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Agreement
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Agreement
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Agreement
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302
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Section 906
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(Parenthetical)
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Operations
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Comprehensive Loss
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Equity (Deficit)
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Cash Flows
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Licensed Program Rights
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Licensed Program Rights (Tables)
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Licensed Program Rights (Narrative) (Details)
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Licensed Program Rights (Investment in Films and
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(Details)
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Guaranteed Payments of IP Credit Facility
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Required to be Carried at Fair Value on a
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Values Of Assets and Liabilities Not Required to
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(Details)
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(Details)
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(Details)
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Compensation) (Details)
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General and Administration to Consolidated)
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Assets By Segment to Consolidated Assets)
(Details)
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(Narrative) (Details)
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(Forward Foreign Exchange Contracts) (Details)
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(Interest Rate Swaps) (Details)
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(Derivatives Effect on Statement of Operations and
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(Derivatives by Balance Sheet Location) (Details)
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Other Accrued Liabilities) (Details)
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Receivable Monetization) (Details)
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Other Comprehensive Income) (Details)
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Securities registered
pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
iClass A Voting Common Shares, no par value per share
iLGF.A
iNew
York Stock Exchange
iClass B Non-Voting Common Shares, no par value per share
iLGF.B
iNew
York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYes☒ No ☐
Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
iLarge
accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
This report includes statements that are, or may be deemed to be, “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements can be identified by the use of forward-looking terminology, including the terms “believes,”“estimates,”“potential,”“anticipates,”“expects,”“intends,”“plans,”“projects,”“forecasts,”“may,”“will,”“could,”“would” or “should” or, in each case, their negative or other variations or comparable terminology. These forward-looking statements include all matters that are not historical facts. They appear in a number of places throughout this report and include statements regarding our intentions, beliefs or current expectations concerning, among other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the industry in which we operate, including statements regarding our restructuring plan and expected charges and timing.
By
their nature, forward-looking statements involve risks and uncertainties because they relate to events and depend on circumstances that may or may not occur in the future. We believe that these risks and uncertainties include, but are not limited to, those discussed under Part I, Item 1A. “Risk Factors” found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on May 25, 2023, as amended on July 20, 2023 (the "Form 10-K"), which risk factors are incorporated herein by reference, as updated by any update to the risk factors found under Part II, Item 1A. "Risk Factors" herein. These risk factors should not be construed as exhaustive and should be read with the other cautionary statements and information in our Form 10-K, and this report.
We
caution you that forward-looking statements made in this report or anywhere else are not guarantees of future performance and that our actual results of operations, financial condition and liquidity, and the development of the industry in which we operate may differ materially and adversely from those made in or suggested by the forward-looking statements contained in this report as a result of various important factors, including, but not limited to: changes in our business strategy including the potential spin-off our studio business; possible delays in closing, or the inability to close the proposed business combination with Screaming Eagle Acquisition Corp. pursuant to the terms of the Business Combination Agreement entered into on December 22, 2023; the substantial investment of capital required to produce and market films and television series; budget overruns; limitations imposed by our credit facilities and notes;
unpredictability of the commercial success of our motion pictures and television programming; risks related to acquisition and integration of acquired businesses; the effects of dispositions of businesses or assets, including individual films or libraries; the cost of defending our intellectual property; technological changes and other trends affecting the entertainment industry; potential adverse reactions or changes to business or employee relationships; the impact of global pandemics on our business; weakness in the global economy and financial markets, including a recession and future bank failures; wars, terrorism and multiple international conflicts that could cause significant economic disruption and political and social instability; labor disruption or strikes; and the other risks and uncertainties discussed under Part I, Item 1A. “Risk Factors” found in our Form 10-K, which risk factors are incorporated herein
by reference, as updated by any risk factors found under Part II, Item 1A. "Risk Factors" herein. In addition, even if our results of operations, financial condition and liquidity, and the development of the industry in which we operate are consistent with the forward-looking statements contained in this report, those results or developments may not be indicative of results or developments in subsequent periods.
Any forward-looking statements, which we make in this report, speak only as of the date of such statement, and we undertake no obligation to update such statements. Comparisons of results for current and any prior periods are not intended to express any future trends or indications of future performance, unless expressed as such, and should only be viewed as historical data.
This Quarterly Report on Form 10-Q may contain references to our trademarks and to trademarks
belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Quarterly Report on Form 10-Q, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other company.
Unless otherwise indicated or the context requires, all references to the “Company,”“Lionsgate,”“we,”“us,” and “our” refer to Lions Gate Entertainment Corp., a corporation organized under the laws of the province of British Columbia, Canada, and its direct and indirect subsidiaries.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. iGeneral
Nature
of Operations
Lions Gate Entertainment Corp. (the “Company,”“Lionsgate,”"Lions Gate,"“we,”“us” or “our”) encompasses world-class motion picture and television studio operations (collectively referred to as the “Studio Business”) aligned with the STARZ premium global subscription platform to bring a unique and varied portfolio of entertainment to consumers around the world. The Company’s film, television, subscription and location-based entertainment businesses are backed by a more than i20,000-title
library and a valuable collection of iconic film and television franchises.
i
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements include the accounts of Lionsgate and all of its majority-owned and controlled subsidiaries.
The unaudited condensed consolidated financial statements have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles
(“GAAP”) for interim financial information and the instructions to quarterly report on Form 10-Q under the Securities Exchange Act of 1934, as amended, and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the Company’s management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been reflected in these unaudited condensed consolidated financial statements. Operating results for the three and nine months ended December 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2024. The balance sheet at March 31,
2023 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by U.S. GAAP for complete financial statements. The accompanying unaudited condensed consolidated financial statements should be read together with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2023, as amended.
Certain amounts presented in prior periods have been reclassified to conform to the current period presentation.
i
Use
of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The most significant estimates made by management in the preparation of the financial statements relate to ultimate revenue and costs used for the amortization of investment in films and television programs; estimates of future viewership used for the amortization of licensed program rights; estimates related to the revenue recognition of sales or usage-based royalties; fair value of equity-based compensation; fair value of assets and liabilities for allocation of the purchase price of companies acquired; income taxes including the assessment of valuation allowances
for deferred tax assets; accruals for contingent liabilities; and impairment assessments for investment in films and television programs and licensed program rights, property and equipment, equity investments, goodwill and intangible assets. Actual results could differ from such estimates.
i
Recent Accounting Pronouncements
Segment Reporting: In November 2023, the Financial Accounting Standards Board (“FASB”) issued guidance
which expands public entities’ segment disclosures by requiring disclosure of significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount and description of its composition for other segment items, and interim disclosures of a reportable segment’s profit or loss and assets. This guidance is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and therefore will be effective beginning with the Company’s financial statements issued for the fiscal year ending March 31, 2025 and subsequent interim periods, with early adoption permitted. The
Company is currently evaluating the impact of adopting this guidance on its consolidated financial statements and disclosures.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Income Taxes: In December 2023, the FASB issued guidance which expands income tax disclosures by requiring public business entities, on an annual basis, to disclose
specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. Additionally, this guidance requires all entities disaggregate disclosures on the amount of income taxes paid (net of refunds received), income or loss from continuing operations before income tax expense (or benefit) and income tax expense (or benefit) from continuing operations. This guidance is effective for fiscal years beginning after December 15, 2024, and therefore will be effective beginning with the Company’s annual audited consolidated financial statements for the fiscal year ending March 31, 2026 with early adoption permitted. The Company is currently evaluating
the impact of adopting this guidance on its consolidated financial statements and disclosures.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. iAcquisitions
eOne
Acquisition
On December 27, 2023, the Company, and its subsidiaries, Lions Gate Entertainment Inc., a Delaware corporation (“LGEI”), and Lions Gate International Motion Pictures S.à.r.l., a Luxembourg société à responsabilité limitée (“LGIMP” and, with the Company and LGEI, collectively the “Buyers”), completed the previously announced acquisition of all of the issued and outstanding equity interests of the companies constituting the Entertainment One television and film (“eOne”) business from Hasbro, Inc., a Rhode Island corporation (“Hasbro”),
pursuant to that certain Equity Purchase Agreement (the “Purchase Agreement”) dated August 3, 2023. The aggregate cash purchase price was approximately $i375.0 million, subject to certain purchase price adjustments, including for cash, debt, and working capital. Upon closing, the Company paid $i331.0 million,
net of cash acquired of $i54.1 million, which reflects the purchase price of $i375.0 million
adjusted for estimated cash, debt, transaction costs and working capital. The preliminary purchase price is subject to further adjustments based on the final determination of the purchase price adjustments. The acquisition of eOne, a film and television production and distribution company, builds the Company's film and television library, strengthens the Company's scripted and unscripted television business, and continues to expand the Company's presence in Canada and the U.K.
The acquisition was accounted for under the acquisition method of accounting, with the financial results of eOne included in the
Company's consolidated results from December 27, 2023. There was iino/
material revenue or net income from eOne for the period from December 27, 2023 through December 31, 2023. The Company incurred approximately $i5.6 million and $i8.8 million
of acquisition-related costs that were expensed in restructuring and other during the three and nine months ended December 31, 2023, respectively.
Allocation of Purchase Consideration. The Company has made a preliminary estimate of the allocation of the preliminary purchase price of eOne to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair value. The Company is still evaluating the fair value of film and television programs and libraries, projects in development, intangible assets, and income taxes, in addition to ensuring all other assets and liabilities and contingencies have been identified and
recorded. The Company has estimated the preliminary fair value of assets acquired and liabilities assumed based on information currently available and will continue to adjust those estimates as additional information pertaining to events or circumstances present at December 27, 2023 becomes available and final appraisals and analysis are completed. The Company has also conducted an initial review of, and is in the process of continuing to evaluate, the accounting policies and practices of eOne, to determine if differences in accounting policies and practices require reclassifications to conform to the Company's accounting policies and practices. As a result of that review,
the Company may identify additional differences between the accounting policies and practices of the companies that, when conformed, could have a material impact on the consolidated financial statements of the Company. The Company will reflect measurement period adjustments, in the period in which the adjustments occur, and the Company will finalize its accounting for the acquisition within one year from December 27, 2023. A change in the fair value of the net assets may change the amount of the purchase price allocable to goodwill. If the final fair value estimates and tax adjustments
related to the net assets acquired decrease from their preliminary estimates, the amount of goodwill will increase and if the final fair value estimates and tax adjustments related to the net assets acquired increase from their preliminary estimates, the amount of goodwill will decrease and may result in a gain on purchase. In addition, the final fair value estimates related to the net assets acquired could impact the amount of amortization expense recorded associated with amounts allocated to film and television programs and other intangible assets. The preliminary goodwill recorded was not significant and is reflected in the table below. The goodwill will not be amortized for financial reporting purposes, and will not be deductible for federal tax purposes. The fair value measurements were primarily based on significant inputs that are not observable in the market, such as discounted cash flow (DCF) analyses, and thus represent Level 3 fair value measurements.
i
The
preliminary allocation of the purchase price to the assets acquired and liabilities assumed, and a reconciliation to total consideration transferred is presented in the table below:
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(Amounts
in millions)
Cash and cash equivalents
$
i54.1
Accounts receivable
i287.6
Investment
in films and television programs
i367.9
Property and equipment
i14.0
Intangible
assets
i4.0
Other assets(1)
i205.0
Accounts
payable and accrued liabilities
(i72.0)
Content related payable
(i37.3)
Participations
and residuals(1)
(i203.7)
Film related obligations(1)
(i105.8)
Other
liabilities and deferred revenue(1)
(i134.5)
Preliminary fair value of net assets acquired
i379.3
Goodwill
i5.8
Preliminary
purchase price consideration
$
i385.1
______________
(1)Includes current and non-current amounts.
Investment in films and television programs includes the preliminary fair value of completed films and television programs which have been produced by eOne or for which eOne has acquired distribution rights,
as well as the preliminary fair value of films and television programs in production, pre-production and development. For investment in films and television programs, the fair value was preliminarily estimated based on forecasted cash flows discounted to present value at a rate commensurate with the risk of the assets. Titles that were released less than three years prior to the acquisition date (December 27, 2023) were valued individually and will be amortized using the individual film forecast method, based on the ratio of current period revenues to management’s estimated remaining total gross revenues to be earned ("ultimate revenue"). Titles released more than three years prior to the acquisition date were valued as part of a library and will be amortized on a straight-line basis over the estimated useful life of i5
years to i10 years.
The intangible assets acquired include trade names with a weighted average estimated useful life of i5 years. The fair value of the trade names was preliminarily estimated based on the
present value of the hypothetical cost savings that could be realized by the owner of the trade names as a result of not having to pay a stream of royalty payments to another party. These cost savings were calculated based on a DCF analysis of the hypothetical royalty payment that a licensee would be required to pay in exchange for use of the trade names, reduced by the tax effect realized by the licensee on the royalty payments.
Other preliminary fair value adjustments were made to property and equipment and right-of-use lease assets to reflect the fair value of certain assets upon acquisition.
Deferred taxes were preliminarily adjusted to record the deferred tax impact of acquisition accounting adjustments primarily related to amounts allocated to film and television programs, other intangible assets,
and certain property and equipment, right-of-use lease assets, and other liabilities.
The fair value of eOne's cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, participations and residuals, film related obligations and other liabilities were estimated to approximate their book values.
Pro Forma Statement of Operations Information. iThe following unaudited
pro forma condensed consolidated statement of operations information presented below illustrate the results of operations of the Company as if the acquisition of eOne as described above occurred on April 1, 2022. The unaudited pro forma condensed consolidated financial information is presented for informational purposes and is not indicative of the results of operations that would have been achieved if the acquisition had occurred on April 1, 2022, nor is it indicative of future results. The statement of operations information below for the nine month periods includes (i) the statement of operations of eOne for the nine months ended September 30, 2023 combined with the
Company's statement of operations for the nine months ended December 31, 2023, and (ii) the statement of operations of
Net
income (loss) attributable to Lions Gate Entertainment Corp. shareholders
$
(i87.4)
$
i41.2
$
(i1,344.0)
$
(i1,880.5)
The
unaudited pro forma condensed consolidated financial information includes, where applicable, adjustments for (i) reductions in amortization expense from the fair value adjustments to investment in films and television programs, (ii) reduction in amortization expense related to acquired intangible assets, (iii) reduction in depreciation expense from the fair value of property and equipment, (iv) transaction costs and other one-time non-recurring costs, (v) increase in interest expense resulting from financing the acquisition with borrowings under the Company's revolving credit facility, (vi) elimination of intercompany activity between eOne and the Company, and (vii) associated tax-related impacts of adjustments. These pro forma adjustments are based on available information as of the date hereof and
upon assumptions that the Company believes are reasonable to reflect the impact of the acquisition of eOne on the Company's historical financial information on a supplemental pro forma basis. The unaudited pro forma condensed consolidated statement of operations information does not include adjustments related to integration activities, operating efficiencies or cost savings. In addition, the unaudited pro forma condensed consolidated financial information for the nine months ended December 31, 2023 includes an impairment of goodwill and trade name of $i296.2 million
which was reflected in the statement of operations of eOne for the nine months ended September 30, 2023.
The results of operations of eOne were reflected beginning December 27, 2023, in the Motion Picture and Television Production reportable segments of the Company.
Business Combination Agreement
On December 22, 2023, the Company entered into a business combination agreement (the “Business Combination
Agreement”), with Screaming Eagle Acquisition Corp., a Cayman Islands exempted company (“Screaming Eagle”), SEAC II Corp., a Cayman Islands exempted company and a wholly-owned subsidiary of Screaming Eagle (“New SEAC”), SEAC MergerCo, a Cayman Islands exempted company and a wholly-owned subsidiary of Screaming Eagle, 1455941 B.C. Unlimited Liability Company, a British Columbia unlimited liability company and a wholly-owned subsidiary of Screaming Eagle, LG Sirius Holdings ULC, a British Columbia unlimited liability company and wholly-owned subsidiary of Lionsgate and LG Orion Holdings ULC, a British Columbia unlimited liability company and wholly-owned subsidiary of Lionsgate (“StudioCo”). Pursuant to the terms and conditions of the Business Combination Agreement, the Studio Business will be combined with Screaming Eagle through a series of transactions, including an amalgamation of StudioCo and New SEAC under a Canadian plan
of arrangement (the “Business Combination”). Upon consummation of the Business Combination, approximately i87.3% of the total shares of the Studio Business are expected to continue to be held by Lionsgate, while Screaming Eagle public shareholders and founders and common equity financing investors are expected to own an aggregate of approximately i12.7%
of the combined company. In addition to establishing the Studio Business as a standalone publicly-traded entity, the transaction is expected to deliver approximately $i350.0 million of gross proceeds to the Company, including $i175.0 million
in private investments in public equities (“PIPE”) financing. The transaction is subject to certain closing conditions, including regulatory approvals and approval from the shareholders and public warrant holders of Screaming Eagle, and is expected to close in the spring of 2024. The closing of the transaction is also subject to the gross proceeds to the Company being equal to a minimum of $i350.0 million.
Harry E. Sloan, a member of the
Company’s Board of Directors, is also the Chairman of Screaming Eagle, and owns, directly or indirectly, a material interest in Eagle Equity Partners V, LLC, a Delaware limited liability company, the Screaming Eagle sponsor. Mr. Sloan recused himself from the decisions to approve the Business Combination made by both the board of directors of Screaming Eagle and Lionsgate.
The Business Combination is expected to be accounted for as a reverse recapitalization in accordance with U.S. GAAP. Under this method of accounting, Screaming Eagle will be treated as the acquired company and the Studio Business will be treated as the acquirer for financial reporting purposes. Accordingly, for accounting purposes, the financial statements of New SEAC will represent a continuation of the financial statements of the Studio Business, with the Business Combination treated as the equivalent of the Studio Business issuing stock for the historical
net assets of Screaming Eagle, accompanied by a
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
recapitalization. The net assets of Screaming Eagle will be stated at fair value, which approximates historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination will be those of the Studio Business.
3. iInvestment in Films and Television Programs and Licensed Program Rights
i
Total
investment in films and television programs and licensed program rights by predominant monetization strategy is as follows:
Licensed
program rights, net of accumulated amortization
i187.6
i285.7
Investment
in films and television programs and licensed program rights, net
$
i2,772.7
$
i2,947.9
/
At
December 31, 2023, acquired film and television libraries have remaining unamortized costs of $i233.5 million, which are monetized individually and are being amortized on a straight-line basis or the individual-film-forecast method over a weighted-average remaining period of approximately i13.0
years (March 31, 2023 - unamortized costs of $i132.8 million).
i
Amortization
of investment in film and television programs and licensed program rights by predominant monetization strategy is as follows, and was included in direct operating expense in the unaudited condensed consolidated statements of operations:
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Impairments. Investment in films and television programs and licensed program rights includes write-downs to fair value. iThe following table sets forth impairments by segment and the
line item in our unaudited condensed consolidated statement of operations they are recorded in for the three and nine months ended December 31, 2023 and 2022:
Impairments
not included in segment operating results(1):
Included in restructuring and other
i77.8
i80.8
i317.4
i293.8
$
i79.5
$
i81.4
$
i351.5
$
i299.6
________________
(1)Represents
charges related to the Media Networks restructuring plan initiatives, including content impairment of programming removed from its platforms and in certain international territories exited or to be exited. See Note 14 for further information.
4. iInvestments
i
The
Company's investments consisted of the following:
The Company has investments in various equity method investees with ownership percentages ranging from approximately i6% to i49%.
These investments include:
Spyglass. Spyglass is a global premium content company, focused on developing, producing, financing and acquiring motion pictures and television programming across all platforms for worldwide audiences.
STARZPLAY Arabia. STARZPLAY Arabia (Playco Holdings Limited) offers a STARZ-branded online subscription video-on-demand service in the Middle East and North Africa. On October 17, 2022, the Company sold a portion of its ownership interest in STARZPLAY Arabia and received net proceeds of $i43.4
million, and the Company recorded a gain of $i43.4 million on the sale which is included in gain (loss) on investments in the Company's unaudited condensed consolidated statement of operations for the three months ended December 31, 2022. Subsequent to the transaction, the
Company continues to hold a minority ownership interest in STARZPLAY Arabia.
Roadside Attractions. Roadside Attractions is an independent theatrical distribution company.
Pantelion Films. Pantelion Films is a joint venture with Videocine, an affiliate of Televisa, which produces, acquires and distributes a slate of English and Spanish language feature films that target Hispanic moviegoers in the U.S.
Atom Tickets. Atom Tickets is the first-of-its-kind theatrical mobile ticketing platform and app.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
42. 42 is a fully integrated management and production company, producing film, television and content, representing actors, writers, directors, comedians, presenters, producers, casting directors and media book rights; with offices in London and Los Angeles.
Other. In addition to the equity method investments discussed above, the Company holds ownership interests in other immaterial equity method investees.
5.
iGoodwill and Intangible Assets
Goodwill
i
Changes in the carrying value of goodwill by reporting segment were as follows:
(1)As
of March 31, 2023 and December 31, 2023, accumulated goodwill impairment losses totaled $i1.475 billion and $i1.969 billion,
respectively, related to the Media Networks reporting unit, as further described below.
/
Impairment Assessments
Fiscal 2024. During the second quarter ended September 30, 2023, due to the continuing difficult macro and microeconomic conditions, industry trends, and their impact on the performance and projected cash flows of the Media Networks segment, including its growth in subscribers and revenue worldwide, and the expanded restructuring activities discussed in Note 14, along with recent market valuation multiples, the Company
updated its quantitative impairment assessment for its Media Networks reporting unit goodwill based on the most recent data and expected growth trends. In performing its quantitative impairment assessment, the fair value of the Company's reporting units was estimated by using a combination of discounted cash flow ("DCF") analyses and market-based valuation methodologies. The Media Networks reporting unit goodwill was established in connection with the acquisition of Starz as of December 8, 2016.
Based on its quantitative impairment assessment, the Company determined that the fair value of our Media Networks reporting unit which was previously disclosed as a reporting
unit "at risk" of impairment, was less than its carrying value (after the impairment write-down of its indefinite-lived intangible assets discussed below). The analysis resulted in a goodwill impairment charge of $i493.9 million in the second quarter ended September 30, 2023, representing all of the remaining Media Networks reporting unit goodwill, which is recorded in the "goodwill and intangible asset impairment" line item in the unaudited condensed consolidated statement of operations in the nine months ended December
31, 2023.
During each quarter in the nine months ended December 31, 2023, we performed qualitative goodwill impairment assessments for all our other reporting units (Motion Picture, and our Television and Talent Management businesses, both of which are part of our Television Production segment). Our qualitative assessment considered the market price of the Company’s common shares, the recent performance of these reporting units, and updated forecasts of performance and cash flows, as well as the current micro and macroeconomic environments in relation to the current and expected performance of these reporting units, and industry considerations, and determined that since the quantitative assessment performed in the quarter ended September
30, 2022 and our qualitative assessment performed for fiscal 2023, there were no events or circumstances that rise to a level that would more-likely-than-not reduce the fair value of those reporting units below their carrying values; therefore, a quantitative goodwill impairment analysis was not required for these reporting units.
Fiscal 2023. In fiscal 2023, during the second quarter ended September 30, 2022, due to adverse macro and microeconomic conditions, including the competitive environment, continued inflationary trends and recessionary economies worldwide and its impact on the Company's growth in subscribers worldwide, the Company
began implementing a plan to
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
restructure its LIONSGATE+ business, and the Company revised its subscriber growth and forecasted cash flow assumptions and implemented certain cost-saving measures.
Accordingly,
for the second quarter ended September 30, 2022, the Company updated its quantitative impairment assessment for all of its reporting units, using a combination of DCF analyses and market-based valuation methodologies to estimate the fair value of the Company's reporting units, and determined that the fair value of its reporting units exceeded the carrying values for all of its reporting units, except the Media Networks reporting unit which had been previously disclosed as a reporting unit "at risk" of impairment. The analysis resulted in a goodwill impairment charge of $i1.475 billion
in the three months ended September 30, 2022, related to the Company's Media Networks reporting unit goodwill, which is recorded in the "goodwill and intangible asset impairment" line item in the unaudited condensed consolidated statement of operations. Since the impairment charge reduced the carrying value of the Media Networks reporting unit to its fair value, at September 30, 2022 the fair value and carrying value of the Media Networks reporting unit were equal and thus it continued to be considered "at risk" of impairment.
Indefinite-Lived Intangible Assets
Through September 30, 2023, our indefinite-lived intangible assets consisted
of trade names representing the estimated fair value of the Starz brand name determined in connection with the acquisition of Starz as of December 8, 2016, amounting to $i250.0 million related to the Media Networks reporting unit before the impairment charge recorded in the second quarter ended September 30, 2023 discussed below.
During the second quarter ended September 30, 2023,
due to the events and their impact discussed above related to our Media Networks reporting unit, we performed a quantitative impairment assessment of our indefinite-lived trade names. The fair value of the Company's indefinite-lived trade names was estimated based on the present value of the hypothetical cost savings that could be realized by the owner of the trade names as a result of not having to pay a stream of royalty payments to another party. These cost savings were calculated based on a DCF analysis of the hypothetical royalty payment that a licensee would be required to pay in exchange for use of the trade names, reduced by the tax effect realized by the licensee on the royalty payments. Based on the quantitative impairment assessment of our trade names, we recorded an impairment charge of $i170.0 million
in the second quarter ended September 30, 2023 related to the Company's Starz business, which was recorded in the "goodwill and intangible asset impairment" line item in the unaudited condensed consolidated statement of operations in the nine months ended December 31, 2023.
After the Company performed its quantitative impairment assessment, during the second quarter ended September 30, 2023, the Company then reassessed the estimated useful life of the trade names with a remaining carrying value of $i80.0 million,
net of the impairment charge discussed above. The Company concluded that based upon the most recent factors, including current macro and microeconomic conditions, market competition and historical Company and industry trends, the trade names now have a finite estimated remaining useful life of i10 years. Accordingly, beginning in the third quarter ended December 31, 2023, the trade names are being accounted for as finite-lived intangible assets and amortized over their estimated remaining useful life. This resulted in an increase
to amortization expense of $ii2.0/ million for the three and nine months ended December
31, 2023 with a corresponding reduction of income before income taxes, net loss, and net loss attributable to Lions Gate Entertainment Corp. shareholders. This resulted in a decrease to basic and diluted net loss per share for the three months ended December 31, 2023 by $ii0.01/
per share, and a decrease to basic and diluted net loss per share for the nine months ended December 31, 2023 by $ii0.01/ per share.
There was no tax benefit from the change due to changes in the Company’s valuation allowance on deferred taxes.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Finite-Lived Intangible Assets
Our finite-lived intangible assets primarily relate to customer relationships representing
Starz affiliation agreements with distributors, related to the Media Networks reporting unit. Beginning in the third quarter ended December 31, 2023, our finite-lived intangible assets also include the trade names previously accounted for as indefinite-lived intangible assets as discussed above.
The Company monitors its finite-lived intangible assets and changes in the underlying circumstances each reporting period for indicators of possible impairments or a change in the useful life or method of amortization of our finite-lived intangible assets.
During the third quarter ended December 31, 2023, there were no events or circumstances that would indicate that the carrying amount of our finite-lived
intangible assets (which including the trade names discussed above amounted to $i1,028.5 million at December 31, 2023) may not be recoverable.
6. iDebt
i
Total
debt of the Company, excluding film related obligations, was as follows:
Senior
Credit Facilities (Revolving Credit Facility, Term Loan A and Term Loan B)
Revolving Credit Facility Availability of Funds & Commitment Fee. The Revolving Credit Facility provides for borrowings and letters of credit up to an aggregate of $i1.25 billion, and at December 31, 2023 there was $i875.0
million available. However, borrowing levels are subject to certain financial covenants as discussed below. There were ino letters of credit outstanding at December 31, 2023. The Company is required to pay a quarterly commitment fee on the Revolving Credit Facility of i0.250%
to i0.375% per annum, depending on the achievement of certain leverage ratios, as defined in the credit and guarantee agreement dated December 8, 2016, as amended (the "Credit Agreement"), on the total Revolving Credit Facility of $i1.25
billion less the amount drawn.
Maturity Date:
•Revolving Credit Facility & Term Loan A:April 6, 2026. The outstanding amounts may become due on December 23, 2024 (i.e., 91 days prior to March 24, 2025) prior to its maturity on April 6, 2026 in the event that the aggregate principal amount of outstanding Term Loan B in excess of $i250 million
has not been repaid, refinanced or extended to have a maturity date on or after July 6, 2026. The Company expects to refinance and extend the maturity date of the Term Loan B prior to December 23, 2024 such that the maturity of the revolving credit facility and Term Loan A are not accelerated.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest: In June 2023, the Company amended its Credit Agreement to replace the benchmark interest rate, U.S. dollar LIBOR, with the Secured Overnight Financing Rate (“SOFR”), due to the discontinuance of LIBOR, as further described below.
•Revolving Credit Facility & Term Loan A: As amended on June 14, 2023, the Revolving Credit Facility and term loan A facility due April 2026 (the "Term Loan A") bear
interest at a rate per annum equal to SOFR plus i0.10% plus i1.75% margin (or an alternative base rate plus i0.75%),
with a SOFR floor of izero (prior to the amendment, bore interest at LIBOR plus i1.75% margin, with a LIBOR floor of izero).
The margin is subject to potential increases of up to i50 basis points (itwo
(i2) increases of i25 basis points each) upon certain increases to net first lien
leverage ratios, as defined in the Credit Agreement (effective interest rate of i7.20% as of December 31, 2023, before the impact of interest rate swaps, see Note 17 for interest rate swaps).
•Term Loan B: As amended on June 14, 2023, the term loan B facility due March 2025 (the "Term Loan B") bears interest at a rate per annum equal to SOFR plus i0.10%
plus i2.25% margin, with a SOFR floor of izero (or an alternative base rate plus i1.25%
margin) (prior to the amendment, bore interest at LIBOR plus i2.25% margin with a LIBOR floor of izero) (effective interest rate of i7.70%
as of December 31, 2023, before the impact of interest rate swaps).
•Term Loan B: Quarterly principal payments at a quarterly rate of i0.25%, with the balance payable at maturity.
The Term Loan A and Term Loan B also require mandatory prepayments in connection with certain asset sales, subject to certain significant exceptions, and
the Term Loan B is subject to additional mandatory repayment from specified percentages of excess cash flow, as defined in the Credit Agreement.
Optional Prepayment:
•Revolving Credit Facility, Term Loan A & Term Loan B: The Company may voluntarily prepay the Revolving Credit Facility, Term Loan A and Term Loan B at any time without premium or penalty
Security. The Senior Credit Facilities are guaranteed by the guarantors named in the Credit Agreement and are secured by a security interest in substantially all of the assets of Lionsgate and the Guarantors (as defined in the Credit Agreement), subject to certain exceptions.
Covenants.
The Senior Credit Facilities contain representations and warranties, events of default and affirmative and negative covenants that are customary for similar financings and which include, among other things and subject to certain significant exceptions, restrictions on the ability to declare or pay dividends, create liens, incur additional indebtedness, make investments, dispose of assets and merge or consolidate with any other person. In addition, a net first lien leverage maintenance covenant and an interest coverage ratio maintenance covenant apply to the Revolving Credit Facility and the Term Loan A and are tested quarterly. As of December 31, 2023, the Company was in compliance with all applicable covenants.
Change in Control.The
Company may also be subject to an event of default upon a change in control (as defined in the Credit Agreement) which, among other things, includes a person or group acquiring ownership or control in excess of i50% of the Company’s common shares.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i5.500% Senior Notes
Interest: Bears interest at i5.500%
annually (payable semi-annually in arrears on April 15 and October 15 of each year, commencing on October 15, 2021).
(i)Prior to April 15, 2024, the Company may redeem the i5.500%
Senior Notes in whole at any time, or in part from time to time, at a price equal to i100% of the principal amount of the notes to be redeemed plus a "make-whole" premium, plus accrued and unpaid interest, if any, to, but not including, the redemption date. The make-whole premium is the greater of (i) i1.0%
of the principal amount redeemed and (ii) the excess, if any, of the present value at such redemption date of the redemption price at April 15, 2024 (see redemption prices below) plus interest through April 15, 2024 (discounted to the redemption date at the treasury rate plus i50 basis points) over the principal amount of the notes redeemed on the redemption date.
(ii)On or after April 15, 2024, the
Company may redeem the i5.500% Senior Notes in whole at any time, or in part from time to time, at certain specified redemption prices, plus accrued and unpaid interest, if any, to, but not including, the redemption date. Such redemption prices are as follows (as a percentage of the principal amount redeemed): (i) on or after April 15, 2024 - i102.750%;
(ii) on or after April 15, 2025 - i101.375%; and (iii) on or after April 15, 2026 - i100%. In addition, the
Company may redeem up to i40% of the aggregate principal amount of the notes at any time and from time to time prior to April 15, 2024 with the net proceeds of certain equity offerings at a price of i105.500%
of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the redemption date.
Security. The i5.500% Senior Notes are unsubordinated, unsecured obligations of the Company.
Covenants. The i5.500%
Senior Notes contain certain restrictions and covenants that, subject to certain exceptions, limit the Company’s ability to incur additional indebtedness, pay dividends or repurchase the Company’s common shares, make certain loans or investments, and sell or otherwise dispose of certain assets subject to certain conditions, among other limitations. As of December 31, 2023, the Company was in compliance with all applicable covenants.
Change in Control. The occurrence of a change of control will be a triggering event requiring the
Company to offer to purchase from holders all of the i5.500% Senior Notes, at a price equal to i101% of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase. In addition, certain asset dispositions will be triggering events
that may require the Company to use the excess proceeds from such dispositions to make an offer to purchase the i5.500% Senior Notes at i100% of their principal amount, plus accrued
and unpaid interest, if any, to the date of purchase.
Capacity to Pay Dividends
At December 31, 2023, the capacity to pay dividends under the Senior Credit Facilities and the i5.500% Senior Notes significantly exceeded the amount of the Company's accumulated deficit or net loss, and therefore the Company's
net loss of $i1,066.8 million and accumulated deficit of $i3,574.6 million were deemed free of restrictions from paying dividends at December 31, 2023.
Debt
Transactions:
Senior Notes Repurchases. In the nine months ended December 31, 2023, the Company repurchased $i85.0 million principal amount of the i5.500%
Senior Notes for $i61.4 million, together with accrued and unpaid interest (inone in the three months ended December 31, 2023).
In
the three months ended December 31, 2022, the Company repurchased $i123.7 million principal amount of the i5.500%
Senior Notes for $i81.6 million, together with accrued and unpaid interest (nine months ended December 31, 2022 - repurchased $i142.4 million principal amount for $i96.2
million).
Term Loan A Prepayment. In April 2022, the Company voluntarily prepaid the entire outstanding principal amount of the Term Loan A due March 22, 2023 of $i193.6 million, together with accrued and unpaid interest.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Gain (Loss) on Extinguishment of Debt:
i
During the three and nine months ended December 31, 2023 and 2022, the
Company recorded a gain (loss) on extinguishment of debt related to the transactions described above as summarized in the table below:
Production
Loans. Production loans represent individual and multi-title loans for the production of film and television programs that the Company produces. The majority of the Company's production loans have contractual repayment dates either at or near the expected completion or release dates, with the exception of certain loans containing repayment dates on a longer term basis, and incur primarily SOFR-based interest at a weighted average rate of i6.91%
(before the impact of interest rate swaps, see Note 17 for interest rate swaps). Production loans amounting to $i1,109.2 million are secured by collateral which consists of the underlying rights related to the intellectual property (i.e. film or television show), and $i170.0 million
are unsecured.
Production Tax Credit Facility. In January 2021, as amended in December 2023, the Company entered into a non-recourse senior secured revolving credit facility (the "Production Tax Credit Facility") based on and secured by collateral consisting solely of certain of the Company’s tax credit receivables. The maximum principal amount of the Production Tax Credit Facility is $i250.0
million, subject to the amount of collateral available, which is based on specified percentages of amounts payable to the Company by governmental authorities pursuant to the tax incentive laws of certain eligible jurisdictions that arise from the production or exploitation of motion pictures and television programming in such jurisdiction. Cash collections from the underlying collateral (tax credit receivables) are used to repay the Production Tax Credit Facility. Advances under the Production Tax Credit Facility bear interest at a rate equal to SOFR plus i0.10%
to i0.25% depending on the SOFR term (i.e.,
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
one,
three or six months), plus i1.50% per annum or the base rate plus i0.50% per annum (effective interest rate of i6.95%
at December 31, 2023). The Production Tax Credit Facility matures on January 27, 2025.As of December 31, 2023, there were ino amounts available under the Production Tax Credit Facility.
Programming Notes. Programming notes represent individual unsecured loans for the licensing of film and
television programs that the Company licenses. The Company's programming notes have contractual repayment dates in February 2024, and incur SOFR-based interest at a weighted average rate of i8.74%.
IP Credit Facility. In July 2021, as amended in September 2022, certain subsidiaries of the
Company entered into a senior secured amortizing term credit facility (the "IP Credit Facility") based on and secured by the collateral consisting solely of certain of the Company’s rights in certain library titles. The maximum principal amount of the IP Credit Facility is $i161.9 million, subject to the amount of collateral available, which is based on the valuation of cash flows from the libraries. iThe
cash flows generated from the exploitation of the rights will be applied to repay the IP Credit Facility subject to cumulative minimum guaranteed payment amounts as set forth below:
Advances under the IP Credit Facility bear interest at a rate equal to, at the
Company’s option, SOFR plus i0.11% to i0.26% depending on the SOFR term (i.e., one or three months) plus i2.25%
per annum (with a SOFR floor of i0.25%) or the base rate plus i1.25% per annum (effective interest rate of i7.78%
at December 31, 2023). The IP Credit Facility matures on July 30, 2027.
Backlog Facility and Other:
Backlog Facility. In March 2022, as amended in August 2022, certain subsidiaries of the Company entered into a committed secured revolving credit facility (the "Backlog Facility") based on and secured by collateral consisting solely of certain of the Company's fixed fee or minimum guarantee contracts
where cash will be received in the future. The maximum principal amount of the Backlog Facility is $i175.0 million, subject to the amount of eligible collateral contributed to the facility. Advances under the Backlog Facility bear interest at a rate equal to Term SOFR plus i0.10%
to i0.25% depending on the SOFR term (i.e., one, three or six months), plus an applicable margin amounting to i1.15% per annum. The applicable margin is subject to a potential increase to either i1.25%
or i1.50% based on the weighted average credit quality rating of the collateral contributed to the facility (effective interest rate of i6.60% at December 31, 2023). The Backlog Facility revolving
period ends on May 16, 2025, at which point cash collections from the underlying collateral is used to repay the facility. The facility maturity date is up to i2 years, 90 days after the revolving period ends, currently August 14, 2027. As of December 31, 2023, there was $i175.0 million
outstanding under the Backlog Facility, and there were ino amounts available under the Backlog Facility (March 31, 2023 - $i175.0 million outstanding).
Other.
The Company has previously had other loans, which are secured by contracted receivables which are not yet recognized as revenue under certain licensing agreements. Outstanding loan balances under these "other" loans must be repaid with any cash collections from the underlying collateral if and when received by the Company, and may be voluntarily repaid at any time without prepayment penalty fees. The Company's "other" loans had ino
amounts outstanding as of December 31, 2023.
8. iFair Value Measurements
Fair Value
Accounting guidance and standards about fair value define fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants
at the measurement date.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair value hierarchy requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is
significant to the fair value measurement. The accounting guidance and standards establish three levels of inputs that may be used to measure fair value:
•Level 1 — Quoted prices in active markets for identical assets or liabilities.
•Level 2 — Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
•Level 3 — Unobservable inputs to the valuation methodology that are significant
to the measurement of fair value of assets or liabilities.
i
The following table sets forth the assets and liabilities required to be carried at fair value on a recurring basis as of December 31, 2023 and March 31, 2023:
The
following table sets forth the carrying values and fair values of the Company’s outstanding debt and film related obligations at December 31, 2023 and March 31, 2023:
(1)The
Company measures the fair value of its outstanding debt and interest rate swaps using discounted cash flow techniques that use observable market inputs, such as SOFR-based yield curves, swap rates, and credit ratings (Level 2 measurements).
/
The Company’s financial instruments also include cash and cash equivalents, accounts receivable, accounts payable, content related payables, other accrued liabilities, other liabilities, and borrowings under the Revolving Credit Facility, if any. The carrying values of these financial instruments approximated the fair values at December 31, 2023 and March 31,
2023.
Net
loss attributable to redeemable noncontrolling interests
(i4.4)
(i7.4)
Noncontrolling
interests discount accretion
i—
i13.4
Adjustments
to redemption value
i71.5
i34.7
Cash
distributions
(i1.0)
(i4.8)
Purchase
of noncontrolling interest
(i0.6)
i—
Ending
balance
$
i409.1
$
i357.1
/
Redeemable
noncontrolling interests (included in temporary equity on the unaudited condensed consolidated balance sheets) primarily relate to the November 12, 2015 acquisition of a controlling interest in Pilgrim Media Group and the May 29, 2018 acquisition of a controlling interest in 3 Arts Entertainment.
3 Arts Entertainment. As of December 31, 2023, the Company had a redeemable noncontrolling interest representing i49%
of 3 Arts Entertainment. The noncontrolling interest was subject to put and call options at fair value that were exercisable during the quarter. See below discussion of the January 2, 2024 purchase of a portion of the noncontrolling interest. The put and call options were determined to be embedded in the noncontrolling interest, and because the put rights are outside the control of the Company, the noncontrolling interest holder's interest is presented as redeemable noncontrolling interest outside of shareholders' equity on the Company's consolidated balance sheets.
The noncontrolling interest holders are employees of 3 Arts Entertainment. Pursuant to the various 3 Arts
Entertainment acquisition and related agreements, a portion of the noncontrolling interest holders' participation in the put and call proceeds is based on the noncontrolling interest holders' performance during the period. Further, if the employment of a noncontrolling interest holder is terminated, under certain circumstances, their participation in distributions cease and the put and call value is discounted from the fair value of their equity ownership percentage. Accordingly, earned distributions are accounted for as compensation and are being expensed within general and administrative expense as incurred. Additionally, the amount of the put and call proceeds subject to the discount is accounted for as compensation, and is amortized over the vesting period within general and administrative expense and reflected as an addition to redeemable noncontrolling interest over the vesting period which ended in November 2022.
On
January 2, 2024, the Company closed on the acquisition of an additional i25% of 3 Arts Entertainment representing approximately half of the noncontrolling interest for approximately $i194 million.
In addition, the Company purchased certain profit interests held by certain managers and entered into certain option rights agreements, which replaced the put and call rights discussed above by providing noncontrolling interest holders the right to sell to the Company and the Company the right to purchase their remaining (i24%)
interest beginning in January 2027.
Pilgrim Media Group. The Company has a remaining redeemable noncontrolling interest representing i12.5% of Pilgrim Media Group. The noncontrolling interest holder has a right to put and the Company has a right to call the noncontrolling interest at fair value, subject to
a cap, exercisable for thirty (i30) days beginning November 12, 2024, as amended. The put and call options have been determined to be embedded in the noncontrolling interest, and because the put rights are outside the control of the Company and require partial cash settlement, the noncontrolling interest holder's interest is presented as redeemable noncontrolling interest outside of shareholders' equity on the Company's consolidated balance sheets.
Redeemable
noncontrolling interests are measured at the greater of (i) the redemption amount that would be paid if settlement occurred at the balance sheet date less the amount attributed to unamortized noncontrolling interest discount if applicable, or (ii) the historical value resulting from the original acquisition date value plus or minus any earnings or loss attribution, plus the amount of amortized noncontrolling interest discount, less the amount of cash distributions that are not
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
accounted
for as compensation, if any. The amount of the redemption value in excess of the historical values of the noncontrolling interest, if any, is recognized as an increase to redeemable noncontrolling interest and a charge to retained earnings or accumulated deficit.
Other. The Company has other immaterial redeemable noncontrolling interests.
Other Noncontrolling Interests
The Company has other immaterial noncontrolling interests that are not redeemable.
10.
iRevenue
The Company's Motion Picture and Television Production segments generate revenue principally from the licensing of content in domestic theatrical exhibition, home entertainment (e.g., digital media and packaged media), television, and international marketplaces. The Company's Media Networks segment generates revenue primarily from the distribution of the
Company's STARZ premium subscription video services.
Revenue by Segment, Market or Product Line
i
The table below presents revenues by segment, market or product line for the three and nine months ended December 31, 2023 and 2022:
Remaining
performance obligations represent deferred revenue on the balance sheet plus fixed fee or minimum guarantee contracts where the revenue will be recognized and the cash received in the future (i.e., backlog). iRevenues expected to be recognized in the future related to performance obligations that are unsatisfied at December 31, 2023 are as follows:
The
above table does not include estimates of variable consideration for transactions involving sales or usage-based royalties in exchange for licenses of intellectual property. The revenues included in the above table include all fixed fee contracts regardless of duration.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenues
of $i64.2 million and $i236.2 million, respectively, including variable and fixed
fee arrangements, were recognized during the three and nine months ended December 31, 2023 from performance obligations satisfied prior to March 31, 2023. These revenues were primarily associated with the distribution of television and theatrical product in electronic sell-through and video-on-demand formats, and to a lesser extent, the distribution of theatrical product in the domestic and international markets related to films initially released in prior periods.
Accounts Receivable, Contract Assets and Deferred Revenue
The timing of revenue recognition, billings and cash collections affects the recognition of accounts receivable,
contract assets and deferred revenue. See the unaudited condensed consolidated balance sheets or Note 18 for accounts receivable, contract assets and deferred revenue balances at December 31, 2023 and March 31, 2023.
Accounts Receivable. Accounts receivable are presented net of a provision for doubtful accounts. The Company estimates provisions for accounts receivable based on historical experience for the respective risk categories and current and future expected economic conditions. To assess collectability,
the Company analyzes market trends, economic conditions, the aging of receivables and customer specific risks, and records a provision for estimated credit losses expected over the lifetime of the receivables in direct operating expense.
The Company performs ongoing credit evaluations and monitors its credit exposure through active review of customers' financial condition, aging of receivable balances, historical collection trends, and expectations about relevant future events that may significantly affect collectability. The Company generally does not require collateral for its trade accounts receivable.
i
Changes
in the provision for doubtful accounts consisted of the following:
(1)Represents
the provision for doubtful accounts acquired in the acquisition of eOne (see Note 2).
(2)Represents primarily accounts receivable previously reserved for bad debt from customers in Russia, related to Russia's invasion of Ukraine.
/
Contract Assets. Contract assets relate to the Company’s conditional right to consideration for completed performance under the contract.
Amounts relate primarily to contractual payment holdbacks in cases in which the Company is required to deliver additional episodes or seasons of television content in order to receive payment, complete certain administrative activities, such as guild filings, or allow the Company's customers' audit rights to expire. See Note 18 for contract assets at December 31, 2023 and March 31, 2023.
Deferred Revenue. Deferred revenue relates primarily to customer cash advances or deposits received prior to when the
Company satisfies the corresponding performance obligation. Revenues of $i14.7 million and $i124.5 million, respectively, were recognized during the three and nine months
ended December 31, 2023 related to the balance of deferred revenue at March 31, 2023.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11.
iNet Income (Loss) Per Share
iBasic net income (loss) per share is calculated based on the weighted average common shares outstanding for the period.iBasic
net income (loss) per share for the three and nine months ended December 31, 2023 and 2022 is presented below:
Net
income (loss) attributable to Lions Gate Entertainment Corp. shareholders
$
(i106.6)
$
i16.6
$
(i1,063.5)
$
(i1,913.5)
Denominator:
Weighted
average common shares outstanding
i235.1
i228.8
i233.1
i227.4
Basic
net income (loss) per common share
$
(i0.45)
$
i0.07
$
(i4.56)
$
(i8.41)
Diluted
net income (loss) per common share reflects share purchase options, including share appreciation rights ("SARs"), restricted share units ("RSUs") and restricted stock using the treasury stock method when dilutive, and any contingently issuable shares when dilutive. iDiluted net income (loss) per common share for the three and nine months ended December 31, 2023 and 2022 is presented below:
Net
income (loss) attributable to Lions Gate Entertainment Corp. shareholders
$
(i106.6)
$
i16.6
$
(i1,063.5)
$
(i1,913.5)
Denominator:
Weighted
average common shares outstanding
i235.1
i228.8
i233.1
i227.4
Effect
of dilutive securities:
Restricted share units and restricted stock
i—
i1.3
i—
i—
Adjusted
weighted average common shares outstanding
i235.1
i230.1
i233.1
i227.4
Diluted
net income (loss) per common share
$
(i0.45)
$
i0.07
$
(i4.56)
$
(i8.41)
As
a result of the net loss in the three and nine months ended December 31, 2023 and the nine months ended December 31, 2022, the dilutive effect of the share purchase options, RSUs and restricted stock, and contingently issuable shares were considered anti-dilutive and, therefore, excluded from diluted net loss per share. The weighted average anti-dilutive shares excluded from the calculation due to the net loss for the three and nine months ended December 31, 2023 totaled i1.6 million
and i2.7 million, respectively (nine months ended December 31, 2022 - i2.5 million).
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
Additionally, for the three and nine months ended December 31, 2023 and 2022, the outstanding common shares issuable
presented below were excluded from diluted net loss per common share because their inclusion would have had an anti-dilutive effect regardless of net income or loss in the period.
Total
weighted average anti-dilutive shares issuable excluded from diluted net income (loss) per common share
i21.8
i35.1
i24.6
i28.5
/
12.
iCapital Stock
(a) Common Shares
The Company had ii500/
million authorized Class A voting shares and ii500/ million authorized Class B non-voting shares at December 31,
2023 and March 31, 2023. iThe table below outlines common shares reserved for future issuance:
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
i
The following table sets forth the stock option, SARs, restricted stock and restricted share unit activity during the nine months ended December 31, 2023:
(1)Represents
less than iiiii0.1////
million shares.
/
(c) Share Repurchases
During the three and nine months ended December 31, 2023 and 2022, the Company did iiiinot///
repurchase any common shares. To date, approximately $i288.1 million common shares have been repurchased, leaving approximately $i179.9 million of authorized
potential repurchases.
13. iIncome Taxes
The income tax provision for the three and nine months ended December 31, 2023 and 2022 is calculated by estimating the Company's annual effective tax rate (estimated annual tax provision divided by estimated
annual income before income taxes), and then applying the effective tax rate to income (loss) before income taxes for the period, plus or minus the tax effects of items that relate discretely to the period, if any.
The Company's income tax provision differs from the federal statutory rate multiplied by pre-tax income (loss) due to the mix of the Company's pre-tax income (loss) generated across the various jurisdictions in which the Company operates, and the tax deductions generated by the Company's capital structure. The
Company's income tax provision for the three and nine months ended December 31, 2023 and 2022 was impacted by changes in the valuation allowances against certain U.S. and foreign deferred tax assets, certain minimum taxes and foreign withholding taxes. The Company's income tax provision for the three and nine months ended December 31, 2023 and 2022 was also impacted by charges for interest on uncertain tax benefits, and benefited from the release of uncertain tax benefits due to the close of audits or expiration of statutory limitations. The Company acquired all of the issued and outstanding equity interests
of eOne on December 27, 2023 and is evaluating the tax impact on the preliminary purchase price allocation (see Note 2).
The Company's income tax provision can be affected by many factors, including the overall level of pre-tax income, the mix of pre-tax income generated across the various jurisdictions in which the Company operates, changes in tax laws and regulations in those jurisdictions, changes in uncertain tax positions, changes in valuation allowances on its deferred tax assets, tax planning strategies available to the Company, and other discrete items.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
14. iRestructuring and Other
Restructuring and other includes restructuring and severance costs, certain transaction and other costs, and certain unusual items, when applicable.
iDuring the three and nine months ended December 31, 2023 and 2022, the Company also incurred certain other unusual charges or benefits, which are included in direct operating expense in the consolidated statements of operations and are described below. The following table sets forth restructuring and other and these other unusual charges or benefits and the statement of operations line items they are included in for the three and nine months ended
December 31, 2023 and 2022:
Accelerated
vesting on equity awards (see Note 12)
i6.8
i1.5
i8.4
i2.1
Total
severance costs
i30.7
i3.9
i41.3
i16.9
COVID-19
related charges included in restructuring and other
i—
i—
i—
i0.1
Transaction
and other costs(3)
i8.4
(i9.4)
i12.3
(i0.2)
Total
Restructuring and Other
i116.9
i75.3
i371.0
i316.5
Other
unusual charges not included in restructuring and other or the Company's operating segments:
Content charges included in direct operating expense(4)
i—
i—
i—
i7.2
COVID-19
related charges (benefit) included in direct operating expense(5)
(i0.1)
(i1.8)
(i0.5)
(i8.8)
Total
restructuring and other and other unusual charges not included in restructuring and other
$
i116.8
$
i73.5
$
i370.5
$
i314.9
_______________________
(1)Media
Networks Restructuring: In fiscal 2023, the Company began a plan to restructure its LIONSGATE+ business, which initially included exiting the business in seven international territories (France, Germany, Italy, Spain, Benelux, the Nordics and Japan), and identifying additional cost-saving initiatives. This plan included a strategic review of content performance across Starz's domestic and international platforms, resulting in certain programming being removed from those platforms and written down to fair value.
In July 2023, in connection with a modification to shorten a long-term distribution contract, the Company decided to shut down the LIONSGATE+ service in Latin America.
During the nine months ended December 31, 2023, the Company continued executing its restructuring plan, including its evaluation of the programming on Starz's domestic and international platforms. In connection with this review, the Company cancelled certain ordered programming, and identified certain other programming with limited strategic purpose which was removed from the Starz platforms and abandoned by the Media Networks segment. In addition, as a result of the continuing review of its international territories, in order to continue growing the profitability of STARZ and given the economic and industry challenges in the United Kingdom ("U.K."), the
Company has made the strategic decision to shut down the LIONSGATE+ service in the U.K. market, resulting in additional content impairment charges.
As a result of these restructuring initiatives, the Company recorded content impairment charges related to the Media Networks segment in the three and nine months ended December 31, 2023 of $i77.8 million and $i317.4 million,
respectively (three and nine months ended December 31, 2022 - $i80.8 million and $i293.8 million, respectively). The Company has incurred impairment
charges from the inception of the plan through December 31, 2023 amounting to $i696.7 million.
Under the current restructuring plan and ongoing strategic content review, the Company estimates it will incur
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
additional charges ranging from approximately $i30 million to $i55 million
related to certain contractual content commitments or programming content impairment charges, among other items, related to territories exited or to be exited and content to be removed from its services. The net future cash outlay is estimated to range from approximately $i145 million to $i170 million,
which includes contractual commitments on content in territories being exited or to be exited, and payments on the remaining amounts payable for content removed or that may be removed from its services. The amounts above will depend on the results of its strategic content review and amounts recoverable from alternative distribution strategies, if any, on content in domestic and foreign markets.
As the Company continues to evaluate the Media Networks business and its current restructuring plan in relation to the current micro and macroeconomic environment and the announced plan to separate the Company's Starz business (i.e., Media Networks segment) and Studio Business (i.e., Motion Picture and Television Production segments), including further strategic review of content performance and its strategy
on a territory-by-territory basis, the Company may decide to expand its restructuring plan and exit additional territories or remove certain content off its platform in the future. Accordingly, the Company may incur additional content impairment and other restructuring charges beyond the estimates above.
Other Impairments: Amounts in the nine months ended December 31, 2022 also include an impairment of an operating lease right-of-use asset related to the Studio business and corporate facilities amounting to $i5.8 million
associated with a portion of a facility lease that will no longer be utilized by the Company. The impairment reflects a decline in market conditions since the inception of the lease impacting potential sublease opportunities, and represents the difference between the estimated fair value, which was determined based on the expected discounted future cash flows of the lease asset, and the carrying value.
(2)Severance costs were primarily related to restructuring activities and other cost-saving initiatives. In the three and nine months ended December 31, 2023, amounts were due to restructuring activities including integration of the acquisition of eOne, LIONSGATE+ international restructuring and our Motion Picture and Television Production segments.
(3)Transaction
and other costs in the three and nine months ended December 31, 2023 and 2022 reflect transaction, integration and legal costs associated with certain strategic transactions, and restructuring activities and also include costs and benefits associated with certain legal matters. In the nine months ended December 31, 2023, transaction and other costs also includes a benefit of $i3.8 million associated with an arrangement to migrate subscribers in some of the exited territories
to a third-party in connection with the LIONSGATE+ international restructuring. In the three and nine months ended December 31, 2022, transaction and other costs includes a benefit of $ii11.0/ million
for a settlement of a legal matter related to the Media Networks segment.
(4)In the nine months ended December 31, 2022, the amounts represent development costs written off as a result of changes in strategy across the Company's theatrical slate in connection with certain management changes and changes in the theatrical marketplace in the Motion Picture segment. These charges are excluded from segment results and included in amortization of investment in film and television programs in direct operating expense on the unaudited condensed consolidated statement of operations.
(5)Amounts include incremental costs incurred, if any, due to circumstances associated with the COVID-19 global pandemic, net of
insurance recoveries of $i0.1 million and $i0.7 million in the three and nine months ended December 31, 2023, respectively (three and nine months ended December 31, 2022 - insurance recoveries of
$i2.8 million and $i10.7 million, respectively). In the three and nine months ended December 31, 2023 and 2022, insurance recoveries exceeded the incremental costs expensed in the period, resulting
in a net benefit included in direct operating expense. The Company is in the process of seeking additional insurance recovery for some of these costs. The ultimate amount of insurance recovery cannot be estimated at this time.
(1)As
of December 31, 2023, the remaining severance liability of approximately $i29.5 million is expected to be paid in the next 12 months.
15. iSegment
Information
The Company’s reportable segments have been determined based on the distinct nature of their operations, the Company's internal management structure, and the financial information that is evaluated regularly by the Company's chief operating decision maker.
The Company has ithree
reportable business segments: (1) Motion Picture, (2) Television Production and (3) Media Networks. We refer to our Motion Picture and Television Production segments collectively as our Studio Business.
Studio Business:
Motion Picture. Motion Picture consists of the development and production of feature films, acquisition of North American and worldwide distribution rights, North American theatrical, home entertainment and television distribution of feature films produced and acquired, and worldwide licensing of distribution rights to feature films produced and acquired.
Television Production. Television Production consists of the development, production and worldwide distribution of television productions including television series, television movies and mini-series, and non-fiction programming.
Television Production includes the licensing of Starz original series productions to Starz Networks and LIONSGATE+, and the ancillary market distribution of Starz original productions and licensed product. Additionally, the Television Production segment includes the results of operations of 3 Arts Entertainment.
Media Networks Business:
Media Networks. Media Networks consists of the following product lines (i) Starz Networks, which includes the domestic distribution of STARZ branded premium subscription video services through over-the-top ("OTT") platforms, on a direct-to-consumer basis through the Starz App, and through U.S. multichannel video programming distributors ("MVPDs") including cable operators, satellite television providers and telecommunication companies (collectively, "Distributors") (in the aggregate, the "Starz Domestic
Platform"); and (ii) LIONSGATE+, which represents revenues primarily from the OTT distribution of the Company's STARZ branded premium subscription video services outside of the U.S. The Starz Domestic Platform together with the LIONSGATE+ platforms are referred to as the "Starz Platforms".
In the ordinary course of business, the Company's reportable segments enter into transactions with one another. The most common types of intersegment transactions include licensing motion pictures or television programming (including Starz original productions) from the Motion Picture and Television Production segments to the Media Networks segment. While intersegment transactions are treated like third-party transactions to determine segment performance, the
revenues (and corresponding expenses, assets, or liabilities recognized by the segment that is the counterparty to the transaction) are eliminated in consolidation and, therefore, do not affect consolidated results.
The
Company's primary measure of segment performance is segment profit. Segment profit is defined as gross contribution (revenues, less direct operating and distribution and marketing expense) less segment general and administration expenses. Segment profit excludes, when applicable, corporate general and administrative expense, restructuring and other
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
costs, share-based
compensation, certain programming and content charges as a result of changes in management and/or programming and content strategy, certain charges related to the COVID-19 global pandemic, charges related to Russia's invasion of Ukraine, and purchase accounting and related adjustments. The Company believes the presentation of segment profit is relevant and useful for investors because it allows investors to view segment performance in a manner similar to the primary method used by the Company's management and enables them to understand the fundamental performance of the Company's businesses.
i
The
reconciliation of total segment profit to the Company’s income (loss) before income taxes is as follows:
COVID-19
related benefit (charges) included in direct operating expense(5)
i0.1
i1.8
i0.5
i8.8
Content
charges(6)
i—
i—
i—
(i7.2)
Adjusted
share-based compensation expense(7)
(i24.9)
(i23.3)
(i66.9)
(i57.7)
Purchase
accounting and related adjustments(8)
(i39.2)
(i53.4)
(i120.5)
(i151.1)
Operating
income (loss)
(i43.5)
i7.8
(i877.9)
(i1,808.1)
Interest
expense
(i67.1)
(i59.6)
(i192.9)
(i163.0)
Interest
and other income
i1.8
i1.7
i6.5
i4.8
Other
expense
(i2.5)
(i10.7)
(i19.6)
(i21.1)
Gain
on extinguishment of debt
i—
i38.2
i21.2
i40.3
Gain
on investments, net
i4.4
i43.4
i2.7
i42.1
Equity
interests income
i4.2
i—
i5.7
i0.8
Income
(loss) before income taxes
$
(i102.7)
$
i20.8
$
(i1,054.3)
$
(i1,904.2)
___________________
(1)Corporate
general and administrative expenses include certain corporate executive expense (such as salaries and wages for the office of the Chief Executive Officer, Chief Financial Officer, General Counsel and other corporate officers), investor relations costs, costs of maintaining corporate facilities, and other unallocated common administrative support functions, including corporate accounting, finance and financial reporting, internal and external audit and tax costs, corporate and other legal support functions, and certain information technology and human resources expense.
(2)Adjusted depreciation and amortization represents depreciation and amortization as presented on our unaudited condensed consolidated statements of operations less the depreciation and amortization related to the non-cash fair value adjustments to property and equipment and intangible assets acquired in recent acquisitions which are
included in the purchase accounting and related adjustments line item above, as shown in the table below:
Less:
Amount included in purchase accounting and related adjustments
(i36.4)
(i36.5)
(i105.5)
(i104.4)
Adjusted
depreciation and amortization
$
i13.5
$
i9.8
$
i33.4
$
i29.5
(3)Restructuring and other includes restructuring and severance costs, certain transaction and other costs, and certain unusual items, when applicable (see Note 14).
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(4)Goodwill
and intangible asset impairment reflects the goodwill impairment charges recorded in the nine months ended December 31, 2023 and December 31, 2022 related to the Media Networks reporting unit, and the nine months ended December 31, 2023 also includes the impairment of the indefinite-lived trade names related to the Media Networks reporting unit (see Note 5).
(5)Amounts represent the incremental costs, if any, included in direct operating expense resulting from circumstances associated with the COVID-19 global pandemic, net of insurance recoveries. During the three and nine months ended December 31, 2023 and 2022, the
Company has incurred a net benefit in direct operating expense due to insurance recoveries in excess of the incremental costs expensed in the period (see Note 14). These benefits (charges) are excluded from segment operating results.
(6)Content charges represent certain charges included in direct operating expense in the consolidated statements of operations, and excluded from segment operating results (see Note 14 for further information).
(7)The following table reconciles total share-based compensation expense to adjusted share-based compensation expense:
(i)Represents
share-based compensation expense included in restructuring and other expenses reflecting the impact of the acceleration of vesting schedules for equity awards pursuant to certain severance arrangements.
(8)Purchase accounting and related adjustments primarily represent the amortization of non-cash fair value adjustments to certain assets acquired in recent acquisitions. These adjustments include the accretion of the noncontrolling interest discount related to Pilgrim Media Group and 3 Arts Entertainment, the amortization of the recoupable portion of the purchase price and the expense associated with the earned distributions related to 3 Arts Entertainment, all of which are accounted for as compensation and are included in general and administrative expense. The following sets forth the amounts included in each line item in the financial statements:
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(i)These adjustments include the non-cash charge for the accretion of the noncontrolling interest discount related to Pilgrim Media Group and 3 Arts Entertainment, the non-cash charge for the amortization of the recoupable portion of the purchase price and the expense associated with the noncontrolling equity interests in the distributable earnings related to 3 Arts Entertainment, all of which are accounted for as compensation and are included in general and administrative expense, as presented in the table below. The noncontrolling equity interest in the distributable earnings of 3 Arts
Entertainment are reflected as an expense rather than noncontrolling interest in the consolidated statement of operations due to the relationship to continued employment.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16.
iContingencies
From time to time, the Company is involved in certain claims and legal proceedings arising in the normal course of business.
The Company establishes an accrued liability for claims and legal proceedings when the Company determines that a loss is both probable and the amount
of the loss can be reasonably estimated. Once established, accruals are adjusted from time to time, as appropriate, in light of additional information. The amount of any loss ultimately incurred in relation to matters for which an accrual has been established may be higher or lower than the amounts accrued for such matters.
As of December 31, 2023, the Company is not a party to any material pending claims or legal proceeding and is not aware of any other claims that it believes could, individually or in the aggregate, have a material adverse effect on the Company's financial position, results of operations or cash flows.
17.
iDerivative Instruments and Hedging Activities
The Company enters into forward foreign exchange contracts to hedge its foreign currency exposures on future production expenses and tax credit receivables denominated
in various foreign currencies (i.e., cash flow hedges). The Company also enters into forward foreign exchange contracts that economically hedge certain of its foreign currency risks, even though hedge accounting does not apply or the Company elects not to apply hedge accounting. The Company monitors its positions with, and the credit quality of, the financial institutions that are party to its financial transactions. Changes in the fair value of the foreign exchange contracts that are designated as hedges are reflected in accumulated other
comprehensive income (loss), and changes in the fair value of foreign exchange contracts that are not designated as hedges and do not qualify for hedge accounting are recorded in direct operating expense. Gains and losses realized upon settlement of the foreign exchange contracts that are designated as hedges are amortized to direct operating expense on the same basis as the production expenses being hedged.
The Company is exposed to the impact of interest rate changes primarily through its borrowing activities. The Company’s objective is to mitigate the impact of interest rate changes on earnings and cash flows. The Company primarily uses pay-fixed interest rate swaps to facilitate its interest rate risk management activities, which the Company generally designates as cash flow hedges of interest payments on floating-rate borrowings. Pay-fixed swaps effectively convert floating-rate borrowings to fixed-rate borrowings. The unrealized gains or
losses from these designated cash flow hedges are deferred in accumulated other comprehensive income (loss) and recognized in interest expense as the interest payments occur. Changes in the fair value of interest rate swaps that are not designated as hedges are recorded in interest expense (see further explanation below).
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash
settlements related to interest rate contracts are generally classified as operating activities on the consolidated statements of cash flows. However, due to a financing component (debt host) on a portion of our previously outstanding interest rate swaps, the cash flows related to these contracts are classified as financing activities through the date of termination.
Designated Cash Flow Hedges. As of December 31, 2023 and March 31, 2023, the Company had the following pay-fixed
interest rate swaps, which have been designated as cash flow hedges outstanding (all related to the Company's SOFR-based debt, see Note 6 and Note 7):
(1)Represents
the "Re-designated Swaps" as described in the May 2022 Transactions section below that were previously not designated cash flow hedges at March 31, 2022.
May 2022 Transactions: In May 2022, the Company terminated certain of its previous interest rate swap contracts (the "Terminated Swaps"). As a result of the terminations, the Company received approximately $i56.4 million.
Simultaneously with the termination of the Terminated Swaps, the Company re-designated all other swaps previously not designated as cash flow hedges of variable rate debt.
The receipt of approximately $i56.4 million as a result of the termination was recorded as a reduction of the asset values of the derivatives amounting to $i188.7 million
and a reduction of the financing component (debt host) of the Terminated Swaps amounting to $i131.3 million. At the time of the termination of the Terminated Swaps, there was approximately $i180.4
million of unrealized gains recorded in accumulated other comprehensive income (loss) related to these Terminated Swaps. This amount will be amortized as a reduction of interest expense through the remaining term of the swaps unless it becomes probable that the cash flows originally hedged will not occur, in which case the proportionate amount of the gain will be recorded as a reduction to interest expense at that time. In addition, the liability amount of $i6.8 million for the Re-designated Swaps at the re-designation date will be amortized as a reduction of interest expense throughout the remaining term of the Re-designated
Swaps, unless it becomes probable that the cash flows originally hedged will not occur, in which case the proportionate amount of the loss will be recorded to interest expense at that time.
The receipt of approximately $i56.4 million was classified in the unaudited condensed consolidated statement of cash flows as cash provided by operating activities of $i188.7 million
reflecting the amount received for the derivative portion of the termination of swaps, and a use of cash in financing activities of $i134.5 million reflecting the pay down of the financing component of the Terminated Swaps (inclusive of payments made between April 1, 2022 and the termination date amounting to $i3.2 million).
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Statement Effect of Derivatives
Unaudited condensed consolidated statements of operations and comprehensive loss:iThe
following table presents the pre-tax effect of the Company's derivatives on the accompanying unaudited condensed consolidated statements of operations and comprehensive loss for the three and nine months ended December 31, 2023 and 2022:
Gain (loss) recognized in accumulated other comprehensive income (loss)
$
(i4.3)
$
i2.7
$
(i7.3)
$
i4.4
Loss
reclassified from accumulated other comprehensive income (loss) into direct operating expense
$
(i2.6)
$
(i0.6)
$
(i2.5)
$
(i0.7)
Interest
rate swaps
Gain recognized in accumulated other comprehensive income (loss)
$
(i11.7)
$
i6.5
$
i24.7
$
i87.8
Gain
(loss) reclassified from accumulated other comprehensive income (loss) into interest expense
$
i11.4
$
i3.6
$
i31.5
$
(i5.7)
Derivatives
not designated as cash flow hedges:
Interest rate swaps
Loss
reclassified from accumulated other comprehensive income (loss) into interest expense
$
(i1.8)
$
(i2.1)
$
(i5.5)
$
(i9.9)
Total
direct operating expense on consolidated statements of operations
$
i510.8
$
i584.7
$
i1,549.1
$
i1,744.7
Total
interest expense on consolidated statements of operations
$
i67.1
$
i59.6
$
i192.9
$
i163.0
Unaudited
condensed consolidated balance sheets:The Company classifies its forward foreign exchange contracts and interest rate swap agreements within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments (see Note 8). The portion of the swaps, if any, reflecting the financing component (debt host) of the hybrid instrument discussed above is recorded at amortized cost and reduced over time based on payments. Pursuant to the Company's accounting policy to offset the fair value amounts recognized for derivative instruments, the Company presents the asset or liability
position of the swaps that are with the same counterparty under a master netting arrangement net as either an asset or liability in its unaudited condensed consolidated balance sheets. As of December 31, 2023 and March 31, 2023, there were no swaps outstanding that were subject to a master netting arrangement.
As
of December 31, 2023, based on the current release schedule, the Company estimates approximately $i2.0 million of losses associated with forward foreign exchange contract cash flow hedges in accumulated other comprehensive income will be reclassified into earnings during
the one-year period ending December 31, 2024.
As of December 31, 2023, the Company estimates approximately $i25.4 million of gains recorded in accumulated other comprehensive income associated with interest rate swap agreement cash flow hedges will be reclassified into interest
expense during the one-year period ending December 31, 2024.
18. iAdditional Financial Information
The following tables present supplemental information related to the unaudited condensed consolidated financial statements.
Cash,
Cash Equivalents and Restricted Cash
i
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported in the unaudited condensed consolidated balance sheet to the total amounts reported in the unaudited condensed consolidated statement of cash flows at December 31, 2023 and March 31, 2023. At December 31, 2023 and March
31, 2023, restricted cash represents primarily amounts related to required cash reserves for interest payments associated with the Production Tax Credit Facility, IP Credit Facility, and Backlog Facility.
(1)During
the three months ended December 31, 2023, the Company extended certain of its operating leases and entered into new operating leases. The Company recorded an increase to operating lease right-of-use assets of $i211.9 million which is included in "other non-current assets". Additionally, the Company
recorded a corresponding decrease to operating lease liability of $i1.3 million and a corresponding increase of $i213.2 million to "other accrued liabilities" and "other liabilities - non-current", respectively, at December
31, 2023 related to these leases. In addition, in connection with the December 27, 2023 acquisition of eOne, the Company recorded operating lease right-of-use assets of $i21.3 million included in "other non-current assets", and a corresponding operating lease liability of $i6.9 million
and $i17.3 million included in "other accrued liabilities" and "other liabilities - non-current", respectively, as of December 31, 2023 (see Note 2).
Accounts Receivable Monetization
Under the Company's accounts receivable monetization programs, the
Company has entered into (1) individual agreements to monetize certain of its trade accounts receivable directly with third-party purchasers and (2) a revolving agreement to monetize designated pools of trade accounts receivable with various financial institutions, as further described below. Under these programs, the Company transfers receivables to purchasers in exchange for cash proceeds, and the Company continues to service the receivables for the purchasers. The Company accounts for the transfers of these receivables as a sale, removes (derecognizes) the carrying amount of the receivables from its balance sheets and classifies the proceeds received as cash flows from operating activities in the statements of
cash flows. The Company records a loss on the sale of these receivables reflecting the net proceeds received (net of any obligations incurred), less the carrying amount of the receivables transferred. The loss is reflected in the "other expense" line item on the unaudited condensed consolidated statements of operations. The Company
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
— (Continued)
receives fees for servicing the accounts receivable for the purchasers, which represent the fair value of the services and were immaterial for the three and nine months ended December 31, 2023 and 2022.
Individual Monetization Agreements. The Company enters into individual agreements to monetize trade accounts receivable. The third-party purchasers have no recourse to other assets of the Company in the event of non-payment by the customers. iThe
following table sets forth a summary of the receivables transferred under individual agreements or purchases during the three and nine months ended December 31, 2023 and 2022:
Carrying value of receivables transferred and derecognized
$
i305.9
$
i404.5
$
i1,065.9
$
i1,075.3
Net
cash proceeds received
i300.7
i394.5
i1,045.6
i1,056.5
Loss
recorded related to transfers of receivables
i5.2
i10.0
i20.3
i18.8
At
December 31, 2023, the outstanding amount of receivables derecognized from the Company's unaudited condensed consolidated balance sheets, but which the Company continues to service, related to the Company's individual agreements to monetize trade accounts receivable was $i587.1
million (March 31, 2023 - $i520.4 million).
Pooled Monetization Agreement. In December 2019, the Company entered into a revolving agreement,
as amended in July 2023, to transfer up to $i100.0 million of certain receivables to various financial institutions on a recurring basis in exchange for cash equal to the gross receivables transferred, which matured on October 1, 2023. As customers paid their balances, the Company would transfer additional receivables into the program. The transferred
receivables were fully guaranteed by a bankruptcy-remote wholly-owned subsidiary of the Company. The third-party purchasers had no recourse to other assets of the Company in the event of non-payment by the customers.
The following table sets forth a summary of the receivables transferred under the pooled monetization agreement during the three and nine months ended December 31, 2023 and 2022:
Gross cash proceeds received for receivables transferred and derecognized
$
i—
$
i57.3
$
i22.2
$
i156.0
Less
amounts from collections reinvested under revolving agreement
i—
(i33.3)
(i9.1)
(i83.3)
Proceeds
from new transfers
i—
i24.0
i13.1
i72.7
Collections
not reinvested and remitted or to be remitted
i—
(i24.2)
(i13.4)
(i48.0)
Net
cash proceeds received (paid or to be paid)(1)
$
i—
$
(i0.2)
$
(i0.3)
$
i24.7
Carrying
value of receivables transferred and derecognized (2)
$
i—
$
i57.0
$
i22.1
$
i154.2
Obligations
recorded
$
i—
$
i1.0
$
i2.1
$
i4.4
Loss
recorded related to transfers of receivables
$
i—
$
i0.7
$
i2.0
$
i2.6
___________________
(1)During
the three and nine months ended December 31, 2023, the Company voluntarily repurchased $ii46.0/ million
of receivables previously transferred. In addition, during the three and nine months ended December 31, 2022, the Company repurchased $i6.5 million and $i27.4 million,
respectively, of receivables previously transferred, as separately agreed upon with the third-party purchasers, in order to monetize such receivables under the individual monetization program discussed above without being subject to the collateral requirements under the pooled monetization program.
(2)Receivables net of unamortized discounts on long-term, non-interest bearing receivables.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At
December 31, 2023, there were ino outstanding receivables derecognized from the Company's unaudited condensed consolidated balance sheet, for which the Company continues
to service, related to the pooled monetization agreement (March 31, 2023 - $i52.3 million).
Content related payables
Content related payables include minimum guarantees and accrued licensed program
rights obligations, which represent amounts payable for film or television rights that the Company has acquired or licensed.
Other Accrued Liabilities
Other accrued liabilities include employee related liabilities (such as accrued bonuses and salaries and wages) of $i135.9 million and $i128.7 million
at December 31, 2023 and March 31, 2023, respectively.
Accumulated Other Comprehensive Income
i
The following table summarizes the changes in the components of accumulated other comprehensive income, net of tax. During the nine months ended December 31, 2023 and 2022, there was
iino/ income tax expense or benefit reflected in other comprehensive income due to the income tax impact being
offset by changes in the Company’s deferred tax valuation allowance.
(1)Represents
a loss of $i2.5 million included in direct operating expense and a gain of $i26.0
million included in interest expense on the unaudited condensed consolidated statement of operations in the nine months ended December 31, 2023 (nine months ended December 31, 2022 - loss of $i0.7 million included in direct operating expense and loss of $i15.6
million included in interest expense) (see Note 17).
/
Supplemental Cash Flow Information
Significant non-cash transactions during the nine months ended December 31, 2023 and 2022 include certain interest rate swap agreements, which are discussed in Note 17, "Derivative Instruments and Hedging Activities".
There were no significant non-cash financing or investing activities for the nine months ended December 31,
2023 and 2022.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
19. iSubsequent
Events
On January 2, 2024, the Company closed on the acquisition of an additional i25% of 3 Arts Entertainment representing approximately half of the noncontrolling interest for approximately $i194 million.
In addition, the Company purchased certain profit interests held by certain managers and entered into certain option rights agreements, which replaced the put and call rights discussed in Note 2 by providing noncontrolling interest holders the right to sell to the Company and the Company the right to purchase their remaining (i24%)
interest beginning in January 2027, see Note 2.
ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
Lions Gate Entertainment
Corp. (the “Company,”“Lionsgate,”"Lions Gate,"“we,”“us” or “our”) encompasses world-class motion picture and television studio operations (collectively referred to as the “Studio Business”) aligned with the STARZ premium global subscription platform to bring a unique and varied portfolio of entertainment to consumers around the world. The Company’s film, television, subscription and location-based entertainment businesses are backed by a more than 20,000-title library and a valuable collection of iconic film and television franchises. We classify our operations through three reporting segments: Motion Picture,Television Production, and Media Networks (see further discussion below).
Acquisition
of eOne
On December 27, 2023, the Company, and its subsidiaries, Lions Gate Entertainment Inc., a Delaware corporation (“LGEI”), and Lions Gate International Motion Pictures S.à.r.l., a Luxembourg société à responsabilité limitée (“LGIMP” and, with the Company and LGEI, collectively the “Buyers”), completed the previously announced acquisition of all of the issued and outstanding equity interests of the companies constituting the Entertainment One television and film (“eOne”) business from Hasbro, Inc., a Rhode Island corporation (“Hasbro”), pursuant to that certain Equity Purchase
Agreement (the “Purchase Agreement”) dated August 3, 2023. The aggregate cash purchase price was approximately $375.0 million, subject to certain purchase price adjustments, including for cash, debt, and working capital. Upon closing, the Company paid $331.0 million, net of cash acquired of $54.1 million, which reflects the purchase price of $375.0 million adjusted for estimated cash, debt, transaction costs and working capital. The preliminary purchase price is subject to further adjustments based on the final determination of the purchase price adjustments. The acquisition of eOne, a film and television production and distribution company, builds the Company's film and television library, strengthens the
Company's scripted and unscripted television business, and continues to expand the Company's presence in Canada and the U.K.
The acquisition was accounted for under the acquisition method of accounting, with the financial results of eOne included in the Company's consolidated results from December 27, 2023. There was no material revenue or net income from eOne for the period from December 27, 2023 through December 31, 2023. The Company incurred approximately $5.6 million and $8.8 million of acquisition-related costs that
were expensed in restructuring and other during the three and nine months ended December 31, 2023, respectively.
See Note 2 to our unaudited condensed consolidated financial statements for further information.
Business Combination
On December 22, 2023, the Company entered into a business combination agreement (the “Business Combination Agreement”), with Screaming Eagle Acquisition Corp., a Cayman Islands exempted company (“Screaming Eagle”), SEAC II Corp., a Cayman Islands exempted company and a wholly-owned subsidiary of Screaming Eagle (“New SEAC”), SEAC
MergerCo, a Cayman Islands exempted company and a wholly-owned subsidiary of Screaming Eagle, 1455941 B.C. Unlimited Liability Company, a British Columbia unlimited liability company and a wholly-owned subsidiary of Screaming Eagle, LG Sirius Holdings ULC, a British Columbia unlimited liability company and wholly-owned subsidiary of Lionsgate and LG Orion Holdings ULC, a British Columbia unlimited liability company and wholly-owned subsidiary of Lionsgate (“StudioCo”). Pursuant to the terms and conditions of the Business Combination Agreement, the Studio Business will be combined with Screaming Eagle through a series of transactions, including an amalgamation of StudioCo and New SEAC under a Canadian plan of arrangement (the “Business Combination”). Upon consummation of the Business Combination, approximately 87.3% of the total shares of the Studio Business are expected
to continue to be held by Lionsgate, while Screaming Eagle public shareholders and founders and common equity financing investors are expected to own an aggregate of approximately 12.7% of the combined company. In addition to establishing the Studio Business as a standalone publicly-traded entity, the transaction is expected to deliver approximately $350.0 million of gross proceeds to the Company, including $175.0 million in private investments in public equities (“PIPE”) financing. The transaction is subject to certain closing conditions, including regulatory approvals and approval from the shareholders and public warrant holders of Screaming Eagle, and is expected to close in the
spring of 2024. The closing of the transaction is subject to the gross proceeds to the Company being equal to a minimum of $350.0 million.
Harry E. Sloan, a member of the Company’s Board of Directors, is also the Chairman of Screaming Eagle, and owns, directly or indirectly, a material interest in Eagle Equity Partners V, LLC, a Delaware limited liability company, the Screaming Eagle sponsor. Mr. Sloan recused himself from the decisions to approve the Business Combination made by both the board of directors of Screaming Eagle and Lionsgate.
The Business Combination is expected to be accounted for as a reverse recapitalization in accordance with U.S.
GAAP. Under this method of accounting, Screaming Eagle will be treated as the acquired company and the Studio Business will be treated as the acquirer for financial reporting purposes. Accordingly, for accounting purposes, the financial statements of New SEAC will represent a continuation of the financial statements of the Studio Business, with the Business Combination treated as the equivalent of the Studio Business issuing stock for the historical net assets of Screaming Eagle, accompanied by a recapitalization. The net assets of Screaming Eagle will be stated at fair value, which approximates historical cost, with no goodwill or other intangible assets recorded. Operations prior to the Business Combination will be those of the Studio Business.
Media Networks Restructuring
In fiscal 2023, we began a plan to restructure our LIONSGATE+ business, which initially included exiting
the business in seven international territories (France, Germany, Italy, Spain, Benelux, the Nordics and Japan), and identifying additional cost-saving initiatives. This plan included a strategic review of content performance across Starz’s domestic and international platforms, resulting in certain programming being removed from those platforms and written down to fair value.
In July 2023, in connection with a modification to shorten a long-term distribution contract, the Company decided to shut down the LIONSGATE+ service in Latin America. While the modified contract covers the cost of the content during the shutdown period, there may be additional charges for
remaining contractual commitments when the service is completely shut down in Latin America, which is expected in the quarter ended March 31, 2024.
During the nine months ended December 31, 2023, the Company continued executing its restructuring plan, including its evaluation of the programming on Starz's domestic and international platforms. In connection with this review, the Company cancelled certain ordered programming, and identified certain other programming with limited strategic purpose which was removed from the Starz platforms and abandoned by the Media Networks segment. In addition, as a result of the continuing review of its international territories,
in order to continue growing the profitability of STARZ and given the economic and industry challenges in the United Kingdom ("U.K."), the Company has made the strategic decision to shut down the LIONSGATE+ service in the U.K. market, resulting in additional content impairment charges.
As a result of these restructuring initiatives, we recorded content impairment charges related to the Media Networks segment in the three and nine months ended December 31, 2023 of $77.8 million and $317.4 million, respectively, which are included in restructuring and other in the unaudited condensed consolidated statement of operations (three and nine months ended December 31, 2022 - $80.8 million and $293.8 million, respectively) (see Note 14 to our unaudited
condensed consolidated financial statements). We have incurred impairment charges from the inception of the plan through December 31, 2023 amounting to $696.7 million.
Under the current restructuring plan and ongoing strategic content review, the Company estimates it will incur additional charges ranging from approximately $30 million to $55 million related to certain contractual content commitments or programming content impairment charges, among other items, related to territories exited or to be exited and content to be removed from its services. The net future cash outlay is estimated to range from approximately $145 million to $170 million, which includes contractual commitments on content in territories being exited or to be exited, and payments on the remaining amounts payable for content
removed or that may be removed from its services. The amounts above will depend on the results of its strategic content review and amounts recoverable from alternative distribution strategies, if any, on content in domestic and foreign markets.
As the Company continues to evaluate the Media Networks business and its current restructuring plan in relation to the current micro and macroeconomic environment and the announced plan to separate the Company's Starz business (i.e., Media Networks segment) and Studio Business (i.e., Motion Picture and Television Production segments), including further strategic review of content performance and its strategy on a territory-by-territory basis, the
Company may decide to expand its restructuring plan and exit additional territories or remove certain content off its platform in the future. Accordingly, the Company may incur additional content impairment and other restructuring charges beyond the estimates above.
On May 1, 2023, the collective bargaining agreement between the Writers Guild of America (“WGA”) and the Alliance of Motion Picture and Television Producers (“AMPTP”) expired, and
on May 2, 2023, the WGA commenced an industry-wide strike. Subsequently, on September 25, 2023, WGA members voted in favor ratifying a new three-year contract, commencing September 25, 2023 and ending May 1, 2026.
On July 12, 2023, the collective bargaining agreement between the Screen Actors Guild - American Federation of Television and Radio Artists (“SAG-AFTRA”) and the AMPTP expired, and on July 14, 2023, the SAG-AFTRA commenced an industry-wide strike. Subsequently, on November 9,
2023, the national board of SAG-AFTRA approved an agreement reached on November 8, 2023 between SAG-AFTRA and the AMPTP to end the strike, and SAG-AFTRA union members ratified it shortly thereafter.
We paused certain theatrical and television productions as a result of the strikes. Consequently, the timing of certain production payments were delayed until productions resume and may increase the variability in payments for investment in film and television programs and licensed program rights in future periods. In addition, the pausing and restarting of productions resulted in incremental costs, delayed the completion and release of some of our content (investment in films, television programs and licensed programs) and may have been the cause of impairments of our investment in film, television programs or licensed program rights
due to the cancellation of certain television shows. The extent of these costs and delays depends on the ability to reschedule production in a timely and efficient manner.
Revenues
Our revenues are derived from the Motion Picture, Television Production and Media Networks segments, as described below. We refer to our Motion Picture and Television Production segments collectively as our Studio Business. Our revenues are derived from the U.S., Canada, the United Kingdom and other foreign countries. None of the non-U.S. countries individually comprised greater than 10% of total revenues for the three and nine months ended December 31, 2023 and 2022.
Studio Business
Motion Picture: Our
Motion Picturesegment includes revenues derived from the following:
•Theatrical. Theatrical revenues are derived from the domestic theatrical release of motion pictures licensed to theatrical exhibitors on a picture-by-picture basis (distributed by us directly in the U.S. and through a sub-distributor in Canada). The revenues from Canada are reported net of distribution fees and release expenses of the Canadian sub-distributor. The financial terms that we negotiate with our theatrical exhibitors in the U.S. generally provide that we receive a percentage of the box office results.
•Home Entertainment. Home entertainment revenues are derived from the sale or rental of our film productions and acquired or licensed films and certain television
programs (including theatrical and direct-to-video releases) on packaged media and through digital media platforms (including pay-per-view and video-on-demand platforms, electronic sell through, and digital rental). In addition, we have revenue sharing arrangements with certain digital media platforms which generally provide that, in exchange for a nominal or no upfront sales price, we share in the rental or sales revenues generated by the platform on a title-by-title basis.
•Television. Television revenues are primarily derived from the licensing of our theatrical productions and acquired films to the linear pay, basic cable and free television markets. In addition, when a license in our traditional pay television window is made to a subscription video-on-demand ("SVOD") or other digital platform, the revenues are included here.
•International.
International revenues are derived from (1) licensing of our productions, acquired films, our catalog product and libraries of acquired titles to international distributors, on a territory-by-territory basis; and (2) the direct distribution of our productions, acquired films, and our catalog product and libraries of acquired titles in the United Kingdom.
•Other. Other revenues are derived from, among others, the licensing of our film and television and related content (games, music, location-based entertainment royalties, etc.) to other ancillary markets.
Television Production: Our Television Production segment includes revenues derived from the following.
•Television. Television
revenues are derived from the licensing to domestic markets (linear pay, basic cable, free television and syndication) of scripted and unscripted series, television movies, mini-series and non-fiction
programming. Television revenues include fixed fee arrangements as well as arrangements in which we earn advertising revenue from the exploitation of certain content on television networks. Television revenues also include revenue from licenses to SVOD platforms in which the initial license of a television series is to an SVOD platform.
•International. International
revenues are derived from the licensing and syndication to international markets of scripted and unscripted series, television movies, mini-series and non-fiction programming.
•Home Entertainment. Home entertainment revenues are derived from the sale or rental of television production movies or series on packaged media and through digital media platforms.
•Other. Other revenues are derived from, among others, the licensing of our television programs to other ancillary markets, the sales and licensing of music from the television broadcasts of our productions, and from commissions and executive producer fees earned related to talent management.
Media Networks
Our Media
Networks segment includes revenues derived from the following:
•Starz Networks. Starz Networks’ revenues are derived from the domestic distribution of our STARZ branded premium subscription video services through over-the-top ("OTT") streaming platforms and distributors, on a direct-to-consumer basis through the Starz App, and through U.S. multichannel video programming distributors (“MVPDs”) including cable operators, satellite television providers and telecommunications companies (collectively, “Distributors”), (in the aggregate, the "Starz Domestic Platform").
•LIONSGATE+.LIONSGATE+ revenues are primarily derived from OTT distribution of the STARZ branded premium subscription video services outside of the
U.S.
The Starz Domestic Platform together with the LIONSGATE+ platforms are referred to as the "Starz Platforms".
Expenses
Our primary operating expenses include direct operating expenses, distribution and marketing expenses and general and administration expenses.
Direct operating expenses include amortization of film and television production or acquisition costs, amortization of programming production or acquisition costs and programming related salaries, participation and residual expenses, provision for doubtful accounts, and foreign exchange gains and losses.
Participation costs represent contingent consideration payable based on the performance of the film or television program to parties associated with the film or television program, including producers, writers, directors
or actors. Residuals represent amounts payable to various unions or “guilds” such as the Screen Actors Guild - American Federation of Television and Radio Artists, Directors Guild of America, and Writers Guild of America, based on the performance of the film or television program in certain ancillary markets or based on the individual’s (i.e., actor, director, writer) salary level in the television market.
Distribution and marketing expenses primarily include the costs of theatrical prints and advertising (“P&A”) and premium video-on-demand ("Premium VOD") expense and of DVD/Blu-ray duplication and marketing. Theatrical P&A includes the costs of the theatrical prints delivered to theatrical exhibitors and the advertising and marketing cost associated with the theatrical release of the picture. Premium VOD expense represents the advertising and marketing cost associated with the Premium VOD release
of the picture. DVD/Blu-ray duplication represents the cost of the DVD/Blu-ray product and the manufacturing costs associated with creating the physical products. DVD/Blu-ray marketing costs represent the cost of advertising the product at or near the time of its release or special promotional advertising. Marketing costs for Media Networks includes advertising, consumer marketing, distributor marketing support and other marketing costs. In addition, distribution and marketing costs includes our Media Networks segment operating costs for the direct-to-consumer service, transponder expenses and maintenance and repairs.
General and administration expenses include salaries and other overhead. Corporate general and administrative expenses include certain corporate executive expense (such as salaries and wages for the office of the Chief Executive Officer, Chief Financial Officer, General Counsel and other corporate officers),
investor relations costs, costs of maintaining corporate facilities, and other unallocated common administrative support functions, including corporate accounting, finance and financial reporting, internal and external audit and tax costs, corporate and other legal support functions, and certain information technology and human resources expense.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management
to make estimates, judgments and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The application of the following accounting policies, which are important to our financial position and results of operations, requires significant judgments and estimates on the part of management. As described more fully below, these estimates bear the risk of change due to the inherent uncertainty of the estimate. In some cases, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ materially from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates on past experience and other assumptions that we believe are reasonable under the circumstances, and we evaluate these estimates on an ongoing basis. We believe
that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management's most difficult, subjective and complex judgments. For a summary of all of our accounting policies, including the accounting policies discussed below, see Note 1 to our audited consolidated financial statements in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "SEC") on May 25, 2023, as amended on July 20, 2023 (the "Form 10-K").
Accounting for Films and Television Programs and Licensed Program Rights
Capitalized costs for films or television programs are amortized and tested for impairment based on whether the content
is predominantly monetized individually or as a group.
Film and Television Programs Monetized Individually. For films and television programs monetized individually, film cost amortization, participations and residuals expense are based on management's estimates. Costs of acquiring and producing films and television programs and of acquired libraries that are monetized individually are amortized and estimated liabilities for participations and residuals costs are accrued using the individual-film-forecast method, based on the ratio of the current period's revenues to management’s estimated remaining total gross revenues to be earned ("ultimate revenue"). Management's judgment is required in estimating ultimate revenue and the costs to be incurred throughout the life of each film or television program.
Management estimates ultimate revenues based on
historical experience with similar titles or the title genre, the general public appeal of the cast, audience test results when available, actual performance (when available) at the box office or in markets currently being exploited, and other factors such as the quality and acceptance of motion pictures or programs that our competitors release into the marketplace at or near the same time, critical reviews, general economic conditions and other tangible and intangible factors, many of which we do not control and which may change.
For motion pictures, ultimate revenue includes estimates over a period not to exceed ten years following the date of initial release of the motion picture. The most sensitive factor affecting our estimate of ultimate revenues for a film intended for theatrical release is the film's theatrical performance, as subsequent revenues from the licensing and sale in other markets have historically been
highly correlated to its theatrical performance. After a film's release, our estimates of revenue from succeeding markets are revised based on historical relationships and an analysis of current market trends.
For an episodic television series, the period over which ultimate revenues are estimated cannot exceed ten years following the date of delivery of the first episode, or, if still in production, five years from the date of delivery of the most recent episode, if later. The most sensitive factors affecting our estimate of ultimate revenues for a television series is whether the series will be ordered for a subsequent season and estimates of revenue in secondary markets other than the initial license fee, which may depend on a number of factors, including, among others, the ratings or viewership the program achieves on the customers' platforms. The initial estimate of ultimate revenue may include estimates of revenues outside
of the initial license window (i.e., international, home entertainment and other distribution platforms) and are based on historical experience for similar programs (genre, duration, etc.) and the estimated number of seasons of the series. Ultimates of revenue beyond the initial license fee are generally higher for programs that have been or are expected to be ordered for multiple seasons. We regularly monitor the performance of each season, and evaluate whether impairment indicators are present (i.e., low ratings, cancellations or the season is not reordered), and based upon our review, we revise our estimates as needed and perform an impairment assessment if impairment indicators are present (see below).
For titles included in acquired libraries, ultimate revenue includes estimates over a period not to exceed twenty years following the date of acquisition.
Due to the inherent
uncertainties involved in making such estimates of ultimate revenues and expenses, these estimates have differed in the past from actual results and are likely to differ to some extent in the future from actual results. In addition, in the normal course of our business, some films and titles are more successful or less successful than anticipated. Management
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regularly reviews and revises when necessary, its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or a write-down of all or a portion of the unamortized costs of the film or television program to its estimated fair value (see below).
An increase in the estimate of ultimate
revenue will generally result in a lower amortization rate and, therefore, less film and television program amortization expense, while a decrease in the estimate of ultimate revenue will generally result in a higher amortization rate and, therefore, higher film and television program amortization expense, and also periodically results in an impairment requiring a write-down of the film cost to the title’s fair value. These write-downs are included in amortization expense within direct operating expenses in our consolidated statements of operations. See further discussion below under Impairment Assessment.
Film and Television Programs Monetized as a Group. Licensed programming rights may include rights to more than one exploitation window under the Company's output and
library agreements. For films with multiple windows, the license fee is allocated between the windows based upon the proportionate estimated fair value of each window which generally results in the majority of the cost allocated to the first window on newer releases.
Certain license agreements and productions may include additional ancillary rights in addition to the rights for exploitation on the Starz Platforms. A portion of the cost of these licenses and the cost of produced content, is allocated between the programming rights for exploitation on the Starz Platforms and investment in film and television programs for exploitation outside of the Starz Platforms in ancillary markets (e.g., home video, digital platforms, television, etc.) based on the relative fair value of those markets. The estimates of fair value for the allocation between windows of exploitation on the Starz Platform and ancillary markets is based on historical
experience of the values of similar titles licensed in subsequent windows and estimates of future revenues in ancillary markets. Management believes these are reasonably reliable estimates of these values, however, these estimates involve uncertainty and management judgment.
The cost of licensed program rights for films and television programs (including original series) exhibited by the Media Networks segment are generally amortized on a title-by-title or episode-by-episode basis using an accelerated or straight-line method based on the expected and historical viewership patterns, or the current and anticipated number of exhibitions over the license period or estimated life for owned or produced programs. The number of exhibitions is estimated based on the number of exhibitions allowed in the agreement (if specified) and the expected usage of the content. Participations and residuals are expensed in line with the amortization
of production costs.
Changes in management’s estimate of the anticipated exhibitions and viewership patterns of films and original series on our platforms could result in the earlier recognition of our programming costs than anticipated.
Impairment Assessment. A film group or individual film or television program is evaluated for impairment when events or changes in circumstances indicate that the fair value of an individual film or film group is less than its unamortized cost. If the result of the impairment test indicates that the carrying value exceeds the estimated fair value, an impairment charge will then be recorded for the amount of the difference.
Estimate of Fair Value. For content that is predominantly monetized individually (primarily investment in film and television programs
related to the Motion Picture and Television Production segments), the fair value is determined based on a discounted cash flow analysis of the cash flows directly attributable to the title. For motion pictures intended for theatrical release, the discounted cash flow analysis used in the impairment evaluation prior to theatrical release is subjective and the key inputs include estimates of future anticipated revenues, estimates of box office performance, which may differ from future actual results. These estimates are based in part on the historical performance of similar films, test audience results when available, information regarding competing film releases, and critic reviews. For television programs, the discounted cash flow analysis used in the impairment evaluation includes key inputs such as estimates of future anticipated revenue, as discussed above. See further discussion of Valuation Assumptions below.
For
content that is predominantly monetized as a group (primarily licensed program rights in the Media Networks segment and internally produced programming, as discussed above), the fair value is determined based on the present value of the discounted cash flows of the group using the lowest level for which identifiable cash flows are independent of other produced and licensed content. The Company's film groups are generally aligned with the Company's networks and digital content offerings domestically (i.e., Starz Networks) and internationally by territory or groups of territories where content assets are shared across the various territories. Content removed from the service and abandoned is written down to its fair value, if any, determined using a discounted cash flow approach.
As
a result of the Media Networks restructuring initiatives discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview", we recorded content impairment charges related to the Media Networks segment in the three and nine months ended December 31, 2023 of $77.8 million and $317.4 million, respectively, which are included in restructuring and other in the unaudited condensed consolidated statement of operations (three and nine months ended December 31, 2022 - $80.8 million and $293.8 million, respectively) (see Note 3 and Note 14 to our unaudited
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condensed consolidated financial statements). We have incurred
impairment charges from the inception of the plan through December 31 2023 amounting to $696.7 million.
Valuation Assumptions. The discounted cash flow analysis includes cash flows estimates of ultimate revenue and costs as well as a discount rate (a Level 3 fair value measurement, see Note 8 to our unaudited condensed consolidated financial statements). The discount rate utilized in the discounted cash flow analysis is based on the weighted average cost of capital of the Company plus a risk premium representing the risk associated with producing a particular film or television program or film group. Estimates of future revenue involve measurement uncertainty and it is therefore possible that reductions in the carrying value of investment in films and television programs may be required as a consequence of changes in
management’s future revenue estimates.
Revenue Recognition.Our Motion Picture and Television Production segments generate revenue principally from the licensing of content in domestic theatrical exhibition, home entertainment (e.g., digital media and packaged media), television, and international market places. Our Media Networks segment generates revenue primarily from the distribution of our STARZ premium subscription video services.
Our content licensing arrangements include fixed fee and minimum guarantee arrangements, and sales or usage based royalties. Our fixed fee or minimum guarantee licensing arrangements in the television, digital media and international markets may, in some cases, include multiple titles, multiple license periods (windows) with a substantive period in between the windows, rights to exploitation in different
media, or rights to exploitation in multiple territories, which may be considered distinct performance obligations. When these performance obligations are considered distinct, the fixed fee or minimum guarantee in the arrangement is allocated to the title, window, media right or territory as applicable, based on estimates of relative standalone selling prices. The amounts related to each performance obligation (i.e., title, window, media or territory) are recognized when the content has been delivered, and the window for the exploitation right in that territory has begun, which is the point in time at which the customer is able to begin to use and benefit from the content.
Sales or usage based royalties represent amounts due to us based on the “sale” or “usage” of our content by the customer, and revenues are recognized at the later of when the subsequent sale or usage occurs, or the performance obligation
to which some or all the sales or usage-based royalty has been allocated has been satisfied (or partially satisfied). Generally, when we license completed content (with standalone functionality, such as a movie, or television show), our performance obligation will be satisfied prior to the sale or usage. When we license intellectual property that does not have stand-alone functionality (e.g., brands, themes, logos, etc.), our performance obligation is generally satisfied in the same period as the sale or usage. The actual amounts due to us under these arrangements are generally not reported to us until after the close of the reporting period. We record revenue under these arrangements for the amounts due and not yet reported to us based on estimates of the sales or usage of these customers and pursuant to the terms of the contracts. Such estimates are based on information from
our customers, historical experience with similar titles in that market or territory, the performance of the title in other markets and/or available data in the industry. While we believe these estimates are reasonable estimates of the amounts due under these arrangements, such estimated amounts could differ from the actual amounts to be subsequently reported by the customer, which could be higher or lower than our estimates, and could result in an adjustment to revenues in future periods.
Revenue from the theatrical release of feature films are treated as sales or usage-based royalties and recognized starting at the exhibition date and based on our participation in box office receipts of the theatrical exhibitor.
Digital media revenue sharing arrangements are recognized as sales or usage based royalties.
Revenue
from the sale of physical discs (DVDs, Blu-ray or 4K Ultra HD), referred to as "Packaged Media", in the retail market, net of an allowance for estimated returns and other allowances, is recognized on the later of receipt by the customer or “street date” (when it is available for sale by the customer).
Revenue from commissions are recognized as such services are provided.
Media Networks revenues may be based on a variable fee (i.e., a fee based on number of subscribers who receive our networks or other subscriber based factors) or to a lesser extent, may be based on a monthly fixed fee or minimum guarantee, subject to nominal annual escalations. Media Networks revenue is also generated through the distribution of our SVOD service directly to consumer through the Starz App. The variable distribution fee arrangements represent sales or usage based royalties, which are
recognized over the period of such sales or usage by our distributor, which is the same period that the content is provided to the distributor. Estimates of revenue generated but not yet reported to us by our distribution partners are made based on the estimated number of subscribers using historical trends and recent reporting. Media Networks fixed fee or minimum guarantee programming revenue is recognized over the contract term based on the continuous delivery of the content to the distributor. Subscribers through the Starz App are billed in advance of the start of their monthly or annual membership and revenues are recognized ratably over each applicable membership period. Payments to distributors for marketing support
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costs
for which Starz receives a discrete benefit are recorded as distribution and marketing costs, and payments to distributors for which Starz receives no discrete benefit are recorded as a reduction of revenue.
Goodwill and Indefinite-Lived Intangibles.At December 31, 2023, the carrying value of goodwill and indefinite-lived intangible assets was $801.4 million and nil, respectively, net of impairment charges recorded and reflecting the reassessment of the estimated useful life of our indefinite-lived intangible assets in the second quarter ended September 30, 2023, as further discussed below. Through September 30, 2023, our indefinite-lived intangible assets consisted of trade names representing the estimated fair value of the Starz
brand name determined in connection with the acquisition of Starz as of December 8, 2016 (see further discussion under Indefinite-Lived Intangibles Other Than Goodwill Impairment Assessment below). Goodwill is allocated to our reporting units, which are our operating segments or one level below our operating segments (component level). Reporting units are determined by the discrete financial information available for the component and whether that information is regularly reviewed by segment management. Components are aggregated into a single reporting unit if they share similar economic characteristics. Our reporting units for purposes of goodwill impairment testing, along with their respective goodwill balances at December 31, 2023, were Motion Picture (goodwill of $395 million), Media Networks (no remaining goodwill balance
subsequent to the impairment discussed below), and our Television (goodwill of $314 million) and Talent Management (goodwill of $93 million) businesses, both of which are part of our Television Production segment.
Goodwill and indefinite-lived intangible assets are not amortized but are reviewed for impairment each fiscal year or between the annual tests if an event occurs or circumstances change that indicates it is more-likely-than-not that the fair value of a reporting unit or indefinite-lived intangible asset is less than its carrying value. We perform our annual impairment test as of January 1 in each fiscal year. A goodwill or indefinite-lived intangible asset impairment loss would be recognized for the amount that the carrying amount of a reporting unit, including goodwill or an indefinite-lived intangible asset, exceeds its fair value. An entity may perform a qualitative assessment of the likelihood of the existence
of a goodwill or indefinite-lived intangible asset impairment. The qualitative assessment is an evaluation, based on all identified events and circumstances which impact the fair value of the reporting unit or indefinite-lived intangible asset, of whether or not it is more-likely-than-not that the fair value is less than the carrying value of the reporting unit or indefinite-lived intangible asset. If we believe that as a result of our qualitative assessment it is more likely than not that the fair value of a reporting unit or indefinite-lived intangible asset is greater than its carrying amount, a quantitative impairment test is not required but may be performed at the option of the Company. A quantitative assessment requires determining the fair value of our reporting units or indefinite-lived intangible assets. The determination of fair value requires considerable judgment and requires
assumptions and estimates of many factors, including revenue and market growth, operating margins and cash flows, market multiples and discount rates.
In performing a quantitative assessment of goodwill, we determine the fair value of our reporting units by using a combination of discounted cash flow ("DCF") analyses and market-based valuation methodologies. The models rely on significant judgments and assumptions surrounding general market and economic conditions, short-term and long-term growth rates, discount rates, income tax rates, and detailed management forecasts of future cash flow and operating margin projections, and other assumptions, all of which are based on our internal forecasts of future performance as well as historical trends. The market-based valuation method utilizes EBITDA multiples from guideline public companies operating in similar industries and a control premium. The results of these valuation
methodologies are weighted as to their relative importance and a single fair value is determined. The fair value of our reporting units is reconciled to the market value of our equity, determined based on the average prices of our common shares just prior to the period end. Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual or interim goodwill impairment tests will prove to be an accurate prediction of the future.
Goodwill Impairment Assessments:
Fiscal 2024. During the second quarter ended September 30, 2023, due to the continuing difficult macro and microeconomic conditions, industry trends, and their impact on the performance and
projected cash flows of the Media Networks segment, including its growth in subscribers and revenue worldwide, and the expanded restructuring activities discussed in Note 14 to our unaudited condensed consolidated financial statements, along with recent market valuation multiples, we updated our quantitative impairment assessment for the Media Networks reporting unit goodwill based on the most recent data and expected growth trends. The DCF analysis components of the fair value estimates were determined primarily by discounting estimated future cash flows, which included a weighted average perpetual nominal growth rate of 1.5%, at a weighted average cost of capital (discount rate) of 10.5%, which considered the risk of achieving the projected cash flows, including the risk applicable to the reporting unit, industry and market as a whole. The Media Networks reporting unit goodwill was established in connection with the acquisition of Starz as of December
8, 2016.
Based on our quantitative impairment assessment, we determined that the fair value of our Media Networks reporting unit which was previously disclosed as a reporting unit "at risk" of impairment, was less than its carrying value (after the
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impairment write-down of its indefinite-lived intangible assets discussed below). The analysis resulted in a goodwill impairment charge of $493.9 million in the second quarter ended September 30, 2023, representing all of our remaining Media Networks reporting unit goodwill, which is recorded in the "goodwill and intangible asset impairment" line item in the unaudited condensed consolidated
statement of operations in the nine months ended December 31, 2023 (see Note 5 to the unaudited condensed consolidated financial statements).
During each quarter in the nine months ended December 31, 2023, we performed qualitative goodwill impairment assessments for all our other reporting units (Motion Picture, and our Television and Talent Management businesses, both of which are part of our Television Production segment). Our qualitative assessment considered the market price of the Company’s common shares, the recent performance of these reporting units, and updated forecasts of performance and cash flows, as well as the current micro and macroeconomic environments in relation
to the current and expected performance of these reporting units, and industry considerations, and determined that since the quantitative assessment performed in the quarter ended September 30, 2022 and our qualitative assessment performed for fiscal 2023, there were no events or circumstances that rise to a level that would more-likely-than-not reduce the fair value of those reporting units below their carrying values; therefore, a quantitative goodwill impairment analysis was not required for these reporting units.
Fiscal 2023. In fiscal 2023, during the second quarter ended September 30, 2022, we updated our quantitative impairment assessment for all of our reporting units based on the most recent data and expected growth trends. The DCF analysis components of the fair value estimates were determined
primarily by discounting estimated future cash flows, which included weighted average perpetual nominal growth rates ranging from 1.5% to 3.5%, at a weighted average cost of capital (discount rate) ranging from 10.5% to 13.0%, which considered the risk of achieving the projected cash flows, including the risk applicable to the reporting unit, industry and market as a whole. Based on our quantitative impairment assessment, the Company determined that the fair value of our reporting units exceeded the carrying values for all of our reporting units, except the Media Networks reporting unit which was previously disclosed as a reporting unit "at risk" of impairment. The analysis resulted in a goodwill impairment charge of $1.475 billion in the second quarter of fiscal 2023, related to our Media Networks reporting unit goodwill. Since the impairment charge reduced the carrying value
of the Media Networks reporting unit to its fair value, at September 30, 2022 the fair value and carrying value of the Media Networks reporting unit were equal and thus it continued to be considered "at risk" of impairment.
Management will continue to monitor all of its reporting units for further changes in the business environment that could impact the recoverability in future periods. The recoverability of goodwill is dependent upon the continued growth of revenue and cash flows from our business activities. Examples of events or circumstances that could result in changes to the underlying key assumptions and judgments used in our goodwill impairment tests, and ultimately impact the estimated fair value of our reporting units may include the global economy; consumer consumption levels of our content; adverse macroeconomic conditions related to higher inflation and
interest rates and currency rate fluctuations, and the impact on the global economy from wars, terrorism and multiple international conflicts, and future bank failures; volatility in the equity and debt markets which could result in higher weighted-average cost of capital; capital market transactions; the duration and potential impact of strikes of unions which we rely on, on our ability to produce, acquire and distribute our content; the commercial success of our television programming and motion pictures; our continual contractual relationships with our customers; and changes in consumer behavior. If our assumptions are not realized, it is possible that additional impairment charges may need to be recorded in the future.
Indefinite-Lived Intangibles Other Than Goodwill Impairment Assessment:
Through September 30, 2023, our indefinite-lived
intangible assets consisted of trade names representing the estimated fair value of the Starz brand name determined in connection with the acquisition of Starz as of December 8, 2016, amounting to $250.0 million related to the Media Networks reporting unit before the impairment charge recorded in the second quarter ended September 30, 2023 discussed below.
During the second quarter ended September 30, 2023, due to the events and their impact discussed above related to our Media Networks reporting unit, we performed a quantitative impairment assessment of our indefinite-lived trade names. The fair value of the Company's indefinite-lived trade names was estimated based on the present value of
the hypothetical cost savings that could be realized by the owner of the tradenames as a result of not having to pay a stream of royalty payments to another party. These cost savings were calculated based on a DCF analysis of the hypothetical royalty payment that a licensee would be required to pay in exchange for use of the tradenames, reduced by the tax effect realized by the licensee on the royalty payments. Based on the quantitative impairment assessment of our trade names, we recorded an impairment charge of $170.0 million in the second quarter ended September 30, 2023 related to the Company's Starz business, which was recorded in the "goodwill and intangible asset impairment" line item in the unaudited condensed consolidated statement of operations in the nine months ended December
31, 2023.
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After the Company performed its quantitative impairment assessment, during the second quarter ended September 30, 2023, the Company then reassessed the estimated useful life of the trade names with a remaining carrying value of $80.0 million, net of the impairment charge discussed above. The Company concluded that based upon the most recent factors, including current macro and microeconomic conditions, market competition and historical Company and industry
trends, the trade names now have a finite estimated remaining useful life of 10 years. Accordingly, beginning in the third quarter ended December 31, 2023, the trade names are being accounted for as finite-lived intangible assets and amortized over their estimated remaining useful life. This resulted in an increase to amortization expense of $2.0 million for the three and nine months ended December 31, 2023 with a corresponding reduction of income before income taxes, net loss, and net loss attributable to Lions Gate Entertainment Corp. shareholders. This resulted in a decrease to basic and diluted net loss per share for the three months ended December 31, 2023 by $0.01 per share, and a decrease to basic and diluted net loss per share for the nine months ended December 31, 2023
by $0.01 per share. There was no tax benefit from the change due to changes in the Company’s valuation allowance on deferred taxes.
Finite-Lived Intangible Assets.At December 31, 2023, the carrying value of our finite-lived intangible assets was approximately $950.5 million. Our finite-lived intangible assets primarily relate to customer relationships associated with U.S. MVPDs, including cable operators, satellite television providers and telecommunications companies ("Traditional Affiliate"), which amounted to $943.1 million. The amount of our customer relationship asset related to these Traditional Affiliate relationships reflects the estimated fair value of these customer relationships determined in connection with the acquisition
of Starz on December 8, 2016, net of amortization recorded since the date of the Starz acquisition. Beginning in the third quarter ended December 31, 2023, our finite-lived intangible assets also include the trade names previously accounted for as indefinite-lived intangible assets as discussed above.
Identifiable intangible assets with finite lives are amortized to depreciation and amortization expense over their estimated useful lives, ranging from 5 to 16 years. The Starz Traditional Affiliate customer relationship intangible asset is amortized in the proportion that current period revenues bear to management’s estimate of future revenue over the remaining estimated useful life of the asset, which results in greater amortization in the earlier years of the estimated useful life of the asset than the latter years.
Amortizable
intangible assets are tested for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount of the asset may not be recoverable. If a triggering event has occurred, an impairment analysis is required. The impairment test first requires a comparison of undiscounted future cash flows expected to be generated over the useful life of an asset to the carrying value of the asset. The impairment test is performed at the lowest level of cash flows associated with the asset. If the carrying value of the asset exceeds the undiscounted future cash flows, the asset would not be deemed to be recoverable. Impairment would then be measured as the excess of the asset’s carrying value over its fair value.
The Company monitors its finite-lived intangible assets and changes in the underlying circumstances each
reporting period for indicators of possible impairments or a change in the useful life or method of amortization of our finite-lived intangible assets. During the second quarter ended September 30, 2023, for the Company's finite-lived customer relationship intangible assets related to our Media Networks reporting unit, which represented $956.8 million as of September 30, 2023, the Company performed a comparison of undiscounted future cash flows expected to be generated over the remaining useful life of an asset to the carrying value of the asset. Based on our impairment analysis, the estimated undiscounted cash flows exceeded the carrying amount of the assets and therefore no impairment charge was required.
During
the third quarter ended December 31, 2023, there were no events or circumstances that would indicate that the carrying amount of our finite-lived intangible assets may not be recoverable.
Determining whether an intangible asset is recoverable or impaired requires various estimates and assumptions, including whether events or circumstances indicate that the carrying amount of the asset may not be recoverable, determining estimates of future cash flows for the assets involved and, when applicable, the assumptions applied in determining fair value, including discount rates, growth rates, market risk premiums and other assumptions about the economic environment. Should the revenues from our Traditional Affiliate relationships decline more than the assumed attrition rates used in our current estimates, either as a result of decreases in subscriber rates or changes of the terms of
our renewals of our Traditional Affiliate contracts, we may have indicators of impairment which could result in an impairment of our customer relationships intangible assets, or we may need to further shorten the useful life or adopt a more accelerated method of amortization, both of which would increase the amount of amortization expense we record.
Income Taxes. We are subject to federal and state income taxes in the U.S., and in several foreign jurisdictions. We record deferred tax assets related to net operating loss carryforwards and certain temporary differences, net of applicable reserves in these jurisdictions. We recognize a future tax benefit to the extent that realization of such benefit is more likely than not on a jurisdiction-by-jurisdiction basis; otherwise, a valuation allowance is applied. In
order to realize the benefit of our deferred tax
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assets, we will need to generate sufficient taxable income in the future in each of the jurisdictions which have these deferred tax assets. However, the assessment as to whether there will be sufficient taxable income in a jurisdiction to realize our net deferred tax assets in that jurisdiction is an estimate which could change in the future depending primarily upon the actual performance of our Company. We will be required to continually evaluate the more likely than not assessment that our net deferred tax assets will be realized, and if operating results deteriorate in a particular jurisdiction, we may need to record a valuation allowance
for all or a portion of our deferred tax assets through a charge to our income tax benefit (provision). As of March 31, 2023, we had a valuation allowance of $455.7 million against certain U.S. and foreign deferred tax assets that may not be realized on a more likely than not basis.
Our quarterly income tax provision and our corresponding annual effective tax rate are based on expected income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which we operate. For interim financial reporting, we estimate the annual effective tax rate based on projected taxable income for the full year and record a quarterly tax provision in accordance with the expected annual effective tax rate. As the year progresses, we refine the estimates of the year’s taxable income as new information becomes available, including year-to-date financial results.
This continual estimation process often results in a change to our expected annual effective tax rate for the year. When this occurs, we adjust our income tax provision during the quarter in which the change in estimate occurs so that the year-to-date income tax provision reflects the expected annual effective tax rate. Significant judgment is required in determining our expected annual effective tax rate and in evaluating our tax positions.
Our effective tax rates differ from the federal statutory rate and are affected by many factors, including the overall level of pre-tax income (loss), the mix of our pre-tax income (loss) generated across the various jurisdictions in which we operate, any changes in tax laws and regulations in those jurisdictions, changes in uncertain tax positions, changes in valuation allowances against our deferred tax assets, tax planning strategies available to us and other discrete items.
The following table sets forth our consolidated results of operations for the three months ended December 31, 2023 and 2022:
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Three
Months Ended
December 31,
Change
2023
2022
Amount
Percent
(Amounts in millions)
Revenues
Studio
Business
Motion Picture
$
443.2
$
288.8
$
154.4
53.5
%
Television Production
248.4
605.4
(357.0)
(59.0)
%
Total
Studio Business
691.6
894.2
(202.6)
(22.7)
%
Media Networks
417.2
380.3
36.9
9.7
%
Intersegment
eliminations
(133.7)
(274.4)
140.7
(51.3)
%
Total revenues
975.1
1,000.1
(25.0)
(2.5)
%
Expenses:
Direct
operating
510.8
584.7
(73.9)
(12.6)
%
Distribution and marketing
220.0
171.0
49.0
28.7
%
General
and administration
121.0
115.0
6.0
5.2
%
Depreciation and amortization
49.9
46.3
3.6
7.8
%
Restructuring
and other
116.9
75.3
41.6
55.2
%
Total expenses
1,018.6
992.3
26.3
2.7
%
Operating
income (loss)
(43.5)
7.8
(51.3)
nm
Interest expense
(67.1)
(59.6)
(7.5)
12.6
%
Interest
and other income
1.8
1.7
0.1
5.9
%
Other expense
(2.5)
(10.7)
8.2
(76.6)
%
Gain on extinguishment
of debt
—
38.2
(38.2)
(100.0)
%
Gain on investments, net
4.4
43.4
(39.0)
(89.9)
%
Equity interests
income (loss)
4.2
—
4.2
n/a
Income (loss) before income taxes
(102.7)
20.8
(123.5)
nm
Income tax provision
(4.7)
(5.6)
0.9
(16.1)
%
Net
income (loss)
(107.4)
15.2
(122.6)
nm
Less: Net loss attributable to noncontrolling interest
0.8
1.4
(0.6)
(42.9)
%
Net income (loss)
attributable to Lions Gate Entertainment Corp. shareholders
$
(106.6)
$
16.6
$
(123.2)
nm
_______________________
nm - Percentage not meaningful.
59
Revenues.
Consolidated revenues decreased $25.0 million in the three months ended December 31, 2023 reflecting a decrease of $202.6 million from our Studio Business, offset by an increase of $36.9 million from our Media Networks business, and lower intersegment eliminations of $140.7 million. Intersegment eliminations relate to the licensing of product from our Studio Business (primarily our Television Production segment as discussed below) to the Media Networks segment.
Motion Picture revenue increased $154.4 million in the current quarter due primarily to higher theatrical and international revenue associated with the release of The Hunger Games: The Ballad of Songbirds & Snakes, and higher television and home entertainment revenue. Motion Picture revenue included $36.6 million of revenue from licensing Motion
Picture segment product to the Media Networks segment, representing an increase of $20.4 million from the three months ended December 31, 2022.
Television Production revenue decreased $357.0 million due to decreased domestic and international television revenue from lower intersegment revenues from the licensing of Starz original series, and lower third-party domestic television revenue, digital media home entertainment and other revenue. Television Production revenue included $97.1 million of revenue from licensing Television Production segment product to our Media Networks segment, representing a decrease of $161.1 million from the three months ended December 31, 2022.
The decrease in intersegment eliminations of $140.7 million is primarily associated with lower Television Production
revenues of $161.1 million, for licenses of original series to Starz Networks and LIONSGATE+, partially offset by higher Motion Picture revenues of $20.4 million reflecting the licensing of certain recent theatrical releases to Starz, both in the Media Networks segment as discussed above.
Media Networks revenue increased $36.9 million reflecting increased revenue at LIONSGATE+ of $35.9 million, and at Starz Networks of $1.0 million.
See further discussion in the Segment Results of Operations section below.
Direct Operating Expenses. Direct operating expenses by segment were as follows for the three months ended December 31, 2023 and 2022:
Direct operating expenses decreased in the three months ended December 31, 2023 due to lower direct operating expenses for our Studio Business and Media Networks segment, partially offset by lower intersegment eliminations. The decrease at the Studio Business reflects lower direct operating expenses of the Television Production segment associated with lower Television Production revenues, partially offset by higher direct operating expenses of the Motion Picture segment due to higher Motion Picture revenues. The decrease in Media Networks direct operating expense was driven by a decrease at Starz Networks of $24.9 million due to lower programming cost amortization, partially offset by an increase at LIONSGATE+ of $18.5 million. The decrease in intersegment eliminations is due to lower Television Production revenue from licenses of original series
to Starz Networks and LIONSGATE+, partially offset by increased Motion Picture revenue from licenses of recent theatrical
60
releases to Starz Networks and LIONSGATE+, as discussed above. See further discussion in the Segment Results of Operations section below.
COVID-19 Related Charges (Benefit).We incurred certain incremental costs associated with the COVID-19 global pandemic. In the three months ended December 31, 2023, direct operating expense included a benefit of $0.1 million, representing insurance recoveries on costs incurred (three months ended December
31, 2022 - benefit of $1.8 million, net of insurance recoveries of $2.8 million). Direct operating expenses related to the COVID-19 global pandemic have been declining and are expected to continue to decline as the severity of the COVID-19 global pandemic continues to lessen. We are in the process of seeking additional insurance recovery for some of the costs incurred. The ultimate amount of insurance recovery cannot be estimated at this time.
Other. Other direct operating expense includes share-based compensation.
Distribution and Marketing Expenses. Distribution and marketing expenses by segment were as follows for the three months ended December 31, 2023 and 2022:
Three
Months Ended
December 31,
Change
2023
2022
Amount
Percent
(Amounts in millions)
Distribution and marketing expenses
Studio
Business:
Motion Picture
$
101.4
$
60.0
$
41.4
69.0
%
Television Production
7.8
7.6
0.2
2.6
%
Total
Studio Business
109.2
67.6
41.6
61.5
%
Media Networks
110.7
103.2
7.5
7.3
%
Other
0.2
0.2
—
—
%
Intersegment
eliminations
(0.1)
—
(0.1)
n/a
$
220.0
$
171.0
$
49.0
28.7
%
U.S.
theatrical P&A and Premium VOD expense included in Motion Picture distribution and marketing expense
$
54.1
$
27.7
$
26.4
95.3
%
_______________________
nm - Percentage not meaningful.
Distribution and marketing expenses increased in the three months ended December 31,
2023, due to higher Studio Business and Media Networks distribution and marketing expense. The increase at the Studio Business primarily reflects greater Motion Picture theatrical P&A and Premium VOD expense associated with the theatrical release of The Hunger Games: The Ballad of Songbirds & Snakes in the current quarter. The increase in Media Networks distribution and marketing expense was due to an increase at Starz Networks of $18.8 million due to increased advertising and marketing costs, partially offset by a decrease at LIONSGATE+ of $11.3 million due to a decrease in distribution and advertising expenses from the territories exited, or to be exited. See further discussion in the Segment Results of Operations section below.
General and Administrative Expenses. General and administrative expenses
by segment were as follows for the three months ended December 31, 2023 and 2022:
61
Three
Months Ended
December 31,
Change
2023
% of Revenues
2022
% of Revenues
Amount
Percent
(Amounts
in millions)
General and administrative expenses
Studio Business:
Motion Picture
$
27.1
$
20.5
$
6.6
32.2
%
Television
Production
13.5
10.8
2.7
25.0
%
Total Studio Business
40.6
31.3
9.3
29.7
%
Media
Networks
22.7
22.9
(0.2)
(0.9)
%
Corporate
31.1
21.3
9.8
46.0
%
Share-based
compensation expense
23.8
22.6
1.2
5.3
%
Purchase accounting and related adjustments
2.8
16.9
(14.1)
(83.4)
%
Total
general and administrative expenses
$
121.0
12.4%
$
115.0
11.5%
$
6.0
5.2
%
General and administrative expenses increased in the three months ended December 31, 2023, resulting from increased
corporate, Motion Picture, and Television Production general and administrative expenses and share-based compensation expense, partially offset by lower purchase accounting and related adjustments, and a slight decrease in Media Networks general and administrative expenses. See further discussion in the Segment Results of Operations section below.
Corporate general and administrative expenses increased $9.8 million, or 46.0%, primarily due to an increase in incentive based compensation.
The following table presents share-based compensation expense by financial statement line item:
Share-based compensation expense by expense category
General and administrative expense
$
23.8
$
22.6
Restructuring
and other(1)
6.8
1.5
Direct operating expense
0.9
0.5
Distribution and marketing expense
0.2
0.2
Total share-based compensation expense
$
31.7
$
24.8
_______________________
(1)Represents
share-based compensation expense included in restructuring and other expenses reflecting the impact of the acceleration of vesting schedules for equity awards pursuant to certain severance arrangements.
Purchase accounting and related adjustments include the non-cash charge for the accretion of the noncontrolling interest discount related to Pilgrim Media Group and 3 Arts Entertainment, the non-cash charge for the amortization of the recoupable portion of the purchase price and the expense associated with the noncontrolling equity interests in the distributable earnings related to 3 Arts Entertainment, all of which are accounted for as compensation and are included in general and administrative expense. The noncontrolling equity interest in the distributable earnings of 3 Arts Entertainment are reflected as an expense rather than noncontrolling interest in the consolidated statement
of operations due to the relationship to continued employment. Purchase accounting and related adjustments decreased $14.1 million, or 83.4%, primarily due to lower expense of $8.9 million associated with the noncontrolling equity interests in the distributable earnings related to 3 Arts Entertainment and lower noncontrolling interest discount amortization of $3.3 million.
Depreciation and Amortization Expense. Depreciation and amortization of $49.9 million in the three months ended December 31, 2023 increased $3.6 million from $46.3 million in the three months ended December 31, 2022 due to increased depreciation expense related to software in the current quarter.
62
Restructuring
and Other. Restructuring and other increased $41.6 million in the three months ended December 31, 2023 as compared to the three months ended December 31, 2022, and includes restructuring and severance costs, certain transaction and other costs, and certain unusual items, when applicable. Restructuring and other costs were as follows for the three months ended December 31, 2023 and 2022 (see Note 14 to our unaudited condensed consolidated financial statements):
Three
Months Ended
December 31,
Increase (Decrease)
2023
2022
Amount
Percent
(Amounts in millions)
Restructuring and other:
Content
and other impairments(1)
$
77.8
$
80.8
$
(3.0)
(3.7)
%
Severance(2)
Cash
23.9
2.4
21.5
nm
Accelerated
vesting on equity awards (see Note 12 to our unaudited condensed consolidated financial statements)
6.8
1.5
5.3
nm
Total severance costs
30.7
3.9
26.8
nm
Transaction
and other costs(3)
8.4
(9.4)
17.8
(189.4)
%
$
116.9
$
75.3
$
41.6
55.2
%
_______________________
nm
- Percentage not meaningful.
(1)Media Networks Restructuring: As a result of the Media Networks restructuring initiatives discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview",the Company recorded content impairment charges related to the Media Networks segment in the three months ended December 31, 2023 of $77.8 million (three months ended December 31, 2022 - $80.8 million). See Note 14 to our unaudited condensed consolidated financial statements.
(2)Severance costs were primarily related to restructuring
activities and other cost-saving initiatives. In the three months ended December 31, 2023, amounts were due to restructuring activities including integration of the acquisition of eOne, LIONSGATE+ international restructuring and our Motion Picture and Television Production segments.
(3)Transaction and other costs in the three months ended December 31, 2023 and 2022 reflect transaction, integration and legal costs associated with certain strategic transactions, and restructuring activities and also include costs and benefits associated with certain legal matters. In the three months ended December 31, 2022, these amounts include a benefit of $11.0 million for a settlement of a legal matter related to the
Media Networks segment.
Interest Expense. Interest expense of $67.1 million for the three months ended December 31, 2023 increased $7.5 million, from $59.6 million in the three months ended December 31, 2022 due tohigher average interest rates and balances on variable rate corporate debt and film related obligations, partially offset by a larger benefit from the interest rate swaps. The following table sets forth the components of interest expense for the three months ended December 31, 2023 and 2022:
Amortization
of debt issuance costs and other non-cash interest(2)
7.5
6.3
Total interest expense
$
67.1
$
59.6
_______________________
(1)Other interest expense includes payments associated with certain film related obligations (Production Tax Credit Facility, IP Credit Facility, Backlog Facility and other, see Note 7 to our unaudited condensed consolidated financial statements),
and payments and receipts associated with the Company's interest rate swaps (see Note 17 to our unaudited condensed consolidated financial statements).
(2)Amounts include the amortization of unrealized losses in accumulated other comprehensive income (loss) related to de-designated interest rate swaps which are being amortized to interest expense (see Note 17 to our unaudited condensed consolidated financial statements).
Interest and Other Income. Interest and other income of $1.8 million for the three months ended December 31, 2023 was comparable to interest and other income of $1.7 million for the three months ended December 31, 2022.
Other
Expense. Other expense of $2.5 million for the three months ended December 31, 2023 compared to other expense of $10.7 million for the three months ended December 31, 2022, and represented a decrease in the loss recorded related to our monetization of accounts receivable programs (see Note 18 to our unaudited condensed consolidated financial statements).
Gain on Extinguishment of Debt. Gain on extinguishment of debt of $38.2 million in the three months ended December 31, 2022 represented a gain associated with the repurchase of $123.7 million principal amount of 5.500% Senior Notes at a discount. There was no comparable gain on extinguishment of debt in the three months ended December 31,
2023. See Note 6 to our unaudited condensed consolidated financial statements.
Gain on Investments, net. Gain on investments, net was $4.4 million for the three months ended December 31, 2023 due to a gain on other investments, as compared to $43.4 million for the three months ended December 31, 2022 which represented a gain associated with the sale of a portion of our ownership interest in STARZPLAY Arabia.
Equity Interests Income (Loss). Equity interests income of $4.2 million in the three months ended December 31, 2023 compared to equity interests income of nil in the three months ended December 31, 2022 due to a gain in the
current quarter related to the sale of an equity method investee.
Income Tax Provision. We had an income tax provision of $4.7 million in the three months ended December 31, 2023, compared to an income tax provision of $5.6 million in the three months ended December 31, 2022. Our income tax provision differs from the federal statutory rate multiplied by pre-tax income (loss) due to the mix of our pre-tax income (loss) generated across the various jurisdictions in which we operate, changes in the valuation allowance against our deferred tax assets, and certain minimum taxes and foreign withholding taxes. Our income tax provision for the three months ended December 31, 2023 and 2022
was also impacted by charges for interest on uncertain tax benefits, and benefited from the release of uncertain tax benefits due to the close of audits or expiration of statutory limitations. We acquired all of the issued and outstanding equity interests of eOne on December 27, 2023 and are evaluating the tax impact on the preliminary purchase price allocation (see Note 2 to our unaudited condensed consolidated financial statements).
Net Income (Loss) Attributable to Lions Gate Entertainment Corp. Shareholders. Net loss attributable to our shareholders for the three months ended December 31, 2023 was $106.6 million, or basic and diluted net loss per common share of $0.45 on 235.1 million weighted average common shares outstanding. This compares to net income attributable
to our shareholders for the three months ended December 31, 2022 of $16.6 million, or basic net income per common share of $0.07 on 228.8 million weighted average common shares outstanding and diluted net income per common share of $0.07 on 230.1 million weighted average common shares outstanding.
64
Segment Results of Operations and Non-GAAP Measures
The Company's primary measure of segment performance is segment profit. Segment profit is defined as segment revenues, less segment direct operating and segment distribution and marketing expense, less segment
general and administration expenses. Total segment profit represents the sum of segment profit for our individual segments, net of eliminations for intersegment transactions. Segment profit and total segment profit excludes, when applicable, corporate general and administrative expense, restructuring and other costs, share-based compensation, certain programming and content charges as a result of changes in management and/or programming and content strategy, certain charges related to the COVID-19 global pandemic, charges resulting from Russia's invasion of Ukraine, and purchase accounting and related adjustments. Segment profit when presented in accordance with ASC 280 within the notes to the consolidated financial statements is a GAAP financial measure and is disclosed in Note 15 to our unaudited condensed consolidated financial statements.
We also present below our total segment profit for all of our segments and the sum
of our Motion Picture and Television Production segment profit as our "Studio Business" segment profit. Total segment profit and Studio Business segment profit, when presented outside of the segment information and reconciliations included in Note 15 to our unaudited condensed consolidated financial statements, is considered a non-GAAP financial measure, and should be considered in addition to, not as a substitute for, or superior to, measures of financial performance prepared in accordance with United States GAAP. We use this non-GAAP measure, among other measures, to evaluate the aggregate operating performance of our business.
The Company believes the presentation of total segment profit and Studio Business segment profit is relevant and useful for investors because it allows investors to view total segment performance in a manner
similar to the primary method used by the Company's management and enables them to understand the fundamental performance of the Company's businesses before non-operating items. Total segment profit and Studio Business segment profit is considered an important measure of the Company’s performance because it reflects the aggregate profit contribution from the Company's segments, both in total and for the Studio Business and represents a measure, consistent with our segment profit, that eliminates amounts that, in management’s opinion, do not necessarily reflect the fundamental performance of the
Company’s businesses, are infrequent in occurrence, and in some cases are non-cash expenses. Not all companies calculate segment profit or total segment profit in the same manner, and segment profit and total segment profit as defined by the Company may not be comparable to similarly titled measures presented by other companies due to differences in the methods of calculation and excluded items.
The following table reconciles the GAAP measure, operating income (loss), to the non-GAAP measure, total segment profit, for the three months ended December 31, 2023 and 2022. In addition, each of segment direct operating expense, distribution and marketing expense and general and administrative expense is reconciled to the respective line items
presented in the GAAP-based statement of operations in the preceding section of the Management's Discussion and Analysis of Financial Condition and Results of Operations which discusses consolidated results of operations.
Three Months Ended
December
31,
Change
2023
2022
Amount
Percent
(Amounts in millions)
Operating income (loss)
$
(43.5)
$
7.8
$
(51.3)
nm
Corporate
general and administrative expenses
31.1
21.3
9.8
46.0
%
Adjusted depreciation and amortization
13.5
9.8
3.7
37.8
%
Restructuring
and other
116.9
75.3
41.6
55.2
%
COVID-19 related charges (benefit)
(0.1)
(1.8)
1.7
(94.4)
%
Adjusted
share-based compensation expense
24.9
23.3
1.6
6.9
%
Purchase accounting and related adjustments
39.2
53.4
(14.2)
(26.6)
%
Total
segment profit
$
182.0
$
189.1
$
(7.1)
(3.8)
%
_______________________
nm - Percentage not meaningful.
See Note 15 to our unaudited condensed consolidated financial statements for further information on the reconciling line items above, and for reconciliations of depreciation and amortization and share-based compensation
expense as presented on our unaudited condensed consolidated statements of operations to adjusted depreciation and amortization and adjusted share-based compensation expense, respectively, as presented in the line items above.
We refer to our Motion Picture and Television Production segments collectively as our Studio Business. The table below
65
sets forth the revenues and segment profit of our collective Studio Business and Media Networks segment.
Three
Months Ended
December 31,
Increase (Decrease)
2023
2022
Amount
Percent
(Amounts in millions)
Revenue
Studio
Business
Motion Picture
$
443.2
$
288.8
$
154.4
53.5
%
Television Production
248.4
605.4
(357.0)
(59.0)
%
Total
Studio Business
$
691.6
$
894.2
$
(202.6)
(22.7)
%
Media Networks
417.2
380.3
36.9
9.7
%
Intersegment
eliminations
(133.7)
(274.4)
140.7
(51.3)
%
$
975.1
$
1,000.1
$
(25.0)
(2.5)
%
Segment
Profit
Studio Business
Motion Picture
$
100.4
$
76.5
$
23.9
31.2
%
Television
Production
8.1
71.5
(63.4)
(88.7)
%
Total Studio Business
$
108.5
$
148.0
$
(39.5)
(26.7)
%
Media
Networks
85.5
49.5
36.0
72.7
%
Intersegment eliminations
(12.0)
(8.4)
(3.6)
42.9
%
$
182.0
$
189.1
$
(7.1)
(3.8)
%
See
the following discussion for further detail of our individual segments. The segment results of operations presented below do not include the elimination of intersegment transactions which are eliminated when presenting consolidated results.
Motion Picture
The table below sets forth Motion Picture gross contribution and segment profit for the three months ended December 31, 2023 and 2022:
Three
Months Ended
December 31,
Increase (Decrease)
2023
2022
Amount
Percent
(Amounts in millions)
Motion Picture Segment:
Revenue
$
443.2
$
288.8
$
154.4
53.5
%
Expenses:
Direct
operating expense
214.3
131.8
82.5
62.6
%
Distribution & marketing expense
101.4
60.0
41.4
69.0
%
Gross
contribution
127.5
97.0
30.5
31.4
%
General and administrative expenses
27.1
20.5
6.6
32.2
%
Segment
profit
$
100.4
$
76.5
$
23.9
31.2
%
U.S. theatrical P&A and Premium VOD expense included in distribution and marketing expense
$
54.1
$
27.7
$
26.4
95.3
%
Direct
operating expense as a percentage of revenue
48.4
%
45.6
%
Gross contribution as a percentage of revenue
28.8
%
33.6
%
Revenue.
The table below sets forth Motion Picture revenue by media and product category for the three months ended December 31, 2023 and 2022:
(1)Lionsgate
Original Releases: Includes titles originally planned for a wide theatrical release by Lionsgate, including titles that have changed from a planned wide theatrical release to an initial direct-to-streaming release. These releases include films developed and produced in-house, films co-developed and co-produced and films acquired or licensed from third parties. In addition, Lionsgate Original Releases also includes multi-platform and direct-to-platform motion pictures originally released or licensed by Lionsgate, and the licensing of our original release motion picture content to other ancillary markets (location-based entertainment, games, etc.).
(2)Other Film: Includes acquired and licensed brands and libraries originally released by other parties such as third-party library product, including our titles released by acquired companies prior to our acquisition
of the company (i.e., Summit Entertainment library), and titles released with our equity method investees, Roadside Attractions and Pantelion Films, and other titles.
Theatrical revenue increased $88.4 million in the three months ended December 31, 2023 as compared to the three months ended December 31, 2022 due to an increase of $89.2 million from Lionsgate Original Releases driven by the successful box-office performance of The Hunger Games: The Ballad of Songbirds & Snakes, and to a lesser extent, theatrical revenue from Saw X, released September 29, 2023.
Home
entertainment revenue increased $9.8 million, or 5.9%, in the three months ended December 31, 2023, as compared to the three months ended December 31, 2022, due to higher digital media revenue of $8.1 million. The increase in digital media revenue was due to an increase from Lionsgate Original Releases of $5.0 million due to revenues generated from a greater number of fiscal 2024 theatrical slate titles released on home entertainment digital media in the current quarter and revenues from titles in The Hunger Games franchise, which were offset by revenue from the license of Shotgun Wedding to a direct-to-streaming platform in the prior year's quarter. The increase in digital media revenue was also due to an increase from Other Film of $3.1 million from our acquired library titles.
Television revenue increased $18.3 million, or 38.9%, in the three months ended December 31, 2023, as compared to the three months ended December 31, 2022, due to an increase from Lionsgate Original Releases of $22.1 million due to a greater number of television windows opening from our fiscal 2024 theatrical slate (Are You There God? It's Me, Margaret., The Blackening, Joy Ride and About My Father), than from our fiscal 2023 theatrical slate in the prior year's quarter (The Unbearable Weight of Massive Talent).
International revenue increased $39.4 million, or 71.2%, in the three months ended December 31,
2023, as compared to the three months ended December 31, 2022 due to an increase from Lionsgate Original Releases of $39.4 million driven by higher revenue generated from our fiscal 2024 theatrical state titles in the current quarter, and in particular, The Hunger Games: The Ballad of Songbirds & Snakes, as compared to the fiscal 2023 theatrical slate titles in the prior year's quarter.
Direct Operating Expense.The increase in direct operating expenses is due to higher motion picture revenue in the current quarter. The increase in direct operating expenses as a percentage of motion picture revenue is driven by the change in the mix of titles and product categories generating revenue in the current quarter as compared to the prior
year's quarter. In addition, the current quarter included a lower benefit from foreign currency gains of $2.6 million as compared to the prior year's quarter.
67
Investment in film write-downs included in Motion Picture segment direct operating expense were $0.5 million in the three months ended December 31, 2023, compared to approximately $0.6 million in the three months ended December 31, 2022.
Distribution and Marketing Expense.The increase in distribution and marketing expense in the three months ended December 31,
2023 is due to higher theatrical P&A and Premium VOD expense due to higher expense associated with the theatrical release of The Hunger Games: The Ballad of Songbirds & Snakes in the current quarter, partially offset by lower expense for films to be released in subsequent quarters.In the three months ended December 31, 2023, approximately $10.5 million of theatrical P&A and Premium VOD expense was incurred in advance for films to be released in subsequent quarters, compared to approximately $15.5 million in the prior year's quarter in the Motion Picture segment.
Gross Contribution. Gross contribution of the Motion Picture segment for the three months ended December 31, 2023 increased as compared
to the three months ended December 31, 2022, due to higher Motion Picture revenue, partially offset by higher direct operating expense as a percentage of revenue and distribution and marketing expense.
General and Administrative Expense. General and administrative expenses of the Motion Picture segment increased $6.6 million, or 32.2% primarily due to an increase in incentive based compensation.
Television Production
The table below sets forth Television Production gross contribution and segment profit for the three months ended December 31, 2023 and 2022:
Three
Months Ended
December 31,
Increase (Decrease)
2023
2022
Amount
Percent
(Amounts in millions)
Television Production Segment:
Revenue
$
248.4
$
605.4
$
(357.0)
(59.0)
%
Expenses:
Direct
operating expense
219.0
515.5
(296.5)
(57.5)
%
Distribution & marketing expense
7.8
7.6
0.2
2.6
%
Gross
contribution
21.6
82.3
(60.7)
(73.8)
%
General and administrative expenses
13.5
10.8
2.7
25.0
%
Segment
profit
$
8.1
$
71.5
$
(63.4)
(88.7)
%
Direct operating expense as a percentage of revenue
88.2
%
85.2
%
Gross
contribution as a percentage of revenue
8.7
%
13.6
%
68
Revenue. The table below sets forth Television Production revenue and changes in revenue by media for the three months ended December 31, 2023 and 2022:
Three
Months Ended
December 31,
Increase (Decrease)
2023
2022
Amount
Percent
(Amounts in millions)
Television
Production Revenue
Television
$
182.3
$
377.5
$
(195.2)
(51.7)
%
International
32.1
65.7
(33.6)
(51.1)
%
Home
Entertainment
Digital
17.4
131.2
(113.8)
(86.7)
%
Packaged Media
0.3
1.3
(1.0)
(76.9)
%
Total
Home Entertainment
17.7
132.5
(114.8)
(86.6)
%
Other
16.3
29.7
(13.4)
(45.1)
%
$
248.4
$
605.4
$
(357.0)
(59.0)
%
The
primary component of Television Production revenue is domestic television revenue. Domestic television revenue decreased in the three months ended December 31, 2023 due to a decrease of $114.2million from intersegment revenues from the licensing of fewer Starz original series to Starz Networks (revenue in the current quarter from Power Book II: Ghost Season 4, and BMF - Black Mafia Family Season 3, among others, compared to revenue in the prior year's quarter from Heels Season 2, Power Book IV: Force Season 2, Hightown Season 3, and Power Book II: Ghost Season 3, among others), and lower
third-party revenue from fewer television episodes delivered which were impacted by the WGA and SAG-AFTRA strikes. In particular, the prior year's period included significant third-party revenue from Minx - Season 2 and Home Economics - Season 3.
International revenue in the three months ended December 31, 2023 decreased $33.6 million, or 51.1%, and reflected a decrease of $41.0 million from intersegment revenues from the licensing of fewer Starz original series to LIONSGATE+ (revenue in the current quarter from Power Book II: Ghost Season 4, among others, compared to revenue in the prior year's quarter from Heels Season 2, Power Book IV: Force Season
2, Nacho Season 1, among others). This decrease was partially offset by increased third-party revenue in the current quarter (The Continental Season 1 and Acapulco Season 3 in the current quarter, compared to Love and Death Season 1 and Minx Season 2in the prior year's quarter).
Home entertainment revenue in the three months ended December 31, 2023 decreased $114.8 million due primarily to digital media revenue in the prior year's quarter for Schitt's Creek Seasons 1 to 6 from the license to a streaming platform, and to a lesser extent, Nashville
Seasons 1 to 6, and a decrease in digital media intersegment revenues from the licensing of Starz original series to Starz Networks of $5.9 million.
Other revenue decreased $13.4 million in the three months ended December 31, 2023 as compared to the three months ended December 31, 2022, and primarily reflects lower revenue of 3 Arts Entertainment, which is generated from commissions and executive producer fees earned related to talent management and was unfavorably impacted by the WGA and SAG-AFTRA strikes.
Direct Operating Expense.Direct operating expense of the Television Production segment in the three months ended December 31, 2023 decreased $296.5 million, or 57.5% due to the
decrease in Television Production revenues. Direct operating expenses as a percentage of television production revenue increased primarily due to the mix of titles generating revenue in the current quarter as compared to the prior year's quarter, and in particular, the prior year's quarter amortization rate reflected the timing of the licensing of higher margin library and acquired titles.
Gross Contribution. Gross contribution of the Television Production segment for the three months ended December 31, 2023 decreased as compared to the three months ended December 31, 2022, due to lower television production revenue and higher direct operating expenses as a percentage of television production revenue.
General and Administrative Expense. General
and administrative expenses of the Television Production segment increased $2.7 million, or 25.0%, primarily due to an increase in incentive based compensation.
69
Media Networks
The table below sets forth Media Networks gross contribution and segment profit for the three months ended December 31, 2023 and 2022.
Three
Months Ended
December 31,
Increase (Decrease)
2023
2022
Amount
Percent
(Amounts in millions)
Media Networks Segment:
Revenue
$
417.2
$
380.3
$
36.9
9.7
%
Expenses:
Direct
operating expense
198.3
204.7
(6.4)
(3.1)
%
Distribution & marketing expense
110.7
103.2
7.5
7.3
%
Gross
contribution
108.2
72.4
35.8
49.4
%
General and administrative expenses
22.7
22.9
(0.2)
(0.9)
%
Segment
profit
$
85.5
$
49.5
$
36.0
72.7
%
Direct operating expense as a percentage of revenue
47.5
%
53.8
%
Gross
contribution as a percentage of revenue
25.9
%
19.0
%
The following table sets forth the Media Networks segment profit by product line:
Subscriber
Data. The number of period-end service subscribers is a key metric which management uses to evaluate a non-ad supported subscription video service. We believe this key metric provides useful information to investors as a growing or decreasing subscriber base is a key indicator of the health of the overall business. Service subscribers may impact revenue differently depending on specific distribution agreements we have with our distributors which may include fixed fees, rates per basic video household or a rate per STARZ subscriber. The table below sets forth, as of the dates presented, subscriptions to our Media Networks and STARZPLAY Arabia services.
(1)Pro forma amounts exclude OTT subscribers for the international territories exited or to be exited in Australia, Continental Europe, Japan, Latin America and the U.K. amounting to 1.10 million and 10.18 million at December 31, 2023 and 2022,
respectively.
(2)Represents subscribers of STARZPLAY Arabia, a non-consolidated equity method investee.
(3)OTT subscribers includes subscribers of STARZPLAY Arabia, as presented above.
(4)Starz North America subscribers include subscribers in the U.S. (as presented in the "Starz Domestic" line item) and Canada (included in the LIONSGATE+ subscriber amounts in the table above).
71
Revenue. Media Networks revenue increased $36.9 million and reflected increased revenue at LIONSGATE+
of $35.9 million, and Starz Networks of $1.0 million. Starz Networks' revenue increased $1.0 million primarily due to higher OTT revenue of $19.0 million resulting from an increase in OTT subscribers as well as from a price increase initiated at the end of June 2023 and fully implemented during the quarter ended September 30, 2023, which was mostly offset by declines in revenue of $17.4 million from traditional linear services. The LIONSGATE+ revenue of $74.5 million for the three months ended December 31, 2023 includes $67.5 million from the LIONSGATE+ territories exited, or to be exited of Australia, Continental Europe, Japan, Latin America and the U.K. (the "Exiting Territories"). The increase in revenue at LIONSGATE+ was primarily due to an increase in revenue from the Exiting Territories of approximately $35.6 million, which was primarily the result of a modification
to shorten a long-term distribution contract in Latin America.
During the three months ended December 31, 2023 and 2022, the following original series premiered on STARZ:
Direct Operating and Distribution and Marketing Expenses. Direct operating and
distribution and marketing expenses primarily represent programming cost amortization and advertising and marketing costs, respectively. The level of programming cost amortization and advertising and marketing costs and thus the gross contribution margin for the Media Networks' segment can fluctuate from period to period depending on the number of new original series and first-run output theatrical movies premiering on the network during the period. Programming cost amortization and advertising and marketing costs generally increase in periods where new original series premiere. In addition, the shutdown, and planned shutdown, of the LIONSGATE+ international service in the Exiting Territories, will result in a decrease in expenses going forward.
The decrease in Media Networks direct operating expenses is due to a decrease at Starz Networks of $24.9 million, partially offset by an increase at LIONSGATE+ of $18.5 million in
the three months ended December 31, 2023. The decrease in Starz Networks direct operating expense was primarily due to lower programming cost amortization of $9.0 million related to library content, $8.5 million related to our Starz Originals, and $7.0 million related to theatrical releases under our programming output agreements. Direct operating expenses at LIONSGATE+ increased in the Exiting Territories as a result of higher programming cost amortization and operating expenses of approximately $12.1 million and increased expense of approximately $5.5 million related to lower foreign exchange gains in the current quarter. The LIONSGATE+ direct operating expense of $41.1 million for the three months ended December 31, 2023 includes $35.4 million from the Exiting Territories.
The increase in Media Networks distribution and
marketing expense is due to an increase of $18.8 million at Starz Networks due to an increase in advertising and marketing costs to drive subscriber growth and increased spend on our Starz Original premieres, partially offset by a decrease of $11.3 million at LIONSGATE+ primarily due to a decrease in distribution and advertising expenses from the Exiting Territories. The LIONSGATE+ distribution and marketing expense of $7.0 million for the three months ended December 31, 2023 includes $5.2 million from the Exiting Territories.
Gross Contribution. The increase in gross contribution compared to the three months ended December 31, 2022 was due to increased gross contribution at LIONSGATE+ of $28.7 million and at Starz Networks of $7.1 million, driven by higher revenue and lower distribution and marketing
expense at LIONSGATE+, and lower direct operating expense partially offset by higher distribution and marketing expense at Starz Networks, as described above. The positive gross contribution related to the Exiting Territories was approximately $27.0 million for the three months ended December 31, 2023.
General and Administrative Expense. General and administrative expenses of the Media Networks segment in the three months ended December 31, 2023 decreased slightly from the prior year's quarter, due to a decrease of $2.9 million at LIONSGATE+, partially offset by increases of $2.7 million at Starz Networks.
The following table sets forth our consolidated results of operations for the nine months ended December 31, 2023 and 2022:
72
Nine
Months Ended
December 31,
Change
2023
2022
Amount
Percent
(Amounts in millions)
Revenues
Studio
Business
Motion Picture
$
1,245.6
$
791.6
$
454.0
57.4
%
Television Production
860.7
1,468.6
(607.9)
(41.4)
%
Total
Studio Business
2,106.3
2,260.2
(153.9)
(6.8)
%
Media Networks
1,214.9
1,157.5
57.4
5.0
%
Intersegment
eliminations
(422.1)
(648.6)
226.5
(34.9)
%
Total revenues
2,899.1
2,769.1
130.0
4.7
%
Expenses:
Direct
operating
1,549.1
1,744.7
(195.6)
(11.2)
%
Distribution and marketing
686.0
567.1
118.9
21.0
%
General
and administration
368.1
340.0
28.1
8.3
%
Depreciation and amortization
138.9
133.9
5.0
3.7
%
Restructuring
and other
371.0
316.5
54.5
17.2
%
Goodwill and intangible asset impairment
663.9
1,475.0
(811.1)
(55.0)
%
Total
expenses
3,777.0
4,577.2
(800.2)
(17.5)
%
Operating loss
(877.9)
(1,808.1)
930.2
(51.4)
%
Interest
expense
(192.9)
(163.0)
(29.9)
18.3
%
Interest and other income
6.5
4.8
1.7
35.4
%
Other expense
(19.6)
(21.1)
1.5
(7.1)
%
Gain
on extinguishment of debt
21.2
40.3
(19.1)
(47.4)
%
Gain on investments, net
2.7
42.1
(39.4)
(93.6)
%
Equity
interests income
5.7
0.8
4.9
612.5
%
Loss before income taxes
(1,054.3)
(1,904.2)
849.9
(44.6)
%
Income
tax provision
(12.5)
(16.6)
4.1
(24.7)
%
Net loss
(1,066.8)
(1,920.8)
854.0
(44.5)
%
Less: Net
loss attributable to noncontrolling interest
3.3
7.3
(4.0)
(54.8)
%
Net loss attributable to Lions Gate Entertainment Corp. shareholders
$
(1,063.5)
$
(1,913.5)
$
850.0
(44.4)
%
_______________________
nm
- Percentage not meaningful.
73
Revenues. Consolidated revenues increased $130.0 million in the nine months ended December 31, 2023 reflecting an increase of $57.4 million from our Media Networks business, and a decrease of $153.9 million from our Studio Business which was more than offset by lower intersegment eliminations of $226.5 million. Intersegment eliminations relate to the licensing of product from our Studio Business (primarily our Television Production segment) to the Media Networks segment.
Motion Picture revenue increased $454.0 million in the current period due primarily to higher theatrical and international revenue associated with the release
of The Hunger Games: The Ballad of Songbirds & Snakes, and higher digital media home entertainment revenue, television and other revenue. Motion Picture revenue included $113.7 million of revenue from licensing Motion Picture segment product to the Media Networks segment, representing an increase of $83.7 million from the nine months ended December 31, 2022.
Television Production revenue decreased $607.9 million due to decreased domestic and international television revenue from lower intersegment revenues from the licensing of Starz original series, and lower third-party domestic television revenue, digital media home entertainment and other revenue. Television Production revenue included $308.4 million of revenue from licensing Television Production segment product to our Media Networks segment, representing a decrease
of $310.2 million from the nine months ended December 31, 2022.
The decrease in intersegment eliminations of $226.5 million is primarily associated with lower Television Production revenues of $310.2 million for licenses of original series to Starz Networks and LIONSGATE+, both in the Media Networks segment as discussed above, partially offset by higher Motion Picture revenues of $83.7 million reflecting the licensing of certain recent theatrical releases to Starz.
Media Networks revenue increased $57.4 million, and reflected increased revenue at LIONSGATE+ of $86.2 million, offset by a decrease of $28.8 million at Starz Networks.
See further discussion in the Segment Results of Operations section below.
Direct
Operating Expenses. Direct operating expenses by segment were as follows for the nine months ended December 31, 2023 and 2022:
Direct
operating expenses decreased in the nine months ended December 31, 2023 due to lower direct operating expenses for our Studio Business and the Media Networks segment, partially offset by lower intersegment eliminations. The decrease at the Studio Business reflects lower direct operating expenses of the Television Production segment due to lower revenues from Television Production, partially offset by higher direct operating expenses of the Motion Picture segment due to higher Motion Picture revenues. The decrease in Media Networks direct operating expense was driven by decreases at Starz Networks of $55.5 million and LIONSGATE+ of $4.0 million due to lower programming cost amortization, and a benefit from foreign exchange gains as compared to foreign exchange losses in the prior year's period at LIONSGATE+. The decrease in intersegment eliminations is due to lower Television Production revenue from licenses of original
series to Starz Networks and LIONSGATE+, as discussed above. See further discussion in the Segment Results of Operations section below.
74
COVID-19 Related Charges (Benefit).We incurred certain incremental costs associated with the COVID-19 global pandemic. In the nine months ended December 31, 2023, direct operating expense included a benefit of $0.5 million, net of insurance recoveries of $0.7 million (nine months ended December 31, 2022 - benefit of $8.8 million, net of insurance recoveries of $10.7 million).
Other.
In the nine months ended December 31, 2023 and 2022, other direct operating expense includes share-based compensation. In addition, in the nine months ended December 31, 2022, other direct operating expenses includes approximately $7.2 million in development costs written off in connection with certain management changes and changes in the theatrical marketplace in the Motion Picture segment, as a result of changes in strategy across its theatrical slate. These charges are excluded from segment operating results but included in direct operating expense in the consolidated statement of operations and reflected in the "other" line item above. Other direct operating expense in the nine months ended December 31, 2022 also includes the amortization
of the non-cash fair value adjustments on film and television assets associated with the application of purchase accounting related to recent acquisitions.
Distribution and Marketing Expenses. Distribution and marketing expenses by segment were as follows for the nine months ended December 31, 2023 and 2022:
Nine
Months Ended
December 31,
Change
2023
2022
Amount
Percent
(Amounts in millions)
Distribution and marketing expenses
Studio
Business:
Motion Picture
$
321.7
$
163.1
$
158.6
97.2
%
Television Production
24.3
25.9
(1.6)
(6.2)
%
Total
Studio Business
346.0
189.0
157.0
83.1
%
Media Networks
342.0
376.5
(34.5)
(9.2)
%
Other
0.7
0.6
0.1
16.7
%
Intersegment
eliminations
(2.7)
1.0
(3.7)
nm
$
686.0
$
567.1
$
118.9
21.0
%
U.S.
theatrical P&A and Premium VOD expense included in Motion Picture distribution and marketing expense
$
204.0
$
77.0
$
127.0
164.9
%
_______________________
nm - Percentage not meaningful
Distribution and marketing expenses increased in the nine months ended December 31, 2023, due to higher
Studio Business distribution and marketing expense, partially offset by lower Media Networks distribution and marketing expense. The increase at the Studio Business primarily reflects greater Motion Picture theatrical P&A and Premium VOD expense associated with the theatrical slate releases in the current period. The decrease in Media Networks distribution and marketing expense was due to a decrease at LIONSGATE+ of $39.6 million primarily due to a decrease in distribution and advertising expenses from the Exiting Territories, partially offset by an increase at Starz Networks of $5.1 million. See further discussion in the Segment Results of Operations section below.
75
General and Administrative
Expenses. General and administrative expenses by segment were as follows for the nine months ended December 31, 2023 and 2022:
Nine Months Ended
December
31,
Change
2023
% of Revenues
2022
% of Revenues
Amount
Percent
(Amounts in millions)
General and administrative expenses
Studio
Business
Motion Picture
$
83.2
$
66.2
$
17.0
25.7
%
Television
Production
40.5
32.0
8.5
26.6
%
Total Studio Business
123.7
98.2
25.5
26.0
%
Media
Networks
71.3
70.5
0.8
1.1
%
Corporate
94.2
69.4
24.8
35.7
%
Share-based
compensation expense
63.9
55.9
8.0
14.3
%
Purchase accounting and related adjustments
15.0
46.0
(31.0)
(67.4)
%
Total
general and administrative expenses
$
368.1
12.7%
$
340.0
12.3%
$
28.1
8.3
%
General and administrative expenses increased in the nine months ended December 31, 2023, resulting from increased
corporate, Motion Picture, Television Production, share-based compensation expense, and Media Networks general and administrative expenses, partially offset by lower purchase accounting and related adjustments. See further discussion in the Segment Results of Operations section below.
Corporate general and administrative expenses increased $24.8 million, or 35.7%, primarily due to an increase in incentive based compensation.
The increase in share-based compensation expense included in general and administrative expense in the nine months ended December 31, 2023, as compared to the nine months ended December 31, 2022 is primarily due to lower fair values in the prior year's period associated with performance-based stock option and other equity awards that are revalued at each reporting
period until the stock option or equity award vests and the applicable performance goals are achieved. The following table presents share-based compensation expense by financial statement line item:
Share-based compensation expense by expense category
General and administrative expense
$
63.9
$
55.9
Restructuring and other(1)
8.4
2.1
Direct operating expense
2.3
1.2
Distribution
and marketing expense
0.7
0.6
Total share-based compensation expense
$
75.3
$
59.8
_______________________
(1)Represents share-based compensation expense included in restructuring and other expenses reflecting the impact of the acceleration of vesting schedules for equity awards pursuant to certain severance arrangements.
Purchase accounting and
related adjustments include the non-cash charge for the accretion of the noncontrolling interest discount related to Pilgrim Media Group and 3 Arts Entertainment, the non-cash charge for the amortization of the recoupable portion of the purchase price and the expense associated with the noncontrolling equity interests in the distributable earnings related to 3 Arts Entertainment, all of which are accounted for as compensation and are included in general and administrative expense. The noncontrolling equity interest in the distributable earnings of 3 Arts Entertainment are reflected as an expense rather than noncontrolling interest in the consolidated statement of operations due to the relationship to continued employment. Purchase accounting and related adjustments decreased $31.0 million, or 67.4% primarily due to lower noncontrolling interest
76
discount
amortization of $13.3 million and lower expense of $13.3 million associated with the noncontrolling equity interests in the distributable earnings related to 3 Arts Entertainment.
Depreciation and Amortization Expense. Depreciation and amortization of $138.9 million for the nine months ended December 31, 2023 increased $5.0 million from $133.9 million in the nine months ended December 31, 2022 due to increased depreciation expense related to software in the current period.
Restructuring and Other. Restructuring and other increased $54.5 million in the nine months ended December 31, 2023 as compared to the nine months ended December 31, 2022,
and includes restructuring and severance costs, certain transaction and other costs, and certain unusual items, when applicable. Restructuring and other costs were as follows for the nine months ended December 31, 2023 and 2022 (see Note 14 to our unaudited condensed consolidated financial statements):
Nine Months Ended
December
31,
Change
2023
2022
Amount
Percent
(Amounts in millions)
Restructuring and other:
Content
and other impairments(1)
$
317.4
$
299.7
$
17.7
5.9
%
Severance(2)
Cash
32.9
14.8
18.1
122.3
%
Accelerated
vesting on equity awards (see Note 12 to our unaudited condensed consolidated financial statements)
8.4
2.1
6.3
300.0
%
Total severance costs
41.3
16.9
24.4
144.4
%
COVID-19
related charges
—
0.1
(0.1)
(100.0)
%
Transaction and other costs(3)
12.3
(0.2)
12.5
nm
$
371.0
$
316.5
$
54.5
17.2
%
_______________________
nm
- Percentage not meaningful
(1)Media Networks Restructuring: As a result of the Media Networks restructuring initiatives discussed in "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview",the Company recorded content impairment charges related to the Media Networks segment in the nine months ended December 31, 2023 of $317.4 million (nine months ended December 31, 2022 - $293.8 million). See Note 14 to our unaudited condensed consolidated financial statements.
Other Impairments: Amounts in the nine months ended December
31, 2022 also include an impairment of an operating lease right-of-use asset related to the Studio business and corporate facilities amounting to $5.8 million associated with a portion of a facility lease that will no longer be utilized by the Company.
(2)Severance costs were primarily related to restructuring activities and other cost-saving initiatives. In the nine months ended December 31, 2023, amounts were due to restructuring activities including integration of the acquisition of eOne, LIONSGATE+ international restructuring and our Motion Picture and Television Production segments.
(3)Transaction and other costs in the nine months ended December 31,
2023 and 2022 reflect transaction, integration and legal costs associated with certain strategic transactions, and restructuring activities and also include costs and benefits associated with certain legal matters. In the nine months ended December 31, 2023, transaction and other costs also includes a benefit of $3.8 million associated with an arrangement to migrate subscribers in some of the exited territories to a third-party in connection with the LIONSGATE+ international restructuring. In the nine months ended December 31, 2022, transaction and other costs includes a benefit of $11.0 million for a settlement of a legal matter related to the Media Networks segment.
Goodwill and Intangible Asset Impairment. Goodwill and intangible asset impairment
of $663.9 million in the nine months ended December 31, 2023 included goodwill impairment of $493.9 million and impairment of our indefinite-lived trade names of $170.0 million related to the Media Networks reporting unit, as compared to goodwill impairment of $1.475 billion for the nine months ended December 31, 2022 related to the Media Networks reporting unit. See "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates",
77
Goodwill and Indefinite-Lived Intangible Assets and Note 5 to our unaudited condensed consolidated financial statements for further information.
Interest
Expense. Interest expense of $192.9 million in the nine months ended December 31, 2023 increased $29.9 million from the nine months ended December 31, 2022 due to higher average interest rates and balances on variable rate corporate debt and film related obligations, partially offset by a larger benefit from the interest rate swaps. The following table sets forth the components of interest expense for the nine months ended December 31, 2023 and 2022:
Amortization
of debt issuance costs and other non-cash interest(2)
22.0
20.1
Total interest expense
$
192.9
$
163.0
______________________
(1)Other interest expense includes payments associated with certain film related obligations (Production Tax Credit Facility, IP Credit Facility, Backlog Facility and other, see Note 7 to our unaudited condensed consolidated financial statements),
and payments and receipts associated with the Company's interest rate swaps (see Note 17 to our unaudited condensed consolidated financial statements).
(2)Amounts include the amortization of unrealized losses in accumulated other comprehensive income (loss) related to de-designated interest rate swaps which are being amortized to interest expense (see Note 17 to our unaudited condensed consolidated financial statements).
Interest and Other Income. Interest and other income of $6.5 million for the nine months ended December 31, 2023 was comparable to interest and other income of $4.8 million for the nine months ended December 31, 2022.
Other
Expense. Other expense of $19.6 million for the nine months ended December 31, 2023 was comparable to other expense of $21.1 million for the nine months ended December 31, 2022, and represented the loss recorded related to our monetization of accounts receivable programs (see Note 18 to our unaudited condensed consolidated financial statements).
Gain on Extinguishment of Debt. Gain on extinguishment of debt of $21.2 million for the nine months ended December 31, 2023 represented a gain associated with the repurchase of $85.0 million principal amount of 5.500% Senior Notes at a discount.
In the nine months ended December 31, 2022, the
gain on extinguishment of debt of $40.3 million represented a gain associated with the repurchase of $123.7 million principal amount of 5.500% Senior Notes at a discount, partially offset by the write-off of debt issuance costs associated with the voluntary prepayment of the entire outstanding amount of Term Loan A due March 22, 2023 and the repurchase of the 5.500% Senior Notes. See Note 6 to our unaudited condensed consolidated financial statements.
Gain on Investments, net. Gain on investments, net was $2.7 million for the nine months ended December 31, 2023, as compared to gain on investments, net of $42.1 millionfor the nine months ended December 31, 2022 which primarily represented a gain associated
with the sale of a portion of our ownership interest in STARZPLAY Arabia.
Equity Interests Income. Equity interests income of $5.7 million in the nine months ended December 31, 2023 compared to equity interests income of $0.8 million in the nine months ended December 31, 2022 due to a gain in the current period related to the sale of an equity method investee.
78
Income Tax Provision. We had an income tax provision of $12.5 million in the nine months ended December 31, 2023, compared to an income tax provision
of $16.6 million in the nine months ended December 31, 2022. Our income tax provision differs from the federal statutory rate multiplied by pre-tax income (loss) due to the mix of our pre-tax income (loss) generated across the various jurisdictions in which we operate, changes in the valuation allowance against our deferred tax assets, and certain minimum taxes and foreign withholding taxes. Our income tax provision for the nine months ended December 31, 2023 and 2022 was also impacted by charges for interest on uncertain tax benefits, and benefited from the release of uncertain tax benefits due to the close of audits or expiration of statutory limitations. We acquired all of the issued and outstanding equity interests of eOne on December 27, 2023 and are evaluating the
tax impact on the preliminary purchase price allocation (see Note 2 to our unaudited condensed consolidated financial statements).
Net Loss Attributable to Lions Gate Entertainment Corp. Shareholders. Net loss attributable to our shareholders for the nine months ended December 31, 2023 was $1,063.5 million, or basic and diluted net loss per common share of $4.56 on 233.1 million weighted average common shares outstanding. This compares to net loss attributable to our shareholders for the nine months ended December 31, 2022 of $1,913.5 million, or basic and diluted net loss per common share of $8.41 on 227.4 million weighted average common shares outstanding.
Segment Results of Operations
and Non-GAAP Measures
See"Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations - Three Months Ended December 31, 2023 Compared to Three Months Ended December 31, 2022", Segment Results of Operations and Non-GAAP measures for a definition of the non-GAAP measure, total segment profit and Studio Business segment profit, which when presented outside of the segment information and reconciliations included in Note 15 to our unaudited condensed consolidated financial statements, is considered a non-GAAP financial measure, and should be considered in addition to, not as a substitute for, or superior to, measures of financial performance prepared in accordance with United
States GAAP. We use this non-GAAP measure, among other measures, to evaluate the aggregate operating performance of our business.
The following table reconciles the GAAP measure, operating loss, to the non-GAAP measure, total segment profit, for the nine months ended December 31, 2023 and 2022. In addition, each of segment direct operating expense, distribution and marketing expense and general and administrative expense is reconciled to the respective line items presented in the GAAP-based statement of operations in the preceding section of the Management's Discussion and Analysis of Financial Condition and Results of Operations which discusses consolidated results of operations.
Nine
Months Ended
December 31,
Change
2023
2022
Amount
Percent
(Amounts in millions)
Operating loss
$
(877.9)
$
(1,808.1)
$
930.2
(51.4)
%
Corporate
general and administrative expenses
94.2
69.4
24.8
35.7
%
Goodwill and intangible asset impairment
663.9
1,475.0
(811.1)
(55.0)
%
Adjusted
depreciation and amortization
33.4
29.5
3.9
13.2
%
Restructuring and other
371.0
316.5
54.5
17.2
%
COVID-19
related charges (benefit)
(0.5)
(8.8)
8.3
(94.3)
%
Content charges
—
7.2
(7.2)
(100.0)
%
Adjusted
share-based compensation expense
66.9
57.7
9.2
15.9
%
Purchase accounting and related adjustments
120.5
151.1
(30.6)
(20.3)
%
Total
segment profit
$
471.5
$
289.5
$
182.0
62.9
%
_______________________
nm - Percentage not meaningful.
79
See Note 15 to our unaudited condensed consolidated financial
statements for further information on the reconciling line items above, and for reconciliations of depreciation and amortization and share-based compensation expense as presented on our unaudited condensed consolidated statements of operations to adjusted depreciation and amortization and adjusted share-based compensation expense, respectively, as presented in the line items above.
We refer to our Motion Picture and Television Production segments collectively as our Studio Business. The table below sets forth the revenues and segment profit of our collective Studio Business and Media Networks segment.
Nine
Months Ended
December 31,
Change
2023
2022
Amount
Percent
(Amounts in millions)
Revenue
Studio
Business
Motion Picture
$
1,245.6
$
791.6
$
454.0
57.4
%
Television Production
860.7
1,468.6
(607.9)
(41.4)
%
Total
Studio Business
$
2,106.3
$
2,260.2
$
(153.9)
(6.8)
%
Media Networks
1,214.9
1,157.5
57.4
5.0
%
Intersegment
eliminations
(422.1)
(648.6)
226.5
(34.9)
%
$
2,899.1
$
2,769.1
$
130.0
4.7
%
Segment
Profit
Studio Business
Motion Picture
$
237.1
$
182.7
$
54.4
29.8
%
Television
Production
94.1
104.6
(10.5)
(10.0)
%
Total Studio Business
$
331.2
$
287.3
$
43.9
15.3
%
Media
Networks
184.1
33.5
150.6
nm
Intersegment eliminations
(43.8)
(31.3)
(12.5)
39.9
%
$
471.5
$
289.5
$
182.0
62.9
%
_______________________
nm
- Percentage not meaningful.
See the following discussion for further detail of our individual segments. The segment results of operations presented below do not include the elimination of intersegment transactions which are eliminated when presenting consolidated results.
Motion Picture
The table below sets forth Motion Picture gross contribution and segment profit for the nine months ended December 31, 2023 and 2022:
80
Nine
Months Ended
December 31,
Change
2023
2022
Amount
Percent
(Amounts in millions)
Motion Picture Segment:
Revenue
$
1,245.6
$
791.6
$
454.0
57.4
%
Expenses:
Direct
operating expense
603.6
379.6
224.0
59.0
%
Distribution & marketing expense
321.7
163.1
158.6
97.2
%
Gross
contribution
320.3
248.9
71.4
28.7
%
General and administrative expenses
83.2
66.2
17.0
25.7
%
Segment
profit
$
237.1
$
182.7
$
54.4
29.8
%
U.S. theatrical P&A and Premium VOD expense included in distribution and marketing expense
$
204.0
$
77.0
$
127.0
164.9
%
Direct
operating expense as a percentage of revenue
48.5
%
48.0
%
Gross contribution as a percentage of revenue
25.7
%
31.4
%
Revenue.
The table below sets forth Motion Picture revenue by media and product category for the nine months ended December 31, 2023 and 2022:
(1)Lionsgate
Original Releases: Includes titles originally planned for a wide theatrical release by Lionsgate, including titles that have changed from a planned wide theatrical release to an initial direct-to-streaming release. These releases include films developed and produced in-house, films co-developed and co-produced and films acquired or licensed from third parties. In addition, Lionsgate Original Releases also includes multi-platform and direct-to-platform motion pictures originally released or licensed by Lionsgate, and the licensing of our original release motion picture content to other ancillary markets (location-based entertainment, games, etc.).
(2)Other Film: Includes acquired and licensed brands and libraries originally released by other parties such as third-party library product, including our titles released by acquired companies prior to our acquisition
of the company (i.e., Summit Entertainment library), and titles released with our equity method investees, Roadside Attractions and Pantelion Films, and other titles.
Theatrical revenue increased $165.6 million in the nine months ended December 31, 2023 as compared to the nine months ended December 31, 2022 due to an increase of $167.0 million from Lionsgate Original Releases driven by the performance of our fiscal 2024 theatrical slate, and in particular, The Hunger Games: The Ballad of Songbirds & Snakes and Saw X, and revenue from our fiscal 2023 theatrical slate release, John Wick: Chapter 4 in
the current period. The increase was also, to a lesser extent, due to a greater number of theatrical slate releases in the current period as compared to the prior year's period.
81
Home entertainment revenue increased $124.5 million, or 28.7%, in the nine months ended December 31, 2023, as compared to the nine months ended December 31, 2022, due to higher digital media revenue of $116.8 million. The increase in digital media revenue was due to an increase from Lionsgate Original Releases of $103.4 million due to revenues generated from John Wick: Chapter 4, Jesus
Revolution (fiscal 2023 theatrical slate titles), and from titles in The Hunger Games franchise, and a greater number of fiscal 2024 theatrical slate titles released on home entertainment digital media in the current period as compared to the prior year's period, partially offset by revenue in the prior year's period from the license of Shotgun Wedding to a direct-to-streaming platform. The increase in digital media revenue was also due to an increase from Other Film of $13.4 million from our acquired library titles.
Television revenue increased $67.5 million, or 45.9%, in the nine months ended December 31, 2023, as compared to the nine months ended December 31, 2022 due to an increase from Lionsgate Original
Releases of $77.2 million due to a greater number of television windows opening from our fiscal 2024 and fiscal 2023 theatrical slates than from our fiscal 2023 and fiscal 2022 theatrical slates in the prior year's period, and higher revenue recognized for those titles, and in particular, John Wick: Chapter 4, partially offset by a decrease from Other Film of $9.7 million from our acquired library titles.
International revenue increased $88.8 million, or 53.3%, in the nine months ended December 31, 2023, as compared to the nine months ended December 31, 2022 due to an increase from Lionsgate Original Releases of $95.6 million driven by higher revenue generated from our fiscal 2024 and fiscal 2023 theatrical slate titles in the current period, and in particular, The
Hunger Games: The Ballad of Songbirds & Snakes, and John Wick: Chapter 4, as compared to the fiscal 2023 and fiscal 2022 theatrical slate titles in the prior year's period, partially offset by a decrease from Other Film of $9.0 million from our acquired library titles.
Direct Operating Expense. The increase in direct operating expenses is due to higher motion picture revenue in the current period. Direct operating expenses as a percentage of motion picture revenue was comparable to the prior year's period and is driven by the change in the mix of titles and product categories generating revenue in the current period as compared to the prior year's period. Investment in film write-downs included in Motion Picture segment direct operating expense increased to $27.5 million in the nine months ended December 31,
2023, as compared to $1.1 million in the nine months ended December 31, 2022.
Distribution and Marketing Expense. The increase in distribution and marketing expense in the nine months ended December 31, 2023 is due to higher theatrical P&A and Premium VOD expense due to higher expense associated with the theatrical slate releases in the current period, partially offset by slightly lower expense for films to be released in subsequent quarters. In the nine months ended December 31, 2023 approximately $24.8 million of P&A and Premium VOD expense was incurred in advance for films to be released in subsequent quarters, compared to approximately $27.3 million in the nine months ended December 31, 2022
in the Motion Picture segment.
Gross Contribution. Gross contribution of the Motion Picture segment for the nine months ended December 31, 2023 increased as compared to the nine months ended December 31, 2022 due to higher Motion Picture revenue, partially offset by higher distribution and marketing expense and direct operating expense.
General and Administrative Expense. General and administrative expenses of the Motion Picture segment in the nine months ended December 31, 2023 increased $17.0 million, or 25.7%, primarily due to an increase in incentive based compensation.
82
Television
Production
The table below sets forth Television Production gross contribution and segment profit for the nine months ended December 31, 2023 and 2022:
Nine Months Ended
December
31,
Change
2023
2022
Amount
Percent
(Amounts in millions)
Television Production Segment:
Revenue
$
860.7
$
1,468.6
$
(607.9)
(41.4)
%
Expenses:
Direct
operating expense
701.8
1,306.1
(604.3)
(46.3)
%
Distribution & marketing expense
24.3
25.9
(1.6)
(6.2)
%
Gross
contribution
134.6
136.6
(2.0)
(1.5)
%
General and administrative expenses
40.5
32.0
8.5
26.6
%
Segment
profit
$
94.1
$
104.6
$
(10.5)
(10.0)
%
Direct operating expense as a percentage of revenue
81.5
%
88.9
%
Gross
contribution as a percentage of revenue
15.6
%
9.3
%
Revenue. The table below sets forth Television Production revenue and changes in revenue by media for the nine months ended December 31, 2023 and 2022:
Nine
Months Ended
December 31,
Increase (Decrease)
2023
2022
Amount
Percent
Television Production
(Amounts in millions)
Television
$
554.2
$
973.1
$
(418.9)
(43.0)
%
International
137.7
219.4
(81.7)
(37.2)
%
Home
Entertainment
Digital
113.4
205.1
(91.7)
(44.7)
%
Packaged Media
1.0
2.7
(1.7)
(63.0)
%
Total
Home Entertainment
114.4
207.8
(93.4)
(44.9)
%
Other
54.4
68.3
(13.9)
(20.4)
%
$
860.7
$
1,468.6
$
(607.9)
(41.4)
%
83
The
primary component of Television Production revenue is domestic television revenue. Domestic television revenue decreased in the nine months ended December 31, 2023 due to a decrease of $214.1million from intersegment revenues from the licensing of fewer Starz original series to Starz Networks (revenue in the current period from Power Book II: Ghost Season 4, BMF Season 3 and Power Book III: Raising Kanan Season 3 compared to revenue in the prior year's period from Power Book II: Ghost Season 3, P-Valley Season 2, BMF Season 2, Heels Season
2, Power Book III: Raising Kanan Season 2, and Power Book IV: Force Season 2, among others). The decrease in domestic television revenue was also due to lower third-party revenue from fewer television episodes delivered which were impacted by the WGA and SAG-AFTRA strikes (including significant revenue in the prior year's period from The First Lady Season 1, and lower revenue in the current period from unscripted television programs).
International revenue in the nine months ended December 31, 2023 decreased $81.7 million, or 37.2% as compared to the nine months ended December 31, 2022 due
to a decrease of $79.9 million from intersegment revenues from the licensing of fewer Starz original series to LIONSGATE+.
Home entertainment revenue in the nine months ended December 31, 2023 decreased $93.4 million, or 44.9% as compared to the nine months ended December 31, 2022 due to lower third-party digital media revenue (The Continental Season 1 in the current period, compared to Schitt's Creek Seasons 1 to 6 from the license to a streaming platform, Nashville Seasons 1 to 6, and Ghosts Season 1 in the prior year's period), and a decrease of $16.2 million from digital media intersegment revenues from the licensing of Starz original
series to Starz Networks.
Other revenue in the nine months ended December 31, 2023 decreased $13.9 million, or 20.4% from the nine months ended December 31, 2022, and primarily reflects lower revenue of 3 Arts Entertainment, which is generated from commissions and executive producer fees earned related to talent management and was unfavorably impacted by the WGA and SAG-AFTRA strikes.
Direct Operating Expense.Direct operating expense of the Television Production segment in the nine months ended December 31, 2023 decreased $604.3 million, or 46.3% due to the decrease in Television Production revenues. Direct operating expenses as a percentage of television production revenue decreased
as compared to the prior year's period, primarily due to the mix of titles generating revenue in the current period as compared to the prior year's period, and in particular, the current period included significant revenue from The Continental which has a lower amortization rate as compared to the prior year's period, which included a greater number of deliveries of newer shows in which direct operating expense is typically higher as a percentage of revenue. Investment in film and television programs write-downs included in Television Production segment direct operating expense in the nine months ended December 31, 2023 were $6.6 million as compared to $4.7 million in the nine months ended December 31, 2022.
Gross Contribution. Gross contribution of the
Television Production segment for the nine months ended December 31, 2023 decreased slightly as compared to the nine months ended December 31, 2022, due to lower television production revenue which was mostly offset by lower direct operating expenses as a percentage of television production revenue.
General and Administrative Expense. General and administrative expenses of the Television Production segment increased $8.5 million, or 26.6% primarily due to an increase in incentive based compensation.
Media Networks
The table below sets forth Media Networks gross contribution and segment profit for the nine months ended December 31, 2023 and 2022:
84
Nine Months Ended
December 31,
Change
2023
2022
Amount
Percent
(Amounts
in millions)
Media Networks Segment:
Revenue
$
1,214.9
$
1,157.5
$
57.4
5.0
%
Expenses:
Direct
operating expense
617.5
677.0
(59.5)
(8.8)
%
Distribution & marketing expense
342.0
376.5
(34.5)
(9.2)
%
Gross
contribution
255.4
104.0
151.4
145.6
%
General and administrative expenses
71.3
70.5
0.8
1.1
%
Segment
profit
$
184.1
$
33.5
$
150.6
449.6
%
Direct operating expense as a percentage of revenue
50.8
%
58.5
%
Gross
contribution as a percentage of revenue
21.0
%
9.0
%
_______________________
nm - Percentage not meaningful.
The following table sets forth the Media Networks segment profit by product line:
Revenue.
Media Networks revenue increased $57.4 million and reflected increased revenue at LIONSGATE+ of $86.2 million, partially offset by a decrease of $28.8 million at Starz Networks. Starz Networks' revenue decreased $28.8 million primarily because of declines in revenue of $63.1 million from traditional linear services, which were offset by higher OTT revenue of $33.1 million resulting primarily from an increase in OTT subscribers as well as from a price increase initiated at the end of June 2023 and fully implemented during the quarter ended September 30, 2023. The LIONSGATE+ revenue of $195.0 million for the nine months ended December 31, 2023 includes $158.8 million from the Exiting Territories. The increase in revenue at LIONSGATE+, was primarily due to an increase in revenue from the Exiting Territories of approximately $69.9 million, which was primarily the result of
a modification to shorten a long-term distribution contract in Latin America. In addition, the increase was due to revenue from the distribution of certain Starz Originals and licensed content to third-party distributors outside of the Starz Platforms in ancillary markets of approximately $16.1 million.
85
During the nine months ended December 31, 2023 and 2022, the following original series premiered on STARZ:
Direct
Operating and Distribution and Marketing Expenses. Direct operating and distribution and marketing expenses primarily represent programming cost amortization and advertising and marketing costs, respectively. The level of programming cost amortization and advertising and marketing costs and thus the gross contribution margin for the Media Networks' segment can fluctuate from period to period depending on the number of new original series and first-run output theatrical movies premiering on the network during the period. Programming cost amortization and advertising and marketing costs generally increase in periods where new original series premiere. In addition, the shutdown, and planned shutdown, of the LIONSGATE+ international service in the Exiting Territories will result in a decrease in expenses going forward.
The decrease in Media Networks direct operating expenses is due to decreases at Starz
Networks of $55.5 million and LIONSGATE+ of $4.0 million in the nine months ended December 31, 2023. The decrease in Starz Networks direct operating expense was due primarily to lower programming cost amortization of $27.0 million related to theatrical releases under our programming output agreements, $24.5 million related to library content, and $10.0 million related to our Starz Originals, partially offset by a benefit in the prior year's period of $10.0 million associated with the modification of a content licensing arrangement. Direct operating expenses at LIONSGATE+ decreased in the Exiting Territories as a result of lower programming cost amortization and operating costs of approximately $10.2 million and lower expense of approximately $7.3 million related to foreign exchange gains in the current period compared to foreign exchange losses in the prior year's period, partially offset by higher amortization of investment
in films and television programs of $11.9 million associated with the distribution of Starz Originals and licensed content to third-party distributors outside of the Starz Platforms in ancillary markets. The LIONSGATE+ direct operating expense of $115.2 million for the nine months ended December 31, 2023 includes $87.8 million from the Exiting Territories.
The decrease in Media Networks distribution and marketing expense is due to a decrease of $39.6 million at LIONSGATE+ primarily due to a decrease in distribution and advertising expenses from the Exiting Territories, partially offset by an increase of $5.1 million at Starz Networks. The LIONSGATE+ distribution and marketing expense of $32.1 million for the nine months ended December 31, 2023 includes $25.4 million from the Exiting Territories.
Gross
Contribution. The increase in gross contribution compared to the nine months ended December 31, 2022 was due to increased gross contribution at LIONSGATE+ of $129.8 million, and at Starz Networks of $21.6 million, driven by higher LIONSGATE+ revenue, and lower direct operating expense and LIONSGATE+ distribution and marketing expense, partially offset by lower Starz Networks revenue, as described above. The positive gross contribution related to the Exiting Territories was approximately $45.7 million for the nine months ended December 31, 2023.
General and Administrative Expense. General and administrative expenses in the nine months ended December 31, 2023 increased from the prior year's period, due to increases of $8.6 million
at Starz Networks, partially offset by a decrease of $7.8 million at LIONSGATE+.
86
LIQUIDITY AND CAPITAL RESOURCES
Sources of Cash
Our liquidity and capital requirements in the nine months ended December 31, 2023 were provided principally through cash generated from operations, corporate debt, our film related obligations (as further discussed below), and the monetization of trade accounts receivable. As of December 31, 2023, we had cash and cash
equivalents of $283.0 million.
As discussed under "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview", in connection with the business combination with Screaming Eagle and establishing the Studio Business as a standalone publicly-traded entity, the transaction is expected to deliver approximately $350.0 million of gross proceeds to the Company, including $175.0 million in private investments in public equities (“PIPE”) financing. The transaction is subject to certain closing conditions, including regulatory approvals and approval from the shareholders and public warrant holders of Screaming Eagle, and is expected to close in the spring of 2024. The closing of the transaction is also subject to the gross proceeds to the
Company being equal to a minimum of $350.0 million.
Corporate Debt
Our corporate debt at December 31, 2023, excluding film related obligations discussed further below, consisted of the following:
•Senior Credit Facilities:
◦Revolving Credit Facility. We have a $1.25 billion revolving credit facility (with $375.0 million outstanding at December 31, 2023 used for the purchase of eOne) due April 2026 (the "Revolving Credit Facility"). We maintain significant availability under our Revolving Credit Facility, which is currently used to meet our short-term liquidity requirements, and could also be used for longer
term liquidity requirements.
◦Term Loan A. We have a term loan A facility due April 2026 (the "Term Loan A"), with $407.1 million outstanding at December 31, 2023.
The outstanding amounts under the Revolving Credit Facility and Term Loan A may become due on December 23, 2024 (i.e. 91 days prior to March 24, 2025) prior to its maturity on April 6, 2026 in the event that the aggregate principal amount of outstanding Term Loan B in excess of $250 million has not been repaid, refinanced or extended to have a maturity date on or after July 6, 2026. The
Company expects to refinance and extend the maturity date of the Term Loan B prior to December 23, 2024 such that the maturity of the revolving credit facility and Term Loan A are not accelerated.
◦Term Loan B. We have a term loan B facility due March 2025 (the "Term Loan B", and, together with the Revolving Credit Facility and the Term Loan A, the "Senior Credit Facilities"), with $822.3 million outstanding at December 31, 2023.
•Senior Notes:We have $715.0 million outstanding of 5.500% senior notes due 2029 (the "5.500% Senior Notes") at December 31, 2023.
See
Note 6 to our unaudited condensed consolidated financial statements for a discussion of our corporate debt.
Film Related Obligations
We utilize our film related obligations to fund our film and television productions or licenses. Our film related obligations at December 31, 2023 include the following:
•Production Loans: Production loans represent individual and multi-title loans for the production of film and television programs that we produce or license. The majority of the Company's production loans have contractual repayment dates either at or near the expected completion or release dates, with the exception of certain loans containing repayment dates
on a longer term basis. At December 31, 2023, there was $1,279.2 million outstanding of production loans.
•Programming Notes: Programming notes represent individual loans for the licensing of film and television programs that we license, related to our Media Networks business. The Company's programming notes have contractual repayment dates in February 2024. At December 31, 2023, there was $60.4 million outstanding of programming notes.
87
•Production Tax Credit Facility:
We have a $250.0 million non-recourse senior secured revolving credit facility due January 2025 based on collateral consisting solely of certain of the Company’s tax credit receivables (the "Production Tax Credit Facility"). Cash collections from the underlying collateral (tax credit receivables) are used to repay the Production Tax Credit Facility. At December 31, 2023, there was $250.0 million outstanding under the Production Tax Credit Facility.
•IP Credit Facility: In July 2021, as amended in September 2022, certain of our subsidiaries entered into a senior secured amortizing term credit facility due July 2027 (the "IP
Credit Facility") based on the collateral consisting solely of certain of our rights in certain library titles, including the Spyglass and other recently acquired libraries. The maximum principal amount of the IP Credit Facility is $161.9 million, subject to the amount of collateral available, which is based on the valuation of cash flows from the libraries. At December 31, 2023, there was $117.3 million outstanding under the IP Credit Facility.
•Backlog Facility and Other:
◦Backlog Facility. In March 2022, as amended in August 2022, certain subsidiaries of the
Company entered into a committed secured revolving credit facility (the "Backlog Facility") based on collateral consisting solely of certain of the Company's fixed fee or minimum guarantee contracts where cash will be received in the future. The maximum principal amount of the Backlog Facility is $175.0 million, subject to the amount of eligible collateral contributed to the facility. The Backlog Facility revolving period finishes on May 16, 2025, at which point cash collections from the underlying collateral is used to repay the facility. The facility maturity date is up to two years and 90 days after the revolving period ends, currently August 14, 2027. As of December 31,
2023, there was $175.0 million outstanding under the Backlog Facility.
◦Other. The Company has previously had other loans which are secured by contracted receivables which are not yet recognized as revenue under certain licensing agreements. Outstanding loan balances under these "other" loans must be repaid with any cash collections from the underlying collateral if and when received by the Company, and may be voluntarily repaid at any time without prepayment penalty fees. The Company's "other" loans had no amounts outstanding as of December 31, 2023.
See Note 7 to our unaudited condensed consolidated financial statements for a discussion of our film related obligations.
Accounts Receivable Monetization and Governmental Incentives
Our accounts receivable monetization programs include individual agreements to monetize certain of our trade accounts receivable directly with third-party purchasers and a revolving agreement to monetize designated pools of trade accounts receivable with various financial institutions.
In addition, we utilize governmental incentives, programs and other structures from states and foreign countries (e.g., sales tax refunds, transferable tax credits, refundable tax credits, low interest loans, direct subsidies or cash rebates, calculated based on the amount of money spent in the particular jurisdiction in connection with the production) to fund our film and
television productions and reduce financial risk.
See Note 18 to our unaudited condensed consolidated financial statements for our accounts receivable monetization programs and our tax credit receivables.
Uses of Cash
Our principal uses of cash in operations include the funding of film and television productions, film and programming rights acquisitions, the distribution and marketing of films and television programs, and general and administrative expenses. We also use cash for debt service (i.e. principal and interest payments) requirements, equity method or other equity investments, quarterly cash dividends when declared, the purchase of common shares under our share repurchase program, capital expenditures, and acquisitions of or investment in businesses.
Redeemable Noncontrolling Interests.
In addition, the Company has a redeemable noncontrolling interest balance of $409.1 million as of December 31, 2023 related to its acquisition of a controlling interest, consisting of a limited liability company interest, in each of Pilgrim Media Group and 3 Arts Entertainment, which may require the use of cash in the event the holders of the noncontrolling interests require the Company to repurchase their interests (see Note 9 to our unaudited condensed consolidated financial statements).
88
•3 Arts Entertainment. As
of December 31, 2023, the Company had a redeemable noncontrolling interest representing 49% of 3 Arts Entertainment. The noncontrolling interest was subject to put and call options at fair value that were exercisable during the quarter. On January 2, 2024, the Company closed on the acquisition of an additional 25% of 3 Arts Entertainment representing approximately half of the noncontrolling interest for approximately $194 million. In addition, the Company purchased certain profit interests held by certain managers and entered into certain option rights
agreements, which replaced the put and call rights discussed above by providing noncontrolling interest holders the right to sell to the Company and the Company the right to purchase their remaining (24%) interest beginning in January 2027.
•Pilgrim Media Group. The Company has a remaining redeemable noncontrolling interest representing 12.5% of Pilgrim Media Group. The noncontrolling interest holder has a right to put and the Company has a right to call the noncontrolling interest at fair value, subject to a cap, exercisable for thirty (30)
days beginning November 12, 2024, as amended.
We may from time to time seek to retire or purchase or refinance our outstanding debt through cash purchases, and/or exchanges for equity securities, in open market purchases, privately negotiated transactions, refinancings, or otherwise. Such repurchases or exchanges or refinancings, if any, will depend on prevailing market conditions, our liquidity requirements, our assessment of opportunities to lower interest expense, contractual restrictions and other factors, and such repurchases or exchanges could result in a charge from the early extinguishment of debt. The amounts involved may be material.
Anticipated Cash Requirements. The nature of our business is such that significant initial expenditures are required to produce, acquire, distribute and market films
and television programs, while revenues from these films and television programs are earned over an extended period of time after their completion or acquisition. In addition to the cash requirements of any potential future redemption of our noncontrolling interests as discussed above, which we may fund with a combination of cash on hand, borrowings under our line of credit and/or new financing arrangements, we have other anticipated cash requirements outside of our normal operations.
Under the current Media Networks business restructuring plan and ongoing strategic review previously discussed under "Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview", we estimate we will incur additional charges ranging from approximately $30 million to $55 million related to certain contractual content commitments or programming content impairment charges, among other items related
to territories exited or to be exited and content to be removed from its services. The net future cash outlay is estimated to range from approximately $145 million to $170 million, which includes contractual commitments on content in territories being exited or to be exited, and payments on the remaining amounts payable for content removed or that may be removed from its services. The amounts above will depend on the results of its strategic content review and amounts recoverable from alternative distribution strategies, if any, on content in domestic and foreign markets. As we continue to evaluate the Media Networks business and its current restructuring plan in relation to the current micro and macroeconomic environment and the announced plan to separate the Company's Starz business (i.e., Media Networks segment) and Studio Business (i.e., Motion Picture and Television Production segments),
including further strategic review of content performance and its strategy on a territory-by-territory basis, we may decide to expand our restructuring plan and exit additional territories or remove certain content off its platform in the future. We may incur additional content impairment and other restructuring charges beyond the estimates above.
In the short-term, we currently expect that our cash requirements for productions will decrease and that our cash requirements for marketing spend will increase in fiscal 2024 as compared to fiscal 2023.
However, we currently believe that cash flow from operations, cash on hand, revolving credit facility availability, the monetization of trade accounts receivable, tax-efficient financing, the availability of our Production Tax Credit Facility, IP Credit Facility and Backlog Facility and other financing obligations, and available production
or license financing will be adequate to meet known operational cash and debt service (i.e. principal and interest payments) requirements for the next 12 months and beyond, including the funding of future film and television production, film and programming rights acquisitions and theatrical and home entertainment release schedules, and future equity method or other investment funding requirements, and international expansion in our remaining international territories. We monitor our cash flow liquidity, availability, fixed charge coverage, capital base, film spending and leverage ratios with the long-term goal of maintaining our credit worthiness.
Our current financing strategy is to fund operations and to leverage investment in films and television programs in the short-term and long-term through our cash flow from operations, our revolving credit facility, production loans and programming notes, government incentive programs,
the monetization of trade accounts receivable, our Production Tax Credit Facility, our IP Credit Facility, our Backlog Facility, and other obligations. In addition, we may acquire businesses or assets, including individual films or libraries that are complementary to our business. Any such transaction could be financed through our cash flow from operations, credit facilities, equity or debt financing. If additional financing beyond our existing cash flows
89
from operations and credit facilities cannot fund such transactions, there is no assurance that such financing will be available on terms acceptable to us. Our ability to obtain any additional financing will depend on, among other things, our business plans, operating performance, the condition of the capital markets
at the time we seek financing, and short and long-term debt ratings assigned by independent rating agencies. Additionally, circumstances related to inflation and rising interest rates and bank failures has caused disruption in the capital markets, which could make financing more difficult and/or expensive, and we may not be able to obtain such financing. We may also dispose of businesses or assets, including individual films or libraries, and use the net proceeds from such dispositions to fund operations or such acquisitions, or to repay debt.
Material Cash Requirements from Known Contractual and Other Obligations.Our material cash requirements from known contractual and other obligations primarily relate to our corporate debt and film related obligations. The following table sets forth our significant contractual and other obligations as of December 31,
2023 and the estimated timing of payment:
Total
Next 12 Months
Beyond 12 Months
(Amounts in millions)
Future annual repayment of debt and other obligations recorded as of December
31, 2023 (on-balance sheet arrangements)
Corporate debt(1):
Revolving credit facility(2)
$
375.0
$
—
$
375.0
Term
Loan A(2)
407.1
37.8
369.3
Term Loan B
822.3
12.5
809.8
5.500% Senior Notes
715.0
—
715.0
Film
related obligations(3)
1,881.9
1,318.6
563.3
Content related payables(4)
338.2
282.2
56.0
Operating lease obligations
408.3
43.6
364.7
4,947.8
1,694.7
3,253.1
Contractual
commitments by expected repayment date (off-balance sheet arrangements)
Film related obligations commitments(5)
666.6
454.9
211.7
Interest payments(6)
401.8
159.8
242.0
Other
contractual obligations
416.3
112.2
304.1
1,484.7
726.9
757.8
Total future repayment of debt and other commitments under contractual obligations (6)
$
6,432.5
$
2,421.6
$
4,010.9
___________________
(1)See
Note 6 to our unaudited condensed consolidated financial statements for further information on our corporate debt.
(2)The outstanding amounts under the Revolving Credit Facility and Term Loan A may become due on December 23, 2024 (i.e. 91 days prior to March 24, 2025) prior to its maturity on April 6, 2026 in the event that the aggregate principal amount of outstanding Term Loan B in excess of $250 million has not been repaid, refinanced or extended to have a maturity date on or after July 6, 2026. The Company expects to refinance and extend the maturity date of the Term Loan B prior to December
23, 2024 such that the maturity of the revolving credit facility and Term Loan A are not accelerated.
(3)See Note 7 to our unaudited condensed consolidated financial statements for further information on our film related obligations
(4)Content related payables include minimum guarantees and accrued licensed program rights obligations included on our consolidated balance sheet, which represent amounts payable for film or television rights that we have acquired or licensed.
(5)Film related obligations commitments include distribution and marketing commitments, minimum guarantee commitments, program rights commitments, and production loan commitments not reflected on the consolidated balance sheets as they did not then meet the criteria for recognition.
(6)Includes
cash interest payments on our corporate debt and film related obligations, based on the applicable SOFR interest rates at December 31, 2023, net of payments and receipts from the Company's interest rate swaps, and excluding the interest payments on the revolving credit facility as future amounts are not fixed or determinable due to fluctuating balances and interest rates.
(7)Not included in the amounts above are $409.1 million of redeemable noncontrolling interest, as future amounts and timing are subject to a number of uncertainties such that we are unable to make sufficiently reliable estimations of future payments. As discussed above, on January 2, 2024, the
Company closed on the acquisition of an additional 25% of 3 Arts
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Entertainment representing approximately half of the noncontrolling interest for approximately $194 million. See Note 9 to our unaudited condensed consolidated financial statements.
We have an exclusive multiyear post pay-one output licensing agreement with Universal for live-action films theatrically released in the U.S. starting January 1, 2022. The Universal agreement provides us with rights to exhibit these films immediately following their pay-one windows. We are unable to estimate the amounts to be paid under the Universal agreement for films that have not yet
been released in theaters, however, such amounts are expected to be significant.
For additional details of contingencies, see Note 16 to our unaudited condensed consolidated financial statements.
Covenants. The Senior Credit Facilities contain representations and warranties, events of default and affirmative and negative covenants that are customary for similar financings and which include, among other things and subject to certain significant exceptions, restrictions on the ability to declare or pay dividends, create liens, incur additional indebtedness, make investments, dispose of assets and merge or consolidate with any other person. In addition, a net first lien leverage maintenance covenant and an interest coverage ratio maintenance covenant apply to the Revolving Credit Facility and the Term Loan A and are tested
quarterly. As of December 31, 2023, the Company was in compliance with all applicable covenants.
The 5.500% Senior Notes contain certain restrictions and covenants that, subject to certain exceptions, limit the Company’s ability to incur additional indebtedness, pay dividends or repurchase the Company’s common shares, make certain loans or investments, and sell or otherwise dispose of certain assets subject to certain conditions, among other limitations. As of December 31, 2023, the
Company was in compliance with all applicable covenants.
Share Repurchase Plan. On February 2, 2016, our Board of Directors authorized to increase our previously announced share repurchase plan from $300 million to $468 million. To date, approximately $288.1 million of our common shares have been purchased under the plan, leaving approximately $179.9 million of authorized potential repurchases. The remaining $179.9 million of our common shares authorized under the plan may be purchased from time to time at our discretion, including quantity, timing and price thereof, and will be subject to market conditions. Such purchases will be structured as permitted by securities laws and other legal requirements. During the nine months ended December 31, 2023, the
Company did not repurchase any common shares.
Dividends. The amount of dividends, if any, that we pay to our shareholders is determined by our Board of Directors, at its discretion, and is dependent on a number of factors, including our financial position, results of operations, cash flows, capital requirements and restrictions under our credit agreements, and shall be in compliance with applicable law.
Capacity to Pay Dividends. At December 31, 2023, the capacity to pay dividends under the Senior Credit Facilities and the Senior Notes significantly exceeded the amount of the Company's accumulated deficit or net loss, and therefore the
Company's net loss of $1,066.8 million and accumulated deficit of $3,574.6 million were deemed free of restrictions from paying dividends at December 31, 2023.
Discussion of Operating, Investing, Financing Cash Flows
Cash, cash equivalents and restricted cash increased by $18.5 million for the nine months ended December 31, 2023 and increased by $89.9 million for the nine months ended December 31, 2022, before foreign exchange effects on cash. Components of these changes are discussed below in more detail.
Operating Activities. Cash flows provided by (used in) operating activities for the nine months ended December 31,
2023 and 2022 were as follows:
Net Cash Flows Provided By (Used In) Operating Activities
$
401.4
$
(128.0)
$
529.4
Cash flows provided by operating activities for the nine months ended December 31, 2023 were $401.4 million compared to cash flows used in operating activities
of $128.0 million for the nine months ended December 31, 2022. The increase in cash provided by operating activities is due to greater cash provided by changes in operating assets and liabilities of $572.2 million. The greater cash provided by changes in operating assets and liabilities was driven by lower cash used for investment in film and television programs and program rights, greater proceeds from decreases in accounts receivable, net, and increases in film
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related obligations and deferred revenue, partially offset by lower increases in participations and residuals and greater decreases in accounts payable and accrued liabilities. The nine months ended December 31,
2022 included proceeds in the prior year's period from the termination of interest rate swaps (see further discussion below for interest rate swap transactions in the prior year's period). In addition, cash flows provided by operating activities for the nine months ended December 31, 2023 included a net benefit of approximately $40.1 million from the monetization of accounts receivables programs, as compared to a net benefit of approximately $77.0 million for the nine months ended December 31, 2022 (see Note 18 to our unaudited condensed consolidated financial statements).
During the nine months ended December 31, 2022, we terminated certain interest rate swaps (a portion of which were considered hybrid instruments with a financing component and an embedded at-market derivative
that was a designated cash flow hedge), and received approximately $56.4 million. The $56.4 million received was classified in the unaudited condensed consolidated statement of cash flows as cash provided by operating activities of $188.7 million reflecting the amount received for the derivative portion of the termination of swaps (and presented in the "proceeds from the termination of interest rate swaps" line item on the unaudited condensed consolidated statement of cash flows), and a use of cash in financing activities of $134.5 million reflecting the pay down of the financing component of the Terminated Swaps (inclusive of payments made between April 1, 2022 and the termination date amounting to $3.2 million) (see Financing Activities below). See Note 17 to our unaudited condensed consolidated financial statements.
Investing
Activities.Cash flows used in investing activities for the nine months ended December 31, 2023 and 2022 were as follows:
Proceeds from the sale of equity method and other investments
5.2
46.3
Investment
in equity method investees and other
(11.3)
(17.5)
Increase in loans receivable
(3.6)
—
Capital
expenditures
(24.7)
(36.6)
Net Cash Flows Used In Investing Activities
$
(365.5)
$
(7.8)
Cash flows used in investing activities of $365.5 million for the nine months ended December 31, 2023 compared to cash flows used in investing activities of $7.8 million
for the nine months ended December 31, 2022, primarily due to cash used for the purchase of eOne, net of cash acquired, in the current period and lower proceeds from the sale of equity method and other investments due to the sale of a portion of our ownership interest in STARZPLAY Arabia in the prior year's period, partially offset by lower cash used for capital expenditures and investment in equity method investees and other.
Financing Activities.Cash flows provided by (used in) financing activities for the nine months ended December 31, 2023 and 2022 were as follows:
Net proceeds from (repayments and repurchases of) debt
283.1
(310.3)
Film related obligations - borrowings
1,262.6
1,384.0
Film
related obligations - repayments
(1,530.3)
(694.8)
Net proceeds from (repayments of) film related obligations
(267.7)
689.2
Other
financing activities
(32.8)
(153.2)
Net Cash Flows Provided By (Used In) Financing Activities
$
(17.4)
$
225.7
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Cash flows used in financing activities
of $17.4 million for the nine months ended December 31, 2023 compared to cash flows provided by financing activities of $225.7 million for the nine months ended December 31, 2022. Cash flows used in financing activities for the nine months ended December 31, 2023 primarily reflects net film related obligations repayments of $267.7 million due to net repayments under production loans and the Production Tax Credit Facility of $188.1 million and net repayments under the Backlog Facility, IP Credit Facility and other of $79.6 million, and cash used for other financing activities of $32.8 million representing primarily tax withholding required on equity awards of $31.0 million. These uses of cash were partially offset by net proceeds from debt of $283.1 million in the nine months ended December 31,
2023, which included net borrowings under our revolving credit facility of $375.0 million to fund the purchase of eOne, which were offset by cash paid of $61.4 million for the repurchase of $85.0 million principal amount of the 5.500% Senior Notes, and required repayments on our term loans.
Cash flows provided by financing activities of $225.7 million for the nine months ended December 31, 2022 primarily reflects net film related obligations borrowings of $689.2 million due to net borrowings under production loans and the Production Tax Credit Facility of $430.2 million and increased net borrowings under the Backlog Facility, IP Credit Facility and other of $259.0 million, offset by net debt repayments of $310.3 million. Net debt repayments and repurchases of $310.3 million in the nine months ended December 31, 2022 included
the below transactions, along with required repayments on our term loans:
•In April 2022, we voluntarily prepaid the entire outstanding principal amount of the Term Loan A due March 22, 2023 of $193.6 million.
•During the nine months ended December 31, 2022, we repurchased $142.4 million principal amount of the 5.500% Senior Notes for $96.2 million.
In addition, other financing activities in the nine months ended December 31, 2022 includes $134.5 million for interest rate swap settlement payments due to a financing component on a portion of our interest rate swaps (inclusive of payments made between April
1, 2022 and the termination date amounting to $3.2 million) (see discussion above in Operating Activities, and Note 17 to our unaudited condensed consolidated financial statements). Other financing activities also includes tax withholding required on equity awards of $17.3 million.
Remaining Performance Obligations and Backlog
Remaining performance obligations represent deferred revenue on the balance sheet plus fixed fee or minimum guarantee contracts where the revenue will be recognized and the cash received in the future (i.e., backlog). As disclosed in Note 10 to our unaudited condensed consolidated financial statements, remaining performance obligations were $2.0 billion at December 31,
2023 (March 31, 2023 - $1.9 billion). The backlog portion of remaining performance obligations (excluding deferred revenue) related to our Motion Picture and Television Production segments was $1.6 billion at December 31, 2023 (March 31, 2023 - $1.5 billion).
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
Currency and Interest Rate Risk Management
Market risks relating to our operations result primarily
from changes in interest rates and changes in foreign currency exchange rates. Our exposure to interest rate risk results from the financial debt instruments that arise from transactions entered into during the normal course of business. As part of our overall risk management program, we evaluate and manage our exposure to changes in interest rates and currency exchange risks on an ongoing basis. Hedges and derivative financial instruments will continue to be used in the future in order to manage our interest rate and currency exposure. We have no intention of entering into financial derivative contracts, other than to hedge a specific financial risk. See Note 17 to our unaudited condensed consolidated financial statements for additional information on our financial instruments, and see Part II, Item 7A. “Quantitative and Qualitative Disclosures About Market Risk” found
in our Form 10-K.
Certain of our borrowings, primarily borrowings under our Senior Credit Facilities, and our film related obligations are, and are expected to continue to be, at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease. The applicable margin with respect to loans under the revolving credit facility and Term Loan A is a percentage per annum equal to SOFR plus 0.10% plus 1.75% margin. The applicable margin with respect to loans under our Term Loan B is a percentage per annum equal to SOFR plus 0.10% plus 2.25% margin. Assuming the revolving credit
93
facility
is drawn up to its maximum borrowing capacity of $1.25 billion, based on the applicable SOFR in effect as of December 31, 2023, each quarter point change in interest rates would result in a $1.9 million change in annual net interest expense on the revolving credit facility, Term Loan A, Term Loan B and interest rate swap agreements.
The variable interest film related obligations (which includes our production loans, programming notes, Production Tax Credit Facility, IP Credit Facility, Backlog Facility and other) incur primarily SOFR-based interest, with applicable margins ranging from 0.25% to 3.25% per annum. A quarter point increase of the interest rates on the variable interest film related obligations would result in $3.3 million in additional costs capitalized to the respective film or television asset for production loans and
programming notes (based on the outstanding principal amount of such loans), and a $1.4 million change in annual net interest expense (based on the outstanding principal amount of such loans, and assuming the Production Tax Credit Facility and Backlog Facility are utilized up to their maximum capacity of $250.0 million and $175.0 million, respectively).
At December 31, 2023, our 5.500% Senior Notes had an outstanding carrying value of $695.8 million, and an estimated fair value of $536.2 million. A 1% increase in the level of interest rates would decrease the fair value of the 5.500% Senior Notes by approximately $22.4 million, and a 1% decrease in the level of interest rates would increase the fair value of the 5.500% Senior Notes by approximately $23.6 million.
The following table presents
information about our financial instruments that are sensitive to changes in interest rates. The table also presents the cash flows of the principal amounts of the financial instruments, or the cash flows associated with the notional amounts of interest rate derivative instruments, and related weighted-average interest rates by expected maturity or required principal payment dates and the fair value of the instrument as of December 31, 2023:
(1)The
effective interest rate in the table above is before the impact of interest rate swaps.
(2)The outstanding amounts under the Revolving Credit Facility and Term Loan A may become due on December 23, 2024 (i.e. 91 days prior to March 24, 2025) prior to its maturity on April 6, 2026 in the event that the aggregate principal amount of outstanding Term Loan B in excess of $250 million has not been repaid, refinanced or extended to have a maturity date on or after July 6, 2026. The Company expects to refinance and extend the maturity date of the Term Loan B prior to December 23, 2024
such that the maturity of the revolving credit facility and Term Loan A are not accelerated.
(3)Represents amounts outstanding under film related obligations (i.e., production loans, Production Tax Credit Facility, programming notes, Backlog Facility and other, and IP Credit Facility), actual amounts outstanding and the timing of expected future repayments may vary in the future (see Note 7 to our unaudited condensed consolidated financial statements for further information).
94
(4)Represents interest rate swap agreements on certain of our SOFR-based floating-rate debt with fixed rates paid ranging from 2.723% to 2.915% with maturities in March 2025. See Note 17 to our unaudited
condensed consolidated financial statements.
Item 4.Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as amended (the “Exchange Act”). These rules refer to the controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within required time periods specified
in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As of December 31, 2023, the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that such controls and procedures were effective as of December 31, 2023.
Changes
in Internal Control over Financial Reporting
On December 27, 2023, we purchased all of the issued and outstanding equity interests of the companies constituting the Entertainment One television and film (“eOne”) business and, as a result, we have begun integrating the processes, systems and controls relating to eOne into our existing system of internal control over financial reporting in accordance with our integration plans. As required by Rule 13a-15(d) of the Exchange Act, the Company, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, has evaluated whether any changes occurred to the
Company’s internal control over financial reporting during the quarter ended December 31, 2023 that have materially affected, or are reasonably likely to materially affect, such control. Based on that evaluation, except for the processes, systems and controls relating to the integration of eOne, there has been no such change during the quarter ended December 31, 2023.
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PART II
Item 1. Legal
Proceedings.
From time to time, the Company is involved in certain claims and legal proceedings arising in the normal course of business. Due to the inherent difficulty of predicting the outcome of litigation and claims, the Company often cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, if any, related to each pending matter may be.
For a discussion of certain claims and legal proceedings, see Note 16 - Contingencies
to our unaudited condensed consolidated financial statements, which discussion is incorporated by reference into this Part II, Item 1, Legal Proceedings.
Item 1A. Risk Factors.
Other than as set forth below, there were no other material changes to the risk factors previously reported in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
If Entertainment One Canada Ltd. loses Canadian status, it could lose licenses,
incentives and tax credits.
Through the acquisition of eOne, the Company acquired the economic interests in Entertainment One Canada Ltd., a Canadian corporation (“EOCL”). EOCL is able to benefit from a number of licenses, incentive programs and Canadian government tax credits as a result of it being “Canadian controlled” as defined in the Investment Canada Act. The Company has taken measures to ensure that EOCL’s Canadian status is maintained. There can be no assurance, however, that EOCL will be able to continue to maintain its Canadian status. The loss of EOCL’s Canadian status could harm the Company’s business, including the possible
loss of future incentive programs and clawback of funding previously provided to EOCL.
The Company may fail to realize the anticipated benefits of the acquisition of eOne.
The Company may not be able to successfully integrate acquired personnel, operations, and technologies, or effectively manage the combined business following the eOne acquisition. The Company also may not achieve the anticipated benefits from the eOne acquisition due to a number of factors, including: (a) an inability to integrate or benefit from the acquisition in a profitable manner; (b) unanticipated
costs or liabilities associated with the acquisition; (c) the incurrence of acquisition-related costs; (d) the diversion of management’s attention from other business concerns; and (e) the loss of our or the acquired business’ key employees.
Risks Related to the Business Combination
The completion of the Business Combination is subject to conditions, including certain conditions that may not be satisfied on a timely basis, if at all.
On December 22, 2023, we entered into the Business Combination Agreement with Screaming Eagle Acquisition Corp., a Cayman Islands exempted company (“SEAC”), SEAC II Corp., a Cayman Islands exempted company and a wholly owned subsidiary of SEAC (“New SEAC”), SEAC MergerCo,
a Cayman Islands exempted company and a wholly owned subsidiary of New SEAC (“MergerCo”), 1455941 B.C. Unlimited Liability Company, a British Columbia unlimited liability company and a wholly owned subsidiary of SEAC (“New BC Sub”), LG Sirius Holdings ULC, a British Columbia unlimited liability company and a wholly owned subsidiary of us (“Studio HoldCo”), and LG Orion Holdings ULC, a British Columbia unlimited liability company and a wholly-owned subsidiary of Studio HoldCo (“StudioCo,” and such agreement, the “Business Combination Agreement”).
Pursuant to the Business Combination Agreement, among other things and subject to the terms and conditions contained therein, (i) SEAC will merge with and into MergerCo (the “SEAC Merger”) with MergerCo surviving the SEAC Merger as a direct, wholly owned subsidiary of New SEAC, (ii) MergerCo will distribute all of its assets
lawfully available for distribution to New SEAC by way of a cash dividend (the “Cash Distribution”), (iii) MergerCo will transfer by way of continuation from the Cayman Islands to British Columbia in accordance with the Cayman Islands Companies Act (as revised) (the “Companies Act”) and convert to a British Columbia unlimited liability company in accordance with the applicable provisions of the Business Corporations Act (British Columbia) (the “BC Act”) (the “MergerCo Domestication and Conversion”), (iv) New SEAC will transfer by way of continuation from the Cayman Islands (together with the MergerCo Domestication and Conversion, the “Domestications”) to British Columbia in accordance with the Companies Act and continue as a British Columbia company in accordance with the applicable provisions of the BC Act, (v) MergerCo and New BC Sub will amalgamate (the “MergerCo Amalgamation”) to form one corporate entity (“MergerCo Amalco”),
with the attributes and
96
effects set out in a Plan of Arrangement, substantially in the form attached to the Business Combination Agreement filed as Exhibit 2.1 on our Current Report on Form 8-K filed with the SEC on December 26, 2023 (“Plan of Arrangement”), (vi) New SEAC and MergerCo Amalco shall amalgamate (the “SEAC Amalgamation”) to form one corporate entity (“SEAC Amalco”) in accordance with the terms of the Plan of Arrangement, and (vii) StudioCo
and SEAC Amalco shall amalgamate to form one corporate entity ( “Pubco”), with the attributes and effects set out in the Plan of Arrangement (the “StudioCo Amalgamation” and, together with the MergerCo Amalgamation and the SEAC Amalgamation, the “Amalgamations,” and the Amalgamations together with the SEAC Merger, the Cash Distribution, and the Domestications, together with the other transactions contemplated by the Business Combination Agreement, the Plan of Arrangement and all other agreements, certificates and instruments entered into in connection therewith, the “Business Combination”).
As a result of the Business Combination, our Studio Business, which consists of our Motion Picture and Television
Production segments and our general corporate administrative function, will be held by Pubco, which will be a separate, publicly traded company listed on the Nasdaq Stock Market. It is expected that immediately following the consummation of the Business Combination, we will indirectly own a number of common shares of Pubco equal to approximately 87.2% of the common shares of Pubco then issued and outstanding, while the remaining common shares will be publicly held.
The completion of the Business Combination is subject to a number of conditions. The timing and completion of the Business Combination is not assured and is subject to risks, including the risk that approval of the Business Combination by SEAC Shareholders is not obtained or that there are not sufficient funds in the Trust Account (as defined in the Business Combination Agreement), in each case subject to certain terms specified in the Business Combination Agreement, or that
other Closing conditions are not satisfied. If we do not complete the Business Combination, we could be subject to various risks, including:
•the parties may be liable for damages to one another under certain circumstances pursuant to the terms and conditions of the Business Combination Agreement;
•negative reactions from the financial markets, including declines in the price of our common shares due to the fact that current prices may reflect a market assumption that the Business Combination will be completed; and
•the attention of our management will have been diverted to the Business Combination rather than the pursuit of other opportunities.
We may be subject to business
uncertainties while the Business Combination is pending.
Uncertainty about the effect of the Business Combination on employees and third parties may have an adverse effect on us. These uncertainties may impair the ability to retain and motivate key personnel and could cause third parties that deal with us to defer entering into contracts or making other decisions or seek to change existing business relationships.
We may be restricted during the pendency of the Business Combination pursuant to terms of the Business Combination Agreement.
Prior to the consummation of the Business Combination, we are subject to customary interim operating covenants relating to carrying on the Studio Business
in the ordinary course of business and are also subject to customary restrictions on actions that may be taken during such period without SEAC’s consent. As a result, we may be unable, during the pendency of the Business Combination, to make certain acquisitions and capital expenditures, borrow money and otherwise pursue other actions, even if such actions would prove beneficial.
We or Pubco may be held liable to the other if the other fails to perform under its agreements, and the performance of such services may negatively affect Pubco’s business and operations.
In connection with the Business Combination, we and Pubco will enter into a tax matters agreement, a shared services/overhead sharing agreement and a separation agreement that will provide for the performance of certain services by each company for the benefit of the other for a period
of time after the completion of the Business Combination. If we or Pubco do not satisfactorily perform our obligations under the agreement, one of us may be held liable for any resulting losses suffered by the other, subject to certain limits.
We may not be able to complete a separation of Pubco from the Starz Business of Lionsgate in a timely manner, or at all.
We currently contemplate a separation of the Studio Business, which will be held by Pubco following the consummation of the Business Combination, and the Starz Business, which consists of substantially all of the assets and liabilities constituting our Media Networks segment, into two independent companies. Our ability to effect and complete such a separation is subject to a number of conditions and risks, including general business, economic, market and financial conditions, regulatory
or other legal requirements, tax and capital structuring considerations and various other factors, all of which are difficult to predict and may be beyond our control. Therefore, there can be no assurance regarding the anticipated timing or structure of any separation of Pubco from the Starz Business or that the separation can be completed at all.
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We may fail to realize the anticipated benefits of the Business Combination.
We may not achieve the anticipated benefits from the Business Combination due to a number of factors, including: (a) unanticipated costs or liabilities associated with the Business Combination; (b) the incurrence of transaction-related costs; (c) the diversion of management’s
attention from other business concerns; and (d) the increased complexity and potential expense arising from the Studio Business being operated by Pubco, a separate public company.
We expect to incur significant transaction expenses in connection with the Business Combination.
We expect to incur substantial expenses, and devote significant resources, in connection with the completion of the Business Combination. The management of the combined business may face significant challenges in implementing the separation of the Studio Business into a separate public company, many of which may be beyond the control of management and which may result in increased costs and diversion of management’s time and energy, as well as materially adversely impact the anticipated benefits of the Business Combination and the business, financial condition and results
of operations of the Company and Pubco. Factors beyond the parties’ control could affect the total amount or timing of these expenses, many of which, by their nature, are difficult to estimate accurately. Some of these expenses have already been incurred or may be incurred regardless of whether the Business Combination is completed.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Securities
On May
31, 2007, our Board of Directors authorized the repurchase of up to $50 million of our common shares. On each of May 29, 2008 and November 6, 2008, our Board of Directors authorized additional repurchases up to an additional $50 million of our common shares. On December 17, 2013, our Board of Directors authorized the Company to increase its stock repurchase plan to $300 million and on February 2, 2016, our Board of Directors authorized the Company to further increase its stock repurchase plan to $468 million. To date, approximately $288.1 million (or 16,608,796) of our common shares have been purchased,
leaving approximately $179.9 million of authorized potential repurchases. The remaining $179.9 million of our common shares may be purchased from time to time at the Company’s discretion, including quantity, timing and price thereof, and will be subject to market conditions. Such purchases will be structured as permitted by securities laws and other legal requirements. The share repurchase program has no expiration date.
No common shares were purchased by us during the three months ended December 31, 2023.
Additionally, during the three months ended December 31, 2023, 4,517 Class A voting shares and 36,178 Class B non-voting
shares were withheld upon the vesting of restricted share units and restricted awards, share issuances and stock option exercises to satisfy minimum statutory federal, state and local tax withholding obligations.
The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended December 31, 2023, formatted in Inline XBRL: (i) Consolidated Balance Sheets (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statements of Equity (Deficit), (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags.
104x
The
cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2023 (formatted as Inline XBRL and contained in Exhibit 101).
__________________________
*
Management contract or compensatory plan or arrangement.
Furnished
herewith and not deemed to be "filed" for purposes of Section 18 of the Exchange Act and shall not be deemed to be incorporated by reference into any filing under the Securities Act, or the Exchange Act, irrespective of any general incorporation language contained in such filing
+
Certain of the exhibits and schedules to this Exhibit have been omitted in accordance with Regulation S-K Item 601(a)(5). The Registrant agrees to furnish a copy of all omitted exhibits and schedules to the SEC upon its request.
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SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
