DreamWorks Animation Reports Third Quarter 2014 Financial Results

DreamWorks Animation Reports Third Quarter 2014 Financial Results

Quarterly Revenue and Earnings Up 17% Year-Over-Year On Strength Of How To Train Your Dragon 2

GLENDALE, Calif., Oct. 29, 2014 /PRNewswire/ -- DreamWorks Animation SKG, Inc. (Nasdaq: DWA) today announced financial results for its third quarter ended September 30, 2014. For the quarter, the Company reported total revenue of $180.9 million and net income attributable to the Company of $11.9 million, or $0.14 per diluted share. This compares to revenue of $154.5 million and net income attributable to the Company of $10.1 million, or $0.12 per diluted share in the third quarter of 2013.

"The third quarter of 2014 was strong for DreamWorks Animation, with both quarterly revenue and earnings per share up 17% in a year-over-year comparison," commented Jeffrey Katzenberg, Chief Executive Officer of DreamWorks Animation. "Driving the Company's third quarter results is the blockbuster performance of How to Train Your Dragon 2, which has reached over $615 million at the worldwide box office to become the highest-grossing animated film of the year."

The feature film segment contributed revenue of $142.4 million and segment gross profit of $64.3 million to the third quarter.

How to Train Your Dragon 2 contributed feature film revenue of $74.2 million to the third quarter, primarily from its continued performance at the worldwide box office.

Turbo, The Croods and Rise of the Guardians contributed feature film revenue of $12.7 million, $1.8 million and $3.5 million, respectively, to the third quarter and reached an estimated 5.3 million, 7.8 million and 5.8 million home entertainment units sold worldwide, respectively, through the end of the third quarter, net of actual and estimated future returns.

Library titles contributed feature film revenue of $50.2 million to the third quarter.

The Television segment contributed revenue of $14.3 million and segment gross profit of $2.3 million to the third quarter, primarily from Classic Media content, the Turbo F.A.S.T. series and DreamWorks Dragons: Riders of Berk on Cartoon Network.

The Consumer Products segment contributed revenue of $12.1 million and segment gross profit of $4.2 million to the third quarter.

The segment consisting of all other items contributed revenue of $12.1 million and segment gross profit of $1.2 million to the third quarter, primarily from AwesomenessTV. The Company reduced the estimated fair value of the contingent consideration related to its prior acquisition of AwesomenessTV resulting in a $4.9 million pretax gain in the third quarter.

Due to the Company's continued focus on diversification and growth in the variety of business lines in which it now operates, it is now presenting all selling and marketing expenses as a single line item on its statements of operations. Certain selling and marketing expenses previously captured in costs of revenue and selling, general and administrative expenses will now be recorded in the selling and marketing expense line item.

Costs of revenue for the third quarter equaled $103.7 million. Selling and marketing expenses totaled $8.8 million for the third quarter. General and administrative expenses totaled $55.0 million.

The Company's income tax expense for the third quarter was approximately $2.6 million. The Company's combined effective tax rate, its actual tax rate coupled with the effect of a tax sharing agreement with a former stockholder, was approximately 30% for the third quarter.

The Company's fourth quarter 2014 results are expected to be driven primarily by its feature film segment, including results from the theatrical release of Penguins of Madagascar and the home entertainment release of How to Train Your Dragon 2.

Items related to the earnings press release for the third quarter of 2014 will be discussed in more detail on the Company's earnings conference call later today.

Conference Call Information

DreamWorks Animation will host a conference call and webcast to discuss the results on Wednesday, October 29, 2014, at 4:30 p.m. (ET). Investors can access the call by dialing (800) 230-1085 in the U.S. and (612) 332-0107 internationally and identifying "DreamWorks Animation Earnings" to the operator. The call will also be available via live webcast at ir.dreamworksanimation.com.

A replay of the conference call will be available shortly after the call ends on Wednesday, October 29, 2014. To access the replay, dial (800) 475-6701 in the U.S. and (320) 365-3844 internationally and enter 336661 as the conference ID number. Both the earnings release and archived webcast will be available on the Company's website at ir.dreamworksanimation.com.

About DreamWorks Animation

DreamWorks Animation creates high-quality entertainment, including CG animated feature films, television specials and series and live entertainment properties, meant for audiences around the world. The Company has world-class creative talent, a strong and experienced management team and advanced filmmaking technology and techniques. DreamWorks Animation has been named one of the "100 Best Companies to Work For" by FORTUNE® Magazine for five consecutive years. In 2013, DreamWorks Animation ranked #12 on the list. All of DreamWorks Animation's feature films are produced in 3D. The Company has theatrically released a total of 29 animated feature films, including the franchise properties of Shrek, Madagascar, Kung Fu Panda, How to Train Your Dragon, Puss In Boots and The Croods.

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Caution Concerning Forward-Looking Statements

This document includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company's plans, prospects, strategies, proposals and our beliefs and expectations concerning performance of our current and future releases and anticipated talent, directors and storyline for our upcoming films and other projects, constitute forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate and management's beliefs and assumptions. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Actual results may vary materially from those expressed or implied by the statements herein due to changes in economic, business, competitive, technological and/or regulatory factors, and other risks and uncertainties affecting the operation of the business of DreamWorks Animation SKG, Inc. These risks and uncertainties include: audience acceptance of our films, our dependence on the success of a limited number of releases each year, the increasing cost of producing and marketing feature films, piracy of motion pictures, the effect of rapid technological change or alternative forms of entertainment and our need to protect our proprietary technology and enhance or develop new technology. In addition, due to the uncertainties and risks involved in the development and production of animated feature projects, the release dates for the projects described in this document may be delayed. For a further list and description of such risks and uncertainties, see the reports filed by us with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our most recent quarterly reports on Form 10-Q. DreamWorks Animation is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise.


DREAMWORKS ANIMATION SKG, INC.

CONSOLIDATED BALANCE SHEETS

(Unaudited)




September 30, December 31,

2014 2013
---- ----

(in thousands, except par value

and share amounts)

Assets

Cash and cash equivalents $49,066 $95,467

Trade accounts receivable, net of allowance
for doubtful accounts 128,970 130,744

Receivables from distributors, net of
allowance for doubtful accounts 285,722 283,226

Film and other inventory costs, net 1,015,198 943,486

Prepaid expenses 19,264 20,555

Other assets 49,089 23,385

Investments in unconsolidated entities 54,551 38,542

Property, plant and equipment, net of
accumulated depreciation and amortization 182,047 186,670

Deferred taxes, net 243,332 221,920

Intangible assets, net of accumulated
amortization 191,361 150,511

Goodwill 189,667 179,722
------- -------

Total assets $2,408,267 $2,274,228
========== ==========


Liabilities and Equity

Liabilities:

Accounts payable $8,299 $5,807

Accrued liabilities 208,850 263,668

Payable to former stockholder 264,079 262,309

Deferred revenue and other advances 34,911 36,425

Revolving credit facility 205,000 -

Senior unsecured notes 300,000 300,000
------- -------

Total liabilities 1,021,139 868,209

Commitments and contingencies

Equity:

DreamWorks Animation SKG, Inc. Stockholders' Equity:

Class A common stock, par value $0.01 per
share, 350,000,000 shares authorized,
104,964,269 and 104,155,993 shares issued,
as of September 30, 2014 and December 31,
2013, respectively 1,050 1,042

Class B common stock, par value $0.01 per
share, 150,000,000 shares authorized,
7,838,731 shares issued and outstanding,
as of September 30, 2014 and December 31,
2013 78 78

Additional paid-in capital 1,131,732 1,100,101

Accumulated other comprehensive loss (1,071) (600)

Retained earnings 1,026,003 1,072,398

Less: Class A Treasury common stock, at
cost, 27,582,874 and 27,439,119 shares, as
of September 30, 2014 and December 31,
2013, respectively (771,660) (768,224)
-------- --------

Total DreamWorks Animation SKG, Inc.
stockholders' equity 1,386,132 1,404,795

Non-controlling interests 996 1,224
--- -----

Total equity 1,387,128 1,406,019
--------- ---------

Total liabilities and equity $2,408,267 $2,274,228
========== ==========





DREAMWORKS ANIMATION SKG, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)




Three Months Ended Nine Months Ended

September 30, September 30,
------------- -------------

2014 2013 2014 2013
---- ---- ---- ----

(in thousands, except per share amounts)

Revenues $180,861 $154,549 $450,379 $502,633


Operating expenses (income):

Costs of revenues 103,719 86,639 335,734 293,406

Selling and marketing 8,790 6,935 28,334 21,128

General and
administrative 54,957 45,869 153,393 136,206

Product development 434 455 1,585 2,487

Change in fair value of
contingent
consideration (4,955) - (9,675) -

Other operating income (2,673) (3,333) (6,662) (6,192)
------ ------ ------ ------

Operating income (loss) 20,589 17,984 (52,330) 55,598


Non-operating income (expense):

Interest (expense)
income, net (2,840) (769) (7,097) 871

Other income, net 298 2,847 3,369 4,889

(Increase) decrease in
income tax benefit
payable to former
stockholder (2,384) (283) 238 (1,352)
------ ---- --- ------

Income (loss) before
loss from equity
method investees and
income taxes 15,663 19,779 (55,820) 60,006


Loss from equity method
investees 1,212 2,781 7,939 4,110
----- ----- ----- -----

Income (loss) before
income taxes 14,451 16,998 (63,759) 55,896

Provision (benefit) for
income taxes 2,587 6,919 (17,279) 17,455
----- ----- ------- ------

Net income (loss) 11,864 10,079 (46,480) 38,441

Less: Net (loss) income
attributable to non-
controlling interests (64) 15 (85) 547
--- --- --- ---

Net income (loss)
attributable to
DreamWorks Animation
SKG, Inc. $11,928 $10,064 $(46,395) $37,894
======= ======= ======== =======


Net income (loss) per share of common stock
attributable to DreamWorks Animation SKG, Inc.

Basic net income (loss)
per share $0.14 $0.12 $(0.55) $0.45

Diluted net income
(loss) per share $0.14 $0.12 $(0.55) $0.45

Shares used in computing net income (loss) per
share

Basic 84,646 83,631 84,562 83,939

Diluted 85,845 85,353 84,562 85,041








DREAMWORKS ANIMATION SKG, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)




Nine Months Ended

September 30,
-------------

2014 2013
---- ----

(in thousands)

Operating activities

Net (loss) income $(46,480) $38,441

Adjustments to reconcile net (loss) income to net cash (used in) provided by
operating activities:

Amortization and write-off of film and other
inventory costs(1) 298,096 254,489

Amortization of intangible assets 10,516 7,341

Stock-based compensation expense 8,387 14,483

Amortization of deferred financing costs 865 182

Depreciation and amortization 3,654 3,420

Change in fair value of contingent consideration (9,675) -

Revenue earned against deferred revenue and other
advances (43,143) (71,489)

Income related to investment contributions (6,662) (14,033)

Loss from equity method investees 7,939 4,110

Deferred taxes, net (19,658) 15,372

Changes in operating assets and liabilities, net of the effects of acquisitions:

Trade accounts receivable 2,830 878

Receivables from distributors (2,011) 50,507

Film and other inventory costs (354,003) (323,967)

Intangible assets - 1,015

Prepaid expenses and other assets (21,145) (6,587)

Accounts payable and accrued liabilities (46,553) 11,269

Payable to former stockholder 1,770 (14,645)

Income taxes payable/receivable, net 2,510 3,115

Deferred revenue and other advances 72,117 96,538
------ ------

Net cash (used in) provided by operating activities (140,646) 70,439
-------- ------


Investing activities

Investments in unconsolidated entities (18,154) (14,720)

Purchases of property, plant and equipment (26,263) (26,669)

Acquisitions of character and distribution rights (51,000) -

Acquisitions, net of cash acquired (12,605) (30,093)

Net cash used in investing activities (108,022) (71,482)
-------- -------


Financing activities

Proceeds from stock option exercises 261 -

Deferred financing costs - (7,718)

Purchase of treasury stock (3,580) (28,170)

Borrowings from revolving credit facility 215,000 68,000

Repayments of borrowings from revolving credit
facility (10,000) (233,000)

Borrowings from senior unsecured notes - 300,000

Net cash provided by financing activities 201,681 99,112
------- ------

Effect of exchange rate changes on cash and cash
equivalents 586 (889)
--- ----

(Decrease) increase in cash and cash equivalents (46,401) 97,180

Cash and cash equivalents at beginning of period 95,467 59,246
------ ------

Cash and cash equivalents at end of period $49,066 $156,426
======= ========


Non-cash investing activities:

Contingent consideration portion of business
acquisition purchase price $ - $95,000

Intellectual property and technology licenses
granted in exchange for equity interest 6,057 12,007

Services provided in exchange for equity interest 682 2,026

Total non-cash investing activities $6,739 $109,033
====== ========


Supplemental disclosure of cash flow information:

Cash paid (refunded) during the period for income
taxes, net $70 $(1,182)
=== =======

Cash paid during the period for interest, net of
amounts capitalized $14,039 $ -
======= ===============


(1) Included within this amount is
depreciation and amortization,
interest expense and stock-based
compensation previously
capitalized to "Film and other
inventory costs." During the nine
months ended September 30, 2014
and 2013, these amounts totaled
$24,574 and $24,932,
respectively.




Non-GAAP Financial Measures

In connection with our issuance of the 6.875% Senior Notes due 2020 (the "Notes") on August 14, 2013, we began to use Adjusted EBITDA to provide investors with a measure of our ability to make our interest payments on the Notes. We define Adjusted EBITDA as net income before provision for income taxes, loss from equity method investees, increase/decrease in income tax benefit payable to former stockholder, other income, net, interest income, net, other non-cash operating income, depreciation and amortization, stock-based compensation expense, impairments and other charges and certain components of amortization of film and other inventory costs (refer to the reconciliation below). Although the indenture governing the Notes does not include covenants based on Adjusted EBITDA, we believe our investors and noteholders use Adjusted EBITDA as one indicator of our ability to comply with our debt covenants as it is similar to the consolidated cash flow measure described in the indenture (refer to our Current Report on Form 8-K filed on August 14, 2013). Although consolidated cash flow is not a financial covenant under the indenture, it is a measure that is used to determine our ability to make certain restricted payments and incur additional indebtedness in accordance with the terms of the indenture.

Adjusted EBITDA is not prepared in accordance with U.S. GAAP. We believe the use of this non-GAAP measure on a consolidated basis assists investors in comparing our ongoing operating performance between periods. Adjusted EBITDA provides a supplemental presentation of our operating performance and generally includes adjustments for unusual or non-operational activities. We may not calculate Adjusted EBITDA in a manner consistent with the methodologies used by other companies. Adjusted EBITDA (a) does not represent our operating income or cash flows from operating activities as defined by U.S. GAAP; (b) does not include all of the adjustments used to compute consolidated cash flow for purposes of the covenants applicable to the Notes; (c) is not necessarily indicative of cash available to fund our cash flow needs; and (d) should not be considered as an alternative to net income, operating income, cash provided by operating activities or our other financial information as determined under U.S. GAAP. Our presentation of Adjusted EBITDA should not be construed as an implication that our future results will be unaffected by unusual or nonrecurring items. We believe that net income is the most directly comparable U.S. GAAP measure to Adjusted EBITDA. Accordingly, the following table presents a reconciliation of net income (or loss) to Adjusted EBITDA (in thousands):





DREAMWORKS ANIMATION SKG, INC.

ADJUSTED EBITDA RECONCILIATIONS

(Unaudited)




Three Months Ended Nine Months Ended

September 30, September 30,
------------- -------------

2014 2013 2014 2013
---- ---- ---- ----

(in thousands)

Reconciliation of Net Income (Loss) to Adjusted EBITDA:


Net income (loss) $11,864 $10,079 $(46,480) $38,441

Provision (benefit) for income
taxes 2,587 6,919 (17,279) 17,455

Loss from equity method
investees 1,212 2,781 7,939 4,110

Increase (decrease) in income
tax benefit payable to former
stockholder 2,384 283 (238) 1,352

Other income, net (298) (2,847) (3,369) (4,889)

Interest expense, net 2,840 769 7,097 (871)
----- --- ----- ----

Operating income (loss) 20,589 17,984 (52,330) 55,598

Income related to investment
contributions (2,673) (3,333) (6,662) (14,033)

Amounts included in
amortization of film and other
inventory costs(1) 10,508 7,555 24,574 24,932

Film impairments 2,104 - 59,178 -

Depreciation and
amortization(2) 5,485 4,002 14,170 10,761

Stock-based compensation
expense (34) 4,646 8,387 14,483
--- ----- ----- ------

Adjusted EBITDA $35,979 $30,854 $47,317 $91,741
======= ======= ======= =======


Reconciliation of Adjusted EBITDA to Cash (Used in) Provided by
Operating Activities:


Adjusted EBITDA $35,979 $30,854 $47,317 $91,741

Amortization and write-off of
film and other inventory
costs(3) 78,991 68,911 214,344 229,557

Revenue earned against deferred
revenue and other advances (10,559) (32,428) (43,143) (71,489)

Change in fair value of
contingent consideration (4,955) - (9,675) -

Other income, net 298 2,847 3,369 4,889

Interest expense, net (2,840) (769) (7,097) 871

Net refund from (payments of)
income taxes and stockholder
payable (676) (310) 1,923 (14,744)

Changes in certain operating
asset and liability accounts (170,449) (18,362) (347,684) (170,386)
-------- ------- -------- --------

Cash (used in) provided by
operating activities $(74,211) $50,743 $(140,646) $70,439
======== ======= ========= =======



(1) Amortization of film and other
inventory costs in any period
includes depreciation and
amortization, interest expense
and stock-based compensation
expense that were capitalized as
part of film and other inventory
costs in the period that those
charges were incurred. For
purposes of Adjusted EBITDA, we
add back the portion of
amortization of film and other
inventory costs that represents
amounts previously capitalized as
depreciation and amortization,
interest expense and stock-based
compensation expense.


(2) Includes those amounts
pertaining to the amortization of
intangible assets that are
classified within costs of
revenues.


(3) Represents the remaining
portion of amortization and
write-off of film and other
inventory costs not already
included in Adjusted EBITDA
(refer to reconciliation of net
income (or loss) to Adjusted
EBITDA).




SOURCE DreamWorks Animation SKG, Inc.

DreamWorks Animation SKG, Inc.

CONTACT: Shannon Olivas, DreamWorks Animation Investor Relations, (818) 695-3658, shannon.olivas@dreamworks.com

Web Site: http://www.dreamworksanimation.com


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