NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. General
Nature of Operations
Lions Gate Entertainment Corp. (the “Company,” “Lionsgate,” "Lions Gate," “we,” “us” or “our”) is a global content leader whose films, television series, digital products and linear and over-the-top platforms reach next generation audiences around the world. Lionsgate’s film and television properties support location-based entertainment venues and other branded attractions, as well as a video game business. Lionsgate's content initiatives are backed by a nearly 17,000-title film and television library and delivered through a global sales and licensing infrastructure.
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, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2021. The balance sheet at March 31, 2020 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, 2020.
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 sales returns and other allowances and provisions for doubtful accounts; 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, property and equipment, equity investments, goodwill and intangible assets. Actual results could differ from such estimates.
Recent Accounting Pronouncements
Accounting Guidance Adopted in Fiscal 2021
Fair Value Measurement - Changes to Disclosure Requirements: In August 2018, the Financial Accounting Standards Board ("FASB") issued guidance that eliminates, adds and modifies certain disclosure requirements for fair value measurements. This guidance eliminates the requirement that entities disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but requires public companies to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements, among other changes. This Company adopted this guidance on April 1, 2020, with no material impact to its consolidated financial statements.
Improvements to Accounting for Costs of Films and License Agreements for Program Materials: On April 1, 2020, the Company adopted, on a prospective basis, FASB guidance on the accounting for costs of films and episodic television series which aligns the accounting for capitalizing production costs of episodic television series with guidance for films. The following reflects some of the more significant changes under the new guidance:
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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•
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Classification in balance sheet: Allows for the classification of licensed program rights as long-term assets. Previously, the Company reported a portion of these rights in current assets. After adoption, the Company now classifies licensed program rights as long-term assets. Accordingly, as of April 1, 2020, the Company has classified $310.5 million of these rights as non-current assets in the balance sheet.
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|
|
•
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Removes capitalization constraint for episodic television: The capitalization of production costs for episodic television series is no longer constrained until persuasive evidence of secondary market revenues exists. Previously, theatrical content production costs could be fully capitalized while episodic television production costs were generally limited to the amount of contracted revenues.
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|
|
•
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Monetization strategy: Requires the determination of a titles' monetization strategy for purposes of amortization and testing impairment as follows:
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◦
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Monetized individually - lifetime value is predominantly derived from third-party revenues that are directly attributable to the specific film or television title (e.g., theatrical revenues or sales to third-party television programmers).
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◦
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Monetized as a film group - lifetime value is predominantly derived from third-party revenues that are attributable only to a bundle of titles, which is referred to as a "film group" in the updated guidance. A film group is defined as the lowest level at which identifiable cash flows are largely independent of the cash flows of other films and/or license agreements.
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The determination of the monetization strategy is made at commencement of production on a consolidated basis. Because the new accounting guidance is applied prospectively, the predominant monetization strategy for content released prior to the beginning of fiscal 2021 is determined based on the expected means of monetization over the remaining life of the content. The classification of content as individually monetized or monetized as part of a film group only changes if there is a significant change to the title's monetization strategy relative to its initial assessment.
For these accounting purposes, the Company generally classifies content that is initially intended for use on the Company's Media Networks services (including its linear television networks, OTT services and direct-to-consumer services) as content monetized as a film group. Content initially intended for theatrical release, home entertainment distribution, or for license to third parties, is generally classified as content monetized individually.
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•
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Impairment testing: The new guidance requires that an entity test a film or television program for impairment, when impairment indicators are present, at a film group level when the film or license agreement is predominantly monetized with other films and/or license agreements or individually for titles monetized individually. An impairment results when the fair value of the film or film group is less than its carrying value. Under previous guidance, film and television programs accounted for under the broadcasting accounting standard (i.e., licensed product in the Company's Media Networks segment) were carried on the balance sheet at the lower of cost or net realizable value rather than fair value.
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See Note 2 for further information.
Financial Instruments - Credit Losses: In June 2016, the FASB issued guidance, as amended, that changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, from the incurred loss methodology under current U.S. GAAP to a new, forward-looking current expected credit loss model that would generally result in the earlier recognition of credit losses. The Company adopted this guidance on April 1, 2020 using a modified retrospective approach, with no material impact to its consolidated financial statements.
Accounting Guidance Not Yet Adopted
Simplifying the Accounting for Income Taxes: In December 2019, the FASB issued guidance that simplifies the accounting for income taxes. The guidance amends the rules for recognizing deferred taxes for investments, performing intraperiod tax allocations and calculating income taxes in interim periods. It also reduces complexity in certain areas, including the accounting for transactions that result in a step-up in the tax basis of goodwill and allocating taxes to members of a consolidated group. The guidance is effective for the Company's fiscal year beginning April 1, 2021, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this new guidance will have on its consolidated financial statements.
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
2. Investment in Films and Television Programs and Licensed Program Rights
Investment in Films and Television Programs
General. Investment in films and television programs includes the unamortized costs of films and television programs, a portion of which are monetized individually (i.e., through domestic theatrical, home entertainment, television, international or other ancillary-market distribution), and a portion of which are monetized as part of a film group (i.e., primarily content internally produced by our Television Production segment for our Media Networks segment).
Recording Cost. Costs of acquiring and producing films and television programs and of acquired libraries are capitalized when incurred. For films and television programs produced by the Company, capitalized costs include all direct production and financing costs, capitalized interest and production overhead. For acquired films and television programs, capitalized costs consist of minimum guarantee payments to acquire the distribution rights.
Amortization. Costs of acquiring and producing films and television programs and of acquired libraries that are monetized individually are amortized using the individual-film-forecast method, whereby these costs are amortized and participations and residuals costs are accrued in the proportion that current year’s revenue bears to management’s estimate of ultimate revenue at the beginning of the current year expected to be recognized from the exploitation, exhibition or sale of the films or television programs.
For investment in films and television programs monetized as a group, see further discussion below under Licensed Program Rights, Amortization for a description of amortization of costs monetized as a group.
Ultimate Revenue. Ultimate revenue includes estimates over a period not to exceed 10 years following the date of initial release of the motion picture. For an episodic television series, the period over which ultimate revenues are estimated cannot exceed 10 years following the date of delivery of the first episode, or, if still in production, five years from the date of delivery of the most recent episode, if later. For titles included in acquired libraries, ultimate revenue includes estimates over a period not to exceed twenty years following the date of acquisition.
Development. Films and television programs in development include costs of acquiring film rights to books, stage plays or original screenplays and costs to adapt such projects. Such costs are capitalized and, upon commencement of production, are transferred to production costs. Projects in development are written off at the earlier of the date they are determined not to be recoverable or when abandoned, or three years from the date of the initial investment unless the fair value of the project exceeds its carrying cost.
Licensed Program Rights
General. Licensed program rights include content licensed from third parties that is monetized as part of a film group for distribution on Media Networks distribution platforms. Licensed content is comprised of films or series that have been previously produced by third parties and the Company retains specified airing rights over a contractual term. Program licenses typically have fixed terms and require payments during the term of the license.
Recording Cost. The cost of licensed content is capitalized when the cost is known or reasonably determinable, the license period for programs has commenced, the program materials have been accepted by the Company in accordance with the license agreements, and the programs are available for the first showing. Licensed programming rights may include rights to more than one exploitation window under the Company's output and library agreements. For films with multiple windows, the license fee is allocated between the windows based upon the proportionate estimated fair value of each window which generally results in the majority of the cost allocated to the first window on newer releases. Certain license agreements may include additional ancillary rights in addition to the pay television rights. The cost of the Media Networks’ third-party licensed content is allocated between the pay television market distributed by the Media Networks’ segment and the ancillary revenue markets (e.g., home video, digital platforms, international television, etc.) based on the estimated relative fair values of these markets. Our estimates of fair value for the pay television and ancillary markets and windows of exploitation involve uncertainty and management judgment.
Amortization. The cost of program rights for films and television programs (including original series) exhibited by the Media Networks segment are generally amortized on an accelerated or straight-line basis based on the anticipated number of exhibitions or expected and historical viewership patterns or the license period on a title-by-title or episode-by-episode basis. The number of exhibitions is estimated based on the number of exhibitions allowed in the agreement (if specified) and the expected usage of the content. Participations and residuals are expensed in line with the amortization of production costs.
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Changes in management’s estimate of the anticipated exhibitions and viewership patterns of films and original series on our networks could result in the earlier recognition of our programming costs than anticipated. Conversely, scheduled exhibitions and expected viewership patterns may not capture the appropriate usage of the program rights in current periods which would lead to the write-off of additional program rights in future periods and may have a significant impact on our future results of operations and our financial position.
Impairment Assessment for Investment in Films and Television Programs and Licensed Program Rights
General. A film group or individual film or television program is evaluated for impairment when an event or change in circumstances indicates that the fair value of an individual film or film group is less than its unamortized cost. A film group represents the unit of account for impairment testing for a film or license agreement for program material when the film or license agreement is expected to be predominantly monetized with other films and/or license agreements instead of being predominantly monetized on its own. A film group is defined as the lowest level at which identifiable cash flows are largely independent of the cash flows of other films and/or license agreements.
Content Monetized Individually. For content that is predominantly monetized individually (primarily investment in film and television programs related to the Motion Picture and Television Production segments), the unamortized costs of the individual film are compared to the estimated fair value of the individual film. The fair value is determined based on a discounted cash flow analysis of the cash flows directly attributable to the title. To the extent the unamortized costs exceed the fair value, an impairment charge is recorded for the excess.
Content Monetized as a Group. For content that is predominantly monetized as a group (primarily licensed program rights in the Media Networks segment and internally produced programming, as discussed above), the aggregate unamortized costs of the group are compared to the present value of the discounted cash flows of the group using the lowest level for which identifiable cash flows are independent of other produced and licensed content. The Company's film groups are generally aligned along the Company's networks and digital content offerings domestically (i.e., Starz Networks and Other Streaming Services) and by territory or groups of territories internationally, wherein content assets are shared across the various territories and therefore, the territory or group of territories is the film group. If the unamortized costs exceed the present value of discounted cash flows, an impairment charge is recorded for the excess and allocated to individual titles based on the relative carrying value of each title in the group.
Valuation Assumptions. The discounted cash flow analysis includes cash flows estimates of ultimate revenue and costs as well as a discount rate (a Level 3 fair value measurement, see Note 6). The discount rate utilized in the discounted cash flow analysis is based on the weighted average cost of capital of the Company plus a risk premium representing the risk associated with producing a particular film or television program or film group. The fair value of any film costs associated with a film or television program that management plans to abandon is zero. Estimates of future revenue involve measurement uncertainty and it is therefore possible that reductions in the carrying value of investment in films and television programs may be required as a consequence of changes in management’s future revenue estimates.
Impairments. Investment in films and television programs and licensed program rights includes write-downs to fair value of $0.6 million, and $2.1 million in the three months ended June 30, 2020 and 2019, respectively, which are included in direct operating expense on the consolidated statements of operations. In the three months ended June 30, 2020, these charges represented $0.6 million recorded in the Motion Picture segment (three months ended June 30, 2019 - $1.6 million recorded in the Motion Picture segment, and $0.5 million recorded in the Television Production segment).
Total investment in films and television programs and licensed program rights by predominant monetization strategy is as follows:
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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June 30,
2020
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(Amounts in millions)
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Investment in Films and Television Programs:
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|
Individual Monetization
|
|
Released, net of accumulated amortization
|
$
|
440.7
|
|
Completed and not released
|
60.2
|
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In progress
|
155.4
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In development
|
81.5
|
|
|
737.8
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Film Group Monetization
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|
Released, net of accumulated amortization
|
$
|
186.3
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|
Completed and not released
|
4.8
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In progress
|
201.1
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In development
|
39.0
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|
|
431.2
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Licensed program rights, net of accumulated amortization
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$
|
543.2
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Investment in films and television programs and program rights, net
|
$
|
1,712.2
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Amortization of investment in film and television programs and licensed program rights by predominant monetization strategy is as follows for the three months ended June 30, 2020, and was included in direct operating expense in the unaudited condensed consolidated statement of operations:
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Three Months Ended
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|
June 30,
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|
2020
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|
(Amounts in millions)
|
Amortization expense:
|
|
Individual monetization
|
$
|
122.5
|
|
Film group monetization
|
48.2
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|
Licensed program rights
|
110.5
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|
|
$
|
281.2
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Amortization of investment in film and television programs and licensed program rights for the three months ended June 30, 2019 was $436.6 million.
The table below summarizes estimated future amortization expense for the Company's investment in film and television programs and licensed program rights as of June 30, 2020:
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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Twelve Months Ended
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June 30,
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2021
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|
2022
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|
2023
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(Amounts in millions)
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Estimated future amortization expense:
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|
|
|
|
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Released investment in films and television programs:
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|
|
|
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Individual monetization
|
$
|
164.0
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|
|
$
|
88.0
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|
|
$
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82.0
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Film group monetization
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$
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87.4
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|
|
$
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50.4
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|
|
$
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17.1
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Licensed program rights
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$
|
276.9
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|
|
$
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92.7
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$
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54.2
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|
|
|
|
|
|
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Completed and not released investment in films and television programs:
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|
|
|
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Individual monetization
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$
|
36.9
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n/a
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|
|
n/a
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Film group monetization
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$
|
4.8
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|
|
n/a
|
|
|
n/a
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3. Investments
The Company's investments consisted of the following:
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|
|
|
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June 30,
2020
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March 31,
2020
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(Amounts in millions)
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Investments in equity method investees
|
|
$
|
32.1
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|
|
$
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34.3
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Other investments(1)
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|
6.1
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6.0
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$
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38.2
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$
|
40.3
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________________
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(1)
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Includes investments in equity securities without readily determinable fair values of $5.0 million and $5.4 million at June 30, 2020 and March 31, 2020, respectively.
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Equity Method Investments:
The Company has investments in various equity method investees with ownership percentages ranging from approximately 9% to 49%. These investments include:
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 a partnership to make investments in an operating company that will operate a studio facility in Yonkers, New York.
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:
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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|
|
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|
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June 30,
2020
|
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March 31,
2020
|
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(Amounts in millions)
|
Current assets
|
$
|
158.7
|
|
|
$
|
138.3
|
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Non-current assets
|
$
|
175.3
|
|
|
$
|
162.0
|
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Current liabilities
|
$
|
178.2
|
|
|
$
|
167.3
|
|
Non-current liabilities
|
$
|
102.4
|
|
|
$
|
102.2
|
|
|
|
|
|
|
|
|
|
|
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Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
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Revenues
|
$
|
23.9
|
|
|
$
|
25.9
|
|
Gross profit
|
$
|
6.1
|
|
|
$
|
10.1
|
|
Net loss
|
$
|
(17.6
|
)
|
|
$
|
(16.9
|
)
|
Gain on Investments:
The following table summarizes the components of the gain on investments:
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|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Unrealized gains on equity securities held as of June 30, 2020 and 2019, respectively
|
$
|
0.5
|
|
|
$
|
0.1
|
|
Gain on sale of other investments
|
4.6
|
|
|
—
|
|
|
$
|
5.1
|
|
|
$
|
0.1
|
|
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
4. Debt
Total debt of the Company, excluding film obligations and production loans, was as follows as of June 30, 2020 and March 31, 2020:
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|
|
|
|
|
|
|
June 30,
2020
|
|
March 31,
2020
|
|
(Amounts in millions)
|
Corporate debt:
|
|
|
|
Revolving Credit Facility
|
$
|
—
|
|
|
$
|
—
|
|
Term Loan A
|
699.4
|
|
|
712.5
|
|
Term Loan B
|
962.0
|
|
|
965.1
|
|
5.875% Senior Notes
|
518.7
|
|
|
518.7
|
|
6.375% Senior Notes
|
545.6
|
|
|
545.6
|
|
Total corporate debt
|
2,725.7
|
|
|
2,741.9
|
|
Finance lease obligations
|
41.6
|
|
|
42.4
|
|
Total debt
|
2,767.3
|
|
|
2,784.3
|
|
Unamortized debt issuance costs, net of fair value adjustment on finance lease obligations
|
(47.5
|
)
|
|
(51.3
|
)
|
Total debt, net
|
2,719.8
|
|
|
2,733.0
|
|
Less current portion
|
(73.7
|
)
|
|
(68.6
|
)
|
Non-current portion of debt
|
$
|
2,646.1
|
|
|
$
|
2,664.4
|
|
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 $1.5 billion, and at June 30, 2020 there was $1.5 billion available. However, borrowing levels are subject to certain financial covenants as discussed below. There were no letters of credit outstanding at June 30, 2020. 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 "Amended Credit Agreement"), on the total revolving credit facility of $1.5 billion less the amount drawn.
Maturity Date:
•Revolving Credit Facility & Term Loan A: March 22, 2023.
•Term Loan B: March 24, 2025.
Interest:
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|
•
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Revolving Credit Facility & Term Loan A: The Revolving Credit Facility and Term Loan A bear interest at a rate per annum equal to LIBOR plus 1.75% (or an alternative base rate plus 0.75%) 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 Amended Credit Agreement (effective interest rate of 1.91% as of June 30, 2020, before the impact of interest rate swaps).
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•
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Term Loan B: The Term Loan B bears interest at a rate per annum equal to LIBOR plus 2.25% margin, with a LIBOR floor of zero (or an alternative base rate plus 1.25% margin) (effective interest rate of 2.41% as of June 30, 2020, before the impact of interest rate swaps).
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Potential Impact of LIBOR Transition
The Chief Executive of the U.K. Financial Conduct Authority (the “FCA”), which regulates the London Interbank Offered Rate, or LIBOR, has announced that the FCA will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021. That announcement indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Moreover, it is possible that LIBOR will be discontinued or modified prior to 2021.
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Under the terms of the Company's Amended Credit Agreement, in the event of the discontinuance of the LIBOR Rate, a mutually agreed-upon alternate benchmark rate will be established to replace the LIBOR Rate. The Company and Lenders (as defined in the Amended Credit Agreement) shall, in good faith, endeavor to establish an alternate benchmark rate that gives due consideration to prevailing market convention for determining a rate of interest for syndicated loans in the United States at such time, and which places the Lenders and the Company in the same economic position that existed immediately prior to the discontinuation of the LIBOR Rate. The Company does not anticipate that the discontinuance or modification of the LIBOR Rate will materially impact its liquidity or financial position.
Required Principal Payments:
|
|
•
|
Term Loan A: Quarterly principal payments, at quarterly rates of 1.25% beginning June 30, 2019, 1.75% beginning June 30, 2020, and 2.50% beginning June 30, 2021 through December 31, 2022, 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 Amended Credit Agreement.
Optional Prepayment:
|
|
•
|
Revolving Credit Facility & Term Loan A: The Company may voluntarily prepay the Revolving Credit Facility and Term Loan A at any time without premium or penalty.
|
|
|
•
|
Term Loan B: The Company may voluntarily prepay the Term Loan B at any time.
|
Security. The Senior Credit Facilities are guaranteed by the Guarantors (as defined in the Amended Credit Agreement) and are secured by a security interest in substantially all of the assets of Lionsgate and the Guarantors (as defined in the Amended 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, 2020, 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 Amended 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.
5.875% Senior Notes and 6.375% Senior Notes
Interest:
|
|
•
|
5.875% Senior Notes: Bears interest at 5.875% annually (payable semi-annually on May and November 1 of each year).
|
|
|
•
|
6.375% Senior Notes: Bears interest at 6.375% annually (payable semi-annually in arrears on February 1 and August 1 of each year, commencing on August 1, 2019).
|
Maturity Date:
|
|
•
|
5.875% Senior Notes: November 1, 2024.
|
|
|
•
|
6.375% Senior Notes: February 1, 2024.
|
Optional Redemption:
|
|
(i)
|
Redeemable by the Company, in whole or in part, at the redemption prices set forth as follows (as a percentage of the principal amount redeemed), plus accrued and unpaid interest to the redemption date: (i) on or after November 1, 2019 - 104.406%; (ii) on or after November 1, 2020 - 102.938%; (iii) on or after November 1, 2021 - 101.439%; and (iv) on or after November 1, 2022 - 100%.
|
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
(i)
|
Prior to February 1, 2021, the 6.375% Senior Notes are redeemable by the Company under certain circumstances (as defined in the indenture governing the 6.375% 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 the Applicable Premium. The Applicable Premium is the greater of (i) 1.0% of the principal amount redeemed and (ii) the excess of the present value of the redemption amount at February 1, 2021 (see redemption prices below) of the notes redeemed plus interest through February 1, 2021 (discounted at the treasury rate on the redemption date plus 50 basis points) over the principal amount of the notes redeemed on the redemption date.
|
|
|
(ii)
|
On and after February 1, 2021, redeemable by the Company, in whole or in part, at the redemption prices set forth as follows (as a percentage of the principal amount redeemed), plus accrued and unpaid interest to the redemption date: (i) on or after February 1, 2021 - 103.188%; (ii) on or after February 1, 2022 - 101.594%; (iii) on or after February 1, 2023 - 100%.
|
Security. The 5.875% Senior Notes and 6.375% Senior Notes are unsubordinated, unsecured obligations of the Company.
Covenants. The 5.875% Senior Notes and 6.375% 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, 2020, 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 5.875% Senior Notes and 6.375% 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 5.875% Senior Notes and 6.375% 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, 2020, the capacity to pay dividends under the Senior Credit Facilities and the 5.875% Senior Notes and the 6.375% Senior Notes significantly exceeded the amount of the Company's retained earnings or net income, and therefore the Company's net income of $46.2 million and retained earnings of $28.3 million were deemed free of restrictions at June 30, 2020.
5. Film Obligations and Production Loans
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
March 31,
2020
|
|
(Amounts in millions)
|
Film obligations
|
$
|
235.5
|
|
|
$
|
299.3
|
|
Production loans
|
153.4
|
|
|
151.4
|
|
Total film obligations and production loans
|
388.9
|
|
|
450.7
|
|
Unamortized debt issuance costs
|
(0.2
|
)
|
|
(0.1
|
)
|
Total film obligations and production loans, net
|
388.7
|
|
|
450.6
|
|
Less current portion
|
(308.2
|
)
|
|
(353.7
|
)
|
Total non-current film obligations and production loans
|
$
|
80.5
|
|
|
$
|
96.9
|
|
Film Obligations
Film obligations include minimum guarantees and accrued licensed program rights obligations, which represent amounts payable for film rights that the Company has acquired and certain theatrical marketing obligations for amounts received from third parties that are contractually committed for theatrical marketing expenditures associated with specific titles.
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Production Loans
Production loans represent individual loans for the production of film and television programs that the Company produces. The majority of production loans have contractual repayment dates either at or near the expected completion date, with the exception of certain loans containing repayment dates on a longer term basis, and incur LIBOR-based interest at rates ranging from 2.49% to 2.99% (before the impact of interest rate swaps, see Note 15 for interest rate swaps).
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, 2020 and March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
March 31, 2020
|
|
Level 1
|
|
Level 2
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Total
|
Assets:
|
(Amounts in millions)
|
Available-for-sale equity securities
|
$
|
1.1
|
|
|
$
|
—
|
|
|
$
|
1.1
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
0.6
|
|
Forward exchange contracts (see Note 15)
|
—
|
|
|
0.2
|
|
|
0.2
|
|
|
—
|
|
|
0.6
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Forward exchange contracts (see Note 15)
|
—
|
|
|
(0.2
|
)
|
|
(0.2
|
)
|
|
—
|
|
|
(0.9
|
)
|
|
(0.9
|
)
|
Interest rate swaps (see Note 15)
|
—
|
|
|
(51.7
|
)
|
|
(51.7
|
)
|
|
—
|
|
|
(187.9
|
)
|
|
(187.9
|
)
|
LIONS GATE ENTERTAINMENT CORP.
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 at June 30, 2020 and March 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
March 31, 2020
|
|
(Amounts in millions)
|
|
Carrying
Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
|
|
(Level 2)
|
|
|
|
(Level 2)
|
Liabilities(1):
|
|
|
|
|
|
|
|
Term Loan A
|
$
|
687.7
|
|
|
$
|
660.9
|
|
|
$
|
699.8
|
|
|
$
|
637.7
|
|
Term Loan B
|
950.4
|
|
|
909.1
|
|
|
952.9
|
|
|
845.7
|
|
5.875% Senior Notes
|
504.7
|
|
|
499.7
|
|
|
504.0
|
|
|
430.5
|
|
6.375% Senior Notes
|
539.6
|
|
|
532.0
|
|
|
539.2
|
|
|
452.9
|
|
Production loans
|
153.3
|
|
|
153.3
|
|
|
151.3
|
|
|
151.3
|
|
Financing component of interest rate swaps
|
144.2
|
|
|
145.2
|
|
|
—
|
|
|
—
|
|
________________
|
|
(1)
|
The Company measures the fair value of its outstanding debt using discounted cash flow techniques that use observable market inputs, such as LIBOR-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 and accrued liabilities, other liabilities, borrowings under the Revolving Credit Facility, if any, and finance lease obligations. The carrying values of these financial instruments approximated the fair values at June 30, 2020 and March 31, 2020.
7. Noncontrolling Interests
Redeemable Noncontrolling Interests
The table below presents the reconciliation of changes in redeemable noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Beginning balance
|
$
|
167.8
|
|
|
$
|
127.6
|
|
Net loss attributable to redeemable noncontrolling interests
|
(4.9
|
)
|
|
(4.5
|
)
|
Noncontrolling interests discount accretion
|
5.9
|
|
|
6.4
|
|
Adjustments to redemption value
|
5.9
|
|
|
5.5
|
|
Cash distributions
|
(0.8
|
)
|
|
(0.1
|
)
|
Ending balance
|
$
|
173.9
|
|
|
$
|
134.9
|
|
Redeemable noncontrolling interests (included in temporary equity on the unaudited condensed consolidated balance sheets) 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 noncontrolling interest holders have a right to put the noncontrolling interest of 3 Arts Entertainment, at fair value, exercisable at five years after the acquisition date of May 29, 2018, for a 60 day period. Beginning 30 days after the expiration 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.
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pilgrim Media Group. The noncontrolling interest holder has a right to put and the Company has a right to call a portion of the noncontrolling interest, equal to 17.5% of Pilgrim Media Group, at fair value, exercisable at five years after the acquisition date of November 12, 2015. In addition, the noncontrolling interest holder has a right to put and the Company has a right to call the remaining amount of noncontrolling interest at fair value, subject to a cap, exercisable at seven years after the acquisition date of November 12, 2015.
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.
Other Noncontrolling Interests
The Company has other 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 market places. The Company's Media Networks segment generates revenue primarily from the distribution of the Company's STARZ branded premium subscription video services and, to a lesser extent, direct-to-consumer content streaming 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, 2020 and 2019:
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Revenue by Type:
|
|
|
|
Motion Picture
|
|
|
|
Theatrical
|
$
|
0.3
|
|
|
$
|
121.8
|
|
Home Entertainment
|
|
|
|
Digital Media
|
127.7
|
|
|
83.3
|
|
Packaged Media
|
39.5
|
|
|
56.4
|
|
Total Home Entertainment
|
167.2
|
|
|
139.7
|
|
Television
|
58.5
|
|
|
64.8
|
|
International
|
52.5
|
|
|
67.4
|
|
Other
|
2.2
|
|
|
4.1
|
|
Total Motion Picture revenues
|
280.7
|
|
|
397.8
|
|
|
|
|
|
Television Production
|
|
|
|
Television
|
95.9
|
|
|
196.8
|
|
International
|
46.4
|
|
|
56.7
|
|
Home Entertainment
|
|
|
|
Digital Media
|
45.9
|
|
|
5.9
|
|
Packaged Media
|
0.7
|
|
|
1.4
|
|
Total Home Entertainment
|
46.6
|
|
|
7.3
|
|
Other
|
6.8
|
|
|
19.0
|
|
Total Television Production revenues
|
195.7
|
|
|
279.8
|
|
|
|
|
|
Media Networks - Programming Revenues
|
|
|
|
Domestic(1)
|
357.3
|
|
|
369.3
|
|
International
|
10.0
|
|
|
3.1
|
|
|
367.3
|
|
|
372.4
|
|
|
|
|
|
Intersegment eliminations
|
(30.0
|
)
|
|
(86.4
|
)
|
Total revenues
|
$
|
813.7
|
|
|
$
|
963.6
|
|
___________________
|
|
(1)
|
Media Networks domestic revenues include revenue from the Company's Other Streaming Services product line of $11.5 million in the three months ended June 30, 2020 (2019 - $6.4 million).
|
Remaining Performance Obligations
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, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rest of Year Ending March 31, 2021
|
|
Year Ending March 31,
|
|
|
|
|
|
|
|
2022
|
|
2023
|
|
Thereafter
|
|
Total
|
|
|
(Amounts in millions)
|
Remaining Performance Obligations
|
|
$
|
862.3
|
|
|
$
|
343.3
|
|
|
$
|
145.5
|
|
|
$
|
161.1
|
|
|
$
|
1,512.2
|
|
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Revenues of $96.1 million, including variable and fixed fee arrangements, were recognized during the three months ended June 30, 2020, respectively, from performance obligations satisfied prior to March 31, 2020. 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. At June 30, 2020 and March 31, 2020, accounts receivable, contract assets and deferred revenue are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Item
|
|
Balance Sheet Location
|
|
June 30,
2020
|
|
March 31,
2020
|
|
Addition (Reduction)
|
|
|
|
|
(Amounts in millions)
|
|
|
Accounts receivable, net - current
|
|
Accounts receivable, net
|
|
$
|
430.6
|
|
|
$
|
522.0
|
|
|
$
|
(91.4
|
)
|
Accounts receivable, net - non-current
|
|
Other assets - non-current
|
|
60.1
|
|
|
53.6
|
|
|
6.5
|
|
Contract asset - current
|
|
Other assets - current(1)
|
|
20.2
|
|
|
18.8
|
|
|
1.4
|
|
Contract asset - non-current
|
|
Other assets - non-current(1)
|
|
6.0
|
|
|
10.5
|
|
|
(4.5
|
)
|
Deferred revenue - current
|
|
Deferred revenue - current
|
|
89.4
|
|
|
116.6
|
|
|
(27.2
|
)
|
Deferred revenue - non-current
|
|
Deferred revenue - non-current
|
|
59.8
|
|
|
61.3
|
|
|
(1.5
|
)
|
__________________
|
|
(1)
|
Included in prepaid expenses and other.
|
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 collectibility, 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 collectibility. 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, 2020
|
|
(Benefit) provision for doubtful accounts(1)
|
|
Uncollectible accounts written-off
|
|
June 30,
2020
|
|
(Amounts in millions)
|
Trade accounts receivable
|
$
|
9.3
|
|
|
$
|
(1.6
|
)
|
|
$
|
(0.1
|
)
|
|
$
|
7.6
|
|
_______________________
(1)Represents collections on accounts receivable previously reserved.
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. The change in the balance of contract assets is primarily due to the satisfaction of the condition related to payment holdbacks.
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 $48.5 million were recognized during the three months ended June 30, 2020, respectively, related to the balance of deferred revenue at March 31, 2020.
9. Net Income (Loss) Per Share
Basic net income (loss) per share is calculated based on the weighted average common shares outstanding for the period. Basic net income (loss) per share for the three months ended June 30, 2020 and 2019 is presented below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions, except per share amounts)
|
Basic Net Income (Loss) Per Common Share:
|
|
|
|
Numerator:
|
|
|
|
Net income (loss) attributable to Lions Gate Entertainment Corp. shareholders
|
$
|
51.1
|
|
|
$
|
(54.0
|
)
|
Denominator:
|
|
|
|
Weighted average common shares outstanding
|
219.5
|
|
|
216.1
|
|
Basic net income (loss) per common share
|
$
|
0.23
|
|
|
$
|
(0.25
|
)
|
Diluted net income (loss) per common share reflects share purchase options, including equity-settled share appreciation rights ("SARs"), restricted share units ("RSUs") and restricted stock using the treasury stock method when dilutive, and any contingently issuable shares when dilutive. Diluted net income (loss) per common share for the three months ended June 30, 2020 and 2019 is presented below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions, except per share amounts)
|
Diluted Net Income (Loss) Per Common Share:
|
|
|
|
Numerator:
|
|
|
|
Net income (loss) attributable to Lions Gate Entertainment Corp. shareholders
|
$
|
51.1
|
|
|
$
|
(54.0
|
)
|
Denominator:
|
|
|
|
Weighted average common shares outstanding
|
219.5
|
|
|
216.1
|
|
Effect of dilutive securities:
|
|
|
|
Restricted share units and restricted stock
|
0.4
|
|
|
—
|
|
Adjusted weighted average common shares outstanding
|
219.9
|
|
|
216.1
|
|
Diluted net income (loss) per common share
|
$
|
0.23
|
|
|
$
|
(0.25
|
)
|
As a result of the net loss in the three months ended June 30, 2019, the dilutive effect of the share purchase options, restricted share units 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, 2019 totaled 3.6 million.
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Additionally, for the three months ended June 30, 2020 and 2019, the outstanding common shares issuable presented below were excluded from diluted net income (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,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Anti-dilutive shares issuable
|
|
|
|
Share purchase options
|
27.8
|
|
|
29.3
|
|
Restricted share units
|
2.6
|
|
|
1.4
|
|
Other issuable shares
|
4.9
|
|
|
2.1
|
|
Total weighted average anti-dilutive shares issuable excluded from diluted net income (loss) per common share
|
35.3
|
|
|
32.8
|
|
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, 2020 and March 31, 2020. The table below outlines common shares reserved for future issuance:
|
|
|
|
|
|
|
|
June 30,
2020
|
|
March 31,
2020
|
|
(Amounts in millions)
|
Stock options and equity-settled SARs outstanding
|
29.8
|
|
|
35.7
|
|
Restricted stock and restricted share units — unvested
|
5.0
|
|
|
3.7
|
|
Common shares available for future issuance
|
13.5
|
|
|
11.5
|
|
Shares reserved for future issuance
|
48.3
|
|
|
50.9
|
|
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
(b) Share-based Compensation
The Company recognized the following share-based compensation expense during the three months ended June 30, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Compensation Expense:
|
|
|
|
Stock options
|
$
|
4.3
|
|
|
$
|
3.6
|
|
Restricted share units and other share-based compensation
|
8.9
|
|
|
4.8
|
|
Share appreciation rights
|
1.2
|
|
|
0.8
|
|
|
14.4
|
|
|
9.2
|
|
Impact of accelerated vesting on equity awards(1)
|
—
|
|
|
0.3
|
|
Total share-based compensation expense
|
$
|
14.4
|
|
|
$
|
9.5
|
|
|
|
|
|
Tax impact(2)
|
(3.0
|
)
|
|
(2.1
|
)
|
Reduction in net income
|
$
|
11.4
|
|
|
$
|
7.4
|
|
___________________
|
|
(1)
|
Represents the impact of the acceleration of certain vesting schedules for equity awards pursuant to certain severance arrangements.
|
|
|
(2)
|
Represents the income tax benefit recognized in the unaudited condensed consolidated statements of operations for share-based compensation arrangements prior to the effects of changes in the valuation allowance.
|
Share-based compensation expense, by expense category, consisted of the following:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Share-Based Compensation Expense:
|
|
|
|
Direct operating
|
$
|
0.4
|
|
|
$
|
0.1
|
|
Distribution and marketing
|
0.1
|
|
|
0.1
|
|
General and administration
|
13.9
|
|
|
9.0
|
|
Restructuring and other
|
—
|
|
|
0.3
|
|
|
$
|
14.4
|
|
|
$
|
9.5
|
|
The following table sets forth the stock option, equity-settled SARs, cash-settled SARs, restricted stock and restricted share unit activity during the three months ended June 30, 2020:
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options, Equity-settled and Cash-settled 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, 2020
|
7.2
|
|
|
$26.21
|
|
28.5
|
|
|
$19.03
|
|
—
|
|
(1)
|
$14.89
|
|
3.8
|
|
|
$24.24
|
Granted
|
—
|
|
|
—
|
|
|
0.1
|
|
(2)
|
$7.25
|
|
—
|
|
|
—
|
|
|
2.0
|
|
|
$8.96
|
Options exercised or restricted stock or RSUs vested
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.7
|
)
|
|
$15.03
|
Awards canceled in exchange program
|
(1.1
|
)
|
|
$31.56
|
|
(4.1
|
)
|
|
$26.46
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Awards issued in exchange program
|
0.1
|
|
|
$7.70
|
|
0.7
|
|
|
$7.13
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Forfeited or expired
|
(0.6
|
)
|
|
$31.75
|
|
(1.0
|
)
|
|
$27.70
|
|
—
|
|
|
—
|
|
|
(0.1
|
)
|
|
$13.95
|
Outstanding at June 30, 2020
|
5.6
|
|
|
$24.24
|
|
24.2
|
|
|
$17.03
|
|
—
|
|
(1)
|
$14.89
|
|
5.0
|
|
|
$12.31
|
__________________
|
|
(1)
|
Represents less than 0.1 million shares.
|
|
|
(2)
|
During the three months ended June 30, 2020, the Company granted less than 0.1 million cash-settled share-appreciation rights ("CSARs"). The CSARs are revalued each reporting period until settlement using a closed-form option pricing model (Black Scholes).
|
Exchange Program
On January 10, 2020, the Company’s Board of Directors authorized, and on April 2, 2020, the Company’s shareholders approved, a stock option and share appreciation rights exchange program (the “Exchange Program”) that permitted certain current employees to exchange certain outstanding stock options and share appreciation rights with exercise prices substantially above the current market price of the Company’s Class A voting shares and the Company’s Class B non-voting shares for a lesser number of stock options and share appreciation rights that have a fair value that is lower than the fair value of the “out of the money” stock options and share appreciation rights. The program began on April 9, 2020 and was completed on May 7, 2020. As a result of this program 1.1 million outstanding eligible stock options and share appreciation rights of Class A voting shares were exchanged for 0.1 million new stock options and share appreciation rights at an exercise price of $7.70 per share and 4.3 million outstanding eligible stock options and share appreciation rights of Class B non-voting shares were exchanged for 0.8 million new stock options and share appreciation rights at an exercise price of $7.13.
(c) Share Repurchases
During the three months ended June 30, 2020, the Company repurchased 0.2 million of its Class A voting shares for an aggregate cost of $1.0 million, with an average repurchase price per share of $5.75. During the three months ended June 30, 2019 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 purchases.
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. Income Taxes
The income tax provision (benefit) for the three months ended June 30, 2020 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 before income taxes for the period, plus or minus the tax effects of items that relate discretely to the period, if any.
For the quarter ended June 30, 2019, the Company determined that a small change in its estimated pretax results for the year ending March 31, 2020 would create a large change in its expected annual effective rate. Accordingly, it was determined that a reliable estimate of the expected annual effective tax rate could not be made. As a result, for the three months ended June 30, 2019, the Company computed its tax provision (benefit) using the cut-off method, which reflects the actual taxes attributable to year-to-date earnings or losses.
The Company's income tax provision (benefit) 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, changes in the valuation allowance against the Company's deferred tax assets, and certain minimum taxes and foreign withholding taxes. The Company's income tax provision for the quarter ended June 30, 2020 was also impacted by the release of uncertain tax benefits due to the close of audits or expiration of statutory limitations.
The Company's income tax provision (benefit) 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, further interpretation and legislative guidance regarding the new Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), 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 related costs, and certain unusual items, when applicable. During the three months ended June 30, 2020, the Company also incurred certain other unusual charges related to the COVID-19 global pandemic, which are included in direct operating and distribution and marketing expense in the unaudited consolidated statement of operations. The following table sets forth restructuring and other and these COVID-19 related charges and the statement of operations line items they are included in for the three months ended June 30, 2020 and 2019:
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Restructuring and other:
|
|
|
|
Severance(1)
|
|
|
|
Cash
|
$
|
2.2
|
|
|
$
|
3.8
|
|
Accelerated vesting on equity awards (see Note 10)
|
—
|
|
|
0.3
|
|
Total severance costs
|
2.2
|
|
|
4.1
|
|
COVID-19 related costs included in restructuring and other(2)
|
0.5
|
|
|
—
|
|
Transaction and related costs(3)
|
0.3
|
|
|
1.5
|
|
Total Restructuring and Other
|
3.0
|
|
|
5.6
|
|
|
|
|
|
COVID-19 related charges included in:
|
|
|
|
Direct operating expense(4)
|
5.7
|
|
|
—
|
|
Distribution and marketing expense(4)
|
4.7
|
|
|
—
|
|
Total restructuring and other and COVID-19 related costs
|
$
|
13.4
|
|
|
$
|
5.6
|
|
_______________________
|
|
(1)
|
Severance costs in the three months ended June 30, 2020 and 2019 were primarily related to restructuring activities in connection with cost-saving initiatives and recent acquisitions.
|
|
|
(2)
|
During the three months ended June 30, 2020, the Company has incurred certain costs including costs primarily related to transitioning the Company to a remote-work environment and other incremental costs associated with the COVID-19 global pandemic.
|
|
|
(3)
|
Transaction and related costs in the three months ended June 30, 2020 and 2019 reflect transaction, integration and legal costs associated with certain strategic transactions, restructuring activities and legal matters.
|
|
|
(4)
|
In connection with the disruptions associated with the COVID-19 global pandemic and measures to prevent its spread and mitigate its effects both domestically and internationally, and the related economic disruption, including the worldwide closure of most theaters, international travel restrictions and the pausing of motion picture and television productions, during the three months ended June 30, 2020 the Company incurred certain incremental costs which were expensed in the period. The costs included in direct operating expense primarily represent costs associated with the pausing of productions, including certain cast and crew costs. In addition, the costs included in distribution and marketing expense primarily consist of contractual marketing spends for film releases and events that have been canceled or delayed and will provide no economic benefit. The Company is in the process of seeking insurance recovery for some of these costs, which cannot be estimated at this time, and therefore have not been recorded in the consolidated financial statements.
|
Changes in the restructuring and other severance liability were as follows for the three months ended June 30, 2020 and 2019:
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Severance liability
|
|
|
|
Beginning balance
|
$
|
11.1
|
|
|
$
|
21.2
|
|
Accruals
|
2.2
|
|
|
3.8
|
|
Severance payments
|
(5.3
|
)
|
|
(12.3
|
)
|
Ending balance(1)
|
$
|
8.0
|
|
|
$
|
12.7
|
|
_______________________
|
|
(1)
|
As of June 30, 2020, the remaining severance liability of approximately $8.0 million is expected to be paid in the next 12 months.
|
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.
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 STARZPLAY International, 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. Media Networks consists of the following product lines (i) Starz Networks, which includes the domestic licensing of premium subscription video programming to distributors, and on a direct-to-consumer basis (ii) STARZPLAY International, which represents revenues primarily from the OTT distribution of the Company's STARZ branded premium subscription video services internationally and (iii) Other Streaming Services, which represents primarily our majority owned premium Spanish language streaming services business, Pantaya.
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.
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,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Segment revenues
|
|
|
|
Motion Picture
|
$
|
280.7
|
|
|
$
|
397.8
|
|
Television Production
|
195.7
|
|
|
279.8
|
|
Media Networks
|
367.3
|
|
|
372.4
|
|
Intersegment eliminations
|
(30.0
|
)
|
|
(86.4
|
)
|
|
$
|
813.7
|
|
|
$
|
963.6
|
|
Intersegment revenues
|
|
|
|
Motion Picture
|
$
|
3.1
|
|
|
$
|
4.4
|
|
Television Production
|
26.9
|
|
|
81.4
|
|
Media Networks
|
—
|
|
|
0.6
|
|
|
$
|
30.0
|
|
|
$
|
86.4
|
|
Gross contribution
|
|
|
|
Motion Picture
|
$
|
129.9
|
|
|
$
|
32.9
|
|
Television Production
|
45.6
|
|
|
34.7
|
|
Media Networks
|
92.3
|
|
|
80.9
|
|
Intersegment eliminations
|
(7.7
|
)
|
|
(1.7
|
)
|
|
$
|
260.1
|
|
|
$
|
146.8
|
|
Segment general and administration
|
|
|
|
Motion Picture
|
$
|
28.8
|
|
|
$
|
25.3
|
|
Television Production
|
10.7
|
|
|
9.7
|
|
Media Networks
|
20.5
|
|
|
20.3
|
|
|
$
|
60.0
|
|
|
$
|
55.3
|
|
Segment profit
|
|
|
|
Motion Picture
|
$
|
101.1
|
|
|
$
|
7.6
|
|
Television Production
|
34.9
|
|
|
25.0
|
|
Media Networks
|
71.8
|
|
|
60.6
|
|
Intersegment eliminations
|
(7.7
|
)
|
|
(1.7
|
)
|
|
$
|
200.1
|
|
|
$
|
91.5
|
|
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 corporate general and administrative expense, restructuring and other costs, share-based compensation, certain programming and content charges as a result of changes in management and associated programming and content strategy, and, when applicable, certain costs related to the COVID-19 global pandemic 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 income (loss) before income taxes is as follows:
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Company’s total segment profit
|
$
|
200.1
|
|
|
$
|
91.5
|
|
Corporate general and administrative expenses
|
(26.4
|
)
|
|
(24.2
|
)
|
Adjusted depreciation and amortization(1)
|
(10.1
|
)
|
|
(10.7
|
)
|
Restructuring and other(2)
|
(3.0
|
)
|
|
(5.6
|
)
|
COVID-19 related costs included in direct operating expense and distribution and marketing expense(3)
|
(10.4
|
)
|
|
—
|
|
Adjusted share-based compensation expense(4)
|
(14.4
|
)
|
|
(9.2
|
)
|
Purchase accounting and related adjustments(5)
|
(46.4
|
)
|
|
(45.0
|
)
|
Operating income (loss)
|
89.4
|
|
|
(3.2
|
)
|
Interest expense
|
(44.4
|
)
|
|
(49.0
|
)
|
Interest and other income
|
1.7
|
|
|
2.8
|
|
Other expense
|
(1.7
|
)
|
|
(2.3
|
)
|
Gain on investments
|
5.1
|
|
|
0.1
|
|
Equity interests loss
|
(2.6
|
)
|
|
(7.9
|
)
|
Income (loss) before income taxes
|
$
|
47.5
|
|
|
$
|
(59.5
|
)
|
___________________
|
|
(1)
|
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,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Depreciation and amortization
|
$
|
47.6
|
|
|
$
|
40.1
|
|
Less: Amount included in purchase accounting and related adjustments
|
(37.5
|
)
|
|
(29.4
|
)
|
Adjusted depreciation and amortization
|
$
|
10.1
|
|
|
$
|
10.7
|
|
|
|
(2)
|
Restructuring and other includes restructuring and severance costs, certain transaction and related costs, and certain unusual items, when applicable (see Note 12).
|
|
|
(3)
|
In connection with the disruptions associated with the COVID-19 global pandemic and measures to prevent its spread and mitigate its effects both domestically and internationally, during the three months ended June 30, 2020 the Company has incurred $10.4 million in incremental direct operating and distribution and marketing expense (see Note 12). These charges are excluded from segment operating results.
|
|
|
(4)
|
The following table reconciles total share-based compensation expense to adjusted share-based compensation expense:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Total share-based compensation expense
|
$
|
14.4
|
|
|
$
|
9.5
|
|
Less:
|
|
|
|
Amount included in restructuring and other(i)
|
—
|
|
|
(0.3
|
)
|
Adjusted share-based compensation
|
$
|
14.4
|
|
|
$
|
9.2
|
|
|
|
(i)
|
Represents share-based compensation expense included in restructuring and other expenses reflecting the impact of the acceleration of certain vesting schedules for equity awards pursuant to certain severance arrangements.
|
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
(5)
|
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,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Purchase accounting and related adjustments:
|
|
|
|
Direct operating
|
$
|
0.3
|
|
|
$
|
1.5
|
|
General and administrative expense
|
8.7
|
|
|
14.1
|
|
Depreciation and amortization
|
37.4
|
|
|
29.4
|
|
|
$
|
46.4
|
|
|
$
|
45.0
|
|
See Note 8 for revenues by media or product line as broken down by segment for the three months ended June 30, 2020 and 2019.
The following table reconciles segment general and administration expense to the Company's total consolidated general and administration expense:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
General and administration
|
|
|
|
Segment general and administrative expenses
|
$
|
60.0
|
|
|
$
|
55.3
|
|
Corporate general and administrative expenses
|
26.4
|
|
|
24.2
|
|
Share-based compensation expense included in general and administrative expense
|
13.9
|
|
|
9.0
|
|
Purchase accounting and related adjustments
|
8.7
|
|
|
14.1
|
|
|
$
|
109.0
|
|
|
$
|
102.6
|
|
The reconciliation of total segment assets to the Company’s total consolidated assets is as follows:
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
March 31,
2020
|
|
(Amounts in millions)
|
Assets
|
|
|
|
Motion Picture
|
$
|
1,174.2
|
|
|
$
|
1,266.9
|
|
Television Production
|
1,339.5
|
|
|
1,414.8
|
|
Media Networks
|
4,610.1
|
|
|
4,671.4
|
|
Other unallocated assets(1)
|
632.2
|
|
|
598.1
|
|
|
$
|
7,756.0
|
|
|
$
|
7,951.2
|
|
_____________________
|
|
(1)
|
Other unallocated assets primarily consist of cash, other assets and investments.
|
14. Contingencies
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
Due to the inherent difficulty of predicting the outcome of claims and legal proceedings, the Company often cannot predict what the eventual outcome of the pending matters will be, what the timing of the ultimate resolution of these matters will be, or what the eventual loss, if any, related to each pending matter may be. Accordingly, at this time, the Company has determined a loss related to these matters in excess of accrued liabilities is reasonably possible, however a reasonable estimate of the possible loss or range of loss cannot be made at this time.
Insurance Litigation
Between July 19, 2016 and August 30, 2016, seven putative class action complaints were filed by purported Starz stockholders in the Court of Chancery of the State of Delaware (the "Fiduciary Litigation"). On August 22, 2018, the parties to the Fiduciary Litigation reached an agreement in principle providing for the settlement of the Fiduciary Litigation on the terms and conditions set forth in an executed term sheet. On October 9, 2018, the parties to the Litigation executed a stipulation of settlement, which was filed with the court (the "Stipulation"). The Stipulation provided for, among other things, the final dismissal of the Fiduciary Litigation in exchange for a settlement payment made in the amount of $92.5 million, of which $37.8 million was reimbursed by insurance. The Fiduciary Litigation settlement was approved by the Court of Chancery of the State of Delaware and the settlement amount and insurance reimbursement discussed above were paid during the quarter ended December 31, 2018. The Company is continuing to seek additional insurance reimbursement, including pursuant to a lawsuit submitted by the Company on November 7, 2018 against certain insurers.
On November 5, 2018, an insurer that entered into an agreement and contributed $10.0 million to the Company's aggregate insurance reimbursement filed a lawsuit seeking declaratory judgment for reimbursement of its agreed upon payment. The Company believes the lawsuit to be without merit and intends to vigorously defend it.
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, 2020, the Company had the following outstanding forward foreign exchange contracts (all outstanding contracts have maturities of less than 13 months from June 30, 2020):
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
Foreign Currency
|
|
Foreign Currency Amount
|
|
US Dollar Amount
|
|
Weighted Average Exchange Rate Per $1 USD
|
|
|
(Amounts in millions)
|
|
(Amounts in millions)
|
|
|
British Pound Sterling
|
|
|
£3.8
|
|
in exchange for
|
|
$4.7
|
|
|
£0.80
|
Euro
|
|
|
€2.1
|
|
in exchange for
|
|
$2.4
|
|
|
€0.89
|
Canadian Dollar
|
|
|
C$5.4
|
|
in exchange for
|
|
$4.0
|
|
|
C$1.34
|
Australian Dollar
|
|
|
A$0.9
|
|
in exchange for
|
|
$0.8
|
|
|
A$1.25
|
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).
As of March 31, 2020, the Company had the following pay-fixed interest rate swaps outstanding (all related to the Company's LIBOR-based debt, see Note 4 and Note 5):
|
|
|
|
|
|
|
|
|
|
Effective Date
|
|
Notional Amount (in millions)
|
|
Fixed Rate Paid
|
|
Maturity Date
|
May 23, 2018
|
|
|
$1,000.0
|
|
|
2.915%
|
|
March 24, 2025
|
June 25, 2018
|
|
|
$200.0
|
|
|
2.723%
|
|
March 23, 2025
|
July 31, 2018
|
|
|
$300.0
|
|
|
2.885%
|
|
March 23, 2025
|
December 24, 2018
|
|
|
$50.0
|
|
|
2.744%
|
|
March 23, 2025
|
December 24, 2018
|
|
|
$100.0
|
|
|
2.808%
|
|
March 23, 2025
|
December 24, 2018
|
|
|
$50.0
|
|
|
2.728%
|
|
March 23, 2025
|
Total
|
|
|
$1,700.0
|
|
|
|
|
|
During the three months ended June 30, 2020, the Company completed a series of transactions to amend and extend certain interest rate swap agreements. These transactions effectively replaced $1.2 billion of the interest rate swaps presented in the table above, and resulted in an extension of the maturity date on an aggregate of $1.2 billion of the Company's interest rate swaps by an additional 2 to 5 years, subject to mandatory early termination dates, and a decrease of the weighted average fixed pay rate from 2.870% to 2.354% per annum.
These interest rate swap transactions consisted of the following: (i) $1.2 billion of the interest rate swaps presented in the table above were de-designated as cash flow hedges, (ii) the Company entered into $1.2 billion of pay-variable receive-fixed interest rate swaps which are designed to offset the terms of the $1.2 billion of swaps in (i) and which are not designated as cash flow hedges, and (iii) the Company entered into $1.2 billion of new pay-fixed interest rate swaps with extended maturities. These new pay-fixed interest rate swaps are considered hybrid instruments with a financing component and an embedded at-market derivative that was designated as a cash flows hedge (see discussion of cash flow presentation below).
Key terms of the new offsetting pay-variable receive-fixed interest rate swaps outstanding at June 30, 2020 are presented below (not designated as hedges):
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
Effective Date
|
|
Notional Amount (in millions)
|
|
Fixed Rate Received
|
|
Maturity Date
|
May 19, 2020
|
|
|
$700.0
|
|
|
2.915%
|
|
March 24, 2025
|
May 19, 2020
|
|
|
$300.0
|
|
|
2.885%
|
|
March 23, 2025
|
May 19, 2020
|
|
|
$50.0
|
|
|
2.744%
|
|
March 23, 2025
|
June 15, 2020
|
|
|
$100.0
|
|
|
2.808%
|
|
March 23, 2025
|
June 15, 2020
|
|
|
$50.0
|
|
|
2.728%
|
|
March 23, 2025
|
Total
|
|
|
$1,200.0
|
|
|
|
|
|
Key terms of the new designated cash flow hedge pay-fixed interest rate swaps outstanding at June 30, 2020 are presented below:
|
|
|
|
|
|
|
|
|
|
Effective Date
|
|
Notional Amount (in millions)
|
|
Fixed Rate Paid
|
|
Maturity Date(1)
|
May 19, 2020
|
|
|
$700.0
|
|
|
1.923%
|
|
March 23, 2030
|
May 19, 2020
|
|
|
$350.0
|
|
|
2.531%
|
|
March 23, 2027
|
June 15, 2020
|
|
|
$150.0
|
|
|
2.343%
|
|
March 23, 2027
|
Total
|
|
|
$1,200.0
|
|
|
|
|
|
__________________
|
|
(1)
|
Subject to a mandatory early termination date of March 23, 2025.
|
At the time of the de-designation of the above $1.2 billion in interest rate swaps, there was approximately $142.1 million of unrealized losses recorded in accumulated other comprehensive income (loss). This amount will be amortized to interest expense through the remaining term of the original de-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 $1.2 billion of interest rate swaps de-designated as cash flow hedges and the $1.2 billion of offsetting swaps will be marked to market with changes in fair value recognized, along with the fixed and variable payments on these swaps, in interest expense, which are expected to nearly offset each other.
Cash settlements related to interest rate contracts are generally classified as operating activities on the consolidated statements of cash flows. However, due to an other-than-insignificant financing element on a portion of our interest rate swaps (see table above for new designated cash flow hedge pay-fixed interest rate swaps), the cash flows related to these contracts are classified as financing activities.
Financial Statement Effect of Derivatives
Unaudited condensed consolidated statement 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, 2020 and 2019:
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Derivatives designated as cash flow hedges:
|
|
|
|
Forward exchange contracts
|
|
|
|
Gain (loss) recognized in accumulated other comprehensive loss
|
$
|
(0.1
|
)
|
|
$
|
—
|
|
Gain (loss) reclassified from accumulated other comprehensive loss into direct operating expense
|
$
|
(0.1
|
)
|
|
$
|
1.1
|
|
Interest rate swaps
|
|
|
|
Loss recognized in accumulated other comprehensive loss
|
$
|
(17.7
|
)
|
|
$
|
(45.9
|
)
|
Loss reclassified from accumulated other comprehensive loss into interest expense
|
$
|
(7.4
|
)
|
|
$
|
(1.8
|
)
|
|
|
|
|
Derivatives not designated as cash flow hedges:
|
|
|
|
Forward exchange contracts
|
|
|
|
Gain (loss) recognized in direct operating expense
|
$
|
0.3
|
|
|
$
|
—
|
|
Interest rate swaps
|
|
|
|
Loss reclassified from accumulated other comprehensive loss into interest expense
|
$
|
(3.4
|
)
|
|
$
|
—
|
|
|
|
|
|
Total direct operating expense on consolidated statements of operations
|
$
|
423.0
|
|
|
$
|
568.0
|
|
Total interest expense on consolidated statements of operations
|
$
|
44.4
|
|
|
$
|
49.0
|
|
Unaudited condensed consolidated balance sheets: The Company classifies its forward foreign exchange contracts and interest rate swap agreements within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments (see Note 6). The portion of the swaps reflecting the financing component 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. The gross amount of swaps in an asset and liability position that were subject to a master netting arrangement was $144.7 million and $259.9 million, respectively, resulting in a net liability recorded in other liabilities - non-current of $115.2 million as of June 30, 2020.
As of June 30, 2020 and March 31, 2020, the Company had the following amounts recorded in the accompanying unaudited condensed consolidated balance sheets related to the Company's use of derivatives:
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2020
|
|
|
Other Current Assets
|
|
Accounts Payable and Accrued Liabilities
|
|
Other Non-Current Liabilities
|
|
|
(Amounts in millions)
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
Forward exchange contracts
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
—
|
|
Interest rate swaps
|
|
—
|
|
|
—
|
|
|
56.1
|
|
Derivatives not designated as cash flow hedges:
|
|
|
|
|
|
|
Interest rate swaps(1)
|
|
—
|
|
|
—
|
|
|
139.8
|
|
Fair value of derivatives
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
195.9
|
|
________________
|
|
(1)
|
Includes $144.2 million representing the financing element of certain hybrid instruments, which is offset by the new pay-variable receive-fixed interest rate swaps outstanding at June 30, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2020
|
|
|
Other Current Assets
|
|
Accounts Payable and Accrued Liabilities
|
|
Other Non-Current Liabilities
|
|
|
(Amounts in millions)
|
Derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
Forward exchange contracts
|
|
$
|
0.6
|
|
|
$
|
0.5
|
|
|
$
|
—
|
|
Interest rate swaps
|
|
—
|
|
|
—
|
|
|
187.9
|
|
Derivatives not designated as cash flow hedges:
|
|
|
|
|
|
|
Forward exchange contracts
|
|
—
|
|
|
0.4
|
|
|
—
|
|
Fair value of derivatives
|
|
$
|
0.6
|
|
|
$
|
0.9
|
|
|
187.9
|
|
As of June 30, 2020, based on the current release schedule, the Company estimates approximately $1.1 million of gains associated with forward foreign exchange contract cash flow hedges in accumulated other comprehensive loss will be reclassified into earnings during the one-year period ending June 30, 2021.
As of June 30, 2020, the Company estimates approximately $46.6 million of losses recorded in accumulated other comprehensive loss associated with interest rate swap agreement cash flow hedges will be reclassified into interest expense during the one-year period ending June 30, 2021.
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
16. Additional Financial Information
The following tables present supplemental information related to the unaudited condensed consolidated financial statements.
Other Assets
The composition of the Company’s other assets is as follows as of June 30, 2020 and March 31, 2020:
|
|
|
|
|
|
|
|
|
|
June 30,
2020
|
|
March 31,
2020
|
|
(Amounts in millions)
|
Other current assets
|
|
|
|
Prepaid expenses and other
|
$
|
67.1
|
|
|
$
|
65.7
|
|
Product inventory(1)
|
12.2
|
|
|
13.4
|
|
Tax credits receivable
|
68.5
|
|
|
78.3
|
|
|
$
|
147.8
|
|
|
$
|
157.4
|
|
Other non-current assets
|
|
|
|
Prepaid expenses and other
|
$
|
26.3
|
|
|
$
|
34.3
|
|
Accounts receivable
|
60.1
|
|
|
53.6
|
|
Tax credits receivable
|
172.6
|
|
|
166.7
|
|
Operating lease right-of-use assets
|
137.7
|
|
|
136.9
|
|
|
$
|
396.7
|
|
|
$
|
391.5
|
|
___________________
|
|
(1)
|
Home entertainment product inventory consists of Packaged Media and is stated at the lower of cost or market value (first-in, first-out method). Costs of Packaged Media sales, including shipping and handling costs, are included in distribution and marketing expenses.
|
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, 2020 and 2019.
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, 2020 and 2019:
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
|
|
|
|
Carrying value of receivables transferred and derecognized
|
$
|
313.2
|
|
|
$
|
374.5
|
|
Net cash proceeds received
|
311.7
|
|
|
372.2
|
|
Loss recorded related to transfers of receivables
|
1.5
|
|
|
2.3
|
|
At June 30, 2020, the outstanding amount of receivables derecognized from the Company's unaudited condensed consolidated balance sheets, but which the Company continues to service, related the Company's individual agreements to monetize trade accounts receivable was $514.2 million (March 31, 2020 - $529.8 million).
Pooled Monetization Agreement. In December 2019, the Company entered into a revolving agreement to transfer up to $150.0 million of certain receivables to various financial institutions on a recurring basis in exchange for cash equal to the gross receivables transferred. 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 $61.7 million as of June 30, 2020 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, 2020:
|
|
|
|
|
|
Three Months Ended
|
|
June 30,
|
|
2020
|
|
(Amounts in millions)
|
|
|
Gross cash proceeds received for receivables transferred and derecognized
|
$
|
52.3
|
|
Less amounts from collections reinvested under revolving agreement
|
(41.3
|
)
|
Proceeds from new transfers
|
11.0
|
|
Collections not reinvested and remitted or to be remitted
|
(10.4
|
)
|
Net cash proceeds received
|
$
|
0.6
|
|
|
|
Carrying value of receivables transferred and derecognized (1)
|
$
|
52.0
|
|
Obligations recorded
|
$
|
0.4
|
|
Loss recorded related to transfers of receivables
|
$
|
0.1
|
|
___________________
|
|
(1)
|
Receivables net of unamortized discounts on long-term, non-interest bearing receivables.
|
At June 30, 2020, 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 $93.1 million.
LIONS GATE ENTERTAINMENT CORP.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accumulated Other Comprehensive Loss
The following table summarizes the changes in the components of accumulated other comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
|
Net unrealized loss on cash flow hedges
|
|
Total
|
|
(Amounts in millions)
|
March 31, 2020
|
$
|
(18.8
|
)
|
|
$
|
(187.2
|
)
|
|
$
|
(206.0
|
)
|
Other comprehensive income (loss)
|
0.4
|
|
|
(7.0
|
)
|
|
(6.6
|
)
|
June 30, 2020
|
$
|
(18.4
|
)
|
|
$
|
(194.2
|
)
|
|
$
|
(212.6
|
)
|
Cash, Cash Equivalents and Restricted Cash
There was no restricted cash in the unaudited condensed consolidated balance sheets as of June 30, 2020 or March 31, 2020.
Supplemental Cash Flow Information
Significant non-cash transactions during the quarter include certain interest rate swap agreements, which are discussed in Note 15, "Derivative Instruments and Hedging Activities".
The supplemental schedule of non-cash investing activities is presented below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
2020
|
|
2019
|
|
(Amounts in millions)
|
Non-cash investing activities:
|
|
|
|
Common shares related to business acquisitions
|
$
|
—
|
|
|
$
|
28.1
|
|
There were no significant non-cash financing activities for the three months ended June 30, 2020 and 2019.