Business context and reporting period
This filing is Lions Gate Entertainment Corp.’s Form 10-Q for the quarter ended September 30, 2015, the second quarter of its fiscal 2016 year, and the six months then ended. It is not a filing by Starz Entertainment Corp.; Lionsgate disclosed a minority investment in Starz. Lionsgate operates Motion Pictures and Television Production segments.
Financial performance and position
Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
| Metric | Three months ended Sept. 30, 2015 | Six months ended Sept. 30, 2015 | Comparable 2014 period |
|---|---|---|---|
| Revenue | $476.8 | $885.7 | $552.9; $1,002.3 |
| Operating income (loss) | ($39.3) | $4.9 | $30.5; $78.3 |
| Net income (loss) | ($42.1) | ($1.4) | $20.8; $64.0 |
| Diluted EPS | ($0.28) | ($0.01) | $0.15; $0.44 |
| Operating cash flow | Not separately reported | ($168.6) | ($207.9) |
- Six-month segment revenue was $629.3 million for Motion Pictures and $256.4 million for Television Production, down 13.8% and 5.8%, respectively. Segment profit was $67.8 million and $23.8 million, compared with $136.7 million and $27.6 million.
- Six-month gross segment contribution fell to $137.5 million from $206.8 million; margin declined to 15.5% from 20.6%. In the quarter, total segment contribution was $30.8 million, versus $93.6 million.
- Cash and cash equivalents were $170.4 million at September 30, up from $102.7 million at March 31. Investing cash outflow was $10.5 million and financing cash inflow was $247.4 million for the six months.
- Corporate debt principal was $726.9 million (carrying value $724.0 million); production loans were $859.4 million and film obligations $44.7 million. The $800 million revolving facility was undrawn and fully available, subject to borrowing-base limits. The company reported compliance with applicable debt covenants.
- Total assets were $3.565 billion and shareholders’ equity $887.5 million. Film and television investments were $1.557 billion. The Starz minority investment was carried as an available-for-sale security at $175.8 million fair value.
Material changes versus the prior comparable period
- Six-month revenue declined 11.6%; the quarter declined 13.8%. Motion Pictures revenue fell 13.8% for the six months, notably reflecting lower theatrical, home-entertainment and television revenue as prior-year blockbuster titles compared favorably.
- Six-month net income shifted from $64.0 million profit to a $1.4 million loss; the quarter shifted from $20.8 million profit to a $42.1 million loss. The quarterly operating loss reflected lower revenue and weaker contribution, higher film amortization and film write-downs, and increased corporate and restructuring costs.
- Film write-downs were $8.5 million for the six months, versus $3.4 million a year earlier. Production loans increased from $600.9 million at March 31 to $859.4 million at September 30.
- Operating cash use improved by $39.3 million year over year, but remained substantial, largely reflecting film and television investment. Cash generated from financing, particularly production loans, supported the increase in cash.
Outlook, commentary, risks and unusual items
- Management stated that operating cash flow, cash on hand, revolver availability, tax-efficient financing and production financing should be adequate for foreseeable operational needs, dividends and debt service. No specific earnings or revenue guidance was provided.
- Management expected fiscal 2016 cash tax requirements not to increase significantly from fiscal 2015, citing tax attributes and net operating loss carryforwards. The company also reported a $1.2 billion filmed-entertainment backlog at September 30.
- Quarterly dividend declared was $0.09 per common share. Future dividends remain subject to board discretion, financial conditions and debt restrictions. The repurchase authorization had $89.9 million remaining; no shares were repurchased during the quarter.
- Key risks include the uncertain commercial performance of films and television content, substantial production and marketing spending, debt and interest-rate exposure, and estimates of ultimate title revenues and costs. Variable-rate production loans expose the company to rate changes; the $800 million revolver was also available at variable rates.
- Restructuring and other items included $2.7 million of pension withdrawal costs, strategic-transaction professional fees and $0.4 million of direct-to-consumer SVOD costs. The company also recorded an unrealized securities gain in comprehensive income, while quarterly net unrealized gains on Starz securities were affected by market-price movements.
- Two securities-related legal matters tied to a prior SEC investigation remained pending. Lionsgate said it believed the matters lacked merit or did not expect pending proceedings to materially harm its consolidated financial position, results or cash flow.
Most important facts for investors to verify
- Confirm the issuer and period: this is Lions Gate Entertainment Corp.’s fiscal Q2 2016 filing, not Starz Entertainment Corp.’s 10-Q.
- Assess whether film slate performance, title amortization and write-downs explain the sharp quarterly loss and margin deterioration, and whether subsequent releases improved results.
- Track operating cash use against film investment needs and the increasing production-loan balance, including repayment timing and availability of production financing.
- Review corporate debt terms, covenant headroom, variable-rate exposure, and whether the stated $800 million revolver availability remains accessible under borrowing-base requirements.
- Monitor Starz investment valuation, pending litigation and the sustainability of dividends given negative six-month operating cash flow.