Business context and reporting period
This filing is by Lions Gate Entertainment Corp., not STARZ Entertainment Corp. It reports the quarter and six months ended September 30, 2011, the second quarter of Lionsgate’s fiscal 2012. Lionsgate operates motion-picture and television-production businesses.
Financial performance and condition
| Metric | Three months ended September 30, 2011 | Six months ended September 30, 2011 |
|---|---|---|
| Revenue | $358.1 million, down 21.5% year over year | $619.3 million, down 20.9% |
| Operating income (loss) | $(9.0) million; operating margin approximately (2.5)% | $19.0 million; operating margin approximately 3.1% |
| Net loss | $(24.6) million; $(0.18) per share | $(12.3) million; $(0.09) per share |
| Operating cash flow | Not separately provided for the quarter | $(140.6) million, versus $(94.8) million used in the prior-year period |
Quarter revenue weakness was concentrated in Motion Pictures, down 35.8% to $218.9 million; Television Production rose 20.7% to $139.2 million. For the six months, Motion Pictures revenue fell 33.0% to $411.4 million while Television Production increased 23.4% to $207.9 million. Motion Pictures’ quarterly segment loss was $36.5 million, partly offset by $32.1 million of Television Production segment profit.
At September 30, cash and cash equivalents were $29.5 million (down from $86.4 million at March 31); restricted cash was $22.5 million. Total assets were $1.715 billion, total liabilities $1.678 billion, and shareholders’ equity $37.5 million. Revolver borrowings were $23.0 million, with $302.0 million reported available, subject to borrowing-base limits and letters of credit. Senior secured second-priority notes had $436.0 million principal and $431.2 million carrying value; their coupon is 10.25%. Film obligations and production loans totaled $373.4 million. Cash plus restricted cash should not be viewed as fully available liquidity.
Material changes versus prior comparable periods
- Quarterly revenue fell primarily because theatrical, home-entertainment, television-licensing and international motion-picture revenues were lower; management cited weaker box-office results, including compared with The Expendables in the prior-year quarter.
- Television Production’s gains included higher television home-entertainment and international revenue, while domestic series licensing declined.
- Six-month net loss improved from $93.7 million to $12.3 million. Lower share-based compensation (including a prior-year $21.9 million change-in-control charge), lower activist-related costs, and improved equity-method results contributed; revenue nevertheless declined substantially.
- Operating cash use increased, primarily reflecting a $433.4 million investment in films and television programs, compared with $313.7 million a year earlier.
- The company sold Maple Pictures in August for approximately $35.3 million, recognized an $11.0 million gain, and recorded $17.8 million of the sale price as deferred revenue for continuing distribution rights. It also repurchased 11.0 million common shares for approximately $77.1 million.
Outlook, risks and unusual items
Management gave no specific earnings or revenue guidance. It said cash from operations, cash on hand, revolver availability, production financing and the May 2011 notes proceeds should meet known operating cash needs for the foreseeable future. This is management’s assessment, not a guarantee; the filing notes substantial upfront film and television spending and the timing uncertainty of content revenues.
Key risks include unpredictable title performance and box-office results, film-cost and revenue-estimation uncertainty, significant production and marketing commitments, borrowing-base and debt-covenant restrictions, and variable-rate exposure. A change in control could trigger debt repurchases or defaults; the filing notes that the company might lack funds or contractual capacity to repurchase all tendered debt. The company reported $1.672 billion of total future contractual commitments, including debt, content-related obligations, interest, leases and employment contracts.
Subsequent to quarter-end, holders required repurchase of $26.6 million principal of the October 2004 convertible notes; LGEI paid approximately $27.0 million on October 17, 2011. Selling shareholders’ October offering of 19.2 million shares generated no proceeds for the company, which paid an approximately $3.4 million underwriting fee. The Icahn-related litigation was settled and dismissed in September 2011. Management said other pending claims were not expected, based on current knowledge, to have a material adverse effect.
Most important facts for investors to verify
- Confirm the issuer and period: this is Lions Gate Entertainment Corp.’s fiscal Q2 2012 10-Q, not a STARZ Entertainment Corp. filing.
- Track whether Motion Pictures revenue and segment profitability recover, and whether Television Production growth continues.
- Assess operating cash burn, film investment requirements, and the distinction between unrestricted and restricted cash.
- Review debt service and maturities, especially the 10.25% senior notes, production financing, and covenant or change-in-control provisions.
- Evaluate how much reported earnings depend on the Maple Pictures sale gain, equity-method results, and changes in noncash compensation and activist-related expenses.
- Monitor title-level performance and estimates for film amortization, returns, and impairment; actual results may differ materially from management estimates.