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Item 2. Management’s Discussion and Analysis

2022-02-08 compared with 2021-08-03 · 240 added, 557 removed, 415 unchanged (66% of the section changed)

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

You should read the following discussion of our results of operations and financial condition with the unaudited interim financial statements included elsewhere in this Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2021 (the “Quarterly Report”).

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

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Forward-looking statements include, without limitation, all matters that are not historical facts.

They appear in a number of places throughout this Quarterly Report and include, without limitation, our ability to compete in the highly competitive markets in which we operate, statements regarding our ability to develop talent and attract future talent, our ability to reduce future capital expenditures, our ability to monetize our music, including through new distribution channels and formats to capitalize on the growth areas of the music entertainment industry, our ability to effectively deploy our capital, the development of digital music and the effect of digital distribution channels on our business, including whether we will be able to achieve higher margins from digital sales, the success of strategic actions we are taking to accelerate our transformation as we redefine our role in the music entertainment industry, the effectiveness of our ongoing efforts to reduce overhead expenditures and manage our variable and fixed cost structure and our ability to generate expected cost savings from such efforts, our success in limiting piracy, the growth of the music entertainment industry and the effect of our and the industry’s efforts to combat piracy on the industry, our intention to pay dividends or repurchase or retire our outstanding debt or notes in open market purchases, privately or otherwise, the impact on us of potential strategic transactions, our ability to fund our future capital needs and the effect of litigation on us.

They appear in a number of places throughout this Quarterly Report and include, without limitation, our ability to compete in the highly competitive markets in which we operate, statements regarding our ability to develop talent and attract future talent, our ability to reduce future capital expenditures, our ability to monetize our music, including through new distribution channels and formats to capitalize on the growth areas of the music entertainment industry, our ability to effectively deploy our capital, the development of digital music and the effect of digital distribution channels on our business, including whether we will be able to achieve higher margins from digital sales, the success of strategic actions we are taking to accelerate our transformation as we redefine our role in the music entertainment industry, the effectiveness of our ongoing efforts to reduce overhead expenditures and manage our variable and fixed cost structure and our ability to generate expected cost savings from such efforts, our success in limiting piracy, the growth of the music entertainment industry and the effect of our and the industry’s efforts to combat piracy on the industry, our intention and ability to pay dividends or repurchase or retire our outstanding debt or notes in open market purchases, privately or otherwise, the impact on us of potential strategic transactions, our ability to fund our future capital needs and the effect of litigation on us.

Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control.

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Factors that could cause actual results and outcomes to differ from those reflected in forward-looking statements include, without limitation:

• risks related to the effects of natural or man-made disasters, including pandemics such as COVID-19;

• our ability to identify, sign and retain recording artists and songwriters and the existence or absence of superstar releases;

• our inability to compete successfully in the highly competitive markets in which we operate;

• our ability to identify, sign and retain recording artists and songwriters and the existence or absence of superstar releases;

• slower growth in streaming adoption and revenue;

• our dependence on a limited number of digital music services for the online distribution and marketing of our music and their ability to significantly influence the pricing structure for online music stores;

• the ability to further develop a successful business model applicable to a digital environment and to enter into artist services and expanded-rights deals with recording artists in order to broaden our revenue streams in growing segments of the music entertainment business;

• the popular demand for particular recording artists and/or songwriters and music and the timely delivery to us of music by major recording artists and/or songwriters;

• risks related to the effects of natural or man-made disasters, including pandemics such as COVID-19;

• the diversity and quality of our recording artists, songwriters and releases;

• slower growth in streaming adoption and revenue;

• trends, developments or other events in some foreign countries in which we operate;

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• an impairment in the carrying value of goodwill or other intangible and long-lived assets;

• our failure to have full control and ability to direct the operations we conduct through joint ventures;

• the impact of, and risks inherent in, acquisitions or other business combinations;

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• legislation limiting the terms by which an individual can be bound under a “personal services” contract;

• new legislation that affects the terms of our contracts with recording artists and songwriters;

• a potential loss of catalog if it is determined that recording artists have a right to recapture U.S.

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• the ability to generate sufficient cash to service all of our indebtedness, and the risk that we may be forced to take other actions to satisfy our obligations under our indebtedness, which may not be successful;

• the fact that our debt agreements contain restrictions that limit our flexibility in operating our business;

• the fact that our debt agreements contain restrictions that may limit our flexibility in operating our business;

• the significant amount of cash required to service our indebtedness and the ability to generate cash or refinance indebtedness as it becomes due depends on many factors, some of which are beyond our control;

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

• risks related to other factors discussed under “Risk Factors” of our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2021 and June 30, 2021, and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.

• risks related to other factors discussed under “Risk Factors” of this Quarterly Report and in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.

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

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

Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation,

other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise.

Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in

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

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

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

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

The offering consisted entirely of secondary shares sold by Access and certain related selling stockholders.

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

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

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

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

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

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• Results of operations.

This section provides an analysis of our results of operations for the three and nine months ended June 30, 2021 and June 30, 2020.

This section provides an analysis of our results of operations for the three months ended December 31, 2021 and December 31, 2020.

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

• Financial condition and liquidity.

This section provides an analysis of our cash flows for the nine months ended June 30, 2021 and June 30, 2020, as well as a discussion of our financial condition and liquidity as of June 30, 2021.

This section provides an analysis of our cash flows for the three months ended December 31, 2021 and December 31, 2020, as well as a discussion of our financial condition and liquidity as of December 31, 2021.

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

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We consider OIBDA to be an important indicator of the operational strengths and performance of our businesses.

However, a limitation of the use of OIBDA as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses and other non-operating income (loss).

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

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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.

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, and in December 2021, we acquired 300 Entertainment.

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.

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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;

Our Recorded Music business’ operations includes WMX, a next generation services division that connects artists with fans and amplifies brands in creative, immersive, and engaging ways.

This division includes a rebranded WEA commercial services & marketing network (formerly Warner-Elektra-Atlantic Corporation, or WEA Corp.), which markets, distributes and sells music and video products to retailers and wholesale distributors, as well as acting as the Company’s media and creative content arm.

Our business’ distribution operations also includes 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 A&R and distribution.

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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.

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.

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• Artist services and expanded-rights :

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

the rightsholder receives revenues with respect to our artist services businesses and our participation in expanded rights, including advertising, merchandising such as direct-to-consumer sales, touring, concert promotion, ticketing, sponsorship, fan clubs, artist websites, social publishing, and artist and brand management;

• Licensing :

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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.

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.

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.

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

Assembled over decades, our award-winning catalog includes over 100,000 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, electronic, 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.

Music Publishing revenues are derived from five main sources:

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

• Performance :

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

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

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

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

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

• Mechanical :

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Factors Affecting Results of Operations and Comparability

Fiscal Quarter End

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

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.

For the three months ended December 31, 2021, the revenue benefit of the additional week was approximately $73 million, primarily reflected in Recorded Music streaming revenue.

COVID-19 Pandemic

In January 2020, a new strain of coronavirus, COVID-19 (also referred to as “COVID”), was identified in Wuhan, China.

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

On March 11, 2020, the COVID-19 outbreak (also referred to as “COVID”) was declared a global pandemic by the World Health Organization.

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

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

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

While global vaccination efforts are underway and businesses are beginning to reopen, it is unclear how long the global pandemic will last due to the possibility of new variants, increases in infection rates and renewed government action to slow the spread of the virus, and as such, it cannot be predicted to what extent the global pandemic will continue to impact the demand for our music and related services.

Our results of operations, cash flows and financial condition for both the three and nine months ended June 30, 2021 and June 30, 2020, were adversely affected by the global pandemic despite some recovery in the current quarter as businesses are beginning to reopen.

The Company recognized a one-time $2 million credit loss reserve reversal impacting OIBDA for the three and nine months ended June 30, 2021, compared to one-time charges of $13 million impacting OIBDA and a total of $18 million impacting net income for the nine months ended June 30, 2020.

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

Initial Public Offering

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

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

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

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

Going forward, our results of operations will include expenses associated with being a public company, including auditing, accounting and legal fees and expenses, investor relations expenses, increased directors’

fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses.

For the three and nine months ended June 30, 2021, costs associated with being a public company were $3 million and $9 million, respectively.

Senior Management Free Cash Flow Plan

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

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

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

We incurred non-cash stock-based compensation expense and other related expenses of $14 million and $440 million for the three months ended June 30, 2021 and June 30, 2020, respectively, and $36 million and $600 million for the nine months ended June 30, 2021 and June 30, 2020, respectively.

However, the disruption from the COVID-19 pandemic, including the disruption caused by the Omicron variant, accelerated growth of other revenue streams such as fitness and interactive gaming (including augmented reality and virtual reality), which may continue to grow.

It is unclear how long the global pandemic will last due to the possibility of new variants, increases in infection rates and renewed government action to slow the spread of the virus, and as such, it cannot be predicted to what extent the global pandemic will continue to impact the demand for our music and related services.

Our results of operations, cash flows and financial condition at and for both the three months ended December 31, 2021and 2020 were adversely affected by the global pandemic despite a partial recovery starting in fiscal year 2021 as businesses began to reopen and concerts and other live music resumed.

For both the three months ended December 31, 2021 and 2020, costs recognized by the Company attributable to COVID were not significant.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2021 Compared with Three Months Ended June 30, 2020

Three Months Ended December 31, 2021 Compared with Three Months Ended December 31, 2020

Consolidated Results

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For the Three Months Ended

June 30, 2021 vs.

December 31, 2021 vs.

2021 2020 $ Change % Change

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Total Revenues

Total revenues increased by $330 million, or 33%, to $1,340 million for the three months ended June 30, 2021 from $1,010 million for the three months ended June 30, 2020.

The increase includes $49 million of favorable currency exchange fluctuations.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 86% and 14% of total revenue for the three months ended June 30, 2021, respectively, and 85% and 15% of total revenue for the three months ended June 30, 2020, respectively.

Total revenues increased by $279 million, or 21%, to $1,614 million for the three months ended December 31, 2021 from $1,335 million for the three months ended December 31, 2020.

The quarter included an additional week, primarily reflected in Recorded Music streaming revenue.

Additionally, the quarter included the impact of a new deal with one of our digital partners impacting Recorded Music streaming revenue.

These items were partially offsetting and adjusting for these items, total revenue was up 18%.

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

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 86% and 14% of total revenue for the three months ended December 31, 2021, respectively, and 87% and 13% of total revenue for the three months ended December 31, 2020, respectively.

Prior to intersegment eliminations, U.S.

and international revenues represented 44% and 56% of total revenues for the three months ended June 30, 2021, respectively, and 43% and 57% of total revenues for the three months ended June 30, 2020, respectively.

Total digital revenues after intersegment eliminations increased by $208 million, or 29%, to $928 million for the three months ended June 30, 2021 from $720 million for the three months ended June 30, 2020.

Total digital revenues represented 69% and 71% of consolidated revenues for the three months ended June 30, 2021 and June 30, 2020, respectively.

Prior to intersegment eliminations, total digital revenues for the three months ended June 30, 2021 were comprised of U.S.

and international revenues represented 45% and 55% of total revenues for the three months ended December 31, 2021, respectively, and 43% and 57% of total revenues for the three months ended December 31, 2020, respectively.

Total digital revenues after intersegment eliminations increased by $177 million, or 21%, to $1,002 million for the three months ended December 31, 2021 from $825 million for the three months ended December 31, 2020.

Total streaming revenue increased 23% driven by growth across Recorded Music and Music Publishing, including revenue from emerging streaming platforms.

Total digital revenues remained constant at 62% of consolidated revenues for each of the three months ended December 31, 2021 and December 31, 2020.

Prior to intersegment eliminations, total digital revenues for the three months ended December 31, 2021 were comprised of U.S.

revenues of $514 million and international revenues of $489 million, respectively, or 51% and 49% of total digital revenues, respectively.

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

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

and international revenues.

Recorded Music revenues increased by $291 million, or 34%, to $1,152 million for the three months ended June 30, 2021 from $861 million for the three months ended June 30, 2020.

The increase includes $42 million of favorable currency exchange fluctuations.

Recorded Music revenues were $504 million and $358 million, or 44% and 42%, of consolidated Recorded Music revenues for the three months ended June 30, 2021 and June 30, 2020, respectively.

International Recorded Music revenues were $648 million and $503 million, or 56% and 58%, of consolidated Recorded Music revenues for the three months ended June 30, 2021 and June 30, 2020, respectively.

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

Digital revenue increased by $185 million as a result of the continued growth in streaming services, including growth in emerging streaming platforms such as Facebook, TikTok, and Peloton, strength of releases including the current year release from Cardi B and Masked Wolf as well as carryover success from Dua Lipa, Ed Sheeran, and Ava Max.

Revenue from streaming services grew by $192 million, or 33%, to $781 million for the three months ended June 30, 2021 from $589 million for the three months ended June 30, 2020.

Digital revenue growth was partially offset by decreases in digital download and other digital declines of $7 million, or 17%, to $34 million for the three months ended June 30, 2021 from $41 million for the three months ended June 30, 2020 due to the continued shift to streaming services.

Physical revenue increased by $79 million, or 155%, primarily from higher sales due to an increased demand for vinyl products, increasing retail sales as businesses began to recover from the COVID disruption, as well as the favorable impact of foreign currency exchange rates of $4 million.

Artist services and expanded-rights revenue increased by $9 million primarily due to higher direct-to-consumer merchandising revenue at EMP and the favorable impact of foreign currency exchange rates of $8 million, partially offset by the decrease in touring activity resulting from the COVID disruption.

Licensing revenue increased by $18 million mainly due to higher broadcast fees and synchronization revenue as businesses began to recover from the COVID disruption, and favorable foreign currency exchange rates.

Music Publishing revenues increased by $40 million, or 27%, to $189 million for the three months ended June 30, 2021 from $149 million for the three months ended June 30, 2020.

Music Publishing revenues were $90 million and $74 million, or 48% and 50%, of consolidated Music Publishing revenues for the three months ended June 30, 2021 and June 30, 2020, respectively.

International Music Publishing revenues were $99 million and $75 million or 52% and 50%, of consolidated Music Publishing revenues for the three months ended June 30, 2021 and June 30, 2020, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $23 million, synchronization revenue of $12 million, and mechanical revenue of $5 million.

The increase in digital revenue of 26% to $113 million is primarily due to increases in streaming revenue driven by the continued growth in streaming services and timing of new digital deals, partially offset by a shift in the collection of certain writer’s share income from certain digital service providers.

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

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

Recorded Music revenues increased by $225 million, or 19%, to $1,386 million for the three months ended December 31, 2021 from $1,161 million for the three months ended December 31, 2020.

Adjusted for the benefit of the additional week and the impact of the new deal with one of our digital partners, Recorded Music revenue was up 16%.

The increase includes $15 million of unfavorable currency exchange fluctuations.

Recorded Music revenues were $608 million and $481 million, or 44% and 41% of consolidated Recorded Music revenues, for the three months ended December 31, 2021 and December 31, 2020, respectively.

International Recorded Music revenues were $778 million and $680 million, or 56% and 59% of consolidated Recorded Music revenues, for the three months ended December 31, 2021 and December 31, 2020, respectively.

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

Digital revenue increased by $143 million as a result of the continued growth in streaming services, including growth in emerging streaming platforms, strength of releases including a new release from Ed Sheeran as well as carryover success from Dua Lipa, Ed Sheeran, YoungBoy Never Broke Again and Ava Max.

Revenue from streaming services grew by $144 million, or 21%, to $836 million for the three months ended December 31, 2021 from $692 million for the three months ended December 31, 2020.

Adjusted for the benefit of the additional week and the impact of the new deal with one of our digital partners, Recorded Music streaming revenue was up 17%.

Streaming revenue growth was partially offset by a decline in download and other digital revenues of $1 million, or 3%, to $34 million for the three months ended December 31, 2021 from $35 million for the three months ended December 31, 2020 due to the continued shift to streaming services.

Artist services and expanded-rights revenue increased by $52 million primarily due to higher merchandising revenue and touring activity, both of which were disrupted by COVID in the prior-year quarter, partially offset by an unfavorable impact of foreign currency exchange rates of $6 million.

Physical revenue increased by $21 million, or 12%, primarily from higher sales due to the success of new releases, an increased demand for vinyl products and COVID disruption in the prior-year quarter, partially offset by an unfavorable impact of foreign currency exchange rates of $3 million.

Licensing revenue increased by $9 million, mainly due to higher synchronization and other licensing revenue, as businesses continued to recover from COVID disruption.

Music Publishing revenues increased by $54 million, or 31%, to $229 million for the three months ended December 31, 2021 from $175 million for the three months ended December 31, 2020.

Music Publishing revenues were $115 million and $91 million, or 50% and 52% of consolidated Music Publishing revenues, for the three months ended December 31, 2021 and December 31, 2020, respectively.

International Music Publishing revenues were $114 million and $84 million, or 50% and 48% of consolidated Music Publishing revenues, for the three months ended December 31, 2021 and December 31, 2020, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $34 million, or 34%, synchronization revenue of $9 million, performance revenue of $8 million and mechanical revenue of $3 million.

The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services, including emerging streaming platforms, and timing of new digital deals, partially offset by a shift in the collection of certain writer’s share income from certain digital service providers.

This change has no impact on Music Publishing OIBDA, but results in a slight improvement to OIBDA margin.

The increase in synchronization revenue is attributable to higher motion picture and commercial income.

The increase in mechanical revenue is a result of businesses beginning to recover from the COVID disruption.

Performance revenue was flat due to the ongoing COVID impact on bars, restaurants, concerts and live events, partially offset by the favorable impact of foreign currency exchange rates.

Revenue from streaming services grew by $35 million, or 37%, to $129 million for the three months ended December 31, 2021 from $94 million for the three months ended December 31, 2020.

The increase in synchronization revenue is attributable to higher television, motion picture and commercial income and COVID disruption in the prior-year quarter.

Performance revenue increased as bars, restaurants, concerts and live events continued to recover from COVID disruption.

Mechanical revenue increased as businesses continued to recover from COVID disruption and from strong physical sales.

Revenue by Geographical Location

revenue increased by $162 million, or 38%, to $594 million for the three months ended June 30, 2021 from $432 million for the three months ended June 30, 2020.

revenue increased by $151 million, or 26%, to $723 million for the three months ended December 31, 2021 from $572 million for the three months ended December 31, 2020.

Recorded Music revenue increased by $127 million, or 26%.

The primary driver was the increase of U.S.

Recorded Music digital revenue of $85 million driven by the continued growth in streaming services.

Recorded Music digital revenue of $80 million, or 22%, driven by the continued growth in streaming services.

Recorded Music streaming revenue increased by $81 million, or 24%, partially offset by $1 million of download and other digital declines.

Recorded Music artist services and expanded-rights revenue increased $23 million primarily driven by higher merchandising and advertising revenues.

Increases are also attributable to the increase in U.S.

Recorded Music physical revenue of $43 million from higher sales due to an increased demand for vinyl products and increasing retail sales as businesses began to recover from the COVID disruption.

Recorded Music artist services and expanded-rights revenue increased $13 million primarily driven by higher advertising and platform revenues from recent acquisitions.

Recorded Music physical revenue of $23 million from higher sales due to the success of new releases, an increased demand for vinyl products and

COVID disruption in the prior-year quarter.

The increase in licensing revenue of $1 million is due to higher synchronization activity.

Music Publishing revenue increased by $16 million, or 22%, to $90 million for the three months ended June 30, 2021 from $74 million for the three months ended June 30, 2020.

Music Publishing revenue increased by $24 million, or 26%, to $115 million for the three months ended December 31, 2021 from $91 million for the three months ended December 31, 2020.

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

Music Publishing of $10 million in digital revenue due to the continued growth in streaming services and timing of new digital deals.

The increase in synchronization revenue of $6 million is due to higher motion picture and commercial income.

The increase in performance revenue of $2 million is a result of businesses beginning to recover from the COVID disruption.

Increases are partially offset by the decrease in mechanical revenue of $1 million driven by the continuing shift to streaming services.

International revenue increased by $169 million, or 29%, to $747 million for the three months ended June 30, 2021 from $578 million for the three months ended June 30, 2020.

Excluding the favorable impact of foreign currency exchange rates, International revenue increased by $120 million, or 19%.

International Recorded Music revenue increased by $145 million primarily due to increases in digital revenue of $100 million, physical revenue of $36 million, and licensing revenue of $13 million, partially offset by the decrease in artist services and expanded-rights revenue of $4 million.

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

International Recorded Music physical revenue increased by $36 million due to the increased demand for vinyl products, increasing retail sales as businesses began to recover from the COVID disruption, and favorable impact of foreign currency exchange rates.

International Recorded Music licensing revenue increased by $13 million due to higher broadcast fees, and favorable impact of foreign currency exchange rates.

International Recorded Music artist services and expanded-rights revenue decreased by $4 million primarily due to the decrease in touring activity resulting from the COVID disruption.

This was offset by growth in EMP direct-to-consumer merchandise revenue and the favorable impact of foreign currency exchange rates of $8 million.

International Music Publishing revenue increased from the prior-year quarter by $24 million, or 32%, to $99 million for the three months ended June 30, 2021 from $75 million for the three months ended June 30, 2020.

This was primarily driven by the increase in digital revenue of $13 million, synchronization revenue of $6 million, and mechanical revenue of $6 million, partially offset by the decrease in performance revenue of $2 million.

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

Higher synchronization revenue is primarily driven by higher commercial income.

The increase in mechanical revenue is a result of businesses beginning to recover from the COVID disruption and favorable impact of foreign currency exchange rates.

The decline in performance revenue is due to the impact from the COVID disruption.

Music Publishing of $16 million in digital revenue due to the continued growth in streaming services, including emerging streaming platforms, and timing of new digital deals, partially offset by a shift in the collection of writer’s share of U.S.

digital performance income from certain digital service providers.

Music Publishing streaming revenue increased by $16 million, or 29%.

The increase in synchronization revenue of $7 million is due to higher television, motion picture and commercial income and COVID disruption in the prior-year quarter.

Mechanical revenue increased by $1 million and performance revenue remained constant.

International revenue increased by $128 million, or 17%, to $892 million for the three months ended December 31, 2021 from $764 million for the three months ended December 31, 2020.

Excluding the unfavorable impact of foreign currency exchange rates, International revenue increased by $144 million, or 19%.

International Recorded Music revenue increased by $98 million primarily due to increases in digital revenue of $63 million, artist services and expanded-rights revenue of $29 million and licensing revenue of $8 million, partially offset by the decrease in physical revenue of $2 million.

International Recorded Music digital revenue increased due to a $63 million, or 18%, increase in streaming revenue.

International Recorded Music artist services and expanded-rights revenue increased by $29 million reflecting an increase in concert promotion and merchandise revenue, both of which were disrupted by COVID in the prior-year quarter, partially offset by the unfavorable impact of foreign currency exchange rates of $6 million.

International Recorded Music licensing revenue increased by $8 million primarily due to other licensing revenue as businesses continued to recover from COVID disruption.

International Recorded Music physical revenue decreased by $2 million primarily driven by an unfavorable impact of foreign currency exchange rates.

International Music Publishing revenue increased from the prior-year quarter by $30 million, or 36%, to $114 million for the three months ended December 31, 2021 from $84 million for the three months ended December 31, 2020.

This was primarily driven by the increase in digital revenue of $18 million, performance revenue of $8 million, mechanical revenue of $2 million and synchronization revenue of $2 million.

International Music Publishing streaming revenue increased by $19 million, or 50%, partially offset by $1 million of download and other digital declines.

Performance revenue increased as businesses continued to recover from COVID disruption.

Mechanical revenue increased as businesses continued to recover from COVID disruption and from strong physical sales.

Higher synchronization revenue is primarily driven by higher motion picture and commercial income and COVID disruption in the prior-year quarter.

Cost of revenues

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December 31, 2021 vs.

2021 2020 $ Change % Change

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Total cost of revenues $ 818 $ 686 $ 132 19 %

Artist and repertoire costs increased by $77 million, to $444 million for the three months ended June 30, 2021 from $367 million for the three months ended June 30, 2020.

Artist and repertoire costs as a percentage of revenue decreased to 33% for the three months ended June 30, 2021 from 36% for the three months ended June 30, 2020.

The overall decrease as a percentage of revenue is due to revenue mix.

Product costs increased by $77 million, to $237 million for the three months ended June 30, 2021 from $160 million for the three months ended June 30, 2020.

Product costs as a percentage of revenue increased to 18% for the three months ended June 30, 2021 from 16% for the three months ended June 30, 2020.

The overall increase as a percentage of revenue is due to revenue mix, primarily increases in physical revenue.

Artist and repertoire costs increased by $68 million, to $493 million for the three months ended December 31, 2021 from $425 million for the three months ended December 31, 2020.

Artist and repertoire costs as a percentage of revenue decreased to 31% for the three months ended December 31, 2021 from 32% for the three months ended December 31, 2020, primarily due to timing of artist and repertoire investments.

Product costs increased by $64 million, to $325 million for the three months ended December 31, 2021 from $261 million for the three months ended December 31, 2020.

Product costs as a percentage of revenue remained constant at 20% for each of the three months ended December 31, 2021 and December 31, 2020.

Selling, general and administrative expenses

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December 31, 2021 vs.

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______________________________________

(1) Includes depreciation expense of $19 million and $15 million for the three months ended June 30, 2021 and for the three months ended June 30, 2020, respectively.

Total selling, general and administrative expense decreased by $432 million, or 50%, to $437 million for the three months ended June 30, 2021 from $869 million for the three months ended June 30, 2020.

Expressed as a percentage of revenue, selling, general and administrative expense decreased to 33% for the three months ended June 30, 2021 from 86% for the three months ended June 30, 2020.

This is primarily due to lower non-cash stock-based compensation and other related expenses of $426 million, the

prior-year quarter management agreement termination fee and IPO related expenses totaling $86 million.

Excluding the expense associated with non-cash stock-based compensation and other related expenses, the prior-year quarter management agreement termination fee and IPO related expenses, selling, general and administrative expense as a percentage of revenue decreased to 32% for the three months ended June 30, 2021 from 34% for the three months ended June 30, 2020.

General and administrative expense decreased by $494 million to $223 million for the three months ended June 30, 2021 from $717 million for the three months ended June 30, 2020.

The decrease in general and administrative expense was mainly due to lower non-cash stock-based compensation and other related expenses of $426 million, the prior-year quarter management agreement termination fee and IPO related expenses totaling $86 million, and credit loss reserve reversal, partially offset by increased employee related costs.

Expressed as a percentage of revenue, general and administrative expense decreased to 17% for the three months ended June 30, 2021 from 71% for the three months ended June 30, 2020.

Excluding the expense associated with non-cash stock-based compensation and other related expenses, the prior-year quarter management agreement termination fee and IPO related expenses, general and administrative expenses as a percentage of revenue decreased to 16% for the three months ended June 30, 2021 from 19% for the three months ended June 30, 2020 due to COVID related revenue impacts in the prior-year quarter.

Selling and marketing expense increased by $57 million, or 43%, to $190 million for the three months ended June 30, 2021 from $133 million for the three months ended June 30, 2020.

Expressed as a percentage of revenue, selling and marketing expense increased to 14% for the three months ended June 30, 2021 from 13% for the three months ended June 30, 2020 due to an increase in spend as a percentage of revenue resulting from an increase in variable marketing in Recorded Music driven by the COVID disruption in the prior-year quarter.

Distribution expense was $24 million for the three months ended June 30, 2021 and $19 million the three months ended June 30, 2020.

Expressed as a percentage of revenue, distribution expense remained constant at 2% for both the three months ended June 30, 2021 and the three months ended June 30, 2020.

(1) Includes depreciation expense of $21 million and $19 million for the three months ended December 31, 2021 and December 31, 2020, respectively.

Total selling, general and administrative expense increased by $96 million, or 24%, to $497 million for the three months ended December 31, 2021 from $401 million for the three months ended December 31, 2020.

Expressed as a percentage of revenue, selling, general and administrative expense increased to 31% for the three months ended December 31, 2021 from 30% for the three months ended December 31, 2020.

This is primarily due to higher non-cash stock-based compensation and other related expenses from a one-time equity grant and the timing of expense recognition for new annual equity grants in the quarter of $18 million.

General and administrative expense increased by $53 million to $242 million for the three months ended December 31, 2021 from $189 million for the three months ended December 31, 2020.

The increase in general and administrative expense was mainly due to higher non-cash stock-based compensation and other related expenses from a one-time equity grant and the timing of expense recognition for new annual equity grants in the quarter of $18 million, increased employee related costs, including the impact of the additional week, unfavorable movements in foreign currency exchange rates of $10 million and increased expenses related to transformation initiatives and acquisition transaction costs.

Expressed as a percentage of revenue, general and administrative expense increased to 15% for the three months ended December 31, 2021 from 14% for the three months ended December 31, 2020 due to the factors described above.

Selling and marketing expense increased by $36 million, or 20%, to $214 million for the three months ended December 31, 2021 from $178 million for the three months ended December 31, 2020.

Expressed as a percentage of revenue, selling and marketing expense remained constant at 13% for each of the three months ended December 31, 2021 and December 31, 2020.

Distribution expense was $41 million for the three months ended December 31, 2021 and $34 million the three months ended December 31, 2020.

Expressed as a percentage of revenue, distribution expense remained constant at 3% for each of the three months ended December 31, 2021 and December 31, 2020.

Reconciliation of Net Income Attributable to Warner Music Group Corp.

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December 31, 2021 vs.

2021 2020 $ Change % Change

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

Net income attributable to Warner Music Group Corp.

$ 187 $ 98 $ 89 91 %

Income attributable to noncontrolling interest 1 1 — — %

Net income (loss) 61 (519) 580 — %

Net income 188 99 89 90 %

Income tax expense 75 35 40 — %

Income (loss) before income taxes 102 (468) 570 — %

Other expense 18 3 15 — %

Income before income taxes 263 134 129 96 %

Other (income) expense (54) 31 (85) — %

Interest expense, net 30 31 (1) -3 %

Loss on extinguishment of debt 12 — 12 — %

Operating income (loss) 162 (433) 595 — %

Operating income 239 196 43 22 %

Amortization expense 60 52 8 15 %

1 unchanged sentence

OIBDA $ 320 $ 267 $ 53 20 %

OIBDA increased by $612 million to $241 million for the three months ended June 30, 2021 as compared to a loss of $371 million for the three months ended June 30, 2020 as a result of higher revenues and lower expense associated with non-cash stock-based compensation and other related expenses, the prior-year quarter management agreement termination fee and IPO related expenses, partially offset by higher cost of revenues.

Expressed as a percentage of total revenue, OIBDA margin increased to 18% for the three months ended June 30, 2021 from (37)% for the three months ended June 30, 2020.

Excluding the expense associated with non-cash stock-based compensation and other related expenses, the prior-year quarter management agreement termination fee and IPO related expenses, OIBDA margin as a percentage of revenue increased to 19% for the three months ended June 30, 2021 from 15% for the three months ended June 30, 2020 due to strong operating performance and margin improvement associated with revenue mix.

OIBDA increased by $53 million to $320 million for the three months ended December 31, 2021 as compared to $267 million for the three months ended December 31, 2020 as a result of higher revenues, partially offset by higher cost of revenues and selling, general and administrative expenses.

Expressed as a percentage of total revenue, OIBDA margin remained constant at 20% for each of the three months ended December 31, 2021 and December 31, 2020 due to strong operating performance, which was offset by growth of lower-margin COVID-impacted revenue streams and increase in non-cash stock-based compensation and other related expenses as described above.

Depreciation expense

Our depreciation expense increased by $4 million, or 27%, to $19 million for the three months ended June 30, 2021 from $15 million for the three months ended June 30, 2020.

The increase is primarily due to an increase in capital spending and new assets being placed into service.

Our depreciation expense increased by $2 million, or 11%, to $21 million for the three months ended December 31, 2021 from $19 million for the three months ended December 31, 2020.

The increase is primarily due to an increase in IT capital spending and assets being placed into service.

Amortization expense

Our amortization expense increased by $13 million, or 28%, to $60 million for the three months ended June 30, 2021 from $47 million for the three months ended June 30, 2020.

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

Operating income (loss)

Our operating income increased by $595 million to $162 million for the three months ended June 30, 2021 from operating loss of $433 million for the three months ended June 30, 2020.

Our amortization expense increased by $8 million, or 15%, to $60 million for the three months ended December 31, 2021 from $52 million for the three months ended December 31, 2020.

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

Operating income

Our operating income increased by $43 million to $239 million for the three months ended December 31, 2021 from $196 million for the three months ended December 31, 2020.

The increase in operating income was due to the factors that led to the increase in OIBDA, partially offset by higher depreciation and amortization as noted above.

Loss on extinguishment of debt

We recorded a loss on extinguishment of debt in the amount of $12 million for the three months ended June 30, 2021 which represents the premium paid on early redemption and unamortized deferred financing costs related to the redemption of the 5.500% Notes.

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

Interest expense, net

Our interest expense, net, decreased to $30 million for the three months ended June 30, 2021 from $32 million for the three months ended June 30, 2020 due to lower interest rates resulting from debt refinancing, partially offset by a higher principal balance.

Other expense

Other expense for the three months ended June 30, 2021 primarily includes foreign currency losses on our Euro-denominated debt of $12 million and unrealized losses of $5 million on the mark-to-market of equity investments.

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

Our interest expense, net, decreased to $30 million for the three months ended December 31, 2021 from $31 million for the three months ended December 31, 2020 due to lower interest rates resulting from debt refinancing, partially offset by a higher principal balance due to the issuance of senior secured notes.

Other (income) expense

Other income for the three months ended December 31, 2021 primarily includes foreign currency gains on our Euro-denominated debt of $31 million, unrealized gains of $8 million on the mark-to-market of equity investments, currency exchange gains on our intercompany loans of $6 million and unrealized gains on hedging activity of $4 million.

This compares to foreign

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

Income tax expense

Our income tax expense decreased by $10 million to $41 million for the three months ended June 30, 2021 from $51 million for the three months ended June 30, 2020.

The change of $10 million in income tax expense is due to timing of expense and the impact of the Company’s IPO in the prior-year quarter, partially offset by the impact of higher pre-tax income and the change in the U.K.

future statutory tax rate recognized in the current-year quarter.

Net income (loss)

Net income increased by $580 million to $61 million for the three months ended June 30, 2021 from a net loss of $519 million for the three months ended June 30, 2020 as a result of the factors described above.

Our income tax expense increased by $40 million to $75 million for the three months ended December 31, 2021 from $35 million for the three months ended December 31, 2020.

The change of $40 million in income tax expense is due to the impact of higher pre-tax income in the current-year quarter.

Net income increased by $89 million to $188 million for the three months ended December 31, 2021 from $99 million for the three months ended December 31, 2020 as a result of the factors described above.

Noncontrolling interest

There was no income attributable to noncontrolling interest for three months ended June 30, 2021 and $1 million of income attributable to noncontrolling interest for the three months ended June 30, 2020.

There was $1 million of income attributable to noncontrolling interest for each of the three months ended December 31, 2021 and December 31, 2020.

Business Segment Results

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December 31, 2021 vs.

2021 2020 $ Change % Change

1 unchanged sentence

Revenues $ 1,386 $ 1,161 $ 225 19 %

Operating income (loss) 197 (160) 357 — %

Operating income 276 223 53 24 %

OIBDA 330 269 61 23 %

8 unchanged sentences

Revenues 1,614 1,335 279 21 %

Operating income (loss) 162 (433) 595 — %

Operating income 239 196 43 22 %

OIBDA 320 267 53 20 %

Recorded Music

Recorded Music revenue increased by $291 million, or 34%, to $1,152 million for the three months ended June 30, 2021 from $861 million for the three months ended June 30, 2020.

Recorded Music revenues were $504 million and $358 million, or 44% and 42%, of consolidated Recorded Music revenues for the three months ended June 30, 2021 and June 30, 2020, respectively.

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

Recorded Music revenue increased by $225 million, or 19%, to $1,386 million for the three months ended December 31, 2021 from $1,161 million for the three months ended December 31, 2020.

Adjusted for the benefit of the additional week and the impact of the new deal with one of our digital partners, Recorded Music revenue was up 16%.

Recorded Music revenues were $608 million and $481 million, or 44% and 41% of consolidated Recorded Music revenues, for the three months ended December 31, 2021 and December 31, 2020, respectively.

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

Cost of revenues

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2021 2020 $ Change % Change

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Total cost of revenues $ 668 $ 574 $ 94 16 %

Recorded Music cost of revenues increased by $129 million, or 30%, to $560 million for the three months ended June 30, 2021 from $431 million for the three months ended June 30, 2020.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs decreased to 28% for the three months ended June 30, 2021 from 31% for the three months ended June 30, 2020.

The decrease is primarily attributable to revenue mix.

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs increased to 21% for the three months ended June 30, 2021 from 19% for the three months ended June 30, 2020.

The overall increase as a percentage of revenue is due to revenue mix, primarily increases in physical revenue.

Recorded Music cost of revenues increased by $94 million, or 16%, to $668 million for the three months ended December 31, 2021 from $574 million for the three months ended December 31, 2020.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs decreased to 25% for the three months ended December 31, 2021 from 27% for the three months ended December 31, 2020.

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

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs increased to 23% for the three months ended December 31, 2021 from 22% for the three months ended December 31, 2020.

The overall increase as a percentage of revenue primarily relates to revenue mix due to an increase in lower-margin artist services and expanded-rights revenue.

Selling, general and administrative expense

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2021 2020 $ Change % Change

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______________________________________

(1) Includes depreciation expense of $14 million and $11 million for the three months ended June 30, 2021 and June 30, 2020, respectively.

Recorded Music selling, general and administrative expense decreased by $204 million, or 36%, to $356 million for the three months ended June 30, 2021 from $560 million for the three months ended June 30, 2020.

The decrease in general and administrative expense was primarily due to lower non-cash stock-based compensation and other related expenses of $279 million and credit loss reserve reversal, partially offset by increased employee related costs.

The increase in selling and marketing expense was primarily due to increased variable marketing spend driven by the COVID disruption in the prior-year quarter.

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

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense decreased to 31% for the three months ended June 30, 2021 from 65% for the three months ended June 30, 2020.

This is primarily due to lower non-cash stock-based compensation and other related expenses of $279 million.

Excluding non-cash stock-based compensation expense and other related expenses, selling, general and administrative expense as a percentage of Recorded Music revenue decreased to 30% for the three months ended June 30, 2021 from 32% for the three months ended June 30, 2020 due to COVID related revenue impacts in the prior-year quarter.

(1) Includes depreciation expense of $14 million and $13 million for the three months ended December 31, 2021 and December 31, 2020, respectively.

Recorded Music selling, general and administrative expense increased by $71 million, or 21%, to $402 million for the three months ended December 31, 2021 from $331 million for the three months ended December 31, 2020.

The increase in general and administrative expense was primarily due to increased employee related costs, unfavorable movements in foreign currency exchange rates of $8 million and increased expenses related to acquisition transaction costs.

The increase in selling and marketing expense was primarily due to increased variable marketing spend on higher revenues and new releases, increased employee related costs and higher travel expenses as limited travel resumed.

The increase in distribution expense was primarily due to higher artist services and expanded-rights revenue.

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense remained constant at 29% for each of the three months ended December 31, 2021 and December 31, 2020.

Operating Income and OIBDA

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2 unchanged sentences

OIBDA $ 330 $ 269 $ 61 23 %

Recorded Music OIBDA increased by $369 million to $250 million for the three months ended June 30, 2021 from a loss of $119 million for the three months ended June 30, 2020 as a result of higher revenues and lower non-cash stock-based compensation and other related expenses of $279 million, partially offset by higher costs of revenue.

Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin increased to 22% for the three months ended June 30, 2021 from (14)% for the three months ended June 30, 2020.

Excluding the expense associated with non-cash stock-based compensation and other related expenses, OIBDA margin increased to 22% for the three months ended June 30, 2021 from 19% for the three months ended June 30, 2020 due to strong operating performance, revenue mix, and the impact of recent acquisitions.

Recorded Music operating income increased by $357 million to $197 million for the three months ended June 30, 2021 from operating loss of $160 million for the three months ended June 30, 2020 due to the factors that led to the increase in Recorded Music OIBDA noted above, partially offset by higher depreciation from new assets placed into service and an increase in amortizable intangible assets related to the recent acquisitions of music-related assets.

Recorded Music OIBDA increased by $61 million to $330 million for the three months ended December 31, 2021 from $269 million for the three months ended December 31, 2020 as a result of higher revenues, partially offset by higher costs of revenue and selling, general and administrative expenses.

Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin increased to 24% for the three months ended December 31, 2021 from 23% for the three months ended December 31, 2020 due to strong operating performance, partially offset by growth of lower-margin COVID-impacted revenue streams in the quarter.

Recorded Music operating income increased by $53 million to $276 million for the three months ended December 31, 2021 from $223 million for the three months ended December 31, 2020 due to the factors that led to the increase in Recorded Music OIBDA noted above, partially offset by higher depreciation from new assets placed into service and an increase in amortizable intangible assets related to the acquisition of music-related assets.

Music Publishing

Music Publishing revenues increased by $40 million, or 27%, to $189 million for the three months ended June 30, 2021 from $149 million for the three months ended June 30, 2020.

Music Publishing revenues were $90 million and $74 million, or 48% and 50%, of consolidated Music Publishing revenues for the three months ended June 30, 2021 and June 30, 2020, respectively.

International Music Publishing revenues were $99 million and $75 million, or 52% and 50%, of consolidated Music Publishing revenues for the three months ended June 30, 2021 and June 30, 2020, respectively.

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

Music Publishing revenues increased by $54 million, or 31%, to $229 million for the three months ended December 31, 2021 from $175 million for the three months ended December 31, 2020.

The overall increase in Music Publishing revenue was driven by growth across all revenue types, including digital, synchronization, performance and mechanical revenue, as described in the “Total Revenues” and “Revenue by Geographical Location” sections above.

Cost of revenues

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2021 2020 $ Change % Change

1 unchanged sentence

Total cost of revenues $ 151 $ 113 $ 38 34 %

Music Publishing cost of revenues increased by $26 million, or 27%, to $122 million for the three months ended June 30, 2021 from $96 million for the three months ended June 30, 2020.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues increased to 65% for the three months ended June 30, 2021 from 64% for the three months ended June 30, 2020.

This increase is primarily attributable to revenue mix, partially offset by lower royalty expense due to a shift in the collection of certain writer’s share income from certain digital service providers .

Music Publishing cost of revenues increased by $38 million, or 34%, to $151 million for the three months ended December 31, 2021 from $113 million for the three months ended December 31, 2020.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues increased to 66% for the three months ended December 31, 2021 from 65% for the three months ended December 31, 2020 primarily attributable to revenue mix .

Selling, general and administrative expense

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General and administrative expense (1) $ 25 $ 22 $ 3 14 %

Total selling, general and administrative expense $ 25 $ 22 $ 3 14 %

______________________________________

(1) Includes depreciation expense of $1 million and $2 million for the three months ended June 30, 2021 and June 30, 2020, respectively.

Music Publishing selling, general and administrative expense increased by $3 million or 14% to $25 million for the three months ended June 30, 2021 from $22 million for the three months ended June 30, 2020.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense decreased to 13% for the three months ended June 30, 2021 from 15% for the three months ended June 30, 2020 due to restructuring and COVID related revenue impacts in the prior-year quarter.

Operating income and OIBDA

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

For the Three Months Ended

June 30, 2021 vs.

2021 2020 $ Change % Change

Operating income $ 21 $ 14 $ 7 50 %

Depreciation and amortization 22 19 3 16 %

OIBDA $ 43 $ 33 $ 10 30 %

Music Publishing OIBDA increased by $10 million, or 30%, to $43 million for the three months ended June 30, 2021 from $33 million for the three months ended June 30, 2020.

Expressed as a percentage of Music Publishing revenue, Music Publishing OIBDA margin increased to 23% for the three months ended June 30, 2021 from 22% for the three months ended June 30, 2020.

The increase was due to revenue mix, lower royalty expense due to a shift in the collection of certain writer’s share income from certain digital service providers, and restructuring in the prior-year quarter.

Music Publishing operating income increased by $7 million to $21 million for the three months ended June 30, 2021 from $14 million for the three months ended June 30, 2020 due to the factors that led to the increase in Music Publishing OIBDA noted above.

Corporate Expenses and Eliminations

Our operating loss from corporate expenses and eliminations decreased by $231 million for the three months ended June 30, 2021 to $56 million from $287 million for the three months ended June 30, 2020, which primarily includes the decrease in non-cash stock-based compensation and other related expenses of $148 million, the prior-year quarter management agreement termination fee and IPO related expenses totaling $86 million, decline in management fees of $3 million, partially offset by higher employee related costs and public company related expenses.

Our OIBDA loss from corporate expenses and eliminations decreased by $233 million for the three months ended June 30, 2021 to $52 million from $285 million for the three months ended June 30, 2020 due to the operating loss factors noted above.

RESULTS OF OPERATIONS

Nine Months Ended June 30, 2021 Compared with Nine Months Ended June 30, 2020

Consolidated Results

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

For the Nine Months Ended

June 30, 2021 vs.

2021 2020 $ Change % Change

Revenue by Type

Digital $ 2,298 $ 1,889 $ 409 22 %

Physical 422 329 93 28 %

Total Digital and Physical 2,720 2,218 502 23 %

Artist services and expanded-rights 431 427 4 1 %

Licensing 221 207 14 7 %

Total Recorded Music 3,372 2,852 520 18 %

Performance 92 114 (22) -19 %

Digital 316 237 79 33 %

Mechanical 36 38 (2) -5 %

Synchronization 105 92 13 14 %

Other 7 7 — — %

Total Music Publishing 556 488 68 14 %

Intersegment eliminations (3) (3) — — %

Total Revenues $ 3,925 $ 3,337 $ 588 18 %

Revenue by Geographical Location

Recorded Music $ 1,454 $ 1,191 $ 263 22 %

Music Publishing 277 242 35 14 %

1,731 1,433 298 21 %

International Recorded Music 1,918 1,661 257 15 %

International Music Publishing 279 246 33 13 %

Total International 2,197 1,907 290 15 %

Intersegment eliminations (3) (3) — — %

Total Revenues $ 3,925 $ 3,337 $ 588 18 %

Total Revenues

Total revenues increased by $588 million to $3,925 million for the nine months ended June 30, 2021 from $3,337 million for the nine months ended June 30, 2020.

The increase includes $116 million of favorable currency exchange fluctuations.

Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 86% and 14% of total revenues for the nine months ended June 30, 2021, respectively, and 85% and 15% of total revenues for the nine months ended June 30, 2020, respectively.

Prior to intersegment eliminations, U.S.

and international revenues represented 44% and 56% for the nine months ended June 30, 2021, respectively, and 43% and 57% for the nine months ended June 30, 2020, respectively.

Total digital revenues after intersegment eliminations increased by $488 million, or 23%, to $2,613 million for the nine months ended June 30, 2021 from $2,125 million for the nine months ended June 30, 2020.

Total digital revenues represented 67% and 64% of consolidated revenues for the nine months ended June 30, 2021 and June 30, 2020, respectively.

Prior to intersegment eliminations, total digital revenues for the nine months ended June 30, 2021 were comprised of U.S.

revenues of $1,308 million and international revenues of $1,306 million, or 50% of total digital revenues for each of U.S.

and international revenues.

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

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

Recorded Music revenues increased by $520 million, or 18%, to $3,372 million for the nine months ended June 30, 2021 from $2,852 million for the nine months ended June 30, 2020.

The increase includes $100 million of favorable currency exchange fluctuations.

Recorded Music revenues were $1,454 million and $1,191 million, or 43% and 42%, of consolidated Recorded Music revenues for the nine months ended June 30, 2021 and June 30, 2020, respectively.

International Recorded Music revenues were $1,918 million and $1,661 million, or 57% and 58%, of consolidated Recorded Music revenues for the nine months ended June 30, 2021 and June 30, 2020, respectively.

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

Digital revenue increased by $409 million as a result of the continued growth in streaming services, including growth in emerging streaming platforms such as Facebook, TikTok, and Peloton as well as strength of releases from Dua Lipa, Ed Sheeran, Ava Max, Cardi B, and Hamilton Cast Recording.

Revenue from streaming services grew by $431 million to $2,195 million for the nine months ended June 30, 2021 from $1,764 million for the nine months ended June 30, 2020.

Digital revenue growth was partially offset by digital download and other digital declines of $22 million, or 18%, to $103 million for the nine months ended June 30, 2021 from $125 million for the nine months ended June 30, 2020 due to the continued shift to streaming services.

Physical revenue increased by $93 million primarily from higher sales due to an increased demand for vinyl products, success of releases including Tom Petty, Mariya Takeuchi, Johnny Hallyday, Kim Hojoong in Korea, and The Yellow Monkey in Japan as well as the favorable impact of foreign currency exchange rates of $16 million.

Licensing revenue increased by $14 million due to higher broadcast fees and synchronization activity as businesses began to recover from the COVID disruption and favorable foreign currency exchange rates.

Artist services and expanded-rights revenue increased by $4 million primarily due to the favorable impact of foreign currency exchange rates of $25 million and higher direct-to-consumer merchandising revenue at EMP, partially offset by a decrease in touring activity resulting from the impact of the COVID disruption.

Music Publishing revenues increased by $68 million, or 14%, to $556 million for the nine months ended June 30, 2021 from $488 million for the nine months ended June 30, 2020.

Music Publishing revenues were $277 million and $242 million, or 50% and 50%, of consolidated Music Publishing revenues for the nine months ended June 30, 2021 and June 30, 2020, respectively.

International Music Publishing revenues were $279 million and $246 million, or 50% and 50%, of Music Publishing revenues for the nine months ended June 30, 2021 and June 30, 2020, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $79 million and synchronization revenue of $13 million, partially offset by decreases in performance revenue of $22 million and mechanical revenue of $2 million.

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

The increase in synchronization revenue is attributable to higher motion picture and commercial income.

The decline in performance revenue is primarily driven by the impact of the COVID disruption.

The decline in mechanical revenue is driven by the continuing shift to streaming services and the impact from the COVID disruption.

Revenue by Geographical Location

revenue increased by $298 million, or 21%, to $1,731 million for the nine months ended June 30, 2021 from $1,433 million for the nine months ended June 30, 2020.

Recorded Music revenue increased by $263 million, or 22%.

The primary driver was the increase of U.S.

Recorded Music digital revenue of $179 million driven by the continued growth in streaming services.

Streaming revenue increased by $189 million, partially offset by $10 million of digital download and other digital declines.

Increases are also attributable to the increase in U.S.

Recorded Music physical revenue, which increased by $63 million from higher sales due to an increased demand for vinyl products as well as the success of releases including Tom Petty.

Recorded Music artist services and expanded-rights revenue increased by $16 million primarily driven by higher advertising and platform revenues from recent acquisitions.

Music Publishing revenue increased by $35 million to $277 million for the nine months ended June 30, 2021 from $242 million for the nine months ended June 30, 2020.

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

Music Publishing of $35 million in digital revenue due to the continued growth in streaming services and timing of new digital deals, and increase in synchronization revenue of $6 million due to higher motion picture and commercial income, partially offset by decreases in performance revenue of $2 million due to the impact of the COVID disruption, as well as a decline in mechanical revenue of $3 million from the continuing shift to streaming services.

International revenue increased by $290 million to $2,197 million for the nine months ended June 30, 2021 from $1,907 million for the nine months ended June 30, 2020.

Excluding the favorable impact of foreign currency exchange rates, International revenue increased by $174 million or 9%.

International Recorded Music revenue increased by $257 million primarily due to increases in digital revenue of $230 million, physical revenue of $30 million, and licensing revenue of $9 million, partially offset by decreases in artist services and expanded-rights revenue of $12 million.

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

International Recorded Music physical revenue increased by $30 million primarily due to an increased demand for vinyl products as well as the success of releases including Mariya Takeuchi, Johnny Hallyday, and Kim Hojoong, and favorable impact of foreign currency exchange rates.

International Recorded Music licensing revenue increased by $9 million as businesses began to recover from the COVID disruption,

as well as favorable foreign currency exchange rates.

International Recorded Music artist services and expanded-rights revenue decreased primarily due to the decrease in touring activity resulting from the impact of the COVID disruption.

This was offset by growth in EMP direct-to consumer merchandise revenue and the favorable impact of foreign currency exchange rates of $25 million.

International Music Publishing revenue increased by $33 million, or 13%, to $279 million for the nine months ended June 30, 2021 from $246 million for the nine months ended June 30, 2020.

This was primarily driven by increases in digital revenue of $44 million, synchronization revenue of $7 million, and mechanical revenue of $1 million, partially offset by decreases in performance revenue of $20 million.

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

The increase in synchronization revenue is due to higher commercial income.

The increase in mechanical revenue is a result of favorable foreign currency exchange rates, partially offset by the continuing shift to streaming.

The decline in performance revenue is due to the impact of the COVID disruption.

Cost of revenues

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

For the Nine Months Ended

June 30, 2021 vs.

2021 2020 $ Change % Change

Artist and repertoire costs $ 1,288 $ 1,138 $ 150 13 %

Product costs 702 589 113 19 %

Total cost of revenues $ 1,990 $ 1,727 $ 263 15 %

Artist and repertoire costs increased by $150 million, to $1,288 million for the nine months ended June 30, 2021 from $1,138 million for the nine months ended June 30, 2020.

Artist and repertoire costs as a percentage of revenue decreased to 33% for the nine months ended June 30, 2021 from 34% for the nine months ended June 30, 2020.

The overall decrease as a percentage of revenue is due to revenue mix.

Product costs increased by $113 million, to $702 million for the nine months ended June 30, 2021 from $589 million for the nine months ended June 30, 2020.

Product costs as a percentage of revenue remained constant at 18% for the nine months ended June 30, 2021 and June 30, 2020.

Selling, general and administrative expenses

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

For the Nine Months Ended

June 30, 2021 vs.

2021 2020 $ Change % Change

General and administrative expense (1) $ 629 $ 1,240 $ (611) -49 %

Selling and marketing expense 544 472 72 15 %

Distribution expense 83 74 9 12 %

Total selling, general and administrative expense $ 1,256 $ 1,786 $ (530) -30 %

______________________________________

(1) Includes depreciation expense of $57 million and $53 million for the nine months ended June 30, 2021 and June 30, 2020, respectively.

Total selling, general and administrative expense decreased by $530 million, or 30%, to $1,256 million for the nine months ended June 30, 2021 from $1,786 million for the nine months ended June 30, 2020.

Expressed as a percentage of revenue, selling, general and administrative expense decreased to 32% for the nine months ended June 30, 2021 from 54% for the nine months ended June 30, 2020.

This is primarily due to the decreased expense associated with non-cash stock-based compensation and other related expenses of $564 million, the prior-year management agreement termination fee and IPO related expenses totaling $90 million.

Excluding non-cash stock-based compensation and other related expenses, the prior-year management agreement termination fee and IPO related expenses, selling, general and administrative expense as a percentage of revenue decreased to 31% for the nine months ended June 30, 2021 from 33% for the nine months ended June 30, 2020.

General and administrative expense decreased by $611 million to $629 million for the nine months ended June 30, 2021 from $1,240 million for the nine months ended June 30, 2020.

The decrease in general and administrative expense was mainly due to lower expense associated with non-cash stock-based compensation and other related expenses of $564 million, the prior-year management agreement termination fee and IPO related expenses totaling $90 million, credit loss reserve reversal, and lower overhead due to active cost management efforts, partially offset by increased employee related costs.

Expressed as a percentage of revenue, general and

administrative expense decreased to 16% for the nine months ended June 30, 2021 from 37% for the nine months ended June 30, 2020.

Excluding non-cash stock-based compensation and other related expenses, the prior-year management agreement termination fee and IPO related expenses, general and administrative expense as a percentage of revenue decreased to 15% for the nine months ended June 30, 2021 from 16% for the nine months ended June 30, 2020 due to the factors described above.

Selling and marketing expense increased by $72 million, or 15%, to $544 million for the nine months ended June 30, 2021 from $472 million for the nine months ended June 30, 2020.

Expressed as a percentage of revenue, selling and marketing expense remained constant at 14% for both the nine months ended June 30, 2021 and June 30, 2020.

Distribution expense increased by $9 million, or 12%, to $83 million for the nine months ended June 30, 2021 from $74 million for the nine months ended June 30, 2020.

Expressed as a percentage of revenue, distribution expense remained constant at 2% for both the nine months ended June 30, 2021 and June 30, 2020.

Reconciliation of Net Income Attributable to Warner Music Group Corp.

and Operating Income to Consolidated OIBDA

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

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

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

For the Nine Months Ended

June 30, 2021 vs.

2021 2020 $ Change % Change

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

$ 276 $ (474) $ 750 — %

Income attributable to noncontrolling interest 1 3 (2) -67 %

Net income (loss) 277 (471) 748 — %

Income tax expense 127 44 83 — %

Income (loss) before income taxes 404 (427) 831 — %

Other expense — 12 (12) -100 %

Interest expense, net 93 98 (5) -5 %

Loss on extinguishment of debt 12 — 12 — %

Operating income (loss) 509 (317) 826 — %

Amortization expense 170 141 29 21 %

Depreciation expense 57 53 4 8 %

OIBDA $ 736 $ (123) $ 859 — %

OIBDA increased by $859 million to $736 million for the nine months ended June 30, 2021 as compared to a loss of $123 million for the nine months ended June 30, 2020 as a result of higher revenues and lower expense associated with non-cash stock-based compensation and other related expenses, the prior-year management agreement termination fee and IPO related expenses, partially offset by higher cost of revenues.

Expressed as a percentage of total revenue, OIBDA margin increased to 19% for the nine months ended June 30, 2021 from (4)% for the nine months ended June 30, 2020.

Excluding the expense associated with non-cash stock-based compensation and other related expenses, the prior-year management agreement termination fee and IPO related expenses, OIBDA margin as a percentage of revenue increased to 20% for the nine months ended June 30, 2021 from 17% for the nine months ended June 30, 2020 from revenue mix and lower overhead due to active cost management efforts.

Depreciation expense

Our depreciation expense increased by $4 million to $57 million for the nine months ended June 30, 2021 from $53 million for the nine months ended June 30, 2020.

This is due to new assets placed into service, partially offset by a one-time charge of $10 million representing the difference between the net book value of a building and its recoverable value in the prior year.

Amortization expense

Our amortization expense increased by $29 million, or 21%, to $170 million for the nine months ended June 30, 2021 from $141 million for the nine months ended June 30, 2020.

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

Operating income (loss)

Our operating income increased by $826 million to $509 million for the nine months ended June 30, 2021 from operating loss of $317 million for the nine months ended June 30, 2020.

The increase in operating income was due to the factors that led to the increase in OIBDA, partially offset by higher depreciation and amortization as noted above.

Interest expense, net

Our interest expense, net, decreased to $93 million for the nine months ended June 30, 2021 from $98 million for the nine months ended June 30, 2020 due to lower interest rates resulting from debt refinancing, partially offset by a higher principal balance due to the issuance of senior secured notes.

Other expense

Other expense for the nine months ended June 30, 2021 primarily includes unrealized gains of $26 million on the mark-to-market of equity investments, offset by foreign currency losses on our Euro-denominated debt of $20 million and currency exchange losses on our intercompany loans of $7 million.

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

Loss on extinguishment of debt

We recorded a loss on extinguishment of debt in the amount of $12 million for the nine months ended June 30, 2021 which represents the premium paid on early redemption and unamortized deferred financing costs related to the redemption of the 5.500% Notes.

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

Income tax expense

Our income tax expense increased by $83 million to $127 million for the nine months ended June 30, 2021 from $44 million for the nine months ended June 30, 2020.

The change of $83 million in income tax expense primarily relates to the higher pre-tax income in the current year as compared to pre-tax income before non-deductible executive compensation and transaction costs and release of a valuation allowance of foreign tax credits of $33 million for the nine months ended June 30, 2020.

Net income (loss)

Net income increased by $748 million to $277 million for the nine months ended June 30, 2021 from net loss of $471 million for the nine months ended June 30, 2020 as a result of the factors described above.

Noncontrolling interest

There was $1 million of income attributable to noncontrolling interest for the nine months ended June 30, 2021 and $3 million of income attributable to noncontrolling interest for the nine months ended June 30, 2020.

Business Segment Results

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

For the Nine Months Ended

June 30, 2021 vs.

2021 2020 $ Change % Change

Recorded Music

Revenues $ 3,372 $ 2,852 $ 520 18 %

Operating income 604 67 537 — %

OIBDA 754 198 556 — %

Music Publishing

Revenues 556 488 68 14 %

Operating income 61 58 3 5 %

OIBDA 125 114 11 10 %

Corporate expenses and eliminations

Revenue eliminations (3) (3) — — %

Operating loss (156) (442) 286 -65 %

OIBDA loss (143) (435) 292 -67 %

Revenues 3,925 3,337 588 18 %

Operating income (loss) 509 (317) 826 — %

OIBDA 736 (123) 859 — %

Recorded Music

Recorded Music revenue increased by $520 million, or 18%, to $3,372 million for the nine months ended June 30, 2021 from $2,852 million for the nine months ended June 30, 2020.

Recorded Music revenues were $1,454 million and $1,191 million, or 43% and 42%, of consolidated Recorded Music revenues for the nine months ended June 30, 2021 and June 30, 2020, respectively.

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

Cost of revenues

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

For the Nine Months Ended

June 30, 2021 vs.

2021 2020 $ Change % Change

Artist and repertoire costs $ 931 $ 829 $ 102 12 %

Product costs 702 589 113 19 %

Total cost of revenues $ 1,633 $ 1,418 $ 215 15 %

Recorded Music cost of revenues increased by $215 million, or 15%, to $1,633 million for the nine months ended June 30, 2021 from $1,418 million for the nine months ended June 30, 2020.

Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs decreased to 28% for the nine months ended June 30, 2021 from 29% for the nine months ended June 30, 2020.

The decrease is primarily attributable to revenue mix.

Expressed as a percentage of Recorded Music revenue, Recorded Music product costs remained constant at 21% for both the nine months ended June 30, 2021 and June 30, 2020.

Selling, general and administrative expense

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

For the Nine Months Ended

June 30, 2021 vs.

2021 2020 $ Change % Change

General and administrative expense (1) $ 408 $ 741 $ (333) -45 %

Selling and marketing expense 534 463 71 15 %

Distribution expense 83 74 9 12 %

Total selling, general and administrative expense $ 1,025 $ 1,278 $ (253) -20 %

______________________________________

(1) Includes depreciation expense of $40 million and $42 million for the nine months ended June 30, 2021 and June 30, 2020, respectively.

Recorded Music selling, general and administrative expense decreased by $253 million, or 20%, to $1,025 million for the nine months ended June 30, 2021 from $1,278 million for the nine months ended June 30, 2020.

The decrease in general and administrative expense was primarily due to lower non-cash stock-based compensation and other related expenses of $365 million, credit loss reserve reversal, and lower overhead due to active cost management efforts, partially offset by increased employee related costs.

The increase in selling and marketing expense was primarily due to increased variable marketing spend on higher revenues and new releases.

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

Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense decreased to 30% for the nine months ended June 30, 2021 from 45% for the nine months ended June 30, 2020 primarily due to lower non-cash stock-based compensation and other related expenses of $365 million.

Excluding non-cash stock-based compensation and other related expenses, selling, general and administrative expense as a percentage of Recorded Music revenue decreased to 30% for the nine months ended June 30, 2021 from 31% for the nine months ended June 30, 2020 due to the factors described above.

Operating income and OIBDA

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

For the Nine Months Ended

June 30, 2021 vs.

2021 2020 $ Change % Change

Operating income $ 604 $ 67 $ 537 — %

Depreciation and amortization 150 131 19 15 %

OIBDA $ 754 $ 198 $ 556 — %

Recorded Music OIBDA increased by $556 million, to $754 million for the nine months ended June 30, 2021 from $198 million for the nine months ended June 30, 2020 as a result of higher revenues and lower non-cash stock-based compensation and other related expenses of $365 million, partially offset by higher costs of revenue.

Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin increased to 22% for the nine months ended June 30, 2021 from 7% for the nine months ended June 30, 2020.

Excluding non-cash stock-based compensation and other related expenses, OIBDA, as a percentage of Recorded Music revenue, increased to 23% for the nine months ended June 30, 2021 from 20% for the nine months ended June 30, 2020 due to revenue mix, impact from a recent acquisition and lower costs of revenue and selling, general and administrative expenses as a percentage of total Recorded Music revenue.

Recorded Music operating income increased by $537 million to $604 million for the nine months ended June 30, 2021 from $67 million for the nine months ended June 30, 2020 due to the factors that led to the increase in Recorded Music OIBDA noted above, partially offset by an increase in amortizable intangible assets related to the acquisition of music-related assets.

Music Publishing

Music Publishing revenues increased by $68 million, or 14%, to $556 million for the nine months ended June 30, 2021 from $488 million for the nine months ended June 30, 2020.

Music Publishing revenues were $277 million and $242 million, or 50% and 50%, of consolidated Music Publishing revenues for the nine months ended June 30, 2021 and June 30, 2020, respectively.

International Music Publishing revenues were $279 million and $246 million, or 50% and 50%, of consolidated Music Publishing revenues for the nine months ended June 30, 2021 and June 30, 2020, respectively.

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

Cost of revenues

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

For the Nine Months Ended

June 30, 2021 vs.

2021 2020 $ Change % Change

Artist and repertoire costs $ 360 $ 312 $ 48 15 %

Total cost of revenues $ 360 $ 312 $ 48 15 %

Music Publishing cost of revenues increased by $48 million, or 15%, to $360 million for the nine months ended June 30, 2021 from $312 million for the nine months ended June 30, 2020.

Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues increased to 65% for the nine months ended June 30, 2021 from 64% for the nine months ended June 30, 2020, primarily attributable to revenue mix.

Selling, general and administrative expense

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

For the Nine Months Ended

June 30, 2021 vs.

December 31, 2021 vs.

2021 2020 $ Change % Change

3 unchanged sentences

______________________________________

(1) Includes depreciation expense of $4 million for both the nine months ended June 30, 2021 and June 30, 2020.

Music Publishing selling, general and administrative expense increased to $75 million for the nine months ended June 30, 2021 from $66 million for the nine months ended June 30, 2020 due to higher employee-related costs.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense decreased to 13% for the nine months ended June 30, 2021 from 14% for the nine months ended June 30, 2020 due to COVID related revenue impacts in the prior year.

(1) Includes depreciation expense of $2 million and $2 million for the three months ended December 31, 2021 and December 31, 2020, respectively.

Music Publishing selling, general and administrative expense increased by $1 million, or 4%, to $26 million for the three months ended December 31, 2021 from $25 million for the three months ended December 31, 2020.

Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense decreased to 11% for the three months ended December 31, 2021 from 14% for the three months ended December 31, 2020.

Operating Income and OIBDA

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

For the Nine Months Ended

June 30, 2021 vs.

For the Three Months Ended

December 31, 2021 vs.

2021 2020 $ Change % Change

2 unchanged sentences

OIBDA $ 54 $ 39 $ 15 38 %

Music Publishing OIBDA increased by $11 million, or 10%, to $125 million for the nine months ended June 30, 2021 from $114 million for the nine months ended June 30, 2020 as a result of higher revenues, partially offset by higher costs of revenue.

Expressed as a percentage of Music Publishing revenue, Music Publishing OIBDA margin remained constant at 23% for both the nine months ended June 30, 2021 and June 30, 2020.

Music Publishing operating income increased by $3 million to $61 million for the nine months ended June 30, 2021 from $58 million operating income for the nine months ended June 30, 2020 largely due to the factors that led to the increase in Music Publishing OIBDA noted above, partially offset by an increase in amortizable intangible assets related to the acquisition of music-related assets.

Music Publishing OIBDA increased by $15 million, or 38%, to $54 million for the three months ended December 31, 2021 from $39 million for the three months ended December 31, 2020.

Expressed as a percentage of Music Publishing revenue, Music Publishing OIBDA margin increased to 24% for the three months ended December 31, 2021 from 22% for the three months ended December 31, 2020.

The increase was due to strong operating performance.

Music Publishing operating income increased by $14 million to $32 million for the three months ended December 31, 2021 from $18 million for the three months ended December 31, 2020 due to the factors that led to the increase in Music Publishing OIBDA noted above, partially offset by an increase in amortizable intangible assets related to the acquisition of music-related assets.

Corporate Expenses and Eliminations

Our operating loss from corporate expenses and eliminations decreased by $286 million to $156 million for the nine months ended June 30, 2021 from $442 million for the nine months ended June 30, 2020 which primarily includes the decrease in non-cash stock-based compensation and other related expenses of $201 million, the prior-year management agreement termination fee and IPO related expenses totaling $90 million, decline in management fees of $9 million and lower overhead due to active cost management efforts, partially offset by higher employee related costs and public company related expenses.

Our OIBDA loss from corporate expenses and eliminations decreased by $292 million to $143 million for the nine months ended June 30, 2021 from $435 million for the nine months ended June 30, 2020 due to the operating loss factors noted above.

Our operating loss from corporate expenses and eliminations increased by $24 million for the three months ended December 31, 2021 to $69 million from $45 million for the three months ended December 31, 2020, which primarily includes the increase in non-cash stock-based compensation and other related expenses from a one-time equity grant and the timing of expense recognition for new annual equity grants in the quarter of $16 million, expenses related to transformation initiatives and the impact of the additional week in the current-year quarter.

Our OIBDA loss from corporate expenses and eliminations increased by $23 million for the three months ended December 31, 2021 to $64 million from $41 million for the three months ended December 31, 2020 due to the operating loss factors noted above.

FINANCIAL CONDITION AND LIQUIDITY

Financial Condition at June 30, 2021

At June 30, 2021, we had $3.367 billion of debt (which is net of $31 million of premiums, discounts and deferred financing costs), $442 million of cash and equivalents (net debt of $2.925 billion, defined as total debt, less cash and equivalents and premiums, discounts and deferred financing costs) and $81 million of Warner Music Group Corp.

Financial Condition at December 31, 2021

At December 31, 2021, we had $3.846 billion of debt (which is net of $46 million of premiums, discounts and deferred financing costs), $450 million of cash and equivalents (net debt of $3.396 billion, defined as total debt, less cash and equivalents and premiums, discounts and deferred financing costs) and $153 million of Warner Music Group Corp.

This compares to $3.346 billion of debt (which is net of $37 million of premiums, discounts and deferred financing costs), $499 million of cash and equivalents (net debt of $2.847 billion) and $31 million of Warner Music Group Corp.

deficit at September 30, 2020.

equity at September 30, 2021.

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

The financial data for the nine months ended June 30, 2021 and June 30, 2020 are unaudited and have been derived from our consolidated interim financial statements included elsewhere herein.

Nine Months Ended

The financial data for the three months ended December 31, 2021 and December 31, 2020 are unaudited and have been derived from our consolidated interim financial statements included elsewhere herein.

Three Months Ended

Cash provided by (used in):

3 unchanged sentences

Operating Activities

Cash provided by operating activities was $410 million for the nine months ended June 30, 2021 as compared with cash provided by operating activities of $287 million for the nine months ended June 30, 2020.

The $123 million increase in cash provided by operating activities was primarily due to an increase in OIBDA offset by a decrease in non-cash equity compensation expense and continued A&R investment driving a use of cash from working capital.

Cash provided by operating activities was $129 million for the three months ended December 31, 2021 as compared with cash provided by operating activities of $169 million for the three months ended December 31, 2020.

The $40 million decrease in cash provided by operating activities was primarily due to continued A&R investment, the timing of digital advances and the seasonal increase in outstanding receivables, driving a use of cash from working capital, partially offset by an increase in OIBDA and a source of cash from the timing of royalty payments.

Investing Activities

Cash used in investing activities was $566 million for the nine months ended June 30, 2021 as compared with cash used in investing activities of $87 million for the nine months ended June 30, 2020.

The $566 million of cash used in investing activities in the nine months ended June 30, 2021 consisted of $49 million relating to investments and acquisitions of businesses, $58 million relating to capital expenditures and $459 million to acquire music related assets, a portion of which was debt-financed.

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

Cash used in investing activities was $624 million for the three months ended December 31, 2021 as compared with cash used in investing activities of $343 million for the three months ended December 31, 2020.

The $624 million of cash used in investing activities in the three months ended December 31, 2021 consisted of $425 million relating to investments and acquisitions of businesses and $165 million to acquire music-related assets, a portion of which was debt-financed, and $34 million relating to capital expenditures.

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

Financing Activities

Cash provided by financing activities was $35 million for the nine months ended June 30, 2021 as compared with cash used in financing activities of $288 million for the nine months ended June 30, 2020.

The $35 million of cash provided by financing activities for the nine months ended June 30, 2021 consisted of proceeds from debt issuance of $244 million, which was used to fund, the acquisition of music related assets, and proceeds from the increase supplement to the Senior Term Loan Facility of $325 million, partially offset by the redemption of the outstanding aggregate principal amount of $325 million of the 5.500% Senior Notes due 2026, dividends paid of $187 million, call premiums paid on early redemption of the 5.500% Senior Notes due 2026 of $8 million, distributions to noncontrolling interest holders of $6 million and deferred financing costs of $8 million.

The $288 million of cash used in financing activities for the nine months ended June 30, 2020 consisted of dividends paid of $281 million, which included a special cash dividend of $206 million, distributions to noncontrolling interest holders of $6 million and deferred financing costs of $1 million.

Cash provided by financing activities was $448 million for the three months ended December 31, 2021 as compared with cash provided by financing activities of $178 million for the three months ended December 31, 2020.

The $448 million of cash provided by financing activities for the three months ended December 31, 2021 consisted of proceeds from debt issuance of $535 million, which was used to fund the acquisition of a business and music-related assets, partially offset by dividends paid of $78 million, deferred financing costs of $4 million, cash paid to settle contingent consideration of $4 million and distributions to noncontrolling interest holders of $1 million.

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

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

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

We are continuing our financial transformation initiative, launched in August 2019, to upgrade our information technology and finance infrastructure, including related systems and processes, for which we currently expect upfront costs to be approximately $140 million, which includes capital expenditures of approximately $45 million to $55 million.

There has been a slight delay in the timing of the transformation initiative as a result of COVID lasting over a year, but it is still expected to be delivered in fiscal 2022.

Annualized run-rate savings from the financial transformation initiative are expected to be between approximately $35 million and $40 million once fully implemented starting in fiscal 2023.

We are continuing our financial transformation initiative, launched in August 2019, to upgrade our information technology and finance infrastructure, including related systems and processes, for which we currently expect upfront costs to be approximately $160 million, which includes capital expenditures of approximately $65 million.

There has been a slight delay in the timing of the transformation initiative as a result of the ongoing effects of COVID-19, but it is still expected to be delivered by the end of fiscal year 2022.

Annualized run-rate savings from the financial transformation initiative are expected to be between approximately $35 million and $40 million once fully implemented starting in fiscal year 2023.

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

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For example, our S&P corporate credit rating improved from B in 2017 to BB+ in July 2021 with a stable outlook, and our Moody’s corporate family rating improved from B1 in 2016 to Ba3 in 2020.

In addition, our weighted-average interest rate on our outstanding indebtedness has decreased from 10.5% in 2011 to 3.4% as of June 30, 2021.

In addition, our weighted-average interest rate on our outstanding indebtedness has decreased from 10.5% in 2011 to 3.2% as of December 31, 2021.

Our nearest-term maturity date is in 2028.

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

Additional 3.000% Senior Secured Notes

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”).

The net proceeds of the issuance and sale of the aforementioned Additional Notes of $241 million, in conjunction with cash on hand, were used to fund the acquisition of music-related assets.

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.

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 3.750% Senior Secured Notes due 2029 (the “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 proceeds of the issuance and sale of the aforementioned Notes were used to fund the acquisition of a business and music-related assets for aggregate cash consideration of $525 million.

Revolving Credit Facility

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

Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.00x 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 (as defined in the Revolving Credit Agreement).

Existing Debt as of June 30, 2021

As of June 30, 2021, our long-term debt, all of which was issued by Acquisition Corp., was as follows (in millions):

Based on the Senior Secured Indebtedness to EBITDA Ratio

of 3.08x 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 (as defined in the Revolving Credit Agreement).

Existing Debt as of December 31, 2021

As of December 31, 2021, our long-term debt, all of which was issued by Acquisition Corp., was as follows (in millions):

Revolving Credit Facility (a) $ —

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2.750% Senior Secured Notes due 2028 (€325 face amount) 368

2.750% Senior Secured Notes due 2028 (€325 face amount) 387

3.750% Senior Secured Notes due 2029 540

3.875% Senior Secured Notes due 2030 535

2.250% Senior Secured Notes due 2031 (€445 face amount) 504

3.000% Senior Secured Notes due 2031 800

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

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

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

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

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

For further discussion of our debt agreements, see “Liquidity” in the “Financial Condition and Liquidity” section of our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.

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’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.

Covenant Compliance

The Company was in compliance with its covenants under its outstanding notes, the Revolving Credit Facility and the Senior Term Loan Facility as of June 30, 2021.

The Company was in compliance with its covenants under its outstanding notes, the Revolving Credit Facility and the Senior Term Loan Facility as of December 31, 2021.

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

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

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

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

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

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

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

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

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

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

GAAP measure of our operating results, to Adjusted EBITDA as defined, for the most recently ended four fiscal quarters, or the twelve months ended June 30, 2021, for the twelve months ended June 30, 2020 and for the three months ended June 30, 2021 and June 30, 2020.

In addition, the reconciliation includes the calculation of the Senior Secured Indebtedness to Adjusted EBITDA ratio, which we refer to as the Leverage Ratio, under the Revolving Credit Agreement for the most recently ended four fiscal quarters, or the twelve months ended June 30, 2021.

GAAP measure of our operating results, to Adjusted EBITDA as defined, for the most recently ended four fiscal quarters, or the twelve months ended December 31, 2021, for the twelve months ended December 31, 2020 and for the three months ended December 31, 2021 and December 31, 2020.

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

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Twelve Months Ended

June 30, Three Months Ended

December 31, Three Months Ended

2021 2020 2021 2020

Net Income (Loss) $ 396 $ (493) $ 188 $ 99

Income tax expense (benefit) 106 (33) 41 51

Income tax expense 189 53 75 35

Interest expense, net 121 125 30 31

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Restructuring costs (c) 30 20 4 3

Net hedging and foreign exchange losses (gains) (d) 82 (17) 15 15

Net hedging and foreign exchange (gains) losses (d) (78) 104 (41) 48

Management fees (e) — 17 — —

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(a) For the three months ended June 30, 2021, reflects a net loss incurred on the early extinguishment of our debt as part of the April 2021 redemption of our 5.500% Senior Notes.

The twelve months ended June 30, 2021 also reflects a net loss incurred on the early extinguishment of our debt as part of the redemption of our 4.125% Senior Secured Notes and 4.875% Senior Secured Notes, the tender for and redemption of the 5.000% Senior Secured Notes and the partial repayment of the Senior Term Loan Facility, all of which occurred in the fourth quarter of fiscal 2020.

(a) Reflects loss on extinguishment of debt, primarily including tender fees and unamortized deferred financing costs.

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

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

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

(e) Reflects management fees and related expenses paid to Access pursuant to the management agreement, which was terminated upon completion of the IPO in June 2020.

(f) Reflects mainly integration, transaction and qualifying IPO costs.

(g) Reflects costs associated with our transformation initiatives and IT system updates, which includes costs of $9 million and $28 million related to our finance transformation for the three and twelve months ended June 30, 2021, respectively, as well as $6 million and $33 million for the three and twelve months ended June 30, 2020, respectively.

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

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

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

(j) Reflects expected savings resulting from transformation initiatives and pro forma impact of specified transactions for the three and twelve months ended June 30, 2021.

(f) Reflects mainly transaction and qualifying IPO costs.

(g) Reflects costs associated with our transformation initiatives and IT system updates, which includes costs of $10 million and $37 million related to our finance transformation for the three and twelve months ended December 31, 2021, respectively, as well as $6 million and $27 million for the three and twelve months ended December 31, 2020, respectively.

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

Senior Management Free Cash Flow Plan.

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

(j) Reflects expected savings resulting from transformation initiatives and the pro forma impact of certain specified transactions for the three and twelve months ended December 31, 2021.

Certain of these cost savings initiatives and transactions impacted quarters prior to the quarter during which they were identified within the last twelve-month period.

The pro forma impact of these specified transactions and initiatives resulted in a $15 million increase in the twelve months ended June 30, 2021 Adjusted EBITDA.

The pro forma impact of these specified transactions and initiatives resulted in a $31 million increase in the twelve months ended December 31, 2021 Adjusted EBITDA.

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

of approximately $3.367 billion less cash of $250 million.

of approximately $3.846 billion and the balance of current notes payable of approximately $125 million less cash of $250 million.

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

This is calculated net of cash and equivalents of the Company as of June 30, 2021 not exceeding $250 million.

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

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

This is calculated net of cash and equivalents of the Company as of December 31, 2021 not exceeding $250 million.

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

The Company’s Revolving Credit Facility does not

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

On May 4, 2021, certain covenants set forth in our Revolving Credit Facility were suspended, including the restriction on incurring certain additional indebtedness, based on the determination that the total indebtedness to EBITDA ratio is below the required threshold specified therein.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis