Warner Music Group Corp. 10-Q

ITEM 1. FINANCIAL STATEMENTS Warner Music Group Corp. Condensed Consolidated Balance Sheets (In millions, except share amounts which are reflected in thousands) (Unaudited) December 31, 2024 September 30, 2024 Assets Current assets: Cash and equivalents $ 802 $ 694 Accounts receivable, net of allowances of $ 24 million and $ 26 million 1,201 1,255 Inventories 84 99 Royalty advances expected to be recouped within one year 473 470 Prepaid and other current assets 156 125 Total current assets 2,716 2,643 Royalty advances expected to be recouped after one year 878 874 Property, plant and equipment, net of accumulated depreciation of $ 632 million and $ 615 million 491 481 Operating lease right-of-use assets, net 221 225 Goodwill 2,013 2,021 Intangible assets subject to amortization, net 2,329 2,359 Intangible assets not subject to amortization 149 152 Deferred tax assets, net 40 52 Other assets 309 348 Total assets $ 9,146 $ 9,155 Liabilities and Equity Current liabilities: Accounts payable $ 189 $ 289 Accrued royalties 2,653 2,549 Accrued liabilities 539 641 Accrued interest 42 17 Operating lease liabilities, current 47 45 Deferred revenue 312 246 Other current liabilities 141 110 Total current liabilities 3,923 3,897 Long-term debt 3,955 4,014 Operating lease liabilities, noncurrent 222 228 Deferred tax liabilities, net 209 195 Other noncurrent liabilities 140 146 Total liabilities $ 8,449 $ 8,480 Equity: Class A common stock, $ 0.001 par value; 1,000,000 shares authorized, 144,301 and 142,559 shares issued and outstanding as of December 31, 2024 and September 30, 2024, respectively $ — $ — Class B common stock, $ 0.001 par value; 1,000,000 shares authorized, 375,380 and 375,380 issued and outstanding as of December 31, 2024 and September 30, 2024, respectively 1 1 Additional paid-in capital 2,091 2,077 Accumulated deficit ( 1,171 ) ( 1,313 ) Accumulated other comprehensive loss, net ( 376 ) ( 247 ) Total Warner Music Group Corp. equity 545 518 Noncontrolling interest 152 157 Total equity 697 675 Total liabilities and equity $ 9,146 $ 9,155 See accompanying notes 1 Warner Music Group Corp. Condensed Consolidated Statements of Operations (In millions, except share amounts which are reflected in thousands, and per share data) (Unaudited) Three Months Ended December 31, 2024 2023 Revenue $ 1,666 $ 1,748 Costs and expenses: Cost of revenue ( 894 ) ( 880 ) Selling, general and administrative expenses (a) ( 474 ) ( 476 ) Restructuring and impairments ( 27 ) — Amortization expense ( 57 ) ( 55 ) Total costs and expenses ( 1,452 ) ( 1,411 ) Net gain on divestitures — 17 Operating income 214 354 Interest expense, net ( 37 ) ( 39 ) Other income (expense) 153 ( 50 ) Income before income taxes 330 265 Income tax expense ( 89 ) ( 72 ) Net income 241 193 Less: Income attributable to noncontrolling interest ( 5 ) ( 34 ) Net income attributable to Warner Music Group Corp. $ 236 $ 159 Net income per share attributable to common stockholders: Class A – Basic and Diluted $ 0.45 $ 0.30 Class B – Basic and Diluted $ 0.45 $ 0.30 Weighted average common shares: Class A – Basic and Diluted 143,053 138,972 Class B – Basic and Diluted 375,380 377,490 (a) Includes depreciation expense: $ ( 29 ) $ ( 26 ) See accompanying notes 2 Warner Music Group Corp. Condensed Consolidated Statements of Comprehensive Income (In millions) (Unaudited) Three Months Ended December 31, 2024 2023 Net income $ 241 $ 193 Other comprehensive (loss) income, net of tax: Foreign currency adjustment ( 129 ) 64 Deferred (loss) gain on derivative financial instruments — ( 1 ) Minimum pension liability — ( 1 ) Other comprehensive (loss) income, net of tax ( 129 ) 62 Total comprehensive income 112 255 Less: Income attributable to noncontrolling interest ( 5 ) ( 34 ) Comprehensive income attributable to Warner Music Group Corp. $ 107 $ 221 See accompanying notes 3 Warner Music Group Corp. Condensed Consolidated Statements of Cash Flows (In millions) (Unaudited) Three Months Ended December 31, 2024 2023 Cash flows from operating activities Net income $ 241 $ 193 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 86 81 Unrealized (gains) losses and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts ( 120 ) 61 Deferred income taxes 23 5 Net loss (gain) on investments ( 28 ) ( 3 ) Net loss (gain) on divestitures — ( 17 ) Non-cash interest expense 2 — Non-cash stock-based compensation expense 13 9 Non-cash impairments 26 — Changes in operating assets and liabilities: Accounts receivable, net 24 ( 53 ) Inventories 10 24 Royalty advances ( 42 ) ( 89 ) Other noncurrent assets 3 ( 81 ) Accounts payable and accrued liabilities ( 183 ) ( 31 ) Royalty payables 173 202 Accrued interest 24 11 Operating lease liabilities ( 2 ) ( 1 ) Deferred revenue 66 ( 70 ) Other balance sheet changes 16 52 Net cash provided by operating activities 332 293 Cash flows from investing activities Acquisition of music publishing rights and music catalogs ( 41 ) ( 59 ) Capital expenditures ( 36 ) ( 29 ) Investments and acquisitions of businesses, net of cash received ( 40 ) ( 17 ) Proceeds from the sale of investments 36 9 Proceeds from divestitures — 4 Net cash used in investing activities ( 81 ) ( 92 ) Cash flows from financing activities Distribution to noncontrolling interest holders ( 7 ) ( 4 ) Dividends paid ( 94 ) ( 89 ) Payment of deferred consideration ( 17 ) — Taxes paid related to net share settlement of restricted stock units and common stock ( 2 ) — Common stock repurchased and retired ( 2 ) — Other financing activity ( 5 ) Net cash used in financing activities ( 127 ) ( 93 ) Effect of exchange rate changes on cash and equivalents ( 16 ) 5 Net increase in cash and equivalents 108 113 Cash and equivalents at beginning of period 694 641 Cash and equivalents at end of period $ 802 $ 754 See accompanying notes 4 Warner Music Group Corp. Condensed Consolidated Statements of Equity (In millions, except share amounts which are reflected in thousands, and per share data) (Unaudited) Three Months Ended December 31, 2024 Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Warner Music Group Corp. Equity Non-controlling Interest Total Equity Shares Value Shares Value Balance at September 30, 2024 142,559 $ — 375,380 $ 1 $ 2,077 $ ( 1,313 ) $ ( 247 ) $ 518 $ 157 $ 675 Net income — — — — — 236 — 236 5 241 Other comprehensive income, net of tax — — — — — — ( 129 ) ( 129 ) — ( 129 ) Dividends ($ 0.18 per share) — — — — — ( 94 ) — ( 94 ) — ( 94 ) Stock-based compensation — — — — 20 — — 20 — 20 Distribution to noncontrolling interest holders — — — — — — — — ( 8 ) ( 8 ) Vesting of restricted stock units, net of shares withheld for employee taxes 64 — — — ( 2 ) — — ( 2 ) — ( 2 ) Shares issued under the Plan 1,738 — — — — — — — — — Common shares repurchased and retired ( 60 ) — — — ( 2 ) — — ( 2 ) — ( 2 ) Other — — — — ( 2 ) — — ( 2 ) ( 2 ) ( 4 ) Balance at December 31, 2024 144,301 $ — 375,380 $ 1 $ 2,091 $ ( 1,171 ) $ ( 376 ) $ 545 $ 152 $ 697 Three Months Ended December 31, 2023 Class A Common Stock Class B Common Stock Additional Paid-in Capital Accumulated Deficit Accumulated Other Comprehensive Loss Total Warner Music Group Corp. Equity Non-controlling Interest Total Equity Shares Value Shares Value Balance at September 30, 2023 138,345 $ — 377,650 $ 1 $ 2,015 $ ( 1,387 ) $ ( 322 ) $ 307 $ 123 $ 430 Net income — — — — — 159 — 159 34 193 Other comprehensive income, net of tax — — — — — — 62 62 — 62 Dividends ($ 0.17 per share) — — — — — ( 89 ) — ( 89 ) — ( 89 ) Stock-based compensation — — — — 24 — — 24 — 24 Distribution to noncontrolling interest holders — — — — — — — — ( 4 ) ( 4 ) Shares issued under the Plan 1,738 — — — — — — — — — Exchange of Class B shares for Class A shares 547 — ( 547 ) — — — — — — — Shares issued under Omnibus Incentive Plan 7 — — — — — — — — — Balance at December 31, 2023 140,637 $ — 377,103 $ 1 $ 2,039 $ ( 1,317 ) $ ( 260 ) $ 463 $ 153 $ 616 See accompanying notes 5 Warner Music Group Corp. Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Description of Business Warner Music Group Corp. (the “Company”) was formed on November 21, 2003. The Company is the direct parent of WMG Holdings Corp. (“Holdings”), which is the direct parent of WMG Acquisition Corp. (“Acquisition Corp.”). Acquisition Corp. is one of the world’s major music entertainment companies. We classify our business interests into two fundamental operations: Recorded Music and Music Publishing. Recorded Music Operations Our Recorded Music business primarily consists of the discovery and development of recording artists and the related marketing, promotion, distribution, sale and licensing of music created by such recording artists. We play an integral role in virtually all aspects of the recorded music value chain from discovering and developing talent to producing, distributing and selling music to marketing and promoting recording artists and their music. Music Publishing Operations While Recorded Music is focused on marketing, promoting, distributing and licensing a particular recording of a musical composition, Music Publishing is an intellectual property business focused on generating revenue from uses of the musical composition itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rightsholders, our Music Publishing business shares the revenues generated from use of the musical compositions with the songwriter or other rightsholders. 2. Summary of Significant Accounting Policies Interim Financial Statements The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended December 31, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2025. The consolidated balance sheet at September 30, 2024 has been derived from the audited consolidated financial statements at that date but does not include all the information and notes required by U.S. GAAP for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2024 (File No. 001-32502). Basis of Consolidation The accompanying financial statements present the consolidated accounts of all entities in which the Company has a controlling voting interest and/or variable interest required to be consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated. 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 December 31, 2024 and September 30, 2024, there were approximately $ 66 million and $ 77 million of assets, respectively, and $ 2 million and $ 2 million of liabilities, respectively, related to VIEs included in our condensed 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. 6 Income Taxes The Company uses the estimated annual effective tax rate method in computing its interim tax provision. Certain items, including those deemed to be unusual and infrequent are excluded from the estimated annual effective tax rate. In such cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions, and are recorded in the period in which the change occurs. 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. New Accounting Pronouncements Accounting Pronouncements Not Yet Adopted 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 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, divided 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, divided by the weighted average number of outstanding common shares, plus dilutive potential common shares, which is calculated using the treasury-stock method. The potentially dilutive common shares did not have a dilutive effect on the Company’s EPS calculation for the three months ended December 31, 2024 and 2023, respectively. The following table sets forth the calculation of basic and diluted net income per common share under the two-class method for the three months ended December 31, 2024 and 2023 (in millions, except share amounts, which are reflected in thousands, and per share data): 7 Three Months Ended December 31, 2024 2023 Class A Class B Class A Class B Basic and Diluted EPS: Numerator Net income attributable to Warner Music Group Corp. $ 67 $ 169 $ 44 $ 115 Less: Net income attributable to participating securities (a) ( 3 ) — ( 2 ) — Net income attributable to common stockholders $ 64 $ 169 $ 42 $ 115 Denominator Weighted average shares outstanding 143,053 375,380 138,972 377,490 Basic and Diluted EPS $ 0.45 $ 0.45 $ 0.30 $ 0.30 ______________________________________ (a) Participating securities include unvested restricted stock units, which include the right to receive non-forfeitable dividend equivalents. 4. Revenue Recognition Disaggregation of Revenue The Company’s revenue consists of the following categories, which aggregate into the segments – Recorded Music and Music Publishing: Three Months Ended December 31, 2024 2023 (in millions) Revenue by Type Digital $ 873 $ 908 Physical 166 154 Total digital and physical 1,039 1,062 Artist services and expanded-rights 196 204 Licensing 110 179 Total Recorded Music 1,345 1,445 Performance 56 51 Digital 207 196 Mechanical 14 15 Synchronization 39 39 Other 7 3 Total Music Publishing 323 304 Intersegment eliminations ( 2 ) ( 1 ) Total revenues $ 1,666 $ 1,748 Revenue by geographical location U.S. Recorded Music $ 532 $ 627 U.S. Music Publishing 173 172 Total U.S. 705 799 International Recorded Music 813 818 International Music Publishing 150 132 Total international 963 950 Intersegment eliminations ( 2 ) ( 1 ) Total revenues $ 1,666 $ 1,748 8 Sales Returns and Uncollectible Accounts Based on management’s analysis of sales returns, refund liabilities of $ 22 million and $ 20 million were established at December 31, 2024 and September 30, 2024, respectively. Based on management’s analysis of estimated credit losses, reserves of $ 24 million and $ 26 million were established at December 31, 2024 and September 30, 2024, respectively. Deferred Revenue Deferred revenue increased by $ 244 million during the three months ended December 31, 2024 related to cash received from customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period. Revenues of $ 88 million were recognized during the three months ended December 31, 2024 related to the balance of deferred revenue at September 30, 2024. There were no other significant changes to deferred revenue during the reporting period. Performance Obligations For the three months ended December 31, 2024 and December 31, 2023, the Company recognized revenue of $ 40 million and $ 30 million, respectively, from performance obligations satisfied in previous periods. Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at December 31, 2024 are as follows: Rest of FY25 FY26 FY27 Thereafter Total (in millions) Remaining performance obligations $ 329 $ 153 $ 5 $ 1 $ 488 Total $ 329 $ 153 $ 5 $ 1 $ 488 5. Comprehensive Income Comprehensive income, which is reported in the accompanying condensed 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. Foreign Currency Translation Loss (a) Minimum Pension Liability Adjustment Accumulated Other Comprehensive Loss, net (in millions) Balances at September 30, 2024 $ ( 244 ) $ ( 3 ) $ ( 247 ) Other comprehensive loss ( 129 ) — ( 129 ) Balances at December 31, 2024 $ ( 373 ) $ ( 3 ) $ ( 376 ) ______________________________________ (a) Includes historical foreign currency translation related to certain intra-entity transactions. 9 6. 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, 2024 $ 1,557 $ 464 $ 2,021 Acquisitions 21 — 21 Other adjustments (a) ( 29 ) — ( 29 ) Balances at December 31, 2024 $ 1,549 $ 464 $ 2,013 ______________________________________ (a) Other adjustments during the three months ended December 31, 2024 represent foreign currency movements. The Company performs its annual goodwill impairment test in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”) during the fourth quarter of each fiscal year as of July 1. The Company may conduct an earlier review if events or circumstances occur that would suggest the carrying value of the Company’s goodwill may not be recoverable. No indicators of impairment were identified during the current period that required the Company to perform an interim assessment or recoverability test. Intangible Assets Intangible assets consist of the following: Weighted-Average Useful Life December 31, 2024 September 30, 2024 (in millions) Intangible assets subject to amortization: Recorded music catalog 12 years $ 1,603 $ 1,616 Music publishing copyrights 24 years 2,182 2,227 Artist and songwriter contracts 13 years 1,099 1,125 Trademarks 17 years 73 69 Other intangible assets 5 years 86 69 Total gross intangible assets subject to amortization 5,043 5,106 Accumulated amortization ( 2,714 ) ( 2,747 ) Total net intangible assets subject to amortization 2,329 2,359 Intangible assets not subject to amortization: Trademarks and tradenames Indefinite 149 152 Total net intangible assets $ 2,478 $ 2,511 The decrease in net intangible assets during the three months ended December 31, 2024 is primarily related to foreign currency movements, partially offset by business combinations which resulted in the recognition of intangible assets with a preliminary estimated fair value of $ 39 million in the aggregate within recorded music catalogs, artist and songwriter contracts, trademarks, and other intangibles. 10 7. Debt Debt Capitalization Long-term debt, all of which was issued by Acquisition Corp., consists of the following: December 31, 2024 September 30, 2024 (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) 337 363 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) 462 497 3.000 % Senior Secured Notes due 2031 800 800 Mortgage Term Loan due 2033 18 $ 18 Total long-term debt, including the current portion $ 3,987 $ 4,048 Issuance premium less unamortized discount and unamortized deferred financing costs ( 32 ) ( 34 ) Total long-term debt, including the current portion, net $ 3,955 $ 4,014 ______________________________________ (a) Reflects $ 350 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $ 2 million as of December 31, 2024 and September 30, 2024. There were no loans outstanding under the Revolving Credit Facility at December 31, 2024 or September 30, 2024. The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp. Acquisition Corp. is party to a $ 1,295 million senior secured term loan credit facility, pursuant to a credit agreement dated November 1, 2012, as amended or supplemented (the “Senior Term Loan Credit Agreement”) with JPMorgan Chase Bank NA, as administrative agent and collateral agent, and the other financial institutions and lenders from time to time party thereto (the “Senior Term Loan Facility”). Additionally, as of December 31, 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 (as defined below) and the Senior Term Loan Facility, should Acquisition Corp.’s Total Indebtedness to EBITDA Ratio increase above 3.50 :1.00 and the term loans not achieve an investment grade rating, the covenants under the Revolving Credit Facility, 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 covenants under its outstanding notes, the Revolving Credit Facility and the Senior Term Loan Facility as of December 31, 2024 . 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 2.11 x at December 31, 2024, 11 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. As of December 31, 2024, there are no interest rate swaps outstanding. 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 December 31, 2024, there are no scheduled maturities of notes until 2028, when $ 337 million is scheduled to mature. Thereafter, $ 2.337 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 $ 37 million and $ 39 million for the three months ended December 31, 2024 and 2023, respectively. Interest expense, net includes interest expense related to our outstanding indebtedness of $ 43 million and $ 45 million for the three months ended December 31, 2024 and 2023, respectively. The weighted-average interest rate of the Company’s total debt was 4.2 % at December 31, 2024, 4.3 % at September 30, 2024, and 4.6 % at December 31, 2023. 8. 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. The Company expects to incur total non-recurring restructuring charges of approximately $ 230 million or approximately $ 150 million of total non-recurring after tax charges . The expected pre-tax charges include approximately $ 154 million of severance and other termination costs, along with approximately $ 76 million of non-cash impairment charges. The majority of severance payments and other termination costs are expected to be paid by the end of fiscal year 2026. For the three months ended December 31, 2024, total severance costs recorded in connection with the Strategic Restructuring Plan were $ 1 million, of which $ 2 million of expense was recognized in our Recorded Music segment while there was a $ 1 million benefit recognized at Corporate associated with a change in estimate for costs previously recorded. Additionally, for the three months ended December 31, 2024, the Company recognized $ 26 million of impairment losses which were recognized in our Recorded Music 12 segment. Impairment charges recognized during the period primarily relate to the write-off of certain long-form audiovisual production assets and lease termination costs for office closures. As of December 31, 2024, total cumulative restructuring and impairment charges recognized in connection with the Strategic Restructuring Plan were $ 205 million with $ 195 million of costs recognized in our Recorded Music segment and $ 10 million recognized at Corporate. These costs are composed of $ 129 million of severance and other termination benefits, of which $ 7 million was non-cash, and $ 76 million of non-cash impairment charges. The below table sets forth the activity for the three months ended December 31, 2024 in the restructuring accrual associated with the Strategic Restructuring Plan included within accrued liabilities in the accompanying condensed consolidated balance sheets. Severance Costs Contract Termination Costs Total (in millions) Balance at September 30, 2024 $ 99 $ 5 $ 104 Restructuring charges 1 — 1 Cash payments ( 23 ) ( 2 ) ( 25 ) Foreign currency movements ( 1 ) — ( 1 ) Balance at December 31, 2024 $ 76 $ 3 $ 79 9. Commitments and Contingencies From time to time the Company is involved in claims and legal proceedings that arise in the ordinary course of business. The Company is currently subject to several such claims and legal proceedings. Based on currently available information, the Company does not believe that resolution of pending matters will have a material adverse effect on its financial condition, cash flows or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that the Company’s defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on the Company’s business, financial condition, cash flows and results of operations in a particular period. Any claims or proceedings against the Company, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors. 10. Equity Stock-Based Compensation The Company’s stock-based compensation plans are described in Note 14, “Equity,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024. Stock-based compensation consists primarily of common stock, restricted stock units and market-based performance share units granted to eligible employees and executives under the Omnibus Incentive Plan. For the three months ended December 31, 2024, the Company recognized a total of $ 13 million of non-cash stock-based compensation expense, which was recorded to additional paid-in capital. For the three months ended December 31, 2023, the Company recognized a total of $ 9 million of non-cash stock-based compensation expense, all of which was recorded to additional paid-in capital. During the three months ended December 31, 2024 and 2023, $ 7 million and $ 15 million of share-based compensation liabilities were reclassified to additional paid-in capital upon a certain number of awards becoming determinable, respectively. Common Stock During the three months ended December 31, 2024, in connection with the Senior Management Free Cash Flow Plan (the “Plan”), the Company issued a total of 1,738,018 shares of Class A Common Stock to settle participants’ deferred equity units previously issued under the Plan. During the three months ended December 31, 2024, the Company satisfied the vesting of RSUs by issuing 63,886 shares of Class A Common Stock under the Omnibus Incentive Plan, which is net of shares used to settle employee income tax obligations. Share Repurchase Program On November 14, 2024, the Company’s board of directors authorized a new $ 100 million share repurchase program (the “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 13 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 and the Share Repurchase Program does not have a fixed expiration date. The Company 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. The Company expects 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 Company’s board of directors at any time. The following table summarizes our total share repurchases and retirement under the Share Repurchase Program during the three months ended December 31, 2024: December 31, 2024 Share Repurchase Type Shares Amount (in millions) Open Market Repurchases 60,383 $ 2 11. Income Taxes For the three months ended December 31, 2024, the Company recorded an income tax expense of $ 89 million. The income tax expense for the three months ended December 31, 2024 is higher than the expected tax expense at the statutory rate of 21% primarily due to foreign income taxed at rates higher than the United States, including withholding taxes, and U.S. state and local taxes, unrecognized tax benefit related to uncertain tax positions, and non-deductible executive compensation under IRC Section 162(m). These charges were partially offset by tax benefits associated with R&D credits, and the net impact of GILTI and foreign derived intangible income (“FDII”). For the three months ended December 31, 2023, the Company recorded an income tax expense of $ 72 million. The income tax expense for the three months ended December 31, 2023 is higher than the expected tax benefit at the statutory tax rate of 21% primarily due to foreign income taxed at rates higher than the United States, including withholding taxes, U.S. state and local taxes, unrecognized tax benefit related to uncertain tax positions, and non-deductible executive compensation under IRC Section 162(m). These charges were partially offset by tax benefits associated with R&D credits, release of U.S. state valuation allowance, and the net impact of GILTI and FDII. The Company has determined that it is reasonably possible that the gross unrecognized tax benefits as of December 31, 2024 could decrease by up to approximately $ 2 million related to various ongoing audits and settlement discussions in various jurisdictions during the next twelve months. The Organization for 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 with general implementation of a global minimum tax rate by January 1, 2025. The Company has evaluated the potential impact of the rules based on the most recently available information and estimates that the impact to the Company is immaterial. The Company will continue to monitor legislative developments to determine if there are significant changes to Pillar 2 rules that could lead to a material impact. 12. Derivative Financial Instruments The Company uses derivative financial instruments, primarily foreign currency forward exchange contracts, for the purposes of managing foreign currency exchange rate risk on expected future cash flows. As of December 31, 2024, the Company had outstanding foreign currency forward exchange contracts for the sale of $ 438 million and the purchase of $ 260 million of foreign currencies at fixed rates that will be settled by September 2025. As of September 30, 2024, the Company had no foreign currency forward exchange contracts outstanding. 14 The Company recorded realized pre-tax gains of $ 3 million and unrealized pre-tax gains of $ 12 million related to its foreign currency forward exchange contracts in the condensed consolidated statement of operations as other expense for the three months ended December 31, 2024. The Company recorded no realized pre-tax gains or losses and recorded unrealized pre-tax losses of $ 6 million related to its foreign currency forward exchange contracts in the condensed consolidated statement of operations as other expense for the three months ended December 31, 2023. The following is a summary of amounts recorded in the consolidated balance sheets pertaining to the Company’s derivative instruments at December 31, 2024 and September 30, 2024: December 31, 2024 September 30, 2024 (in millions) Other Current Assets: Foreign currency forward exchange contracts (a) 15 — Other Current Liabilities: Foreign currency forward exchange contracts (a) ( 3 ) — ______________________________________ (a) Includes $ 29 million and $ 17 million of foreign exchange derivative contracts in asset and liability positions, respectively, which net to $ 15 million of current assets and $ 3 million of current liabilities, respectively. 13. 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. The accounting policies of the Company’s business segments are the same as those described in Note 2, “Summary of Significant Accounting Policies,” to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2024. The Company accounts for intersegment sales at fair value as if the sales were to third parties. While intercompany transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses recognized by the segment that is counterparty to the transaction) are eliminated in consolidation, and therefore, do not themselves impact consolidated results. Recorded Music Music Publishing Corporate expenses and eliminations Total Three Months Ended (in millions) December 31, 2024 Revenues $ 1,345 $ 323 $ ( 2 ) $ 1,666 Adjusted OIBDA 323 83 ( 43 ) 363 December 31, 2023 Revenues $ 1,445 $ 304 $ ( 1 ) $ 1,748 Adjusted OIBDA 412 86 ( 47 ) 451 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. 15 For the Three Months Ended December 31, 2025 2023 Operating income $ 214 $ 354 Amortization expense 57 55 Depreciation expense 29 26 Restructuring and impairments 27 — Transformation initiative costs 17 19 Net gain on divestitures — ( 17 ) Non-cash stock-based compensation and other related costs 19 14 Adjusted OIBDA $ 363 $ 451 14. Additional Financial Information Supplemental Cash Flow Disclosures The Company made interest payments of approximately $ 18 million and $ 33 million during the three months ended December 31, 2024 and 2023, respectively. The Company paid approximately $ 43 million and $ 39 million of income and withholding taxes, net of refunds, for the three months ended December 31, 2024 and 2023, respectively. Non-cash investing activities were approximately $ 18 million related to business combinations and the acquisition of music catalogs during the three months ended December 31, 2024, and $ 18 million related to the acquisition of music publishing rights and music catalogs during the three months ended December 31, 2023. Net Gain on Divestitures The Company recognized a pre-tax gain of $ 17 million during the three months ended December 31, 2023 in connection with the divestiture of certain sound recordings rights in the period which has been reflected as a net gain on divestiture in the accompanying condensed consolidated statement of operations. Net Gain on Sale of Investments The Company recognized a pre-tax realized net gain of $ 29 million during the three months ended December 31, 2024 in connection with the sale of an investment which has been presented within the Other income (expense) line of the accompanying condensed 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. 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. 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, which was paid to stockholders on December 3, 2024. The Company paid an aggregate of approximately $ 94 million, or $ 0.18 per share, in cash dividends to stockholders and participating security holders for the three months ended December 31, 2024. 16 15. Fair Value Measurements The following tables show the fair value of the Company’s financial instruments that are required to be measured at fair value as of December 31, 2024 and September 30, 2024. Fair Value Measurements as of December 31, 2024 (Level 1) (Level 2) (Level 3) Total (in millions) Other Current Assets: Foreign Currency Forward Exchange Contracts (a) $ — $ 15 $ — $ 15 Other current liabilities: Foreign currency forward exchange contracts (a) $ — $ ( 3 ) $ — $ ( 3 ) Other noncurrent assets: Equity investments with readily determinable fair value (b) 8 — — 8 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 ______________________________________ (a) The fair value of foreign currency forward exchange contracts is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay at their maturity dates for contracts involving the same currencies and maturity dates. (b) 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. The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, inventories and property, plant and equipment, are not required to be re-measured to fair value on a recurring basis. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that impairment exists, the asset is written down to its fair value. In addition, an impairment analysis is performed at least annually for goodwill and indefinite-lived intangible assets. Equity Investments Without Readily Determinable Fair Value The Company evaluates its equity investments without readily determinable fair values for impairment if factors indicate that a significant decrease in value has occurred. The Company has elected to use the measurement alternative to fair value that will allow these investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. In each of the three month periods ended December 31, 2024 and 2023, the Company recorded approximately $ 1 million of impairment charges on these investments. In addition, there were no observable price changes events that were completed during the three months ended December 31, 2024 and 2023. Fair Value of Debt Based on the level of interest rates prevailing at December 31, 2024, the fair value of the Company’s debt was $ 3.751 billion. Based on the level of interest rates prevailing at September 30, 2024, the fair value of the Company’s debt was $ 3.836 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. 16. Subsequent Events The Company has performed a review of all subsequent events through the date the financial statements were issued on February 6, 2025. On February 5, 2025, WMG Tempo Holdco LLC, a wholly owned subsidiary of Acquisition Corp. and an indirect subsidiary of the Company, entered into a Share Purchase Agreement by and among WMG Tempo Holdco LLC and various affiliates of Providence Equity Partners, including Tempo Music Holdings, LLC (“Tempo”), a proprietary music rights acquisition platform, pursuant to which WMG Tempo Holdco LLC (a) acquired a 50.1 % interest in Tempo for approximately $ 76 million, subject to a post-closing working capital adjustment, and (b) received an option, exercisable on or prior to November 30, 2027, to acquire the remaining 17 49.9 % of Tempo for approximately $ 73 million, subject to contractual adjustments. A subsidiary of Tempo is the issuer of approximately $ 311 million of asset-based securities due November 2050 secured by certain music rights owned by Tempo. 18