AMC Networks Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparative period is Q1 2017. The filing identifies the registrant as AMC Networks Inc. (not AMC Global Media Inc.). The company operates National Networks and International and Other segments, including AMC Studios, international channels, IFC Films, and Shudder and Sundance Now.
Key financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $740.8 million | $720.2 million | +2.9% |
| Operating income | $233.7 million | $231.7 million | +0.9% |
| Operating margin | 31.5% | 32.2% | Down 0.7 percentage points |
| Adjusted operating income (non-GAAP) | $269.3 million | $270.3 million | Down 0.4% |
| Net income attributable to AMC Networks stockholders | $156.9 million | $136.2 million | +15.2% |
| Diluted EPS | $2.54 | $1.98 | +$0.56 |
| Cash from operating activities | $117.0 million | $144.9 million | Down $27.9 million |
Net margin attributable to AMC Networks stockholders was 21.2%, compared with 18.9%. Lower tax expense contributed to higher net income: the effective tax rate was 26% versus 34%. Q1 2018 results reflect adoption of the new revenue recognition standard; 2017 was not restated. Adoption increased opening retained earnings by approximately $12.8 million, net of tax.
Segments and material changes
- National Networks: Revenue rose 2.9% to $633.0 million. Distribution revenue increased $39.7 million, including higher content licensing and subscription revenue; advertising revenue fell $21.8 million, primarily because of lower AMC ratings. Adjusted operating income increased 1.1% to $270.9 million.
- International and Other: Revenue rose 4.3% to $111.4 million, while adjusted operating income moved from $1.1 million to a loss of $2.2 million. Higher programming and transmission costs weighed on results; favorable currency translation and growth in streaming revenue provided offsets.
- Consolidated technical and operating expense increased 7.3%, faster than revenue, and its share of revenue rose to 43.2% from 41.5%. The prior-year quarter included $2.7 million of restructuring expense; Q1 2018 had none.
- Interest expense, net, increased $6.2 million, principally following the 2017 issuance of $800 million of 4.75% notes due 2025. Miscellaneous income included gains related to RLJE derivatives and foreign-currency movements.
Financial position, liquidity, and capital allocation
- At March 31, 2018, cash and cash equivalents were $529.2 million, down from $558.8 million at year-end. Current assets were $1.89 billion and current liabilities $715.7 million.
- Long-term debt, net of discounts and financing costs, was $3.10 billion; debt principal totaled $3.15 billion. The $500 million revolving credit facility was undrawn, and the company reported covenant compliance. Cash less reported long-term debt was approximately $2.57 billion; this excludes capital leases and other obligations.
- Operating cash flow was $117.0 million; investing cash outflow was $54.1 million, including $42.3 million of investments and $11.9 million of capital expenditures. Financing cash outflow was $101.8 million, including $83.6 million of treasury-stock purchases.
- The company repurchased 1.65 million Class A shares in Q1 at an average $50.77 per share; $258.9 million remained authorized. From April 1 through May 4, it repurchased approximately 2.4 million additional shares for $124.8 million.
Outlook, risks, and unusual items
- No numerical earnings or revenue guidance is provided. Management expects increased investment in original programming to continue in 2018 and cautions that revenue and adjusted operating income may vary by quarter, including due to programming schedules, ratings, licensing availability, and foreign exchange.
- Management said cash, operating cash flow, and the undrawn revolver should provide sufficient liquidity for obligations and investment needs over the next 12 months. It also said operating cash flow is not expected to repay all debt at maturity, making future access to capital and credit markets important.
- Key stated risks include declining linear-TV viewing and advertising demand, competition and changing consumption patterns, programming costs and performance, distributor negotiations and renewals, substantial leverage, interest and currency movements, and acquisition and integration risks.
- Two Walking Dead-related Darabont actions seek at least $280 million and at least $20 million, respectively; the company disputes the claims and says outcomes and potential liability cannot currently be determined. Separate California claims by other series participants also remain pending, with damages and outcomes uncertain. Management said resolution of the matters is not expected to materially impair financial position or ability to meet obligations, while acknowledging period-specific results could be materially affected.
- The company proposed buying additional RLJE shares for $4.25 per share; completion was not assured. On April 20, 2018, it acquired a majority interest in Levity Entertainment Group for $48.5 million.
- Tax expense included a provisional $15.6 million discrete charge for a valuation allowance against foreign tax credit carryforwards, as the company continued assessing the Tax Cuts and Jobs Act. Program-rights write-offs were also higher than the prior-year period; the filing reports $5.2 million in the note and $4.6 million in its National Networks discussion.
Important facts for investors to verify
- Whether distribution growth can offset weaker advertising, including the effect of AMC ratings and the timing of content licensing.
- Whether International and Other can restore positive adjusted operating income as programming and transmission investment rises.
- Cash conversion and programming cash requirements, given lower operating cash flow and substantial program-rights obligations.
- Debt refinancing capacity and the implications of continued share repurchases and acquisitions for leverage and liquidity.
- Developments in the RLJE proposal, Levity integration, tax assessments, and the pending Walking Dead litigation.