Warner Music Group Corp. - Quarter Report: 2021 December (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 001-32502


Warner Music Group Corp. (Exact name of registrant as specified in its charter)


Delaware (State or other jurisdiction of incorporation or organization)		13-4271875 (I.R.S. Employer Identification No.)
	1633 Broadway New York, NY 10019 (Address of principal executive offices) (212) 275-2000 (Registrant’s telephone number, including area code)

___________________________________________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Class A Common Stock, $0.001 par value per share

WMG

The Nasdaq Stock Market LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes ☐ No ☒

As of February 2, 2022, there were 137,163,316 shares of Class A Common Stock and 377,650,449 shares of Class B Common Stock of the registrant outstanding.

WARNER MUSIC GROUP CORP.

QUARTERLY REPORT ON FORM 10-Q

FOR THE THREE MONTHS ENDED DECEMBER 31, 2021

TABLE OF CONTENTS


		Page Number
Part I.	Financial Information
Item 1.	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets as of December 31, 2021 and September 30, 2021	1
	Consolidated Statements of Operations for the Three Months Ended December 31, 2021 and December 31, 2020	2
	Consolidated Statements of Comprehensive Income for the Three Months Ended December 31, 2021 and December 31, 2020	3
	Consolidated Statements of Cash Flows for the Three Months Ended December 31, 2021 and December 31, 2020	4
	Consolidated Statements of Equity for the Three Months Ended December 31, 2021 and December 31, 2020	5
	Notes to Consolidated Interim Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	46
Part II.	Other Information
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	47
Item 5.	Other Information	47
Item 6.	Exhibits	48
Signatures		49

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Warner Music Group Corp.

Consolidated Balance Sheets (Unaudited)


	December 31, 2021		September 30, 2021
	(in millions, except share data)
Assets
Current assets:
Cash and equivalents	$	450	$	499
Accounts receivable, net of allowances of $20 million and $20 million	941		839
Inventories	84		99
Royalty advances expected to be recouped within one year	468		373
Prepaid and other current assets	78		86
Total current assets	2,021		1,896
Royalty advances expected to be recouped after one year	566		457
Property, plant and equipment, net of accumulated depreciation of $435 million and $419 million	378		364
Operating lease right-of-use assets, net	258		268
Goodwill	1,945		1,830
Intangible assets subject to amortization, net	2,472		2,017
Intangible assets not subject to amortization	152		154
Deferred tax assets, net	3		31
Other assets	220		194
Total assets	$	8,015	$	7,211
Liabilities and Equity
Current liabilities:
Accounts payable	$	274	$	302
Accrued royalties	1,974		1,880
Accrued liabilities	466		461
Accrued interest	30		14
Operating lease liabilities, current	43		43
Deferred revenue	298		348
Other current liabilities	272		102
Total current liabilities	3,357		3,150
Long-term debt	3,846		3,346
Operating lease liabilities, noncurrent	275		287
Deferred tax liabilities, net	195		207
Other noncurrent liabilities	170		175
Total liabilities	$	7,843	$	7,165
Equity:
Class A common stock, $0.001 par value; 1,000,000,000 shares authorized, 127,236,783 and 122,414,827 shares issued and outstanding as of December 31, 2021 and September 30, 2021, respectively	$	—	$	—
Class B common stock, $0.001 par value; 1,000,000,000 shares authorized, 387,300,086 and 391,970,996 issued and outstanding as of December 31, 2021 and September 30, 2021, respectively	1		1
Additional paid-in capital	1,973		1,942
Accumulated deficit	(1,601)		(1,710)
Accumulated other comprehensive loss, net	(220)		(202)
Total Warner Music Group Corp. equity	153		31
Noncontrolling interest	19		15
Total equity	172		46
Total liabilities and equity	$	8,015	$	7,211

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Operations (Unaudited)


	Three Months Ended December 31,
	2021		2020
	(in millions, except share and per share data)
Revenue	$	1,614	$	1,335
Costs and expenses:
Cost of revenue	(818)		(686)
Selling, general and administrative expenses (a)	(497)		(401)
Amortization expense	(60)		(52)
Total costs and expenses	(1,375)		(1,139)
Operating income	239		196

Interest expense, net	(30)		(31)
Other income (expense)	54		(31)
Income before income taxes	263		134
Income tax expense	(75)		(35)
Net income	188		99
Less: Income attributable to noncontrolling interest	(1)		(1)
Net income attributable to Warner Music Group Corp.	$	187	$	98

Net income per share attributable to common stockholders:
Class A – Basic and Diluted	$	0.36	$	0.18
Class B – Basic and Diluted	$	0.36	$	0.19
Weighted average common shares:
Class A – Basic and Diluted	123,969,142		94,221,946
Class B – Basic and Diluted	390,952,038		416,632,808

(a) Includes depreciation expense:	$	(21)	$	(19)

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Comprehensive Income (Unaudited)


	Three Months Ended December 31,
	2021		2020
	(in millions)
Net income	$	188	$	99
Other comprehensive (loss) income, net of tax:
Foreign currency adjustment	(25)		34
Deferred gain on derivative financial instruments	7		3
Other comprehensive (loss) income, net of tax	(18)		37
Total comprehensive income	170		136
Less: Income attributable to noncontrolling interest	(1)		(1)
Comprehensive income attributable to Warner Music Group Corp.	$	169	$	135

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Cash Flows (Unaudited)


	Three Months Ended December 31,
	2021		2020
	(in millions)
Cash flows from operating activities
Net income	$	188	$	99
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	81		71
Unrealized (gains) losses and remeasurement of foreign-denominated loans and foreign currency forward exchange contracts	(36)		45
Deferred income taxes	19		2

Net gain on divestitures and investments	(11)		(14)
Non-cash interest expense	1		1
Non-cash stock-based compensation expense	24		6
Changes in operating assets and liabilities:
Accounts receivable, net	(100)		(98)
Inventories	12		11
Royalty advances	(177)		(56)
Accounts payable and accrued liabilities	(2)		(35)
Royalty payables	107		54
Accrued interest	16		6
Operating lease liabilities	(2)		(2)
Deferred revenue	(50)		24
Other balance sheet changes	59		55
Net cash provided by operating activities	129		169
Cash flows from investing activities
Acquisition of music publishing rights and music catalogs, net	(165)		(324)
Capital expenditures	(34)		(18)
Investments and acquisitions of businesses, net of cash received	(425)		(1)

Net cash used in investing activities	(624)		(343)
Cash flows from financing activities
Proceeds from issuance of 3.750% Senior Secured Notes due 2029	535		—
Proceeds from issuance of 3.000% Senior Secured Notes due 2031	—		244






Deferred financing costs paid	(4)		(3)

Distribution to noncontrolling interest holders	(1)		(1)
Dividends paid	(78)		(62)
Cash paid to settle contingent consideration	(4)		—
Net cash provided by financing activities	448		178
Effect of exchange rate changes on cash and equivalents	(2)		9
Net (decrease) increase in cash and equivalents	(49)		13
Cash and equivalents at beginning of period	499		553
Cash and equivalents at end of period	$	450	$	566

See accompanying notes

Warner Music Group Corp.

Consolidated Statements of Equity (Unaudited)


Three Months Ended December 31, 2021
	Class A Common Stock			Class B Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Warner Music Group Corp. Equity		Non-controlling Interest		Total Equity

	Shares	Value		Shares	Value
	(in millions, except share and per share data)
Balance at September 30, 2021	122,414,827	$	—	391,970,996	$	1	$	1,942	$	(1,710)	$	(202)	$	31	$	15	$	46
Net income	—	—		—	—		—		187		—		187		1		188
Other comprehensive loss, net of tax	—	—		—	—		—		—		(18)		(18)		—		(18)
Dividends ($0.15 per Class A and B share)	—	—		—	—		—		(78)		—		(78)		—		(78)
Stock-based compensation expense	—	—		—	—		31		—		—		31		—		31
Distribution to noncontrolling interest holders	—	—		—	—		—		—		—		—		(1)		(1)
Conversion of Class B shares for Class A shares	4,670,910	—		(4,670,910)	—		—		—		—		—		—		—
Shares issued under Omnibus Incentive Plan	151,046	—		—	—		—		—		—		—		—		—
Other	—	—		—	—		—		—		—		—		4		4
Balance at December 31, 2021	127,236,783	$	—	387,300,086	$	1	$	1,973	$	(1,601)	$	(220)	$	153	$	19	$	172


Three Months Ended December 31, 2020
	Class A Common Stock			Class B Common Stock			Additional Paid-in Capital		Accumulated Deficit		Accumulated Other Comprehensive Loss		Total Warner Music Group Corp. Equity (Deficit)		Non-controlling Interest		Total Equity (Deficit)

	Shares	Value		Shares	Value
	(in millions, except share and per share data)
Balance at September 30, 2020	88,578,361	$	—	421,450,000	$	1	$	1,907	$	(1,749)	$	(222)	$	(63)	$	18	$	(45)
Net income	—	—		—	—		—		98		—		98		1		99
Other comprehensive income, net of tax	—	—		—	—		—		—		37		37		—		37
Dividends ($0.12 per Class A and B share)	—	—		—	—		—		(62)		—		(62)		—		(62)
Stock-based compensation expense	—	—		—	—		6		—		—		6		—		6
Distribution to noncontrolling interest holders	—	—		—	—		—		—		—		—		(2)		(2)
Exchange of Class B shares for Class A shares	18,265,183	—		(18,265,186)	—		—		—		—		—		—		—
Shares issued under the Plan	4,321,259	—		—	—		—		—		—		—		—		—
Shares issued under Omnibus Incentive Plan	2,553	—		—	—		—		—		—		—		—		—
Balance at December 31, 2020	111,167,356	$	—	403,184,814	$	1	$	1,913	$	(1,713)	$	(185)	$	16	$	17	$	33

See accompanying notes

Warner Music Group Corp.

Notes to Consolidated Interim Financial Statements (Unaudited)

1. Description of Business

Warner Music Group Corp. (the “Company”) was formed on November 21, 2003. The Company is the direct parent of WMG Holdings Corp. (“Holdings”), which is the direct parent of WMG Acquisition Corp. (“Acquisition Corp.”). Acquisition Corp. is one of the world’s major music entertainment companies.

Initial Public Offering

On June 5, 2020, the Company completed an initial public offering (“IPO”) of Class A common stock of the Company, par value $0.001 per share (“Class A Common Stock”). The Company listed these shares on the NASDAQ stock market under the ticker symbol “WMG.” The offering consisted entirely of secondary shares sold by Access Industries, LLC (collectively with its affiliates, “Access”) and certain related selling stockholders.

Access and its affiliates continue to hold all of the Class B common stock of the Company, par value $0.001 per share (“Class B Common Stock”), representing approximately 98% of the total combined voting power of the Company’s outstanding common stock and approximately 75% of the economic interest as of December 31, 2021. As a result, the Company is a “controlled company” within the meaning of the corporate governance standards of NASDAQ.

Recorded Music Operations

Our Recorded Music business primarily consists of the discovery and development of recording artists and the related marketing, promotion, distribution, sale and licensing of music created by such recording artists. We play an integral role in virtually all aspects of the recorded music value chain from discovering and developing talent to producing, distributing and selling music to marketing and promoting recording artists and their music.

Music Publishing Operations

While Recorded Music is focused on marketing, promoting, distributing and licensing a particular recording of a musical composition, Music Publishing is an intellectual property business focused on generating revenue from uses of the musical composition itself. In return for promoting, placing, marketing and administering the creative output of a songwriter, or engaging in those activities for other rightsholders, our Music Publishing business shares the revenues generated from use of the musical compositions with the songwriter or other rightsholders.

2. Summary of Significant Accounting Policies

Interim Financial Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with United States generally accepted accounting principles (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended December 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending September 30, 2022.

The consolidated balance sheet at September 30, 2021 has been derived from the audited consolidated financial statements at that date but does not include all the information and notes required by U.S. GAAP for complete financial statements.

For further information, refer to the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (File No. 001-32502).

Basis of Consolidation

The accompanying financial statements present the consolidated accounts of all entities in which the Company has a controlling voting interest and/or variable interest required to be consolidated in accordance with U.S. GAAP. All intercompany balances and transactions have been eliminated.

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation (“ASC 810”) requires the Company first evaluate its investments to determine if any investments qualify as a variable interest entity (“VIE”). A VIE is consolidated if the Company is deemed to be the primary beneficiary of the VIE, which is the party involved with the VIE that has both (i) the power to control the most significant activities of the VIE and (ii) either the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. If an entity is not deemed to be a VIE, the Company consolidates the entity if the Company has a controlling voting interest.

The Company maintains a 52-53 week fiscal year ending on the last Friday in each reporting period. The fiscal year ended September 30, 2022 includes 53 weeks, and the fiscal year ended September 30, 2021 included 52 weeks. The additional week in fiscal year 2022 falls in the fiscal quarter ended December 31, 2021. Accordingly, the results of operations for the three months ended December 31, 2021 reflect 14 weeks compared to 13 weeks for the three months ended December 31, 2020.

All references to December 31, 2021 and December 31, 2020 relate to the periods ended December 31, 2021 and December 25, 2020, respectively. For convenience purposes, the Company continues to date its first-quarter financial statements as of December 31. The fiscal year ended September 30, 2021 ended on September 24, 2021.

The Company has performed a review of all subsequent events through the date the financial statements were issued and has determined that no additional disclosures are necessary.

Common Stock

On February 28, 2020, the Company amended its certificate of incorporation to increase its authorized capital stock to 2,100,000,000 shares, consisting of 1,000,000,000 shares of Class A Common Stock, 1,000,000,000 shares of Class B Common Stock, and 100,000,000 shares of preferred stock, par value $1.00 per share. In addition, the February 28, 2020 amendment to the Company’s certificate of incorporation also gave effect to the reclassification and 477,242.614671815-for-1 stock split of the Company’s existing common stock outstanding into 510,000,000 shares of Class B Common Stock. Upon completion of the IPO and the exercise in full of the underwriters’ option to purchase additional shares, 88,550,000 shares of Class A Common Stock, 421,450,000 shares of Class B Common Stock and no shares of preferred stock were outstanding.

In connection with the IPO, the Company’s board of directors and stockholders approved the Warner Music Group Corp. 2020 Omnibus Incentive Plan, or the “Omnibus Incentive Plan.” The Omnibus Incentive Plan provides for the grant of incentive common stock, stock options, restricted stock, restricted stock units (“RSUs”), performance awards and stock appreciation rights to employees, consultants and directors. The aggregate number of shares of common stock available for issuance under the Omnibus Incentive Plan is 31,169,099 shares of Class A Common Stock over the 10-year period from the date of adoption, including up to 1,000,000 shares of our Class A Common Stock in connection with the IPO.

Since the IPO, a total of 215,613 shares of Class A Common Stock have been issued under the Omnibus Incentive Plan, which includes 151,046 and 2,553 shares issued during the three months ended December 31, 2021, and 2020, respectively.

During the three months ended December 31, 2021, an aggregate of 4,670,910 shares of Class B Common Stock were converted to Class A Common Stock. In connection with the Senior Management Free Cash Flow Plan (the “Plan”), a remaining Plan participant redeemed a portion of vested Class B equity units of the LLC holding company, WMG Management Holdings, LLC (“Management LLC”). These Class B equity units were redeemed in exchange for a total of 510,165 shares of Class B Common Stock, which shares of Class B Common Stock converted to shares of Class A Common Stock upon the exchange.

Additionally, during the three months ended December 31, 2021, Access converted 4,160,745 shares of Class B Common Stock to the same number of shares of Class A Common Stock, which it subsequently sold through open market sales, which is reflected as an exchange of Class B Common Stock in the consolidated statements of equity for the three months ended December 31, 2021.

Earnings per Share

The consolidated statements of operations present basic and diluted earnings per share (“EPS”). The Company utilizes the two-class method to report earnings per share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and participation rights in undistributed earnings. Undistributed earnings allocated to participating securities are subtracted from net income in determining net income attributable to common stockholders.

Stock-Based Compensation

The Company accounts for stock-based payments in accordance with ASC 718, Compensation—Stock Compensation (“ASC 718”). Stock-based compensation consists primarily of restricted stock units (“RSUs”) granted to eligible employees and executives under the Omnibus Incentive Plan. The Company measures compensation expense for RSUs based on the fair value of the award on the date of grant. The grant date fair value is based on the closing market price of the Company’s Class A Common Stock on the date of grant. The Company accounts for forfeitures as they occur. Stock-based compensation is recognized on a straight-line basis over the requisite service period, which is generally four years except for certain one-year awards issued in connection with the IPO.

The Company also grants unvested restricted stock to the Company’s directors. The Company recognizes stock-based compensation expense equal to the grant date fair value of the restricted stock, based on the closing stock price on grant date, on a straight-line basis over the requisite service period of the awards, which is generally one year.

The Company also recognizes stock-based compensation under the Plan. The awards outstanding under the Plan are equity-classified.

The Company recognized approximately $24 million of non-cash stock-based compensation expense for the three months ended December 31, 2021, of which $22 million was recorded to additional paid-in capital, and a remaining $2 million has been classified as a share-based compensation liability as of December 31, 2021. The share-based compensation liability represents executive awards that have not yet been granted under the Omnibus Incentive Plan, where a total value is known and settlement will occur in a variable number of RSUs. During the three months ended December 31, 2021, $9 million was reclassified from share-based compensation liability to additional paid-in capital, representing the grant date fair value of RSUs granted which were previously classified as a share-based compensation liability as of September 30, 2021. The Company recognized approximately $6 million of non-cash stock-based compensation expense for the three months ended December 31, 2020.

Income Taxes

The Company uses the estimated annual effective tax rate method in computing its interim tax provision. Certain items, including those deemed to be unusual and infrequent are excluded from the estimated annual effective tax rate. In such cases, the actual tax expense or benefit is reported in the same period as the related item. Certain tax effects are also not reflected in the estimated annual effective tax rate, primarily certain changes in the realizability of deferred tax assets and uncertain tax positions.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (“ASU 2019-12”). This ASU eliminates certain exceptions to the general principles in ASC 740, Income Taxes. Specifically, it eliminates the exception to (1) the incremental approach for intraperiod tax allocation when there is a loss from continuing operations, and income or a gain from other items; (2) the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment; (3) the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary; and (4) the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. ASU 2019-12 also simplifies U.S. GAAP by making other changes. The Company adopted ASU 2019-12 in the first quarter of fiscal 2022 and this adoption did not have a material impact on the Company’s consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for convertible instruments by eliminating the cash conversion and beneficial conversion feature models used to separately account for embedded conversion features as a component of equity. Instead, the entity will account for the convertible debt or convertible preferred stock securities as a single unit of account, unless the conversion feature requires bifurcation and recognition as derivatives. Additionally, the guidance requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of potential share settlement for instruments that may be settled in cash or shares. The Company adopted ASU 2020-06 in the first quarter of fiscal year 2022 and this adoption did not have any impact on the Company’s consolidated financial statements.

3. Earnings per Share

The Company utilizes the two-class method to report earnings per share. Basic earnings per share is computed by dividing net income available to each class of stock by the weighted average number of outstanding common shares for each class of stock. Diluted earnings per share is computed by dividing net income available to each class of stock by the weighted average number of outstanding common shares, plus dilutive potential common shares, which is calculated using the treasury-stock method. Under the treasury-stock method, potential common shares are excluded from the computation of EPS in periods in which they have an anti-dilutive effect. The potentially dilutive common shares did not have a dilutive effect on the Company’s EPS calculation for the three months ended December 31, 2021 and 2020, respectively.

The Company allocates dividends declared to Class A Common Stock and Class B Common Stock based on timing and amounts actually declared for each class of stock and the undistributed earnings are allocated to Class A Common Stock and Class B Common Stock pro rata on a basic weighted average shares outstanding basis since the two classes of stock participate equally on a per share basis upon liquidation.

The Class B Common Stock issued to Management LLC for the exercise of the vested deferred equity units is included in the basic weighted average number of outstanding shares of Class B Common Stock. Upon issuance to the participants in the Plan, the Class B Common Stock will be converted into Class A Common Stock and included in the basic weighted average number of outstanding shares of Class A Common Stock. Since the shares expected to satisfy the vested portion of the deferred equity units are already included in the basic weighted average number of outstanding common shares, there is no potential dilutive effect associated with the vested portion of these stock-based compensation awards. Refer to Note 2 for a description of current period activity.

The following table sets forth the calculation of basic and diluted net income per common share under the two-class method for the three months ended December 31, 2021 and 2020 (in millions, except share and per share data):


	Three Months Ended December 31,
	2021				2020
	Class A		Class B		Class A		Class B
Basic and Diluted EPS:
Numerator
Net income attributable to Warner Music Group Corp.	$	47	$	140	$	19	$	79
Less: Net income attributable to participating securities	(2)		—		(2)		—
Net income attributable to common stockholders	$	45	$	140	$	17	$	79
Denominator
Weighted average shares outstanding	123,969,142		390,952,038		94,221,946		416,632,808
Basic and Diluted EPS	$	0.36	$	0.36	$	0.18	$	0.19

4. Revenue Recognition

For our operating segments, Recorded Music and Music Publishing, the Company accounts for a contract when it has legally enforceable rights and obligations and collectability of consideration is probable. The Company identifies the performance obligations and determines the transaction price associated with the contract, which is then allocated to each performance obligation, using management’s best estimate of standalone selling price for arrangements with multiple performance obligations. Revenue is recognized when, or as, control of the promised services or goods is transferred to the Company’s customers, and in an amount that reflects the consideration the Company is contractually due in exchange for those services or goods. An estimate of variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Certain of the Company’s arrangements include licenses of intellectual property with consideration in the form of sales- and usage-based royalties. Royalty revenue is recognized when the subsequent sale or usage occurs using the best estimates available of the amounts that will be received by the Company.

Disaggregation of Revenue

The Company’s revenue consists of the following categories, which aggregate into the segments – Recorded Music and Music Publishing:


	Three Months Ended December 31,
	2021		2020
	(in millions)
Revenue by Type
Digital	$	870	$	727
Physical	195		174
Total Digital and Physical	1,065		901
Artist services and expanded-rights	232		180
Licensing	89		80
Total Recorded Music	1,386		1,161
Performance	38		30
Digital	133		99
Mechanical	14		11
Synchronization	42		33
Other	2		2
Total Music Publishing	229		175
Intersegment eliminations	(1)		(1)
Total Revenues	$	1,614	$	1,335
Revenue by Geographical Location
U.S. Recorded Music	$	608	$	481
U.S. Music Publishing	115		91
Total U.S.	723		572
International Recorded Music	778		680
International Music Publishing	114		84
Total International	892		764
Intersegment eliminations	(1)		(1)
Total Revenues	$	1,614	$	1,335

Recorded Music

Recorded Music mainly involves selling, marketing, distribution and licensing of recorded music produced by the Company’s recording artists. Recorded Music revenues are derived from four main sources, which include digital, physical, artist services and expanded-rights, and licensing.

Digital revenues are generated from the expanded universe of digital partners, including digital streaming services and download services. These licenses typically contain a single performance obligation, which is ongoing access to all intellectual property in an evolving content library, predicated on: (1) the business practice and contractual ability to remove specific content without a requirement to replace the content and without impact to minimum royalty guarantees and (2) the contracts not containing a specific listing of content subject to the license. Digital licensing contracts are generally long-term with consideration in the form of sales- and usage-based royalties that are typically received monthly. Certain contracts contain minimum guarantees, which are recoupable against royalties. Upon contract inception, the Company will assess whether a shortfall or breakage is expected (i.e., where the minimum guarantee will not be recouped through royalties) in order to determine timing of revenue recognition for the minimum guarantee.

For fixed fee contracts and minimum guarantee contracts where breakage is expected, the total transaction price (fixed fee or minimum guarantee) is recognized proportionately over the contract term using an appropriate measure of progress which is based on the Company’s digital partner’s subscribers or streaming activity as these are measures of access to an evolving catalog, or on a straight-line basis. The Company updates its assessment of the transaction price each reporting period to see if anticipated royalty earnings exceed the minimum guarantee. For contracts where breakage is not expected, royalties are recognized as revenue as sales or usage occurs based upon the licensee’s usage reports and, when these reports are not available, revenue is based on historical data, industry information and other relevant trends.

Additionally, for certain licenses where the consideration is fixed and the intellectual property being licensed is static, revenue is recognized at the point in time when control of the licensed content is transferred to the customer.

Physical revenues are generated from the sale of physical products such as vinyl, CDs and DVDs. Revenues from the sale of physical Recorded Music products are recognized upon transfer of control to the customer, which typically occurs once the product has been shipped and the ability to direct use and obtain substantially all of the benefit from the asset have been transferred. In accordance with industry practice and as is customary in many territories, certain products, such as vinyl, CDs and DVDs, are sold to customers with the right to return unsold items. Revenues from such sales are generally recognized upon shipment based on gross sales less a provision for future estimated returns.

Artist services and expanded-rights revenues are generated from artist services businesses and participation in expanded-rights associated with artists, including advertising, merchandising including direct-to-consumer sales, touring, concert promotion, ticketing, sponsorship, fan clubs, artist websites, social publishing, and artist and brand management. Artist services and expanded-rights contracts are generally short term. Revenue is recognized as or when services are provided (e.g., at time of an artist’s event) assuming collectability is probable. In some cases, the Company is reliant on the artist to report revenue generating activities. For certain artist services and expanded-rights contracts, collectability is not considered probable until notification is received from the artist’s management. Revenues from the sale of products sold through our e-commerce websites are recognized when control of the goods is transferred to the customer, which is upon receipt of finished goods by the customer.

Licensing revenues represent royalties or fees for the right to use sound recordings in combination with visual images such as in films or television programs, television commercials and video games. In certain territories, the Company may also receive royalties when sound recordings are performed publicly through broadcast of music on television, radio and cable and in public spaces such as shops, workplaces, restaurants, bars and clubs. Licensing contracts are generally short term. For fixed-fee contracts, revenue is recognized at the point in time when control of the licensed content is transferred to the customer. Royalty based contracts are recognized as the underlying sales or usage occurs.

Music Publishing

Music Publishing acts as a copyright owner and/or administrator of the musical compositions and generates revenues related to the exploitation of musical compositions (as opposed to recorded music). Music publishers generally receive royalties from the use of the musical compositions in public performances, digital and physical recordings and in combination with visual images. Music publishing revenues are derived from five main sources: mechanical, performance, synchronization, digital and other.

Digital revenues are generated with respect to the musical compositions being embodied in recordings licensed to digital streaming services and digital download services and for digital performance. Performance revenues are received when the musical composition is performed publicly through broadcast of music on television, radio and cable and in retail locations (e.g., bars and restaurants), live performance at a concert or other venue (e.g., arena concerts and nightclubs) and performance of musical compositions in staged theatrical productions. Mechanical revenues are generated with respect to the musical compositions embodied in recordings sold in any physical format or configuration such as vinyl, CDs and DVDs. Synchronization revenues represent the right to use the composition in combination with visual images such as in films or television programs, television commercials and video games as well as from other uses such as in toys or novelty items and merchandise. Other revenues represent earnings for use in printed sheet music and other uses. Digital and synchronization revenue recognition is similar for both Recorded Music and Music Publishing, therefore refer to the discussion within Recorded Music.

Included in these revenue streams, excluding synchronization and other, are licenses with performing rights organizations or collecting societies (e.g., ASCAP, BMI, SESAC and GEMA), which are long-term contracts containing a single performance obligation, which is ongoing access to all intellectual property in an evolving content library. The most common form of consideration for these contracts is sales- and usage-based royalties. The collecting societies submit usage reports, typically with payment for royalties due, often on a quarterly or biannual reporting period, in arrears. Royalties are recognized as the sale or usage occurs based upon usage reports and, when these reports are not available, royalties are estimated based on historical data, such as recent royalties reported, company-specific information with respect to changes in repertoire, industry information and other relevant trends. Also included in these revenue streams are smaller, short-term contracts for specified content, which generally involve a fixed fee. For fixed-fee contracts, revenue is recognized at the point in time when control of the license is transferred to the customer.

The Company excludes from the measurement of transaction price all taxes assessed by governmental authorities that are both (i) imposed on and concurrent with a specific revenue-producing transaction and (ii) collected from customers.

Sales Returns and Uncollectible Accounts

In accordance with practice in the recorded music industry and as customary in many territories, certain physical revenue products (such as vinyl, CDs and DVDs) are sold to customers with the right to return unsold items. Revenues from such sales are recognized when the products are shipped based on gross sales less a provision for future estimated returns.

In determining the estimate of physical product sales that will be returned, management analyzes vendor sales of product, historical return trends, current economic conditions, changes in customer demand and commercial acceptance of the Company’s products. Based on this information, management reserves a percentage of each dollar of physical product sales that provide the customer with the right of return and records an asset for the value of the returned goods and liability for the amounts expected to be refunded.

Similarly, management evaluates accounts receivables to determine if they will ultimately be collected. In performing this evaluation, significant judgments and estimates are involved, including an analysis of specific risks on a customer-by-customer basis for larger accounts and customers and a receivables aging analysis that determines the percent that has historically been uncollected by aged category, in addition to other factors to estimate an allowance for credit losses. The time between the Company’s issuance of an invoice and payment due date is not significant; customer payments that are not collected in advance of the transfer of promised services or goods are generally due no later than 30 days from invoice date. Based on this information, management provides a reserve for estimated credit losses.

Based on management’s analysis of sales returns, refund liabilities of $33 million and $23 million were established at December 31, 2021 and September 30, 2021, respectively.

Based on management’s analysis of estimated credit losses, reserves of $20 million and $20 million were established at December 31, 2021 and September 30, 2021, respectively.

Principal versus Agent Revenue Recognition

The Company reports revenue on a gross or net basis based on management’s assessment of whether the Company acts as a principal or agent in the transaction. The determination of whether the Company acts as a principal or an agent in a transaction is based on an evaluation of whether the Company controls the good or service before transfer to the customer. When the Company concludes that it controls the good or service before transfer to the customer, the Company is considered a principal in the transaction and records revenue on a gross basis. When the Company concludes that it does not control the good or service before transfer to the customer but arranges for another entity to provide the good or service, the Company acts as an agent and records revenue on a net basis in the amount it earns for its agency service.

In the normal course of business, the Company distributes music content on behalf of third-party record labels. Based on the above guidance, the Company records the distribution of content of third-party record labels on a gross basis, subject to the terms of the contract, as the Company controls the content before transfer to the customer. Conversely, recorded music distributed by other record companies where the Company has a right to participate in the profits are recorded on a net basis.

Deferred Revenue

Deferred revenue principally relates to fixed fees and minimum guarantees received in advance of the Company’s performance or usage by the licensee. Reductions in deferred revenue are a result of the Company’s performance under the contract or usage by the licensee.

Deferred revenue increased by $104 million during the three months ended December 31, 2021 related to cash received from customers for fixed fees and minimum guarantees in advance of performance, including amounts recognized in the period. Revenues of $135 million were recognized during the three months ended December 31, 2021 related to the balance of deferred revenue at September 30, 2021. There were no other significant changes to deferred revenue during the reporting period.

Performance Obligations

For the three months ended December 31, 2021 and December 31, 2020, the Company recognized revenue of $37 million and $20 million, respectively, from performance obligations satisfied in previous periods.

Wholly and partially unsatisfied performance obligations represent future revenues not yet recorded under long-term intellectual property licensing contracts containing fixed fees, advances and minimum guarantees. Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at December 31, 2021 are as follows:


	Rest of FY22		FY23		FY24		Thereafter		Total
	(in millions)
Remaining performance obligations	$	341	$	312	$	121	$	1	$	775
Total	$	341	$	312	$	121	$	1	$	775

5. Acquisition of 300 Entertainment

On December 16, 2021, the Company purchased all outstanding shares of Theory Entertainment LLC d/b/a 300 Entertainment (“300 Entertainment”), an independent U.S. record label, pursuant to the terms and conditions of the merger agreement of the same date among Warner Music Inc. and MM Investment LLC, both wholly-owned subsidiaries of the Company, the Buyer Representative, Trifecta Merger Subsidiary LLC, Theory Entertainment LLC d/b/a 300 Entertainment and the Seller Representative (the “Merger Agreement”). The cash consideration paid at closing of the acquisition was approximately $397 million, which reflects the base purchase price of $400 million, adjusted for, among other items, preliminary working capital of 300 Entertainment.

The acquisition was accounted for as a business combination in accordance with ASC 805, Business Combinations, using the acquisition method of accounting. The assets and liabilities of 300 Entertainment, including identifiable intangible assets, have been measured at their fair value primarily using Level 3 inputs (see Note 15 for additional information on fair value inputs). Determining the fair value of the assets acquired and liabilities assumed requires judgment and involved the use of assumptions with respect to future cash inflows and outflows, discount rates, asset useful lives and market multiples, among other items. The use of different estimates and judgments could yield materially different results.

The excess of the purchase price over the fair value of the net assets acquired, including the amount assigned to identifiable intangible assets, has been recorded as goodwill. The resulting goodwill has been included in our Recorded Music reportable segment. The recognized goodwill will be deductible for income tax purposes. Any impairment charges made in future periods associated with goodwill, if any, will not be tax-deductible.

The table below presents (i) the preliminary estimate of the acquisition consideration as it relates to the acquisition of 300 Entertainment and (ii) the preliminary allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed on the closing date of December 16, 2021 (in millions):


	Preliminary Purchase Price Allocation
Cash and equivalents	$	2
Accounts receivable	10
Royalty advances	35
Property, plant and equipment, net	1
Goodwill	127
Intangible assets subject to amortization, net (a)	233
Other assets	1
Accounts payable	(4)
Accrued royalties	(7)
Accrued liabilities	(1)
Total purchase price allocated	$	397

______________________________________

(a)Identifiable intangible assets are comprised of the following (in millions):


	Total
Recorded music catalog	$	135
Artist and songwriter contracts	82
Trademarks	11
Music publishing copyrights	5
Total intangible assets acquired	$	233

The acquisition accounting is subject to revision based on final determinations of fair value and allocations of purchase price to the identifiable assets and liabilities acquired, in addition to the determination of the final consideration, including the determination of the final working capital adjustment pursuant to the mechanism set forth in the Merger Agreement.

During the three months ended December 31, 2021, the Company incurred costs related to this acquisition of approximately $3 million, which were expensed as incurred and recorded in selling, general and administrative expenses in the accompanying consolidated statement of operations. Prior to the acquisition, the Company had a distribution arrangement with 300 Entertainment. The unaudited pro forma revenue and operating income as if the acquisition occurred on October 1, 2020 is not material to the Company’s reported results for three months ended December 31, 2021 and December 31, 2020.

6. Comprehensive Income

Comprehensive income, which is reported in the accompanying consolidated statements of equity, consists of net income and other gains and losses affecting equity that, under U.S. GAAP, are excluded from net income. For the Company, the components of other comprehensive income primarily consist of foreign currency translation gains and losses, minimum pension liabilities, and deferred gains and losses on financial instruments designated as hedges under ASC 815, Derivatives and Hedging. The following summary sets forth the changes in the components of accumulated other comprehensive loss, net of related tax expense of approximately $2 million:


	Foreign Currency Translation Loss (a)		Minimum Pension Liability Adjustment		Deferred Gains (Losses) On Derivative Financial Instruments		Accumulated Other Comprehensive Loss, net
	(in millions)
Balances at September 30, 2021	$	(174)	$	(11)	$	(17)	$	(202)
Other comprehensive (loss) income	(25)		—		7		(18)
Balances at December 31, 2021	$	(199)	$	(11)	$	(10)	$	(220)

______________________________________

(a)Includes historical foreign currency translation related to certain intra-entity transactions.

7. Leases

The Company’s lease portfolio consists of operating real estate leases for its corporate offices and, to a lesser extent, storage and other equipment. The Company adopted FASB ASC Topic 842, Leases (“ASC 842”), on October 1, 2019 using the modified retrospective transition method. Under ASC 842, a contract is or contains a lease when (1) an explicitly or implicitly identified asset has been deployed in the contract and (2) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract. The Company determines if an arrangement is or contains a lease at inception of the contract. For all leases (finance and operating), other than those that qualify for the short-term recognition exemption, the Company will recognize on the balance sheet a lease liability for its obligation to make lease payments arising from the lease and a corresponding right-of-use (“ROU”) asset representing its right to use the underlying asset over the period of use based on the present value of lease payments over the lease term as of the lease commencement date. ROU assets are adjusted for initial direct costs, lease payments made and incentives. As the rates implicit in our leases are not readily determinable, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of lease payments. This rate is based on the estimated rate of interest for collateralized borrowing over a similar term of the lease payments. The lease term used to calculate the lease liability will include options to extend or terminate the lease when the option to extend or terminate is at the Company’s discretion and it is reasonably certain that the Company will exercise the option. Fixed payments are recognized as lease expense on a straight-line basis over the lease term. For leases with a term of one year or less, the lease payments are recognized in the consolidated statements of operations on a straight-line basis over the lease term.

ASC 842 requires that only limited types of variable payments be included in the determination of lease payments, which affects lease classification and measurement. Variable lease costs, if any, are recognized as incurred and such costs are excluded from lease balances recorded on the consolidated balance sheet. The initial measurement of the lease liability and ROU asset are determined based on fixed lease payments. Lease payments that depend on an index or a rate (such as the Consumer Price Index or a market interest rate) are variable and are recognized in the period in which the payments are incurred.

The Company’s operating ROU assets are included in operating lease right-of-use assets and the Company’s current and non-current operating lease liabilities are included in operating lease liabilities, current and operating lease liabilities, noncurrent, respectively, in the Company’s balance sheet.

Operating lease liabilities are amortized using the effective interest method. That is, in each period, the liability will be increased to reflect the interest that is accrued on the related liability by using the appropriate discount rate and decreased by the lease payments made during the period. The subsequent measurement of the ROU asset is linked to the amount recognized as the lease liability. Accordingly, the ROU asset is measured as the lease liability adjusted by (1) accrued or prepaid rents (i.e., the aggregate difference between the cash payment and straight-line lease cost), (2) remaining unamortized initial direct costs and lease incentives, and (3) impairments of the ROU asset. Operating lease costs are included in Selling, general and administrative expenses.

For lease agreements that contain both lease and non-lease components, the Company has elected the practical expedient provided by ASC 842 that permits the accounting for these components as a single lease component (rather than separating the lease from the non-lease components and accounting for the components individually).

The Company enters into operating leases for buildings, office equipment, production equipment, warehouses, and other types of equipment. Our leases have remaining lease terms of 1 year to 20 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within 1 year.

Among the Company’s operating leases are its leases for the Ford Factory Building, located at 777 S. Santa Fe Avenue in Los Angeles, California, and for 27 Wrights Lane, Kensington, London, United Kingdom. The landlord for both leases is an affiliate of Access. As of December 31, 2021, the aggregate lease liability related to these leases was $121 million.

There are no restrictions or covenants, such as those relating to dividends or incurring additional financial obligations, relating to our lease portfolio, and residual value guarantees are not significant.

The components of lease expense were as follows:


	Three Months Ended December 31,
	2021		2020
	(in millions)
Lease Cost
Operating lease cost	$	14	14
Short-term lease cost	1		1
Variable lease cost	2		2

Total lease cost	$	17	$	17

The Company incurred and recorded other occupancy expenses of $4 million for both the three months ended December 31, 2021 and December 31, 2020.

Supplemental cash flow information related to leases was as follows:


	Three Months Ended December 31,
	2021		2020
	(in millions)
Cash paid for amounts included in the measurement of operating lease liabilities	$	15	$	15
Right-of-use assets obtained in exchange for operating lease obligations	—		6

Supplemental balance sheet information related to leases was as follows:


	December 31, 2021			September 30, 2021
	(in millions)
Operating Leases
Operating lease right-of-use assets	$	258		$	268

Operating lease liabilities, current	$	43		$	43
Operating lease liabilities, noncurrent	275			287
Total operating lease liabilities	$	318		$	330

Weighted Average Remaining Lease Term
Operating leases	7 years			8 years
Weighted Average Discount Rate
Operating leases	4.70		%	4.69		%

Maturities of lease liabilities were as follows:


Fiscal Year Ended September 30,	Operating Leases
	(in millions)
2022	$	42
2023	55
2024	51
2025	51
2026	43
Thereafter	136
Total lease payments	378
Less: Imputed interest	(60)
Total	$	318

As of December 31, 2021, there have been no leases entered into that have not yet commenced.

8. Goodwill and Intangible Assets

Goodwill

The following analysis details the changes in goodwill for each reportable segment:


	Recorded Music		Music Publishing		Total
	(in millions)
Balances at September 30, 2021	$	1,366	$	464	$	1,830
Acquisitions (a)	130		—		130

Other adjustments (b)	(15)		—		(15)
Balances at December 31, 2021	$	1,481	$	464	$	1,945

______________________________________

(a)Primarily relates to the acquisition of 300 Entertainment as described in Note 5.

(b)Other adjustments during the three months ended December 31, 2021 represent foreign currency movements.

The Company performs its annual goodwill impairment test in accordance with ASC 350, Intangibles—Goodwill and Other (“ASC 350”) during the fourth quarter of each fiscal year as of July 1. The Company may conduct an earlier review if events or circumstances occur that would suggest the carrying value of the Company’s goodwill may not be recoverable. No indicators of impairment were identified during the current period that required the Company to perform an interim assessment or recoverability test.

Intangible Assets

Intangible assets consist of the following:


	Weighted-Average Useful Life	December 31, 2021		September 30, 2021
		(in millions)
Intangible assets subject to amortization:
Recorded music catalog	12 years	$	1,338	$	1,206
Music publishing copyrights	25 years	2,005		1,730
Artist and songwriter contracts	13 years	1,068		997
Trademarks	14 years	106		96
Other intangible assets	6 years	96		96
Total gross intangible asset subject to amortization		4,613		4,125
Accumulated amortization		(2,141)		(2,108)
Total net intangible assets subject to amortization		2,472		2,017
Intangible assets not subject to amortization:
Trademarks and tradenames	Indefinite	152		154
Total net intangible assets		$	2,624	$	2,171

The increase in intangible assets during the three months ended December 31, 2021 primarily relates to the acquisition of 300 Entertainment, which resulted in an increase in intangible assets as described in Note 5, and an acquisition of music-related assets within music publishing copyrights for approximately $250 million.

9. Debt

Debt Capitalization

Long-term debt, all of which was issued by Acquisition Corp., consists of the following:


	December 31, 2021		September 30, 2021
	(in millions)
Revolving Credit Facility (a)	$	—	$	—
Senior Term Loan Facility due 2028	1,145		1,145
2.750% Senior Secured Notes due 2028 (€325 face amount)	368		381
3.750% Senior Secured Notes due 2029	540		—
3.875% Senior Secured Notes due 2030	535		535
2.250% Senior Secured Notes due 2031 (€445 face amount)	504		522
3.000% Senior Secured Notes due 2031	800		800
Total long-term debt, including the current portion	$	3,892	$	3,383
Issuance premium less unamortized discount and unamortized deferred financing costs	(46)		(37)
Total long-term debt, including the current portion, net	$	3,846	$	3,346

______________________________________

(a)Reflects $300 million of commitments under the Revolving Credit Facility, less letters of credit outstanding of approximately $7 million at both December 31, 2021 and September 30, 2021. There were no loans outstanding under the Revolving Credit Facility at December 31, 2021 or September 30, 2021.

The Company is the direct parent of Holdings, which is the direct parent of Acquisition Corp. As of December 31, 2021 Acquisition Corp. had issued and outstanding the 2.750% Senior Secured Notes due 2028, the 3.750% Senior Secured Notes due 2029, the 3.875% Senior Secured Notes due 2030, the 2.250% Senior Secured Notes due 2031 and the 3.000% Senior Secured Notes due 2031 (together, the “Acquisition Corp. Notes”).

All of the Acquisition Corp. Notes are guaranteed by all of Acquisition Corp.’s domestic wholly-owned subsidiaries. The guarantee of the Acquisition Corp. Notes by Acquisition Corp.’s domestic wholly-owned subsidiaries is full, unconditional and joint and several. The secured notes are guaranteed on a senior secured basis.

The Company and Holdings are holding companies that conduct substantially all of their business operations through Acquisition Corp. Accordingly, while Acquisition Corp. and its subsidiaries are not currently restricted from distributing funds to the Company and Holdings under the indentures for the Acquisition Corp. Notes, as well as the credit agreements for the Acquisition Corp. Senior Credit Facilities, including the Revolving Credit Facility and the Senior Term Loan Facility, should Acquisition Corp.’s Total Indebtedness to EBITDA Ratio increase above 3.50:1.00 and the term loans not achieve an investment grade rating, the covenants under the Revolving Credit Facility will be reinstated and the ability of the Company and Holdings to obtain funds from their subsidiaries will be restricted by the Revolving Credit Facility.

Fiscal 2022 Transactions

3.750% Senior Secured Notes Offering

On November 24, 2021, Acquisition Corp. issued and sold $540 million of its 3.750% Senior Secured Notes due 2029 (the “3.750% Senior Secured Notes”). Interest on the Notes will accrue at the rate of 3.750% per annum and will be payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 2022.

The 3.750% Senior Secured Notes are fully and unconditionally guaranteed on a senior secured basis by each of Acquisition Corp.’s existing direct or indirect wholly-owned domestic restricted subsidiaries and by any such subsidiaries that guarantee obligations of Acquisition Corp. under its existing credit facilities, subject to customary exceptions. The indenture governing the 3.750% Senior Secured Notes contains covenants limiting, among other things, Acquisition Corp.’s ability and the ability of most of its subsidiaries to create liens and consolidate, merge, sell or otherwise dispose of all or substantially all of its assets.

Interest Rates

The loans under the Revolving Credit Facility bear interest at Acquisition Corp.’s election at a rate equal to (i) the rate for deposits in the borrowing currency in the London interbank market (adjusted for maximum reserves) for the applicable interest period (“Revolving LIBOR”) subject to a zero floor, plus 1.75% per annum in the case of Initial Revolving Loans (as defined in the Revolving Credit Agreement), or 1.875% per annum in the case of 2020 Revolving Loans (as defined in the Revolving Credit Agreement), or (ii) the base rate, which is the highest of (x) the corporate base rate established by the administrative agent from time to time, (y) 0.50% in excess of the overnight federal funds rate and (z) the one-month Revolving LIBOR plus 1.0% per annum, plus, in each case, 0.75% per annum in the case of Initial Revolving Loans, or 0.875% per annum in the case of 2020 Revolving Loans; provided that, in respect of 2020 Revolving Loans, the applicable margin with respect to such loans is subject to adjustment as set forth in the pricing grid in the Revolving Credit Agreement. Based on the Senior Secured Indebtedness to EBITDA Ratio of 3.08x at December 31, 2021, the applicable margin for Eurodollar loans would be 1.625% instead of 1.875% and the applicable margin for ABR loans would be 0.625% instead of 0.875% in the case of 2020 Revolving Loans. If there is a payment default at any time, then the interest rate applicable to overdue principal will be the rate otherwise applicable to such loan plus 2.0% per annum. Default interest will also be payable on other overdue amounts at a rate of 2.0% per annum above the amount that would apply to an alternative base rate loan.

The loans under the Senior Term Loan Facility bear interest at Acquisition Corp.’s election at a rate equal to (i) the rate for deposits in U.S. dollars in the London interbank market (adjusted for maximum reserves) for the applicable interest period (“Term Loan LIBOR”) subject to a zero floor, plus 2.125% per annum or (ii) the base rate, which is the highest of (x) the corporate base rate established by the administrative agent as its prime rate in effect at its principal office in New York City from time to time, (y) 0.50% in excess of the overnight federal funds rate and (z) one-month Term Loan LIBOR, plus 1.00% per annum, plus, in each case, 1.125% per annum. If there is a payment default at any time, then the interest rate applicable to overdue principal and interest will be the rate otherwise applicable to such loan plus 2.0% per annum. Default interest will also be payable on other overdue amounts at a rate of 2.0% per annum above the amount that would apply to an alternative base rate loan.

The Company has entered into, and in the future may enter into, interest rate swaps to manage interest rate risk. Please refer to Note 12 of our consolidated financial statements for further discussion.

Maturity of Senior Term Loan Facility

The loans outstanding under the Senior Term Loan Facility mature on January 20, 2028.

Maturity of Revolving Credit Facility

The maturity date of the Revolving Credit Facility is April 3, 2025.

Maturities of Senior Secured Notes

As of December 31, 2021, there are no scheduled maturities of notes until 2028, when $368 million is scheduled to mature. Thereafter, $2.379 billion is scheduled to mature.

Interest Expense, net

Total interest expense, net was $30 million and $31 million for the three months ended December 31, 2021 and 2020, respectively. The weighted-average interest rate of the Company’s total debt was 3.2% at December 31, 2021, 3.2% at September 30, 2021 and 3.7% at December 31, 2020.

10. Commitments and Contingencies

From time to time the Company is involved in claims and legal proceedings that arise in the ordinary course of business. The Company is currently subject to several such claims and legal proceedings. Based on currently available information, the Company does not believe that resolution of pending matters will have a material adverse effect on its financial condition, cash flows or results of operations. However, litigation is subject to inherent uncertainties, and there can be no assurances that the Company’s defenses will be successful or that any such lawsuit or claim would not have a material adverse impact on the Company’s business, financial condition, cash flows and results of operations in a particular period. Any claims or proceedings against the Company, whether meritorious or not, can have an adverse impact because of defense costs, diversion of management and operational resources, negative publicity and other factors.

11. Income Taxes

For the three months ended December 31, 2021, the Company recorded an income tax expense of $75 million. The income tax expense for the three months ended December 31, 2021 is higher than the expected tax expense at the statutory tax rate of 21% primarily due to U.S. state and local taxes, withholding taxes, foreign income taxed at rates higher than the U.S., and non-deductible executive compensation under IRC Section 162(m), offset by a deduction against foreign derived intangible income (“FDII”).

For the three months ended December 31, 2020, the Company recorded an income tax expense of $35 million. The income tax expense for the three months ended December 31, 2020 is higher than the expected tax benefit at the statutory tax rate of 21% primarily due to U.S. state and local taxes, withholding taxes, foreign income taxed at rates higher than the U.S., and non-deductible executive compensation under IRC Section 162(m), offset by FDII and excess tax benefits from long term incentive plan.

The Company has determined that it is reasonably possible that the gross unrecognized tax benefits as of December 31, 2021 could decrease by up to approximately $2 million related to various ongoing audits and settlement discussions in various foreign jurisdictions during the next twelve months.

12. Derivative Financial Instruments

The Company uses derivative financial instruments, primarily foreign currency forward exchange contracts and interest rate swaps, for the purposes of managing foreign currency exchange rate risk and interest rate risk on expected future cash flows. However, the Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures. There can be no assurance the hedges will offset more than a portion of the financial impact resulting from movements in foreign currency exchange or interest rates.

The Company enters into foreign currency forward exchange contracts primarily to hedge the risk that unremitted or future royalties and license fees owed to its U.S. companies for the sale or licensing of U.S.-based music and merchandise abroad may be adversely affected by changes in foreign currency exchange rates. The Company focuses on managing the level of exposure to the risk of foreign currency exchange rate fluctuations on its major currencies, which include the Euro, British pound sterling, Japanese yen, Canadian dollar, Swedish krona, Australian dollar, Brazilian real, Korean won and Norwegian krone. The Company also may at times choose to hedge foreign currency risk associated with financing transactions such as third-party debt and other balance sheet items. The Company’s foreign currency forward exchange contracts have not been designated as hedges under the criteria prescribed in ASC 815. The Company records these contracts at fair value on its balance sheet and the related gains and losses are immediately recognized in the consolidated statement of operations where there is an offsetting entry related to the underlying exposure.

The Company has entered into, and in the future may enter into, interest rate swaps to manage interest rate risk. These instruments may offset a portion of changes in income or expense, or changes in fair value of the Company’s long-term debt. The interest rate swap instruments are designated and qualify as cash flow hedges under the criteria prescribed in ASC 815. The Company

records these contracts at fair value on its balance sheet and gains or losses on these contracts are deferred in equity (as a component of comprehensive income).

The fair value of foreign currency forward exchange contracts is determined by using observable market transactions of spot and forward rates (i.e., Level 2 inputs) which is discussed further in Note 15. Additionally, netting provisions are provided for in existing International Swap and Derivative Association Inc. agreements in situations where the Company executes multiple contracts with the same counterparty. As a result, net assets or liabilities resulting from foreign exchange derivatives subject to these netting agreements are classified within other current assets or other current liabilities in the Company’s consolidated balance sheets.

The Company’s hedged interest rate transactions as of December 31, 2021 are expected to be recognized within two years. The fair value of interest rate swaps is based on dealer quotes of market rates (i.e., Level 2 inputs) which is discussed further in Note 15. Interest income or expense related to interest rate swaps is recognized in interest income (expense), net in the same period as the related expense is recognized. Any ineffective portion of the interest rate swaps are recognized in other income (expense) in the period measured.

The Company monitors its positions with, and the credit quality of, the financial institutions that are party to any of its financial transactions.

As of December 31, 2021, the Company had outstanding hedge contracts for the sale of $317 million and the purchase of $218 million of foreign currencies at fixed rates that will be settled by September 2022.

As of December 31, 2021, the Company had outstanding $820 million in pay-fixed receive-variable interest rate swaps with $10 million of unrealized deferred losses in comprehensive income related to the interest rate swaps. As of September 30, 2021, the Company had outstanding $820 million in pay-fixed receive-variable interest rate swaps with $17 million of unrealized deferred losses in comprehensive income related to the interest rate swaps.

The Company recorded realized pre-tax gains of $1 million and unrealized pre-tax gains of $2 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other income for the three months ended December 31, 2021. The Company recorded realized pre-tax losses of $1 million and unrealized pre-tax losses of $4 million related to its foreign currency forward exchange contracts in the consolidated statement of operations as other expense for the three months ended December 31, 2020.

The unrealized pre-tax gains of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the three months ended December 31, 2021 were $9 million. The unrealized pre-tax gains of the Company’s derivative interest rate swaps designated as cash flow hedges recorded in other comprehensive income during the three months ended December 31, 2020 were $4 million.

The following is a summary of amounts recorded in the consolidated balance sheets pertaining to the Company’s derivative instruments at December 31, 2021 and September 30, 2021:


	December 31, 2021 (a)		September 30, 2021 (b)
	(in millions)
Other current assets	$	2	$	—
Other current liabilities	—		—
Other noncurrent assets	—		—
Other noncurrent liabilities	(13)		(22)

______________________________________

(a)$5 million and $3 million of foreign exchange derivative contracts in current asset and liability positions, respectively, and $13 million of interest rate swaps in noncurrent liability positions.

(b)$22 million of interest rate swaps in noncurrent liability positions.

13. Segment Information

As discussed more fully in Note 1, based on the nature of its products and services, the Company classifies its business interests into two fundamental operations: Recorded Music and Music Publishing, which also represent the reportable segments of the Company. Information as to each of these operations is set forth below. The Company evaluates performance based on several factors, of which the primary financial measure is operating income (loss) before non-cash depreciation of tangible assets and non-cash amortization of intangible assets (“OIBDA”). The Company has supplemented its analysis of OIBDA results by segment with an analysis of operating income (loss) by segment.

The accounting policies of the Company’s business segments are the same as those described in the summary of significant accounting policies included elsewhere herein. The Company accounts for intersegment sales at fair value as if the sales were to third parties. While intercompany transactions are treated like third-party transactions to determine segment performance, the revenues (and corresponding expenses recognized by the segment that is counterparty to the transaction) are eliminated in consolidation, and therefore, do not themselves impact consolidated results.


	Recorded Music		Music Publishing		Corporate expenses and eliminations		Total
Three Months Ended	(in millions)
December 31, 2021
Revenues	$	1,386	$	229	$	(1)	$	1,614
Operating income (loss)	276		32		(69)		239
Amortization of intangible assets	40		20		—		60
Depreciation of property, plant and equipment	14		2		5		21
OIBDA	330		54		(64)		320
December 31, 2020
Revenues	$	1,161	$	175	$	(1)	$	1,335
Operating income (loss)	223		18		(45)		196
Amortization of intangible assets	33		19		—		52
Depreciation of property, plant and equipment	13		2		4		19
OIBDA	269		39		(41)		267

14. Additional Financial Information

Cash Interest and Taxes

The Company made interest payments of approximately $13 million and $27 million during the three month ended December 31, 2021 and 2020, respectively. The Company paid approximately $29 million and $17 million of income and withholding taxes, net of refunds, for the three months ended December 31, 2021 and 2020, respectively.

Dividends

The Company’s ability to pay dividends may be restricted by covenants in the credit agreement for the Revolving Credit Facility which are currently suspended but which will be reinstated if Acquisition Corp.’s Total Indebtedness to EBITDA Ratio increases above 3.50:1.00 and the term loans do not achieve an investment grade rating.

The Company intends to pay quarterly cash dividends to holders of its Class A Common Stock and Class B Common Stock. The declaration of each dividend will continue to be at the discretion of the Company’s board of directors and will depend on the Company’s financial condition, earnings, liquidity and capital requirements, level of indebtedness, contractual restrictions with respect to payment of dividends, restrictions imposed by Delaware law, general business conditions and any other factors that the Company’s board of directors deems relevant in making such a determination. Therefore, there can be no assurance that the Company will pay any dividends to holders of the Company’s common stock, or as to the amount of any such dividends.

On November 9, 2021, the Company’s board of directors declared a cash dividend of $0.15 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, which was paid to stockholders on December 1, 2021. The Company paid an aggregate of approximately $78 million, or $0.15 per share, in cash dividends to stockholders and participating security holders for the three months ended December 31, 2021.

On February 8, 2022, the Company’s board of directors declared a cash dividend of $0.15 per share on the Company’s Class A Common Stock and Class B Common Stock, as well as related payments under certain stock-based compensation plans, payable on March 1, 2022 to stockholders of record as of the close of business on February 18, 2022.

Noncash Investment Activity

Noncash investing activities for the three months ended December 31, 2021 was approximately $125 million related to the acquisition of music publishing rights and music catalogs, net during the three months ended December 31, 2021. The corresponding notes payable balance is reflected as other current liabilities within the Company’s consolidated balance sheet at December 31, 2021.

COVID-19 Pandemic

On March 11, 2020, the COVID-19 outbreak was declared a global pandemic by the World Health Organization. Government-imposed mandates limiting public assembly and restrictions on non-essential businesses have adversely impacted the Company’s operations for the three months ended December 31, 2021 and December 31, 2020, including touring and live events. For the three months ended December 31, 2021, revenues improved due to the ongoing recovery of certain COVID-19 impacted revenue streams despite a rise in COVID-19 cases associated with the Omicron variant. The continued impact of COVID-19, including increases in infection rates, new variants, renewed governmental action to slow the spread of COVID-19 and to what extent it will impact the Company’s music and related services cannot be predicted.

The Company is not presently aware of any events or circumstances arising from the global pandemic that would require us to update any estimates, judgments or materially revise the carrying value of our assets or liabilities. The Company’s estimates may change, however, as new events occur and additional information is obtained, and any such changes will be recognized in the consolidated financial statements. Actual results could differ from estimates, and any such differences may be material to our consolidated financial statements.

15. Fair Value Measurements

ASC 820, Fair Value Measurement (“ASC 820”) defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity.

In addition to defining fair value, ASC 820 expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

•Level 1—inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.

•Level 2—inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

•Level 3—inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques.

In accordance with the fair value hierarchy, described above, the following tables show the fair value of the Company’s financial instruments that are required to be measured at fair value as of December 31, 2021 and September 30, 2021.


	Fair Value Measurements as of December 31, 2021
	(Level 1)		(Level 2)		(Level 3)		Total
	(in millions)
Other Current Assets:
Foreign Currency Forward Exchange Contracts (a)	$	—	$	2	$	—	$	2
Other Current Liabilities:

Contractual Obligations (b)	—		—		(7)		(7)
Other Noncurrent Assets:

Equity Investments with Readily Determinable Fair Value (d)	72		—		—		72
Other Noncurrent Liabilities:
Contractual Obligations (b)	—		—		(10)		(10)
Interest Rate Swaps (e)	—		(13)		—		(13)
Total	$	72	$	(11)	$	(17)	$	44


	Fair Value Measurements as of September 30, 2021
	(Level 1)		(Level 2)		(Level 3)		Total
	(in millions)
Other Current Liabilities:
Contractual Obligations (b)	$	—	$	—	$	(4)	$	(4)
Other Noncurrent Assets:
Equity Method Investment (c)	26		—		—		26
Equity Investment with Readily Determinable Fair Value (d)	37		—		—		37
Other Noncurrent Liabilities:
Contractual Obligations (b)	—		—		(15)		(15)
Interest Rate Swaps (e)	—		(22)		—		(22)
Total	$	63	$	(22)	$	(19)	$	22

______________________________________

(a)The fair value of foreign currency forward exchange contracts is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay at their maturity dates for contracts involving the same currencies and maturity dates.

(b)This represents contingent consideration related to a fiscal 2020 acquisition. This is based on a probability weighted performance approach and it is adjusted to fair value on a recurring basis and any adjustments are typically included as a component of operating income in the consolidated statements of operations. This amount was mainly calculated using unobservable inputs such as future earnings performance of the acquiree and the expected timing of payments.

(c)This represents an equity method investment which was acquired in fiscal 2019 whereby the Company elected the fair value option under ASC 825, Financial Instruments (“ASC 825”). In November 2021, the investment was reclassified to an equity investment with a readily determinable fair value.

(d)These represent equity investments with a readily determinable fair value. The Company has measured its investments to fair value in accordance with ASC 321, Investments—Equity Securities, based on quoted prices in active markets.

(e)The fair value of the interest rate swaps is based on dealer quotes of market forward rates and reflects the amount that the Company would receive or pay as of December 31, 2021 for contracts involving the same attributes and maturity dates.

The following table reconciles the beginning and ending balances of net liabilities classified as Level 3:


	Total
	(in millions)
Balance at September 30, 2021	$	(19)
Additions	(2)
Reductions	—
Payments	4
Balance at December 31, 2021	$	(17)

The majority of the Company’s non-financial instruments, which include goodwill, intangible assets, inventories and property, plant and equipment, are not required to be re-measured to fair value on a recurring basis. These assets are evaluated for impairment if certain triggering events occur. If such evaluation indicates that impairment exists, the asset is written down to its fair value. In addition, an impairment analysis is performed at least annually for goodwill and indefinite-lived intangible assets.

Equity Investments Without Readily Determinable Fair Value

The Company evaluates its equity investments without readily determinable fair values for impairment if factors indicate that a significant decrease in value has occurred. The Company has elected to use the measurement alternative to fair value that will allow these investments to be recorded at cost, less impairment, and adjusted for subsequent observable price changes. The Company did not record any impairment charges on these investments during the three months ended December 31, 2021 and 2020. In addition, there were no observable price changes events that were completed during the three months ended December 31, 2021 and 2020.

Fair Value of Debt

Based on the level of interest rates prevailing at December 31, 2021, the fair value of the Company’s debt was $3.875 billion. Based on the level of interest rates prevailing at September 30, 2021, the fair value of the Company’s debt was $3.412 billion. The fair value of the Company’s debt instruments is determined using quoted market prices from less active markets or by using quoted market prices for instruments with identical terms and maturities; both approaches are considered a Level 2 measurement.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition with the unaudited interim financial statements included elsewhere in this Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2021 (the “Quarterly Report”).

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

This Quarterly Report includes forward-looking statements and cautionary statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Some of the forward-looking statements can be identified by the use of forward-looking terms such as “believes,” “expects,” “may,” “will,” “shall,” “should,” “would,” “could,” “seeks,” “aims,” “projects,” “is optimistic,” “intends,” “plans,” “estimates,” “anticipates” or other comparable terms or the negative thereof. Forward-looking statements include, without limitation, all matters that are not historical facts. They appear in a number of places throughout this Quarterly Report and include, without limitation, our ability to compete in the highly competitive markets in which we operate, statements regarding our ability to develop talent and attract future talent, our ability to reduce future capital expenditures, our ability to monetize our music, including through new distribution channels and formats to capitalize on the growth areas of the music entertainment industry, our ability to effectively deploy our capital, the development of digital music and the effect of digital distribution channels on our business, including whether we will be able to achieve higher margins from digital sales, the success of strategic actions we are taking to accelerate our transformation as we redefine our role in the music entertainment industry, the effectiveness of our ongoing efforts to reduce overhead expenditures and manage our variable and fixed cost structure and our ability to generate expected cost savings from such efforts, our success in limiting piracy, the growth of the music entertainment industry and the effect of our and the industry’s efforts to combat piracy on the industry, our intention and ability to pay dividends or repurchase or retire our outstanding debt or notes in open market purchases, privately or otherwise, the impact on us of potential strategic transactions, our ability to fund our future capital needs and the effect of litigation on us.

Forward-looking statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control. We caution you that forward-looking statements are not guarantees of future performance or outcomes and that actual performance and outcomes, including, without limitation, our actual results of operations, financial condition and liquidity, and the development of the market in which we operate, may differ materially from those made in or suggested by the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition and cash flows, and the development of the market in which we operate, are consistent with the forward-looking statements contained in this Quarterly Report, those results or developments may not be indicative of results or developments in subsequent periods. New factors emerge from time to time that may cause our business not to develop as we expect, and it is not possible for us to predict all of them. Factors that could cause actual results and outcomes to differ from those reflected in forward-looking statements include, without limitation:

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

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

•slower growth in streaming adoption and revenue;

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

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

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

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

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

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

•risks associated with our non-U.S. operations, including limited legal protections of our intellectual property rights and restrictions on the repatriation of capital;

•unfavorable currency exchange rate fluctuations;

•the impact of heightened and intensive competition in the recorded music and music publishing industries and our inability to execute our business strategy;

•significant fluctuations in our operations, cash flows and the trading price of our common stock from period to period;

•our failure to attract and retain our executive officers and other key personnel;

•a significant portion of our revenues are subject to rate regulation either by government entities or by local third-party collecting societies throughout the world and rates on other income streams may be set by governmental proceedings, which may limit our profitability;

•risks associated with obtaining, maintaining, protecting and enforcing our intellectual property rights;

•our involvement in intellectual property litigation;

•threats to our business associated with digital piracy, including organized industrial piracy;

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

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

•risks inherent to our outsourcing certain finance and accounting functions;

•the fact that we have engaged in substantial restructuring activities in the past, and may need to implement further restructurings in the future and our restructuring efforts may not be successful or generate expected cost savings;

•our ability to maintain the security of information relating to our customers, employees and vendors and our music;

•risks related to evolving laws and regulations concerning data privacy which might result in increased regulation and different industry standards;

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

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

•a potential loss of catalog if it is determined that recording artists have a right to recapture U.S. rights in their recordings under the U.S. Copyright Act;

•potential employment and withholding liabilities if our recording artists and songwriters are characterized as employees;

•any delays and difficulties in satisfying obligations incident to being a public company;

•the impact of our substantial leverage on our ability to raise additional capital to fund our operations, on our ability to react to changes in the economy or our industry and on our ability to meet our obligations under our indebtedness;

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

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

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

•our indebtedness levels, and the fact that we may be able to incur substantially more indebtedness, which may increase the risks created by our substantial indebtedness;

•risks of downgrade, suspension or withdrawal of the rating assigned by a rating agency to us could impact our cost of capital;

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

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

You should read this Quarterly Report completely and with the understanding that actual future results may be materially different from expectations. All forward-looking statements made in this Quarterly Report are qualified by these cautionary statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation, other than as may be required by law, to update or revise any forward-looking or cautionary statements to reflect changes in

assumptions, the occurrence of events, unanticipated or otherwise, and changes in future operating results over time or otherwise. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.

Other risks, uncertainties and factors, including those discussed in the “Risk Factors” of our Quarterly Reports and our Annual Report on Form 10-K, could cause our actual results to differ materially from those projected in any forward-looking statements we make. You should read carefully the factors described in the “Risk Factors” section of our Quarterly Reports and our Annual Report on Form 10-K to better understand the risks and uncertainties inherent in our business and underlying any forward-looking statements.

INTRODUCTION

The Company and Holdings are holding companies that conduct substantially all of their business operations through their subsidiaries. The terms “we,” “us,” “our,” “ours” and the “Company” refer collectively to Warner Music Group Corp. and its consolidated subsidiaries, except where otherwise indicated.

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is provided as a supplement to the unaudited financial statements and related notes thereto included elsewhere herein to help provide an understanding of our financial condition, changes in financial condition and results of our operations. MD&A is organized as follows:

•Business overview. This section provides a general description of our business, as well as a discussion of factors that we believe are important in understanding our results of operations and comparability and in anticipating future trends.

•Results of operations. This section provides an analysis of our results of operations for the three months ended December 31, 2021 and December 31, 2020. This analysis is presented on both a consolidated and segment basis.

•Financial condition and liquidity. This section provides an analysis of our cash flows for the three months ended December 31, 2021 and December 31, 2020, as well as a discussion of our financial condition and liquidity as of December 31, 2021. The discussion of our financial condition and liquidity includes recent debt financings and a summary of the key debt covenant compliance measures under our debt agreements.

Use of OIBDA

We evaluate our operating performance based on several factors, including our primary financial measure of operating income (loss) before non-cash depreciation of tangible assets and non-cash amortization of intangible assets (“OIBDA”). We consider OIBDA to be an important indicator of the operational strengths and performance of our businesses. However, a limitation of the use of OIBDA as a performance measure is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Accordingly, OIBDA should be considered in addition to, not as a substitute for, operating income (loss), net income (loss) attributable to Warner Music Group Corp. and other measures of financial performance reported in accordance with United States generally accepted accounting principles (“U.S. GAAP”). In addition, our definition of OIBDA may differ from similarly titled measures used by other companies. A reconciliation of consolidated OIBDA to operating income (loss) and net income (loss) attributable to Warner Music Group Corp. is provided in our “Results of Operations.”

Use of Constant Currency

As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of revenue on a constant-currency basis in addition to reported results helps improve the ability to understand our operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares revenue between periods as if exchange rates had remained constant period over period. We use revenue on a constant-currency basis as one measure to evaluate our performance. We calculate constant currency by calculating prior-year revenue using current-year foreign currency exchange rates. We generally refer to such amounts calculated on a constant-currency basis as “excluding the impact of foreign currency exchange rates.” This revenue should be considered in addition to, not as a substitute for, revenue reported in accordance with U.S. GAAP. Revenue on a constant-currency basis, as we present it, may not be comparable to similarly titled measures used by other companies and are not a measure of performance presented in accordance with U.S. GAAP.

BUSINESS OVERVIEW

We are one of the world’s leading music entertainment companies. Our renowned family of iconic record labels, including Atlantic Records, Warner Records, Elektra Records and Parlophone Records, is home to many of the world’s most popular and influential recording artists. In addition, Warner Chappell Music, our global music publishing business, boasts an extraordinary catalog that includes timeless standards and contemporary hits, representing works by over 100,000 songwriters and composers, with a global collection of more than one million musical compositions. We classify our business interests into two fundamental operations: Recorded Music and Music Publishing. A brief description of each of those operations is presented below.

Components of Our Operating Results

Recorded Music Operations

In the United States, our Recorded Music business is conducted principally through our major record labels—Atlantic Records and Warner Records. In October 2018, we launched Elektra Music Group in the United States as a standalone label group, which comprises the Elektra, Fueled by Ramen and Roadrunner labels, and in December 2021, we acquired 300 Entertainment. Our Recorded Music business also includes Rhino Entertainment, a division that specializes in marketing our recorded music catalog through compilations, reissuances of previously released music and video titles and releasing previously unreleased material from our vault. We also conduct our Recorded Music business through a collection of additional record labels including Asylum, Big Beat, Canvasback, East West, Erato, FFRR, Nonesuch, Parlophone, Reprise, Sire, Spinnin’ Records, Warner Classics and Warner Music Nashville.

Outside the United States, our Recorded Music business is conducted in more than 70 countries through various subsidiaries, affiliates and non-affiliated licensees. Internationally, we engage in the same activities as in the United States: discovering and signing artists and distributing, selling, marketing and promoting their music. In most cases, we also market, promote, distribute and sell the music of those recording artists for whom our domestic record labels have international rights. In certain smaller markets, we license the right to distribute and sell our music to non-affiliated third-party record labels.

Our Recorded Music business’ operations includes WMX, a next generation services division that connects artists with fans and amplifies brands in creative, immersive, and engaging ways. This division includes a rebranded WEA commercial services & marketing network (formerly Warner-Elektra-Atlantic Corporation, or WEA Corp.), which markets, distributes and sells music and video products to retailers and wholesale distributors, as well as acting as the Company’s media and creative content arm. Our business’ distribution operations also includes Alternative Distribution Alliance (“ADA”), which markets, distributes and sells the products of independent labels to retail and wholesale distributors; and various distribution centers and ventures operated internationally.

In addition to our music being sold in physical retail outlets, our music is also sold in physical form to online physical retailers, such as amazon.com, barnesandnoble.com and bestbuy.com, and distributed in digital form to an expanded universe of digital partners, including streaming services such as those of Amazon, Apple, Deezer, SoundCloud, Spotify, Tencent Music Entertainment Group and YouTube, radio services such as iHeart Radio and SiriusXM and other download services.

We have integrated the marketing of digital content into all aspects of our business, including A&R and distribution. Our business development executives work closely with A&R departments to ensure that while music is being produced, digital assets are also created with all distribution channels in mind, including streaming services, social networking sites, online portals and music-centered destinations. We also work side-by-side with our online and mobile partners to test new concepts. We believe existing and new digital businesses will be a significant source of growth and will provide new opportunities to successfully monetize our assets and create new revenue streams. The proportion of digital revenues attributable to each distribution channel varies by region and proportions may change as the introduction of new technologies continues. As one of the world’s largest music entertainment companies, we believe we are well positioned to take advantage of growth in digital distribution and emerging technologies to maximize the value of our assets.

We have diversified our revenues beyond our traditional businesses by entering into expanded-rights deals with recording artists in order to partner with such artists in other aspects of their careers. Under these agreements, we provide services to and participate in recording artists’ activities outside the traditional recorded music business such as touring, merchandising and sponsorships. We have built and acquired artist services capabilities and platforms for marketing and distributing this broader set of music-related rights and participating more widely in the monetization of the artist brands we help create. We believe that entering

into expanded-rights deals and enhancing our artist services capabilities in areas such as merchandising, VIP ticketing, fan clubs, concert promotion and management has permitted us to diversify revenue streams and capitalize on other revenue opportunities. This provides for improved long-term relationships with our recording artists and allows us to more effectively connect recording artists and fans.

Recorded Music revenues are derived from four main sources:

•Digital: the rightsholder receives revenues with respect to streaming and download services;

•Physical: the rightsholder receives revenues with respect to sales of physical products such as vinyl, CDs and DVDs;

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

•Licensing: the rightsholder receives 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; the rightsholder also receives royalties if 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.

The principal costs associated with our Recorded Music business are as follows:

•A&R costs: the costs associated with (i) paying royalties to recording artists, producers, songwriters, other copyright holders and trade unions; (ii) signing and developing recording artists; and (iii) creating master recordings in the studio;

•Product costs: the costs to manufacture, package and distribute products to wholesale and retail distribution outlets, the royalty costs associated with distributing products of independent labels to wholesale and retail distribution outlets, as well as the costs related to our artist services business;

•Selling and marketing expenses: the costs associated with the promotion and marketing of recording artists and music, including costs to produce music videos for promotional purposes and artist tour support; and

•General and administrative expenses: the costs associated with general overhead and other administrative expenses.

Music Publishing Operations

The operations of our Music Publishing business are conducted principally through Warner Chappell Music, our global music publishing company headquartered in Los Angeles, with operations in over 70 countries through various subsidiaries, affiliates, and non-affiliated licensees and sub-publishers. We own or control rights to more than one million musical compositions, including numerous pop hits, American standards, folk songs and motion picture and theatrical compositions. Assembled over decades, our award-winning catalog includes over 100,000 songwriters and composers and a diverse range of genres including pop, rock, jazz, classical, country, R&B, hip-hop, rap, reggae, Latin, folk, blues, symphonic, soul, Broadway, electronic, alternative and gospel. Warner Chappell Music also administers the music and soundtracks of several third-party television and film producers and studios. We have an extensive production music catalog collectively branded as Warner Chappell Production Music.

Music Publishing revenues are derived from five main sources:

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

•Performance: the rightsholder receives revenues if the musical composition is performed publicly through broadcast of music on television, radio and cable and in retail locations (e.g., bars and restaurants), live performance at a concert or other venue (e.g., arena concerts and nightclubs), and performance of music in staged theatrical productions;

•Mechanical: the rightsholder receives revenues with respect to musical compositions embodied in recordings sold in any physical format or configuration such as vinyl, CDs and DVDs;

•Synchronization: the rightsholder receives revenues for the right to use the musical 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; and

•Other: the rightsholder receives revenues for use in sheet music and other uses.

The principal costs associated with our Music Publishing business are as follows:

•A&R costs: the costs associated with (i) paying royalties to songwriters, co-publishers and other copyright holders in connection with income generated from the uses of their works and (ii) signing and developing songwriters; and

•Selling and marketing, general overhead and other administrative expenses: the costs associated with selling and marketing, general overhead and other administrative expenses.

Factors Affecting Results of Operations and Comparability

Fiscal Quarter End

COVID-19 Pandemic

On March 11, 2020, the COVID-19 outbreak (also referred to as “COVID”) was declared a global pandemic by the World Health Organization. The global pandemic and governmental responses thereto disrupted physical and manufacturing supply chains and required the closures of physical retailers, resulting in declines in our physical revenue streams at the onset of the pandemic. Additionally, stay at home orders, limited indoor and outdoor gatherings and other restrictions have negatively affected our business in other ways, such as, making it difficult to hold live concert tours, adversely impacting our concert promotion business and the sale of merchandise, delaying the release of new recordings and disrupting the production and release of motion pictures and television programs, which negatively affected licensing revenue in our Recorded Music business and synchronization revenue in our Music Publishing business. However, the disruption from the COVID-19 pandemic, including the disruption caused by the Omicron variant, accelerated growth of other revenue streams such as fitness and interactive gaming (including augmented reality and virtual reality), which may continue to grow. It is unclear how long the global pandemic will last due to the possibility of new variants, increases in infection rates and renewed government action to slow the spread of the virus, and as such, it cannot be predicted to what extent the global pandemic will continue to impact the demand for our music and related services.

Our results of operations, cash flows and financial condition at and for both the three months ended December 31, 2021and 2020 were adversely affected by the global pandemic despite a partial recovery starting in fiscal year 2021 as businesses began to reopen and concerts and other live music resumed. For both the three months ended December 31, 2021 and 2020, costs recognized by the Company attributable to COVID were not significant.

RESULTS OF OPERATIONS

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

Consolidated Results

Revenues

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


	For the Three Months Ended December 31,				2021 vs. 2020
	2021		2020		$ Change		% Change
Revenue by Type
Digital	$	870	$	727	$	143	20	%
Physical	195		174		21		12	%
Total Digital and Physical	1,065		901		164		18	%
Artist services and expanded-rights	232		180		52		29	%
Licensing	89		80		9		11	%
Total Recorded Music	1,386		1,161		225		19	%
Performance	38		30		8		27	%
Digital	133		99		34		34	%
Mechanical	14		11		3		27	%
Synchronization	42		33		9		27	%
Other	2		2		—		—	%
Total Music Publishing	229		175		54		31	%
Intersegment eliminations	(1)		(1)		—		—	%
Total Revenues	$	1,614	$	1,335	$	279	21	%
Revenue by Geographical Location
U.S. Recorded Music	$	608	$	481	$	127	26	%
U.S. Music Publishing	115		91		24		26	%
Total U.S.	723		572		151		26	%
International Recorded Music	778		680		98		14	%
International Music Publishing	114		84		30		36	%
Total International	892		764		128		17	%
Intersegment eliminations	(1)		(1)		—		—	%
Total Revenues	$	1,614	$	1,335	$	279	21	%

Total Revenues

Total revenues increased by $279 million, or 21%, to $1,614 million for the three months ended December 31, 2021 from $1,335 million for the three months ended December 31, 2020. The quarter included an additional week, primarily reflected in Recorded Music streaming revenue. Additionally, the quarter included the impact of a new deal with one of our digital partners impacting Recorded Music streaming revenue. These items were partially offsetting and adjusting for these items, total revenue was up 18%. The increase includes $16 million of unfavorable currency exchange fluctuations. Prior to intersegment eliminations, Recorded Music and Music Publishing revenues represented 86% and 14% of total revenue for the three months ended December 31, 2021, respectively, and 87% and 13% of total revenue for the three months ended December 31, 2020, respectively. Prior to intersegment eliminations, U.S. and international revenues represented 45% and 55% of total revenues for the three months ended December 31, 2021, respectively, and 43% and 57% of total revenues for the three months ended December 31, 2020, respectively.

Total digital revenues after intersegment eliminations increased by $177 million, or 21%, to $1,002 million for the three months ended December 31, 2021 from $825 million for the three months ended December 31, 2020. Total streaming revenue increased 23% driven by growth across Recorded Music and Music Publishing, including revenue from emerging streaming platforms. Total digital revenues remained constant at 62% of consolidated revenues for each of the three months ended December 31, 2021 and December 31, 2020. Prior to intersegment eliminations, total digital revenues for the three months ended December 31, 2021 were comprised of U.S. revenues of $514 million and international revenues of $489 million, respectively, or 51% and 49% of total digital revenues, respectively. Prior to intersegment eliminations, total digital revenues for the three months ended December 31, 2020 were comprised of U.S. revenues of $418 million and international revenues of $408 million, respectively, or 51% and 49% of total digital revenues, respectively.

Recorded Music revenues increased by $225 million, or 19%, to $1,386 million for the three months ended December 31, 2021 from $1,161 million for the three months ended December 31, 2020. Adjusted for the benefit of the additional week and the impact of the new deal with one of our digital partners, Recorded Music revenue was up 16%. The increase includes $15 million of unfavorable currency exchange fluctuations. U.S. Recorded Music revenues were $608 million and $481 million, or 44% and 41% of consolidated Recorded Music revenues, for the three months ended December 31, 2021 and December 31, 2020, respectively. International Recorded Music revenues were $778 million and $680 million, or 56% and 59% of consolidated Recorded Music revenues, for the three months ended December 31, 2021 and December 31, 2020, respectively.

The overall increase in Recorded Music revenue was driven by increases in digital, artist services and expanded-rights, physical and licensing revenues. Digital revenue increased by $143 million as a result of the continued growth in streaming services, including growth in emerging streaming platforms, strength of releases including a new release from Ed Sheeran as well as carryover success from Dua Lipa, Ed Sheeran, YoungBoy Never Broke Again and Ava Max. Revenue from streaming services grew by $144 million, or 21%, to $836 million for the three months ended December 31, 2021 from $692 million for the three months ended December 31, 2020. Adjusted for the benefit of the additional week and the impact of the new deal with one of our digital partners, Recorded Music streaming revenue was up 17%. Streaming revenue growth was partially offset by a decline in download and other digital revenues of $1 million, or 3%, to $34 million for the three months ended December 31, 2021 from $35 million for the three months ended December 31, 2020 due to the continued shift to streaming services. Artist services and expanded-rights revenue increased by $52 million primarily due to higher merchandising revenue and touring activity, both of which were disrupted by COVID in the prior-year quarter, partially offset by an unfavorable impact of foreign currency exchange rates of $6 million. Physical revenue increased by $21 million, or 12%, primarily from higher sales due to the success of new releases, an increased demand for vinyl products and COVID disruption in the prior-year quarter, partially offset by an unfavorable impact of foreign currency exchange rates of $3 million. Licensing revenue increased by $9 million, mainly due to higher synchronization and other licensing revenue, as businesses continued to recover from COVID disruption.

Music Publishing revenues increased by $54 million, or 31%, to $229 million for the three months ended December 31, 2021 from $175 million for the three months ended December 31, 2020. U.S. Music Publishing revenues were $115 million and $91 million, or 50% and 52% of consolidated Music Publishing revenues, for the three months ended December 31, 2021 and December 31, 2020, respectively. International Music Publishing revenues were $114 million and $84 million, or 50% and 48% of consolidated Music Publishing revenues, for the three months ended December 31, 2021 and December 31, 2020, respectively.

The overall increase in Music Publishing revenue was mainly driven by increases in digital revenue of $34 million, or 34%, synchronization revenue of $9 million, performance revenue of $8 million and mechanical revenue of $3 million. The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services, including emerging streaming platforms, and timing of new digital deals, partially offset by a shift in the collection of certain writer’s share income from certain digital service providers. This change has no impact on Music Publishing OIBDA, but results in a slight improvement to OIBDA margin. Revenue from streaming services grew by $35 million, or 37%, to $129 million for the three months ended December 31, 2021 from $94 million for the three months ended December 31, 2020. The increase in synchronization revenue is attributable to higher television, motion picture and commercial income and COVID disruption in the prior-year quarter. Performance revenue increased as bars, restaurants, concerts and live events continued to recover from COVID disruption. Mechanical revenue increased as businesses continued to recover from COVID disruption and from strong physical sales.

Revenue by Geographical Location

U.S. revenue increased by $151 million, or 26%, to $723 million for the three months ended December 31, 2021 from $572 million for the three months ended December 31, 2020. U.S. Recorded Music revenue increased by $127 million, or 26%. The primary driver was the increase of U.S. Recorded Music digital revenue of $80 million, or 22%, driven by the continued growth in streaming services. U.S. Recorded Music streaming revenue increased by $81 million, or 24%, partially offset by $1 million of download and other digital declines. U.S. Recorded Music artist services and expanded-rights revenue increased $23 million primarily driven by higher merchandising and advertising revenues. Increases are also attributable to the increase in U.S. Recorded Music physical revenue of $23 million from higher sales due to the success of new releases, an increased demand for vinyl products and

COVID disruption in the prior-year quarter. The increase in licensing revenue of $1 million is due to higher synchronization activity. U.S. Music Publishing revenue increased by $24 million, or 26%, to $115 million for the three months ended December 31, 2021 from $91 million for the three months ended December 31, 2020. This was primarily driven by the increase in U.S. Music Publishing of $16 million in digital revenue due to the continued growth in streaming services, including emerging streaming platforms, and timing of new digital deals, partially offset by a shift in the collection of writer’s share of U.S. digital performance income from certain digital service providers. U.S. Music Publishing streaming revenue increased by $16 million, or 29%. The increase in synchronization revenue of $7 million is due to higher television, motion picture and commercial income and COVID disruption in the prior-year quarter. Mechanical revenue increased by $1 million and performance revenue remained constant.

International revenue increased by $128 million, or 17%, to $892 million for the three months ended December 31, 2021 from $764 million for the three months ended December 31, 2020. Excluding the unfavorable impact of foreign currency exchange rates, International revenue increased by $144 million, or 19%. International Recorded Music revenue increased by $98 million primarily due to increases in digital revenue of $63 million, artist services and expanded-rights revenue of $29 million and licensing revenue of $8 million, partially offset by the decrease in physical revenue of $2 million. International Recorded Music digital revenue increased due to a $63 million, or 18%, increase in streaming revenue. International Recorded Music artist services and expanded-rights revenue increased by $29 million reflecting an increase in concert promotion and merchandise revenue, both of which were disrupted by COVID in the prior-year quarter, partially offset by the unfavorable impact of foreign currency exchange rates of $6 million. International Recorded Music licensing revenue increased by $8 million primarily due to other licensing revenue as businesses continued to recover from COVID disruption. International Recorded Music physical revenue decreased by $2 million primarily driven by an unfavorable impact of foreign currency exchange rates. International Music Publishing revenue increased from the prior-year quarter by $30 million, or 36%, to $114 million for the three months ended December 31, 2021 from $84 million for the three months ended December 31, 2020. This was primarily driven by the increase in digital revenue of $18 million, performance revenue of $8 million, mechanical revenue of $2 million and synchronization revenue of $2 million. The increase in digital revenue is primarily due to increases in streaming revenue driven by the continued growth in streaming services, including emerging streaming platforms, and timing of new digital deals. International Music Publishing streaming revenue increased by $19 million, or 50%, partially offset by $1 million of download and other digital declines. Performance revenue increased as businesses continued to recover from COVID disruption. Mechanical revenue increased as businesses continued to recover from COVID disruption and from strong physical sales. Higher synchronization revenue is primarily driven by higher motion picture and commercial income and COVID disruption in the prior-year quarter.

Cost of revenues

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


	For the Three Months Ended December 31,				2021 vs. 2020
	2021		2020		$ Change		% Change
Artist and repertoire costs	$	493	$	425	$	68	16	%
Product costs	325		261		64		25	%
Total cost of revenues	$	818	$	686	$	132	19	%

Artist and repertoire costs increased by $68 million, to $493 million for the three months ended December 31, 2021 from $425 million for the three months ended December 31, 2020. Artist and repertoire costs as a percentage of revenue decreased to 31% for the three months ended December 31, 2021 from 32% for the three months ended December 31, 2020, primarily due to timing of artist and repertoire investments.

Product costs increased by $64 million, to $325 million for the three months ended December 31, 2021 from $261 million for the three months ended December 31, 2020. Product costs as a percentage of revenue remained constant at 20% for each of the three months ended December 31, 2021 and December 31, 2020.

Selling, general and administrative expenses

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


	For the Three Months Ended December 31,				2021 vs. 2020
	2021		2020		$ Change		% Change
General and administrative expense (1)	$	242	$	189	$	53	28	%
Selling and marketing expense	214		178		36		20	%
Distribution expense	41		34		7		21	%
Total selling, general and administrative expense	$	497	$	401	$	96	24	%

______________________________________

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

Total selling, general and administrative expense increased by $96 million, or 24%, to $497 million for the three months ended December 31, 2021 from $401 million for the three months ended December 31, 2020. Expressed as a percentage of revenue, selling, general and administrative expense increased to 31% for the three months ended December 31, 2021 from 30% for the three months ended December 31, 2020. This is primarily due to higher non-cash stock-based compensation and other related expenses from a one-time equity grant and the timing of expense recognition for new annual equity grants in the quarter of $18 million.

General and administrative expense increased by $53 million to $242 million for the three months ended December 31, 2021 from $189 million for the three months ended December 31, 2020. The increase in general and administrative expense was mainly due to higher non-cash stock-based compensation and other related expenses from a one-time equity grant and the timing of expense recognition for new annual equity grants in the quarter of $18 million, increased employee related costs, including the impact of the additional week, unfavorable movements in foreign currency exchange rates of $10 million and increased expenses related to transformation initiatives and acquisition transaction costs. Expressed as a percentage of revenue, general and administrative expense increased to 15% for the three months ended December 31, 2021 from 14% for the three months ended December 31, 2020 due to the factors described above.

Selling and marketing expense increased by $36 million, or 20%, to $214 million for the three months ended December 31, 2021 from $178 million for the three months ended December 31, 2020. Expressed as a percentage of revenue, selling and marketing expense remained constant at 13% for each of the three months ended December 31, 2021 and December 31, 2020.

Distribution expense was $41 million for the three months ended December 31, 2021 and $34 million the three months ended December 31, 2020. Expressed as a percentage of revenue, distribution expense remained constant at 3% for each of the three months ended December 31, 2021 and December 31, 2020.

Reconciliation of Net Income Attributable to Warner Music Group Corp. and Operating Income to Consolidated OIBDA

As previously described, we use OIBDA as our primary measure of financial performance. The following table reconciles operating income to OIBDA, and further provides the components from net income attributable to Warner Music Group Corp. to operating income for purposes of the discussion that follows (in millions):


	For the Three Months Ended December 31,				2021 vs. 2020
	2021		2020		$ Change		% Change
Net income attributable to Warner Music Group Corp.	$	187	$	98	$	89	91	%
Income attributable to noncontrolling interest	1		1		—		—	%
Net income	188		99		89		90	%
Income tax expense	75		35		40		—	%
Income before income taxes	263		134		129		96	%
Other (income) expense	(54)		31		(85)		—	%
Interest expense, net	30		31		(1)		-3	%

Operating income	239		196		43		22	%
Amortization expense	60		52		8		15	%
Depreciation expense	21		19		2		11	%
OIBDA	$	320	$	267	$	53	20	%

OIBDA

OIBDA increased by $53 million to $320 million for the three months ended December 31, 2021 as compared to $267 million for the three months ended December 31, 2020 as a result of higher revenues, partially offset by higher cost of revenues and selling, general and administrative expenses. Expressed as a percentage of total revenue, OIBDA margin remained constant at 20% for each of the three months ended December 31, 2021 and December 31, 2020 due to strong operating performance, which was offset by growth of lower-margin COVID-impacted revenue streams and increase in non-cash stock-based compensation and other related expenses as described above.

Depreciation expense

Our depreciation expense increased by $2 million, or 11%, to $21 million for the three months ended December 31, 2021 from $19 million for the three months ended December 31, 2020. The increase is primarily due to an increase in IT capital spending and assets being placed into service.

Amortization expense

Our amortization expense increased by $8 million, or 15%, to $60 million for the three months ended December 31, 2021 from $52 million for the three months ended December 31, 2020. The increase is primarily due to an increase in amortizable intangible assets primarily related to the acquisition of music-related assets.

Operating income

Our operating income increased by $43 million to $239 million for the three months ended December 31, 2021 from $196 million for the three months ended December 31, 2020. The increase in operating income was due to the factors that led to the increase in OIBDA, partially offset by higher depreciation and amortization as noted above.

Interest expense, net

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

Other (income) expense

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

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

Income tax expense

Our income tax expense increased by $40 million to $75 million for the three months ended December 31, 2021 from $35 million for the three months ended December 31, 2020. The change of $40 million in income tax expense is due to the impact of higher pre-tax income in the current-year quarter.

Net income

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

Noncontrolling interest

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

Business Segment Results

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


	For the Three Months Ended December 31,				2021 vs. 2020
	2021		2020		$ Change		% Change
Recorded Music
Revenues	$	1,386	$	1,161	$	225	19	%
Operating income	276		223		53		24	%
OIBDA	330		269		61		23	%
Music Publishing
Revenues	229		175		54		31	%
Operating income	32		18		14		78	%
OIBDA	54		39		15		38	%
Corporate expenses and eliminations
Revenue eliminations	(1)		(1)		—		—	%
Operating loss	(69)		(45)		(24)		53	%
OIBDA loss	(64)		(41)		(23)		56	%
Total
Revenues	1,614		1,335		279		21	%
Operating income	239		196		43		22	%
OIBDA	320		267		53		20	%

Recorded Music

Revenues

Recorded Music revenue increased by $225 million, or 19%, to $1,386 million for the three months ended December 31, 2021 from $1,161 million for the three months ended December 31, 2020. Adjusted for the benefit of the additional week and the impact of the new deal with one of our digital partners, Recorded Music revenue was up 16%. U.S. Recorded Music revenues were $608 million and $481 million, or 44% and 41% of consolidated Recorded Music revenues, for the three months ended December 31, 2021 and December 31, 2020, respectively. International Recorded Music revenues were $778 million and $680 million, or 56% and 59% of consolidated Recorded Music revenues, for the three months ended December 31, 2021 and December 31, 2020, respectively.

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

Cost of revenues

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


	For the Three Months Ended December 31,				2021 vs. 2020
	2021		2020		$ Change		% Change
Artist and repertoire costs	$	343	$	313	$	30	10	%
Product costs	325		261		64		25	%
Total cost of revenues	$	668	$	574	$	94	16	%

Recorded Music cost of revenues increased by $94 million, or 16%, to $668 million for the three months ended December 31, 2021 from $574 million for the three months ended December 31, 2020. Expressed as a percentage of Recorded Music revenue, Recorded Music artist and repertoire costs decreased to 25% for the three months ended December 31, 2021 from 27% for the three months ended December 31, 2020. The decrease is primarily attributable to revenue mix and timing of artist and repertoire investments. Expressed as a percentage of Recorded Music revenue, Recorded Music product costs increased to 23% for the three months ended December 31, 2021 from 22% for the three months ended December 31, 2020. The overall increase as a percentage of revenue primarily relates to revenue mix due to an increase in lower-margin artist services and expanded-rights revenue.

Selling, general and administrative expense

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


	For the Three Months Ended December 31,				2021 vs. 2020
	2021		2020		$ Change		% Change
General and administrative expense (1)	$	151	$	122	$	29	24	%
Selling and marketing expense	210		175		35		20	%
Distribution expense	41		34		7		21	%
Total selling, general and administrative expense	$	402	$	331	$	71	21	%

______________________________________

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

Recorded Music selling, general and administrative expense increased by $71 million, or 21%, to $402 million for the three months ended December 31, 2021 from $331 million for the three months ended December 31, 2020. The increase in general and administrative expense was primarily due to increased employee related costs, unfavorable movements in foreign currency exchange rates of $8 million and increased expenses related to acquisition transaction costs. The increase in selling and marketing expense was primarily due to increased variable marketing spend on higher revenues and new releases, increased employee related costs and higher travel expenses as limited travel resumed. The increase in distribution expense was primarily due to higher artist services and expanded-rights revenue. Expressed as a percentage of Recorded Music revenue, Recorded Music selling, general and administrative expense remained constant at 29% for each of the three months ended December 31, 2021 and December 31, 2020.

Operating Income and OIBDA

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


	For the Three Months Ended December 31,				2021 vs. 2020
	2021		2020		$ Change		% Change
Operating income	$	276	$	223	$	53	24	%
Depreciation and amortization	54		46		8		17	%
OIBDA	$	330	$	269	$	61	23	%

Recorded Music OIBDA increased by $61 million to $330 million for the three months ended December 31, 2021 from $269 million for the three months ended December 31, 2020 as a result of higher revenues, partially offset by higher costs of revenue and selling, general and administrative expenses. Expressed as a percentage of Recorded Music revenue, Recorded Music OIBDA margin increased to 24% for the three months ended December 31, 2021 from 23% for the three months ended December 31, 2020 due to strong operating performance, partially offset by growth of lower-margin COVID-impacted revenue streams in the quarter.

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

Music Publishing

Revenues

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

Cost of revenues

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


	For the Three Months Ended December 31,				2021 vs. 2020
	2021		2020		$ Change		% Change
Artist and repertoire costs	$	151	$	113	$	38	34	%
Total cost of revenues	$	151	$	113	$	38	34	%

Music Publishing cost of revenues increased by $38 million, or 34%, to $151 million for the three months ended December 31, 2021 from $113 million for the three months ended December 31, 2020. Expressed as a percentage of Music Publishing revenue, Music Publishing cost of revenues increased to 66% for the three months ended December 31, 2021 from 65% for the three months ended December 31, 2020 primarily attributable to revenue mix.

Selling, general and administrative expense

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


	For the Three Months Ended December 31,				2021 vs. 2020
	2021		2020		$ Change		% Change
General and administrative expense (1)	$	25	$	24	$	1	4	%
Selling and marketing expense	1		1		—		—	%
Total selling, general and administrative expense	$	26	$	25	$	1	4	%

______________________________________

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

Music Publishing selling, general and administrative expense increased by $1 million, or 4%, to $26 million for the three months ended December 31, 2021 from $25 million for the three months ended December 31, 2020. Expressed as a percentage of Music Publishing revenue, Music Publishing selling, general and administrative expense decreased to 11% for the three months ended December 31, 2021 from 14% for the three months ended December 31, 2020.

Operating Income and OIBDA

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


	For the Three Months Ended December 31,				2021 vs. 2020
	2021		2020		$ Change		% Change
Operating income	$	32	$	18	$	14	78	%
Depreciation and amortization	22		21		1		5	%
OIBDA	$	54	$	39	$	15	38	%

Music Publishing OIBDA increased by $15 million, or 38%, to $54 million for the three months ended December 31, 2021 from $39 million for the three months ended December 31, 2020. Expressed as a percentage of Music Publishing revenue, Music Publishing OIBDA margin increased to 24% for the three months ended December 31, 2021 from 22% for the three months ended December 31, 2020. The increase was due to strong operating performance.

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

Corporate Expenses and Eliminations

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

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

FINANCIAL CONDITION AND LIQUIDITY

Financial Condition at December 31, 2021

At December 31, 2021, we had $3.846 billion of debt (which is net of $46 million of premiums, discounts and deferred financing costs), $450 million of cash and equivalents (net debt of $3.396 billion, defined as total debt, less cash and equivalents and premiums, discounts and deferred financing costs) and $153 million of Warner Music Group Corp. equity. This compares to $3.346 billion of debt (which is net of $37 million of premiums, discounts and deferred financing costs), $499 million of cash and equivalents (net debt of $2.847 billion) and $31 million of Warner Music Group Corp. equity at September 30, 2021.

Cash Flows

The following table summarizes our historical cash flows (in millions). The financial data for the three months ended December 31, 2021 and December 31, 2020 are unaudited and have been derived from our consolidated interim financial statements included elsewhere herein.


	Three Months Ended December 31,
	2021		2020
Cash provided by (used in):
Operating activities	$	129	$	169
Investing activities	(624)		(343)
Financing activities	448		178

Operating Activities

Cash provided by operating activities was $129 million for the three months ended December 31, 2021 as compared with cash provided by operating activities of $169 million for the three months ended December 31, 2020. The $40 million decrease in cash provided by operating activities was primarily due to continued A&R investment, the timing of digital advances and the seasonal increase in outstanding receivables, driving a use of cash from working capital, partially offset by an increase in OIBDA and a source of cash from the timing of royalty payments.

Investing Activities

Cash used in investing activities was $624 million for the three months ended December 31, 2021 as compared with cash used in investing activities of $343 million for the three months ended December 31, 2020. The $624 million of cash used in investing activities in the three months ended December 31, 2021 consisted of $425 million relating to investments and acquisitions of businesses and $165 million to acquire music-related assets, a portion of which was debt-financed, and $34 million relating to capital expenditures. The $343 million of cash used in investing activities in the three months ended December 31, 2020 consisted of $1 million relating to investments, $18 million relating to capital expenditures and $324 million to acquire music publishing rights and recorded music catalogs, a portion of which was debt-financed.

Financing Activities

Cash provided by financing activities was $448 million for the three months ended December 31, 2021 as compared with cash provided by financing activities of $178 million for the three months ended December 31, 2020. The $448 million of cash provided by financing activities for the three months ended December 31, 2021 consisted of proceeds from debt issuance of $535 million, which was used to fund the acquisition of a business and music-related assets, partially offset by dividends paid of $78 million, deferred financing costs of $4 million, cash paid to settle contingent consideration of $4 million and distributions to noncontrolling interest holders of $1 million. The $178 million of cash provided by financing activities for the three months ended December 31, 2020 consisted of proceeds from debt issuance of $244 million which was used to fund the acquisition of music publishing rights and recorded music catalogs, partially offset by dividends paid of $62 million, deferred financing costs of $3 million and distributions to noncontrolling interest holders of $1 million.

Liquidity

Our primary sources of liquidity are the cash flows generated from our subsidiaries’ operations, available cash and equivalents and funds available for drawing under our Revolving Credit Facility. These sources of liquidity are needed to fund our debt service requirements, working capital requirements, capital expenditure requirements, strategic acquisitions and investments, and dividends, prepayments of debt, repurchases or retirement of our outstanding debt or notes or repurchases of our outstanding equity securities in open market purchases, privately negotiated purchases or otherwise, we may elect to pay or make in the future.

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

We are continuing our financial transformation initiative, launched in August 2019, to upgrade our information technology and finance infrastructure, including related systems and processes, for which we currently expect upfront costs to be approximately $160 million, which includes capital expenditures of approximately $65 million. There has been a slight delay in the timing of the transformation initiative as a result of the ongoing effects of COVID-19, but it is still expected to be delivered by the end of fiscal year 2022. Annualized run-rate savings from the financial transformation initiative are expected to be between approximately $35 million and $40 million once fully implemented starting in fiscal year 2023. We expect that our primary sources of liquidity will be sufficient to fund these expenditures.

Debt Capital Structure

Since Access acquired us in 2011, we have sought to extend the maturity dates on our outstanding indebtedness, reduce interest expense and improve our debt ratings. For example, our S&P corporate credit rating improved from B in 2017 to BB+ in July 2021 with a stable outlook, and our Moody’s corporate family rating improved from B1 in 2016 to Ba3 in 2020. In addition, our weighted-average interest rate on our outstanding indebtedness has decreased from 10.5% in 2011 to 3.2% as of December 31, 2021. Our nearest-term maturity date is in 2028. Subject to market conditions, we expect to continue to take opportunistic steps to extend our maturity dates and reduce related interest expense. From time to time, we may incur additional indebtedness for, among other things, working capital, repurchasing, redeeming or tendering for existing indebtedness and acquisitions or other strategic transactions.

3.750% Senior Secured Notes Offering

On November 24, 2021, Acquisition Corp. issued and sold $540 million of 3.750% Senior Secured Notes due 2029 (the “Notes”). Interest on the Notes will accrue at the rate of 3.750% per annum and will be payable semi-annually in arrears on June 1 and December 1, commencing on June 1, 2022.

The proceeds of the issuance and sale of the aforementioned Notes were used to fund the acquisition of a business and music-related assets for aggregate cash consideration of $525 million.

Revolving Credit Facility

On January 31, 2018, Acquisition Corp. entered into the revolving credit agreement (as amended by the amendment dated October 9, 2019 and as further amended, amended and restated or otherwise modified from time to time, the “Revolving Credit Agreement”) for a senior secured revolving credit facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto (the “Revolving Credit Facility”). On April 3, 2020, Acquisition Corp. entered into an amendment to the Revolving Credit Agreement (the “Second Amendment”) which, among other things, increased the commitments under the Revolving Credit Facility from an aggregate principal amount of $180 million to an aggregate principal amount of $300 million and extended the final maturity of the Revolving Credit Facility from January 31, 2023 to April 3, 2025.

On March 1, 2021, Acquisition Corp. entered into an amendment (the “Revolving Credit Agreement Amendment”) to the Revolving Credit Agreement among Acquisition Corp., the several banks and other financial institutions party thereto and Credit Suisse AG, as administrative agent, governing Acquisition Corp.’s revolving credit facility with Credit Suisse AG, as administrative agent, and the other financial institutions and lenders from time to time party thereto. The Revolving Credit Agreement Amendment (among other changes) adds certain exceptions and increases the leverage ratio below which Acquisition Corp. can access certain baskets in connection with Acquisition Corp.’s negative covenants, including those related to incurrence of indebtedness, restricted payments and covenant suspension. On May 4, 2021, certain covenants set forth in our Revolving Credit Facility were suspended, including the restriction on incurring certain additional indebtedness, based on the determination that the total indebtedness to EBITDA ratio is below the required threshold specified therein.

Acquisition Corp. is the borrower under the Revolving Credit Agreement which provides for a revolving credit facility in the amount of up to $300 million and includes a $90 million letter of credit sub-facility. Amounts are available under the Revolving Credit Facility in U.S. dollars, euros or pounds sterling. The Revolving Credit Agreement permits loans for general corporate purposes and may also be utilized to issue letters of credit. Borrowings under the Revolving Credit Agreement bear interest at Acquisition Corp.’s election at a rate equal to (i) the rate for deposits in the borrowing currency in the London interbank market (adjusted for maximum reserves) for the applicable interest period (“Revolving LIBOR”) plus 1.875% per annum, 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) the overnight federal funds rate plus 0.5% and (z) the one-month Revolving LIBOR plus 1.00% per annum, plus, in each case, 0.875% per annum; provided that, for each of clauses (i) and (ii), the applicable margin with respect to such loans is subject to adjustment upon achievement of certain leverage ratios as set forth in a leverage-based pricing grid in the Revolving Credit Agreement. Based on the Senior Secured Indebtedness to EBITDA Ratio

of 3.08x at December 31, 2021, the applicable margin for Eurodollar loans would be 1.625% instead of 1.875% and the applicable margin for ABR loans would be 0.625% instead of 0.875% in the case of 2020 Revolving Loans (as defined in the Revolving Credit Agreement).

Existing Debt as of December 31, 2021

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


Revolving Credit Facility (a)	$	—
Senior Term Loan Facility due 2028	1,145
2.750% Senior Secured Notes due 2028 (€325 face amount)	368
3.750% Senior Secured Notes due 2029	540
3.875% Senior Secured Notes due 2030	535
2.250% Senior Secured Notes due 2031 (€445 face amount)	504
3.000% Senior Secured Notes due 2031	800
Total long-term debt, including the current portion	$	3,892
Issuance premium less unamortized discount and unamortized deferred financing costs	(46)
Total long-term debt, including the current portion, net	$	3,846

______________________________________

(a)Reflects $300 million of commitments under the Revolving Credit Facility available at December 31, 2021, less letters of credit outstanding of approximately $7 million at December 31, 2021. There were no loans outstanding under the Revolving Credit Facility at December 31, 2021.

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

Dividends

Covenant Compliance

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

On January 18, 2019, we delivered a notice to the trustee under the 2012 Secured Indenture and 2014 Unsecured Indenture changing the Fixed GAAP Date, as defined under the indentures, to October 1, 2018. Under the Senior Term Loan Facility, the Revolving Credit Facility and the Secured Notes Indenture, the Fixed GAAP Date is set for April 3, 2020, other than in respect of capital leases, which are frozen at November 1, 2012.

The Revolving Credit Facility contains a springing leverage ratio that is tied to a ratio based on EBITDA, which is defined under the Revolving Credit Agreement. Our ability to borrow funds under the Revolving Credit Facility may depend upon our ability to meet the leverage ratio test at the end of a fiscal quarter to the extent we have drawn a certain amount of revolving loans. On May 4, 2021, certain covenants set forth in our Revolving Credit Facility were suspended, including the restriction on incurring certain additional indebtedness, based on the determination that the total indebtedness to EBITDA ratio is below the required threshold specified therein. EBITDA as defined in the Revolving Credit Facility is based on Consolidated Net Income (as defined in the Revolving Credit Facility), both of which terms differ from the terms “EBITDA” and “net income” as they are commonly used. For example, the calculation of EBITDA under the Revolving Credit Facility, in addition to adjusting net income to exclude interest expense, income taxes and depreciation and amortization, also adjusts net income by excluding items or expenses such as, among other items, (1) the amount of any restructuring charges or reserves; (2) any non-cash charges (including any impairment charges); (3) any net loss resulting from hedging currency exchange risks; (4) the amount of management, monitoring, consulting and advisory fees paid to Access; (5) business optimization expenses (including consolidation initiatives, severance costs and other costs relating to initiatives aimed at profitability improvement); (6) transaction expenses; (7) equity-based compensation expense; and (8) certain extraordinary, unusual or non-recurring items. The definition of EBITDA under the Revolving Credit Facility also includes adjustments for the pro forma impact of certain projected cost savings, operating expense reductions and synergies and any quality of earnings analysis prepared by independent certified public accountants in connection with an acquisition, merger, consolidation or other investment. The Senior Term Loan Facility and the Secured Notes Indenture use financial measures called “Consolidated EBITDA” or “EBITDA” and “Consolidated Net Income” that have substantially the same definitions to EBITDA and Consolidated Net Income, each as defined under the Revolving Credit Agreement.

EBITDA as defined in the Revolving Credit Facility (referred to in this section as “Adjusted EBITDA”) is presented herein because it is a material component of the leverage ratio contained in the Revolving Credit Agreement. Non-compliance with the leverage ratio could result in the inability to use the Revolving Credit Facility, which could have a material adverse effect on our results of operations, financial position and cash flow. Adjusted EBITDA does not represent net income or cash from operating activities as those terms are defined by U.S. GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. While Adjusted EBITDA and similar measures are frequently used as measures of operations and the ability to meet debt service requirements, these terms are not necessarily comparable to other similarly titled captions of other companies due to the potential inconsistencies in the method of calculation. Adjusted EBITDA does not reflect the impact of earnings or charges resulting from matters that we may consider not to be indicative of our ongoing operations. In particular, the definition of Adjusted EBITDA in the Revolving Credit Agreement allows us to add back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net income. However, these are expenses that may recur, vary greatly and are difficult to predict.

Adjusted EBITDA as presented below should not be used by investors as an indicator of performance for any future period. Further, our debt instruments require that it be calculated for the most recent four fiscal quarters. As a result, the measure can be disproportionately affected by a particularly strong or weak quarter. Further, it may not be comparable to the measure for any subsequent four quarter period or any complete fiscal year. In addition, our debt instruments require that the leverage ratio be calculated on a pro forma basis for certain transactions including acquisitions as if such transactions had occurred on the first date of the measurement period and may include expected cost savings and synergies resulting from or related to any such transaction. There can be no assurances that any such cost savings or synergies will be achieved in full.

In addition, Adjusted EBITDA is a key measure used by our management to understand and evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under U.S. GAAP. Some of those limitations include: (1) it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenue for our business; (2) it does not reflect the significant interest expense or cash requirements necessary to service interest or principal payments on our indebtedness; and (3) it does not reflect every cash expenditure, future requirements for capital expenditures or contractual commitments. In particular, this measure adds back certain non-cash, extraordinary, unusual or non-recurring charges that are deducted in calculating net income; however, these are expenses that may recur, vary greatly and are difficult to predict. In addition, Adjusted EBITDA is not the same as net income or cash flow provided by operating activities as those terms are defined by U.S. GAAP and does not necessarily indicate whether cash flows will be sufficient to fund cash needs. Accordingly, Adjusted EBITDA should be considered in addition to, not as a substitute for, net income (loss) and other measures of financial performance reported in accordance with U.S. GAAP.

The following is a reconciliation of net income (loss), which is a U.S. GAAP measure of our operating results, to Adjusted EBITDA as defined, for the most recently ended four fiscal quarters, or the twelve months ended December 31, 2021, for the twelve months ended December 31, 2020 and for the three months ended December 31, 2021 and December 31, 2020. In addition, the reconciliation includes the calculation of the Senior Secured Indebtedness to Adjusted EBITDA ratio, which we refer to as the Leverage Ratio, under the Revolving Credit Agreement for the most recently ended four fiscal quarters, or the twelve months ended December 31, 2021. The terms and related calculations are defined in the Revolving Credit Agreement. All amounts in the reconciliation below reflect Acquisition Corp. (in millions, except ratios):


	Twelve Months Ended December 31,				Three Months Ended December 31,
	2021		2020		2021		2020
Net Income (Loss)	$	396	$	(493)	$	188	$	99
Income tax expense	189		53		75		35
Interest expense, net	121		125		30		31
Depreciation and amortization	316		261		81		71
Loss on extinguishment of debt (a)	22		34		—		—
Net gain on divestitures and sale of securities (b)	(3)		(1)		—		—
Restructuring costs (c)	30		20		4		3
Net hedging and foreign exchange (gains) losses (d)	(78)		104		(41)		48
Management fees (e)	—		17		—		—
Transaction costs (f)	17		76		7		—
Business optimization expenses (g)	48		37		14		8
Non-cash stock-based compensation expense (h)	62		621		23		6
Other non-cash charges (i)	8		(5)		(11)		(14)
Pro forma impact of cost savings initiatives and specified transactions (j)	79		55		19		10
Adjusted EBITDA	$	1,207	$	904	$	389	$	297
Senior Secured Indebtedness (k)	$	3,721
Leverage Ratio (l)	3.08x

______________________________________

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

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

(c)Reflects severance costs and other restructuring related expenses.

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

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

(f)Reflects mainly transaction and qualifying IPO costs.

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

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

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

(j)Reflects expected savings resulting from transformation initiatives and the pro forma impact of certain specified transactions for the three and twelve months ended December 31, 2021. Certain of these cost savings initiatives and transactions impacted quarters prior to the quarter during which they were identified within the last twelve-month period. The pro forma impact of these specified transactions and initiatives resulted in a $31 million increase in the twelve months ended December 31, 2021 Adjusted EBITDA.

(k)Reflects the balance of senior secured debt at Acquisition Corp. of approximately $3.846 billion and the balance of current notes payable of approximately $125 million less cash of $250 million.

(l)Reflects the ratio of Senior Secured Indebtedness, including Revolving Credit Agreement Indebtedness, to Adjusted EBITDA. This is calculated net of cash and equivalents of the Company as of December 31, 2021 not exceeding $250 million. If the outstanding aggregate principal amount of borrowings and drawings under letters of credit which have not been reimbursed under our Revolving Credit Facility is greater than $105 million at the end of a fiscal quarter, the maximum leverage ratio permitted under the Revolving Credit Facility is 5.00:1.00. The Company’s Revolving Credit Facility does not

impose any “leverage ratio” maintenance requirement on the Company when the aggregate principal amount of borrowings and drawings under letters of credit, which have not been reimbursed under the Revolving Credit Facility, is less than or equal to $105 million at the end of a fiscal quarter. On May 4, 2021, certain covenants set forth in our Revolving Credit Facility were suspended, including the restriction on incurring certain additional indebtedness, based on the determination that the total indebtedness to EBITDA ratio is below the required threshold specified therein.

Summary

Management believes that funds generated from our operations and borrowings under the Revolving Credit Facility and available cash and equivalents will be sufficient to fund our debt service requirements, working capital requirements and capital expenditure requirements for the foreseeable future. We also have additional borrowing capacity under our indentures and the Senior Term Loan Facility. However, our ability to continue to fund these items and to reduce debt may be affected by general economic, financial, competitive, legislative and regulatory factors, as well as other industry-specific factors such as the ability to control music piracy and the continued transition from physical to digital formats in the recorded music and music publishing industries. It could also be affected by the severity and duration of natural or man-made disasters, including pandemics such as COVID-19. We and our affiliates continue to evaluate opportunities to, from time to time, depending on market conditions and prices, contractual restrictions, our financial liquidity and other factors, seek to pay dividends or prepay outstanding debt or repurchase or retire Acquisition Corp.’s outstanding debt or debt securities or repurchase our outstanding equity securities in open market purchases, privately negotiated purchases or otherwise. The amounts involved in any such transactions, individually or in the aggregate, may be material and may be funded from available cash or from additional borrowings. In addition, from time to time, depending on market conditions and prices, contractual restrictions, our financial liquidity and other factors, we may seek to refinance the Senior Credit Facilities or our outstanding debt or debt securities with existing cash and/or with funds provided from additional borrowings.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As discussed in Note 15 to our audited consolidated financial statements for the fiscal year ended September 30, 2021, the Company is exposed to market risk arising from changes in market rates and prices, including movements in foreign currency exchange rates and interest rates. As of December 31, 2021, other than as described below, there have been no material changes to the Company’s exposure to market risk since September 30, 2021.

Foreign Currency Risk

Within our global business operations we have transactional exposures that may be adversely affected by changes in foreign currency exchange rates relative to the U.S. dollar. We may at times choose to use foreign exchange currency derivatives, primarily forward contracts, to manage the risk associated with the volatility of future cash flows denominated in foreign currencies, such as unremitted or future royalties and license fees owed to our U.S. companies for the sale or licensing of U.S.-based music and merchandise abroad that may be adversely affected by changes in foreign currency exchange rates. We focus on managing the level of exposure to the risk of foreign currency exchange rate fluctuations on major currencies, which can include the Euro, British pound sterling, Japanese yen, Canadian dollar, Swedish krona, Australian dollar, Brazilian real, Korean won and Norwegian krone, and in many cases we have natural hedges where we have expenses associated with local operations that offset the revenue in local currency and our Euro-denominated debt, which can offset declines in the Euro. As of December 31, 2021, the Company had outstanding hedge contracts for the sale of $317 million and the purchase of $218 million of foreign currencies at fixed rates. Subsequent to December 31, 2021, certain of our foreign exchange contracts expired.

The fair value of foreign exchange contracts is subject to changes in foreign currency exchange rates. For the purpose of assessing the specific risks, we use a sensitivity analysis to determine the effects that market risk exposures may have on the fair value of our financial instruments. For foreign exchange forward contracts outstanding at December 31, 2021, we typically perform a sensitivity analysis assuming a hypothetical 10% depreciation of the U.S. dollar against foreign currencies from prevailing foreign currency exchange rates and assuming no change in interest rates. The fair value of the foreign exchange forward contracts would have decreased by $10 million based on this analysis. Hypothetically, even if there was a decrease in the fair value of the forward contracts, because our foreign exchange contracts are entered into for hedging purposes, these losses would be largely offset by gains on the underlying transactions.

Interest Rate Risk

We had $3.892 billion of principal debt outstanding at December 31, 2021, of which $1.145 billion was variable-rate debt and $2.747 billion was fixed-rate debt. As such, we are exposed to changes in interest rates. At December 31, 2021, 71% of the Company’s debt was at a fixed rate. In addition, as of December 31, 2021, we have the option under all of our floating rate debt under the Senior Term Loan Facility to select a one, two, three or six month LIBOR rate. To manage interest rate risk on $1.145 billion of U.S. dollar-denominated variable-rate debt, the Company has entered into interest rate swaps to effectively convert the floating interest rates to a fixed interest rate on a portion of its variable-rate debt. As a result, as of December 31, 2021, 92% of the Company’s debt was effectively at a fixed rate. As of December 31, 2021, the Company’s interest rate swaps are expected to mature within two years.

Based on the level of interest rates prevailing at December 31, 2021, the fair value of the Company’s fixed-rate and variable-rate debt was approximately $3.875 billion. Further, as of December 31, 2021, based on the amount of the Company’s fixed-rate debt, a 25 basis point increase or decrease in the level of interest rates would decrease the fair value of the fixed-rate debt by approximately $44 million or increase the fair value of the fixed-rate debt by approximately $34 million. This potential fluctuation is based on the simplified assumption that the level of fixed-rate debt remains constant with an immediate across the board increase or decrease in the level of interest rates with no subsequent changes in rates for the remainder of the period.

Inflation Risk

Inflationary factors such as increases in overhead costs may adversely affect our results of operations. We do not believe that inflation has had a material effect on our business, financial condition or results of operations to date. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases for services. Our inability or failure to do so could harm our business, financial condition or results of operations.

ITEM 4. CONTROLS AND PROCEDURES

Certification

The certifications of the principal executive officer and the principal financial officer (or persons performing similar functions) required by Rules 13a-14(a) and 15d-14(a) of the Exchange Act (the “Certifications”) are filed as exhibits to this report. This section of the report contains the information concerning the evaluation of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) (“Disclosure Controls”) and changes to internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) (“Internal Controls”) referred to in the Certifications and this information should be read in conjunction with the Certifications for a more complete understanding of the topics presented.

Introduction

The SEC’s rules define “disclosure controls and procedures” as controls and procedures that are designed to ensure that information required to be disclosed by public companies in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by public companies in the reports that they file or submit under the Exchange Act is accumulated and communicated to a company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

The SEC’s rules define “internal control over financial reporting” as a process designed by, or under the supervision of, a public company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the Company’s board of directors, management and other personnel, 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, or U.S. GAAP, including those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

The Company’s management, including its principal executive officer and principal financial officer, does not expect that our Disclosure Controls or Internal Controls will prevent or detect all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the limitations in any and all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Further, the design of any control system is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected even when effective Disclosure Controls and Internal Controls are in place.

Evaluation of Disclosure Controls and Procedures

Based on management’s evaluation (with the participation of the Company’s principal executive officer and principal financial officer), as of the end of the period covered by this report, the Company’s principal executive officer and principal financial officer have concluded that the Company’s Disclosure Controls are effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act will be recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, including that such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting or other factors that occurred during the three months ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company has not experienced any material impact to our internal controls over financial reporting despite the fact that most of our employees continue to work remotely due to the COVID-19 global pandemic. The Company will continue to monitor and assess the impact of the COVID-19 situation and our ability to maintain the design and operating effectiveness of internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

There are no material changes to the risk factors discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.


Exhibit Number						Exhibit Description
2.1*^						Agreement and Plan of Merger, dated as of December 16, 2021, by and among Warner Music Inc., MM Investment LLC, Trifecta Merger Subsidiary LLC, Buyer Representative, Theory Entertainment LLC, and Seller
10.1*†						Form of Award Agreement under Warner Music Group Corp. 2020 Omnibus Incentive Plan
31.1*						Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
31.2*						Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended
32.1**						Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**						Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS						Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH						XBRL Taxonomy Extension Schema Document
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						XBRL Taxonomy Extension Label Linkbase Document
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document
104*						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

______________________________________

* Filed herewith.

** Pursuant to SEC Release No. 33-8212, this certification will be treated as “accompanying” this Quarterly Report on Form 10-Q and not “filed” as part of such report for purposes of Section 18 of the Securities Exchange Act, as amended, or otherwise subject to the liability of Section 18 of the Securities Exchange Act, as amended, and this certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933, as amended, except to the extent that the registrant specifically incorporates it by reference.

^ Portions of this exhibit (indicated by asterisks) have been redacted in accordance with Item 601(b)(2) of Regulation S-K.

† Identifies each management contract or compensatory plan or arrangement in which directors and/or executive officers are eligible to participate.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

February 8, 2022


			WARNER MUSIC GROUP CORP.

			By:						/s/ STEPHEN COOPER
			Name: Title:						Stephen Cooper Chief Executive Officer (Principal Executive Officer)

			By:						/s/ LOUIS DICKLER
			Name: Title:						Louis Dickler Acting Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)