Business context and reporting period
The supplied filing is Lions Gate Entertainment Corp.’s unaudited Form 10-Q for the quarter and nine months ended December 31, 2017—not a filing by STARZ Entertainment Corp. Lionsgate’s business spans motion pictures, television production and Media Networks, including STARZ. The prior-year comparisons are affected by the December 2016 Starz acquisition: Starz contributed only from December 8 in the comparable 2016 period.
Financial performance and position
Amounts are in U.S. dollars; figures below are in millions except per-share amounts and percentages.
| Metric | Three months ended Dec. 31, 2017 | Three months ended Dec. 31, 2016 | Nine months ended Dec. 31, 2017 | Nine months ended Dec. 31, 2016 |
|---|---|---|---|---|
| Revenue | $1,142.7 | $752.3 | $3,088.8 | $1,945.4 |
| Operating income (loss) | $80.2 | $(7.4) | $200.3 | $(87.6) |
| Net income (loss) attributable to Lionsgate shareholders | $193.0 | $(30.6) | $382.3 | $(46.8) |
| Diluted earnings (loss) per share | $0.87 | $(0.19) | $1.74 | $(0.31) |
| Operating cash flow | Not provided separately | Not provided separately | $372.1 | $415.7 |
- Revenue rose 51.9% for the quarter and 58.8% year to date, primarily reflecting a full-period contribution from Starz, plus motion-picture growth. The comparisons are not like-for-like.
- Operating margin was approximately 7.0% for the quarter and 6.5% year to date, versus a loss in the prior-year periods. Consolidated operating expenses grew more slowly than revenue, though direct operating costs, marketing and depreciation/amortization increased.
- Reported net income benefited materially from a provisional $165.0 tax benefit from the U.S. corporate tax-rate reduction. The quarter had a $13.1 pretax loss; the nine-month pretax income of $173.5 included a $201.0 gain on the EPIX sale. Results also included $29.2 of investment and other-asset impairments.
- Quarterly segment profit: Motion Pictures $54.3, Television Production $22.7 and Media Networks $128.3. On a pro forma comparison, Media Networks segment profit increased 5.6% for the quarter and 9.9% for the nine months.
- At December 31, 2017, cash was $216.7, current assets $1,553.6 and current liabilities $1,528.6 (current ratio approximately 1.02). Cash decreased $101.6 from March 31, 2017.
- Cash from operations was $372.1, investing activities provided $315.9 (including EPIX sale proceeds), and financing activities used $789.6, mainly reflecting debt repayments. Operating cash flow was down from $415.7, in part because film/program investment and changes in operating liabilities absorbed more cash.
- Debt principal, including capital leases but excluding film obligations and production loans, was $2,407.1; the balance-sheet net debt carrying amount was $2,340.3. Production loans were $398.4, and total film obligations and production loans were $528.3 before issuance costs. Lionsgate reported $1.0 billion available under its revolving facility and compliance with applicable debt covenants.
Material changes, outlook, risks and unusual items
- Lionsgate prepaid $740.0 of Term Loan B principal during the nine months and repriced $900.0 of remaining principal into a six-year Term Loan B-1 at a lower margin. The new facility had no regular scheduled principal amortization; variable-rate debt leaves the company exposed to rising interest rates.
- The company sold its 31.15% EPIX interest in May 2017, receiving $393.7 net cash proceeds and recording a $201.0 pretax gain. It acquired Good Universe in October 2017; the acquisition’s reported operating contribution was not material.
- A $854.5 liability for Starz merger appraisal claimants remained outstanding, with the ultimate amount uncertain and potentially greater than the merger consideration, plus accrued interest. Related interest expense was $41.6 for the nine months.
- The Tax Act accounting was provisional and incomplete; management said it would finalize the assessment within one year of enactment. Management expected a tax benefit for fiscal 2018 based on the anticipated jurisdictional mix, but provided no specific earnings or revenue guidance.
- Other unusual costs included $35.8 of restructuring and other charges year to date, including severance, transaction/legal costs and $8.4 of abandoned-development write-downs. Film write-downs were $26.8 year to date.
- Management said cash, operating cash flow, revolving availability and production financing should cover foreseeable operating and debt-service needs. Risks include film/TV production and marketing investment, uncertain title performance, leverage and covenants, variable interest rates, acquisition integration, litigation, changing technology and tax-law interpretation.
- STARZ subscriptions were 24.0 million at December 31, 2017, versus 24.3 million a year earlier. On a pro forma basis, STARZ Networks revenue growth benefited from higher effective rates and OTT growth, partly offset by subscriber losses at certain distributors.
Important facts for investors to verify
- Confirm the issuer identity: this source is Lions Gate Entertainment Corp., despite the request metadata naming STARZ Entertainment Corp.
- Assess earnings quality separately from the $165.0 tax benefit and $201.0 EPIX gain; reconcile pretax performance, cash generation and nonrecurring charges.
- Review the timing and potential range of the $854.5 Starz appraisal liability and its continuing interest accrual.
- Check debt maturities, variable-rate exposure, covenant headroom and the liquidity impact of film/program commitments and production loans.
- Compare STARZ subscriber trends, OTT growth, marketing costs and pro forma segment results on a consistent basis, accounting for the merger-date comparison.
- Follow final Tax Act accounting and the adoption effects of the new revenue-recognition standard, which the company planned to adopt April 1, 2018.