SEC filing summary
Filing identity: The supplied filing is Lions Gate Entertainment Corp.’s Form 10-Q for the quarter ended June 30, 2018 (its fiscal 2019 first quarter), not a filing identified as STARZ Entertainment Corp. or 2019 Q1 by calendar quarter. Amounts below are in U.S. dollars.
Business context and reporting period
Lionsgate operates Motion Pictures, Television Production and Media Networks, including STARZ-branded subscription services. It reports a global film and television content business backed by a library of approximately 16,000 titles. The quarter’s results are unaudited; management cautions that they are not necessarily indicative of full-year results.
During the quarter, Lionsgate reorganized segment reporting to include STARZ original production and related ancillary distribution in Television Production. Prior-period segment figures were recast for comparison. The company also acquired a 51% interest in 3 Arts Entertainment on May 29, 2018.
Financial performance and position
| Metric | Quarter ended June 30, 2018 | Comparable 2017 quarter |
|---|---|---|
| Revenue | $932.7 million | $1,005.3 million |
| Operating income | $38.2 million | $89.7 million |
| Operating margin | 4.1% | 8.9% |
| Net income (loss) attributable to shareholders | $(7.9) million; $(0.04) per share | $173.8 million; $0.84 basic per share |
| Operating cash flow | $113.3 million | $66.8 million |
- Revenue declined 7.2%. Motion Pictures revenue fell 22.7% to $365.3 million, mainly because the smaller fiscal 2018 film slate generated less home-entertainment and international revenue. Television Production revenue rose 7.0% to $279.4 million, while Media Networks revenue rose 3.0% to $354.9 million.
- Operating income fell 57.4%. Television Production segment profit declined to $15.6 million from $43.2 million, primarily as direct operating costs rose faster than revenue. Motion Pictures segment profit declined to $51.6 million from $86.9 million. Media Networks segment profit was broadly stable at $88.5 million.
- The prior-year quarter included a $201.0 million gain from the sale of EPIX and an $11.6 million debt-extinguishment loss. The current quarter had neither item; it recorded a $0.9 million investment loss. These items substantially affect the year-over-year comparison of net income.
- Cash and cash equivalents were $315.6 million at June 30, down from $378.1 million at March 31, 2018. Operating cash flow increased year over year, while investing activities used $93.3 million, including $77.3 million net cash for the 3 Arts acquisition. Financing activities used $80.9 million, including debt repayment and $19.0 million in dividends paid.
- Total debt, net of discounts and issuance costs, was $2.50 billion, excluding film obligations and production loans; those obligations totaled $491.9 million net. The company had no revolving-credit borrowings and reported $1.5 billion available under its revolving facility, subject to covenants. It reported compliance with applicable debt covenants.
- Current assets were $1.78 billion and current liabilities were $2.42 billion. Current liabilities included an $885.2 million dissenting-shareholder liability related to the Starz merger. Equity totaled $3.20 billion.
- The board declared a quarterly dividend of $0.09 per share. The company reported $2.26 billion of remaining performance obligations at June 30, 2018, including deferred revenue and contracted amounts expected to be recognized in the future.
Material changes, outlook, risks and unusual items
- 3 Arts acquisition: The approximate $166.6 million purchase price was paid partly in cash and partly in Class B shares, with a further share payment subject to conditions. The preliminary allocation included $92.0 million of goodwill and $47.7 million of finite-lived intangible assets. Acquired results were not material to the quarter.
- Revenue accounting: Lionsgate adopted the new revenue-recognition standard on April 1, 2018. Adoption increased opening retained earnings by $18.7 million and did not materially change reported operating results overall. The filing’s comparison indicates that adoption increased current-quarter reported revenue by $3.1 million and reduced the reported net loss by $1.7 million versus prior guidance.
- Management outlook: Management said operating cash flow, cash on hand, revolving-credit availability, tax-efficient financing and production financing should be adequate for known operational and debt-service needs for the foreseeable future. The filing gives no numerical earnings or revenue guidance.
- Legal and appraisal exposure: Starz merger-related class-action and appraisal proceedings remained pending, with a trial scheduled for the second half of fiscal 2019. The $885.2 million recorded liability estimates merger consideration plus interest for approximately 22.5 million shares subject to appraisal; the ultimate amount is uncertain and could exceed the original merger consideration. The company said additional losses were reasonably possible but could not estimate a range; it expected some potential losses might be recoverable through insurance.
- Commitments and financing risks: Reported future contractual commitments totaled $5.70 billion, excluding the dissenting-shareholder liability and redeemable noncontrolling interests. The filing notes significant future film-programming obligations, including Sony output-agreement fees for qualifying films not yet released, whose amounts could not be estimated and were expected to be significant.
- Interest-rate exposure: Two swaps fixed rates on $1.2 billion of floating-rate debt as of June 30; a further $300 million swap was entered into on July 31, 2018. Management notes that higher rates could increase debt-service costs on remaining variable-rate borrowings.
- Other unusual items: Film write-downs were $4.5 million versus $0.3 million a year earlier. Restructuring and other costs were $10.5 million, including transaction, integration and legal costs. The company said it was still evaluating the full financial-statement impact of the Tax Act and had recorded provisional estimates.
Important facts for investors to verify
- Confirm that this Lions Gate June 30, 2018 filing—not a STARZ Entertainment Corp. 2019 Q1 filing—is the intended document.
- Track the Starz appraisal proceedings, potential settlement or judgment, accrued interest and any insurance recovery related to the $885.2 million liability.
- Assess whether Motion Pictures revenue and Television Production profitability recover as film and television titles are released and licensed.
- Review debt maturities, covenant headroom, variable-rate exposure and the company’s ability to meet substantial film and programming commitments.
- Monitor cash conversion and production spending, including whether operating cash flow can support dividends, acquisitions and ongoing content investment.
- Check subsequent disclosures for final 3 Arts purchase accounting and any revisions to Tax Act estimates or revenue-recognition effects.