Filing summary
Entity and period: The supplied filing is Lions Gate Entertainment Corp.’s unaudited Form 10-Q for the quarter ended December 31, 2011 (fiscal 2012 third quarter), not a Starz Entertainment Corp. filing. Financial figures below are in U.S. dollars.
Business context and financial performance
Lionsgate operates Motion Pictures and Television Production businesses, including film and television production, distribution, licensing, home entertainment and digital distribution.
- Quarter revenue: $323.0 million, down 23.6% from $422.9 million. Motion Pictures revenue fell 28.6% to $233.3 million; Television Production revenue fell 6.8% to $89.7 million.
- Quarter profitability: Operating income was $11.8 million versus $21.9 million; operating margin was approximately 3.6% versus 5.2%. Net loss improved to $1.7 million ($0.01 per share) from $6.0 million ($0.04 per share). Interest expense increased 28.4% to $17.2 million.
- Nine-month results: Revenue was $942.4 million, down 21.8%. Operating income was $30.7 million versus $5.0 million; net loss was $14.1 million ($0.11 per share), compared with $99.7 million ($0.77 per share). The current-period operating result included an $11.0 million gain on the Maple Pictures sale. Equity-method results improved to $8.3 million of income from a $45.6 million loss, largely reflecting EPIX.
- Cash flow: Operations used $211.9 million in the nine months, compared with $115.6 million used in the prior-year period. Film and television investment was $551.8 million. Financing activities provided $175.6 million; investing activities provided $5.0 million. Cash ended at $52.9 million, down from $86.4 million at March 31, 2011.
- Liquidity and balance sheet: Restricted cash was $26.5 million. The revolving credit facility had $94.5 million drawn and $220.5 million available, subject to borrowing-base limits; it matures July 2013. Total assets were $1.76 billion, liabilities $1.72 billion and shareholders’ equity $37.9 million. The Maple Pictures sale released the prior-period restricted severance trust funds back to unrestricted cash.
- Debt and obligations: The balance sheet reported $94.5 million of revolver borrowings, $431.3 million carrying value of 10.25% senior secured second-priority notes, $71.3 million of convertible notes and other financing, and $463.4 million of film obligations and production loans. The $436.0 million principal amount of senior notes is due in 2016. A $23.5 million convertible-note holder put was due in March 2012.
- Other metrics: Filmed-entertainment backlog was $607.5 million at December 31, versus $532.0 million at March 31. Film and television program assets were $802.9 million. No dividends were reported.
Material changes and drivers
- Quarterly Motion Pictures revenue declined amid no theatrical releases in the quarter, lower home-entertainment contributions from the slate (including comparison with The Expendables in the prior year), and lower Lionsgate UK, international and television revenue. Mandate Pictures revenue increased.
- Quarterly Television Production revenue was lower due mainly to reduced domestic series licensing and international deliveries, partly offset by stronger television home-entertainment revenue. For the nine months, Television Production revenue increased 12.4%, led by home-entertainment releases.
- Distribution and marketing expense fell substantially in the quarter, largely because there were no theatrical releases, while Motion Pictures direct costs were higher relative to revenue. Nine-month general and administrative expense declined 30.6%, partly because the prior year included a $21.9 million executive equity-award acceleration charge and higher shareholder-activist costs.
- Maple Pictures was sold in August 2011 for approximately $35.3 million; Lionsgate recorded an $11.0 million gain. $17.8 million of the price was allocated to distribution rights and recorded as deferred revenue.
- Lionsgate repurchased 11.0 million common shares for $77.1 million. It also issued approximately $200 million principal amount of 10.25% senior notes, increasing the notes’ outstanding principal to $436 million.
Outlook, commentary and risks
- Management stated that cash from operations, cash on hand, revolving-credit availability, production financing and other sources should meet known operating cash needs for the foreseeable future. This is not quantified earnings guidance; the filing gives no clear numeric forecast for revenue or profit.
- On January 13, 2012, after quarter-end, Lionsgate acquired Summit Entertainment for approximately $413.7 million, including cash and shares, and assumed/refinanced Summit debt through a new $500 million term loan. The loan bears LIBOR plus 6.00% or base rate plus 5.00%, has a September 2016 maturity, and requires quarterly installments. Lionsgate also issued $45 million of 4.00% convertible notes to help fund the transaction. Pro forma information was preliminary and excludes potential restructuring, efficiencies and cost savings.
- Risks include film performance uncertainty and substantial production, acquisition and marketing spending; film-cost and revenue-estimate judgments; variable-rate debt; restrictive debt covenants; acquisition integration and financing; and potential impairment of film assets or goodwill. Management cited no material adverse effect expected from pending legal matters; Legal Proceedings reports none.
- Debt agreements contain change-of-control provisions. A qualifying change could require debt repurchases or trigger acceleration, and the company cautioned it might not have funds or contractual capacity to meet such obligations. Management reported disclosure controls were effective and no material change in internal control during the period.
Important facts for investors to verify
- Confirm the issuer and period: the supplied filing is Lions Gate Entertainment Corp., quarter ended December 31, 2011, not Starz Entertainment Corp.
- Assess whether the $211.9 million operating cash outflow and film investment cycle are supportable by available liquidity and future receipts.
- Review post-acquisition Summit debt, purchase-price allocation, integration costs and the resulting consolidated leverage; the acquisition closed after the reporting date.
- Check the March 2012 holder put on $23.5 million of convertible notes and upcoming film-loan, production-financing and other contractual commitments.
- Evaluate the sustainability of revenue and margins given the weaker theatrical slate, film-title concentration, and reliance on estimated ultimate film revenues and returns.