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Item 2. Management’s Discussion and Analysis

2021-02-01 compared with 2020-08-04 · 241 added, 535 removed, 426 unchanged (65% of the section changed)

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

You should read the following discussion of our results of operations and financial condition with the unaudited interim financial statements included elsewhere in this Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020 (the “Quarterly Report”).

“SAFE HARBOR” STATEMENT UNDER PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

This Quarterly Report includes forward-looking statements and cautionary statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

This Quarterly Report includes forward-looking statements and cautionary statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “shall,” “should,” “would,” “could,” “seeks,” “aims,” “projects,” “is optimistic,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms or the negative thereof.

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• the dual class structure of our common stock and Access’s existing ownership of our Class B Common Stock have the effect of concentrating control over our management and affairs and over matters requiring stockholder approval with Access;

• risks related to the Plan;

• risks related to other factors discussed under “Risk Factors” of this Quarterly Report, in the prospectus filed pursuant to Rule 424(b) dated as of June 3, 2020 and filed with the Securities and Exchange Commission on June 4, 2020 (the “Prospectus”) and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2019.

• risks related to other factors discussed under “Risk Factors” of this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

You should read this Quarterly Report completely and with the understanding that actual future results may be materially different from expectations.

All forward-looking statements made in this Quarterly Report are qualified by these cautionary

Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.

All forward-looking statements made in this Quarterly Report are qualified by these cautionary statements.

assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.

Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

Other risks, uncertainties and factors, including those discussed in the “Risk Factors” of this Quarterly Report, the Prospectus and our Annual Report on Form 10-K, could cause our actual results to differ materially from those projected in any forward-looking statements we make.

You should read carefully the factors described in the “Risk Factors” section of this Quarterly Report, the Prospectus and our Annual Report on our Form 10-K to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

Other risks, uncertainties and factors, including those discussed in the “Risk Factors” of this Quarterly Report and our Annual Report on Form 10-K, could cause our actual results to differ materially from those projected in any forward-looking statements we make.

You should read carefully the factors described in the “Risk Factors” section of this Quarterly Report and our Annual Report on Form 10-K to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

Warner Music Group Corp.

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

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

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

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

Risk Factors — Risks Related to Our Controlling Stockholder.

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

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and its consolidated subsidiaries, except where otherwise indicated.

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

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

MD&A is organized as follows:

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• Results of operations.

This section provides an analysis of our results of operations for the three and nine months ended June 30, 2020 and June 30, 2019.

This section provides an analysis of our results of operations for the three months ended December 31, 2020 and December 31, 2019.

This analysis is presented on both a consolidated and segment basis.

• Financial condition and liquidity.

This section provides an analysis of our cash flows for the nine months ended June 30, 2020 and June 30, 2019, as well as a discussion of our financial condition and liquidity as of June 30, 2020.

The discussion of our financial condition and liquidity includes a summary of the key debt covenant compliance measures under our debt agreements.

This section provides an analysis of our cash flows for the three months ended December 31, 2020 and December 31, 2019, as well as a discussion of our financial condition and liquidity as of December 31, 2020.

The discussion of our financial condition and liquidity includes recent debt financings and a summary of the key debt covenant compliance measures under our debt agreements.

We evaluate our operating performance based on several factors, including our primary financial measure of operating income (loss) before non-cash depreciation of tangible assets and non-cash amortization of intangible assets (“OIBDA”).

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

A reconciliation of

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

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

is provided in our “Results of Operations.”

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

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

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

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

We classify our business interests into two fundamental operations:

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• Artist services and expanded-rights :

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

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

• Licensing :

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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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• Performance :

the rightsholder receives revenues if the musical composition is performed publicly through broadcast of music on television, radio and cable, live performance at a concert or other venue ( e.g.

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

bars and restaurants), live performance at a concert or other venue ( e.g.

, arena concerts and nightclubs), and performance of music in staged theatrical productions;

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

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

• Mechanical :

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

Additionally, the requirement that people stay in their homes has impacted our business in other ways, such as, making it impossible to hold live concert tours, adversely impacting our concert promotion business and the sale of merchandise, delaying the release of new recordings and disrupting the production and release of motion pictures and television programs, which has negatively affected licensing revenue in our Recorded Music business and synchronization revenue in our Music Publishing business.

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

Our results of operations, cash flows and financial condition at and for the three and nine months ended June 30, 2020 were adversely affected by the global pandemic.

In addition to the impact resulting from the business disruption, the Company recognized one-time charges of $13 million impacting OIBDA and a total of $18 million impacting net income for the nine months ended June 30, 2020.

No such charges were incurred for the three months ended June 30, 2020.

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

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

Our results of operations, cash flows and financial condition at and for the three months ended December 31, 2020 were adversely affected by the global pandemic, but direct costs recorded to OIBDA related to COVID-19 were not material.

Initial Public Offering

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

As a result, we incurred one-time costs associated with the IPO of approximately $86 million and $90 million for the three and nine months ended June 30, 2020, respectively.

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

For the three months ended June 30, 2020, costs associated with being a public company were not material.

For the three months ended December 31, 2020, costs associated with being a public company were $4 million.

Senior Management Free Cash Flow Plan

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

Our results of operations were adversely impacted by non-cash stock-based compensation charges of $436 million and $593 million for the three and nine months ended June 30, 2020, respectively, which reflect the mark-to-market adjustment through the modification date of the Plan for the change in value of our common stock upon consummation of the IPO.

We incurred non-cash stock-based compensation charges of $13 million and $23 million for the three and nine months ended June 30, 2019, respectively.

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

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

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

We incurred non-cash stock-based compensation expense of $6 million and non-cash stock-based compensation benefit of $7 million for the three months ended December 31, 2020 and December 31, 2019, respectively.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2020 Compared with Three Months Ended June 30, 2019

Three Months Ended December 31, 2020 Compared with Three Months Ended December 31, 2019

Consolidated Results

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For the Three Months Ended

June 30, 2020 vs.

December 31, 2020 vs.

2020 2019 $ Change % Change

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Total Revenues

Total revenues decreased by $48 million, or 5%, to $1,010 million for the three months ended June 30, 2020 from $1,058 million for the three months ended June 30, 2019.

The decrease includes $16 million of unfavorable currency exchange fluctuations.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 85% and 15% of total revenue for the three months ended June 30, 2020, respectively, and 86% and 14% of total revenue for the three months ended June 30, 2019.

Total revenues increased by $79 million, or 6%, to $1,335 million for the three months ended December 31, 2020 from $1,256 million for the three months ended December 31, 2019.

The increase includes $30 million of favorable currency exchange fluctuations.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 87% and 13% of total revenue for the three months ended December 31, 2020, respectively, and 86% and 14% of total revenue for the three months ended December 31, 2019.

Prior to intersegment eliminations, U.S.

and international revenues represented 43% and 57% of total revenues for the three months ended June 30, 2020, respectively, and 44% and 56% of total revenues for the three months ended June 30, 2019, respectively.

Total digital revenues after intersegment eliminations increased by $72 million, or 11%, to $720 million for the three months ended June 30, 2020 from $648 million for the three months ended June 30, 2019.

Total digital revenues represented 71% and 61% of consolidated revenues for the three months ended June 30, 2020 and June 30, 2019, respectively.

Prior to intersegment eliminations, total digital revenues for the three months ended June 30, 2020 were comprised of U.S.

revenues of $363 million and international revenues of $357 million, or 50% of total digital revenues for each of U.S.

and international revenues.

Prior to intersegment eliminations, total digital revenues for the three months ended June 30, 2019 were comprised of U.S.

and international revenues represented 43% and 57% of total revenues for the three months ended December 31, 2020, respectively, and 43% and 58% of total revenues for the three months ended December 31, 2019, respectively.

Total digital revenues after intersegment eliminations increased by $119 million, or 17%, to $825 million for the three months ended December 31, 2020 from $706 million for the three months ended December 31, 2019.

Total digital revenues represented 62% and 56% of consolidated revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

Prior to intersegment eliminations, total digital revenues for the three months ended December 31, 2020 were comprised of U.S.

revenues of $418 million and international revenues of $408 million, or 51% and 49% of total digital revenues, respectively.

Recorded Music revenues decreased by $52 million, or 6%, to $861 million for the three months ended June 30, 2020 from $913 million for the three months ended June 30, 2019.

The decrease includes $14 million of unfavorable currency exchange fluctuations.

Recorded Music revenues were $358 million and $395 million, or 42% and 43%, of consolidated Recorded Music revenues for the three months ended June 30, 2020 and June 30, 2019, respectively.

International Recorded Music revenues were $503 million and $518 million, or 58% and 57%, of consolidated Recorded Music revenues for the three months ended June 30, 2020 and June 30, 2019, respectively.

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

Physical revenue decreased by $44 million primarily due to the impact of the COVID-19 business disruption resulting in lower physical sales, continued shift from physical revenue to digital revenue, and timing of releases and carryover success in the prior-year quarter.

Artist services and expanded-rights revenue decreased by $34 million primarily due to timing of touring activity and the impact of COVID-19, which resulted in tour postponements and cancellations and decreased merchandising revenues.

Licensing revenue decreased by $20 million primarily due to the impact of COVID-19, which resulted in lower advertising and deal activity.

Partially offsetting these decreases was an increase of digital revenue by $46 million as a result of the continued growth in streaming services and strength of releases, which included carryover success from Roddy Ricch, Dua Lipa, Lil Uzi Vert, Tones and I, and Ed Sheeran.

Revenue from streaming services grew by $49 million to $589 million for the three months ended June 30, 2020 from $540 million for the three months ended June 30, 2019.

Digital revenue growth was partially offset by decreases in digital download and other digital declines of $3 million to $41 million for the three months ended June 30, 2020 from $44 million for the three months ended June 30, 2019 due to the continued shift to streaming services.

Prior to intersegment eliminations, total digital revenues for the three months ended December 31, 2019 were comprised of U.S.

revenues of $380 million and international revenues of $326 million, or 54% and 46% of total digital revenues, respectively.

Recorded Music revenues increased by $77 million, or 7%, to $1,161 million for the three months ended December 31, 2020 from $1,084 million for the three months ended December 31, 2019.

The increase includes $27 million of favorable currency exchange fluctuations.

Recorded Music revenues were $481 million and $453 million, or 41% and 42%, of consolidated Recorded Music revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

International Recorded Music revenues were $680 million and $631 million, or 59% and 58%, of consolidated Recorded Music revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

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

Digital revenue increased by $94 million as a result of the continued growth in streaming services and strength of releases, which included carryover success from Dua Lipa, Ava Max, Hamilton, Cardi B, Ed Sheeran, and Roddy Ricch.

Revenue from streaming services grew by $103 million or 17% to $692 million for the three months ended December 31, 2020 from $589 million for the three months ended December 31, 2019.

Digital revenue growth was partially offset by decreases in digital download and other digital declines of $9 million to $35 million for the three months ended December 31, 2020 from $44 million for the three months ended December 31, 2019 due to the continued shift to streaming services.

Digital revenue was not materially impacted by COVID-19 in the quarter.

Music Publishing revenues increased by $2 million, or 1%, to $149 million for the three months ended June 30, 2020 from $147 million for the three months ended June 30, 2019.

Music Publishing revenues were $74 million and $71 million, or 50% and 48%, of consolidated Music Publishing revenues for the three months ended June 30, 2020 and June 30, 2019, respectively.

International Music Publishing revenues were $75 million and $76 million or 50% and 52%, of consolidated Music Publishing revenues for the three months ended June 30, 2020 and June 30, 2019, respectively.

Licensing revenue increased by $1 million due to favorable foreign currency exchange rates.

Physical revenue decreased by $10 million primarily due to the impact of the COVID-19 business disruption resulting in lower physical sales and continued shift from physical revenue to digital revenue, partially offset by the success of new releases including Johnny Hallyday, Mariya Takeuchi, and Kim Hojoong, and favorable impact of foreign currency exchange rates of $7 million.

Artist services and expanded-rights revenue decreased by $8 million primarily due to a decrease in touring activity resulting from COVID-19 business interruption related tour postponements and cancellations, partially offset by higher direct-to-consumer merchandising revenue at EMP and the favorable impact of foreign currency exchange rates of $10 million.

Music Publishing revenues increased by $2 million, or 1%, to $175 million for the three months ended December 31, 2020 from $173 million for the three months ended December 31, 2019.

Music Publishing revenues were $91 million and $81 million, or 52% and 47%, of consolidated Music Publishing revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

International Music Publishing revenues were $84 million and $92 million or 48% and 53%, of consolidated Music Publishing revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $26 million, partially offset by decreases in performance revenue of $16 million, synchronization revenue of $3 million, and mechanical revenue of $4 million.

The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services and timing of digital deals.

The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services and timing of new digital deals.

The decline in performance revenue and synchronization revenue is primarily driven by the impact from COVID-19.

The decline in mechanical revenue is driven by the continued market decline in physical revenue, timing of distributions and the impact from COVID-19.

The decline in mechanical revenue is driven by the continued market decline in physical revenue and the impact from COVID-19.

Revenue by Geographical Location

revenue decreased by $34 million, or 7%, to $432 million for the three months ended June 30, 2020 from $466 million for the three months ended June 30, 2019.

Recorded Music revenue decreased by $37 million, or 9%.

The primary driver was the decrease in U.S.

Recorded Music physical revenue of $22 million driven by general market decline, impact of COVID-19, and timing of releases, as well as a decrease of U.S.

Recorded Music artist services and expanded-rights revenue of $21 million primarily due to the impact of COVID-19.

Partially offsetting this decrease is an increase of U.S.

Recorded Music digital revenue of $10 million driven by the continued growth in streaming services.

Music Publishing revenue increased by $3 million, or 4%, to $74 million for the three months ended June 30, 2020 from $71 million for the three months ended June 30, 2019.

revenue increased by $38 million, or 7%, to $572 million for the three months ended December 31, 2020 from $534 million for the three months ended December 31, 2019.

Recorded Music revenue increased by $28 million, or 6%.

The primary driver was the increase of U.S.

Recorded Music digital revenue of $24 million driven by the continued growth in streaming services and an increase in U.S.

Recorded Music physical revenue of $6 million due to the success of new releases, partially offset by market decline due to the shift from physical to digital formats and the impact of COVID-19.

These increases were also partially offset by a decrease of U.S.

Recorded Music artist services and expanded-rights revenue of $2 million primarily driven by the impact of COVID-19 business interruptions, which resulted in tour postponements and cancellations and decreased physical retail and tour-related merchandising revenues.

Music Publishing revenue increased by $10 million, or 12%, to $91 million for the three months ended December 31, 2020 from $81 million for the three months ended December 31, 2019.

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

Music Publishing of $10 million in digital revenue due to the continued growth in streaming services, partially offset by decreases in synchronization revenue and performance revenue of $4 million and $3 million, respectively, primarily due to the impact of COVID-19.

International revenue decreased by $16 million, or 3%, to $578 million for the three months ended June 30, 2020 from $594 million for the three months ended June 30, 2019.

Excluding the unfavorable impact of foreign currency exchange rates, International revenue remained flat.

International Recorded Music revenue decreased by $15 million primarily due to decreases in physical revenue of $22 million, licensing revenue of $16 million, and artist services and expanded-rights revenue of $13 million, partially offset by increases in digital revenue of $36 million.

International Recorded Music physical revenue decreased by $22 million due to the continued shift from physical revenue to digital revenue, impact of COVID-19, timing of releases and carryover success in the prior-year quarter.

International Recorded Music licensing revenue decreased by $16 million primarily due to the impact of COVID-19.

International Recorded Music artist services and expanded-rights revenue decreased by $13 million primarily due to the impact of COVID-19, which resulted in tour postponements and cancellations and decreased merchandising revenues, and timing of larger tours in Japan and France in the prior-year quarter.

Music Publishing of $14 million in digital revenue due to the continued growth in streaming services and timing of new digital deals, partially offset by decreases in synchronization revenue and performance revenue of $2 million and $1 million, respectively, primarily due to the impact of COVID-19 as well as a decline in mechanical revenue of $1 million driven by the continued market decline in physical revenue.

International revenue increased by $41 million, or 6%, to $764 million for the three months ended December 31, 2020 from $723 million for the three months ended December 31, 2019.

Excluding the favorable impact of foreign currency exchange rates, International revenue increased by $11 million, or 2%.

International Recorded Music revenue increased by $49 million primarily due to increases in digital revenue of $70 million and licensing revenue of $1 million, partially offset by decreases in physical revenue of $16 million and artist services and expanded-rights revenue of $6 million.

The increase in International Recorded Music digital revenue was due to continued growth in streaming services internationally.

International Music Publishing revenue decreased from the prior-year quarter by $1 million to $75 million for the three months ended June 30, 2020.

International Recorded Music licensing revenue increased by $1 million due to favorable foreign currency exchange rates.

International Recorded Music physical revenue decreased by $16 million due to the continued shift from physical revenue to digital revenue and the impact of COVID-19, partially offset by the success of new releases, including Johnny Hallyday, Mariya Takeuchi, and Kim Hojoong, and favorable impact of foreign currency exchange rates.

International Recorded Music artist services and expanded-rights revenue decreased by $6 million primarily due to the impact of COVID-19 business interruptions, which resulted in tour postponements and cancellations, in contrast to strong touring in the prior year.

This was offset by growth in EMP direct-to-consumer merchandise revenue and the favorable impact of foreign currency exchange rates of $10 million.

International Music Publishing revenue decreased from the prior-year quarter by $8 million, or 9%, to $84 million for the three months ended December 31, 2020.

This was primarily driven by decreases in performance revenue of $15 million, mechanical revenue of $3 million, and synchronization revenue of $1 million, partially offset by an increase in digital revenue of $12 million.

The decline in performance revenue and synchronization revenue is primarily driven by the impact from COVID-19.

The decline in mechanical revenue is driven by lower private copy income in France, the continued market decline in physical revenue and the impact from COVID-19.

The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services.

The decline in mechanical revenue is driven by the continued market decline in physical revenue and the impact from COVID-19.

The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services and timing of new deals.

Cost of revenues

Our cost of revenues was composed of the following amounts (in millions):

For the Three Months Ended

June 30, 2020 vs.

December 31, 2020 vs.

2020 2019 $ Change % Change

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Total cost of revenues $ 686 $ 665 $ 21 3 %

Artist and repertoire costs decreased by $5 million, to $367 million for the three months ended June 30, 2020 from $372 million for the three months ended June 30, 2019.

Artist and repertoire costs as a percentage of revenue increased to 36% for the three months ended June 30, 2020 from 35% for the three months ended June 30, 2019.

Product costs decreased by $45 million, to $160 million for the three months ended June 30, 2020 from $205 million for the three months ended June 30, 2019.

Product costs as a percentage of revenue decreased to 16% for the three months ended June 30, 2020 from 19% for the three months ended June 30, 2019.

Decreases in product costs relate to revenue mix, specifically the decrease in physical and artist services and expanded-rights revenue.

Artist and repertoire costs increased by $14 million, to $425 million for the three months ended December 31, 2020 from $411 million for the three months ended December 31, 2019.

Artist and repertoire costs as a percentage of revenue decreased to 32% for the three months ended December 31, 2020 from 33% for the three months ended December 31, 2019.

The overall decrease as a percentage of revenue is due to revenue mix and timing of artist and repertoire investments within the Music Publishing segment.

Product costs increased by $7 million, to $261 million for the three months ended December 31, 2020 from $254 million for the three months ended December 31, 2019.

Product costs as a percentage of revenue remained constant at 20% for both the three months ended December 31, 2020 and the three months ended December 31, 2019.

Selling, general and administrative expenses

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For the Three Months Ended

June 30, 2020 vs.

December 31, 2020 vs.

2020 2019 $ Change % Change

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______________________________________

(1) Includes depreciation expense of $15 million for both the three months ended June 30, 2020 and June 30, 2019.

Total selling, general and administrative expense increased by $497 million to $869 million for the three months ended June 30, 2020 from $372 million for the three months ended June 30, 2019.

Expressed as a percentage of revenue, selling, general and administrative expense increased to 86% for the three months ended June 30, 2020 from 35% for the three months ended June 30, 2019.

This is primarily due to the increased non-cash stock-based compensation expense of $426 million and management agreement termination fee and IPO related expenses totaling $86 million.

Excluding non-cash stock-based compensation expense, the management agreement termination fee and IPO related expenses, selling, general and administrative expense as a percentage of revenue remained constant at 34% for both the three months ended June 30, 2020 and June 30, 2019.

General and administrative expense increased by $526 million to $717 million for the three months ended June 30, 2020 from $191 million for the three months ended June 30, 2019.

The increase in general and administrative expense was mainly due to higher non-cash stock-based compensation expense of $426 million, and the management agreement termination fee and IPO related expenses totaling $86 million, timing of variable compensation expense, and higher transformation initiatives costs of $5 million.

Expressed as a percentage of revenue, general and administrative expense increased to 71% for the three months ended June 30, 2020 from 18% for the three months ended June 30, 2019.

Excluding non-cash stock-based compensation expense, management agreement termination fee and IPO related expenses, general and administrative expense as a percentage of revenue increased to 19% for the three months ended June 30, 2020 from 17% for the three months ended June 30, 2019 due to the factors described above.

Selling and marketing expense decreased by $22 million, or 14%, to $133 million for the three months ended June 30, 2020 from $155 million for the three months ended June 30, 2019.

The decrease in selling and marketing expense was primarily due to a decrease in spend as a result of the COVID-19 disruption.

Expressed as a percentage of revenue, selling and marketing expense decreased to 13% for the three months ended June 30, 2020 from 15% for the three months ended June 30, 2019 due to the factors described above.

Distribution expense was $19 million for the three months ended June 30, 2020 and $26 million for the three months ended June 30, 2019.

Expressed as a percentage of revenue, distribution expense decreased to 2% for the three months ended June 30, 2020 from 3% for the three months ended June 30, 2019.

(1) Includes depreciation expense of $19 million and $24 million for the three months ended December 31, 2020 and December 31, 2019, respectively.

Total selling, general and administrative expense increased by $22 million, or 6%, to $401 million for the three months ended December 31, 2020 from $379 million for the three months ended December 31, 2019.

Expressed as a percentage of revenue, selling, general and administrative expense remained flat at 30% for both the three months ended December 31, 2020 and the three months ended December 31, 2019.

General and administrative expense increased by $17 million to $189 million for the three months ended December 31, 2020 from $172 million for the three months ended December 31, 2019.

The increase in general and administrative expense was mainly due to higher non-cash stock-based compensation expense of $13 million, public company related expenses totaling $4 million, and increased employee related costs, partially offset by a one-time charge in the prior year within depreciation expense of $10 million and lower overhead due to active cost management efforts.

Expressed as a percentage of revenue, general and administrative expense remained constant at 14% for both the three months ended December 31, 2020 and the three months ended December 31, 2019 due to the factors described above.

Selling and marketing expense increased by $5 million, or 3%, to $178 million for the three months ended December 31, 2020 from $173 million for the three months ended December 31, 2019.

Expressed as a percentage of revenue, selling and marketing expense decreased to 13% for the three months ended December 31, 2020 from 14% for the three months ended December 31, 2019 due to a decrease in spend as a percentage of revenue resulting from COVID-19 business disruption.

Distribution expense was $34 million for both the three months ended December 31, 2020 and the three months ended December 31, 2019.

Expressed as a percentage of revenue, distribution expense remained constant at 3% for both the three months ended December 31, 2020 and the three months ended December 31, 2019.

Reconciliation of Net Income Attributable to Warner Music Group Corp.

4 unchanged sentences

For the Three Months Ended

June 30, 2020 vs.

December 31, 2020 vs.

2020 2019 $ Change % Change

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

Net income attributable to Warner Music Group Corp.

$ 98 $ 120 $ (22) -18 %

Income attributable to noncontrolling interest 1 2 (1) -50 %

Net (loss) income (519) 14 (533) — %

Income tax expense (benefit) 51 (12) 63 — %

(Loss) income before income taxes (468) 2 (470) — %

Net income 99 122 (23) -19 %

Income tax expense 35 5 30 — %

Income before income taxes 134 127 7 6 %

Other expense 31 5 26 — %

Interest expense, net 31 33 (2) -6 %

Loss on extinguishment of debt — 4 (4) -100 %

Operating (loss) income (433) 58 (491) — %

Operating income 196 165 31 19 %

Amortization expense 52 47 5 11 %

1 unchanged sentence

OIBDA $ 267 $ 236 $ 31 13 %

OIBDA decreased by $495 million to a loss of $371 million for the three months ended June 30, 2020 as compared to income of $124 million for the three months ended June 30, 2019 as a result of lower revenues and higher non-cash stock-based compensation expense, and the management agreement termination fee and IPO related expenses.

Expressed as a percentage of total revenue, OIBDA margin decreased to (37)% for the three months ended June 30, 2020 from 12% for the three months ended June 30, 2019.

Excluding non-cash stock-based compensation expense, management agreement termination fee and IPO related expenses, as a percentage of total revenue, OIBDA margin increased to 15% for the three months ended June 30, 2020 from 13% for the three months ended June 30, 2019 as a result of lower product costs and lower selling and marketing expense.

OIBDA increased by $31 million to $267 million for the three months ended December 31, 2020 as compared to $236 million for the three months ended December 31, 2019 as a result of higher revenues, partially offset by higher cost of revenues and selling, general, and administrative expenses.

Expressed as a percentage of total revenue, OIBDA margin increased to 20% for the three months ended December 31, 2020 from 19% for the three months ended December 31, 2019.

Depreciation expense

Our depreciation expense decreased by $5 million, or 21%, to $19 million for the three months ended December 31, 2020 from $24 million for the three months ended December 31, 2019.

The decrease is primarily due to a one-time charge of $10 million representing the difference between the net book value of a building and its recoverable value.

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

This was partially offset by new assets placed into service.

Amortization expense

Our amortization expense decreased by $4 million, or 8%, to $47 million for the three months ended June 30, 2020 from $51 million for the three months ended June 30, 2019.

The decrease is primarily due to certain intangible assets becoming fully amortized.

Operating (loss) income

Our operating (loss) income decreased by $491 million to operating loss of $433 million for the three months ended June 30, 2020 from operating income of $58 million for the three months ended June 30, 2019.

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

Loss on extinguishment of debt

There was no loss on extinguishment of debt for the three months ended June 30, 2020.

We recorded a loss on extinguishment of debt in the amount of $4 million for the three months ended June 30, 2019 related to the redemption of the remaining 5.625% Senior Secured Notes.

Our amortization expense increased by $5 million, or 11%, to $52 million for the three months ended December 31, 2020 from $47 million for the three months ended December 31, 2019.

The increase is primarily due to an increase in amortizable intangible assets related to the acquisition of music-related assets.

Operating income

Our operating income increased by $31 million to $196 million for the three months ended December 31, 2020 from $165 million for the three months ended December 31, 2019.

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

Interest expense, net

Our interest expense, net, decreased to $32 million for the three months ended June 30, 2020 from $36 million for the three months ended June 30, 2019 due to a decline in LIBOR rates as well as lower interest rates resulting from the redemption of the 5.625% Senior Secured Notes and issuance of the 3.625% Senior Secured Notes.

Our interest expense, net, decreased to $31 million for the three months ended December 31, 2020 from $33 million for the three months ended December 31, 2019 due to lower interest rates resulting from debt refinancing, partially offset by the issuance of the new senior secured notes.

Other expense

Other expense for the three months ended June 30, 2020 primarily includes foreign currency loss on our Euro-denominated debt of $16 million, unrealized loss on hedging activity of $2 million, and a loss on investment of $1 million, partially offset by unrealized gain of $14 million on the mark-to-market of an equity method investment and currency exchange gains on our intercompany loans of $3 million.

This compares to the unrealized loss of $6 million on the mark-to-market of an equity method investment and a loss on our Euro-denominated debt of $10 million for the three months ended June 30, 2019.

Income tax expense (benefit)

Our income tax expense (benefit) increased by $63 million to a tax expense of $51 million for the three months ended June 30, 2020 from $12 million of a tax benefit for the three months ended June 30, 2019.

The change of $63 million in income tax expense primarily relates to higher pre-tax income before non-deductible expenses of the Plan and transaction costs and impact of IRC Section 162(m) in the three months ended June 30, 2020 as compared to change in components of forecasted taxable income in the three months ended June 30, 2019.

Net (loss) income

Net (loss) income decreased by $533 million to net loss of $519 million for the three months ended June 30, 2020 from net income of $14 million for the three months ended June 30, 2019 as a result of the factors described above.

Other expense for the three months ended December 31, 2020 primarily includes foreign currency loss on our Euro-denominated debt of $41 million, aggregate realized and unrealized losses on hedging activity of $5 million, and currency exchange losses on our intercompany loans of $2 million, partially offset by an unrealized gain of $14 million on the mark-to-market of an equity method investment.

This compares to foreign currency loss on our Euro-denominated debt of $12 million and aggregate realized and unrealized losses on hedging activity of $4 million, partially offset by currency exchange gains on our intercompany loans of $11 million for the three months ended December 31, 2019.

Income tax expense

Our income tax expense increased by $30 million to $35 million for the three months ended December 31, 2020 from $5 million for the three months ended December 31, 2019.

The change of $30 million in income tax expense primarily relates to the release of a valuation allowance on foreign tax credits of $33 million during the three months ended December 31, 2019.

For the three months ended December 31, 2020, income tax expense is partially offset by a $4 million benefit related to the impact of excess tax benefits on our long term incentive plan.

Net income decreased by $23 million to $99 million for the three months ended December 31, 2020 from $122 million for the three months ended December 31, 2019 as a result of the factors described above.

Noncontrolling interest

There was $1 million of income attributable to noncontrolling interest for both the three months ended June 30, 2020 and June 30, 2019.

There was $1 million of income attributable to noncontrolling interest for the three months ended December 31, 2020 and $2 million for the three months ended December 31, 2019.

Business Segment Results

1 unchanged sentence

For the Three Months Ended

June 30, 2020 vs.

December 31, 2020 vs.

2020 2019 $ Change % Change

1 unchanged sentence

Revenues $ 1,161 $ 1,084 $ 77 7 %

Operating (loss) income (160) 85 (245) — %

Operating income 223 191 32 17 %

OIBDA 269 241 28 12 %

8 unchanged sentences

Revenues 1,335 1,256 79 6 %

Operating (loss) income (433) 58 (491) — %

Operating income 196 165 31 19 %

OIBDA 267 236 31 13 %

Recorded Music

Recorded Music revenue decreased by $52 million, or 6%, to $861 million for the three months ended June 30, 2020 from $913 million for the three months ended June 30, 2019.

Recorded Music revenues were $358 million and $395 million, or 42% and 43%, of consolidated Recorded Music revenues for the three months ended June 30, 2020 and June 30, 2019, respectively.

International Recorded Music revenues were $503 million and $518 million, or 58% and 57%, of consolidated Recorded Music revenues for both the three months ended June 30, 2020 and June 30, 2019, respectively.

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

Recorded Music revenue increased by $77 million, or 7%, to $1,161 million for the three months ended December 31, 2020 from $1,084 million for the three months ended December 31, 2019.

Recorded Music revenues were $481 million and $453 million, or 41% and 42%, of consolidated Recorded Music revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

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

Cost of revenues

1 unchanged sentence

For the Three Months Ended

June 30, 2020 vs.

December 31, 2020 vs.

2020 2019 $ Change % Change

2 unchanged sentences

Total cost of revenues $ 574 $ 548 $ 26 5 %

Recorded Music cost of revenues decreased by $56 million, or 11%, to $431 million for the three months ended June 30, 2020 from $487 million for the three months ended June 30, 2019.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs remained constant at 31% for both the three months ended June 30, 2020 and June 30, 2019.

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs decreased to 19% for the three months ended June 30, 2020 from 22% for the three months ended June 30, 2019.

The decrease in product costs relates to revenue mix, specifically decreases in physical and artist services and expanded-rights revenue.

Recorded Music cost of revenues increased by $26 million, or 5%, to $574 million for the three months ended December 31, 2020 from $548 million for the three months ended December 31, 2019.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs remained constant at 27% for both the three months ended December 31, 2020 and December 31, 2019.

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs decreased to 22% for the three months ended December 31, 2020 from 23% for the three months ended December 31, 2019.

The decrease in product costs relates to revenue mix due to lower physical and artist services and expanded-rights revenues.

Selling, general and administrative expense

1 unchanged sentence

For the Three Months Ended

June 30, 2020 vs.

December 31, 2020 vs.

2020 2019 $ Change % Change

4 unchanged sentences

______________________________________

(1) Includes depreciation expense of $11 million and $12 million for the three months ended June 30, 2020 and for the three months ended June 30, 2019, respectively.

Recorded Music selling, general and administrative expense increased by $253 million, or 82%, to $560 million for the three months ended June 30, 2020 from $307 million for the three months ended June 30, 2019.

The increase in general and administrative expense was primarily due to higher non-cash stock-based compensation expense of $276 million and timing of variable compensation expense.

The decrease in selling and marketing expense was primarily due to a decrease in spend resulting from the COVID-19 business disruption.

The decrease in distribution expense was primarily due to revenue mix.

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense increased to 65% for the three months ended June 30, 2020 from 34% for the three months ended June 30, 2019.

Excluding non-cash stock-based compensation expense, selling, general and administrative expense as a percentage of Recorded Music revenue decreased to 32% for the three months ended June 30, 2020 from 33% for the three months ended June 30, 2019 due to the factors described above.

(1) Includes depreciation expense of $13 million and $21 million for the three months ended December 31, 2020 and for the three months ended December 31, 2019, respectively.

Recorded Music selling, general and administrative expense increased by $15 million, or 5%, to $331 million for the three months ended December 31, 2020 from $316 million for the three months ended December 31, 2019.

The increase in general and administrative expense was primarily due to higher non-cash stock-based compensation expense of $8 million and increase in employee related costs, partially offset by a one-time charge in the prior year within depreciation expense of $10 million representing the difference between the net book value of a building and its recoverable value, and lower overhead due to active cost management efforts.

The increase in selling and marketing expense was primarily due to increased variable marketing spend primarily at EMP, which drove higher direct-to-consumer merchandising revenue.

Distribution expense remained flat.

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense remained flat at 29% for both the three months ended December 31, 2020 and the three months ended December 31, 2019.

Excluding non-cash stock-based compensation expense, selling, general and administrative expense as a percentage of Recorded Music revenue decreased to 28% for the three months ended December 31, 2020 from 29% for the three months ended December 31, 2019 due to the factors described above.

Operating income and OIBDA

1 unchanged sentence

For the Three Months Ended

June 30, 2020 vs.

December 31, 2020 vs.

2020 2019 $ Change % Change

2 unchanged sentences

OIBDA $ 269 $ 241 $ 28 12 %

Recorded Music OIBDA decreased by $250 million to a loss of $119 million for the three months ended June 30, 2020 from income of $131 million for the three months ended June 30, 2019 as a result of lower revenues and higher non-cash stock-based compensation expense.

Excluding non-cash stock-based compensation expense, Recorded Music OIBDA increased by $26 million, or 19%, for the three months ended June 30, 2020.

Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin decreased to (14)% for the three months ended June 30, 2020 from 14% for the three months ended June 30, 2019.

Excluding non-cash stock-based compensation expense, OIBDA, as a percentage of Recorded Music revenue, increased to 19% for the three months ended June 30, 2020 from 15% for the three months ended June 30, 2019 as a result of lower product costs, selling and marketing expense, and distribution expense.

Recorded Music operating (loss) income decreased by $245 million to operating loss of $160 million for the three months ended June 30, 2020 from operating income $85 million for the three months ended June 30, 2019.

Excluding non-cash stock-based compensation expense, operating income increased by $31 million to $125 million for the three months ended June 30, 2020 from $94 million for the three months ended June 30, 2019.

Recorded Music OIBDA increased by $28 million, or 12%, to $269 million for the three months ended December 31, 2020 from $241 million for the three months ended December 31, 2019 as a result of higher revenues and lower costs.

Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin increased to 23% for the three months ended December 31, 2020 from 22% for the three months ended December 31, 2019.

Recorded Music operating income increased by $32 million to $223 million for the three months ended December 31, 2020 from $191 million for the three months ended December 31, 2019 due to the factors that led to the increase in Recorded Music OIBDA noted above.

Music Publishing

Music Publishing revenues increased by $2 million, or 1%, to $149 million for the three months ended June 30, 2020 from $147 million for the three months ended June 30, 2019.

Music Publishing revenues were $74 million and $71 million, or 50% and 48%, of consolidated Music Publishing revenues for the three months ended June 30, 2020 and June 30, 2019, respectively.

International Music Publishing revenues were $75 million and $76 million, or 50% and 52%, of consolidated Music Publishing revenues for the three months ended June 30, 2020 and June 30, 2019, respectively.

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

Music Publishing revenues increased by $2 million, or 1%, to $175 million for the three months ended December 31, 2020 from $173 million for the three months ended December 31, 2019.

Music Publishing revenues were $91 million and $81 million, or 52% and 47%, of consolidated Music Publishing revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

International Music Publishing revenues were $84 million and $92 million, or 48% and 53%, of consolidated Music Publishing revenues for the three months ended December 31, 2020 and December 31, 2019, respectively.

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

Cost of revenues

1 unchanged sentence

For the Three Months Ended

June 30, 2020 vs.

December 31, 2020 vs.

2020 2019 $ Change % Change

1 unchanged sentence

Total cost of revenues $ 113 $ 118 $ (5) -4 %

Music Publishing cost of revenues increased by $4 million, or 4%, to $96 million for the three months ended June 30, 2020 from $92 million for the three months ended June 30, 2019.

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

This increase is primarily attributable to revenue mix.

Music Publishing cost of revenues decreased by $5 million, or 4%, to $113 million for the three months ended December 31, 2020 from $118 million for the three months ended December 31, 2019.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues decreased to 65% for the three months ended December 31, 2020 from 68% for the three months ended December 31, 2019.

This decrease is primarily attributable to revenue mix and timing of artist and repertoire investments.

Selling, general and administrative expense

1 unchanged sentence

For the Three Months Ended

June 30, 2020 vs.

December 31, 2020 vs.

2020 2019 $ Change % Change

3 unchanged sentences

______________________________________

(1) Includes depreciation expense of $2 million and $1 million for the three months ended June 30, 2020 and the three months ended June 30, 2019, respectively.

Music Publishing selling, general and administrative expense increased to $22 million for the three months ended June 30, 2020 from $20 million for the three months ended June 30, 2019.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense increased to 15% for the three months ended June 30, 2020 from 14% for the three months ended June 30, 2019 due to higher employee-related and restructuring costs.

(1) Includes depreciation expense of $2 million and $1 million for the three months ended December 31, 2020 and the three months ended December 31, 2019, respectively.

Music Publishing selling, general and administrative expense increased to $25 million for the three months ended December 31, 2020 from $23 million for the three months ended December 31, 2019.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense increased to 14% for the three months ended December 31, 2020 from 13% for the three months ended December 31, 2019 mainly due to higher employee-related costs and higher depreciation expense.

Operating income and OIBDA

1 unchanged sentence

For the Three Months Ended

June 30, 2020 vs.

2020 2019 $ Change % Change

Operating income $ 14 $ 18 $ (4) -22 %

Depreciation and amortization 19 18 1 6 %

OIBDA $ 33 $ 36 $ (3) -8 %

Music Publishing OIBDA decreased by $3 million, or 8%, to $33 million for the three months ended June 30, 2020 from $36 million for the three months ended June 30, 2019.

Expressed as a percentage of Music Publishing revenue, Music Publishing OIBDA margin decreased to 22% for the three months ended June 30, 2020 from 24% for the three months ended June 30, 2019.

The decrease was primarily due to higher artist and repertoire expenses and general and administrative expenses as a percentage of revenue.

Music Publishing operating income decreased by $4 million to $14 million for the three months ended June 30, 2020 from $18 million for the three months ended June 30, 2019 due to the factors that led to the decrease in Music Publishing OIBDA noted above.

Corporate Expenses and Eliminations

Our operating loss from corporate expenses and eliminations increased by $242 million for the three months ended June 30, 2020 to $287 million from $45 million for the three months ended June 30, 2019, which primarily includes an increase in non-cash stock-based compensation expense of $150 million, the management agreement termination fee and IPO related expenses totaling $86 million, and higher costs related to transformation initiatives of $5 million.

Our OIBDA loss from corporate expenses and eliminations increased by $242 million for the three months ended June 30, 2020 to $285 million from $43 million for the three months ended June 30, 2019 due to the operating loss factors noted above.

RESULTS OF OPERATIONS

Nine Months Ended June 30, 2020 Compared with Nine Months Ended June 30, 2019

Consolidated Results

Our revenues were composed of the following amounts (in millions):

For the Nine Months Ended

June 30, 2020 vs.

2020 2019 $ Change % Change

Revenue by Type

Digital $ 1,889 $ 1,744 $ 145 8 %

Physical 329 456 (127) -28 %

Total Digital and Physical 2,218 2,200 18 1 %

Artist services and expanded-rights 427 458 (31) -7 %

Licensing 207 229 (22) -10 %

Total Recorded Music 2,852 2,887 (35) -1 %

Performance 114 135 (21) -16 %

Digital 237 195 42 22 %

Mechanical 38 41 (3) -7 %

Synchronization 92 89 3 3 %

Other 7 10 (3) -30 %

Total Music Publishing 488 470 18 4 %

Intersegment eliminations (3) (6) 3 -50 %

Total Revenues $ 3,337 $ 3,351 $ (14) — %

Revenue by Geographical Location

Recorded Music $ 1,191 $ 1,236 $ (45) -4 %

Music Publishing 242 219 23 11 %

1,433 1,455 (22) -2 %

International Recorded Music 1,661 1,651 10 1 %

International Music Publishing 246 251 (5) -2 %

Total International 1,907 1,902 5 — %

Intersegment eliminations (3) (6) 3 -50 %

Total Revenues $ 3,337 $ 3,351 $ (14) — %

Total Revenues

Total revenues decreased by $14 million to $3,337 million for the nine months ended June 30, 2020 from $3,351 million for the nine months ended June 30, 2019.

The increase includes $44 million of unfavorable currency exchange fluctuations.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 85% and 15% of total revenues for the nine months ended June 30, 2020, respectively, and 86% and 14% of total revenues for the nine months ended June 30, 2019, respectively.

Prior to intersegment eliminations, U.S.

and international revenues represented 43% and 57% of total revenues for both the nine months ended June 30, 2020 and June 30, 2019, respectively.

Total digital revenues after intersegment eliminations increased by $189 million, or 10%, to $2,125 million for the nine months ended June 30, 2020 from $1,936 million for the nine months ended June 30, 2019.

Total digital revenues represented 64% and 58% of consolidated revenues for the nine months ended June 30, 2020 and June 30, 2019, respectively.

Prior to intersegment eliminations, total digital revenues for the nine months ended June 30, 2020 were comprised of U.S.

revenues of $1,094 million and international revenues of $1,032 million, or 51% and 49% of total digital revenues, respectively.

Prior to intersegment eliminations, total digital revenues for the nine months ended June 30, 2019 were comprised of U.S.

revenues of $1,028 million and international revenues of $911 million, or 53% and 47% of total digital revenues, respectively.

Recorded Music revenues decreased by $35 million, or 1%, to $2,852 million for the nine months ended June 30, 2020 from $2,887 million for the nine months ended June 30, 2019.

The decrease includes $36 million of unfavorable currency exchange fluctuations.

Recorded Music revenues were $1,191 million and $1,236 million, or 42% and 43%, of consolidated Recorded Music revenues for the nine months ended June 30, 2020 and June 30, 2019, respectively.

International Recorded Music revenues were $1,661 million and $1,651 million, or 58% and 57%, of consolidated Recorded Music revenues for the nine months ended June 30, 2020 and June 30, 2019, respectively.

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

Physical revenue decreased by $127 million primarily due to the continued shift from physical revenue to digital revenue, timing of releases, prior-year success of Johnny Hallyday, and impact of the COVID-19 business interruption resulting in lower physical sales.

Artist services and expanded-rights revenue decreased by $31 million primarily due to timing of touring activity and the impact of COVID-19, which resulted in tour postponements and cancellations and decreased merchandising revenues.

Licensing revenue decreased by $22 million primarily due to the impact of COVID-19, which resulted in lower advertising and deal activity.

Digital revenue increased by $145 million as a result of the continued growth in streaming services and strength of releases, which included new releases from Roddy Ricch, YoungBoy Never Broke Again, and Dua Lipa as well as carryover success from Ed Sheeran, Tones and I, Lizzo, Cardi B, and Young Thug.

Revenue from streaming services grew by $185 million to $1,764 million for the nine months ended June 30, 2020 from $1,579 million for the nine months ended June 30, 2019.

Digital revenue growth was partially offset by digital download and other digital declines of $40 million to $125 million for the nine months ended June 30, 2020 from $165 million for the nine months ended June 30, 2019 due to the continued shift to streaming services.

Music Publishing revenues increased by $18 million, or 4% , to $488 million for the nine months ended June 30, 2020 from $470 million for the nine months ended June 30, 2019.

Music Publishing revenues were $242 million and $219 million, or 50% and 47%, of consolidated Music Publishing revenues for the nine months ended June 30, 2020 and June 30, 2019, respectively.

International Music Publishing revenues were $246 million and $251 million, or 50% and 53%, of Music Publishing revenues for the nine months ended June 30, 2020 and June 30, 2019, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $42 million, partially offset by decreases in performance revenue of $21 million.

The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services.

The decline in performance revenue is primarily driven by the impact of COVID-19 and timing of distributions.

Revenue by Geographical Location

revenue decreased by $22 million, or 2%, to $1,433 million for the nine months ended June 30, 2020 from $1,455 million for the nine months ended June 30, 2019.

Recorded Music revenue decreased by $45 million, or 4%.

The primary driver was the decrease in U.S.

Recorded Music physical revenue, which decreased by $57 million driven by general market decline, impact of COVID-19, and timing of releases, as well as a decrease of U.S.

Recorded Music artist services and expanded-rights revenue of $30 million primarily due to the impact of COVID-19.

Partially offsetting this decrease was an increase of U.S.

Recorded Music digital revenue for $39 million driven by the continued growth in streaming services.

Streaming revenue increased by $62 million, partially offset by $23 million of digital download and other digital declines.

Music Publishing revenue increased by $23 million to $242 million for the nine months ended June 30, 2020 from $219 million for the nine months ended June 30, 2019.

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

Music Publishing of $27 million in digital revenue due to the continued growth in streaming services, partially offset by decreases in performance revenue of $4 million.

International revenue increased by $5 million to $1,907 million for the nine months ended June 30, 2020 from $1,902 million for the nine months ended June 30, 2019.

Excluding the unfavorable impact of foreign currency exchange rates, International revenue increased by $49 million or 3%.

International Recorded Music revenue increased by $10 million primarily due to increases in digital revenue of $106 million, partially offset by decreases in physical revenue of $70 million and licensing revenue of $25 million.

The increase in International Recorded Music digital revenue was due to continued growth in streaming services internationally, partially offset by a decline in digital downloads.

International Recorded Music physical revenue decreased by $70 million due to the continued shift from physical revenue to digital revenue, impact of COVID-19, timing of releases, and the prior-year physical success of Johnny Hallyday.

International Recorded Music licensing revenue decreased by $25 million primarily due to the impact of COVID-19 and higher broadcast fees in the prior year.

International Music Publishing revenue decreased by $5 million, or 2%, to $246 million for the nine months ended June 30, 2020 from $251 million for the nine months ended June 30, 2019.

This was primarily driven by decreases in performance revenue of $17 million due to the impact of COVID-19 and timing of distribution, other revenue of $3 million, and mechanical revenue of $2 million, partially offset by increases in digital revenue of $15 million and synchronization revenue of $2 million.

Our cost of revenues was composed of the following amounts (in millions):

For the Nine Months Ended

June 30, 2020 vs.

2020 2019 $ Change % Change

Artist and repertoire costs $ 1,138 $ 1,145 $ (7) -1 %

Product costs 589 617 (28) -5 %

Total cost of revenues $ 1,727 $ 1,762 $ (35) -2 %

Artist and repertoire costs decreased by $7 million, to $1,138 million for the nine months ended June 30, 2020 from $1,145 million for the nine months ended June 30, 2019.

Artist and repertoire costs as a percentage of revenue remained constant at 34% for both the nine months ended June 30, 2020 and June 30, 2019.

Product costs decreased by $28 million, to $589 million for the nine months ended June 30, 2020 from $617 million for the nine months ended June 30, 2019.

Product costs as a percentage of revenue remained constant at 18% for the nine months ended June 30, 2020 and June 30, 2019.

Selling, general and administrative expenses

Our selling, general and administrative expenses were composed of the following amounts (in millions):

For the Nine Months Ended

June 30, 2020 vs.

2020 2019 $ Change % Change

General and administrative expense (1) $ 1,240 $ 542 $ 698 — %

Selling and marketing expense 472 472 — — %

Distribution expense 74 88 (14) -16 %

Total selling, general and administrative expense $ 1,786 $ 1,102 $ 684 62 %

______________________________________

(1) Includes depreciation expense of $53 million and $43 million for the nine months ended June 30, 2020 and June 30, 2019, respectively.

Total selling, general and administrative expense increased by $684 million, or 62%, to $1,786 million for the nine months ended June 30, 2020 from $1,102 million for the nine months ended June 30, 2019.

Expressed as a percentage of revenue, selling, general and administrative expense increased to 54% for the nine months ended June 30, 2020 from 33% for the nine months ended June 30, 2019.

This is primarily due to the increased expense associated with non-cash stock-based compensation expense of $572 million, the management agreement termination fee and IPO related expenses totaling $90 million and a one-time charge within depreciation expense of $10 million.

Excluding non-cash stock-based compensation expense, the management agreement termination fee and IPO related expenses, and one-time charge within depreciation expense, selling, general and administrative expense as a percentage of revenue increased to 33% for the nine months ended June 30, 2020 from 32% for the nine months ended June 30, 2019.

General and administrative expense increased by $698 million to $1,240 million for the nine months ended June 30, 2020 from $542 million for the nine months ended June 30, 2019.

The increase in general and administrative expense was mainly due to higher expense associated with non-cash stock-based compensation expense of $572 million, the management agreement termination fee and IPO related expenses totaling $90 million, a one-time charge within depreciation expense of $10 million, increases in bad debt provisions of $3 million associated with COVID-19 related physical distribution business disruptions and costs associated with transformation initiatives of $22 million.

Expressed as a percentage of revenue, general and administrative expense increased to 37% for the nine months ended June 30, 2020 from 16% for the nine months ended June 30, 2019.

Excluding non-cash stock-based compensation expense, the management agreement termination fee and IPO related expenses, and the one-time charge within depreciation expense, general and administrative expense as a percentage of revenue increased to 16% for the nine months ended June 30, 2020 from 15% for the nine months ended June 30, 2019 due to the factors described above.

Selling and marketing expense remained flat at $472 million for both the nine months ended June 30, 2020 and June 30, 2019.

Expressed as a percentage of revenue, selling and marketing expense remained flat at 14% for both the nine months ended June 30, 2020 and June 30, 2019.

Distribution expense was $74 million for the nine months ended June 30, 2020 and $88 million for the nine months ended June 30, 2019.

Expressed as a percentage of revenue, distribution expense decreased to 2% for the nine months ended June 30, 2020 from 3% for the nine months ended June 30, 2019.

The decrease in distribution costs is due to revenue mix.

Reconciliation of Net Income Attributable to Warner Music Group Corp.

and Operating Income to Consolidated OIBDA

As previously described, we use OIBDA as our primary measure of financial performance.

The following table reconciles operating income to OIBDA, and further provides the components from net income attributable to Warner Music Group Corp.

to operating income for purposes of the discussion that follows (in millions):

For the Nine Months Ended

June 30, 2020 vs.

2020 2019 $ Change % Change

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

$ (474) $ 166 $ (640) — %

Income attributable to noncontrolling interest 3 1 2 — %

Net (loss) income (471) 167 (638) — %

Income tax expense 44 86 (42) -49 %

(Loss) income before income taxes (427) 253 (680) — %

Other expense (income) 12 (41) 53 — %

Interest expense, net 98 108 (10) -9 %

Loss on extinguishment of debt — 7 (7) -100 %

Operating (loss) income (317) 327 (644) — %

Amortization expense 141 160 (19) -12 %

Depreciation expense 53 43 10 23 %

OIBDA $ (123) $ 530 $ (653) — %

OIBDA decreased by $653 million to a loss of $123 million for the nine months ended June 30, 2020 as compared to income of $530 million for the nine months ended June 30, 2019 as a result of higher selling, general and administrative expenses.

Expressed as a percentage of total revenue, OIBDA margin decreased to (4)% for the nine months ended June 30, 2020 from 16% for the nine months ended June 30, 2019.

Excluding non-cash stock-based compensation expense, the management agreement termination fee and IPO related expenses, as a percentage of total revenue, OIBDA margin remained constant at 17% for both the nine months ended June 30, 2020 and June 30, 2019.

Amortization expense

Our amortization expense decreased by $19 million, or 12%, to $141 million for the nine months ended June 30, 2020 from $160 million for the nine months ended June 30, 2019.

The decrease is primarily due to certain intangible assets becoming fully amortized.

Operating (loss) income

Our operating (loss) income decreased by $644 million to operating loss of $317 million for the nine months ended June 30, 2020 from operating income of $327 million for the nine months ended June 30, 2019.

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

Loss on extinguishment of debt

There was no loss on extinguishment of debt for the nine months ended June 30, 2020.

We recorded a loss on extinguishment of debt in the amount of $7 million for the nine months ended June 30, 2019, which represents the unamortized deferred financing costs related to the partial redemption of the 4.125% Senior Secured Notes and 5.625% Senior Secured Notes, and the open market purchases of the 4.875% Senior Secured Notes.

Interest expense, net

Our interest expense, net, decreased to $98 million for the nine months ended June 30, 2020 from $108 million for the nine months ended June 30, 2019 due to a decline in LIBOR rates as well as lower interest rates resulting from the redemption of the 5.625% Senior Secured Notes and issuance of the 3.625% Senior Secured Notes.

Other expense (income)

Other expense (income) for the nine months ended June 30, 2020 primarily includes the loss on our Euro-denominated debt of $22 million, $6 million relating to a loss on investments, and $2 million unrealized loss on hedging activity, partially offset by currency exchange gains on our intercompany loans of $14 million and unrealized gain of $4 million on the mark-to-market of an equity method investment.

This compares to an unrealized gain of $25 million on the mark-to-market of an equity method investment, foreign currency gains on our Euro-denominated debt of $10 million, and $4 million unrealized gains on hedging activity for the nine months ended June 30, 2019.

Income tax expense

Our income tax expense decreased by $42 million to $44 million for the nine months ended June 30, 2020 from $86 million for the nine months ended June 30, 2019.

The change of $42 million in income tax expense primarily relates to the release of a valuation allowance on foreign tax credits of $33 million during the nine months ended June 30, 2020.

Net (loss) income

Net (loss) income decreased by $638 million to net loss of $471 million for the nine months ended June 30, 2020 from net income of $167 million for the nine months ended June 30, 2019 as a result of the factors described above.

Noncontrolling interest

There was $3 million of income attributable to noncontrolling interest for the nine months ended June 30, 2020 and $1 million of income attributable to noncontrolling interest for the nine months ended June 30, 2019.

Business Segment Results

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

For the Nine Months Ended

June 30, 2020 vs.

2020 2019 $ Change % Change

Recorded Music

Revenues $ 2,852 $ 2,887 $ (35) -1 %

Operating income 67 382 (315) -82 %

OIBDA 198 522 (324) -62 %

Music Publishing

Revenues 488 470 18 4 %

Operating income 58 67 (9) -13 %

OIBDA 114 122 (8) -7 %

Corporate expenses and eliminations

Revenue eliminations (3) (6) 3 -50 %

Operating loss (442) (122) (320) — %

OIBDA loss (435) (114) (321) — %

Revenues 3,337 3,351 (14) — %

Operating (loss) income (317) 327 (644) — %

OIBDA (123) 530 (653) — %

Recorded Music

Recorded Music revenue decreased by $35 million, or 1%, to $2,852 million for the nine months ended June 30, 2020 from $2,887 million for the nine months ended June 30, 2019.

Recorded Music revenues were $1,191 million and $1,236 million, or 42% and 43%, of consolidated Recorded Music revenues for the nine months ended June 30, 2020 and June 30, 2019, respectively.

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

Cost of revenues

Recorded Music cost of revenues was composed of the following amounts (in millions)

For the Nine Months Ended

June 30, 2020 vs.

2020 2019 $ Change % Change

Artist and repertoire costs $ 829 $ 857 $ (28) -3 %

Product costs 589 617 (28) -5 %

Total cost of revenues $ 1,418 $ 1,474 $ (56) -4 %

Recorded Music cost of revenues decreased by $56 million, or 4%, to $1,418 million for the nine months ended June 30, 2020 from $1,474 million for the nine months ended June 30, 2019.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs decreased to 29% for the nine months ended June 30, 2020 from 30% for the nine months ended June 30, 2019.

The decrease is primarily attributable to lower artist-related costs, including a decrease in spending resulting from the impact of COVID-19.

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs remained constant at 21% for both the nine months ended June 30, 2020 and June 30, 2019.

Selling, general and administrative expense

Recorded Music selling, general and administrative expenses were composed of the following amounts (in millions):

For the Nine Months Ended

June 30, 2020 vs.

2020 2019 $ Change % Change

General and administrative expense (1) $ 741 $ 371 $ 370 100 %

Selling and marketing expense 463 463 — — %

Distribution expense 74 88 (14) -16 %

Total selling, general and administrative expense $ 1,278 $ 922 $ 356 39 %

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(1) Includes depreciation expense of $42 million and $31 million for the nine months ended June 30, 2020 and June 30, 2019, respectively.

Recorded Music selling, general and administrative expense increased by $356 million, or 39%, to $1,278 million for the nine months ended June 30, 2020 from $922 million for the nine months ended June 30, 2019.

The increase in general and administrative expense was primarily due to higher non-cash stock-based compensation expense of $364 million and a one-time charge within depreciation expense of $10 million, increases in bad debt provisions of $3 million associated with COVID-19 related physical distribution business disruptions partially offset by decrease in restructuring costs and lower overhead from cost control efforts.

The decrease in distribution expense was primarily due to revenue mix.

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense increased to 45% for the nine months ended June 30, 2020 from 32% for the nine months ended June 30, 2019.

Excluding non-cash stock-based compensation expense and the one-time charge within depreciation expense, selling, general and administrative expense as a percentage of Recorded Music revenue remained flat at 31% for both the nine months ended June 30, 2020 and June 30, 2019.

Operating income and OIBDA

Recorded Music OIBDA included the following amounts (in millions):

For the Nine Months Ended

June 30, 2020 vs.

2020 2019 $ Change % Change

Operating income $ 67 $ 382 $ (315) -82 %

Depreciation and amortization 131 140 (9) -6 %

OIBDA $ 198 $ 522 $ (324) -62 %

Recorded Music OIBDA decreased by $324 million, or 62%, to $198 million for the nine months ended June 30, 2020 from $522 million for the nine months ended June 30, 2019 as a result of higher general and administrative expenses.

Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin decreased to 7% for the nine months ended June 30, 2020 from 18% for the nine months ended June 30, 2019.

Excluding non-cash stock-based compensation expense, OIBDA, as a percentage of Recorded Music revenue, increased to 20% for the nine months ended June 30, 2020 from 19% for the nine months ended June 30, 2019.

Recorded Music operating income decreased by $315 million to $67 million for the nine months ended June 30, 2020 from $382 million for the nine months ended June 30, 2019 due to factors within the Recorded Music OIBDA decrease noted above.

Excluding non-cash stock-based compensation expense and the one-time charge within depreciation expense, Recorded Music operating income increased $59 million due to lower total cost of revenues, depreciation and amortization expense, distribution expense, and general and administrative expense within the quarter.

Music Publishing

Music Publishing revenues increased by $18 million, or 4%, to $488 million for the nine months ended June 30, 2020 from $470 million for the nine months ended June 30, 2019.

Music Publishing revenues were $242 million and $219 million, or 50% and 47%, of consolidated Music Publishing revenues for the nine months ended June 30, 2020 and June 30, 2019, respectively.

International Music Publishing revenues were $246 million and $251 million, or 50% and 53%, of consolidated Music Publishing revenues for the nine months ended June 30, 2020 and June 30, 2019, respectively.

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

Cost of revenues

Music Publishing cost of revenues were composed of the following amounts (in millions):

For the Nine Months Ended

June 30, 2020 vs.

2020 2019 $ Change % Change

Artist and repertoire costs $ 312 $ 294 $ 18 6 %

Total cost of revenues $ 312 $ 294 $ 18 6 %

Music Publishing cost of revenues increased by $18 million, or 6%, to $312 million for the nine months ended June 30, 2020 from $294 million for the nine months ended June 30, 2019.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues increased to 64% for the nine months ended June 30, 2020 from 63% for the nine months ended June 30, 2019, primarily due to revenue mix and timing of artist and repertoire investments.

Selling, general and administrative expense

Music Publishing selling, general and administrative expenses were comprised of the following amounts (in millions):

For the Nine Months Ended

June 30, 2020 vs.

2020 2019 $ Change % Change

General and administrative expense (1) $ 65 $ 56 $ 9 16 %

Selling and marketing expense 1 2 (1) -50 %

Total selling, general and administrative expense $ 66 $ 58 $ 8 14 %

______________________________________

(1) Includes depreciation expense of $4 million for both the nine months ended June 30, 2020 and June 30, 2019.

Music Publishing selling, general and administrative expense increased to $66 million for the nine months ended June 30, 2020 from $58 million for the nine months ended June 30, 2019 due to higher employee-related and restructuring costs.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense increased to 14% for the nine months ended June 30, 2020 from 12% for the nine months ended June 30, 2019 due to factors described above.

Operating income and OIBDA

Music Publishing OIBDA included the following amounts (in millions):

For the Nine Months Ended

June 30, 2020 vs.

December 31, 2020 vs.

2020 2019 $ Change % Change

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OIBDA $ 39 $ 33 $ 6 18 %

Music Publishing OIBDA decreased by $8 million, or 7%, to $114 million for the nine months ended June 30, 2020 from $122 million for the nine months ended June 30, 2019.

Expressed as a percentage of Music Publishing revenue, Music Publishing OIBDA margin decreased to 23% for the nine months ended June 30, 2020 from 26% for the nine months ended June 30, 2019.

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

Music Publishing operating income decreased by $9 million to $58 million for the nine months ended June 30, 2020 from $67 million operating income for the nine months ended June 30, 2019 largely due to the factors that led to the decrease in Music Publishing OIBDA noted above.

Music Publishing OIBDA increased by $6 million, or 18%, to $39 million for the three months ended December 31, 2020 from $33 million for the three months ended December 31, 2019.

Expressed as a percentage of Music Publishing revenue, Music Publishing OIBDA margin increased to 22% for the three months ended December 31, 2020 from 19% for the three months ended December 31, 2019.

The increase was primarily due to the increase in revenue and the timing of artist and repertoire investments.

Music Publishing operating income increased by $4 million to $18 million for the three months ended December 31, 2020 from $14 million for the three months ended December 31, 2019 due to the factors that led to the increase in Music Publishing OIBDA noted above.

Corporate Expenses and Eliminations

Our operating loss from corporate expenses and eliminations increased by $320 million to $442 million for the nine months ended June 30, 2020 from $122 million for the nine months ended June 30, 2019 which primarily includes an increase in non-cash stock-based compensation expense of $208 million, the management agreement termination fee and IPO related expenses totaling $90 million, and higher costs related to transformation initiatives of $22 million.

Our OIBDA loss from corporate expenses and eliminations increased by $321 million to $435 million for the nine months ended June 30, 2020 from $114 million for the nine months ended June 30, 2019 due to the operating loss factors noted above.

Our operating loss from corporate expenses and eliminations increased by $5 million for the three months ended December 31, 2020 to $45 million from $40 million for the three months ended December 31, 2019, which primarily includes an increase in non-cash stock-based compensation expense of $5 million, public company related expenses totaling $4 million, and

higher employee related costs, partially offset by a decline in management fees of $3 million and lower overhead due to active cost management efforts.

Our OIBDA loss from corporate expenses and eliminations increased by $3 million for the three months ended December 31, 2020 to $41 million from $38 million for the three months ended December 31, 2019 due to the operating loss factors noted above.

FINANCIAL CONDITION AND LIQUIDITY

Financial Condition at June 30, 2020

At June 30, 2020, we had $3.000 billion of debt (which is net of $23 million of deferred financing costs), $532 million of cash and equivalents (net debt of $2.468 billion, defined as total debt, less cash and equivalents and deferred financing costs) and $38 million of Warner Music Group Corp.

Financial Condition at December 31, 2020

At December 31, 2020, we had $3.387 billion of debt (which is net of $31 million of deferred financing costs), $566 million of cash and equivalents (net debt of $2.821 billion, defined as total debt, less cash and equivalents and deferred financing costs) and $16 million of Warner Music Group Corp.

This compares to $3.104 billion of debt (which is net of $29 million of deferred financing costs), $553 million of cash and equivalents (net debt of $2.551 billion) and $63 million of Warner Music Group Corp.

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

The financial data for the nine months ended June 30, 2020 and June 30, 2019 are unaudited and have been derived from our interim financial statements included elsewhere herein.

For the Nine Months Ended

The financial data for the three months ended December 31, 2020 and December 31, 2019 are unaudited and have been derived from our consolidated interim financial statements included elsewhere herein.

Three Months Ended

Cash provided by (used in):

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Operating Activities

Cash provided by operating activities was $287 million for the nine months ended June 30, 2020 as compared with cash provided by operating activities of $249 million for the nine months ended June 30, 2019.

The $38 million increase in cash provided by operating activities was primarily due to timing of working capital partially offset by higher cash taxes.

Cash provided by operating activities was $169 million for the three months ended December 31, 2020 as compared with cash provided by operating activities of $78 million for the three months ended December 31, 2019.

The $91 million increase in cash provided by operating activities was primarily due to an increase in OIBDA, a decrease in cash interest payments, and timing of working capital.

Investing Activities

Cash used in investing activities was $87 million for the nine months ended June 30, 2020 as compared with cash used in investing activities of $340 million for the nine months ended June 30, 2019.

The $87 million of cash used in investing activities in the nine months ended June 30, 2020 consisted of $11 million relating to investments, $48 million relating to capital expenditures and $28 million to acquire music publishing rights and recorded music catalogs.

The $340 million of cash used in investing activities in the nine months ended June 30, 2019 consisted of $183 million relating to the acquisition of EMP, net of cash and equivalents acquired, $47 million relating to the acquisition of equity investments, $82 million relating to capital expenditure and $24 million to acquire music publishing rights.

Cash used in investing activities was $343 million for the three months ended December 31, 2020 as compared with cash used in investing activities of $32 million for the three months ended December 31, 2019.

The $343 million of cash used in investing activities in the three months ended December 31, 2020 consisted of $1 million relating to investments, $18 million relating to capital expenditures and $324 million to acquire music publishing rights and recorded music catalogs, a portion of which was debt-financed.

The $32 million of cash used in investing activities in the three months ended December 31, 2019 consisted of $6 million relating to investments, $15 million relating to capital expenditures and $11 million to acquire music publishing rights.

Financing Activities

Cash used in financing activities was $288 million for the nine months ended June 30, 2020 as compared with cash provided by financing activities of $119 million for the nine months ended June 30, 2019.

The $288 million of cash used in financing activities for the nine months ended June 30, 2020 consisted of dividends paid of $281 million, distributions to noncontrolling interest holders of $6 million and deferred financing costs of $1 million.

The $119 million of cash provided by financing activities for the nine months ended June 30, 2019 consisted of proceeds of $514 million from the issuance of Acquisition Corp.’s 3.625% Senior Secured Notes due 2026 partially offset by deferred financing costs paid of $7 million, the repayment of Acquisition Corp.’s 5.625% Senior Secured Notes due 2022 of $247 million including call premiums paid of $5 million, partial repayment of Acquisition Corp.’s 4.125% Senior Secured Notes due 2024 of $40 million and 4.875% Senior Secured Notes due 2024 of $30 million, for an aggregate $185 million, dividends paid of $63 million and distributions to noncontrolling interest holders of $3 million.

Cash provided by financing activities was $178 million for the three months ended December 31, 2020 as compared with cash used in financing activities of $207 million for the three months ended December 31, 2019.

The $178 million of cash provided by financing activities for the three months ended December 31, 2020 consisted of proceeds from debt issuance of $244 million which was used to fund investments, partially offset by dividends paid of $62 million, distributions to noncontrolling interest holders of $1 million and deferred financing costs of $3 million.

The $207 million of cash used in financing activities for the three months ended December 31, 2019 consisted of dividends paid of $206 million and distributions to noncontrolling interest holders of $1 million.

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

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

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

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

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

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

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

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

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

On February 20, 2020, S&P upgraded the outlook on our corporate credit rating from stable to positive.

Additionally, on June 16, 2020, S&P further upgraded our S&P corporate credit rating from BB- to BB with a stable outlook.

Our Moody’s corporate family rating has improved from B1 in 2016 to Ba3 in 2020.

In addition, our weighted-average interest rate on our outstanding indebtedness has decreased from 10.5% in 2011 to 4.0% as of June 30, 2020.

Our nearest-term maturity date is in 2026 after our June 2020 debt refinancing (as described below) which further reduced our weighted-average interest rate to 3.6%.

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

In addition, our weighted-average interest rate on our outstanding indebtedness has decreased from 10.5% in 2011 to 3.7% as of December 31, 2020.

Our nearest-term maturity date is in 2026 following effectiveness of the Senior Term Loan Credit Agreement Amendment in January 2021.

Subject to market conditions, we expect to continue to take opportunistic steps to extend our maturity dates and reduce related interest expense.

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

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 due 2024 (the “4.125% Senior Secured Notes”) and $220 million of the 4.875% Senior Secured Notes due 2024 (the “4.875% Senior Secured Notes”), 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 due 2023 (the “5.000% Senior Secured Notes”), $244 million of which was tendered and accepted on June 29, 2020 and $295,000 of which was tendered and accepted on July 14, 2020.

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

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.

Additional 3.000% Senior Secured Notes

On November 2, 2020, Acquisition Corp.

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.

The proceeds of the issuance and sale of the aforementioned Additional Notes, in conjunction with cash on hand, were used to fund the acquisition of music-related assets for aggregate cash consideration of $338 million.

Revolving Credit Facility

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

For a more detailed description of the changes effected by the Second Amendment, see Note 8 to our unaudited interim consolidated financial statements for the three and nine months ended June 30, 2020, included in Part I to this Quarterly Report.

Acquisition Corp.

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

Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.11x 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.

Existing Debt as of June 30, 2020

As of June 30, 2020, our long-term debt, all of which was issued by Acquisition Corp., was as follows (in millions):

Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.15x 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 (as defined in the Revolving Credit Agreement).

Existing Debt as of December 31, 2020

As of December 31, 2020, our long-term debt, all of which was issued by Acquisition Corp., was as follows (in millions):

Revolving Credit Facility (a) $ —

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______________________________________

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

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

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 less unamortized discount of $3 million and unamortized deferred financing costs of $8 million at June 30, 2020.

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.

Also on June 30, 2020, Acquisition Corp.

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

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

See Note 15 to our unaudited interim consolidated financial statements included in Part I to this Quarterly Report.

(d) Face amount of €311 million.

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

Principal amount of $349 million less unamortized deferred financing costs of $3 million at June 30, 2020.

On June 30, 2020, Acquisition Corp.

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

See Note 15 to our unaudited interim consolidated financial statements included in Part I to this Quarterly Report.

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

On June 30, 2020, Acquisition Corp.

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

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

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

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

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.

See Note 15 to our unaudited interim consolidated financial statements included in Part I to this Quarterly Report.

(f) Face amount of €445 million at June 30, 2020.

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

Principal amount of $499 million, an additional issuance premium of $7 million, less unamortized deferred financing costs of $5 million at June 30, 2020.

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

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

Above amount represents the dollar equivalent of such note at December 31, 2020.

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

(d) Face amount of €325 million at December 31, 2020.

Above amount represents the dollar equivalent of such note at December 31, 2020.

Principal amount of $396 million less unamortized deferred financing costs of $4 million at December 31, 2020.

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

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

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 at December 31, 2020.

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

For further discussion of our debt agreements, see “Liquidity” in the “Financial Condition and Liquidity” section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

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

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.

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.

Covenant Compliance

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

With respect to the Revolving Credit Facility, the discussion below now reflects the covenants in effect under the Second Amendment, dated as of April 3, 2020.

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

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

The Company was in compliance with its covenants under its outstanding notes, the Revolving Credit Facility and the Senior Term Loan Facility as of December 31, 2020.

On January 18, 2019, we delivered a notice to the trustee under the 2012 Secured Indenture and 2014 Unsecured Indenture changing the Fixed GAAP Date, as defined under the indentures, to October 1, 2018.

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

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

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

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

The Senior Term Loan Facility and the 2020 Secured Indenture use financial measures called “Consolidated EBITDA” or “EBITDA” and “Consolidated Net Income” that have substantially the same definitions to EBITDA and Consolidated Net Income, each as defined under the Revolving Credit Agreement.

The 2012 Secured Indenture and the 2014 Unsecured Indenture use financial measures called “Consolidated EBITDA” or “EBITDA” and “Consolidated Net Income” that have similar (but not the same) definitions to EBITDA and Consolidated Net Income, each as defined under the Revolving Credit Agreement.

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

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

In particular, the definition of Adjusted EBITDA in

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

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

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

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

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

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

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

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

GAAP measure of our operating results, to Adjusted EBITDA as defined, for the most recently ended four fiscal quarters, or the twelve months ended December 31, 2020, for the twelve months ended December 31, 2019 and for the three months ended December 31, 2020 and December 31, 2019.

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

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(in millions, except ratios):

For the Twelve Months Ended

June 30, For the Three Months Ended

Twelve Months Ended

December 31, Three Months Ended

2020 2019 2020 2019

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Restructuring costs (c) 20 26 3 5

Net hedging and foreign exchange (gains) losses (d) (17) (11) 15 14

Net hedging and foreign exchange losses (gains) (d) 104 (23) 48 5

Management fees (e) 17 11 — 3

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______________________________________

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

remaining 5.625% Secured Notes.

For the three months ended June 30, 2019, reflects net loss incurred on the early extinguishment of our debt incurred as part of the May 2019 redemption of the remaining 5.625% Secured Notes.

(b) For the twelve months ended June 30, 2020 and June 30, 2019, reflects net gain on sale of securities and divestitures.

(a) For the twelve months ended December 31, 2020, reflects a net loss incurred on the early extinguishment of our debt incurred as part of the June 2020 redemption of our 4.125% Senior Secured Notes and 4.875% Senior Secured Notes, the June 2020 tender for and the August 2020 redemption of the 5.000% Senior Secured Notes and the August 2020 partial repayment of the Senior Term Loan Facility.

For the twelve months ended December 31, 2019, reflects a net loss incurred on the early extinguishment of our debt incurred as part of the May 2019 redemption of the remaining 5.625% Secured Notes.

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

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

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

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

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

Prior to termination of the management agreement, the annual fee was equal to the greater of a base amount of approximately $9 million and 1.5% of Adjusted EBITDA.

Refer to Note 13 of our unaudited interim consolidated financial statements included in Part I to this Quarterly Report for further discussion.

(f) Reflects expenses related to transaction costs, which includes qualifying IPO costs of $73 million and $77 million for the three and twelve months ended June 30, 2020, respectively.

(g) Reflects costs associated with our transformation initiatives and IT system updates, which includes costs of $6 million and $33 million related to our finance transformation for the three and twelve months ended June 30, 2020, respectively, as well as $4 million and $12 million for the three and twelve months ended June 30, 2019, respectively.

For the twelve months ended December 31, 2020, amounts include a one-time fee of $13 million related to termination of the management agreement with Access.

Prior to termination of the management agreement, the annual fee was equal to the greater of a base amount, equal to approximately $4 million for the twelve months ended December 31, 2020, and 1.5% of EBITDA (as defined in the indenture governing the redeemed Holdings 13.75% Senior Notes due 2019) of the Company for the applicable fiscal year, plus expenses.

(f) Reflects transaction costs, including qualifying IPO costs of $76 million for the twelve months ended December 31, 2020.

(g) Reflects costs associated with our transformation initiatives and IT system updates, which includes costs of $6 million and $27 million related to our finance transformation for the three and twelve months ended December 31, 2020, respectively, as well as $10 million and $24 million for the three and twelve months ended December 31, 2019, respectively.

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

Senior Management Free Cash Flow Plan.

Senior Management Free Cash Flow Plan and the Omnibus Incentive Plan.

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

(j) Reflects expected savings resulting from transformation initiatives and restructuring programs and, for the twelve months ended June 30, 2019, reflects expected savings resulting from transformation initiatives and pro forma impact of specified transactions, including pro forma adjustments related to the acquisition of EMP.

(j) Reflects expected savings resulting from transformation initiatives and pro forma impact of specified transactions for the three and twelve months ended December 31, 2020.

Certain of these costs savings initiatives and transactions were identified in the current quarter and as a result the proforma impact was not included in the three and twelve months ended September 30, 2020, the impact of which would have been approximately a $29 million increase in the previously reported quarters included in the twelve months ended December 31, 2020 Adjusted EBITDA.

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

of approximately $3.094 billion less cash of $250 million.

(l) Reflects the ratio of Senior Secured Indebtedness, including Revolving Credit Agreement Indebtedness, to Adjusted EBITDA as of the twelve months ended June 30, 2020.

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

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

This is calculated net of cash and equivalents of the Company as of December 31, 2020 not exceeding $250 million.

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

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

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

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

The amounts involved in any such transactions, individually or in the aggregate, may be material and may be funded from available cash or from additional borrowings.

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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 2. Management’s Discussion and Analysis