Business context and reporting period
Filing identity: The supplied filing is Lions Gate Entertainment Corp.’s unaudited Form 10-Q for the quarter and nine months ended December 31, 2016 (fiscal 2017 Q3), not a standalone STARZ Entertainment Corp. filing. Lionsgate acquired Starz on December 8, 2016; reported results include Starz only from that date, limiting comparison with prior periods.
Lionsgate reports Motion Pictures, Television Production and Media Networks. Its business spans film and television production and distribution, premium networks, and streaming services. Unless otherwise noted, dollar amounts below are in millions.
Key financial metrics
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Revenue | $752; prior year $671 | $1,945; prior year $1,556 |
| Operating income (loss) | $(7); prior year $(9) | $(88); prior year $(4) |
| Net income (loss) attributable to Lionsgate shareholders | $(31); prior year $41 | $(47); prior year $39 |
| Basic and diluted EPS | $(0.19); prior year basic $0.27, diluted $0.26 | $(0.31); prior year $0.26 |
| Operating cash flow | Not separately presented in the supplied cash-flow statement | $416; prior year $(111) |
For the quarter, revenue rose 12%, while the operating margin was approximately negative 0.9%. For the nine months, revenue rose 25%, while the operating margin was approximately negative 4.5%. Segment profit, a company-defined measure, was $109 for the quarter versus $41 and $140 for the nine months versus $127.
Cash and liquidity: Cash and cash equivalents were $595 at December 31, 2016, compared with $58 at March 31, 2016; current assets were $1,870 and current liabilities $1,585. The cash balance included approximately $450 raised for merger consideration that remained unpaid because of appraisal demands.
Debt: Debt, net of unamortized discount and issuance costs, was $3,575, excluding film obligations and production loans; principal debt including capital leases was $3,681. Film obligations and production loans totaled $420. A $1.0 billion revolving facility was undrawn and available at period-end, subject to covenants. The company reported compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Quarterly revenue increased $81, primarily reflecting Starz’s partial-period contribution and higher Television Production revenue; Motion Pictures revenue declined $66, mainly because the prior-year quarter included The Hunger Games: Mockingjay – Part 2.
- Nine-month revenue increased $389, reflecting growth in Motion Pictures and Television Production, Pilgrim Media Group, and Starz’s partial-period contribution. Nine-month operating loss widened to $88 from $4, and shareholders’ net result shifted to a $47 loss from $39 income.
- Quarterly distribution and marketing expense fell $28, but general and administrative expense rose $32, depreciation and amortization rose $10, and restructuring and other expense increased to $52 from $13. Nine-month restructuring and other expense was $70 versus $18.
- Operating cash flow improved by $527 year over year, to $416. Investing cash outflow was $1,084, including $1,057 for Starz, while financing cash inflow was $1,203, primarily reflecting merger-related borrowings and repayments.
- At December 31, Starz had 24.3 million STARZ subscriptions and 31.0 million STARZ ENCORE subscriptions, compared with 23.6 million and 32.2 million, respectively, at December 31, 2015.
Outlook, commentary, risks and unusual items
- Management said operating cash flow, cash on hand, revolving-facility availability, tax-efficient financing and production financing should be adequate for foreseeable operating and debt-service needs. It also stated an objective to reduce leverage by 1.5 times over the first 12–18 months after the merger; this is an objective, not a guarantee.
- Management expects interest expense and depreciation and amortization to increase following the merger financing and purchase-accounting adjustments. It expected cash tax requirements in fiscal 2017 not to increase significantly from fiscal 2016, assuming use of tax attributes.
- Unusual merger-related costs included $49 of expenses in the quarter; nine-month restructuring and other expense included $39 of transaction costs and $26 of severance costs. The company also recorded a $28 debt-extinguishment loss and a $20 gain on its previously held Starz investment.
- Approximately 25.0 million Starz Series A shares were subject to appraisal demands at December 31. Lionsgate recorded an $886 liability for estimated merger consideration; valid appraisal claims could result in cash payments, including interest, greater than the merger consideration. Approximately 2.5 million shares later withdrew their demands by February 6, 2017.
- Key risks include substantial new leverage and variable-rate exposure, debt covenants and refinancing needs, successful Starz integration and realization of synergies, appraisal litigation, dependence on distributors and affiliation renewals, subscriber and programming trends, film and television performance, and uncertainty around U.S. and international tax rules.
- The quarterly dividend was suspended effective September 2016. The filing provides no firm consolidated earnings or revenue guidance.
Important facts for investors to verify
- Confirm the filing entity and reporting period: the document is Lions Gate Entertainment Corp.’s 10-Q, not a standalone Starz 10-Q.
- Assess the merger’s ongoing contribution: Starz was consolidated only from December 8, 2016, so reported-period comparisons are not like-for-like.
- Track total debt, variable-rate sensitivity, covenant headroom, and progress toward the stated leverage-reduction objective.
- Monitor appraisal proceedings and whether the $886 recorded liability adequately reflects potential settlement amounts and interest.
- Evaluate recurring earnings and cash generation separately from merger costs, debt-extinguishment charges, purchase-accounting effects, and the one-time Starz investment gain.
- Review subscriber trends, distributor renewals, programming costs, and integration progress; pro forma segment figures are illustrative and exclude potential synergies.