Business context and reporting period
This is AMC Networks Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The filing describes two segments: National Networks and International and Other, which includes international channels, subscription streaming services, Levity and IFC Films. The request metadata names AMC Global Media Inc.; the filing itself identifies AMC Networks Inc. as the registrant.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $718.6 million | $696.9 million | $2,275.1 million | $2,199.1 million |
| Operating income | $168.4 million | $164.6 million | $583.6 million | $589.8 million |
| Net income attributable to AMC Networks shareholders | $116.9 million | $111.3 million | $389.1 million | $374.3 million |
| Diluted earnings per share | $2.07 | $1.93 | $6.80 | $6.31 |
| Adjusted operating income (AOI; non-GAAP) | $219.3 million | $211.2 million | $744.0 million | $713.5 million |
Q3 operating margin was 23.4% versus 23.6%; nine-month operating margin was 25.6% versus 26.8%. Shareholder net income margin was 16.3% versus 16.0% for Q3 and 17.1% versus 17.0% for the nine-month periods. Net income improved despite lower pre-tax income, principally as income tax expense fell.
- For the first nine months, operating cash flow was $400.4 million, down from $471.8 million. Investing cash outflow was $59.9 million and financing cash outflow was $117.7 million. Cash increased by $222.9 million to $773.4 million.
- At September 30, cash and cash equivalents were $773.4 million; current assets were $2,224.9 million and current liabilities were $820.4 million. Long-term debt, net of discounts and financing costs, was $3,104.6 million; the $500 million revolving facility was undrawn. The company reported compliance with debt covenants.
- Operating lease liabilities were $248.6 million following adoption of the new lease standard. The company reported total assets of $5,618.2 million and total stockholders’ equity of $654.8 million.
Material changes versus comparable periods
- Q3 revenue grew 3.1%. National Networks revenue was nearly flat, with lower advertising partly offset by distribution growth. International and Other revenue increased 20.5%, primarily reflecting RLJ Entertainment (RLJE), plus growth in Shudder and Sundance Now.
- For the first nine months, revenue grew 3.5%. International and Other rose 30.2%, including acquisition contributions from RLJE and Levity; National Networks declined 2.2%. National Networks advertising was pressured by lower AMC ratings, while distribution reflected lower content licensing and subscriber-related effects.
- Q3 operating income increased 2.3%, while nine-month operating income declined 1.1%. AOI increased 3.9% for Q3 and 4.3% for the nine-month period. International and Other remained loss-making at the operating-income level, despite improved AOI.
- Miscellaneous expense swung from income of $28.8 million to expense of $1.5 million in Q3, and from income of $31.0 million to expense of $17.0 million for the nine months. A principal comparison factor was the absence of prior-year gains on the RLJE investment. 2019 nine-month miscellaneous expense also included a $20.2 million partial write-down of non-marketable equity securities and a note receivable.
- Cash from operations declined year over year. The filing attributes 2019 cash uses in part to program-rights payments and higher prepaid expenses and other assets.
Outlook, commentary, risks and unusual items
- Management expected additional restructuring charges in Q4 2019. Nine-month restructuring and related charges were $30.0 million, including a $13.0 million programming write-off tied to changes in the direct-to-consumer strategy.
- Management said investment in original programming was expected to continue increasing in 2019, with funding generally six to nine months ahead of airing. Revenue, expenses and AOI may fluctuate with programming schedules, audience ratings, licensing timing and subscriber trends; management gave no quantified earnings or revenue guidance.
- Management believed cash, operating cash generation and the undrawn revolver would cover liquidity needs over the next 12 months and longer term. It also stated that operating cash was not expected to be sufficient to repay all debt at maturity, making access to capital markets or refinancing important.
- Key disclosed risks include substantial debt and leverage, advertising and subscriber demand, competition, renewal of distribution agreements, programming costs and performance, foreign exchange and interest rates, and the outcome of litigation.
- AMC faced unresolved disputes related to The Walking Dead. One action sought damages of at least $280 million; a consolidated related action sought at least $20 million. A separate California action sought compensatory and punitive damages, with a contract-interpretation trial scheduled for February 2020. The company disputed the claims; it said outcomes and potential liability could not be determined.
- Adoption of the lease standard in January 2019 added $237.0 million of lease liabilities and $180.0 million of net lease assets at transition; management said it did not materially affect net income or cash flows.
Most important facts for investors to verify
- Whether National Networks advertising, subscriber trends and distribution revenue stabilize, particularly given lower AMC ratings and subscriber-related pressures.
- How much International and Other growth and AOI reflect acquisitions versus sustainable performance in streaming and international operations.
- Cash generation after program-rights spending, and the company’s ability to refinance or repay significant debt at maturity.
- The amount and timing of further restructuring charges and the financial effects of the direct-to-consumer strategy changes.
- Developments and potential financial exposure in the Walking Dead litigation; the filing does not provide a clear estimate of ultimate liability.
- The sustainability of the low 2019 effective tax rate, which included specified foreign-operation, valuation-allowance, investment-credit and tax-position benefits.