Filing identity and reporting period
Important mismatch: The supplied filing is for Lions Gate Entertainment Corp., not STARZ Entertainment Corp. It is a Form 10-Q for the quarter ended September 30, 2013, the second quarter of Lionsgate’s fiscal 2014, and includes six-month results. The figures below summarize the supplied filing, not a STARZ filing. Unless noted otherwise, dollar amounts are in millions.
Lionsgate operates in motion picture production and distribution and television production and syndication.
Financial results and liquidity
| Metric | Quarter ended Sep. 30, 2013 | Prior-year quarter | Six months ended Sep. 30, 2013 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $498.7 | $707.0 | $1,068.5 | $1,178.8 |
| Operating income | $26.0 | $101.2 | $59.5 | $94.0 |
| Net income | $0.5 | $75.5 | $14.1 | $31.3 |
| Basic EPS | $0.00 | $0.56 | $0.10 | $0.23 |
| Operating cash flow | Not provided separately | Not provided separately | $110.6 | $142.1 |
- Quarterly operating margin was approximately 5.2%, versus 14.3% a year earlier; six-month operating margin was approximately 5.6%, versus 8.0%. Quarterly net income was nearly break-even despite a $18.3 million pretax loss, largely reflecting an income tax benefit.
- Six-month cash used in investing was $9.0 million provided; financing used $114.6 million. Cash and equivalents were $67.2 million at September 30, 2013, up from $62.4 million at March 31; restricted cash was $8.1 million.
- Corporate debt carrying value was $881.5 million; production loans and film obligations totaled $444.2 million. The filing cites total indebtedness of $1,279.6 million principal, or $1,259.2 million carrying value. Revolver borrowings were $285.5 million, with $514.5 million available, subject to borrowing-base limits.
- Total assets were $2,651.9 million and shareholders’ equity $426.1 million at September 30. Film and television investments were $1,208.2 million.
Changes versus comparable periods
- Quarterly revenue fell 29.5%; six-month revenue declined 9.4%. Motion picture revenue fell 28.6% for the quarter and 13.9% for the six months. Television production revenue fell 35.1% for the quarter but rose 18.9% for the six months.
- Management attributed much of the motion picture comparison decline to the prior-year contribution of The Hunger Games. Lower theatrical and home-entertainment revenue also affected results. Six-month television production growth reflected more domestic episode deliveries and higher international revenue.
- Quarterly general and administrative expense rose 45.0% to $63.8 million; six-month expense rose 25.0% to $120.5 million. Increased share-based compensation was a major contributor.
- Six-month operating cash flow declined $31.6 million year over year, primarily reflecting changes in operating assets and liabilities, including lower accounts payable and accrued liabilities, film obligations and deferred revenue.
Debt transactions, outlook and risks
- In July 2013, Lionsgate issued $225 million of 5.25% notes and borrowed $225 million principal under a term loan, using the proceeds together with cash and revolver borrowings to redeem its 10.25% notes. The refinancing reduced the stated coupon on the notes but generated a $36.2 million quarterly debt-extinguishment loss; six-month loss was $36.7 million.
- A $12.0 million discrete Canadian deferred-tax valuation-allowance reversal benefited the quarter and six-month tax results. Management said cash tax requirements were not expected to increase significantly in fiscal 2014, assuming use of tax attributes.
- Management expected fiscal 2014 motion-picture distribution and marketing expense to be lower than fiscal 2013 because fewer films were expected to be released. It said operating cash flow, cash on hand, revolver availability and production financing should cover known operating and debt-service needs for the foreseeable future. Film and television licensing backlog was $1.1 billion at both September 30 and March 31, 2013.
- Key risks include substantial leverage, variable-rate debt, reliance on uncertain film and television performance, significant production and marketing investment, and restrictive debt covenants. Management reported compliance with applicable debt covenants. Pending legal matters were not expected by management to have a material adverse effect; the filing provides no specific material contingency amount.
Important facts for investors to verify
- Confirm the intended issuer and period: this source is Lions Gate Entertainment Corp. for fiscal Q2 2014, not STARZ Entertainment Corp.
- Assess whether the revenue and operating-profit declines are temporary slate and release-timing effects or indicate sustained weakness; compare later title performance and deliveries.
- Review the refinancing economics, including the $36.7 million debt-extinguishment loss, future interest costs, maturities and any prepayment or change-of-control terms.
- Verify liquidity against the borrowing base, production-loan commitments and the filing’s $2,679.2 million total future contractual commitments.
- Consider the sustainability of reported earnings given the discrete $12.0 million tax benefit, higher share-based compensation and film/television cost write-downs.