Business context and reporting period
The supplied filing is Lions Gate Entertainment Corp.’s Form 10-K for the fiscal year ended March 31, 2015, filed May 21, 2015. It reports two segments: Motion Pictures and Television Production. The request identifies STARZ ENTERTAINMENT CORP., but that is not the registrant named in this filing; Lionsgate disclosed a minority investment in Starz.
Motion Pictures generated 75.9% of fiscal 2015 revenue and Television Production 24.1%. The filing presents full-year results and unaudited quarterly data, including the quarter ended March 31, 2015.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $2,399.6 million | $2,630.3 million |
| Operating income / margin | $222.3 million / 9.3% | $259.9 million / 9.9% |
| Net income / diluted EPS | $181.8 million / $1.23 | $152.0 million / $1.04 |
| Operating cash flow | $96.5 million | $252.5 million |
| Cash and cash equivalents at year-end | $102.7 million | $25.7 million |
| Corporate debt carrying value | $714.1 million | $677.2 million |
| Film obligations and production loans | $656.8 million | $499.8 million |
Net margin was approximately 7.6%, compared with 5.8% in FY2014. Cash flow from operations fell despite higher net income, primarily reflecting increased investment in film and television production and changes in operating liabilities. Cash increased by $75.5 million before foreign-exchange effects.
The company had no borrowings under its $800 million senior revolving facility at March 31, 2015, with $800 million reported available, subject to borrowing-base limits. It refinanced a $225 million variable-rate term loan with a $375 million, 5.00% fixed-rate term loan due 2022. The $225 million 5.25% senior notes mature in 2018; the revolving facility matures in 2017. Production loans were $600.9 million. Total contractual commitments were $2.15 billion, including recorded debt and film-related obligations.
Motion Pictures revenue fell 16.6% to $1.82 billion, while Television Production revenue rose 29.5% to $579.5 million. Gross segment contribution was $492.4 million, down 5.6%; Motion Pictures contribution declined 11.1% to $437.3 million, while Television Production contribution rose 86.1% to $55.1 million. Home entertainment revenue declined 18.1% to $707.5 million.
For the fourth quarter of FY2015, unaudited revenue was $646.1 million, gross contribution was $106.3 million, and net income was $19.6 million, or $0.14 per diluted share. In the prior-year fourth quarter, revenue was $721.9 million and net income was $49.2 million, or $0.33 per diluted share.
Material changes versus the prior period
- Annual revenue decreased 8.8%, mainly due to weaker Motion Pictures results. Theatrical revenue fell 32.5% and Motion Pictures home entertainment revenue fell 20.1%; the filing attributes this to slate size and title performance, including lower box office for The Hunger Games: Mockingjay – Part 1 than Catching Fire.
- Television Production revenue increased 29.5%, supported by more episodes delivered and higher domestic and international licensing revenue, including contributions from Orange Is the New Black and other series.
- Net income increased 19.6%, notwithstanding lower revenue and operating income. Equity-method income rose to $52.5 million from $24.7 million, including $48.7 million from EPIX and an $11.4 million gain on the sale of FEARnet. Interest expense declined, while the reported result also included an $11.7 million loss on debt extinguishment.
- Operating cash flow declined 61.8%. Film and television investment increased to $1.01 billion from $948.1 million; year-end net investment in films and programs was $1.38 billion.
- Corporate debt carrying value increased, while the company ended the year with no revolving credit borrowings. Production loans and film-related obligations also increased.
Outlook, commentary, risks and unusual items
- Management said operating cash flow, cash on hand, revolving-facility availability, tax-efficient financing and production financing should meet known operational, dividend and debt-service needs for the foreseeable future. This is management’s assessment, not a guarantee.
- The company expected more wide theatrical releases in FY2016 than in FY2015 and therefore expected theatrical prints-and-advertising expense to rise. It also expected cash tax requirements not to increase significantly in FY2016, citing available tax attributes.
- Major risks include unpredictable film and television performance, high production and marketing costs, budget overruns, timing-related earnings volatility, dependence on financing and debt service, restrictive debt covenants, variable-rate exposure, piracy, changing distribution technology, currency movements, customer and title concentration, and the ability to exploit content rights. The filing also highlights cybersecurity, intellectual-property, international-market and acquisition-integration risks.
- Film and television asset valuations depend on estimates of future title revenue; FY2015 included $32.6 million of impairment charges on film and television programs. A 1% change in the estimated home-entertainment returns rate would have affected FY2015 revenue by approximately $6.6 million.
- FY2015 included $10.7 million of restructuring and other items, primarily severance related to combining film-label marketing operations and costs of moving international sales operations to the U.K. Debt refinancing generated an $11.7 million extinguishment loss. Quarterly earnings were also affected by these and other discrete items.
- Lionsgate exchanged 4.97 million newly issued shares for Starz shares in March 2015. The Starz holding represented approximately 14.7% of voting power and was recorded as an available-for-sale investment valued at $162.0 million. The filing states Lionsgate owned approximately 4.6% of Starz common stock outstanding.
- The filing describes securities litigation and a shareholder demand concerning an earlier SEC investigation. The company said it intended to defend the litigation and did not believe pending matters would materially affect its consolidated financial position, results or cash flow. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended issuer: this document is Lions Gate Entertainment Corp.’s 10-K, not a 10-K filed by STARZ ENTERTAINMENT CORP.
- Review the audited cash-flow statement and production-loan disclosures to assess whether lower operating cash generation and higher production funding are sustainable.
- Check the terms, covenants, maturities and borrowing-base availability of corporate debt and production financing, including the May 2015 additional $25 million term loan.
- Assess the assumptions behind film and television asset amortization, impairment charges, and sales-return estimates.
- Verify the valuation, voting arrangements and subsequent performance of the Starz investment, and the status and potential exposure of the disclosed legal matters.