Alliance Atlantis Communications Inc. (the "Company") reported revenue and earnings growth for the second quarter ended June 30, 2006, driven by the continued strength of the Broadcasting business and strong sales for the CSI franchise.
"We are exceptionally pleased with the performance of the CSI franchise, which continues to enjoy ratings successes in the U.S. and international markets," said Phyllis Yaffe, Chief Executive Officer of Alliance Atlantis. "Subsequent to the end of the quarter, we announced the sale of certain international second window rights for a total value of US$250 million. These sales demonstrate the strong interest in the re-licensing of CSI around the world."
"Our Broadcasting business recorded strong gains in subscriber revenue, and for the third successive quarter, our digital channels made a positive contribution to EBITDA," Yaffe added. "Additionally, total advertising revenue increased by 3% compared to last year's period. Given the overall context of advertising sales in the specialty market in the quarter, we are satisfied with the growth recorded. The specialty ad market was affected by an unusually heavy season for sports this winter/spring resulting in ad dollars temporarily being shifted towards sports programming."
"During the quarter we repurchased and cancelled just under one million of our Class B Non-Voting shares at a total cost of $31.1 million," said David Lazzarato, Executive Vice President and Chief Financial Officer. "Since announcing our share buyback during the fourth quarter of 2005, we have used approximately $72.5 million of free cash flow to repurchase approximately 2.1 million shares, representing 5% of the shares then outstanding."
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(*) This press release contains forward-looking statements and should be
read in conjunction with the note on forward looking statements
contained at the conclusion of this release.
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Second Quarter Financial Results
Revenue
Broadcasting revenue of $76.8 million represented an increase of 6% over the prior year's quarter. Total advertising revenue increased by 3% compared to last year's period. The growth levels reflect several unique sports programming events during the first half of the year, which attracted a significant volume of ad spending. Total subscriber revenue grew 11% over the prior year's period reflecting strong growth in paid subscribers.
In the Entertainment segment, CSI revenue of $84.7 million was up 28% from $66.2 million in the prior year's quarter. The increase was primarily due to strength of U.S and international sales partially offset by a stronger Canadian dollar during the quarter. The negative impact of foreign exchange changes on CSI revenue in the quarter was $8.6 million. The foreign exchange rate for the second quarter of 2006 was $1.14 compared to $1.24 in the prior year's quarter. The foreign exchange rate had a positive impact on the amount of U.S. dollar denominated debt outstanding, as discussed below.
The Other Entertainment segment, which primarily represents sales made from the Company's historical library of program rights, recorded $9.4 million of revenue during the quarter compared to $12.8 million in the prior year's period. The decrease is primarily due to the timing of sales.
Motion Picture Distribution revenue of $82.3 million was down 7% from $88.4 million in the prior year's period due to a more modest slate of theatrical and DVD releases, partially offset by strong television sales.
EBITDA
During the second quarter, Broadcasting EBITDA of $26.6 million increased 7% compared to the prior year's quarter. This represented an EBITDA margin of 35% compared to a margin of 34% in the same period last year. The increases are primarily due to higher revenue and a positive contribution from our digital channels which generated a negative EBITDA contribution in the prior year's quarter. These increases were partially offset by higher programming and marketing costs.
During the second quarter, Entertainment EBITDA of $24.2 million represented an increase of 11% over the prior year's period. The CSI franchise recorded direct profit of $35.2 million representing a direct profit margin of 42% during the quarter. This compares to direct profit of $22.8 million representing a direct profit margin of 34% in the prior year's period. Results in this year's quarter reflect the benefit from the recognition of the reimbursement of production costs which lowered the investment in film balance and amortization expense, offset in part by increased third party participation expenses. The negative impact of foreign exchange on CSI direct profit was $3.5 million during the quarter. The Other Entertainment segment recorded a direct loss of $4.7 million compared to a direct profit of $4.5 million in last year's quarter. This decrease is due to timing of sales, higher amortization and third party participation costs, as well as the impact of the strengthening of the Canadian dollar.
Motion Picture Distribution EBITDA during the quarter of $5.1 million compared to EBITDA of $10.3 million in the prior year's quarter. The decrease is a result of lower theatrical and DVD revenues as discussed above.
Corporate and Other expenses were $6.3 million during the quarter compared to $10.0 million in the prior year's period. The decrease is primarily due to lower professional fees as well as a retirement allowance incurred in the prior year.
Amortization
In the second quarter, amortization expense was $5.1 million compared to $3.0 million in the same period last year. This increase is due to impairment charges related to certain broadcast intangible assets totaling $1.0 million as well as a write-down of intangible assets of Motion Picture Distribution LP totaling $1.2 million.
Interest
Interest expense of $8.0 million was up from $5.4 million in the prior year's quarter. The increase in interest expense is primarily the result of higher borrowings under Motion Picture Distribution LP, a higher effective interest rate and interest incurred relating to certain provincial government tax audits. The Company's average cost of borrowing in the quarter was 6.8% compared to 4.8% in the prior year's quarter.
Provision for Income Taxes
Provision for Income Taxes during the quarter was $16.4 million compared to $16.5 million in the prior year's period. This represents an effective tax rate of 36.1% during the quarter compared to 53.9% in the prior year's period. The decrease is mainly the result of the mix of earnings between different tax jurisdictions. These benefits more than offset the increase in future income tax expense due to the recent changes in federal tax rates.
Non-controlling Interest
Non-controlling interest primarily represents the tax affected 49% interest of Movie Distribution Income Fund in the earnings of Motion Picture Distribution LP. During the second quarter, Non-controlling interest expense was $3.0 million compared to $3.4 million in last year's period. The decrease is primarily due to lower net income of Motion Picture Distribution LP.
Net Earnings
Net earnings for the quarter were $26.0 million compared to net earnings of $10.7 million for the prior year's period. The increase is due primarily to unrealized foreign exchange gains on the unhedged portion of the Company's long-term U.S. dollar denominated debt as the Canadian dollar strengthened relative to the U.S. dollar in the quarter. On a basic and diluted basis, net earnings per share were $0.61 and $0.60 respectively for the quarter, compared to basic and diluted net earnings per share of $0.25 and $0.24 respectively for the prior year's period.
Liquidity
Consolidated Free Cash Flow for the second quarter was an inflow of $20.4 million compared to an outflow of $56.2 million in the prior year's quarter. The prior year's quarter was impacted by working capital changes related to the Motion Picture Distribution business. Excluding the Motion Picture Distribution business, Free Cash Flow during the quarter was an inflow of $31.5 million during the quarter compared to an outflow of $13.5 million in the prior year's period.
Consolidated net debt was down $91.8 million to $364.3 million compared to $456.1 million one year ago. Net debt, excluding non-recourse net debt related to Motion Picture Distribution LP, was $275.9 million, representing a reduction of $127.5 million from the prior year's period. At June 30, 2006, net debt to EBITDA (excluding Motion Picture Distribution LP) was 1.8x. During the quarter, the foreign exchange rate had a positive impact of $15.6 million on the amount of U.S. dollar denominated debt outstanding.
Outlook
For Broadcasting, steady growth in subscriber revenue is expected to continue for the remainder of the year. Consistent with the traditional sales cycle, advertising revenue is expected to be relatively modest in the third quarter followed by strong sales in the fourth quarter. Margin percentage for the full year is expected to be similar to the prior year as higher margin percentage for our digital channels is offset by incremental investment in programming and online initiatives.
The CSI franchise is expected to continue to perform strongly as evidenced by the July 14, 2006 press release announcing the licensing of international second window rights.
Motion Picture Distribution LP released their financial results on August 9, 2006. For further information on Motion Picture Distribution LP, please refer to their press release or go to their website at www.moviedistributionincomefund.com.
Operating Highlights
Broadcasting
During the quarter, the Company had four digital networks ranked in the top 10, with Showcase Action, National Geographic Channel, and Showcase Diva ranking No. 1 through No. 3 respectively.(1)
Alliance Atlantis' analog channels also achieved strong audience results during the second quarter of 2006. Three of the Company's established analog channels ranked in the top 10 of all Canadian English language analog specialty networks.(2) HGTV Canada posted its highest average minute audience (AMA) for the Adult 25-54 demographic of any spring season in the network's history, a 15% increase when compared to the same period in the prior year.(3)
In the second quarter, Alliance Atlantis was the recipient of 31 awards, a record year, at the 2006 PROMAX & BDA Awards Ceremony that took place in New York from June 20-22, 2006. In total, 10 of the Company's 13 channels came home with awards including 12 gold, 17 silver and two bronze.
In July, Alliance Atlantis unveiled programming from its fall/winter broadcast schedule across the Company's specialty channels. The programs include the exclusive Canadian broadcast of HBO's Deadwood on History Television and Showtime's Huff on Showcase, along with a lineup of original Canadian Productions.
On July 25th Showcase.ca streamed the final episode of the current season of the series Naked Josh. This initiative marked the first time the Company has streamed a full episode of its programming online.
Entertainment
During the second quarter of 2006, the CSI franchise continued to deliver exceptional results. CSI: Crime Scene Investigation - Season Six ended the 2005/06 broadcast season as the No. 1 drama on U.S. television averaging 25.2 million viewers per week.(4) CSI: Miami - Season Four ended the 2005/06 broadcast season as the No. 5 drama on U.S. television averaging 18.1 million viewers per week,(5) was the No. 1 series on Monday nights on during the 2005/06 broadcast season(6) and is currently the No. 1 drama airing on U.S. television during Summer 2006.(7) CSI: NY - Season Two ended the 2005/06 broadcast season on U.S. television as the No. 1 series within its timeslot and attracted 3% more viewers than it garnered during the 2004/05 broadcast season.(8) During the current summer run, CSI: NY is currently ranked as the 4th most watched drama on U.S. television.(9)
About Alliance Atlantis Communications
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Alliance Atlantis offers Canadians 13 well-branded specialty television channels boasting targeted, high-quality programming. The Company also co-produces and distributes the hit CSI franchise and indirectly holds a 51% limited partnership interest in Motion Picture Distribution LP, a leading distributor of motion pictures in Canada, with a presence in motion picture distribution in the United Kingdom and Spain. The Company's common shares are listed on the Toronto Stock Exchange - trading symbols AAC.A and AAC.B. The Company's Web site is www.allianceatlantis.com.
Forward-Looking Statements
--------------------------
This press release, in particular the "Outlook" section, contains forward-looking statements within the meaning of Canadian and U.S. securities laws. Such statements include, but are not limited to, statements of the Company's expectations and intentions that contain words such as "anticipate", "believe", "plan", "estimate", "expect", "intend", "will", "should", "may", and other similar expressions. These forward-looking statements are based on certain assumptions and reflect the Company's current expectations. The reader should not place undue reliance on them. They involve known and unknown risks, uncertainties and other factors that may cause them to differ materially from the anticipated future results or expectations expressed or implied by such forward-looking statements. Important factors that could cause actual results to differ materially from those set forth in the forward-looking statements are: audience acceptance of our filmed entertainment; our ability to attract advertising revenue; changes to the regulatory environment; actions of our competitors; technological change that increases competition or facilitates the infringement of our intellectual property; cost of production financing; the loss of key personnel; our relationship with filmed entertainment content suppliers and changes in the general economy. In addition, the cessation of Victor Loewy's employment with Distribution LP, a subsidiary of the Company, gave rise to a right of termination in favour of the counterparty under one of Distribution LP's principal content supplier agreements; any such termination could have a material adverse effect on Distribution LP. Additional information about these and other factors are described in materials filed by the Company with the securities regulatory authorities in Canada and the United States from time to time, including the Company's Management's Discussion and Analysis for the year ended December 31, 2005 and the Material Change Report dated July 28, 2006. The Company undertakes no obligation to publicly update or revise any forward-looking statements or information, whether as a result of new information, future events or otherwise.
This earnings release contains the unaudited interim consolidated financial statements for the three months ended June 30, 2006 and the three months ended June 30, 2005.
(xx)Non-GAAP financial measures
The Company uses EBITDA, direct profit (loss) and free cash flow to gain a better understanding of the results of the business. These non-GAAP financial measures are not recognized under Canadian or United States GAAP. These non-GAAP financial measures are provided to enhance the user's understanding of the Company's historical and current financial performance and its prospects for the future. Management believes that these measures provide useful information in that they exclude amounts that are not indicative of the Company's core operating results and ongoing operations and provide a more consistent basis for comparison between years. The Company uses EBITDA, direct profit (loss) and free cash flow to measure operating performance. The Company has defined EBITDA, calculated using figures determined in accordance with Canadian GAAP, as earnings (loss) before under noted, which are earnings before amortization, interest, equity losses in affiliates, foreign exchange gains and losses, income taxes and non-controlling interest. Direct profit (loss) is defined as revenue less direct operating expenses, as defined in note 25 of the Company's consolidated financial statements included in the Company's December 2005 Corporate Report. Free cash flow is defined as the total of cash and cash equivalents provided by (used in) operating activities and provided by (used in) investing activities.
Net debt is defined as the Company's revolving credit facility and term loans, net of cash and cash equivalents.
While many in the financial community consider EBITDA to be an important measure of operating performance, it should be considered in addition to, but not as a substitute for net earnings, cash flow and other measures of financial performance prepared in accordance with Canadian GAAP which are presented in the attached unaudited interim consolidated financial statements. In addition, the Company's calculation of EBITDA may be different than the calculation used by other companies and therefore comparability may be affected. A reconciliation of these non-GAAP financial measures to the most directly comparable measures calculated in accordance with Canadian GAAP is presented in the Company's MD&A.
(xxx)Alliance Atlantis holds a 51% limited partnership interest in Motion Picture Distribution LP (the "Partnership"), a motion picture distributor in Canada, the U.K. and Spain. The balance of the Partnership is owned by Movie Distribution Income Fund (TSX: FLM.UN).
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(1) Source: Nielsen Media Research: 04/03/06-06/25/06 Mo-Su 6a-6a Ad
25-54 Average Minute Audience
(2) Source: Nielsen Media Research : 04/03/06-06/25/06 Mo-Su 6a-6a Ad
25-54 Average Minute Audience
(3) Source: Nielsen Media Research, Mo-Su 6a-6a less paid programming
October 1997-June 2006.
Spring 2006=April 03, 2006-July 02, 2006.
Spring 2005=April 04 2005-July 3, 2005.
(4) Source: National Nielsen Ratings: Primetime Season to Date Rank-
Regular Programs for Demographic PER2+ for 09/19/05 - 05/28/06)
(5) Source: National Nielsen Ratings: Primetime Season to Date Rank-
Regular Programs for Demographic PER2+ for 09/19/05 - 05/28/06)
(6) Source: National Nielsen Ratings: Primetime Season to Date Rank-
Regular Programs for Demographic PER2+ for 09/19/05 - 05/28/06)
(7) Source: National Nielsen Ratings: Primetime Season to Date Rank-
Regular Programs for Demographic PER2+ for 05/29/06 - 07/30/06)
(8) Source: National Nielsen Ratings: Primetime Season to Date Rank-
Regular Programs for Demographic PER2+ for 09/19/05 - 05/28/06)
(9) Source: National Nielsen Ratings: Primetime Season to Date Rank-
Regular Programs for Demographic PER2+ for 05/29/06 - 07/30/06)
CONSOLIDATED FINANCIAL STATEMENTS
For the Three Months and Six Months Ended
June 30, 2006 and June 30, 2005
(Unaudited)
The interim Consolidated Financial Statements for the prior year's
periods ended June 30 have not been reviewed by an auditor.
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Management's responsibility for financial reporting
The accompanying unaudited interim consolidated financial statements and Management's Discussion and Analysis ("MD&A") of Alliance Atlantis Communications Inc. ("the Company") are the responsibility of management and have been approved by the Board of Directors.
The unaudited interim consolidated financial statements have been prepared by management in accordance with Canadian generally accepted accounting principles. When alternative methods of accounting exist, management has chosen those it deems most appropriate in the circumstances. The unaudited interim consolidated financial statements and information in the MD&A necessarily include amounts based on informed judgments and estimates of the expected effects of current events and transactions with appropriate consideration to materiality. In addition, in preparing the financial information management must make determinations as to the relevancy of information to be included, and make estimates and assumptions that affect reported information. The MD&A also includes information regarding the impact of current transactions and events, sources of liquidity and capital resources, operating trends, risks and uncertainties. Actual results in the future may differ materially from our present assessment of this information because future events and circumstances may not occur as expected.
The Company maintains a system of internal accounting and administrative controls. Such systems are designed to provide reasonable assurance that the financial information is relevant, reliable and accurate and the Company's assets are appropriately accounted for and adequately safeguarded.
The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting, and is ultimately responsible for reviewing and approving the unaudited interim consolidated financial statements and MD&A. The Board carries out this responsibility through its Audit Committee.
The Audit Committee is appointed by the Board, and all of its members are independent directors. The Committee meets periodically with management, as well as the independent external auditors, to discuss internal controls over the financial reporting process and financial reporting issues. The Committee reviews the unaudited interim consolidated financial statements and the MD&A and reports its findings to the Board for consideration when the Board approves the unaudited interim consolidated financial statements and the MD&A for issuance to the shareholders.
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August 11, 2006
Phyllis Yaffe David Lazzarato
Chief Executive Officer Executive Vice President and
Chief Financial Officer
Alliance Atlantis Communications Inc.
Consolidated Balance Sheets
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(in millions of Canadian dollars)
(unaudited) (unaudited)
June 30, December 31, June 30,
2006 2005 2005
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Assets
Cash and cash equivalents 75.1 110.6 26.7
Accounts and other receivables
(note 10) 368.1 343.4 333.5
Investment in film and television
programs (note 2) 524.7 578.9 590.9
Property and equipment 38.6 39.7 40.8
Investments 5.4 6.8 18.0
Future income taxes 78.1 87.1 108.4
Other assets 12.1 14.4 20.7
Loans receivable from tax shelters 97.8 97.2 100.8
Broadcast licences 105.0 106.0 108.7
Goodwill (note 5 and 9) 204.7 202.8 207.0
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1,509.6 1,586.9 1,555.5
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Liabilities
Revolving credit facilities
(note 3) 50.0 33.0 22.0
Accounts payable and accrued
liabilities 429.7 504.1 443.4
Income taxes payable 43.8 38.5 46.0
Deferred revenue 27.3 31.4 36.5
Term loans (note 4) 389.4 409.5 460.8
Tax shelter participation
liabilities 97.8 97.2 100.8
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1,038.0 1,113.7 1,109.5
Non-controlling interest 57.6 59.9 57.9
Shareholders' Equity
Share capital and other (note 6) 715.1 732.7 732.0
Deficit (290.6) (310.3) (338.6)
Cumulative translation adjustments (10.5) (9.1) (5.3)
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414.0 413.3 388.1
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1,509.6 1,586.9 1,555.5
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Alliance Atlantis Communications Inc.
Consolidated Statements of Earnings and Deficit
For the periods ended June 30,
(unaudited)
-------------------------------------------------------------------------
(in millions of Canadian dollars - except per share amounts)
Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
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Revenue
Broadcasting 76.8 72.7 146.5 135.2
Entertainment 94.1 79.0 195.2 180.7
Motion Picture Distribution 82.3 88.4 182.9 188.7
Corporate and Other - - - 0.3
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253.2 240.1 524.6 504.9
Direct operating expenses 163.0 150.9 344.6 337.4
Direct profit
Broadcasting 45.1 42.1 82.5 74.4
Entertainment 30.5 27.3 66.8 62.8
Motion Picture Distribution 14.6 19.8 30.7 30.0
Corporate and Other - - - 0.3
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90.2 89.2 180.0 167.5
Operating expenses
Selling, general and
administrative 39.0 41.0 76.8 80.7
Stock based compensation 1.6 1.1 5.2 1.0
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40.6 42.1 82.0 81.7
Earnings (loss) before
undernoted
Broadcasting 26.6 24.9 46.7 41.0
Entertainment 24.2 21.9 56.8 53.1
Motion Picture Distribution 5.1 10.3 11.3 8.6
Corporate and Other (6.3) (10.0) (16.8) (16.9)
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49.6 47.1 98.0 85.8
Amortization 5.1 3.0 7.8 6.7
Interest (note 7) 8.0 5.4 14.3 10.9
Equity losses in affiliates - - 0.1 -
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Earnings from operations
before undernoted 36.5 38.7 75.8 68.2
Foreign exchange (gains) losses (8.9) 8.1 (9.6) 9.4
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Earnings before income taxes
and non-controlling interest 45.4 30.6 85.4 58.8
Provision for income taxes 16.4 16.5 30.3 23.2
Non-controlling interest 3.0 3.4 7.6 1.7
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Net earnings for the period 26.0 10.7 47.5 33.9
Deficit - beginning of period (301.4) (349.3) (310.3) (372.5)
Shares repurchased and
cancelled under issuer bid
(note 6) (15.2) - (27.8) -
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Deficit - end of period (290.6) (338.6) (290.6) (338.6)
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Earnings per Common Share
(note 8)
Basic $0.61 $0.25 $1.10 $0.78
Diluted $0.60 $0.24 $1.09 $0.77
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Alliance Atlantis Communications Inc.
Consolidated Statements of Cash Flows
For the periods ended June 30,
(unaudited)
-------------------------------------------------------------------------
(in millions of Canadian dollars)
Three months ended Six months ended
June 30, June 30,
2006 2005 2006 2005
-------------------------------------------------------------------------
Cash and cash equivalents
provided by (used in)
Operating activities
Net earnings for the period 26.0 10.7 47.5 33.9
Items not affecting cash
Amortization of film and
television programs (note 9f) 71.7 93.0 161.8 184.7
Amortization of development
costs - - - 0.6
Amortization of property and
equipment 2.8 2.5 5.5 5.1
Amortization of other assets 2.0 1.9 2.6 2.8
Writedown of broadcast
licences 1.0 - 1.0 -
Equity losses in affiliates - - 0.1 -
Non-controlling interest 3.0 3.4 7.6 1.7
Future income taxes 0.9 12.0 9.0 20.0
Unrealized net foreign
exchange (gains) losses (9.5) 3.8 (10.8) 1.3
Non-cash stock based
compensation 2.2 1.0 3.2 1.7
Investment in film and
television programs (note 9f) (78.7) (103.6) (182.2) (207.1)
Net changes in other non-cash
balances related to operations 2.4 (78.1) (27.6) (51.9)
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23.8 (53.4) 17.7 (7.2)
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Investing activities
Purchases of property and
equipment (3.4) (0.6) (4.4) (2.2)
Long-term investments - (2.2) - (1.6)
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(3.4) (2.8) (4.4) (3.8)
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Financing activities
Proceeds from revolving
credit facility 23.5 22.0 17.0 22.0
Repayment of term loans (3.4) (31.4) (6.0) (31.4)
Distributions paid to
non-controlling interest (5.7) (7.5) (11.5) (11.2)
Issue of share capital 3.1 0.4 6.8 4.6
Shares purchased and cancelled
under issuer bid (31.1) - (55.4) -
------------------------------------------
(13.6) (16.5) (49.1) (16.0)
-------------------------------------------------------------------------
Effect of exchange rate changes
on cash and cash equivalents (0.2) (0.7) 0.3 (1.3)
-------------------------------------------------------------------------
Change in cash and cash
equivalents 6.6 (73.4) (35.5) (28.3)
Cash and cash equivalents
- beginning of period 68.5 100.1 110.6 55.0
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Cash and cash equivalents
- end of period 75.1 26.7 75.1 26.7
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For further information: Andrew Akman, Vice President, Corporate Development & Investor Relations, Tel: (416) 966-7701, andrew.akman@allianceatlantis.com; Nicola McIsaac, Manager, Corporate & Public Affairs, Tel: (416) 969-4405, nicola.mcisaac@allianceatlantis.com