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 determine 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):
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DREAMWORKS ANIMATION SKG, INC. | |||
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ADJUSTED EBITDA RECONCILIATIONS | |||
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(Unaudited) | |||
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Three Months Ended |
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Six Months Ended |
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June 30, 2014 |
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June 30, 2014 |
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(in thousands) | ||
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Reconciliation of Net Loss to Adjusted EBITDA: |
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Net loss |
$ (15,928) |
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$ (58,344) |
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Provision (benefit) for income taxes |
2,601 |
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(19,866) |
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Loss from equity method investees |
3,467 |
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6,727 |
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Decrease in income tax benefit payable to former stockholder |
(1,695) |
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(2,622) |
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Other income, net |
(1,853) |
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(3,071) |
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Interest expense, net |
2,484 |
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4,257 |
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Operating loss |
(10,924) |
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(72,919) |
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Income related to investment contributions |
(2,317) |
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(3,989) |
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Amounts included in amortization of film and other inventory costs(1) |
5,245 |
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14,066 |
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Film impairment |
- |
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57,074 |
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Depreciation and amortization(2) |
4,450 |
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8,685 |
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Stock-based compensation expense |
3,112 |
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8,421 |
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Adjusted EBITDA |
$ (434) |
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$ 11,338 |
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Reconciliation of Adjusted EBITDA to Cash Used in Operating Activities: |
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Adjusted EBITDA |
$ (434) |
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$ 11,338 |
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Amortization and write-off of film and other inventory costs (3) |
55,836 |
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135,353 |
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Revenue earned against deferred revenue and other advances |
(16,396) |
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(32,584) |
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Change in fair value of contingent consideration |
(7,220) |
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(4,720) |
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Other income, net |
1,853 |
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3,071 |
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Interest expense, net |
(2,484) |
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(4,257) |
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Net refund from income taxes and stockholder payable |
1,101 |
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2,599 |
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Changes in certain operating asset and liability accounts |
(86,204) |
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(177,235) |
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Cash used in operating activities |
$ (53,948) |
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$ (66,435) |
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(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. |
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(2) Includes those amounts pertaining to the amortization of intangible assets that are classified within costs of revenues. |
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(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 loss to Adjusted EBITDA). |
