AMC Networks(AMCX) - 2019 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's analysis of financial condition and operations Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements, detailing Q2 2019 revenue growth, operating income decline, and net income increase, reflecting new accounting standards and acquisitions Condensed Consolidated Balance Sheets Total assets increased to $5.56 billion by June 30, 2019, driven by higher cash and new lease assets, while liabilities slightly rose to $4.69 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2019 | December 31, 2018 | | :--- | :--- | :--- | | Total Assets | $5,561,734 | $5,278,563 | | Cash and cash equivalents | $706,342 | $554,886 | | Program rights, net (Current & Non-current) | $1,547,807 | $1,654,790 | | Goodwill | $792,083 | $798,037 | | Operating lease right-of-use asset | $175,677 | — | | Total Liabilities | $4,690,433 | $4,633,797 | | Long-term debt (Current & Non-current) | $3,110,919 | $3,109,555 | | Lease obligations (Current & Non-current) | $254,780 | $26,517 | | Total Stockholders' Equity | $568,513 | $345,208 | Condensed Consolidated Statements of Income Q2 2019 revenues increased 1.4% to $772.3 million, while operating income declined 11.1% due to restructuring charges, yet net income rose 21.2% Q2 & H1 2019 Income Statement Highlights (in thousands, except per share amounts) | Metric | Q2 2019 | Q2 2018 | YoY Change | H1 2019 | H1 2018 | YoY Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Revenues, net | $772,299 | $761,385 | +1.4% | $1,556,520 | $1,502,208 | +3.6% | | Operating income | $170,257 | $191,531 | -11.1% | $415,120 | $425,186 | -2.4% | | Restructuring charges | $17,162 | $0 | n/m | $19,804 | $0 | n/m | | Net income attributable to AMC | $128,743 | $106,181 | +21.2% | $272,140 | $263,051 | +3.5% | | Diluted EPS | $2.25 | $1.82 | +23.6% | $4.73 | $4.38 | +8.0% | Condensed Consolidated Statements of Cash Flows Net cash from operations slightly increased to $288.9 million for H1 2019, while cash used in investing and financing activities significantly decreased Six Months Ended June 30 Cash Flow Summary (in thousands) | Cash Flow Activity | 2019 | 2018 | | :--- | :--- | :--- | | Net cash provided by operating activities | $288,937 | $278,577 | | Net cash used in investing activities | ($43,555) | ($159,422) | | Net cash used in financing activities | ($92,265) | ($263,418) | | Net increase (decrease) in cash | $153,117 | ($144,263) | | Cash and cash equivalents at end of period | $706,342 | $416,124 | Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures on business segments, lease accounting adoption, restructuring charges, business combinations, legal proceedings, and segment financial data Note 1. Description of Business and Basis of Presentation The company operates through National Networks and International & Other segments, with financials prepared under GAAP and the new lease standard adopted in 2019 - The company's operations are divided into two main segments: National Networks and International and Other[19][20] - On January 1, 2019, the company adopted the new lease standard (ASU No. 2016-02, Topic 842), which resulted in recognizing net lease assets of $180.0 million and lease liabilities of $237.0 million[29] Note 4. Restructuring and Other Related Charges The company recorded $17.2 million in Q2 2019 restructuring charges, primarily for direct-to-consumer streaming reorganization and programming write-offs Restructuring and Other Related Charges (in thousands) | Period | Amount | | :--- | :--- | | Three Months Ended June 30, 2019 | $17,162 | | Six Months Ended June 30, 2019 | $19,804 | - Charges in Q2 2019 include $13.0 million for a write-off of programming related to a change in strategy for the company's owned subscription streaming services[40] - The majority of the restructuring charges ($16.9 million in Q2) were allocated to the International & Other segment[41] Note 5. Business Combinations This note details the 2018 acquisitions of RLJ Entertainment and Levity Entertainment Group, which expanded streaming services and production capabilities - In October 2018, the company acquired a controlling interest in RLJ Entertainment (RLJE), which operates streaming services Acorn TV and UMC. The transaction added $95.8 million in goodwill[44][49] - In April 2018, the company acquired a 57% controlling interest in Levity Entertainment Group for $48.4 million, adding a production services and comedy venue business. This resulted in $24.2 million of goodwill[50][54] Note 14. Commitments and Contingencies The company faces significant legal proceedings, including multiple lawsuits from 'The Walking Dead' producers seeking substantial damages for alleged breach of contract - The company is defending a lawsuit from Frank Darabont and others related to 'The Walking Dead', with a damages claim of no less than $280 million. The court has dismissed some causes of action but others remain[99] - A second lawsuit from the same plaintiffs seeks at least $20 million in damages. This action has been consolidated for a joint trial with the first lawsuit, scheduled to begin in May 2020[100] - A separate lawsuit was filed by other producers of 'The Walking Dead' (including Robert Kirkman) in California, alleging improper underpayment. The company believes these claims are without merit[101] Note 19. Segment Information This note details financial performance by segment, showing National Networks revenue of $604.7 million and International & Other revenue of $179.5 million for Q2 2019 Segment Revenues, Net (in thousands) | Segment | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 | | :--- | :--- | :--- | :--- | :--- | | National Networks | $604,739 | $627,289 | $1,220,858 | $1,260,317 | | International and Other | $179,526 | $146,711 | $350,615 | $258,101 | Segment Adjusted Operating Income (AOI) (in thousands) | Segment | Q2 2019 | Q2 2018 | H1 2019 | H1 2018 | | :--- | :--- | :--- | :--- | :--- | | National Networks | $236,472 | $234,678 | $513,159 | $505,552 | | International and Other | $11,830 | $5,413 | $21,772 | $3,251 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2019 consolidated revenue growth driven by acquisitions, National Networks' revenue decline, operating income decrease, and strong liquidity Consolidated Results of Operations - Three Months Ended June 30, 2019 Q2 2019 consolidated revenues increased 1.4% to $772.3 million, driven by International & Other segment growth, while operating income declined 11.1% due to restructuring - National Networks advertising revenue decreased by $27.3 million (11.1%), mainly at the AMC network, due to the timing of original programming and lower ratings[180] - International and Other distribution revenue increased by $32.7 million (26.5%), primarily driven by a $35.6 million impact from the acquisitions of Levity and RLJE[182] - Operating income was impacted by $17.2 million in restructuring charges, primarily related to the direct-to-consumer business reorganization and programming write-offs[192][194] Consolidated Results of Operations - Six Months Ended June 30, 2019 H1 2019 consolidated revenues increased 3.6% to $1.56 billion, driven by International & Other, while operating income declined 2.4% due to restructuring - National Networks distribution revenue for H1 2019 decreased by $25.5 million, primarily due to a $29.4 million decline in content licensing from lower foreign distribution of original programming[214] - International and Other revenue for H1 2019 grew by $92.5 million, with acquisitions contributing $100.3 million to distribution revenue[215] - Miscellaneous expense increased by $17.7 million, driven by a $7.7 million impairment on non-marketable securities and the absence of a $12.4 million gain on the RLJE investment that was recorded in H1 2018[233] Liquidity and Capital Resources The company maintains strong liquidity with $706.3 million cash, an undrawn credit facility, and $501.0 million remaining for stock repurchases - The company's Board of Directors has authorized a stock repurchase program of up to $1.5 billion. As of June 30, 2019, $501.0 million of authorization remained[238] - Cash flow from operations for H1 2019 was $288.9 million. The company believes cash on hand and operating cash flow will be sufficient to meet funding requirements for the next year[241][246] - The company's $500 million revolving credit facility was undrawn as of June 30, 2019[67][243] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages market risks from interest rates and foreign currency, with 79% of its $3.1 billion debt at a fixed rate - As of June 30, 2019, the company had $3.1 billion of debt outstanding. Through fixed-rate notes and $100.0 million in interest rate swaps, approximately 79% of this debt is at an effectively fixed interest rate[257][258] - The company is exposed to foreign currency risk from international operations. For H1 2019, it recognized a net loss of $1.7 million from foreign currency transactions[260] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2019, with no material changes to internal controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by this report[263] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[264] PART II. OTHER INFORMATION This section provides additional information including legal proceedings, equity security sales, and required exhibits Item 1. Legal Proceedings No material developments in legal proceedings since the 2018 Form 10-K, with details on ongoing litigation referenced in Note 14 - The report states there have been no material developments in legal proceedings since the 2018 Form 10-K and refers to Note 14 for further details[266] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1.05 million shares in Q2 2019 as part of its $1.5 billion stock repurchase program, with $501.0 million remaining Share Repurchases for Q2 2019 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | April 2019 | 0 | n/a | | May 2019 | 1,023,002 | $54.64 | | June 2019 | 28,779 | $53.88 | | Total Q2 | 1,051,781 | $54.62 | - The company's stock repurchase program is authorized for up to $1.5 billion and has no pre-established closing date[267] Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and XBRL Interactive Data Files - Exhibits filed include CEO and CFO certifications under Sarbanes-Oxley Sections 302 and 906[271]