DreamWorks Animation Posts Second Quarter 2015 Results

Dreamworks Animation SKG, Inc. (DWA) today reported revenues for the quarter ended June 30, 2015 of $170.8 million, representing an increase of 39.7% from the same period in 2014. In addition, DWA reported an adjusted (b) operating loss of ($1.0) million and adjusted (b) net loss attributable to DWA of ($11.6) million or an adjusted (b) loss of ($0.13) per share. Adjusted financial RESULTS exclude a $20.9 million pre-tax charge associated with Company's Restructuring Plan announced on January 22, 2015.

Including the impact of the Restructuring Plan, DWA reported an operating loss of ($21.8) million and reported net loss attributable to DWA of ($38.6) million, or ($0.45) per share for the quarter ended June 30, 2015. Of the restructuring-related charges totaling $20.9 million or a loss of ($0.25) per share, $2.4 million was due to employee termination and other employee-related costs, $10.9 million was related to accelerated depreciation and amortization charges associated with the closure of our Redwood City facility, and $7.6 million was primarily related to excess staffing and other costs associated with previously announced changes in the feature film slate.

"Our second quarter financial RESULTS were solid, highlighted by the theatrical success of Home and the rapid expansion of our Television and New Media businesses," said Jeffrey Katzenberg, Chief Executive Officer of Dreamworks Animation. "The appetite for premium content across platforms continues to grow both domestically and internationally, and it's clear Dreamworks Animation is well-positioned to capitalize on the growing demand."

Home, which was released theatrically on March 27, 2015 has reached $177 million at the domestic box office and $207 million at the international box office to date.

Second Quarter Review:

DWA's second quarter revenues of $170.8 million increased 39.7% versus the prior-year period primarily driven by the performance of the Feature Film, Television Series and Specials and New Media segments.

Revenues for the quarter ended June 30, 2015 from the Feature Film Segment increased to $87.8 million, up from $69.7 million in the prior-year period. Segment gross profit also increased to $31.7 million compared to $23.9 million in the same period last year.

Home contributed feature film revenue of $23.9 million in the quarter, primarily earned in the worldwide theatrical market. In addition, the film was released in the digital market on June 26, 2015 and reached an estimated 0.1 million home entertainment transactions sold worldwide, as of the end of the quarter. Subsequent to the end of the quarter, on July 28, 2015 the film was released on physical DVD and Blu-ray.

THE PENGUINS OF MADAGASCAR contributed feature film revenue of $8.3 million in the current quarter, primarily from the worldwide home entertainment market. Through the end of the second quarter, the film reached an estimated 3.5 million home entertainment units sold worldwide, net of actual and estimated future returns.

HOW TO TRAIN YOUR DRAGON 2 contributed feature film revenue of $17.9 million in the quarter, primarily from the international pay television market. Through the end of the second quarter, the film reached an estimated 8.6 million home entertainment units sold worldwide, net of actual and estimated future returns.

Mr. Peabody and Sherman contributed feature film revenue of $8.4 million in the quarter, primarily from the international pay television market. The film reached an estimated 4.0 million home entertainment units sold worldwide at the end of the second quarter, net of actual and estimated future returns.

Turbo contributed feature film revenue of $1.0 million in the current quarter. The film reached an estimated 7.2 million home entertainment units sold worldwide at the end of the second quarter, net of actual and estimated future returns.

Library titles contributed feature film revenue of $28.3 million to the quarter. Library revenues in the current quarter were driven by worldwide television and home entertainment revenues for a number of titles including The Croods, Rise of the Guardians, Madagascar 3, How to Train Your Dragon, Madagascar: Escape 2 Africa and Madagascar.

Revenues for the quarter ended June 30, 2015 from the Television Series and Specials Segment increased to $54.5 million, compared to $20.0 million during the prior-year period. The increase in revenues was attributable to a significantly higher number of episodes delivered under our episodic content licensing arrangements. Segment gross profit increased to $19.2 million in the current quarter, from $1.2 million in the same period of the prior year. The increase was primarily driven by favorable amortization rates associated with our episodic series, partially offset by higher up-front marketing costs associated with the release of our new television series. In addition, for the three months ended June 30, 2014 segment gross profit was negatively impacted by higher than expected returns of seasonal and newly-released home entertainment product, as well as increased selling costs, related to our Classic Media properties.

Revenues from the Consumer Products Segment decreased to $12.7 million in the second quarter, compared to $18.5 million in the same period last year. The prior year period benefitted from merchandise and licensing revenue associated with How to Train Your Dragon 2, which was released theatrically in June 2014. Segment revenues in the current quarter were primarily generated by licensing arrangements related to a variety of our intellectual property rights associated with the characters from our feature films. Segment gross profit decreased to $1.8 million from $7.3 million in the prior year period, largely due to higher costs incurred across a variety of segment activities.

Revenues for the quarter ended June 30, 2015 from the Company's New Media Segment were$14.6million compared to$11.5million during the three months ended June 30, 2014. This increase was primarily attributable to revenue generated under new licensing agreements and the delivery of newly-created content versus the prior-year period. In the prior year period, the Company reported certain advertising and talent management revenues in this segment on a "gross" basis rather than on a "net" basis.For comparative purposes, if the New Media Segment's revenues had been reported on a "net" basis during the quarter ended June 30, 2014, revenues for the quarter ended June 30, 2015 would reflect an increase of 103% compared with the prior-year period. Segment gross profit, which is not affected by this item, increased to$7.5million from$2.5million in the prior-year period, primarily due to higher revenue contributions from newly licensed content.

For the quarter ended June 30, 2015, DWA posted an adjusted (b) operating loss of ($1.0) million. The increase in revenues and segment gross profit were offset by an increase in adjusted (b) general and administrative expenses. Adjusted (b) general and administrative costs in the current quarter were largely driven by the expansion and growth of the AwesomenessTV business. Operating loss in the prior-year period included a $7.2 million benefit associated with a reduction in the fair value of the contingent consideration liability related to our acquisition of ATV. The reported operating loss for the quarter ended June 30, 2015, inclusive of restructuring-related charges, was ($21.8) million.

Adjusted (b) net loss attributable to DWA for the quarter ended June 30, 2015 was ($11.6) million, or an adjusted (b) loss of ($0.13) per share. Adjusted net loss reflects higher interest expense in the current quarter attributable to lease financing obligation associated with the Company's headquarters, as well as a decrease in the amount of interest expense that could be capitalized. The RESULTS for the second quarter also included a provision for income taxes of $1.8 million and a $7.1 million expense related to the Company's tax sharing agreement with a former stockholder. This aggregate expense of $8.9 million resulted in the Company's combined effective tax rate of (29.3%) for the second quarter compared to an aggregate expense of $0.9 million, or a combined effective tax rate of (6%), in the prior-year period. Reported net loss attributable to DWA for the quarter ended June 30, 2015 was ($38.6) million, or ($0.45) per share.

Year to Date Review:

DWA's revenues for the six months ended June 30, 2015 increased 25.2% to $337.3 million compared to $269.5 million in the prior-year period. The increase was driven by year-over-year growth in the Feature Films, Television Series and Specials and New Media segments.

Revenues for the six months ended June 30, 2015 from the Feature Film Segment increased to $215.8 million, primarily due to higher revenue from current year and prior year theatrical release categories relative to the prior-year period. Segment gross profit increased to $72.7 million for the six months ended June 30, 2015 compared to a loss of $1.5 million in the prior-year period. In the first half of 2014, DWA recorded an impairment charge of $57.1 million related to the performance of Mr. Peabody and Sherman.

Home, contributed feature film revenue of $26.9 million during the six months ended June 30, 2015, primarily from revenues earned in the worldwide theatrical market.

THE PENGUINS OF MADAGASCAR contributed feature film revenue of $10.3 million during the first half of 2015, primarily from the home entertainment market.

HOW TO TRAIN YOUR DRAGON 2 contributed feature film revenue of $59.3 million in the first six months of 2015, primarily from the film's domestic and international pay television windows, as well as the home entertainment market.

Mr. Peabody and Sherman contributed feature film revenue of $39.9 million in the first six months of 2015, primarily from the film's domestic and international pay television windows and the home entertainment market.

Turbo contributed feature film revenue of $13.4 million in the six months ended June 30, 2015, primarily from the international home entertainment market.

Library titles contributed feature film revenue of $66.0 million in the first half of 2015. Library revenues were driven by worldwide television and home entertainment revenues for a number of titles including Rise of the Guardians, How to Train Your Dragon, The Croods,and Madagascar 3. In addition, during the six months ended June 30, 2015, our Library benefitted from recoveries of $7.8 million from previously established home entertainment reserves related to sales through DWA's former primary theatrical distributor.

Revenues from the Television Series and Specials Segment for the six months ending June 30, 2015 increased 91.3% to $72.5 million, due to a significantly higher number of episodes delivered under our episodic content licensing arrangements. Segment gross profit also increased to $22.6 million in the first half of 2015, up from $7.0 million in the same period of the prior year. The increase was primarily driven by favorable amortization rates associated with our episodic series relative to the prior-year period, partially offset by an increase in up-front marketing costs associated with the launch of our new television series. In addition, gross profit for the six months ended June 30, 2014 was negatively impacted by higher than expected returns of seasonal and newly-released home entertainment product, as well as increased selling costs, related to our Classic Media properties.

Revenues from the Consumer Products Segment in the first half of 2015 decreased to $27.8 million, from $30.7 million in the prior-year period. The prior-year period benefited from merchandise and licensing revenue associated with How to Train Your Dragon 2. Segment revenues for each of the six-month periods ended June 30, 2015 and 2014 were primarily driven by licensing arrangements related to a variety of intellectual property rights associated with the characters from our feature films. For the six months ended June 30, 2015, segment gross profit decreased to $8.4 million, from $13.4 million in the prior year period. The decrease was largely due to lower revenues and higher costs incurred across the segments business activities.

Revenues for the six months ended June 30, 2015 from the Company's New Media Segment increased to $19.1 million, from $15.6 million in the prior-year period. This increase was primarily attributable to revenue generated under new licensing agreements and for the delivery of newly-created content as well as revenues generated by Big Frame, which was acquired in April 2014. In the prior year period, the Company reported certain advertising and talent management revenues in this segment on a "gross" basis rather than on a "net" basis.For comparative purposes, if the New Media Segment's revenues had been reported on a "net" basis during the six months ended June 30, 2014, revenues for the six months ended June 30, 2015 would reflect an increase of approximately 95% compared with the prior-year period. Segment gross profit for the first half of 2015, which is not affected by this item, was $9.6 million, compared to $2.4 million during the same period last year, primarily due to higher revenue contributions from newly licensed content and improved margins on content deliveries.

For the six months ended June, 2015, DWA posted an adjusted (b) operating loss of ($4.4) million. The increase in revenues and segment gross profit was offset by an increase in adjusted (b) general and administrative expenses. Adjusted (b) general and administrative costs in the current year were largely driven by the expansion and growth of the AwesomenessTV business. The reported operating loss for the six months ended June 30, 2015, inclusive of restructuring-related charges was ($57.1) million. This compares to an operating loss of ($72.9) million in the prior-year period, which included a $4.7 million benefit associated with a reduction in the fair value of the contingent consideration liability related to our acquisition of ATV.

Adjusted (b) net loss attributable to DWA for the six months ended June 30, 2015 was ($33.5) million, or an adjusted (b) loss of ($0.40) per share. Adjusted net loss reflects higher interest expense associated with a lease financing obligation associated with the Company's headquarters, and higher debt balances, as well as a write-off of an equity method investment in the amount of $5.1 million in other expense (net). Additionally, during the six months ended June 30, 2015 we recorded a provision for income taxes of $4.2 million and a $7.1 million expense related to the Company's tax sharing agreement with a former stockholder. This aggregate expense of $11.3 million resulted in the Company's combined effective tax rate of (13.5%) for the six months ended June 30, 2015, compared to an aggregate benefit of $22.5 million or a combined effective tax rate of 27.8% in the prior year period. Reported net loss attributable to DWA for the six months ended June 30, 2015 was ($93.4) million, or ($1.09) per share.

For the six months ended June 30, 2015, net cash provided by operating activities was $7.3 million, compared to net cash used in operating activities of ($66.4) million in the prior-year period. The main sources of cash from operating activities were How to Train Your Dragon 2's worldwide home entertainment and international theatrical revenues, The Croods' worldwide home entertainment revenues, Madagascar 3's international television revenues, and to a lesser extent, THE COLLECTION of worldwide television and home entertainment revenues from our other films. In addition, cash provided by operating activities during the six months ended June 30, 2015 benefited from a higher amount of advances received for future deliveries of content. Cash from operating activities in the six months ended June 30, 2015 included cash payments totaling $48.0 million related to the 2015 Restructuring Plan.

Also during the six months ended June 30, 2015, DWA amended its $400 million revolving credit facility, increasing the size of the committed facility to $450 million and extending the term through February 2020. DWA also entered into an agreement to sell its campus located in Glendale, California for $185.0 million and concurrently leased it back from the purchaser. Proceeds from the sale were used to repay outstanding borrowings on the Company's revolving credit facility and for general corporate purposes.

As of June 30, 2015, DWA had $335.0 million of availability on its revolving credit facility and $122.2 million of unrestricted cash and cash equivalents on hand, bringing the Company's total available liquidity to over $450 million.

On July 21, 2015, the original purchaser of the campus resold it for a total sale price of $215.0 million. Pursuant to a sharing agreement between the Company and such original purchaser, the Company was entitled to receive 50% of any increase in value from the original sale price of $185.0 million, net of expenses. Accordingly, the Company received approximately $14.2 million from the original purchase following such resale.

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