Filing summary
Entity and period: The supplied filing is Lions Gate Entertainment Corp.’s Form 10-Q for the quarter ended December 31, 2019, not a filing identified as STARZ Entertainment Corp. It covers fiscal 2020’s third quarter and nine months ended December 31, 2019. Unless stated otherwise, amounts below are U.S. dollars in millions.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Prior-year quarter | Nine months ended Dec. 31, 2019 | Prior-year period |
|---|---|---|---|---|
| Revenue | $998.5 | $933.2 | $2,945.7 | $2,766.9 |
| Operating income (loss) | $(39.5) | $86.8 | $14.9 | $164.0 |
| Net income (loss) attributable to Lionsgate shareholders | $(91.2) | $22.9 | $(143.4) | $(129.0) |
| Basic and diluted EPS | $(0.42) | $0.11 basic; $0.10 diluted | $(0.66) | $(0.61) |
| Cash provided by operating activities | Not separately presented for the quarter | Not separately presented for the quarter | $434.4 | $255.7 |
Quarterly drivers: Revenue rose 7.0%, led by Motion Picture (up 30.7%) and Media Networks (up 4.3%); Television Production revenue fell 12.5%. Higher distribution and marketing costs, including theatrical marketing, and $74.0 million of programming and content charges contributed to the swing to an operating loss. Film write-downs were $37.2 million in the quarter.
Nine-month segment profit: Motion Picture was $107.6 (approximately flat year over year); Television Production was $31.9 (down from $46.5); and Media Networks was $267.3 (down from $345.4). Segment profit is a company-defined measure and excludes certain corporate, content, restructuring, share-based compensation and purchase-accounting items.
Balance sheet, debt and liquidity
- At December 31, 2019, cash and cash equivalents were $195.5, total assets $7,959.7, and current assets and current liabilities were $1,210.1 and $1,421.0, respectively.
- Net debt was $2,775.8, including $2,710.8 non-current and $65.0 current debt; the stated total includes finance leases and is net of unamortized issuance costs. The $1.5 billion revolving facility was undrawn, with $1.5 billion available, subject to covenants. The company reported covenant compliance.
- Film obligations and production loans totaled $397.4, of which $286.8 was current. Nine-month financing cash flows included $141.5 of net debt repayments and $236.9 of net production-loan repayments.
- Operating cash flow increased to $434.4. The filing says receivables monetization programs benefited operating cash flow by approximately $280.9 during the period. Investing cash outflow was $38.8 and financing cash outflow was $385.5; cash ended the period at $195.5.
Material changes and unusual items
- The company recorded $74.0 of programming and content charges following management changes and a revised programming and broadcasting strategy: $66.2 related to Media Networks and $7.8 to Television Production.
- It changed the amortization method for the Starz Traditional Affiliate customer-relationship intangible asset, citing the shift from linear distribution toward OTT and direct-to-consumer viewing. This increased amortization expense by $12.2 in the quarter and $23.5 year to date, reducing EPS by $0.06 and $0.11, respectively.
- Film write-downs were $38.8 year to date, versus $17.4 in the prior-year period. The company also reported $1.4 of loss on early repayment of Term Loan B principal.
- Nine-month losses were partly offset by the absence of $114.1 in shareholder litigation settlement charges recorded in the prior-year period. Conversely, the current period had a $6.5 income tax provision versus a $26.6 tax benefit previously.
- Media Networks had 28.5 million reported domestic and international subscribers at December 31, up from 26.4 million a year earlier; domestic STARZ subscribers fell to 23.5 million from 25.1 million, while OTT subscribers increased to 8.6 million from 4.9 million. Subscriber figures include STARZPLAY Arabia, an equity-method investee.
Outlook, risks and contingencies
Management stated that operating cash flow, cash on hand, revolver availability, receivables monetization, tax-efficient financing and production financing should be adequate for known operating and debt-service needs for the foreseeable future. It also noted that international STARZPLAY expansion may require alternative capital. The filing does not provide numerical earnings or revenue guidance.
- Goodwill was $2.8 billion, and finite-lived intangible assets were approximately $1.51 billion. Television and Media Networks reporting units were identified as at risk of goodwill impairment because estimated fair values exceeded carrying values by less than 20%. No new triggering circumstances were reported for the December quarter, but future impairment remains possible.
- Traditional affiliate customer-relationship revenue declines beyond assumptions could require further accelerated amortization or impairment. The company also identified commercial success of content, subscriber trends, customer affiliate relationships, market conditions and financing costs as relevant risks.
- Management said a loss in excess of accrued liabilities on pending legal matters was reasonably possible, but it could not estimate a loss or range. The company was also defending an insurer’s lawsuit seeking reimbursement of a previously agreed $10.0 contribution to litigation settlement costs.
- Contractual debt and other commitments totaled $5.1 billion in the filing’s schedule, including $761.4 of estimated interest payments and $908.2 of film-obligation and production-loan commitments. The schedule excludes $150.1 of redeemable noncontrolling interests and certain unquantifiable future Sony output-program fees.
Key facts for investors to verify
- Confirm the intended issuer: this source is Lions Gate Entertainment Corp. (LGF.A/LGF.B), not a filing captioned STARZ Entertainment Corp.
- Assess how much of the $434.4 nine-month operating cash flow depended on receivables monetization, and whether that source is repeatable.
- Track the $74.0 programming charges, film write-downs, and the financial impact of the revised amortization method.
- Monitor domestic linear subscriber losses, OTT growth, international expansion costs and the performance of the at-risk Media Networks and Television reporting units.
- Review debt maturities, production financing and commitments, covenant headroom, and the unresolved legal and insurance matters.