-- Total revenue of $854 million for the fourth quarter of 2006 decreased 5.6% from the prior-year quarter, or 7.1% on a constant-currency basis. Full-year 2006 revenue increased 0.4% to $3,516 million, or 1.8% on a constant-currency basis. -- Digital revenue was $104 million or 12.2% of total revenue in the quarter, up 13.0% sequentially from $92 million in the third quarter of fiscal 2006 and up 96.2% from $53 million in the prior-year quarter. -- Operating income rose to $66 million in the quarter compared to $19 million in the prior-year quarter. Adjusted to exclude non-recurring items, including the Kazaa copyright infringement settlement in 2006 and other previously announced 2005 items, which are described below under "Non- Recurring Items" (the "Fourth-Quarter Non-Recurring Items"), operating income was $53 million in the quarter compared to $54 million in the prior- year quarter. -- Operating income before depreciation and amortization (OIBDA) improved to $126 million from $77 million in the prior-year quarter. Adjusted to exclude the Fourth-Quarter Non-Recurring Items, OIBDA grew 0.9% to $113 million from $112 million. -- Net income of $0.08 per diluted share in the quarter improved from a net loss of $0.21 per diluted share in the prior-year quarter. Adjusted to exclude the Fourth-Quarter Non-Recurring Items, the net loss was $0.01 per diluted share in the quarter compared to net income per diluted share of $0.04 in the prior-year quarter.Warner Music Group Corp. (
Figure 1. Warner Music Group Corp. - Consolidated Statement of Operations, Three and Twelve Months Ended 9/30/06 versus 9/30/05 (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, 2006 2005 % Change 2006 2005 % Change -------- -------- -------- -------- -------- -------- (unaudi- (unaudi- (audited) (audited) ted) ted) Revenues: $ 854 $ 905 (6%) $ 3,516 $ 3,502 0% Costs and expenses: Cost of revenues (438) (473) 7% (1,822) (1,850) 2% Selling, general and administrative expenses (314) (359) 13% (1,232) (1,305) 6% Other income, net 14 - 100% 14 4 250% Amortization of intangible assets (50) (47) (6%) (193) (187) (3%) Loss on termination of management agreement - - - - (73) - Restructuring costs - (7) 100% - (7) - -------- -------- -------- -------- -------- -------- Total costs and expenses $ (788) $ (886) 11% $ (3,233) $ (3,418) 5% -------- -------- -------- -------- -------- -------- Operating income $ 66 $ 19 247% $ 283 $ 84 237% Interest expense, net (45) (42) (7%) (180) (182) 1% Net investment- related gains - - - - 1 (100%) Equity in gains (losses) of equity-method investees - - - 1 (1) 200% Unrealized gain on warrants - - - - 17 - Loss on repayment of Holdings Notes - - - - (35) - Minority interest expense - - - - (5) - Other income, net - 2 - 3 7 (57%) -------- -------- -------- -------- -------- -------- Net income (loss) before income taxes $ 21 $ (21) 200% $ 107 $ (114) 194% Income tax expense (9) (9) 0% (47) (55) 15% -------- -------- -------- -------- -------- -------- Net income (loss) $ 12 $ (30) 140% $ 60 $ (169) 136% ======== ======== ======== ======== ======== ======== Net income (loss) per share: Basic $ 0.08 $ (0.21) 139% $ 0.42 $ (1.40) 130% ======== ======== ======== ======== ======== ======== Diluted (a) $ 0.08 $ (0.21) 139% $ 0.40 $ (1.40) 128% ======== ======== ======== ======== ======== ======== Weighted averages shares outstanding: Basic 144.3 141.2 2% 142.8 120.9 18% ======== ======== ======== ======== ======== ======== Diluted (b) 151.3 141.2 7% 150.9 120.9 25% ======== ======== ======== ======== ======== ======== (a) Diluted net loss per share for the twelve months ended September 30, 2005 reflects an add-back to net income for the unrealized gain on warrants as a result of the assumed exercise of the warrants in the calculation. (b) Diluted shares for the three months and twelve months ended September 30, 2005 would include an additional 9.3 million shares and 8.5 million shares, respectively, related to the assumed vesting of restricted stock and assumed exercise of stock options if they were anti-dilutive. Figure 2. Warner Music Group Corp. - Consolidated Balance Sheets as of 9/30/06 and 9/30/05 (dollars in millions) Sept 30, Sept 30, 2006 2005 % Change ---------- ---------- ---------- (audited) (audited) Assets: Current Assets Cash & cash equivalents $ 367 $ 288 27% Short-term investments 18 - 100% Accounts receivable, less allowances of $207 and $218, respectively 585 637 (8%) Inventories 59 52 13% Royalty advances (to be recouped w/in 1 year) 191 190 1% Deferred tax assets 45 36 25% Other current assets 35 39 (10%) ---------- ---------- ---------- Total Current Assets $ 1,300 $ 1,242 5% Royalty advances (to be recouped after 1 year) 207 190 9% Investments 25 21 19% Property, plant & equipment, net 146 157 (7%) Goodwill 929 869 7% Intangible assets subject to amortization, net 1,711 1,815 (6%) Intangible assets not subject to amortization 100 100 - Other assets 102 104 (2%) ---------- ---------- ---------- Total Assets $ 4,520 $ 4,498 0% ========== ========== ========== Liabilities & Shareholders' Equity: Current Liabilities Accounts payable $ 209 $ 247 (15%) Accrued royalties 1,142 1,057 8% Taxes & other withholdings 32 23 39% Current portion of long-term debt 17 17 - Dividend payable 22 - 100% Other current liabilities 377 404 (7%) ---------- ---------- ---------- Total current liabilities $ 1,799 $ 1,748 3% Long-term debt $ 2,239 $ 2,229 - Dividends payable 3 5 (40%) Deferred tax liabilities, net 197 201 (2%) Other noncurrent liabilities 224 226 (1%) ---------- ---------- ---------- Total Liabilities $ 4,462 $ 4,409 1% Common stock - - - Additional paid-in capital 567 548 3% Accumulated deficit (516) (480) (8%) Accumulated other comprehensive income 7 21 (67%) ---------- ---------- ---------- Total Shareholders' Equity $ 58 $ 89 (35%) ---------- ---------- ---------- Total Liabilities & Shareholders' Equity $ 4,520 $ 4,498 0% ========== ========== ========== Figure 3. Warner Music Group Corp. - Summarized Statement of Cash Flows, Three Months and Twelve Months Ended 9/30/06 versus 9/30/05 (dollars in millions) Three Three Twelve Twelve Months Months Months Months Ended Ended Ended Ended Sept Sept Sept Sept 30, 30, % 30, 30, % 2006 2005 Change 2006 2005 Change ------ ------ ------ ------ ------ ------ (unau- (unau- (audited)(audited) dited) dited) Net cash provided by operating activities $ 84 $ 33 $ 307 $ 205 Net cash used in by investing activities (11) - (153) (54) Net cash used in financing activities (13) (9) (81) (416) Effect of foreign currency exchange rates on cash 1 (1) 6 (2) ------ ------ ------ ------ ------ ------ Net increase (decrease) in cash $ 61 $ 23 165% $ 79 $ (267) 130% ------ ------ ------ ------ ------ ------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 before non-cash depreciation of tangible assets and non-cash amortization of 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 presentation of OIBDA helps 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 revenue in our businesses. Accordingly, OIBDA should be considered in addition to, not as a substitute for, operating income, net income (loss) and other measures of financial performance reported in accordance with accounting principles generally accepted in the U.S ("GAAP").
Figure 4. Warner Music Group Corp. -- Reconciliation of OIBDA to Net Income (Loss), Three and Twelve Months Ended 9/30/06 versus 9/30/05 (dollars in millions) Three Three Twelve Twelve Months Months Months Months Ended Ended Ended Ended Sept Sept Sept Sept 30, 30, % 30, 30, % 2006 2005 Change 2006 2005 Change ------- ------- ------- ------- ------- ------- (unaud- (unaud- (audited)(audited) ited) ited) OIBDA $ 126 $ 77 64% $ 518 $ 322 61% Depreciation expense (10) (11) 9% (42) (51) 18% Amortization expense (50) (47) (6%) (193) (187) (3%) ------- ------- ------- ------- ------- ------- Operating income $ 66 $ 19 247% $ 283 $ 84 237% Interest expense, net (45) (42) (7%) (180) (182) 1% Net investment- related gains - - - - 1 - Equity in gains (losses) of equity-method investees - - - 1 (1) 200% Unrealized gain on warrants - - - - 17 - Loss on repayment of Holdings Notes - - - - (35) - Minority interest expense - - - - (5) - Other income, net - 2 - 3 7 (57%) ------- ------- ------- ------- ------- ------- Income (loss) before income taxes $ 21 $ (21) 200% $ 107 $ (114) 194% Income tax expense (9) (9) - (47) (55) 15% ------- ------- ------- ------- ------- ------- Net income (loss) $ 12 $ (30) 140% $ 60 $ (169) 136% ======= ======= ======= ======= ======= ======= OIBDA Margin 14.8% 8.5% 14.7% 9.2% Operating Income Margin 7.7% 2.1% 8.0% 2.4%Adjusted Results In the fourth quarter of 2006 and for the year ended September 30, 2006, non-recurring items consisted of approximately $13 million of income related to the previously announced settlement of copyright infringement litigation between the major music companies and peer-to-peer network, Kazaa. The company recorded an estimate of the amounts it expects to receive as a result of the settlement, net of the estimated amounts payable to its artists in royalties. The settlement amounts are currently being held in escrow pending distribution to the participants in the litigation. 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 an Atlantic executive and the expensing of certain other amounts. Approximately $20 million of these charges were non-cash. In addition, the company took a $4 million charge in the fourth quarter of 2005 for the $5 million settlement of a government investigation into radio promotion practices by New York State Attorney General. The remaining $1 million of this settlement was accrued for in the third fiscal quarter of 2005. As previously disclosed, the prior year also contained a number of non-recurring charges that occurred concurrently with or in connection with our initial public offering in May 2005. Such charges relate to specific one-time events and do not reflect ongoing operations of the business. Therefore, the company is also presenting results excluding these items. We consider these adjusted results to be an important indicator of the operational strengths and performance of our businesses, including the ability to provide free cash flow 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, net income (loss), EPS and other measures of financial performance reported in accordance with GAAP.
Figure 5. Warner Music Group Corp. - Reconciliation of GAAP Operating Income to Non-GAAP Adjusted OIBDA, for the Three and Twelve Months ended 9/30/06 versus 9/30/05 (dollars in millions) Three Three Twelve Twelve Months Months Months Months Ended Ended Ended Ended Sept Sept Sept Sept 30, 30, % 30, 30, % 2006 2005 Change 2006 2005 Change ------ ------- ------ ------ ------- ------ (unau- (unaud- (audited)(audited) dited) ited) Total WMG Operating Income - GAAP $ 66 $ 19 247% $ 283 $ 84 237% Depreciation and Amortization 60 58 3% 235 238 (1%) ------ ------- ------ ------ ------- ------ Total WMG OIBDA 126 77 64% 518 322 61% IPO-related cash bonus - - - - 10 - Bonus related to stock awards - - - - 19 - Loss on termination of management agreement - - - - 73 - Management fees - - - - 6 - Non-recurring severance and other - 24 - - 24 - Legal settlement - 4 - - 5 - Copyright Litigation (13) - - (13) - - Restructuring costs - 7 - - 7 - ------ ------- ------ ------ ------- ------ Total WMG OIBDA Excluding Non-Recurring Charges $ 113 $ 112 1% $ 505 $ 466 8% ====== ======= ====== ====== ======= ====== Recorded Music Operating Income - GAAP $ 59 $ 27 119% $ 317 $ 215 47% Depreciation and Amortization 42 40 5% 163 165 (1%) ------ ------- ------ ------ ------- ------ Recorded Music OIBDA 101 67 51% 480 380 26% IPO-related cash bonus - - - - 8 - Bonus related to stock awards - - - - 12 - Non-recurring severance and other - 24 - - 24 - Restructuring costs - 7 - - 7 - Copyright Litigation (13) - - (13) - - ------ ------- ------ ------ ------- ------ Recorded Music OIBDA Excluding Non-Recurring Charges $ 88 $ 98 (10%) $ 467 $ 431 8% ====== ======= ====== ====== ======= ====== Music Publishing Operating Income - GAAP $ 37 $ 27 37% $ 84 $ 82 2% Depreciation and Amortization 16 15 7% 60 59 2% ------ ------- ------ ------ ------- ------ Music Publishing OIBDA 53 42 26% 144 141 2% IPO-related cash bonus - - - - 1 - ------ ------- ------ ------ ------- ------ Music Publishing OIBDA Excluding Non-Recurring Charges $ 53 $ 42 26% $ 144 $ 142 1% ------ ------- ------ ------ ------- ------ Figure 6. Warner Music Group Corp. - Reconciliation of GAAP Operating Income to Non-GAAP Operating Income for the Three and Twelve Months ended 9/30/06 versus 9/30/05 (dollars in millions) Three Three Twelve Twelve Months Months Months Months Ended Ended Ended Ended Sept Sept Sept Sept 30, 30, % 30, 30, % 2006 2005 Change 2006 2005 Change ----- ------ ----- ----- ------ ----- (unaud- (unaud- (audited)(audited) ited) ited) Total WMG Operating Income - GAAP $ 66 $ 19 247% $ 283 $ 84 237% IPO-related cash bonus - - - - 10 - Bonus related to stock awards - - - - 19 - Loss on termination of management agreement - - - - 73 - Management fees - - - - 6 - Non-recurring severance and other - 24 - - 24 - Legal settlement - 4 - - 5 - Copyright Litigation (13) - - (13) - - Restructuring costs - 7 - - 7 - ----- ------ ----- ----- ------ ----- Total WMG Operating Income Excluding Non-Recurring Charges $ 53 $ 54 (2%) $ 270 $ 228 18% ===== ====== ===== ===== ====== ===== Recorded Music Operating Income - GAAP $ 59 $ 27 119% $ 317 $ 215 47% IPO-related cash bonus - - - - 8 - Bonus related to stock awards - - - - 12 - Non-recurring severance and other - 24 - - 24 - Restructuring costs - 7 - - 7 - Copyright Litigation (13) - - (13) - - ----- ------ ----- ----- ------ ----- Recorded Music Operating Income Excluding Non-Recurring Charges $ 46 $ 58 (21%) $ 304 $ 266 14% ===== ====== ===== ===== ====== ===== Music Publishing Operating Income - GAAP $ 37 $ 27 37% $ 84 $ 82 2% IPO-related cash bonus - - - - 1 - ----- ------ ----- ----- ------ ----- Music Publishing Operating Income Excluding Non-Recurring Charges $ 37 $ 27 37% $ 84 $ 83 1% ===== ====== ===== ===== ====== ===== Figure 7. Warner Music Group Corp. - Reconciliation of GAAP to Non-GAAP Net Income (Loss) and Earnings Per Share for the Three and Twelve Months ended 9/30/06 versus 9/30/05 (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, 2006 2005 2006 2005 ------- ------- ------- ------- (unaud- (unaud- (audited)(audited) ited) ited) Net Income (loss): Net income (loss) - GAAP $ 12 $ (30) $ 60 $ (169) IPO-related cash bonus - - - 10 Bonus related to stock awards - - - 19 Loss on termination of management fee - - - 73 Management fees - - - 6 Loss on repayment of debt - - - 35 Non-recurring severance and other - 24 - 24 Legal settlement - 4 - 5 Copyright Litigation (13) - (13) - Restructuring costs - 7 - 7 Tax effect on non-recurring items - - - (3) ------- ------- ------- ------- Net (loss) income - Excluding Non-Recurring Charges $ (1) $ 5 $ 47 $ 7 ======= ======= ======= ======= Earnings Per Share: EPS - GAAP $ 0.08 ($ 0.21) $ 0.40 $ (1.40) IPO-related cash bonus - - - 0.08 Bonus related to stock awards - - - 0.16 Loss on termination of management fee - - - 0.60 Management fees - - - 0.05 Loss on repayment of debt - - - 0.29 Non-recurring severance and other - 0.17 - 0.20 Legal settlement - 0.03 - 0.04 Copyright Litigation (0.09) - (0.09) - Restructuring costs - 0.05 - 0.06 Tax effect on non-recurring items - - - (0.02) ------- ------- ------- ------- Diluted EPS- Excluding Non-Recurring Charges $ (0.01) $ 0.04 $ 0.31 $ 0.06 ------- ------- ------- -------Constant Currency As exchange rates are an important factor in understanding period to period comparisons, we believe the presentation of results on a constant-currency basis in addition to reported results helps improve the ability to understand the company's operating results and evaluate our performance in comparison to prior periods. Constant-currency information compares results between periods as if exchange rates had remained constant period-over-period. We use results on a constant-currency basis as one measure to evaluate our performance. However, a limitation of the use of the constant-currency results as a performance measure is that it does not reflect the $14 million, $10 million and $4 million unfavorable impact of exchange rates on our Total, Recorded Music and Music Publishing revenue, respectively, in the three months ended September 30, 2006 compared to the comparable prior-year quarter and the $48 million, $38 million and $10 million favorable impact of exchange rates on our Total, Recorded Music and Music Publishing revenue, respectively, in the year ended September 30, 2006 compared to prior year (see Figure 9). Further, it does not reflect the $7 million, $3 million and $1 million impact of favorable exchange rates on our Total, Recorded Music and Music Publishing operating income in the year ended September 30, 2006 (see Figure 8 and 5 to calculate the impact). These results should be considered in addition to, not as a substitute for, results reported in accordance with GAAP. Results on a constant-currency basis, as we present them, may not be comparable to similarly titled measures used by other companies and is not a measure of performance presented in accordance with GAAP.
Figure 8. Warner Music Group Corp. Reconciliation of GAAP Operating Income to Non-GAAP Adjusted OIBDA, Constant Currency for the Three and Twelve Months ended 9/30/06 versus 9/30/05 (dollars in millions) Three Three Twelve Twelve Months Months Months Months Ended Ended Ended Ended Sept 30, Sept 30, % Sept 30, Sept 30, % 2006 2005 Change 2006 2005 Change -------- --------- ---- -------- --------- ---- (unaudited)(unaudited) (unaudited)(unaudited) Total WMG Operating Income - GAAP $ 66 $ 19 247% $ 283 $ 77 268% Depreciation and Amortization 60 60 0% 235 240 (2%) -------- --------- -------- --------- Total WMG OIBDA 126 79 59% 518 317 63% IPO-related cash bonus - - - - 10 - Bonus related to stock awards - - - - 19 - Loss on termination of management agreement - - - - 73 - Management fees - - - - 6 - Non-recurring severance and other - 24 - - 24 - Legal settlement - 4 - - 5 - Copyright Litigation (13) - - (13) - - Restructuring costs - 7 - - 7 - -------- --------- -------- --------- Total WMG OIBDA Excluding Non-Recurring Charges $ 113 $ 114 (1%)$ 505 $ 461 10% ======== ========= ======== ========= Recorded Music Operating Income - GAAP $ 59 $ 27 119% $ 317 $ 212 50% Depreciation and Amortization 42 40 5% 163 165 (1%) -------- --------- -------- --------- Recorded Music OIBDA 101 67 51% 480 377 27% IPO-related cash bonus - - - - 8 - Bonus related to stock awards - - - - 12 - Non-recurring severance and other - 24 - - 24 - Restructuring costs - 7 - - 7 - Copyright Litigation (13) - - (13) - - -------- --------- -------- --------- Recorded Music OIBDA Excluding Non-Recurring Charges $ 88 $ 98 (10%)$ 467 $ 428 9% ======== ========= ======== ========= Music Publishing Operating Income - GAAP $ 37 $ 27 37% $ 84 $ 81 4% Depreciation and Amortization 16 15 7% 60 59 2% -------- --------- -------- --------- Music Publishing OIBDA 53 42 26% 144 140 3% IPO-related cash bonus - - - - 1 - -------- --------- -------- --------- Music Publishing OIBDA Excluding Non-Recurring Charges $ 53 $ 42 26% $ 144 $ 141 2% -------- --------- -------- --------- Figure 9. Warner Music Group Corp. - Revenue by Geography, Three and Twelve Months Ended 9/30/06 versus 9/30/05 As Reported and Constant Currency (dollars in millions) Three Three Three Twelve Twelve Twelve Months Months Months Months Months Months Ended Ended Ended Ended Ended Ended Sept 30, Sept 30, Sept 30, Sept 30, Sept 30, Sept 30, 2006 2005 2005 2006 2005 2005 ------- ------- ------- ------- ------- ------- As As Constant As As Constant reported reported $ reported reported $ (audited)(audited) (unaud- (audited)(audited) (unaud- ited) ited) Revenue by Geography: US revenue $ 421 $ 460 $ 460 $ 1,703 $ 1,677 $ 1,677 Recorded Music 368 410 410 1,483 1,411 1,411 Music Publishing (a) 53 50 50 220 266 266 International revenue $ 438 $ 452 $ 466 $ 1,840 $ 1,854 $ 1,806 Recorded Music 363 365 375 1,522 1,513 1,475 Music Publishing (a) 75 87 91 318 341 331 Intersegment eliminations $ (5) $ (7) $ (7) $ (27) $ (29) $ (29) ------- ------- ------- ------- ------- ------- Total Revenue $ 854 $ 905 $ 919 $ 3,516 $ 3,502 $ 3,454 ======= ======= ======= ======= ======= ======= Revenue by Segment: Recorded Music $ 731 $ 775 $ 785 $ 3,005 $ 2,924 $ 2,886 Music Publishing 128 137 141 538 607 597 Intersegment eliminations (5) (7) (7) (27) (29) (29) ------- ------- ------- ------- ------- ------- Total Revenue $ 854 $ 905 $ 919 $ 3,516 $ 3,502 $ 3,454 ======= ======= ======= ======= ======= ======= (a) The sheet music business, which was sold in May 2005, contributed to Music Publishing revenues for the twelve months ended September 30, 2005, as follows: Twelve Months Ended --------------------------------------------- Including sheet Sheet music Excluding sheet music business business music business --------------- ----------- --------------- Revenue $ 607 $ 34 $ 573Free 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." Unlevered After-Tax Cash Flow Free cash flow includes cash paid for interest and, in certain periods prior to our IPO, non-recurring management fees. We also review our cash flow adjusted for these items, a measure we call unlevered after-tax cash flow. Management believes this measure provides investors with an additional important perspective on our cash generation ability. We consider unlevered after-tax cash flow excluding, in certain periods prior to our IPO, non-recurring management fees 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 10. Warner Music Group Corp. Calculation of Free Cash Flow, Three Months and Twelve Months Ended 9/30/06 versus 9/30/05 (dollars in millions) Three Three Twelve Twelve Months Months Months Months Ended Ended Ended Ended Sept 30, Sept 30, Sept 30, Sept 30, 2006 2005 2006 2005 --------- -------- --------- --------- (unaudi- (unaudi- (audited) (audited) ted) ted) Net cash flow provided by operating activities $ 84 $ 33 $ 307 $ 205 Less: Capital expenditures 12 10 30 30 Less: Cash paid (received) for investments, excluding short-term investments 10 (10) 105 24 --------- -------- --------- --------- Free cash flow (a) $ 62 $ 33 $ 172 $ 151 ========= ======== ========= ========= (a) - 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, 2006 2005 2006 2005 --------- -------- --------- --------- Free cash flow $ 62 $ 33 $ 172 $ 151 Plus: Cash paid for interest 23 22 141 151 Plus: Cash paid for management fees - - - 6 --------- -------- --------- --------- Unlevered after-tax cash flow $ 85 $ 55 $ 313 $ 308 ========= ======== ========= ========= Unlevered after-tax cash flow for the twelve months ended September 30, 2005 includes the payment of certain non-recurring items related to the company's IPO in 2005 (see Non-Recurring Items above) including $73 million paid to terminate the management agreement, $10 million paid for IPO-related cash bonuses and $19 million paid for bonuses related to stock awards. Adjusted to exclude non-recurring items related to the company's IPO in 2005, unlevered after-tax cash flow was $410 million for the twelve months ended September 30, 2005.
Contact Information: Media Contact: Will Tanous (212) 275-2244 Email Contact Investor Contact: Jill Krutick (212) 275-4790 Email Contact