AMC Networks Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; figures are unaudited. AMC Networks operates National Networks and International and Other businesses, including AMC, WE tv, BBC AMERICA, IFC, SundanceTV, AMC Studios, and international channels. The filing identifies the registrant as AMC Networks Inc.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $648.0m | $634.6m | $2,078.8m | $2,026.1m |
| Operating income | $153.4m | $117.1m | $560.8m | $553.8m |
| Operating margin | 23.7% | 18.5% | 27.0% | 27.3% |
| Adjusted operating income (AOI), non-GAAP | $200.4m | $168.1m | $699.3m | $665.8m |
| Net income attributable to AMC Networks stockholders | $87.0m | $65.4m | $325.8m | $256.0m |
| Diluted earnings per share | $1.35 | $0.91 | $4.89 | $3.51 |
| Cash provided by operating activities | Not stated for quarter | Not stated for quarter | $273.6m | $426.6m |
Q3 revenue grew 2.1%; operating income rose 30.9% and stockholder net income rose 33.0%. For the nine-month period, revenue grew 2.6%, operating income 1.3%, and stockholder net income 27.3%. Nine-month operating cash flow less capital expenditures was approximately $211.8m, versus $382.1m in 2016.
Margins and segments: Q3 National Networks revenue rose 3.0% to $541.4m, supported by advertising and distribution; segment AOI increased to $199.7m. International and Other revenue declined 1.1% to $112.8m, and AOI fell to $8.2m. For nine months, National Networks revenue increased 3.8% while International and Other revenue declined 3.2%; the latter’s AOI declined 57.4% to $10.3m.
Balance sheet, cash flow and capital
- At September 30, cash and cash equivalents were $552.3m, total assets $4.89bn, and current assets $1.82bn. Gross debt principal was $3.15bn; debt carrying value was $3.10bn. The $500m revolving facility was undrawn.
- In July, AMC Networks issued $800m of 4.75% senior notes due 2025 and used approximately $400m of proceeds to repay Term Loan A borrowings. The amended credit agreement provides a $750m Term Loan A due 2023 and a $500m revolver due 2022. The company reported compliance with debt covenants at quarter-end.
- Operating cash flow decreased to $273.6m from $426.6m. Investing used $104.8m, including $61.8m of capital expenditures and $43.0m of investments and loans to investees. Financing used $112.6m, including $347.3m of share repurchases, offset in part by debt issuance and repayments.
- The board’s repurchase authorization totals $1.0bn. By September 30, $430.4m remained; the company repurchased 6.1m shares during the nine months at an average price of about $56.37 per share.
Material changes, outlook and risks
- National Networks’ Q3 performance benefited from higher affiliation rates and advertising pricing, while program-rights expense declined year over year. Management cautioned that advertising, distribution revenue, AOI, and programming costs can vary by quarter; it expected increased investment in original programming to continue in 2017.
- International and Other results were affected by weaker advertising demand, the July sale of AMCNI-DMC, and increased investment in online distribution initiatives. AMCNI-DMC’s sale generated an $11.0m Q3 pre-tax loss and a $17.1m second-quarter impairment charge.
- Net income included favorable foreign-currency transaction gains and gains on RLJ Entertainment (RLJE) derivatives; nine-month derivative gains were $26.8m. These valuation and currency items may fluctuate.
- Management said cash, operating cash generation, and the undrawn revolver should meet funding needs over the next 12 months and longer term. It also said operating cash generation is not expected to repay all debt at maturity, leaving the company dependent on capital-market access or alternatives such as asset sales or reduced discretionary spending.
- Key risks cited include high leverage, programming costs and performance, competition and distribution renewals, advertising demand, foreign exchange and interest rates, and litigation. Contractual obligations not reflected on the balance sheet rose $57.2m to $1.4bn, primarily due to production-cost payment guarantees.
- The Walking Dead litigation remains unresolved. Frank Darabont plaintiffs claim damages of $280m or more; summary-judgment motions had been argued but not decided. Separate claims by other writers and producers were consolidated in California; the company disputes the claims and says potential liability cannot presently be determined.
- No specific earnings or revenue guidance is provided in the filing. Management’s liquidity assessment and comments about programming investment are outlook statements, not quantified guidance.
Investor facts to verify
- Whether National Networks’ distribution and advertising momentum can offset weaker international results and ongoing programming investment.
- How lower operating cash flow and share repurchases affect debt reduction, liquidity, and future refinancing needs.
- The eventual outcome and potential financial exposure from the Darabont and consolidated California litigation.
- The sustainability of income contributions from foreign-currency gains and RLJE derivative valuations.
- The amount and timing of production-related commitments, and the effect of adopting the new revenue-recognition standard in 2018.