Warner Music Group Corp. 10-Q

ITEM 1. FINANCIAL STATEMENTS Warner Music Group Corp. Consolidated Balance Sheets (Unaudited) December 31, 2021 September 30, 2021 (in millions, except share data) Assets Current assets: Cash and equivalents $ 450 $ 499 Accounts receivable, net of allowances of $ 20 million and $ 20 million 941 839 Inventories 84 99 Royalty advances expected to be recouped within one year 468 373 Prepaid and other current assets 78 86 Total current assets 2,021 1,896 Royalty advances expected to be recouped after one year 566 457 Property, plant and equipment, net of accumulated depreciation of $ 435 million and $ 419 million 378 364 Operating lease right-of-use assets, net 258 268 Goodwill 1,945 1,830 Intangible assets subject to amortization, net 2,472 2,017 Intangible assets not subject to amortization 152 154 Deferred tax assets, net 3 31 Other assets 220 194 Total assets $ 8,015 $ 7,211 Liabilities and Equity Current liabilities: Accounts payable $ 274 $ 302 Accrued royalties 1,974 1,880 Accrued liabilities 466 461 Accrued interest 30 14 Operating lease liabilities, current 43 43 Deferred revenue 298 348 Other current liabilities 272 102 Total current liabilities 3,357 3,150 Long-term debt 3,846 3,346 Operating lease liabilities, noncurrent 275 287 Deferred tax liabilities, net 195 207 Other noncurrent liabilities 170 175 Total liabilities $ 7,843 $ 7,165 Equity: Class A common stock, $ 0.001 par value; 1,000,000,000 shares authorized, 127,236,783 and 122,414,827 shares issued and outstanding as of December 31, 2021 and September 30, 2021, respectively $ — $ — Class B common stock, $ 0.001 par value; 1,000,000,000 shares authorized, 387,300,086 and 391,970,996 issued and outstanding as of December 31, 2021 and September 30, 2021, respectively 1 1 Additional paid-in capital 1,973 1,942 Accumulated deficit ( 1,601 ) ( 1,710 ) Accumulated other comprehensive loss, net ( 220 ) ( 202 ) Total Warner Music Group Corp. equity 153 31 Noncontrolling interest 19 15 Total equity 172 46 Total liabilities and equity $ 8,015 $ 7,211 See accompanying notes 1 Warner Music Group Corp. Consolidated Statements of Operations (Unaudited) Three Months Ended December 31, 2021 2020 (in millions, except share and per share data) Revenue $ 1,614 $ 1,335 Costs and expenses: Cost of revenue ( 818 ) ( 686 ) Selling, general and administrative expenses (a) ( 497 ) ( 401 ) Amortization expense ( 60 ) ( 52 ) Total costs and expenses ( 1,375 ) ( 1,139 ) Operating income 239 196 Interest expense, net ( 30 ) ( 31 ) Other income (expense) 54 ( 31 ) Income before income taxes 263 134 Income tax expense ( 75 ) ( 35 ) Net income 188 99 Less: Income attributable to noncontrolling interest ( 1 ) ( 1 ) Net income attributable to Warner Music Group Corp. $ 187 $ 98 Net income per share attributable to common stockholders: Class A – Basic and Diluted $ 0.36 $ 0.18 Class B – Basic and Diluted $ 0.36 $ 0.19 Weighted average common shares: Class A – Basic and Diluted 123,969,142 94,221,946 Class B – Basic and Diluted 390,952,038 416,632,808 (a) Includes depreciation expense: $ ( 21 ) $ ( 19 ) See accompanying notes 2 Warner Music Group Corp. Consolidated Statements of Comprehensive Income (Unaudited) Three Months Ended December 31, 2021 2020 (in millions) Net income $ 188 $ 99 Other comprehensive (loss) income, net of tax: Foreign currency adjustment ( 25 ) 34 Deferred gain on derivative financial instruments 7 3 Other comprehensive (loss) income, net of tax ( 18 ) 37 Total comprehensive income 170 136 Less: Income attributable to noncontrolling interest ( 1 ) ( 1 ) Comprehensive income attributable to Warner Music Group Corp. $ 169 $ 135 See accompanying notes 3 Warner Music Group Corp. Consolidated Statements of Cash Flows (Unaudited) Three Months Ended December 31, 2021 2020 (in millions) Cash flows from operating activities Net income $ 188 $ 99 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 81 71 Unrealized (gains) losses and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts ( 36 ) 45 Deferred income taxes 19 2 Net gain on divestitures and investments ( 11 ) ( 14 ) Non-cash interest expense 1 1 Non-cash stock-based compensation expense 24 6 Changes in operating assets and liabilities: Accounts receivable, net ( 100 ) ( 98 ) Inventories 12 11 Royalty advances ( 177 ) ( 56 ) Accounts payable and accrued liabilities ( 2 ) ( 35 ) Royalty payables 107 54 Accrued interest 16 6 Operating lease liabilities ( 2 ) ( 2 ) Deferred revenue ( 50 ) 24 Other balance sheet changes 59 55 Net cash provided by operating activities 129 169 Cash flows from investing activities Acquisition of music publishing rights and music catalogs, net ( 165 ) ( 324 ) Capital expenditures ( 34 ) ( 18 ) Investments and acquisitions of businesses, net of cash received ( 425 ) ( 1 ) Net cash used in investing activities ( 624 ) ( 343 ) Cash flows from financing activities Proceeds from issuance of 3.750 % Senior Secured Notes due 2029 535 — Proceeds from issuance of 3.000 % Senior Secured Notes due 2031 — 244 Deferred financing costs paid ( 4 ) ( 3 ) Distribution to noncontrolling interest holders ( 1 ) ( 1 ) Dividends paid ( 78 ) ( 62 ) Cash paid to settle contingent consideration ( 4 ) — Net cash provided by financing activities 448 178 Effect of exchange rate changes on cash and equivalents ( 2 ) 9 Net (decrease) increase in cash and equivalents ( 49 ) 13 Cash and equivalents at beginning of period 499 553 Cash and equivalents at end of period $ 450 $ 566 See accompanying notes 4 Warner Music Group Corp. Consolidated Statements of Equity (Unaudited) Three Months Ended December 31, 2021 Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Warner Music Group Corp. Equity Non-controlling Interest Total Equity Shares Value Shares Value (in millions, except share and per share data) Balance at September 30, 2021 122,414,827 $ — 391,970,996 $ 1 $ 1,942 $ ( 1,710 ) $ ( 202 ) $ 31 $ 15 $ 46 Net income — — — — — 187 — 187 1 188 Other comprehensive loss, net of tax — — — — — — ( 18 ) ( 18 ) — ( 18 ) Dividends ($ 0.15 per Class A and B share) — — — — — ( 78 ) — ( 78 ) — ( 78 ) Stock-based compensation expense — — — — 31 — — 31 — 31 Distribution to noncontrolling interest holders — — — — — — — — ( 1 ) ( 1 ) Conversion of Class B shares for Class A shares 4,670,910 — ( 4,670,910 ) — — — — — — — Shares issued under Omnibus Incentive Plan 151,046 — — — — — — — — — Other — — — — — — — — 4 4 Balance at December 31, 2021 127,236,783 $ — 387,300,086 $ 1 $ 1,973 $ ( 1,601 ) $ ( 220 ) $ 153 $ 19 $ 172 Three Months Ended December 31, 2020 Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Warner Music Group Corp. Equity (Deficit) Non-controlling Interest Total Equity (Deficit) Shares Value Shares Value (in millions, except share and per share data) Balance at September 30, 2020 88,578,361 $ — 421,450,000 $ 1 $ 1,907 $ ( 1,749 ) $ ( 222 ) $ ( 63 ) $ 18 $ ( 45 ) Net income — — — — — 98 — 98 1 99 Other comprehensive income, net of tax — — — — — — 37 37 — 37 Dividends ($ 0.12 per Class A and B share) — — — — — ( 62 ) — ( 62 ) — ( 62 ) Stock-based compensation expense — — — — 6 — — 6 — 6 Distribution to noncontrolling interest holders — — — — — — — — ( 2 ) ( 2 ) Exchange of Class B shares for Class A shares 18,265,183 — ( 18,265,186 ) — — — — — — — Shares issued under the Plan 4,321,259 — — — — — — — — — Shares issued under Omnibus Incentive Plan 2,553 — — — — — — — — — Balance at December 31, 2020 111,167,356 $ — 403,184,814 $ 1 $ 1,913 $ ( 1,713 ) $ ( 185 ) $ 16 $ 17 $ 33 See accompanying notes 5 Warner Music Group Corp. Notes to Consolidated Interim Financial Statements (Unaudited) 1. Description of Business Warner Music Group Corp. (the “Company”) was formed on November 21, 2003. The Company is the direct parent of WMG Holdings Corp. (“Holdings”), which is the direct parent of WMG Acquisition Corp. (“Acquisition Corp.”). Acquisition Corp. is one of the world’s major music entertainment companies. Initial Public Offering On June 5, 2020, the Company completed an initial public offering (“IPO”) of Class A common stock of the Company, par value $ 0.001 per share (“Class A Common Stock”). The Company listed these shares on the NASDAQ stock market under the ticker symbol “WMG.” The offering consisted entirely of secondary shares sold by Access Industries, LLC (collectively with its affiliates, “Access”) and certain related selling stockholders. Access and its affiliates continue to hold all of the Class B common stock of the Company, par value $ 0.001 per share (“Class B Common Stock”), representing approximately 98 % of the total combined voting power of the Company’s outstanding common stock and approximately 75 % of the economic interest as of December 31, 2021. As a result, the Company is a “controlled company” within the meaning of the corporate governance standards of NASDAQ. Recorded Music Operations Our Recorded Music business primarily consists of the discovery and development of recording artists and the related marketing, promotion, distribution, sale and licensing of music created by such recording artists. We play an integral role in virtually all aspects of the recorded music value chain from discovering and developing talent to producing, distributing and selling music to marketing and promoting recording artists and their music. Music Publishing Operations While Recorded Music is focused on marketing, promoting, distributing and licensing a particular recording of a musical composition, Music Publishing is an intellectual property business focused on generating revenue from uses of the musical composition itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rightsholders, our Music Publishing business shares the revenues generated from use of the musical compositions with the songwriter or other rightsholders. 2. Summary of Significant Accounting Policies Interim Financial Statements The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended December 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2022. The consolidated balance sheet at September 30, 2021 has been derived from the audited consolidated financial statements at that date but does not include all the information and notes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (File No. 001-32502). Basis of Consolidation The accompanying financial statements present the consolidated accounts of all entities in which the Company has a controlling voting interest and/or variable interest required to be consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated. 6 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation (“ASC 810”) requires the Company first evaluate its investments to determine if any investments qualify as a variable interest entity (“VIE”). A VIE is consolidated if the Company is deemed to be the primary beneficiary of the VIE, which is the party involved with the VIE that has both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. If an entity is not deemed to be a VIE, the Company consolidates the entity if the Company has a controlling voting interest. 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. All references to December 31, 2021 and December 31, 2020 relate to the periods ended December 31, 2021 and December 25, 2020, respectively. For convenience purposes, the Company continues to date its first-quarter financial statements as of December 31. The fiscal year ended September 30, 2021 ended on September 24, 2021. The Company has performed a review of all subsequent events through the date the financial statements were issued and has determined that no additional disclosures are necessary. Common Stock On February 28, 2020, the Company amended its certificate of incorporation to increase its authorized capital stock to 2,100,000,000 shares, consisting of 1,000,000,000 shares of Class A Common Stock, 1,000,000,000 shares of Class B Common Stock, and 100,000,000 shares of preferred stock, par value $ 1.00 per share. In addition, the February 28, 2020 amendment to the Company’s certificate of incorporation also gave effect to the reclassification and 477,242.614671815 -for-1 stock split of the Company’s existing common stock outstanding into 510,000,000 shares of Class B Common Stock. Upon completion of the IPO and the exercise in full of the underwriters’ option to purchase additional shares, 88,550,000 shares of Class A Common Stock, 421,450,000 shares of Class B Common Stock and no shares of preferred stock were outstanding. In connection with the IPO, the Company’s board of directors and stockholders approved the Warner Music Group Corp. 2020 Omnibus Incentive Plan, or the “Omnibus Incentive Plan.” The Omnibus Incentive Plan provides for the grant of incentive common stock, stock options, restricted stock, restricted stock units (“RSUs”), performance awards and stock appreciation rights to employees, consultants and directors. The aggregate number of shares of common stock available for issuance under the Omnibus Incentive Plan is 31,169,099 shares of Class A Common Stock over the 10-year period from the date of adoption, including up to 1,000,000 shares of our Class A Common Stock in connection with the IPO. Since the IPO, a total of 215,613 shares of Class A Common Stock have been issued under the Omnibus Incentive Plan, which includes 151,046 and 2,553 shares issued during the three months ended December 31, 2021, and 2020, respectively. During the three months ended December 31, 2021, an aggregate of 4,670,910 shares of Class B Common Stock were converted to Class A Common Stock. In connection with the Senior Management Free Cash Flow Plan (the “Plan”), a remaining Plan participant redeemed a portion of vested Class B equity units of the LLC holding company, WMG Management Holdings, LLC (“Management LLC”). These Class B equity units were redeemed in exchange for a total of 510,165 shares of Class B Common Stock, which shares of Class B Common Stock converted to shares of Class A Common Stock upon the exchange. Additionally, during the three months ended December 31, 2021, Access converted 4,160,745 shares of Class B Common Stock to the same number of shares of Class A Common Stock, which it subsequently sold through open market sales, which is reflected as an exchange of Class B Common Stock in the consolidated statements of equity for the three months ended December 31, 2021. Earnings per Share The consolidated statements of operations present basic and diluted earnings per share (“EPS”). The Company utilizes the two-class method to report earnings per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings. Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders. 7 Stock-Based Compensation The Company accounts for stock-based payments in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”). Stock-based compensation consists primarily of restricted stock units (“RSUs”) granted to eligible employees and executives under the Omnibus Incentive Plan. The Company measures compensation expense for RSUs based on the fair value of the award on the date of grant. The grant date fair value is based on the closing market price of the Company’s Class A Common Stock on the date of grant. The Company accounts for forfeitures as they occur. Stock-based compensation is recognized on a straight-line basis over the requisite service period, which is generally four years except for certain one-year awards issued in connection with the IPO. The Company also grants unvested restricted stock to the Company’s directors. The Company recognizes stock-based compensation expense equal to the grant date fair value of the restricted stock, based on the closing stock price on grant date, on a straight-line basis over the requisite service period of the awards, which is generally one year . The Company also recognizes stock-based compensation under the Plan. The awards outstanding under the Plan are equity-classified. The Company recognized approximately $ 24 million of non-cash stock-based compensation expense for the three months ended December 31, 2021, of which $ 22 million was recorded to additional paid-in capital, and a remaining $ 2 million has been classified as a share-based compensation liability as of December 31, 2021. The share-based compensation liability represents executive awards that have not yet been granted under the Omnibus Incentive Plan, where a total value is known and settlement will occur in a variable number of RSUs. During the three months ended December 31, 2021, $ 9 million was reclassified from share-based compensation liability to additional paid-in capital, representing the grant date fair value of RSUs granted which were previously classified as a share-based compensation liability as of September 30, 2021. The Company recognized approximately $ 6 million of non-cash stock-based compensation expense for the three months ended December 31, 2020. Income Taxes The Company uses the estimated annual effective tax rate method in computing its interim tax provision. Certain items, including those deemed to be unusual and infrequent are excluded from the estimated annual effective tax rate. In such cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions. New Accounting Pronouncements Recently Adopted Accounting Pronouncements In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This ASU eliminates certain exceptions to the general principles in ASC 740, Income Taxes . Specifically, it eliminates the exception to (1) the incremental approach for intraperiod tax allocation when there is a loss from continuing operations, and income or a gain from other items; (2) the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 also simplifies U.S. GAAP by making other changes. The Company adopted ASU 2019-12 in the first quarter of fiscal 2022 and this adoption did not have a material impact on the Company’s consolidated financial statements. In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and D erivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models used to separately account for embedded conversion features as a component of equity. Instead, the entity will account for the convertible debt or convertible preferred stock securities as a single unit of account, unless the conversion feature requires bifurcation and recognition as derivatives. Additionally, the guidance requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares. The Company adopted ASU 2020-06 in the first quarter of fiscal year 2022 and this adoption did not have any impact on the Company’s consolidated financial statements. 8 3. Earnings per Share The Company utilizes the two-class method to report earnings per share. Basic earnings per share is computed by dividing net income available to each class of stock by the weighted average number of outstanding common shares for each class of stock. Diluted earnings per share is computed by dividing net income available to each class of stock by the weighted average number of outstanding common shares, plus dilutive potential common shares, which is calculated using the treasury-stock method. Under the treasury-stock method, potential common shares are excluded from the computation of EPS in periods in which they have an anti-dilutive effect. The potentially dilutive common shares did not have a dilutive effect on the Company’s EPS calculation for the three months ended December 31, 2021 and 2020, respectively. The Company allocates dividends declared to Class A Common Stock and Class B Common Stock based on timing and amounts actually declared for each class of stock and the undistributed earnings are allocated to Class A Common Stock and Class B Common Stock pro rata on a basic weighted average shares outstanding basis since the two classes of stock participate equally on a per share basis upon liquidation. The Class B Common Stock issued to Management LLC for the exercise of the vested deferred equity units is included in the basic weighted average number of outstanding shares of Class B Common Stock. Upon issuance to the participants in the Plan, the Class B Common Stock will be converted into Class A Common Stock and included in the basic weighted average number of outstanding shares of Class A Common Stock. Since the shares expected to satisfy the vested portion of the deferred equity units are already included in the basic weighted average number of outstanding common shares, there is no potential dilutive effect associated with the vested portion of these stock-based compensation awards. Refer to Note 2 for a description of current period activity. The following table sets forth the calculation of basic and diluted net income per common share under the two-class method for the three months ended December 31, 2021 and 2020 (in millions, except share and per share data): Three Months Ended December 31, 2021 2020 Class A Class B Class A Class B Basic and Diluted EPS: Numerator Net income attributable to Warner Music Group Corp. $ 47 $ 140 $ 19 $ 79 Less: Net income attributable to participating securities ( 2 ) — ( 2 ) — Net income attributable to common stockholders $ 45 $ 140 $ 17 $ 79 Denominator Weighted average shares outstanding 123,969,142 390,952,038 94,221,946 416,632,808 Basic and Diluted EPS $ 0.36 $ 0.36 $ 0.18 $ 0.19 4. Revenue Recognition For our operating segments, Recorded Music and Music Publishing, the Company accounts for a contract when it has legally enforceable rights and obligations and collectability of consideration is probable. The Company identifies the performance obligations and determines the transaction price associated with the contract, which is then allocated to each performance obligation, using management’s best estimate of standalone selling price for arrangements with multiple performance obligations. Revenue is recognized when, or as, control of the promised services or goods is transferred to the Company’s customers, and in an amount that reflects the consideration the Company is contractually due in exchange for those services or goods. An estimate of variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Certain of the Company’s arrangements include licenses of intellectual property with consideration in the form of sales- and usage-based royalties. Royalty revenue is recognized when the subsequent sale or usage occurs using the best estimates available of the amounts that will be received by the Company. 9 Disaggregation of Revenue The Company’s revenue consists of the following categories, which aggregate into the segments – Recorded Music and Music Publishing: Three Months Ended December 31, 2021 2020 (in millions) Revenue by Type Digital $ 870 $ 727 Physical 195 174 Total Digital and Physical 1,065 901 Artist services and expanded-rights 232 180 Licensing 89 80 Total Recorded Music 1,386 1,161 Performance 38 30 Digital 133 99 Mechanical 14 11 Synchronization 42 33 Other 2 2 Total Music Publishing 229 175 Intersegment eliminations ( 1 ) ( 1 ) Total Revenues $ 1,614 $ 1,335 Revenue by Geographical Location U.S. Recorded Music $ 608 $ 481 U.S. Music Publishing 115 91 Total U.S. 723 572 International Recorded Music 778 680 International Music Publishing 114 84 Total International 892 764 Intersegment eliminations ( 1 ) ( 1 ) Total Revenues $ 1,614 $ 1,335 Recorded Music Recorded Music mainly involves selling, marketing, distribution and licensing of recorded music produced by the Company’s recording artists. Recorded Music revenues are derived from four main sources, which include digital, physical, artist services and expanded-rights, and licensing. Digital revenues are generated from the expanded universe of digital partners, including digital streaming services and download services. These licenses typically contain a single performance obligation, which is ongoing access to all intellectual property in an evolving content library, predicated on: (1) the business practice and contractual ability to remove specific content without a requirement to replace the content and without impact to minimum royalty guarantees and (2) the contracts not containing a specific listing of content subject to the license. Digital licensing contracts are generally long-term with consideration in the form of sales- and usage-based royalties that are typically received monthly. Certain contracts contain minimum guarantees, which are recoupable against royalties. Upon contract inception, the Company will assess whether a shortfall or breakage is expected (i.e., where the minimum guarantee will not be recouped through royalties) in order to determine timing of revenue recognition for the minimum guarantee. For fixed fee contracts and minimum guarantee contracts where breakage is expected, the total transaction price (fixed fee or minimum guarantee) is recognized proportionately over the contract term using an appropriate measure of progress which is based on the Company’s digital partner’s subscribers or streaming activity as these are measures of access to an evolving catalog, or on a straight-line basis. The Company updates its assessment of the transaction price each reporting period to see if anticipated royalty earnings exceed the minimum guarantee. For contracts where breakage is not expected, royalties are recognized as revenue as sales or usage occurs based upon the licensee’s usage reports and, when these reports are not available, revenue is based on historical data, industry information and other relevant trends. 10 Additionally, for certain licenses where the consideration is fixed and the intellectual property being licensed is static, revenue is recognized at the point in time when control of the licensed content is transferred to the customer. Physical revenues are generated from the sale of physical products such as vinyl, CDs and DVDs. Revenues from the sale of physical Recorded Music products are recognized upon transfer of control to the customer, which typically occurs once the product has been shipped and the ability to direct use and obtain substantially all of the benefit from the asset have been transferred. In accordance with industry practice and as is customary in many territories, certain products, such as vinyl, CDs and DVDs, are sold to customers with the right to return unsold items. Revenues from such sales are generally recognized upon shipment based on gross sales less a provision for future estimated returns. Artist services and expanded-rights revenues are generated from artist services businesses and participation in expanded-rights associated with artists, including advertising, merchandising including direct-to-consumer sales, touring, concert promotion, ticketing, sponsorship, fan clubs, artist websites, social publishing, and artist and brand management. Artist services and expanded-rights contracts are generally short term. Revenue is recognized as or when services are provided (e.g., at time of an artist’s event) assuming collectability is probable. In some cases, the Company is reliant on the artist to report revenue generating activities. For certain artist services and expanded-rights contracts, collectability is not considered probable until notification is received from the artist’s management. Revenues from the sale of products sold through our e-commerce websites are recognized when control of the goods is transferred to the customer, which is upon receipt of finished goods by the customer. Licensing revenues represent royalties or fees for the right to use sound recordings in combination with visual images such as in films or television programs, television commercials and video games. In certain territories, the Company may also receive royalties when sound recordings are performed publicly through broadcast of music on television, radio and cable and in public spaces such as shops, workplaces, restaurants, bars and clubs. Licensing contracts are generally short term. For fixed-fee contracts, revenue is recognized at the point in time when control of the licensed content is transferred to the customer. Royalty based contracts are recognized as the underlying sales or usage occurs. Music Publishing Music Publishing acts as a copyright owner and/or administrator of the musical compositions and generates revenues related to the exploitation of musical compositions (as opposed to recorded music). Music publishers generally receive royalties from the use of the musical compositions in public performances, digital and physical recordings and in combination with visual images. Music publishing revenues are derived from five main sources: mechanical, performance, synchronization, digital and other. Digital revenues are generated with respect to the musical compositions being embodied in recordings licensed to digital streaming services and digital download services and for digital performance. Performance revenues are received when the musical composition is performed publicly through broadcast of music on television, radio and cable and in retail locations (e.g., bars and restaurants), live performance at a concert or other venue (e.g., arena concerts and nightclubs) and performance of musical compositions in staged theatrical productions. Mechanical revenues are generated with respect to the musical compositions embodied in recordings sold in any physical format or configuration such as vinyl, CDs and DVDs. Synchronization revenues represent the right to use the composition in combination with visual images such as in films or television programs, television commercials and video games as well as from other uses such as in toys or novelty items and merchandise. Other revenues represent earnings for use in printed sheet music and other uses. Digital and synchronization revenue recognition is similar for both Recorded Music and Music Publishing, therefore refer to the discussion within Recorded Music. Included in these revenue streams, excluding synchronization and other, are licenses with performing rights organizations or collecting societies (e.g., ASCAP, BMI, SESAC and GEMA), which are long-term contracts containing a single performance obligation, which is ongoing access to all intellectual property in an evolving content library. The most common form of consideration for these contracts is sales- and usage-based royalties. The collecting societies submit usage reports, typically with payment for royalties due, often on a quarterly or biannual reporting period, in arrears. Royalties are recognized as the sale or usage occurs based upon usage reports and, when these reports are not available, royalties are estimated based on historical data, such as recent royalties reported, company-specific information with respect to changes in repertoire, industry information and other relevant trends. Also included in these revenue streams are smaller, short-term contracts for specified content, which generally involve a fixed fee. For fixed-fee contracts, revenue is recognized at the point in time when control of the license is transferred to the customer. The Company excludes from the measurement of transaction price all taxes assessed by governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers. 11 Sales Returns and Uncollectible Accounts In accordance with practice in the recorded music industry and as customary in many territories, certain physical revenue products (such as vinyl, CDs and DVDs) are sold to customers with the right to return unsold items. Revenues from such sales are recognized when the products are shipped based on gross sales less a provision for future estimated returns. In determining the estimate of physical product sales that will be returned, management analyzes vendor sales of product, historical return trends, current economic conditions, changes in customer demand and commercial acceptance of the Company’s products. Based on this information, management reserves a percentage of each dollar of physical product sales that provide the customer with the right of return and records an asset for the value of the returned goods and liability for the amounts expected to be refunded. Similarly, management evaluates accounts receivables to determine if they will ultimately be collected. In performing this evaluation, significant judgments and estimates are involved, including an analysis of specific risks on a customer-by-customer basis for larger accounts and customers and a receivables aging analysis that determines the percent that has historically been uncollected by aged category, in addition to other factors to estimate an allowance for credit losses. The time between the Company’s issuance of an invoice and payment due date is not significant; customer payments that are not collected in advance of the transfer of promised services or goods are generally due no later than 30 days from invoice date. Based on this information, management provides a reserve for estimated credit losses. Based on management’s analysis of sales returns, refund liabilities of $ 33 million and $ 23 million were established at December 31, 2021 and September 30, 2021, respectively. Based on management’s analysis of estimated credit losses, reserves of $ 20 million and $ 20 million were established at December 31, 2021 and September 30, 2021, respectively. Principal versus Agent Revenue Recognition The Company reports revenue on a gross or net basis based on management’s assessment of whether the Company acts as a principal or agent in the transaction. The determination of whether the Company acts as a principal or an agent in a transaction is based on an evaluation of whether the Company controls the good or service before transfer to the customer. When the Company concludes that it controls the good or service before transfer to the customer, the Company is considered a principal in the transaction and records revenue on a gross basis. When the Company concludes that it does not control the good or service before transfer to the customer but arranges for another entity to provide the good or service, the Company acts as an agent and records revenue on a net basis in the amount it earns for its agency service. In the normal course of business, the Company distributes music content on behalf of third-party record labels. Based on the above guidance, the Company records the distribution of content of third-party record labels on a gross basis, subject to the terms of the contract, as the Company controls the content before transfer to the customer. Conversely, recorded music distributed by other record companies where the Company has a right to participate in the profits are recorded on a net basis. Deferred Revenue Deferred revenue principally relates to fixed fees and minimum guarantees received in advance of the Company’s performance or usage by the licensee. Reductions in deferred revenue are a result of the Company’s performance under the contract or usage by the licensee. Deferred revenue increased by $ 104 million during the three months ended December 31, 2021 related to cash received from customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period. Revenues of $ 135 million were recognized during the three months ended December 31, 2021 related to the balance of deferred revenue at September 30, 2021. There were no other significant changes to deferred revenue during the reporting period. Performance Obligations For the three months ended December 31, 2021 and December 31, 2020, the Company recognized revenue of $ 37 million and $ 20 million, respectively, from performance obligations satisfied in previous periods. 12 Wholly and partially unsatisfied performance obligations represent future revenues not yet recorded under long-term intellectual property licensing contracts containing fixed fees, advances and minimum guarantees. Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at December 31, 2021 are as follows: Rest of FY22 FY23 FY24 Thereafter Total (in millions) Remaining performance obligations $ 341 $ 312 $ 121 $ 1 $ 775 Total $ 341 $ 312 $ 121 $ 1 $ 775 5. Acquisition of 300 Entertainment On December 16, 2021, the Company purchased all outstanding shares of Theory Entertainment LLC d/b/a 300 Entertainment (“300 Entertainment”), an independent U.S. record label, pursuant to the terms and conditions of the merger agreement of the same date among Warner Music Inc. and MM Investment LLC, both wholly-owned subsidiaries of the Company, the Buyer Representative, Trifecta Merger Subsidiary LLC, Theory Entertainment LLC d/b/a 300 Entertainment and the Seller Representative (the “Merger Agreement”). The cash consideration paid at closing of the acquisition was approximately $ 397 million, which reflects the base purchase price of $ 400 million, adjusted for, among other items, preliminary working capital of 300 Entertainment. The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations , using the acquisition method of accounting. The assets and liabilities of 300 Entertainment, including identifiable intangible assets, have been measured at their fair value primarily using Level 3 inputs (see Note 15 for additional information on fair value inputs). Determining the fair value of the assets acquired and liabilities assumed requires judgment and involved the use of assumptions with respect to future cash inflows and outflows, discount rates, asset useful lives and market multiples, among other items. The use of different estimates and judgments could yield materially different results. The excess of the purchase price over the fair value of the net assets acquired, including the amount assigned to identifiable intangible assets, has been recorded as goodwill. The resulting goodwill has been included in our Recorded Music reportable segment. The recognized goodwill will be deductible for income tax purposes. Any impairment charges made in future periods associated with goodwill, if any, will not be tax-deductible. The table below presents (i) the preliminary estimate of the acquisition consideration as it relates to the acquisition of 300 Entertainment and (ii) the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of December 16, 2021 (in millions): Preliminary Purchase Price Allocation Cash and equivalents $ 2 Accounts receivable 10 Royalty advances 35 Property, plant and equipment, net 1 Goodwill 127 Intangible assets subject to amortization, net (a) 233 Other assets 1 Accounts payable ( 4 ) Accrued royalties ( 7 ) Accrued liabilities ( 1 ) Total purchase price allocated $ 397 ______________________________________ (a) Identifiable intangible assets are comprised of the following (in millions): Total Recorded music catalog $ 135 Artist and songwriter contracts 82 Trademarks 11 Music publishing copyrights 5 Total intangible assets acquired $ 233 13 The acquisition accounting is subject to revision based on final determinations of fair value and allocations of purchase price to the identifiable assets and liabilities acquired, in addition to the determination of the final consideration, including the determination of the final working capital adjustment pursuant to the mechanism set forth in the Merger Agreement. During the three months ended December 31, 2021, the Company incurred costs related to this acquisition of approximately $ 3 million, which were expensed as incurred and recorded in selling, general and administrative expenses in the accompanying consolidated statement of operations. Prior to the acquisition, the Company had a distribution arrangement with 300 Entertainment. The unaudited pro forma revenue and operating income as if the acquisition occurred on October 1, 2020 is not material to the Company’s reported results for three months ended December 31, 2021 and December 31, 2020. 6. Comprehensive Income Comprehensive income, which is reported in the accompanying consolidated statements of equity, consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income. For the Company, the components of other comprehensive income primarily consist of foreign currency translation gains and losses, minimum pension liabilities, and deferred gains and losses on financial instruments designated as hedges under ASC 815, Derivatives and Hedging . The following summary sets forth the changes in the components of accumulated other comprehensive loss, net of related tax expense of approximately $ 2 million: Foreign Currency Translation Loss (a) Minimum Pension Liability Adjustment Deferred Gains (Losses) On Derivative Financial Instruments Accumulated Other Comprehensive Loss, net (in millions) Balances at September 30, 2021 $ ( 174 ) $ ( 11 ) $ ( 17 ) $ ( 202 ) Other comprehensive (loss) income ( 25 ) — 7 ( 18 ) Balances at December 31, 2021 $ ( 199 ) $ ( 11 ) $ ( 10 ) $ ( 220 ) ______________________________________ (a) Includes historical foreign currency translation related to certain intra-entity transactions. 7. Leases The Company’s lease portfolio consists of operating real estate leases for its corporate offices and, to a lesser extent, storage and other equipment. The Company adopted FASB ASC Topic 842, Leases (“ASC 842”), on October 1, 2019 using the modified retrospective transition method. Under ASC 842, a contract is or contains a lease when (1) an explicitly or implicitly identified asset has been deployed in the contract and (2) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract. The Company determines if an arrangement is or contains a lease at inception of the contract. For all leases (finance and operating), other than those that qualify for the short-term recognition exemption, the Company will recognize on the balance sheet a lease liability for its obligation to make lease payments arising from the lease and a corresponding right-of-use (“ROU”) asset representing its right to use the underlying asset over the period of use based on the present value of lease payments over the lease term as of the lease commencement date. ROU assets are adjusted for initial direct costs, lease payments made and incentives. As the rates implicit in our leases are not readily determinable, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. This rate is based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments. The lease term used to calculate the lease liability will include options to extend or terminate the lease when the option to extend or terminate is at the Company’s discretion and it is reasonably certain that the Company will exercise the option. Fixed payments are recognized as lease expense on a straight-line basis over the lease term. For leases with a term of one year or less, the lease payments are recognized in the consolidated statements of operations on a straight-line basis over the lease term. ASC 842 requires that only limited types of variable payments be included in the determination of lease payments, which affects lease classification and measurement. Variable lease costs, if any, are recognized as incurred and such costs are excluded from lease balances recorded on the consolidated balance sheet. The initial measurement of the lease liability and ROU asset are determined based on fixed lease payments. Lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate) are variable and are recognized in the period in which the payments are incurred. The Company’s operating ROU assets are included in operating lease right-of-use assets and the Company’s current and non-current operating lease liabilities are included in operating lease liabilities, current and operating lease liabilities, noncurrent, respectively, in the Company’s balance sheet. 14 Operating lease liabilities are amortized using the effective interest method. That is, in each period, the liability will be increased to reflect the interest that is accrued on the related liability by using the appropriate discount rate and decreased by the lease payments made during the period. The subsequent measurement of the ROU asset is linked to the amount recognized as the lease liability. Accordingly, the ROU asset is measured as the lease liability adjusted by (1) accrued or prepaid rents (i.e., the aggregate difference between the cash payment and straight-line lease cost), (2) remaining unamortized initial direct costs and lease incentives, and (3) impairments of the ROU asset. Operating lease costs are included in Selling, general and administrative expenses. For lease agreements that contain both lease and non-lease components, the Company has elected the practical expedient provided by ASC 842 that permits the accounting for these components as a single lease component (rather than separating the lease from the non-lease components and accounting for the components individually). The Company enters into operating leases for buildings, office equipment, production equipment, warehouses, and other types of equipment. Our leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year. Among the Company’s operating leases are its leases for the Ford Factory Building, located at 777 S. Santa Fe Avenue in Los Angeles, California, and for 27 Wrights Lane, Kensington, London, United Kingdom. The landlord for both leases is an affiliate of Access. As of December 31, 2021, the aggregate lease liability related to these leases was $ 121 million. There are no restrictions or covenants, such as those relating to dividends or incurring additional financial obligations, relating to our lease portfolio, and residual value guarantees are not significant. The components of lease expense were as follows: Three Months Ended December 31, 2021 2020 (in millions) Lease Cost Operating lease cost $ 14 14 Short-term lease cost 1 1 Variable lease cost 2 2 Total lease cost $ 17 $ 17 The Company incurred and recorded other occupancy expenses of $ 4 million for both the three months ended December 31, 2021 and December 31, 2020. Supplemental cash flow information related to leases was as follows: Three Months Ended December 31, 2021 2020 (in millions) Cash paid for amounts included in the measurement of operating lease liabilities $ 15 $ 15 Right-of-use assets obtained in exchange for operating lease obligations — 6 15 Supplemental balance sheet information related to leases was as follows: December 31, 2021 September 30, 2021 (in millions) Operating Leases Operating lease right-of-use assets $ 258 $ 268 Operating lease liabilities, current $ 43 $ 43 Operating lease liabilities, noncurrent 275 287 Total operating lease liabilities $ 318 $ 330 Weighted Average Remaining Lease Term Operating leases 7 years 8 years Weighted Average Discount Rate Operating leases 4.70 % 4.69 % Maturities of lease liabilities were as follows: Fiscal Year Ended September 30, Operating Leases (in millions) 2022 $ 42 2023 55 2024 51 2025 51 2026 43 Thereafter 136 Total lease payments 378 Less: Imputed interest ( 60 ) Total $ 318 As of December 31, 2021, there have been no leases entered into that have not yet commenced. 8. Goodwill and Intangible Assets Goodwill The following analysis details the changes in goodwill for each reportable segment: Recorded Music Music Publishing Total (in millions) Balances at September 30, 2021 $ 1,366 $ 464 $ 1,830 Acquisitions (a) 130 — 130 Other adjustments (b) ( 15 ) — ( 15 ) Balances at December 31, 2021 $ 1,481 $ 464 $ 1,945 ______________________________________ (a) Primarily relates to the acquisition of 300 Entertainment as described in Note 5. (b) Other adjustments during the three months ended December 31, 2021 represent foreign currency movements. The Company performs its annual goodwill impairment test in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”) during the fourth quarter of each fiscal year as of July 1. The Company may conduct an earlier review if events or circumstances occur that would suggest the carrying value of the Company’s goodwill may not be recoverable. No indicators of impairment were identified during the current period that required the Company to perform an interim assessment or recoverability test. 16 Intangible Assets Intangible assets consist of the following: Weighted-Average Useful Life December 31, 2021 September 30, 2021 (in millions) Intangible assets subject to amortization: Recorded music catalog 12 years $ 1,338 $ 1,206 Music publishing copyrights 25 years 2,005 1,730 Artist and songwriter contracts 13 years 1,068 997 Trademarks 14 years 106 96 Other intangible assets 6 years 96 96 Total gross intangible asset subject to amortization 4,613 4,125 Accumulated amortization ( 2,141 ) ( 2,108 ) Total net intangible assets subject to amortization 2,472 2,017 Intangible assets not subject to amortization: Trademarks and tradenames Indefinite 152 154 Total net intangible assets $ 2,624 $ 2,171 The increase in intangible assets during the three months ended December 31, 2021 primarily relates to the acquisition of 300 Entertainment, which resulted in an increase in intangible assets as described in Note 5, and an acquisition of music-related assets within music publishing copyrights for approximately $ 250 million. 9. Debt Debt Capitalization Long-term debt, all of which was issued by Acquisition Corp., consists of the following: December 31, 2021 September 30, 2021 (in millions) Revolving Credit Facility (a) $ — $ — Senior Term Loan Facility due 2028 1,145 1,145 2.750 % Senior Secured Notes due 2028 (€ 325 face amount) 368 381 3.750 % Senior Secured Notes due 2029 540 — 3.875 % Senior Secured Notes due 2030 535 535 2.250 % Senior Secured Notes due 2031 (€ 445 face amount) 504 522 3.000 % Senior Secured Notes due 2031 800 800 Total long-term debt, including the current portion $ 3,892 $ 3,383 Issuance premium less unamortized discount and unamortized deferred financing costs ( 46 ) ( 37 ) Total long-term debt, including the current portion, net $ 3,846 $ 3,346 ______________________________________ (a) Reflects $ 300 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $ 7 million at both December 31, 2021 and September 30, 2021. There were no loans outstanding under the Revolving Credit Facility at December 31, 2021 or September 30, 2021. The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp. As of December 31, 2021 Acquisition Corp. had issued and outstanding the 2.750 % Senior Secured Notes due 2028, the 3.750 % Senior Secured Notes due 2029, the 3.875 % Senior Secured Notes due 2030, the 2.250 % Senior Secured Notes due 2031 and the 3.000 % Senior Secured Notes due 2031 (together, the “Acquisition Corp. Notes”). All of the Acquisition Corp. Notes are guaranteed by all of Acquisition Corp.’s domestic wholly-owned subsidiaries. The guarantee of the Acquisition Corp. Notes by Acquisition Corp.’s domestic wholly-owned subsidiaries is full, unconditional and joint and several. The secured notes are guaranteed on a senior secured basis. 17 The Company and Holdings are holding companies that conduct substantially all of their business operations through Acquisition Corp. Accordingly, while Acquisition Corp. and its subsidiaries are not currently restricted from distributing funds to the Company and Holdings under the indentures for the Acquisition Corp. Notes, as well as the credit agreements for the Acquisition Corp. Senior Credit Facilities, including the Revolving Credit Facility and the Senior Term Loan Facility, should Acquisition Corp.’s Total Indebtedness to EBITDA Ratio increase above 3.50 :1.00 and the term loans not achieve an investment grade rating, the covenants under the Revolving Credit Facility will be reinstated and the ability of the Company and Holdings to obtain funds from their subsidiaries will be restricted by the Revolving Credit Facility. Fiscal 2022 Transactions 3.750 % Senior Secured Notes Offering On November 24, 2021, Acquisition Corp. issued and sold $ 540 million of its 3.750 % Senior Secured Notes due 2029 (the “ 3.750 % Senior Secured Notes”). Interest on the Notes will accrue at the rate of 3.750 % per annum and will be payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 2022. The 3.750 % Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis by each of Acquisition Corp.’s existing direct or indirect wholly-owned domestic restricted subsidiaries and by any such subsidiaries that guarantee obligations of Acquisition Corp. under its existing credit facilities, subject to customary exceptions. The indenture governing the 3.750 % Senior Secured Notes contains covenants limiting, among other things, Acquisition Corp.’s ability and the ability of most of its subsidiaries to create liens and consolidate, merge, sell or otherwise dispose of all or substantially all of its assets. Interest Rates The loans under the Revolving Credit Facility bear interest at Acquisition Corp.’s election at a rate equal to (i) the rate for deposits in the borrowing currency in the London interbank market (adjusted for maximum reserves) for the applicable interest period (“Revolving LIBOR”) subject to a zero floor, plus 1.75 % per annum in the case of Initial Revolving Loans (as defined in the Revolving Credit Agreement), or 1.875 % per annum in the case of 2020 Revolving Loans (as defined in the Revolving Credit Agreement), or (ii) the base rate, which is the highest of (x) the corporate base rate established by the administrative agent from time to time, (y) 0.50 % in excess of the overnight federal funds rate and (z) the one-month Revolving LIBOR plus 1.0 % per annum, plus, in each case, 0.75 % per annum in the case of Initial Revolving Loans, or 0.875 % per annum in the case of 2020 Revolving Loans; provided that, in respect of 2020 Revolving Loans, the applicable margin with respect to such loans is subject to adjustment as set forth in the pricing grid in the Revolving Credit Agreement. Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.08 x at December 31, 2021, the applicable margin for Eurodollar loans would be 1.625 % instead of 1.875 % and the applicable margin for ABR loans would be 0.625 % instead of 0.875 % in the case of 2020 Revolving Loans. If there is a payment default at any time, then the interest rate applicable to overdue principal will be the rate otherwise applicable to such loan plus 2.0 % per annum. Default interest will also be payable on other overdue amounts at a rate of 2.0 % per annum above the amount that would apply to an alternative base rate loan. The loans under the Senior Term Loan Facility bear interest at Acquisition Corp.’s election at a rate equal to (i) the rate for deposits in U.S. dollars in the London interbank market (adjusted for maximum reserves) for the applicable interest period (“Term Loan LIBOR”) subject to a zero floor, plus 2.125 % per annum or (ii) the base rate, which is the highest of (x) the corporate base rate established by the administrative agent as its prime rate in effect at its principal office in New York City from time to time, (y) 0.50 % in excess of the overnight federal funds rate and (z) one-month Term Loan LIBOR, plus 1.00 % per annum, plus, in each case, 1.125 % per annum. If there is a payment default at any time, then the interest rate applicable to overdue principal and interest will be the rate otherwise applicable to such loan plus 2.0 % per annum. Default interest will also be payable on other overdue amounts at a rate of 2.0 % per annum above the amount that would apply to an alternative base rate loan. The Company has entered into, and in the future may enter into, interest rate swaps to manage interest rate risk. Please refer to Note 12 of our consolidated financial statements for further discussion. Maturity of Senior Term Loan Facility The loans outstanding under the Senior Term Loan Facility mature on January 20, 2028. Maturity of Revolving Credit Facility The maturity date of the Revolving Credit Facility is April 3, 2025. 18 Maturities of Senior Secured Notes As of December 31, 2021, there are no scheduled maturities of notes until 2028, when $ 368 million is scheduled to mature. Thereafter, $ 2.379 billion is scheduled to mature. Interest Expense, net Total interest expense, net was $ 30 million and $ 31 million for the three months ended December 31, 2021 and 2020, respectively. The weighted-average interest rate of the Company’s total debt was 3.2 % at December 31, 2021, 3.2 % at September 30, 2021 and 3.7 % at December 31, 2020. 10. Commitments and Contingencies From time to time the Company is involved in claims and legal proceedings that arise in the ordinary course of business. The Company is currently subject to several such claims and legal proceedings. Based on currently available information, the Company does not believe that resolution of pending matters will have a material adverse effect on its financial condition, cash flows or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that the Company’s defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on the Company’s business, financial condition, cash flows and results of operations in a particular period. Any claims or proceedings against the Company, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors. 11. Income Taxes For the three months ended December 31, 2021, the Company recorded an income tax expense of $ 75 million. The income tax expense for the three months ended December 31, 2021 is higher than the expected tax expense at the statutory tax rate of 21% primarily due to U.S. state and local taxes, withholding taxes, foreign income taxed at rates higher than the U.S., and non-deductible executive compensation under IRC Section 162(m), offset by a deduction against foreign derived intangible income (“FDII”). For the three months ended December 31, 2020, the Company recorded an income tax expense of $ 35 million. The income tax expense for the three months ended December 31, 2020 is higher than the expected tax benefit at the statutory tax rate of 21% primarily due to U.S. state and local taxes, withholding taxes, foreign income taxed at rates higher than the U.S., and non-deductible executive compensation under IRC Section 162(m), offset by FDII and excess tax benefits from long term incentive plan. The Company has determined that it is reasonably possible that the gross unrecognized tax benefits as of December 31, 2021 could decrease by up to approximately $ 2 million related to various ongoing audits and settlement discussions in various foreign jurisdictions during the next twelve months. 12. Derivative Financial Instruments The Company uses derivative financial instruments, primarily foreign currency forward exchange contracts and interest rate swaps, for the purposes of managing foreign currency exchange rate risk and interest rate risk on expected future cash flows. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates. The Company enters into foreign currency forward exchange contracts primarily to hedge the risk that unremitted or future royalties and license fees owed to its U.S. companies for the sale or licensing of U.S.-based music and merchandise abroad may be adversely affected by changes in foreign currency exchange rates. The Company focuses on managing the level of exposure to the risk of foreign currency exchange rate fluctuations on its major currencies, which include the Euro, British pound sterling, Japanese yen, Canadian dollar, Swedish krona, Australian dollar, Brazilian real, Korean won and Norwegian krone. The Company also may at times choose to hedge foreign currency risk associated with financing transactions such as third-party debt and other balance sheet items. The Company’s foreign currency forward exchange contracts have not been designated as hedges under the criteria prescribed in ASC 815. The Company records these contracts at fair value on its balance sheet and the related gains and losses are immediately recognized in the consolidated statement of operations where there is an offsetting entry related to the underlying exposure. The Company has entered into, and in the future may enter into, interest rate swaps to manage interest rate risk. These instruments may offset a portion of changes in income or expense, or changes in fair value of the Company’s long-term debt. The interest rate swap instruments are designated and qualify as cash flow hedges under the criteria prescribed in ASC 815. The Company 19 records these contracts at fair value on its balance sheet and gains or losses on these contracts are deferred in equity (as a component of comprehensive income). The fair value of foreign currency forward exchange contracts is determined by using observable market transactions of spot and forward rates (i.e., Level 2 inputs) which is discussed further in Note 15. Additionally, netting provisions are provided for in existing International Swap and Derivative Association Inc. agreements in situations where the Company executes multiple contracts with the same counterparty. As a result, net assets or liabilities resulting from foreign exchange derivatives subject to these netting agreements are classified within other current assets or other current liabilities in the Company’s consolidated balance sheets. The Company’s hedged interest rate transactions as of December 31, 2021 are expected to be recognized within two years . The fair value of interest rate swaps is based on dealer quotes of market rates (i.e., Level 2 inputs) which is discussed further in Note 15. Interest income or expense related to interest rate swaps is recognized in interest income (expense), net in the same period as the related expense is recognized. Any ineffective portion of the interest rate swaps are recognized in other income (expense) in the period measured. The Company monitors its positions with, and the credit quality of, the financial institutions that are party to any of its financial transactions. As of December 31, 2021, the Company had outstanding hedge contracts for the sale of $ 317 million and the purchase of $ 218 million of foreign currencies at fixed rates that will be settled by September 2022. As of December 31, 2021, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 10 million of unrealized deferred losses in comprehensive income related to the interest rate swaps. As of September 30, 2021, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 17 million of unrealized deferred losses in comprehensive income related to the interest rate swaps. The Company recorded realized pre-tax gains of $ 1 million and unrealized pre-tax gains of $ 2 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other income for the three months ended December 31, 2021. The Company recorded realized pre-tax losses of $ 1 million and unrealized pre-tax losses of $ 4 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other expense for the three months ended December 31, 2020. The unrealized pre-tax gains of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the three months ended December 31, 2021 were $ 9 million. The unrealized pre-tax gains of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the three months ended December 31, 2020 were $ 4 million. The following is a summary of amounts recorded in the consolidated balance sheets pertaining to the Company’s derivative instruments at December 31, 2021 and September 30, 2021: December 31, 2021 (a) September 30, 2021 (b) (in millions) Other current assets $ 2 $ — Other current liabilities — — Other noncurrent assets — — Other noncurrent liabilities ( 13 ) ( 22 ) ______________________________________ (a) $ 5 million and $ 3 million of foreign exchange derivative contracts in current asset and liability positions, respectively, and $ 13 million of interest rate swaps in noncurrent liability positions. (b) $ 22 million of interest rate swaps in noncurrent liability positions. 13. Segment Information As discussed more fully in Note 1, based on the nature of its products and services, the Company classifies its business interests into two fundamental operations: Recorded Music and Music Publishing, which also represent the reportable segments of the Company. Information as to each of these operations is set forth below. The Company evaluates performance based on several factors, of which the primary financial measure is operating income (loss) before non-cash depreciation of tangible assets and non-cash amortization of intangible assets (“OIBDA”). The Company has supplemented its analysis of OIBDA results by segment with an analysis of operating income (loss) by segment. 20 The accounting policies of the Company’s business segments are the same as those described in the summary of significant accounting policies included elsewhere herein. The Company accounts for intersegment sales at fair value as if the sales were to third parties. While intercompany transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses recognized by the segment that is counterparty to the transaction) are eliminated in consolidation, and therefore, do not themselves impact consolidated results. Recorded Music Music Publishing Corporate expenses and eliminations Total Three Months Ended (in millions) December 31, 2021 Revenues $ 1,386 $ 229 $ ( 1 ) $ 1,614 Operating income (loss) 276 32 ( 69 ) 239 Amortization of intangible assets 40 20 — 60 Depreciation of property, plant and equipment 14 2 5 21 OIBDA 330 54 ( 64 ) 320 December 31, 2020 Revenues $ 1,161 $ 175 $ ( 1 ) $ 1,335 Operating income (loss) 223 18 ( 45 ) 196 Amortization of intangible assets 33 19 — 52 Depreciation of property, plant and equipment 13 2 4 19 OIBDA 269 39 ( 41 ) 267 14. Additional Financial Information Cash Interest and Taxes The Company made interest payments of approximately $ 13 million and $ 27 million during the three month ended December 31, 2021 and 2020, respectively. The Company paid approximately $ 29 million and $ 17 million of income and withholding taxes, net of refunds, for the three months ended December 31, 2021 and 2020, respectively. Dividends 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 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 November 9, 2021, the Company’s board of directors declared a cash dividend of $ 0.15 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, which was paid to stockholders on December 1, 2021. The Company paid an aggregate of approximately $ 78 million, or $ 0.15 per share, in cash dividends to stockholders and participating security holders for the three months ended December 31, 2021. On February 8, 2022, the Company’s board of directors declared a cash dividend of $ 0.15 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, payable on March 1, 2022 to stockholders of record as of the close of business on February 18, 2022. Noncash Investment Activity Noncash investing activities for the three months ended December 31, 2021 was approximately $ 125 million related to the acquisition of music publishing rights and music catalogs, net during the three months ended December 31, 2021. The corresponding notes payable balance is reflected as other current liabilities within the Company’s consolidated balance sheet at December 31, 2021. 21 COVID-19 Pandemic On March 11, 2020, the COVID-19 outbreak was declared a global pandemic by the World Health Organization. Government-imposed mandates limiting public assembly and restrictions on non-essential businesses have adversely impacted the Company’s operations for the three months ended December 31, 2021 and December 31, 2020, including touring and live events. For the three months ended December 31, 2021, revenues improved due to the ongoing recovery of certain COVID-19 impacted revenue streams despite a rise in COVID-19 cases associated with the Omicron variant. The continued impact of COVID-19, including increases in infection rates, new variants, renewed governmental action to slow the spread of COVID-19 and to what extent it will impact the Company’s music and related services cannot be predicted. The Company is not presently aware of any events or circumstances arising from the global pandemic that would require us to update any estimates, judgments or materially revise the carrying value of our assets or liabilities. The Company’s estimates may change, however, as new events occur and additional information is obtained, and any such changes will be recognized in the consolidated financial statements. Actual results could differ from estimates, and any such differences may be material to our consolidated financial statements. 15. Fair Value Measurements ASC 820, Fair Value Measurement (“ASC 820”) defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition to defining fair value, ASC 820 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are: • Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. • Level 2—inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. • Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques. In accordance with the fair value hierarchy, described above, the following tables show the fair value of the Company’s financial instruments that are required to be measured at fair value as of December 31, 2021 and September 30, 2021. Fair Value Measurements as of December 31, 2021 (Level 1) (Level 2) (Level 3) Total (in millions) Other Current Assets: Foreign Currency Forward Exchange Contracts (a) $ — $ 2 $ — $ 2 Other Current Liabilities: Contractual Obligations (b) — — ( 7 ) ( 7 ) Other Noncurrent Assets: Equity Investments with Readily Determinable Fair Value (d) 72 — — 72 Other Noncurrent Liabilities: Contractual Obligations (b) — — ( 10 ) ( 10 ) Interest Rate Swaps (e) — ( 13 ) — ( 13 ) Total $ 72 $ ( 11 ) $ ( 17 ) $ 44 22 Fair Value Measurements as of September 30, 2021 (Level 1) (Level 2) (Level 3) Total (in millions) Other Current Liabilities: Contractual Obligations (b) $ — $ — $ ( 4 ) $ ( 4 ) Other Noncurrent Assets: Equity Method Investment (c) 26 — — 26 Equity Investment with Readily Determinable Fair Value (d) 37 — — 37 Other Noncurrent Liabilities: Contractual Obligations (b) — — ( 15 ) ( 15 ) Interest Rate Swaps (e) — ( 22 ) — ( 22 ) Total $ 63 $ ( 22 ) $ ( 19 ) $ 22 ______________________________________ (a) The fair value of foreign currency forward exchange contracts is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay at their maturity dates for contracts involving the same currencies and maturity dates. (b) This represents contingent consideration related to a fiscal 2020 acquisition. This is based on a probability weighted performance approach and it is adjusted to fair value on a recurring basis and any adjustments are typically included as a component of operating income in the consolidated statements of operations. This amount was mainly calculated using unobservable inputs such as future earnings performance of the acquiree and the expected timing of payments. (c) This represents an equity method investment which was acquired in fiscal 2019 whereby the Company elected the fair value option under ASC 825, Financial Instruments (“ASC 825”). In November 2021, the investment was reclassified to an equity investment with a readily determinable fair value. (d) These represent equity investments with a readily determinable fair value. The Company has measured its investments to fair value in accordance with ASC 321, Investments—Equity Securities, based on quoted prices in active markets. (e) The fair value of the interest rate swaps is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay as of December 31, 2021 for contracts involving the same attributes and maturity dates. The following table reconciles the beginning and ending balances of net liabilities classified as Level 3: Total (in millions) Balance at September 30, 2021 $ ( 19 ) Additions ( 2 ) Reductions — Payments 4 Balance at December 31, 2021 $ ( 17 ) The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, inventories and property, plant and equipment, are not required to be re-measured to fair value on a recurring basis. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that impairment exists, the asset is written down to its fair value. In addition, an impairment analysis is performed at least annually for goodwill and indefinite-lived intangible assets. Equity Investments Without Readily Determinable Fair Value The Company evaluates its equity investments without readily determinable fair values for impairment if factors indicate that a significant decrease in value has occurred. The Company has elected to use the measurement alternative to fair value that will allow these investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. The Company did not record any impairment charges on these investments during the three months ended December 31, 2021 and 2020. In addition, there were no observable price changes events that were completed during the three months ended December 31, 2021 and 2020. Fair Value of Debt Based on the level of interest rates prevailing at December 31, 2021, the fair value of the Company’s debt was $ 3.875 billion. Based on the level of interest rates prevailing at September 30, 2021, the fair value of the Company’s debt was $ 3.412 billion. The fair value of the Company’s debt instruments is determined using quoted market prices from less active markets or by using quoted market prices for instruments with identical terms and maturities; both approaches are considered a Level 2 measurement. 23