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 and nine months ended September 30, 2016. Its businesses are reported in National Networks and International and Other, including U.S. and Canadian programming networks, international channels, IFC Films and related operations. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $634.6 million | $632.2 million | $2,026.1 million | $1,902.0 million |
| Operating income | $117.1 million | $159.3 million | $553.8 million | $548.8 million |
| Operating margin | 18.5% | 25.2% | 27.3% | 28.9% |
| Net income attributable to AMC Networks stockholders | $65.4 million | $72.8 million | $256.0 million | $276.7 million |
| Diluted earnings per share | $0.91 | $0.99 | $3.51 | $3.78 |
| Adjusted operating income (AOI, non-GAAP) | $168.1 million | $190.6 million | $665.8 million | $641.1 million |
For the nine months, net cash from operations was $426.6 million, compared with $301.0 million; investing activities used $44.9 million, versus $79.6 million; and financing activities used $2.6 million, versus $108.7 million. Capital expenditures were $44.5 million. Cash and cash equivalents were $682.8 million at September 30, 2016, up from $316.3 million at year-end 2015.
At September 30, total debt principal was $2.895 billion ($2.854 billion net of discounts and financing costs); current debt was $203.5 million. The $500 million revolving facility was undrawn, and the company reported compliance with debt covenants. Total current assets were $1.849 billion and current liabilities $927.9 million. Total liabilities were $4.267 billion; stockholders’ equity was $139.5 million.
Material changes versus the comparable period
- Q3 revenue rose 0.4%, but operating income fell 26.5% and attributable net income fell 10.1%. Higher programming-related technical and operating costs and $19.3 million of restructuring expense weighed on results. National Networks advertising revenue declined 9.9%, largely due to lower AMC ratings; distribution revenue increased 8.0%.
- For the first nine months, revenue increased 6.5%, operating income 0.9%, and AOI 3.9%, while attributable net income declined 7.5%. National Networks revenue grew 7.9%; International and Other revenue grew 2.4%.
- The company issued $1.0 billion of 5.00% notes due 2024 and used proceeds in part to tender for and redeem all of its 7.75% notes due 2021. The refinancing generated a $50.6 million loss on debt extinguishment and contributed to higher reported debt principal.
- Cash from operations increased year over year, while program-rights payments rose to $687.9 million from $616.0 million. The company repurchased $110.0 million of stock during the nine-month period.
Outlook, commentary, risks and unusual items
- No specific numerical earnings or revenue guidance is provided. Management said it expected increased investment in original programming to continue in 2016 and cautioned that revenue and AOI can vary quarter to quarter, including with programming schedules, ratings, licensing timing and distribution-agreement renewals.
- A new restructuring initiative, primarily voluntary employee buyouts, resulted in $19.7 million of nine-month expense; additional charges may occur. Program-rights write-offs were $20.7 million for the nine months.
- Management said cash on hand, operating cash flow and the undrawn revolver should meet funding needs, but operating cash flow alone is not expected to repay all debt at maturity. Repayment or refinancing will depend on access to capital and credit markets.
- Risks highlighted include substantial leverage, advertising and subscriber demand, content costs and performance, distributor negotiations, competition and emerging distribution technologies, foreign exchange and interest-rate movements, and litigation. The company recorded $26.6 million of net foreign-currency transaction losses for the nine months.
- In the Frank Darabont litigation concerning The Walking Dead compensation, discovery was complete and summary-judgment motions were being briefed. The company denied the claims; outcome and potential liability were undetermined.
- Subsequent event: on October 14, 2016, the company provided $65 million of term loans to RLJ Entertainment and received warrants that, if fully exercised, could represent at least 50.1% of RLJE’s fully diluted common stock.
Important facts for investors to verify
- Whether National Networks’ Q3 advertising softness and elevated programming costs persist, and how programming performance affects future write-offs and margins.
- Debt maturities, scheduled amortization, refinancing access and the effect of covenants on capital returns; confirm the remaining stock-repurchase authorization and subsequent purchases.
- Whether restructuring produces the expected cost savings and whether further charges are incurred.
- Developments and potential financial exposure in the Darabont litigation, which the filing says cannot yet be determined.
- Terms, credit exposure and potential ownership impact of the RLJE loan and warrants, including whether the warrants are exercised.