Revenue Increases by 13% for the Quarter and by 2% for the Full Year
- Total revenue grew 13% year-over-year to $905 million for the fourth
quarter 2005, driven by strong growth in Recorded Music.
- Digital revenue represented 6% of total revenue in the fourth quarter
2005 and rose to $53 million, up 20% sequentially from the third quarter.
- Operating income increased to $19 million for the quarter, as compared
to $3 million in the fourth quarter of 2004. Excluding the previously
announced Lava restructuring costs, certain other non-recurring items and
FAS 123 expenses in 2005 as well as certain non-recurring costs in 2004
(see Non-Recurring Items below), adjusted operating income increased 85% to
$61 million.
- Operating income before depreciation and amortization (OIBDA) for the
fourth quarter 2005 rose 24% year-over-year to $77 million. Excluding non-
recurring items and FAS 123 expenses (see Non-Recurring Items below),
adjusted OIBDA grew 29% to $119 million.
- Net losses for the quarter amounted to ($0.21) per share as compared
to net losses of ($1.27) per share in 2004. However, excluding non-
recurring items and FAS 123 expenses (see Non-Recurring Items below),
adjusted earnings were $0.08 per diluted share, a major improvement from
last year's adjusted net losses of ($1.01) per share.
Warner Music Group Corp. (NYSE: WMG) today announced its full-year
and fourth-quarter financial results for the period ended September
30, 2005.
"This report demonstrates that Warner Music Group is translating its
vision and marketplace momentum into results," said Edgar Bronfman,
Jr., Warner Music Group's Chairman and CEO. "Our focus on the digital
music business has yielded dramatic growth in digital revenue. Not
only did annual digital revenue rise more than four-fold
year-over-year to represent 6% of our fourth-quarter revenue, but we
are also proud to report that for our 2005 fiscal year the absolute
growth in digital revenue outpaced the absolute decline in physical
revenue for our U.S. Recorded Music business."
"As we complete our first fiscal year as a publicly traded company,
we remain committed to delivering value to our artists, consumers and
our shareholders as we lead the transformation of the music industry."
Michael Fleisher, Warner Music Group's Executive Vice President and
CFO, added:
"In addition to our solid revenue and OIBDA growth, we
generated strong cash flow for the quarter and fiscal year. Net cash
provided by operating activities for the year was $205 million. We
also focus on unlevered after-tax cash flow as an important measure
of our cash-generating ability. For the fiscal year we converted 84%
of adjusted OIBDA into unlevered after-tax cash flow excluding
non-recurring IPO-related items. Our ability to convert OIBDA into
unlevered after-tax cash flow benefits from disciplined control of
capital expenditures and our valuable amortization tax deduction of
about $100 million annually, which together with our interest expense
deduction completely offsets our taxable income in the U.S."
Fourth Quarter Results
For the fourth quarter 2005, revenue climbed 13% to $905 million from
$798 million in 2004, driven primarily by a strong fourth-quarter
release schedule and continued growth in digital. On a
constant-currency basis, quarterly revenue grew 12%. Domestic revenue
grew 17% while international markets advanced 11% or 9% on a
constant-currency basis.
Operating income for the quarter rose by $16 million to $19 million
from $3 million in the prior year. Excluding non-recurring items and
FAS 123 expenses (see Non-Recurring Items below), the company's
adjusted operating income improved by 85% to $61 million from $33
million in the comparable 2004 quarter.
OIBDA for the quarter rose 24% to $77 million from $62 million last
year. Excluding non-recurring items and FAS 123 expenses (see
Non-Recurring Items below), the company's adjusted OIBDA improved 29%
year-over-year to $119 million from $92 million, driving margin
improvement of 1.6 percentage points to 13.1%.
Reported net losses were $30 million or ($0.21) per share for the
quarter. Net losses in the fourth quarter of 2004 were $137 million or
($1.27) per share. Excluding non-recurring items and FAS 123 expenses
(see Non-Recurring Items below), adjusted net income for the fourth
quarter 2005 was $12 million or $0.08 per diluted share, compared to
adjusted net losses of $109 million or ($1.01) per share for the
comparable quarter in 2004.
The company also reported a cash balance of $288 million, total
long-term debt of $2.2 billion and net debt (total long-term debt
minus cash) of $1.9 billion, as of September 30, 2005.
For the quarter, the company's business segment performance was as
follows:
Recorded Music
Revenue for the company's Recorded Music business increased 17% to
$775 million. Digital Recorded Music revenue of $47 million
represented 6% of total Recorded Music revenue and grew 24%
sequentially from the third quarter. Major sellers in the quarter
were James Blunt, Faith Hill, Green Day, Eric Clapton, Sean Paul,
Disturbed, Staind and Craig David.
Recorded Music operating income climbed to $27 million from $2
million last year. Excluding non-recurring items and FAS 123 expenses
(see Non-Recurring Items below), adjusted operating income increased
by $43 million to $63 million yielding a margin of 8.1%, up 5.1
percentage points from 3.0% in the comparable prior-year period.
Recorded Music OIBDA grew 60% to $67 million for the quarter compared
to $42 million in last year's comparable period. Excluding
non-recurring items and FAS 123 expenses (see Non-Recurring Items
below), quarterly Recorded Music adjusted OIBDA increased 72% to $103
million from $60 million in last year's comparable quarter as
cost-savings initiatives and higher-margin digital sales contributed
to results. Recorded Music adjusted OIBDA margin rose 4.2 percentage
points to 13.3% as compared to the same quarter last year.
Music Publishing
Music Publishing revenue decreased 2% to $137 million compared to
last year's comparable period. However, last year's comparable quarter
included $9 million of revenue from the Sheet Music business divested
on May 31, 2005. Excluding this amount from last year's fourth
quarter Music Publishing revenue to compare revenue on a continuing
operations basis, Music Publishing revenue rose by 5%. Digital
revenue from Music Publishing of $6 million represented 4% of total
Music Publishing revenue.
Synchronization and performance revenue increased while mechanical
revenue was relatively flat with the prior year. Movie, video game and
advertisement deals as well as continued increases in sales in newer
formats, particularly of ringtones, drove higher synchronization
revenue. Performance revenue increases reflect both improved chart
activity and the timing of Music Publishing A&R investments.
Mechanical revenue results are reflective of the state of the
recorded music industry.
Music Publishing operating income was $27 million in the quarter
compared to $31 million in the prior-year quarter. Music Publishing
OIBDA was $42 million for the quarter, compared to $44 million in the
prior-year quarter. Music Publishing OIBDA margin was 30.7%,
relatively flat with the comparable prior-year period.
Full Year Results
For the full year 2005, Warner Music Group revenue increased 2% to
$3.5 billion from $3.4 billion in the prior year. On a
constant-currency basis, total revenue fell 1%. Total revenue was
split 48% and 52% between domestic and international territories,
respectively, on a constant-currency basis. Total digital revenue
increased more than four-fold to $157 million and was split 73%
domestic and 27% international, showing the more advanced state of
the domestic digital industry.
Warner Music Group's reported operating income of $84 million
reflected solid growth by both Recorded Music and Music Publishing.
OIBDA for the year amounted to $322 million compared to $333 million
last year. However, excluding non-recurring items and FAS 123 expenses
(see Non-Recurring Items below), adjusted OIBDA rose 31% to $491
million from $374 million last year, contributing to a 3.1 percentage
point margin improvement to 14.0%, as results benefited from cost
savings and higher margins on digital sales.
Reported net losses were $169 million or ($1.40) per share, compared
to net losses of $1.4 billion reported last year. Excluding
non-recurring items and FAS 123 expenses (see Non-Recurring Items
below), adjusted net income was $32 million, or $0.25 per diluted
share, compared to adjusted net losses of $295 million last year.
For the full fiscal year, the company's business segment performance
was as follows:
Recorded Music
Recorded Music revenue improved 2% to $2.9 billion, led by robust
digital sales and a broad slate of successful releases. Digital
Recorded Music revenue of $137 million represented 5% of total
Recorded Music revenue. Domestic Recorded Music digital revenue
amounted to $105 million or 7% of total domestic Recorded Music
revenue. Major sellers for the year were Green Day, Linkin
Park/Jay-Z, Michael Buble, James Blunt, Simple Plan, Ray Charles, Rob
Thomas and Faith Hill.
Recorded Music operating income was $215 million for the year and
when adjusted for non-recurring items and FAS 123 expenses (see
Non-Recurring Items below), more than doubled to $283 million compared
to $110 million last year, yielding an adjusted operating margin of
9.7%, up 5.8 percentage points from 3.9% in the comparable prior-year
period.
Recorded Music OIBDA improved 43% to $380 million for the year from
$266 million last year. Excluding non-recurring items and FAS 123
expenses (see Non-Recurring Items below), adjusted OIBDA rose 54% to
$448 million. Recorded Music adjusted OIBDA margin rose 5.1
percentage points to 15.3% resulting from cost management,
prior-period restructuring efforts and higher margins on digital
sales.
Music Publishing
Music Publishing revenue advanced by 1% to $607 million compared to
last year's comparable period. 2004 revenue included $49 million and
2005 revenue included $35 million from the Sheet Music business
divested on May 31, 2005. Excluding these amounts from both periods,
revenue advanced 4%.
Digital revenue from Music Publishing of $20 million represented 3%
of total Music Publishing revenue. Increases in synchronization
revenue were largely offset by declines in mechanical and performance
revenue. Movie, video game and advertisement deals as well as DVDs
drove higher synchronization revenue. Declines in mechanical and
performance revenue reflect prior-year recorded music industry
declines and the timing of Music Publishing A&R investments.
Music Publishing operating income increased 11% to $82 million for
the year, yielding an operating margin of 13.5%, up 1.2 percentage
points year-over-year. Music Publishing OIBDA was $141 million, down
2% from $144 million last year, leading to a margin decline of 0.7
percentage points to 23.2%.
Non-Recurring Items
In the fourth quarter of 2005, non-recurring items included a
previously announced restructuring charge of $7 million for the
integration of the Lava label into The Atlantic Records Group, which
included severance and contract terminations related to the
integration of operations, as well as other non-recurring charges of
$24 million specifically related to the departure of one of the
executives of Atlantic and the expensing of certain other amounts.
Approximately $20 million of these charges were non-cash. In
addition, Warner Music Group took a $4 million charge in the fourth
quarter for the $5 million settlement of a government investigation
into radio promotion practices by New York State Attorney General,
Eliot Spitzer, which is detailed in the 10-K. The remaining $1
million of this settlement was accrued for in the third fiscal
quarter.
For the year ended September 30, 2005, non-recurring, IPO-related
items included the $73 million fee to terminate the management
contract with the Investor Group, $6 million of management fees paid
to the Investor Group under the management contract prior to the
termination, certain cash payments to employees totaling $29 million
related to the issuance of stock awards below fair market value and
payment of an IPO cash bonus to employees, as well as $35 million
resulting from the payment of redemption premiums and other charges
in connection with the previously announced redemption of debt issued
by the subsidiary, WMG Holdings Corp. All of these charges were
previously reported in the third quarter 2005 results.
The non-recurring items had a related tax benefit of $3 million for
the 2005 fiscal year and had no effect during the quarter.
Non-recurring items in 2004 included a $1.0 billion impairment of
goodwill and intangibles charge primarily reflecting the declines in
the valuation of music-related assets. This charge was taken by Time
Warner in preparation for the sale of its music division to the
Investor Group. In addition, Warner Music Group incurred $34 million
in restructuring charges, which included $20 million associated with
the implementation of a cost-savings incentive compensation plan
designed to reduce operating costs, $6 million from headcount
reductions and $8 million from prior company restructuring charges
for reductions in headcount and termination of leases. Finally, 2004
non-recurring items included $6 million in management fees paid to
the Investor Group and a $6 million loss on repayment of debt.
The non-recurring items had a related tax benefit of $2 million for
both our 2004 fiscal year and the fourth quarter of 2004.
See also Supplemental Disclosures Regarding Non-GAAP Financial
Information, Adjusted Results in Figures 4, 5, and 6 below.
FAS 123 Expenses
FAS 123 expenses for the year 2005 amounted to $25 million and to $7
million for the quarter ending September 30, 2005. FAS 123 expenses
for both the year 2004 and the quarter ended September 30, 2004
amounted to $1 million.
Financial details for the full fiscal year can be found in the
company's current Form 10-K, filed today with the Securities and
Exchange Commission.
This morning, management will be hosting a conference call to discuss
the results at 8:30 A.M. EST. The call will be webcast on
www.wmg.com.
About Warner Music Group
Warner Music Group became the only stand-alone music company to be
publicly traded in the United States in May 2005. With its broad
roster of new stars and legendary artists, Warner Music Group is home
to a collection of the best-known record labels in the music industry
including Asylum, Atlantic, Bad Boy, Cordless, East West, Elektra,
Lava, Maverick, Nonesuch, Reprise, Rhino, Sire, Warner Bros. and
Word. Warner Music International, a leading company in national and
international repertoire operates through numerous international
affiliates and licensees in more than 50 countries. Warner Music
Group also includes Warner/Chappell Music, one of the world's leading
music publishers, with a catalog of more than one million copyrights
worldwide.
"Safe Harbor" Statement under Private Securities Litigation Reform
Act of 1995:
This communication includes forward-looking statements that reflect
the current views of Warner Music Group about future events and
financial performance. Words such as "estimates," "expects,"
"anticipates," "projects," "plans," "intends," "believes," "forecasts"
and variations of such words or similar expressions that predict or
indicate future events or trends, or that do not relate to historical
matters, identify forward-looking statements. Our expectations,
beliefs and projections are expressed in good faith and we believe
there is a reasonable basis for them. However, there can be no
assurance that management's expectations, beliefs and projections
will result or be achieved. Investors should not rely on
forward-looking statements because they are subject to a variety of
risks, uncertainties, and other factors that could cause actual
results to differ materially from our expectations.
Figure 1. Warner Music Group Corp. - Consolidated Statement of Operations,
Three Months and Twelve Months Ended 9/30/05 versus 9/30/04
(dollars in millions except per share amounts)
Three Three Twelve Twelve
Months Months Months Months
Ended Ended Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004(a)
----------- ----------- ----------- -----------
(unaudited) (unaudited) (audited) (unaudited)
Revenues: $905 $798 $3,502 $3,437
Costs and Expenses:
Cost of revenues (473) (421) (1,850) (1,850)
Selling, general and
administrative expenses (359) (304) (1,301) (1,287)
Amortization of
intangible assets (47) (44) (187) (201)
Loss on termination of
management agreement - - (73) -
Impairment of goodwill
and other intangible
assets - - - (1,019)
Restructuring costs (7) (26) (7) (34)
----------- ----------- ----------- -----------
Total Costs and Expenses ($886) ($795) ($3,418) ($4,391)
----------- ----------- ----------- -----------
Operating Income $19 $3 $84 ($954)
Interest expense, net (42) (35) (182) (82)
Net investment-related
gains (losses) - - 1 (9)
Loss on repayment of debt - - (35) (6)
Equity in losses of equity-
method investees - (2) (1) (13)
Deal-related transaction
costs - - - (63)
Unrealized (loss) gain
on warrants - (73) 17 (120)
Minority interest expense - (5) (5) (14)
Other income (expense),
net 2 (4) 7 (11)
----------- ----------- ----------- -----------
Loss before income taxes ($21) ($116) ($114) ($1,272)
Income tax expense (9) (21) (55) (150)
----------- ----------- ----------- -----------
Net Loss ($30) ($137) ($169) ($1,422)
Earnings Per Share:
Basic and Diluted ($0.21) ($1.27) ($1.40)
Weighted Averages
Shares Outstanding:
Basic 141,208,577 107,544,923 120,910,235
Diluted 150,492,386 113,670,396 129,355,871
(a) - The twelve-month period ended September 30, 2004 is the combination
of the five months ended February 29, 2004 of the predecessor company and
the seven months ended September 30, 2004 of the successor company.
Figure 2. Warner Music Group Corp. - Statement of Operations by Segment,
Three Months and Twelve Months Ended 9/30/05 versus 9/30/04
(dollars in millions)
Three Three Twelve Twelve
Months Months Months Months
Ended Ended Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004(a)
----------- ----------- ----------- -----------
(unaudited) (unaudited) (audited) (unaudited)
Recorded Music:
Revenue $775 $662 $2,924 $2,859
OIBDA $67 $42 $380 $266
Depreciation and
amortization (40) (40) (165) (181)
Impairment of goodwill
and other intangible
assets - - - (1,019)
----------- ----------- ----------- -----------
Operating Income $27 $2 $215 ($934)
=========== =========== =========== ===========
Music Publishing:
Revenue $137 $140 $607 $601
OIBDA $42 $44 $141 $144
Depreciation and
amortization (15) (13) (59) (70)
----------- ----------- ----------- -----------
Operating Income $27 $31 $82 $74
=========== =========== =========== ===========
Total:
Revenue $905 $798 $3,502 $3,437
OIBDA $77 $62 $322 $333
Depreciation and
amortization (58) (59) (238) (268)
Impairment of goodwill
and other intangible
assets - - - (1,019)
----------- ----------- ----------- -----------
Operating Income $19 $3 $84 ($954)
=========== =========== =========== ===========
(a) - The twelve-month period ended September 30, 2004 is the combination
of the five months ended February 29, 2004 of the predecessor company and
the seven months ended September 30, 2004 of the successor company.
Supplemental Disclosures Regarding Non-GAAP Financial Information
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, non-cash
amortization of intangible assets and non-cash impairment charges to
reduce the carrying value of goodwill and other intangible assets
(which we refer to as OIBDA). We consider OIBDA to be an important
indicator of the operational strengths and performance of our
businesses, and believe the adjusted results help improve the ability
to understand the company's operating performance and evaluate our
performance in comparison to comparable periods. 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) and other
measures of financial performance reported in accordance with
accounting principles generally accepted in the
U.S.
Figure 3. Warner Music Group Corp. - Reconciliation of OIBDA to Net Loss,
Three Months and Twelve Months Ended 9/30/05 versus 9/30/04
(dollars in millions)
Three Three Twelve Twelve
Months Months Months Months
Ended Ended Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004(a)
----------- ----------- ----------- -----------
(unaudited) (unaudited) (audited) (unaudited)
OIBDA $77 $62 $322 $333
Depreciation expense (11) (15) (51) (67)
Amortization expense (47) (44) (187) (201)
Impairment of goodwill
and other intangible
assets - - - (1,019)
----------- ----------- ----------- -----------
Operating income (loss) $19 $3 $84 ($954)
Interest expense (42) (35) (182) (82)
Net investment-related
gains (losses) - - 1 (9)
Equity in losses of
equity-method investees - (2) (1) (13)
Deal-related transaction
costs - - - (63)
Loss on repayment of
Holdings Notes - - (35) -
Loss on repayment of
bridge loan - - - (6)
Unrealized (loss) gain
on warrants - (73) 17 (120)
Minority interest expense - (5) (5) (14)
Other income (expense), net 2 (4) 7 (11)
----------- ----------- ----------- -----------
Loss before income taxes ($21) ($116) ($114) ($1,272)
Income tax expense (9) (21) (55) (150)
----------- ----------- ----------- -----------
Net Loss ($30) ($137) ($169) ($1,422)
=========== =========== =========== ===========
(a) - The twelve-month period ended September 30, 2004 is the combination
of the five months ended February 29, 2004 of the predecessor company and
the seven months ended September 30, 2004 of the successor company.
Adjusted Results
As previously disclosed, the current year contained a number of
non-recurring charges that occurred concurrently with or in
connection with our initial public offering. Such charges relate to
specific IPO-related one-time events and do not reflect on-going
operations of the business. In addition, the fourth quarter contained
non-recurring charges in connection with our integration of the Lava
label into the Atlantic Records Group and our settlement of the
Spitzer investigation. The prior year also contained non-recurring
items. Therefore, the company is also presenting results excluding
these items and FAS 123 expenses. We consider these adjusted results
to be an important indicator of the operational strengths and
performance of our businesses, including the ability to provide cash
flows to service debt. However, a limitation of the use of these
adjusted amounts as performance measures is that they do not reflect
the charges noted and, therefore, do not necessarily represent funds
available for discretionary use, and are not necessarily measures of
the company's ability to fund its cash needs. Accordingly, these
adjusted amounts should be considered in addition to, not as a
substitute for, operating income (loss), net income (loss), EPS and
other measures of financial performance reported in accordance with
accounting principles generally accepted in the U.S.
Figure 4. Warner Music Group Corp. - Reconciliation of GAAP Operating
Income to Non-GAAP Adjusted OIBDA, Three Months and Twelve Months Ended
9/30/05 versus 9/30/04 (dollars in millions)
Three Three Twelve Twelve
Months Months Months Months
Ended Ended Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004(a)
----------- ----------- ----------- -----------
(unaudited) (unaudited) (audited) (unaudited)
Total WMG Operating
Income (Loss) - GAAP $19 $3 $84 ($954)
Depreciation and
amortization 58 59 238 268
Impairment of goodwill
and intangible assets - - - 1,019
----------- ----------- ----------- -----------
Total WMG OIBDA $77 $62 $322 $333
Non-recurring severance
and other 24 - 24 -
Legal settlement 4 - 5 -
Restructuring costs 7 26 7 34
Loss on termination of
management agreement - - 73 -
IPO-related cash bonus - - 10 -
Bonus related to
stock awards - - 19 -
Management fees - 3 6 6
----------- ----------- ----------- -----------
Total WMG OIBDA Excluding
Non-Recurring Charges $112 $91 $466 $373
FAS 123 expense 7 1 25 1
----------- ----------- ----------- -----------
Total WMG Adjusted OIBDA $119 $92 $491 $374
=========== =========== =========== ===========
Recorded Music Operating
Income (Loss) - GAAP $27 $2 $215 ($934)
Depreciation and
amortization 40 40 165 181
Impairment of goodwill
and intangible assets - - - 1,019
----------- ----------- ----------- -----------
Recorded Music OIBDA $67 $42 $380 $266
Non-recurring severance
and other 24 - 24 -
Restructuring costs 7 17 7 24
IPO-related cash bonus - - 8 -
Bonus related to stock awards - - 12 -
----------- ----------- ----------- -----------
Recorded Music OIBDA
Excluding Non-Recurring
Charges $98 $59 $431 $290
FAS 123 expense 5 1 17 1
----------- ----------- ----------- -----------
Recorded Music
Adjusted OIBDA $103 $60 $448 $291
=========== =========== =========== ===========
Music Publishing
Operating Income
(Loss) - GAAP $27 $31 $82 $74
Depreciation and
amortization 15 13 59 70
----------- ----------- ----------- -----------
Music Publishing OIBDA $42 $44 $141 $144
Restructuring costs - 1 - 1
IPO-related cash bonus - - 1 -
----------- ----------- ----------- -----------
Music Publishing OIBDA
Excluding Non-Recurring
Charges $42 $45 $142 $145
FAS 123 expense 1 - 3 -
----------- ----------- ----------- -----------
Music Publishing
Adjusted OIBDA $43 $45 $145 $145
=========== =========== =========== ===========
(a) - The twelve-month period ended September 30, 2004 is the combination
of the five months ended February 29, 2004 of the predecessor company and
the seven months ended September 30, 2004 of the successor company.
Figure 5. Warner Music Group Corp. - Reconciliation of GAAP Operating
Income to Non-GAAP Operating Income, Three Months and Twelve Months Ended
9/30/05 versus 9/30/04 (dollars in millions)
Three Three Twelve Twelve
Months Months Months Months
Ended Ended Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004(a)
----------- ----------- ----------- -----------
(unaudited) (unaudited) (audited) (unaudited)
Total WMG Operating
Income (Loss) - GAAP $19 $3 $84 ($954)
Non-recurring severance
and other 24 - 24 -
Legal settlement 4 - 5 -
Restructuring costs 7 26 7 34
Loss on termination of
management agreement - - 73 -
IPO-related cash bonus - - 10 -
Impairment of goodwill
and intangible assets - - - 1,019
Bonus related to
stock awards - - 19 -
Management fees - 3 6 6
----------- ----------- ----------- -----------
Total WMG Operating
Income Excluding
Non-Recurring Charges $54 $32 $228 $105
FAS 123 expense 7 1 25 1
----------- ----------- ----------- -----------
Total WMG Adjusted
Operating Income $61 $33 $253 $106
=========== =========== =========== ===========
Recorded Music
Operating Income
(Loss) - GAAP $27 $2 $215 ($934)
Non-recurring severance
and other 24 - 24 -
Restructuring Costs 7 17 7 24
Impairment of goodwill
and intangible assets - - - 1,019
IPO-related cash bonus - - 8 -
Bonus related to
stock awards - - 12 -
----------- ----------- ----------- -----------
Recorded Music Operating
Income Excluding
Non-Recurring Charges $58 $19 $266 $109
FAS 123 expense 5 1 17 1
----------- ----------- ----------- -----------
Recorded Music Adjusted
Operating Income $63 $20 $283 $110
=========== =========== =========== ===========
Music Publishing Operating
Income - GAAP $27 $31 $82 $74
Restructuring Costs - 1 - 1
IPO-related cash bonus - - 1 -
----------- ----------- ----------- -----------
Music Publishing Operating
Income Excluding
Non-Recurring Charges $27 $32 $83 $75
FAS 123 expense 1 - 3 -
----------- ----------- ----------- -----------
Music Publishing Adjusted
Operating Income $28 $32 $86 $75
=========== =========== =========== ===========
(a) - The twelve-month period ended September 30, 2004 is the combination
of the five months ended February 29, 2004 of the predecessor company and
the seven months ended September 30, 2004 of the successor company.
Figure 6. Warner Music Group Corp. - Reconciliation of GAAP to Non-GAAP
Adjusted Net Income and Adjusted Earnings Per Share, Three Months and
Twelve Months Ended 9/30/05 versus 9/30/04
(dollars in millions except per share amounts)
Three Three Twelve Twelve
Months Months Months Months
Ended Ended Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004(a)
----------- ----------- ----------- -----------
(unaudited) (unaudited) (audited) (unaudited)
Net Income:
Net loss - GAAP ($30) ($137) ($169) ($1,422)
Impairment of goodwill
and intangible assets - - - 1,019
Restructuring costs 7 26 7 34
Loss on termination of
management fee - - 73 -
Loss on repayment of debt - - 35 6
IPO-related cash bonus - - 10 -
Bonus related to
stock awards - - 19 -
Management fees - 3 6 6
Non-recurring severance
and other 24 - 24 -
Deal-related and other
transaction costs - - - 63
Legal Settlement 4 - 5 -
Tax effect on
non-recurring items - (2) (3) (2)
----------- ----------- ----------- -----------
Net income (loss) -
Excluding Non-Recurring
Charges $5 ($110) $7 ($296)
FAS 123 expense 7 1 25 1
----------- ----------- ----------- -----------
Net income (loss) -
Adjusted $12 ($109) $32 ($295)
=========== =========== =========== ===========
Earnings Per Share:
EPS - GAAP ($0.21) ($1.27) ($1.40)
Impairment of goodwill
and intangible assets - - -
Restructuring costs 0.05 0.24 0.06
Loss on termination of
management fee - - 0.60
Loss on repayment of debt - - 0.29
IPO-related cash bonus - - 0.08
Bonus related to stock awards - - 0.16
Management fees - 0.03 0.05
Non-recurring severance
and other 0.17 - 0.20
Legal Settlement 0.03 - 0.04
Tax effect on
non-recurring items - (0.02) (0.02)
----------- ----------- ----------- -----------
EPS - Excluding
Non-Recurring Charges $0.04 ($1.02) $0.06
FAS 123 expense 0.05 0.01 0.21
----------- ----------- ----------- -----------
EPS - Adjusted (b) (c) $0.08 ($1.01) $0.26
=========== =========== =========== ===========
(a) - The twelve-month period ended September 30, 2004 is the combination
of the five months ended February 29, 2004 of the predecessor company and
the seven months ended September 30, 2004 of the successor company.
(b) - Totals may not add due to rounding.
(c) - Adjusted earnings per share on a fully diluted basis for the three
months ended September 30, 2005, the three months ended September 30, 2004,
and the twelve months ended September 30, 2005 were $0.08, ($1.01) and
$0.25, respectively.
Free Cash Flow
Free cash flow reflects our cash flow provided by operating
activities less capital expenditures and cash paid or received for
investments. We use free cash flow, among other measures, to
evaluate our operating performance. Management believes free cash
flow provides investors with an important perspective on the cash
available to service debt, make strategic acquisitions and
investments, fund ongoing operations and working capital needs and
pay ongoing regular quarterly dividends. As a result, free cash flow
is a significant measure of our ability to generate long-term value.
It is useful for investors to know whether this ability is being
enhanced or degraded as a result of our operating performance. We
believe the presentation of free cash flow is relevant and useful for
investors because it allows investors to view performance in a manner
similar to the method used by management. In addition, free cash
flow is also a primary measure used externally by our investors and
analysts for purposes of valuation and comparing the operating
performance of our company to other companies in our industry.
As free cash flow is not a measure of performance calculated in
accordance with GAAP, free cash flow should not be considered in
isolation of, or as a substitute for, net income (loss) as an
indicator of operating performance or cash flow provided by operating
activities as a measure of liquidity. Free cash flow, as we calculate
it, may not be comparable to similarly titled measures employed by
other companies. In addition, free cash flow does not necessarily
represent funds available for discretionary use and is not
necessarily a measure of our ability to fund our cash needs. As free
cash flow deducts capital expenditures and cash paid or received for
investments from cash flow provided by operating activities, the most
directly comparable GAAP financial measure, users of this information
should consider the types of events and transactions that are not
reflected. We provide below a reconciliation of free cash flow to
the most directly comparable amount reported under GAAP, cash flow
provided by operating activities.
Free cash flow includes cash paid for interest and certain
non-recurring payments related to our IPO. We also review our cash
flow adjusted for these items, a measure we call unlevered after-tax
cash flow excluding certain non-recurring IPO related items.
Management believes this measure provides investors with an
additional important perspective on our cash generation ability. We
consider unlevered after-tax cash flow excluding certain
non-recurring IPO related items to be an important indicator of the
performance of our businesses and believe the presentation is
relevant and useful for investors because it allows investors to view
performance in a manner similar to the method used by management. A
limitation of the use of this measure is that it does not reflect the
charges noted and, therefore, does not necessarily represent funds
available for discretionary use, and is not necessarily a measure of
the company's ability to fund its cash needs. Accordingly, this
measure should be considered in addition to, not as a substitute for,
net cash flow provided by operating activities and other measures of
liquidity reported in accordance with accounting principles generally
accepted in the U.S.
Figure 7. Warner Music Group Corp. - Calculation of Non-GAAP Free Cash
Flow, Three Months and Twelve Months Ended 9/30/05 versus 9/30/04
(dollars in millions)
Three Three Twelve Twelve
Months Months Months Months
Ended Ended Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004(a)
----------- ----------- ----------- -----------
(unaudited) (unaudited) (audited) (unaudited)
Net cash flow provided
by operating activities $33 $49 $205 $438
Less: Capital expenditures 10 10 30 39
Less: Cash paid (received)
for investments (10) 5 24 (31)
----------- ----------- ----------- -----------
Free cash flow (b) $33 $34 $151 $430
(a) - The twelve-month period ended September 30, 2004 is the combination
of the five months ended February 29, 2004 of the predecessor company and
the seven months ended September 30, 2004 of the successor company.
(b) - Free cash flow includes cash paid for interest and certain
non-recurring cash payments as follows (in millions):
Three Three Twelve Twelve
Months Months Months Months
Ended Ended Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Free cash flow $33 $34 $151 $430
Plus: Cash paid
for interest 22 39 151 63
Plus: Cash paid to
terminate management
agreement - - 73 -
Plus: IPO-related cash bonus - - 10 -
Plus: Cash bonus related
to stock awards - - 19 -
Plus: Cash paid for
management fees - 3 6 6
----------- ----------- ----------- -----------
Unlevered after-tax
cash non-recurring
IPO-related items $55 $76 $410 $499
Figure 8. Warner Music Group Corp. - Consolidated Balance Sheets as of
9/30/05 and 9/30/04 (dollars in millions)
Sept 30, Sept 30,
2005 2004
--------- ---------
(audited) (audited)
Assets:
Current Assets
Cash & cash equivalents $ 288 $ 555
Accounts receivable, less allowances of $218
and $222 637 571
Inventories 52 65
Royalty advances (to be recouped w/in 1 year) 190 223
Deferred tax assets 36 38
Other current assets 39 86
--------- ---------
Total Current Assets $ 1,242 $ 1,538
Royalty advances (to be recouped after 1 year) 190 223
Investments (a) 21 8
Property, plant & equipment, net 157 189
Goodwill 869 978
Intangible assets subject to amortization, net 1,815 1,937
Intangible assets not subject to amortization 100 100
Other assets 104 117
--------- ---------
Total Assets $ 4,498 $ 5,090
Liabilities & Shareholders' Equity:
Current Liabilities
Accounts payable $ 247 $ 226
Accrued royalties 1,057 1,003
Taxes & other withholdings 23 10
Current portion of long-term debt 17 12
Note payable to shareholders - 342
Other current liabilities 404 587
--------- ---------
Total current liabilities $ 1,748 $ 2,180
Long-term debt 2,229 1,828
Dividends payable 5 -
Deferred tax liabilities, net 201 265
Other noncurrent liabilities 226 333
Minority interest in preferred stock of
subsidiary - 204
--------- ---------
Total Liabilities $ 4,409 $ 4,810
Common stock - -
Additional paid-in capital 548 512
Retained earnings (deficit) (480) (238)
Accumulated other comprehensive income (loss) 21 6
--------- ---------
Total Shareholders' Equity $ 89 $ 280
--------- ---------
Total Liabilities & Shareholders' Equity $ 4,498 $ 5,090
========= =========
Figure 9. Warner Music Group Corp. - Summarized Statement of Cash Flows,
Three Months and Twelve Months Ended 9/30/05 versus 9/30/04
(dollars in millions)
Three Three Twelve Twelve
Months Months Months Months
Ended Ended Ended Ended
Sept 30, Sept 30, Sept 30, Sept 30,
2005 2004 2005 2004(a)
---------- ---------- ---------- ----------
(unaudited) (unaudited) (audited) (unaudited)
Net cash provided by
operating activities $ 33 $ 49 $ 205 $ 438
Net cash provided by
(used in) investing
activities - (15) (54) (2,646)
Net cash provided by
(used in) financing
activities (9) (8) (416) 2,679
Effect of foreign
currency exchange rates
on cash (1) 1 (2) 3
---------- ---------- ---------- ----------
Net increase (decrease)
in cash $ 23 $ 27 $ (267) $ 474
(a) - The twelve-month period ended September 30, 2004 is the combination
of the five months ended February 29, 2004 of the predecessor company and
the seven months ended September 30, 2004 of the successor company.