Business context and reporting period
Filer: AMC Networks Inc. (NASDAQ: AMCX), notwithstanding the request metadata naming AMC Global Media Inc. This Form 10-K covers the fiscal year ended December 31, 2019; quarterly figures below include the three months ended December 31, 2019 (Q4).
The company operates National Networks—including AMC, WE tv, BBC AMERICA, IFC, SundanceTV and AMC Studios—and International and Other, which includes international channels, four targeted streaming services, IFC Films and Levity. Revenue is primarily from distribution and advertising; these represented 68% and 32% of consolidated revenue, respectively. The filing identifies AT&T as a National Networks customer exceeding 10% of consolidated revenue.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $3.060 billion | $2.972 billion |
| Operating income / margin | $625.3 million / 20.4% | $726.9 million / 24.5% |
| Adjusted operating income (non-GAAP) | $944.0 million | $932.5 million |
| Net income attributable to AMC Networks stockholders | $380.5 million; diluted EPS $6.67 | $446.2 million; diluted EPS $7.57 |
| Cash provided by operating activities | $483.7 million | $606.5 million |
| Cash and cash equivalents at year-end | $816.2 million | $554.9 million |
| Long-term debt, including finance leases (selected data) | $3.117 billion | $3.136 billion |
Revenue rose 3.0%, but operating income fell 14.0% and attributable net income fell 14.7%. The effective tax rate declined to 16% from 25%, partly offsetting lower pretax income. Adjusted operating income is a company-defined non-GAAP measure and increased 1.2%.
National Networks revenue fell 1.8% to $2.369 billion; advertising declined 4.3%, including a $65 million decrease at AMC attributed to lower ratings, while distribution revenue was nearly flat. International and Other revenue increased 22.7% to $734.1 million, principally reflecting the Levity and RLJE acquisitions and growth in Shudder and Sundance Now. That segment recorded a $170.0 million operating loss, versus a $93.3 million loss in 2018.
Q4 revenue was $785.2 million, versus $772.8 million a year earlier. Q4 operating income was $41.7 million, versus $137.1 million; net income attributable to stockholders was a loss of $8.6 million, versus income of $71.9 million.
Year-end assets were $5.597 billion and stockholders’ equity was $691.5 million. The $500 million revolving facility was undrawn. Gross principal debt was $3.131 billion, primarily consisting of a $731.3 million term loan and $2.4 billion of senior notes; approximately 80% of debt was effectively fixed-rate. A simple operating-cash-flow-less-capital-expenditure proxy was $392.1 million in 2019, compared with $516.7 million in 2018; this is not a company-reported free-cash-flow measure.
Cash flow from operations declined to $483.7 million; the filing cites, among other factors, a $142.3 million increase in prepaid expenses and other assets. Capital expenditures were $91.6 million. The company repurchased $70.6 million of stock during 2019 and had $488.8 million remaining under its repurchase authorization.
Material changes, outlook and risks
- Significant charges: 2019 included $106.6 million of impairment and related charges, including a $98.0 million partial goodwill impairment for AMC Networks International (AMCNI), and $40.9 million of restructuring and related charges. The impairment reflected weaker estimated value amid trends in international television broadcasting and lower valuation multiples. The SVOD reorganization also included a $13.0 million programming write-off.
- Operating trends: Management noted lower AMC ratings and declining domestic network subscriber estimates. AMC’s estimated U.S. subscribers fell from 89.0 million to 85.1 million; estimates also declined for WE tv, BBC AMERICA, IFC and SundanceTV.
- Outlook: The filing gives no specific quantitative revenue or earnings guidance. Management expected increased investment in original programming to continue in 2020 and expected additional restructuring charges in Q1 2020. It stated cash, operating cash flow and revolver availability should fund requirements over the next 12 months and longer term, but operating cash flow alone is not expected to repay all debt at maturity; refinancing or other financing actions will be needed.
- Debt actions and commitments: After year-end, the company announced a planned $200 million redemption of its 4.75% notes due 2022, scheduled for March 4, 2020. Contractual obligations totaled $4.972 billion, including $3.131 billion principal debt, $609.6 million estimated interest, $933.4 million purchase obligations and lease obligations. Certain noncontrolling investors also have future put rights not included in that total.
- Legal contingencies: The Walking Dead creator Frank Darabont and related plaintiffs seek at least $280 million in one action and at least $20 million in a second; the matters were consolidated for trial. Separate California claims by other Walking Dead-related writers and producers seek compensatory and punitive damages and restitution, with no amount specified here. The company denies the claims; outcomes and potential liability were not determinable. Management did not expect resolution to materially harm financial position or ability to meet obligations, while acknowledging a particular period’s results could be materially affected.
- Other key risks: cord-cutting and audience fragmentation, advertising and ratings pressure, competition for content and talent, distribution negotiations, programming cost and performance, cybersecurity and piracy, foreign exchange and regulation, and substantial leverage. The Dolan family controlled approximately 73% of voting power at year-end, limiting other shareholders’ influence.
Important facts for investors to verify
- Review the timing and cash/non-cash composition of the $98.0 million AMCNI goodwill impairment and $40.9 million restructuring charges, and whether further restructuring charges followed in Q1 2020.
- Track domestic subscriber and advertising trends, particularly AMC ratings, and whether SVOD subscriber growth offsets pressure in traditional networks.
- Assess debt maturities, covenant headroom, refinancing access and the impact of the announced $200 million note redemption; management says debt cannot all be repaid at maturity from operating cash flow.
- Monitor the unresolved talent-related litigation, including the claimed amounts and any subsequent rulings, settlements or changes in estimated exposure.
- Confirm the sustainability of cash generation after programming investment, purchase obligations, share repurchases and noncontrolling-interest put rights.