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, 2024 TABLE OF CONTENTS Page Number Reports of Independent Registered Public Accounting Firm (PCAOB ID: 185 ) 83 Consolidated Financial Statements: Consolidated Balance Sheets as of September 30, 2023 and September 30, 2022 86 Consolidated Statements of Operations for the fiscal years ended September 30, 2023, September 30, 2022 and September 30, 2021 87 Consolidated Statements of Comprehensive Income for the fiscal years ended September 30, 2023, September 30, 2022 and September 30, 2021 88 Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2023, September 30, 2022 and September 30, 2021 89 Consolidated Statements of Equity for the fiscal years ended September 30, 2023, September 30, 2022 and September 30, 2021 90 Notes to Consolidated Financial Statements 91 Financial Statement Schedule: Schedule II—Valuation and Qualifying Accounts 122 82 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, 2024 and 2023, the related consolidated statements of operations, comprehensive income, cash flows, and equity for each of the years in the three-year period ended September 30, 2024, and the related notes and financial statement schedule II (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, 2024 and 2023, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2024, 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, 2024, 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 21, 2024 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. 83 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 $3,519 million of digital revenues within the Recorded Music segment for the year ended September 30, 2024. 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 21, 2024 84 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, 2024, 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, 2024, 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, 2024 and 2023, the related consolidated statements of operations, comprehensive income, cash flows, and equity for each of the years in the three-year period ended September 30, 2024, and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our report dated November 21, 2024 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 21, 2024 85 Warner Music Group Corp. Consolidated Balance Sheets (In millions, except share amounts which are reflected in thousands) September 30, 2024 September 30, 2023 Assets Current assets: Cash and equivalents $ 694 $ 641 Accounts receivable, net of allowances of $ 26 million and $ 19 million 1,255 1,120 Inventories 99 126 Royalty advances expected to be recouped within one year 470 413 Prepaid and other current assets 125 102 Total current assets 2,643 2,402 Royalty advances expected to be recouped after one year 874 688 Property, plant and equipment, net 481 458 Operating lease right-of-use assets, net 225 245 Goodwill 2,021 1,993 Intangible assets subject to amortization, net 2,359 2,353 Intangible assets not subject to amortization 152 149 Deferred tax assets, net 52 32 Other assets 348 225 Total assets $ 9,155 $ 8,545 Liabilities and Equity Current liabilities: Accounts payable $ 289 $ 300 Accrued royalties 2,549 2,219 Accrued liabilities 641 533 Accrued interest 17 18 Operating lease liabilities, current 45 41 Deferred revenue 246 371 Other current liabilities 110 57 Total current liabilities 3,897 3,539 Long-term debt 4,014 3,964 Operating lease liabilities, noncurrent 228 255 Deferred tax liabilities, net 195 216 Other noncurrent liabilities 146 141 Total liabilities $ 8,480 $ 8,115 Equity: Class A common stock, $ 0.001 par value; 1,000,000 shares authorized, 142,559 and 138,345 shares issued and outstanding as of September 30, 2024 and September 30, 2023, respectively $ — $ — Class B common stock, $ 0.001 par value; 1,000,000 shares authorized, 375,380 and 377,650 issued and outstanding as of September 30, 2024 and September 30, 2023, respectively 1 1 Additional paid-in capital 2,077 2,015 Accumulated deficit ( 1,313 ) ( 1,387 ) Accumulated other comprehensive loss, net ( 247 ) ( 322 ) Total Warner Music Group Corp. equity 518 307 Noncontrolling interest 157 123 Total equity 675 430 Total liabilities and equity $ 9,155 $ 8,545 See accompanying notes 86 Warner Music Group Corp. Consolidated Statements of Operations (In millions, except share amounts which are reflected in thousands, and per share data) Fiscal Year Ended September 30, 2024 2023 2022 Revenue $ 6,426 $ 6,037 $ 5,919 Costs and expenses: Cost of revenue ( 3,355 ) ( 3,177 ) ( 3,080 ) Selling, general and administrative expenses (a) ( 1,879 ) ( 1,826 ) ( 1,862 ) Restructuring and impairments ( 177 ) ( 40 ) — Amortization expense ( 224 ) ( 245 ) ( 263 ) Total costs and expenses ( 5,635 ) ( 5,288 ) ( 5,205 ) Net gain on divestitures 32 41 — Operating income 823 790 714 Loss on extinguishment of debt — ( 4 ) — Interest expense, net ( 161 ) ( 141 ) ( 125 ) Other (expense) income, net ( 61 ) ( 36 ) 151 Income before income taxes 601 609 740 Income tax expense ( 123 ) ( 170 ) ( 185 ) Net income 478 439 555 Less: Income attributable to noncontrolling interest ( 43 ) ( 9 ) ( 4 ) Net income attributable to Warner Music Group Corp. $ 435 $ 430 $ 551 Net income per share attributable to common stockholders: Class A – Basic and Diluted $ 0.83 $ 0.82 $ 1.06 Class B – Basic and Diluted $ 0.83 $ 0.82 $ 1.06 Weighted average common shares: Class A – Basic and Diluted 140,882 138,070 133,662 Class B – Basic and Diluted 376,641 377,650 381,046 (a) Includes depreciation expense: $ ( 103 ) $ ( 87 ) $ ( 76 ) See accompanying notes 87 Warner Music Group Corp. Consolidated Statements of Comprehensive Income (In millions) Fiscal Year Ended September 30, 2024 2023 2022 Net income $ 478 $ 439 $ 555 Other comprehensive income (loss), net of tax: Foreign currency adjustment, net 78 36 ( 184 ) Deferred (loss) gain on derivative financial instruments ( 1 ) ( 12 ) 30 Minimum pension liability ( 2 ) 1 9 Other comprehensive income (loss), net of tax 75 25 ( 145 ) Total comprehensive income 553 464 410 Less: Income attributable to noncontrolling interest ( 43 ) ( 9 ) ( 4 ) Comprehensive income attributable to Warner Music Group Corp. $ 510 $ 455 $ 406 See accompanying notes 88 Warner Music Group Corp. Consolidated Statements of Cash Flows (In millions) Fiscal Year Ended September 30, 2024 2023 2022 Cash flows from operating activities Net income $ 478 $ 439 $ 555 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 327 332 339 Unrealized losses (gains) and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts 68 38 ( 169 ) Deferred income taxes ( 48 ) ( 13 ) 13 Loss on extinguishment of debt — 4 — Net loss (gain) on investments ( 6 ) ( 3 ) 46 Net loss (gain) on divestitures ( 32 ) ( 42 ) — Non-cash interest expense 6 2 6 Non-cash stock-based compensation expense 52 49 39 Non-cash impairments and restructuring 57 — — Changes in operating assets and liabilities: Accounts receivable, net ( 110 ) ( 113 ) ( 195 ) Inventories 30 ( 12 ) ( 22 ) Royalty advances ( 222 ) ( 191 ) ( 94 ) Other noncurrent assets ( 85 ) ( 10 ) ( 12 ) Accounts payable and accrued liabilities 86 77 ( 21 ) Royalty payables 275 256 158 Accrued interest ( 6 ) 1 3 Operating lease liabilities ( 5 ) ( 4 ) ( 6 ) Deferred revenue ( 133 ) ( 58 ) 86 Other balance sheet changes 22 ( 65 ) 16 Net cash provided by operating activities 754 687 742 Cash flows from investing activities Acquisition of music publishing rights and music catalogs ( 187 ) ( 114 ) ( 191 ) Capital expenditures ( 116 ) ( 127 ) ( 135 ) Investments and acquisitions of businesses, net of cash received ( 40 ) ( 126 ) ( 509 ) Proceeds from the sale of investments 13 22 11 Proceeds from divestitures 19 45 — Net cash used in investing activities ( 311 ) ( 300 ) ( 824 ) Cash flows from financing activities Partial proceeds from Senior Term Loan Facility refinancing 104 146 — Partial repayment of Senior Term Loan Facility refinancing ( 104 ) — — Proceeds from Term Loan Mortgage — 19 — Repayment of Term Loan Mortgage — ( 1 ) — Proceeds from issuance of 3.750 % Senior Secured Notes due 2029 — — 535 Deferred financing costs paid ( 2 ) ( 3 ) ( 5 ) Distribution to noncontrolling interest holders ( 8 ) ( 12 ) ( 6 ) Dividends paid ( 361 ) ( 340 ) ( 318 ) Payment of deferred and contingent consideration ( 20 ) ( 133 ) ( 7 ) Taxes paid related to net share settlement of restricted stock units and common stock ( 5 ) — ( 6 ) Other — ( 1 ) ( 5 ) Net cash (used in) provided by financing activities ( 396 ) ( 325 ) 188 Effect of exchange rate changes on cash and equivalents 6 ( 5 ) ( 21 ) Net increase in cash and equivalents 53 57 85 Cash and equivalents at beginning of period 641 584 499 Cash and equivalents at end of period $ 694 $ 641 $ 584 See accompanying notes 89 Warner Music Group Corp. Consolidated Statements of Equity (In millions, except share amounts which are reflected in thousands, and per share data) 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 Balances at September 30, 2021 122,414 $ — 391,971 $ 1 $ 1,942 $ ( 1,710 ) $ ( 202 ) $ 31 $ 15 $ 46 Net income — — — — — 551 — 551 4 555 Other comprehensive loss, 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 277 — — — ( 6 ) — — ( 6 ) — ( 6 ) Conversion of Class B shares to Class A shares 14,321 — ( 14,321 ) — — — — — — — Shares issued under Omnibus Incentive Plan 187 — — — — — — — — — Other — — — — ( 4 ) — — ( 4 ) 3 ( 1 ) Balances at September 30, 2022 137,199 $ — 377,650 $ 1 $ 1,975 $ ( 1,477 ) $ ( 347 ) $ 152 $ 16 $ 168 Net income — — — — — 430 — 430 9 439 Other comprehensive income, net of tax — — — — — — 25 25 — 25 Dividends ($ 0.65 per share) — — — — — ( 340 ) — ( 340 ) — ( 340 ) Stock-based compensation expense — — — — 39 — — 39 — 39 Distribution to noncontrolling interest holders — — — — — — — — ( 12 ) ( 12 ) Acquisition of noncontrolling interests — — — — — — — — 112 112 Shares issued under the Plan 869 — — — — — — — — — Shares issued under Omnibus Incentive Plan 277 — — — — — — — — — Other — — — — 1 — — 1 ( 2 ) ( 1 ) Balances at September 30, 2023 138,345 $ — 377,650 $ 1 $ 2,015 $ ( 1,387 ) $ ( 322 ) $ 307 $ 123 $ 430 Net income — — — — — 435 — 435 43 478 Other comprehensive income, net of tax — — — — — — 75 75 — 75 Dividends ($ 0.69 per share) — — — — — ( 361 ) — ( 361 ) — ( 361 ) Stock-based compensation expense — — — — 67 — — 67 — 67 Distribution to noncontrolling interest holders — — — — — — — — ( 8 ) ( 8 ) Acquisition of noncontrolling interests — — — — — — — — ( 1 ) ( 1 ) Shares issued under the Plan 1,738 — — — — — — — — — Exchange of Class B shares for Class A shares 2,270 — ( 2,270 ) — — — — — — — Shares issued under Omnibus Incentive Plan 206 — — — ( 5 ) — — ( 5 ) — ( 5 ) Balances at September 30, 2024 142,559 $ — 375,380 $ 1 $ 2,077 $ ( 1,313 ) $ ( 247 ) $ 518 $ 157 $ 675 See accompanying notes 90 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 72 % of the economic interest as of September 30, 2024. As a result, the Company is a “controlled company” within the meaning of the corporate governance standards of NASDAQ. Recorded Music Operations Our Recorded Music business primarily consists of the discovery and development of recording artists and the related marketing, promotion, distribution, sale and licensing of music created by such recording artists. We play an integral role in virtually all aspects of the recorded music value chain from discovering and developing talent to producing, distributing and selling music to marketing and promoting recording artists and their music. Music Publishing Operations While Recorded Music is focused on marketing, promoting, distributing and licensing a particular recording of a musical composition, Music Publishing is an intellectual property business focused on generating revenue from uses of the musical composition itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rightsholders, our Music Publishing business shares the revenues generated from use of the musical compositions with the songwriter or other rightsholders. 2. Summary of Significant Accounting Policies 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. Prior to the start of the 2023 fiscal year, the Company maintained a 52-53 week fiscal year ending on the last Friday in each reporting period. The 2022 fiscal year ended on September 30, 2022 and included 53 weeks. Accordingly, the results of operations for the 2022 fiscal year reflect 53 weeks compared to 52 weeks for the 2023 and 2024 fiscal years. Starting with the 2023 fiscal year, the Company transitioned to a reporting calendar in which the reporting periods end on the last day of the calendar quarter. The Company’s fiscal year begins on October 1 and ends on September 30 of each year. 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. 91 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. As of September 30, 2024 and 2023, there were approximately $ 77 million and $ 5 million of assets, respectively, and $ 2 million and $ 2 million of liabilities, respectively, related to VIEs included in our consolidated balance sheets. 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. 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 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. The Company maintains certain cash deposits in excess of FDIC insurance limits. Accounts Receivable Credit is extended to customers based upon an evaluation of the customer’s financial condition. Accounts receivable are recorded net of an allowance for current expected credit losses. Refund Liabilities and Allowance for Credit Losses 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 losses related to accounts receivable. Judgments and estimates are involved in evaluating if accounts receivable 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 92 should be modified. The Company also monitors payment levels from customers, and an allowance for estimated credit losses is maintained based on such payment levels, historical experience, management’s views on trends in the overall receivable aging, for larger accounts, analyses of specific risks per customer, and reasonable and supportable forecasts of the economic and geopolitical conditions that may exist through the contractual life of the receivable. The Company will write off receivables only when they are deemed no longer collectible. 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 both September 30, 2024 and September 30, 2023, Spotify AB represented 18 % 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. 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 20) 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. 93 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 synergies and economies of scale expected from the combination of services and is determined based on 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 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 gains of $ 2 million, gains of $ 4 million and losses of $ 11 million within operating income on the consolidated statement of operations during the years ended September 30, 2024, 2023 and 2022, respectively. Furthermore, the Company recorded foreign currency transaction losses of $ 72 million, losses of $ 37 million and gains of $ 185 million within other (expense) income, net on the consolidated statement of operations during the years ended September 30, 2024, 2023 and 2022, respectively. 94 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. 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. 95 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 $ 119 million, $ 136 million and $ 155 million for the fiscal years ended September 30, 2024, September 30, 2023 and September 30, 2022, 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 . 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 grants market-based performance share units (“PSUs”) to our Chief Executive Officer whereby the PSU award payout is determined based on the Company’s total shareholder return compared to a designated peer group. The Company recognizes stock-based compensation expense based on the grant date fair value of the PSUs using a Monte Carlo simulation model analysis, on a straight-line basis over the requisite service period of the awards, which is approximately three years . 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. Global Intangible Low-Taxed Income (“GILTI”) imposes U.S. taxes on the excess of a deemed return on tangible assets of certain foreign subsidiaries. The Company made an election to recognize GILTI tax in the specific period in which it occurs. 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 Accounting Pronouncements Not Yet Adopted In March 2023, the FASB issued ASU 2023-01, Leases (Topic 842): Common Control Arrangements (“ASU 2023-01”). The amendment clarifies the accounting for leasehold improvements for leases between entities under common control. Specifically, the ASU 2023-01 requires that leasehold improvements associated with common control leases be both: (1) amortized by the lessee over the useful life of the leasehold improvement to the common control group, regardless of the lease term, and (2) accounted for as an adjustment to equity when leasehold improvements are transferred between entities under common control when the lessee no longer controls the leasehold improvements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023. The Company will adopt this guidance for the fiscal year beginning October 1, 2024 on a prospective basis for all new leasehold 96 improvements recognized on or after that date. The adoption will not have a material impact on the Company’s consolidated financial statements. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures . The amendment enhances reportable segment disclosure requirements, primarily by requiring enhanced disclosures about significant segment expenses, reporting for interim periods, and Chief Operating Decision Maker (“CODM”) related information. The amendments in this ASU are effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company is in the process of evaluating the effect that the adoption of these standards will have on its consolidated financial statements. In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures . The amendment enhances income tax disclosure requirements, by requiring enhanced disclosures on the income tax rate reconciliation and income taxes paid. The amendments in this ASU are effective for fiscal years beginning after December 15, 2024. The Company is in the process of evaluating the effect that the adoption of these standards will have on its consolidated financial statements. In November 2024, the FASB issued ASU 2024-03, Income Statement—Reporting Comprehensive Income—Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses . The amendment requires new financial statement disclosures to provide disaggregated information for certain types of expenses, including purchases of inventory, employee compensation, depreciation, and amortization in commonly presented expense captions such as cost of revenue and selling, general and administrative expenses. The amendments in this ASU are effective for fiscal years beginning after December 15, 2026, and interim periods within fiscal years beginning after December 15, 2027. The Company is in the process of evaluating the effect that the adoption of these standards will have on its consolidated financial statements. 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, less earnings available to participating securities, 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, less earnings available to participating securities, by the weighted average number of outstanding common shares, plus dilutive potential common shares, which is calculated using the treasury-stock method. Under the treasury-stock method, potential common shares are excluded from the computation of EPS in periods in which they have an anti-dilutive effect. The potentially dilutive common shares did not have a dilutive effect on the Company’s EPS calculation for the fiscal years ended September 30, 2024, September 30, 2023 and September 30, 2022. The Company allocates dividends declared to Class A Common Stock and Class B Common Stock based on timing and amounts actually declared for each class of stock and the undistributed earnings are allocated to Class A Common Stock and Class B Common Stock pro rata on a basic weighted average shares outstanding basis since the two classes of stock participate equally on a per share basis upon liquidation. The following table sets forth the calculation of basic and diluted net income per common share under the two-class method (in millions, except share amounts, which are reflected in thousands, and per share data): Fiscal Year Ended September 30, 2024 2023 2022 Class A Class B Class A Class B Class A Class B Basic and Diluted EPS: Numerator Net income attributable to Warner Music Group Corp. $ 122 $ 313 $ 119 $ 311 $ 149 $ 402 Less: Net income attributable to participating securities (a) ( 6 ) — ( 6 ) — ( 7 ) — Net income attributable to common stockholders $ 116 $ 313 $ 113 $ 311 $ 142 $ 402 Denominator Weighted average shares outstanding 140,882 376,641 138,070 377,650 133,662 381,046 Basic and Diluted EPS $ 0.83 $ 0.83 $ 0.82 $ 0.82 $ 1.06 $ 1.06 ______________________________________ (a) Participating securities include unvested restricted stock units, which include the right to receive non-forfeitable dividend equivalents. 97 4. Revenue Recognition For our operating segments, Recorded Music and Music Publishing, the Company accounts for a contract when it has legally enforceable rights and obligations and collectability of consideration is probable. The Company identifies the performance obligations and determines the transaction price associated with the contract, which is then allocated to each performance obligation, using management’s best estimate of standalone selling price for arrangements with multiple performance obligations. Revenue is recognized when, or as, control of the promised services or goods is transferred to the Company’s customers, and in an amount that reflects the consideration the Company is contractually due in exchange for those services or goods. An estimate of variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Certain of the Company’s arrangements include licenses of intellectual property with consideration in the form of sales- and usage-based royalties. Royalty revenue is recognized when the subsequent sale or usage occurs using the best estimates available of the amounts that will be received by the Company. 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, 2024 2023 2022 (in millions) Revenue by Type Digital $ 3,519 $ 3,322 $ 3,305 Physical 519 507 563 Total Digital and Physical 4,038 3,829 3,868 Artist services and expanded-rights 684 744 767 Licensing 501 382 331 Total Recorded Music 5,223 4,955 4,966 Performance 198 173 159 Digital 763 669 563 Mechanical 58 63 50 Synchronization 175 167 172 Other 16 16 14 Total Music Publishing 1,210 1,088 958 Intersegment eliminations ( 7 ) ( 6 ) ( 5 ) Total Revenues $ 6,426 $ 6,037 $ 5,919 Revenue by Geographical Location U.S. Recorded Music $ 2,210 $ 2,184 $ 2,231 U.S. Music Publishing 660 582 513 Total U.S. 2,870 2,766 2,744 International Recorded Music 3,013 2,771 2,735 International Music Publishing 550 506 445 Total International 3,563 3,277 3,180 Intersegment eliminations ( 7 ) ( 6 ) ( 5 ) Total Revenues $ 6,426 $ 6,037 $ 5,919 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 98 without a requirement to replace the content and without impact to minimum royalty guarantees and (2) the contracts not containing a specific listing of content subject to the license. Digital licensing contracts are generally long-term with consideration in the form of sales- and usage-based royalties that are typically received monthly. Certain contracts contain minimum guarantees, which are recoupable against royalties. Upon contract inception, the Company will assess whether a shortfall or breakage is expected (i.e., where the minimum guarantee will not be recouped through royalties) in order to determine timing of revenue recognition for the minimum guarantee. For fixed fee contracts and minimum guarantee contracts where breakage is expected, the total transaction price (fixed fee or minimum guarantee) is recognized proportionately over the contract term using an appropriate measure of progress which is based on the Company’s digital partner’s subscribers or streaming activity as these are measures of access to an evolving catalog, or on a straight-line basis. The Company updates its assessment of the transaction price each reporting period to see if anticipated royalty earnings exceed the minimum guarantee. For contracts where breakage is not expected, royalties are recognized as revenue as sales or usage occurs based upon the licensee’s usage reports and, when these reports are not available, revenue is based on historical data, industry information and other relevant trends. 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. 99 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. 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 $ 20 million and $ 19 million were established at September 30, 2024 and September 30, 2023, respectively. Based on management’s analysis of estimated credit losses, reserves of $ 26 million and $ 19 million were established at September 30, 2024 and September 30, 2023, 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. 100 Deferred revenue increased by $ 645 million during the fiscal year ended September 30, 2024 and $ 724 million during the fiscal year ended September 30, 2023 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, 2024 and 2023 which was included in the deferred revenue balance at the beginning of each respective period was $ 330 million and $ 393 million. There were no other significant changes to deferred revenue during the reporting period. Performance Obligations For the fiscal years ended September 30, 2024, 2023 and 2022, the Company recognized revenue of $ 122 million , $ 91 million and $ 59 million, respectively, from performance obligations satisfied in previous periods. Wholly and partially unsatisfied performance obligations represent future revenues not yet recorded under long-term intellectual property licensing contracts containing fixed fees, advances and minimum guarantees. Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at September 30, 2024 are as follows: FY25 FY26 FY27 Thereafter Total (in millions) Remaining performance obligations $ 445 $ 153 $ 5 $ 1 $ 604 Total $ 445 $ 153 $ 5 $ 1 $ 604 5. Acquisitions TenThousand Projects On August 25, 2023, the Company purchased 51 % of the issued and outstanding equity securities of TenThousand Projects Holdings LLC (“TenThousand Projects”), an independent U.S. record label, pursuant to the terms of the unit purchase agreement of the same date among Warner Music Inc., a wholly-owned subsidiary of the Company, TenThousand Projects LLC, and Ten Thousand Projects Holdings LLC (the “Unit Purchase Agreement”). Cash consideration paid was $ 110 million which was comprised of the base purchase price of $ 102 million, as adjusted for final working capital, and cash acquired. The base purchase price included $ 11 million, which was deferred at the time of acquisition and paid during the fiscal year ended September 30, 2024 The acquisition of TenThousand Projects was accounted for as a business combination in accordance with ASC 805, Business Combinations, using the acquisition method of accounting, as the Company had acquired a controlling financial interest in TenThousand Projects. The results of operations of TenThousand Projects have been included in the Company’s results of operations from the date of the acquisition. The fair value of the net assets acquired was approximately $ 19 million and primarily consisted of royalty advances. The fair value of identifiable intangible assets subject to amortization was approximately $ 152 million and consists of a recorded music catalog, artist and songwriting contracts, and trademarks which have a fair value of $ 99 million, $ 48 million, and $ 5 million, respectively. The weighted-average useful lives of these intangible assets identified are consistent with the average remaining useful lives of such intangible assets previously acquired by the Company as disclosed in Note 9. The fair value of the noncontrolling interest in the acquiree was approximately $ 105 million and was determined using the implied enterprise value of the business based on the purchase price. The excess of the purchase price over the fair value of net assets acquired, including the amount assigned to identifiable intangibles assets, was approximately $ 44 million and has been recorded as goodwill. The resulting goodwill has been included in our Recorded Music reportable segment and the Company’s 51 % share will be deductible for income tax purposes. At September 30, 2024, the Company updated and finalized the purchase price allocation recorded at September 30, 2023, which resulted in a net decrease to intangible assets of approximately $ 1 million, a net increase to goodwill of approximately $ 1 million, a net decrease to other acquired assets and liabilities of $ 1 million, and a net increase to the fair value of noncontrolling interest in the acquiree of $ 1 million. For the fiscal year ended September 30, 2023, 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. The unaudited pro forma revenue and operating income as if the acquisition occurred on October 1, 2021 was not material to the Company’s reported results for the fiscal years ended September 30, 2023 and September 30, 2022. 101 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 a related tax benefit of $ 2 million: Foreign Currency Translation Gains (Losses) (a) Minimum Pension Liability Adjustment Deferred Gains (Losses) On Derivative Financial Instruments Accumulated Other Comprehensive Loss, net (in millions) Balances at September 30, 2021 $ ( 174 ) $ ( 11 ) $ ( 17 ) $ ( 202 ) Other comprehensive loss ( 184 ) 9 30 ( 145 ) Balances at September 30, 2022 $ ( 358 ) $ ( 2 ) $ 13 $ ( 347 ) Other comprehensive income 36 1 ( 12 ) 25 Balances at September 30, 2023 $ ( 322 ) $ ( 1 ) $ 1 $ ( 322 ) Other comprehensive income 78 ( 2 ) ( 1 ) 75 Balances at September 30, 2024 $ ( 244 ) $ ( 3 ) $ — $ ( 247 ) ______________________________________ (a) Includes historical foreign currency translation related to certain intra-entity transactions. 7. Property, Plant and Equipment Property, plant and equipment consist of the following: September 30, 2024 September 30, 2023 (in millions) Land $ 11 $ 11 Buildings and improvements 216 194 Furniture and fixtures 45 37 Computer hardware and software 650 592 Construction in progress 132 107 Machinery and equipment 42 40 Gross Property, Plant and Equipment $ 1,096 $ 981 Less: Accumulated depreciation ( 615 ) ( 523 ) Net Property, Plant and Equipment $ 481 $ 458 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. Under FASB ASC Topic 842, Leases (“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. 102 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). 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 19 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year. Among the Company’s operating leases are its leases for the Ford Factory Building, located at 777 S. Santa Fe Avenue in Los Angeles, California, and for 27 Wrights Lane, Kensington, London, United Kingdom. The landlord for both leases is an affiliate of Access. As of September 30, 2024 and September 30, 2023, the aggregate lease liability related to these leases was $ 99 million and $ 110 million, respectively. See also Note 15, 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, 2024 2023 (in millions) Lease Cost Operating lease cost $ 53 $ 52 Short-term lease cost — — Variable lease cost 12 13 Total lease cost $ 65 $ 65 The Company incurred and recorded other occupancy expenses of $ 26 million and $ 25 million for the fiscal years ended September 30, 2024 and 2023, respectively. Supplemental cash flow information related to leases was as follows: Fiscal Year Ended September 30, 2024 2023 (in millions) Cash paid for amounts included in the measurement of operating lease liabilities $ 59 $ 56 Right-of-use assets obtained in exchange for operating lease obligations 18 77 103 Supplemental balance sheet information related to leases was as follows: September 30, 2024 September 30, 2023 (in millions) Operating Leases Operating lease right-of-use assets $ 225 $ 245 Operating lease liabilities, current $ 45 $ 41 Operating lease liabilities, noncurrent 228 255 Total operating lease liabilities $ 273 $ 296 Weighted Average Remaining Lease Term Operating leases 6 years 7 years Weighted Average Discount Rate Operating leases 5.56 % 5.55 % Maturities of lease liabilities were as follows: Fiscal Year Ended September 30, Operating Leases (in millions) 2025 $ 58 2026 55 2027 52 2028 51 2029 48 Thereafter 63 Total lease payments 327 Less: Imputed interest ( 54 ) Total $ 273 As of September 30, 2024, we have additional operating leases for facilities that have not yet commenced with total lease obligations of $ 7 million and a weighted average lease term of 5 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, 2022 $ 1,456 $ 464 $ 1,920 Acquisitions 51 — 51 Other adjustments 22 — 22 Balances at September 30, 2023 $ 1,529 $ 464 $ 1,993 Acquisitions 5 — 5 Other adjustments 23 — 23 Balances at September 30, 2024 $ 1,557 $ 464 $ 2,021 The increase in goodwill during the fiscal year ended September 30, 2024 primarily relates to an acquisition entered into during the fiscal year. The increase in goodwill during the fiscal year ended September 30, 2023 primarily relates to the acquisition of TenThousand Projects as described in Note 5. The other adjustments during both the fiscal years ended September 30, 2024 and September 30, 2023 primarily represent foreign currency movements. 104 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 2024 impairment analysis did not result in an impairment of the Company’s goodwill. Intangible Assets Intangible assets consist of the following: Weighted-Average Useful Life September 30, 2024 September 30, 2023 (in millions) Intangible assets subject to amortization: Recorded music catalog 12 years $ 1,616 $ 1,507 Music publishing copyrights 24 years 2,227 2,026 Artist and songwriter contracts 13 years 1,125 1,091 Trademarks 18 years 69 111 Other intangible assets 7 years 69 104 Total gross intangible assets subject to amortization 5,106 4,839 Accumulated amortization ( 2,747 ) ( 2,486 ) Total net intangible assets subject to amortization 2,359 2,353 Intangible assets not subject to amortization: Trademarks and tradenames Indefinite 152 149 Total net intangible assets $ 2,511 $ 2,502 The increase in intangible assets during the fiscal year ended September 30, 2024 primarily relates to various music publishing copyright acquisitions, as well as 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 2024 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, 2024, 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) 2025 $ 246 2026 230 2027 200 2028 170 2029 165 Thereafter 1,348 Total $ 2,359 105 10. Debt Debt Capitalization Long-term debt, all of which was issued by Acquisition Corp., consists of the following: September 30, 2024 September 30, 2023 (in millions) Revolving Credit Facility (a) $ — $ — Senior Term Loan Facility due 2031 1,295 1,295 2.750 % Senior Secured Notes due 2028 (€ 325 face amount) 363 343 3.750 % Senior Secured Notes due 2029 540 540 3.875 % Senior Secured Notes due 2030 535 535 2.250 % Senior Secured Notes due 2031 (€ 445 face amount) 497 471 3.000 % Senior Secured Notes due 2031 800 800 Term Loan Mortgage $ 18 $ 18 Total long-term debt, including the current portion $ 4,048 $ 4,002 Issuance premium less unamortized discount and unamortized deferred financing costs $ ( 34 ) $ ( 38 ) Total long-term debt, including the current portion, net $ 4,014 $ 3,964 ______________________________________ (a) Reflects $ 350 million of commitments under the Revolving Credit Facility with no letters of credit outstanding at September 30, 2024 and less letters of credit outstanding of approximately $ 2 million at September 30, 2023, respectively. There were no loans outstanding under the Revolving Credit Facility at September 30, 2024 or September 30, 2023. The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp. As of September 30, 2024 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, certain covenants under the Revolving Credit Facility, which are currently suspended, 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. The Company was in compliance with its all of its covenants that are not currently suspended under its outstanding notes, the Revolving Credit Facility and the Senior Term Loan Facility as of September 30, 2024. Fiscal 2024 Transactions November 2023 Revolving Credit Agreement Amendment On November 30, 2023, Acquisition Corp. entered into an amendment (the “Fifth Revolving Credit Agreement Amendment”) to the revolving credit agreement, dated January 31, 2018, as amended, among Acquisition Corp., the several banks and other financial institutions party thereto and Credit Suisse AG, Cayman Islands Branch, as predecessor administrative agent, governing Acquisition Corp.’s revolving credit facility (the “Revolving Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, and the other financial institutions and lenders from time to time party thereto. The Fifth Revolving Credit Agreement Amendment (among other changes): (i) increased the commitments under the Fifth Revolving Credit Agreement Amendment from an aggregate principal amount of $ 300 million to an aggregate principal amount of $ 350 million, (ii) extended the final maturity date of the Revolving Credit Facility from April 3, 2025 to November 30, 2028, (iii) appointed JPMorgan Chase Bank, N.A. as administrative agent in the place of Credit Suisse AG, Cayman Islands Branch, (iv) modified the existing springing Secured Indebtedness to EBITDA Ratio financial maintenance covenant by increasing the springing threshold from $ 105,000,000 to $ 140,000,000 , and (v) included provisions that allow Acquisition Corp. to terminate the security interests securing the obligations 106 under the Revolving Credit Facility upon the satisfaction of certain conditions and, in the event that the security interests are so terminated, the existing springing Secured Indebtedness to EBITDA Ratio financial maintenance covenant (which is calculated net of up to $ 250 million of cash and cash equivalents held by Acquisition Corp. and its restricted subsidiaries) shall automatically be replaced with a new financial maintenance covenant prohibiting Acquisition Corp. from permitting the Total Indebtedness to EBITDA Ratio to be greater than 3.60 :1.00 (calculated net of all cash and cash equivalents held by Acquisition Corp. and its restricted subsidiaries) as of the end of any fiscal quarter. December 2023 Senior Term Loan Credit Agreement Amendment On December 29, 2023, Acquisition Corp. entered into an amendment (the “Thirteenth Amendment”) to the Senior Term Loan Credit Agreement among Acquisition Corp., the other loan parties, Holdings, each lender party hereto, Credit Suisse AG, Cayman Islands Branch as the resigning administrative agent, and JPMorgan Chase Bank, N.A, as the successor administrative agent. The Thirteenth Amendment appointed JPMorgan Chase Bank, N.A. as administrative agent in the place of Credit Suisse AG, Cayman Islands Branch. January 2024 Senior Term Loan Credit Agreement Amendment On January 24, 2024, Acquisition Corp entered into an amendment (the “Fourteenth Amendment”) to the credit agreement, dated November 1, 2012 (as amended by the amendments dated as of May 9, 2013, July 15, 2016, November 21, 2016, May 22, 2017, December 6, 2017, March 14, 2018, June 7, 2018, January 20, 2021, March 8, 2021, November 1, 2022, May 10, 2023, June 30, 2023 and December 29, 2023), among Acquisition Corp., the guarantors party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, governing Acquisition Corp.’s senior secured term loan facility with JPMorgan Chase Bank N.A., as administrative agent, and the other financial institutions and lenders from time to time party thereto. The Fourteenth Amendment (among other changes) extends the maturity date of its outstanding term loans from January 20, 2028 to January 24, 2031 through the issuance of tranche I term loans and refinancing of the existing tranche G term loans. The tranche I term loans shall bear interest at a rate equal to, at Acquisition Corp.’s election (i) the forward-looking term rate based on the secured overnight financing rate as administered by the Federal Reserve Bank of New York for the applicable interest period (“Term SOFR”) subject to a zero floor, plus 2.00 % 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 SOFR, plus 1.00 % per annum, in each case, subject to a 1.00 % floor, plus 1.00 % per annum. In connection with the Fourteenth Amendment, the Company recognized approximately $ 3 million of expenses associated with fees paid to third parties and capitalized approximately $ 2 million in fees paid to creditors. Certain participating lenders were repaid and replaced by new lenders. The proceeds and repayments of $ 42 million have been presented in the accompanying consolidated statement of cash flows. September 2024 Senior Term Loan Credit Agreement Amendment On September 17, 2024, Acquisition Corp. entered into an amendment (the “Fifteenth Amendment”) to the credit agreement, dated November 1, 2012 (as amended by the amendments dated as of May 9, 2013, July 15, 2016, November 21, 2016, May 22, 2017, December 6, 2017, March 14, 2018, June 7, 2018, January 20, 2021, March 8, 2021, November 1, 2022, May 10, 2023, June 30, 2023, December 29, 2023 and January 24, 2024), among Acquisition Corp., the guarantors party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent, governing Acquisition Corp.’s senior secured term loan facility with JPMorgan Chase Bank N.A., as administrative agent, and the other financial institutions and lenders from time to time party thereto. The Fifteenth Amendment (among other changes) reprices the term loans through the issuance of tranche J term loans and the refinancing of the existing tranche I term loans. The tranche J term loans shall bear interest at a rate equal to, at Acquisition Corp.’s election (i) Term SOFR subject to a zero floor, plus 1.75 % 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 SOFR, plus 1.00 % per annum, in each case, subject to a 1.00 % floor, plus 1.00 % per annum. In connection with the Fifteenth Amendment, the Company recognized approximately $ 2 million of expenses associated with fees paid to third parties. Certain participating lenders were repaid and replaced by new lenders. The proceeds and repayments of $ 62 million have been presented in the accompanying consolidated statement of cash flows. September 2024 Revolving Credit Agreement Amendment On September 20, 2024, Acquisition Corp. entered into an amendment (the “Sixth Revolving Credit Agreement Amendment”) to the revolving credit agreement, dated January 31, 2018, as amended, among Acquisition Corp., the several banks and other financial institutions party thereto and Credit Suisse AG, Cayman Islands Branch, as predecessor administrative agent, governing the Revolving Credit Facility with JPMorgan Chase Bank, N.A., as administrative agent, and the other financial institutions and lenders from time to time party thereto. The Sixth Revolving Credit Agreement Amendment amended the leverage ratios so that 107 the leverage ratios are calculated net of up to $ 750 million of cash and cash equivalents held by Acquisition Corp. and its restricted subsidiaries as of the date of determination. Historical Transactions Senior Term Loan Facility Amendment 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. Term Loan Mortgage Agreement On January 27, 2023, Acquisition Corp., along with Warner Records Inc. and Warner Music Inc., entered into an agreement with Truist Bank, which provides for a term loan of $ 19 million (“Term Loan Mortgage”) secured by the Company’s real estate properties in Nashville, Tennessee. Interest on the Term Loan Mortgage will accrue at a rate of 30-day SOFR plus the applicable margin of 1.40 % subject to a zero floor. Equal principal installments and interest are due monthly. Revolving Credit Agreement Amendment On March 23, 2023, Acquisition Corp. entered into an amendment (the “Fourth Revolving Credit Agreement Amendment”) to the Revolving Credit Agreement among Acquisition Corp. 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 Fourth Revolving Credit Agreement Amendment provides for the replacement of LIBOR-based rates with a SOFR-based rate and other rates for alternate currencies, such as EURIBOR and SONIA. We utilized the expedients set forth in ASC Topic 848, including those relating to derivative instruments used in hedging relationships. This transition does not result in a financial impact to our consolidated financial statements. May 2023 Senior Term Loan Credit Agreement Amendment On May 10, 2023, Acquisition Corp. entered into an amendment (the “Senior Term Loan Credit Agreement Amendment”) to the Senior Term Loan Credit Agreement among Acquisition Corp., the guarantors party thereto and Credit Suisse AG, as administrative agent. The Senior Term Loan Credit Agreement Amendment provides for the replacement of LIBOR-based rates with a SOFR-based rate. We utilized the expedients set forth in ASC 848, including those relating to derivative instruments used in hedging relationships. This transition does not result in a financial impact to our consolidated financial statements. June 2023 Senior Term Loan Credit Agreement Amendment On June 30, 2023, Acquisition Corp. entered into an increase supplement (the “Third Increase Supplement”) to the Senior Term Loan Credit Agreement among Acquisition Corp., the guarantors party thereto, the lender party thereto and Credit Suisse AG, as administrative agent, pursuant to which Acquisition Corp. has borrowed additional Tranche G term loans in an amount equal to $ 150 million, the proceeds of which have been used to prepay the Tranche H term loans in full (see “Senior Term Loan Facility Amendment”), for an aggregate principal amount outstanding under the Senior Term Loan Credit Agreement of $ 1,295 million. The Company recorded a loss on extinguishment of debt of approximately $ 4 million for the fiscal year ended September 30, 2023, which represents the remaining unamortized discount and deferred financing costs of the Tranche H term loan. 108 Interest Rates The loans under the Revolving Credit Facility bear interest at Acquisition Corp.’s election at a rate equal to (i) the secured overnight financing rate as administered by the Federal Reserve Bank of New York for the applicable interest period (“Revolving Term SOFR”), and other rates for alternate currencies, such as EURIBOR and SONIA, as provided in the Revolving Credit Agreement, 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 Term SOFR 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 2.05 x at September 30, 2024, the applicable margin for SOFR loans and RFR loans would be 1.375 % instead of 1.875 % and the applicable margin for ABR loans would be 0.375 % instead of 0.875 % in the case of 2020 Revolving Loans. 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 forward-looking term rate based on Term SOFR subject to a zero floor, plus 1.75 % 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 SOFR, plus 1.00 % per annum, subject to a 1.00 % floor, plus, in each case, 1.00 % 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 2.00 % per annum. Default interest will also be payable on other overdue amounts at a rate of 2.00 % per annum above the amount that would apply to an alternative base rate loan. The term loan entered into on January 27, 2023 (the “Term Loan Mortgage”) bears interest at a rate of 30-day SOFR plus the applicable margin of 1.40 %, subject to a zero floor. The Company has entered into, and in the future may enter into, interest rate swaps to manage interest rate risk. Please refer to Note 17 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 24, 2031. Maturity of Revolving Credit Facility The maturity date of the Revolving Credit Facility is November 30, 2028. Maturities of Senior Secured Notes As of September 30, 2024, there are no scheduled maturities of notes until 2028, when $ 363 million is scheduled to mature. Thereafter, $ 2.372 billion is scheduled to mature. Maturity of Term Loan Mortgage The maturity date of the Term Loan Mortgage is January 27, 2033, subject to a call option exercisable by Truist Bank at any time after January 27, 2028 if certain criteria relating to the Company’s creditworthiness are met. Interest Expense, net Total interest expense, net was $ 161 million, $ 141 million and $ 125 million for the fiscal years ended September 30, 2024, 2023 and 2022, respectively. Interest expense, net includes interest expense related to our outstanding indebtedness of $ 182 million, $ 157 million, $ 125 million for the fiscal years ended September 30, 2024, 2023 and 2022, respectively. The weighted-average interest rate of the Company’s total debt was 4.3 % at September 30, 2024, 4.1 % at September 30, 2023 and 3.5 % at September 30, 2022. 109 11. Income Taxes The domestic and foreign pretax income from continuing operations is as follows: Fiscal Year Ended September 30, 2024 2023 2022 (in millions) Domestic $ 67 $ 218 $ 385 Foreign 534 391 355 Income before income taxes $ 601 $ 609 $ 740 Current and deferred income tax expense provided are as follows: Fiscal Year Ended September 30, 2024 2023 2022 (in millions) Federal: Current $ 26 $ 36 $ 23 Deferred ( 45 ) ( 5 ) 44 Foreign: Current (a) 137 128 128 Deferred 3 ( 3 ) ( 30 ) U.S. State: Current 8 19 21 Deferred ( 6 ) ( 5 ) ( 1 ) Income tax expense $ 123 $ 170 $ 185 ______________________________________ (a) Includes withholding taxes of $ 28 million, $ 38 million and $ 27 million for the fiscal years ended September 30, 2024, 2023 and 2022, respectively. The differences between the U.S. federal statutory income tax rate of 21.0 % for each of the fiscal years ended September 30, 2024, 2023 and 2022 and income taxes provided are as follows: Fiscal Year Ended September 30, 2024 2023 2022 (in millions) Taxes on income at the U.S. federal statutory rate $ 126 $ 128 $ 155 U.S. state and local taxes 1 12 15 Foreign income taxed at different rates, including withholding taxes 29 33 29 Valuation allowance — ( 5 ) ( 6 ) Change in tax rates 3 — 1 GILTI and FDII ( 3 ) ( 4 ) ( 6 ) Federal research and development credits ( 3 ) ( 8 ) — Uncertain tax positions ( 3 ) 7 ( 3 ) Non-deductible compensation 11 8 6 Wind down of O&O media properties ( 17 ) — — Return to provision adjustments ( 15 ) 4 ( 4 ) Nontaxable income from partnerships ( 9 ) ( 1 ) ( 1 ) Other 3 ( 4 ) ( 1 ) Total income tax expense $ 123 $ 170 $ 185 During the fiscal year ended September 30, 2024, the Company recognized a tax benefit of $ 15 million primarily related to change in prior year estimate for allowable costs for reported foreign derived intangible income. During the fiscal year ended September 30, 2023, the Company recognized a tax benefit of $ 8 million related to Federal research and development credits, which was partially offset by $ 7 million of income tax expense arising from an increase in uncertain tax positions in various jurisdictions. 110 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. For the fiscal years ended September 30, 2024 and September 30, 2023, 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, 2024 September 30, 2023 (in millions) Deferred tax assets: Allowance and reserves $ 27 $ 25 Employee benefits and compensation 80 71 Other accruals 45 30 Property, plant and equipment 61 40 Operating lease liabilities 69 73 Tax attribute carryforwards 62 59 Deferred revenue and debt 14 17 Total deferred tax assets 358 315 Less: Valuation allowance ( 25 ) ( 25 ) Deferred tax assets, net of valuation allowance 333 290 Deferred tax liabilities: Royalty advances ( 34 ) ( 27 ) Operating lease right-of-use assets ( 57 ) ( 60 ) Accrued royalties ( 52 ) ( 45 ) Intangible assets ( 284 ) ( 318 ) Debt and other ( 49 ) ( 24 ) Total deferred tax liabilities ( 476 ) ( 474 ) Net deferred tax liabilities $ ( 143 ) $ ( 184 ) At September 30, 2024, the Company has no remaining U.S. federal tax net operating loss carryforwards and $ 21 million tax net operating loss carryforwards in U.S. state and local jurisdictions that expire in various periods. The Company also has tax net operating loss carryforwards, with no expiration date, in France, Spain, and the United Kingdom of $ 11 million, $ 5 million, and $ 5 million, respectively, and other tax net operating loss carryforwards in foreign jurisdictions that expire in various periods. Deferred income taxes have not been recorded on indefinitely reinvested earnings of certain foreign subsidiaries of approximately $ 456 million at September 30, 2024. 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, 2024 and September 30, 2023, the Company had accrued $ 1 million and $ 2 million of interest and penalties, respectively. 111 The following table reflects changes in the gross unrecognized tax benefits: Fiscal Year Ended September 30, 2024 2023 2022 (in millions) Gross unrecognized tax benefits - beginning of period $ 13 $ 8 $ 12 Additions for current year tax positions 2 3 — Additions for prior year tax positions — 9 1 Subtractions for prior year tax positions ( 3 ) ( 7 ) ( 5 ) Settlements ( 2 ) — — Gross unrecognized tax benefits - end of period $ 10 $ 13 $ 8 Included in the total unrecognized tax benefits at September 30, 2024 and September 30, 2023 are $ 11 million and $ 14 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, 2024 could decrease by up to approximately $ 2 million related to various ongoing audits and settlement discussions in various foreign jurisdictions during the next twelve months. 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, 2020, in Germany for the tax years ended through September 30, 2018 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. The Organization Economic Co-operation and Development (“OECD”) introduced Base Erosion and Profit Shifting (“BEPS”) Pillar 2 rules that impose a global minimum tax rate of 15%. Numerous countries, including European Union member states, have enacted or are expected to enact legislation to be effective as early as January 1, 2024, with general implementation of a global minimum tax by January 1, 2025. The Company is currently evaluating the potential impact of the rules. 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 $ 58 million and $ 52 million as of September 30, 2024 and September 30, 2023, 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 $ 38 million and $ 35 million recorded within other noncurrent liabilities in the accompanying consolidated balance sheets as of September 30, 2024 and September 30, 2023, respectively. The Company uses a September 30 measurement date for its plans. For the fiscal years ended September 30, 2024, September 30, 2023 and September 30, 2022, pension expense amounted to $ 3 million, $ 3 million and $ 3 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 $ 16 million for the fiscal year ended September 30, 2024, $ 14 million for the fiscal year ended September 30, 2023 and $ 12 million for the fiscal year ended September 30, 2022. 13. Restructuring and Impairments Strategic Restructuring Plan In 2024, the Company announced a strategic restructuring plan (the “Strategic Restructuring Plan”) designed to free up additional funds to invest in music and accelerate the Company’s growth for the next decade. Under the Strategic Restructuring Plan, the Company expects a reduction in headcount of approximately 13 % of the Company’s overall headcount. The Company expects to incur total non-recurring restructuring charges of approximately $ 210 million or approximately $ 135 million of total non-recurring after tax charges . The expected pre-tax charges include approximately $ 148 million of severance and other termination costs and $ 7 million of other non-cash charges, along with approximately $ 55 million of non-cash impairment charges primarily in connection with the disposal or winding down of the Company’s non-core owned and operated media properties including the Company’s O&O Media Properties. The majority of severance payments and other termination costs are expected to be paid by the end of fiscal year 2026. For the fiscal year ended September 30, 2024, the Company recognized a total of $ 178 million of restructuring and impairments in connection with the Strategic Restructuring Plan. Total severance and other termination costs were $ 121 million, of which, $ 113 million was recognized in our Recorded Music segment and $ 8 million was recognized in Corporate. The below table sets 112 forth the activity for the fiscal year ended September 30, 2024 for restructuring liabilities associated with the Strategic Restructuring Plan which are expected to be paid in cash and are included within accrued liabilities in the accompanying consolidated balance sheets. Severance Costs Contract Termination Costs Total (in millions) Balance at September 30, 2023 $ — $ — $ — Restructuring charges 116 5 121 Cash payments ( 17 ) — ( 17 ) Balance at September 30, 2024 $ 99 $ 5 $ 104 Additionally, for the fiscal year ended September 30, 2024, the Company recognized $ 57 million of non-cash restructuring and impairments which was comprised of $ 50 million of impairment losses on unamortized intangible assets and $ 7 million of non-cash restructuring related to equity awards approved but not yet granted, of which, $ 54 million was recognized in our Recorded Music segment and $ 3 million was recognized in Corporate. Impairment charges recognized primarily relate to the winding down of the Company’s O&O Media Properties. 2023 Restructuring Plan In March 2023, the Company announced a restructuring plan (the “2023 Restructuring Plan”) intended to drive the evolution of the Company and position the Company for long-term growth, primarily through headcount reductions. The 2023 Restructuring Plan is substantially complete as of September 30, 2024. There was a $ 1 million benefit associated with the 2023 Restructuring Plan recorded for the fiscal year ended September 30, 2024 primarily associated with a change in estimate for costs previously recorded. During the fiscal year ended September 30, 2023, the Company recognized restructuring charges of approximately $ 40 million for severance costs. Amounts for both periods were recorded in the Recorded Music segment. The following table sets forth the activity for the fiscal year ended September 30, 2024 in the restructuring accrual associated with the 2023 Restructuring Plan included within accrued liabilities in the accompanying consolidated balance sheets: Severance Costs (in millions) Balance at September 30, 2023 $ 19 Restructuring charges ( 1 ) Cash payments ( 15 ) Balance at September 30, 2024 $ 3 14. Equity 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. To date, the Company has issued common stock, RSUs restricted stock, and PSUs under the Omnibus Incentive Plan. The RSUs were granted to eligible employees and executives, common stock and restricted stock was granted to members of the Company’s Board of Directors, and PSUs were granted to our CEO. 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, 2024, 2023 and 2022, shares of Class A Common Stock issued under the Omnibus Incentive Plan were 206,298 , 276,516 , and 463,826 , respectively. During the fiscal years ended September 30, 2024, 2023, and 2022, shares of Class A Common Stock issued which were net of shares used to settle employee income tax obligations of approximately $ 5 million, $ 0 million , and $ 6 million, respectively. As of September 30, 2024, a total of 1,011,333 shares of Class A Common Stock were issued under the Omnibus Incentive Plan. As of September 30, 2024, there were 30,157,766 shares of Class A Common Stock available to be issued. 113 Restricted Stock Units and Performance Share Units The following table summarizes the activity for the Company’s unvested RSUs and PSUs: Restricted Stock Units Performance Share Units Number of Share Units Weighted-Average Grant Date Fair Value Number of Share Units Weighted-Average Grant Date Fair Value Unvested and outstanding balance as of September 30, 2023 2,876,084 $ 37.30 254,731 $ 60.25 Granted 1,409,115 35.79 310,848 43.49 Vested ( 111,730 ) 36.58 — — Forfeited/canceled ( 46,864 ) 34.08 — — Unvested and outstanding balance as of September 30, 2024 4,126,605 $ 36.84 565,579 $ 51.04 The weighted-average grant date fair value of RSUs granted during the fiscal years ended September 30, 2024, 2023 and 2022 was $ 35.79 , $ 34.93 and $ 44.38 , respectively. The total intrinsic value of RSUs vested during the fiscal years ended September 30, 2024, 2023 and 2022 was $ 4 million, $ 1 million and $ 18 million, respectively, computed as of the date of vesting. The weighted-average grant date fair value of PSUs granted during the fiscal years ended September 30, 2024 and 2023 was $ 43.49 and $ 60.25 , respectively. As of September 30, 2024, total unrecognized compensation cost related to RSUs was approximately $ 37 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. As of September 30, 2024, total unrecognized compensation cost related to PSUs was approximately $ 16 million, which is expected to be recognized over a weighted-average period of approximately 1.6 years. The Company satisfies the vesting of PSUs by issuing new shares of its Class A Common Stock. Common Stock Prior to the IPO, certain eligible employees elected to participate in our Senior Management Free Cash Flow Plan (the “Plan”) which offered them the opportunity to share in the appreciation of the value of our common stock. During the fiscal year ended September 30, 2024, in connection with the Plan, the Company issued a total of 1,738,016 shares of Class A Common Stock to settle a portion of participants’ deferred equity units previously issued under the Plan. Additionally, remaining Plan participants redeemed the remaining portions of their vested Class B equity units of WMG Management Holdings LLC in exchange for a total of 2,270,136 shares of Class B Common Stock which were converted to shares of Class A Common Stock upon the exchange. During the fiscal year ended September 30, 2023, in connection with the Plan, the Company issued a total of 869,008 shares of Class A Common Stock to settle a portion of a participant’s deferred equity units previously issued under the Plan. 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 total non-cash stock-based compensation expense of $ 52 million, $ 49 million and $ 39 million for the fiscal years ended September 30, 2024, 2023 and 2022, respectively. During the fiscal years ended September 30, 2024 and 2023, the Company issued PSUs to our Chief Executive Officer whereby the PSU award payout is determined based on the Company’s total shareholder return compared to a designated peer group. For the fiscal years ended September 30, 2024, and September 30, 2023, n on-cash stock-based compensation associated with these PSUs was approximately $ 8 million and $ 4 million, respectively which is a component of total non-cash stock-based compensation recognized for each respective period. . In connection with the departure of our Chief Executive Officer and Chief Financial Officer, the Company recognized approximately $ 13 million of non-cash stock-based compensation expense associated with RSUs and common stock as there is no remaining service required for vesting which is a component of total non-cash stock-based compensation recorded for the period. This amount is reflected as a share-based compensation liability as of September 30, 2023. 114 During the fiscal year ended September 30, 2024, the Company recognized $ 14 million of non-cash stock-based compensation related to the accelerated vesting of certain RSUs in connection with the Strategic Restructuring Plan. During the fiscal year ended September 30, 2023, the Company recognized $ 2 million of non-cash stock-based compensation related to the accelerated vesting of certain RSUs in connection with the 2023 Restructuring Plan, respectively. Both amounts are a component of total non-cash stock-based compensation recognized for each respective period. Repurchase Program On November 14, 2024, the Company’s board of directors authorized a new $ 100 million share repurchase program, which is intended to offset dilution from the Omnibus Incentive Plan. Under this authorization, the Company may, from time to time, purchase shares of its Class A Common Stock through open market transactions, privately negotiated transactions, forward, derivative, or accelerated repurchase transactions, tender offers or otherwise, in accordance with all applicable securities laws and regulations, including Rule 10b-18 of the Exchange Act. The $ 100 million share repurchase authorization does not obligate the Company to purchase any shares. We may commence such repurchases immediately, subject to compliance with applicable securities laws. We may enter into a pre-arranged stock trading plan in accordance with the guidelines specified under Rule 10b5-1 to effectuate all or a portion of the share repurchase program. We expect to finance any repurchases from a combination of cash on hand and cash provided by operating activities. The timing and method of any repurchases, which will depend on a variety of factors, including market conditions, are subject to our results of operations, financial condition, liquidity and other factors. The authorization for the share repurchase program may be suspended, terminated, increased or decreased by the board of directors at any time. 15. Related Party Transactions 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 Los Angeles, California headquarters and 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 2024 fiscal 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 6 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. On June 26, 2023, the parties entered into an extension on substantially the same terms as the current lease for an additional five years with the lease now expiring on December 24, 2030. 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 $ 41 million, $ 40 million and $ 36 million in connection with the foregoing arrangements during the fiscal years ended September 30, 2024, 2023 and 2022, respectively. In addition, in connection with these arrangements, (i) the Company was issued warrants to purchase shares of Deezer S.A., which it exercised in October 2024 for a small number of shares, and (ii) the Company purchased a small number of preferred 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, 2024, 2023 and 2022, 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. 115 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, 2024 and September 30, 2023, the fair value of these equity interests was approximately $ 8 million and $ 14 million, respectively. 16. 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 $ 558 million and $ 383 million as of September 30, 2024 and September 30, 2023, respectively. Other Other off-balance sheet firm commitments, which primarily include minimum funding commitments to investees, amounted to approximately $ 79 million and $ 46 million at September 30, 2024 and September 30, 2023, 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. 17. Derivative Financial Instruments The Company uses derivative financial instruments, primarily foreign currency forward exchange contracts and interest rate swaps, for the purposes of managing foreign currency exchange rate risk and interest rate risk on expected future cash flows. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates. The Company enters into foreign currency forward exchange contracts primarily to hedge the risk that unremitted or future royalties and license fees owed to its U.S. companies for the sale or licensing of U.S.-based music and merchandise abroad may be adversely affected by changes in foreign currency exchange rates. The Company focuses on managing the level of exposure to the risk of foreign currency exchange rate fluctuations on its major currencies, which include the Euro, British pound sterling, Japanese yen, Canadian dollar, Swedish krona, Australian dollar, Brazilian real, Korean won and Norwegian krone. The Company also may at times choose to hedge foreign currency risk associated with financing transactions such as third-party debt and other balance sheet items. The Company’s foreign currency forward exchange contracts have not been designated as hedges under the criteria prescribed in ASC 815. The Company records these contracts at fair value on its balance sheet and the related gains and losses are immediately recognized in the consolidated statement of operations where there is an offsetting entry related to the underlying exposure. The 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 20. Additionally, netting provisions are provided for in existing International Swap and Derivative Association Inc. agreements in situations where the Company executes multiple contracts 116 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 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 20. 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, 2024 and September 30, 2023, 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, 2024, the Company had no outstanding pay-fixed receive-variable interest rate swaps and no unrealized deferred gains in comprehensive income related to the interest rate swaps. As of September 30, 2023, the Company had outstanding $ 500 million in pay-fixed receive-variable interest rate swaps with $ 1 million of unrealized deferred gains in comprehensive income related to the interest rate swaps. The Company recorded realized pre-tax losses of $ 1 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, 2024. The Company recorded realized pre-tax losses of $ 6 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, 2023. The unrealized pre-tax losses of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the fiscal years ended September 30, 2024 and September 30, 2023 were $ 1 million and $ 16 million, respectively. The following is a summary of amounts recorded in the consolidated balance sheets pertaining to the Company’s derivative instruments at September 30, 2024 and September 30, 2023: September 30, 2024 September 30, 2023 (in millions) Other Current Assets: Interest Rate Swap $ — $ 2 18. Segment Information 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 adjusted to exclude the impact of non-cash stock-based compensation and other related expenses and certain items that affect comparability including but not limited to gains or losses on divestitures and expenses related to restructuring and transformation initiatives, which includes costs associated with the Company’s financial transformation initiative to design and implement new information technology and upgrade our finance infrastructure (“Adjusted OIBDA”). Items excluded are not viewed to contribute directly to management’s evaluation of operating results. During the three months ended December 31, 2023, the Company changed the measure used to evaluate segment profitability from OIBDA to Adjusted OIBDA which is consistent with how the Company's CODM evaluates the results of operations and makes strategic decisions about the business. For these reasons, the Company believes that Adjusted OIBDA represents the most relevant measure of segment profit and loss. All disclosures relating to segment profitability, including those for the fiscal years ended September 30, 2023 and 2022, have been revised as a result of this change. 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. 117 Recorded Music Music Publishing Corporate expenses and eliminations Total (in millions) 2024 Revenues $ 5,223 $ 1,210 $ ( 7 ) $ 6,426 Adjusted OIBDA 1,282 330 ( 180 ) 1,432 Total assets 4,945 3,017 1,193 9,155 Capital expenditures 28 1 87 116 2023 Revenues $ 4,955 $ 1,088 $ ( 6 ) $ 6,037 Adjusted OIBDA 1,093 296 ( 154 ) 1,235 Total assets 4,677 2,781 1,087 8,545 Capital expenditures 39 1 87 127 2022 Revenues $ 4,966 $ 958 $ ( 5 ) $ 5,919 Adjusted OIBDA 1,046 233 ( 130 ) 1,149 Capital expenditures 52 1 82 135 Adjusted OIBDA is not a measure defined by U.S. GAAP but is computed using amounts that are determined in accordance with U.S. GAAP. A reconciliation of the Company’s Adjusted OIBDA to operating income is presented below. For the year ended September 30, 2024 2023 2022 Operating income $ 823 $ 790 $ 714 Amortization expense 224 245 263 Depreciation expense 103 87 76 Restructuring and impairments 177 42 8 Transformation initiative costs 76 53 46 Executive transition costs — 7 — Net gain on divestitures ( 32 ) ( 41 ) — Non-cash stock-based compensation and other related costs 61 52 42 Adjusted OIBDA $ 1,432 $ 1,235 $ 1,149 Revenues relating to operations in different geographical areas are set forth below for the fiscal years ended September 30, 2024, September 30, 2023 and September 30, 2022. 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, 2024 and September 30, 2023. 2024 2023 2022 Revenues Long-lived Assets Revenues Long-lived Assets Revenues (in millions) United States $ 2,870 $ 460 $ 2,766 $ 473 $ 2,744 United Kingdom 774 39 726 39 734 Germany 513 99 535 98 613 All other territories 2,269 108 2,010 93 1,828 Total $ 6,426 $ 706 $ 6,037 $ 703 $ 5,919 Customer Concentration In the fiscal year ended September 30, 2024, the Company had three customers, Spotify, YouTube and Apple, that individually represented 10% or more of total revenues, whereby Spotify AB represented 18 %, YouTube represented 12 % and Apple represented 11 % of total revenues. In the fiscal year ended September 30, 2023, the Company had three customers, Spotify, YouTube, and Apple, that individually represented 10% or more of total revenues, whereby Spotify represented 18 %, YouTube represented 12 % 118 and Apple represented 11 % of total revenues. 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. 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. 19. Additional Financial Information Supplemental Cash Flow Disclosures The Company made interest payments of approximately $ 183 million, $ 157 million and $ 122 million during the fiscal years ended September 30, 2024, September 30, 2023 and September 30, 2022, respectively. The Company paid approximately $ 135 million, $ 219 million and $ 141 million of income and withholding taxes, net of refunds, for the fiscal years ended September 30, 2024, September 30, 2023 and September 30, 2022, respectively. Noncash investing activities were approximately $ 30 million related to the acquisition of music publishing rights and music catalogs, net during the fiscal year ended September 30, 2024. Net Gain on Divestiture During the fiscal year ended September 30, 2024, the Company recognized a pre-tax gain of $ 32 million in connection with the divestiture of certain sound recording and publishing rights and one of its O&O Media Properties. During the fiscal year ended September 30, 2023, the Company recognized a pre-tax gain of $ 41 million in connection with the divestiture of certain sound recording rights. For each period, the divestiture has been reflected as a net gain on divestiture in the accompanying consolidated statement of operations. 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. As of September 30, 2024, Acquisition Corp.’s Total Indebtedness to EBITDA Ratio is 2.05 x and the term loans achieved a corporate credit rating of BBB- from both S&P and Fitch. The Company has been paying 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. The Company paid cash dividends to stockholders and participating security holders of $ 361 million, $ 340 million and $ 318 million for the fiscal years ended September 30, 2024, 2023 and 2022, respectively. On November 8, 2024, the Company’s board of directors declared a cash dividend of $ 0.18 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 3, 2024 to stockholders of record as of the close of business on November 19, 2024. 20. 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 119 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, 2024 and September 30, 2023. Fair Value Measurements as of September 30, 2024 (Level 1) (Level 2) (Level 3) Total (in millions) Other Noncurrent Assets: Equity Investment with Readily Determinable Fair Value (b) 9 — — 9 Other Noncurrent Liabilities: Contractual Obligations (a) — — ( 1 ) ( 1 ) Fair Value Measurements as of September 30, 2023 (Level 1) (Level 2) (Level 3) Total (in millions) Other Current Assets: Interest Rate Swap (c) $ — $ 2 $ — $ 2 Other Noncurrent Assets: Equity Investment with Readily Determinable Fair Value (b) 15 — — 15 Other Noncurrent Liabilities: Contractual Obligations (a) — — ( 1 ) ( 1 ) ______________________________________ (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 primarily calculated using unobservable inputs such as future earnings performance of the acquiree and the expected timing of payments. (b) 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. (c) 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, 2024 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, 2023 $ ( 1 ) Additions — Reductions — Payments — Balance at September 30, 2024 $ ( 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 120 these investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. The Company recorded no impairment charges and $ 1 million of impairment charges on these investments during the fiscal years ended September 30, 2024 and September 30, 2023, respectively. In addition, observable price changes events that were completed during the fiscal years ended September 30, 2024 and September 30, 2023 resulted in an unrealized gain of $ 4 million and $ 2 million, respectively. Fair Value of Debt Based on the level of interest rates prevailing at September 30, 2024, the fair value of the Company’s debt was $ 3.836 billion. Based on the level of interest rates prevailing at September 30, 2023, the fair value of the Company’s debt was $ 3.525 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. 121 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, 2024 Allowance for credit losses $ 19 $ 10 $ ( 3 ) $ 26 Reserves for sales returns 19 37 ( 36 ) 20 Allowance for deferred tax asset 25 1 ( 1 ) 25 Fiscal Year Ended September 30, 2023 Allowance for credit losses $ 19 $ 5 $ ( 5 ) $ 19 Reserves for sales returns 19 39 ( 39 ) 19 Allowance for deferred tax asset 29 1 ( 5 ) 25 Fiscal Year Ended September 30, 2022 Allowance for credit losses $ 20 $ 5 $ ( 6 ) $ 19 Reserves for sales returns 23 52 ( 56 ) 19 Allowance for deferred tax asset 38 2 ( 11 ) 29 122 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.