Warner Music Group Corp. 10-K

ITEM 7. 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, 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. Risk Factors” and elsewhere in this Annual Report. See “Special Note Regarding Forward-Looking Statements.” 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. INTRODUCTION The Company was formed on November 21, 2003. The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp. Acquisition Corp. 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. See Item 1A. 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. The terms “we,” “us,” “our,” “ours” and the “Company” refer collectively to Warner Music Group Corp. and its consolidated subsidiaries, except where otherwise indicated. 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: • Business overview. This section provides a general description of our business, as well as a discussion of factors that we believe are important in understanding our results of operations and comparability and in anticipating future trends. • Results of operations. This section provides an analysis of our results of operations for the fiscal years ended September 30, 2020, September 30, 2019 and September 30, 2018. This analysis is presented on both a consolidated and segment basis. • Financial condition and liquidity. This section provides an analysis of our cash flows for the fiscal years ended September 30, 2020, September 30, 2019 and September 30, 2018, as well as a discussion of our financial condition and liquidity as of September 30, 2020. The discussion of our financial condition and liquidity includes recent debt financings and a summary of the key debt covenant compliance measures under our debt agreements. • Critical accounting policies. This section identifies those accounting policies that are considered important to the Company’s results of operations and financial condition, require significant judgment and involve significant management estimates. The Company’s significant accounting policies, including those considered to be critical accounting policies, are summarized in Note 2 to the accompanying consolidated financial statements. Use of OIBDA We evaluate our operating performance based on several factors, including our primary financial measure of operating income (loss) before non-cash depreciation of tangible assets and non-cash amortization of intangible assets (“OIBDA”). We consider OIBDA to be an important indicator of the operational strengths and performance of our businesses. However, a limitation of the use of OIBDA as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses and other non-operating income (loss). 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 43 measures of financial performance reported in accordance with United States generally accepted accounting principles (“U.S. GAAP”). 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 “—Results of Operations.” Use of Constant Currency As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of revenue on a constant-currency basis in addition to reported results helps improve the ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares revenue between periods as if exchange rates had remained constant period over period. We use revenue on a constant-currency basis as one measure to evaluate our performance. We calculate constant currency by calculating prior-year revenue using current-year foreign currency exchange rates. We generally refer to such amounts calculated on a constant-currency basis as “excluding the impact of foreign currency exchange rates.” This revenue should be considered in addition to, not as a substitute for, revenue reported in accordance with U.S. GAAP. Revenue on a constant-currency basis, as we present it, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with U.S. GAAP. BUSINESS OVERVIEW 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 world’s 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 one million musical compositions. We classify our business interests into two fundamental operations: Recorded Music and Music Publishing. A brief description of each of those operations is presented below. Components of Our Operating Results Recorded Music Operations Our Recorded Music business primarily consists of the discovery and development of recording artists and the related marketing, promotion, distribution, sale and licensing of music created by such recording artists. We play an integral role in virtually all aspects of the recorded music value chain from discovering and developing talent to producing, distributing and selling music to marketing and promoting recording artists and their music. In the United States, our Recorded Music business is conducted principally through our major record labels—Atlantic Records and Warner Records. In October 2018, we launched Elektra Music Group in the United States as a standalone label group, which comprises the Elektra, Fueled by Ramen and Roadrunner labels. Our Recorded Music business also includes Rhino Entertainment, a division that specializes in marketing our recorded music catalog through compilations, reissuances of previously released music and video titles and releasing previously unreleased material from our vault. We also conduct our Recorded Music business through a collection of additional record labels including Asylum, Big Beat, Canvasback, East West, Erato, FFRR, Nonesuch, Parlophone, Reprise, Sire, Spinnin’ Records, Warner Classics and Warner Music Nashville. Outside the United States, our Recorded Music business is conducted in more than 70 countries through various subsidiaries, affiliates and non-affiliated licensees. Internationally, we engage in the same activities as in the United States: discovering and signing artists and distributing, selling, marketing and promoting their music. In most cases, we also market, promote, distribute and sell the music of those recording artists for whom our domestic record labels have international rights. In certain smaller markets, we license the right to distribute and sell our music to non-affiliated third-party record labels. Our Recorded Music business’ distribution operations include WEA Corp., which markets, distributes and sells music and video products to retailers and wholesale distributors; ADA, which markets, distributes and sells the products of independent labels to retail and wholesale distributors; and various distribution centers and ventures operated internationally. In addition to our music being sold in physical retail outlets, our music is also sold in physical form to online physical retailers, such as amazon.com, barnesandnoble.com and bestbuy.com, and distributed in digital form to an expanded universe of digital partners, including streaming services such as those of Amazon, Apple, Deezer, SoundCloud, Spotify, Tencent Music Entertainment Group and YouTube, radio services such as iHeart Radio and SiriusXM and download services. We have integrated the marketing of digital content into all aspects of our business, including 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 44 also created with all distribution channels in mind, including streaming services, social networking sites, online portals and music-centered destinations. We also work side-by-side with our online and mobile partners to test new concepts. We believe existing and new digital businesses will be a significant source of growth and will provide new opportunities to successfully monetize our assets and create new revenue streams. The proportion of digital revenues attributable to each distribution channel varies by region and proportions may change as the introduction of new technologies continues. As one of the world’s largest music entertainment companies, we believe we are well positioned to take advantage of growth in digital distribution and emerging technologies to maximize the value of our assets. We have diversified our revenues beyond our traditional businesses by entering into expanded-rights deals with recording artists in order to partner with such artists in other aspects of their careers. Under these agreements, we provide services to and participate in recording artists’ activities outside the traditional recorded music business such as touring, merchandising and sponsorships. We have built and acquired artist services capabilities and platforms for marketing and distributing this broader set of music-related rights and participating more widely in the monetization of the artist brands we help create. We believe that entering into expanded-rights deals and enhancing our artist services capabilities in areas such as merchandising, VIP ticketing, fan clubs, concert promotion and management has permitted us to diversify revenue streams and capitalize on other revenue opportunities. This provides for improved long-term relationships with our recording artists and allows us to more effectively connect recording artists and fans. Recorded Music revenues are derived from four main sources: • Digital : the rightsholder receives revenues with respect to streaming and download services; • Physical : the rightsholder receives revenues with respect to sales of physical products such as vinyl, CDs and DVDs; • 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 merchandising, touring, concert promotion, ticketing, sponsorship, fan clubs, artist websites and artist and brand management; and • 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; the rightsholder also receives royalties if sound recordings are performed publicly through broadcast of music on television, radio and cable, and in public spaces such as shops, workplaces, restaurants, bars and clubs. 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; (ii) signing and developing recording artists; and (iii) creating master recordings in the studio; • Product costs : the costs to manufacture, package and distribute products to wholesale and retail distribution outlets, the royalty costs associated with distributing products of independent labels to wholesale and retail distribution outlets, as well as the costs related to our artist services business; • Selling and marketing expenses : the costs associated with the promotion and marketing of recording artists and music, including costs to produce music videos for promotional purposes and artist tour support; and • General and administrative expenses : the costs associated with general overhead and other administrative expenses. Music Publishing Operations While Recorded Music is focused on marketing, promoting, distributing and licensing a particular recording of a musical composition, Music Publishing is an intellectual property business focused on generating revenue from uses of the musical composition itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rightsholders, our Music Publishing business garners a share of the revenues generated from use of the musical compositions. The operations of our Music Publishing business are conducted principally through Warner Chappell Music, our global music publishing company headquartered in Los Angeles, with operations in over 70 countries through various subsidiaries, affiliates, and non-affiliated licensees and sub-publishers. We own or control rights to more than 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. Warner Chappell Music also administers the music and soundtracks of several third-party television and film producers and studios. We have an extensive production music catalog collectively branded as Warner Chappell Production Music. 45 Music Publishing revenues are derived from five main sources: • 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; • Digital: 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; • Synchronization: the rightsholder receives revenues for the right to use the musical composition in combination with visual images such as in films or television programs, television commercials and video games as well as from other uses such as in toys or novelty items and merchandise; and • Other: the rightsholder receives revenues for use in sheet music and other uses. 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; and • Selling and marketing, general overhead and other administrative expenses : the costs associated with selling and marketing, general overhead and other administrative expenses. 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. 46 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 On October 10, 2018, we acquired E.M.P. Merchandising Handelsgesellschaft mbH, a limited liability company under the laws of Germany, and its subsidiaries, all of the share capital of MIG Merchandising Investment GmbH, a limited liability company under the laws of Germany, and its subsidiaries, and certain shares of Large Popmarchandising BVBA, a limited liability company under the laws of Belgium (together, “EMP”). EMP is a specialty retailer of merchandise for many popular artists along with other forms of entertainment such as movies and television. Adoption of New Revenue Recognition Standard 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 . 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. 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. See “Critical Accounting Policies.” 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. 47 RESULTS OF OPERATIONS Fiscal Year Ended September 30, 2020 Compared with Fiscal Year Ended September 30, 2019 and Fiscal Year Ended September 30, 2018 Consolidated Results Revenues The Company’s revenues were composed of the following amounts (in millions): For the Fiscal Year Ended September 30, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change Revenue by Type 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 % Intersegment eliminations (4) (8) (8) 4 -50 % — — % Total Revenues $ 4,463 $ 4,475 $ 4,005 $ (12) — % $ 470 12 % Revenue by Geographical Location U.S. Recorded Music $ 1,609 $ 1,656 $ 1,460 $ (47) -3 % $ 196 13 % U.S. Music Publishing 325 300 294 25 8 % 6 2 % Total U.S. 1,934 1,956 1,754 (22) -1 % 202 12 % International Recorded Music 2,201 2,184 1,900 17 1 % 284 15 % International Music Publishing 332 343 359 (11) -3 % (16) -4 % Total International 2,533 2,527 2,259 6 — % 268 12 % Intersegment eliminations (4) (8) (8) 4 -50 % — — % Total Revenues $ 4,463 $ 4,475 $ 4,005 $ (12) — % $ 470 12 % Total Revenues 2020 vs. 2019 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. 48 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. U.S. 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. U.S. 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. 2019 vs. 2018 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. Prior to intersegment eliminations, Recorded Music revenues represented 86% and 84% of total revenues for the fiscal years ended September 30, 2019 and September 30, 2018, respectively. Prior to intersegment eliminations, Music Publishing revenues represented 14% and 16% of total revenues for the fiscal years ended September 30, 2019 and September 30, 2018, respectively. 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, 2019 and September 30, 2018. Total digital revenues after intersegment eliminations increased by $358 million, or 16%, to $2,610 million for the fiscal year ended September 30, 2019 from $2,252 million for the fiscal year ended September 30, 2018. Total digital revenues represented 58% and 56% of consolidated revenues for the fiscal years ended September 30, 2019 and September 30, 2018, respectively. Prior to intersegment eliminations, total digital revenues for the fiscal year ended September 30, 2019 were comprised of U.S. revenues of 49 $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. revenues of $1,169 million and international revenues of $1,087 million, or 52% and 48% of total digital revenues, respectively. 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. U.S. Recorded Music revenues were $1,656 million and $1,460 million, or 43% of consolidated Recorded Music revenues for each of the fiscal years ended September 30, 2019 and September 30, 2018. 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. The overall increase in Recorded Music revenue was driven by increases in digital revenue and artist services and expanded-rights revenue, partially offset by decreases in physical revenue and licensing revenue. Digital revenue increased by $324 million as a result of the continued growth in streaming services and a strong release schedule including top seller Meek Mill and carryover success from Ed Sheeran, The Greatest Showman and Cardi B as well as the adoption of ASC 606. Revenue from streaming services grew by $396 million to $2,129 million for the fiscal year ended September 30, 2019 from $1,733 million for the fiscal year ended September 30, 2018. Digital revenue growth was partially offset by a decline in download and other digital revenues of $72 million to $214 million for the fiscal year ended September 30, 2019 from $286 million for the fiscal year ended September 30, 2018 due to the continued shift to streaming. Artist services and expanded-rights revenue increased by $240 million primarily due to a $240 million increase related to the acquisition of EMP, higher merchandising and advertising revenues and timing of larger tours in Japan, partially offset by $94 million related to the divestment of a concert promotion business in Italy and the unfavorable impact of foreign currency exchange rates of $11 million. Physical revenue decreased by $71 million primarily due to the unfavorable impact of foreign currency exchange rates of $15 million, continued shift from physical revenue to digital revenue, partially offset by the success of new releases. Licensing revenue decreased by $13 million primarily due to the unfavorable impact of foreign currency exchange rates of $11 million and the impact of ASC 606 of $4 million. 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, which was partially offset by an increase of $23 million due to the adoption of ASC 606. U.S. Music Publishing revenues were $300 million, or 47% of consolidated Music Publishing revenues for the fiscal year ended September 30, 2019, and $294 million, or 45% of consolidated Music Publishing revenues for the fiscal year ended September 30, 2018. International Music Publishing revenues were $343 million, or 53% of consolidated Music Publishing revenues for the fiscal year ended September 30, 2019, and $359 million, or 55% of consolidated Music Publishing revenues for the fiscal year ended September 30, 2018. The overall decrease in Music Publishing revenue was mainly driven by decreases in performance revenue of $29 million and mechanical revenue of $17 million, partially offset by increases in digital revenue of $34 million, synchronization revenue of $1 million and other revenue of $1 million. The decreases in Music Publishing performance revenue and mechanical revenue are primarily due to lost administration rights and lower market share, partially offset by $7 million related to the adoption of ASC 606. 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. Revenue by Geographical Location 2020 vs. 2019 U.S. 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. U.S. 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. U.S. streaming revenue increased by $91 million, partially offset by a $27 million decline in download revenue. U.S. 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. U.S. physical revenue decreased by $58 million due to the shift from physical to digital formats, impact of COVID-19 and timing of releases. U.S. 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 50 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. 2019 vs. 2018 U.S. 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. U.S. Recorded Music revenue increased by $196 million or 13%. The primary driver was the increase in U.S. Recorded Music digital revenue, which increased by $191 million due to the continued growth in streaming services. Streaming revenue increased by $228 million, partially offset by a $37 million decline in download revenue. U.S. artist services and expanded-rights revenue also increased by $50 million, or 40%, driven by higher advertising and merchandising revenues. These increases were partially offset by a decline in U.S. physical revenue of $38 million due to the shift from physical to digital formats. U.S. Music Publishing revenue increased by $6 million or 2%. This was primarily driven by the increase in U.S. Music Publishing digital revenue of $22 million due to an increase in streaming revenue and adoption of ASC 606, partially offset by decreases in mechanical revenue of $12 million, performance revenue of $3 million and other revenue of $1 million. International revenue increased by $268 million, or 12%, to $2,527 million for the fiscal year ended September 30, 2019 from $2,259 million for the fiscal year ended September 30, 2018, which includes $240 million related to the acquisition of EMP. Excluding the unfavorable impact of foreign currency exchange rates, International revenue increased by $375 million or 17%. International Recorded Music revenue increased $284 million primarily due to increases in digital revenue of $133 million and artist services and expanded-rights revenue of $190 million, partially offset by a decrease in physical revenue of $33 million and licensing revenue of $6 million. International Recorded Music digital revenue increased due to a $168 million increase in streaming services revenue, partially offset by a $35 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. Decline in downloads was due to the continued shift to streaming services. International Recorded Music artist services and expanded-rights revenue increased $240 million due to the acquisition of EMP, higher merchandising revenues and timing of larger tours in Japan in the current fiscal year, partially offset by $94 million related to the divestment of a concert promotion business in Italy and the unfavorable impact of foreign currency exchange rates of $11 million. International Recorded Music physical revenue decreased due to the continued shift from physical to digital formats and the unfavorable impact of foreign currency exchange rates of $15 million, partially offset by the success of new releases including Johnny Hallyday in France and local artists in Japan. International Recorded Music licensing revenue decreased due to the unfavorable impact of foreign currency exchange rates of $13 million and the impact of ASC 606, partially offset by increased synchronization activity in the U.K. and Japan. International Music Publishing revenue decreased $16 million or 4%. 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. Cost of revenues Our cost of revenues was composed of the following amounts (in millions): For the Fiscal Year Ended September 30, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change Artist and repertoire costs $ 1,560 $ 1,574 $ 1,471 $ (14) -1 % $ 103 7 % Product costs 773 827 700 (54) -7 % 127 18 % Total cost of revenues $ 2,333 $ 2,401 $ 2,171 $ (68) -3 % $ 230 11 % 51 2020 vs. 2019 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. 2019 vs. 2018 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. Expressed as a percentage of revenues, cost of revenues remained constant at 54% for each of the fiscal years ended September 30, 2019 and September 30, 2018. Artist and repertoire costs increased by $103 million, or 7%, to $1,574 million for the fiscal year ended September 30, 2019 from $1,471 million for the fiscal year ended September 30, 2018. Artist and repertoire costs as a percentage of revenues decreased to 35% for the fiscal year ended September 30, 2019 from 37% for the fiscal year ended September 30, 2018 due to the acquisition of EMP, which has no artist and repertoire costs and therefore reduces our total artist and repertoire costs as a percentage of revenue. Excluding EMP revenue, artist and repertoire costs were flat at 37%. Product costs increased by $127 million, or 18%, to $827 million for the fiscal year ended September 30, 2019 from $700 million for the fiscal year ended September 30, 2018. Product costs as a percentage of revenues remained flat at 18% for each of the fiscal years ended September 30, 2019 and September 30, 2018. 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. Selling, general and administrative expenses Our selling, general and administrative expenses are composed of the following amounts (in millions): For the Fiscal Year Ended September 30, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change General and administrative expense (1) $ 1,434 $ 764 $ 814 $ 670 88 % $ (50) -6 % Selling and marketing expense 640 632 530 8 1 % 102 19 % Distribution expense 95 114 67 (19) -17 % 47 70 % Total selling, general and administrative expense $ 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. 2020 vs. 2019 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 52 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. 2019 vs. 2018 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. General and administrative expenses decreased by $50 million, or 6%, to $764 million for the fiscal year ended September 30, 2019 from $814 million for the fiscal year ended September 30, 2018. The decrease in general and administrative expense was primarily due to lower expense associated with the Senior Management Free Cash Flow Plan of $37 million and a decrease in severance and restructuring costs of $46 million, partially offset by higher employee-related costs. Expressed as a percentage of revenue, general and administrative expense decreased to 17% for the fiscal year ended September 30, 2019 from 20% for the fiscal year ended September 30, 2018. Selling and marketing expense increased by $102 million, or 19%, to $632 million for the fiscal year ended September 30, 2019 from $530 million for the fiscal year ended September 30, 2018. The increase in selling and marketing expense was primarily due to an increase of $71 million relating to the acquisition of EMP and increased variable marketing expenses on higher revenue during the fiscal year. Expressed as a percentage of revenues, selling and marketing expense increased to 14% for the fiscal year ended September 30, 2019 from 13% for the fiscal year September 30, 2018. Excluding the acquisition of EMP, selling and marketing expense was flat at 13%. Distribution expense increased by $47 million, or 70%, to $114 million for the fiscal year ended September 30, 2019 from $67 million for the fiscal year ended September 30, 2018. Expressed as a percentage of revenues, distribution expense increased to 3% for the fiscal year ended September 30, 2019 from 2% for the fiscal year ended September 30, 2018 mainly due to $35 million in costs resulting from the acquisition of EMP. Excluding the acquisition of EMP, distribution expense was flat at 2%. 53 Reconciliation of Net Income Attributable to Warner Music Group Corp. and Operating Income to Consolidated OIBDA As previously described, we use OIBDA as our primary measure of financial performance. The following table reconciles operating income to OIBDA, and further provides the components from net income attributable to Warner Music Group Corp. to operating income for purposes of the discussion that follows (in millions): For the Fiscal Year Ended September 30, 2020 vs. 2019 2019 vs. 2018 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 % 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 (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 % OIBDA 2020 vs. 2019 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. 2019 vs. 2018 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. Depreciation expense 2020 vs. 2019 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. 2019 vs. 2018 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. 54 Amortization expense 2020 vs. 2019 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. 2019 vs. 2018 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. Operating (loss) income 2020 vs. 2019 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. 2019 vs. 2018 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. Loss on extinguishment of debt 2020 vs. 2019 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. 2019 vs. 2018 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 $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 refinancing transactions that occurred during fiscal 2018. Please refer to Note 10 of our consolidated financial statements for further discussion. Interest expense, net 2020 vs. 2019 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. 55 2019 vs. 2018 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. Other expense (income) 2020 vs. 2019 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. 2019 vs. 2018 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. Other (income) expense, net for the fiscal year ended September 30, 2019 primarily includes the unrealized gain of $19 million on the mark-to-market of an equity method investment and foreign exchange currency gains on our Euro-denominated debt of $43 million, partially offset by movements in foreign exchange rates. 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. Income tax expense 2020 vs. 2019 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. 2019 vs. 2018 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. The net decrease of $121 million in income tax expense primarily relates to the release of $59 million of our U.S. 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. Net (loss) income 2020 vs. 2019 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. 2019 vs. 2018 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. 56 Noncontrolling interest 2020 vs. 2019 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. 2019 vs. 2018 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. Business Segment Results Revenues, operating income (loss) and OIBDA by business segment were as follows (in millions): For the Fiscal Year Ended September 30, 2020 vs. 2019 2019 vs. 2018 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 eliminations (4) (8) (8) 4 -50 % — — % Operating loss (485) (175) (174) (310) — % (1) 1 % OIBDA (474) (164) (161) (310) — % (3) 2 % Total 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 Revenues 2020 vs. 2019 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. U.S. 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. 2019 vs. 2018 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. U.S. 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. 57 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. Cost of revenues Recorded Music cost of revenues was composed of the following amounts (in millions): For the Fiscal Year Ended September 30, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change Artist and repertoire costs $ 1,148 $ 1,178 $ 1,054 $ (30) -3 % $ 124 12 % Product costs 771 827 700 (56) -7 % 127 18 % Total cost of revenues $ 1,919 $ 2,005 $ 1,754 $ (86) -4 % $ 251 14 % 2020 vs. 2019 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. 2019 vs. 2018 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. Expressed as a percentage of Recorded Music revenues, cost of revenues remained flat at 52% for each of the fiscal years ended September 30, 2019 and September 30, 2018. Artist and repertoire costs as a percentage of revenue remained constant at 31% for each of the fiscal years ended September 30, 2019 and September 30, 2018. Excluding EMP revenue, artist and repertoire costs as a percentage of revenue increased to 33% primarily driven by the mix of revenue, increased investments in artists and songwriters and the prior year benefit for advance recoveries of $10 million. Product costs as a percentage of revenue increased to 22% for the fiscal year ended September 30, 2019 from 21% for the fiscal year ended September 30, 2018. The increase in product costs is primarily due to the acquisition of EMP, partially offset by a concert promotion business divestment in Italy. Selling, general and administrative expense Recorded Music selling, general and administrative expenses were composed of the following amounts (in millions): For the Fiscal Year Ended September 30, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change General and administrative expense (1) $ 875 $ 522 $ 573 $ 353 68 % $ (51) -9 % Selling and marketing expense 627 621 521 6 1 % 100 19 % Distribution expense 95 114 67 (19) -17 % 47 70 % Total selling, general and administrative expense $ 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. 58 2020 vs. 2019 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. 2019 vs. 2018 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. The increase in selling and marketing expense was primarily due to $71 million resulting from the acquisition of EMP and increased variable marketing expense on higher revenue in the fiscal year. The increase in distribution expense was primarily due to $35 million in costs resulting from the acquisition of EMP during the year. 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. Operating income and OIBDA Recorded Music OIBDA included the following amounts (in millions): For the Fiscal Year Ended September 30, 2020 vs. 2019 2019 vs. 2018 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 % 2020 vs. 2019 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. 2019 vs. 2018 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. Expressed as a percentage of Recorded Music revenues, Recorded Music OIBDA increased to 16% for the fiscal year ended September 30, 2019 from 14% for the fiscal year ended September 30, 2018. 59 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. Music Publishing Revenues 2020 vs. 2019 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. U.S. 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. 2019 vs. 2018 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. U.S. Music Publishing revenues were $300 million and $294 million, or 47% and 45%, of Music Publishing revenues for the fiscal years ended September 30, 2019 and September 30, 2018, respectively. International Music Publishing revenues were $343 million and $359 million, or 53% and 55%, of Music Publishing revenues for the fiscal years ended September 30, 2019 and September 30, 2018, respectively. 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. Cost of revenues Music Publishing cost of revenues was composed of the following amounts (in millions): For the Fiscal Year Ended September 30, 2020 vs. 2019 2019 vs. 2018 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 % 2020 vs. 2019 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. 2019 vs. 2018 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. 60 Selling, general and administrative expense Music Publishing selling, general and administrative expenses were comprised of the following amounts (in millions): For the Fiscal Year Ended September 30, 2020 vs. 2019 2019 vs. 2018 2020 2019 2018 $ Change % Change $ Change % Change General and administrative expense (1) $ 85 $ 76 $ 74 $ 9 12 % $ 2 3 % Selling and marketing expense 2 2 2 — — % — — % Total selling, general and administrative expense $ 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. 2020 vs. 2019 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 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. 2019 vs. 2018 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 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. Operating income and OIBDA Music Publishing OIBDA includes the following amounts (in millions): For the Fiscal Year Ended September 30, 2020 vs. 2019 2019 vs. 2018 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 % 2020 vs. 2019 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. 2019 vs. 2018 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. Expressed as a percentage of Music Publishing revenues, Music Publishing OIBDA margin increased to 26% for the fiscal year ended September 30, 2019 from 24% for the fiscal year ended September 30, 2018. The increase was primarily due to $12 million from 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, partially offset by lower revenue and higher general and administrative expenses. 61 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. Corporate Expenses and Eliminations 2020 vs. 2019 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. 2019 vs. 2018 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. 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, due to the operating loss factors noted above. 62 FINANCIAL CONDITION AND LIQUIDITY Financial Condition at September 30, 2020 At September 30, 2020, we had $3.104 billion of debt (which is net of $29 million of deferred financing costs), $553 million of cash and equivalents (net debt of $2.551 billion, defined as total debt, less cash and equivalents and deferred financing costs) and $63 million of Warner Music Group Corp. deficit. This compares to $2.974 billion of debt (which is net of $29 million of deferred financing costs), $619 million of cash and equivalents (net debt of $2.355 billion) and $289 million of Warner Music Group Corp. deficit at September 30, 2019. Cash Flows The following table summarizes our historical cash flows (in millions). 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): Operating activities $ 463 $ 400 $ 425 Investing activities (219) (376) 405 Financing activities (316) 88 (955) Operating Activities 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 $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 $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. Financing Activities 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. 63 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. There were no drawdowns on the Revolving Credit Facility during the fiscal years ended September 30, 2020, September 30, 2019 and September 30, 2018. Liquidity 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 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 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. Subject to market conditions, we expect to continue to take opportunistic steps to extend our maturity dates and reduce related interest expense. 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. 64 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 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 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. dollars, euros or pounds sterling. 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 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). Prepayments 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. The application of proceeds from mandatory prepayments shall not reduce the aggregate amount of then effective commitments under the Revolving Credit Facility and amounts prepaid may be reborrowed, subject to then effective commitments under the Revolving Credit Facility. 65 Voluntary reductions of the unutilized portion of the Commitments under the Revolving Credit Facility are permitted at any time in certain minimum principal amounts, without premium or penalty. Voluntary prepayments of borrowings under the Revolving Credit Facility are permitted at any time in certain minimum principal amounts, subject to reimbursement of the lenders’ redeployment costs actually incurred in the case of a prepayment of LIBOR-based borrowings other than on the last day of the relevant interest period. Senior Term Loan Facility Acquisition Corp. 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. General Acquisition Corp. is the borrower under the Senior Term Loan Facility (the “Term Loan Borrower”). The loans outstanding under the Senior Term Loan Facility mature on November 1, 2023. In addition, the Senior Term Loan Credit Agreement provides the right for individual lenders to extend the maturity date of their loans upon the request of the Term Loan Borrower and without the consent of any other lender. Subject to certain conditions, without the consent of the then existing lenders (but subject to the receipt of commitments), the Senior Term Loan Facility may be expanded (or a new term loan facility entered into) by up to the greater of (i) $300 million and (ii) such additional amount as would not cause the net senior secured leverage ratio, after giving effect to the incurrence of such additional amount and any use of proceeds thereof, to exceed 4.50:1.00. Interest Rates and Fees Term loan borrowings under the Senior Term Loan Credit Agreement bear interest at a floating rate measured by reference to, at Acquisition Corp.’s option, either (i) an adjusted London inter-bank offered rate, LIBOR, not less than 0.00% per annum plus a borrowing margin of 2.125% per annum or (ii) an alternative base rate plus a borrowing margin of 1.125% per annum. Prepayments 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. Secured Notes 3.625% Senior Secured Notes On October 9, 2018, Acquisition Corp. 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 66 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% 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. 67 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. Senior Notes 5.500% Senior Notes On March 14, 2018, Acquisition Corp. 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 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 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 Indentures and Senior Notes Indenture are described below. Ranking 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 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; are effectively senior to Acquisition Corp.’s unsecured senior indebtedness, including the Senior Notes, to the extent of the value of the collateral securing the senior secured obligations; and are structurally subordinated in right of payment to all existing and future indebtedness and other liabilities of any of Acquisition Corp.’s non-guarantor subsidiaries (other than indebtedness and liabilities owed to Acquisition Corp. or one of its subsidiary guarantors (as such term is defined below)). 68 The Senior Notes are Acquisition Corp.’s senior unsecured obligations. The Senior Notes rank senior in right of payment to Acquisition Corp.’s subordinated indebtedness; rank equally in right of payment with all of Acquisition Corp.’s existing and future senior indebtedness; are effectively subordinated to Acquisition Corp.’s secured senior indebtedness, to the extent of the value of the collateral securing such indebtedness; and are structurally subordinated in right of payment to all existing and future indebtedness and other liabilities of any of Acquisition Corp.’s non-guarantor subsidiaries (other than indebtedness and liabilities owed to Acquisition Corp. or one of its subsidiary guarantors). Guarantees and Security 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. All obligations of Acquisition Corp. 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, 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 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; repurchase, prepay or redeem subordinated indebtedness; make investments; create restrictions on the ability of its restricted subsidiaries to pay dividends to it or make other intercompany transfers; create liens; transfer or sell assets; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; enter into certain transactions with its affiliates; 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 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, 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 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. 69 Existing Debt as of September 30, 2020 As of September 30, 2020, our long-term debt, all of which was issued by Acquisition Corp., was as follows (in millions): Revolving Credit Facility (a) $ — Senior Term Loan Facility due 2023 (b) 814 3.625% Senior Secured Notes due 2026 (c) 521 2.750% Senior Secured Notes due 2028 (d) 375 3.875% Senior Secured Notes due 2030 (e) 529 3.000% Senior Secured Notes due 2031 (f) 544 5.500% Senior Notes due 2026 (g) 321 Total long-term debt, including the current portion (h) $ 3,104 ______________________________________ (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. (b) Principal amount of $820 million less unamortized discount of $1 million and unamortized deferred financing costs of $5 million at September 30, 2020. (c) Face amount of €445 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. (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. Dividends The Company’s ability to pay dividends may be restricted by covenants in certain of the indentures governing its notes and in the credit agreements for the Senior Term Loan Facility and the Revolving Credit Facility. 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. 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. 70 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 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. 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; (5) business optimization expenses (including consolidation initiatives, severance costs and other costs relating to initiatives aimed at profitability improvement); (6) transaction expenses; (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. 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 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. 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. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four quarter period or any complete fiscal year. In addition, our debt instruments require that the leverage ratio be calculated on a pro forma basis for certain transactions including acquisitions as if such transactions had occurred on the first date of the measurement period and may include expected cost savings and synergies resulting from or related to any such transaction. There can be no assurances that any such cost savings or synergies will be achieved in full. 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. GAAP. 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. GAAP. 71 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. All amounts in the reconciliation below reflect Acquisition Corp. (in millions, except ratios): 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 Depreciation and amortization 261 269 67 66 Loss on extinguishment of debt (a) 34 7 34 — Net gain on divestitures and sale of securities (b) (1) (4) — (1) Restructuring costs (c) 22 27 9 9 Net hedging and foreign exchange losses (gains) (d) 61 (38) 51 (27) Management fees (e) 20 11 (3) 2 Transaction costs (f) 76 3 (1) — Business optimization expenses (g) 39 22 6 9 Non-cash stock-based compensation expense (h) 608 49 8 22 Other non-cash charges (i) 10 (19) (6) 5 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) 3.05x ______________________________________ (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. (c) Reflects severance costs and other restructuring related expenses. (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. (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 72 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. (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 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. Summary 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. We also have additional borrowing capacity under our indentures and the Senior Term Loan Facility. 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. The amounts involved in any such transactions, individually or in the aggregate, may be material and may be funded from available cash or from additional borrowings. In addition, from time to time, depending on market conditions and prices, contractual restrictions, our financial liquidity and other factors, we may seek to refinance the Senior Credit Facilities or our outstanding debt or debt securities with existing cash and/or with funds provided from additional borrowings. 73 Contractual and Other Obligations Firm Commitments 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 Less than 1 year 1-3 years 3-5 years After 5 years Total (in millions) Senior Secured Notes (1) $ — $ — $ — $ 1,982 $ 1,982 Interest on Senior Secured Notes (1) 66 133 133 254 586 Senior Notes (1) — — 325 — 325 Interest on Senior Notes (1) 18 36 36 18 107 Senior Term Loan Facility (1) — — 820 — 820 Interest on Senior Term Loan Facility (1) 33 69 3 — 105 Operating leases (2) 54 102 93 159 408 Artist, songwriter and co-publisher commitments (3) 442 * * * 442 Minimum funding commitments to investees and other obligations (4) 6 3 3 — 12 Total firm commitments and outstanding debt $ 619 $ 343 $ 1,413 $ 2,413 $ 4,787 ______________________________________ The following is a description of our firmly committed contractual obligations at September 30, 2020: (1) Outstanding debt obligations consist of the Senior Term Loan Facility, the Senior Secured Notes and the Senior Notes. These obligations have been presented based on the principal amounts due, current and long term as of September 30, 2020. Amounts do not include any fair value adjustments, bond premiums, discounts or unamortized deferred financing costs. (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. (3) The Company routinely enters into long-term commitments with recording artists, songwriters and publishers for the future delivery of music. Such commitments generally become due only upon delivery and Company acceptance of albums from the artists or future musical compositions by songwriters and publishers. Additionally, such commitments are typically cancelable at the Company’s discretion, generally without penalty. Based on contractual obligations, aggregate firm commitments to such talent approximate $442 million at September 30, 2020. 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. (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, 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. 74 CRITICAL ACCOUNTING POLICIES The SEC’s Financial Reporting Release No. 60, “Cautionary Advice Regarding Disclosure About Critical Accounting Policies” (“FRR 60”), suggests companies provide additional disclosure and commentary on those accounting policies considered most critical. FRR 60 considers an accounting policy to be critical if it is important to our financial condition and results, and requires significant judgment and estimates on the part of management in our application. 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 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. 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 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. 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. Revenue and Cost Recognition Revenues 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. 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. 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. 75 Music Publishing Music Publishing revenues are earned from the receipt of royalties relating to the licensing of rights in musical compositions and the sale of published sheet music and songbooks. The receipt of royalties principally relates to amounts earned from the public performance of musical compositions, the mechanical reproduction of musical compositions on recorded media including digital formats and the use of musical compositions in synchronization with visual images. Music publishing royalties, except for synchronization royalties, generally are recognized when the sale or usage occurs. The most common form of consideration for publishing contracts is sales- and usage-based royalties. The collecting societies submit usage reports, typically with payment for royalties due, often on a quarterly or biannual reporting period, in arrears. Royalties are recognized as the sale or usage occurs based upon usage reports and, when these reports are not available, royalties are estimated based on historical data, such as recent royalties reported, company-specific information with respect to changes in repertoire, industry information and other relevant trends. Synchronization revenue is typically recognized as revenue when control of the license is transferred to the customer in accordance with ASC 606. 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. 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. We had $489 million and $378 million of advances in our balance sheet at September 30, 2020 and September 30, 2019, respectively. We believe such advances are recoverable through future royalties to be earned by the applicable recording artists and songwriters. Accounting for Income Taxes As part of the process of preparing the consolidated financial statements, we are required to estimate income taxes payable in each of the jurisdictions in which we operate. This process involves estimating the actual current tax expense together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheets. FASB ASC Topic 740, Income Taxes (“ASC 740”), requires a valuation allowance be established when it is more likely than not that all or a portion of deferred tax assets will not be realized. In circumstances where there is sufficient negative evidence, establishment of a valuation allowance must be considered. We believe that cumulative losses in the most recent three-year period generally represent sufficient negative evidence to consider a valuation allowance under the provisions of ASC 740. As a result, we determined that certain of our deferred tax assets required the establishment of a valuation allowance. The realization of the remaining deferred tax assets is primarily dependent on forecasted future taxable income. Any reduction in estimated forecasted future taxable income may require that we record additional valuation allowances against our deferred tax assets on which a valuation allowance has not previously been established. The valuation allowance that has been established will be maintained until there is sufficient positive evidence to conclude that it is more likely than not that such assets will be realized. An ongoing pattern of profitability will generally be considered as sufficient positive evidence. Our income tax expense recorded in the future may be reduced to the extent of offsetting decreases in our valuation allowance. The establishment and reversal of valuation allowances could have a significant negative or positive impact on our future earnings. 76 From time to time, the Company engages in transactions in which the tax consequences may be subject to uncertainty. 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. In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. In determining the Company’s tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions unless such positions are determined to be more likely than not of being sustained upon examination based on their technical merits. 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 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. 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 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. 77