AMC Networks Inc. — Q1 2016 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2016, compared with the same 2015 period. AMC Networks operates National Networks, including AMC, WE tv, BBC AMERICA, IFC and SundanceTV, and International and Other businesses, including AMC Networks International and IFC Films. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $706.6 | $668.7 | +5.7% |
| Operating income | $258.8 | $230.7 | +12.2% |
| Operating margin | 36.6% | 34.5% | +2.1 percentage points |
| Adjusted operating cash flow (AOCF, non-GAAP) | $286.6 | $259.2 | +10.6% |
| Net income attributable to AMC Networks stockholders | $113.4 | $120.9 | -6.2% |
| Diluted EPS | $1.55 | $1.66 | -6.6% |
| Cash from operating activities | $167.4 | $80.2 | +$87.2 |
| Capital expenditures | $12.4 | $18.2 | -$5.9 |
Revenue growth was led by National Networks, up 6.4% to $598.6 million; International and Other rose 2.5% to $109.0 million. National Networks advertising revenue increased 1.3% and distribution revenue rose 10.7%, including growth in digital distribution and licensing and higher affiliation rates. International and Other advertising rose 21.4%, while distribution revenue declined 1.5%.
National Networks operating income increased to $266.7 million, with a 44.6% margin, from $240.4 million and 42.7%. International and Other reported an operating loss of $8.4 million, narrower than $10.0 million; its AOCF declined 10.1% to $5.1 million. Consolidated net income fell despite stronger operating income, principally because Q1 2016 included a $48.3 million loss on extinguishment of debt. Net margin attributable to AMC Networks stockholders was 16.1%, versus 18.1%.
Balance sheet, liquidity and debt
- Cash and cash equivalents were $702.8 million at March 31, 2016, up from $316.3 million at December 31, 2015. The quarter-end balance included approximately $72.5 million held by foreign subsidiaries.
- Total debt, net of discounts and deferred financing costs, was $2,968.2 million, compared with $2,667.8 million at year-end. Cash less debt was approximately negative $2,265.4 million, excluding capital leases. The $500 million revolving credit facility was undrawn, and the company reported compliance with debt covenants.
- Current assets were $1,926.0 million and current liabilities $833.7 million. Total assets were $4,678.2 million; total liabilities were $4,352.0 million.
- Operating cash flow increased substantially, partly because 2015 had a large accounts-receivable cash outflow. Q1 2016 cash use included $192.2 million for program rights, alongside a $68.9 million decrease in accounts payable, accrued expenses and other liabilities.
- Contractual obligations not reflected on the balance sheet totaled $1,545.0 million, up $29.0 million from December 31, 2015, primarily due to program rights obligations.
Material changes and unusual items
- On March 30, 2016, the company issued $1.0 billion of 5.00% senior notes due 2024. Proceeds funded a tender offer for approximately $654 million principal amount of 7.75% notes due 2021; approximately $46 million of those notes remained outstanding at quarter-end. The refinancing reduced the coupon on the refinanced debt but generated the $48.3 million extinguishment loss.
- Technical and operating expense increased 4.6% to $274.3 million, slower than revenue growth; the prior-year quarter included $9.6 million of program-rights write-offs, while none were recorded in Q1 2016. Management cited higher direct programming costs, including participation and residual costs, and continued investment in original programming.
- The Board authorized a share repurchase program of up to $500 million on March 4, 2016; no shares were repurchased during the quarter.
- Comprehensive income attributable to AMC Networks stockholders was $124.9 million, compared with $59.9 million in Q1 2015, reflecting a substantially more favorable foreign-currency translation adjustment.
Outlook, commentary and risks
Management gave no specific numerical revenue or earnings guidance. It expects increased investment in original programming to continue in 2016, with funding generally occurring six to nine months before airing. Management cautioned that advertising, distribution revenue and AOCF can vary by quarter with programming schedules, audience ratings, contract renewals and content availability. It believes cash on hand, operating cash flow and the undrawn revolver should cover liquidity needs over the next twelve months and longer term.
The company does not expect operating cash flow alone to repay all debt at maturity and will depend on access to capital and credit markets to refinance or repay outstanding balances. Stated risks include substantial debt and leverage, competition for programming and viewers, distributor bargaining power and affiliation renewals, advertising demand, content costs, international economic and currency exposure, and access to capital markets. The company reported foreign-currency transaction losses of $2.6 million in Q1 and expects currency fluctuations to have a more significant effect as international operations expand. Ordinary-course lawsuits remain outstanding; management did not believe their resolution would materially harm financial position or ability to meet obligations, though results in a particular period could be affected materially.
Important facts for investors to verify
- Reconcile the $48.3 million debt-extinguishment charge and evaluate the economics of replacing 7.75% notes with 5.00% notes, including the remaining $46 million of 7.75% notes.
- Track debt, required Term Loan A principal payments of $166.5 million over the next twelve months, and the company’s ability to refinance debt at maturity.
- Assess whether National Networks’ distribution and licensing growth can continue and how programming schedules affect advertising revenue and cash generation.
- Monitor original-programming investment, program-rights commitments and the resulting impact on cash flow and margins.
- Consider International and Other’s operating losses, foreign-exchange exposure, and the $500 million repurchase authorization alongside liquidity and debt needs.