Filing summary
Entity and period: The supplied filing is Lions Gate Entertainment Corp.’s Form 10-K, not a standalone STARZ Entertainment Corp. filing. It reports the fiscal year ended March 31, 2018; “2018 Q4” refers to the fiscal fourth quarter, not the full reporting period. The consolidated results include Starz for the full fiscal year, versus only from its December 8, 2016 acquisition date in fiscal 2017, so reported year-over-year growth is not directly comparable.
Business context and reporting period
Lionsgate operates Motion Pictures, Television Production and Media Networks, including Starz Networks. Its businesses produce, acquire, license and distribute film and television content across theatrical, home entertainment, television, international and streaming channels. The company reports a library of approximately 16,000 titles and programs. Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting.
Key financial metrics
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $4.129 billion | $3.202 billion |
| Operating income (loss) | $248.7 million | $(16.3) million |
| Net income attributable to Lionsgate shareholders | $473.6 million | $14.8 million |
| Diluted EPS | $2.15 | $0.09 |
| Cash from operations | $389.2 million | $558.6 million |
| Cash and cash equivalents at year-end | $378.1 million | $321.9 million |
| Total assets | $8.968 billion | $9.197 billion |
Reported operating margin was approximately 6.0%; net margin was approximately 11.5%, substantially affected by non-operating gains and tax benefits. Operating cash flow declined despite higher reported earnings. Film, television-program and program-rights investment was $1.526 billion, a major use of operating cash. Cash increased by $59.4 million during the year.
Segment revenue and segment profit were: Motion Pictures, $1.822 billion and $179.4 million; Television Production, $805.3 million and $67.2 million; Media Networks, $1.533 billion and $469.3 million. Segment profit is a company-defined measure before specified corporate and other items.
At March 31, 2018, total debt, net of discounts and issuance costs, was $2.557 billion; production loans were approximately $352.9 million. The company also reported $50.5 million of capital lease obligations. It had no revolving-facility borrowings and reported $1.5 billion of revolving availability, subject to covenants. Current assets were $1.773 billion and current liabilities $2.412 billion; current liabilities included an $869.3 million Starz appraisal liability. The company reported compliance with applicable debt covenants.
Material changes versus the prior comparable period
- Revenue increased 29%, primarily because Starz was included for a full year in FY2018. On a pro forma basis, Media Networks revenue increased 5% and segment profit increased 5%.
- Motion Pictures revenue fell 5.1%, reflecting a smaller theatrical slate and lower theatrical and international contributions; home entertainment revenue rose 9.4%, partly due to Starz’s third-party distribution business.
- Television Production revenue fell 3.8%, while segment profit rose 12.4%, mainly as direct operating costs declined faster than revenue.
- Starz period-end subscriptions decreased to 23.5 million from 24.2 million. Pro forma Starz Networks revenue rose 2.1%, with higher effective rates, including OTT growth, partly offset by lower average MVPD subscriptions. Starz Networks segment profit declined 1.2% on a pro forma basis.
- Operating income improved from a loss to a profit, but net income growth was amplified by a $319.4 million income tax benefit, a $201.0 million EPIX sale gain and other unusual items.
- Operating cash flow declined by $169.4 million, primarily because investment in films, television programs and program rights increased and changes in other operating assets and liabilities were less favorable.
Guidance, outlook, commentary and notable risks
The filing provides no specific quantified forward guidance. Management said existing cash, operating cash flow, revolving availability, tax-efficient financing and production financing were expected to meet known operating and debt-service needs for the foreseeable future, while cautioning that results are difficult to predict and may fluctuate with title performance, release timing and consumer demand.
- Tax and unusual items: FY2018’s tax benefit included a provisional $165.0 million benefit from the U.S. corporate tax-rate reduction and a $162.3 million benefit primarily related to foreign-affiliate dividends after an internal capital restructuring, partly offset by valuation-allowance charges. The company had not completed its full Tax Act assessment. It also recorded $29.2 million of investment and other-asset impairments, $35.7 million of debt-extinguishment loss and $59.8 million of restructuring and other costs. EPIX sale proceeds were $393.7 million; the reported gain was $201.0 million.
- Starz merger appraisal and litigation: The $869.3 million appraisal liability relates to former Starz shareholders’ appraisal demands. The potential court-determined amount, including interest, remains uncertain and could exceed the original merger consideration. A related appraisal trial was scheduled for the second half of fiscal 2019. The company also faced Starz merger-related litigation; management said it could not reasonably estimate a possible loss range for certain matters.
- Leverage and commitments: Debt service, variable interest rates, restrictive covenants and refinancing needs are material risks. Contractual commitments included $982.7 million of future film and production-loan commitments and $729.9 million of stated interest payments; these amounts exclude the appraisal liability and redeemable noncontrolling interest. Fees under the Sony output agreement through 2021 are expected to be significant but were not estimable for unreleased films.
- Business risks: Film and television commercial performance is uncertain; production costs, write-downs and marketing needs can vary. The company also highlighted competition and shifts toward OTT, dependence on distributors and major customers, piracy and intellectual-property exposure, foreign-exchange and regulatory risks, and cyber and operational disruption risks.
- Other subsequent events: The $60.0 million convertible notes were repaid at maturity in April 2018. In May 2018, the company entered into an interest-rate swap fixing the rate at 2.915% on $1.0 billion of LIBOR-based debt through March 2025.
Fiscal fourth-quarter snapshot
For the quarter ended March 31, 2018, revenue was $1.040 billion, operating income was $48.4 million, net income attributable to Lionsgate shareholders was $91.3 million and diluted EPS was $0.41. Quarterly earnings included restructuring costs, debt-extinguishment losses and tax-related effects; the filing’s quarterly table should be consulted for item-by-item details.
Most important facts for investors to verify
- Confirm the filing is Lionsgate’s consolidated 10-K and distinguish its results from STARZ-only results; assess acquisition-adjusted comparisons.
- Reconcile reported net income and EPS to recurring operating performance, especially the EPIX gain, tax benefits, impairments, restructuring and debt-refinancing costs.
- Track cash generation against content investment, upcoming contractual commitments and debt service; verify access to the reported revolving availability under covenant terms.
- Follow the Starz appraisal proceedings, liability estimates, accrued interest and any potential effect on liquidity or equity.
- Monitor Starz subscriber trends, OTT growth and distributor renewals, alongside film slate performance and impairment/write-down exposure.