AMC Networks Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing is for AMC Networks Inc., not a registrant named AMC Global Media Inc.; it reports full-year results, with selected fourth-quarter data. The company operates domestic and international television networks, studios, digital services and IFC Films.
Financial performance
| Metric | FY 2016 | FY 2015 | Change |
|---|---|---|---|
| Revenue | $2,755.7 million | $2,580.9 million | +6.8% |
| Operating income | $657.6 million | $709.2 million | -7.3% |
| Operating margin | 23.9% | 27.5% | -3.6 percentage points |
| Net income attributable to AMC Networks shareholders | $270.5 million | $366.8 million | -26.2% |
| Diluted earnings per share | $3.74 | $5.01 | Lower |
| Adjusted operating income (AOI, non-GAAP) | $878.5 million | $838.2 million | +4.8% |
| Cash flow from operations | $514.3 million | $370.0 million | Higher |
Distribution and advertising represented approximately 61% and 39% of revenue, respectively. Domestic National Networks revenue grew 8.2% to $2,311.0 million; International and Other revenue rose 1.6% to $460.0 million. Advertising revenue increased 4.8% domestically, while domestic distribution revenue grew 11.0%, including increased digital licensing revenue.
Technical and operating expense rose 12.6% to $1,280.0 million, outpacing revenue growth, principally due to greater programming investment and related costs. The reported operating margin declined. Net income also reflected a $50.6 million loss on extinguishment of debt and $67.8 million of impairment charges. AOI excludes, among other items, impairment, restructuring, depreciation and amortization, and share-based compensation; it is not a GAAP measure.
Cash, debt and liquidity
- Cash and cash equivalents were $481.4 million at year-end, versus $316.3 million in 2015.
- Principal debt was $2,858 million, excluding capital leases; the balance sheet reports total long-term debt including capital leases of $2,859.1 million. The $500 million revolving facility was undrawn, and the company reported compliance with its debt covenants.
- In 2016, the company issued $1 billion of 5.00% notes due 2024 and retired all $700 million principal of its 7.75% notes due 2021. The refinancing lowered the stated coupon but generated the $50.6 million extinguishment loss.
- Contractual principal payments include $222 million in the next year and $1.036 billion over years two to three; $1.6 billion is due after five years. The company said cash, operating cash flow and revolver availability should cover needs in the near term, but it does not expect operating cash flow alone to repay all debt at maturity and expects to rely on capital and credit markets to refinance or repay it.
- Operating cash flow was $514.3 million; investing activities used $174.6 million, including $79.2 million of capital expenditures and $95.0 million of investments and loans; financing activities used $153.9 million. The company repurchased $223.2 million of shares during the year.
Material changes and outlook
- Shareholder net income fell despite revenue and AOI growth, reflecting higher operating costs, impairment, debt-refinancing charges and other expense. The National Networks segment’s operating income rose 3.9%; International and Other recorded a $120.9 million operating loss, compared with a $42.5 million loss in 2015.
- In the fourth quarter, management lowered its growth expectations for AMCNI-DMC, citing increased competition and evolving broadcast technology. This led to a $67.8 million impairment: $40.6 million for long-lived assets and $27.2 million to write off the unit’s goodwill.
- Fourth-quarter revenue was $729.6 million and operating income was $103.7 million. Net income attributable to shareholders was $14.5 million, including the year’s unusual charges; the filing does not provide a normalized fourth-quarter earnings figure.
- Management expected increased investment in original programming to continue in 2017 and warned that revenue and AOI may vary, potentially materially, from quarter to quarter. The filing provides no specific numerical revenue or earnings guidance.
- U.S. Nielsen subscribers declined at AMC to 91.2 million from 93.6 million and at WE tv to 85.9 million from 86.5 million; BBC AMERICA, IFC and SundanceTV subscribers increased. Management cited lower ratings as a partial offset to domestic advertising growth.
Risks, contingencies and other notable items
- Key risks include subscriber losses and “skinny bundles,” distributor bargaining power and contract renewals, competition for programming and viewers, rising content costs, advertising-market and ratings volatility, digital disruption, piracy and cybersecurity, and foreign currency and regulatory exposure.
- Frank Darabont and other plaintiffs seek $280 million or more in litigation concerning contingent compensation for The Walking Dead. Summary-judgment motions had been filed, and the court had not set argument; the company disputes the claims and says the outcome and potential liability cannot be determined.
- Restructuring expense was $29.5 million, including severance and costs associated with ending distribution in certain territories; further charges could occur.
- Affiliation agreements with a major distributor accounted for approximately 11% of consolidated revenue in 2016. The filing also identifies one customer as exceeding 10% of consolidated revenue; verify customer concentration and exposure to contract negotiations.
- The company reported effective disclosure controls and internal control over financial reporting, with unqualified audit opinions. It paid no cash dividend in 2016 and did not expect one in the foreseeable future.
Important facts for investors to verify
- Whether programming investment, ratings and subscriber trends support continued growth in distribution and advertising revenue.
- Progress and cash-flow performance at AMCNI-DMC following the impairment, and whether further impairment is possible.
- Debt maturities, refinancing access, covenant headroom, and the availability and cost of credit markets when larger maturities approach.
- The status and potential financial exposure of the Darabont litigation and other contingencies.
- How much of 2016 earnings weakness reflects recurring operating costs versus impairment, restructuring and debt-extinguishment charges; assess GAAP results alongside non-GAAP AOI.