Business context and reporting period
Entity and period: The supplied filing is Lions Gate Entertainment Corp.’s Form 10-Q for the quarter ended September 30, 2010 (fiscal second quarter) and the six months then ended. It is not a STARZ Entertainment Corp. filing, notwithstanding the request metadata. Amounts below are U.S. dollars; financial-statement amounts are in millions unless stated otherwise.
Lionsgate operated Motion Pictures and Television Production businesses, producing and distributing films and television programming. The interim financial statements are unaudited; management cautions that results for the three and six months are not necessarily indicative of the full fiscal year.
Financial results and liquidity
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Revenue | $456.3; up 24.7% from $366.1 | $782.9; up 5.0% from $745.3 |
| Operating income (loss) | $20.5, versus $44.4 | $(16.9), versus $85.8 |
| Operating margin | 4.5%, versus 12.1% | (2.2)%, versus 11.5% |
| Net income (loss) | $(29.7), versus $31.7; diluted loss per share $(0.22) | $(93.7), versus $68.1; diluted loss per share $(0.75) |
| Interest expense | $13.8, versus $10.2 | $28.4, versus $19.8 |
| Equity-method investee loss | $(20.7), versus $(2.2) | $(32.4), versus $(4.2) |
- Quarterly drivers and margins: Motion Pictures revenue rose 23.1% to $341.1, led by theatrical, international and television licensing. Television Production revenue rose 29.7% to $115.3. The quarter’s increased distribution and marketing expense—$162.4 versus $99.6—more than offset revenue growth; management attributed much of the increase to theatrical releases and promotion. Segment contribution before corporate costs was $55.7, versus $76.9.
- Six-month trends: Motion Pictures revenue increased 11.7% to $614.4, while Television Production revenue declined 4.3% to $168.5. Home-entertainment revenue across both segments fell 13.9% to $249.2. Distribution and marketing expense increased to $302.5 from $183.6; general and administration expense rose to $98.4 from $67.6.
- Cash flow: Operating cash used was $94.8 for the six months, improved from $169.3 used in the comparable period. Investing cash used was $31.5; financing cash provided was $134.0. Cash and cash equivalents ended at $78.1, compared with $69.2 at March 31, 2010. Restricted cash was an additional $29.1 and was not freely available for general use.
- Debt and borrowing capacity: Revolver borrowings were $187.0, up from $17.0 at March 31, with $127.4 available under the facility. The facility matures July 2013 and carried a 2.76% effective rate. Senior secured second-priority notes had $236.0 principal outstanding, a 10.25% coupon and a November 2016 maturity. Convertible subordinated notes had $136.4 principal outstanding (carrying value $102.9); holders had specified put dates beginning in October 2011 and March 2012. Film obligations and production loans totaled $329.0. The separate Film Credit Facility had $39.4 drawn and $80.6 available.
- Other balance-sheet indicators: Total assets were $1,638.0 and total liabilities $1,558.8; shareholders’ equity was $79.2. Film and television program investment was $713.2. A standard current ratio is not clear from the filing text’s balance-sheet presentation.
Material changes, unusual items and management commentary
- The six-month loss includes a $14.5 noncash loss on extinguishment of debt from the July 2010 exchange and conversion of approximately $99.7 principal of notes into 16.2 million common shares. The conversion reduced debt but increased shares outstanding; issued shares rose to 136.5 million from 118.0 million at March 31.
- New consolidation guidance led Lionsgate to retrospectively deconsolidate TV Guide Network from May 28, 2009 and account for its 51% interest using the equity method. The filing says the change did not affect fiscal 2010 net loss, but changes presentation of revenue, expenses and assets. The company recorded a $32.4 equity-method loss for the six-month period, driven principally by EPIX’s losses.
- EPIX accounted for a $31.8 equity-method loss for the six months. Lionsgate reported $39.9 of licensing revenue and $20.6 of gross profit from licenses to EPIX in the quarter. The filing says EPIX expected a further $26.0 loss for its quarter ended September 30, with Lionsgate’s share to be recorded in the following quarter.
- Change-in-control provisions triggered immediate vesting of certain executive awards. Related six-month compensation expense was $21.9; total stock-based compensation expense was $29.8. Corporate expenses also included $12.5 of shareholder-activist-related legal and professional fees for the six months.
- Management stated that operating cash flow, cash on hand, revolver availability and production financing should cover known operating requirements for the foreseeable future. This is management’s assessment, not a quantified earnings forecast; the filing provides no specific revenue or profit guidance.
- Liquidity and execution risks include substantial film and television investment needs, unpredictable title performance, significant release and marketing costs, film-cost estimation and impairment risk, and covenant restrictions. Contractual obligations totaled $1,436.0, including debt, commitments, interest, leases and employment contracts. Variable-rate borrowings expose the company to higher interest costs.
- Control and ownership matters were prominent. The filing disclosed an unsolicited Icahn tender offer, concentrated ownership and litigation over the July exchange/conversion. A British Columbia court dismissed the Offeror’s claims on November 1, 2010, and the Offeror announced an appeal; New York litigation remained pending. These developments are described in the filing after the September 30 period end.
- The company reported effective disclosure controls as of September 30 and no material change in internal control over financial reporting during the period. It said ordinary-course legal proceedings were not expected to have a material adverse effect, while separately describing the activist-related cases and associated risks.
Important facts for investors to verify
- Confirm the issuer: this filing is for Lions Gate Entertainment Corp., not STARZ Entertainment Corp.
- Assess the sustainability and cash conversion of revenue growth, particularly theatrical performance, home-entertainment declines and rising marketing costs.
- Track revolver usage, remaining borrowing-base availability, covenant compliance, upcoming noteholder put dates and the company’s ability to refinance or repay obligations.
- Monitor EPIX’s losses, future equity-method charges and the accounting treatment of licensing profits between Lionsgate and investees.
- Separate recurring operating performance from the $14.5 debt-extinguishment loss, change-in-control compensation and activist-related legal expenses.
- Review the outcome and costs of the pending litigation and tender-offer developments, including any effect on control provisions, debt repayment rights or share value.