Filing Summary
Issuer and period: The supplied filing is Lions Gate Entertainment Corp.’s Form 10-K for the fiscal year ended March 31, 2017, filed May 25, 2017. This does not match the request metadata naming STARZ ENTERTAINMENT CORP.; Starz was acquired by Lionsgate on December 8, 2016. The fiscal year includes Starz results only from the acquisition date, so reported year-over-year figures are not directly comparable.
Business Context and Reporting Period
Lionsgate operates in motion-picture production and distribution, television production and syndication, and premium subscription networks. After acquiring Starz, it reported three segments: Motion Pictures, Television Production, and Media Networks. The filing is an annual report, not a standalone fourth-quarter filing; it separately reports Q4 fiscal 2017 results.
Starz’s STARZ service had 24.2 million subscribers at March 31, 2017. Fiscal 2017 consolidated revenue included $483.2 million from Starz after acquisition. Management describes a strategy of diversifying content and distribution, expanding OTT and international offerings, and managing production and acquisition exposure.
Financial Results and Key Metrics
Amounts below are U.S. dollars; financial figures are in millions except per-share data and ratios.
| Metric | FY 2017 | FY 2016 | Change / note |
|---|---|---|---|
| Revenue | $3,201.5 | $2,347.4 | Up 36.4%; includes Starz from December 8, 2016 |
| Operating income (loss) | $(16.3) | $(25.0) | Loss narrowed by $8.7 |
| Income (loss) before tax | $(134.4) | $(33.8) | Loss widened |
| Income tax benefit | $148.9 | $76.5 | Large benefit materially supported reported net income |
| Net income attributable to Lionsgate shareholders | $14.8 | $50.2 | Down 70.5% |
| Diluted EPS | $0.09 | $0.33 | Down from prior year |
| Cash from operating activities | $558.6 | $(19.0) | Improved by $577.6 |
| Cash and cash equivalents at year-end | $321.9 | $57.7 | Up $264.2 |
| Total debt, net | $3,124.9 | $865.2 | Increased substantially following Starz transaction |
FY 2017 operating margin was approximately negative 0.5% and net margin approximately 0.5%. Operating cash flow included substantial noncash amortization of film, television and program-rights costs; investment in those assets was $1,092.0 million. Cash used in investing was $1,145.3 million, principally the $1,102.6 million net cash purchase of Starz. Financing activities provided $850.1 million.
At year-end, current assets were $1,690.4 million and current liabilities $1,689.9 million, a near 1.0 current ratio. Debt principal was $3,225.2 million, including $3,107.5 million of corporate debt and $353.8 million of production loans (production loans are separate from corporate debt). The company had no revolving-credit borrowings and $1.0 billion of unused revolving commitments, subject to covenants. It reported covenant compliance at March 31, 2017.
- Segment performance: Motion Pictures revenue was $1,920.6 million and segment profit $132.5 million; Television Production revenue was $837.4 million and segment profit $59.8 million; Media Networks revenue was $456.6 million and segment profit $138.6 million. Segment profit is a management measure and is not consolidated operating income.
- Pro forma Media Networks comparison: Assuming the merger had occurred April 1, 2015, segment revenue rose 2.8% to $1,458.9 million and segment profit rose 10.2% to $447.1 million. These unaudited illustrative figures exclude expected synergies and are not reported consolidated results.
- Fiscal Q4 2017: Revenue was $1,256.1 million, operating income $71.3 million, net income attributable to shareholders $61.6 million, and diluted EPS $0.28. Prior-year Q4 revenue was $791.2 million, operating loss $20.2 million, attributable net income $10.9 million, and diluted EPS $0.33. The year-over-year comparison is affected by the Starz acquisition and release timing.
Material Changes Versus Prior Period
- The Starz merger transformed the balance sheet and expanded reported revenue, assets, debt and operating scope; Starz contributed only part-year results in fiscal 2017.
- Motion Pictures revenue increased 14.5%, led by home entertainment, television and theatrical activity; international revenue declined 2.6%, partly reflecting the prior-year contribution from The Hunger Games: Mockingjay – Part 2.
- Television Production revenue increased 25.0%, but segment profit fell 20.5%. Domestic television grew, while international and home-entertainment revenue declined and new-program amortization weighed on contribution.
- Reported interest expense rose to $115.2 million from $54.9 million, reflecting acquisition financing and $15.5 million of interest on the dissenters’ liability. A $40.4 million debt-extinguishment loss also reduced pretax results.
- Restructuring and other charges increased to $88.7 million from $19.8 million, including $29.1 million severance, $44.1 million transaction costs, and $15.5 million litigation and other charges.
- The quarterly cash dividend was suspended effective September 2016 as management focused on deleveraging and growth after the Starz acquisition. No shares were repurchased in fiscal 2017.
Outlook, Risks, Contingencies and Unusual Items
- Management outlook: No quantified consolidated revenue or earnings guidance is provided in the supplied filing. Management said operating cash flow, cash on hand, revolving-credit availability, tax-efficient financing and production financing should cover known operating and debt-service needs for the foreseeable future. It stated an objective to reduce leverage by 1.5 times over the first 12–18 months after the merger; achievement depends on cash generation.
- Merger appraisal exposure: A liability of $812.9 million was recorded for Starz shareholders seeking appraisal, including accrued interest. The eventual court-determined fair value and interest could exceed the merger consideration. Five appraisal petitions were pending.
- Leverage and liquidity: The new debt load increases interest and refinancing risk, particularly because the term loans carry floating rates. Debt agreements impose financial and operating covenants and restrict actions including additional borrowing, dividends, asset sales and investments. Scheduled debt principal and other recorded obligations total $3,709.7 million; contractual commitments and interest add substantial further requirements.
- Customer and programming concentration: AT&T, including DIRECTV, represented at least 10% of pro forma revenue. Starz depends on distributor affiliation agreements, renewals and content-rights arrangements; the Sony output agreement runs through 2021. Subscriber losses, unfavorable renewals or higher content costs could pressure results.
- Integration and production risks: The company cited Starz integration, retention of key employees, acquisition synergies, film and series performance, production overruns, impairment of content assets and volatile release timing as material uncertainties. Fiscal 2017 film and television impairment charges were $22.7 million.
- Other exposures: Risks include piracy and intellectual-property disputes, technology and OTT disruption, foreign exchange, regulatory and tax changes, and litigation. Management and the auditor concluded internal control over financial reporting was effective, but Starz’s controls were excluded from the year-end assessment while integration continued.
- Post-year-end transaction: In May 2017, Lionsgate sold its 31.15% EPIX interest for approximately $397.2 million in net proceeds. The company estimated a pretax gain of about $200 million and after-tax gain of about $125 million, expected in the quarter ended June 30, 2017; actual amounts remained subject to adjustment.
Important Facts for Investors to Verify
- Confirm the intended issuer: this filing is Lions Gate Entertainment Corp., not a standalone STARZ ENTERTAINMENT CORP. filing.
- Review the audited statements and acquisition notes for the final Starz purchase-price allocation, acquisition accounting, and any subsequent revisions to goodwill and intangible assets.
- Track the appraisal proceedings, the $812.9 million recorded liability, and any cash settlement or court valuation.
- Assess post-merger leverage, covenant headroom, floating-rate exposure, maturity schedule and progress toward management’s stated deleveraging objective.
- Separate reported fiscal 2017 results from comparable pro forma performance; verify Starz subscriber trends, distributor renewals and segment margins in subsequent filings.
- Verify the completed EPIX sale proceeds, realized gain and tax effects, and whether proceeds were used to reduce debt.