During the ongoing Terra Firma-Citi saga, EMI has released a few numbers that show improvements in its divisions' operating performance. (See a chart of top-line performance here, via paidContent.) But, beyond the simple accounting measure of EMI's operating performance lay numerous expenses that help describe the company's current financial situation.

The numbers revealed are each EMI division’s revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) for its fiscal year ending March 31, 2009. The company's recorded music division generated £1.095 billion in revenue, a 4.6% increase over the previous year, and £163 million in EBITDA, a 217% increase. The publishing division's revenue grew 7.4% to £468 million while EBITDA rose nearly 20% to £135 million. Group revenue increased 7.4% to £1.56 billion. Combined EBITDA was £298 million, an 81.3% increase.

Growth Is Part of the Story
When Terra Firma acquired EMI, the company was in a state of mismanagement. There was a lot of low-hanging fruit, and the focus and discipline installed by a private equity owner tends to improve acquired companies' performance. In short, some growth in EBITDA should be expected. Combine the early positive results typically gained under private ownership with the continued malaise of the recorded music market and it's reasonable to assume the next 7.4% increase in EMI's revenue will take longer than the previous 7.4% increase. (That said, the next fiscal year should benefit from the release of Beatles remastered CDs and the Beatles version of the Rock Band video game. Those releases came well after the end of the fiscal year discussed here).

The story, however, continues beyond EBITDA. EBITDA is a gauge of operating performance. It doesn’t include interest, amortization, depreciation or restructuring costs. For a highly leveraged company going through a debt-backed turnaround, expenses related to restructuring and servicing debt cannot be overlooked. Interest and restructuring expenses are important because they represent actual cash leaving the company. Amortization and depreciation are non-cash accounting measures that reflect the reduction of intangible assets' useful lives.

By accounting measures, the company had many large expenses beyond the EBITDA figures that greatly reduce net income. In terms of cash flows, interest expenses and restructuring charges represent a significant drain on resources.

Not only does EMI carry quite a bit of debt -- £2.5 billion – but its future will be determined by how Terra Firma deals with that debt. According to Terra Firma's 2008 Annual Report, EMI's interest expense was £147 million for the last nine months of calendar year 2008. That equals £196 million annually. Remember that EMI's EBTIDA was £298 million in fiscal 2009.

Restructuring charges were not included in these released EBITDA figures., but the the Maltby report can be used as a guide. It listed £55 million in restructuring costs for the half year ending September 30, 2008. An equal or very similar amount was probably incurred in the next six months, putting annual restructuring charges at £110. Restructuring charges occur at the front end of a company's reorganization, so EMI will not suffer through restructuring costs for long.

Non-Cash Items Matter, Too
The Maltby report listed an amortization expense of £59 million and a depreciation expense of £10 million for the half-year ended September 30, 2008. So, for the entire year amortization was probably double that, or around £120 million. For comparative purposes, the amortization expense of the similarly-sized Warner Music Group for its latest fiscal year will be around $220 million (£132 million) on gross intangible assets of around $2.4 billion. Why consider amortization if it doesn’t involve cash or reflect improvements in operations? First, it is a standard expense used in the calculation of net income, the most basic measure of a company’s financial performance. Second, media companies are in the business of creating and acquiring intangible assets (recorded music catalog, music publishing rights, artist contracts, trademarks). The expense related to amortizing intangible assets reflects the limited useful life of those assets. This implies companies need to continuously create and/or acquire new assets to remain competitive.

To recap: EMI’s operations are looking better as the industry has become tougher. EBITDA in the year ended March 31, 2009 was £298 million and could easily have been completely negated just by interest expense, restructuring charges and amortization and depreciation. EMI’s operational improvements should be duly noted. But the additional items mentioned here are too important to overlook.