Business context and reporting period
AMC Networks Inc. (the registrant named in the filing; not “AMC Global Media Inc.”) filed this unaudited Form 10-Q for the quarter ended June 30, 2017. It operates National Networks—including AMC, WE tv, BBC AMERICA, IFC and SundanceTV—and International and Other, which includes AMC Networks International, IFC Films and digital initiatives. Comparisons below are with the corresponding 2016 period unless stated otherwise.
Financial performance
| Metric | Q2 2017 | Six months 2017 |
|---|---|---|
| Revenue | $710.5 million, up 3.8% | $1.431 billion, up 2.8% |
| Operating income / margin | $175.8 million / 24.7%; down 1.3% in dollars | $407.5 million / 28.5%; down 6.7% in dollars |
| Adjusted operating income (AOI), non-GAAP | $228.6 million, up 8.2% | $498.9 million, up 0.2% |
| Net income attributable to AMC stockholders | $102.6 million; diluted EPS $1.54 | $238.8 million; diluted EPS $3.52 |
| Cash from operations | Quarterly amount not separately stated in the provided cash flow statement | $166.0 million, versus $229.6 million |
| Capital expenditures / operating cash flow less capex | Quarterly amounts not separately stated | $39.9 million / approximately $126.0 million |
| Cash and debt at June 30 | $189.5 million cash; $2.747 billion gross debt, plus $32.6 million capital lease obligations. $500 million revolving facility undrawn. |
Q2 revenue growth came from National Networks (up 5.6%), particularly distribution revenue, while International and Other revenue fell 6.3%. Six-month National Networks revenue rose 4.2%; international revenue declined 4.3%. Distribution gains in National Networks included higher affiliation fees and digital licensing of original programming. Advertising revenue declined 2.0% for National Networks in the first half, while international advertising weakened.
Material changes and notable items
- Technical and operating costs rose 9.6% in Q2 and 9.9% for the first half, largely reflecting increased programming-rights amortization and continued investment in original programming. These costs rose faster than revenue.
- First-half operating income fell despite higher revenue; consolidated AOI was nearly flat. National Networks AOI increased 2.6% in the first half, while International and Other AOI declined 84.2% to $2.1 million.
- AMCNI-DMC was classified as held for sale in June. The company recorded a $17.1 million impairment and expected an additional approximately $12.1 million pre-tax sale loss in Q3. The sale closed July 12, 2017.
- Q2 miscellaneous income included favorable foreign-currency remeasurement and RLJE-related gains. For the first half, miscellaneous income was $30.0 million versus a $25.6 million loss in 2016; it included $19.6 million of derivative gains, primarily related to RLJE, and foreign-currency transaction gains. These items contributed to net income growth and may not indicate recurring operating performance.
- Cash declined by $291.9 million from year-end to $189.5 million. First-half financing outflows included $244.4 million of share repurchases and $111.0 million of scheduled debt repayments. The company repurchased 4.4 million shares in the first half at an average $55.97; the board increased the repurchase authorization to $1.0 billion.
- After quarter-end, AMC issued $800 million of 4.75% notes due 2025, using approximately $400 million of proceeds to repay term loans. It also amended and extended its credit facilities, including a $750 million term loan facility and undrawn $500 million revolver. These July transactions are subsequent events, not June 30 balance-sheet amounts.
Liquidity, outlook and risks
Management said cash on hand, operating cash flow and revolver availability should be sufficient for debt service and other funding needs over the next 12 months and longer term. It also stated that operating cash flow is not expected to repay all debt at maturity, leaving the company dependent on refinancing or capital-market access. The company reported compliance with debt covenants at June 30; the credit agreement includes leverage and interest-coverage tests and restrictions on certain payments, including stock repurchases.
No quantified revenue or earnings guidance is provided in the filing text. Management expects increased investment in original programming to continue in 2017 and cautions that advertising, distribution revenue and AOI can vary by quarter with ratings, programming schedules, contract renewals and content availability. Identified risks include substantial debt and leverage, programming costs and uncertain program success, competition and changing distribution technology, dependence on distributors, advertising demand, foreign exchange and interest-rate movements, and access to capital markets.
A material litigation contingency is the Darabont dispute relating to The Walking Dead. Plaintiffs asserted damages of $280 million or more; the company disputes the claims and says it is defending the case vigorously. Management said the outcome and potential liability could not then be determined. The filing also reports $1.4 billion of contractual obligations not reflected on the balance sheet, up $46.3 million, primarily because of production-cost payment guarantees.
Key facts for investors to verify
- Whether National Networks distribution growth and higher programming costs translate into sustainable operating income and cash flow.
- The final proceeds, purchase-price adjustments and Q3 loss associated with the AMCNI-DMC sale.
- How much of first-half earnings growth reflects RLJE derivative and foreign-currency gains rather than recurring operations.
- Post-quarter debt balances, refinancing terms, interest costs and covenant headroom after the July note issuance and credit-agreement amendment.
- Remaining repurchase authorization and its effect on liquidity and share count; the filing reports $532.4 million available at June 30 and additional repurchases after quarter-end.
- Developments and potential exposure in the Darabont litigation, as well as the timing and cash requirements of production guarantees.