Filing identity and reporting period
Important identity mismatch: The supplied filing is Lions Gate Entertainment Corp.’s Form 10-Q, not a filing by STARZ Entertainment Corp. It covers the quarter and nine months ended December 31, 2012; the quarter is Lionsgate’s fiscal third quarter. Unless otherwise noted, amounts below are in U.S. dollars.
Financial performance and position
| Metric | Quarter ended Dec. 31, 2012 | Prior-year quarter | Nine months ended Dec. 31, 2012 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $743.6 million | $323.0 million | $1,922.4 million | $942.4 million |
| Operating income | $82.3 million | $11.8 million | $176.3 million | $30.7 million |
| Net income (loss) | $37.8 million | $(1.4) million | $69.2 million | $(16.4) million |
| Diluted EPS | $0.27 | $(0.01) | $0.51 | $(0.12) |
| Operating margin | 11.1% | 3.6% | 9.2% | 3.3% |
Quarter revenue grew 130%, driven mainly by Motion Pictures, which contributed $673.6 million versus $233.3 million. Television Production revenue fell to $70.1 million from $89.7 million. Quarterly net income included a $14.7 million debt-extinguishment loss, principally from paying off the Summit acquisition term loan.
For the nine months, operating cash flow was $218.3 million, compared with cash used of $211.9 million a year earlier. Investing cash flow was positive $6.5 million and financing cash flow was negative $242.2 million. Cash and cash equivalents declined by $16.1 million to $48.2 million; restricted cash was $16.6 million.
At December 31, total assets were $2.673 billion and shareholders’ equity was $192.5 million. Corporate debt carrying value was $964.5 million, including $446.5 million drawn on the revolving facility and $432.1 million of senior secured notes; the Summit term loan had been repaid. Film obligations and production loans totaled $487.9 million. Revolver availability was $194.9 million, subject to borrowing-base and other restrictions.
Material changes versus the prior comparable period
- Results include Summit Entertainment from its January 2012 acquisition; the prior-year reported periods do not. Comparisons therefore reflect both acquisition effects and title performance.
- Quarter Motion Pictures revenue rose sharply, supported by theatrical releases including The Twilight Saga: Breaking Dawn – Part 2, and stronger home entertainment, television and international revenue. The company had no theatrical releases in the comparable prior-year quarter.
- Quarter Television Production revenue declined 21.9%; home entertainment revenue for that segment fell, while television write-downs increased.
- For the nine months, higher revenue and operating income were partly offset by increased distribution and marketing costs, interest expense and amortization of acquired film costs. Interest expense rose to $73.5 million from $51.1 million.
- The company adopted new film-impairment guidance. It did not record an approximately $22.8 million write-down for a film released after quarter-end; management stated that under prior guidance net income would have been lower by $15.1 million for the quarter and $46.4 million for the nine months.
Outlook, management commentary and risks
Management expected fiscal 2013 Motion Pictures revenue to exceed fiscal 2012, while cautioning that results depend on film and home entertainment title performance and may vary materially. It also expected higher Motion Pictures distribution and marketing costs and direct operating expenses for fiscal 2013. Management said operating cash flow, cash on hand, revolver availability and production financing should cover anticipated operating and debt-service needs for the foreseeable future; this is not a guarantee.
Key exposures include unpredictable film and television success, substantial production and marketing investment, cost overruns, estimates of ultimate title revenue and impairment, customer returns and receivable collection, interest-rate and foreign-exchange movements, and debt restrictions. The company reported compliance with applicable credit-facility and note covenants at December 31. It reported no pending legal matter expected, based on current knowledge, to materially adversely affect its financial statements.
Near-term obligations merit attention: $65.0 million of Pennsylvania Regional Center production loans and $8.9 million under the film credit facility were due in 2013; the film facility matured April 6, 2013. The filing also disclosed concentrated share ownership and change-in-control provisions that could require debt repurchases or trigger defaults. The company stated that it had no purchases of common shares during the quarter.
Most important facts for investors to verify
- Confirm the issuer: this is Lions Gate Entertainment Corp., not STARZ Entertainment Corp.
- Assess how much reported growth is attributable to Summit and to the timing and success of individual film releases, versus recurring or organic performance.
- Review the film-impairment accounting change and the excluded $22.8 million write-down, including subsequent title performance and any later impairment.
- Track cash conversion, revolver availability and borrowing-base limits, covenant compliance, and the repayment or refinancing of near-term production financing.
- Evaluate the sustainability of margins given higher marketing spending, increased film amortization, television write-downs and rising corporate costs.
- Review the debt maturity and interest burden, especially the 10.25% senior notes due 2016 and the company’s variable-rate borrowings.