What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2022-02-08 compared with 2021-08-03 · 238 added, 366 removed, 536 unchanged (53% of the section changed)

12 unchanged sentences

Royalty advances expected to be recouped after one year 566 457

Property, plant and equipment, net 347 331

Property, plant and equipment, net of accumulated depreciation of $ 435 million and $ 419 million

Operating lease right-of-use assets, net 258 268

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Total assets $ 8,015 $ 7,211

Liabilities and Equity (Deficit)

Liabilities and Equity

Current liabilities:

12 unchanged sentences

Total liabilities $ 7,843 $ 7,165

Equity (deficit):

Class A common stock, $ 0.001 par value;

1,000,000,000 shares authorized, 116,921,554 and 88,578,361 shares issued and outstanding as of June 30, 2021 and September 30, 2020, respectively

1,000,000,000 shares authorized, 127,236,783 and 122,414,827 shares issued and outstanding as of December 31, 2021 and September 30, 2021, respectively

Class B common stock, $ 0.001 par value;

1,000,000,000 shares authorized, 397,461,268 and 421,450,000 issued and outstanding as of June 30, 2021 and September 30, 2020, respectively

1,000,000,000 shares authorized, 387,300,086 and 391,970,996 issued and outstanding as of December 31, 2021 and September 30, 2021, respectively

Additional paid-in capital 1,973 1,942

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Total Warner Music Group Corp.

equity (deficit) 81 ( 63 )

equity 153 31

Noncontrolling interest 19 15

Total equity (deficit) 95 ( 45 )

Total liabilities and equity (deficit) $ 7,040 $ 6,410

Total equity 172 46

Total liabilities and equity $ 8,015 $ 7,211

See accompanying notes

2 unchanged sentences

Three Months Ended

June 30, Nine Months Ended

2021 2020 2021 2020

(in millions, except share and per share data)

5 unchanged sentences

Total costs and expenses ( 1,375 ) ( 1,139 )

Operating income (loss) 162 ( 433 ) 509 ( 317 )

Loss on extinguishment of debt ( 12 ) — ( 12 ) —

Operating income 239 196

Interest expense, net ( 30 ) ( 31 )

Other (expense) income ( 18 ) ( 3 ) — ( 12 )

Income (loss) before income taxes 102 ( 468 ) 404 ( 427 )

Other income (expense) 54 ( 31 )

Income before income taxes 263 134

Income tax expense ( 75 ) ( 35 )

Net income (loss) 61 ( 519 ) 277 ( 471 )

Net income 188 99

Income attributable to noncontrolling interest ( 1 ) ( 1 )

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

$ 61 $ ( 520 ) $ 276 $ ( 474 )

Net income (loss) per share attributable to common stockholders:

Net income attributable to Warner Music Group Corp.

Net income per share attributable to common stockholders:

Class A – Basic and Diluted $ 0.36 $ 0.18

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Warner Music Group Corp.

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

Consolidated Statements of Comprehensive Income (Unaudited)

Three Months Ended

June 30, Nine Months Ended

2021 2020 2021 2020

(in millions)

Net income (loss) $ 61 $ ( 519 ) $ 277 $ ( 471 )

Other comprehensive income (loss), net of tax:

Net income $ 188 $ 99

Other comprehensive (loss) income, net of tax:

Foreign currency adjustment ( 25 ) 34

Deferred gain (loss) on derivative financial instruments 3 ( 2 ) 9 ( 22 )

Other comprehensive income (loss), net of tax 15 15 28 ( 13 )

Total comprehensive income (loss) 76 ( 504 ) 305 ( 484 )

Deferred gain on derivative financial instruments 7 3

Other comprehensive (loss) income, net of tax ( 18 ) 37

Total comprehensive income 170 136

Income attributable to noncontrolling interest ( 1 ) ( 1 )

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

$ 76 $ ( 505 ) $ 304 $ ( 487 )

Comprehensive income attributable to Warner Music Group Corp.

See accompanying notes

1 unchanged sentence

Consolidated Statements of Cash Flows (Unaudited)

Nine Months Ended

Three Months Ended

(in millions)

Cash flows from operating activities

Net income (loss) $ 277 $ ( 471 )

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

Net income $ 188 $ 99

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

Depreciation and amortization 81 71

Unrealized losses and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts 17 14

Unrealized (gains) losses and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts ( 36 ) 45

Deferred income taxes 19 2

Loss on extinguishment of debt 12 —

Net (gain) loss on divestitures and investments ( 26 ) 2

Net gain on divestitures and investments ( 11 ) ( 14 )

Non-cash interest expense 1 1

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Proceeds from issuance of 3.750 % Senior Secured Notes due 2029

Proceeds from increase supplement to Senior Term Loan Facility 325 —

Repayment of 5.500 % Senior Notes due 2026

Proceeds from issuance of 3.000 % Senior Secured Notes due 2031

Deferred financing costs paid ( 4 ) ( 3 )

Call premiums paid on early redemption of debt ( 8 ) —

Distribution to noncontrolling interest holders ( 1 ) ( 1 )

Dividends paid ( 78 ) ( 62 )

Net cash provided by (used in) financing activities 35 ( 288 )

Cash paid to settle contingent consideration ( 4 ) —

Net cash provided by financing activities 448 178

Effect of exchange rate changes on cash and equivalents ( 2 ) 9

Net decrease in cash and equivalents ( 111 ) ( 87 )

Net (decrease) increase in cash and equivalents ( 49 ) 13

Cash and equivalents at beginning of period 499 553

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Warner Music Group Corp.

Consolidated Statements of Equity (Deficit) (Unaudited)

Nine Months Ended June 30, 2021

Consolidated Statements of Equity (Unaudited)

Three Months Ended December 31, 2021

Common Stock Class B

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Comprehensive

Equity (Deficit) Non-controlling

Interest Total Equity (Deficit)

Equity Non-controlling

Interest Total

Shares Value Shares Value

2 unchanged sentences

Net income — — — — — 187 — 187 1 188

Other comprehensive income, net of tax — — — — — — 28 28 — 28

Dividends ($ 0.36 per share)

— — — — — ( 187 ) — ( 187 ) — ( 187 )

Stock-based compensation expense — — — — 27 — — 27 — 27

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

Exchange of Class B shares for Class A shares 19,234,103 — ( 19,234,106 ) — — — — — — —

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

Conversion of Class B shares 4,754,626 — ( 4,754,626 ) — — — — — — —

Shares issued under Omnibus Incentive Plan 33,205 — — — — — — — — —

Other — — — — — — — — 1 1

Balance at June 30, 2021 116,921,554 $ — 397,461,268 $ 1 $ 1,934 $ ( 1,660 ) $ ( 194 ) $ 81 $ 14 $ 95

Three Months Ended June 30, 2021

Common Stock Class B

Common Stock Additional

Capital Accumulated

Deficit Accumulated

Comprehensive

Equity (Deficit) Non-controlling

Interest Total Equity (Deficit)

Shares Value Shares Value

(in millions, except share and per share data)

Balance at March 31, 2021 116,921,411 $ — 397,461,268 $ 1 $ 1,924 $ ( 1,659 ) $ ( 209 ) $ 57 $ 16 $ 73

Net income — — — — — 61 — 61 — 61

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

Dividends ($ 0.12 per share)

Other comprehensive loss, net of tax — — — — — — ( 18 ) ( 18 ) — ( 18 )

Dividends ($ 0.15 per Class A and B share)

— — — — — ( 78 ) — ( 78 ) — ( 78 )

1 unchanged sentence

Distribution to noncontrolling interest holders — — — — — — — — ( 1 ) ( 1 )

Conversion of Class B shares for Class A shares 4,670,910 — ( 4,670,910 ) — — — — — — —

Shares issued under Omnibus Incentive Plan 151,046 — — — — — — — — —

Other — — — — — — — — 4 4

Balance at June 30, 2021 116,921,554 $ — 397,461,268 $ 1 $ 1,934 $ ( 1,660 ) $ ( 194 ) $ 81 $ 14 $ 95

Nine Months Ended June 30, 2020

Balance at December 31, 2021 127,236,783 $ — 387,300,086 $ 1 $ 1,973 $ ( 1,601 ) $ ( 220 ) $ 153 $ 19 $ 172

Three Months Ended December 31, 2020

Common Stock Class B

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

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

Cumulative effect of ASC 718 accounting policy change — — — — — 33 — 33 — 33

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

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

Dividends ($ 0.15 per share)

Net income — — — — — 98 — 98 1 99

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

Dividends ($ 0.12 per Class A and B share)

— — — — — ( 62 ) — ( 62 ) — ( 62 )

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

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

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

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

Other — — 4,169,978 — — 1 — 1 — 1

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

Three Months Ended June 30, 2020

Common Stock Class B

Common Stock Additional

Capital Accumulated

Deficit Accumulated

Comprehensive

Deficit Non-controlling

Interest Total

Shares Value Shares Value

(in millions, except share and per share data)

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

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

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

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

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

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

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

Other — — — — — 1 — 1 — 1

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

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

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

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

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

See accompanying notes

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

Acquisition of Warner Music Group by Access Industries

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

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

Initial Public Offering

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

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

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

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

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

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

Access and its affiliates continue to hold all of the Class B common stock of the Company, par value $ 0.001 per share (“Class B Common Stock”), representing approximately 98 % of the total combined voting power of the Company’s outstanding common stock and approximately 75 % of the economic interest as of December 31, 2021.

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

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We play an integral role in virtually all aspects of the recorded music value chain from discovering and developing talent to producing, distributing and selling music to marketing and promoting recording artists and their music.

In the United States, our Recorded Music business is conducted principally through our major record labels—Atlantic Records and Warner Records.

In October 2018, we launched Elektra Music Group in the United States as a standalone label group, which comprises the Elektra, Fueled by Ramen and Roadrunner labels.

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

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

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

Internationally, we engage in the same activities as in the United States:

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

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

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

Our Recorded Music business’ distribution operations include Warner-Elektra-Atlantic Corporation (“WEA Corp.”), which markets, distributes and sells music and video products to retailers and wholesale distributors;

Alternative Distribution Alliance (“ADA”), which markets, distributes and sells the products of independent labels to retail and wholesale distributors;

and various distribution centers and ventures operated internationally.

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

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

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

We also work side-by-side with our online and mobile partners to test new concepts.

We believe existing and new digital businesses will be a significant source of growth and will provide new opportunities to successfully monetize our assets and create new revenue streams.

The proportion of digital revenues attributable to each distribution channel varies by region and proportions may change as the introduction of new technologies continues.

As one of the world’s largest music entertainment companies, we believe we are well positioned to take advantage of growth in digital distribution and emerging technologies to maximize the value of our assets.

We have diversified our revenues beyond our traditional businesses by entering into expanded-rights deals with recording artists in order to partner with such artists in other aspects of their careers.

Under these agreements, we provide services to and participate in recording artists’ activities outside the traditional recorded music business such as touring, merchandising and sponsorships.

We have built and acquired artist services capabilities and platforms for marketing and distributing this broader set of music-related rights and participating more widely in the monetization of the artist brands we help create.

We believe that entering into expanded-rights deals and enhancing our artist services capabilities in areas such as merchandising, VIP ticketing, fan clubs, concert promotion and management has permitted us to diversify revenue streams and capitalize on other revenue opportunities.

This provides for improved long-term relationships with our recording artists and allows us to more effectively connect recording artists and fans.

Music Publishing Operations

While Recorded Music is focused on marketing, promoting, distributing and licensing a particular recording of a musical composition, Music Publishing is an intellectual property business focused on generating revenue from uses of the musical composition itself.

In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rightsholders, our Music Publishing business garners a share of the revenues generated from use of the musical compositions.

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

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

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

Warner Chappell Music also administers the music and soundtracks of several third-party television and film producers and studios.

We have an extensive production music catalog collectively branded as Warner Chappell Production Music.

In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rightsholders, our Music Publishing business shares the revenues generated from use of the musical compositions with the songwriter or other rightsholders.

Summary of Significant Accounting Policies

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

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

Operating results for the three months ended December 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2022.

The consolidated balance sheet at September 30, 2021 has been derived from the audited consolidated financial statements at that date but does not include all the information and notes required by U.S.

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

As such, all references to June 30, 2021 and June 30, 2020 relate to the periods ended June 25, 2021 and June 26, 2020, respectively.

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

The fiscal year ended September 30, 2022 includes 53 weeks, and the fiscal year ended September 30, 2021 included 52 weeks.

The additional week in fiscal year 2022 falls in the fiscal quarter ended December 31, 2021.

Accordingly, the results of operations for the three months ended December 31, 2021 reflect 14 weeks compared to 13 weeks for the three months ended December 31, 2020.

All references to December 31, 2021 and December 31, 2020 relate to the periods ended December 31, 2021 and December 25, 2020, respectively.

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

The fiscal year ended September 30, 2021 ended on September 24, 2021.

2 unchanged sentences

In addition, the February 28, 2020 amendment to the Company’s certificate of incorporation also gave effect to the reclassification and 477,242.614671815 -for-1 stock split of the Company’s existing common stock outstanding into 510,000,000 shares of Class B Common Stock.

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

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

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

2020 Omnibus Incentive Plan, or the “Omnibus Incentive Plan.” The aggregate number of shares of common stock available for issuance under the Omnibus Incentive Plan is 31,169,099 shares of Class A Common Stock over the 10 -year period from the date of adoption, including up to 1,000,000 shares of our Class A Common Stock in connection with the IPO.

Since the IPO, a total of 61,423 shares of restricted stock have been issued under the Omnibus Incentive Plan to the Company’s directors, which includes zero and 33,062 shares issued during the three and nine months ended June 30, 2021, respectively.

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

In December 2020, all of the outstanding equity interests held by certain participants in the Second Amended and Restated Warner Music Group Corp.

Senior Management Free Cash Flow Plan (the “Plan”) were settled or redeemed in accordance with the terms of the Plan.

The Class A and Class B equity units held by certain participants in WMG Management Holdings, LLC (“Management LLC”) were redeemed in exchange for 18,265,183 shares of Class B Common Stock.

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

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

In March 2021, the Compensation Committee of the Board of Directors of the Company approved an amendment to the Plan that allowed certain remaining Plan participants to redeem a portion of their vested Class B equity units of Management LLC.

2020 Omnibus Incentive Plan, or the “Omnibus Incentive Plan.” The Omnibus Incentive Plan provides for the grant of incentive common stock, stock options, restricted stock, restricted stock units (“RSUs”), performance awards and stock appreciation rights to employees, consultants and directors.

The aggregate number of shares of common stock available for issuance under the Omnibus Incentive Plan is 31,169,099 shares of Class A Common Stock over the 10-year period from the date of adoption, including up to 1,000,000 shares of our Class A Common Stock in connection with the IPO.

Since the IPO, a total of 215,613 shares of Class A Common Stock have been issued under the Omnibus Incentive Plan, which includes 151,046 and 2,553 shares issued during the three months ended December 31, 2021, and 2020, respectively.

During the three months ended December 31, 2021, an aggregate of 4,670,910 shares of Class B Common Stock were converted to Class A Common Stock.

In connection with the Senior Management Free Cash Flow Plan (the “Plan”), a remaining Plan participant redeemed a portion of vested Class B equity units of the LLC holding company, WMG Management Holdings, LLC (“Management LLC”).

These Class B equity units were redeemed in exchange for a total of 510,165 shares of Class B Common Stock, which shares of Class B Common Stock converted to shares of Class A Common Stock upon the exchange.

In February 2021, Access converted 4,754,626 shares of Class B Common Stock to the same number of shares of Class A Common Stock, which it subsequently sold through open market sales, which is reflected as an exchange of Class B Common Stock for Class A Common Stock in the consolidated statements of equity for the nine months ended June 30, 2021.

Additionally, during the three months ended December 31, 2021, Access converted 4,160,745 shares of Class B Common Stock to the same number of shares of Class A Common Stock, which it subsequently sold through open market sales, which is reflected as an exchange of Class B Common Stock in the consolidated statements of equity for the three months ended December 31, 2021.

Earnings per Share

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

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

mandatorily redeemable in cash.

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

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

The Company utilizes the two-class method to report earnings per share.

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

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Stock-Based Compensation

The Company accounts for stock-based payments as required by ASC 718, Compensation—Stock Compensation (“ASC 718”).

Under the recognition provision of ASC 718, the Company’s liability classified stock-based compensation costs are measured each reporting date until settlement.

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

Upon completion of the IPO in June 2020, the Plan was amended to remove the cash-settlement feature on all future redemptions.

As a result, all awards previously issued under the Plan required settlement in equity.

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

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

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

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

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

During the nine months ended June 30, 2021, the Company granted restricted stock units (“RSUs”) under the Omnibus Incentive Plan to eligible employees and executives.

The Company recognized approximately $ 12 million and $ 33 million of non-cash stock-based compensation expense for the three and nine months ended June 30, 2021, respectively, of which $ 10 million and $ 27 million was recorded to additional paid-in capital, and a remaining $ 6 million has been classified as a share-based compensation liability as of June 30, 2021.

The Company accounts for stock-based payments in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”).

Stock-based compensation consists primarily of restricted stock units (“RSUs”) granted to eligible employees and executives under the Omnibus Incentive Plan.

The Company measures compensation expense for RSUs based on the fair value of the award on the date of grant.

The grant date fair value is based on the closing market price of the Company’s Class A Common Stock on the date of grant.

The Company accounts for forfeitures as they occur.

Stock-based compensation is recognized on a straight-line basis over the requisite service period, which is generally four years except for certain one-year awards issued in connection with the IPO.

The Company also grants unvested restricted stock to the Company’s directors.

The Company recognizes stock-based compensation expense equal to the grant date fair value of the restricted stock, based on the closing stock price on grant date, on a straight-line basis over the requisite service period of the awards, which is generally one year .

The Company also recognizes stock-based compensation under the Plan.

The awards outstanding under the Plan are equity-classified.

The Company recognized approximately $ 24 million of non-cash stock-based compensation expense for the three months ended December 31, 2021, of which $ 22 million was recorded to additional paid-in capital, and a remaining $ 2 million has been classified as a share-based compensation liability as of December 31, 2021.

The share-based compensation liability represents executive awards that have not yet been granted under the Omnibus Incentive Plan, where a total value is known and settlement will occur in a variable number of RSUs.

During the three months ended December 31, 2021, $ 9 million was reclassified from share-based compensation liability to additional paid-in capital, representing the grant date fair value of RSUs granted which were previously classified as a share-based compensation liability as of September 30, 2021.

The Company recognized approximately $ 6 million of non-cash stock-based compensation expense for the three months ended December 31, 2020.

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

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Recently Adopted Accounting Pronouncements

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

Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”).

ASU 2016-13 requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses.

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

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

Accounting Pronouncements Not Yet Adopted

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

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(2) the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment;

(3) the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity

method investment becomes a subsidiary;

(3) the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary;

and (4) the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.

1 unchanged sentence

GAAP by making other changes.

ASU 2019-12 will be effective for the annual periods beginning after December 15, 2021, and for interim periods beginning after December 15, 2022.

Earlier adoption is permitted.

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

The Company adopted ASU 2019-12 in the first quarter of fiscal 2022 and this adoption did not have a material impact on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and D erivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40):

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”).

ASU 2020-06 simplifies the accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models used to separately account for embedded conversion features as a component of equity.

Instead, the entity will account for the convertible debt or convertible preferred stock securities as a single unit of account, unless the conversion feature requires bifurcation and recognition as derivatives.

Additionally, the guidance requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares.

The Company adopted ASU 2020-06 in the first quarter of fiscal year 2022 and this adoption did not have any impact on the Company’s consolidated financial statements.

Earnings per Share

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

The potentially dilutive common shares did not have a dilutive effect on the Company’s EPS calculation for the three and nine months ended June 30, 2021 and 2020, respectively.

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

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

The potentially dilutive common shares did not have a dilutive effect on the Company’s EPS calculation for the three months ended December 31, 2021 and 2020, respectively.

The Company allocates dividends declared to Class A Common Stock and Class B Common Stock based on timing and amounts actually declared for each class of stock and the undistributed earnings are allocated to Class A Common Stock and Class B Common Stock pro rata on a basic weighted average shares outstanding basis since the two classes of stock participate equally on a per share basis upon liquidation.

The Class B Common Stock issued to Management LLC for the exercise of the vested deferred equity units is included in the basic weighted average number of outstanding shares of Class B Common Stock.

Upon issuance to the participants in the Plan, the Class B Common Stock will be converted into Class A Common Stock and included in the basic weighted average number of outstanding shares of Class A Common Stock.

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

The following table sets forth the calculation of basic and diluted net income (loss) per common share under the two-class method for the three and nine months ended June 30, 2021 and 2020 (in millions, except share and per share data):

Three Months Ended June 30,

Class A Class B Class A Class B

Basic and Diluted EPS:

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

$ 15 $ 46 $ ( 21 ) $ ( 499 )

Net income attributable to participating securities ( 1 ) — — —

Net income (loss) attributable to common stockholders $ 14 $ 46 $ ( 21 ) $ ( 499 )

Weighted average shares outstanding 116,890,959 397,461,268 20,307,692 483,796,267

Basic and Diluted EPS $ 0.12 $ 0.12 $ ( 1.03 ) $ ( 1.03 )

Nine Months Ended June 30,

The following table sets forth the calculation of basic and diluted net income per common share under the two-class method for the three months ended December 31, 2021 and 2020 (in millions, except share and per share data):

Three Months Ended December 31,

Class A Class B Class A Class B

Basic and Diluted EPS:

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

Net income attributable to Warner Music Group Corp.

$ 47 $ 140 $ 19 $ 79

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

Net income (loss) attributable to common stockholders $ 57 $ 215 $ ( 7 ) $ ( 467 )

Net income attributable to common stockholders $ 45 $ 140 $ 17 $ 79

Weighted average shares outstanding 123,969,142 390,952,038 94,221,946 416,632,808

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Three Months Ended

June 30, Nine Months Ended

2021 2020 2021 2020

(in millions)

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Synchronization 42 33

Other 2 2 7 7

Total Music Publishing 229 175

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Music Publishing 115 91

594 432 1,731 1,433

International Recorded Music 778 680

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These licenses typically contain a single performance obligation, which is ongoing access to all intellectual property in an evolving content library, predicated on:

(1) the business practice and contractual ability to remove specific content without a requirement to replace the content and without impact to minimum royalty guarantees and (2) the contracts not containing a

specific listing of content subject to the license.

Digital licensing contracts are generally long-term with consideration in the form of sales- and usage-based royalties that are typically received monthly.

Certain contracts contain non-recoupable fixed fees or minimum guarantees, which are recoupable against royalties.

Upon contract inception, the Company will assess whether a shortfall or breakage is expected (i.e., where the minimum guarantee will not be recouped through royalties) in order to determine timing of revenue recognition for the fixed fee or minimum guarantee.

For fixed fee and minimum guarantee contracts where breakage is expected, the total transaction price (fixed fee or minimum guarantee) is recognized proportionately over the contract term using an appropriate measure of progress which is typically based on the Company’s digital partner’s subscribers or streaming activity as these are measures of access to an evolving catalog, or on a straight-line basis.

Certain contracts contain minimum guarantees, which are recoupable against royalties.

For fixed fee contracts and minimum guarantee contracts where breakage is expected, the total transaction price (fixed fee or minimum guarantee) is recognized proportionately over the contract term using an appropriate measure of progress which is based on the Company’s digital partner’s subscribers or streaming activity as these are measures of access to an evolving catalog, or on a straight-line basis.

The Company updates its assessment of the transaction price each reporting period to see if anticipated royalty earnings exceed the minimum guarantee.

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

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

Artist services and expanded-rights revenues are generated from artist services businesses and participation in expanded-rights associated with artists, including advertising, merchandising including direct-to-consumer sales, touring, concert promotion, ticketing, sponsorship, fan clubs, artist websites, social publishing, and artist and brand management.

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

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For certain artist services and expanded-rights contracts, collectability is not considered probable until notification is received from the artist’s management.

Revenues from the sale of products sold through our e-commerce websites are recognized when control of the goods is transferred to the customer, which is upon receipt of finished goods by the customer.

Licensing revenues represent royalties or fees for the right to use sound recordings in combination with visual images such as in films or television programs, television commercials and video games.

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mechanical, performance, synchronization, digital and other.

Performance revenues are received when the musical composition is performed publicly through broadcast of music on television, radio and cable and in retail locations (e.g.

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

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

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

Mechanical revenues are generated with respect to the musical compositions embodied in recordings sold in any physical format or configuration such as vinyl, CDs and DVDs.

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The most common form of consideration for these contracts is sales- and usage-based royalties.

The collecting societies submit usage reports, typically with payment for

royalties due, often on a quarterly or biannual reporting period, in arrears.

The collecting societies submit usage reports, typically with payment for royalties due, often on a quarterly or biannual reporting period, in arrears.

Royalties are recognized as the sale or usage occurs based upon usage reports and, when these reports are not available, royalties are estimated based on historical data, such as recent royalties reported, company-specific information with respect to changes in repertoire, industry information and other relevant trends.

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

Based on management’s analysis of sales returns, refund liabilities of $ 29 million and $ 24 million were established at June 30, 2021 and September 30, 2020, respectively.

Based on management’s analysis of estimated credit losses, reserves of $ 19 million and $ 23 million were established at June 30, 2021 and September 30, 2020, respectively.

Based on management’s analysis of sales returns, refund liabilities of $ 33 million and $ 23 million were established at December 31, 2021 and September 30, 2021, respectively.

Based on management’s analysis of estimated credit losses, reserves of $ 20 million and $ 20 million were established at December 31, 2021 and September 30, 2021, respectively.

Principal versus Agent Revenue Recognition

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

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

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

Deferred Revenue

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

Deferred revenue increased by $ 347 million during the nine months ended June 30, 2021 related to cash received from customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period.

Revenues of $ 187 million were recognized during the nine months ended June 30, 2021 related to the balance of deferred revenue at September 30, 2020.

Deferred revenue increased by $ 104 million during the three months ended December 31, 2021 related to cash received from customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period.

Revenues of $ 135 million were recognized during the three months ended December 31, 2021 related to the balance of deferred revenue at September 30, 2021.

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

Performance Obligations

For the nine months ended June 30, 2021 and June 30, 2020, the Company recognized revenue of $ 57 million and $ 35 million, respectively, from performance obligations satisfied in previous periods.

For the three months ended December 31, 2021 and December 31, 2020, the Company recognized revenue of $ 37 million and $ 20 million, respectively, from performance obligations satisfied in previous periods.

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

Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at June 30, 2021 are as follows:

Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at December 31, 2021 are as follows:

Rest of FY22 FY23 FY24 Thereafter Total

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Total $ 341 $ 312 $ 121 $ 1 $ 775

Acquisition of 300 Entertainment

On December 16, 2021, the Company purchased all outstanding shares of Theory Entertainment LLC d/b/a 300 Entertainment (“300 Entertainment”), an independent U.S.

record label, pursuant to the terms and conditions of the merger agreement of the same date among Warner Music Inc.

and MM Investment LLC, both wholly-owned subsidiaries of the Company, the Buyer Representative, Trifecta Merger Subsidiary LLC, Theory Entertainment LLC d/b/a 300 Entertainment and the Seller Representative (the “Merger Agreement”).

The cash consideration paid at closing of the acquisition was approximately $ 397 million, which reflects the base purchase price of $ 400 million, adjusted for, among other items, preliminary working capital of 300 Entertainment.

The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations , using the acquisition method of accounting.

The assets and liabilities of 300 Entertainment, including identifiable intangible assets, have been measured at their fair value primarily using Level 3 inputs (see Note 15 for additional information on fair value inputs).

Determining the fair value of the assets acquired and liabilities assumed requires judgment and involved the use of assumptions with respect to future cash inflows and outflows, discount rates, asset useful lives and market multiples, among other items.

The use of different estimates and judgments could yield materially different results.

The excess of the purchase price over the fair value of the net assets acquired, including the amount assigned to identifiable intangible assets, has been recorded as goodwill.

The resulting goodwill has been included in our Recorded Music reportable segment.

The recognized goodwill will be deductible for income tax purposes.

Any impairment charges made in future periods associated with goodwill, if any, will not be tax-deductible.

The table below presents (i) the preliminary estimate of the acquisition consideration as it relates to the acquisition of 300 Entertainment and (ii) the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of December 16, 2021 (in millions):

Preliminary Purchase Price Allocation

Cash and equivalents $ 2

Accounts receivable 10

Royalty advances 35

Property, plant and equipment, net 1

Intangible assets subject to amortization, net (a) 233

Other assets 1

Accounts payable ( 4 )

Accrued royalties ( 7 )

Accrued liabilities ( 1 )

Total purchase price allocated $ 397

______________________________________

(a) Identifiable intangible assets are comprised of the following (in millions):

Recorded music catalog $ 135

Artist and songwriter contracts 82

Trademarks 11

Music publishing copyrights 5

Total intangible assets acquired $ 233

The acquisition accounting is subject to revision based on final determinations of fair value and allocations of purchase price to the identifiable assets and liabilities acquired, in addition to the determination of the final consideration, including the determination of the final working capital adjustment pursuant to the mechanism set forth in the Merger Agreement.

During the three months ended December 31, 2021, the Company incurred costs related to this acquisition of approximately $ 3 million, which were expensed as incurred and recorded in selling, general and administrative expenses in the accompanying consolidated statement of operations.

Prior to the acquisition, the Company had a distribution arrangement with 300 Entertainment.

The unaudited pro forma revenue and operating income as if the acquisition occurred on October 1, 2020 is not material to the Company’s reported results for three months ended December 31, 2021 and December 31, 2020.

Comprehensive Income

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

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

GAAP, are excluded from net income.

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

The following summary sets forth the changes in the components of accumulated other comprehensive loss, net of related tax expense of approximately $ 2 million:

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Balances at September 30, 2021 $ ( 174 ) $ ( 11 ) $ ( 17 ) $ ( 202 )

Other comprehensive income 19 — 9 28

Balances at June 30, 2021 $ ( 162 ) $ ( 12 ) $ ( 20 ) $ ( 194 )

Other comprehensive (loss) income ( 25 ) — 7 ( 18 )

Balances at December 31, 2021 $ ( 199 ) $ ( 11 ) $ ( 10 ) $ ( 220 )

______________________________________

(a) Includes historical foreign currency translation related to certain intra-entity transactions.

The Company’s lease portfolio consists operating real estate leases for its corporate offices and, to a lesser extent, storage and other equipment.

The Company’s lease portfolio consists of operating real estate leases for its corporate offices and, to a lesser extent, storage and other equipment.

The Company adopted FASB ASC Topic 842, Leases (“ASC 842”), on October 1, 2019 using the modified retrospective transition method.

Under ASC 842, a contract is or contains a lease when (1) an explicitly or implicitly identified asset has been deployed in the contract and (2) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract.

The Company determines if an arrangement is or contains a lease at inception of the contract.

For all leases (finance and operating), other than those that qualify for the short-term recognition exemption, the Company will recognize on the balance sheet a lease liability for its obligation to make lease payments arising from the lease and a corresponding ROU asset representing its right to use the underlying asset over the period of use based on the present value of lease payments over the lease term as of the lease commencement date.

For all leases (finance and operating), other than those that qualify for the short-term recognition exemption, the Company will recognize on the balance sheet a lease liability for its obligation to make lease payments arising from the lease and a corresponding right-of-use (“ROU”) asset representing its right to use the underlying asset over the period of use based on the present value of lease payments over the lease term as of the lease commencement date.

ROU assets are adjusted for initial direct costs, lease payments made and incentives.

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Fixed payments are recognized as lease expense on a straight-line basis over the lease term.

For leases with a term of one year or less (“short-term leases”), the lease payments are recognized in the consolidated statements of operations on a straight-line basis over the lease term.

For leases with a term of one year or less, the lease payments are recognized in the consolidated statements of operations on a straight-line basis over the lease term.

ASC 842 requires that only limited types of variable payments be included in the determination of lease payments, which affects lease classification and measurement.

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Among the Company’s operating leases are its leases for the Ford Factory Building, located at 777 S.

Santa Fe Avenue in Los Angeles, California, and for 27 Wrights Lane, Kensington, London.

Santa Fe Avenue in Los Angeles, California, and for 27 Wrights Lane, Kensington, London, United Kingdom.

The landlord for both leases is an affiliate of Access.

As of June 30, 2021, the aggregate lease liability related to these leases was $ 128 million.

As of December 31, 2021, the aggregate lease liability related to these leases was $ 121 million.

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

The components of lease expense were as follows:

Three Months Ended June 30, Nine Months Ended June 30,

2021 2020 2021 2020

Three Months Ended December 31,

(in millions)

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Variable lease cost 2 2

Sublease income — — — —

Total lease cost $ 17 $ 17

The Company incurred and recorded other occupancy expenses of $ 3 million and $ 11 million for the three and nine months ended June 30, 2021, respectively, and $ 4 million and $ 13 million for the three and nine months ended June 30, 2020, respectively.

The Company incurred and recorded other occupancy expenses of $ 4 million for both the three months ended December 31, 2021 and December 31, 2020.

Supplemental cash flow information related to leases was as follows:

Nine Months Ended June 30,

Three Months Ended December 31,

(in millions)

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Maturities of lease liabilities were as follows:

Years Operating

Fiscal Year Ended September 30, Operating

(in millions)

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Imputed interest ( 60 )

As of June 30, 2021, there have been no leases entered into that have not yet commenced.

As of December 31, 2021, there have been no leases entered into that have not yet commenced.

Goodwill and Intangible Assets

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Other adjustments (b) ( 15 ) — ( 15 )

Balances at June 30, 2021 $ 1,372 $ 464 $ 1,836

Balances at December 31, 2021 $ 1,481 $ 464 $ 1,945

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(a) Includes purchase price allocations for acquisitions closed during the nine months ended June 30, 2021 offset by measurement period adjustments for acquisitions which closed during the fiscal year ended September 30, 2020.

(b) Other adjustments during the nine months ended June 30, 2021 represent foreign currency movements.

(a) Primarily relates to the acquisition of 300 Entertainment as described in Note 5.

(b) Other adjustments during the three months ended December 31, 2021 represent foreign currency movements.

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

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Intangible assets consist of the following:

Weighted-Average Useful Life June 30,

Weighted-Average Useful Life December 31,

2021 September 30,

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Total net intangible assets $ 2,624 $ 2,171

The increase in intangible assets during the nine months ended June 30, 2021 primarily relates to certain acquisition transactions of music-related assets within recorded music catalogs, music publishing copyrights, and artist and songwriter contracts for approximately $ 470 million.

The increase in intangible assets during the three months ended December 31, 2021 primarily relates to the acquisition of 300 Entertainment, which resulted in an increase in intangible assets as described in Note 5, and an acquisition of music-related assets within music publishing copyrights for approximately $ 250 million.

Debt Capitalization

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2.750 % Senior Secured Notes due 2028 (€ 325 face amount)

3.750 % Senior Secured Notes due 2029

3.875 % Senior Secured Notes due 2030

5.500 % Senior Notes due 2026 (b)

2.250 % Senior Secured Notes due 2031 (€ 445 face amount)

3.000 % Senior Secured Notes due 2031

Total long-term debt, including the current portion $ 3,892 $ 3,383

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______________________________________

(a) Reflects $ 300 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $ 10 million at both June 30, 2021 and September 30, 2020.

There were no loans outstanding under the Revolving Credit Facility at June 30, 2021 or September 30, 2020.

(b) In April 2021, the 5.500 % Senior Notes due 2026 were redeemed in full.

(a) Reflects $ 300 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $ 7 million at both December 31, 2021 and September 30, 2021.

There were no loans outstanding under the Revolving Credit Facility at December 31, 2021 or September 30, 2021.

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

As of June 30, 2021 Acquisition Corp.

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

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

The Company’s guarantee of the 3.625 % Senior Secured Notes due 2026 is full and unconditional.

As of December 31, 2021 Acquisition Corp.

had issued and outstanding the 2.750 % Senior Secured Notes due 2028, the 3.750 % Senior Secured Notes due 2029, the 3.875 % Senior Secured Notes due 2030, the 2.250 % Senior Secured Notes due 2031 and the 3.000 % Senior Secured Notes due 2031 (together, the “Acquisition Corp.

All of the Acquisition Corp.

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The guarantee of the Acquisition Corp.

Notes by Acquisition Corp.’s domestic wholly-

owned subsidiaries is full, unconditional and joint and several.

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

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

The secured notes are guaranteed on a senior secured basis.

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

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

Accordingly, while Acquisition Corp.

and its subsidiaries are not currently restricted from distributing funds to the Company and Holdings under the indentures for the Acquisition Corp.

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

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

Recent Transactions

Additional 3.000 % Senior Secured Notes

Senior Credit Facilities, including the Revolving Credit Facility and the Senior Term Loan Facility, should Acquisition Corp.’s Total Indebtedness to EBITDA Ratio increase above 3.50 :1.00 and the term loans not achieve an investment grade rating, the covenants under the Revolving Credit Facility will be reinstated and the ability of the Company and Holdings to obtain funds from their subsidiaries will be restricted by the Revolving Credit Facility.

Fiscal 2022 Transactions

3.750 % Senior Secured Notes Offering

On November 24, 2021, 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.

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 3.000 % Senior Secured Notes issued on August 12, 2020 (the “Original Notes”).

Senior Term Loan Facility

On January 20, 2021, Acquisition Corp.

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

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

to take various actions.

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

The Company recorded approximately $ 3 million of expenses associated with fees paid to third parties in connection with this debt modification and capitalized approximately $ 1 million in fees paid to creditors.

Revolving Credit Agreement Amendment

On March 1, 2021, Acquisition Corp.

entered into an amendment (the “Revolving Credit Agreement Amendment”) to the revolving credit agreement, dated January 31, 2018 (as amended by the amendments dated as of October 9, 2019 and April 3, 2020), among Acquisition Corp., the several banks and other financial institutions party thereto and Credit Suisse AG, as administrative agent, governing Acquisition Corp.’s revolving credit facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto.

The Revolving Credit Agreement Amendment (among other changes) adds certain exceptions and increases the leverage ratio below which Acquisition Corp.

can access certain baskets in connection with Acquisition Corp.’s negative covenants, including those related to incurrence of indebtedness, restricted payments and covenant suspension.

Senior Term Loan Facility Increase Supplement and Redemption of 5.500 % Senior Notes due 2026

On March 8, 2021, Acquisition Corp.

entered into an Increase Supplement (the “Increase Supplement”), dated as of March 8, 2021, among Acquisition Corp., the guarantors party thereto, WMG Holdings Corp., Credit Suisse AG, Cayman Islands Branch, as increasing lender, and Credit Suisse AG, as administrative agent, to the Senior Term Loan Credit Agreement, whereby prior to April 22, 2021 and subject to the satisfaction of certain conditions, Acquisition Corp.

may borrow additional term loans in an amount up to $ 325 million for an aggregate principal amount outstanding under the Senior Term Loan Credit Agreement of up to $ 1,145 million.

The Increase Supplement was entered into to provide for the redemption of Acquisition Corp.’s 5.500 % Senior Notes due 2026 (the “ 5.500 % Notes”).

On April 14, 2021, Acquisition Corp.

borrowed additional term loans in an amount of $ 325 million under the Increase Supplement.

Following such borrowing, there was an aggregate principal amount outstanding under the Senior Term Loan Credit Agreement of $ 1,145 million.

On April 15, 2021, Acquisition Corp.

redeemed all of the outstanding 5.500 % Notes.

The redemption price for the 5.500 % Notes was approximately $ 343 million, equivalent to 102.750 % of the principal amount of the 5.500 % Notes, plus accrued but unpaid

interest thereon to, but excluding, the redemption date, which was April 15, 2021.

The Company recorded a loss on extinguishment of debt of approximately $ 12 million for the three and nine months ended June 30, 2021, which represents the premium paid on early redemption and unamortized deferred financing costs.

issued and sold $ 540 million of its 3.750 % Senior Secured Notes due 2029 (the “ 3.750 % Senior Secured Notes”).

Interest on the Notes will accrue at the rate of 3.750 % per annum and will be payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 2022.

The 3.750 % 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 indenture governing the 3.750 % Senior Secured Notes 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.

Interest Rates

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

Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.00 x at June 30, 2021, the applicable margin for Eurodollar loans would be 1.375 % instead of 1.875 % and the applicable margin for ABR loans would be 0.375 % instead of 0.875 % in the case of 2020 Revolving Loans.

Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.08 x at December 31, 2021, the applicable margin for Eurodollar loans would be 1.625 % instead of 1.875 % and the applicable margin for ABR loans would be 0.625 % instead of 0.875 % in the case of 2020 Revolving Loans.

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

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Maturities of Senior Secured Notes

As of June 30, 2021, there are no scheduled maturities of notes until 2026, when $ 531 million is scheduled to mature.

As of December 31, 2021, there are no scheduled maturities of notes until 2028, when $ 368 million is scheduled to mature.

Thereafter, $ 2.379 billion is scheduled to mature.

Interest Expense, net

Total interest expense, net was $ 30 million and $ 32 million for the three months ended June 30, 2021 and 2020, respectively, and $ 93 million and $ 98 million for the nine months ended June 30, 2021 and 2020, respectively.

The weighted-average interest rate of the Company’s total debt was 3.4 % at June 30, 2021, 3.7 % at September 30, 2020 and 4.0 % at June 30, 2020.

Total interest expense, net was $ 30 million and $ 31 million for the three months ended December 31, 2021 and 2020, respectively.

The weighted-average interest rate of the Company’s total debt was 3.2 % at December 31, 2021, 3.2 % at September 30, 2021 and 3.7 % at December 31, 2020.

Commitments and Contingencies

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Any claims or proceedings against the Company, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors.

On December 22, 2017, the U.S.

government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“Tax Act”).

The Tax Act significantly revised the U.S.

federal corporate income tax provisions, including, but not limited to, an income inclusion of global intangible low-taxed income (“GILTI”), a deduction against foreign-derived intangible income (“FDII”) and a new minimum tax, the base erosion anti-abuse tax (“BEAT”).

GILTI, FDII and BEAT were effective for the Company’s fiscal year ending September 30, 2019.

The Company has elected to recognize the GILTI impact in the specific period in which it occurs.

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

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

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

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

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

For the three and nine months ended June 30, 2021, the Company recorded an income tax expense of $ 41 million and $ 127 million, respectively.

The income tax expense for the three months ended June 30, 2021 is higher than the expected tax expense at the statutory tax rate of 21% primarily due to income tax arising from an increase in our net U.K.

deferred tax liability due to the change in the U.K.

future statutory tax rate, U.S.

state and local taxes, foreign income taxes at rates higher than the U.S., and non-deductible executive compensation under IRC Section 162(m), offset by FDII.

The income tax expense for the nine months ended June 30, 2021 is higher than the expected tax expense at the statutory tax rate of 21% primarily due to income tax arising from an increase in our net U.K.

deferred tax liability due to the change in the U.K.

future statutory tax rate, U.S.

state and local taxes, foreign income taxes at rates higher than the U.S., and non-deductible executive compensation under IRC Section 162(m), offset by FDII and excess tax benefits from the Plan.

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

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

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

The Company has determined that it is reasonably possible that the gross unrecognized tax benefits as of June 30, 2021 could decrease by up to approximately $ 2 million related to various ongoing audits and settlement discussions in various foreign jurisdictions during the next twelve months.

For the three months ended December 31, 2021, the Company recorded an income tax expense of $ 75 million.

The income tax expense for the three months ended December 31, 2021 is higher than the expected tax expense at the statutory tax rate of 21% primarily due to U.S.

state and local taxes, withholding taxes, foreign income taxed at rates higher than the U.S., and non-deductible executive compensation under IRC Section 162(m), offset by a deduction against foreign derived intangible income (“FDII”).

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

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

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

The Company has determined that it is reasonably possible that the gross unrecognized tax benefits as of December 31, 2021 could decrease by up to approximately $ 2 million related to various ongoing audits and settlement discussions in various foreign jurisdictions during the next twelve months.

Derivative Financial Instruments

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The interest rate swap instruments are designated and qualify as cash flow hedges under the criteria prescribed in ASC 815.

The Company records these contracts at fair value on its balance sheet and gains or losses on these contracts are deferred in equity (as a component of comprehensive income (loss)).

records these contracts at fair value on its balance sheet and gains or losses on these contracts are deferred in equity (as a component of comprehensive income).

The fair value of foreign currency forward exchange contracts is determined by using observable market transactions of spot and forward rates (i.e., Level 2 inputs) which is discussed further in Note 15.

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

The Company’s hedged interest rate transactions as of June 30, 2021 are expected to be recognized within three years .

The Company’s hedged interest rate transactions as of December 31, 2021 are expected to be recognized within two years .

The fair value of interest rate swaps is based on dealer quotes of market rates (i.e., Level 2 inputs) which is discussed further in Note 15.

Interest income or expense related to interest rate swaps is recognized in interest income (expense), net in the same period as the related expense is recognized.

The ineffective portions of interest rate swaps are recognized in other income (expense) in the period measured.

Any ineffective portion of the interest rate swaps are recognized in other income (expense) in the period measured.

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

As of June 30, 2021, the Company had outstanding hedge contracts for the sale of $ 131 million and the purchase of $ 85 million of foreign currencies at fixed rates that will be settled by September 2021.

As of June 30, 2021, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 20 million of unrealized deferred losses in comprehensive income related to the interest rate swaps.

As of December 31, 2021, the Company had outstanding hedge contracts for the sale of $ 317 million and the purchase of $ 218 million of foreign currencies at fixed rates that will be settled by September 2022.

As of December 31, 2021, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 10 million of unrealized deferred losses in comprehensive income related to the interest rate swaps.

As of September 30, 2021, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 17 million of unrealized deferred losses in comprehensive income related to the interest rate swaps.

The Company recorded realized pre-tax losses of $ 4 million and no unrealized pre-tax gains or losses related to its foreign currency forward exchange contracts in the consolidated statement of operations as other expense for the nine months ended June 30, 2021.

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

The unrealized pre-tax gains of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the nine months ended June 30, 2021 were $ 12 million.

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

The following is a summary of amounts recorded in the consolidated balance sheets pertaining to the Company’s derivative instruments at June 30, 2021 and September 30, 2020:

The Company recorded realized pre-tax gains of $ 1 million and unrealized pre-tax gains of $ 2 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other income for the three months ended December 31, 2021.

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

The unrealized pre-tax gains of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the three months ended December 31, 2021 were $ 9 million.

The following is a summary of amounts recorded in the consolidated balance sheets pertaining to the Company’s derivative instruments at December 31, 2021 and September 30, 2021:

2021 (a) September 30,

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Three Months Ended (in millions)

June 30, 2021

Revenues $ 1,152 $ 189 $ ( 1 ) $ 1,340

Operating income (loss) 197 21 ( 56 ) 162

Amortization of intangible assets 39 21 — 60

Depreciation of property, plant and equipment 14 1 4 19

OIBDA 250 43 ( 52 ) 241

June 30, 2020

Revenues $ 861 $ 149 $ — $ 1,010

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

Amortization of intangible assets 30 17 — 47

Depreciation of property, plant and equipment 11 2 2 15

OIBDA ( 119 ) 33 ( 285 ) ( 371 )

Publishing Corporate

eliminations Total

Nine Months Ended (in millions)

June 30, 2021

December 31, 2021

Revenues $ 1,386 $ 229 $ ( 1 ) $ 1,614

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OIBDA 330 54 ( 64 ) 320

June 30, 2020

December 31, 2020

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

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Cash Interest and Taxes

The Company made interest payments of approximately $ 28 million and $ 43 million during the three months ended June 30, 2021 and 2020, respectively, and approximately $ 92 million and $ 108 million during the nine months ended June 30, 2021 and 2020, respectively.

The Company paid approximately $ 37 million and $ 18 million of income and withholding taxes, net of refunds, for the three months ended June 30, 2021 and 2020, respectively, and approximately $ 89 million and $ 58 million of income and withholding taxes, net of refunds, for the nine months ended June 30, 2021 and 2020, respectively.

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

The Company made interest payments of approximately $ 13 million and $ 27 million during the three month ended December 31, 2021 and 2020, respectively.

The Company paid approximately $ 29 million and $ 17 million of income and withholding taxes, net of refunds, for the three months ended December 31, 2021 and 2020, respectively.

The Company’s ability to pay dividends may be restricted by covenants in the credit agreement for the Revolving Credit Facility which are currently suspended but which will be reinstated if Acquisition Corp.’s Total Indebtedness to EBITDA Ratio increases above 3.50 :1.00 and the term loans do not achieve an investment grade rating.

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.

On May 13, 2021, 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 June 1, 2021.

The Company paid an aggregate of approximately $ 62 million and $ 187 million, or $ 0.12 and $ 0.36 per share, in cash dividends to stockholders and participating security holders for the three and nine months ended June 30, 2021, respectively.

On November 9, 2021, the Company’s board of directors declared a cash dividend of $ 0.15 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, 2021.

The Company paid an aggregate of approximately $ 78 million, or $ 0.15 per share, in cash dividends to stockholders and participating security holders for the three months ended December 31, 2021.

On February 8, 2022, the Company’s board of directors declared a cash dividend of $ 0.15 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, payable on March 1, 2022 to stockholders of record as of the close of business on February 18, 2022.

Noncash Investment Activity

Noncash investing activities for the three months ended December 31, 2021 was approximately $ 125 million related to the acquisition of music publishing rights and music catalogs, net during the three months ended December 31, 2021.

The corresponding notes payable balance is reflected as other current liabilities within the Company’s consolidated balance sheet at December 31, 2021.

COVID-19 Pandemic

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

Government-imposed mandates limiting public assembly and restrictions on non-essential businesses have adversely impacted the Company’s operations for the three and nine months ended June 30, 2021 and June 30, 2020, including touring and live events.

While global vaccination efforts are underway and businesses are beginning to reopen, the continued impact of COVID-19, including any increases in infection rates, new variants and renewed governmental action to slow the spread of COVID-19 cannot be predicted.

As such, it is unclear how long the global pandemic will last and to what extent it will impact demand for the Company’s music and related services.

Government-imposed mandates limiting public assembly and restrictions on non-essential businesses have adversely impacted the Company’s operations for the three months ended December 31, 2021 and December 31, 2020, including touring and live events.

For the three months ended December 31, 2021, revenues improved due to the ongoing recovery of certain COVID-19 impacted revenue streams despite a rise in COVID-19 cases associated with the Omicron variant.

The continued impact of COVID-19, including increases in infection rates, new variants, renewed governmental action to slow the spread of COVID-19 and to what extent it will impact the Company’s music and related services cannot be predicted.

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

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

In accordance with the fair value hierarchy, described above, the following tables show the fair value of the Company’s financial instruments that are required to be measured at fair value as of June 30, 2021 and September 30, 2020.

Fair Value Measurements as of June 30, 2021

Fair Value Measurements as of December 31, 2021

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

(in millions)

Other Current Assets:

Foreign Currency Forward Exchange Contracts (a) $ — $ 2 $ — $ 2

Other Current Liabilities:

Contractual Obligations (a) — — ( 4 ) ( 4 )

Contractual Obligations (b) — — ( 7 ) ( 7 )

Other Noncurrent Assets:

Equity Method Investment (b) — 54 — 54

Equity Investment with Readily Determinable Fair Value (c) 39 — — 39

Equity Investments with Readily Determinable Fair Value (d) 72 — — 72

Other Noncurrent Liabilities:

Contractual Obligations (a) — — ( 13 ) ( 13 )

Interest Rate Swaps (d) — ( 26 ) — ( 26 )

Contractual Obligations (b) — — ( 10 ) ( 10 )

Interest Rate Swaps (e) — ( 13 ) — ( 13 )

Total $ 72 $ ( 11 ) $ ( 17 ) $ 44

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Other Current Liabilities:

Contractual Obligations (a) $ — $ — $ ( 2 ) $ ( 2 )

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

Other Noncurrent Assets:

Equity Method Investment (b) — 47 — 47

Equity Method Investment (c) 26 — — 26

Equity Investment with Readily Determinable Fair Value (d) 37 — — 37

Other Noncurrent Liabilities:

Contractual Obligations (a) — — ( 4 ) ( 4 )

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

Contractual Obligations (b) — — ( 15 ) ( 15 )

Interest Rate Swaps (e) — ( 22 ) — ( 22 )

Total $ 63 $ ( 22 ) $ ( 19 ) $ 22

______________________________________

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

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

(b) This represents contingent consideration related to a fiscal 2020 acquisition.

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

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

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

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

(c) This represents an equity investment with a readily determinable fair value that was acquired and subsequently became publicly traded during the nine months ended June 30, 2021.

The Company has measured its investment to fair value in accordance with ASC 321, Investments—Equity Securities, based on quoted prices in active markets.

The Company recognized an unrealized gain on this equity investment of $ 7 million and $ 19 million for the three and nine months ended June 30, 2021, respectively, which was recorded as other income in the consolidated statements of operations.

(d) The fair value of the interest rate swaps is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay as of June 30, 2021 for contracts involving the same attributes and maturity dates.

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

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

In November 2021, the investment was reclassified to an equity investment with a readily determinable fair value.

(d) These represent equity investments with a readily determinable fair value.

The Company has measured its investments to fair value in accordance with ASC 321, Investments—Equity Securities, based on quoted prices in active markets.

(e) The fair value of the interest rate swaps is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay as of December 31, 2021 for contracts involving the same attributes and maturity dates.

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

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Additions ( 2 )

Balance at June 30, 2021 $ ( 17 )

Additions to net liabilities during the nine months ended June 30, 2021 include a measurement period adjustment of $ 7 million to contingent consideration for a fiscal 2020 acquisition.

Balance at December 31, 2021 $ ( 17 )

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

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

The Company did not record any impairment charges on these investments during the three and nine months ended June 30, 2021 and 2020.

In addition, there were no observable price changes events that were completed during the three and nine months ended June 30, 2021 and 2020.

The Company did not record any impairment charges on these investments during the three months ended December 31, 2021 and 2020.

In addition, there were no observable price changes events that were completed during the three months ended December 31, 2021 and 2020.

Fair Value of Debt

Based on the level of interest rates prevailing at June 30, 2021, the fair value of the Company’s debt was $ 3.383 billion.

Based on the level of interest rates prevailing at December 31, 2021, the fair value of the Company’s debt was $ 3.875 billion.

Based on the level of interest rates prevailing at September 30, 2021, the fair value of the Company’s debt was $ 3.412 billion.

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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 1. Financial Statements