Warner Music Group Corp. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA WARNER MUSIC GROUP CORP. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2022 TABLE OF CONTENTS Page Number Reports of Independent Registered Public Accounting Firm (PCAOB ID: 185 ) 78 Consolidated Financial Statements: Consolidated Balance Sheets as of September 30, 2022 and September 30, 2021 81 Consolidated Statements of Operations for the fiscal years ended September 30, 2022, September 30, 2021 and September 30, 2020 82 Consolidated Statements of Comprehensive Income (Loss) for the fiscal years ended September 30, 2022, September 30, 2021 and September 30, 2020 83 Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2022, September 30, 2021 and September 30, 2020 84 Consolidated Statements of Equity for the fiscal years ended September 30, 2022, September 30, 2021 and September 30, 2020 85 Notes to Consolidated Financial Statements 86 Financial Statement Schedule: Schedule II—Valuation and Qualifying Accounts 120 77 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Warner Music Group Corp.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of Warner Music Group Corp. and subsidiaries (the Company) as of September 30, 2022 and September 30, 2021, the related consolidated statements of operations, comprehensive income (loss), cash flows, and equity for each of the years in the three-year period ended September 30, 2022, and the related notes and financial statement schedule II as listed in the accompanying index to Item 8 (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and September 30, 2021, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2022, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated November 22, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. 78 Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Sufficiency of audit evidence over Recorded Music digital revenue As discussed in Notes 2 and 4 to the consolidated financial statements, the Company generated $3,305 million of digital revenues within the Recorded Music segment for the year ended September 30, 2022. The Company’s Recorded Music digital revenue recognition process involves a high volume of royalty transactions dependent on several information technology (IT) applications responsible for the initiation, processing, and recording of transactions in accordance with the Company’s accounting policy. We identified the evaluation of the sufficiency of audit evidence related to digital revenue in the Recorded Music segment as a critical audit matter. Evaluating the sufficiency of audit evidence required especially subjective auditor judgment due to the multiple IT applications, data interfaces, and processing used for the initiation, processing, and recording of transactions, and therefore required involvement of IT professionals. The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over Recorded Music digital revenue. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Recorded Music digital revenue process, including involving IT professionals with specialized skills and knowledge, who assisted in that evaluation and testing. This included controls over the capture and flow of royalty transaction information through the Company’s IT systems. For a selection of Recorded Music digital revenue agreements, we read the underlying agreements and evaluated the Company’s assessment of the contract terms in accordance with revenue recognition requirements. For a sample of revenue transactions, we compared the amounts recognized to (1) underlying sales and usage statements received from customers and cash receipts, where applicable, and (2) underlying documentation, including contracts. For a sample of manual journal entries to Recorded Music digital revenue, which included amounts for contracts that contain non-recoupable fixed fees or minimum guarantees, we agreed amounts to underlying documentation and, where applicable, recalculated the Company’s determination of revenue recognized. In addition, we evaluated the overall sufficiency of audit evidence obtained by assessing the results of procedures performed, including appropriateness of the nature and extent of such evidence. /s/ KPMG LLP We have served as the Company’s auditor since 2015. New York, New York November 22, 2022 79 Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors Warner Music Group Corp.: Opinion on Internal Control Over Financial Reporting We have audited Warner Music Group Corp. and subsidiaries' (the Company) internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), cash flows, and equity for each of the years in the three-year period ended September 30, 2022, and the related notes and financial statement schedule II as listed in the accompanying index to Item 8 (collectively, the consolidated financial statements), and our report dated November 22, 2022 expressed an unqualified opinion on those consolidated financial statements. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ KPMG LLP New York, New York November 22, 2022 80 Warner Music Group Corp. Consolidated Balance Sheets September 30, 2022 September 30, 2021 (in millions, except share data) Assets Current assets: Cash and equivalents $ 584 $ 499 Accounts receivable, net of allowances of $ 19 million and $ 20 million 984 839 Inventories 108 99 Royalty advances expected to be recouped within one year 372 373 Prepaid and other current assets 91 86 Total current assets 2,139 1,896 Royalty advances expected to be recouped after one year 503 457 Property, plant and equipment, net 415 364 Operating lease right-of-use assets, net 226 268 Goodwill 1,920 1,830 Intangible assets subject to amortization, net 2,239 2,017 Intangible assets not subject to amortization 145 154 Deferred tax assets, net 29 31 Other assets 212 194 Total assets $ 7,828 $ 7,211 Liabilities and Equity Current liabilities: Accounts payable $ 268 $ 302 Accrued royalties 1,918 1,880 Accrued liabilities 457 461 Accrued interest 17 14 Operating lease liabilities, current 40 43 Deferred revenue 423 348 Other current liabilities 245 102 Total current liabilities 3,368 3,150 Long-term debt 3,732 3,346 Operating lease liabilities, noncurrent 241 287 Deferred tax liabilities, net 220 207 Other noncurrent liabilities 99 175 Total liabilities $ 7,660 $ 7,165 Equity: Class A common stock, $ 0.001 par value; 1,000,000,000 shares authorized, 137,199,200 and 122,414,827 shares issued and outstanding as of September 30, 2022 and September 30, 2021, respectively $ — $ — Class B common stock, $ 0.001 par value; 1,000,000,000 shares authorized, 377,650,449 and 391,970,996 issued and outstanding as of September 30, 2022 and September 30, 2021, respectively 1 1 Additional paid-in capital 1,975 1,942 Accumulated deficit ( 1,477 ) ( 1,710 ) Accumulated other comprehensive loss, net ( 347 ) ( 202 ) Total Warner Music Group Corp. equity 152 31 Noncontrolling interest 16 15 Total equity 168 46 Total liabilities and equity $ 7,828 $ 7,211 See accompanying notes 81 Warner Music Group Corp. Consolidated Statements of Operations Fiscal Year Ended September 30, 2022 2021 2020 (in millions, except share and per share data) Revenue $ 5,919 $ 5,301 $ 4,463 Costs and expenses: Cost of revenue ( 3,080 ) ( 2,742 ) ( 2,333 ) Selling, general and administrative expenses (a) ( 1,862 ) ( 1,721 ) ( 2,169 ) Amortization expense ( 263 ) ( 229 ) ( 190 ) Total costs and expenses ( 5,205 ) ( 4,692 ) ( 4,692 ) Operating income (loss) 714 609 ( 229 ) Loss on extinguishment of debt — ( 22 ) ( 34 ) Interest expense, net ( 125 ) ( 122 ) ( 127 ) Other income (expense), net 151 ( 9 ) ( 57 ) Income (loss) before income taxes 740 456 ( 447 ) Income tax expense ( 185 ) ( 149 ) ( 23 ) Net income (loss) 555 307 ( 470 ) Less: Income attributable to noncontrolling interest ( 4 ) ( 3 ) ( 5 ) Net income (loss) attributable to Warner Music Group Corp. $ 551 $ 304 $ ( 475 ) Net income (loss) per share attributable to common stockholders: Class A – Basic and Diluted $ 1.06 $ 0.58 $ ( 0.82 ) Class B – Basic and Diluted $ 1.06 $ 0.58 $ ( 0.95 ) Weighted average common shares: Class A – Basic and Diluted 133,662,142 110,560,517 26,897,115 Class B – Basic and Diluted 381,046,177 402,911,743 477,624,846 (a) Includes depreciation expense: $ ( 76 ) $ ( 77 ) $ ( 71 ) See accompanying notes 82 Warner Music Group Corp. Consolidated Statements of Comprehensive Income (Loss) Fiscal Year Ended September 30, 2022 2021 2020 (in millions) Net income (loss) $ 555 $ 307 $ ( 470 ) Other comprehensive (loss) income, net of tax: Foreign currency adjustment, net ( 184 ) 7 37 Deferred gain (loss) on derivative financial instruments 30 12 ( 21 ) Minimum pension liability 9 1 2 Other comprehensive (loss) income, net of tax ( 145 ) 20 18 Total comprehensive income (loss) 410 327 ( 452 ) Less: Income attributable to noncontrolling interest ( 4 ) ( 3 ) ( 5 ) Comprehensive income (loss) attributable to Warner Music Group Corp. $ 406 $ 324 $ ( 457 ) See accompanying notes 83 Warner Music Group Corp. Consolidated Statements of Cash Flows Fiscal Year Ended September 30, 2022 2021 2020 (in millions) Cash flows from operating activities Net income (loss) $ 555 $ 307 $ ( 470 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 339 306 261 Unrealized losses (gains) and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts ( 169 ) 3 54 Deferred income taxes 13 27 ( 57 ) Loss on extinguishment of debt — 22 34 Net loss (gain) on divestitures and investments 46 4 ( 2 ) Non-cash interest expense 6 5 5 Non-cash stock-based compensation expense 39 45 608 Changes in operating assets and liabilities: Accounts receivable, net ( 195 ) ( 58 ) 18 Inventories ( 22 ) ( 19 ) ( 2 ) Royalty advances ( 94 ) ( 332 ) ( 108 ) Accounts payable and accrued liabilities ( 21 ) 91 ( 32 ) Royalty payables 158 217 36 Accrued interest 3 ( 16 ) ( 4 ) Operating lease liabilities ( 6 ) ( 3 ) ( 3 ) Deferred revenue 86 47 114 Other balance sheet changes 4 ( 8 ) 11 Net cash provided by operating activities 742 638 463 Cash flows from investing activities Acquisition of music publishing rights and music catalogs, net ( 191 ) ( 481 ) ( 40 ) Capital expenditures ( 135 ) ( 93 ) ( 85 ) Investments and acquisitions of businesses, net of cash received ( 509 ) ( 64 ) ( 94 ) Proceeds from the sale of investments 11 — — Net cash used in investing activities ( 824 ) ( 638 ) ( 219 ) 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 — 244 550 Proceeds from increase supplement to Senior Term Loan Facility — 325 — Proceeds from issuance of 2.250 % Senior Secured Notes due 2031 — 524 — Repayment of 5.500 % Senior Notes due 2026 — ( 325 ) — Repayment of 3.625 % Senior Secured Notes due 2026 — ( 524 ) — Proceeds from issuance of 3.875 % Senior Secured Notes due 2030 — — 535 Proceeds from issuance of 2.750 % Senior Secured Notes due 2028 — — 365 Repayment of 5.000 % Senior Secured Notes due 2023 — — ( 300 ) Repayment of 4.875 % Senior Secured Notes due 2024 — — ( 220 ) Repayment of 4.125 % Senior Secured Notes due 2024 — — ( 349 ) Partial repayment of Senior Term Loan Facility due 2023 — — ( 506 ) Deferred financing costs paid ( 5 ) ( 12 ) ( 17 ) Call premiums paid on early redemption of debt — ( 21 ) ( 23 ) Distribution to noncontrolling interest holders ( 6 ) ( 7 ) ( 7 ) Dividends paid ( 318 ) ( 265 ) ( 344 ) Payment of deferred and contingent consideration ( 7 ) — — Taxes paid related to net share settlement of restricted stock units ( 6 ) — — Other ( 5 ) — — Net cash provided by (used in) financing activities 188 ( 61 ) ( 316 ) Effect of exchange rate changes on cash and equivalents ( 21 ) 7 6 Net increase (decrease) in cash and equivalents 85 ( 54 ) ( 66 ) Cash and equivalents at beginning of period 499 553 619 Cash and equivalents at end of period $ 584 $ 499 $ 553 See accompanying notes 84 Warner Music Group Corp. Consolidated Statements of Equity 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) Balances at September 30, 2019 — $ — 505,830,022 $ 1 $ 1,127 $ ( 1,177 ) $ ( 240 ) $ ( 289 ) $ 20 $ ( 269 ) Cumulative effect of ASC 842 adoption — — — — — 7 — 7 — 7 Net loss — — — — — ( 475 ) — ( 475 ) 5 ( 470 ) Other comprehensive loss, net of tax — — — — — — 18 18 — 18 Dividends ($ 0.12 per Class A share and $ 0.27 per Class B share) — — — — — ( 137 ) — ( 137 ) — ( 137 ) Stock-based compensation expense — — — — 11 — — 11 — 11 Distribution to noncontrolling interest holders — — — — — — — — ( 7 ) ( 7 ) Cumulative effect of ASC 718 accounting policy change — — — — — 33 — 33 — 33 Modification of stock-based compensation plan — — — — 769 — — 769 — 769 Shares listed through IPO 88,550,000 — ( 88,550,000 ) — — — — — — — Shares issued under Omnibus Incentive Plan 28,361 — — — — — — — — — Other — — 4,169,978 — — — — — — — Balances at September 30, 2020 88,578,361 $ — 421,450,000 $ 1 $ 1,907 $ ( 1,749 ) $ ( 222 ) $ ( 63 ) $ 18 $ ( 45 ) Net income — — — — — 304 — 304 3 307 Other comprehensive income, net of tax — — — — — — 20 20 — 20 Dividends ($ 0.51 per share) — — — — — ( 265 ) — ( 265 ) — ( 265 ) Stock-based compensation expense — — — — 35 — — 35 — 35 Distribution to noncontrolling interest holders — — — — — — — — ( 7 ) ( 7 ) Exchange of Class B shares for Class A shares 19,234,103 — ( 19,234,106 ) — — — — — — — Shares issued under the Plan 4,321,259 — — — — — — — — — Conversion of Class B shares to Class A shares 10,244,898 — ( 10,244,898 ) — — — — — — — Shares issued under Omnibus Incentive Plan 36,206 — — — — — — — — — Other — — — — — — — — 1 1 Balances at September 30, 2021 122,414,827 $ — 391,970,996 $ 1 $ 1,942 $ ( 1,710 ) $ ( 202 ) $ 31 $ 15 $ 46 Net income — — — — — 551 — 551 4 555 Other comprehensive income, net of tax — — — — — — ( 145 ) ( 145 ) — ( 145 ) Dividends ($ 0.61 per share) — — — — — ( 318 ) — ( 318 ) — ( 318 ) Stock-based compensation expense — — — — 43 — — 43 — 43 Distribution to noncontrolling interest holders — — — — — — — — ( 6 ) ( 6 ) Vesting of restricted stock units, net of shares withheld for employee taxes 276,565 — — — ( 6 ) — — ( 6 ) — ( 6 ) Conversion of Class B shares to Class A shares 14,320,547 — ( 14,320,547 ) — — — — — — — Shares issued under Omnibus Incentive Plan 187,261 — — — — — — — — — Other — — — — ( 4 ) — — ( 4 ) 3 ( 1 ) Balances at September 30, 2022 137,199,200 $ — 377,650,449 $ 1 $ 1,975 $ ( 1,477 ) $ ( 347 ) $ 152 $ 16 $ 168 See accompanying notes 85 Warner Music Group Corp. Notes to Consolidated Financial Statements 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 its 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 continues 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 73 % of the economic interest as of September 30, 2022. As a result, the Company is a “controlled company” within the meaning of the corporate governance standards of NASDAQ. See Item 1A. Risk Factors — Risks Related to Our Controlling Stockholder. 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 Basis of Presentation The accompanying consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”). In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For the periods presented in this Annual Report, the Company maintained a 52-53 week fiscal year ending on the last Friday in each reporting period. The fiscal year ended September 30, 2022 ended on September 30, 2022, the fiscal year ended September 30, 2021 ended on September 24, 2021 and the fiscal year ended September 30, 2020 ended on September 25, 2020. For convenience purposes, the Company dates its financial statements as of September 30 for these periods. The fiscal year ended September 30, 2022 includes 53 weeks, and both fiscal years ended September 30, 2021 and 2020 included 52 weeks. The additional week in fiscal year 2022 fell in the fiscal quarter ended December 31, 2021. Accordingly, the results of operations for the fiscal year ended September 30, 2022 reflect 53 weeks compared to 52 weeks for both fiscal years ended September 30, 2021 and 2020. Change in Fiscal Year End On September 29, 2022, the Board of Directors approved a change, effective for the 2023 fiscal year, to the Company’s fiscal year from a modified 52-53-week calendar, in which reporting periods ended on the last Friday of the calendar quarter, to a reporting calendar in which the reporting periods end on the last day of the calendar quarter. The Company’s fiscal year will begin on October 1 86 and end on September 30 of each year. The Company is not required to file a transition report because this change is not deemed to be a change in fiscal year for purposes of reporting under the Exchange Act pursuant to relevant Securities and Exchange Commission guidance. 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. 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 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. This stock split has been retrospectively presented throughout the financial statements. Upon completion of the IPO and the exercise in full of the underwriters’ option to purchase additional shares, 88,550,000 shares of Class A Common Stock, 421,450,000 shares of Class B Common Stock and no shares of preferred stock were outstanding. During the fiscal year ended September 30, 2022, an aggregate of 14,320,547 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 fiscal year ended September 30, 2022, Access converted 13,810,382 shares of Class B Common Stock to the same number of shares of Class A Common Stock, which is reflected as a conversion of Class B Common Stock in the consolidated statements of equity. 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. See also Note 3, Earnings Per Share. Use of Estimates The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates. Business Combinations The Company accounts for its business acquisitions under the FASB ASC Topic 805, Business Combinations (“ASC 805”) guidance for business combinations. The total cost of acquisitions is allocated to the underlying identifiable net assets based on their respective estimated fair values. The excess of the purchase price over the estimated fair values of the net assets acquired is recorded as goodwill. Determining the fair value of assets acquired and liabilities assumed requires management’s judgment and often involves 87 the use of estimates and assumptions, including assumptions with respect to future cash inflows and outflows, discount rates, asset lives and market multiples, among other items. Cash and Equivalents The Company considers all highly liquid investments with maturities of three months or less at the date of purchase to be cash equivalents. The Company includes checks outstanding at year end as a component of accounts payable, instead of a reduction in its cash balance where there is not a right of offset in the related bank accounts. Accounts Receivable Credit is extended to customers based upon an evaluation of the customer’s financial condition. Accounts receivable are recorded at net realizable value. Refund Liabilities and Allowance for Doubtful Accounts Management’s estimate of Recorded Music physical products that will be returned, and the amount of receivables that will ultimately be collected is an area of judgment affecting reported revenues and operating income. 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. The provision for such sales returns is reflected as a reduction in the revenues from the related sale. Similarly, the Company monitors customer credit risk related to accounts receivable. Significant judgments and estimates are involved in evaluating if such amounts will ultimately be fully collected. On an ongoing basis, the Company tracks customer exposure based on news reports, ratings agency information, reviews of customer financial data and direct dialogue with customers. Counterparties that are determined to be of a higher risk are evaluated to assess whether the payment terms previously granted to them should be modified. The Company also monitors payment levels from customers, and a provision for estimated uncollectible amounts is maintained based on such payment levels, historical experience, management’s views on trends in the overall receivable aging and, for larger accounts, analyses of specific risks per customer. Concentration of Credit Risk Customer credit risk represents the potential for financial loss if a customer is unwilling or unable to meet its agreed upon contractual payment obligations. As of September 30, 2022 and September 30, 2021, Spotify represented 17 % and 18 %, respectively, of the Company’s accounts receivable balance. No other single customer accounted for more than 10% of accounts receivable in either period. The Company, by policy, routinely assesses the financial strength of its customers. As such, the Company does not believe there is any significant collection risk. In the Music Publishing business, the Company collects a significant portion of its royalties from copyright collecting societies around the world. Collecting societies and associations generally are not-for-profit organizations that represent composers, songwriters and music publishers. These organizations seek to protect the rights of their members by licensing, collecting license fees and distributing royalties for the use of the members’ works. Accordingly, the Company does not believe there is any significant collection risk from such societies. Inventories Inventories consist of merchandise, vinyl, CDs, DVDs and other related music products. Inventories are stated at the lower of cost or estimated realizable value. Cost is determined using first-in, first-out (“FIFO”) and average cost methods, which approximate cost under the FIFO method. Returned goods included in inventory are valued at estimated realizable value, but not in excess of cost. Derivative and Financial Instruments The Company accounts for these investments as required by the FASB ASC Topic 815, Derivatives and Hedging (“ASC 815”), which requires that all derivative instruments be recognized on the balance sheet at fair value. ASC 815 also provides that, for derivative instruments that qualify for hedge accounting, changes in the fair value are either (a) offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings or (b) recognized in equity until the hedged item is recognized in earnings, depending on whether the derivative is being used to hedge changes in fair value or cash flows. In addition, the ineffective portion of a derivative’s change in fair value is immediately recognized in earnings. 88 The carrying value of the Company’s financial instruments approximates fair value, except for certain differences relating to long-term, fixed-rate debt (see Note 19) and other financial instruments that are not significant. The fair value of financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or an over-the-counter market. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. Property, Plant and Equipment Property, plant and equipment acquired in conjunction with business combinations are recorded at fair value. All other additions are recorded at historical cost. Depreciation is calculated using the straight-line method based upon the estimated useful lives of depreciable assets commencing at the date assets are placed in service as follows: five to seven years for furniture and fixtures, periods of up to five years for computer equipment and software and periods of up to thirteen years for machinery and equipment. Buildings are depreciated over periods of up to forty years . Leasehold improvements are depreciated over the life of the lease or estimated useful lives of the improvements, whichever period is shorter. Construction in progress assets are not depreciated until placed in service and available for their intended use, at which time they are assigned a useful life consistent with the nature of the asset. The Company accounts for costs incurred to develop or purchase computer software for internal use in accordance with FASB ASC Subtopic 350-40, Internal-Use Software (“ASC 350-40”). As required by ASC 350-40, the Company capitalizes the costs incurred during the application development stage, which include costs to design the software configuration and interfaces, coding, installation, and testing. Accounting for Goodwill and Other Intangible Assets In accordance with FASB ASC Topic 350, Intangibles—Goodwill and Other (“ASC 350”), the Company accounts for business combinations using the acquisition method of accounting and accordingly, the assets and liabilities of the acquired entities are recorded at their estimated fair values at the acquisition date. Goodwill represents the excess of the purchase price over the fair value of net assets, including the amount assigned to identifiable intangible assets. Pursuant to this guidance, the Company does not amortize the goodwill balance and instead, performs an annual impairment test to assess the fair value of goodwill over its carrying value. Identifiable intangible assets with finite lives are amortized over their useful lives. Goodwill is tested annually for impairment on July 1 and at any time upon occurrence of certain events or changes in circumstances. ASC 350 gives an entity the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit or intangible asset is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of a reporting unit or intangible asset is less than its carrying amount, then performing the quantitative impairment test is unnecessary. However, if an entity concludes otherwise, then the quantitative impairment test shall be used to identify the impairment and measure the amount of an impairment loss to be recognized (if applicable). The Company performs an annual impairment test of its indefinite-lived intangible assets as of July 1 of each fiscal year, unless events occur which trigger the need for an earlier impairment test. The Company has the option to perform a qualitative assessment to determine if an impairment is more likely than not to have occurred. In the qualitative assessment, the Company must evaluate the totality of qualitative factors, including any recent fair value measurements, that impact whether an indefinite-lived intangible asset other than goodwill has a carrying amount that more likely than not exceeds its fair value. The Company must proceed to conduct a quantitative analysis if the Company (i) determines that such an impairment is more likely than not to exist or (ii) forgoes the qualitative assessment entirely. The impairment tests may require management to make assumptions about future conditions impacting the value of the indefinite-lived intangible assets, including projected growth rates, cost of capital, effective tax rates, tax amortization periods, royalty rates, market share and others. Valuation of Long-Lived Assets The Company periodically reviews the carrying value of its long-lived assets, including finite-lived intangibles, property, plant and equipment and amortizable intangible assets, whenever events or changes in circumstances indicate that the carrying value may not be recoverable or that the lives assigned may no longer be appropriate. To the extent the estimated future cash inflows attributable to the asset, less estimated future cash outflows, are less than the carrying amount, an impairment loss is recognized in an amount equal to the difference between the carrying value of such asset and its fair value. Assets to be disposed of and for which there is a committed plan to dispose of the assets, whether through sale or abandonment, are reported at the lower of carrying value or fair value less costs to sell. If it is determined that events and circumstances warrant a revision to the remaining period of amortization, an 89 asset’s remaining useful life would be changed, and the remaining carrying amount of the asset would be amortized prospectively over that revised remaining useful life. Foreign Currency The financial position and operating results of substantially all foreign operations are consolidated using the local currency as the functional currency. Local currency assets and liabilities are translated at the rates of exchange on the balance sheet date, and local currency revenues and expenses are translated at average rates of exchange during the period. Resulting translation gains or losses are included in the accompanying consolidated statements of equity as a component of accumulated other comprehensive loss. Foreign currency transaction gains and losses arise from exchange rate fluctuations on transactions denominated in a foreign currency other than the functional currency. The Company recorded foreign currency transaction losses of $ 11 million, losses of $ 0 million and gains of $ 2 million within operating income (loss) on the consolidated statement of operations during the years ended September 30, 2022, 2021 and 2020, respectively. The Company recorded foreign currency transaction gains of $ 185 million, losses of $ 8 million and losses of $ 57 million within other income (expense), net on the consolidated statement of operations during the years ended September 30, 2022, 2021 and 2020, respectively. Revenues Recorded Music As required by FASB ASC Topic 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue when, or as, control of the promised services or goods is transferred to our customers and in an amount that reflects the consideration the Company is contractually due in exchange for those services or goods. The Company’s revenue recognition process involves several applications that are responsible for the initiation and processing of transactions in order to recognize revenue in accordance with the Company’s policy and ASC 606. Revenues from the sale or license of Recorded Music products through digital distribution channels are typically recognized when sale or usage occurs based on usage reports received from the customer. 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. 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. 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 using an appropriate measure of progress over the contractual term. 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. Music Publishing Music Publishing revenues are earned from the receipt of royalties relating to the licensing of rights in musical compositions and the sale of published sheet music and songbooks. The receipt of royalties principally relates to amounts earned from the public performance of musical compositions, the mechanical reproduction of musical compositions on recorded media, including digital formats and the use of musical compositions in synchronization with visual images. Music publishing royalties, except for synchronization royalties, generally are recognized when the sale or usage occurs. The most common form of consideration for publishing 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. Synchronization revenue is typically recognized as revenue when control of the license is transferred to the customer in accordance with ASC 606. See also Note 4, Revenue Recognition. 90 Royalty Costs and Royalty Advances The Company incurs royalty costs that are payable to our recording artists and songwriters generated from the sale or license of our Recorded Music catalog and Music Publishing copyrights. Royalties are calculated using negotiated rates in accordance with recording artist and songwriter contracts and are based on revenue earned. There are instances where such data is not available to be processed and royalty cost calculations may involve judgments about significant volumes of data to be processed. In many instances, the Company commits to pay our recording artists and songwriters royalties in advance of future sales. The Company accounts for these advances under the related guidance in FASB ASC Topic 928, Entertainment—Music (“ASC 928”). Under ASC 928, the Company capitalizes as assets certain advances that it believes are recoverable from future royalties to be earned by the recording artist or songwriter. Recoverability is assessed upon initial commitment of the advance based upon the Company’s forecast of anticipated revenue from the sale of future and existing albums or musical compositions. In determining whether the advance is recoverable, the Company evaluates the current and past popularity of the recording artist or songwriter, the sales history of the recording artist or songwriter, the initial or expected commercial acceptability of the product, the current and past popularity of the genre of music that the product is designed to appeal to, and other relevant factors. Advances vary in both amount and expected life based on the underlying recording artist or songwriter. To the extent that a portion of an outstanding advance is no longer deemed recoverable, that amount will be expensed in the period the determination is made. Advertising As required by the FASB ASC Subtopic 720-35, Advertising Costs (“ASC 720-35”), advertising costs are expensed as incurred. Advertising expense amounted to approximately $ 155 million, $ 149 million and $ 115 million for the fiscal years ended September 30, 2022, September 30, 2021 and September 30, 2020, respectively. Deferred advertising costs, which principally relate to advertisements that have been paid for but not been exhibited or services that have not been received, were not material for all periods presented. 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, which vested in January 2022. The Company also grants 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. Prior to the Company’s IPO in June 2020, these awards were liability-classified under the recognition provision of ASC 718 and were re-measured at each reporting date until settlement. Under the provision of ASC 718, the Company determined the Plan was modified as of June 3, 2020, and as such, converted the awards from liability-classified to equity-classified. Prior to conversion, the Company performed a final measurement of its stock-based compensation liability under the fair value method. Subsequent to the amendment, the awards issued under the Plan will no longer be adjusted for changes in the value of the Company’s common stock. Upon modification of the Plan, the Company reclassified a $ 769 million stock-based compensation liability to additional paid-in capital, which included $ 57 million associated with the awards settled through the IPO tag-along right on June 5, 2020. In addition, the Company recognized approximately $ 11 million of stock-based compensation expense under the Plan for the period of June 3, 2020 through September 30, 2020 for the unvested share awards that were granted prior to the IPO, which is included in additional paid-in capital. The Company will continue to incur non-cash stock-based compensation expense for awards that were unvested as of the modification date of the Plan. 91 Income Taxes Income taxes are provided using the asset and liability method presented by FASB ASC Topic 740, Income Taxes (“ASC 740”). Under this method, income taxes (i.e., deferred tax assets, deferred tax liabilities, taxes currently payable/refunds receivable and tax expense) are recorded based on amounts refundable or payable in the current fiscal year and include the results of any differences between U.S. GAAP and tax reporting. Deferred income taxes reflect the tax effect of net operating loss, capital loss and general business credit carryforwards and the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statements and income tax purposes, as determined under enacted tax laws and rates. Valuation allowances are established when management determines that it is more likely than not that some portion or the entire deferred tax asset will not be realized. The financial effect of changes in tax laws or rates is accounted for in the period of enactment. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). In accordance with ASC 740, the Company recorded the impacts in the period of enactment. From time to time, the Company engages in transactions in which the tax consequences may be subject to uncertainty. Judgment may be required in assessing and estimating the tax consequences of these transactions. The Company prepares and files tax returns based on its interpretation of tax laws and regulations. In the normal course of business, the Company’s tax returns are subject to examination by various taxing authorities. Such examinations may result in future tax and interest assessments by these taxing authorities. In determining the Company’s tax provision for financial reporting purposes, the Company establishes a reserve for uncertain tax positions, unless such positions are determined to be more likely than not of being sustained upon examination based on their technical merits. There is judgment involved in determining whether positions taken on the Company’s tax returns are more likely than not of being sustained. 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 Derivatives 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. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). The amendment provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued because of reference rate reform, if certain criteria are met. In January 2021, the FASB issued ASU 2021-01, Reference Rate Reform (Topic 848): Scope, which clarified that certain optional expedients and exceptions in Topic 848 apply to derivative instruments that are affected by the discounting transition due to reference rate reform. These ASUs were effective upon issuance and may be applied prospectively to contract modifications and hedging relationships entered into or evaluated through December 31, 2022. The discontinuation of LIBOR will impact the Senior Term Loan Facility and Revolving Credit Facility as well as a pay-fixed receive-variable interest rate swap which will be outstanding as of the effective date of the discontinuation. The Company is in the process of evaluating the effect that the adoption of these standards will have on its consolidated financial statements, but does not expect it will have a material effect. 92 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. For the fiscal year ended September 30, 2020, the potentially dilutive common shares were excluded from the Class A Common Stock diluted loss per share calculation since their effects would have been anti-dilutive due to the net loss attributable to Class A Common Stock for the period. The potentially dilutive common shares did not have a dilutive effect on the Company’s EPS calculation for the fiscal years ended September 30, 2022 and September 30, 2021. 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. Prior to the completion of the IPO in fiscal 2020, the Company declared dividends totaling $ 75 million which were allocated solely to Class B Common Stock as there was no outstanding Class A Common Stock at the time these dividends were declared. While Class A and Class B Common Stock have the same dividend rights, the allocation of all dividends declared prior to the IPO to Class B Common Stock resulted in a different loss per share for the two classes of common stock for the fiscal year ended September 30, 2020. Subsequent to the completion of the IPO, and modification of our stock-based compensation awards as described in Note 13, 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. The following table sets forth the calculation of basic and diluted net income (loss) per common share under the two-class method (in millions, except share and per share data): Fiscal Year Ended September 30, 2022 2021 2020 Class A Class B Class A Class B Class A Class B Basic and Diluted EPS: Numerator Net income (loss) attributable to Warner Music Group Corp. $ 149 $ 402 $ 68 $ 236 $ ( 21 ) $ ( 454 ) Less: Net income attributable to participating securities ( 7 ) — ( 4 ) — ( 1 ) — Net income (loss) attributable to common stockholders $ 142 $ 402 $ 64 $ 236 $ ( 22 ) $ ( 454 ) Denominator Weighted average shares outstanding 133,662,142 381,046,177 110,560,517 402,911,743 26,897,115 477,624,846 Basic and Diluted EPS $ 1.06 $ 1.06 $ 0.58 $ 0.58 $ ( 0.82 ) $ ( 0.95 ) 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 93 occurs using the best estimates available of the amounts that will be received by the Company. Within revenues, there may be settlements related to past infringements of our intellectual property. Disaggregation of Revenue The Company’s revenue consists of the following categories, which aggregate into the segments – Recorded Music and Music Publishing: Fiscal Year Ended September 30, 2022 2021 2020 (in millions) Revenue by Type Digital $ 3,305 $ 3,105 $ 2,568 Physical 563 549 434 Total Digital and Physical 3,868 3,654 3,002 Artist services and expanded-rights 767 599 525 Licensing 331 291 283 Total Recorded Music 4,966 4,544 3,810 Performance 159 122 142 Digital 563 436 337 Mechanical 50 49 48 Synchronization 172 144 119 Other 14 10 11 Total Music Publishing 958 761 657 Intersegment eliminations ( 5 ) ( 4 ) ( 4 ) Total Revenues $ 5,919 $ 5,301 $ 4,463 Revenue by Geographical Location U.S. Recorded Music $ 2,231 $ 1,985 $ 1,609 U.S. Music Publishing 513 378 325 Total U.S. 2,744 2,363 1,934 International Recorded Music 2,735 2,559 2,201 International Music Publishing 445 383 332 Total International 3,180 2,942 2,533 Intersegment eliminations ( 5 ) ( 4 ) ( 4 ) Total Revenues $ 5,919 $ 5,301 $ 4,463 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 94 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. 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. 95 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 $ 19 million and $ 23 million were established at September 30, 2022 and September 30, 2021, respectively. Based on management’s analysis of estimated credit losses, reserves of $ 19 million and $ 20 million were established at September 30, 2022 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 $ 666 million during the fiscal year ended September 30, 2022 and $ 585 million during the fiscal year ended September 30, 2021 related to cash received from customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period. Revenue recognized during the fiscal years ended September 30, 2022 and 2021 which was included in the deferred revenue balance at the beginning of each respective period was $ 274 million and $ 232 million. There were no other significant changes to deferred revenue during the reporting period. Performance Obligations For the fiscal years ended September 30, 2022, 2021 and 2020, the Company recognized revenue of $ 59 million, $ 64 million and $ 42 million, respectively, from performance obligations satisfied in previous periods. 96 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 September 30, 2022 are as follows: FY23 FY24 FY25 Thereafter Total (in millions) Remaining performance obligations $ 625 $ 275 $ 2 $ 1 $ 903 Total $ 625 $ 275 $ 2 $ 1 $ 903 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 final consideration paid was determined to be $ 394 million after the finalization of purchase price adjustments, including working capital and other items. 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 19 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 3 Royalty advances 14 Property, plant and equipment, net 1 Operating lease right-of-use assets, net 3 Goodwill 135 Intangible assets subject to amortization, net (a) 260 Other assets 1 Accounts payable ( 5 ) Accrued royalties ( 16 ) Accrued liabilities ( 1 ) Operating lease liabilities, noncurrent ( 3 ) Total purchase price allocated $ 394 97 ______________________________________ (a) Identifiable intangible assets are composed of the following (in millions): Total Recorded music catalog $ 154 Artist and songwriter contracts 91 Trademarks 12 Music publishing copyrights 3 Total intangible assets acquired $ 260 At September 30, 2022, the Company updated the preliminary allocation recorded at December 31, 2021 based on final consideration paid and revised estimates of fair value of assets acquired which resulted in an increase to intangible assets of approximately $ 27 million and a net decrease to other acquired assets and liabilities of approximately $ 38 million, with a corresponding net decrease to goodwill of approximately $ 8 million. The acquisition accounting is preliminary and is subject to revision based on the final determination of the purchase price allocation to the identifiable assets and liabilities acquired. For the fiscal year ended September 30, 2022, 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 the fiscal years ended September 30, 2022 and September 30, 2021. 6. Comprehensive Income (Loss) 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 $ 14 million: Foreign Currency Translation Loss (a) Minimum Pension Liability Adjustment Deferred (Losses) Gains On Derivative Financial Instruments Accumulated Other Comprehensive Loss, net (in millions) Balances at September 30, 2019 $ ( 218 ) $ ( 14 ) $ ( 8 ) $ ( 240 ) Other comprehensive income 37 2 ( 21 ) 18 Balances at September 30, 2020 $ ( 181 ) $ ( 12 ) $ ( 29 ) $ ( 222 ) Other comprehensive income 7 1 12 20 Balances at September 30, 2021 $ ( 174 ) $ ( 11 ) $ ( 17 ) $ ( 202 ) Other comprehensive loss ( 184 ) 9 30 ( 145 ) Balances at September 30, 2022 $ ( 358 ) $ ( 2 ) $ 13 $ ( 347 ) ______________________________________ (a) Includes historical foreign currency translation related to certain intra-entity transactions. 98 7. Property, Plant and Equipment Property, plant and equipment consist of the following: September 30, 2022 September 30, 2021 (in millions) Land $ 11 $ 12 Buildings and improvements 188 185 Furniture and fixtures 35 36 Computer hardware and software 464 427 Construction in progress 159 93 Machinery and equipment 19 30 Gross Property, Plant and Equipment $ 876 $ 783 Less: Accumulated depreciation ( 461 ) ( 419 ) Net Property, Plant and Equipment $ 415 $ 364 8. 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. 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). 99 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 15 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 September 30, 2022, the aggregate lease liability related to these leases was $ 109 million. See also Note 14, Related Party Transactions. 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: Fiscal Year Ended September 30, 2022 2021 (in millions) Lease Cost Operating lease cost $ 53 $ 55 Short-term lease cost 2 2 Variable lease cost 11 11 Total lease cost $ 66 $ 68 The Company incurred and recorded other occupancy expenses of $ 23 million and $ 16 million for the fiscal years ended September 30, 2022 and 2021, respectively. Supplemental cash flow information related to leases was as follows: Fiscal Year Ended September 30, 2022 2021 (in millions) Cash paid for amounts included in the measurement of operating lease liabilities $ 58 $ 59 Right-of-use assets obtained in exchange for operating lease obligations 7 25 Supplemental balance sheet information related to leases was as follows: September 30, 2022 September 30, 2021 (in millions) Operating Leases Operating lease right-of-use assets $ 226 $ 268 Operating lease liabilities, current $ 40 $ 43 Operating lease liabilities, noncurrent 241 287 Total operating lease liabilities $ 281 $ 330 Weighted Average Remaining Lease Term Operating leases 7 years 8 years Weighted Average Discount Rate Operating leases 4.75 % 4.69 % 100 Maturities of lease liabilities were as follows: Fiscal Year Ended September 30, Operating Leases (in millions) 2023 $ 52 2024 52 2025 49 2026 43 2027 39 Thereafter 95 Total lease payments 330 Less: Imputed interest ( 49 ) Total $ 281 As of September 30, 2022, we have additional operating leases for facilities that have not yet commenced with lease obligations of $ 28 million with lease terms of 7 to 16 years. 9. 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, 2020 $ 1,367 $ 464 $ 1,831 Acquisitions ( 7 ) — ( 7 ) Other adjustments 6 — 6 Balances at September 30, 2021 $ 1,366 $ 464 $ 1,830 Acquisitions 160 — 160 Other adjustments ( 70 ) — ( 70 ) Balances at September 30, 2022 $ 1,456 $ 464 $ 1,920 The increase in goodwill during the fiscal year ended September 30, 2022 primarily relates to the acquisition of 300 Entertainment as described in Note 5. The decrease in goodwill during the fiscal year ended September 30, 2021 includes purchase price allocations for acquisitions closed during the fiscal year ended September 30, 2021 offset by measurement period adjustments for acquisitions which closed during the fiscal year ended September 30, 2020. The other adjustments during both the fiscal years ended September 30, 2022 and September 30, 2021 primarily represent foreign currency movements. The Company performs its annual goodwill impairment test in accordance with 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. The performance of the annual fiscal 2022 impairment analysis did not result in an impairment of the Company’s goodwill. 101 Intangible Assets Intangible assets consist of the following: Weighted-Average Useful Life September 30, 2022 September 30, 2021 (in millions) Intangible assets subject to amortization: Recorded music catalog 12 years $ 1,316 $ 1,206 Music publishing copyrights 25 years 1,889 1,730 Artist and songwriter contracts 13 years 1,014 997 Trademarks 14 years 103 96 Other intangible assets 6 years 89 96 Total gross intangible assets subject to amortization 4,411 4,125 Accumulated amortization ( 2,172 ) ( 2,108 ) Total net intangible assets subject to amortization 2,239 2,017 Intangible assets not subject to amortization: Trademarks and tradenames Indefinite 145 154 Total net intangible assets $ 2,384 $ 2,171 The increase in intangible assets during the fiscal year ended September 30, 2022 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. The increase in intangible assets is partially offset by foreign currency movements. The Company performs its annual indefinite-lived intangible assets impairment test in accordance with 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 indefinite-lived intangible assets may not be recoverable. The performance of the annual fiscal 2022 impairment analysis did not result in an impairment of the Company’s indefinite-lived intangible assets. Amortization Based on the amount of intangible assets subject to amortization at September 30, 2022, the expected amortization for each of the next five fiscal years and thereafter are as follows: Fiscal Year Ended September 30, Amortization Expense (in millions) 2023 $ 235 2024 198 2025 193 2026 172 2027 150 Thereafter 1,291 Total $ 2,239 102 10. Debt Debt Capitalization Long-term debt, all of which was issued by Acquisition Corp., consists of the following: September 30, 2022 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) 318 381 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) 435 522 3.000 % Senior Secured Notes due 2031 800 800 Total long-term debt, including the current portion $ 3,773 $ 3,383 Issuance premium less unamortized discount and unamortized deferred financing costs $ ( 41 ) $ ( 37 ) Total long-term debt, including the current portion, net $ 3,732 $ 3,346 ______________________________________ (a) Reflects $ 300 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $ 4 million and $ 7 million at September 30, 2022 and September 30, 2021, respectively. There were no loans outstanding under the Revolving Credit Facility at September 30, 2022 or September 30, 2021. The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp. As of September 30, 2022 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. 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 or 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. 103 Historical Transactions Additional 3.000 % Senior Secured Notes On November 2, 2020, Acquisition Corp. issued and sold $ 250 million of additional 3.000 % Senior Secured Notes (the “Additional Notes”). Interest on the Additional Notes will accrue at the rate of 3.000 % per annum and will be payable semi-annually in arrears on February 15 and August 15, commencing on February 15, 2021. The Additional Notes have identical terms as (other than the issue date and the issue price) and are fungible with, and treated as a single series of senior secured debt securities with, the 3.000 % Senior Secured Notes issued on August 12, 2020 (the “Original Notes”). Senior Term Loan Facility Amendment 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, 3.000 % Senior Secured Notes due 2031 and 2.250 % Senior Secured Notes due 2031. The Company recorded approximately $ 3 million of expenses associated with fees paid to third parties in connection with this debt modification and capitalized approximately $ 1 million in fees paid to lenders. Revolving Credit Agreement Amendment On March 1, 2021, Acquisition Corp. entered into an amendment (the “Revolving Credit Agreement Amendment”) to the revolving credit agreement, dated January 31, 2018 (as amended by the amendments dated as of October 9, 2019 and April 3, 2020), among Acquisition Corp., the several banks and other financial institutions party thereto and Credit Suisse AG, as administrative agent, governing Acquisition Corp.’s revolving credit facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto. The Revolving Credit Agreement Amendment (among other changes) adds certain exceptions and increases the leverage ratio below which Acquisition Corp. can access certain baskets in connection with Acquisition Corp.’s negative covenants, including those related to incurrence of indebtedness, restricted payments and covenant suspension. Senior Term Loan Facility Increase Supplement and Redemption of 5.500 % Senior Notes due 2026 On March 8, 2021, Acquisition Corp. entered into an Increase Supplement (the “Increase Supplement”), dated as of March 8, 2021, among Acquisition Corp., the guarantors party thereto, WMG Holdings Corp., Credit Suisse AG, Cayman Islands Branch, as increasing lender, and Credit Suisse AG, as administrative agent, to the Senior Term Loan Credit Agreement, whereby prior to April 22, 2021 and subject to the satisfaction of certain conditions, Acquisition Corp. may borrow additional term loans in an amount up to $ 325 million for an aggregate principal amount outstanding under the Senior Term Loan Credit Agreement of up to $ 1,145 million. The Increase Supplement was entered into to provide for the redemption of Acquisition Corp.’s 5.500 % Senior Notes due 2026 (the “ 5.500 % Senior 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 % Senior Notes. The redemption price for the 5.500 % Senior Notes was approximately $ 343 million, equivalent to 102.750 % of the principal amount of the 5.500 % Senior 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, which represents the premium paid on early redemption and unamortized deferred financing costs. 2.250 % Senior Secured Notes Offering On August 16, 2021, Acquisition Corp. issued and sold € 445 million in aggregate principal amount of its 2.250 % Senior Secured Notes due 2031 (the “ 2.250 % Senior Secured Notes”). Net proceeds of the offering, together with available cash, were used to 104 redeem in full all of the outstanding 3.625 % Senior Secured Notes due 2026 (the “ 3.625 % Senior Secured Notes”), as described below. Interest on the Notes will accrue at the rate of 2.250 % per annum and will be payable semi-annually in arrears on February 15 and August 15, commencing on February 15, 2022. The 2.250 % Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis by each of the Issuer’s existing direct or indirect wholly-owned domestic restricted subsidiaries and by any such subsidiaries that guarantee obligations of the Issuer under the Credit Facilities, subject to customary exceptions. The indenture governing the 2.250 % 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. Redemption of 3.625 % Senior Secured Notes On August 16, 2021, Acquisition Corp. redeemed in full all of the outstanding 3.625 % Senior Secured Notes. The redemption price for the 3.625 % Senior Secured Notes was approximately € 463 million, equivalent to 102.280 % of the principal amount of the 3.625 % Senior Secured Notes, plus accrued but unpaid interest thereon to, but excluding, the redemption date, which was August 16, 2021. The Company recorded a loss on extinguishment of debt of approximately $ 10 million, which represents the premium paid on early redemption, unamortized deferred financing costs and unamortized premium. 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 3.02 x at September 30, 2022, 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 16 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. Maturities of Senior Secured Notes As of September 30, 2022, there are no scheduled maturities of notes until 2028, when $ 318 million is scheduled to mature. Thereafter, $ 2.310 billion is scheduled to mature. 105 Interest Expense, net Total interest expense, net was $ 125 million, $ 122 million and $ 127 million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively. The weighted-average interest rate of the Company’s total debt was 3.5 % at September 30, 2022, 3.2 % at September 30, 2021 and 3.7 % at September 30, 2020. 11. Income Taxes The domestic and foreign pretax income (loss) from continuing operations is as follows: Fiscal Year Ended September 30, 2022 2021 2020 (in millions) Domestic $ 385 $ 182 $ ( 655 ) Foreign 355 274 208 Income (loss) before income taxes $ 740 $ 456 $ ( 447 ) Current and deferred income tax expense provided are as follows: Fiscal Year Ended September 30, 2022 2021 2020 (in millions) Federal: Current $ 23 $ 6 $ 3 Deferred 44 31 ( 28 ) Foreign: Current (a) 128 107 74 Deferred ( 30 ) ( 5 ) ( 28 ) U.S. State: Current 21 9 3 Deferred ( 1 ) 1 ( 1 ) Income tax expense $ 185 $ 149 $ 23 ______________________________________ (a) Includes withholding taxes of $ 27 million, $ 26 million and $ 15 million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively. 106 The differences between the U.S. federal statutory income tax rate of 21.0 % for each of the fiscal years ended September 30, 2022, 2021 and 2020 and income taxes provided are as follows: Fiscal Year Ended September 30, 2022 2021 2020 (in millions) Taxes on income at the U.S. federal statutory rate $ 155 $ 96 $ ( 94 ) U.S. state and local taxes 15 10 2 Foreign income taxed at different rates, including withholding taxes 25 34 10 Increase in valuation allowance 2 2 1 Release of valuation allowance ( 8 ) ( 6 ) ( 38 ) Change in tax rates 1 10 4 Impact of GILTI and FDII ( 6 ) ( 4 ) 2 IPO Costs — — 22 Executive Compensation 2 2 2 Non-deductible long term incentive plan 4 3 112 Other ( 5 ) 2 — Income tax expense $ 185 $ 149 $ 23 During the fiscal year ended September 30, 2022, the Company recognized a tax benefit of $ 8 million for the release of valuation allowances in various foreign jurisdictions. During the fiscal year ended September 30, 2021, the Company recognized $ 10 million of income tax expense arising from an increase in our net UK deferred tax liability due to the change in the UK future statutory tax rate, which was offset by $ 4 million of excess tax benefits from long term incentive plan, and $ 6 million for the release of valuation allowances in Mexico and various foreign jurisdictions. During the fiscal year ended September 30, 2020, the Company recognized a net U.S. tax benefit of $ 25 million primarily related to the release of a U.S. deferred tax valuation allowance of $ 33 million offset by a write-off of expiring foreign tax credits of $ 10 million and a tax benefit of $ 15 million for the release of valuation allowances in Japan and various foreign jurisdictions. 107 For the fiscal years ended September 30, 2022 and September 30, 2021, the Company incurred losses in certain foreign territories and has offset the tax benefit associated with these losses with a valuation allowance as the Company has determined that it is more likely than not that these losses will not be utilized. Significant components of the Company’s net deferred tax liabilities are summarized below: September 30, 2022 September 30, 2021 (a) (in millions) Deferred tax assets: Allowance and reserves $ 27 $ 25 Employee benefits and compensation 75 78 Other accruals 27 28 Property, plant and equipment 30 19 Operating lease liabilities 66 77 Tax attribute carryforwards 65 135 Deferred revenue and debt 17 14 Total deferred tax assets 307 376 Less: Valuation allowance ( 29 ) ( 38 ) Deferred tax assets, net of valuation allowance 278 338 Deferred tax liabilities: Royalty advances ( 24 ) ( 19 ) Operating lease right-of-use assets ( 52 ) ( 63 ) Accrued royalties ( 37 ) ( 38 ) Intangible assets ( 333 ) ( 393 ) Debt and other ( 23 ) ( 1 ) Total deferred tax liabilities ( 469 ) ( 514 ) Net deferred tax liabilities $ ( 191 ) $ ( 176 ) ______________________________________ (a) Prior year amounts were updated to reflect an immaterial correction of previous netting of certain deferred taxes. During the fiscal year ended September 30, 2022, the Company utilized a substantial portion of its foreign tax credit carryforwards in the U.S. The current levels of pre-tax income are sufficient to generate the minimum amount of future taxable income needed to support U.S. deferred tax assets realization. At September 30, 2022, the Company has no remaining U.S. federal tax net operating loss carryforwards. The Company also has tax net operating loss carryforwards, with no expiration date, in France and Spain of $ 40 million and $ 17 million, respectively, and other tax net operating loss carryforwards in state, local and foreign jurisdictions that expire in various periods. In addition, the Company has foreign tax credit carryforwards for U.S. tax purposes of $ 12 million. The U.S. foreign tax credits will begin to expire in fiscal year 2027. Deferred income taxes have not been recorded on indefinitely reinvested earnings of certain foreign subsidiaries of approximately $ 264 million at September 30, 2022. Distribution of these earnings may result in foreign withholding taxes and U.S. state taxes. However, variables existing if and when remittance occurs make it impracticable to estimate the amount of the ultimate tax liability, if any, on these accumulated foreign earnings. The Company classifies interest and penalties related to uncertain tax position as a component of income tax expense. As of September 30, 2022 and September 30, 2021, the Company had accrued $ 4 million and $ 4 million of interest and penalties, respectively. 108 The following table reflects changes in the gross unrecognized tax benefits, including interest and penalties: Fiscal Year Ended September 30, 2022 2021 2020 (in millions) Gross unrecognized tax benefits - beginning of period $ 12 $ 12 $ 12 Additions for prior year tax positions 1 3 3 Subtractions for prior year tax positions ( 5 ) ( 3 ) ( 3 ) Gross unrecognized tax benefits - end of period $ 8 $ 12 $ 12 Included in the total unrecognized tax benefits at September 30, 2022 and September 30, 2021 are $ 7 million and $ 12 million, respectively, that if recognized, would reduce the effective income tax rate. The Company has determined that it is reasonably possible that the gross unrecognized tax benefits as of September 30, 2022 could decrease by up to approximately $ 1 million related to various ongoing audits and settlement discussions in various foreign jurisdictions during the next twelve months. The Company and its subsidiaries file income tax returns in the U.S. and various foreign jurisdictions. The Company has completed tax audits in the U.S. for tax years ended through September 30, 2013, in the UK for the tax years ended through September 30, 2016, in Germany for the tax years ended through September 30, 2014 and in France for the tax years ended through September 30, 2018. The Company is at various stages in the tax audit process in certain foreign and local jurisdictions. 12. Employee Benefit Plans Certain international employees, such as those in Germany and Japan, participate in locally sponsored defined benefit plans, which are not considered to be material either individually or in the aggregate and have a combined projected benefit obligation of approximately $ 51 million and $ 83 million as of September 30, 2022 and September 30, 2021, respectively. Pension benefits under the plans are based on formulas that reflect the employees’ years of service and compensation levels during their employment period. The Company had unfunded pension liabilities relating to these plans of approximately $ 35 million and $ 58 million recorded in its balance sheets as of September 30, 2022 and September 30, 2021, respectively. The Company uses a September 30 measurement date for its plans. For the fiscal years ended September 30, 2022, September 30, 2021 and September 30, 2020, pension expense amounted to $ 3 million, $ 4 million and $ 4 million, respectively. Certain employees also participate in defined contribution plans. The Company’s contributions to the defined contribution plans are based upon a percentage of the employees’ elected contributions. The Company’s defined contribution plan expense amounted to approximately $ 12 million for the fiscal year ended September 30, 2022, $ 9 million for the fiscal year ended September 30, 2021 and $ 8 million for the fiscal year ended September 30, 2020. 13. Stock-Based Compensation Plans Warner Music Group Corp. 2020 Omnibus Incentive Plan 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, 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. To date, the Company has issued common stock, RSUs and restricted stock under the Omnibus Incentive Plan. The RSUs were granted to eligible employees and executives, and the common stock and restricted stock was granted to members of the Company’s Board of Directors. Except in the case of certain awards issued in connection with the IPO, holders of RSUs and restricted stock are entitled to dividends during the vesting period. During the fiscal years ended September 30, 2022, 2021 and 2020, shares of Class A Common Stock issued under the Omnibus Incentive Plan were 463,826 , 36,206 and 28,361 , respectively. During the fiscal year ended September 30, 2022, the Company satisfied the vesting of RSUs issued to employees for the fiscal year ended September 30, 2021 in connection with the IPO by issuing 276,565 shares of Class A Common Stock under the Omnibus Incentive Plan, which is net of shares used to settle employee income tax obligations. As of September 30, 2022, a total of 528,393 shares of Class A Common Stock were issued under the Omnibus Incentive Plan. As of September 30, 2022, there were 30,640,706 shares of Class A Common Stock available to be issued. 109 Warner Music Group Corp. Senior Management Free Cash Flow Plan Effective January 1, 2013, eligible individuals were invited to participate in the Plan. Eligible individuals include any employee, consultant or officer of the Company or any of its affiliates, who is selected by the Company’s Compensation Committee to participate in the Plan. In 2017, the Company’s Compensation Committee invited two additional employees to participate in the Plan. Under the Plan, participants are allocated a specific portion of the Company’s free cash flow to use to purchase the equivalent of Company stock through the acquisition of deferred equity units. Participants also receive a grant of profit interests in a purposely established LLC holding company (the “LLC”) that represent an economic entitlement to future appreciation over an equivalent number of shares of Company stock (“matching units”). The Company’s board of directors authorized the issuance of up to 39,255,429.54 shares of the Company’s common stock pursuant to the Plan, 19,612,714.77 in respect of deferred equity units and 19,612,714.77 in respect of matching units, as adjusted in accordance with the Plan. The LLC currently owns 3,896,654 shares of Class B Common Stock. Each deferred equity unit is equivalent to a share of Company stock. The Company credits units to active participants each Plan year at the time that annual free cash flow bonuses for such Plan year are determined (although certain participants have already received their complete allocations) and may grant unallocated units under the Plan to certain members of current or future management. At the time that annual free cash flow bonuses for such Plan year are determined, a participant is credited a number of deferred equity units based on their respective allocation divided by the grant date intrinsic value and an equal number of the related matching units is vested. The redemption price of the deferred equity units equals the fair market value of a share of the Company’s stock on the date of the settlement and the redemption price for the matching units equals the excess, if any, of the then fair market value of one Company fractional share over the grant date intrinsic value of one share. Dividend distributions, if any, are also paid out on vested deferred equity units and are calculated on the same basis as the Company’s common shares. The Company has applied a graded (tranche-by-tranche) attribution method and expenses stock-based compensation on an accelerated basis over the vesting period of the share award. The Company accounts for stock-based payments as required by ASC 718. ASC 718 requires all stock-based payments to employees to be recognized as compensation expense. Under the recognition provision of ASC 718, liability-classified stock-based compensation costs are measured each reporting date until settlement. The Plan was liability-classified from inception through June 3, 2020, upon completion of the IPO, further discussed herein. For accounting purposes, the grant date was established at the point the Company and the participant reached a mutual understanding of the key terms and conditions, in this case the date at which the participant accepted the invitation to participate in the Plan. For accounting purposes, deferred equity units are deemed to generally vest between one and seven years and matching equity units granted under the Plan are deemed to vest two years after the allocation to the participant’s account. The deferred and matching equity units have cash settlement dates that began in December 2018. Upon the scheduled settlement date in December 2019 and December 2018, the Company settled 314,631.58 deferred equity units, including special deferred equity units, in cash totaling approximately $ 2 million, 8,359,629.35 in Company shares (which were contributed to the LLC in exchange for Class A units of the LLC) with an estimated value of $ 58 million and 217,312.53 matching equity units in cash totaling approximately $ 1 million. Upon completion of the IPO in June 2020, the Plan was amended to remove the cash-settlement feature on all future redemptions. As a result, all awards previously issued under the Plan required settlement in equity. The participants in such plan were also allowed to sell a pro rata portion, consistent with Access’s percentage reduction in shares of Class B Common Stock as a result of the IPO, of their vested profits interests and acquired units of the LLC holding company, Management LLC, in the IPO through a “tag-along right.” Under the provision of ASC 718, the Company determined the Plan was modified as of June 3, 2020, and as such, converted the awards from liability-classified to equity-classified. Prior to conversion, the Company performed a final measurement of its stock-based compensation liability under the fair value method. Subsequent to the amendment, the awards issued under the Plan will no longer be adjusted for changes in the value of the Company’s common stock. Upon modification of the Plan, the Company reclassified a $ 769 million stock-based compensation liability to additional paid-in capital, which included $ 57 million associated with the awards settled through the IPO tag-along right on June 5, 2020. The Company will continue to incur non-cash stock-based compensation expense for awards that were unvested as of the modification date of the Plan. In December 2020, all of the outstanding equity interests held by certain participants in the Plan were settled or redeemed in accordance with the terms of the Plan. The Class A and Class B equity units held by certain participants in Management LLC were redeemed in exchange for 18,265,183 shares of Class B Common Stock. These shares of Class B Common Stock converted to shares of Class A Common Stock upon exchange. The Company also issued a total of 4,321,259 additional shares of Class A Common Stock to settle the participants’ remaining deferred equity units previously issued under the Plan. In March 2021, the Compensation Committee of the Board of Directors of the Company approved an amendment to the Plan that allowed certain remaining Plan participants to redeem a portion of their vested Class B equity units of Management LLC. These Class B equity units were redeemed in exchange for a total of 968,920 shares of Class B Common Stock, which shares of Class B Common Stock converted to shares of Class A Common Stock upon the exchange. In October 2021, a remaining Plan participant redeemed a portion of vested Class B 110 equity units of 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. The following table summarizes the activity for the Company’s unvested share awards under the Plan: Deferred Equity Units Matching Equity Units Deferred Equity Units Weighted-Average Intrinsic Value Matching Equity Units Weighted-Average Intrinsic Value Deferred Equity Units Weighted-Average Grant-Date Intrinsic Value Matching Equity Units Weighted-Average Grant-Date Intrinsic Value Unvested units at September 30, 2020 549,454 4,311,861 $ 27.01 $ 23.82 $ 23.82 $ — Granted — — — — — — Vested ( 549,454 ) ( 2,303,578 ) 44.21 41.02 41.02 — Forfeited — — — — — — Unvested units at September 30, 2021 — 2,008,283 $ — $ 41.02 $ — $ — Granted — — — — — — Vested — ( 1,458,829 ) — 20.02 — — Forfeited — — — — — — Unvested units at September 30, 2022 — 549,454 $ — $ 20.02 $ — $ — As of September 30, 2022 and September 30, 2021, there were no remaining unvested deferred equity unit awards outstanding. The weighted-average grant date intrinsic value of deferred equity unit awards for the fiscal year ended September 30, 2020 was $ 23.82 . The fair value of these deferred equity units at September 30, 2020 was $ 27.01 . As September 30, 2022, 2021 and 2020, the Company had approximately $ 1 million, $ 4 million and $ 14 million, respectively, of unrecognized compensation costs related to its unvested share awards. As of September 30, 2022, the remaining weighted-average period over which total compensation related to unvested awards is expected to be recognized is less than 1 year. Restricted Stock Units The following table summarizes the activity for the Company’s unvested RSUs: Number of Share Units Weighted-Average Grant Date Fair Value Unvested and outstanding balance as of September 30, 2021 1,535,367 $ 32.29 Granted 875,934 44.38 Vested ( 432,816 ) 29.75 Forfeited/canceled ( 87,210 ) 31.73 Unvested and outstanding balance as of September 30, 2022 1,891,275 $ 38.50 The weighted-average grant date fair value of RSUs granted during the fiscal years ended September 30, 2022 and 2021 was $ 44.38 and $ 32.23 , respectively. The total fair value of RSUs vested during the fiscal years ended September 30, 2022 and 2021 was $ 18 million and $ 0 million , respectively, computed as of the date of vesting. During the fiscal year ended September 30, 2020 there were no RSUs granted or vested. As of September 30, 2022, total unrecognized compensation cost related to RSUs was approximately $ 31 million, which is expected to be recognized over a weighted-average period of approximately 2.7 years. The Company satisfies the vesting of RSUs by issuing new shares of its Class A Common Stock. Stock-Based Compensation Expense Stock-based compensation expense is included in the consolidated statements of operations as selling, general and administrative expenses. The Company recognized non-cash stock-based compensation expense of $ 39 million, $ 45 million and $ 608 million for the fiscal years ended September 30, 2022, 2021 and 2020 , respectively. 111 14. Related Party Transactions Management Agreement Upon completion of the Merger, the Company and Holdings entered into the Management Agreement, dated as of the Merger Closing Date, pursuant to which Access provided the Company and its subsidiaries with financial, investment banking, management, advisory and other services. Pursuant to the Management Agreement, the Company paid to Access an annual fee on quarterly basis and reimbursed Access for certain expenses incurred performing services under the agreement. The Company and Holdings agreed to indemnify Access and certain of its affiliates against all liabilities arising out of performance of the Management Agreement. As a result of the completion of the IPO, the Management Agreement terminated in accordance with its terms and the Company paid to Access a one-time termination fee and a fee for transaction services in an aggregate amount of $ 60 million. The Company recorded these fees within selling, general and administrative expenses in the consolidated statements of operations for the fiscal year ended September 30, 2020. As the Management Agreement was terminated in June 2020, the Company incurred no costs associated with the Management Agreement for the fiscal years ended September 30, 2022 and 2021. Prior to the termination of the Management Agreement, the Company incurred costs associated with the Management Agreement of approximately $ 7 million for the fiscal year ended September 30, 2020. Such amounts have been included as a component of selling, general and administrative expense in the accompanying consolidated statements of operations. Lease Arrangements with Related Parties On March 29, 2019, an affiliate of Access acquired the Ford Factory Building, located on 777 S. Santa Fe Avenue in Los Angeles, California from an unaffiliated third party. The building is the Company’s new Los Angeles, California headquarters and as such, the Company is the sole tenant of the building acquired by Access. The existing lease agreement was assumed by Access upon purchase of the building and was not modified as a result of the purchase. Rental payments by the Company under the existing lease for the fiscal 2022 year were approximately $ 14 million and are subject to annual fixed increases throughout the remainder of the lease term. The remaining lease term is approximately 8 years, after which the Company may exercise a single option to extend the term of the lease for 10 years thereafter. On July 29, 2014, AI Wrights Holdings Limited, an affiliate of Access, entered into a lease and related agreements with Warner Chappell Music Limited and WMG Acquisition (UK) Limited, subsidiaries of the Company, for the lease of 27 Wrights Lane, Kensington, London, United Kingdom. The Company had been the tenant of the building which Access acquired. Subsequent to the change in ownership, the parties entered into the lease and related agreements pursuant to which, on January 1, 2015, the rent was increased to £ 3,460,250 per year and the term was extended for an additional five years from December 24, 2020 to December 24, 2025, with a market rate rent review which began on December 25, 2020. License Agreements with Deezer Access owns an equity interest in Deezer S.A., which was formerly known as Odyssey Music Group (“Odyssey”), a French company that controls and operates a music streaming service, formerly through Odyssey’s subsidiary, Blogmusik SAS (“Blogmusik”), under the name Deezer (“Deezer”), and is represented on Deezer S.A.’s Board of Directors. Subsidiaries of the Company have been a party to license arrangements with Deezer since 2008, which provide for the use of the Company’s sound recordings on Deezer’s ad-supported and subscription streaming services worldwide (excluding China, North Korea, and Japan (included for subscription services only)) in exchange for fees paid by Deezer. The Company has also authorized Deezer to include the Company’s sound recordings in Deezer’s streaming services where such services are offered as a bundle with third-party services or products (e.g., telco services or hardware products), for which Deezer is also required to make payments to the Company. Deezer paid to the Company an aggregate amount of approximately $ 36 million, $ 42 million and $ 42 million in connection with the foregoing arrangements during the fiscal years ended September 30, 2022, 2021 and 2020, respectively. In addition, in connection with these arrangements, (i) the Company was issued warrants to purchase shares of Deezer S.A. and (ii) the Company purchased a small number of shares of Deezer S.A. The Company also has various publishing agreements with Deezer. Warner Chappell has licenses with Deezer for use of repertoire on the service in Europe, which the Company refers to as a PEDL license (referencing the Company’s Pan European Digital Licensing initiative), and for territories in Latin America. For the PEDL and Latin American licenses for the fiscal years ended September 30, 2022, 2021 and 2020, Deezer paid the Company an additional approximately $ 2 million, $ 2 million and $ 2 million, respectively. Deezer also licenses other publishing rights controlled by Warner Chappell through statutory licenses or through various collecting societies. 112 On April 13, 2022, the Company entered into an agreement to purchase 900,000 ordinary shares for € 9 million of I2PO, a French société anonyme and special purpose acquisition company listed on the Paris Euronext Exchange. I2PO merged with Deezer S.A., which was consummated on July 5, 2022. In connection with the merger, preferred shares in Deezer S.A. previously held by the Company were converted into ordinary shares of the combined publicly traded entity. Following the consummation of the merger, I2PO was renamed Deezer. The Company’s equity interests in Deezer S.A. are recorded at fair value in accordance with ASC 321, Investments—Equity Securities based on quoted prices in active markets. As of September 30, 2022, the fair value of these equity interests was approximately $ 17 million. Investment in Tencent Music Entertainment Group On October 1, 2018, WMG China LLC (“WMG China”), an affiliate of the Company, entered into a share subscription agreement with Tencent Music Entertainment Group pursuant to which WMG China purchased 37,162,288 ordinary shares of Tencent Music Entertainment Group for $ 100 million. WMG China was 80 % owned by AI New Holdings 5 LLC, an affiliate of Access, and 20 % owned by the Company. On November 4, 2021, WMG China distributed to the Company, the Company’s pro-rata share of the Tencent Music Entertainment Group equity held by WMG China. WMG China was dissolved on May 9, 2022. 15. Commitments and Contingencies Talent Advances The Company routinely enters into long-term commitments with recording artists, songwriters, publishers and third-party labels for the future delivery of music. Such commitments generally become due only upon delivery and Company acceptance of albums from the recording artists or future musical compositions from songwriters and publishers. Additionally, such commitments are typically cancellable at the Company’s discretion, generally without penalty. Based on contractual obligations and the Company’s expected release schedule, off-balance sheet aggregate firm commitments to such talent approximated $ 469 million and $ 537 million as of September 30, 2022 and September 30, 2021, respectively. Other Other off-balance sheet firm commitments, which primarily include minimum funding commitments to investees, amounted to approximately $ 48 million and $ 23 million at September 30, 2022 and September 30, 2021, respectively. Litigation The Company is involved in various litigation and regulatory proceedings arising in the normal course of business. Where it is determined, in consultation with counsel based on litigation and settlement risks, that a loss is probable and estimable in a given matter, the Company establishes an accrual. In the currently pending proceedings, the amount of accrual is not material. An estimate of the reasonably possible loss or range of loss in excess of the amounts already accrued cannot be made at this time due to various factors typical in contested proceedings, including (1) the results of ongoing discovery; (2) uncertain damage theories and demands; (3) a less than complete factual record; (4) uncertainty concerning legal theories and their resolution by courts or regulators; and (5) the unpredictable nature of the opposing party and its demands. However, the Company cannot predict with certainty the outcome of any litigation or the potential for future litigation. As such, the Company continuously monitors these proceedings as they develop and adjusts any accrual or disclosure as needed. Regardless of the outcome, litigation could have an adverse impact on the Company, including the Company’s brand value, because of defense costs, diversion of management resources and other factors and it could have a material effect on the Company’s results of operations for a given reporting period. 16. 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, 113 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 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 19. 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 September 30, 2022 are expected to be recognized within approximately 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 19. Interest income or expense related to interest rate swaps is recognized in interest income (expense), net in the same period as the related expense is recognized. The ineffective portions of interest rate swaps are recognized in other income (expense) in the period measured. 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 September 30, 2022 and September 30, 2021, the Company had no outstanding hedge contracts and no deferred gains or losses in comprehensive income related to foreign exchange hedging. As of September 30, 2022, the Company had outstanding $ 820 million in pay-fixed receive-variable interest rate swaps with $ 13 million of unrealized deferred gains 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 $ 10 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other income for the fiscal year ended September 30, 2022. The Company recorded realized pre-tax losses of $ 3 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other expense for the fiscal year ended September 30, 2021. 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 fiscal year ended September 30, 2022 were $ 40 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 fiscal year ended September 30, 2021 were $ 15 million. The following is a summary of amounts recorded in the consolidated balance sheets pertaining to the Company’s derivative instruments at September 30, 2022 and September 30, 2021: September 30, 2022 (a) September 30, 2021 (b) (in millions) Other current assets $ 2 $ — Other noncurrent assets 16 — Other noncurrent liabilities — ( 22 ) ______________________________________ (a) $ 2 million and $ 16 million of interest rate swaps in current and noncurrent asset positions, respectively. (b) $ 22 million of interest rate swaps in noncurrent liability positions. 114 17. 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. 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 (in millions) 2022 Revenues $ 4,966 $ 958 $ ( 5 ) $ 5,919 Operating income (loss) 796 139 ( 221 ) 714 Amortization of intangible assets 176 87 — 263 Depreciation of property, plant and equipment 51 5 20 76 OIBDA 1,023 231 ( 201 ) 1,053 Total assets 3,515 2,954 1,359 7,828 Capital expenditures 52 1 82 135 2021 Revenues $ 4,544 $ 761 $ ( 4 ) $ 5,301 Operating income (loss) 733 89 ( 213 ) 609 Amortization of intangible assets 150 79 — 229 Depreciation of property, plant and equipment 53 6 18 77 OIBDA 936 174 ( 195 ) 915 Total assets 3,278 2,843 1,090 7,211 Capital expenditures 33 1 59 93 2020 Revenues $ 3,810 $ 657 $ ( 4 ) $ 4,463 Operating income (loss) 175 81 ( 485 ) ( 229 ) Amortization of intangible assets 119 71 — 190 Depreciation of property, plant and equipment 55 5 11 71 OIBDA 349 157 ( 474 ) 32 Capital expenditures 28 1 56 85 Revenues relating to operations in different geographical areas are set forth below for the fiscal years ended September 30, 2022, September 30, 2021 and September 30, 2020. Total long-lived assets relating to operations in different geographical areas, which consist of property, plant and equipment, net and operating lease right-of-use assets, net, are set forth below as of September 30, 2022 and September 30, 2021. 115 2022 2021 2020 Revenues Long-lived Assets Revenues Long-lived Assets Revenues (in millions) United States $ 2,744 $ 468 $ 2,363 $ 439 $ 1,934 United Kingdom 734 30 620 43 551 Germany 613 68 662 52 511 All other territories 1,828 75 1,656 98 1,467 Total $ 5,919 $ 641 $ 5,301 $ 632 $ 4,463 Customer Concentration In the fiscal year ended September 30, 2022, the Company had three customers, Spotify, YouTube and Apple, that individually represented 10% or more of total revenues, whereby Spotify represented 17 %, YouTube represented 12 % and Apple represented 11 % of total revenues. In the fiscal year ended September 30, 2021, the Company had three customers, Spotify, Apple and YouTube, that individually represented 10% or more of total revenues, whereby Spotify represented 18 %, Apple represented 13 % and YouTube represented 11 % of total revenues. In the fiscal year ended September 30, 2020, the Company had two customers, Spotify and Apple, that individually represented 10% or more of total revenues, whereby Spotify represented 17 % and Apple represented 14 % of total revenues. These customers’ revenues are included in both the Company’s Recorded Music and Music Publishing segments and the Company expects that the Company’s license agreements with these customers will be renewed in the normal course of business. 18. Additional Financial Information Cash Interest and Taxes The Company made interest payments of approximately $ 122 million, $ 137 million and $ 128 million during the fiscal years ended September 30, 2022, September 30, 2021 and September 30, 2020, respectively. The Company paid approximately $ 141 million, $ 124 million and $ 81 million of income and withholding taxes, net of refunds, for the fiscal years ended September 30, 2022, September 30, 2021 and September 30, 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 August 12, 2022, the Company’s board of directors declared a cash dividend of $ 0.16 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 on September 1, 2022. The Company paid cash dividends to stockholders and participating security holders of $ 318 million, $ 265 million and $ 344 million for the fiscal years ended September 30, 2022, 2021 and 2020, respectively. On November 10, 2022, the Company’s board of directors declared a cash dividend of $ 0.16 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 December 1, 2022 to stockholders of record as of the close of business on November 22, 2022. Noncash Investment Activity Noncash investing activities was approximately $ 125 million related to the acquisition of music publishing rights and music catalogs, net during the fiscal year ended September 30, 2022. The corresponding notes payable balance is reflected as other current liabilities within the Company’s consolidated balance sheet at September 30, 2022. 116 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 fiscal year ended September 30, 2022, including touring and live events. For the fiscal year ended September 30, 2022, revenues improved due to the recovery of certain COVID-19 impacted revenue streams. 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. 19. 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 September 30, 2022 and September 30, 2021. Fair Value Measurements as of September 30, 2022 (Level 1) (Level 2) (Level 3) Total (in millions) Other Current Assets: Interest Rate Swap (d) $ — $ 2 $ — $ 2 Other Noncurrent Assets: Interest Rate Swaps (d) — 16 — 16 Equity Investment with Readily Determinable Fair Value (c) 36 — — 36 Other Noncurrent Liabilities: Contractual Obligations (a) — — ( 1 ) ( 1 ) Total $ 36 $ 18 $ ( 1 ) $ 53 117 Fair Value Measurements as of September 30, 2021 (Level 1) (Level 2) (Level 3) Total (in millions) Other Current Liabilities: Contractual Obligations (a) $ — $ — $ ( 4 ) $ ( 4 ) Other Noncurrent Assets: Equity Method Investment (b) 26 — — 26 Equity Investment with Readily Determinable Fair Value (c) 37 — — 37 Other Noncurrent Liabilities: Contractual Obligations (a) — — ( 15 ) ( 15 ) Interest Rate Swaps (d) — ( 22 ) — ( 22 ) Total $ 63 $ ( 22 ) $ ( 19 ) $ 22 ______________________________________ (a) This represents contingent consideration related to acquisitions. This is based on a probability weighted performance approach and it is adjusted to fair value on a recurring basis and any adjustments are 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. (b) 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”). During the fiscal year ended September 30, 2022, this investment was sold. (c) 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. (d) The fair value of the interest rate swaps is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay as of September 30, 2022 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 ( 1 ) Reductions 15 Payments 4 Balance at September 30, 2022 $ ( 1 ) 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 fiscal year ended September 30, 2022. In addition, there were no observable price changes events that were completed during the fiscal year ended September 30, 2022. Fair Value of Debt Based on the level of interest rates prevailing at September 30, 2022, the fair value of the Company’s debt was $ 3.181 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. 118 20. Subsequent Events On November 1, 2022, Acquisition Corp. entered into a Seventh Incremental Commitment Amendment (the “Seventh Incremental Commitment Amendment”), with Credit Suisse AG, New York Branch, as Tranche H term lender, and Credit Suisse AG, as administrative agent, and acknowledged by the guarantors party thereto and WMG Holdings Corp., to the Senior Term Loan Credit Agreement, pursuant to which Acquisition Corp. borrowed additional term loans in the amount of $ 150 million for an aggregate principal amount outstanding under the Senior Term Loan Credit Agreement of $ 1,295 million. The Seventh Incremental Commitment Amendment was entered into to fund certain deferred payment obligations owing in respect of certain prior acquisitions, to pay fees and expenses relating thereto and for general corporate purposes. 119 WARNER MUSIC GROUP CORP. Schedule II — Valuation and Qualifying Accounts Description Balance at Beginning of Period Additions Charged to Cost and Expenses Deductions Balance at End of Period (in millions) Fiscal Year Ended September 30, 2022 Allowance for doubtful accounts $ 20 $ 5 $ ( 6 ) $ 19 Reserves for sales returns 23 52 ( 56 ) 19 Allowance for deferred tax asset 38 2 ( 11 ) 29 Fiscal Year Ended September 30, 2021 Allowance for doubtful accounts $ 23 $ 1 $ ( 4 ) $ 20 Reserves for sales returns 24 53 ( 54 ) 23 Allowance for deferred tax asset 45 2 ( 9 ) 38 Fiscal Year Ended September 30, 2020 Allowance for doubtful accounts $ 17 $ 11 $ ( 5 ) $ 23 Reserves for sales returns 23 66 ( 65 ) 24 Allowance for deferred tax asset 91 1 ( 47 ) 45 120 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.