WARNER MUSIC GROUP CORP. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

This Annual Report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995, Section 27A of the Securities
Act, and Section 21E of the Exchange Act. Actual results and the timing of
events could differ materially from those projected in forward-looking
statements due to a number of factors, including those described under "Item 1A.
Risk Factors" and elsewhere in this Annual Report. See "Special Note Regarding
Forward-Looking Statements."
You should read the following discussion of our financial condition and results
of operations in conjunction with the consolidated financial statements and
related notes thereto included elsewhere in this Annual Report.
INTRODUCTION
The Company is the direct parent of Holdings, which is the direct parent of
Acquisition Corp. Acquisition Corp. is one of the world's major music
entertainment companies.
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 consolidated 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 fiscal years ended September 30, 2021, September 30, 2020 and
September 30, 2019. 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 fiscal years ended September 30, 2021, September 30, 2020 and
September 30, 2019, as well as a discussion of our financial condition and
liquidity as of September 30, 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.
•Critical accounting policies and estimates. This section identifies those
accounting policies that are considered important to the Company's results of
operations and financial condition, require significant judgment and involve
significant management estimates. The Company's significant accounting policies,
including those considered to be critical accounting policies, are summarized in
Note 2 to the accompanying consolidated financial statements.
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 "-Results of Operations."
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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
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.
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. 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' distribution operations include WEA Corp., which
markets, distributes and sells music and video products to retailers and
wholesale distributors; 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 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
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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 including 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
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.
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.
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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
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 accelerated growth of other
revenue streams such as fitness and interactive gaming (including augmented
reality and virtual reality), which may continue to grow. While global
vaccination efforts are underway and businesses are beginning to reopen, 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 fiscal years ended September 30, 2021 and 2020 were adversely affected by
the global pandemic despite some recovery in fiscal year 2021 as businesses
began to reopen and concerts and other live music resumed. The Company
recognized a one-time $3 million credit loss reserve reversal impacting OIBDA
for the fiscal year ended September 30, 2021 compared to one-time charges of $17
million impacting OIBDA and a total of $22 million impacting net income for the
fiscal year ended September 30, 2020.
Initial Public Offering
On June 5, 2020, we completed an IPO of Class A Common Stock. The sale of shares
through the offering consisted entirely of secondary shares sold by Access. As a
result, we incurred one-time costs associated with the IPO of approximately $89
million for the fiscal year ended September 30, 2020, $60 million of which
relates to the Management Agreement as defined below. Following the IPO, our
results of operations include expenses associated with being a public company,
including auditing, accounting and legal fees and expenses, investor relations
expenses, increased directors' fees and director and officer liability insurance
costs, registrar and transfer agent fees and listing fees, as well as other
expenses.
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Senior Management Free Cash Flow Plan
On June 5, 2020, we amended our Second Amended and Restated Senior Management
Free Cash Flow Plan (the "Plan"), which pays annual bonuses to certain
executives based on our free cash flow and offers participants the opportunity
to share in the appreciation of the value of our common stock, to remove the
cash-settlement feature of the awards issued previously under the Plan. Our
results of operations were adversely impacted by a non-cash stock-based
compensation charge of $593 million for the fiscal year ended September 30,
2020, which reflects the mark-to-market adjustment through the modification date
of the Plan for the change in value of our common stock upon consummation of the
IPO. We incurred a non-cash stock-based compensation charge associated with a
mark-to-market adjustment of $42 million for the fiscal year ended September 30,
2019.
Subsequent to the amendment, the awards issued under the Plan were converted
from liability-classified to equity-classified and therefore are no longer
adjusted for changes in the value of our common stock. We continue to incur
non-cash stock-based compensation expense for awards that were unvested as of
the modification date of the Plan and for awards issued under the Omnibus
Incentive Plan. We incurred non-cash stock-based compensation expense and other
related expenses of $47 million, $608 million and $50 million for the fiscal
years ended September 30, 2021, 2020 and 2019, respectively. The total expense
of $608 million and $50 million for fiscal 2020 and 2019 include the charges of
$593 million and $42 million, respectively, as described above.
Management Agreement
Upon completion of the Merger, the Company and Holdings entered into a
management agreement with Access, dated as of the Merger Closing Date (the
"Management Agreement"), pursuant to which Access provided the Company and its
subsidiaries with financial, investment banking, management, advisory and other
services. As a result of the completion of the IPO, the Management Agreement
terminated in accordance with its terms and the Company paid to Access a
one-time termination fee and a fee for transaction services in an aggregate
amount of $60 million which was recorded within selling, general and
administrative expenses in the consolidated statements of operations for the
fiscal year ended September 30, 2020. As the Management Agreement was terminated
in June 2020, the Company incurred no costs associated with the Management
Agreement for the fiscal year ended September 30, 2021. Prior to the termination
of the Management Agreement, the Company incurred costs associated with the
Management Agreement of approximately $7 million and $11 million for the fiscal
years ended September 30, 2020 and September 30, 2019, respectively. Such
amounts have been included as a component of selling, general and administrative
expenses in the accompanying consolidated statements of operations.
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RESULTS OF OPERATIONS
Fiscal Year Ended September 30, 2021 Compared with Fiscal Year Ended
September 30, 2020 and Fiscal Year Ended September 30, 2019
Consolidated Results
Revenues
The Company's revenues were composed of the following amounts (in millions):
                                                For the Fiscal Year Ended
                                                      September 30,                                     2021 vs. 2020                              2020 vs. 2019
                                          2021                2020             2019             $ Change              % Change             $ Change              % Change
Revenue by Type
Digital                             $    3,105             $ 2,568          $ 2,343          $        537                   21  %       $        225                   10  %
Physical                                   549                 434              559                   115                   26  %               (125)                 -22  %
Total Digital and Physical               3,654               3,002            2,902                   652                   22  %                100                    3  %
Artist services and expanded-rights        599                 525              629                    74                   14  %               (104)                 -17  %
Licensing                                  291                 283              309                     8                    3  %                (26)                  -8  %
Total Recorded Music                     4,544               3,810            3,840                   734                   19  %                (30)                  -1  %
Performance                                122                 142              183                   (20)                 -14  %                (41)                 -22  %
Digital                                    436                 337              271                    99                   29  %                 66                   24  %
Mechanical                                  49                  48               55                     1                    2  %                 (7)                 -13  %
Synchronization                            144                 119              120                    25                   21  %                 (1)                  -1  %
Other                                       10                  11               14                    (1)                  -9  %                 (3)                 -21  %
Total Music Publishing                     761                 657              643                   104                   16  %                 14                    2  %
Intersegment eliminations                   (4)                 (4)              (8)                    -                    -  %                  4                  -50  %
Total Revenues                      $    5,301             $ 4,463          $ 4,475          $        838                   19  %       $        (12)                   -  %
Revenue by Geographical Location
U.S. Recorded Music                 $    1,985             $ 1,609          $ 1,656          $        376                   23  %       $        (47)                  -3  %
U.S. Music Publishing                      378                 325              300                    53                   16  %                 25                    8  %
Total U.S.                               2,363               1,934            1,956                   429                   22  %                (22)                  -1  %
International Recorded Music             2,559               2,201            2,184                   358                   16  %                 17                    1  %
International Music Publishing             383                 332              343                    51                   15  %                (11)                  -3  %
Total International                      2,942               2,533            2,527                   409                   16  %                  6                    -  %
Intersegment eliminations                   (4)                 (4)              (8)                    -                    -  %                  4                  -50  %
Total Revenues                      $    5,301             $ 4,463          $ 4,475          $        838                   19  %       $        (12)                   -  %


Total Revenues
2021 vs. 2020
Total revenues increased by $838 million, or 19%, to $5,301 million for the
fiscal year ended September 30, 2021 from $4,463 million for the fiscal year
ended September 30, 2020. Prior to intersegment eliminations, Recorded Music
revenues represented 86% and 85% of total revenues for the fiscal years ended
September 30, 2021 and September 30, 2020, respectively. Prior to intersegment
eliminations, Music Publishing revenues represented 14% and 15% of total
revenues for the fiscal years ended September 30, 2021 and September 30, 2020,
respectively. Prior to intersegment eliminations, U.S. and international
revenues represented 45% and 55% of total revenues for the fiscal year ended
September 30, 2021 and 43% and 57% of total revenues for the fiscal year ended
September 30, 2020, respectively.
Total digital revenues after intersegment eliminations increased by $636
million, or 22%, to $3,539 million for the fiscal year ended September 30, 2021
from $2,903 million for the fiscal year ended September 30, 2020. Total digital
revenues represented 67% and 65% of consolidated revenues for the fiscal years
ended September 30, 2021 and September 30, 2020, respectively. Prior to
intersegment eliminations, total digital revenues for the fiscal year ended
September 30, 2021 were comprised of U.S. revenues of $1,769 million and
international revenues of $1,772 million, or 50% of total digital revenues for
each of U.S. and international revenues. Prior to intersegment eliminations,
total digital revenues for the fiscal year ended September 30, 2020 were
comprised of U.S. revenues of $1,479 million and international revenues of
$1,426 million, or 51% and 49% of total digital revenues, respectively.
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Recorded Music revenues increased by $734 million, or 19%, to $4,544 million for
the fiscal year ended September 30, 2021 from $3,810 million for the fiscal year
ended September 30, 2020. U.S. Recorded Music revenues were $1,985 million and
$1,609 million, or 44% and 42%, of consolidated Recorded Music revenues for the
fiscal years ended September 30, 2021 and September 30, 2020, respectively.
International Recorded Music revenues were $2,559 million and $2,201 million, or
56% and 58% of consolidated Recorded Music revenues for the fiscal years ended
September 30, 2021 and September 30, 2020, respectively.
The overall increase in Recorded Music revenue was driven by increases in
digital, physical, artist services and expanded-rights, and licensing revenue.
Digital revenue increased by $537 million, or 21%, as a result of the continued
growth in streaming services, including growth in emerging streaming platforms
such as Facebook, TikTok and Peloton a well as strength of releases, which
included new release from Cardi B, as well as carryover success from Dua Lipa,
Ed Sheeran, Ava Max, the Hamilton original cast recording, Bruno Mars, Roddy
Ricch, Tones and I and YoungBoy Never Broke Again. Revenue from streaming
services grew by $569 million or 24% to $2,972 million for the fiscal year ended
September 30, 2021 from $2,403 million for the fiscal year ended September 30,
2020. Streaming revenue growth was partially offset by a decline in download and
other digital revenues of $32 million to $133 million for the fiscal year ended
September 30, 2021 from $165 million for the fiscal year ended September 30,
2020 due to the continued shift to streaming services. Physical revenue
increased by $115 million primarily from higher sales due to an increased demand
for vinyl products, continued recovery from COVID disruption, as well as the
favorable impact of foreign currency exchange rates of $15 million. Artist
services and expanded-rights revenue increased by $74 million primarily due to
higher direct-to-consumer merchandising revenue at EMP and the favorable impact
of foreign currency exchanges rates of $26 million, partially offset by a
decrease in touring activity resulting from COVID disruption. Licensing revenue
increased by $8 million primarily due to higher synchronization revenue as
businesses continued to recover from COVID disruption and the favorable impact
of foreign currency exchange rates of $9 million, partially offset by lower
compilation revenue and other COVID-impacted licensing revenue.
Music Publishing revenues increased by $104 million, or 16%, to $761 million for
the fiscal year ended September 30, 2021 from $657 million for the fiscal year
ended September 30, 2020. U.S. Music Publishing revenues were $378 million, or
50% of consolidated Music Publishing revenues for the fiscal year ended
September 30, 2021, and $325 million, or 49% of consolidated Music Publishing
revenues for the fiscal year ended September 30, 2020. International Music
Publishing revenues were $383 million, or 50% of consolidated Music Publishing
revenues for the fiscal year ended September 30, 2021, and $332 million, or 51%
of consolidated Music Publishing revenues for the fiscal year ended
September 30, 2020.
The overall increase in Music Publishing revenue was mainly driven by increases
in digital revenue of $99 million or 29%, synchronization revenue of $25 million
or 21% and mechanical revenue of $1 million, partially offset by decreases in
performance revenue of $20 million or 14% and other revenue of $1 million. The
increase in digital revenue is primarily due to an increase in streaming revenue
driven by the continued growth in streaming services, including emerging
streaming platforms, and timing of new digital deals. Digital revenue growth in
the year was impacted by a favorable one-time settlement in the prior year, as
well as a shift in the collection of writer's share of U.S. digital performance
income from certain digital service providers. This change has no impact on
Music Publishing OIBDA, but results in a slight improvement to OIBDA margin. The
increase in synchronization revenue is attributable to higher motion picture and
commercial income and a one-time licensing settlement. Mechanical revenue is up
slightly due to the favorable impact of foreign currency exchange rates. The
decrease in performance revenue is primarily driven by the impact of COVID
disruption on bars, restaurants, concerts and live events, which have only
partially recovered.
2020 vs. 2019
Total revenues decreased by $12 million, or 0%, to $4,463 million for the fiscal
year ended September 30, 2020 from $4,475 million for the fiscal year ended
September 30, 2019. Prior to intersegment eliminations, Recorded Music revenues
represented 85% and 86% of total revenues for the fiscal years ended September
30, 2020 and September 30, 2019, respectively. Prior to intersegment
eliminations, Music Publishing revenues represented 15% and 14% of total
revenues for the fiscal years ended September 30, 2020 and September 30, 2019,
respectively. Prior to intersegment eliminations, U.S. and international
revenues represented 43% and 57% of total revenues for the fiscal year ended
September 30, 2020 and 44% and 56% of total revenues for the fiscal year ended
September 30, 2019, respectively.
Total digital revenues after intersegment eliminations increased by $293
million, or 11%, to $2,903 million for the fiscal year ended September 30, 2020
from $2,610 million for the fiscal year ended September 30, 2019. Total digital
revenues represented 65% and 58% of consolidated revenues for the fiscal years
ended September 30, 2020 and September 30, 2019, respectively. The increase in
digital revenue as a percentage of consolidated revenue is due to the continued
growth in streaming revenue, which was largely uninterrupted by COVID-19, and
the decrease in total consolidated revenue due to the business interruption
impact of COVID-19. Prior to intersegment eliminations, total digital revenues
for the fiscal year ended September 30, 2020 were comprised of U.S. revenues of
$1,479 million and international revenues of $1,426 million, or 51% and 49% of
total digital revenues, respectively. Prior to intersegment eliminations, total
digital revenues for the fiscal year ended September 30, 2019 were comprised of
U.S. revenues of $1,382 million and international revenues of $1,232 million, or
53% and 47% of total digital revenues, respectively.
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Recorded Music revenues decreased by $30 million, or 1%, to $3,810 million for
the fiscal year ended September 30, 2020 from $3,840 million for the fiscal year
ended September 30, 2019. U.S. Recorded Music revenues were $1,609 million and
$1,656 million, or 42% and 43% of consolidated Recorded Music revenues for the
fiscal years ended September 30, 2020 and September 30, 2019, respectively.
International Recorded Music revenues were $2,201 million and $2,184 million, or
58% and 57% of consolidated Recorded Music revenues for the fiscal years ended
September 30, 2020 and September 30, 2019, respectively.
The overall decrease in Recorded Music revenue was driven by decreases in
physical, artist services and expanded-rights, and licensing revenue partially
offset by increases in digital revenue. Physical revenue decreased by $125
million primarily due to the continued shift from physical revenue to digital
revenue, timing of releases, prior-year success of Johnny Hallyday and impact of
the COVID-19 business interruption resulting in lower physical sales, offset by
current year release success in Japan. Artist services and expanded-rights
revenue decreased by $104 million primarily due to a decrease in touring
activity and tour-related merchandising resulting from COVID-19 business
interruption related tour postponements and cancellations, partially offset by
higher e-commerce merchandising revenue. Licensing revenue decreased by $26
million primarily due to the impact of COVID-19, which resulted in lower
broadcast fees, synchronization revenue due to lower advertising, television and
film deal activity, partially offset by $5 million of licensing settlements.
Digital revenue increased by $225 million as a result of the continued growth in
streaming services and strength of releases, which included new releases from
Roddy Ricch, YoungBoy Never Broke Again and Dua Lipa, as well as carryover
success from Ed Sheeran, Tones and I, Hamilton, Lizzo, Cardi B, and Young Thug.
Revenue from streaming services grew by $274 million or 13% to $2,403 million
for the fiscal year ended September 30, 2020 from $2,129 million for the fiscal
year ended September 30, 2019. Streaming revenue growth was partially offset by
a decline in download and other digital revenues of $49 million to $165 million
for the fiscal year ended September 30, 2020 from $214 million for the fiscal
year ended September 30, 2019 due to the continued shift to streaming services.
Music Publishing revenues increased by $14 million, or 2%, to $657 million for
the fiscal year ended September 30, 2020 from $643 million for the fiscal year
ended September 30, 2019. U.S. Music Publishing revenues were $325 million, or
49% of consolidated Music Publishing revenues for the fiscal year ended
September 30, 2020, and $300 million, or 47% of consolidated Music Publishing
revenues for the fiscal year ended September 30, 2019. International Music
Publishing revenues were $332 million, or 51% of consolidated Music Publishing
revenues for the fiscal year ended September 30, 2020, and $343 million, or 53%
of consolidated Music Publishing revenues for the fiscal year ended September
30, 2019.
The overall increase in Music Publishing revenue was mainly driven by an
increase in digital revenue of $66 million or 24%, partially offset by decreases
in performance revenue of $41 million or 22%, mechanical revenue of $7 million,
synchronization revenue of $1 million and other revenue of $3 million. The
increase in digital revenue mainly reflects the continued shift to streaming
services. The decreases in Music Publishing performance revenue and mechanical
revenue are primarily due to COVID-19 related business interruption and the
timing of distributions.
Revenue by Geographical Location
2021 vs. 2020
U.S. revenue increased by $429 million, or 22%, to $2,363 million for the fiscal
year ended September 30, 2021 from $1,934 million for the fiscal year ended
September 30, 2020. U.S. Recorded Music revenue increased by $376 million or
23%. The primary driver was the increase in U.S. Recorded Music digital revenue
of $239 million, or 18%, driven by the continued growth in streaming services.
Streaming revenue increased by $255 million, or 21%, partially offset by $16
million of digital download and other digital declines. Increases are also
attributable to the increase in U.S. Recorded Music physical revenue, which
increased by $77 million from higher sales due to an increased demand for vinyl
products and continued recovery from COVID disruption. U.S artist services and
expanded rights revenue increased by $59 million driven by higher advertising
and social platform revenues, as well as merchandising revenues and U.S
licensing revenue increased by $1 million primarily due to higher
synchronization revenue, partially offset by lower compilation revenue. U.S.
Music Publishing revenue increased by $53 million or 16%. This was primarily
driven by the increase in U.S. Music Publishing digital revenue of $51 million,
or 27%, 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. The increase in synchronization revenue
of $11 million is due to higher motion picture and commercial income and a
one-time licensing settlement. Increases are partially offset by the decrease in
performance revenue of $7 million due to the impact of COVID disruption and
mechanical revenue of $2 million from the continuing shift to streaming
services.
International revenue increased by $409 million, or 16%, to $2,942 million for
the fiscal year ended September 30, 2021 from $2,533 million for the fiscal year
ended September 30, 2020. Excluding the favorable impact of foreign currency
exchange rates, international revenue increased by $280 million or 11%.
International Recorded Music revenue increased $358 million primarily due to an
increase in digital revenue of $298 million, or 23%, physical revenue of $38
million, artist services and expanded-rights revenue of $15 million and
licensing revenue of $7 million. International Recorded Music digital revenue
increased due to a $314 million, or
                                       49
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26%, increase in streaming services revenue, partially offset by a $16 million
decline in download and other digital revenue. The increase in international
Recorded Music streaming revenue was due to the continued growth in streaming
services internationally. International Recorded Music physical revenue
increased from higher sales due to an increased demand for vinyl products,
continued recovery from COVID disruption, as well as the favorable impact of
foreign currency exchange rates. International Recorded Music artist services
and expanded-rights revenue increased primarily due to the growth in EMP
direct-to-consumer merchandise revenue and favorable impact of foreign currency
exchanges rates, partially offset by the decrease in touring activity resulting
from COVID disruption. International Recorded Music licensing revenue increased
due to higher synchronization revenue and favorable foreign currency exchange
rates, partially offset by lower compilation revenue and other COVID-impacted
licensing revenue. International Music Publishing revenue increased by $51
million or 15%. This was primarily driven by increases in International Music
Publishing digital revenue of $48 million, or 32%, synchronization revenue of
$14 million and mechanical revenue of $3 million, partially offset by decreases
in performance revenue of $13 million and other revenue of $1 million. The
increase in digital revenue is primarily due to the increases in streaming
revenue driven by the continued growth in streaming services, including emerging
streaming platforms, and timing of new digital deals. Digital revenue growth in
the year was impacted by a favorable one-time settlement in the prior year. The
increase in synchronization revenue is due to higher commercial income. The
increase in mechanical revenue is a result of favorable foreign currency
exchange rates. The decline in performance revenue is due to the impact of COVID
disruption.
2020 vs. 2019
U.S. revenue decreased by $22 million, or 1%, to $1,934 million for the fiscal
year ended September 30, 2020 from $1,956 million for the fiscal year ended
September 30, 2019. U.S. Recorded Music revenue decreased by $47 million or 3%.
The primary drivers were the decreases in U.S. Recorded Music physical revenue
and U.S artist services and expanded rights revenue. These decreases were
partially offset by increases in U.S digital revenue, which increased by $64
million due to the continued growth in streaming services, and U.S licensing
revenue, which increased by $10 million primarily due to licensing settlements
despite the impact of COVID-19 interruptions. U.S. streaming revenue increased
by $91 million, partially offset by a $27 million decline in download revenue.
U.S. artist services and expanded-rights revenue decreased by $63 million, or
36%, driven by the impact of COVID-19 business interruptions, which resulted in
tour postponements and cancellations and decreased physical retail and
tour-related merchandising revenues. U.S. physical revenue decreased by $58
million due to the shift from physical to digital formats, impact of COVID-19
and timing of releases. U.S. Music Publishing revenue increased by $25 million
or 8%. This was primarily driven by the increase in U.S. Music Publishing
digital revenue of $33 million due to the continued growth in streaming services
partially offset by a decrease in performance revenue of $6 million and
synchronization revenue of $2 million due to COVID-19.
International revenue increased by $6 million, or 0%, to $2,533 million for the
fiscal year ended September 30, 2020 from $2,527 million for the fiscal year
ended September 30, 2019. Excluding the unfavorable impact of foreign currency
exchange rates, International revenue increased by $35 million or 1%.
International Recorded Music revenue increased $17 million primarily due to an
increase in digital revenue of $161 million partially offset by decreases in
artist services and expanded-rights revenue of $41 million, physical revenue of
$67 million and licensing revenue of $36 million. International Recorded Music
digital revenue increased due to a $183 million increase in streaming services
revenue, partially offset by a $22 million decline in download and other digital
revenue. The increase in international Recorded Music streaming revenue was due
to the continued growth in streaming services internationally. International
Recorded Music artist services and expanded-rights revenue decreased primarily
due to the impact of COVID-19 business interruptions, which resulted in tour
postponements and cancellations, in contrast to strong touring in the prior
year. This was offset by an increase in merchandise revenue, which reflects a
decrease in physical retail and tour-related merchandising offset by growth in
EMP e-commerce merchandise revenue. International Recorded Music physical
revenue decreased due to the continued shift from physical revenue to digital
revenue, impact of COVID-19, timing of releases, and the prior-year physical
success of Johnny Hallyday. International Recorded Music licensing revenue
decreased due to the impact of COVID-19. International Music Publishing revenue
decreased $11 million or 3%. This was primarily driven by decreases in
international Music Publishing performance revenue of $35 million and mechanical
revenue of $7 million, both due to the impact of COVID-19 and timing of
distributions, other revenue of $3 million partially offset by increases in
digital revenue of $33 million, primarily due to growth in streaming, and
synchronization revenue of $1 million.
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Cost of revenues
Our cost of revenues was composed of the following amounts (in millions):
                                                        For the Fiscal Year Ended
                                                              September 30,                                     2021 vs. 2020                              2020 vs. 2019
                                                  2021                2020             2019             $ Change              % Change             $ Change              % Change
Artist and repertoire costs                 $    1,780             $ 1,560          $ 1,574          $        220                   14  %       $        (14)                  -1  %
Product costs                                      962                 773              827                   189                   24  %                (54)                  -7  %
Total cost of revenues                      $    2,742             $ 2,333          $ 2,401          $        409                   18  %       $        (68)                  -3  %


2021 vs. 2020
Our cost of revenues increased by $409 million, or 18%, to $2,742 million for
the fiscal year ended September 30, 2021 from $2,333 million for the fiscal year
ended September 30, 2020. Expressed as a percentage of revenues, cost of
revenues remained constant at 52% for each of the fiscal years ended
September 30, 2021 and September 30, 2020.
Artist and repertoire costs increased by $220 million, or 14%, to $1,780 million
for the fiscal year ended September 30, 2021 from $1,560 million for the fiscal
year ended September 30, 2020. Artist and repertoire costs as a percentage of
revenues decreased to 34% for the fiscal year ended September 30, 2021 from 35%
for the fiscal year ended September 30, 2020 due to revenue mix.
Product costs increased by $189 million, or 24%, to $962 million for the fiscal
year ended September 30, 2021 from $773 million for the fiscal year ended
September 30, 2020. Product costs as a percentage of revenues increased to 18%
for the fiscal year ended September 30, 2021 from 17% for the fiscal year ended
September 30, 2020. The overall increase as a percentage of revenues is due to
revenue mix, primarily increases in physical and third party distributed label
revenue.
2020 vs. 2019
Our cost of revenues decreased by $68 million, or 3%, to $2,333 million for the
fiscal year ended September 30, 2020 from $2,401 million for the fiscal year
ended September 30, 2019. Expressed as a percentage of revenues, cost of
revenues decreased to 52% for the fiscal year ended September 30, 2020 from 53%
for the fiscal year ended September 30, 2019.
Artist and repertoire costs decreased by $14 million, or 1%, to $1,560 million
for the fiscal year ended September 30, 2020 from $1,574 million for the fiscal
year ended September 30, 2019. Artist and repertoire costs as a percentage of
revenues remained constant at 35% for each of the fiscal years ended September
30, 2020 and September 30, 2019.
Product costs decreased by $54 million, or 7%, to $773 million for the fiscal
year ended September 30, 2020 from $827 million for the fiscal year ended
September 30, 2019. Product costs as a percentage of revenues decreased to 17%
for the fiscal year ended September 30, 2020 from 18% for the fiscal year ended
September 30, 2019. The overall decrease in product costs primarily relates to
revenue mix due to lower physical and artist-services and expanded rights
revenues, partially offset by increases in our third party distributed label
revenue.
Selling, general and administrative expenses
Our selling, general and administrative expenses are composed of the following
amounts (in millions):
                                                For the Fiscal Year Ended
                                                      September 30,                                     2021 vs. 2020                              2020 vs. 2019
                                          2021                2020             2019             $ Change              % Change             $ Change              % Change
General and administrative expense
(1)                                 $      870             $ 1,434          $   764          $       (564)                 -39  %       $        670                   88  %
Selling and marketing expense              738                 640              632                    98                   15  %                  8                    1  %
Distribution expense                       113                  95              114                    18                   19  %                (19)                 -17  %
Total selling, general and
administrative expense              $    1,721             $ 2,169          $ 1,510          $       (448)                 -21  %       $        659                   44  %

______________________________________

(1)Includes depreciation expense of $77 million, $71 million and $61 million for
the fiscal years ended September 30, 2021, September 30, 2020 and September 30,
2019, respectively.
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2021 vs. 2020
Total selling, general and administrative expense decreased by $448 million, or
21%, to $1,721 million for the fiscal year ended September 30, 2021 from $2,169
million for the fiscal year ended September 30, 2020. Expressed as a percentage
of revenues, selling, general and administrative expenses decreased to 32% for
the fiscal year ended September 30, 2021 from 49% for the fiscal year ended
September 30, 2020. This is primarily due to lower non-cash stock-based
compensation and other related expenses of $560 million, the prior-year
management agreement termination fee and IPO related expenses totaling $89
million. Excluding non-cash stock-based compensation and other related expenses,
the prior-year management agreement termination fee and IPO related expenses,
selling, general and administrative expense as a percentage of revenues
decreased to 32% for the fiscal year ended September 30, 2021 from 33% for the
fiscal year ended September 30, 2020.
General and administrative expenses decreased by $564 million, or 39%, to $870
million for the fiscal year ended September 30, 2021 from $1,434 million for the
fiscal year ended September 30, 2020. The decrease in general and administrative
expense was primarily due to lower expense associated with non-cash stock-based
compensation and other related expenses of $560 million, the prior-year
management agreement termination fee and IPO related expenses totaling $89
million and credit loss reserve reversal, partially offset by increased employee
related costs including restructuring. Expressed as a percentage of revenue,
general and administrative expense decreased to 16% for the fiscal year ended
September 30, 2021 from 32% for the fiscal year ended September 30, 2020.
Excluding non-cash stock-based compensation and other related expenses, the
prior-year management agreement termination fee and IPO related expenses,
general and administrative expense as a percentage of revenue decreased to 16%
for the fiscal year ended September 30, 2021 from 17% for the fiscal year ended
September 30, 2020.
Selling and marketing expense increased by $98 million, or 15%, to $738 million
for the fiscal year ended September 30, 2021 from $640 million for the fiscal
year ended September 30, 2020. Expressed as a percentage of revenues, selling
and marketing expense remained constant at 14% for each of the fiscal years
ended September 30, 2021 and September 30, 2020.
Distribution expense increased by $18 million, or 19%, to $113 million for the
fiscal year ended September 30, 2021 from $95 million for the fiscal year ended
September 30, 2020. Expressed as a percentage of revenues, distribution expense
remained constant at 2% for each of the fiscal years ended September 30, 2021
and September 30, 2020.
2020 vs. 2019
Total selling, general and administrative expense increased by $659 million, or
44%, to $2,169 million for the fiscal year ended September 30, 2020 from $1,510
million for the fiscal year ended September 30, 2019. Expressed as a percentage
of revenues, selling, general and administrative expenses increased to 49% for
the fiscal year ended September 30, 2020 from 34% for the fiscal year ended
September 30, 2019. This is primarily due to the $559 million of increased
expense associated with non-cash stock-based compensation, the one-time
management agreement termination fee and IPO related expenses totaling $89
million and a one-time charge within depreciation expense of $10 million related
to our Los Angeles, California headquarters relocation. Excluding non-cash
stock-based compensation expense, the one-time management agreement termination
fee and IPO related expenses, and one-time charge within depreciation expense,
selling, general and administrative expense as a percentage of revenue remained
constant at 33% for each of the fiscal years ended September 30, 2020 and
September 30, 2019.
General and administrative expenses increased by $670 million, or 88%, to $1,434
million for the fiscal year ended September 30, 2020 from $764 million for the
fiscal year ended September 30, 2019. The increase in general and administrative
expense was primarily due to higher expense associated with non-cash stock-based
compensation of $559 million, the one-time management agreement termination fee
and IPO related expenses totaling $89 million, a one-time charge within
depreciation expense of $10 million, costs associated with transformation
initiatives of $19 million and costs associated with COVID-19 business
interruption of $17 million, partially offset by lower overhead due to active
cost management efforts. Expressed as a percentage of revenue, general and
administrative expense increased to 32% for the fiscal year ended September 30,
2020 from 17% for the fiscal year ended September 30, 2019. Excluding non-cash
stock-based compensation expense, the one-time management agreement termination
fee and IPO related expenses, and the one-time charge within depreciation
expense, general and administrative expense as a percentage of revenue remained
constant at 16% for each of the fiscal years ended September 30, 2020 and
September 30, 2019.
Selling and marketing expense increased by $8 million, or 1%, to $640 million
for the fiscal year ended September 30, 2020 from $632 million for the fiscal
year ended September 30, 2019. Expressed as a percentage of revenues, selling
and marketing expense remained constant at 14% for each of the fiscal years
ended September 30, 2020 and September 30, 2019.
Distribution expense decreased by $19 million, or 17%, to $95 million for the
fiscal year ended September 30, 2020 from $114 million for the fiscal year ended
September 30, 2019. Expressed as a percentage of revenues, distribution expense
decreased to 2% for the fiscal year ended September 30, 2020 from 3% for the
fiscal year ended September 30, 2019 mainly due to revenue mix, specifically
declines in physical and artist services and expanded rights revenue.
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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 Fiscal Year Ended
                                                  September 30,                                 2021 vs. 2020                              2020 vs. 2019
                                       2021             2020            2019            $ Change              % Change             $ Change              % Change
Net income (loss) attributable to
Warner Music Group Corp.           $     304          $ (475)         $ 256          $        779                    -  %       $       (731)                   -  %
Income attributable to
noncontrolling interest                    3               5              2                    (2)                 -40  %                  3                    -  %
Net income (loss)                        307            (470)           258                   777                    -  %               (728)                   -  %
Income tax expense                       149              23              9                   126                    -  %                 14                    -  %
Income (loss) before income taxes        456            (447)           267                   903                    -  %               (714)                   -  %
Other expense (income)                     9              57            (60)                  (48)                 -84  %                117                    -  %
Interest expense, net                    122             127            142                    (5)                  -4  %                (15)                 -11  %
Loss on extinguishment of debt            22              34              7                   (12)                 -35  %                 27                    -  %
Operating income (loss)                  609            (229)           356                   838                    -  %               (585)                   -  %
Amortization expense                     229             190            208                    39                   21  %                (18)                  -9  %
Depreciation expense                      77              71             61                     6                    8  %                 10                   16  %
OIBDA                              $     915          $   32          $ 625          $        883                    -  %       $       (593)                 -95  %


OIBDA
2021 vs. 2020
Our OIBDA increased by $883 million to $915 million for the fiscal year ended
September 30, 2021 as compared to $32 million for the fiscal year ended
September 30, 2020 primarily as a result of higher revenues and lower expense
associated with non-cash stock-based compensation and other related expenses,
the prior-year management agreement termination fee and IPO related expenses,
partially offset by higher cost of revenues. Expressed as a percentage of total
revenue, OIBDA margin increased to 17% for the fiscal year ended September 30,
2021 from 1% for the fiscal year ended September 30, 2020. Excluding the expense
associated with non-cash stock-based compensation and other related expenses,
the prior-year management agreement termination fee and IPO related expenses,
OIBDA margin as a percentage of revenue increased to 18% for the fiscal year
ended September 30, 2021 from 16% for the fiscal year ended September 30, 2020
due to strong operating performance.
2020 vs. 2019
Our OIBDA decreased by $593 million, or 95%, to $32 million for the fiscal year
ended September 30, 2020 as compared to $625 million for the fiscal year ended
September 30, 2019 primarily as a result of higher selling, general and
administrative expenses. Expressed as a percentage of total revenue, OIBDA
margin decreased to 1% for the fiscal year ended September 30, 2020 from 14% for
the fiscal year ended September 30, 2019. Excluding non-cash stock-based
compensation expense, the one-time management agreement termination fee and IPO
related expenses, as a percentage of total revenue, OIBDA margin increased to
16% for the fiscal year ended September 30, 2020 from 15% for the fiscal year
ended September 30, 2019.
Depreciation expense
2021 vs. 2020
Our depreciation expense increased by $6 million, or 8%, to $77 million for the
fiscal year ended September 30, 2021 from $71 million for the fiscal year ended
September 30, 2020, primarily due to an increase in IT capital spend and assets
being placed into service, partially offset by a one-time charge of $10 million
related to the Los Angeles headquarters relocation in the prior year.
2020 vs. 2019
Our depreciation expense increased by $10 million, or 16%, to $71 million for
the fiscal year ended September 30, 2020 from $61 million for the fiscal year
ended September 30, 2019, primarily due to a one-time charge of $10 million
representing the difference between the net book value of a building and its
recoverable value. The building was exited as part of our Los Angeles,
California headquarters relocation.
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Amortization expense
2021 vs. 2020
Amortization expense increased by $39 million, or 21%, to $229 million for the
fiscal year ended September 30, 2021 from $190 million for the fiscal year ended
September 30, 2020, primarily due to an increase in amortizable intangible
assets primarily related to the acquisition of music-related assets.
2020 vs. 2019
Amortization expense decreased by $18 million, or 9%, to $190 million for the
fiscal year ended September 30, 2020 from $208 million for the fiscal year ended
September 30, 2019, primarily due to certain intangible assets becoming fully
amortized.
Operating income (loss)
2021 vs. 2020
Our operating income increased by $838 million to $609 million for the fiscal
year ended September 30, 2021 from operating loss of $229 million for the fiscal
year ended September 30, 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.
2020 vs. 2019
Our operating income decreased by $585 million to a loss of $229 million for the
fiscal year ended September 30, 2020 from income of $356 million for the fiscal
year ended September 30, 2019. The decrease in operating income was due to the
factors that led to the decrease in OIBDA.
Loss on extinguishment of debt
2021 vs. 2020
We recorded a loss on extinguishment of debt in the amount of $22 million for
the fiscal year ended September 30, 2021, which represents the premiums paid for
early redemption and unamortized deferred financing costs in connection with the
redemption of the 5.500% Senior Notes and the 3.625% Senior Secured Notes (as
defined later in this Annual Report). We recorded a loss on extinguishment of
debt in the amount of $34 million for the fiscal year ended September 30, 2020,
which represents the premiums paid for early redemption and unamortized deferred
financing costs in connection with the redemption of the 4.125% Senior Secured
Notes due 2024 (the "4.125% Senior Secured Notes"), the 4.875% Senior Secured
Notes due 2024 (the "4.875% Senior Secured Notes") and the 5.00% Senior Secured
Notes due 2023 (the "5.00% Senior Secured Notes") and the partial repayment of
the Senior Term Loan Facility (as defined later in this Annual Report). Please
refer to Note 9 of our consolidated financial statements for further discussion.
2020 vs. 2019
We recorded a loss on extinguishment of debt in the amount of $34 million for
the fiscal year ended September 30, 2020, which represents the premiums paid for
early redemption and unamortized deferred financing costs in connection with the
redemption of the 4.125% Senior Secured Notes, the 4.875% Senior Secured Notes
and the 5.00% Senior Secured Notes and the partial repayment of the Senior Term
Loan Facility. We recorded a loss on extinguishment of debt in the amount of $7
million for the fiscal year ended September 30, 2019, which represents the
unamortized deferred financing costs related to the redemption of a portion of
the 4.125% Senior Secured Notes and all of the 5.625% Senior Secured Notes due
2022 (the "5.625% Senior Secured Notes"), in addition to the open market
purchases of the 4.875% Senior Secured Notes. Please refer to Note 9 of our
consolidated financial statements for further discussion.
Interest expense, net
2021 vs. 2020
Our interest expense, net decreased by $5 million, or 4% to $122 million for the
fiscal year ended September 30, 2021 from $127 million for the fiscal year ended
September 30, 2020. This was primarily driven by lower interest rates resulting
from debt refinancing, partially offset by a higher principal balance due to the
issuance of senior secured notes.
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2020 vs. 2019
Our interest expense, net decreased by $15 million, or 11% to $127 million for
the fiscal year ended September 30, 2020 from $142 million for the fiscal year
ended September 30, 2019. This was primarily driven by a decline in LIBOR rates
as well as lower interest rates as a result of refinancing transactions and
redemption activity.
Other expense (income)
2021 vs. 2020
Other expense decreased by $48 million to $9 million for the fiscal year ended
September 30, 2021 from $57 million for the fiscal year ended September 30,
2020. Other expense for the fiscal year ended September 30, 2021 primarily
includes foreign currency losses on our Euro-denominated debt of $5 million and
unrealized loss of $4 million on the mark-to-market of equity investments.
Other expense for the fiscal year ended September 30, 2020 primarily includes
the non-cash unrealized loss on the remeasurement of our Euro-denominated debt
of $56 million, $4 million loss on hedging activity and losses on investments of
$7 million, partially offset by an unrealized gain of $9 million on the
mark-to-market of an equity method investment.
2020 vs. 2019
Other expense (income) decreased by $117 million to other expense of $57 million
for the fiscal year ended September 30, 2020 from other income of $60 million
for the fiscal year ended September 30, 2019. Other expense for the fiscal year
ended September 30, 2020 primarily includes the non-cash unrealized loss on the
remeasurement of our Euro-denominated debt of $56 million, $4 million loss on
hedging activity and losses on investments of $7 million, partially offset by an
unrealized gain of $9 million on the mark-to-market of an equity method
investment.
Other expense (income) for the fiscal year ended September 30, 2019 includes
non-cash unrealized foreign exchange currency gains on the remeasurement of our
Euro-denominated debt of $43 million, unrealized gain of $19 million on the
mark-to-market of an equity method investment, partially offset by the impact of
other movements in foreign exchange rates.
Income tax expense
2021 vs. 2020
Our income tax expense increased by $126 million to $149 million for the fiscal
year ended September 30, 2021 from $23 million for the fiscal year ended
September 30, 2020. The net increase of $126 million in income tax expense
primarily relates to the higher pre-tax income in the current fiscal year as
compared to pre-tax income before non-deductible executive compensation and
transaction costs and release of a valuation allowances of foreign tax credits
for the fiscal year ended September 30, 2020.
2020 vs. 2019
Our income tax expense increased by $14 million to $23 million for the fiscal
year ended September 30, 2020 from $9 million for the fiscal year ended
September 30, 2019. The net increase of $14 million in income tax expense
primarily relates to a greater release of a U.S. deferred tax valuation
allowance in the fiscal year ended September 30, 2019.
Net income (loss)
2021 vs. 2020
Our net income increased by $777 million to income of $307 million for the
fiscal year ended September 30, 2021 from a loss of $470 million for the fiscal
year ended September 30, 2020 as a result of the factors described above.
2020 vs. 2019
Our net income decreased by $728 million to a loss of $470 million for the
fiscal year ended September 30, 2020 from income of $258 million for the fiscal
year ended September 30, 2019 as a result of the factors described above.
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Noncontrolling interest
2021 vs. 2020
There was $3 million of income attributable to noncontrolling interests for the
fiscal year ended September 30, 2021. There was $5 million of income
attributable to noncontrolling interests for the fiscal year ended September 30,
2020.
2020 vs. 2019
There was $5 million of income attributable to noncontrolling interests for the
fiscal year ended September 30, 2020. There was $2 million of income
attributable to noncontrolling interests for the fiscal year ended September 30,
2019.
Business Segment Results
Revenues, operating income (loss) and OIBDA by business segment were as follows
(in millions):
                                              For the Fiscal Year Ended
                                                    September 30,                                     2021 vs. 2020                              2020 vs. 2019
                                        2021                2020             2019             $ Change              % Change             $ Change              % Change
Recorded Music
Revenues                          $    4,544             $ 3,810          $ 3,840          $        734                   19  %       $        (30)                  -1  %
Operating income                         733                 175              439                   558                    -  %               (264)                 -60  %
OIBDA                                    936                 349              623                   587                    -  %               (274)                 -44  %
Music Publishing
Revenues                                 761                 657              643                   104                   16  %                 14                    2  %
Operating income                          89                  81               92                     8                   10  %                (11)                 -12  %
OIBDA                                    174                 157              166                    17                   11  %                 (9)                  -5  %
Corporate expenses and
eliminations
Revenue eliminations                      (4)                 (4)              (8)                    -                    -  %                  4                  -50  %
Operating loss                          (213)               (485)            (175)                  272                  -56  %               (310)                   -  %
OIBDA                                   (195)               (474)            (164)                  279                  -59  %               (310)                   -  %
Total
Revenues                               5,301               4,463            4,475                   838                   19  %                (12)                   -  %
Operating income (loss)                  609                (229)             356                   838                    -  %               (585)                   -  %
OIBDA                                    915                  32              625                   883                    -  %               (593)                 -95  %


Recorded Music
Revenues
2021 vs. 2020
Recorded Music revenues increased by $734 million, or 19%, to $4,544 million for
the fiscal year ended September 30, 2021 from $3,810 million for the fiscal year
ended September 30, 2020. U.S. Recorded Music revenues were $1,985 million and
$1,609 million, or 44% and 42%, of consolidated Recorded Music revenues, for the
fiscal years ended September 30, 2021 and September 30, 2020, respectively.
International Recorded Music revenues were $2,559 million and $2,201 million, or
56% and 58% of consolidated Recorded Music revenues, for the fiscal years ended
September 30, 2021 and September 30, 2020, respectively.
The overall increase in Recorded Music revenue was driven by increases in
digital, physical, artist services and expanded-rights and licensing revenue as
described in the "Total Revenues" and "Revenue by Geographical Location"
sections above.
2020 vs. 2019
Recorded Music revenues decreased by $30 million, or 1%, to $3,810 million for
the fiscal year ended September 30, 2020 from $3,840 million for the fiscal year
ended September 30, 2019. U.S. Recorded Music revenues were $1,609 million and
$1,656 million, or 42% and 43% of consolidated Recorded Music revenues, for the
fiscal years ended September 30, 2020 and September 30, 2019, respectively.
International Recorded Music revenues were $2,201 million and $2,184 million, or
58% and 57% of consolidated Recorded Music revenues, for the fiscal years ended
September 30, 2020 and September 30, 2019, respectively.
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The overall decrease in Recorded Music revenue was driven by decreases in
physical, artist services and expanded-rights and licensing revenue, partially
offset by an increase in digital revenue 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 Fiscal Year Ended
                                                              September 30,                                     2021 vs. 2020                              2020 vs. 2019
                                                  2021                2020             2019             $ Change              % Change             $ Change              % Change
Artist and repertoire costs                 $    1,291             $ 1,148          $ 1,178          $        143                   12  %       $        (30)                  -3  %
Product costs                                      962                 771              827                   191                   25  %                (56)                  -7  %
Total cost of revenues                      $    2,253             $ 1,919          $ 2,005          $        334                   17  %       $        (86)                  -4  %


2021 vs. 2020
Recorded Music cost of revenues increased by $334 million, or 17%, to $2,253
million for the fiscal year ended September 30, 2021 from $1,919 million for the
fiscal year ended September 30, 2020. Expressed as a percentage of Recorded
Music revenue, cost of revenues remained constant at 50% for each of the fiscal
years ended September 30, 2021 and September 30, 2020.
Artist and repertoire costs as a percentage of revenue decreased to 28% for the
fiscal year ended September 30, 2021 from 30% for the fiscal year ended
September 30, 2020. The decrease is primarily attributable to revenue mix.
Product costs as a percentage of revenues increased to 21% for the fiscal year
ended September 30, 2021 from 20% for the fiscal year ended September 30, 2020.
The increase in product costs primarily relates to revenue mix due to higher
physical and third party distributed label revenue.
2020 vs. 2019
Recorded Music cost of revenues decreased by $86 million, or 4%, to $1,919
million for the fiscal year ended September 30, 2020 from $2,005 million for the
fiscal year ended September 30, 2019. Expressed as a percentage of Recorded
Music revenue, cost of revenues decreased from 50% for the fiscal year ended
September 30, 2020 from 52% for the fiscal year ended September 30, 2019.
Artist and repertoire costs as a percentage of revenue decreased to 30% for the
fiscal year ended September 30, 2020 from 31% for the fiscal year ended
September 30, 2019. The decrease is primarily attributable to revenue mix and
lower artist related costs, including a decrease in spending.
Product costs as a percentage of revenue decreased to 20% for the fiscal year
ended September 30, 2020 from 22% for the fiscal year ended September 30, 2019.
The decrease in product costs primarily relates to revenue mix due to lower
physical and artist-services and expanded rights revenues, partially offset by
increases in our third party distributed label revenue.
Selling, general and administrative expense
Recorded Music selling, general and administrative expenses were composed of the
following amounts (in millions):
                                                For the Fiscal Year Ended
                                                      September 30,                                     2021 vs. 2020                              2020 vs. 2019
                                          2021                2020             2019             $ Change              % Change             $ Change              % Change
General and administrative expense
(1)                                 $      569             $   875          $   522          $       (306)                 -35  %       $        353                   68  %
Selling and marketing expense              726                 627              621                    99                   16  %                  6                    1  %
Distribution expense                       113                  95              114                    18                   19  %                (19)                 -17  %
Total selling, general and
administrative expense              $    1,408             $ 1,597          $ 1,257          $       (189)                 -12  %       $        340                   27  %

______________________________________

(1)Includes depreciation expense of $53 million, $55 million, and $45 million for the fiscal years ended September 30, 2021, September 30, 2020 and September 30, 2019, respectively.

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2021 vs. 2020
Recorded Music selling, general and administrative expense decreased by $189
million, or 12%, to $1,408 million for the fiscal year ended September 30, 2021
from $1,597 million for the fiscal year ended September 30, 2020. The decrease
in general and administrative expense was primarily due to lower non-cash
stock-based compensation and other related expenses of $367 million and credit
loss reserve reversal, partially offset by increased employee related costs
including restructuring. The increase in selling and marketing expense was
primarily due to increased variable marketing spend on higher revenues and new
releases. 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 decreased to 31% for the fiscal year ended September 30, 2021 from 42%
for the fiscal year ended September 30, 2020 primarily due to lower non-cash
stock-based compensation and other related expenses of $367 million. Excluding
non-cash stock-based compensation and other related expenses, selling, general
and administrative expense as a percentage of Recorded Music revenue decreased
to 30% for the fiscal year ended September 30, 2021 from 32% for the fiscal year
ended September 30, 2020.
2020 vs. 2019
Recorded Music selling, general and administrative expense increased by $340
million, or 27%, to $1,597 million for the fiscal year ended September 30, 2020
from $1,257 million for the fiscal year ended September 30, 2019. The increase
in general and administrative expense was primarily due to higher non-cash
stock-based compensation expense of $359 million and a one-time charge within
depreciation expense of $10 million related to our Los Angeles, California
headquarters relocation, partially offset by lower overhead from active cost
management efforts. The decrease in distribution expense was primarily due to
lower physical and artist services and expanded rights revenues. Expressed as a
percentage of Recorded Music revenue, Recorded Music selling, general and
administrative expense increased to 42% for the fiscal year ended September 30,
2020 from 33% for the fiscal year ended September 30, 2019. Excluding non-cash
stock-based compensation expense and the one-time charge within depreciation
expense, selling, general and administrative expense as a percentage of Recorded
Music revenue decreased to 31% for the fiscal year ended September 30, 2020 from
32% for the fiscal year ended September 30, 2019.
Operating income and OIBDA
Recorded Music OIBDA included the following amounts (in millions):
                                          For the Fiscal Year Ended
                                                September 30,                                 2021 vs. 2020                              2020 vs. 2019
                                      2021             2020           2019            $ Change              % Change             $ Change              % Change
Operating income                  $     733          $ 175          $ 439          $        558                    -  %       $       (264)                 -60  %
Depreciation and amortization           203            174            184                    29                   17  %                (10)                  -5  %
OIBDA                             $     936          $ 349          $ 623          $        587                    -  %       $       (274)                 -44  %


2021 vs. 2020
Recorded Music OIBDA increased by $587 million to $936 million for the fiscal
year ended September 30, 2021 from $349 million for the fiscal year ended
September 30, 2020 primarily as a result of higher revenues and lower non-cash
stock-based compensation and other related expenses of $367 million, partially
offset by higher cost of revenues. Expressed as a percentage of Recorded Music
revenues, Recorded Music OIBDA margin increased to 21% for the fiscal year ended
September 30, 2021 from 9% for the fiscal year ended September 30, 2020.
Excluding non-cash stock-based compensation and other related expenses, OIBDA as
a percentage of Recorded Music revenue increased to 21% for the fiscal year
ended September 30, 2021 from 19% for the fiscal year ended September 30, 2020
due to strong operating performance.
Recorded Music operating income increased by $558 million to $733 million for
the fiscal year ended September 30, 2021 from $175 million for the fiscal year
ended September 30, 2020 due to the factors that led to the increase in Recorded
Music OIBDA noted above, partially offset by an increase in amortizable
intangible assets related to the acquisition of music-related assets.
2020 vs. 2019
Recorded Music OIBDA decreased by $274 million, or 44%, to $349 million for the
fiscal year ended September 30, 2020 from $623 million for the fiscal year ended
September 30, 2019 primarily as a result of higher general and administrative
expenses. Expressed as a percentage of Recorded Music revenues, Recorded Music
OIBDA margin decreased to 9% for the fiscal year ended September 30, 2020 from
16% for the fiscal year ended September 30, 2019. Excluding non-cash stock-based
compensation expense, OIBDA as a percentage of Recorded Music revenue increased
to 19% for the fiscal year ended September 30, 2020 from 17% for the fiscal year
ended September 30, 2019.
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Recorded Music operating income decreased by $264 million to $175 million for
the fiscal year ended September 30, 2020 from $439 million for the fiscal year
ended September 30, 2019 due to the factors that led to the decrease in Recorded
Music OIBDA noted above. Excluding non-cash stock-based compensation expense and
the one-time charge within depreciation expense, Recorded Music operating income
increased by $105 million due to lower total cost of revenues, amortization
expense, distribution expense, and general and administrative expense.
Music Publishing
Revenues
2021 vs. 2020
Music Publishing revenues increased by $104 million, or 16%, to $761 million for
the fiscal year ended September 30, 2021 from $657 million for the fiscal year
ended September 30, 2020. U.S. Music Publishing revenues were $378 million and
$325 million, or 50% and 49%, of Music Publishing revenues for the fiscal years
ended September 30, 2021 and September 30, 2020, respectively. International
Music Publishing revenues were $383 million and $332 million, or 50% and 51%, of
Music Publishing revenues for the fiscal years ended September 30, 2021 and
September 30, 2020, respectively.
The overall increase in Music Publishing revenue was mainly driven by digital,
synchronization and mechanical revenue growth, partially offset by lower
performance and other revenue, as described in the "Total Revenues" and "Revenue
by Geographical Location" sections above.
2020 vs. 2019
Music Publishing revenues increased by $14 million, or 2%, to $657 million for
the fiscal year ended September 30, 2020 from $643 million for the fiscal year
ended September 30, 2019. U.S. Music Publishing revenues were $325 million and
$300 million, or 49% and 47%, of Music Publishing revenues for the fiscal years
ended September 30, 2020 and September 30, 2019, respectively. International
Music Publishing revenues were $332 million and $343 million, or 51% and 53%, of
Music Publishing revenues for the fiscal years ended September 30, 2020 and
September 30, 2019, respectively.
The overall increase in Music Publishing revenue was mainly driven by digital
revenue growth, partially offset by lower performance revenue, mechanical
revenue, synchronization revenue and other revenue, as described in the "Total
Revenues" and "Revenue by Geographical Location" sections above.
Cost of revenues
Music Publishing cost of revenues was composed of the following amounts (in
millions):
                                                    For the Fiscal Year Ended
                                                          September 30,                                 2021 vs. 2020                             2020 vs. 2019
                                                2021             2020           2019            $ Change             % Change             $ Change             % Change
Artist and repertoire costs                 $     493          $ 418          $ 404          $        75                   18  %       $        14                    3  %
Total cost of revenues                      $     493          $ 418          $ 404          $        75                   18  %       $        14                    3  %


2021 vs. 2020
Music Publishing cost of revenues increased by $75 million, or 18%, to $493
million for the fiscal year ended September 30, 2021 from $418 million for the
fiscal year ended September 30, 2020. Expressed as a percentage of Music
Publishing revenue, Music Publishing cost of revenues increased to 65% for the
fiscal year ended September 30, 2021 from 64% for the fiscal year ended
September 30, 2020, primarily attributable to revenue mix, partially offset by
lower royalty expense due to a shift in the collection of writer's share of U.S.
digital performance income from certain digital service providers.
2020 vs. 2019
Music Publishing cost of revenues increased by $14 million, or 3%, to $418
million for the fiscal year ended September 30, 2020 from $404 million for the
fiscal year ended September 30, 2019. Expressed as a percentage of Music
Publishing revenue, Music Publishing cost of revenues increased to 64% for the
fiscal year ended September 30, 2020 from 63% for the fiscal year ended
September 30, 2019.
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Selling, general and administrative expense Music Publishing selling, general and administrative expenses comprised the following amounts (in millions):

                                             For the Fiscal Year Ended
                                                   September 30,                                 2021 vs. 2020                             2020 vs. 2019
                                        2021              2020           2019            $ Change             % Change             $ Change             % Change
General and administrative expense
(1)                                 $       99          $  85          $  76          $        14                   16  %       $         9                   12  %
Selling and marketing expense                1              2              2                   (1)                 -50  %                 -                    -  %
Total selling, general and
administrative expense              $      100          $  87          $  78          $        13                   15  %       $         9                   12  %

______________________________________

(1)Includes depreciation expense of $6 million, $5 million and $5 million for
the fiscal years ended September 30, 2021, September 30, 2020 and September 30,
2019, respectively.
2021 vs. 2020
Music Publishing selling, general and administrative expense increased by $13
million, or 15%, to $100 million for the fiscal year ended September 30, 2021 as
compared to $87 million for the fiscal year ended September 30, 2020. The
increase in general and administrative expense was primarily due to higher
employee-related costs. Expressed as a percentage of Music Publishing revenues,
Music Publishing selling, general and administrative expense remained constant
at 13% for each of the fiscal years ended September 30, 2021 and September 30,
2020.
2020 vs. 2019
Music Publishing selling, general and administrative expense increased by $9
million, or 12%, to $87 million for the fiscal year ended September 30, 2020 as
compared to $78 million for the fiscal year ended September 30, 2019. The
increase in general and administrative expense was primarily due to higher
employee-related costs and restructuring costs, partially offset by active cost
management efforts. Expressed as a percentage of Music Publishing revenues,
Music Publishing selling, general and administrative expense increased to 13%
for the fiscal year ended September 30, 2020 from 12% for the fiscal year ended
September 30, 2019.
Operating income and OIBDA
Music Publishing OIBDA includes the following amounts (in millions):
                                          For the Fiscal Year Ended
                                                September 30,                                 2021 vs. 2020                             2020 vs. 2019
                                      2021             2020           2019            $ Change             % Change             $ Change              % Change
Operating income                  $      89          $  81          $  92          $         8                   10  %       $        (11)                 -12  %
Depreciation and amortization            85             76             74                    9                   12  %                  2                    3  %
OIBDA                             $     174          $ 157          $ 166          $        17                   11  %       $         (9)                  -5  %


2021 vs. 2020
Music Publishing OIBDA increased by $17 million, or 11%, to $174 million for the
fiscal year ended September 30, 2021 from $157 million for the fiscal year ended
September 30, 2020. Expressed as a percentage of Music Publishing revenues,
Music Publishing OIBDA margin decreased to 23% for the fiscal year ended
September 30, 2021 from 24% for the fiscal year ended September 30, 2020. The
decrease was primarily due to higher artist and repertoire costs, partially
offset by lower royalty expense due to a shift in the collection of writer's
share of U.S. digital performance income from certain digital service providers.
Music Publishing operating income increased by $8 million to $89 million for the
fiscal year ended September 30, 2021 from $81 million for the fiscal year ended
September 30, 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.
2020 vs. 2019
Music Publishing OIBDA decreased by $9 million, or 5%, to $157 million for the
fiscal year ended September 30, 2020 from $166 million for the fiscal year ended
September 30, 2019. Expressed as a percentage of Music Publishing revenues,
Music Publishing OIBDA margin decreased to 24% for the fiscal year ended
September 30, 2020 from 26% for the fiscal year ended September 30, 2019. The
decrease was primarily due to higher artist and repertoire costs and general and
administrative expenses.
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Music Publishing operating income decreased by $11 million to $81 million for
the fiscal year ended September 30, 2020 from $92 million for the fiscal year
ended September 30, 2019 due to the factors that led to the decrease in Music
Publishing OIBDA noted above.
Corporate Expenses and Eliminations
2021 vs. 2020
Our operating loss from corporate expenses and eliminations decreased by $272
million to $213 million for the fiscal year ended September 30, 2021 from $485
million for the fiscal year ended September 30, 2020 which primarily includes
the decrease in non-cash stock-based compensation and other related expenses of
$195 million, the prior-year management agreement termination fee and IPO
related expenses totaling $89 million and decline in management fees of $7
million, partially offset by higher employee related costs, technology spend and
public company related expenses.
Our OIBDA loss from corporate expenses and eliminations decreased by $279
million to $195 million for the fiscal year ended September 30, 2021 from $474
million for the fiscal year ended September 30, 2020, due to the operating loss
factors noted above.
2020 vs. 2019
Our operating loss from corporate expenses and eliminations increased by $310
million to $485 million for the fiscal year ended September 30, 2020 from $175
million for the fiscal year ended September 30, 2019 which includes an increase
in non-cash stock-based compensation expense of $200 million, the one-time
management agreement termination fee and IPO related expenses totaling $89
million and higher costs related to transformation initiatives of $19 million.
Our OIBDA loss from corporate expenses and eliminations increased by $310
million to $474 million for the fiscal year ended September 30, 2020 from $164
million for the fiscal year ended September 30, 2019, due to the operating loss
factors noted above.
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FINANCIAL CONDITION AND LIQUIDITY
Financial Condition at September 30, 2021
At September 30, 2021, we had $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, defined as total debt, less
cash and equivalents and premiums, discounts and deferred financing costs) and
$31 million of Warner Music Group Corp. equity. This compares to $3.104 billion
of debt (which is net of $23 million of premiums, discounts and deferred
financing costs), $553 million of cash and equivalents (net debt of $2.551
billion) and $63 million of Warner Music Group Corp. deficit at September 30,
2020.
Cash Flows
The following table summarizes our historical cash flows (in millions). The
financial data for fiscal years ended September 30, 2021, September 30, 2020 and
September 30, 2019 have been derived from our consolidated financial statements
included elsewhere herein.
                                        Fiscal Year Ended September 30,
                                           2021                  2020       

2019

Cash provided by (used in):
Operating activities          $        638                      $ 463      $ 400
Investing activities                  (638)                      (219)      (376)
Financing activities                   (61)                      (316)        88


Operating Activities
Cash provided by operating activities was $638 million for the fiscal year ended
September 30, 2021 compared to $463 million for the fiscal year ended
September 30, 2020 and $400 million for the fiscal year ended September 30,
2019. The primary driver of the $175 million, or 38%, increase in cash provided
by operating activities during the current year was primarily due to an increase
in OIBDA offset by a decrease in non-cash equity compensation expense and
continued A&R investment driving a use of cash from working capital.
The increase in results from operating activities for the fiscal year ended
September 30, 2020 compared to the fiscal year ended September 30, 2019
reflected timing of working capital partially offset by higher taxes paid and
increased cash A&R investments.
Investing Activities
Cash used in investing activities was $638 million for the fiscal year ended
September 30, 2021 compared to $219 million for the fiscal year ended
September 30, 2020 and $376 million for the fiscal year ended September 30,
2019.
Cash used in investing activities of $638 million for the fiscal year ended
September 30, 2021 consisted of $64 million relating to investments and
acquisitions of businesses, $93 million relating to capital expenditures and
$481 million to acquire music-related assets, a portion of which was
debt-financed.
Cash used in investing activities of $219 million for the fiscal year ended
September 30, 2020 consisted of $81 million related to an acquisition, net of
cash and equivalents acquired, $13 million relating to other investments, $85
million relating to capital expenditures, including investment in transformation
initiatives, and $40 million to acquire music publishing rights and music
catalogs.
Cash used in investing activities of $376 million for the fiscal year ended
September 30, 2019 consisted of $183 million related to the acquisition of EMP,
net of cash and equivalents acquired, $48 million relating to other investments,
$104 million relating to capital expenditures, including investment in
transformation initiatives, and $41 million to acquire music publishing rights
and music catalogs.
Financing Activities
Cash used in financing activities was $61 million for the fiscal year ended
September 30, 2021 compared to cash used in financing activities of $316 million
for the fiscal year ended September 30, 2020 and cash provided by financing
activities of $88 million for the fiscal year ended September 30, 2019.
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The $61 million of cash used in financing activities for the fiscal year ended
September 30, 2021 consisted of the redemption of the outstanding aggregate
principal amount of $325 million of the 5.500% Senior Notes due 2026, the
redemption of the 3.625% Senior Secured Notes due 2026 of $524 million,
dividends paid of $265 million, call premiums paid on early redemption of debt
of $21 million, deferred financing costs of $12 million and distributions to
noncontrolling interest holders of $7 million, partially offset by the proceeds
from the issuance of the 3.000% Senior Secured Notes due 2031 of $244 million
which was used to fund the acquisition of music-related assets, proceeds from
the issuance of the 2.250% Senior Secured Notes due 2031 of $524 million, and
proceeds from the increase supplement to the Senior Term Loan Facility of $325
million.
The $316 million of cash used in financing activities for the fiscal year ended
September 30, 2020 consisted of the tender for and repayment of Acquisition
Corp.'s 5.000% Senior Secured Notes due 2023 of $300 million, repayment of
Acquisition Corp.'s 4.875% Senior Secured Notes due 2024 of $220 million,
repayment of Acquisition Corp.'s 4.125% Senior Secured Notes due 2024 of $349
million, partial repayment of Acquisition Corp.'s Senior Term Loan Facility due
2023 of $506 million, call premiums paid on and redemption deposits for early
redemption of the aforementioned Senior Secured Notes of $23 million, dividends
paid of $344 million and distributions to noncontrolling interest holders of $7
million, partially offset by the proceeds from the issuance of Acquisition
Corp.'s 3.875% Senior Secured Notes due 2030 of $535 million, proceeds from the
issuance of Acquisition Corp.'s 2.750% Senior Secured Notes due 2028 of $365
million, and proceeds from the issuance of Acquisition Corp.'s 3.000% Senior
Secured Notes due 2031 of $550 million. Proceeds from issuance of Senior Secured
Notes were offset by deferred financing costs paid of $17 million.
The $88 million of cash provided by financing activities for the fiscal year
ended September 30, 2019 consisted of proceeds of $514 million from the issuance
of Acquisition Corp.'s 3.625% Secured Notes due 2026, partially offset by
deferred financing costs paid of $7 million, the repayment of Acquisition
Corp.'s 5.625% Secured Notes due 2022 of $247 million including call premiums
paid of $5 million, partial repayment of Acquisition Corp.'s 4.125% Secured
Notes due 2024 of $40 million and 4.875% Secured Notes due 2024 of $30 million,
for an aggregate $185 million, dividends paid of $94 million and distributions
to noncontrolling interest holders of $3 million.
There were no drawdowns on the Revolving Credit Facility during the fiscal years
ended September 30, 2021, September 30, 2020 and September 30, 2019.
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 $150 million, which includes capital expenditures of
approximately $55 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 in 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 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 September 30, 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.
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2.250% Senior Secured Notes Offering and Redemption of 3.625% Senior Secured
Notes
On August 16, 2021, Acquisition Corp. issued and sold €445 million in aggregate
principal amount of its 2.250% Senior Secured Notes due 2031. Net proceeds of
the offering, together with available cash, were used to redeem in full all of
the outstanding 3.625% Senior Secured Notes due 2026.
3.750% Senior Secured Notes Offering
On November 17, 2021, Acquisition Corp. priced $540 million in aggregate
principal amount of its 3.750% Senior Secured Notes due 2029 (the "3.750% Senior
Secured Notes"). We expect the issuance to close on November 24, 2021. Net
proceeds of the offering are expected to be used to fund a portion of the
aggregate cash consideration for potential acquisitions of certain music and
music-related assets, or if any of such potential acquisitions are not
completed, for general corporate purposes. We may also use the net proceeds of
the offering to redeem all or a portion of the 3.750% Senior Secured Notes (so
long as, in the case of a partial redemption, at least $250 million of the
3.750% Senior Secured Notes remain outstanding following such redemption) at any
time on one or more occasions on or prior to the fifth business day following
December 20, 2021 by giving notice at least five business days prior to such
time at the special optional redemption price equal to the issue price of the
3.750% Senior Secured Notes plus 1% of the principal amount thereof together
with accrued and unpaid interest on such 3.750% Senior Secured Notes from the
date of issuance to but excluding the redemption date.
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. For a more detailed description of the
changes effected by the Second Amendment, see Note 9 to our consolidated
financial statements included elsewhere herein.
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
2.84x at September 30, 2021, the applicable margin for Eurodollar loans would be
1.375% instead of 1.875% and the applicable margin for ABR loans would be 0.375%
instead of 0.875% in the case of 2020 Revolving Loans (as defined in the
Revolving Credit Agreement).
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Prepayments

If, at any time, the aggregate amount of outstanding loans (including letters of
credit outstanding thereunder) exceeds the commitments under the Revolving
Credit Facility, prepayments of the loans (and after giving effect to such
prepayment the cash collateralization of letters of credit) will be required in
an amount equal to such excess. The application of proceeds from mandatory
prepayments shall not reduce the aggregate amount of then effective commitments
under the Revolving Credit Facility and amounts prepaid may be reborrowed,
subject to then effective commitments under the Revolving Credit Facility.
Voluntary reductions of the unutilized portion of the Commitments under the
Revolving Credit Facility are permitted at any time in certain minimum principal
amounts, without premium or penalty. Voluntary prepayments of borrowings under
the Revolving Credit Facility are permitted at any time in certain minimum
principal amounts, subject to reimbursement of the lenders' redeployment costs
actually incurred in the case of a prepayment of LIBOR-based borrowings other
than on the last day of the relevant interest period.
Senior Term Loan Facility
Acquisition Corp. is party to a $1,145 million senior secured term loan credit
facility, pursuant to a credit agreement dated November 1, 2012, as amended or
supplemented (the "Senior Term Loan Credit Agreement") with Credit Suisse AG, as
administrative agent and collateral agent, and the other financial institutions
and lenders from time to time party thereto (as described below, the "Senior
Term Loan Facility" and, together with the Revolving Credit Facility, the
"Senior Credit Facilities").
On January 20, 2021, Acquisition Corp. entered into an amendment (the "Senior
Term Loan Credit Agreement Amendment") to the Senior Term Loan Credit Agreement.
The Senior Term Loan Credit Agreement Amendment (among other changes) (i)
extends the maturity date of its outstanding term loans from November 1, 2023 to
January 20, 2028 and (ii) removes a number of negative covenants limiting the
ability of Acquisition Corp. to take various actions. The remaining negative
covenants are limited to restrictions on liens, restrictions on fundamental
changes and change of control, and are in a form substantially similar to the
negative covenants in the 2.750% Senior Secured Notes due 2028, 3.875% Senior
Secured Notes due 2030, 3.000% Senior Secured Notes due 2031 and 2.250% Senior
Secured Notes due 2031.
On April 14, 2021, Acquisition Corp. borrowed additional term loans in an amount
of $325 million under the Increase Supplement as described further in Note 9 to
our consolidated financial statements included elsewhere herein. The Increase
Supplement was entered into to provide for the redemption of Acquisition Corp.'s
5.500% Senior Notes due 2026. Following such borrowing, there was an aggregate
principal amount outstanding under the Senior Term Loan Credit Agreement of
$1,145 million.
General
Acquisition Corp. is the borrower under the Senior Term Loan Facility (the "Term
Loan Borrower"). The loans outstanding under the Senior Term Loan Facility
mature on January 20, 2028.
In addition, the Senior Term Loan Credit Agreement provides the right for
individual lenders to extend the maturity date of their loans upon the request
of the Term Loan Borrower and without the consent of any other lender.
Subject to certain conditions, without the consent of the then existing lenders
(but subject to the receipt of commitments), the Senior Term Loan Facility may
be expanded (or a new term loan facility entered into) by up to the greater of
(i) $300 million and (ii) such additional amount as would not cause the net
senior secured leverage ratio, after giving effect to the incurrence of such
additional amount and any use of proceeds thereof, to exceed 4.50:1.00.
Interest Rates and Fees
Term loan borrowings under the Senior Term Loan Credit Agreement bear interest
at a floating rate measured by reference to, at Acquisition Corp.'s option,
either (i) an adjusted London inter-bank offered rate, LIBOR, not less than
0.00% per annum plus a borrowing margin of 2.125% per annum or (ii) an
alternative base rate plus a borrowing margin of 1.125% per annum.
Prepayments
The Senior Term Loan Facility is subject to mandatory prepayment and reduction
in an amount equal to (a) 50% of excess cash flow (as defined in the Senior Term
Loan Credit Agreement), with reductions to 25% and zero based upon achievement
of a net senior secured leverage ratio of less than or equal to 4.50:1.00 or
4.00:1.00, respectively, (b) 100% of the net cash proceeds received from the
incurrence of indebtedness by the Term Loan Borrower or any of its restricted
subsidiaries (other than indebtedness permitted under the Senior Term Loan
Facility) and (c) 100% of the net cash proceeds of all non-ordinary course asset
sales or other dispositions
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of property by the Term Loan Borrower and its restricted subsidiaries (including
certain insurance and condemnation proceeds) in excess of $75 million and
subject to the right of the Term Loan Borrower and its restricted subsidiaries
to reinvest such proceeds within a specified period of time, and other
exceptions. Voluntary prepayments of borrowings under the Senior Term Loan
Facility are permitted at any time, in minimum principal amounts of $1 million
or a whole multiple of $500,000 in excess thereof, subject to reimbursement of
the lenders' redeployment costs actually incurred in the case of a prepayment of
adjusted LIBOR borrowings other than on the last day of the relevant interest
period.
Secured Notes
3.875% Senior Secured Notes
On June 29, 2020, Acquisition Corp. issued $535 million in aggregate principal
amount of its 3.875% Senior Secured Notes under the Indenture, dated June 29,
2020 (the "Senior Secured Base Indenture"), among Acquisition Corp., the
guarantors party thereto, Credit Suisse AG, as Notes Authorized Representative
and Collateral Agent and Wells Fargo Bank, National Association, as Trustee, as
supplemented by the First Supplemental Indenture (the "3.875% Supplemental
Indenture").
At any time prior to July 15, 2025, the 3.875% Senior Secured Notes may be
redeemed at a redemption price equal to 100% of the principal amount of the
3.875% Senior Secured Notes redeemed plus the applicable make-whole premium (the
"Make-Whole Redemption") set forth in the Secured Notes Indenture, plus accrued
and unpaid interest thereon, if any, to the applicable redemption date in
accordance with the 3.875% Supplemental Indenture. Additionally, at any time
prior to July 15, 2025, on one or more occasions, up to 40% of the 3.875% Senior
Secured Notes may be redeemed with proceeds that Acquisition Corp. or its direct
or indirect parent raises in one or more equity offerings (the "Equity
Redemption") at a redemption price equal to 103.875% of the principal amount of
the 3.875% Senior Secured Notes redeemed, plus accrued and unpaid interest
thereon, if any, to the date of redemption. On or after July 15, 2025,
Acquisition Corp. may redeem all or a portion of the 3.875% Senior Secured
Notes, at its option, at the redemption prices starting at 101.938% (expressed
as percentages of principal amount) plus accrued and unpaid interest thereon, if
any, on the 3.875% Senior Secured Notes to be redeemed to the applicable
redemption date, if redeemed during the twelve-month period beginning on July
15, 2025. Additionally, during any twelve month period prior to July 15, 2025,
the 3.875% Senior Secured Notes may be redeemed at a redemption price equal to
103.000% of the aggregate principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the redemption date (the "Secured Notes
Redemption").
2.750% Senior Secured Notes
Also on June 29, 2020, Acquisition Corp. issued €325 million in aggregate
principal amount of its 2.750% Senior Secured Notes under the Senior Secured
Base Indenture, as supplemented by the Second Supplemental Indenture, dated as
of June 29, 2020, among Acquisition Corp., the guarantors party thereto and the
Trustee (the "2.750% Supplemental Indenture").
At any time prior to July 15, 2023, the 2.750% Senior Secured Notes may be
redeemed pursuant to a Make-Whole Redemption in accordance with the 2.750%
Supplemental Indenture. Additionally, at any time prior to July 15, 2023, the
2.750% Senior Secured Notes may be redeemed pursuant to an Equity Redemption at
a redemption price equal to 102.750% of the principal amount of the 2.750%
Senior Secured Notes redeemed, plus accrued and unpaid interest, subject to the
same provisos as the 3.875% Senior Secured Notes Equity Redemption. On or after
July 15, 2023, Acquisition Corp. may redeem all or a portion of the 2.750%
Senior Secured Notes, at its option, at the redemption prices starting at
101.375% (expressed as percentages of principal amount) plus accrued and unpaid
interest thereon, if any, on the 2.750% Senior Secured Notes to be redeemed to
the applicable redemption date, if redeemed during the twelve-month period
beginning on July 15, 2023. Additionally, during any twelve month period prior
to July 15, 2023, the 2.750% Senior Secured Notes may be redeemed pursuant to a
Secured Notes Redemption.
3.000% Senior Secured Notes
On August 12, 2020, Acquisition Corp. issued $550 million in aggregate principal
amount of its 3.000% Senior Secured Notes under the Senior Secured Base
Indenture, as supplemented by the Third Supplemental Indenture, dated as of
August 12, 2020, among Acquisition Corp., the guarantors party thereto and the
Trustee (the "3.000% Supplemental Indenture").
At any time prior to February 15, 2026, the 3.000% Senior Secured Notes may be
redeemed pursuant to a Make-Whole Redemption in accordance with the 3.000%
Supplemental Indenture. Additionally, at any time prior to August 15, 2023, the
3.000% Senior Secured Notes may be redeemed pursuant to an Equity Redemption at
a redemption price equal to 103.000% of the principal amount of the 3.000%
Senior Secured Notes redeemed, plus accrued and unpaid interest, subject to the
same provisos as the 3.875% Senior Secured Notes Equity Redemption. On or after
February 15, 2026, Acquisition Corp. may redeem all or a portion of the 3.000%
Senior Secured Notes, at its option, at the redemption prices starting at
101.500% (expressed as percentages of principal amount) plus accrued and unpaid
interest thereon, if any, on the 3.000% Senior Secured Notes to be redeemed to
the applicable
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redemption date, if redeemed during the twelve-month period beginning on
February 15, 2026. Additionally, during any twelve month period prior to
February 15, 2026, the 3.000% Senior Secured Notes may be redeemed pursuant to a
Secured Notes Redemption.
On November 2, 2020, Acquisition Corp. issued and sold $250 million of
additional 3.000% Senior Secured Notes (the "Additional Notes"). Interest on the
Additional Notes will accrue at the rate of 3.000% per annum and will be payable
semi-annually in arrears on February 15 and August 15, commencing on February
15, 2021. The Additional Notes have identical terms as (other than the issue
date and the issue price) and are fungible with, and treated as a single series
of senior secured debt securities with, the 3.000% Senior Secured Notes issued
on August 12, 2020 (the "Original Notes").
2.250% Senior Secured Notes
On August 16, 2021, Acquisition Corp. issued and sold €445 million in aggregate
principal amount of its 2.250% Senior Secured Notes due 2031 (the "2.250% Senior
Secured Notes") under the Senior Secured Base Indenture, as supplemented by the
Fifth Supplemental Indenture, dated as of August 16, 2021, among Acquisition
Corp., the guarantors party thereto and the Trustee (the "2.250% Supplemental
Indenture").
At any time prior to August 15, 2026, the 2.250% Senior Secured Notes may be
redeemed pursuant to a Make-Whole Redemption in accordance with the 2.250%
Supplemental Indenture. Additionally, at any time prior to August 15, 2026, the
2.250% Senior Secured Notes may be redeemed pursuant to an Equity Redemption at
a redemption price equal to 102.250% of the principal amount of the 2.250%
Senior Secured Notes redeemed, plus accrued and unpaid interest, subject to the
same provisos as the 3.875% Senior Secured Notes Equity Redemption. On or after
August 15, 2026, Acquisition Corp. may redeem all or a portion of the 2.250%
Senior Secured Notes, at its option, at the redemption prices starting at
101.125% (expressed as percentages of principal amount) plus accrued and unpaid
interest thereon, if any, on the 2.250% Senior Secured Notes to be redeemed to
the applicable redemption date, if redeemed during the twelve-month period
beginning on August 15, 2026. Additionally, during any twelve month period prior
to August 15, 2026, the 2.250% Senior Secured Notes may be redeemed pursuant to
a Secured Notes Redemption at 101.125%.
3.750% Senior Secured Notes
On November 17, 2021, Acquisition Corp. priced $540 million in aggregate
principal amount of its 3.750% Senior Secured Notes due 2029 (the "3.750% Senior
Secured Notes," together with the 3.875% Senior Secured Notes, the 2.750% Senior
Secured Notes, the 3.000% Senior Secured Notes and the 2.250% Senior Secured
Notes, the "Secured Notes"). We expect to issue the 3.750% Senior Secured Notes
on November 24, 2021 under the Senior Secured Base Indenture, as supplemented by
the Sixth Supplemental Indenture, dated as of November 24, 2021, among
Acquisition Corp., the guarantors party thereto and the Trustee (the "3.750%
Supplemental Indenture," together with the Senior Secured Base Indenture, the
3.875% Supplemental Indenture, the 2.750% Supplemental Indenture, the 3.000%
Supplemental Indenture and the 2.250% Supplemental Indenture, the "Secured Notes
Indenture").
At any time on one or more occasions on or prior to the fifth business day
following December 20, 2021 by giving notice at least five business days prior
to such time, Acquisition Corp. may elect to redeem all or a portion of the
3.750% Senior Secured Notes at a special optional redemption price equal to the
issue price of the 3.750% Senior Secured Notes plus 1% of the principal amount
thereof, plus accrued and unpaid interest thereon to, but excluding, the
redemption date, provided, that Acquisition Corp. may only elect to redeem fewer
than all of the 3.750% Senior Secured Notes, if, after giving effect to any such
redemption, at least $250 million aggregate principal amount of the 3.750%
Senior Secured Notes remains outstanding following such special optional
redemption.
At any time prior to December 1, 2024, the 3.750% Senior Secured Notes may be
redeemed pursuant to a Make-Whole Redemption in accordance with the 3.750%
Supplemental Indenture. Additionally, at any time prior to December 1, 2024, the
3.750% Senior Secured Notes may be redeemed pursuant to an Equity Redemption at
a redemption price equal to 103.750% of the principal amount of the 3.750%
Senior Secured Notes redeemed, plus accrued and unpaid interest, subject to the
same provisos as the 3.875% Senior Secured Notes Equity Redemption. On or after
December 1, 2024, Acquisition Corp. may redeem all or a portion of the 3.750%
Senior Secured Notes, at its option, at the redemption prices starting at
101.875% (expressed as a percentage of principal amount) plus accrued and unpaid
interest thereon, if any, on the 3.750% Senior Secured Notes to be redeemed to
the applicable redemption date, if redeemed during the twelve-month period
beginning on December 1, 2024. Additionally, during any twelve month period
prior to December 1, 2024, the 3.750% Senior Secured Notes may be redeemed
pursuant to a Secured Notes Redemption.
General Terms of Our Indebtedness
Certain terms of the Senior Credit Facilities and certain terms of each series
of notes under our Secured Notes Indenture are described below.
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Ranking

The indebtedness incurred pursuant to the Revolving Credit Facility and the
Senior Term Loan Facility and the Secured Notes are Acquisition Corp.'s senior
secured obligations and are secured on an equal and ratable basis with all
existing and future indebtedness secured with the same security arrangements.
The Secured Notes rank senior in right of payment to Acquisition Corp.'s
existing and future subordinated indebtedness; rank equally in right of payment
with all of Acquisition Corp.'s existing and future senior indebtedness and any
future senior secured credit facility; are effectively senior to Acquisition
Corp.'s unsecured senior indebtedness to the extent of the value of the
collateral securing the senior secured obligations; and are structurally
subordinated in right of payment to all existing and future indebtedness and
other liabilities of any of Acquisition Corp.'s non-guarantor subsidiaries
(other than indebtedness and liabilities owed to Acquisition Corp. or one of its
subsidiary guarantors (as such term is defined below)).

Guarantees and Security
The obligations under each of the Revolving Credit Facility, the Senior Term
Loan Facility and the Secured Notes Indenture are guaranteed by each direct and
indirect U.S. restricted subsidiary of Acquisition Corp., other than certain
excluded subsidiaries. All obligations of Acquisition Corp. and each guarantor
under the Revolving Credit Facility, the Senior Term Loan Facility and the
Secured Notes Indenture are secured by substantially all the assets of
Acquisition Corp and each subsidiary guarantor.
Covenants, Representations and Warranties
The Revolving Credit Facility, the Senior Term Loan Facility and the Secured
Notes contain customary representations and warranties and certain affirmative
and negative covenants. The negative covenants applicable to securities issued
pursuant to the Secured Notes Indenture, Senior Term Loan Facility and the
Revolving Credit Facility limit the ability of Acquisition Corp. and its
restricted subsidiaries to, among other things, create liens and consolidate,
merge, sell or otherwise dispose of all or substantially all of its assets. In
addition, our Revolving Credit Facility includes additional covenants, which are
incurrence-based high yield covenants and limit the ability of Acquisition Corp.
and its restricted subsidiaries to, among other things, incur additional
indebtedness or issue certain preferred shares; pay dividends, redeem stock or
make other distributions; repurchase, prepay or redeem subordinated
indebtedness; make investments; create restrictions on the ability of its
restricted subsidiaries to pay dividends to it or make other intercompany
transfers; transfer or sell assets; enter into certain transactions with its
affiliates; and designate subsidiaries as unrestricted subsidiaries. These
additional covenants are currently suspended. These covenants 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 negative covenants are subject to customary exceptions. There are no
financial covenants included in the Revolving Credit Agreement, other than a
springing leverage ratio of 5.00:1.00 (with no step-down), which is not tested,
unless at the end of a fiscal quarter the outstanding amount of loans and
drawings under letters of credit which have not been reimbursed exceeds $105
million. There are no financial covenants included in the Senior Term Loan
Credit Agreement or the Secured Notes Indenture.
Events of Default
Events of default under the Revolving Credit Facility, the New Senior Term Loan
Facility and the Secured Notes Indenture include, as applicable, nonpayment of
principal when due, nonpayment of interest or other amounts, inaccuracy of
representations or warranties in any material respect, violation of covenants,
cross default and cross acceleration to other material debt, certain bankruptcy
or insolvency events, certain ERISA events, certain material judgments, actual
or asserted invalidity of security interests in excess of $50 million, or $75
million in the case of the Secured Notes Indenture, in each case subject to
customary thresholds, notice and grace period provisions.
Change of Control
Upon the occurrence of a change of control triggering event, which is defined in
the Secured Notes Indenture, each holder of the Secured Notes has the right to
require Acquisition Corp. to repurchase some or all of such holder's Secured
Notes at a purchase price in cash equal to 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the repurchase date.
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Existing Debt as of September 30, 2021
As of September 30, 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)                   

381

3.875% Senior Secured Notes due 2030                                        

535

2.250% Senior Secured Notes due 2031 (€445 face amount)                   

522

3.000% Senior Secured Notes due 2031                                        

800

Total long-term debt, including the current portion                         

$ 3,383 Issuance premium less unamortized discount and unamortized deferred financing costs

$      (37)
Total long-term debt, including the current portion, net                    

$ 3,346

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(a)Reflects $300 million of commitments under the Revolving Credit Facility,
less letters of credit outstanding of approximately $7 million at September 30,
2021. There were no loans outstanding under the Revolving Credit Facility at
September 30, 2021.
Dividends
The Company's ability to pay dividends may be restricted by covenants in the
credit agreement for the Revolving Credit Facility which are currently suspended
but which will be reinstated if Acquisition Corp.'s Total Indebtedness to EBITDA
Ratio increases above 3.50:1.00 and the term loans do not achieve an investment
grade rating.
The Company intends to pay quarterly cash dividends to holders of its Class A
Common Stock and Class B Common Stock. The declaration of each dividend will
continue to be at the discretion of the Company's board of directors and will
depend on the Company's financial condition, earnings, liquidity and capital
requirements, level of indebtedness, contractual restrictions with respect to
payment of dividends, restrictions imposed by Delaware law, general business
conditions and any other factors that the Company's board of directors deems
relevant in making such a determination. Therefore, there can be no assurance
that the Company will pay any dividends to holders of the Company's common
stock, or as to the amount of any such dividends.
On August 13, 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 on September 1, 2021.
The Company paid cash dividends to stockholders and participating security
holders of $265 million, $344 million and $94 million for the fiscal years ended
September 30, 2021, 2020 and 2019, respectively.
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,
payable on December 1, 2021 to stockholders of record as of the close of
business on November 23, 2021.
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
September 30, 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
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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.
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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 September 30,
2021, for the twelve months ended September 30, 2020 and for the three months
ended September 30, 2021 and September 30, 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 September 30, 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                      Three Months Ended
                                                             September 30,                           September 30,
                                                         2021                  2020              2021               2020
Net Income (Loss)                                 $       307               $  (470)         $       30          $     1
Income tax expense (benefit)                              149                    23                  22              (21)
Interest expense, net                                     122                   127                  29               29
Depreciation and amortization                             306                   261                  79               67
Loss on extinguishment of debt (a)                         22                    34                  10               34
Net gain on divestitures and sale of securities
(b)                                                        (3)                   (1)                  -                -
Restructuring costs (c)                                    29                    22                  18                9
Net hedging and foreign exchange losses (gains)
(d)                                                        11                    61                 (20)              51
Management fees (e)                                         -                    20                   -               (3)
Transaction costs (f)                                      10                    76                   5               (1)
Business optimization expenses (g)                         42                    39                  12                6
Non-cash stock-based compensation expense (h)              45                   608                  12                8
Other non-cash charges (i)                                  5                    10                  30               (6)
Pro forma impact of cost savings initiatives and
specified transactions (j)                                 45                    27                  10                3
Adjusted EBITDA                                   $     1,090               $   837          $      237          $   177
Senior Secured Indebtedness (k)                   $     3,096
Leverage Ratio (l)                                              2.84x

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(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 (gains) losses from hedging activities and unrealized (gains) losses
due to foreign exchange on our Euro-denominated debt 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 integration, transaction and qualifying IPO costs.
(g)Reflects costs associated with our transformation initiatives and IT system
updates, which includes costs of $10 million and $33 million related to our
finance transformation for the three and twelve months ended September 30, 2021,
respectively, as well as $5 million and $30 million for the three and twelve
months ended September 30, 2020, respectively.
(h)Reflects non-cash stock-based compensation expense related to the Second
Amended and Restated Warner Music Group Corp. Senior Management Free Cash Flow
Plan and the Omnibus Incentive Plan.
(i)Reflects non-cash activity, including the unrealized losses (gains) on the
mark-to-market of an equity method investment, investment losses (gains) and
other non-cash impairments.
(j)Reflects expected savings resulting from transformation initiatives and the
pro forma impact of specified transactions for the three and twelve months ended
September 30, 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 $6 million increase in the twelve
months ended September 30, 2021 Adjusted EBITDA.
(k)Reflects the balance of senior secured debt at Acquisition Corp. of
approximately $3.346 billion 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 September 30, 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
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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.
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Contractual and Other Obligations
Firm Commitments
The following table summarizes the Company's aggregate contractual obligations
at September 30, 2021, and the estimated timing and effect that such obligations
are expected to have on the Company's liquidity and cash flow in future periods.
                                                         Less than           1-3            3-5           After 5
Firm Commitments and Outstanding Debt                     1 year            years          years           years            Total
                                                                                       (in millions)
Senior Secured Notes (1)                               $        -         

$ - $ - $ 2,238 $ 2,238 Interest on Senior Secured Notes (1)

                           67            134            134              271              606
Senior Term Loan Facility (1)                                   -              -              -            1,145            1,145
Interest on Senior Term Loan Facility (1)                      44             74             86               63              267
Operating leases (2)                                           57            108             94              136              395
Artist, songwriter and co-publisher commitments
(3)                                                           537                 *              *                *           537
Minimum funding commitments to investees and
other obligations (4)                                          19              3              1                -               23
Total firm commitments and outstanding debt            $      724

$ 319 $ 315 $ 3,853 $ 5,211

______________________________________

The following is a description of our firmly committed contractual obligations
at September 30, 2021:
(1)Outstanding debt obligations consist of the Senior Term Loan Facility and the
Senior Secured Notes. These obligations have been presented based on the
principal amounts due as of September 30, 2021. Amounts do not include any fair
value adjustments, bond premiums, discounts or unamortized deferred financing
costs.
(2)Operating lease obligations primarily relate to the minimum lease rental
obligations for our real estate and operating equipment in various locations
around the world.
(3)The Company routinely enters into long-term commitments with recording
artists, songwriters and publishers for the future delivery of music. Such
commitments generally become due only upon delivery and Company acceptance of
albums from the artists or future musical compositions by songwriters and
publishers. Additionally, such commitments are typically cancellable at the
Company's discretion, generally without penalty. Based on contractual
obligations, aggregate firm commitments to such talent approximate $537 million
at September 30, 2021. The aggregate firm commitments expected for the next
twelve-month period based on contractual obligations and the Company's expected
release schedule approximates $303 million at September 30, 2021.
(4)We have minimum funding commitments and other related obligations to support
the operations of various investments, which are reflected in the table above.
Other long-term liabilities, which are not included in the table above, include
$12 million and $12 million of liabilities for uncertain tax positions as of
September 30, 2021 and September 30, 2020, respectively. We are unable to
accurately predict when these amounts will be realized or released.
*Because the timing of payment, and even whether payment occurs, is dependent
upon the timing of delivery of albums and musical compositions, the timing and
amount of payment of these commitments as presented in the above summary can
vary significantly.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The SEC's Financial Reporting Release No. 60, "Cautionary Advice Regarding
Disclosure About Critical Accounting Policies" ("FRR 60"), suggests companies
provide additional disclosure and commentary on those accounting policies
considered most critical. FRR 60 considers an accounting policy to be critical
if it is important to our financial condition and results, and requires
significant judgment and estimates on the part of management in our application.
We believe the following list represents critical accounting policies as
contemplated by FRR 60. For a summary of all of our significant accounting
policies, see Note 2 to our consolidated financial statements included elsewhere
herein.
Accounting for Goodwill and Other Intangible Assets
We account for our goodwill and other indefinite-lived intangible assets as
required by ASC 350. We test goodwill for impairment at the reporting unit level
and have concluded that our reporting units are generally the same as our
reportable segments. We evaluate the determination of our reporting units
periodically or whenever events or substantive changes in circumstances occur.
ASC 350 requires that goodwill and certain intangible assets be assessed for
impairment using fair value measurement techniques on an annual basis and when
events occur that may suggest that the fair value of such assets cannot support
the carrying value. ASC 350 gives an entity the option to first assess
qualitative factors to determine whether it is more likely than not that the
fair value of a reporting unit or intangible asset is less than its carrying
amount. If an entity determines it is not more likely than not that the fair
value of a reporting unit or intangible asset is less than its carrying amount,
then performing the quantitative impairment test is unnecessary. However, if an
entity concludes otherwise, then the quantitative impairment test shall be used
to identify the impairment and measure the amount of an impairment loss to be
recognized (if applicable).
As of September 30, 2021, we had recorded goodwill in the amount of $1.830
billion, including $1.366 billion and $464 million for our Recorded Music and
Music Publishing businesses, respectively, primarily related to the Merger and
PLG Acquisition. As of September 30, 2021, we had recorded definite-lived
intangible assets of $2.017 billion and indefinite-lived intangible assets of
$154 million. We test our goodwill and other indefinite-lived intangible assets
for impairment on an annual basis in the fourth quarter of each fiscal year as
of July 1. We performed a qualitative assessment for our reporting units and
other indefinite-lived intangible assets in fiscal 2021. This assessment
considered changes in our projected future cash flows and discount rates, recent
market transactions and overall macroeconomic conditions. Based on this
assessment, we concluded that it was more likely than not that the estimated
fair values of our reporting units and other indefinite-lived intangible assets
were higher than their carrying values and that the performance of a
quantitative impairment test was not required.
See Note 8 to the consolidated financial statements for a further discussion of
our goodwill and intangible assets.
Revenue and Cost Recognition
Revenues
Recorded Music
As required by FASB ASC Topic 606, Revenue from Contracts with Customers ("ASC
606"), the Company recognizes revenue when, or as, control of the promised
services or goods is transferred to our customers and in an amount that reflects
the consideration the Company is contractually due in exchange for those
services or goods. The Company's revenue recognition process involves several
applications that are responsible for the initiation and processing of
transactions in order to recognize revenue in accordance with the Company's
policy and ASC 606.
Revenues from the sale or license of Recorded Music products through digital
distribution channels are typically recognized when sale or usage occurs based
on usage reports received from the customer. 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
typically recognized using an appropriate measure of progress over the
contractual term. The Company updates its assessment of the transaction price
each reporting period to see if anticipated royalty earnings exceed the minimum
guarantee. For contracts where breakage is not expected, royalties are
recognized as revenue as sales or usage occurs based upon the licensee's usage
reports and, when these reports are not available, revenue is based on
historical data, industry information and other relevant trends.
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Music Publishing
Music Publishing revenues are earned from the receipt of royalties relating to
the licensing of rights in musical compositions and the sale of published sheet
music and songbooks. The receipt of royalties principally relates to amounts
earned from the public performance of musical compositions, the mechanical
reproduction of musical compositions on recorded media, including digital
formats and the use of musical compositions in synchronization with visual
images. Music publishing royalties, except for synchronization royalties,
generally are recognized when the sale or usage occurs. The most common form of
consideration for publishing contracts is sales- and usage-based royalties. The
collecting societies submit usage reports, typically with payment for royalties
due, often on a quarterly or biannual reporting period, in arrears. Royalties
are recognized as the sale or usage occurs based upon usage reports and, when
these reports are not available, royalties are estimated based on historical
data, such as recent royalties reported, company-specific information with
respect to changes in repertoire, industry information and other relevant
trends. Synchronization revenue is typically recognized as revenue when control
of the license is transferred to the customer in accordance with ASC 606.
Accounting for Royalty Costs and Royalty Advances
The Company incurs royalty costs that are payable to our recording artists and
songwriters generated from the sale or license of our Recorded Music catalog and
Music Publishing copyrights. Royalties are calculated using negotiated rates in
accordance with recording artist and songwriter contracts. Calculations are
based on revenue earned or user/usage measures or a combination of these. There
are instances where such data is not available to be processed and royalty cost
calculations may be complex or involve judgments about significant volumes of
data to be processed and analyzed.
We had $1,880 million and $1,628 million of royalty payables in our balance
sheet at September 30, 2021 and September 30, 2020, respectively.
In many instances, the Company commits to pay our recording artists and
songwriters royalties in advance of future sales. The Company accounts for these
advances under the related guidance in FASB ASC Topic 928, Entertainment-Music
("ASC 928"). Under ASC 928, the Company capitalizes as assets certain advances
that it believes are recoverable from future royalties to be earned by the
recording artist or songwriter. Recoverability is assessed upon initial
commitment of the advance based upon the Company's forecast of anticipated
revenue from the sale of future and existing albums or musical compositions. In
determining whether the advance is recoverable, the Company evaluates the
current and past popularity of the recording artist or songwriter, the sales
history of the recording artist or songwriter, the initial or expected
commercial acceptability of the product, the current and past popularity of the
genre of music that the product is designed to appeal to, and other relevant
factors. Advances vary in both amount and expected life based on the underlying
recording artist or songwriter. To the extent that a portion of an outstanding
advance is no longer deemed recoverable, that amount will be expensed in the
period the determination is made.
We had $830 million and $489 million of advances in our balance sheet at
September 30, 2021 and September 30, 2020, respectively. We believe such
advances are recoverable through future royalties to be earned by the applicable
recording artists and songwriters.
Accounting for Income Taxes
As part of the process of preparing the consolidated financial statements, we
are required to estimate income taxes payable in each of the jurisdictions in
which we operate. This process involves estimating the actual current tax
expense together with assessing temporary differences resulting from differing
treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included within our consolidated
balance sheets. FASB ASC Topic 740, Income Taxes ("ASC 740"), requires a
valuation allowance be established when it is more likely than not that all or a
portion of deferred tax assets will not be realized. In circumstances where
there is sufficient negative evidence, establishment of a valuation allowance
must be considered. We believe that cumulative losses in the most recent
three-year period generally represent sufficient negative evidence to consider a
valuation allowance under the provisions of ASC 740. As a result, we determined
that certain of our deferred tax assets required the establishment of a
valuation allowance.
The realization of the remaining deferred tax assets is primarily dependent on
forecasted future taxable income. Any reduction in estimated forecasted future
taxable income may require that we record additional valuation allowances
against our deferred tax assets on which a valuation allowance has not
previously been established. The valuation allowance that has been established
will be maintained until there is sufficient positive evidence to conclude that
it is more likely than not that such assets will be realized. An ongoing pattern
of profitability will generally be considered as sufficient positive evidence.
Our income tax expense recorded in the future may be reduced to the extent of
offsetting decreases in our valuation allowance. The establishment and reversal
of valuation allowances could have a significant negative or positive impact on
our future earnings.
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From time to time, the Company engages in transactions in which the tax
consequences may be subject to uncertainty. Significant judgment is required in
assessing and estimating the tax consequences of these transactions. The Company
prepares and files tax returns based on its interpretation of tax laws and
regulations. In the normal course of business, the Company's tax returns are
subject to examination by various taxing authorities. Such examinations may
result in future tax and interest assessments by these taxing authorities. In
determining the Company's tax provision for financial reporting purposes, the
Company establishes a reserve for uncertain tax positions, unless such positions
are determined to be more likely than not of being sustained upon examination
based on their technical merits. There is considerable judgment involved in
determining whether positions taken on the Company's tax returns are more likely
than not of being sustained.
Accounting for Stock-Based Compensation
Stock-based compensation represents compensation payment for which the amounts
are based on the fair market value of the Company's common stock. Prior to the
Company's IPO, the Company's Second Amended and Restated Senior Management Free
Cash Flow Plan (the "Plan") was classified as a liability rather than equity
under FASB ASC Topic 718, Compensation-Stock Compensation ("ASC 718"). In
February 2020, the Company filed a Form S-1 registration statement with the SEC
in connection with the IPO, which required a change in accounting policy during
the three months ended March 31, 2020 from the intrinsic value method to fair
value method in determining the basis of measurement of its stock-based
compensation liability.
In determining fair value, the Company utilized an option pricing model for
those awards with an option-like pay-off, which includes various inputs for
volatility, term to exit, discount for lack of marketability, expected dividend
yield and risk-free rates. For awards with an equity-like pay-off, inputs for
discount of lack of marketability and non-performance risk were considered. The
Company continued to use an income approach using a discounted cash flow model
to determine its per-share value input within the model. Upon completion of the
IPO in June 2020, the Plan was amended to remove the cash-settlement feature on
all future redemptions. As a result, all awards previously issued under the Plan
will require settlement in Class A Common Stock. Under the provision of ASC 718,
the Company determined the Plan was modified as of June 3, 2020, and as such,
converted the awards from liability-classified to equity-classified. Prior to
conversion, the Company performed a final measurement of its stock-based
compensation liability under the fair value method. Subsequent to the amendment,
the awards issued under the Plan will no longer be adjusted for changes in the
value of the Company's common stock.
Recent Accounting Pronouncements
Refer to Note 2 to our consolidated financial statements included elsewhere
herein for more information regarding recently issued accounting pronouncements.
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