AMC Global Media Inc. annual report, FY2015

Business context and reporting period

The filing is AMC Networks Inc.’s Form 10-K for the fiscal year ended December 31, 2015, including fourth-quarter results. The request identifies “AMC Global Media Inc.”; the registrant named in the filing is AMC Networks Inc.

AMC Networks operates domestic and international television programming, content licensing and independent film businesses. Its principal domestic brands include AMC, WE tv, BBC AMERICA, IFC and SundanceTV. Revenue primarily comes from distributor affiliation fees and advertising.

Financial performance and position

Unless otherwise noted, amounts below are in U.S. dollars; annual figures are for 2015 versus 2014.

Revenue grew 18.6%; operating income rose 29.8%, net income attributable to stockholders rose 40.6%, and AOCF increased 27.1%. National Networks generated $2,135.4 million of revenue and $811.0 million of AOCF. International and Other generated $452.6 million of revenue and $29.8 million of AOCF, but reported a $42.5 million operating loss. Advertising was 40% and distribution 60% of consolidated revenue.

Fourth-quarter 2015 revenue was $679.0 million versus $609.4 million a year earlier; operating income was $160.3 million versus $159.0 million; net income attributable to stockholders was $90.1 million versus $77.6 million; and diluted EPS was $1.23 versus $1.06.

Year-end current assets were $1,537.3 million and current liabilities $830.9 million. The $500 million revolving credit facility was undrawn. AMC reported compliance with its debt covenants at year-end. No cash dividend was paid in 2015, and the company did not expect one in the foreseeable future.

Material changes versus the prior comparable period

• National Networks revenue increased 22.4%; advertising rose 23.6% and distribution revenue 21.5%. Drivers included stronger advertising demand and pricing, higher affiliation rates, licensing of original programming, and a full year of BBC AMERICA results versus roughly two months in 2014.
• International and Other revenue grew 4.2%, while foreign-currency translation reduced revenue by approximately $51 million. Distribution revenue declined 2.3%, partly reflecting a one-time contract termination benefit recorded in 2014.
• Consolidated operating margin increased to 27.5% from 25.1%, despite higher programming and operating costs. Programming-rights write-offs were approximately $43.2 million in 2015 (the MD&A cites $41.0 million for National Networks) versus approximately $44.2 million in 2014.
• Operating cash flow was nearly flat year over year as higher earnings were offset in part by program-rights payments, which increased to $839.1 million from $690.2 million. Capital expenditures increased to $68.3 million from $39.7 million.
• Cash flow from investing improved substantially from 2014, when acquisitions used $1,184.6 million. 2015 investing outflow was $116.8 million, including capital expenditures, investments and smaller acquisitions.

Outlook, commentary, risks and unusual items

• Management expected increased investment in original programming to continue in 2016, with funding commonly occurring six to nine months before airing. The filing provides no numerical revenue, earnings or cash-flow guidance.
• Management said it believed cash on hand, operating cash flow and revolver availability would be sufficient for debt service and other needs over the next 12 months and longer term, but did not expect operating cash flow alone to repay all debt at maturity; refinancing or capital-market access will be needed.
• Key risks include reliance on successful programming and ratings, rising content costs, distributor negotiations and renewals, competition from digital services, advertising-market volatility, foreign-exchange exposure, cybersecurity and content piracy, and substantial leverage. Several domestic network subscriber totals declined in 2015, including AMC (93.6 million versus 95.0 million), BBC AMERICA (77.1 million versus 78.2 million) and IFC (71.2 million versus 73.7 million); Nielsen subscriber estimates may be affected by sample changes.
• Debt principal was $2.706 billion at year-end, including $1.406 billion under the secured term loan and $1.300 billion of senior notes. The term loan’s reported rate was 1.78%; the notes carry 7.75% and 4.75% coupons. The company disclosed a maximum net-debt-to-operating-cash-flow covenant tightening to 6.00:1 from January 1, 2016, and variable-rate exposure.
• Unusual items included a $16.1 million gain on acquiring control of a previously unconsolidated joint venture, $15.0 million of restructuring expense, and foreign-currency translation losses in other comprehensive income. The 2013 comparison included a $132.9 million DISH Network litigation settlement gain, not repeated in 2014 or 2015.
• The company disclosed litigation with Frank Darabont and another party over future participations relating to The Walking Dead. Management stated ordinary-course legal matters were not expected to materially affect the company’s financial position or ability to meet obligations. BBC AMERICA’s partner has put rights over its 50.1% noncontrolling interest, exercisable on the 15th and 25th anniversaries; potential payments are not included in the contractual-obligations table.
• The filing reports effective disclosure controls and internal control over financial reporting, and KPMG issued unqualified audit opinions on the financial statements and internal controls.

Important facts for investors to verify

• Confirm issuer identity: the filing is for AMC Networks Inc., not “AMC Global Media Inc.”
• Reconcile acquisition effects, currency movements and organic performance when assessing reported revenue and AOCF growth; AOCF is a non-GAAP measure.
• Review debt maturities, covenant headroom, variable-rate exposure and the company’s dependence on refinancing at maturity; also consider the substantial program-rights and purchase commitments.
• Track subscriber trends, affiliation renewals, ratings and programming costs, including future program-rights write-offs.
• Assess potential outcomes and exposure from the Walking Dead participation litigation, BBC AMERICA put rights, tax matters and related-party governance arrangements.