based pricing grid in the Revolving Credit Agreement.

Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.05x at September 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 (as defined in the Revolving Credit Agreement).

If, at any time, the aggregate amount of outstanding loans (including letters of credit outstanding thereunder) exceeds the commitments under the Revolving Credit Facility, prepayments of the loans (and after giving effect to such prepayment the cash collateralization of letters of credit) will be required in an amount equal to such excess.

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Acquisition Corp.

is party to a $1.326 billion senior secured term loan credit facility, pursuant to a credit agreement dated November 1, 2012, as amended or supplemented (the “Senior Term Loan Credit Agreement”) with Credit Suisse AG, as administrative agent and collateral agent, and the other financial institutions and lenders from time to time party thereto (as described below, the “Senior Term Loan Facility” and, together with the Revolving Credit Facility, the “Senior Credit Facilities”).

is party to a $820 million senior secured term loan credit facility, pursuant to a credit agreement dated November 1, 2012, as amended or supplemented (the “Senior Term Loan Credit Agreement”) with Credit Suisse AG, as administrative agent and collateral agent, and the other financial institutions and lenders from time to time party thereto (as described below, the “Senior Term Loan Facility” and, together with the Revolving Credit Facility, the “Senior Credit Facilities”).

In August 2020, Acquisition Corp.

used the proceeds of the offering of the 3.000% Senior Secured Notes to repay a portion of the Senior Term Loan Facility.

Acquisition Corp.

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The Senior Term Loan Facility is subject to mandatory prepayment and reduction in an amount equal to (a) 50% of excess cash flow (as defined in the Senior Term Loan Credit Agreement), with reductions to 25% and zero based upon achievement of a net senior secured leverage ratio of less than or equal to 4.50:1.00 or 4.00:1.00, respectively, (b) 100% of the net cash proceeds received from the incurrence of indebtedness by the Term Loan Borrower or any of its restricted subsidiaries (other than indebtedness permitted under the Senior Term Loan Facility) and (c) 100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property by the Term Loan Borrower and its restricted subsidiaries (including certain insurance and condemnation proceeds) in excess of $75 million and subject to the right of the Term Loan Borrower and its restricted subsidiaries to reinvest such proceeds within a specified period of time, and other exceptions.

Voluntary prepayments of borrowings under the Senior Term Loan Facility are

permitted at any time, in minimum principal amounts of $1 million or a whole multiple of $500,000 in excess thereof, subject to reimbursement of the lenders’ redeployment costs actually incurred in the case of a prepayment of adjusted LIBOR borrowings other than on the last day of the relevant interest period.

Voluntary prepayments of borrowings under the Senior Term Loan Facility are permitted at any time, in minimum principal amounts of $1 million or a whole multiple of $500,000 in excess thereof, subject to reimbursement of the lenders’ redeployment costs actually incurred in the case of a prepayment of adjusted LIBOR borrowings other than on the last day of the relevant interest period.

Secured Notes

On July 27, 2016, Acquisition Corp.

issued $300 million in aggregate principal amount of its 5.000% Secured Notes under the Indenture, dated as of November 1, 2012 (the “Senior Secured Base Indenture”), among Acquisition Corp., the guarantors party thereto, Credit Suisse AG, as Notes Authorized Agent and Collateral Agent and Wells Fargo Bank, National Association, as Trustee (the “Trustee”), as supplemented by the Fifth Supplemental Indenture, dated as of July 27, 2016, among Acquisition Corp., the guarantors party thereto and the Trustee (the “5.000% Supplemental Indenture”).

On October 18, 2016, Acquisition Corp.

issued $250 million in aggregate principal amount of its 4.875% Secured Notes and €345 million in aggregate principal amount of its 4.125% Secured Notes under the Senior Secured Base Indenture, as supplemented by (i) in the case of the 4.875% Secured Notes, the Sixth Supplemental Indenture, dated as of October 18, 2016 (the “4.875% Supplemental Indenture”) and (ii) in the case of the 4.125% Notes, the Seventh Supplemental Indenture, dated as of October 18, 2016, in each case among Acquisition Corp., the guarantors party thereto and the Trustee (the “4.125% Supplemental Indenture”).

3.625% Senior Secured Notes

On October 9, 2018, Acquisition Corp.

issued €250 million in aggregate principal amount of its 3.625% Secured Notes under the Senior Secured Base Indenture, as supplemented by the Eighth Supplemental Indenture, dated as of October 9, 2018, among Acquisition Corp., the guarantors party thereto and the Trustee (the “3.625% Supplemental Indenture”).

On April 30, 2019, Acquisition Corp.

issued €195 million in aggregate principal amount of additional 3.625% Secured Notes under the Senior Secured Base Indenture, as supplemented by the Ninth Supplemental Indenture, dated as of April 30, 2019, among Acquisition Corp., the guarantors party thereto and the Trustee (the “Additional 3.625% Supplemental Indenture” and, the Senior Secured Base Indenture, collectively with the 5.000% Supplemental Indenture, the 4.875% Supplemental Indenture, the 4.125% Supplemental Indenture, the 3.625% Supplemental Indenture or the Additional 3.625% Supplemental Indenture, as applicable, the “Secured Notes Indenture”).

Optional Redemption

5.000% Secured Notes

On or after August 1, 2019, Acquisition Corp.

may redeem all or a portion of the 5.000% Secured Notes, at its option, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, on the 5.000% Secured Notes to be redeemed to the applicable redemption date, if redeemed during the twelve-month period beginning on August 1 of the years indicated below:

2021 and thereafter

4.875% Secured Notes

On or after November 1, 2019, Acquisition Corp.

may redeem all or a portion of the 4.875% Secured Notes, at its option, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, on the 4.875% Secured Notes to be redeemed to the applicable redemption date, if redeemed during the twelve-month period beginning on November 1 of the years indicated below:

2022 and thereafter

4.125% Secured Notes

On or after November 1, 2019, Acquisition Corp.

may redeem all or a portion of the 4.125% Secured Notes, at its option, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, on the 4.125% Secured Notes to be redeemed to the applicable redemption date, if redeemed during the twelve-month period beginning on November 1 of the years indicated below:

2022 and thereafter

3.625% Secured Notes

At any time prior to October 15, 2021, Acquisition Corp.

may on any one or more occasions redeem up to 40% of the aggregate principal amount of the 3.625% Secured Notes (including the aggregate principal amount of any additional securities constituting 3.625% Secured Notes) issued under the Secured Notes Indenture, at its option, at a redemption price equal to 103.625% of the principal amount of the 3.625% Secured Notes redeemed, plus accrued and unpaid interest thereon, if any, to the date of redemption (subject to the rights of holders of Notes on the relevant record date to receive interest on the relevant interest payment date), with funds in an aggregate amount not exceeding the net cash proceeds of one or more equity offerings by Acquisition Corp.

or any contribution to Acquisition Corp.’s common equity capital made with the net cash proceeds of one or more equity offerings by Acquisition Corp.’s direct or indirect parent;

provided that:

(1) at least 50% of the aggregate principal amount of the 3.625% Secured Notes originally issued under the Secured Notes Indenture (including the aggregate principal amount of any additional securities constituting 3.625% Secured Notes issued under the Secured Notes Indenture) remains outstanding immediately after the occurrence of such redemption;

(2) the redemption occurs within 180 days of the date of, and may be conditioned upon, the closing of such equity offering.

The 3.625% Secured Notes may be redeemed, in whole or in part, at any time prior to October 15, 2021, at the option of Acquisition Corp., at a redemption price equal to 100% of the principal amount of the 3.625% Secured Notes redeemed plus the applicable make-whole premium as of, and accrued and unpaid interest thereon, if any, to the applicable redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

issued €250 million in aggregate principal amount of its 3.625% Senior Secured Notes due 2026 (the “3.625% Senior Secured Notes”) and on April 30, 2019, Acquisition Corp.

issued an additional €195 million in aggregate principal amount of the 3.625% Senior Secured Notes, in each case under the Indenture, dated as of November 1, 2012 (the “Original Senior Secured Base Indenture”, among Acquisition Corp., the guarantors party thereto, Credit Suisse AG, as Notes Authorized Agent and Collateral Agent and Wells Fargo Bank, National Association, as Trustee (the “Trustee”), as supplemented by the Eighth Supplemental Indenture and the Ninth Supplemental Indenture (the Original Senior Secured Base Indenture together with the Eight Supplemental Indenture and Ninth Supplemental Indenture, the “3.625% Senior Notes Indenture”).

The 3.625% Senior Secured Notes may be redeemed, in whole or in part, at any time prior to October 15, 2021, at the option of Acquisition Corp., at a

redemption price equal to 100% of the principal amount of the 3.625% Senior Secured Notes redeemed plus the applicable make-whole premium (the “Make-Whole Redemption”) set forth in the 3.625% Senior Notes Indenture, plus accrued and unpaid interest thereon, if any, to the applicable redemption date.

Additionally, at any time prior to October 15, 2021, Acquisition Corp.

may on any one or more occasions redeem up to 40% of the aggregate principal amount of the 3.625% Senior Secured Notes (including the aggregate principal amount of any additional securities constituting 3.625% Senior Secured Notes) issued under the 3.625% Secured Notes Indenture, at its option, at a redemption price equal to 103.625% of the principal amount of the 3.625% Senior Secured Notes redeemed, plus accrued and unpaid interest thereon, if any, to the date of redemption with proceeds that Acquisition Corp.

or its direct or indirect parent raises in one or more equity offerings (the “Equity Redemption”).

On or after October 15, 2021, Acquisition Corp.

may redeem all or a portion of the 3.625% Secured Notes, at its option, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, on the 3.625% Secured Notes to be redeemed to the applicable redemption date, if redeemed during the twelve-month period beginning on October 15 of the years indicated below:

2023 and thereafter

In addition, during any twelve-month period prior to October 15, 2021, Acquisition Corp.

will be entitled to redeem up to 10% of the original aggregate principal amount of the 3.625% Secured Notes (including the principal amount of any additional securities of the same series) at a redemption price equal to 103.000% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

may redeem all or a portion of the 3.625% Senior Secured Notes, at its option, at redemption prices starting at 101.813% during the twelve month period beginning on October 15, 2021 (expressed as percentages of principal amount), declining ratably each year to a price of 100% beginning on October 15, 2023, plus accrued and unpaid interest thereon, if any, on the 3.625% Senior Secured Notes to be redeemed to the applicable redemption date.

Additionally, during any twelve-month period prior to October 15, 2021, Acquisition Corp.

may redeem up to 10% of the original aggregate principal amount of the 3.625% Senior Secured Notes (including the principal amount of any additional securities of the same series) at a redemption price equal to 103.000% of the aggregate principal amount thereof, plus accrued and unpaid interest thereon, if any, to the redemption date (the “Secured Notes Redemption”).

3.875% Senior Secured Notes

On June 29, 2020, Acquisition Corp.

issued $535 million in aggregate principal amount of its 3.875% Senior Secured Notes under the Indenture, dated June 29, 2020 (the “New Senior Secured Base Indenture”), among Acquisition Corp., the guarantors party thereto, Credit Suisse AG, as Notes Authorized Representative and Collateral Agent and Wells Fargo Bank, National Association, as Trustee, as supplemented by the First Supplemental Indenture (the “3.875% Supplemental Indenture”).

At any time prior to July 15, 2025, the 3.875% Senior Secured Notes may be redeemed pursuant to a Make-Whole Redemption in accordance with the 3.875% Supplemental Indenture.

Additionally, at any time prior to July 15, 2025, the 3.875% Senior Secured Notes may be redeemed pursuant to an Equity Redemption at a redemption price equal to 103.875% of the principal amount of the 3.875% Senior Secured Notes redeemed, plus accrued and unpaid interest, subject to the same provisos as the 3.625% Senior Secured Notes Equity Redemption.

On or after July 15, 2025, Acquisition Corp.

may redeem all or a portion of the 3.875% Senior Secured Notes, at its option, at the redemption prices starting at 101.938% (expressed as percentages of principal amount) plus accrued and unpaid interest thereon, if any, on the 3.875% Senior Secured Notes to be redeemed to the applicable redemption date, if redeemed during the twelve-month period beginning on July 15, 2025.

Additionally, during any twelve month period prior to July 15, 2025, the 3.875% Senior Secured Notes may be redeemed pursuant to a Secured Notes Redemption.

2.750% Senior Secured Notes

Also on June 29, 2020, Acquisition Corp.

issued €325 million in aggregate principal amount of its 2.750% Senior Secured Notes under the New Senior Secured Base Indenture, as supplemented by the Second Supplemental Indenture, dated as of June 29, 2020, among Acquisition Corp., the guarantors party thereto and the Trustee (the “2.750% Supplemental Indenture”).

At any time prior to July 15, 2023, the 2.750% Senior Secured Notes may be redeemed pursuant to a Make-Whole Redemption in accordance with the 2.750% Supplemental Indenture.

Additionally, at any time prior to July 15, 2023, the 2.750% Senior Secured Notes may be redeemed pursuant to an Equity Redemption at a redemption price equal to 102.750% of the principal amount of the 2.750% Senior Secured Notes redeemed, plus accrued and unpaid interest, subject to the same provisos as the 3.625% Senior Secured Notes Equity Redemption.

On or after July 15, 2023, Acquisition Corp.

may redeem all or a portion of the 2.750% Senior Secured Notes, at its option, at the redemption prices starting at 101.375% (expressed as percentages of principal amount) plus accrued and unpaid interest thereon, if any, on the 2.750% Senior Secured Notes to be redeemed to the applicable redemption date, if redeemed during the twelve-month period beginning on July 15, 2023.

Additionally, during any twelve month period prior to July 15, 2023, the 2.750% Senior Secured Notes may be redeemed pursuant to a Secured Notes Redemption.

3.000% Senior Secured Notes

On August 12, 2020, Acquisition Corp.

issued $550 million in aggregate principal amount of its 3.000% Senior Secured Notes under the New Senior Secured Base Indenture, as supplemented by the Third Supplemental Indenture, dated as of August 12, 2020, among Acquisition Corp., the guarantors party thereto and the Trustee (the “3.000% Supplemental Indenture”, collectively with the New Senior Secured Based Indenture, the 3.875% Supplemental Indenture and the 2.750% Supplemental Indenture, the “New Secured Notes Indenture”).

The 3.625% Secured Notes Indenture and the New Secured Notes Indenture are referred to together as the “Secured Notes Indentures”.

At any time prior to February 15, 2026, the 3.000% Senior Secured Notes may be redeemed pursuant to a Make-Whole Redemption in accordance with the 3.000% Supplemental Indenture.

Additionally, at any time prior to August 15, 2023, the 3.000% Senior Secured Notes may be redeemed pursuant to an Equity Redemption at a redemption price equal to 103.000% of the principal amount of the 3.000% Senior Secured Notes redeemed, plus accrued and unpaid interest, subject to the same provisos as the 3.625% Senior Secured Notes Equity Redemption.

On or after February 15, 2026, Acquisition Corp.

may redeem all or a portion of the 3.000% Senior Secured Notes, at its option, at the redemption prices starting at 101.500% (expressed as percentages of principal amount) plus accrued and unpaid interest thereon, if any, on the 3.000% Senior Secured Notes to be redeemed to the applicable redemption date, if redeemed during the twelve-month period beginning on February 15, 2026.

Additionally, during any twelve month period prior to February 15, 2026, the 3.000% Senior Secured Notes may be redeemed pursuant to a Secured Notes Redemption.

5.500% Senior Notes

On March 14, 2018, Acquisition Corp.

issued $325 million in aggregate principal amount of 5.500% Senior Notes due 2026 under the Indenture, dated as of April 9, 2014 (the “Senior Notes Base Indenture”), among Acquisition Corp., the guarantors party thereto and the Trustee, as supplemented by the fifth supplemental indenture thereto, dated as of March 14, 2018 (the “Senior Notes Supplemental Indenture” and, together with the Senior Notes Base Indenture, the “Senior Notes Indenture”), among Acquisition Corp., the guarantors party thereto and the Trustee.

Optional Redemption

issued $325 million in aggregate principal amount of 5.500% Senior Notes due 2026 (the “5.500% Senior Notes”) under the Indenture, dated as of April 9, 2014 (the “Senior Notes Base Indenture”), among Acquisition Corp., the guarantors party thereto and the Trustee, as supplemented by the fifth supplemental indenture thereto, dated as of March 14, 2018 (the “Senior Notes Supplemental Indenture” and, together with the Senior Notes Base Indenture, the “Senior Notes Indenture”), among Acquisition Corp., the guarantors party thereto and the Trustee.

At any time prior to April 15, 2021, Acquisition Corp.

may on any one or more occasions redeem up to 40% of the aggregate principal amount of the Senior Notes (including the aggregate principal amount of any additional securities constituting the same series) issued under the Senior Notes Indenture, at its option, at a redemption price equal to 105.500% of the principal amount of the Senior Notes redeemed, plus accrued and unpaid interest thereon, if any, to the date of redemption (subject to the rights of holders of the Senior Notes on the relevant record date to receive interest on the relevant interest payment date), with funds in an aggregate amount not exceeding the net cash proceeds of one or more equity offerings by Acquisition Corp.

or any contribution to Acquisition Corp.’s common equity capital made with the net cash proceeds of one or more equity offerings by Acquisition Corp.’s direct or indirect parent;

provided that:

(1) at least 50% of the aggregate principal amount of the Senior Notes originally issued under the Senior Notes Indenture (including the aggregate principal amount of any additional securities constituting the Senior Notes issued under the Senior Notes Indenture) remains outstanding immediately after the occurrence of such redemption;

and (2) the redemption occurs within 180 days of the date of, and may be conditioned upon, the closing of such equity offering.

may on any one or more occasions redeem up to 40% of the aggregate principal amount of the 5.500% Senior Notes, pursuant to an Equity Redemption, at a redemption price equal to 105.500% of the principal amount of the 5.500% Senior Notes redeemed, plus accrued and unpaid interest thereon, if any, to the date of redemption.

The 5.500% Senior Notes may be redeemed, in whole or in part, at any time prior to April 15, 2021, at the option of Acquisition Corp., at a redemption price equal to 100% of the principal amount of the 5.500% Senior Notes redeemed plus the applicable make-whole premium as of, and accrued and unpaid interest thereon, if any, to the applicable redemption date (subject to the right of holders of record on the relevant record date to receive interest due on the relevant interest payment date).

On or after April 15, 2021, Acquisition Corp.

may redeem all or a portion of the Senior Notes, at its option, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest thereon, if any, on the Senior Notes to be redeemed to the applicable redemption date, if redeemed during the twelve-month period beginning on April 15 of the years indicated below:

2023 and thereafter

may redeem all or a portion of the 5.500% Senior Notes, at its option, at the redemption prices starting at 102.750% (expressed as percentages of principal amount) plus accrued and unpaid interest thereon, if any, on the 5.500% Senior Notes to be redeemed to the applicable redemption date, if redeemed during the twelve-month period beginning on April 15, 2021.

General Terms of Our Indebtedness

Certain terms of the Senior Credit Facilities and certain terms of each series of notes under our Secured Notes Indenture and Senior Notes Indenture are described below.

Certain terms of the Senior Credit Facilities and certain terms of each series of notes under our Secured Notes Indentures and Senior Notes Indenture are described below.

The indebtedness incurred pursuant to the Revolving Credit Facility and the Senior Term Loan Facility and the Secured Notes are Acquisition Corp.’s senior secured obligations and are secured on an equal and ratable basis with all existing and future indebtedness secured with the same security arrangements.

The Secured Notes rank senior in right of payment to Acquisition Corp.’s subordinated indebtedness;

The Secured Notes rank senior in right of payment to Acquisition Corp.’s existing and future subordinated indebtedness;

rank equally in right of payment with all of Acquisition Corp.’s existing and future senior indebtedness and any future senior secured credit facility;

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Guarantees and Security

The obligations under each of the Revolving Credit Facility, the Senior Term Loan Facility, the Secured Notes Indenture and the Senior Notes Indenture are guaranteed by each direct and indirect U.S.

The obligations under each of the Revolving Credit Facility, the Senior Term Loan Facility, the Secured Notes Indentures and the Senior Notes Indenture are guaranteed by each direct and indirect U.S.

restricted subsidiary of Acquisition Corp., other than certain excluded subsidiaries.

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and each guarantor under the Revolving Credit Facility, the Senior Term Loan Facility and the Secured Notes Indenture are secured by substantially all the assets of Acquisition Corp and each subsidiary guarantor.

In addition, each series of notes issued pursuant to the Secured Notes Indenture and the Senior Notes Indenture have been fully and unconditionally guaranteed by the Company.

In addition, the 3.625% Senior Secured Notes and the Senior Notes have been fully and unconditionally guaranteed by the Company.

Covenants, Representations and Warranties

The Revolving Credit Facility, the Senior Term Loan Facility, the Secured Notes and the Senior Notes contain customary representations and warranties and customary affirmative and negative covenants.

The negative covenants are incurrence-based high yield covenants and limit the ability of Acquisition Corp.

and its restricted subsidiaries to incur additional indebtedness or issue certain preferred shares;

The negative covenants applicable to the Revolving Credit Facility, the Senior Term Loan Facility, the 3.625% Senior Secured Notes and the Senior Notes are incurrence-based high yield covenants and limit the ability of Acquisition Corp.

and its restricted subsidiaries to, among other things, incur additional indebtedness or issue certain preferred shares;

pay dividends, redeem stock or make other distributions;

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and designate subsidiaries as unrestricted subsidiaries.

The negative covenants applicable to securities issued pursuant to the New Secured Notes Indenture limit the ability of Acquisition Corp.

and its restricted subsidiaries to, among other things, create liens and consolidate, merge, sell or otherwise dispose of all or substantially all of its assets.

The negative covenants are subject to customary exceptions.

There are no financial covenants included in the Revolving Credit Agreement, other than a springing leverage ratio of 4.75:1.00 (with no step-down), which is not 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 $54,000,000.

There are no financial covenants included in the Senior Term Loan Credit Agreement, the Secured Notes Indenture or the Senior Notes Indenture.

There are no financial covenants included in the Revolving Credit Agreement, other than a springing leverage ratio of 5.00:1.00 (with no step-down), which is not 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.

There are no financial covenants included in the Senior Term Loan Credit Agreement, the Secured Notes Indentures or the Senior Notes Indenture.

Events of Default

Events of default under the Revolving Credit Facility, the Senior Term Loan Facility and the Secured Notes Indenture include nonpayment of principal when due, nonpayment of interest or other amounts, inaccuracy of representations or warranties in any material respect, violation of covenants, cross default and cross acceleration to other material debt, certain bankruptcy or insolvency events, certain ERISA events, certain material judgments, actual or asserted invalidity of security interests in excess of $50 million, in each case subject to customary thresholds, notice and grace period provisions.

Events of default under the Revolving Credit Facility, the Senior Term Loan Facility and the Secured Notes Indenture include, as applicable, nonpayment of principal when due, nonpayment of interest or other amounts, inaccuracy of representations or warranties in any material respect, violation of covenants, cross default and cross acceleration to other material debt, certain bankruptcy or insolvency events, certain ERISA events, certain material judgments, actual or asserted invalidity of security interests in excess of $50 million, or $75 million in the case of the New Secured Notes Indenture, in each case subject to customary thresholds, notice and grace period provisions.

Change of Control

Upon the occurrence of a change of control, which is defined in the Secured Notes Base Indenture and the Senior Notes Base Indenture, each holder of the Secured Notes and the Senior Notes has the right to require Acquisition Corp.

Upon the occurrence of a change of control, which is defined in the Original Senior Secured Base Indenture and the Senior Notes Base Indenture, or a change of control triggering event, which is defined in the New Senior Secured Base Indenture, each holder of the Secured Notes and the Senior Notes has the right to require Acquisition Corp.

to repurchase some or all of such holder’s Secured Notes and Senior Notes at a purchase price in cash equal to 101% of the principal amount thereof, plus accrued and unpaid interest, if any, to the repurchase date.

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Reflects $180 million of commitments under the Revolving Credit Facility available at September 30, 2019 , less letters of credit outstanding of approximately $13 million at September 30, 2019 .

(a) Reflects $300 million of commitments under the Revolving Credit Facility available at September 30, 2020, less letters of credit outstanding of approximately $10 million at September 30, 2020.

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

Principal amount of $1.326 billion less unamortized discount of $3 million and unamortized deferred financing costs of $10 million at September 30, 2019 .

Principal amount of $300 million less unamortized deferred financing costs of $2 million at September 30, 2019 .

Face amount of €311 million .

Above amount represents the dollar equivalent of such note at September 30, 2019 .

Principal amount of $340 million less unamortized deferred financing costs of $4 million at September 30, 2019 .

Principal amount of $220 million less unamortized deferred financing costs of $2 million at September 30, 2019 .

Face amount of €445 million at September 30, 2019 .

(b) Principal amount of $820 million less unamortized discount of $1 million and unamortized deferred financing costs of $5 million at September 30, 2020.

Above amount represents the dollar equivalent of such note at September 30, 2020.

Principal amount of $519 million, an additional issuance premium of $7 million, less unamortized deferred financing costs of $5 million at September 30, 2020.

(d) Face amount of €325 million at September 30, 2020.

Above amount represents the dollar equivalent of such notes at September 30, 2020.

Principal amount of $379 million less unamortized deferred financing costs of $4 million at September 30, 2020.

Principal amount of debt of $2.998 billion , an additional issuance premium of $8 million , less unamortized discount of $3 million and unamortized deferred financing costs of $29 million at September 30, 2019 .

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

On September 23, 2019 , the Company’s board of directors declared a cash dividend of $206.25 million which was paid to stockholders on October 4, 2019 and recorded as an accrual as of September 30, 2019 .

(e) Principal amount of $535 million less unamortized deferred financing costs of $6 million at September 30, 2020.

(f) Principal amount of $550 million less unamortized deferred financing costs of $6 million at September 30, 2020.

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

(h) Principal amount of debt of $3.127 billion, an additional issuance premium of $7 million, less unamortized discount of $1 million and unamortized deferred financing costs of $29 million at September 30, 2020.

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.

The Company intends to pay quarterly cash dividends to holders of its Class A Common Stock and Class B Common Stock.

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, in fiscal 2020 the Company paid an aggregate of $281 million in cash dividends to common stockholders, $75 million of which was declared by the Company’s board of directors in fiscal 2020 and $206 million of which was declared by the Company’s board of directors in fiscal 2019 and recorded as an accrual as of September 30, 2019.

On August 14, 2020, the Company’s board of directors declared a cash dividend of $0.12 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, which was paid on September 1, 2020.

For fiscal year 2020, the Company paid an aggregate of $344 million in cash dividends to stockholders and participating security holders.

For fiscal year 2019, the Company paid an aggregate of $94 million in cash dividends to stockholders.

For fiscal year 2018, the Company paid an aggregate of $925 million in cash dividends to stockholders, which reflected proceeds from the sale of Spotify shares acquired in the ordinary course of business.

For fiscal year 2017 , the Company paid an aggregate of $84 million in cash dividends to stockholders.

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

The declaration of each dividend will continue to be at the discretion of the Board.

On November 13, 2020, the Company’s board of directors declared a cash dividend of $0.12 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, payable on December 1, 2020 to stockholders of record as of the close of business on November 24, 2020.

Covenant Compliance

The Company was in compliance with its covenants under its outstanding notes, the Revolving Credit Facility and the Senior Term Loan Facility as of September 30, 2020.

On January 18, 2019, we delivered a notice to the administrative agent under each of the Revolving Credit Facility and the Senior Term Loan Facility and the trustee under the indentures governing each of the Senior Notes and the Secured Notes changing the Fixed GAAP Date, as defined under each such facility and the indentures, to October 1, 2018.

The Revolving Credit Facility contains a springing leverage ratio that is tied to a ratio based on Consolidated EBITDA, which is defined under the Revolving Credit Agreement.

On January 18, 2019, we delivered a notice to the administrative agent under the Senior Term Loan Facility and the trustee under the indentures governing each of the Senior Notes and the Secured Notes changing the Fixed GAAP Date, as defined under each such facility and the indentures, to October 1, 2018.

Under the Revolving Credit Facility, the Fixed GAAP Date is set for April 3, 2020, other than in respect of capital leases, which are frozen at November 1, 2012.

The Revolving Credit Facility contains a springing leverage ratio that is tied to a ratio based on EBITDA, which is defined under the Revolving Credit Agreement.

Our ability to borrow funds under the Revolving Credit Facility may depend upon our ability to meet the leverage ratio test at the end of a fiscal quarter to the extent we have drawn a certain amount of revolving loans.

Consolidated EBITDA differs from the term “EBITDA” as it is commonly used.

For example, the definition of Consolidated EBITDA, in addition to adjusting net income to exclude interest expense, income taxes and depreciation and amortization, also adjusts net income by excluding items or expenses not typically excluded in the calculation of “EBITDA” such as, among other items, (1) the amount of any restructuring charges or reserves;

EBITDA as defined in the Revolving Credit Facility is based on Consolidated Net Income (as defined in the Revolving Credit Facility), both of which terms differ from the terms “EBITDA” and “net income” as they are commonly used.

For example, the calculation of EBITDA under the Revolving Credit Facility, in addition to adjusting net income to exclude interest expense, income taxes and depreciation and amortization, also adjusts net income by excluding items or expenses such as, among other items, (1) the amount of any restructuring charges or reserves;

(2) any non-cash charges (including any impairment charges);

(3) any net loss resulting from hedging currency exchange risks;

(4) the amount of management, monitoring, consulting and advisory fees paid to Access under the Management Agreement (as defined in the Credit Agreement);

(4) the amount of management, monitoring, consulting and advisory fees paid to Access;

(5) business optimization expenses (including consolidation initiatives, severance costs and other costs relating to initiatives aimed at profitability improvement);

(6) transaction expenses;

and (7) equity-based compensation expense.

It also includes an adjustment for the pro forma impact of certain projected cost savings and synergies.

The indentures governing our notes and the Senior Term Loan Facility use financial measures called “Consolidated EBITDA” or “EBITDA” that have the same definition as Consolidated EBITDA as defined under the Revolving Credit Agreement.

Consolidated EBITDA is presented herein because it is a material component of the leverage ratio contained in the Revolving Credit Agreement.

(7) equity-based compensation expense;

and (8) certain extraordinary, unusual or non-recurring items.

The definition of EBITDA under the Revolving Credit Facility also includes adjustments for the pro forma impact of certain projected cost savings, operating expense reductions and synergies and any quality of earnings analysis prepared by independent certified public accountants in connection with an acquisition, merger, consolidation or other investment.

The indentures governing our notes and the Senior Term Loan Facility use financial measures called “Consolidated EBITDA” or “EBITDA” and “Consolidated Net Income”, that have similar (but not identical) definitions to EBITDA and Consolidated Net Income, each as defined under the Revolving Credit Agreement.

EBITDA as defined in the Revolving Credit Facility (referred to in this section as “Adjusted EBITDA”) is presented herein because it is a material component of the leverage ratio contained in the Revolving Credit Agreement.

Non-compliance with the leverage ratio could result in the inability to use the Revolving Credit Facility, which could have a material adverse effect on our results of operations, financial position and cash flow.

Consolidated EBITDA does not represent net income or cash from operating activities as those terms are defined by U.S.

Adjusted EBITDA does not represent net income or cash from operating activities as those terms are defined by U.S.

GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs.

While Consolidated EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.

Consolidated EBITDA does not reflect the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations.

In particular, the definition of Consolidated EBITDA in the Revolving Credit Agreement allows us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net income.

While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation.

Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations.

In particular, the definition of Adjusted EBITDA in the Revolving Credit Agreement allows us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net income.

However, these are expenses that may recur, vary greatly and are difficult to predict.

Consolidated EBITDA as presented below is not a measure of the performance of our business and should not be used by investors as an indicator of performance for any future period.

Adjusted EBITDA as presented below should not be used by investors as an indicator of performance for any future period.

Further, our debt instruments require that it be calculated for the most recent four fiscal quarters.

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There can be no assurances that any such cost savings or synergies will be achieved in full.

The following is a reconciliation of net income, which is a U.S.

GAAP measure of our operating results, to Consolidated EBITDA as defined, and the calculation of the Senior Secured Indebtedness to Consolidated EBITDA ratio, which we refer to as the Leverage Ratio, under the Revolving Credit Agreement for the most recently ended four fiscal quarters, or the twelve months ended September 30, 2019 .

In addition, Adjusted EBITDA is a key measure used by our management to understand and evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital.

Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S.

Some of those limitations include:

(1) it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenue for our business;

(2) it does not reflect the significant interest expense or cash requirements necessary to service interest or principal payments on our indebtedness;

and (3) it does not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments.

In particular, this measure adds back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net income;

however, these are expenses that may recur, vary greatly and are difficult to predict.

In addition, Adjusted EBITDA is not the same as net income or cash flow provided by operating activities as those terms are defined by U.S.

GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs.

Accordingly, Adjusted EBITDA should be considered in addition to, not as a substitute for, net income (loss) and other measures of financial performance reported in accordance with U.S.

The following is a reconciliation of net income (loss), which is a U.S.

GAAP measure of our operating results, to Adjusted EBITDA as defined, for the most recently ended four fiscal quarters, or the twelve months ended September 30, 2020, for the twelve months ended September 30, 2019 and for the three months ended September 30, 2020 and September 30, 2019.

In addition, the reconciliation includes the calculation of the Senior Secured Indebtedness to Adjusted EBITDA ratio, which we refer to as the Leverage Ratio, under the Revolving Credit Agreement for the most recently ended four fiscal quarters, or the twelve months ended September 30, 2020.

The terms and related calculations are defined in the Revolving Credit Agreement.

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(in millions, except ratios):

Twelve Months Ended September 30, 2019

Income tax expense

Twelve Months Ended

September 30, Three Months Ended

September 30,

2020 2019 2020 2019

Net (Loss) Income $ (470) $ 258 $ 1 $ 91

Income tax expense (benefit) 23 9 (21) (77)

Interest expense, net 127 142 29 34

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Restructuring costs (c) 22 27 9 9

Net hedging and foreign exchange gains (d)

Net hedging and foreign exchange losses (gains) (d) 61 (38) 51 (27)

Management fees (e) 20 11 (3) 2

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Business optimization expenses (g) 39 22 6 9

Equity-based compensation expense (h)

Non-cash stock-based compensation expense (h) 608 49 8 22

Other non-cash charges (i) 10 (19) (6) 5

Pro forma impact of specified transactions (j)

Pro Forma Consolidated EBITDA

Pro forma impact of cost savings initiatives and specified transactions (j) 27 1 3 —

Adjusted EBITDA $ 837 $ 737 $ 177 $ 133

Senior Secured Indebtedness (k) $ 2,553

Leverage Ratio (l)

Leverage Ratio (l) 3.05x

______________________________________

Reflects net loss incurred on the early extinguishment of our debt incurred as part of the October 2018 partial redemption of the 4.125% Secured Notes, the October 2018 open market purchase of the 4.875% Senior Secured Notes, the November 2018 partial redemption of 5.625% Secured Notes and the May 2019 redemption of the remaining 5.625% Secured Notes.

Reflects net gain on divestitures and sale of securities.

Reflects severance costs and other restructuring related expenses.

Reflects net losses from hedging activities and unrealized losses due to foreign exchange on our Euro-denominated debt and intercompany transactions.

Reflects management fees paid to Access, including an annual fee and related expenses.

Pursuant to the Company’s and Holdings’ management agreement with Access, the base amount of the annual fee is approximately $9 million, subject to certain potential upward adjustments.

Reflects expenses related to transaction and other related costs.

Reflects primarily costs associated with IT systems updates and other transformation initiatives.

Reflects equity-based compensation expense related to the Warner Music Group Corp.

(a) For the three and twelve months ended September 30, 2020, reflects a net loss incurred on the early extinguishment of our debt incurred as part of the June 2020 redemption of our 4.125% Senior Secured Notes and 4.875% Senior Secured Notes, the June 2020 tender for and the August 2020 redemption of the 5.000% Senior Secured Notes and the August 2020 partial repayment of the Senior Term Loan Facility.

For the twelve months ended September 30, 2019, reflects net loss incurred on the early extinguishment of our debt incurred as part of the October 2018 partial redemption of our 4.125% Secured Notes, the October 2018 open market purchase of our 4.875% Senior Secured Notes, the November 2018 partial redemption of our 5.625% Secured Notes and the May 2019 redemption of the remaining 5.625% Secured Notes.

(b) Reflects net gain on sale of securities and divestitures.

(d) Reflects (gains) losses from hedging activities and unrealized (gains) losses due to foreign exchange on our Euro-denominated debt and intercompany transactions.

(e) Reflects management fees and related expenses paid to Access.

For the twelve months ended September 30, 2020, amounts include a one-time fee of $13 million related to termination of the management agreement with Access.

Prior to termination of the management agreement, the annual fee was equal to the greater of a base amount, equal to approximately $7 million for the twelve months ended September 30, 2020, and 1.5% of EBITDA (as defined in the indenture governing the redeemed Holdings 13.75% Senior Notes due 2019) of the Company for the applicable fiscal year, plus expenses.

Refer to Note 14 of our consolidated financial statements included in Part II to this Annual Report for further discussion.

(f) Reflects transaction costs, including qualifying IPO costs of $76 million for the twelve months ended September 30, 2020.

(g) Reflects costs associated with our transformation initiatives and IT system updates, which includes costs of $5 million and $30 million related to our finance transformation for the three and twelve months ended September 30, 2020, respectively, as well as $8 million and $18 million for the three and twelve months ended September 30, 2019, respectively.

(h) Reflects non-cash stock-based compensation expense mainly related to the Warner Music Group Corp.

Senior Management Free Cash Flow Plan.

Reflects non-cash activity, including the unrealized gains on the mark-to-market of an equity method investment.

Reflects pro forma adjustments related to the acquisition of EMP in October 2018.

Reflects the principal balance of senior secured debt at Acquisition Corp.

(i) Reflects non-cash activity, including the unrealized losses (gains) on the mark-to-market of an equity method investment, investment losses (gains) and other non-cash impairments.

(j) Reflects expected savings resulting from transformation initiatives and pro forma impact of specified transactions for the three and twelve months ended September 30, 2020 and September 30, 2019.

Certain of these costs savings initiatives and transactions were identified in the current quarter and as a result the proforma impact was not included in the three and

twelve months ended June 30, 2020.

The impact of which would have been approximately a $7 million increase in the twelve months ended June 30, 2020 Adjusted EBITDA.

In addition, the three and twelve months ended September 30, 2019 also excluded certain proforma items identified within the current fiscal year, the impact of which would have been an approximately $9 million increase in the three and twelve months ended September 30, 2019 Adjusted EBITDA.

(k) Reflects the principal balance of senior secured debt at Acquisition Corp.

of approximately $2.803 billion less cash of $250 million.

Reflects the ratio of Senior Secured Indebtedness, including Revolving Credit Agreement Indebtedness, to Pro Forma Consolidated EBITDA as of the twelve months ended September 30, 2019 .

(l) Reflects the ratio of Senior Secured Indebtedness, including Revolving Credit Agreement Indebtedness, to Adjusted EBITDA.

This is calculated net of cash and equivalents of the Company as of September 30, 2020 not exceeding $250 million.

If the outstanding aggregate principal amount of borrowings and drawings under letters of credit which have not been reimbursed under the Revolving Credit Facility is greater than $54 million at the end of a fiscal quarter, the maximum leverage ratio permitted under our Revolving Credit Facility is 4.75:1.00.

The Company’s Revolving Credit Facility does not impose any “leverage ratio” restrictions on the Company when the aggregate principal amount of borrowings and drawings under letters of credit, which have not been reimbursed under the Revolving Credit Facility, is less than or equal to $54 million at the end of a fiscal quarter.

If the outstanding aggregate principal amount of borrowings and drawings under letters of credit which have not been reimbursed under our Revolving Credit Facility is greater than $105 million at the end of a fiscal quarter, the maximum leverage ratio permitted under the Revolving Credit Facility is 5.00:1.00.

The Company’s Revolving Credit Facility does not impose any “leverage ratio” maintenance requirement on the Company when the aggregate principal amount of borrowings and drawings under letters of credit, which have not been reimbursed under the Revolving Credit Facility, is less than or equal to $105 million at the end of a fiscal quarter.

Management believes that funds generated from our operations and borrowings under the Revolving Credit Facility and available cash and equivalents will be sufficient to fund our debt service requirements, working capital requirements and capital expenditure requirements for the foreseeable future.

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However, our ability to continue to fund these items and to reduce debt may be affected by general economic, financial, competitive, legislative and regulatory factors, as well as other industry-specific factors such as the ability to control music piracy and the continued transition from physical to digital formats in the recorded music and music publishing industries.

It could also be affected by the severity and duration of natural or man-made disasters, including pandemics such as COVID-19.

We and our affiliates continue to evaluate opportunities to, from time to time, depending on market conditions and prices, contractual restrictions, our financial liquidity and other factors, seek to pay dividends or prepay outstanding debt or repurchase or retire Acquisition Corp.’s outstanding debt or debt securities in open market purchases, privately negotiated purchases or otherwise.

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The following table summarizes the Company’s aggregate contractual obligations at September 30, 2020, and the estimated timing and effect that such obligations are expected to have on the Company’s liquidity and cash flow in future periods.

Firm Commitments and Outstanding Debt

Firm Commitments and Outstanding Debt Less than

years After 5

(in millions)

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Artist, songwriter and co-publisher commitments (3) 442 * * * 442

Management Fees (4)

Minimum funding commitments to investees and other obligations (4) 6 3 3 — 12

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(2) Operating lease obligations primarily relate to the minimum lease rental obligations for our real estate and operating equipment in various locations around the world.

These obligations have been presented without the benefit of $1 million of total sublease income expected to be received under non-cancelable agreements.

(3) The Company routinely enters into long-term commitments with recording artists, songwriters and publishers for the future delivery of music.

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The aggregate firm commitments expected for the next twelve-month period based on contractual obligations and the Company’s expected release schedule approximates $268 million at September 30, 2020.

Pursuant to the Management Agreement, the Company will pay Access an annual fee equal to the greater of (i) a base amount, which is the sum of (x) $6 million and (y) 1.5% of the aggregate amount of Acquired EBITDA (as defined in the Management Agreement) and was approximately $9 million for the fiscal year ended September 30, 2019 , and (ii) 1.5% of the EBITDA (as defined in the indenture governing the redeemed WMG Holdings Corp.

13.75% Senior Notes due 2019) of the Company for the applicable fiscal year, plus expenses.

The Company will also pay Access a specified transaction fee for certain types of transactions completed by Holdings or one or more of its subsidiaries, plus expenses.

The future balances disclosed are representative of the base amount of the annual fee only.

(4) We have minimum funding commitments and other related obligations to support the operations of various investments, which are reflected in the table above.

Other long-term liabilities include $12 million and $15 million of liabilities for uncertain tax positions as of September 30, 2019 and September 30, 2018 , respectively.

Other long-term liabilities, which are not included in the table above, include $12 million and $12 million of liabilities for uncertain tax positions as of September 30, 2020 and September 30, 2019, respectively.

We are unable to accurately predict when these amounts will be realized or released.

* Because the timing of payment, and even whether payment occurs, is dependent upon the timing of delivery of albums and musical compositions, the timing and amount of payment of these commitments as presented in the above summary can vary significantly.

Per the above explanation, the minimum annual fee will be approximately $9 million per year.

This amount may vary based on the terms described above;

and will continue as long as the Management Agreement remains unmodified and effective.

CRITICAL ACCOUNTING POLICIES

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We believe the following list represents critical accounting policies as contemplated by FRR 60.

For a summary of all of our significant accounting policies, see Note 2 to our audited Consolidated Financial Statements included elsewhere herein.

Business Combinations

We account for our business acquisitions under the FASB ASC Topic 805, Business Combinations (“ASC 805”) guidance for business combinations.

The total cost of acquisitions is allocated to the underlying identifiable net assets based on their respective estimated fair values.

The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill.

Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves the use of significant estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items.

If our assumptions or estimates in the fair value calculation change, the fair value of our acquired intangible assets could change;

this would also change the value of our goodwill.

For a summary of all of our significant accounting policies, see Note 2 to our consolidated financial statements included elsewhere herein.

Accounting for Goodwill and Other Intangible Assets

We account for our goodwill and other indefinite-lived intangible assets as required by ASC 350.

Under ASC 350, we do not amortize goodwill, including the goodwill included in the carrying value of investments accounted for using the equity method of accounting, and certain other intangible assets deemed to have an indefinite useful life.

We test goodwill for impairment at the reporting unit level and have concluded that our reporting units are generally the same as our reportable segments.

We evaluate the determination of our reporting units periodically or whenever events or substantive changes in circumstances occur.

ASC 350 requires that goodwill and certain intangible assets be assessed for impairment using fair value measurement techniques on an annual basis and when events occur that may suggest that the fair value of such assets cannot support the carrying value.

ASC 350 gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.

If an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is unnecessary.

However, if an entity concludes otherwise, then it is required to perform the step one of the two-step process.

The first step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its net book value (or carrying amount), including goodwill.

In performing the first step, management determines the fair value of its reporting units using a discounted cash flow (“DCF”) analysis.

Determining fair value requires significant judgment concerning the assumptions used in the valuation model, including discount rates, the amount and timing of expected future cash flows and, growth rates.

The cash flows employed in the DCF analysis are based on management’s most recent budgets and business plans and when applicable, various growth rates have been assumed for years beyond the current business plan periods.

Any forecast contains a degree of uncertainty and modifications to these cash flows could significantly increase or decrease the fair value of a reporting unit.

For example, if revenue from sales of physical formats continues to decline and the revenue from sales of digital formats does not continue to grow as expected and we are unable to adjust costs accordingly, it could have a negative impact on future impairment tests.

If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the second step of the impairment test is unnecessary.

If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any.

The second step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill.

If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.

The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination.

That is, the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.

ASC 350 gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or intangible asset is less than its carrying amount.

If an entity determines it is not more likely than not that the fair value of a reporting unit or intangible asset is less than its carrying amount, then performing the quantitative impairment test is unnecessary.

However, if an entity concludes otherwise, then the quantitative impairment test shall be used to identify the impairment and measure the amount of an impairment loss to be recognized (if applicable).

As of September 30, 2020, we had recorded goodwill in the amount of $1.831 billion, including $1.367 billion and $464 million for our Recorded Music and Music Publishing businesses, respectively, primarily related to the Merger and PLG Acquisition.

As of September 30, 2020, we had recorded definite-lived intangible assets of $1.653 billion and indefinite-lived intangible assets of $154 million.

We test our goodwill and other indefinite-lived intangible assets for impairment on an annual basis in the fourth quarter of each fiscal year as of July 1.

The performance of our fiscal 2019 impairment analysis did not result in an impairment of the Company’s goodwill and other indefinite-lived intangible assets.

The impairment test for other intangible assets not subject to amortization involves a comparison of the estimated fair value of the intangible asset with its carrying value.

If the carrying value of the intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

The estimates of fair value of intangible assets not subject to amortization are determined using a DCF analysis.

Common among such approaches is the “relief from royalty” methodology, which is used in estimating the fair value of the Company’s trademarks.

Discount rate assumptions are based on an assessment of the risk inherent in the projected future cash flows generated by the respective intangible assets.

Also subject to judgment are assumptions about royalty rates, which are based on the estimated rates at which similar trademarks are being licensed in the marketplace.

We performed a qualitative assessment for our reporting units and other indefinite-lived intangible assets in fiscal 2020.

This assessment considered changes in our projected future cash flows and discount rates, recent market transactions and overall macroeconomic conditions.

Based on this assessment, we concluded that it was more likely than not that the estimated fair values of our reporting units and other indefinite-lived intangible assets were higher than their carrying values and that the performance of a quantitative impairment test was not required.

See Note 9 to the consolidated financial statements for a further discussion of our goodwill and intangible assets.

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Recorded Music

As required by FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes

revenue when, or as, control of the promised services or goods is transferred to our customers and in an amount that reflects the

consideration the Company is contractually due in exchange for those services or goods.

As required by FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when, or as, control of the promised services or goods is transferred to our customers and in an amount that reflects the consideration the Company is contractually due in exchange for those services or goods.

The Company adopted ASC 606 as of October 1, 2018 using the modified retrospective method to all contracts not completed as of the date of adoption.

Revenues from the sale or license of Recorded Music products through digital distribution channels are typically recognized when sale or usage occurs based on usage reports received from the customer.

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.

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.

Revenues from the sale of physical Recorded Music products are recognized upon delivery, which occurs once the product has been shipped and control has 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.

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 typically recognized using an appropriate measure of progress over the contractual term.

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.

Music Publishing

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Synchronization revenue is typically recognized as revenue when control of the license is transferred to the customer in accordance with ASC 606.

Refund Liabilities and Allowance for Doubtful Accounts

Management’s estimate of Recorded Music physical products that will be returned, and the amount of receivables that will ultimately be collected is an area of judgment affecting reported revenues and operating income.

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.

The provision for such sales returns is reflected as a reduction in the revenues from the related sale.

Similarly, the Company monitors customer credit risk related to accounts receivable.

Significant judgments and estimates are involved in evaluating if such amounts will ultimately be fully collected.

On an ongoing basis, the Company tracks customer exposure based on news reports, ratings agency information, reviews of customer financial data and direct dialogue with customers.

Counterparties that are determined to be of a higher risk are evaluated to assess whether the payment terms previously granted to them

should be modified.

The Company also monitors payment levels from customers, and a provision for estimated uncollectible amounts is maintained based on such payment levels, historical experience, management’s views on trends in the overall receivable agings and, for larger accounts, analyses of specific risks on a customer specific basis.

Based on management’s analysis of sales returns, refund liabilities of $23 million and $28 million were established at September 30, 2019 and September 30, 2018 , respectively.

Based on management’s analysis of uncollectible accounts, reserves of $17 million and $17 million were established at September 30, 2019 and September 30, 2018 , respectively.

The ratio of our receivable allowances and refund liabilities to gross accounts receivables was 5% at September 30, 2019 and 9% at September 30, 2018 .

Accounting for Royalty Advances

We regularly commit to and pay royalty advances to our recording artists and songwriters in respect of future sales.

We account for these advances under the related guidance in FASB ASC Topic 928, Entertainment—Music (“ASC 928”).

Under ASC 928, we capitalize as assets certain advances that we believe are recoverable from future royalties to be earned by the recording artist or songwriter.

Accounting for Royalty Costs and Royalty Advances

The Company incurs royalty costs that are payable to our recording artists and songwriters generated from the sale or license of our Recorded Music catalog and Music Publishing copyrights.

Royalties are calculated using negotiated rates in accordance with recording artist and songwriter contracts.

Calculations are based on revenue earned or user/usage measures or a combination of these.

There are instances where such data is not available to be processed and royalty cost calculations may be complex or involve judgments about significant volumes of data to be processed and analyzed.

We had $1,628 million and $1,567 million of royalty payables in our balance sheet at September 30, 2020 and September 30, 2019, respectively.

In many instances, the Company commits to pay our recording artists and songwriters royalties in advance of future sales.

The Company accounts for these advances under the related guidance in FASB ASC Topic 928, Entertainment—Music (“ASC 928”).

Under ASC 928, the Company capitalizes as assets certain advances that it believes are recoverable from future royalties to be earned by the recording artist or songwriter.

Recoverability is assessed upon initial commitment of the advance based upon the Company’s forecast of anticipated revenue from the sale of future and existing albums or musical compositions.

In determining whether the advance is recoverable, the Company evaluates the current and past popularity of the recording artist or songwriter, the sales history of the recording artist or songwriter, the initial or expected commercial acceptability of the product, the current and past popularity of the genre of music that the product is designed to appeal to, and other relevant factors.

Advances vary in both amount and expected life based on the underlying recording artist or songwriter.

Advances to recording artists or songwriters with a history of successful commercial acceptability will typically be larger than advances to a newer or unproven recording artist or songwriter.

In addition, in certain cases these advances represent a multi-album release or multi-musical composition obligation and the number of album releases and musical compositions will vary by recording artist or songwriter.

Management’s decision to capitalize an advance to a recording artist or songwriter as an asset requires significant judgment as to the recoverability of the advance.

The recoverability is assessed upon initial commitment of the advance based upon management’s forecast of anticipated revenue from the sale and licensing of future and existing albums or musical compositions.

In determining whether the advance is recoverable, management evaluates the current and past popularity of the recording artist or songwriter, the sales history of the recording artist or songwriter, the initial or expected commercial acceptability of the music, the current and past popularity of the genre of music that the music is designed to appeal to, and other relevant factors.

Based upon this information, management expenses the portion of any advance that it believes is not recoverable.

In most cases, advances to recording artists or songwriters without a history of success and evidence of current or past popularity will be expensed immediately.

Advances are individually assessed for recoverability continuously and at minimum on a quarterly basis.

As part of the ongoing assessment of recoverability, we monitor the projection of future sales based on the current environment, the recording artist’s or songwriter’s ability to meet their contractual obligations as well as our intent to support future album releases or musical compositions from the recording artist or songwriter.

To the extent that a portion of an outstanding advance is no longer deemed recoverable, that amount will be expensed in the period the determination is made.

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Significant judgment is required in assessing and estimating the tax consequences of these transactions.

The Company prepares and

files tax returns based on its interpretation of tax laws and regulations.

The Company prepares and files tax returns based on its interpretation of tax laws and regulations.

In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities.

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There is considerable judgment involved in determining whether positions taken on the Company’s tax returns are more likely than not of being sustained.

Accounting for Share-Based Compensation

Accounting for Stock-Based Compensation

Share-based compensation represents compensation payment for which the amounts are based on the fair market value of the Company’s common stock.

The Company’s Senior Management Free Cash Flow Plan is classified as a liability rather than equity under FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”) .

Liability classified share-based compensation costs are measured at fair value each reporting date until settlement.

Because it is not practical for the Company to estimate the volatility of its share price needed to use the fair value approach (since our stock is not currently publicly traded), the Company has made a policy election that whenever share-based payment awards are required to be measured as a liability, the Company will use the intrinsic value method to measure the costs.

Under the intrinsic value method, the Company obtains a valuation of our presumed stock price quarterly and re-measures the related awards using this new price, recognizing compensation costs for the difference between the existing price and new price.

There are two general valuation approaches that are used in estimating fair value of a business that is considered to be a going concern:

the income approach and market approach.

As of September 30, 2019 , the Company derived its fair value through the application of the income approach using a discounted cash flow model, which is then adjusted for non-operating assets and the estimated fair value of the Company’s debt.

The Company’s valuation approach did not include the application of the market approach due to no directly comparable market transactions.

Under the income approach, the cash flows employed in the discounted cash flows analysis are based on management’s most recent budget and business plans and when applicable, various growth rates have been assumed for years beyond the current business plan periods.

Any forecast contains a degree of uncertainty and modifications to these cash flows could significantly increase or decrease the fair value of the presumed share price.

In determining which discount rate to utilize, management determines the appropriate weighted-average cost of capital (“WACC”) for the Company.

Management considers many factors in selecting a WACC, including the market view of risk, the appropriate capital structure and the appropriate borrowing rates for the Company.

The selection of a WACC is subjective and modification to this rate could significantly increase or decrease the fair value of our presumed stock price.

Prior to the Company’s IPO, the Company’s Senior Management Free Cash Flow Plan (the “Plan”) was classified as a liability rather than equity under FASB ASC Topic 718, Compensation—Stock Compensation (“ASC 718”) .

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.

Upon completion of the IPO in June 2020, 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.

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.

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

New Accounting Principles

In May 2014, the FASB issued guidance codified in ASC 606, which replaces the guidance in former ASC 605, Revenue Recognition and ASC 928-605, Entertainment—Music .

The amendment was the result of a joint effort by the FASB and the International Accounting Standards Board to improve financial reporting by creating common revenue recognition guidance for U.S.

GAAP and international financial reporting standards (“IFRS”).

The joint project clarifies the principles for recognizing revenue and develops a common revenue standard for U.S.

GAAP and IFRS.

The Company adopted ASC 606 on October 1, 2018, using the modified retrospective method to all contracts not completed as of the date of adoption.

The reported results as of and for the fiscal year ended September 30, 2019 reflect the application of the new standard, while the reported results for the fiscal year ended September 30, 2018 have not been adjusted to reflect the new standard and were prepared under prior revenue recognition accounting guidance.

The adoption of ASC 606 resulted in a change in the timing of revenue recognition in the Company’s Music Publishing segment as well as international broadcast rights within the Company’s Recorded Music segment.

Under the new revenue recognition rules, revenue is recorded based on best estimates available in the period of sale or usage whereas revenue was previously recorded when cash was received for both the licensing of publishing rights and international Recorded Music broadcast fees.

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.

As a result of adopting ASC 606, the Company recorded a decrease to the opening accumulated deficit of approximately $139 million, net of tax, as of October 1, 2018.

The Company also reclassified $28 million from accounts receivable to other current liabilities related to estimated refund liabilities for its physical sales.

We will adopt ASC 842, Leases , on October 1, 2019, which will result in most of our operating leases being recognized as right of use assets and operating lease liabilities on our consolidated balance sheet.

None of the remaining new accounting principles had a material effect on our audited financial statements.

See Note 2 to our audited Consolidated Financial Statements included elsewhere herein for a complete summary of all our significant accounting policies.

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.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis