Filing summary
Important identification note: The supplied filing is Lions Gate Entertainment Corp.’s Form 10-Q for the quarter ended June 30, 2012, not a STARZ Entertainment Corp. filing. The source therefore does not provide STARZ-specific financial information. It reports Lions Gate’s fiscal 2013 first quarter; amounts below are in U.S. dollars.
Business context and reporting period
Lions Gate is an entertainment company operating in motion picture production and distribution and television production. The unaudited quarter covers the three months ended June 30, 2012. The comparable 2011 results are identified as adjusted for the elimination of a one-quarter reporting lag for EPIX. The 2011 quarter did not include Summit Entertainment, acquired by Lions Gate in January 2012.
Key financial metrics
| Metric | Quarter ended June 30, 2012 | Prior comparable quarter |
|---|---|---|
| Revenue | $471.8 million | $261.3 million |
| Operating income (loss) | ($7.2 million); operating margin about (1.5%) | $28.0 million; margin about 10.7% |
| Net income (loss) | ($44.2 million); diluted loss per share $0.33 | $10.3 million; diluted earnings per share $0.08 |
| Operating cash flow | $151.0 million | ($44.5 million) |
| Cash and cash equivalents at period end | $67.6 million | $111.0 million |
At June 30, 2012, total assets were $2.57 billion, total liabilities $2.52 billion, and shareholders’ equity $47.9 million. Corporate debt, excluding film obligations and production loans, had a carrying value of $1.12 billion. Film obligations and production loans added $403.3 million. Restricted cash was $16.4 million. The revolving credit facility had $289.5 million drawn and $40.8 million available.
Motion Pictures generated $406.5 million of revenue and $23.1 million of segment profit; Television Production generated $65.3 million and $4.6 million, respectively. Consolidated segment profit was $27.7 million before shared services and corporate expenses, interest, debt-extinguishment loss, and other items.
Material changes versus the prior comparable period
- Revenue increased 80.6%, largely reflecting the inclusion of Summit and stronger motion-picture results. Motion Pictures revenue rose 111.1%; Television Production revenue declined 4.9%.
- The theatrical slate, including the performance of The Hunger Games and four wide releases during the quarter, drove theatrical revenue to $137.6 million from $27.1 million. Home entertainment revenue increased 56.6% to $145.5 million.
- Despite higher revenue, operating results deteriorated to a loss. Film and television amortization rose to $167.1 million from $85.0 million, and distribution and marketing expense increased to $178.7 million from $64.7 million.
- Interest expense increased to $27.5 million from $16.3 million, primarily following the Summit-related term loan. An $8.2 million loss on extinguishment of debt resulted from early term-loan repayments.
- Cash from operations improved to $151.0 million, with management citing higher receivable collections and other working-capital movements. Cash used in financing was $147.2 million, including term-loan and production-loan repayments; revolving-credit borrowings increased substantially.
Outlook, commentary, risks, and unusual items
- Management expected fiscal 2013 Motion Pictures revenue to exceed fiscal 2012, while cautioning that results depend on title performance and can vary materially. It also expected higher Motion Pictures direct operating and distribution and marketing expenses, including because of Summit purchase accounting and a larger theatrical slate.
- Management said operating cash flow, cash on hand, revolving-credit availability, and production financing should be adequate for foreseeable operating and debt-service requirements. This outlook should be considered alongside only $40.8 million of revolver availability and the facility’s July 2013 expiry.
- Summit-related film asset fair-value adjustments increased amortization; the quarter also included $1.7 million of Summit severance and transaction costs. Share-based compensation was $9.7 million, versus $2.6 million a year earlier.
- Film and television investment valuation depends on estimates of ultimate title revenues and costs; actual performance can differ and could require further amortization or impairment. Other stated risks include production and marketing costs, title unpredictability, acquisition integration, financing restrictions, and technology and industry changes.
- Variable-rate borrowings expose the company to higher interest expense if rates rise. The filing also identifies change-of-control provisions, debt covenants, concentrated shareholder ownership, and possible share sales as risks. Management did not expect pending legal proceedings to have a material adverse effect.
- After quarter-end, the February 2005 convertible notes were redeemed or converted in July 2012; the film credit facility commitment was reduced from $130 million to $60 million in July.
Important facts for investors to verify
- Confirm the intended issuer: the supplied 10-Q is for Lions Gate Entertainment Corp., not STARZ Entertainment Corp.
- Review Summit’s contribution to reported revenue and earnings, and distinguish reported results from the pro forma comparison that includes Summit in the prior period.
- Assess near-term liquidity and refinancing needs, including the July 2013 revolving-facility expiry, limited reported availability, and 2013 production-financing maturities.
- Track film amortization, title-level performance, theatrical marketing commitments, and any subsequent impairments or cost overruns.
- Check subsequent filings for the effects of the July note redemption/conversion, the reduced film-credit commitment, and compliance with debt covenants.