Filing identity and reporting period
Important issuer mismatch: The supplied filing is Lions Gate Entertainment Corp.’s Form 10-Q, not a filing by STARZ ENTERTAINMENT CORP. It covers the quarter and six months ended September 30, 2012 (Lions Gate fiscal 2013 Q2). Financial amounts below are in U.S. dollars unless noted.
Lions Gate operates motion-picture production and distribution and television production businesses. Prior-year comparative results were adjusted for the elimination of a one-quarter reporting lag for EPIX. Comparisons are also affected by Summit Entertainment’s acquisition in January 2012; the September 2011 periods do not include Summit.
Financial performance
| Metric | Three months ended September 30, 2012 | Six months ended September 30, 2012 | Comparable 2011 period |
|---|---|---|---|
| Revenue | $707.0 million | $1,178.8 million | $358.1 million; $619.3 million |
| Operating income (loss) | $101.2 million | $94.0 million | $(9.0) million; $19.0 million |
| Net income (loss) | $75.5 million | $31.3 million | $(25.3) million; $(15.0) million |
| Diluted earnings (loss) per share | $0.53 | $0.23 | $(0.19); $(0.11) |
| Operating cash flow | Not separately presented | $142.1 million | $(140.6) million |
Calculated operating margin was approximately 14.3% for the quarter and 8.0% for the six-month period; calculated net margin was approximately 10.7% and 2.7%, respectively. The filing does not present these margins as reported metrics.
- Revenue mix: Motion Pictures revenue was $608.0 million for the quarter and $1,014.5 million for six months. Television Production revenue was $99.0 million and $164.3 million, respectively.
- Cash flow: Six-month investing cash flow was $3.3 million provided; financing cash flow was $156.2 million used. Cash declined from $64.3 million at March 31 to $54.4 million at September 30.
- Balance sheet: Total assets were $2.710 billion, total liabilities $2.564 billion, and shareholders’ equity $146.2 million at September 30. Restricted cash was $6.6 million.
- Debt and liquidity: Corporate debt, excluding film obligations and production loans, had a carrying value of $1.079 billion. Film obligations and production loans totaled $437.6 million. Revolver borrowings were $268.7 million, with reported availability of $62.7 million at September 30.
Material changes versus prior comparable periods
- Quarterly revenue rose 97.4%; six-month revenue rose 90.3%. Motion Pictures drove the increase, supported by theatrical releases, home entertainment, international sales and Summit titles. The Hunger Games contributed to theatrical and home-entertainment results.
- Television Production revenue declined 28.9% for the quarter and 21.0% for six months, including lower home-entertainment licensing and fewer international episode deliveries.
- Quarterly results moved from a loss to profit, and six-month results improved from a net loss to net income. The prior-year quarter included an $11.0 million gain on the sale of Maple Pictures; the current-year six-month period included a $9.2 million debt-extinguishment loss.
- Six-month operating cash flow improved by $282.7 million year over year, primarily reflecting higher income before non-cash charges and improved collections of receivables.
- Quarterly interest expense increased to $23.3 million from $17.6 million; six-month interest expense rose to $50.8 million from $33.9 million, primarily reflecting the Summit-related term loan.
Outlook, commentary, risks and unusual items
- Management expected fiscal 2013 Motion Pictures revenue to exceed fiscal 2012, while cautioning that title performance can cause material variation. Management also expected higher fiscal 2013 film distribution and marketing expense and higher Motion Pictures direct operating expense.
- Management said operating cash flow, cash on hand, revolver availability and production financing should be adequate for foreseeable operational and debt-service needs. This is a forward-looking assessment, not a guarantee.
- On October 18, 2012, after quarter-end, Lions Gate paid off the remaining $299.2 million term-loan principal and accrued interest. It expected an approximately $14.7 million charge in the December 2012 quarter for unamortized financing costs and debt discount.
- On October 15, 2012, an amendment increased the permitted secured borrowing limit under the notes indenture from $340 million to $650 million, subject to terms and restrictions. The amended revolving facility’s stated commitment was up to $800 million, subject to borrowing-base and other limits.
- Notable period items included the $9.2 million six-month debt-extinguishment loss, Summit-related severance and transaction costs of $2.0 million for six months, and television-program write-downs of $5.2 million for six months. The filing reported no pending legal matter expected to have a material adverse effect based on current knowledge.
- Key risks include uncertain film and television title performance, substantial production and marketing spending, high debt and covenant restrictions, variable-rate borrowing, and the possibility that a change in control could trigger debt repurchases or defaults. The filing also disclosed concentrated shareholder ownership and potential share-sale pressure.
Most important facts for investors to verify
- Confirm the issuer: this filing is for Lions Gate Entertainment Corp., not Starz Entertainment Corp.
- Assess how much of the revenue and earnings growth reflects Summit consolidation and specific film releases, and whether those results are repeatable.
- Verify post-quarter-end term-loan repayment funding, the expected $14.7 million charge, and current debt, revolver availability and covenant headroom.
- Monitor film and television investment balances, title-level revenue estimates, returns reserves and write-downs, which depend on management estimates.
- Review future film-release spending, production-loan maturities and contractual commitments, as well as ownership concentration and change-of-control provisions.