Filing summary
Entity and period: The supplied filing is Lions Gate Entertainment Corp.’s Form 10-K for the fiscal year ended March 31, 2011, not a filing for Starz Entertainment Corp. The filing also reports fiscal fourth-quarter results, but the annual financial statements cover the full fiscal year. Dollar amounts below are U.S. dollars.
Business context
Lionsgate produces and distributes motion pictures and television programming and earns revenue through theatrical releases, home entertainment, licensing, syndication, and international distribution. Its library comprised approximately 13,000 film titles and television episodes/programs. The filing describes two reportable segments: Motion Pictures and Television Production.
Financial results and liquidity
| Metric | FY ended March 31, 2011 | FY ended March 31, 2010 |
|---|---|---|
| Revenue | $1,582.7 million | $1,489.5 million |
| Operating income | $62.5 million | $49.9 million |
| Operating margin | Approximately 4.0% | Approximately 3.3% |
| Net loss | $53.6 million; $0.41 per share | $19.5 million; $0.17 per share |
| Operating cash flow | $42.3 million provided | $135.0 million used |
| Cash and cash equivalents at year-end | $86.4 million | $69.2 million |
- Revenue increased 6.3%. Motion Pictures revenue rose 9.8% to $1,229.5 million; Television Production revenue was nearly flat at $353.2 million.
- Motion Pictures operating-segment profit increased to $143.4 million from $108.9 million; Television Production segment profit increased to $36.5 million from $29.7 million.
- Home entertainment revenue increased 4.7% to $690.0 million. Electronic-media revenue rose to $122.3 million from $67.9 million, while packaged-media revenue declined slightly.
- Total reported indebtedness was $713.6 million at March 31, 2011, with a carrying value of $674.8 million. Separately, the balance sheet reported $226.3 million of senior secured notes, $69.8 million drawn on the revolving facility, and $327.4 million in film obligations and production loans.
- The $340 million revolving facility had $255.2 million available at year-end, subject to borrowing-base limits and $15.0 million of letters of credit. Restricted cash was $43.5 million and was not equivalent to freely available cash.
- Interest expense was $55.2 million, up from $47.2 million. The $236 million senior secured second-priority notes carried a 10.25% coupon and were due in 2016.
- Operating cash flow improved substantially year over year, though the company remained loss-making. Cash used in investing activities was $28.4 million; financing activities used $1.5 million.
Changes, outlook, risks and unusual items
- Year-over-year drivers: Higher theatrical revenue (up 47.7%) and international revenue (up 72.3%) supported growth. Mandate Pictures revenue fell 60.9%, partly reflecting the prior-year contribution from Drag Me to Hell. Television Production growth was supported by Debmar-Mercury licensing.
- Quarterly volatility: Fiscal Q4 revenue was $376.9 million and net income was $46.1 million, compared with a $6.0 million net loss in Q3. The full-year result remained a $53.6 million net loss.
- Unusual expenses: The company recorded a $14.5 million loss on extinguishment of debt, $22.9 million of shareholder-activist-related legal and professional expenses, and $21.9 million of accelerated executive stock compensation after a change-in-control trigger. The filing attributes the fiscal-year loss primarily to financing costs, equity-method investment losses and these special expenses despite positive operating income.
- Equity-method investments: Equity-method losses totaled $43.9 million, including $38.2 million from EPIX. Lionsgate reported $89.4 million of revenue from licensing content to EPIX; its EPIX investment results and licensing eliminations affected reported earnings.
- Subsequent financing: On May 13, 2011, the company issued approximately $200 million of additional 10.25% senior secured notes due 2016. Net proceeds were approximately $191.6 million after transaction costs and a consent payment; a portion repaid revolving-facility borrowings. This occurred after the fiscal year-end.
- Management outlook: For fiscal 2012, management intended to release approximately 11–13 theatrical films and deliver approximately 56 hours of television programming. Management stated that operating cash, cash on hand, revolving-credit availability, production financing, incentives and the additional notes were expected to cover known cash requirements for the foreseeable future. These are forward-looking expectations, not guarantees.
- Key risks: Results depend on unpredictable title performance and release timing; production and marketing costs, budget overruns, piracy, changing home-entertainment formats, customer concentration, foreign exchange, and joint-venture performance could pressure results. High leverage, debt covenants, variable rates and refinancing requirements constrain flexibility. Wal-Mart accounted for approximately 13% of revenue, and one retailer represented about 35% of packaged-media home-entertainment revenue.
- Contingencies and controls: Icahn-related litigation included appeals and an ongoing claim in the company’s action against Icahn entities; the company said it did not expect pending ordinary-course matters to materially affect its consolidated results. Management and the auditor reported effective internal controls, and the auditor gave an unqualified opinion on the financial statements.
- Comparability: Adoption of revised variable-interest-entity accounting led Lionsgate to deconsolidate TV Guide Network retrospectively and account for it under the equity method. The filing cautions that acquisitions, dispositions and this accounting change limit direct comparability across periods.
Most important facts for investors to verify
- Confirm that Lions Gate Entertainment Corp., rather than Starz Entertainment Corp., is the intended issuer and that the relevant period is the fiscal year ended March 31, 2011.
- Review the full financial statements and debt agreements for borrowing-base availability, covenant compliance, repayment terms and the effect of the May 2011 note issuance.
- Assess whether improved operating cash flow is sustainable given film investment requirements, restricted cash, production-loan maturities and contractual commitments.
- Examine EPIX’s subsequent profitability, Lionsgate’s remaining funding obligations, and the extent to which related-party licensing and equity-method adjustments influence earnings.
- Verify the status and potential financial impact of the remaining litigation, shareholder-control provisions and change-in-control debt triggers.