Filing summary
Entity and period: The supplied filing is Lions Gate Entertainment Corp.’s Form 10-K for the fiscal year ended March 31, 2013, not a Starz Entertainment Corp. filing or a calendar 2013 fourth-quarter report. Fiscal 2013 includes a full year of Summit Entertainment results; fiscal 2012 includes Summit only from its January 2012 acquisition date, limiting comparability.
Business context
Lionsgate produces, acquires and distributes motion pictures and television programming, with additional home entertainment, syndication, international and digital businesses. It reported two segments: Motion Pictures and Television Production. Its fiscal 2013 theatrical slate included 20 releases; management expected approximately 13–16 theatrical releases annually in fiscal 2014 and future years.
Financial performance and liquidity
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Revenue | $2.708 billion | $1.588 billion |
| Operating income | $273.1 million; 10.1% operating margin | $33.5 million; 2.1% operating margin |
| Net income (loss) | $232.1 million; $1.73 basic EPS, $1.61 diluted EPS | $(39.1) million; $(0.30) basic and diluted EPS |
| Operating cash flow | $276.1 million | $(214.1) million |
| Cash and cash equivalents at year-end | $62.4 million | $64.3 million |
| Interest expense | $93.6 million | $78.1 million |
| Total assets / total liabilities | $2.761 billion / $2.404 billion | $2.788 billion / $2.698 billion |
Motion Pictures revenue rose 95.7% to $2.329 billion, while Television Production revenue declined 4.6% to $379.0 million. Total home entertainment revenue increased 41.1% to $964.1 million. Growth reflected Summit’s full-year inclusion, more theatrical releases and strong contributions from titles including The Hunger Games and The Twilight Saga: Breaking Dawn – Part 2.
Fiscal 2013 net income included a $75.8 million income tax benefit, principally from reversing deferred-tax valuation allowances. The filing reports an $87.5 million discrete deferred-tax benefit and says fiscal 2013 net income would have been $212.8 million under the previous film-impairment accounting guidance. The reported result therefore was materially affected by tax and accounting items.
At March 31, 2013, corporate debt carrying value was $857.9 million, and production loans and film obligations totaled $569.0 million. The company separately stated consolidated total indebtedness of $1.354 billion, with carrying value of $1.327 billion. Cash was $62.4 million; availability under the senior revolving credit facility was $303.0 million, subject to borrowing-base and other restrictions. The $800 million facility was limited to $650 million under the notes indenture unless specified financial ratios were met. The company reported compliance with applicable debt covenants.
Operating cash flow improved by $490.2 million year over year, but included substantial noncash film and television amortization and $890.3 million of investment in film and television programs. Investing activities provided $4.5 million; financing activities used $282.5 million. The company reported $1.1 billion of filmed-entertainment backlog at year-end, compared with $999.7 million a year earlier.
Material changes versus prior period
- Revenue increased 70.6%, operating income increased substantially, and the company moved from a $39.1 million net loss to $232.1 million net income. Summit’s partial-year contribution in fiscal 2012 makes the comparison non-like-for-like.
- Operating cash flow shifted from a $214.1 million use to $276.1 million provided, while year-end cash edged down by $1.9 million.
- The Summit acquisition term loan was fully repaid during fiscal 2013; the company recorded a $24.1 million loss on debt extinguishment, primarily from writing off related financing costs and discount.
- The senior revolving facility was amended and expanded, and the notes indenture was amended to permit increased revolver borrowings, subject to conditions. At year-end, revolver borrowings were $338.5 million.
- Film and television program impairment charges increased to $31.3 million from $10.6 million. Segment disclosures also report fiscal 2013 write-downs of $15.2 million for Motion Pictures and $16.1 million for Television Production.
Outlook, risks and unusual items
Management expected continued growth in television through original content, and forecast lower Motion Pictures direct operating expenses and distribution and marketing expenses in fiscal 2014, partly because of a smaller planned theatrical slate. It said cash from operations, cash on hand, revolver availability, tax-efficient financing and production financing should meet anticipated operating and debt-service needs for the foreseeable future. This is management’s expectation, not a guarantee.
Major risks include uncertain film and television performance; significant production, acquisition and marketing capital requirements; potential budget overruns and impairments; substantial leverage, variable-rate exposure and restrictive debt covenants; dependence on key titles, customers and distributors; changing home-entertainment formats and piracy; international currency, regulatory and market risks; and acquisition integration and joint-venture risks. Wal-Mart represented approximately 11% of fiscal 2013 revenue and approximately 35% of net packaged-media home-entertainment revenue. A single customer represented $287.2 million, or more than 10%, of consolidated revenue.
Other notable items: a $60 million 1.25% convertible-note issuance closed April 15, 2013, after year-end; the Pennsylvania Regional Center production loan was repaid in April 2013, and the Film Credit Facility expired April 6, 2013. No pending legal proceedings were expected by management to have a material adverse effect. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Confirm the issuer and reporting period: this is Lions Gate Entertainment Corp., fiscal year ended March 31, 2013.
- Assess how much reported earnings depended on the deferred-tax valuation-allowance release and the film-impairment accounting change.
- Reconcile the stated $1.354 billion total indebtedness with the separate corporate-debt, production-loan and film-obligation disclosures; review maturity dates, covenants and borrowing-base availability.
- Evaluate cash conversion and the timing of production spending, receivable collections and government tax-credit receipts.
- Test whether the fiscal 2013 slate’s exceptional title performance and Summit acquisition effects are sustainable, and monitor planned fiscal 2014 releases and television deliveries.
- Review customer concentration, especially Wal-Mart, and the risks from title-dependent revenues, digital distribution shifts and film impairments.