AMC Networks Inc. — Q2 2019 Form 10-Q
Business context and period: The filing is for the quarter and six months ended June 30, 2019. AMC Networks operates National Networks and International and Other, including its U.S. and Canadian networks, AMC Studios, international channels, film distribution, production services, and subscription streaming services. Results are unaudited. The supplied company name differs from the registrant named in the filing: AMC Networks Inc.
Financial performance
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $772.3 | $761.4 | $1,556.5 | $1,502.2 |
| Operating income | $170.3 | $191.5 | $415.1 | $425.2 |
| Operating margin | 22.0% | 25.2% | 26.7% | 28.3% |
| Net income attributable to AMC Networks shareholders | $128.7 | $106.2 | $272.1 | $263.1 |
| Diluted EPS | $2.25 | $1.82 | $4.73 | $4.38 |
| Adjusted operating income (non-GAAP) | $231.6 | $233.0 | $524.7 | $502.3 |
- Revenue and segment mix: Q2 revenue increased 1.4%; National Networks revenue fell 3.6% to $604.7 million, while International and Other rose 22.4% to $179.5 million, partly reflecting the Levity and RLJE acquisitions. National Networks advertising revenue declined 11.1%, largely due to AMC programming timing and lower ratings. For the first half, revenue grew 3.6%; National Networks declined 3.1% and International and Other grew 35.8%.
- Profit and margins: Q2 operating income decreased 11.1%, with operating margin down 3.2 percentage points. Shareholder net income rose 21.2%, helped by a $1.4 million tax benefit versus $32.5 million tax expense a year earlier. First-half operating income declined 2.4%, while shareholder net income increased 3.5%; the first-half effective tax rate was 14%, compared with 25% in 2018.
- Cash flow: First-half operating cash flow was $288.9 million, versus $278.6 million. Investing used $43.6 million, including $49.5 million of capital expenditures; financing used $92.3 million. Cash increased $153.1 million during the period to $706.3 million.
- Debt and liquidity: At June 30, gross debt principal was $3.15 billion and debt net of unamortized discounts and financing costs was $3.11 billion. Cash was $706.3 million; the $500 million revolving facility was undrawn. The company reported compliance with debt covenants and said cash, operating cash flow, and revolver availability should cover requirements over the next 12 months. It also said operating cash flow alone is not expected to repay all debt at maturity, making future access to capital and credit markets important. Lease liabilities totaled $254.8 million.
- Other balance-sheet items: Total assets were $5.56 billion and stockholders’ equity was $568.5 million at June 30, 2019. The company repurchased 1.05 million Class A shares for approximately $57.4 million during the first half; $501.0 million remained authorized under its repurchase program.
Material changes and unusual items
- Q2 restructuring and related charges were $17.2 million; first-half charges were $19.8 million. These included a $13.0 million programming write-off connected with reorganization and a strategy change in owned streaming services, along with severance and other costs.
- First-half miscellaneous expense included $17.7 million of impairment charges related to certain non-marketable equity securities and a note receivable. This contributed to miscellaneous expense worsening by $17.7 million year over year.
- International and Other revenue and expenses reflect the acquisitions of Levity in April 2018 and RLJE in October 2018, limiting comparability with 2018.
- The company adopted the new lease accounting standard in January 2019, recognizing lease assets and liabilities; it said adoption did not materially affect net income or cash flows.
- The filing revised 2018 foreign-currency translation amounts in comprehensive income, reducing relevant reported comprehensive-income figures by $53.2 million. Management concluded the error was not material to previously issued financial statements.
Outlook, commentary, and risks
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expects quarter-to-quarter variability in advertising, distribution revenue, and adjusted operating income, citing programming schedules, ratings, affiliation agreement renewals, and licensing timing.
- Management expects increased investment in original programming to continue in 2019, with funding generally occurring six to nine months before airing. It cautioned that content costs may rise and programming that underperforms can require write-offs.
- Key disclosed risks include substantial debt and refinancing needs, advertising and subscriber demand, competition and changing viewing habits, distribution agreement renewals, programming costs and performance, foreign exchange and interest rates, acquisitions and integration, and legal outcomes.
- Several Walking Dead-related disputes remain unresolved. One action sought damages of at least $280 million and another at least $20 million; the matters were consolidated for a joint trial scheduled to begin May 4, 2020. The company disputed the claims and said ultimate outcomes and potential liability could not be determined. It also disclosed other claims, including a California action, for which the supplied text does not state a specific damages amount.
Important facts for investors to verify
- Whether National Networks advertising and subscriber trends improve, and how much quarterly results depend on programming timing and ratings.
- How acquisitions and streaming operations affect International and Other profitability, cash needs, and the company’s revised direct-to-consumer strategy.
- Debt maturities, covenant terms, refinancing access, and the availability of the undrawn revolver as funding needs evolve.
- The drivers and recurrence of programming write-offs, investment impairments, restructuring costs, and tax benefits affecting reported earnings.
- Developments in the Walking Dead litigation, including the claimed amounts, trial timing, and any change in the company’s assessment of potential liability.