Item 1. Financial Statements
Item 1. Financial Statements.
LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
June 30,
2023 March 31,
2023
(Amounts in millions)
ASSETS
Cash and cash equivalents $ 322.7 $ 272.1
Accounts receivable, net 516.3 582.1
Other current assets 277.7 264.2
Total current assets 1,116.7 1,118.4
Investment in films and television programs and program rights, net 3,008.1 2,947.9
Property and equipment, net 88.5 89.5
Investments 64.5 64.7
Intangible assets 1,265.6 1,300.1
Goodwill 1,289.5 1,289.5
Other assets 629.3 616.1
Total assets $ 7,462.2 $ 7,426.2
LIABILITIES
Accounts payable $ 350.3 $ 368.1
Content related payables 203.1 184.1
Other accrued liabilities 280.2 273.4
Participations and residuals 526.6 549.3
Film related obligations 1,314.0 1,007.2
Debt - short term portion 43.6 41.4
Deferred revenue 187.7 147.2
Total current liabilities 2,905.5 2,570.7
Debt 1,887.1 1,978.2
Participations and residuals 347.4 329.6
Film related obligations 858.8 1,016.4
Other liabilities 304.7 317.9
Deferred revenue 51.3 52.0
Deferred tax liabilities 32.0 31.8
Total liabilities 6,386.8 6,296.6
Commitments and contingencies (Note 14)
Redeemable noncontrolling interests 347.2 343.6
EQUITY
Class A voting common shares, no par value, 500.0 shares authorized, 83.5 shares issued (March 31, 2023 - 83.5 shares issued)
672.9 672.3
Class B non-voting common shares, no par value, 500.0 shares authorized, 148.0 shares issued (March 31, 2023 - 145.9 shares issued)
2,431.2 2,430.9
Accumulated deficit ( 2,516.3 ) ( 2,439.6 )
Accumulated other comprehensive income 138.6 120.9
Total Lions Gate Entertainment Corp. shareholders' equity 726.4 784.5
Noncontrolling interests 1.8 1.5
Total equity 728.2 786.0
Total liabilities, redeemable noncontrolling interests and equity $ 7,462.2 $ 7,426.2
See accompanying notes.
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LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
June 30,
2023 2022
(Amounts in millions, except per share amounts)
Revenues $ 908.6 $ 893.9
Expenses
Direct operating 481.2 596.5
Distribution and marketing 244.2 211.5
General and administration 123.6 103.7
Depreciation and amortization 44.4 42.4
Restructuring and other 32.0 8.0
Total expenses 925.4 962.1
Operating loss ( 16.8 ) ( 68.2 )
Interest expense ( 62.0 ) ( 46.1 )
Interest and other income 1.9 1.3
Other expense ( 5.7 ) ( 5.0 )
Gain (loss) on extinguishment of debt 21.2 ( 1.3 )
Gain on investments — 1.8
Equity interests income (loss) ( 0.3 ) 0.9
Loss before income taxes ( 61.7 ) ( 116.6 )
Income tax provision ( 9.8 ) ( 6.0 )
Net loss ( 71.5 ) ( 122.6 )
Less: Net loss attributable to noncontrolling interests 0.8 3.6
Net loss attributable to Lions Gate Entertainment Corp. shareholders $ ( 70.7 ) $ ( 119.0 )
Per share information attributable to Lions Gate Entertainment Corp. shareholders:
Basic net loss per common share $ ( 0.31 ) $ ( 0.53 )
Diluted net loss per common share $ ( 0.31 ) $ ( 0.53 )
Weighted average number of common shares outstanding:
Basic 230.2 225.6
Diluted 230.2 225.6
See accompanying notes.
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LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Net loss $ ( 71.5 ) $ ( 122.6 )
Foreign currency translation adjustments, net of tax 0.8 ( 3.0 )
Net unrealized gain on cash flow hedges, net of tax 16.9 48.9
Comprehensive loss ( 53.8 ) ( 76.7 )
Less: Comprehensive loss attributable to noncontrolling interests 0.8 3.6
Comprehensive loss attributable to Lions Gate Entertainment Corp. shareholders $ ( 53.0 ) $ ( 73.1 )
See accompanying notes.
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LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
Three Months Ended
Class A Voting Class B Non-Voting Accumulated Deficit Accumulated Other Comprehensive Income Lions Gate Entertainment Corp. Shareholders' Equity Noncontrolling Interests (a) Total Equity
Common Shares Common Shares
Number Amount Number Amount
(Amounts in millions)
Balance at March 31, 2023 83.5 $ 672.3 145.9 $ 2,430.9 $ ( 2,439.6 ) $ 120.9 $ 784.5 $ 1.5 $ 786.0
Share-based compensation, net of share cancellations for taxes — 0.3 2.1 — — — 0.3 — 0.3
Issuance of common shares — 0.3 — 0.3 — — 0.6 — 0.6
Net loss — — — — ( 70.7 ) — ( 70.7 ) 0.3 ( 70.4 )
Other comprehensive income — — — — — 17.7 17.7 — 17.7
Redeemable noncontrolling interests adjustments to redemption value — — — — ( 6.0 ) — ( 6.0 ) — ( 6.0 )
Balance at June 30, 2023 83.5 $ 672.9 148.0 $ 2,431.2 $ ( 2,516.3 ) $ 138.6 $ 726.4 $ 1.8 $ 728.2
Balance at March 31, 2022 83.3 $ 668.2 142.0 $ 2,353.8 $ ( 369.7 ) $ 29.3 $ 2,681.6 $ 1.8 $ 2,683.4
Exercise of stock options — — 0.3 3.5 — — 3.5 — 3.5
Share-based compensation, net of share cancellations for taxes — 1.1 — 5.8 — — 6.9 — 6.9
Issuance of common shares — 0.1 0.2 0.1 — — 0.2 — 0.2
Noncontrolling interests — — — — — — — ( 0.4 ) ( 0.4 )
Net loss — — — — ( 119.0 ) — ( 119.0 ) 0.2 ( 118.8 )
Other comprehensive income — — — — — 45.9 45.9 — 45.9
Redeemable noncontrolling interests adjustments to redemption value — — — — ( 16.0 ) — ( 16.0 ) — ( 16.0 )
Balance at June 30, 2022 83.3 $ 669.4 142.5 $ 2,363.2 $ ( 504.7 ) $ 75.2 $ 2,603.1 $ 1.6 $ 2,604.7
_____________________
(a) Excludes redeemable noncontrolling interests, which are reflected in temporary equity (see Note 7).
See accompanying notes.
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LIONS GATE ENTERTAINMENT CORP.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Operating Activities:
Net loss $ ( 71.5 ) $ ( 122.6 )
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 44.4 42.4
Amortization of films and television programs and program rights 359.9 472.0
Amortization of debt financing costs and other non-cash interest 6.8 7.2
Non-cash share-based compensation 16.5 8.4
Other amortization 11.8 23.1
Content impairments 28.0 —
(Gain) loss on extinguishment of debt ( 21.2 ) 1.3
Equity interests (income) loss 0.3 ( 0.9 )
Gain on investments — ( 1.8 )
Deferred income taxes 0.2 0.2
Changes in operating assets and liabilities:
Proceeds from the termination of interest rate swaps — 188.7
Accounts receivable, net 76.7 12.0
Investment in films and television programs and program rights, net ( 445.4 ) ( 608.4 )
Other assets ( 1.5 ) ( 6.6 )
Accounts payable and accrued liabilities ( 20.3 ) ( 51.8 )
Participations and residuals ( 7.4 ) ( 26.4 )
Content related payables 12.2 49.3
Deferred revenue 39.7 13.7
Net Cash Flows Provided By (Used In) Operating Activities 29.2 ( 0.2 )
Investing Activities:
Proceeds from the sale of other investments — 2.3
Investment in equity method investees and other — ( 7.5 )
Increase in loans receivable ( 0.9 ) —
Capital expenditures ( 8.9 ) ( 9.6 )
Net Cash Flows Used In Investing Activities ( 9.8 ) ( 14.8 )
Financing Activities:
Debt - borrowings, net of debt issuance and redemption costs 490.0 518.5
Debt - repurchases and repayments ( 560.1 ) ( 715.2 )
Film related obligations - borrowings 569.9 522.9
Film related obligations - repayments ( 423.7 ) ( 152.6 )
Settlement of financing component of interest rate swaps — ( 134.5 )
Purchase of noncontrolling interest ( 0.6 ) —
Distributions to noncontrolling interest — ( 1.7 )
Exercise of stock options 0.1 3.5
Tax withholding required on equity awards ( 15.1 ) ( 1.1 )
Net Cash Flows Provided By Financing Activities 60.5 39.8
Net Change In Cash, Cash Equivalents and Restricted Cash 79.9 24.8
Foreign Exchange Effects on Cash, Cash Equivalents and Restricted Cash 1.2 ( 3.5 )
Cash, Cash Equivalents and Restricted Cash - Beginning Of Period 313.0 384.6
Cash, Cash Equivalents and Restricted Cash - End Of Period $ 394.1 $ 405.9
See accompanying notes.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
Nature of Operations
Lionsgate Entertainment Corp. (the “Company,” “Lionsgate,” "Lions Gate," “we,” “us” or “our”) encompasses world-class motion picture and television studio operations 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 an 18,000 -title library and a valuable collection of iconic film and television franchises.
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 months ended June 30, 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.
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.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. Investment in Films and Television Programs and Licensed Program Rights
Total investment in films and television programs and licensed program rights by predominant monetization strategy is as follows:
June 30,
2023 March 31,
2023
(Amounts in millions)
Investment in Films and Television Programs:
Individual Monetization
Released, net of accumulated amortization $ 586.6 $ 611.7
Completed and not released 230.3 278.7
In progress 578.6 457.0
In development 69.9 64.1
1,465.4 1,411.5
Film Group Monetization
Released, net of accumulated amortization 601.5 657.8
Completed and not released 322.3 281.7
In progress 289.2 303.0
In development 10.3 8.2
1,223.3 1,250.7
Licensed program rights, net of accumulated amortization 319.4 285.7
Investment in films and television programs and licensed program rights, net $ 3,008.1 $ 2,947.9
At June 30, 2023, acquired film and television libraries have remaining unamortized costs of $ 129.2 million, which are monetized individually and are being amortized using the individual-film-forecast method over a remaining period of approximately 17.9 years (March 31, 2023 - unamortized costs of $ 132.8 million).
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:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Amortization expense:
Individual monetization $ 181.1 $ 267.9
Film group monetization 111.2 52.5
Licensed program rights 67.6 151.6
$ 359.9 $ 472.0
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LIONS GATE ENTERTAINMENT CORP.
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. The 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 months ended June 30, 2023 and 2022:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Impairments by segment:
Included in direct operating expense:
Motion Picture $ 0.2 $ 0.5
Television Production — 1.2
Impairments not included in segment operating results (1) :
Included in restructuring and other 28.0 —
$ 28.2 $ 1.7
________________
(1) Represents charges related to the Media Networks restructuring plan initiatives, including content impairment of programming in certain international territories exited. See Note 12 for further information.
3. Investments
The Company's investments consisted of the following:
June 30,
2023 March 31,
2023
(Amounts in millions)
Investments in equity method investees $ 62.9 $ 63.1
Other investments 1.6 1.6
$ 64.5 $ 64.7
Equity Method Investments:
The Company has investments in various equity method investees with ownership percentages ranging from approximately 6 % to 49 %. 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.
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.
Great Point Opportunity Fund. Great Point Opportunity Fund is an operating company that operates Lionsgate Studios Yonkers, a studio facility in Yonkers, New York.
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.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Other. In addition to the equity method investments discussed above, the Company holds ownership interests in other immaterial equity method investees.
Summarized Financial Information. Summarized financial information for the Company's equity method investees on an aggregate basis is set forth below:
June 30,
2023 March 31,
2023
(Amounts in millions)
Current assets $ 167.0 $ 189.0
Non-current assets $ 219.3 $ 203.0
Current liabilities $ 216.8 $ 215.5
Non-current liabilities $ 65.9 $ 65.0
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Revenues $ 45.7 $ 34.6
Gross profit $ 6.6 $ 12.2
Net loss $ ( 5.9 ) $ ( 2.0 )
4. Debt
Total debt of the Company, excluding film related obligations, was as follows:
June 30,
2023 March 31,
2023
(Amounts in millions)
Corporate debt:
Revolving Credit Facility $ — $ —
Term Loan A 422.6 428.2
Term Loan B 828.5 831.7
5.500 % Senior Notes
715.0 800.0
Total corporate debt 1,966.1 2,059.9
Unamortized debt issuance costs ( 35.4 ) ( 40.3 )
Total debt, net 1,930.7 2,019.6
Less current portion ( 43.6 ) ( 41.4 )
Non-current portion of debt $ 1,887.1 $ 1,978.2
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 $ 1.25 billion, and at June 30, 2023 there was $ 1.25 billion available. However, borrowing levels are subject to certain financial covenants as discussed below. There were no letters of credit outstanding at June 30, 2023. The Company is required to pay a quarterly commitment fee on the Revolving Credit Facility of 0.250 % to 0.375 % 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 $ 1.25 billion less the amount drawn.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 $ 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: March 24, 2025.
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 0.10 % plus 1.75 % margin (or an alternative base rate plus 0.75 %), with a SOFR floor of zero (prior to the amendment, bore interest at LIBOR plus 1.75 % margin, with a LIBOR floor of zero ). The margin is subject to potential increases of up to 50 basis points ( two ( 2 ) increases of 25 basis points each) upon certain increases to net first lien leverage ratios, as defined in the Credit Agreement (effective interest rate of 6.99 % as of June 30, 2023, before the impact of 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 0.10 % plus 2.25 % margin, with a SOFR floor of zero (or an alternative base rate plus 1.25 % margin) (prior to the amendment, bore interest at LIBOR plus 2.25 % margin with a LIBOR floor of zero ) (effective interest rate of 7.49 % as of June 30, 2023, before the impact of interest rate swaps).
Required Principal Payments:
• Term Loan A: Quarterly principal payments, at quarterly rates of 1.25 % beginning September 30, 2022, 1.75 % beginning September 30, 2023, and 2.50 % beginning September 30, 2024 through March 31, 2026, with the balance payable at maturity.
• Term Loan B: Quarterly principal payments at a quarterly rate of 0.25 %, 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 June 30, 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 50 % of the Company’s common shares.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
5.500 % Senior Notes
Interest: Bears interest at 5.500 % annually (payable semi-annually in arrears on April 15 and October 15 of each year, commencing on October 15, 2021).
Maturity Date: April 15, 2029.
Optional Redemption:
(i) Prior to April 15, 2024, the Company may redeem the 5.500 % Senior Notes in whole at any time, or in part from time to time, at a price equal to 100 % 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) 1.0 % 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 50 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 5.500 % 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 - 102.750 %; (ii) on or after April 15, 2025 - 101.375 %; and (iii) on or after April 15, 2026 - 100 %. In addition, the Company may redeem up to 40 % 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 105.500 % of the aggregate principal amount thereof, plus accrued and unpaid interest, if any, to, but not including, the redemption date.
Security. The 5.500 % Senior Notes are unsubordinated, unsecured obligations of the Company.
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 June 30, 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 5.500 % Senior Notes, at a price equal to 101 % 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 5.500 % Senior Notes at 100 % of their principal amount, plus accrued and unpaid interest, if any, to the date of purchase.
Capacity to Pay Dividends
At June 30, 2023, the capacity to pay dividends under the Senior Credit Facilities and the 5.500 % Senior Notes significantly exceeded the amount of the Company's accumulated deficit or net loss, and therefore the Company's net loss of $ 71.5 million and accumulated deficit of $ 2,516.3 million were deemed free of restrictions from paying dividends at June 30, 2023.
Debt Transactions:
Senior Notes Repurchases. In the three months ended June 30, 2023, the Company repurchased $ 85.0 million principal amount of the 5.500 % Senior Notes for $ 61.4 million, together with accrued and unpaid interest.
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 $ 193.6 million, together with accrued and unpaid interest.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Gain (Loss) on Extinguishment of Debt:
During the three months ended June 30, 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:
Three Months Ended
June 30,
2023 2022
Gain (Loss) on Extinguishment of Debt:
Senior Notes repurchases $ 21.2 $ —
Term Loan A prepayment — ( 1.3 )
$ 21.2 $ ( 1.3 )
5. Film Related Obligations
June 30,
2023 March 31,
2023
(Amounts in millions)
Film related obligations:
Production Loans $ 1,374.4 $ 1,349.9
Production Tax Credit Facility 235.0 231.8
Programming Notes 62.2 83.6
Backlog Facility and Other 381.1 226.0
IP Credit Facility 133.1 143.8
Total film related obligations 2,185.8 2,035.1
Unamortized debt issuance costs ( 13.0 ) ( 11.5 )
Total film related obligations, net 2,172.8 2,023.6
Less current portion ( 1,314.0 ) ( 1,007.2 )
Total non-current film related obligations $ 858.8 $ 1,016.4
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 and LIBOR-based interest at a weighted average rate of 6.95 % (before the impact of interest rate swaps, see Note 15 for interest rate swaps). Production loans amounting to $ 1,286.5 million are secured by collateral which consists of the underlying rights related to the intellectual property (i.e. film or television show), and $ 87.9 million are unsecured.
Production Tax Credit Facility. In January 2021, as amended in March 2022, 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 $ 235.0 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 0.10 % to 0.25 % depending on the SOFR term (i.e., one, three or six months), plus 1.50 % per annum or the base rate plus 0.50 % per annum (effective interest rate of 6.74 % at
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
June 30, 2023). The Production Tax Credit Facility matures on January 27, 2025. As of June 30, 2023, there were no 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 August 2023, and incur SOFR-based interest at a weighted average rate of 8.10 %.
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 $ 161.9 million, subject to the amount of collateral available, which is based on the valuation of cash flows from the libraries. The 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:
Cumulative Period From
September 29, 2022 Through: Cumulative Minimum Guaranteed Payment Amounts Payment Due Date
(in millions)
September 30, 2023 $ 30.4 November 14, 2023
September 30, 2024 $ 60.7 November 14, 2024
September 30, 2025 $ 91.1 November 14, 2025
September 30, 2026 $ 121.4 November 14, 2026
July 30, 2027 $ 161.9 July 30, 2027
Advances under the IP Credit Facility bear interest at a rate equal to, at the Company’s option, SOFR plus 0.11 % to 0.26 % depending on the SOFR term (i.e., one or three months) plus 2.25 % per annum (with a SOFR floor of 0.25 %) or the base rate plus 1.25 % per annum (effective interest rate of 7.82 % at June 30, 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 $ 175.0 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 0.10 % to 0.25 % depending on the SOFR term (i.e., one, three or six months), plus an applicable margin amounting to 1.15 % per annum. The applicable margin is subject to a potential increase to either 1.25 % or 1.50 % based on the weighted average credit quality rating of the collateral contributed to the facility (effective interest rate of 6.39 % at June 30, 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 2 years, 90 days after the revolving period ends, currently August 14, 2027. As of June 30, 2023, there was $ 175.0 million outstanding under the Backlog Facility, and there were no amounts available under the Backlog Facility (March 31, 2023 - $ 175.0 million outstanding).
Other. In June 2022, the Company borrowed $ 118.6 million under a loan agreement which was secured by contracted receivables which are not yet recognized as revenue under certain licensing agreements (the "June 2022 Distribution Loan"), which was fully repaid in the second and third quarter of fiscal 2023.
In September 2022, the Company borrowed $ 43.4 million under a loan agreement which matures on March 28, 2026 (the "September 2022 Distribution Loan") and bears interest at a rate equal to Term SOFR plus 0.11 %, plus an applicable margin amounting to 1.50 % per annum (effective interest rate of 6.75 % at June 30, 2023). As of June 30, 2023, $ 36.6 million remains outstanding under the September 2022 Distribution Loan.
In December 2022, the Company borrowed $ 16.2 million under a loan agreement which matures on November 1, 2025 (the "December 2022 Distribution Loan"), and bears interest at a rate equal to Term SOFR plus 0.11 %, plus an applicable margin amounting to 2.10 % per annum (effective interest rate of 7.35 % at June 30, 2023). The December 2022 Distribution Loan provides for total borrowings up to an aggregate of $ 18.7 million. As of June 30, 2023, $ 11.4 million remains outstanding under the December 2022 Distribution Loan.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In June 2023, the Company borrowed an aggregate of $ 158.1 million under a loan agreement (the "June 2023 Distribution Loan", and together with the September 2022 Distribution Loan and December 2022 Distribution Loan, the "Distribution Loans"), of which $ 110.0 million matures on June 30, 2026 and bears interest at a rate equal to Term SOFR plus 1.50 % per annum (effective interest rate of 6.64 % at June 30, 2023), and $ 48.1 million matures on August 6, 2025 and bears interest at a rate equal to Term SOFR plus 1.40 % per annum (effective interest rate of 6.54 % at June 30, 2023). As of June 30, 2023, $ 158.1 million remains outstanding under the June 2023 Distribution Loan.
Outstanding loan balances under the Distribution 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. As of June 30, 2023, an aggregate of $ 206.1 million remains outstanding under the Distribution Loans.
6. Fair 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.
Fair Value Hierarchy
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.
The following table sets forth the assets and liabilities required to be carried at fair value on a recurring basis as of June 30, 2023 and March 31, 2023:
June 30, 2023 March 31, 2023
Level 1 Level 2 Total Level 1 Level 2 Total
Assets: (Amounts in millions)
Forward exchange contracts (see Note 15)
$ — $ 0.2 $ 0.2 $ — $ 2.9 $ 2.9
Interest rate swaps (see Note 15)
— 59.0 59.0 — 41.1 41.1
Liabilities:
Forward exchange contracts (see Note 15)
— ( 0.4 ) ( 0.4 ) — ( 0.1 ) ( 0.1 )
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth the carrying values and fair values of the Company’s outstanding debt and film related obligations at June 30, 2023 and March 31, 2023:
June 30, 2023 March 31, 2023
(Amounts in millions)
Carrying
Value Fair Value (1)
Carrying Value Fair Value (1)
(Level 2) (Level 2)
Term Loan A $ 419.0 $ 416.3 $ 424.2 $ 415.4
Term Loan B 824.6 825.4 827.2 817.1
5.500 % Senior Notes
694.3 511.2 776.0 510.0
Production Loans 1,369.2 1,374.4 1,346.1 1,349.9
Production Tax Credit Facility 233.0 235.0 229.4 231.8
Programming Notes 62.2 62.2 83.6 83.6
Backlog Facility and Other 378.0 381.1 223.7 226.0
IP Credit Facility 130.4 133.1 140.8 143.8
________________
(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 June 30, 2023 and March 31, 2023.
7. Noncontrolling Interests
Redeemable Noncontrolling Interests
The table below presents the reconciliation of changes in redeemable noncontrolling interests:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Beginning balance $ 343.6 $ 321.2
Net loss attributable to redeemable noncontrolling interests ( 1.2 ) ( 3.8 )
Noncontrolling interests discount accretion — 4.9
Adjustments to redemption value 6.0 16.0
Cash distributions ( 0.6 ) ( 1.7 )
Purchase of noncontrolling interest ( 0.6 ) —
Ending balance $ 347.2 $ 336.6
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. The Company has a redeemable noncontrolling interest representing 49 % of 3 Arts Entertainment. Pursuant to an amendment dated July 31, 2023, the put rights associated with the 3 Arts Entertainment noncontrolling interest were extended, such that the noncontrolling interest holders have a right to put the noncontrolling interest of 3 Arts Entertainment, at fair value, exercisable beginning August 15, 2023, for a 60 day period. Beginning 30 days after the expiration
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of the exercise period for the put rights held by the noncontrolling interest holders, the Company has a right to call the noncontrolling interest of 3 Arts Entertainment, at fair value, for a 60 day period. 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, the noncontrolling interest holder's interest is presented as redeemable noncontrolling interest outside of shareholders' equity on the Company's consolidated balance sheets.
In addition, the noncontrolling interest holders have continued as 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 also accounted for as compensation, and is being 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.
A portion of the purchase price of the controlling interest in 3 Arts Entertainment, up to $ 38.3 million, was recoupable for a five-year period commencing on the acquisition date of May 29, 2018, contingent upon the continued employment of certain employees, or the achievement of certain EBITDA targets, as defined in the 3 Arts Entertainment acquisition and related agreements. Accordingly, $ 38.3 million was initially recorded as a deferred compensation arrangement within other current and non-current assets and was amortized in general and administrative expenses over the five-year period.
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. 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 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.
8. Revenue
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
The table below presents revenues by segment, market or product line for the three months ended June 30, 2023 and 2022:
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Revenue by Type:
Motion Picture
Theatrical $ 65.9 $ 10.9
Home Entertainment
Digital Media 174.1 132.2
Packaged Media 25.9 22.1
Total Home Entertainment 200.0 154.3
Television 48.5 45.3
International 81.0 65.7
Other 11.1 2.6
Total Motion Picture revenues 406.5 278.8
Television Production
Television 150.0 301.3
International 31.9 79.3
Home Entertainment
Digital Media 11.8 31.3
Packaged Media 0.4 0.9
Total Home Entertainment 12.2 32.2
Other 24.4 19.5
Total Television Production revenues 218.5 432.3
Media Networks - Programming Revenues
Domestic 337.4 349.6
International 43.7 31.6
381.1 381.2
Intersegment eliminations ( 97.5 ) ( 198.4 )
Total revenues $ 908.6 $ 893.9
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). Revenues expected to be recognized in the future related to performance obligations that are unsatisfied at June 30, 2023 are as follows:
Rest of Year Ending March 31, 2024 Year Ending March 31,
2025 2026 Thereafter Total
(Amounts in millions)
Remaining Performance Obligations $ 1,115.1 $ 472.7 $ 203.1 $ 100.5 $ 1,891.4
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.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Revenues of $ 106.9 million, including variable and fixed fee arrangements, were recognized during the three months ended June 30, 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 16 for accounts receivable, contract assets and deferred revenue balances at June 30, 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.
Changes in the provision for doubtful accounts consisted of the following:
March 31, 2023 (Benefit) provision for doubtful accounts Uncollectible accounts written-off (1)
June 30, 2023
(Amounts in millions)
Provision for doubtful accounts $ 9.2 $ — $ ( 3.3 ) $ 5.9
_______________________
(1) 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 (e.g., unbilled receivables). 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 16 for contract assets at June 30, 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 $ 86.3 million were recognized during the three months ended June 30, 2023 related to the balance of deferred revenue at March 31, 2023.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
9. Net Loss Per Share
Basic net loss per share is calculated based on the weighted average common shares outstanding for the period. Basic and diluted net loss per share for the three months ended June 30, 2023 and 2022 is presented below:
Three Months Ended
June 30,
2023 2022
(Amounts in millions, except per share amounts)
Basic and Diluted Net Loss Per Common Share:
Numerator:
Net loss attributable to Lions Gate Entertainment Corp. shareholders $ ( 70.7 ) $ ( 119.0 )
Denominator:
Weighted average common shares outstanding 230.2 225.6
Basic and diluted net loss per common share $ ( 0.31 ) $ ( 0.53 )
As a result of the net loss in the three months ended June 30, 2023 and 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 months ended June 30, 2023 totaled 5.6 million (three months ended June 30, 2022 - 3.8 million).
Additionally, for the three months ended June 30, 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.
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Anti-dilutive shares issuable
Share purchase options 17.0 19.6
Restricted share units 0.2 0.1
Other issuable shares 3.8 2.7
Total weighted average anti-dilutive shares issuable excluded from diluted net loss per common share 21.0 22.4
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
10. Capital Stock
(a) Common Shares
The Company had 500 million authorized Class A voting shares and 500 million authorized Class B non-voting shares at June 30, 2023 and March 31, 2023. The table below outlines common shares reserved for future issuance:
June 30,
2023 March 31,
2023
(Amounts in millions)
Stock options and share appreciation rights (SARs) outstanding 21.5 24.8
Restricted share units and restricted stock — unvested 10.4 14.0
Common shares available for future issuance 16.2 11.4
Shares reserved for future issuance 48.1 50.2
(b) Share-based Compensation
The Company recognized the following share-based compensation expense during the three months ended June 30, 2023 and 2022:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Compensation Expense:
Stock options $ 0.9 $ 1.7
Restricted share units and other share-based compensation 14.3 5.8
Share appreciation rights 0.7 0.3
15.9 7.8
Impact of accelerated vesting on equity awards (1)
0.5 0.6
Total share-based compensation expense $ 16.4 $ 8.4
___________________
(1) Represents the impact of the acceleration of vesting schedules for equity awards pursuant to certain severance arrangements.
Share-based compensation expense, by expense category, consisted of the following:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Share-Based Compensation Expense:
Direct operating $ 0.4 $ 0.2
Distribution and marketing 0.2 0.1
General and administration 15.3 7.5
Restructuring and other 0.5 0.6
$ 16.4 $ 8.4
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth the stock option, SARs, restricted stock and restricted share unit activity during the three months ended June 30, 2023:
Stock Options and SARs Restricted Stock and Restricted Share Units
Class A Voting Shares Class B Non-Voting Shares Class A Voting Shares Class B Non-Voting Shares
Number of Shares Weighted-Average Exercise Price Number of Shares Weighted-Average Exercise Price Number of Shares Weighted-Average Grant-Date Fair Value Number of Shares Weighted-Average Grant-Date Fair Value
(Number of shares in millions)
Outstanding at March 31, 2023 4.3 $ 26.35 20.5 $ 15.23 — (1)
$ 10.95 14.0 $ 9.48
Granted — — — — — — 0.1 $ 9.17
Options exercised or restricted stock or RSUs vested — — — (1)
$ 7.15 — — ( 3.6 ) $ 9.60
Forfeited or expired ( 1.6 ) $ 29.54 ( 1.7 ) $ 29.77 — — ( 0.1 ) $ 9.24
Outstanding at June 30, 2023 2.7 $ 24.45 18.8 $ 14.12 — (1)
$ 10.95 10.4 $ 9.43
__________________
(1) Represents less than 0.1 million shares.
(c) Share Repurchases
During the three months ended June 30, 2023 and 2022, the Company did not repurchase any common shares. To date, approximately $ 288.1 million common shares have been repurchased, leaving approximately $ 179.9 million of authorized potential repurchases.
11. Income Taxes
The income tax provision for the three months ended June 30, 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 months ended June 30, 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 months ended June 30, 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'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.
12. Restructuring and Other
Restructuring and other includes restructuring and severance costs, certain transaction and other costs, and certain unusual items, when applicable. During the three months ended June 30, 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 months ended June 30, 2023 and 2022:
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Restructuring and other:
Content impairments (1)
$ 28.0 $ —
Severance (2)
Cash 4.3 2.8
Accelerated vesting on equity awards (see Note 10)
0.5 0.6
Total severance costs 4.8 3.4
COVID-19 related charges included in restructuring and other — 0.1
Transaction and other costs (benefits) (3)
( 0.8 ) 4.5
Total Restructuring and Other 32.0 8.0
Other unusual charges not included in restructuring and other or the Company's operating segments:
COVID-19 related charges (benefit) included in direct operating expense (4)
0.2 ( 1.0 )
Total restructuring and other and other unusual charges not included in restructuring and other $ 32.2 $ 7.0
_______________________
(1) Media Networks Restructuring: In fiscal 2023, the Company began a plan to restructure its LIONSGATE+ business, which 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. As a result of these restructuring initiatives, the Company recorded content impairment charges related to the Media Networks segment in the three months ended June 30, 2023 of $ 28.0 million. The Company has incurred impairment charges from the inception of the plan through June 30, 2023 amounting to $ 407.3 million.
Under the current restructuring plan, the Company estimates it will incur additional charges ranging from approximately $ 5 million to $ 30 million related to certain contractual content commitments or programming content impairment charges, among other items, related to territories exited or to be exited. The net future cash outlay is estimated to range from approximately $ 60 million to $ 90 million, which includes contractual commitments on content in territories being exited or to be exited, and payments on the remaining amounts payable for content previously written down.
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. 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 toward the end of calendar 2023. The Company may incur additional content impairment and other restructuring charges beyond the estimates above.
(2) Severance costs were primarily related to restructuring activities and other cost-saving initiatives.
(3) Transaction and other costs in the three months ended June 30, 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 June 30, 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.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(4) Amounts include incremental costs incurred due to circumstances associated with the COVID-19 global pandemic, net of immaterial insurance recoveries in the three months ended June 30, 2023 (three months ended June 30, 2022 - insurance recoveries of $ 1.0 million). In the three months ended June 30, 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.
Changes in the restructuring and other severance liability were as follows for the three months ended June 30, 2023 and 2022:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Severance liability
Beginning balance $ 8.7 $ 1.5
Accruals 4.3 2.8
Severance payments ( 8.2 ) ( 2.0 )
Ending balance (1)
$ 4.8 $ 2.3
_______________________
(1) As of June 30, 2023, the remaining severance liability of approximately $ 4.8 million is expected to be paid in the next 12 months.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
13. Segment 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 three 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.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Segment information is presented in the table below:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Segment revenues
Studio Business:
Motion Picture $ 406.5 $ 278.8
Television Production 218.5 432.3
Total Studio Business 625.0 711.1
Media Networks 381.1 381.2
Intersegment eliminations ( 97.5 ) ( 198.4 )
$ 908.6 $ 893.9
Intersegment revenues
Studio Business:
Motion Picture $ 16.5 $ 3.5
Television Production 81.0 194.9
Total Studio Business 97.5 198.4
Media Networks — —
$ 97.5 $ 198.4
Gross contribution
Studio Business:
Motion Picture $ 98.6 $ 73.1
Television Production 35.6 30.7
Total Studio Business 134.2 103.8
Media Networks 57.7 ( 13.5 )
Intersegment eliminations ( 7.9 ) ( 5.1 )
$ 184.0 $ 85.2
Segment general and administration
Studio Business:
Motion Picture $ 29.4 $ 22.6
Television Production 12.7 11.1
Total Studio Business 42.1 33.7
Media Networks 25.8 23.5
$ 67.9 $ 57.2
Segment profit (loss)
Studio Business:
Motion Picture $ 69.2 $ 50.5
Television Production 22.9 19.6
Total Studio Business 92.1 70.1
Media Networks 31.9 ( 37.0 )
Intersegment eliminations ( 7.9 ) ( 5.1 )
$ 116.1 $ 28.0
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
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LIONS GATE ENTERTAINMENT CORP.
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.
The reconciliation of total segment profit to the Company’s loss before income taxes is as follows:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Company’s total segment profit $ 116.1 $ 28.0
Corporate general and administrative expenses (1)
( 30.4 ) ( 23.0 )
Adjusted depreciation and amortization (2)
( 10.0 ) ( 10.1 )
Restructuring and other (3)
( 32.0 ) ( 8.0 )
COVID-19 related benefit (charges) included in direct operating expense (4)
( 0.2 ) 1.0
Adjusted share-based compensation expense (5)
( 15.9 ) ( 7.8 )
Purchase accounting and related adjustments (6)
( 44.4 ) ( 48.3 )
Operating loss ( 16.8 ) ( 68.2 )
Interest expense ( 62.0 ) ( 46.1 )
Interest and other income 1.9 1.3
Other expense ( 5.7 ) ( 5.0 )
Gain (loss) on extinguishment of debt 21.2 ( 1.3 )
Gain on investments — 1.8
Equity interests income (loss) ( 0.3 ) 0.9
Loss before income taxes $ ( 61.7 ) $ ( 116.6 )
___________________
(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:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Depreciation and amortization $ 44.4 $ 42.4
Less: Amount included in purchase accounting and related adjustments ( 34.4 ) ( 32.3 )
Adjusted depreciation and amortization $ 10.0 $ 10.1
(3) Restructuring and other includes restructuring and severance costs, certain transaction and other costs, and certain unusual items, when applicable (see Note 12).
(4) Amounts represent the incremental costs included in direct operating expense resulting from circumstances associated with the COVID-19 global pandemic, net of insurance recoveries. During the three months ended June 30, 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 12). These charges (benefits) are excluded from segment operating results.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(5) The following table reconciles total share-based compensation expense to adjusted share-based compensation expense:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Total share-based compensation expense $ 16.4 $ 8.4
Less:
Amount included in restructuring and other (i)
( 0.5 ) ( 0.6 )
Adjusted share-based compensation $ 15.9 $ 7.8
(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.
(6) 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:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Purchase accounting and related adjustments:
General and administrative expense (i)
$ 10.0 $ 16.0
Depreciation and amortization 34.4 32.3
$ 44.4 $ 48.3
(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.
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Amortization of recoupable portion of the purchase price $ 1.3 $ 1.9
Noncontrolling interest discount amortization — 4.9
Noncontrolling equity interest in distributable earnings 8.7 9.2
$ 10.0 $ 16.0
See Note 8 for revenues by media or product line as broken down by segment for the three months ended June 30, 2023 and 2022.
The following table reconciles segment general and administration expense to the Company's total consolidated general and administration expense:
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
General and administration
Segment general and administrative expenses $ 67.9 $ 57.2
Corporate general and administrative expenses 30.4 23.0
Share-based compensation expense included in general and administrative expense 15.3 7.5
Purchase accounting and related adjustments 10.0 16.0
$ 123.6 $ 103.7
The reconciliation of total segment assets to the Company’s total consolidated assets is as follows:
June 30,
2023 March 31,
2023
(Amounts in millions)
Assets
Motion Picture $ 1,743.4 $ 1,759.4
Television Production 1,989.8 1,949.1
Media Networks 3,033.3 3,120.8
Other unallocated assets (1)
695.7 596.9
$ 7,462.2 $ 7,426.2
_____________________
(1) Other unallocated assets primarily consist of cash, other assets and investments.
14. Contingencies
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 June 30, 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.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
15. Derivative Instruments and Hedging Activities
Forward Foreign Exchange Contracts
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.
As of June 30, 2023, the Company had the following outstanding forward foreign exchange contracts (all outstanding contracts have maturities of less than 27 months from June 30, 2023):
June 30, 2023
Foreign Currency Foreign Currency Amount US Dollar Amount Weighted Average Exchange Rate Per $1 USD
(Amounts in millions) (Amounts in millions)
British Pound Sterling 0.2 GBP in exchange for $ 0.2 0.84 GBP
Czech Koruna 180.0 CZK in exchange for $ 7.5 23.11 CZK
Euro 3.6 EUR in exchange for $ 4.6 0.94 EUR
Canadian Dollar 18.7 CAD in exchange for $ 14.0 1.34 CAD
Polish Zloty 8.0 PLN in exchange for $ 1.9 4.24 PLN
Hungarian Forint 41.2 HUF in exchange for $ 0.1 341.56 HUF
Mexican Peso 6.1 MXN in exchange for $ 0.2 19.77 MXN
Interest Rate Swaps
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).
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.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Designated Cash Flow Hedges. As of June 30, 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 4 and Note 5):
Effective Date Notional Amount Fixed Rate Paid Maturity Date
(in millions)
May 23, 2018 $ 300.0 2.915 % March 24, 2025
May 23, 2018 $ 700.0 2.915 % March 24, 2025 (1)
June 25, 2018 $ 200.0 2.723 % March 23, 2025 (1)
July 31, 2018 $ 300.0 2.885 % March 23, 2025 (1)
December 24, 2018 $ 50.0 2.744 % March 23, 2025 (1)
December 24, 2018 $ 100.0 2.808 % March 23, 2025 (1)
December 24, 2018 $ 50.0 2.728 % March 23, 2025 (1)
Total $ 1,700.0
__________________
(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 $ 56.4 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 $ 56.4 million as a result of the termination was recorded as a reduction of the asset values of the derivatives amounting to $ 188.7 million and a reduction of the financing component (debt host) of the Terminated Swaps amounting to $ 131.3 million. At the time of the termination of the Terminated Swaps, there was approximately $ 180.4 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 $ 6.8 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 $ 56.4 million 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 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).
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Statement Effect of Derivatives
Unaudited condensed consolidated statements of operations and comprehensive loss: The 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 months ended June 30, 2023 and 2022:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Derivatives designated as cash flow hedges:
Forward exchange contracts
Loss recognized in accumulated other comprehensive income (loss) $ ( 2.5 ) $ ( 0.4 )
Gain (loss) reclassified from accumulated other comprehensive income (loss) into direct operating expense $ 0.4 $ ( 0.9 )
Interest rate swaps
Gain recognized in accumulated other comprehensive income (loss) $ 27.1 $ 36.7
Gain (loss) reclassified from accumulated other comprehensive income (loss) into interest expense $ 9.1 $ ( 6.1 )
Derivatives not designated as cash flow hedges:
Interest rate swaps
Loss reclassified from accumulated other comprehensive income (loss) into interest expense $ ( 1.9 ) $ ( 5.6 )
Total direct operating expense on consolidated statements of operations $ 481.2 $ 596.5
Total interest expense on consolidated statements of operations $ 62.0 $ 46.1
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 6). 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 June 30, 2023 and March 31, 2023, there were no swaps outstanding that were subject to a master netting arrangement.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As of June 30, 2023 and March 31, 2023, the Company had the following amounts recorded in the accompanying unaudited condensed consolidated balance sheets related to the Company's use of derivatives:
June 30, 2023
Other Current Assets Other Non-Current Assets Other Accrued Liabilities Other Non-Current Liabilities
(Amounts in millions)
Derivatives designated as cash flow hedges:
Forward exchange contracts $ 0.2 $ — $ 0.4 $ —
Interest rate swaps — 59.0 — —
Fair value of derivatives $ 0.2 $ 59.0 $ 0.4 $ —
March 31, 2023
Other Current Assets Other Non-Current Assets Other Accrued Liabilities Other Non-Current Liabilities
(Amounts in millions)
Derivatives designated as cash flow hedges:
Forward exchange contracts $ 2.9 $ — $ 0.1 $ —
Interest rate swaps — 41.1 — —
Fair value of derivatives $ 2.9 41.1 $ 0.1 —
.
As of June 30, 2023, based on the current release schedule, the Company estimates approximately $ 3.9 million of gains 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 June 30, 2024.
As of June 30, 2023, the Company estimates approximately $ 34.1 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 June 30, 2024.
16. Additional Financial Information
The following tables present supplemental information related to the unaudited condensed consolidated financial statements.
Cash, Cash Equivalents and Restricted Cash
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 June 30, 2023 and March 31, 2023. At June 30, 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, Backlog Facility, and Distribution Loans.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
June 30,
2023 March 31,
2023
(Amounts in millions)
Cash and cash equivalents $ 322.7 $ 272.1
Restricted cash included in other current assets 51.7 27.9
Restricted cash included in other non-current assets 19.7 13.0
Total cash, cash equivalents and restricted cash $ 394.1 $ 313.0
Other Assets
The composition of the Company’s other assets is as follows as of June 30, 2023 and March 31, 2023:
June 30,
2023 March 31,
2023
(Amounts in millions)
Other current assets
Prepaid expenses and other $ 50.5 $ 43.3
Restricted cash 51.7 27.9
Contract assets 53.5 63.5
Tax credits receivable 122.0 129.5
$ 277.7 $ 264.2
Other non-current assets
Prepaid expenses and other $ 9.1 $ 8.4
Restricted cash 19.7 13.0
Accounts receivable 27.8 37.8
Contract assets 6.6 5.1
Tax credits receivable 348.5 341.7
Operating lease right-of-use assets 158.6 169.0
Interest rate swap assets 59.0 41.1
$ 629.3 $ 616.1
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 receives fees for servicing the accounts receivable for the purchasers, which represent the fair value of the services and were immaterial for the three months ended June 30, 2023 and 2022.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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. The following table sets forth a summary of the receivables transferred under individual agreements or purchases during the three months ended June 30, 2023 and 2022:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Carrying value of receivables transferred and derecognized $ 341.3 $ 337.3
Net cash proceeds received 336.6 333.7
Loss recorded related to transfers of receivables 4.7 3.6
At June 30, 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 $ 500.2 million (March 31, 2023 - $ 520.4 million).
Pooled Monetization Agreement. In December 2019, the Company entered into a revolving agreement, as amended in July 2023 to transfer up to $ 100.0 million of certain receivables to various financial institutions on a recurring basis in exchange for cash equal to the gross receivables transferred, which expires the earlier of October 1, 2023 or the date of the separation of the Company's Starz Business (i.e., Media Networks segment) and Studio Business (i.e., Motion Picture and Television Production segments). As customers pay their balances, the Company transfers additional receivables into the program. The transferred receivables are fully guaranteed by a bankruptcy-remote wholly-owned subsidiary of the Company, which holds additional receivables in the amount of $ 62.5 million as of June 30, 2023 that are pledged as collateral under this agreement. The third-party purchasers have 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 months ended June 30, 2023 and 2022:
Three Months Ended
June 30,
2023 2022
(Amounts in millions)
Gross cash proceeds received for receivables transferred and derecognized $ 5.8 $ 60.8
Less amounts from collections reinvested under revolving agreement ( 2.9 ) ( 24.1 )
Proceeds from new transfers 2.9 36.7
Collections not reinvested and remitted or to be remitted 0.5 ( 16.8 )
Net cash proceeds received (paid or to be paid) (1)
$ 3.4 $ 19.9
Carrying value of receivables transferred and derecognized (2)
$ 5.8 $ 59.1
Obligations recorded $ 1.1 $ 3.0
Loss recorded related to transfers of receivables $ 1.0 $ 1.3
___________________
(1) In addition, during the three months ended June 30, 2022, the Company repurchased $ 20.9 million 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.
At June 30, 2023, the outstanding amount of receivables derecognized from the Company's unaudited condensed consolidated balance sheet, but which the Company continues to service, related to the pooled monetization agreement was approximately $ 45.3 million (March 31, 2023 - $ 52.3 million).
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 $ 142.5 million and $ 128.7 million at June 30, 2023 and March 31, 2023, respectively.
Accumulated Other Comprehensive Income
The following table summarizes the changes in the components of accumulated other comprehensive income, net of tax. During the three months ended June 30, 2023 and 2022, there was no 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.
Foreign currency translation adjustments Net unrealized gain (loss) on cash flow hedges Total
(Amounts in millions)
March 31, 2023 $ ( 21.6 ) $ 142.5 $ 120.9
Other comprehensive income 0.8 24.5 25.3
Reclassifications to net loss (1)
— ( 7.6 ) ( 7.6 )
June 30, 2023 $ ( 20.8 ) $ 159.4 $ 138.6
March 31, 2022 $ ( 19.7 ) $ 49.0 $ 29.3
Other comprehensive income (loss) ( 3.0 ) 36.3 33.3
Reclassifications to net loss (1)
— 12.6 12.6
June 30, 2022 $ ( 22.7 ) $ 97.9 $ 75.2
___________________
(1) Represents a gain of $ 0.4 million included in direct operating expense and a gain of $ 7.2 million included in interest expense on the unaudited condensed consolidated statement of operations in the three months ended June 30, 2023 (three months ended June 30, 2022 - loss of $ 0.9 million included in direct operating expense and loss of $ 11.7 million included in interest expense) (see Note 15).
Supplemental Cash Flow Information
Significant non-cash transactions during the three months ended June 30, 2023 and 2022 include certain interest rate swap agreements, which are discussed in Note 15, "Derivative Instruments and Hedging Activities".
There were no significant non-cash financing or investing activities for the three months ended June 30, 2023 and 2022.
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LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
17. Subsequent Events
On August 3, 2023, Lions Gate Entertainment Corp., a corporation organized and existing under the corporate laws of British Columbia (the “Company”), and the Company’s 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”), entered into an Equity Purchase Agreement (the “Purchase Agreement”) with Hasbro, Inc., a Rhode Island corporation (“Hasbro”), pursuant to which (following a contemplated pre-closing reorganization), the Buyers will acquire from Hasbro, upon the closing of the transactions contemplated under the Purchase Agreement (the “Purchase”), all of the issued and outstanding equity interests of the companies constituting the Entertainment One television and film (“eOne”) business for an aggregate cash purchase price of $ 375.0 million, subject to certain purchase price adjustments, including for cash, debt, transaction expenses and working capital, and the assumption by the Buyers of certain production financing indebtedness.
The Purchase Agreement contains customary representations and warranties by each party with respect to itself, as well as various customary covenants and indemnification provisions and other agreements, including, among others, to run the business in the ordinary course during the period between the execution of the Purchase Agreement and closing of the Purchase (the “Closing”). The Closing is contingent on expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, approval under the Competition Act (Canada), the delivery by Hasbro to the Company of certain financial statements with respect to the eOne business and other customary closing conditions. The Purchase Agreement contains customary termination rights permitting each party to terminate the Purchase Agreement under certain specified circumstances, including if the Closing has not occurred on or before January 31, 2024.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.