AMC Global Media Inc. quarterly report, Q2 FY2018

Business context and reporting period

The filing is AMC Networks Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2018; the supplied company name, AMC Global Media Inc., does not match the registrant named in the filing. AMC Networks operates National Networks and International and Other, including AMC Studios, international channels, IFC Films, streaming services, and, from April 20, 2018, Levity Entertainment Group.

Financial performance and position

• Q2 revenue rose 7.2% and stockholder net income rose 3.5% year over year. For the first half, revenue increased 5.0% and stockholder net income increased 10.1%.
• Q2 National Networks revenue increased 3.7%; International and Other revenue increased 32.4%, including $29.6m of Levity revenue after acquisition. National Networks remained the principal earnings contributor. International and Other reported a Q2 operating loss of $11.3m, improved from $31.2m a year earlier.
• Advertising was mixed: first-half National Networks advertising revenue fell 4.1%, primarily because of lower AMC ratings, while distribution revenue grew 8.3%. Management notes advertising and distribution results can vary with ratings, programming schedules, and contract renewals.
• For the six months, operating cash flow was $278.6m (up from $166.0m); investing cash outflow was $159.4m and financing cash outflow was $263.4m. Cash declined $144.3m to $416.1m, primarily amid $242.4m of share repurchases and investment and acquisition spending.
• At June 30, cash was $416.1m, current assets $1.81bn, and current liabilities $735.4m. Long-term debt, net, was $3.10bn; cash less reported long-term debt was approximately negative $2.69bn. The $500m revolving facility was undrawn, and the company reported compliance with debt covenants.
• Debt principal totaled $3.15bn before unamortized discounts and financing costs, with senior notes due 2022, 2024, and 2025 and a $750m Term Loan A. Management said about 83% of debt (excluding capital leases) was effectively fixed-rate at quarter-end.

Material changes and unusual items

• AMC acquired a 57% controlling interest in Levity for a stated purchase price of $48.4m; acquisition accounting remained preliminary. Levity added $29.6m of revenue and $1.2m of operating income from acquisition through quarter-end.
• Technical and operating costs increased faster than revenue in Q2, partly reflecting programming amortization and Levity. First-half program-rights write-offs were $8.4m, versus $1.8m in the prior-year period.
• Interest expense increased: management attributed the rise principally to the $800m of 4.75% notes issued in July 2017. Miscellaneous income/expense worsened year over year, including a $10.0m impairment of a non-marketable equity investment and less favorable foreign-currency and investment-related results.
• The effective tax rate was 23% in Q2 and 25% for the first half, compared with 36% and 35%, respectively, in 2017. The filing cites tax-law effects and valuation allowances; the company continued assessing the impact of the Tax Cuts and Jobs Act.
• The company repurchased 4.7m Class A shares for the first six months at an average price of about $51.89 per share, spending $242.4m. In June, the board increased total program authorization to $1.5bn; $600.1m remained available at June 30.
• Revenue-recognition standard adoption increased opening retained earnings by approximately $12.8m, net of tax. Management said its impact on current-period financial statement line items was not material; 2017 comparative results were not restated.

Outlook, risks, and contingencies

• No specific earnings or revenue guidance was provided. Management expects increased investment in original programming to continue in 2018 and expects results to vary with programming schedules, ratings, advertising demand, distribution renewals, and content costs.
• Management said cash, operating cash flow, and revolver availability should meet near- and longer-term funding needs, but does not expect operating cash flow alone to repay all debt at maturity; refinancing or other capital-market access will be necessary.
• Key disclosed risks include substantial debt and leverage, competition and changing viewing patterns, distributor bargaining power and renewals, programming cost and performance, advertising ratings guarantees, foreign exchange and interest rates, acquisitions, and litigation.
• Litigation includes claims concerning The Walking Dead. One action includes a $280m damages claim; a second seeks at least $20m, and related claims by other creators are also pending. The company denies the allegations and says outcomes and potential liability cannot currently be determined.
• After quarter-end, on July 29, 2018, AMC agreed to acquire the remaining RLJ Entertainment shares not already owned by it or Robert L. Johnson-affiliated entities for approximately $65.3m, or $6.25 per share, subject to customary conditions and shareholder approval.

Important facts for investors to verify

• Confirm the intended issuer: the filing is for AMC Networks Inc., not AMC Global Media Inc.
• Assess whether distribution growth can offset weaker National Networks advertising and whether programming-cost growth pressures margins.
• Review debt maturities, refinancing assumptions, covenant terms, and the company’s capacity to fund programming, acquisitions, and buybacks while maintaining liquidity.
• Track the Levity acquisition’s final purchase-price allocation and contribution to segment results, and the status and funding of the RLJE transaction.
• Monitor the Walking Dead litigation, investment valuation and impairment risk, and tax valuation allowances and remaining tax-law measurement-period adjustments.