Business context and reporting period
Issuer clarification: The supplied filing is Lions Gate Entertainment Corp.’s Form 10-K, not a Starz Entertainment Corp. 10-K. Starz is identified in the filing as an investment in which Lionsgate held approximately 4.8% of common shares and 15.0% of voting power.
The filing covers Lionsgate’s fiscal year ended March 31, 2016, with fiscal 2015 as the primary comparison. Lionsgate reports Motion Pictures and Television Production segments. Its business spans film and television production, distribution, home entertainment and international licensing.
Financial results and liquidity
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $2.347 billion | $2.400 billion |
| Operating income (loss) | $(25.0) million | $222.3 million |
| Net income attributable to Lionsgate shareholders | $50.2 million | $181.8 million |
| Diluted earnings per share | $0.33 | $1.23 |
| Cash from (used in) operating activities | $(19.0) million | $96.5 million |
| Cash and cash equivalents at year-end | $57.7 million | $102.7 million |
Revenue declined 2.2%. Operating margin was approximately negative 1.1%, compared with 9.3% in FY2015; net income attributable to shareholders was about 2.1% of revenue, versus 7.6%. Gross segment contribution, a company-defined measure before segment G&A and certain items, fell to $288.3 million (12.3% of revenue) from $504.9 million (21.0%).
- Segments: Motion Pictures revenue was $1.677 billion, down 7.8%; gross segment contribution fell 59.0% to $184.3 million. Television Production revenue rose 15.6% to $669.9 million; contribution increased 88.7% to $104.0 million.
- Cash flow: Operating cash use reflected production investment, higher receivables and lower operating income. Investing activities used $162.1 million, including $126.9 million for Pilgrim Media Group, net of acquired cash. Financing activities provided $135.7 million, including net revolving-credit borrowings.
- Debt and liquidity: Corporate debt principal was $887.9 million ($886.1 million carrying value); production loans were $690.4 million. Cash was $57.7 million, and $639.0 million remained available under the $800 million revolving facility. The company reported compliance with applicable debt covenants.
- Balance sheet: Total assets were $3.856 billion, total liabilities $2.915 billion, and shareholders’ equity $850.3 million. Film and television investment was $1.478 billion; accounts receivable totaled $1.049 billion.
- Quarterly context: FY2016 fourth-quarter revenue was $791.2 million, operating loss $20.2 million, net income attributable to shareholders $10.9 million, and diluted EPS $0.07.
Material changes versus the prior comparable period
- Motion Pictures weakened across theatrical, home entertainment and television licensing. Revenue fell 11.3% in theatrical, 12.5% in home entertainment and 24.1% in television. Management cited lower performance from Mockingjay—Part 2 and Allegiant relative to their prior-year franchise installments, as well as fewer and lower-performing television windows.
- International Motion Pictures revenue increased 10.7%, supported by a greater contribution from the FY2016 slate. Television Production international revenue rose 69.2%, while domestic television revenue was essentially flat.
- Distribution and marketing expense rose to $661.8 million from $591.5 million, notably as theatrical prints-and-advertising spending increased. Direct operating expense also rose to $1.415 billion, including higher film amortization and $22.2 million of investment-in-film write-downs (versus $17.3 million in FY2015).
- FY2016 included Pilgrim Media Group from its November 12, 2015 acquisition: $52.5 million of revenue and $7.2 million of net loss. Lionsgate acquired a 62.5% interest for approximately $201.7 million in total consideration and recorded $211.5 million of goodwill. The acquisition also added $90.5 million of redeemable noncontrolling interests, with put/call rights exercisable five and seven years after closing, subject to caps.
Outlook, management commentary, risks and unusual items
- Management said operating cash flow, cash on hand, revolving-credit availability, tax-efficient financing and production financing should meet known operational, dividend and debt-service requirements for the foreseeable future. This is not a guarantee; the filing gives no specific revenue or earnings guidance. Management expected FY2017 cash tax requirements not to increase significantly from FY2016, citing available tax attributes.
- Key risks include unpredictable film and program performance, production and marketing cost increases, budget overruns, volatile release timing, reliance on distributors and major customers, piracy and intellectual-property disputes, technology and consumer shifts, foreign-exchange exposure, and substantial leverage. Netflix represented approximately 12% of FY2016 revenue; one customer represented more than 10% of revenue, and approximately 25% of gross receivables were due from that customer.
- Contractual obligations totaled approximately $2.540 billion, including recorded debt and film/production-loan obligations plus future commitments. The company separately disclosed $90.5 million of redeemable noncontrolling interest whose payment timing and amount could not be reliably estimated.
- A $76.5 million income-tax benefit, principally including a favorable Canadian tax treatment of certain foreign-affiliate dividends and deferred tax effects, helped offset the pretax loss of $33.8 million. Deferred tax assets were $134.4 million; their realization depends on future taxable income.
- The company reported an unrealized loss on its Starz investment in other comprehensive income; its stated fair value on May 24, 2016 was $124.7 million versus a $158.9 million cost basis. Lionsgate said it intended and was able to hold the securities pending potential recovery.
- Lionsgate declared $0.34 per share in dividends during FY2016 and had $184.7 million remaining under its authorized share-repurchase plan. Future dividends and repurchases remain subject to board discretion, liquidity, debt restrictions and other factors.
- Management and the independent auditor concluded internal control over financial reporting was effective as of March 31, 2016, but the assessment excluded Pilgrim Studios because of acquisition timing. The auditor issued an unqualified opinion on the financial statements and controls. Two disclosed shareholder litigation matters were dismissed in January and March 2016; the company said other ordinary-course proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the issuer identity: this filing is for Lions Gate Entertainment Corp., while the request names Starz Entertainment Corp.
- Review the full cash-flow statement and debt notes, particularly production-loan repayment timing, the September 2017 revolving facility maturity, and the January 2017 convertible-note maturity.
- Assess whether film and television revenue estimates support the $1.478 billion content-asset balance and whether further write-downs may be needed.
- Monitor collection and concentration risk in receivables, including tax-credit receivables and the large customer balance.
- Review Pilgrim’s subsequent performance, final purchase-price allocation and potential cash obligations from noncontrolling-interest put rights.
- Evaluate the sustainability of dividends and repurchases given negative FY2016 operating cash flow, debt levels and contractual commitments.