Business context and reporting period
AMC Networks Inc. (NASDAQ: AMCX) filed this Form 10-K for the fiscal year ended December 31, 2018; it is an annual report, not a standalone quarterly filing. The company operates U.S. and international television networks, studios and content distribution businesses, including streaming services. Its main revenue sources are distribution and advertising. 2018 results include Levity from April 20 and RLJ Entertainment (RLJE) from October 1; AMCNI-DMC was sold in July 2017.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Revenue | $2.972 billion | $2.806 billion | +5.9% |
| Operating income | $726.9 million | $722.4 million | +0.6% |
| Operating margin | 24.5% | 25.7% | Down 1.2 percentage points |
| Net income attributable to AMC Networks shareholders | $446.2 million | $471.3 million | −5.3% |
| Diluted EPS | $7.57 | $7.18 | +5.4% |
| Adjusted operating income (non-GAAP) | $932.5 million | $904.8 million | +3.1% |
| Cash from operating activities | $606.5 million | $385.7 million | +$220.8 million |
- National Networks revenue rose 1.9% to $2.413 billion. Advertising fell 1.6% to $944.7 million, including a $47.2 million decline at AMC attributed to lower ratings; distribution revenue rose 4.3% to $1.469 billion, mainly from higher subscription rates.
- International and Other revenue grew 30.9% to $598.3 million, substantially reflecting Levity and RLJE acquisitions. The segment recorded a $93.3 million operating loss, versus an $88.9 million loss in 2017.
- Technical and operating expenses rose 7.8% to $1.446 billion; SG&A increased 7.2% to $657.5 million. Restructuring expense increased to $45.8 million from $6.1 million.
- Fourth-quarter 2018 revenue was $772.8 million and operating income was $137.1 million, versus $726.9 million and $161.5 million, respectively, in fourth-quarter 2017. Q4 net income attributable to shareholders was $71.9 million versus $145.5 million; the filing notes that Q4 2017 included a substantial one-time tax benefit.
Cash, debt and liquidity
- Year-end cash and cash equivalents were $554.9 million, down slightly from $558.8 million. Operating cash flow was $606.5 million; investing activities used $260.2 million and financing activities used $314.6 million. Capital expenditures were $89.8 million.
- Principal debt was $3.153 billion, including $750 million under the Term Loan A Facility and $2.4 billion of senior notes. The $500 million revolving facility was undrawn. Long-term debt, net of discounts and financing costs, was $3.110 billion.
- Net interest expense increased to $135.8 million from $119.3 million. Management said cash on hand, operating cash flow and revolver availability should support debt service and other needs, but it does not expect operating cash flow alone to repay all debt at maturity and expects to depend on capital and credit markets to refinance or repay it.
- Contractual obligations totaled $6.004 billion, including $3.153 billion of principal, $773.6 million of estimated interest, and $1.752 billion of purchase obligations, primarily programming rights, participations, residuals and transmission and marketing commitments.
Material changes, outlook and risks
- The company acquired controlling interests in Levity for $48.4 million and RLJE; acquisition accounting remained preliminary at year-end. Together, the acquired businesses contributed $134.9 million of revenue and a $2.8 million operating loss from their respective acquisition dates through year-end.
- Management expects increased investment in original programming to continue in 2019, with funding typically occurring six to nine months before airing. The filing provides no quantified 2019 revenue or earnings guidance.
- 2018 included $45.8 million of restructuring charges for workforce and organizational changes and exits from distribution in certain territories, plus a $4.5 million impairment-related charge. Program-rights write-offs were $48.8 million in National Networks; total program-rights write-offs were $50.5 million.
- Key risks include declining traditional pay-TV subscribers, lower ratings—particularly at AMC—pressure on advertising, competition for viewers and programming, rising content costs, distributor negotiations, international and foreign-exchange exposure, and substantial leverage and refinancing needs. The international programming networks goodwill valuation had limited headroom: a 6% decrease in estimated fair value would require an impairment charge.
- Pending litigation includes claims related to The Walking Dead, including a Darabont action claiming at least $280 million and a separate action claiming at least $20 million, plus claims by other writers and producers. The company disputes the claims; outcomes and potential liability were not determinable in the filing.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded Levity and RLJE from the year-end controls assessment; together they represented 5% of 2018 revenue and 9% of year-end assets.
Important facts for investors to verify
- Whether ratings and subscriber trends, especially at AMC, continue to affect advertising and distribution revenues.
- Whether acquired RLJE and Levity businesses meet expectations, and how their results and preliminary purchase accounting develop.
- Debt maturities, covenant headroom, borrowing costs and the company’s ability to refinance its obligations.
- Cash generation after programming commitments, repurchases and continued original-content investment.
- Developments in The Walking Dead litigation and any resulting financial exposure.