Filing and reporting period
The supplied filing is a Lions Gate Entertainment Corp. Form 10-Q for the quarter ended December 31, 2013 (its fiscal 2014 third quarter), not a STARZ Entertainment Corp. filing or a 2014 calendar-year Q3 filing. The summary below reflects the filing provided. Financial amounts are in U.S. dollars; millions unless stated otherwise.
Financial results and liquidity
| Metric | Three months ended Dec. 31, 2013 | Nine months ended Dec. 31, 2013 |
|---|---|---|
| Revenue | $839.9; up 13.0% | $1,908.4; down 0.7% |
| Operating income | $141.8; margin 16.9% | $201.3; margin 10.5% |
| Net income | $88.8; diluted EPS $0.59 | $102.9; diluted EPS $0.71 |
| Operating cash flow | Not separately presented for the quarter | $145.8, versus $218.3 in prior-year period |
For the quarter, revenue growth and lower direct operating costs lifted operating income 72% year over year; net income rose from $37.8 million. Nine-month net income increased from $69.2 million despite slightly lower revenue. Nine-month operating cash flow fell $72.4 million, principally reflecting a $174.7 million year-over-year swing in accounts receivable cash flows.
At December 31, 2013, cash was $75.4 million and restricted cash $40.4 million. The revolving facility had $194.1 million drawn and $605.8 million available, subject to the borrowing base. Corporate debt was $792.5 million carrying value ($810.6 million principal); film obligations and production loans totaled $573.9 million. Total liabilities were $2.392 billion and shareholders’ equity $518.5 million. The company reported compliance with applicable debt covenants.
Material changes and operating drivers
- Quarterly Motion Pictures revenue grew 12.5%, led by theatrical revenue, up 43.9%, including The Hunger Games: Catching Fire; international and Lionsgate UK revenue also increased. Home entertainment revenue declined 13.9% overall.
- Quarterly Television Production revenue rose 17.4%, primarily on higher domestic and international television deliveries. Nine-month Television Production revenue increased 18.6%, while Motion Pictures revenue declined 3.4%; total nine-month revenue declined 0.7%.
- Quarterly general and administrative expense increased 39.9% to $65.6 million, reflecting higher corporate costs and share-based compensation. Nine-month share-based compensation was $52.2 million, up from $25.6 million.
- Interest expense declined year over year, but nine-month results included a $36.7 million loss on extinguishment of debt. The company redeemed its 10.25% senior notes and issued $225 million of 5.25% notes plus a $225 million term loan in July 2013. Corporate debt carrying value declined from $857.9 million at March 31, 2013.
- Cash and restricted cash together increased from $73.0 million at March 31, 2013 to $115.8 million. Film and television program investment was $1.303 billion, up from $1.244 billion.
Outlook, risks, and unusual items
Management said it expects fiscal 2014 Motion Pictures distribution and marketing expense to decrease versus fiscal 2013 because it expects to release fewer pictures. It believed operating cash flow, cash, revolver availability, tax-efficient financing, and production financing would meet foreseeable operating, production, dividend, and debt-service needs. Filmed-entertainment backlog was $1.2 billion at December 31, 2013, versus $1.1 billion at March 31, 2013. The filing does not provide clear earnings or revenue guidance.
The nine-month tax provision included a $12.0 million discrete benefit from reversing a Canadian deferred-tax valuation allowance. A quarterly dividend of $0.05 per share was declared, payable February 7, 2014. Legal proceedings were described as ordinary-course matters not expected, based on current knowledge, to have a material adverse effect.
Key risks include substantial leverage and variable-rate exposure, dependence on unpredictable film and television performance, significant production and marketing spending, film-cost estimates and potential write-downs, intellectual-property claims, and concentrated share ownership. Management noted that a change in control could trigger debt repurchase or acceleration provisions. It also cited the possibility that future operating results could require reinstating deferred-tax valuation allowances.
Investor verification priorities
- Confirm the issuer and period: this filing is for Lions Gate, fiscal Q3 2014, not STARZ.
- Assess the sustainability of earnings given title-driven revenue, falling home-entertainment revenue, and film/television cost estimates.
- Reconcile reported profit to cash generation, including receivables and the timing of film investment and collections.
- Review total leverage, production-loan repayment timing, variable-rate sensitivity, borrowing-base availability, and covenant limits.
- Separate recurring performance from the $36.7 million debt-extinguishment loss, $12.0 million tax benefit, and elevated share-based compensation.
- Evaluate the assumptions underlying the $1.2 billion backlog and management’s expectation of adequate liquidity.