AMC Networks Inc. — Q3 2018 Form 10-Q
Business and period: The filing is by AMC Networks Inc. (not “AMC Global Media Inc.” as stated in the request metadata). It covers the three and nine months ended September 30, 2018. The company operates National Networks and International and Other, including AMC, WE tv, BBC AMERICA, IFC, SundanceTV, AMC Studios, international channels, streaming services and, since April 20, Levity.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $696.9 million | $648.0 million | $2,199.1 million | $2,078.8 million |
| Operating income | $164.6 million | $153.4 million | $589.8 million | $560.8 million |
| Operating margin | 23.6% | 23.7% | 26.8% | 27.0% |
| Net income attributable to AMC Networks | $111.3 million | $87.0 million | $374.3 million | $325.8 million |
| Diluted EPS | $1.93 | $1.35 | $6.31 | $4.89 |
| Adjusted operating income (AOI; non-GAAP) | $211.2 million | $200.4 million | $713.5 million | $699.3 million |
- Revenue and segment trends: Q3 revenue rose 7.5%; nine-month revenue rose 5.8%. National Networks revenue grew 3.5% in Q3 and 3.4% year to date. Q3 International and Other revenue increased 34.6%, primarily reflecting Levity; the segment remained loss-making on a GAAP operating basis. National Networks advertising was pressured by lower AMC ratings: down 2.7% for the nine-month period, partly offset by higher distribution revenue from rate increases and content licensing.
- Profitability: Q3 net income attributable to shareholders increased 27.9%, while nine-month net income rose 14.9%. Q3 operating margin was slightly lower year over year; nine-month operating margin also edged down. AOI increased 5.4% in Q3 and 2.0% year to date; AOI is a company-defined non-GAAP measure.
- Cash flow: Nine-month operating cash flow was $471.8 million, up from $273.6 million. Investing cash outflow was $185.9 million, including $90.1 million of investments, $60.8 million of capital expenditures and $35.6 million for acquisitions. Financing cash outflow was $292.0 million, primarily reflecting $267.4 million of share repurchases. Cash ended the period at $564.7 million versus $558.8 million at year-end 2017.
- Debt and liquidity: Debt, net of unamortized discounts and financing costs, was $3.105 billion, compared with $3.099 billion at year-end. The $500 million revolving credit facility was undrawn; the company reported compliance with debt covenants. Management said cash, operating cash flow and revolver availability should cover debt service and other needs over the next 12 months, but operating cash flow alone is not expected to repay all debt at maturity; refinancing or other capital-market access will be needed.
- Other balance-sheet items: Total assets were $5.162 billion and total liabilities were $4.618 billion. Current assets were $1.931 billion and current liabilities $769.9 million. Program rights and related obligations remain substantial operating assets and commitments.
Material changes and unusual items
- Levity acquisition: AMC acquired a 57% controlling interest on April 20 for a total purchase price of $48.4 million. Levity contributed $68.1 million of revenue and $2.2 million of operating income from acquisition through September 30. The 2017 comparison is also affected by the July 2017 sale of AMCNI–DMC.
- RLJE transaction: AMC agreed in July to acquire RLJE shares it did not already own. After quarter-end, AMC obtained control through warrant exercises and completed the acquisition on October 31 for approximately $58.9 million in cash, subject to the disclosed assumption regarding preferred holders’ elections. AMC reported a 17% minority stake held by affiliates of Robert L. Johnson after closing.
- Q3 miscellaneous income was $28.8 million, including gains associated with RLJE derivatives and warrants. The company reported $27.2 million of Q3 gains on other derivatives and $20.6 million of Q3 gains related to RLJE warrants; these fair-value items contributed to reported earnings and may fluctuate.
- Nine-month interest expense, net, increased to $100.2 million from $85.8 million, primarily reflecting the 2017 issuance of $800 million of 4.75% notes due 2025. Nine-month income tax expense fell to $133.1 million from $173.4 million; the effective tax rate was 26% versus 34%, reflecting tax-law effects and other discrete items.
- The company repurchased 5.1 million Class A shares during the first nine months at an average price of approximately $52.53 per share. Approximately $575.2 million remained authorized for repurchases at September 30.
- Adoption of the new revenue-recognition standard increased opening retained earnings by approximately $12.8 million, net of tax. The filing says the impact on current-period line items compared with prior policy was not material; 2017 results were not recast.
Outlook, risks and contingencies
- No quantitative full-year earnings or revenue guidance is provided. Management expects original-programming investment to continue increasing in 2018 and notes that it is generally funded six to nine months before a program airs. Advertising, distribution revenue and AOI may vary from quarter to quarter.
- The company expected additional restructuring charges in Q4 2018 following $3.1 million of Q3 severance expense. Program-rights write-offs were $11.4 million in Q3 and $20.6 million for the nine months, according to the financial-statement note.
- Key disclosed risks include substantial debt and refinancing needs; competition and changes in viewing behavior; distributor negotiations and subscriber trends; advertising demand and audience ratings; content costs and programming performance; foreign exchange and interest rates; integration of acquisitions; and access to capital markets.
- Several disputes concern compensation and accounting for The Walking Dead and related programming. Darabont-related actions include a stated $280 million damages claim and a separate claim seeking at least $20 million; the actions were consolidated for joint trial. Other producer-related claims seek compensatory and punitive damages and restitution. The company denies the claims and says outcomes and potential liability cannot currently be determined.
- Foreign-currency translation reduced nine-month other comprehensive income by $32.7 million. A 100-basis-point rate increase was not expected to have a material impact on annual interest expense, according to the filing.
Important facts for investors to verify
- Underlying National Networks trends, especially AMC ratings and advertising, against distribution-rate and content-licensing growth.
- How much earnings growth depends on volatile RLJE-related fair-value gains, and the subsequent acquisition’s cash, debt and minority-interest effects.
- Whether operating cash flow can sustain programming investment, share repurchases and debt service, and the company’s refinancing plan for maturities.
- Levity’s continuing contribution and the International and Other segment’s path to sustained GAAP profitability.
- Developments, timing and potential exposure in the Walking Dead litigation, for which the filing provides no clear estimate of ultimate liability.