Filing summary
Entity and period note: The metadata identifies STARZ Entertainment Corp. and “2021 Q2,” but the supplied filing is Lions Gate Entertainment Corp.’s Form 10-Q for the quarter ended September 30, 2020—its fiscal second quarter of fiscal 2021. The filing also reports the six months ended September 30, 2020. Figures below are in U.S. dollars; financial statements are unaudited.
Business context and reporting period
Lionsgate combines STARZ subscription and streaming services with motion picture and television production. Its reportable segments are Motion Picture, Television Production, and Media Networks. The reporting period was heavily affected by COVID-19 disruptions to theatrical releases and production, while streaming and home-entertainment consumption increased.
Key financial metrics
| Metric | Three months ended September 30, 2020 | Comparable 2019 period | Six months ended September 30, 2020 | Comparable 2019 period |
|---|---|---|---|---|
| Revenue | $745.0 million | $983.5 million | $1,558.7 million | $1,947.1 million |
| Operating income | $29.7 million | $57.6 million | $119.1 million | $54.3 million |
| Operating margin | 4.0% | 5.9% | 7.6% | 2.8% |
| Net income (loss) attributable to Lions Gate shareholders | $(18.4) million | $1.8 million | $32.7 million | $(52.2) million |
| Basic and diluted EPS | $(0.08) | $0.01 | $0.15 | $(0.24) |
| Cash flow from operating activities | Not separately stated for the quarter | Not separately stated for the quarter | $203.5 million | $218.5 million |
At September 30, 2020, cash and cash equivalents were $463.7 million, versus $318.2 million at March 31, 2020. Current assets were $1.00 billion and current liabilities were $1.41 billion. Reported debt, net of issuance costs, was $2.66 billion, including $77.3 million classified as current; the revolving credit facility was undrawn, with $1.5 billion available, subject to covenants. Cash less reported debt was approximately $2.19 billion of net debt.
Six-month investing cash outflow was $12.2 million and financing cash outflow was $48.5 million. Cash increased by $142.8 million before foreign-exchange effects. The company reported compliance with applicable debt covenants.
Material changes versus the prior comparable periods
- Quarterly revenue fell 24.3%; six-month revenue fell 19.9%. The main causes were lower Motion Picture and Television Production revenue amid theater closures, delayed releases, and paused productions.
- Quarterly shareholder results shifted from $1.8 million of income to an $18.4 million loss. For the six-month period, results improved to $32.7 million of income from a $52.2 million loss.
- Media Networks revenue increased 3.8% for the quarter and 1.2% for six months, but segment profit declined 11.2% in the quarter and was nearly flat for six months. Prior-period comparisons included a content-licensing benefit of $43.7 million for the quarter and $36.7 million for six months.
- For six months, Motion Picture revenue declined 33.0% and Television Production revenue declined 29.1%; Media Networks revenue rose 1.2%. Lower theatrical marketing and distribution costs helped Motion Picture segment profit rise to $184.0 million from $58.6 million for six months, despite lower revenue.
- Global subscribers were reported at 27.1 million, including 13.7 million OTT and 13.4 million linear subscribers. The comparable pro forma September 2019 total was 22.0 million; the filing’s unadjusted September 2019 total was 28.7 million. Domestic STARZ subscribers were 20.7 million versus 18.0 million on the pro forma comparison.
Outlook, risks, contingencies, and unusual items
- Management expected fiscal 2021 Motion Picture and Television Production revenues to decrease from fiscal 2020 because of delayed theatrical distribution and production. It did not provide a quantified company-wide earnings or revenue forecast.
- Management said cash from operations, cash on hand, revolver availability, receivables monetization, tax-efficient financing, and production financing were expected to meet known operating and debt-service requirements for the foreseeable future. It cautioned that the pandemic’s effects on cash flows and financial position could not be reliably estimated.
- The company recorded $28.7 million of COVID-19-related incremental costs in the quarter and $39.6 million for six months, including production interruption and restart costs, content impairment, idle facilities, and marketing costs for delayed or canceled releases. It expected further costs; potential insurance recoveries were not recorded because they could not be estimated.
- Six-month film and program impairments totaled $19.1 million, including $15.4 million outside segment results attributed to changed performance expectations associated with COVID-19.
- Key risks include renewed pandemic restrictions, delayed production and releases, uncertain theater attendance, possible streaming growth moderation, content-performance and impairment risk, and debt and covenant constraints. The filing identified two reporting units, Television and Media Networks, as at risk of impairment in the fiscal 2020 assessment, although management reported no subsequent-quarter indicator requiring a revised assessment.
- Redeemable noncontrolling interests were $182.3 million and may require cash payments if holders exercise put rights. The company also disclosed pending insurance-related litigation and said potential losses beyond accrued amounts were reasonably possible but could not be estimated.
- The quarterly cash dividend had been suspended in November 2018. The filing reports a change in lease classification for the STARZ commercial building, moving it from finance to operating lease accounting.
Important facts for investors to verify
- Confirm that Lions Gate Entertainment Corp., rather than STARZ Entertainment Corp., is the intended issuer and that the relevant period is the quarter ended September 30, 2020.
- Assess the timing and scale of theater reopenings, production restarts, release schedules, and any further pandemic-related costs or recoveries.
- Reconcile reported subscriber trends using the filing’s pro forma comparison, particularly the distinction between linear and OTT subscribers and the treatment of removed MVPD bundle subscribers.
- Review debt maturities, covenant headroom, variable-rate exposure, interest-rate swaps, and the potential cash demands from redeemable noncontrolling interests.
- Monitor the Media Networks and Television reporting units’ goodwill impairment sensitivity, as well as content-performance estimates underlying film and program amortization.
- Review the status and potential financial effect of the disclosed insurance disputes and other legal proceedings; the filing does not provide a clear estimate of possible losses beyond recorded accruals.