What changed in this filing

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Item 1. Financial Statements

2021-02-01 compared with 2020-08-04 · 217 added, 405 removed, 586 unchanged (51% of the section changed)

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Consolidated Balance Sheets (Unaudited)

June 30, 2020 September 30, 2019

2020 September 30,

(in millions, except share data)

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Total assets $ 6,943 $ 6,410

Liabilities and Deficit

Liabilities and Equity (Deficit)

Current liabilities:

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Class A common stock, $ 0.001 par value;

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

1,000,000,000 shares authorized, 111,167,356 and 88,578,361 shares issued and outstanding as of December 31, 2020 and September 30, 2020, respectively

Class B common stock, $ 0.001 par value;

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

1,000,000,000 shares authorized, 403,184,814 and 421,450,000 issued and outstanding as of December 31, 2020 and September 30, 2020, respectively

Additional paid-in capital 1,913 1,907

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Total Warner Music Group Corp.

deficit ( 38 ) ( 289 )

equity (deficit) 16 ( 63 )

Noncontrolling interest 17 18

Total deficit ( 21 ) ( 269 )

Total liabilities and deficit $ 6,148 $ 6,017

Total equity (deficit) 33 ( 45 )

Total liabilities and equity (deficit) $ 6,943 $ 6,410

See accompanying notes

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Three Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

(in millions, except share and per share data)

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Total costs and expenses ( 1,139 ) ( 1,091 )

Operating (loss) income ( 433 ) 58 ( 317 ) 327

Loss on extinguishment of debt — ( 4 ) — ( 7 )

Operating income 196 165

Interest expense, net ( 31 ) ( 33 )

Other (expense) income ( 3 ) ( 16 ) ( 12 ) 41

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

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

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

Other expense ( 31 ) ( 5 )

Income before income taxes 134 127

Income tax expense ( 35 ) ( 5 )

Net income 99 122

Income attributable to noncontrolling interest ( 1 ) ( 2 )

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

$ ( 520 ) $ 13 $ ( 474 ) $ 166

Net income attributable to Warner Music Group Corp.

(a) Includes depreciation expense:

$ ( 19 ) $ ( 24 )

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

Net income per share attributable to common stockholders:

Class A – Basic and Diluted $ 0.18 $ —

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Warner Music Group Corp.

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

Consolidated Statements of Comprehensive Income (Unaudited)

Three Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

(in millions)

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

Other comprehensive income (loss), net of tax:

Net income $ 99 $ 122

Other comprehensive income, net of tax:

Foreign currency adjustment 34 7

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

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

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

Deferred gain on derivative financial instruments 3 3

Other comprehensive income, net of tax 37 10

Total comprehensive income 136 132

Income attributable to noncontrolling interest ( 1 ) ( 2 )

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

$ ( 505 ) $ 19 $ ( 487 ) $ 137

Comprehensive income attributable to Warner Music Group Corp.

See accompanying notes

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Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended

Three Months Ended

(in millions)

Cash flows from operating activities

Net (loss) income $ ( 471 ) $ 167

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

Net income $ 99 $ 122

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

Depreciation and amortization 71 71

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

Unrealized losses and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts 45 5

Deferred income taxes 2 ( 29 )

Loss on extinguishment of debt — 7

Net loss (gain) on divestitures and investments 2 ( 27 )

Net (gain) loss on divestitures and investments ( 14 ) 1

Non-cash interest expense 1 1

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Cash flows from financing activities

Proceeds from issuance of Acquisition Corp.

3.625 % Senior Secured Notes

Repayment of Acquisition Corp.

4.125 % Senior Secured Notes

Repayment of Acquisition Corp.

4.875 % Senior Secured Notes

Repayment of Acquisition Corp.

5.625 % Senior Secured Notes

Call premiums paid and deposit on early redemption of debt — ( 5 )

Proceeds from issuance of 3.000 % Senior Secured Notes due 2031

Deferred financing costs paid ( 3 ) —

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Dividends paid ( 62 ) ( 206 )

Net cash (used in) provided by financing activities ( 288 ) 119

Net cash provided by (used in) financing activities 178 ( 207 )

Effect of exchange rate changes on cash and equivalents 9 4

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

Net increase (decrease) in cash and equivalents 13 ( 157 )

Cash and equivalents at beginning of period 553 619

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Warner Music Group Corp.

Consolidated Statements of Deficit (Unaudited)

Nine Months Ended June 30, 2020

Consolidated Statements of Equity (Deficit) (Unaudited)

Three Months Ended December 31, 2020

Common Stock Class B

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Balance at September 30, 2020 88,578,361 $ — 421,450,000 $ 1 $ 1,907 $ ( 1,749 ) $ ( 222 ) $ ( 63 ) $ 18 $ ( 45 )

Cumulative effect of ASC 842 adoption — — — — — 7 — 7 — 7

Cumulative effect of ASC 718 accounting policy change

— — — — — 33 — 33 — 33

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

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

Dividends ($ 0.15 per share)

Net income — — — — — 98 — 98 1 99

Other comprehensive income, net of tax — — — — — — 37 37 — 37

Dividends ($ 0.12 per Class A and B share)

— — — — — ( 62 ) — ( 62 ) — ( 62 )

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

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

Stock-based compensation expense — — — — 6 — — 6 — 6

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

Other — — 4,169,978 — — 1 — 1 — 1

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

Three Months Ended June 30, 2020

Common Stock Class B

Common Stock Additional

Capital Accumulated

Deficit Accumulated

Comprehensive

Deficit Non-controlling

Interest Total

Shares Value Shares Value

(in millions, except share and per share data)

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

Cumulative effect of ASC 718 accounting policy change

— — — — — — — — — —

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

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

Distribution to noncontrolling interest holders — — — — — — — — ( 2 ) ( 2 )

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

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

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

Other — — — — — 1 — 1 — 1

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

Nine Months Ended June 30, 2019

Exchange of Class B shares for Class A shares 18,265,183 — ( 18,265,186 ) — — — — — — —

Shares issued under the Plan 4,321,259 — — — — — — — — —

Shares issued under Omnibus Incentive Plan 2,553 — — — — — — — — —

Balance at December 31, 2020 111,167,356 $ — 403,184,814 $ 1 $ 1,913 $ ( 1,713 ) $ ( 185 ) $ 16 $ 17 $ 33

Three Months Ended December 31, 2019

Common Stock Class B

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Net income — — — — — 120 — 120 2 122

Other comprehensive loss, net of tax — — — — — — ( 29 ) ( 29 ) — ( 29 )

Dividends ($ 0.19 per share)

— — — — — ( 94 ) — ( 94 ) — ( 94 )

Distribution to noncontrolling interest holders — — — — — — — — ( 3 ) ( 3 )

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

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

Three Months Ended June 30, 2019

Common Stock Class B

Common Stock Additional

Capital Accumulated

Deficit Accumulated

Comprehensive

Deficit Non-controlling

Interest Total

Shares Value Shares Value

(in millions, except share and per share data)

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

Net income — — — — — 13 — 13 1 14

Other comprehensive income, net of tax — — — — — — 10 10 — 10

Dividends ($ 0.06 per share)

Dividends ($ 0.07 per Class B share)

— — — — — ( 38 ) — ( 38 ) — ( 38 )

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Other — — 4,169,978 — — — — — — —

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

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

See accompanying notes

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Pursuant to the Agreement and Plan of Merger, dated as of May 6, 2011 (the “Merger Agreement”), by and among the Company, AI Entertainment Holdings LLC (formerly Airplanes Music LLC), a Delaware limited liability company (“Parent”) and an affiliate of Access Industries, Inc., and Airplanes Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent (“Merger Sub”), on July 20, 2011 (the “Merger Closing Date”), Merger Sub merged with and into the Company with the Company surviving as a wholly owned subsidiary of Parent (the “Merger”).

In connection with the Merger, the Company delisted its common stock from the New York Stock Exchange (the “NYSE”).

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

Securities and Exchange Commission (the “SEC”) current and periodic reports that would be required to be filed with the SEC pursuant to Section 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as provided for in certain covenants contained in the instruments covering its outstanding indebtedness.

In connection with the Merger, the Company delisted its common stock from the New York Stock Exchange.

Initial Public Offering

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

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

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

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

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

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

Following the 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 of the Company, par value $ 0.001 per share (“Class B Common Stock”), representing approximately 99 % of the total combined voting power of the Company’s outstanding common stock and approximately 83 % of the economic interest.

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

Risk Factors — Risks Related to Our Controlling Stockholder.

Recorded Music Operations

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

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

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

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

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

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In addition to our music being sold in physical retail outlets, our music is also sold in physical form to online physical retailers, such as amazon.com, barnesandnoble.com and bestbuy.com, and distributed in digital form to an expanded universe of digital partners, including streaming services such as those of Amazon, Apple, Deezer, SoundCloud, Spotify, Tencent Music Entertainment Group and YouTube, radio services such as iHeart Radio and SiriusXM and download services.

We have integrated the marketing of digital content into all aspects of our business, including artist and repertoire (“A&R”) and distribution.

We have integrated the marketing of digital content into all aspects of our business, including artists and repertoire (“A&R”) and distribution.

Our business development executives work closely with A&R departments to ensure that while music is being produced, digital assets are also created with all distribution channels in mind, including streaming services, social networking sites, online portals and music-centered destinations.

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The operations of our Music Publishing business are conducted principally through Warner Chappell Music, our global music publishing company headquartered in Los Angeles, with operations in over 70 countries through various subsidiaries, affiliates and non-affiliated licensees and sub-publishers.

We own or control rights to more than 1.4 million musical compositions, including numerous pop hits, American standards, folk songs and motion picture and theatrical compositions.

We own or control rights to more than one million musical compositions, including numerous pop hits, American standards, folk songs and motion picture and theatrical compositions.

Assembled over decades, our award-winning catalog includes over 80,000 songwriters and composers and a diverse range of genres including pop, rock, jazz, classical, country, R&B, hip-hop, rap, reggae, Latin, folk, blues, symphonic, soul, Broadway, techno, alternative and gospel.

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In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.

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

Operating results for the three months ended December 31, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2021.

The consolidated balance sheet at September 30, 2020 has been derived from the audited consolidated financial statements at that date but does not include all the information and notes required by U.S.

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

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

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

As such, all references to December 31, 2020 and December 31, 2019 relate to the periods ended December 25, 2020 and December 27, 2019, respectively.

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

The fiscal year ended September 30, 2020 ended on September 25, 2020.

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

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

Upon completion of the IPO and the exercise in full of the underwriters’ option to purchase additional shares, 88,550,000 shares of Class A Common Stock, 421,450,000 shares of Class B Common Stock and no shares of preferred stock were outstanding.

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

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

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

Since the IPO, a total of 30,914 shares of restricted stock has been issued under the Omnibus Incentive Plan to the Company’s directors, which includes 2,553 issued during the three months ended December 31, 2020.

Refer to “Stock-Based Compensation” below regarding additional shares issued under our Omnibus Incentive Plan.

In connection with the Company’s Senior Management Cash Flow Plan (“the Plan”), equity units held by certain participants were required to be settled in December 2020.

This resulted in the redemption of Class A and Class B units held by certain participants in WMG Management Holdings, LLC (“Management LLC”) in exchange for 18,265,813 shares of Class B Common Stock.

These shares of Class B Common Stock converted to shares of Class A Common Stock upon exchange.

Additionally, the Company issued a total of 4,321,259 additional shares of Class A Common Stock to settle the participants’ remaining deferred equity units previously issued under the Plan.

As a result of these transactions, the participants received a total of 22,586,442 shares of Class A Common Stock in connection with the final settlement in December 2020 for all interests previously issued under the Plan.

Earnings per Share

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

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

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

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

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

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

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

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

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

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

Stock-Based Compensation

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

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

For awards with an equity-like pay-off, inputs for discount of lack of marketability and non-performance risk were considered.

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

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

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

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

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

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 required settlement in equity.

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

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

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

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

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

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

Prior to conversion, the Company performed a final measurement of its stock-based compensation liability under the fair value method.

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

The Company will continue to incur non-cash stock-based compensation expense for awards that were unvested as of the modification date of the Plan and awards issued under the Omnibus Incentive Plan.

During the three months ended December 31, 2020, the Company approved the issuance of restricted stock units (“RSUs”) under the Omnibus Incentive Plan to eligible employees and executives.

For accounting purposes, vesting of such restricted stock units commenced during the period.

The Company recognized approximately $ 6 million of stock-based compensation expense for the three months ended December 31, 2020, which is included in additional paid-in capital, for its unvested share awards that were granted prior to the IPO and shares issued under the Omnibus Incentive Plan.

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

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Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (“ASU 2016-02”), which established a new ASC Topic 842 (“ASC 842”) that introduces a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months.

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

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

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

The Company adopted ASU 2016-02 on October 1, 2019, using the modified retrospective transition method provided by ASU 2018-11.

The adoption of ASU 2016-02 resulted in the recognition of operating lease liabilities of $ 366 million and ROU assets of $ 297 million, which is net of the historical deferred rent liability balance of $ 69 million, primarily related to real estate leases.

The Company also recorded a decrease to opening accumulated deficit of $ 7 million, net of taxes, related to previously deferred gains related to sale-leaseback transactions.

Upon transition, the Company adopted the “package of three” practical expedient provided by ASC 842 and therefore has not (1) reassessed whether any expired or existing contracts are or contain a lease, (2) reassessed the lease classification for expired or existing leases and (3) reassessed initial direct costs for any existing leases.

Rather, the Company will retain the conclusions reached for these items under ASC 840.

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”).

This ASU improves certain aspects of the hedge accounting model including making more risk management strategies eligible for hedge accounting and simplifying the assessment of hedge effectiveness.

ASU 2017-12 is effective for all annual periods beginning after December 15, 2018 and interim periods within those fiscal years.

Early adoption is permitted and requires a prospective adoption with a cumulative-effect adjustment to accumulated deficit as of the beginning of the fiscal year of adoption for existing hedging relationships.

The Company adopted ASU 2017-12 in the first quarter of fiscal 2020 and this adoption did not have a significant impact on the Company’s financial statements.

Accounting Pronouncements Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses:

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ASU 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases.

ASU 2016-13 will be effective for annual periods beginning after December 15, 2019, and interim periods within those fiscal years.

Earlier adoption is permitted.

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

The Company adopted ASU 2016-13 in the first quarter of fiscal 2021 and this adoption did not have a material impact on the Company’s consolidated financial statements.

Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”).

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Earnings per Share

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

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

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

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

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

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

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

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

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

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

The Company did not have any dilutive securities for the three months ended December 31, 2019.

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

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

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

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

Three Months Ended

June 30, 2020 Nine Months Ended

June 30, 2020

Refer to Note 2 for a description of current period activity.

Restricted stock units with anti-dilutive effect were excluded from the EPS calculation and they were not material for the three months ended December 31, 2020.

The following table sets forth the calculation of basic and diluted net income per common share under the two-class method for the three months ended December 31, 2020 and 2019 (in millions, except share and per share data):

Three Months Ended December 31,

Class A Class B Class A Class B

(in millions, except share and per share data)

Basic and Diluted EPS:

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

Net income attributable to Warner Music Group Corp.

$ 19 $ 79 $ — $ 120

Net income attributable to participating securities ( 2 ) — — —

Net income attributable to common stockholders $ 17 $ 79 $ — $ 120

Weighted average shares outstanding 94,221,946 416,632,808 0 501,991,944

Basic and Diluted EPS $ 0.18 $ 0.19 $ — $ 0.24

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

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

Revenue Recognition

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Three Months Ended

June 30, Nine Months Ended

2020 2019 2020 2019

(in millions)

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Synchronization 33 36

Other 2 4 7 10

Total Music Publishing 175 173

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Music Publishing 91 81

432 466 1,433 1,455

International Recorded Music 680 631

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Revenues from such sales are generally recognized upon shipment based on gross sales less a provision for future estimated returns.

Artist services and expanded-rights revenues are generated from artist services businesses and participations in expanded-rights associated with artists, including sponsorship, fan clubs, artist websites, merchandising, touring, concert promotion, ticketing and artist and brand management.

Artist services and expanded-rights revenues are generated from artist services businesses and participations in expanded-rights associated with artists, including merchandising, touring, concert promotion, ticketing, sponsorship, fan clubs, artist websites, and artist and brand management.

Artist services and expanded-rights contracts are generally short term.

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mechanical, performance, synchronization, digital and other.

Performance revenues are received when the musical composition is performed publicly through broadcast of music on television, radio and cable, live performance at a concert or other venue (e.g., arena concerts and nightclubs) and performance of musical compositions in staged theatrical productions.

Performance revenues are received when 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 musical compositions in staged theatrical productions.

Digital revenues are generated with respect to the musical compositions being embodied in recordings licensed to digital streaming services and digital download services and for digital performance.

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Sales Returns and Uncollectible Accounts

In accordance with practice in the recorded music industry and as customary in many territories, certain physical revenue products (such as CDs and DVDs) are sold to customers with the right to return unsold items.

In accordance with practice in the recorded music industry and as customary in many territories, certain physical revenue products (such as vinyls, CDs and DVDs) are sold to customers with the right to return unsold items.

Revenues from such sales are recognized when the products are shipped based on gross sales less a provision for future estimated returns.

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Similarly, management evaluates accounts receivables to determine if they will ultimately be collected.

In performing this evaluation, significant judgments and estimates are involved, including an analysis of specific risks on a customer-by-customer basis for larger accounts and customers and a receivables aging analysis that determines the percent that has historically been uncollected by aged category.

The time between the Company’s issuance of an invoice and payment due date is not significant;

customer payments that are not collected in advance of the transfer of promised services or goods are generally due no later than 30 days from invoice date.

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

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

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

Based on this information, management provides a reserve for estimated credit losses.

Based on management’s analysis of sales returns, refund liabilities of $ 37 million and $ 24 million were established at December 31, 2020 and September 30, 2020, respectively.

Based on management’s analysis of estimated credit losses, reserves of $ 24 million and $ 23 million were established at December 31, 2020 and September 30, 2020, respectively.

Principal versus Agent Revenue Recognition

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When the Company concludes that it does not control the good or service before transfer to the customer but arranges for another entity to provide the good or service, the Company acts as an agent and records revenue on a net basis in the amount it earns for its agency service.

In the normal course of business, the Company acts as an intermediary with respect to certain payments received from third parties.

For example, the Company distributes music content on behalf of third-party record labels.

Based on the above guidance, the Company records the distribution of content on behalf of third-party record labels on a gross basis, subject to the terms of the contract, as the Company controls the content before transfer to the customer.

In the normal course of business, the Company distributes music content on behalf of third-party record labels.

Based on the above guidance, the Company records the distribution of content of third-party record labels on a gross basis, subject to the terms of the contract, as the Company controls the content before transfer to the customer.

Conversely, recorded music compilations distributed by other record companies where the Company has a right to participate in the profits are recorded on a net basis.

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

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

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

Deferred revenue increased by $ 128 million during the three months ended December 31, 2020 related to cash received from customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period.

Revenues of $ 87 million were recognized during the three months ended December 31, 2020 related to the balance of deferred revenue at September 30, 2020.

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

Performance Obligations

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

The Company recognized revenue of $ 20 million and $ 27 million from performance obligations satisfied in previous periods for the three months ended December 31, 2020 and December 31, 2019, respectively.

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

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

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

Rest of FY21 FY22 FY23 Thereafter Total

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Comprehensive Income (Loss)

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

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

GAAP, are excluded from net income.

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

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

The following summary sets forth the changes in the components of accumulated other comprehensive loss, net of related tax expense of approximately $ 1 million:

Foreign Currency Translation Loss (a) Minimum Pension Liability Adjustment Deferred Gains (Losses) On Derivative Financial Instruments Accumulated Other Comprehensive Loss, net

(in millions)

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

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

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

Balances at September 30, 2020 $ ( 181 ) $ ( 12 ) $ ( 29 ) $ ( 222 )

Other comprehensive income 34 — 3 37

Balances at December 31, 2020 $ ( 147 ) $ ( 12 ) $ ( 26 ) $ ( 185 )

______________________________________

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Variable lease costs, if any, are recognized as incurred and such costs are excluded from lease balances recorded on the consolidated balance sheet.

The initial measurement of the lease liability and ROU asset are determined based on both the fixed lease payments and any variable lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate).

The Company initially measures these variable lease payments using the index or rate at lease commencement (i.e., the spot or gross index or rate applied to the base rental amount).

All other variable lease payments are recognized in the period in which the payments are incurred.

The initial measurement of the lease liability and ROU asset are determined based on fixed lease payments.

Lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate) are variable and are recognized in the period in which the payments are incurred.

The Company’s operating ROU assets are included in operating lease right-of-use assets and the Company’s current and non-current operating lease liabilities are included in operating lease liabilities, current and operating lease liabilities, noncurrent, respectively, in the Company’s balance sheet.

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The landlord for both leases is an affiliate of Access.

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

As of December 31, 2020, the aggregate lease liability related to these leases was $ 133 million.

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

The components of lease expense were as follows:

Three Months Ended

June 30, 2020 Nine Months Ended

June 30, 2020

Three Months Ended December 31,

(in millions)

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Supplemental cash flow information related to leases was as follows:

Nine Months Ended

June 30, 2020

Three Months Ended December 31,

(in millions)

2 unchanged sentences

Supplemental balance sheet information related to leases was as follows:

2020 September 30,

(in millions)

5 unchanged sentences

Weighted Average Remaining Lease Term

Operating leases 8 years

Operating leases 8 years 8 years

Weighted Average Discount Rate

6 unchanged sentences

Less imputed interest ( 68 )

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

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

Goodwill and Intangible Assets

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(in millions)

Balance at September 30, 2019 $ 1,297 $ 464 $ 1,761

Balances at September 30, 2020 $ 1,367 $ 464 $ 1,831

Acquisitions — — —

Other adjustments 9 — 9

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

Other adjustments (a) 20 — 20

Balances at December 31, 2020 $ 1,387 $ 464 $ 1,851

______________________________________

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

(a) Other adjustments during the three months ended December 31, 2020 represent foreign currency movements

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

3 unchanged sentences

Intangible assets consist of the following:

Weighted-Average Useful Life June 30,

Weighted-Average Useful Life December 31,

2020 September 30,

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Total net intangible assets $ 2,124 $ 1,807

The increase in intangible assets during the three months ended December 31, 2020 primarily relates to two acquisition transactions of music-related assets within recorded music catalogs, music publishing copyrights, and artist and songwriter contracts for approximately $ 318 million.

Debt Capitalization

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______________________________________

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

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

On April 3, 2020, Acquisition Corp.

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

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

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

On June 16, 2020, Acquisition Corp.

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

On June 30, 2020, Acquisition Corp.

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

Also on June 30, 2020, Acquisition Corp.

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

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

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

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

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

2020, Acquisition Corp.

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

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

On June 30, 2020, Acquisition Corp.

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

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

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

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

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

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

(a) Reflects $ 300 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $ 10 million at both December 31, 2020 and September 30, 2020.

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

(b) Principal amount of $ 820 million at both December 31, 2020 and September 30, 2020 less unamortized discount of $ 1 million and $ 1 million and unamortized deferred financing costs of $ 4 million and $ 5 million at December 31, 2020 and September 30, 2020, respectively.

On January 20, 2021, Acquisition Corp.

entered into an amendment of the credit agreement governing the Senior Term Loan Facility which, among other things, extends the maturity date of its outstanding term loans from November 1, 2023 to January 20, 2028 and removes a number of negative covenants limiting the ability of Acquisition Corp.

to take various actions.

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

Principal amount of $ 543 million and $ 519 million at December 31, 2020 and September 30, 2020, respectively, an additional issuance premium of $ 7 million, less unamortized deferred financing costs of $ 5 million at both December 31, 2020 and September 30, 2020.

(d) Face amount of € 325 million at both December 31, 2020 and September 30, 2020.

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

Principal amount of $ 396 million and $ 379 million at

December 31, 2020 and September 30, 2020, respectively, less unamortized deferred financing costs of $ 4 million and $ 4 million at both December 31, 2020 and September 30, 2020.

(e) Principal amount of $ 535 million less unamortized deferred financing costs of $ 6 million at both December 31, 2020 and September 30, 2020.

(f) Principal amount of $ 800 million and $ 550 million at December 31, 2020 and September 30, 2020, respectively, less unamortized discount of $ 7 million at December 31, 2020 and unamortized deferred financing costs of $ 9 million and $ 6 million at December 31, 2020 and September 30, 2020, respectively.

On November 2, 2020, Acquisition Corp.

issued an additional $ 250 million in aggregate principal amount of its 3.000 % Senior Secured Notes due 2031.

(g) Principal amount of $ 325 million less unamortized deferred financing costs of $ 3 million and $ 4 million at December 31, 2020 and September 30, 2020.

(h) Principal amount of debt of $ 3.419 billion and $ 3.127 billion, an additional issuance premium of $ 7 million and $ 7 million, less unamortized discount of $ 8 million and $ 1 million and unamortized deferred financing costs of $ 31 million and $ 29 million at December 31, 2020 and September 30, 2020, respectively.

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

As of June 30, 2020 Acquisition Corp.

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

On June 29, 2020, Acquisition Corp.

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

See Note 15 for further information.

The Acquisition Corp.

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

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

As of December 31, 2020 Acquisition Corp.

had issued and outstanding the 3.625 % Senior Secured Notes due 2026, the 5.500 % Senior Notes due 2026, the 2.750 % Senior Secured Notes due 2028, the 3.875 % Senior Secured Notes due 2030 and the 3.000 % Senior Secured Notes due 2031 (together, the “Acquisition Corp.

The 3.625 % Senior Secured Notes due 2026 and the 5.500 % Senior Notes due 2026 are guaranteed by the Company.

The Company’s guarantee of the Acquisition Corp.

Notes is full and unconditional.

All of the Acquisition Corp.

Notes are guaranteed by all of Acquisition Corp.’s domestic wholly-owned subsidiaries.

The guarantee of the Acquisition Corp.

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

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

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

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

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

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

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

Recent Transactions

Revolving Credit Agreement Amendment

On April 3, 2020, Acquisition Corp.

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

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

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

Redemption of 4.125 % Senior Secured Notes

On June 30, 2020, Acquisition Corp.

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

Redemption of 4.875 % Senior Secured Notes

On June 30, 2020, Acquisition Corp.

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

Tender Offer for 5.000 % Senior Secured Notes

On June 16, 2020, Acquisition Corp.

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

On June 30, 2020, Acquisition Corp.

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

On June 30, 2020, Acquisition Corp.

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

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

Historical Transactions

3.625 % Senior Secured Notes Offerings

On October 9, 2018, Acquisition Corp.

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

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

On April 30, 2019, Acquisition Corp.

issued and sold € 195 million in aggregate principal amount of additional 3.625 % Senior Secured Notes due 2026 (the “Additional Notes”).

The Additional Notes and the 3.625 % Secured Notes were treated as the same series for all purposes under the indenture that governs the 3.625 % Secured Notes and the Additional Notes.

Net proceeds of the offering were used to redeem all of the 5.625 % Secured Notes due 2022.

Partial Redemption of 4.125 % Senior Secured Notes

On October 12, 2018, Acquisition Corp.

redeemed € 34.5 million aggregate principal amount of its 4.125 % Senior Secured Notes due 2024 (the “ 4.125 % Secured Notes”) using a portion of the proceeds from the offering of the 3.625 % Secured Notes described above.

The redemption price for the 4.125 % Secured Notes was approximately € 36.17 million, equivalent to 103 % of the principal amount of the 4.125 % Secured Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was October 12, 2018.

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

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

Open Market Purchase

On October 9, 2018, Acquisition Corp.

purchased, in the open market, $ 30 million aggregate principal amount of its outstanding 4.875 % Senior Secured Notes due 2024 (the “ 4.875 % Secured Notes”).

The acquired notes were subsequently retired.

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

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

Redemption of 5.625 % Senior Secured Notes

Additional 3.000% Senior Secured Notes

On November 2, 2020, Acquisition Corp.

redeemed $ 26.55 million aggregate principal amount of its 5.625 % Senior Secured Notes due 2022 (the “ 5.625 % Secured Notes”).

The redemption price for the 5.625 % Secured Notes was approximately $ 27.38 million, equivalent to 102.813 % of the principal amount of the 5.625 % Secured Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was November 5, 2018.

Following the partial redemption of the 5.625 % Secured Notes, $ 220.95 million of the 5.625 % Secured Notes remain outstanding.

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

On April 16, 2019, Acquisition Corp.

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

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

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

issued and sold $ 250 million of additional 3.000 % Senior Secured Notes (the “Additional Notes”).

Interest on the Additional Notes will accrue at the rate of 3.000 % per annum and will be payable semi-annually in arrears on February 15 and August 15, commencing on February 15, 2021.

Acquisition Corp.

had the option to repurchase all or a portion of the Additional Notes at any time on one or more occasions on or prior to the fifth business day after December 18, 2020 (the “Special Optional Redemption Election Date”), but did not exercise its option to repurchase.

The Additional Notes were not initially fungible with the 3.000 % Senior Secured Notes issued on August 12, 2020 (the “Original Notes”).

Following the Special Optional Redemption Election Date, Acquisition Corp.

caused the Additional Notes to bear the same CUSIP and ISIN numbers as the Original Notes (the “CUSIP Merger Event”).

Following the CUSIP Merger Event, the Additional Notes have identical terms as (other than the issue date and the issue price) and are fungible with, and treated as a single series of senior secured debt securities with, the Original Notes.

Interest Rates

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

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

Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.15 x at December 31, 2020, the applicable margin for Eurodollar loans would be 1.625 % instead of 1.875 % and the applicable margin for ABR loans would be 0.625 % instead of 0.875 % in the case of 2020 Revolving Loans.

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

Default interest will also be payable on other overdue amounts at a rate of 2.0 % per annum above the amount that would apply to an alternative base rate loan.

interest will also be payable on other overdue amounts at a rate of 2.0 % per annum above the amount that would apply to an alternative base rate loan.

The loans under the Senior Term Loan Facility bear interest at Acquisition Corp.’s election at a rate equal to (i) the rate for deposits in U.S.

6 unchanged sentences

The loans outstanding under the Senior Term Loan Facility mature on November 1, 2023.

On January 20, 2021, Acquisition Corp.

to take various actions.

Maturity of Revolving Credit Facility

1 unchanged sentence

Maturities of Senior Notes and Senior Secured Notes

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

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

Refer to Note 15 for further information.

As of December 31, 2020, there are no scheduled maturities of notes until 2026, when $ 868 million is scheduled to mature.

Thereafter, $ 1.731 billion is scheduled to mature.

Interest Expense, net

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

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

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

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

The weighted-average interest rate of the Company’s total debt was 3.7 % at December 31, 2020, 3.7 % at September 30, 2020 and 4.2 % at December 31, 2019.

Commitments and Contingencies

11 unchanged sentences

As a result of final regulations regarding the interest expense allocation rules issued by the Internal Revenue Service in December 2019, the Company concluded that it is more likely than not that the entire amount of the Company’s deferred tax assets relating to foreign tax credit carryforwards will be realized.

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

Consequently, the Company released its $ 33 million valuation allowance

at September 30, 2019 relating to such deferred tax assets and recognized a corresponding U.S.

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

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

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

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

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

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

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

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

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

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

For the three months ended December 31, 2020, the Company recorded an income tax expense of $ 35 million.

The income tax expense for the three months ended December 31, 2020 is higher than the expected tax expense at the statutory tax rate of 21% primarily due to U.S.

state and local taxes, foreign income taxed at rates higher than the US, and non-deductible executive compensation under IRC Section 162(m), offset by FDII and excess tax benefits from long term incentive plan.

For the three months ended December 31, 2019, the Company recorded an income tax expense of $ 5 million.

The income tax expense for the three months ended December 31, 2019 is lower than the expected tax expense at the statutory tax rate of 21% primarily due to tax benefit of a release of a valuation allowance relating to foreign tax credit carryforwards and FDII, offset by non-deductible long term incentive plan, U.S.

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

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

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

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

The Company has determined that it is reasonably possible that the gross unrecognized tax benefits as of December 31, 2020 could decrease by up to approximately $ 2 million related to various ongoing audits and settlement discussions in various foreign jurisdictions during the next twelve months.

Derivative Financial Instruments

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The Company records these contracts at fair value on its balance sheet and the related gains and losses are immediately recognized in the consolidated statement of operations where there is an offsetting entry related to the underlying exposure.

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

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

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

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

However, to the extent that any of these contracts were not considered to be perfectly effective in offsetting the change in the value of the royalties and license fees being hedged, any changes in fair value relating to the ineffective portion of these contracts were immediately recognized in the consolidated statement of operations.

The Company has entered into, and in the future may enter into, interest rate swaps to manage interest rate risk.

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As a result, net assets or liabilities resulting from foreign exchange derivatives subject to these netting agreements are classified within other current assets or other current liabilities in the Company’s consolidated balance sheets.

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

The Company’s hedged interest rate transactions as of December 31, 2020 are expected to be recognized within three years .

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

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The Company monitors its positions with, and the credit quality of, the financial institutions that are party to any of its financial transactions.

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

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

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

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

As of December 31, 2020, the Company had outstanding hedge contracts for the sale of $ 270 million and the purchase of $ 176 million of foreign currencies at fixed rates that will be settled by September 2021.

As of December 31, 2020, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 26 million of unrealized deferred losses in comprehensive income related to the interest rate swaps.

As of September 30, 2020, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 29 million of unrealized deferred losses in comprehensive income related to the interest rate swaps.

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

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

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

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

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

The Company recorded realized pre-tax losses of $ 1 million and unrealized pre-tax losses of $ 4 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other expense for the three months ended December 31, 2020.

The Company recorded realized pre-tax losses of $ 1 million and unrealized pre-tax losses of $ 3 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other expense for the three months ended December 31, 2019.

The unrealized pre-tax gains of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the three months ended December 31, 2020 were $ 4 million.

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

2020 (a) September 30,

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(a) $ 8 million and $ 12 million of foreign exchange derivative contracts in current asset and liability positions, respectively, and $ 34 million of interest rate swaps in noncurrent liability positions.

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

(b) $ 38 million of interest rate swaps in noncurrent liability positions.

Segment Information

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Three Months Ended (in millions)

June 30, 2020

Revenues $ 861 $ 149 $ — $ 1,010

Operating income (loss) ( 160 ) 14 ( 287 ) ( 433 )

Amortization of intangible assets 30 17 — 47

Depreciation of property, plant and equipment 11 2 2 15

OIBDA ( 119 ) 33 ( 285 ) ( 371 )

June 30, 2019

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

Operating income (loss) 85 18 ( 45 ) 58

Amortization of intangible assets 34 17 — 51

Depreciation of property, plant and equipment 12 1 2 15

OIBDA 131 36 ( 43 ) 124

Publishing Corporate

eliminations Total

Nine Months Ended (in millions)

June 30, 2020

December 31, 2020

Revenues $ 1,161 $ 175 $ ( 1 ) $ 1,335

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OIBDA 269 39 ( 41 ) 267

June 30, 2019

December 31, 2019

Revenues $ 1,084 $ 173 $ ( 1 ) $ 1,256

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Cash Interest and Taxes

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

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

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

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

The Company made interest payments of approximately $ 27 million and $ 44 million during the three months ended December 31, 2020 and December 31, 2019, respectively.

The Company paid approximately $ 17 million and $ 20 million of income and withholding taxes, net of refunds, for the three months ended December 31, 2020 and December 31, 2019, respectively.

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

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

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

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

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

The Company paid the first dividend under this policy in September 2020.

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

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

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

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

Depreciation Expense

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

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, which was paid to stockholders on December 1, 2020.

The Company paid an aggregate of approximately $ 62 million in cash dividends to stockholders and participating security holders for the three months ended December 31, 2020.

COVID-19 Pandemic

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

Government-imposed mandates limiting public assembly and requiring that non-essential businesses close have adversely impacted the Company’s operations, including touring and physical product distribution, for the three and nine months ended June 30, 2020.

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

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

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

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

Termination of Access Management Agreement

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

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

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

Fair Value Measurements

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

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

Fair Value Measurements as of June 30, 2020

Fair Value Measurements as of December 31, 2020

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

(in millions)

Other Current Assets:

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

Other Current Liabilities:

Foreign Currency Forward Exchange Contracts (a) ( 4 ) ( 4 )

Contractual Obligations (b) — — ( 2 ) ( 2 )

Other Noncurrent Assets:

Equity Method Investment (d) — 42 — 42

Equity Method Investment (c) — 61 — 61

Other Noncurrent Liabilities:

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

Contractual Obligations (b) — — ( 5 ) ( 5 )

Interest Rate Swaps (d) — ( 34 ) — ( 34 )

Total $ — $ 23 $ ( 7 ) $ 16

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Other Noncurrent Assets:

Equity Method Investment (d) — 40 — 40

Interest Rate Swap — 2 — 2

Equity Method Investment (c) — 47 — 47

Other Noncurrent Liabilities:

Interest Rate Swap — ( 13 ) — ( 13 )

Contractual Obligations (b) — — ( 4 ) ( 4 )

Interest Rate Swaps (d) — ( 38 ) — ( 38 )

Total $ — $ 9 $ ( 6 ) $ 3

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(a) The fair value of foreign currency forward exchange contracts is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay at their maturity dates for contracts involving the same currencies and maturity dates.

(b) This represents purchase obligations and contingent consideration related to the Company’s various acquisitions.

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

These amounts were mainly

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

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

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

(b) This represents contingent consideration related to an acquisition.

This amount was mainly calculated using unobservable inputs such as future earnings performance of the acquiree and the expected timing of the payment.

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

The valuation is based upon quoted prices in active markets and model-based valuation techniques to determine fair value.

The following table reconciles the beginning and ending balances of net assets and liabilities classified as Level 3:

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

The following table reconciles the beginning and ending balances of net liabilities classified as Level 3:

(in millions)

Balance at September 30, 2020 $ ( 6 )

Balance at June 30, 2020 $ —

Additions ( 1 )

Balance at December 31, 2020 $ ( 7 )

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

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

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

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

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

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

Fair Value of Debt

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

Based on the level of interest rates prevailing at December 31, 2020, the fair value of the Company’s debt was $ 3.468 billion.

Based on the level of interest rates prevailing at September 30, 2020, the fair value of the Company’s debt was $ 3.137 billion.

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Subsequent Events

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

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

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

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

On June 29, 2020, Acquisition Corp.

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

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

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

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

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

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

under its existing credit facilities, subject to customary exceptions.

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

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

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

On June 30, 2020, Acquisition Corp.

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

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

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

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

Tender Offer and Redemption of 5.000 % Senior Secured Notes

On June 16, 2020, Acquisition Corp.

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

On June 30, 2020, Acquisition Corp.

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

Also on June 30, 2020, Acquisition Corp.

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

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

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

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

Senior Term Loan Facility

On January 20, 2021, Acquisition Corp.

entered into an amendment (the “Senior Term Loan Credit Agreement Amendment”) to the credit agreement, dated November 1, 2012 (as amended by the amendments dated as of May 9, 2013, July 13, 2016, November 21, 2016, May 22, 2017, December 6, 2017 and June 7, 2018), among Acquisition Corp., the guarantors party thereto, the lenders party thereto and Credit Suisse AG, as administrative agent, governing the Senior Term Loan Facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto.

The Senior Term Loan Credit Agreement Amendment (among other changes) (i) extends the maturity date of its outstanding term loans from November 1, 2023 to January 20, 2028 and (ii) removes a number of negative covenants limiting the ability of Acquisition Corp.

to take various actions.

The remaining negative covenants are limited to restrictions on liens, restrictions on fundamental changes and change of control, and are in a form substantially similar to the negative covenants in the 2.750 % Senior Secured Notes due 2028, 3.875 % Senior Secured Notes due 2030 and 3.000 % Senior Secured Notes due 2031.

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

What changed 10-Q

Item 1. Financial Statements