Filing and reporting period
The supplied filing is Lions Gate Entertainment Corp.’s unaudited Form 10-Q for the three months ended June 30, 2017 (fiscal Q1 2018), not a standalone STARZ Entertainment Corp. filing. Unless stated otherwise, amounts are in U.S. dollars.
Lionsgate acquired Starz on December 8, 2016. Accordingly, 2017 results include Starz, while the prior-year quarter generally does not; year-over-year consolidated comparisons are therefore not on a like-for-like basis.
Key financial results
| Metric | Q1 2018 | Prior-year quarter |
|---|---|---|
| Revenue | $1,005.3 million | $553.6 million |
| Operating income (loss) | $89.7 million | $(22.0) million |
| Net income attributable to Lionsgate shareholders | $173.8 million | $1.3 million |
| Diluted earnings per share | $0.80 | $0.01 |
| Cash from operating activities | $69.6 million | $143.1 million |
Revenue increased 81.6%, substantially reflecting the acquired Starz business. Operating margin was approximately 8.9%, versus a loss margin of approximately 4.0% in the prior-year quarter. Net income included a $201.0 million pretax gain on the sale of Lionsgate’s EPIX interest; reported earnings therefore should not be viewed as solely reflecting recurring operations.
Cash and cash equivalents were $156.5 million at June 30, down from $321.9 million at March 31. Investing activities provided $374.8 million, including $393.7 million of net EPIX sale proceeds. Financing activities used $608.9 million, primarily for debt and production-loan repayments. Operating cash flow fell year over year amid working-capital movements and higher film and program investment.
At June 30, total debt, net of unamortized discounts and issuance costs, was $2,701.2 million, including $78.0 million current; principal debt including capital leases was $2,786.2 million. Film obligations and production loans, net, were a further $325.6 million. The company had no revolving-credit borrowings and reported $1.0 billion of available revolver capacity. Current assets were $1,427.8 million and current liabilities $1,235.0 million.
Changes, segments, and management commentary
- Motion Pictures: Revenue rose 30.4% to $472.4 million and segment profit rose to $86.9 million from $31.8 million. Home entertainment revenue increased, supported by releases including La La Land and John Wick: Chapter 2; theatrical marketing costs were lower.
- Television Production: Revenue declined 18.1% to $156.6 million, primarily because fewer episodes were delivered. Segment profit increased to $12.6 million from $9.6 million as direct costs fell faster than revenue.
- Media Networks: Reported revenue was $390.5 million and segment profit $109.5 million, largely reflecting Starz. On a pro forma comparison, revenue increased 9.2% while segment profit decreased 7.9% to $109.5 million, mainly due to higher marketing expense. Starz subscriptions were 24.1 million versus 24.2 million a year earlier; management cited OTT rate growth offset by losses at traditional distributors.
- The May 2017 sale of Lionsgate’s 31.15% EPIX interest generated $393.7 million net cash proceeds and the $201.0 million pretax gain. Lionsgate prepaid $420.0 million of Term Loan B principal and recorded an $11.6 million debt-extinguishment loss.
- Management said cash on hand, operating cash flow, revolver availability, tax-efficient financing and production financing should be adequate for known operating and debt-service needs for the foreseeable future. It expected fiscal 2018 cash tax requirements not to increase significantly from fiscal 2017 and said it currently expected an annual tax benefit. No earnings or revenue guidance was provided.
Risks, contingencies, and unusual items
- Starz appraisal proceedings remained unresolved. The company recorded an $826.2 million dissenting-shareholder liability, including accrued interest; the ultimate amount is uncertain and could exceed the merger consideration otherwise payable. A trial was scheduled for the second half of fiscal 2019.
- Merger-related litigation, integration costs and severance continued. Restructuring and other costs were $10.9 million, including transaction, litigation and severance costs; remaining severance liability was approximately $17.3 million.
- Debt and production financing create substantial interest and refinancing exposure. A $1.0 billion revolver was available, but borrowing is subject to covenants; the company reported compliance with applicable covenants. The $60.0 million convertible notes mature in April 2018.
- Film and television results depend on uncertain title performance and estimates of ultimate revenue, amortization and impairment. The company also faces variable production and programming costs, changing subscriber levels, foreign-exchange exposure and significant contractual commitments.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Confirm the filing entity and period: this is Lions Gate Entertainment Corp.’s quarter ended June 30, 2017, not a standalone Starz filing.
- Assess recurring performance separately from the $201.0 million EPIX gain and the acquisition-related effects on revenue, expenses, interest and taxes.
- Track cash conversion, production and film spending, and the large financing cash outflows following the $420.0 million Term Loan B prepayment.
- Monitor the Starz appraisal liability and litigation for changes in estimated settlement exposure or timing.
- Review debt maturities, variable-rate exposure, covenant headroom and the approaching April 2018 convertible-note maturity.
- Compare Media Networks trends on a pro forma basis, particularly subscriber movement, OTT growth, marketing expense and segment profit.