Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 1.24M
2: EX-10.1 Material Contract HTML 77K
3: EX-10.2 Material Contract HTML 56K
4: EX-22 Published Report re: Matters Submitted to a Vote HTML 45K
of Security Holders
5: EX-31.1 Certification -- §302 - SOA'02 HTML 29K
6: EX-31.2 Certification -- §302 - SOA'02 HTML 29K
7: EX-32 Certification -- §906 - SOA'02 HTML 28K
14: R1 Cover Page HTML 82K
15: R2 Condensed Consolidated Balance Sheets HTML 142K
16: R3 Condensed Consolidated Balance Sheets HTML 50K
(Parenthetical)
17: R4 Condensed Consolidated Statements of Income HTML 115K
18: R5 Condensed Consolidated Statements of Comprehensive HTML 66K
Income
19: R6 Condensed Consolidated Statements of Stockholders' HTML 103K
Equity
20: R7 Condensed Consolidated Statements of Cash Flows HTML 128K
21: R8 Description of Business and Basis of Presentation HTML 44K
22: R9 Revenue Recognition HTML 41K
23: R10 Net Income per Share HTML 48K
24: R11 Restructuring and Other Related Charges HTML 68K
25: R12 Program Rights HTML 115K
26: R13 Investments HTML 32K
27: R14 Goodwill and Other Intangible Assets HTML 110K
28: R15 Accrued Liabilities HTML 38K
29: R16 Long-term Debt HTML 52K
30: R17 Leases HTML 89K
31: R18 Fair Value Measurement HTML 109K
32: R19 Derivative Financial Instruments HTML 88K
33: R20 Income Taxes HTML 32K
34: R21 Commitments and Contingencies HTML 39K
35: R22 Equity Plans HTML 32K
36: R23 Redeemable Noncontrolling Interests HTML 34K
37: R24 Related Party Transactions HTML 28K
38: R25 Cash Flows HTML 39K
39: R26 Segment Information HTML 232K
40: R27 Description of Business and Basis of Presentation HTML 57K
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41: R28 Revenue Recognition (Tables) HTML 37K
42: R29 Net Income per Share (Tables) HTML 44K
43: R30 Restructuring and Other Related Charges (Tables) HTML 67K
44: R31 Program Rights (Tables) HTML 107K
45: R32 Goodwill and Other Intangible Assets (Tables) HTML 162K
46: R33 Accrued Liabilities (Tables) HTML 37K
47: R34 Long-term Debt (Tables) HTML 53K
48: R35 Leases (Tables) HTML 56K
49: R36 Fair Value Measurement (Tables) HTML 104K
50: R37 Derivative Financial Instruments (Tables) HTML 92K
51: R38 Redeemable Noncontrolling Interests (Tables) HTML 33K
52: R39 Cash Flows (Tables) HTML 39K
53: R40 Segment Information (Tables) HTML 234K
54: R41 Description of Business and Basis of Presentation HTML 47K
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55: R42 Revenue Recognition (Narrative) (Details) HTML 27K
56: R43 Revenue Recognition (Contract with Customer, Asset HTML 35K
and Liability) (Details)
57: R44 Net Income per Share (Reconciliation Between Basic HTML 40K
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(Details)
58: R45 Net Income per Share (Narrative) (Details) HTML 40K
59: R46 Restructuring and Other Related Charges HTML 31K
(Narrative) (Details)
60: R47 Restructuring and Other Related Charges (Summary HTML 37K
of Restructuring and Other Related Charges by
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61: R48 Restructuring and Other Related Charges (Summary HTML 44K
of Accrued Restructuring Costs) (Details)
62: R49 Program Rights (Program Rights by Predominant HTML 80K
Monetization Strategy) (Details)
63: R50 Program Rights (Amortization of Owned and Licensed HTML 46K
Program Rights) (Details)
64: R51 Program Rights (Narrative) (Details) HTML 27K
65: R52 Investments (Narrative) (Details) HTML 39K
66: R53 Goodwill and Other Intangible Assets (Schedule of HTML 41K
Goodwill) (Details)
67: R54 Goodwill and Other Intangible Assets (Narrative) HTML 46K
(Details)
68: R55 Goodwill and Other Intangible Assets (Schedule of HTML 60K
Finite and Indefinite-Lived Intangible Assets)
(Details)
69: R56 Goodwill and Other Intangible Assets (Schedule of HTML 36K
Estimated Amortization Expense) (Details)
70: R57 Accrued Liabilities (Details) HTML 37K
71: R58 Long-term Debt (Summary of Long-Term Debt) HTML 72K
(Details)
72: R59 Long-term Debt (Narrative) (Details) HTML 39K
73: R60 Leases (Summary of Lease Assets and Liabilities) HTML 44K
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74: R61 Fair Value Measurement (Financial Assets and HTML 54K
Liabilities Measured at Fair Value on a Recurring
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75: R62 Fair Value Measurement (Carrying Values and Fair HTML 53K
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76: R63 Derivative Financial Instruments (Narrative) HTML 28K
(Details)
77: R64 Derivative Financial Instruments (Fair Value of HTML 46K
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(Details)
78: R65 Derivative Financial Instruments (Schedule of HTML 37K
Gains and Losses Related to Derivative
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79: R66 Derivative Financial Instruments (Schedule of HTML 31K
Other Derivatives Not Designated as Hedging
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80: R67 Income Taxes (Narrative) (Details) HTML 52K
81: R68 Commitments and Contingencies (Narrative) HTML 35K
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82: R69 Equity Plans (Narrative) (Details) HTML 65K
83: R70 Redeemable Noncontrolling Interests Activity HTML 35K
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84: R71 Related Party Transactions (Narrative) (Details) HTML 30K
85: R72 Cash Flows (Summary of Non-Cash Activities and HTML 38K
Other Supplemental Data) (Details)
86: R73 Segment Information (Narrative) (Details) HTML 27K
87: R74 Segment Information (Summary of Continuing HTML 81K
Operations by Reportable Segment) (Details)
88: R75 Segment Information (Summary of Inter-Segment HTML 38K
Eliminations) (Details)
89: R76 Segment Information (Revenues by geographic HTML 37K
region) (Details)
90: R77 Segment Information (Long-lived Assets by HTML 34K
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title
of each class
Trading Symbol(s)
Name of each exchange on which registered
iClass A Common Stock, par value $0.01 per share
iAMCX
The
iNASDAQ
Stock
Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesþ No ¨
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). iYesþ No ¨
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company (as defined in Exchange Act Rule 12b-2).
iLarge accelerated filer
þ
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
i☐
Emerging
growth company
i☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No þ
The number of shares of common stock outstanding as of July 24, 2020:
Accounts
receivable, trade (less allowance for doubtful accounts of $i9,440 and $i5,733)
i796,834
i857,143
Current
portion of program rights, net
i17,354
i426,624
Prepaid
expenses and other current assets
i189,683
i230,360
Total
current assets
i1,893,758
i2,330,297
Property
and equipment, net of accumulated depreciation of $i235,687 and $i347,302
i259,783
i283,752
Program
rights, net
i1,370,500
i1,038,060
Intangible
assets, net
i425,233
i524,531
Goodwill
i665,890
i701,980
Deferred
tax asset, net
i55,792
i51,545
Operating
lease right-of-use asset
i154,676
i170,056
Other
assets
i480,324
i496,465
Total
assets
$
i5,305,956
$
i5,596,686
LIABILITIES
AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable
$
i89,971
$
i94,306
Accrued
liabilities
i245,281
i251,214
Current
portion of program rights obligations
i286,143
i304,692
Deferred
revenue
i58,871
i63,921
Current
portion of long-term debt
i81,000
i56,250
Current
portion of lease obligations
i33,179
i33,959
Total
current liabilities
i794,445
i804,342
Program
rights obligations
i222,631
i239,813
Long-term
debt
i2,807,890
i3,039,979
Lease
obligations
i214,334
i211,047
Deferred
tax liability, net
i150,046
i136,911
Other
liabilities
i133,933
i163,638
Total
liabilities
i4,323,279
i4,595,730
Commitments
and contingencies
i
i
Redeemable noncontrolling interests
i307,532
i309,451
Stockholders'
equity:
Class A Common Stock, $ii0.01/
par value, ii360,000/ shares authorized,
i64,348 and i63,886 shares issued and i40,557
and i44,078 shares outstanding, respectively
i643
i639
Class
B Common Stock, $ii0.01/ par value, ii90,000/
shares authorized, ii11,484/ shares issued and outstanding
i115
i115
Preferred
stock, $ii0.01/ par value,
ii45,000/ shares authorized;
iinone/ issued
i—
i—
Paid-in
capital
i308,288
i286,491
Accumulated
earnings
i1,691,100
i1,609,428
Treasury
stock, at cost (i23,790 and i19,808 shares Class A Common Stock, respectively)
(i1,166,119)
(i1,063,181)
Accumulated
other comprehensive loss
(i182,111)
(i167,711)
Total
AMC Networks stockholders' equity
i651,916
i665,781
Non-redeemable
noncontrolling interests
i23,229
i25,724
Total
stockholders' equity
i675,145
i691,505
Total
liabilities and stockholders' equity
$
i5,305,956
$
i5,596,686
See
accompanying notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1. iDescription
of Business and Basis of Presentation
Description of Business
AMC Networks Inc. ("AMC Networks") and its subsidiaries (collectively referred to as the "Company") own and operate entertainment businesses and assets. The Company is comprised of itwo operating segments:
•National
Networks: Includes activities of our ifive national programming networks, AMC Studios operations and AMC Broadcasting & Technology. Our national programming networks are AMC, WE tv, BBC AMERICA, IFC and SundanceTV and also include our AMC Premiere service. Our AMC Studios operations produces original programming for our programming networks and also licenses such program rights worldwide. AMC Networks Broadcasting & Technology is our technical services business, which primarily services
most of the national programming networks.
•International and Other: Includes AMC Networks International ("AMCNI"), our international programming businesses consisting of a portfolio of channels around the world; AMC Networks SVOD, consisting of our targeted subscription streaming services (Acorn TV, Shudder, Sundance Now, UMC) and other subscription video on demand ("SVOD") initiatives; Levity, our production services and comedy venues business; and IFC Films, our independent film distribution business.
Basis of Presentation
i
Principles
of Consolidation
The consolidated financial statements include the accounts of AMC Networks and its subsidiaries in which a controlling voting interest is maintained or variable interest entities ("VIEs") in which the Company has determined it is the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
Investments in business entities in which the Company lacks control but does have the ability to exercise significant influence over operating and financial policies are accounted for using the equity method of accounting.
Unaudited
Interim Financial Statements
These condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and Article 10 of Regulation S-X of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the Company's consolidated financial statements and notes thereto for the year ended December 31, 2019 contained in the Company's Annual Report on Form 10-K ("2019 Form 10-K") filed with the SEC. The condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q are unaudited; however, in the opinion of management, such financial statements
reflect all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented.
The results of operations for interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2020.
Risks and Uncertainties
In March 2020, the World Health Organization characterized the novel coronavirus ("COVID-19") a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy.
The impact of COVID-19
and measures to prevent its spread are affecting our businesses in a number of ways. Beginning in mid-March, the Company experienced adverse advertising sales impacts, suspended content production, which has led to delays in the creation and availability of substantially all of its programming, and the temporary closure of its comedy venues. Operationally, nearly all Company employees are working remotely, and the Company has restricted business travel. If significant portions of our workforce, including key personnel, are unable to work effectively because of illness, government actions or other restrictions in connection with the COVID-19 pandemic, the impact of the pandemic on our businesses could be exacerbated.
The
Company has evaluated and continues to evaluate the potential impact of the COVID-19 pandemic on its consolidated financial statements, including the impairment of goodwill (see Note 7) and indefinite-lived intangible assets and the fair value and collectibility of receivables. The COVID-19 pandemic has had a material impact on the Company's operations since mid-March 2020. The Company cannot reasonably predict the ultimate impact of the COVID-19 pandemic, including the extent of any adverse impact on our business, results of operations and financial condition, which will depend on, among other things, the duration and spread of the pandemic, the impact of governmental regulations that have been, and may
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)
continue to be, imposed in response to the pandemic, the effectiveness of actions taken to contain or mitigate the outbreak, the availability, safety and efficacy of a vaccine, and global economic conditions. The Company does not expect the COVID-19 pandemic and its related economic impact to affect its liquidity position or its ongoing ability to meet the covenants in its debt instruments.
i
Use
of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements; and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates and judgments inherent in the preparation of the consolidated financial statements include the useful lives and methodologies used to amortize and assess recoverability of program rights, the estimated useful lives of intangible assets and the valuation and recoverability of goodwill and intangible assets.
i
Recently
Adopted Accounting Standards
Effective January 1, 2020, the Company adopted Financial Accounting Standard Board (“FASB”) Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments, which changed the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking "expected loss" model that would generally result in the earlier recognition of allowances for losses. The Company adopted the standard using the modified retrospective approach
and recorded a decrease to opening retained earnings of $i2.0 million, after taxes, for the cumulative-effect of the adoption.
Effective January 1, 2020, the Company adopted FASB ASU No. 2018-13, Fair Value Measurement (Topic 820). The standard changed the disclosure requirements related to transfers between
Level I and II assets, as well as several aspects surrounding the valuation process and unrealized gains and losses related to Level III assets. The adoption of the standard did not have any effect on the Company's consolidated financial statements.
Effective January 1, 2020, the Company adopted FASB ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The standard amended prior guidance to align the accounting for costs incurred in a hosting arrangement that is a service contract
with the requirements for capitalizing costs associated with developing or obtaining internal-use software. Capitalized implementation costs must be expensed over the term of the hosting arrangement and presented in the same line item in the income statement as the fees associated with the hosting element (service) of the arrangement. The adoption of the standard did not have a material effect on the Company's consolidated financial statements.
Effective January 1, 2020, the Company adopted FASB ASU No. 2019-02, Improvements to Accounting for Costs of Films and License Agreements for Program Materials. The standard
aligns the accounting for production costs of episodic television series with the accounting for production costs of films. In addition, the standard modifies certain aspects of the capitalization, impairment, presentation and disclosure requirements in Accounting Standards Codification (“ASC”) 926-20 and the impairment, presentation and disclosure requirements in ASC 920-350. The Company adopted the standard on a prospective basis. See Note 5 for further information.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 - Income Taxes. These changes are effective for the first quarter
of 2021, with early adoption permitted. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.
/
Note 2. iRevenue
Recognition
Transaction Price Allocated to Future Performance Obligations
As of June 30, 2020, other than contracts for which the Company has applied the practical expedients, the aggregate amount of transaction price allocated to future performance obligations was not material to our consolidated revenues.
Diluted
weighted average common shares outstanding
i52,797
i57,335
i54,429
i57,529
/
Approximately
i1.2 million and i1.5 million
restricted stock units outstanding as of June 30, 2020 and June 30, 2019, respectively, have been excluded from diluted weighted average common shares outstanding since a performance condition for these awards was not met in each of the respective periods. As of June 30, 2020 and June 30, 2019, i0.7
million and i0.3 million, respectively, of restricted stock units and stock options have been excluded from diluted weighted average common shares outstanding, as their impact would have been anti-dilutive.
Stock Repurchase Program
The Company's Board of Directors
has authorized a program to repurchase up to $i1.5 billion of its outstanding shares of common stock (the "Stock Repurchase Program"). The Stock Repurchase Program has no pre-established closing date and may be suspended or discontinued at any time. For the six months ended June 30, 2020, the Company repurchased i4.0
million shares of its Class A Common Stock at an average purchase price of approximately $i25.85 per share. As of June 30, 2020, the Company has $i385.9
million of authorization remaining for repurchase under the Stock Repurchase Program.
Note 4. iRestructuring and Other Related Charges
Restructuring and other related charges of $i3.5 million
and $i9.5 million for the three and six months ended June 30, 2020, respectively, related to restructuring costs associated with termination of distribution in certain territories as well as severance and other personnel related costs associated with previously announced restructuring activities.
Restructuring and other related charges of $i17.2 million
and $i19.8 million for the three and six months ended June 30, 2019, respectively, primarily related to the direct to consumer re-organization as well as severance and other personnel related costs incurred at AMCNI associated with the termination of distribution in certain territories.
Accrued
restructuring costs of $i8.6 million are included in accrued liabilities in the condensed consolidated balance sheet at June 30, 2020.
Note 5. iProgram
Rights
i
Effective January 1, 2020, the Company adopted FASB ASU No. 2019-02, Improvements to Accounting for Costs of Films and License Agreements for Program Materials. The new guidance impacts the Company as follows:
•Allows
for the classification of acquired/licensed program rights as long-term assets. Previously, the Company reported a portion of these rights in current assets. Advances for live programming rights made prior to the live event and acquired/licensed program rights with license terms of less than one year continue to be reported in current assets.
•Aligns the capitalization of production costs for episodic television programs with the capitalization of production costs for theatrical content. Previously, theatrical content production costs could be fully capitalized while episodic television production costs were generally limited to the amount of contracted revenues.
•Introduces the concept of “predominant monetization strategy” to classify capitalized
program rights for purposes of amortization and impairment as follows:
◦Individual program rights - programming value is predominantly derived from third-party revenues that are directly attributable to the specific film or television title (e.g., theatrical revenues, significant in-show advertising on the Company’s programming networks or specific content licensing revenues).
◦Group program rights - programming value is predominantly derived from third-party revenues that are not directly attributable to a specific film or television title (e.g., library of program rights for purpose of the Company’s programming networks or subscription revenue for
direct-to-consumer SVOD targeted streaming services).
The determination of the predominant monetization strategy is made at commencement of production and is based on the means by which we derive third-party revenues from use of the programming. The classification of program rights as individual or group only changes if there is a significant change to the title’s monetization strategy relative to its initial assessment.
Amortization,
including write-offs, of owned and licensed program rights is as follows:
Three Months Ended June 30,
Six
Months Ended June 30,
(In thousands)
Predominantly Monetized Individually
Predominantly Monetized as a Group
Total
Predominantly Monetized Individually
Predominantly Monetized as a Group
Total
Owned
original program rights
$
i62,229
$
i9,458
$
i71,687
$
i161,271
$
i15,977
$
i177,248
Licensed
program rights
i19,910
i99,678
i119,588
i41,262
i196,745
i238,007
Program
rights amortization
$
i82,139
$
i109,136
$
i191,275
$
i202,533
$
i212,722
$
i415,255
/
Rights
to programming, including feature films and episodic series, acquired under license agreements are stated at the lower of unamortized cost or fair value. Such licensed rights along with the related obligations are recorded at the contract value when a license agreement is executed, unless there is uncertainty with respect to either cost, acceptability or availability. If such uncertainty exists, those rights and obligations are recorded at the earlier of when the uncertainty is resolved or the license period begins. Costs are amortized to technical and operating expense on a straight-line or accelerated basis, based on the expected exploitation strategy of the rights, over a period not to exceed the respective license periods.
Owned original programming costs, including estimated participation and residual costs, qualifying for capitalization
as program rights are amortized to technical and operating expense over their estimated useful lives, commencing upon the first airing, based on attributable revenue for airings to date as a percentage of total projected attributable revenue, or ultimate revenue (individual-film-forecast-computation method). Projected attributable revenue is based on previously generated revenues for similar content in established markets, primarily consisting of distribution and advertising revenues, and projected program usage. Projected program usage is based on the Company's current expectation of future exhibitions taking into
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)
account historical usage of similar content. Projected attributable revenue can change based upon programming market acceptance, levels of distribution and advertising revenue and decisions regarding planned program usage. These calculations require management to make assumptions and to apply judgment regarding revenue and planned usage. Accordingly, the Company periodically reviews revenue estimates and planned usage and revises its assumptions if necessary, which could impact the timing of amortization expense or result in a write-down to fair value. Any capitalized development costs for programs that the Company determines will
not be produced are written off.
The Company periodically reviews the programming usefulness of its licensed and owned original program rights based on several factors, including expected future revenue generation from airings on the Company's networks and other exploitation opportunities, ratings, type and quality of program material, standards and practices, and fitness for exhibition through various forms of distribution. If it is determined that film or other program rights have limited, or no, future programming usefulness, the useful life is updated, which generally results in a write-off of the unamortized cost to technical and operating expense in the consolidated statements of income. Program rights write-offs, included
in technical and operating expense, were $i7.9 million and $i12.1 million for the three and six months ended June 30,
2020, respectively, and $i10.3 million and $i13.6 million for the three and six months ended June 30,
2019, respectively.
Note 6. iInvestments
The Company holds several investments and loans in non-consolidated entities which are included in Other assets in
the condensed consolidated balance sheet. Equity method investments were $i68.2 million at June 30, 2020 and $i69.1
million at December 31, 2019.
Marketable Equity Securities
The Company classifies publicly traded investments with readily determinable fair values that are not accounted for under the equity method as marketable equity securities. Marketable equity securities are recorded at cost and adjusted to fair value at each reporting period. The changes in fair value between measurement dates are recorded in Miscellaneous, net in the condensed consolidated statement of income. In April 2020, one of our investments with a cost of $i25.0 million,
previously classified as a non-marketable equity security, became a publicly traded company. Accordingly, the investment is classified within marketable equity securities as of June 30, 2020. Investments in marketable equity securities were $i43.3 million at June 30, 2020 and $i4.4
million at December 31, 2019. For the three and six months ended June 30, 2020, unrealized gains on marketable equity securities were $i15.0 million and $i14.0 million,
respectively, included in miscellaneous, net in the condensed consolidated statement of income.
Non-marketable Equity Securities
The Company classifies investments without readily determinable fair values that are not accounted for under the equity method as non-marketable equity securities. The accounting guidance requires non-marketable equity securities to be recorded at cost and adjusted to fair value at each reporting period. However, the guidance allows for a measurement alternative, which is to record the investments at cost, less impairment, if any, and subsequently adjust for observable price changes of identical or similar investments of the same issuer. The Company applies this measurement alternative
to its non-marketable equity securities. When an observable event occurs, the Company estimates the fair values of its non-marketable equity securities based on Level 2 inputs that are derived from observable price changes of similar securities adjusted for insignificant differences in rights and obligations. The changes in value are recorded in miscellaneous, net in the condensed consolidated statement of income.
Investments in non-marketable equity securities were $i16.8
million at June 30, 2020 and $i61.8 million at December 31, 2019. For the six months ended June 30, 2020 and June 30, 2019, the Company recognized impairment charges of $i20.0
million and $i17.7 million, respectively, related to the write-down of certain non-marketable equity securities and a note receivable, included in miscellaneous, net in the condensed consolidated statements of income.
As
of June 30, 2020 and December 31, 2019, accumulated impairment charges in the International and Other segment totaled $i123.1 million and $i98.0 million,
respectively.
The reduction of $i0.7 million in the carrying amount of goodwill for National Networks is due to the realization of a tax benefit for the amortization of "second component" goodwill at SundanceTV. Second component goodwill is the amount of tax deductible goodwill in excess of goodwill for financial reporting purposes. In accordance with the authoritative guidance at the time of the SundanceTV acquisition,
the tax benefits associated with this excess are applied to first reduce the amount of goodwill, and then other intangible assets for financial reporting purposes, if and when such tax benefits are realized in the Company's tax returns.
The Company performs its annual goodwill impairment test as of December 1 each year. In addition to the annual impairment test, the Company is required to regularly assess whether a triggering event has occurred which would require an interim impairment test. As a result of the continuing impact of the COVID-19 pandemic, the Company qualitatively assessed
whether it was more likely than not that goodwill and long-lived assets were impaired as of June 30, 2020. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on each of its reporting units. Further, the Company assessed the current forecasts (including significant assumptions about revenue growth rates, long-term growth rates and enterprise specific discount rates) and the amount of excess fair value over carrying value for each of its reporting units in the 2019 impairment test. In connection with the preparation of the second quarter financial information, the Company determined
that a triggering event had occurred with respect to its AMCNI reporting unit, which required an interim impairment test to be performed as of June 30, 2020. As such, the Company performed a quantitative assessment for its AMCNI reporting unit. The fair value was determined using a combination of an income approach, using a discounted cash flow (DCF) model, and a market comparables approach. The DCF model includes significant assumptions about revenue growth rates, long-term growth rates and enterprise specific discount rates. Additionally, the market comparables approach is determined using guideline company financial multiples. Given the uncertainty in determining assumptions underlying the DCF approach, actual results may differ from those used in the valuations.
Based on the valuations
performed, in response to current and expected trends across the International television broadcasting markets, the fair value of the Company's AMCNI reporting unit declined below its carrying amount. As a result, in June 2020, the Company recognized an impairment charge of $i25.1 million related to the AMCNI reporting unit, included in impairment charges
in the condensed consolidated income statement.
No impairment charge was required for any of the Company's other reporting units.
The determination of fair value of the Company's AMCNI reporting unit represents a Level 3 fair value measurement in the fair value hierarchy due to its use of internal projections and unobservable measurement inputs. Changes in significant judgments and estimates could significantly impact the concluded fair value of the reporting unit or the valuation of intangible assets. Changes to assumptions that would decrease the fair value of the reporting unit would result in corresponding increases to the impairment
of goodwill at the reporting unit.
We are unable to predict how long the COVID-19 pandemic conditions will persist, what additional measures may be introduced by governments or private parties or what effect any such additional measures may have on our business. If these estimates or related assumptions change in the future, we may be required to record additional impairment charges related to goodwill.
Aggregate
amortization expense for amortizable intangible assets for the six months ended June 30, 2020 and 2019 was $i23.1 million and $i22.3
million, respectively. iEstimated aggregate amortization expense for intangible assets subject to amortization for each of the following five years is:
In June 2020, given the continuing and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact, the Company revised its outlook for the AMCNI business, resulting in lower expected future cash flows. As a result, the Company determined that sufficient indicators of potential impairment of long-lived assets existed and the Company performed a recoverability test of the long-lived asset groups within the AMCNI business. Based on the recoverability tests performed, the Company determined that certain long-lived assets were
not recoverable and recognized an impairment charge of $i105.3 million related primarily to certain identifiable intangible assets, as well as property and equipment, and operating lease right-of-use assets, which is included in impairment charges in the condensed consolidated statement of income.
(a)The
Company's $i500 million revolving credit facility remains undrawn at June 30, 2020. Total undrawn revolver commitments are available to be drawn for general corporate purposes of the Company.
(b)A majority owned subsidiary of the Company
has credit facilities totaling $i7.0 million, which bear interest at the greater of i3.5% or the prime rate plus i1%
and mature on August 25, 2020. As of June 30, 2020, there was $i6.0 million of outstanding borrowings on the credit facilities.
/
i4.75%
Notes due December 2022
In March 2020, the Company redeemed $i200 million principal amount of the outstanding $i600 million
principal amount of its i4.75% Notes due 2022. In connection with the redemption, the Company incurred a loss on extinguishment of debt for the six months ended June 30, 2020 of $i2.9 million
representing the redemption premium and the write-off of a portion of the unamortized discount and deferred financing costs.
For
the six months ended June 30, 2020, impairment charges were recorded related to certain operating lease right-of-use assets at the AMCNI business. See Note 7 for additional details regarding the impairment test of long-lived assets.
Note 11. iFair Value Measurement
The fair value hierarchy
is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity's pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
•Level I - Quoted prices for identical instruments in active markets.
•Level II - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
•Level
III - Instruments whose significant value drivers are unobservable.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)
i
The
following table presents for each of these hierarchy levels, the Company's financial assets and liabilities that are measured at fair value on a recurring basis at June 30, 2020 and December 31, 2019:
The
Company's cash equivalents and marketable securities are classified within Level I of the fair value hierarchy because they are valued using quoted market prices.
The Company's interest rate swap contracts and foreign currency derivatives are classified within Level II of the fair value hierarchy as their fair values are determined based on a market approach valuation technique that uses readily observable market parameters and the consideration of counterparty risk.
At June 30, 2020 and December 31, 2019, the Company
did not have any assets or liabilities measured at fair value on a recurring basis that would be considered Level III.
Fair value measurements are also used in nonrecurring valuations performed in connection with acquisition accounting and impairment testing. These nonrecurring valuations primarily include the valuation of intangible assets and property and equipment. All of our nonrecurring valuations use significant unobservable inputs and therefore fall under Level III of the fair value hierarchy.
Credit Facility Debt and Senior Notes
The fair values of each of the Company's debt instruments are based on quoted market prices for the same or similar issues or on the current rates offered to the
Company for instruments of the same remaining maturities.
The carrying values and estimated fair values of the Company's financial instruments, excluding those that are carried at fair value in the condensed consolidated balance sheets, are summarized as follows:
Fair
value estimates related to the Company's debt instruments presented above are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Note 12. iDerivative
Financial Instruments
Interest Rate Risk
To manage interest rate risk, the Company enters into interest rate swap contracts to adjust the amount of total debt that is subject to variable interest rates.
As of June 30, 2020, the Company had interest rate swap contracts outstanding with notional amounts aggregating $i100.0 million
that are designated as hedging instruments. The Company's outstanding interest rate swap contracts mature in December 2021.
Foreign Currency Exchange Rate Risk
We are exposed to foreign currency risk to the extent that we enter into transactions denominated in currencies other than our or our subsidiaries' respective functional currencies (non-functional currency risk), such as affiliation agreements, programming contracts, certain accounts payable and trade receivables (including intercompany amounts) that are denominated
in a currency other than the applicable functional currency.
The fair values of the Company's derivative financial instruments included in the condensed consolidated balance sheets are as follows:
For the three and six months ended June 30, 2020, income tax expense was $i9.7
million and $i43.3 million, respectively, representing an effective tax rate of i36% and i32%,
respectively, as compared to the federal statutory rate of i21%. For the three and six months ended June 30, 2020, the effective tax rate differs from the federal statutory rate due primarily to tax expense from foreign operations of $i5.5 million
and $i9.4 million, state and local income tax expense of $i2.6 million
and $i5.7 million and tax expense of $i2.9 million
and $i5.6 million resulting from an increase in valuation allowances for foreign taxes and U.S. foreign tax credits, partially offset by a tax benefit of $i5.2 million
and $i8.7 million relating to uncertain tax positions (including accrued interest) and tax benefit of $i1.4 million
and $i2.9 million related to a foreign-derived intangible income deduction, respectively. The tax benefit relating to uncertain tax positions is primarily due to audit settlements and the filing of state income tax returns under voluntary disclosure agreements.
For the three and six months ended June 30, 2019, income tax benefit was $i1.4
million and income tax expense was $i45.1 million, respectively, representing a negative effective tax rate of i1% and an effective tax rate
of i14%, respectively, as compared to the federal statutory rate of 21%. For the three and six months ended June 30, 2019, the effective tax rate differs from the federal statutory rate due primarily to a tax benefit of $ii25.0/ million
resulting from a decrease in valuation allowances for foreign tax assets, and a tax benefit of $i7.2 million and $i5.6 million
relating to uncertain tax positions (including accrued interest), partially offset by state and local income tax expense of $i4.1 million and $i7.3 million,
respectively. The decrease in the valuation allowance is primarily due to the expected utilization of foreign net operating loss carryforwards resulting from the planned implementation of certain tax planning strategies. The tax benefit relating to uncertain tax positions is primarily due to an audit settlement and the filing of state income tax returns under a voluntary disclosure agreement.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)
At June 30, 2020, the
Company had foreign tax credit carry forwards of approximately $i32.2 million, expiring on various dates from 2022 through 2030. These carryforwards have been reduced by a valuation allowance of $i30.6
million as it is more likely than not that these carry forwards will not be realized. For the six months ended June 30, 2020, $i0.7 million relating to amortization of tax deductible second component goodwill was realized as a reduction in tax liability (as determined on a 'with-and-without' approach).
Note 14. iCommitments
and Contingencies
Commitments
As of June 30, 2020, the Company's contractual obligations not reflected on the Company's condensed consolidated balance sheet decreased $i104.0
million, as compared to December 31, 2019, to$i829.9 million. The decrease primarily relates to payments for program rights and marketing commitments.
Legal Matters
On December 17, 2013, Frank Darabont ("Darabont"), Ferenc, Inc., Darkwoods Productions, Inc., and Creative Artists Agency, LLC (together, the "2013 Plaintiffs"), filed a complaint
in New York Supreme Court in connection with Darabont's rendering services as a writer, director and producer of the television series entitled The Walking Dead and the agreement between the parties related thereto. The Plaintiffs asserted claims for breach of contract, breach of the covenant of good faith and fair dealing, for an accounting and for declaratory relief. On August 19, 2015, Plaintiffs filed their First Amended Complaint (the "Amended Complaint"), in which they retracted their claims for wrongful termination and failure to apply production tax credits in calculating Plaintiffs' contingent compensation. Plaintiffs also added a claim that Darabont is entitled to a larger share, on a percentage basis, of contingent compensation than he is currently being accorded.
On September 26, 2016, Plaintiffs filed their note of issue and certificate of readiness for trial, which included a claim for damages of no less than $i280 million. The parties each filed motions for summary judgment. Oral arguments of the summary judgment motions took place on September 15, 2017. On April 19, 2018, the Court granted the
Company’s motion for leave to submit supplemental summary judgment briefing. A hearing on the supplemental summary judgment submissions was held on June 13, 2018. On December 10, 2018, the Court denied Plaintiffs' motion for partial summary judgment and granted in part Defendants' motion for summary judgment, dismissing four of Plaintiffs' causes of action. The Company believes that the remaining claims are without merit, denies the allegations and continues to defend the case vigorously. At this time, no determination can be made as to the ultimate outcome of this litigation or the potential liability, if any, on the part of the Company.
On January
18, 2018, the 2013 Plaintiffs filed a second action in New York Supreme Court in connection with Darabont’s services on The Walking Dead television series and agreements between the parties related thereto. The claims in the action allegedly arise from Plaintiffs' audit of their participation statements covering the accounting period from inception of The Walking Dead through September 30, 2014. Plaintiffs seek no less than $i20 million
in damages on claims for breach of contract, breach of the covenant of good faith and fair dealing, and declaratory relief. The Company filed an Answer to the Complaint on April 16, 2018. On August 30, 2018, Plaintiff's filed an Amended Complaint, and on September 19, 2018, the Company answered. The parties have agreed to consolidate this action for a joint trial with the action Plaintiffs filed in the New York Supreme Court on December 17, 2013. Following the conclusion of discovery, the
Company filed a motion for summary judgment seeking the dismissal of the second action, which was denied on April 13, 2020. Due to the continued impact of the Coronavirus pandemic on the New York State courts, the joint trial, originally scheduled to begin on June 1, 2020, has been further delayed and is currently scheduled to begin on April 26, 2021. The Company believes that the asserted claims are without merit, denies the allegations and will defend the case vigorously. At this time, no determination can be made as to the ultimate outcome of this litigation or the potential liability, if any, on the part of the Company.
On
August 14, 2017, Robert Kirkman, Robert Kirkman, LLC, Glen Mazzara, 44 Strong Productions, Inc., David Alpert, Circle of Confusion Productions, LLC, New Circle of Confusion Productions, Inc., Gale Anne Hurd, and Valhalla Entertainment, Inc. f/k/a Valhalla Motion Pictures, Inc. (together, the "California Plaintiffs") filed a complaint in California Superior Court in connection with California Plaintiffs’ rendering of services as writers and producers of the television series entitled The Walking Dead, as well as Fear the Walking Dead and/or Talking Dead, and the agreements between the parties related thereto (the "California Action"). The California Plaintiffs asserted that the Company
has been improperly underpaying the California Plaintiffs under their contracts with the Company and they assert claims for breach of contract, breach of the covenant of good faith and fair dealing, inducing breach of contract, and liability for violation of Cal. Bus. & Prof. Code § 17200. On August 15, 2017, two of the California Plaintiffs, Gale Anne Hurd and David Alpert (and their associated loan-out companies), along with Charles Eglee and his loan-out company, United Bongo Drum, Inc., filed a complaint in New York Supreme Court alleging nearly identical
claims as the California Action (the "New York Action"). Hurd, Alpert, and Eglee filed the New York Action in connection with their contract claims involving The Walking Dead because their agreements contained exclusive New York jurisdiction provisions. On October 23, 2017, the parties stipulated to discontinuing the New York Action
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)
without
prejudice and consolidating all of the claims in the California Action. The California Plaintiffs seek compensatory and punitive damages and restitution. The Company filed an Answer on April 30, 2018 and believes that the asserted claims are without merit and will vigorously defend against them. On August 8, 2019, the judge in the California Action ordered a trial to resolve certain issues of contract interpretation only. The trial commenced on February 10, 2020 and concluded on March 10, 2020 after eight days of trial. On July
22, 2020, the judge in the California Action issued a Statement of Decision finding in the Company's favor on all seven matters of contract interpretation before the court in this first phase trial. At this time, no determination can be made as to the ultimate outcome of this litigation or the potential liability, if any, on the part of the Company.
The Company is party to various lawsuits and claims in the ordinary course of business, including the matters described above. Although the outcome of these matters cannot be predicted with certainty and
while the impact of these matters on the Company's results of operations in any particular subsequent reporting period could be material, management does not believe that the resolution of these matters will have a material adverse effect on the financial position of the Company or the ability of the Company to meet its financial obligations as they become due.
Note 15. iEquity
Plans
In June 2020, AMC Networks granted i54,535 restricted stock units ("RSUs") under the 2011 Stock Plan for Non-Employee Directors to non-employee directors that vested on the date of grant.
In March 2020, AMC Networks granted i1,171,956
RSUs to certain executive officers and employees under the AMC Networks Inc. 2016 Employee Stock Plan. The RSUs vest ratably over a three-year period and the vesting criteria for i380,142 RSUs include the achievement of certain performance targets by the Company.
During
the six months ended June 30, 2020, i477,764 RSUs and i325,836
PRSUs of AMC Networks Class A Common Stock previously issued to employees of the Company vested. On the vesting date, i199,377 RSUs and i142,882PRSUs were surrendered to the Company to cover the required statutory tax withholding obligations and i278,387 RSU and i182,954
PRSU new shares of AMC Networks Class A Common Stock were issued. The units surrendered to satisfy the employees' statutory minimum tax withholding obligations for the applicable income and other employment tax had an aggregate value of $i8.9 million, which has been reflected as a financing activity in the condensed consolidated statement of cash flows for the six months ended June 30, 2020.
Share-based
compensation expense included in selling, general and administrative expense was $i15.2 million and $i30.7
million for the three and six months ended June 30, 2020, respectively, and $i16.7 million and $i36.6
million the for three and six months ended June 30, 2019, respectively.
As of June 30, 2020, there was $i59.7 million of total unrecognized share-based compensation cost related to outstanding unvested share-based awards. The unrecognized compensation
cost is expected to be recognized over a weighted-average remaining period of approximatelyi1.8 years.
Note 16. iRedeemable
Noncontrolling Interests
i
The following table summarizes activity related to redeemable noncontrolling interest for the six months ended June 30, 2020.
The Company and its related parties routinely enter into transactions with each other in the ordinary course of business. Revenues, net from related parties amounted to $i1.2
million and $i1.2 million for the three months ended June 30, 2020 and 2019, respectively, and $i2.4
million and $i2.4 million for the six months ended June 30, 2020 and 2019, respectively. Amounts charged to the Company, included in selling, general and administrative expenses, pursuant to transactions with its related parties amounted to $i0.1
million and $i0.3 million for the three months ended June 30, 2020 and 2019, respectively, and $i0.1
million and $i0.8 million for the six months ended June 30, 2020 and 2019, respectively.
The Company classifies its operations into two operating segments: National Networks and International and Other. These operating segments represent strategic business units that are managed separately.
The Company generally allocates all corporate overhead costs within operating expenses
to the Company's itwo operating segments based upon their proportionate estimated usage of services, including such costs as executive salaries and benefits, costs of maintaining corporate headquarters, facilities and common support functions (such as human resources, legal, finance, strategic planning and information technology) as well as sales support functions and creative and production services.
The
Company evaluates segment performance based on several factors, of which the primary financial measure is operating segment adjusted operating income ("AOI"), a non-GAAP measure. The Company defines AOI as operating income (loss) before depreciation and amortization, cloud computing amortization, share-based compensation expense or benefit, impairment charges (including gains or losses on sales or dispositions of businesses), restructuring and other related charges and including the Company’s proportionate share of adjusted operating income (loss) from majority-owned equity method investees. The Company has presented the components that reconcile adjusted operating income to operating income, an accepted
GAAP measure, and other information as to the continuing operations of the Company's operating segments below.
iInter-segment
eliminations are primarily licensing revenues recognized between the National Networks and International and Other segments as well as revenues recognized by AMC Networks Broadcasting & Technology for transmission revenues recognized from the International and Other operating segment.
For
the six months ended June 30, 2020, impairment charges were recorded related to certain property and equipment in Europe and Other. See Note 7 for additional details regarding the impairment test of long-lived assets.
24
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
This Management's Discussion and Analysis of Financial Condition and Results of Operations contains statements that constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. In this Management's
Discussion and Analysis of Financial Condition and Results of Operations there are statements concerning our future operating results and future financial performance. Words such as "expects,""anticipates,""believes,""estimates,""may,""will,""should,""could,""potential,""continue,""intends,""plans" and similar words and terms used in the discussion of future operating results and future financial performance identify forward-looking statements. You are cautioned that any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to:
•the impact
of COVID-19 on the economy and our business, including the measures taken by governmental authorities to address the pandemic, which may precipitate or exacerbate other risks and/or uncertainties;
•the level of our revenues;
•market demand, including changes in viewer consumption patterns, for our programming networks, our subscription streaming services, our programming, and our production services;
•demand for advertising inventory and our ability to deliver guaranteed viewer ratings;
•the highly competitive nature of the cable, telecommunications and programming industries;
•our ability to maintain and renew distribution or affiliation
agreements with distributors;
•the cost of, and our ability to obtain or produce, desirable programming content for our networks, other forms of distribution, including digital and licensing in international markets, as well as our independent film distribution businesses;
•market demand for our owned original programming and our independent film content;
•changes in consumer demand for our comedy venues;
•the security of our program rights and other electronic data;
•the loss of any of our key personnel and artistic talent;
•changes in domestic and foreign laws
or regulations under which we operate;
•economic and business conditions and industry trends in the countries in which we operate;
•fluctuations in currency exchange rates and interest rates;
•changes in laws or treaties relating to taxation, or the interpretation thereof, in the U.S. or in the countries in which we operate, including the impact of the Tax Cuts and Jobs Act and the Bipartisan Budget Act of 2018;
•the impact of new and proposed federal, state and international laws and regulations relating to data protection, privacy and security, including the E.U. General Data Protection Regulation;
•the impact of Brexit, particularly
in the event of the U.K.'s departure from the E.U. without an agreement on terms;
•our substantial debt and high leverage;
•reduced access to capital markets or significant increases in costs to borrow;
•the level of our expenses;
•the level of our capital expenditures;
•future acquisitions and dispositions of assets;
•our ability to successfully acquire new businesses and, if acquired, to integrate, and implement our plan with respect to businesses we acquire;
•problems we may discover post-closing
with the operations, including the internal controls and financial reporting process, of businesses we acquire;
•uncertainties regarding the financial results of equity method investees, issuers of our investments in marketable equity securities and non-marketable equity securities and changes in the nature of key strategic relationships with partners and joint ventures;
•the outcome of litigation and other proceedings;
•whether pending uncompleted transactions, if any, are completed on the terms and at the times set forth (if at all);
•other risks and uncertainties inherent in our programming businesses;
•financial community and
rating agency perceptions of our business, operations, financial condition and the industry in which we operate;
25
•events that are outside our control, such as political unrest in international markets, terrorist attacks, natural disasters and other similar events; and
•the factors described under Item 1A, "Risk Factors" in our 2019 Annual Report on Form 10-K (the "2019 Form 10-K"), as filed with the Securities and Exchange Commission ("SEC") and under 1A, "Risk Factors" in this Quarterly Report on Form 10-Q.
We disclaim any obligation to update or revise the forward-looking statements contained herein,
except as otherwise required by applicable federal securities laws.
Introduction
Management's discussion and analysis, or MD&A, of our results of operations and financial condition is provided as a supplement to, and should be read in conjunction with, the unaudited condensed consolidated financial statements and notes thereto included elsewhere herein and our 2019 Form 10-K to enhance the understanding of our financial condition, changes in financial condition and results of our operations. Unless the context otherwise requires, all references to "we,""us,""our,""AMC Networks" or the "Company" refer to AMC Networks Inc., together with its subsidiaries.
MD&A is organized as follows:
Business Overview. This section provides a general description of our business and our operating segments, as well as other matters that we believe are important in understanding our results of operations and financial condition and in anticipating future trends.
Consolidated Results of Operations. This section provides an analysis of our results of operations for the three and six months ended June 30, 2020 compared to the three and six months ended June 30, 2019. Our discussion is presented on both a consolidated and operating segment basis. Our two operating segments are: (i) National Networks and (ii) International and Other.
Liquidity and Capital Resources.
This section provides a discussion of our financial condition as of June 30, 2020, as well as an analysis of our cash flows for the six months ended June 30, 2020 and 2019. The discussion of our financial condition and liquidity includes summaries of (i) our primary sources of liquidity and (ii) our contractual obligations that existed at June 30, 2020 as compared to December 31, 2019.
Critical Accounting Policies and Estimates. This section provides an update, if any, to our significant accounting policies or critical accounting estimates since December 31, 2019.
Business
Overview
We manage our business through the following two operating segments:
•National Networks: Includes activities of our five national programming networks, AMC Studios operations and AMC Broadcasting & Technology. Our national programming networks are AMC, WE tv, BBC AMERICA, IFC, and SundanceTV and also include our AMC Premiere service. Our AMC Studios operation produces original programming for our programming networks and also licenses such programming worldwide. AMC Networks Broadcasting & Technology is our technical services business, which primarily services most of the national programming networks.
•International and Other: Includes AMC Networks International ("AMCNI"), our international programming businesses consisting
of a portfolio of channels around the world; AMC Networks SVOD, consisting of our targeted subscription streaming services (Acorn TV, Shudder, Sundance Now, UMC) and other subscription video on demand ("SVOD") initiatives; Levity, our production services and comedy venues business; and IFC Films, our independent film distribution business.
26
Financial Results Overview
The tables presented below set forth our consolidated revenues, net, operating income (loss) and adjusted operating income ("AOI"), defined below, for the periods indicated.
We
evaluate segment performance based on several factors, of which the primary financial measure is operating segment AOI. We define AOI, which is a financial measure that is not calculated in accordance with generally accepted accounting principles ("GAAP"), as operating income (loss) before depreciation and amortization, cloud computing amortization, share-based compensation expense or benefit, impairment charges (including gains or losses on sales or dispositions of businesses), restructuring and other related charges and including the Company’s proportionate share of adjusted operating income (loss) from majority-owned equity method investees. From time to time, we may exclude the impact of certain events, gains, losses or other charges (such as significant legal settlements) from AOI that affect our operating performance.
We believe
that AOI is an appropriate measure for evaluating the operating performance on both an operating segment and consolidated basis. AOI and similar measures with similar titles are common performance measures used by investors, analysts and peers to compare performance in the industry.
Internally, we use revenues, net and AOI measures as the most important indicators of our business performance, and evaluate management's effectiveness with specific reference to these indicators. AOI should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), cash flows from operating activities and other measures of performance and/or liquidity presented in accordance with GAAP. Since AOI is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similar measures with similar titles used by other companies.
The
following is a reconciliation of consolidated operating income to AOI for the periods indicated:
In March 2020, the World Health Organization characterized the novel coronavirus ("COVID-19") a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy.
The impact of COVID-19 and measures to prevent its spread are affecting our businesses in a number of ways. Beginning in mid-March, we have experienced adverse advertising sales impacts, suspended content production, which has led to delays in the creation and availability of substantially all of our programming, and the temporary closure of our comedy venues. Operationally, nearly all of our employees are working remotely, and we have restricted business travel. If significant portions of our workforce,
including key personnel, are unable to work effectively because of illness, government actions or other restrictions in connection with the COVID-19 pandemic, the impact of the pandemic on our businesses could be exacerbated.
The Company has evaluated and continues to evaluate the potential impact of the COVID-19 pandemic on its consolidated financial statements, including the impairment of goodwill (see Note 7) and indefinite-lived intangible assets and the fair value and collectibility of receivables. The COVID-19 pandemic has had a material impact on the Company's operations since mid-March 2020. The Company cannot reasonably predict the ultimate impact of the COVID-19
pandemic, including the extent of any adverse impact on our business, results of operations and financial condition, which will depend on, among other things, the duration and spread of the pandemic, the impact of governmental regulations that have been, and may continue to be, imposed in response to the pandemic, the effectiveness of actions taken to contain or mitigate the outbreak, the availability, safety and efficacy of a vaccine, and global economic conditions. The Company does not expect the COVID-19 pandemic and its related economic impact to affect its liquidity position or its ongoing ability to meet the covenants in its debt instruments.
National Networks
In our National Networks segment, we earn revenue principally from the distribution of our programming and the sale of advertising.
Distribution revenue primarily includes subscription fees paid by distributors to carry our programming networks and content licensing revenue from the licensing of original programming for digital, foreign and home video distribution. Subscription fees paid by distributors represent the largest component of distribution revenue. Our subscription fee revenues are based on a per subscriber fee, and, to a lesser extent, fixed fees under multi-year contracts, commonly referred to as "affiliation agreements," which generally provide for annual rate increases. The specific subscription fee revenues we earn vary from period to period, distributor to distributor and also vary among our networks, but are generally based upon the number of each distributor's subscribers who receive our programming, referred to as viewing subscribers. Content licensing revenue from the licensing
of original programming for digital and foreign distribution is recognized upon availability or distribution by the licensee.
Under affiliation agreements with our distributors, we have the right to sell a specified amount of national advertising time on our programming networks. Our advertising revenues are more variable than subscription fee revenues because the majority of our advertising is sold on a short-term basis, not under long-term contracts. Our arrangements with advertisers provide for a set number of advertising units to air over a specific period of time at a negotiated price per unit. Additionally, in these advertising sales arrangements, our programming networks generally guarantee specified viewer ratings for their programming.
On August
5, 2020, the Company filed a program carriage complaint with the Federal Communications Commission (the "FCC") alleging that, in connection with the negotiation of a new affiliation agreement between AT&T and the Company, AT&T has been engaging in discriminatory conduct that violates Section 616 of the Communications Act of 1934, as amended, and the FCC’s program carriage rules.
Programming expense, included in technical and operating expense, represents the largest expense of the National Networks segment and primarily consists of amortization and write-offs of programming rights, such as those for original programming, feature films and licensed series, as well as participation and residual costs. The other components of technical
and operating expense primarily include distribution and production related costs and program operating costs including cost of delivery, such as origination, transmission, uplinking and encryption.
To an increasing extent, the success of our business depends on original programming, both scripted and unscripted, across all of our networks. In recent years, we have introduced a number of scripted original series. These series generally result in higher ratings for our networks. Among other things, higher audience ratings drive increased revenues through higher advertising revenues. The timing of exhibition and distribution of original programming varies from period to period, which results in greater variability in our revenues, earnings and cash flows from operating activities. We will continue to increase our investment in programming across all of our networks. There may be significant changes in the level of our technical
and operating expenses due to the amortization of content acquisition and/or original programming costs and/or the impact of management's periodic assessment of programming usefulness. Such costs will also fluctuate with the level of revenues derived
28
from owned original programming in each period as these costs are amortized based on the individual-film-forecast-computation method.
Most original series require us to make up-front investments, which are often significant amounts. Not all of our programming efforts are commercially successful, which could result in a write-off of program rights. If it is determined that programming rights have limited, or no, future programming usefulness based on actual demand or market conditions,
a write-off of the unamortized cost is recorded in technical and operating expense. Program rights write-offs, included in technical and operating expense, were $7.5 million and $13.4 million for the six months ended June 30, 2020 and June 30, 2019, respectively.
International and Other
Our International and Other segment primarily includes the operations of AMCNI, AMC Networks SVOD, Levity, and IFC Films.
In our International and Other segment, we earn revenue principally from the international distribution of programming and, to a lesser extent, the sale of advertising from our AMCNI programming networks. We also earn revenue from; (i) production services from Levity, (ii) our subscription streaming services Acorn TV, Shudder, Sundance
Now and UMC (Urban Movie Channel) from our AMC Networks SVOD business, (iii) the distribution of content of IFC Films and RLJE, and (iv) Levity's operation of comedy venues (all of which are temporarily closed as a result of the COVID-19 pandemic). For the six months ended June 30, 2020, distribution revenues represented 90% of the revenues of the International and Other segment. Distribution revenue primarily includes subscription fees paid by distributors or consumers to carry our programming networks or subscription-based streaming services and production services revenue generated from Levity. Our subscription revenues are generally based on either a per-subscriber fee or a fixed contractual annual fee, under multi-year affiliation agreements, which may provide for annual rate increases, and a monthly fee paid by consumers for our subscription-based streaming services.
Our production services revenues are based on master production agreements whereby a third-party engages us to produce content on its behalf. Production services revenues are recognized based on the percentage of cost incurred to total estimated cost of the contract. Distribution revenues are derived from the distribution of our programming networks primarily in Europe and to a lesser extent, Latin America as well as from our owned subscription streaming services available in the United States, Canada, Latin America, parts of Europe, India, Australia and New Zealand.
Programming expense, program operating costs and production costs incurred to produce content for third parties are included in technical and operating expense, and represent the largest expense of the International and Other segment. Programming expense primarily consist
of amortization of acquired content, costs of dubbing and sub-titling of programs, production costs, participation and residual costs. Program operating costs include costs such as origination, transmission, uplinking and encryption of our linear AMCNI channels as well as content hosting and delivery costs at our various on-line content distribution initiatives. Not all of our programming efforts are commercially successful, which could result in a write-off of program rights. If it is determined that programming rights have limited, or no, future programming usefulness based on actual demand or market conditions, a write-off of the unamortized cost is recorded in technical and operating expense.
We view our investments in international expansion and our various developing on-line content distribution initiatives as important long-term strategies. We may experience an adverse impact to the International and Other segment's
operating results and cash flows in periods of increased investment by the Company in these aforementioned initiatives.
Corporate Expenses
We allocate corporate overhead within operating expenses to each segment based upon its proportionate estimated usage of services. The segment financial information set forth below, including the discussion related to individual line items, does not reflect inter-segment eliminations unless specifically indicated.
Impact of Economic Conditions
Our future performance is dependent, to a large extent, on general economic conditions including the impact of direct competition, our ability to manage our businesses effectively, and our relative strength and leverage in the marketplace,
both with suppliers and customers.
Capital and credit market disruptions, as well as other events such as the COVID-19 pandemic, could cause economic downturns, which may lead to lower demand for our products, such as lower demand for television advertising and a decrease in the number of subscribers receiving our programming networks from our distributors. Events such as these may adversely impact our results of operations, cash flows and financial position.
29
Consolidated Results of Operations
The amounts presented and
discussed below represent 100% of each operating segment's revenues, net and expenses. Where we have management control of an entity, we consolidate 100% of such entity in our consolidated statements of operations notwithstanding that a third-party owns a significant interest in such entity. The noncontrolling owner's interest in the operating results of majority-owned or controlled subsidiaries are reflected in net income attributable to noncontrolling interests in our consolidated statements of operations.
Technical and operating (excluding depreciation and amortization)
90,198
56.0
111,722
62.2
(21,524)
(19.3)
Selling,
general and administrative
59,968
37.3
60,486
33.7
(518)
(0.9)
Depreciation and amortization
17,083
10.6
17,714
9.9
(631)
(3.6)
Impairment
charges
130,411
81.0
—
—
130,411
n/m
Restructuring and other related charges
2,293
1.4
16,888
9.4
(14,595)
(86.4)
Operating
loss
$
(138,973)
(86.3)
%
$
(27,284)
(15.2)
%
$
(111,689)
n/m
Share-based compensation expense
2,869
1.8
2,904
1.6
(35)
(1.2)
Depreciation
and amortization
17,083
10.6
17,714
9.9
(631)
(3.6)
Impairment
charges
130,411
81.0
—
—
130,411
n/m
Restructuring
and other related charges
2,293
1.4
16,888
9.4
(14,595)
(86.4)
Majority-owned equity investees AOI
1,418
0.9
1,608
0.9
(190)
(11.8)
AOI
$
15,101
9.4
%
$
11,830
6.6
%
$
3,271
27.7
%
31
Revenues,
net
Revenues, net decreased $126.0 million to $646.3 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. The net change by segment was as follows:
Three
Months Ended June 30,
(In thousands)
2020
% of total
2019
% of total
$ change
% change
National
Networks
$
495,850
76.7
%
$
604,739
78.3
%
$
(108,889)
(18.0)
%
International and Other
160,980
24.9
179,526
23.2
(18,546)
(10.3)
Inter-segment
eliminations
(10,539)
(1.6)
(11,966)
(1.5)
1,427
(11.9)
Consolidated revenues, net
$
646,291
100.0
%
$
772,299
100.0
%
$
(126,008)
(16.3)
%
National
Networks
The decrease in National Networks revenues, net was attributable to the following:
Three
Months Ended June 30,
(In thousands)
2020
% of total
2019
% of total
$ change
% change
Advertising
$
187,434
37.8
%
$
219,490
36.3
%
$
(32,056)
(14.6)
%
Distribution
308,416
62.2
385,249
63.7
(76,833)
(19.9)
$
495,850
100.0
%
$
604,739
100.0
%
$
(108,889)
(18.0)
%
•The
decrease of $32.1 million in advertising revenues was primarily attributable to the timing of our original programming and the impact of the COVID-19 pandemic, both of which resulted in lower pricing across all of our networks. Most of our advertising revenues vary based on the timing of our original programming series and the popularity of our programming as measured by Nielsen. Due to these factors, we expect advertising revenues to vary from quarter to quarter.
•Distribution revenues decreased $76.8 million due to a decrease of $28.3 million in subscription revenues as compared to the prior comparable period due to lower subscribers. Content licensing revenues decreased $48.5 million due to a decrease in the number of original programs we distributed. Distribution revenues may vary based on the impact of renewals of affiliation agreements and content licensing revenues vary based on the timing of
availability of our programming to distributors. Because of these factors, we expect distribution revenues to vary from quarter to quarter.
International and Other
The decrease in International and Other revenues, net was attributable to the following:
Three
Months Ended June 30,
(In thousands)
2020
% of total
2019
% of total
$ change
% change
Advertising
$
14,810
9.2
%
$
23,535
13.1
%
$
(8,725)
(37.1)
%
Distribution
146,170
90.8
155,991
86.9
(9,821)
(6.3)
$
160,980
100.0
%
$
179,526
100.0
%
$
(18,546)
(10.3)
%
Advertising
revenues decreased $7.7 million at AMCNI, excluding the impact of foreign currency fluctuations, primarily related to lower demand resulting from the impact of the COVID-19 pandemic. Foreign currency translation had an unfavorable impact to advertising revenues of $1.0 million. Distribution revenues decreased $25.6 million at Levity, due to the impact of the COVID-19 pandemic on its operations, which resulted in a temporary halt in production activities and closure of comedy venues. The decrease in distribution revenues was partially offset by an increase of $21.9 million related to an increase in subscription revenues at AMC Networks SVOD targeted streaming services. In addition, distribution revenues decreased $3.5 million at IFC Films and $2.1 million at AMCNI, excluding the impact of foreign currency fluctuations. Foreign currency translation had an unfavorable impact to distribution revenues of $2.7 million.
Technical
and operating expense (excluding depreciation and amortization)
The components of technical and operating expense primarily include the amortization and impairments or write-offs of program rights, such as those for original programming, feature films and licensed series, participation and residual costs, distribution and production related costs and program operating costs, such as origination, transmission, uplinking and encryption.
32
Technical and operating expense (excluding depreciation and amortization) decreased $103.1 million to $282.5 million for the three months ended June 30, 2020 as compared to the three months ended June 30,
2019. The net change by segment was as follows:
Three Months Ended June 30,
(In
thousands)
2020
2019
$ change
% change
National Networks
$
203,074
$
269,147
$
(66,073)
(24.5)
%
International
and Other
90,198
111,722
(21,524)
(19.3)
%
Inter-segment eliminations
(10,769)
4,754
(15,523)
n/m
Total
$
282,503
$
385,623
$
(103,120)
(26.7)
%
Percentage
of revenues, net
43.7
%
49.9
%
National Networks
The decrease in technical and operating expense of $66.1 million was due to a decrease in program amortization of $64.8 million primarily attributable to the mix of original programming as compared to the prior comparable period, which was impacted by the production stoppages resulting from the COVID-19 pandemic. In addition, other direct programming costs decreased $1.3 million. Program rights amortization expense includes write-offs of $7.5 million and $10.1 million for the
three months ended June 30, 2020 and June 30, 2019, respectively. Program write-offs are based on management's periodic assessment of programming usefulness.
There may be significant changes in the level of our technical and operating expenses due to content acquisition and/or original programming costs and/or the impact of management's periodic assessment of programming usefulness. Such costs will also fluctuate with the level of revenues derived from owned original programming in each period as these costs are amortized based on the film-forecast-computation method. As additional competition for programming increases and alternate distribution technologies continue to develop in the industry, costs for content acquisition and original programming may increase.
International and
Other
Technical and operating expense decreased $17.0 million related to Levity, $6.1 million at AMCNI and $2.6 million at IFC Films. The decrease at Levity was due to the impact of the COVID-19 pandemic on its operations, which resulted in a temporary halt in production activities and closure of comedy venues. These decreases were partially offset by an increase of $4.4 million at AMC Networks SVOD targeted streaming services. Foreign currency translation had a favorable impact to the change in technical and operating expense of $2.3 million.
Selling, general and administrative expense
The components of selling, general and administrative expense primarily include sales, marketing and advertising expenses, administrative costs and costs of non-production facilities.
Selling, general and administrative
expense decreased $18.2 million to $155.2 million for the three months ended June 30, 2020, as compared to the three months ended June 30, 2019. The net change by segment was as follows:
Three Months Ended June 30,
(In
thousands)
2020
2019
$ change
% change
National Networks
$
95,208
$
112,941
$
(17,733)
(15.7)
%
International
and Other
59,968
60,486
(518)
(0.9)
Inter-segment eliminations
(13)
(63)
50
(79.4)
Total
$
155,163
$
173,364
$
(18,201)
(10.5)
%
Percentage
of revenues, net
24.0
%
22.4
%
National Networks
Selling, general and administrative expense decreased $17.7 million principally due to a decrease in advertising and marketing expenses of $15.8 million related to the mix of original programming, which was impacted by the COVID-19 pandemic.
There may be significant changes in the level of our selling, general and administrative expense from quarter to quarter and year to year due to the timing of promotion and marketing of original
programming series and subscriber retention marketing efforts.
33
International and Other
Selling, general and administrative expense decreased $0.5 million. Decreases in selling, general and administrative expense included $5.5 million at AMCNI primarily related to advertising and marketing expenses, and $5.8 million at Levity primarily related to the impact of the COVID-19 pandemic. These decreases were partially offset by an increase of $13.0 million at AMC Networks SVOD targeted streaming services primarily related to advertising and marketing expenses. Foreign currency translation had a favorable impact to the change in selling, general and administrative expense of $1.3 million.
Depreciation
and amortization
Depreciation and amortization expense was $25.9 million for both the three months ended June 30, 2020 and June 30, 2019. The net change by segment was as follows:
Three Months Ended June 30,
(In
thousands)
2020
2019
$ change
% change
National Networks
$
8,822
$
8,179
$
643
7.9
%
International
and Other
17,083
17,714
(631)
(3.6)
$
25,905
$
25,893
$
12
—
%
Impairment
charges
As a result of the continuing impact of the COVID-19 pandemic, we qualitatively assessed whether it was more likely than not that goodwill and long-lived assets were impaired as of June 30, 2020. Based on our current projections and updated forecasts, we determined that sufficient indicators of potential impairment of long-lived assets existed and, in connection with the preparation of the Company's second quarter financial information, the Company performed a recoverability test of certain long-lived asset groups within the AMCNI reporting unit. This resulted in an impairment charge of $105.3 million primarily related to certain identifiable intangible assets, as well as property and equipment,
and operating lease right-of-use assets. The Company then performed a goodwill impairment test and determined that the carrying value of the AMCNI reporting unit exceeded its fair value, resulting in an impairment charge of $25.1 million.
Restructuring and other related charges
Restructuring and other related charges of $3.5 million for the three months ended June 30, 2020 primarily consisted of charges at AMCNI of $2.3 million related to costs associated with termination of distribution in certain territories and charges of $1.2 million related to severance associated with previously announced restructuring activities.
Restructuring expense of $17.2 million for the three months ended June
30, 2019 primarily related to the direct to consumer re-organization and consisted of severance and other personnel related costs of $1.3 million and programming write-offs of $13.0 million related to a change in programming strategy, as well as $2.9 million related to severance associated with previously announced restructuring activities.
Operating Income
Three
Months Ended June 30,
(In thousands)
2020
2019
$ change
% change
National Networks
$
187,532
$
214,198
$
(26,666)
(12.4)
%
International
and Other
(138,973)
(27,284)
(111,689)
n/m
Inter-segment Eliminations
243
(16,657)
16,900
n/m
$
48,802
$
170,257
$
(121,455)
(71.3)
%
The
decrease in operating income at the National Networks segment was primarily attributable to a decrease in revenue of $108.9 million, partially offset by a decrease in technical and operating expense of $66.1 million and a decrease in selling, general and administrative expense of $17.7 million.
The increase in operating losses at the International and Other segment was primarily attributable to the impairment charges of $130.4 million and a decrease in revenues of $18.5 million, partially offset by a decrease in technical and operating expense of $21.5 and a decrease in restructuring and other related charges of $14.6 million.
34
AOI
The following is a reconciliation of our consolidated
operating income to AOI:
Three Months Ended June 30,
(In thousands)
2020
2019
$
change
% change
Operating income
$
48,802
$
170,257
$
(121,455)
(71.3)
%
Share-based compensation expense
15,235
16,725
(1,490)
(8.9)
Depreciation
and amortization
25,905
25,893
12
—
Impairment charges
130,411
—
130,411
n/m
Restructuring
and other related charges
3,507
17,162
(13,655)
(79.6)
Majority-owned equity investees AOI
1,418
1,608
(190)
(11.8)
AOI
$
225,278
$
231,645
$
(6,367)
(2.7)
%
AOI
decreased $6.4 million for the three months ended June 30, 2020 as compared to the three months ended June 30, 2019. The net change by segment was as follows:
Three Months Ended June 30,
(In
thousands)
2020
2019
$ change
% change
National Networks
$
209,934
$
236,472
$
(26,538)
(11.2)
%
International
and Other
15,101
11,830
3,271
27.7
Inter-segment eliminations
243
(16,657)
16,900
n/m
AOI
$
225,278
$
231,645
$
(6,367)
(2.7)
%
AOI
decreased at the National Networks segment principally due to a decrease in operating income.
As a result of the factors discussed above impacting the variability in revenues and operating expenses, we expect AOI to vary from quarter to quarter.
Interest expense, net
The decrease in interest expense, net of $4.4 million is primarily due to lower average outstanding balances.
Miscellaneous, net
Miscellaneous, net was income of $8.7 million for the three months ended June 30, 2020 as compared to expense of $2.7 million for the three months ended June 30, 2019. The increase in miscellaneous, net income of $11.4 million was primarily related to an unrealized
gain of $14.9 million from certain marketable equity securities, partially offset by unfavorable variance of $2.8 million in the foreign currency remeasurement of monetary assets and liabilities (principally intercompany loans) that are denominated in currencies other than the underlying functional currency of the applicable entity.
Income tax expense
For the three months ended June 30, 2020, income tax expense was $9.7 million representing an effective tax rate of 36%. The effective tax rate differs from the federal statutory rate of 21% due primarily to tax expense from foreign operations of $5.5 million, state and local income tax expense of $2.6 million and tax expense of $2.9 million resulting from an increase in valuation allowances for foreign taxes and U.S. foreign tax credits,
partially offset by a tax benefit of $5.2 million relating to uncertain tax positions (including accrued interest) and tax benefit of $1.4 million related to a foreign-derived intangible income deduction. The tax benefit relating to uncertain tax positions is primarily due to an audit settlement and the filing of state income tax returns under a voluntary disclosure agreement.
For the three months ended June 30, 2019, income tax benefit was $1.4 million representing a negative effective tax rate of 1%. The effective tax rate differs from the federal statutory rate of 21% due primarily to a tax benefit of $25.0 million resulting from a decrease in valuation allowances for foreign tax assets, and a tax benefit of $7.2 million relating to uncertain tax positions (including accrued interest), partially offset by state and local income tax expense of $4.1 million. The decrease in
the valuation allowance is primarily due to the expected utilization of foreign net operating loss carryforwards resulting from the planned implementation of certain tax planning strategies. The tax benefit relating to uncertain tax positions is primarily due to an audit settlement and the filing of state income tax returns under a voluntary disclosure agreement.
Technical and operating (excluding depreciation and amortization)
196,826
59.4
219,994
62.7
(23,168)
(10.5)
Selling,
general and administrative
120,486
36.3
118,571
33.8
1,915
1.6
Depreciation and amortization
35,424
10.7
33,158
9.5
2,266
6.8
Impairment
charges
130,411
39.3
—
—
130,411
n/m
Restructuring and other related charges
6,750
2.0
19,923
5.7
(13,173)
(66.1)
Operating
loss
$
(158,424)
(47.8)
%
$
(41,031)
(11.7)
%
$
(117,393)
n/m
Share-based compensation expense
5,915
1.8
6,534
1.9
(619)
(9.5)
Depreciation
and amortization
35,424
10.7
33,158
9.5
2,266
6.8
Impairment
charges
130,411
39.3
—
—
130,411
n/m
Restructuring
and other related charges
6,750
2.0
19,923
5.7
(13,173)
(66.1)
Majority-owned equity investees AOI
2,694
0.8
3,188
0.9
(494)
(15.5)
AOI
$
22,770
6.9
%
$
21,772
6.2
%
$
998
4.6
%
37
Revenues,
net
Revenues, net decreased $175.9 million to $1,380.7 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. The net change by segment was as follows:
Six
Months Ended June 30,
(In thousands)
2020
% of total
2019
% of total
$ change
% change
National
Networks
$
1,062,789
77.1
%
$
1,220,858
78.4
%
$
(158,069)
(12.9)
%
International and
Other
331,473
24.0
350,615
22.5
(19,142)
(5.5)
Inter-segment eliminations
(13,596)
(1.0)
(14,953)
(1.0)
1,357
(9.1)
Consolidated
revenues, net
$
1,380,666
100.1
%
$
1,556,520
99.9
%
$
(175,854)
(11.3)
%
National
Networks
The decrease in National Networks revenues, net was attributable to the following:
Six
Months Ended June 30,
(In thousands)
2020
% of total
2019
% of total
$ change
% change
Advertising
$
400,660
37.7
%
$
458,579
37.6
%
$
(57,919)
(12.6)
%
Distribution
662,129
62.3
762,279
62.4
(100,150)
(13.1)
$
1,062,789
100.0
%
$
1,220,858
100.0
%
$
(158,069)
(12.9)
%
•The
decrease of $57.9 million in advertising revenues was primarily attributable to the timing of our original programming and the impact of the COVID-19 pandemic, both of which resulted in lower pricing across all of our networks. Most of our advertising revenues vary based on the timing of our original programming series and the popularity of our programming as measured by Nielsen. Due to these factors, we expect advertising revenues to vary from quarter to quarter.
•Distribution revenues decreased $100.2 million due to a decrease of $49.9 million in subscription revenues as compared to the prior comparable period due to lower subscribers. Content licensing revenues decreased $50.3 million due to a decrease in the number of original programs we distributed. Subscription revenues may vary based on the impact of renewals of affiliation agreements and content licensing revenues vary based on the timing of
availability of our programming to distributors. Because of these factors, we expect distribution revenues to vary from quarter to quarter.
International and Other
The decrease in International and Other revenues, net was attributable to the following:
Six
Months Ended June 30,
(In thousands)
2020
% of total
2019
% of total
$ change
% change
Advertising
$
34,174
10.3
%
$
44,741
12.8
%
$
(10,567)
(23.6)
%
Distribution
297,299
89.7
305,874
87.2
(8,575)
(2.8)
$
331,473
100.0
%
$
350,615
100.0
%
$
(19,142)
(5.5)
%
Advertising
revenues decreased $9.0 million at AMCNI, excluding the impact of foreign currency fluctuations, primarily related to lower demand resulting from the impact of the COVID-19 pandemic. Foreign currency translation had an unfavorable impact to advertising revenues of $1.6 million. Distribution revenues decreased $27.3 million at Levity, due to the impact of the COVID-19 pandemic on its operations, which resulted in a temporary halt in production activities and closure of comedy venues. The decrease in distribution revenues was offset by an increase of $31.4 million related to an increase in subscription revenues at AMC Networks SVOD targeted streaming services. In addition, distribution revenues decreased $6.1 million at IFC Films and $4.3 million at AMCNI, excluding the impact of foreign currency fluctuations. Foreign currency translation had an unfavorable impact to distribution revenues of $4.8 million.
Technical and operating
expense (excluding depreciation and amortization)
The components of technical and operating expense primarily include the amortization and write-offs of program rights, such as those for original programming, feature films and licensed series, participation and residual costs, distribution and production related costs and program delivery costs, such as transmission, encryption, hosting, and formatting.
Technical and operating expense (excluding depreciation and amortization) decreased $99.2 million to $626.6 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. The net change by segment was as follows:
38
Six
Months Ended June 30,
(In thousands)
2020
2019
$ change
% change
National Networks
$
440,745
$
510,407
$
(69,662)
(13.6)
%
International
and Other
196,826
219,994
(23,168)
(10.5)
Inter-segment eliminations
(11,008)
(4,630)
(6,378)
137.8
Total
$
626,563
$
725,771
$
(99,208)
(13.7)
%
Percentage
of revenues, net
45.4
%
46.6
%
National Networks
The decrease in technical and operating expense of $69.7 million was due to a decrease in program amortization of $67.1 million primarily attributable to the mix of original programming as compared to the prior comparable period, which was impacted by the production stoppages resulting from the COVID-19 pandemic. In addition, other direct programming costs decreased $2.6 million. Program rights amortization expense includes write-offs of $7.5 million for the six months ended
June 30, 2020 as compared to program rights write-offs of $13.4 million for the six months ended June 30, 2019. Programming write-offs are based on management's periodic assessment of programming usefulness.
There may be significant changes in the level of our technical and operating expenses due to content acquisition and/or original programming costs and/or the impact of management's periodic assessment of programming usefulness. Such costs will also fluctuate with the level of revenues derived from owned original programming in each period as these costs are amortized based on the film-forecast-computation method. As additional competition for programming increases and alternate distribution technologies continue to develop in the industry, costs for content acquisition and
original programming may increase.
International and Other
Technical and operating expense decreased $15.9 million related to Levity, $6.6 million at AMCNI and $4.7 million at IFC Films. The decrease at Levity is due to the impact of the COVID-19 pandemic on its operations, which resulted in a temporary halt in production activities and closure of comedy venues. These decreases were partially offset by an increase of $6.4 million at AMC Networks SVOD targeted streaming services. Foreign currency translation had a favorable impact to the change in technical and operating expense of $4.1 million.
Selling, general and administrative expense
The components of selling, general and administrative expense primarily include sales, marketing and advertising expenses, administrative costs and costs of
non-production facilities.
Selling, general and administrative expense decreased $6.1 million to $339.8 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The net change by segment was as follows:
Six
Months Ended June 30,
(In thousands)
2020
2019
$ change
% change
National Networks
$
219,354
$
227,382
$
(8,028)
(3.5)
%
International
and Other
120,486
118,571
1,915
1.6
Inter-segment eliminations
(28)
(77)
49
(63.6)
Total
$
339,812
$
345,876
$
(6,064)
(1.8)
%
Percentage
of revenues, net
24.6
%
22.2
%
National Networks
Selling, general and administrative expense decreased $8.0 million principally due to a decrease in advertising and marketing expenses of $12.8 million related to the mix of original programming, which was impacted by the COVID-19 pandemic, partially offset by an increase in legal fees.
There may be significant changes in the level of our selling, general and administrative expense from quarter to quarter and year to year due to the
timing of promotion and marketing of original programming series and subscriber retention marketing efforts.
International and Other
Selling, general and administrative expense increased $1.9 million. The increase in selling, general and administrative expense related to $17.3 million at AMC Networks SVOD targeted streaming services primarily related to advertising and marketing expenses, which was partially offset by decreases of $6.6 million at AMCNI primarily related to advertising and
39
marketing expenses, and $6.3 million at Levity primarily related to the impact of the COVID-19 pandemic. Foreign currency translation had a favorable impact to the change in selling, general
and administrative expense of $2.3 million.
Depreciation and amortization
Depreciation and amortization expense increased $2.7 million to $52.6 million for the six months ended June 30, 2020, as compared to the six months ended June 30, 2019. The net change by segment was as follows:
Six
Months Ended June 30,
(In thousands)
2020
2019
$ change
% change
National Networks
$
17,211
$
16,791
$
420
2.5
%
International
and Other
35,424
33,158
2,266
6.8
$
52,635
$
49,949
$
2,686
5.4
%
The
increase in depreciation and amortization expense in the National Networks segment was primarily due to depreciation of equipment at our AMC Networks Broadcasting and Technology facilities. The increase in depreciation and amortization expense in the International and Other segment was primarily due to an increase in depreciation expense related to leasehold additions.
Impairment charges
As a result of the continuing impact of the COVID-19 pandemic, we qualitatively assessed whether it was more likely than not that goodwill and long-lived assets were impaired as of June 30, 2020. Based on our current projections and updated forecasts, we determined that sufficient indicators of potential impairment of long-lived assets existed and, in connection with the preparation of the
Company's second quarter financial information, the Company performed a recoverability test of certain long-lived asset groups within the AMCNI reporting unit. This resulted in an impairment charge of $105.1 million primarily related to certain identifiable intangible assets, as well as property and equipment, and operating lease right-of-use assets. The Company then performed a goodwill impairment test and determined that the carrying value of the AMCNI reporting unit exceeded its fair value, resulting in an impairment charge of $25.1 million.
Restructuring and other related charges
Restructuring and other related charges of $9.5 million for the six months ended June 30,
2020 primarily consisted of charges at AMCNI of $6.2 million related to costs associated with termination of distribution in certain territories and charges of $3.3 million related to severance associated with previously announced restructuring activities.
Restructuring expense of $19.8 million for the six months ended June 30, 2019 primarily related to the direct to consumer re-organization and consisted of severance and other personnel related costs of $1.3 million and programming write-offs of $13.0 million related to a change in programming strategy, as well as $5.5 million related to severance associated with previously announced restructuring activities.
Operating Income
Six
Months Ended June 30,
(In thousands)
2020
2019
$ change
% change
National Networks
$
382,756
$
465,702
$
(82,946)
(17.8)
%
International
and Other
(158,424)
(41,031)
(117,393)
n/m
Inter-segment Eliminations
(2,560)
(9,551)
6,991
n/m
$
221,772
$
415,120
$
(193,348)
(46.6)
%
The
decrease in operating income at the National Networks segment was primarily attributable to a decrease in revenue of $158.1 million and an increase in restructuring and other related charges of $2.1 million, partially offset by a decrease in technical and operating expense of $69.7 million and a decrease in selling, general and administrative expense of $8.0 million.
The increase in operating losses at the International and Other segment was primarily attributable to the impairment charges of $130.4 million and a decrease in revenues of $19.1 million, partially offset by a decrease in technical and operating expense of $23.2 million and a decrease in restructuring and other related charges of $13.2 million.
40
AOI
The
following is a reconciliation of our consolidated operating income to AOI:
Six Months Ended June 30,
(In
thousands)
2020
2019
$ change
% change
Operating income
$
221,772
$
415,120
$
(193,348)
(46.6)
%
Share-based
compensation expense
30,747
36,624
(5,877)
(16.0)
Depreciation and amortization
52,635
49,949
2,686
5.4
Impairment
charges
130,411
—
130,411
n/m
Restructuring and other related charges
9,473
19,804
(10,331)
(52.2)
Majority-owned
equity investees AOI
2,694
3,188
(494)
(15.5)
AOI
$
447,732
$
524,685
$
(76,953)
(14.7)
%
AOI
decreased $77.0 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019. The net change by segment was as follows:
Six Months Ended June 30,
(In
thousands)
2020
2019
$ change
% change
National Networks
$
427,522
$
513,159
$
(85,637)
(16.7)
%
International
and Other
22,770
21,772
998
4.6
Inter-segment eliminations
(2,560)
(10,246)
7,686
n/m
AOI
$
447,732
$
524,685
$
(76,953)
(14.7)
%
AOI
decreased at the National Networks segment principally due to a decrease in operating income.
As a result of the factors discussed above impacting the variability in revenues and operating expenses, we expect AOI to vary from quarter to quarter.
Interest expense, net
The decrease in interest expense, net of $6.8 million is primarily due to lower average outstanding balances.
Loss on extinguishment of debt
In March 2020, we redeemed $200 million principal amount of the outstanding $600 million principal amount of our 4.75% Notes due 2022. The loss on extinguishment of debt for the six months ended June 30, 2020 of $2.9 million represents the redemption premium, the write-off of a portion of the unamortized
discount and deferred financing costs.
Miscellaneous, net
The increase in miscellaneous expense, net of $5.7 million for the six months ended June 30, 2020 as compared to the six months ended June 30, 2019 was primarily due to an unfavorable variance of $18.1 million in the foreign currency remeasurement of monetary assets and liabilities (principally intercompany loans) that are denominated in currencies other than the underlying functional currency of the applicable entity, partially offset by an unrealized gain of $13.6 million from certain marketable equity securities.
Income tax expense
For the six months ended June
30, 2020, income tax expense was $43.3 million representing an effective tax rate of 32%. The effective tax rate differs from the federal statutory rate of 21% due primarily to tax expense from foreign operations of $9.4 million, state and local income tax expense of $5.7 million and tax expense of $5.6 million resulting from an increase in valuation allowances for foreign taxes and U.S. foreign tax credits, partially offset by a tax benefit of $8.7 million relating to uncertain tax positions (including accrued interest) and tax benefit of $2.9 million related to a foreign-derived intangible income deduction. The tax benefit relating to uncertain tax positions is primarily due to audit settlements and the filing of state income tax returns under voluntary disclosure agreements.
For the six months ended June 30, 2019, income tax expense was $45.1 million representing an
effective tax rate of 14%. The effective tax rate differs from the federal statutory rate of 21% due primarily to a tax benefit of $25.0 million resulting from a decrease in valuation allowances for foreign tax assets, and a tax benefit of $5.6 million relating to uncertain tax positions (including accrued interest), partially offset by state and local income tax expense of $7.3 million. The decrease in the valuation allowance is primarily due to the expected utilization of foreign net operating loss carryforwards resulting from the planned
41
implementation of certain tax planning strategies. The tax benefit relating to uncertain tax positions is primarily due to an audit settlement and the filing of state income tax returns under a voluntary disclosure agreement.
Liquidity
and Capital Resources
Our operations have historically generated positive net cash flow from operating activities. However, each of our programming businesses has substantial programming acquisition and production expenditure requirements.
Sources of cash primarily include cash flow from operations, amounts available under our revolving credit facility and access to capital markets. Although we currently believe that amounts available under our revolving credit facility will be available when and if needed, we can provide no assurance that access to such funds will not be impacted by adverse conditions in the financial markets. The obligations of the financial institutions under our revolving credit facility are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others. As a public company, we may have access
to other sources of capital such as the public bond markets.
The Company's Board of Directors has authorized a program to repurchase up to $1.5 billion of its outstanding shares of common stock (the "Stock Repurchase Program"). The Stock Repurchase Program has no pre-established closing date and may be suspended or discontinued at any time. For the three months ended June 30, 2020, the Company repurchased 0.7 million shares of its Class A common stock at an average purchase price of approximately $24.68 per share. As of June 30, 2020, the Company has $385.9 million
of authorization remaining for repurchase under the Stock Repurchase Program.
Our principal uses of cash include the acquisition and production of programming, investments and acquisitions, repurchases of outstanding debt and common stock, debt service, and payments for income taxes. Although impacted by the COVID-19 pandemic, we continue to increase our investment in original programming, the funding of which generally occurs six to nine months in advance of a program's airing. In March 2020, we redeemed $200 million principal amount of the outstanding $600 million principal amount of our 4.75% Notes due 2022.
As of June 30, 2020, our consolidated cash and cash equivalents balance includes approximately $173.0 million held by foreign subsidiaries.
Most or all of the earnings of our foreign subsidiaries will continue to be permanently reinvested in foreign operations and we do not expect to incur any significant, additional taxes related to such amounts, nor have any been provided for in the current period.
We believe that a combination of cash-on-hand, cash generated from operating activities and availability under our revolving credit facility will provide sufficient liquidity to service the principal and interest payments on our indebtedness, along with our other funding and investment requirements over the next twelve months and over the longer term. However, we do not expect to generate sufficient cash from operations to repay at maturity the entirety of the then outstanding balances of our debt. As a result, we will then be dependent upon our ability to access the capital
and credit markets in order to repay or refinance the outstanding balances of our indebtedness. Failure to raise significant amounts of funding to repay these obligations at maturity would adversely affect our business. In such a circumstance, we would need to take other actions including selling assets, seeking strategic investments from third parties or reducing other discretionary uses of cash.
Our level of debt could have important consequences on our business including, but not limited to, increasing our vulnerability to general adverse economic and industry conditions, limiting the availability of our cash flow to fund future programming investments, capital expenditures, working capital, business activities and other general corporate requirements and limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate. For information relating to our outstanding debt
obligations, refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Debt Financing Agreements" of our 2019 Form 10-K.
In addition, economic or market disruptions could lead to lower demand for our services, such as lower levels of advertising. These events would adversely impact our results of operations, cash flows and financial position.
The revolving credit facility was not drawn upon at June 30, 2020. The total undrawn revolver commitment is available to be drawn for our general corporate purposes.
AMC Networks was in compliance with all of its debt covenants as of June 30, 2020.
42
Cash
Flow Discussion
The following table is a summary of cash flows provided by (used in) operating, investing and financing activities for the six months ended June 30:
Net cash provided by operating activities amounted to $424.9 million for the six months ended June 30, 2020 as compared to $288.9 million for the six months ended June 30, 2019. Net cash provided by operating activities for the six months ended June 30, 2020 primarily resulted from $776.9 million of net income before amortization of program rights, depreciation and amortization, and other non-cash items, which was partially
offset by payments for program rights of $387.0 million, a decrease in accounts payable, accrued expenses and other liabilities of $45.4 million primarily related to lower employee related liabilities and an increase in deferred carriage fees payable of $16.0 million. In addition, net cash provided by operating activities increased as a result of a decrease in accounts receivable of $55.4 million and a decrease in prepaid expense and other assets of $46.0 million primarily related to a decrease in long-term receivables. Changes in all other assets and liabilities resulted in a decrease of $4.8 million.
Net cash provided by operating activities amounted to $288.9 million for the six months ended June 30, 2019. Net cash provided by operating activities for the six months ended June
30, 2019 primarily resulted from $843.3 million of net income before amortization of program rights, depreciation and amortization, and other non-cash items, which was partially offset by payments for program rights of $443.5 million, an increase in prepaid expense and other assets of $40.0 million primarily related to an increase in long-term receivables and a decrease in accounts payable, accrued expenses and other liabilities of $58.3 million primarily related to lower employee related liabilities. Changes in all other assets and liabilities resulted in a decrease of $12.6 million.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2020 and 2019 was $10.0 million and $43.6 million, respectively. For the six months ended June 30,
2020, cash used in investing activities included capital expenditures of $22.2 million, partially offset by partial proceeds received from the sale of an investment of $10.0 million and principal payments received from a loan to an investee of $2.5 million. For the six months ended June 30, 2019, cash used in investing activities included capital expenditures of $49.5 million, partially offset by a return of capital from investees of $5.9 million.
Financing Activities
Net cash used in financing activities amounted to $336.8 million for the six months ended June 30, 2020 and primarily consisted of principal payments, net of proceeds, on long-term debt (including the redemption of $200 million of 4.75% Notes due 2022), of $212.8 million, purchases of our common stock of $102.9 million,
taxes paid in lieu of shares issued for equity-based compensation of $8.9 million, distributions to noncontrolling interests of $10.6 million, and payments on finance leases of $1.6 million.
Net cash used in financing activities amounted to $92.3 million for the six months ended June 30, 2019 and primarily consisted of purchases of our common stock of $58.4 million, taxes paid in lieu of shares issued for equity-based compensation of $23.0 million, distributions to noncontrolling interests of $10.1 million, and principal payments on debt and finance leases of $5.3 million, partially offset by proceeds from stock option exercises of $4.6 million.
43
Contractual
Obligations
As of June 30, 2020, our contractual obligations not reflected on the condensed consolidated balance sheet decreased $104.0 million, as compared to December 31, 2019, to $829.9 million. The decrease primarily relates to payments for program rights and marketing commitments.
Supplemental Guarantor Financial Information
The following is a description of the terms and conditions of the guarantees with respect to the outstanding notes for which AMC Networks is the issuer.
Note Guarantees
Debt of AMC Networks as of June 30, 2020 includes $400.0 million of 4.75% Notes due December 2022, $1.0 billion
of 5.00% Notes due April 2024 and $800.0 million of 4.75% Notes due August 2025 (collectively, the “notes”). The notes were issued by AMC Networks and are unconditionally guaranteed, jointly and severally, on an unsecured basis, by each of AMC Networks’ existing and future domestic restricted subsidiaries, subject to certain exceptions (each, a “Guarantor Subsidiary,” and collectively, the “Guarantor Subsidiaries”). The obligations of each Guarantor Subsidiary under its note guarantee are limited as necessary to prevent such note guarantee from constituting a fraudulent conveyance under applicable law. A guarantee of the notes by a Guarantor Subsidiary is subject to release in the following circumstances: (i) any sale or other disposition of all of the capital stock
of a Guarantor Subsidiary to a person that is not (either before or after giving effect to such transaction) a restricted subsidiary, in compliance with the terms of the applicable indenture; (ii) the designation of a restricted subsidiary as an “Unrestricted Subsidiary” under the applicable indenture; or (iii) the release or discharge of the guarantee (including the guarantee under the AMC Networks’ credit agreement) which resulted in the creation of the note guarantee (provided that such Guarantor Subsidiary does not have any preferred stock outstanding at such time that is not held by AMC Networks or another Guarantor Subsidiary).
Foreign subsidiaries
of AMC Networks do not and will not guarantee the notes.
The following tables present the summarized financial information specified in Rule 1-02(bb)(1) of Regulation S-X for AMC Networks and each Guarantor Subsidiary. The summarized financial information has been prepared in accordance with Rule 13-01 of Regulation S-X.
We describe our significant accounting policies in Note 2 to the Company's Consolidated Financial Statements included in our 2019 Form 10-K. Other than the adoption of ASU 2019-02 described in Note 5 to the accompanying condensed consolidated financial statements of the Company included herein, there have been no significant changes in our significant accounting policies since December 31, 2019.
We discuss our critical accounting estimates in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in the same 2019 Form 10-K. There have been no significant changes in our critical
accounting estimates since December 31, 2019.
The Company performs its annual goodwill impairment test as of December 1 each year. In addition to the annual impairment test, the Company is required to regularly assess whether a triggering event has occurred which would require an interim impairment test. The Company considered the current and expected future economic and market conditions surrounding the COVID-19 pandemic and its impact on each of its reporting units. Further, the Company assessed the current forecasts (including significant
assumptions about revenue growth rates, long-term growth rates and enterprise specific discount rates) and the amount of excess fair value over carrying value for each of its reporting units in the 2019 impairment test. In connection with the preparation of the second quarter financial information, the Company determined that a triggering event had occurred with respect to its AMCNI reporting unit, which required an interim impairment test to be performed as of June 30, 2020. As such, the Company performed a quantitative assessment for its AMCNI reporting unit. The fair value was determined using a combination of an income approach, using a discounted cash flow (DCF) model, and a market comparables approach. The DCF model includes significant assumptions
about revenue growth rates, long-term growth rates and enterprise specific discount rates. Additionally, the market comparables approach is determined using guideline company financial multiples. Given the uncertainty in determining assumptions underlying the DCF approach, actual results may differ from those used in the valuations.
Based on the valuations performed, in response to current and expected trends across the International television broadcasting markets, the fair value of the Company's AMCNI reporting unit declined below its carrying amount. As a result, in June 2020, the Company recognized an impairment charge of $25.1 million related to the AMCNI reporting unit, included in impairment charges in the condensed consolidated
income statement.
No impairment charge was required for any of the Company's other reporting units.
As we are unable to predict how long the COVID-19 pandemic conditions will persist, what additional measures may be introduced by governments or private parties or what effect any such additional measures may have on our business. If these estimates or related assumptions change in the future, we may be required to record additional impairment charges related to goodwill.
Recently Issued Accounting Pronouncements
See Note 1 to the accompanying Condensed Consolidated Financial Statements of the Company
for a discussion of recently issued accounting pronouncements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Fair Value of Debt
Based on the level of interest rates prevailing at June 30, 2020, the carrying value of our fixed rate debt of $2.18 billion was more than its fair value of $2.17 billion by approximately $5.3 million. The fair value of these financial instruments is estimated based on reference to quoted market prices for these or comparable securities. A hypothetical 100 basis point decrease in interest rates prevailing at June 30, 2020 would increase the estimated fair value of our fixed
rate debt by approximately $71.8 million to approximately $2.24 billion.
Managing our Interest Rate Risk
To manage interest rate risk, we enter into interest rate swap contracts from time to time to adjust the amount of total debt that is subject to variable interest rates. Such contracts effectively fix the borrowing rates on floating rate debt to limit the exposure against the risk of rising rates. We do not enter into interest rate swap contracts for speculative or trading purposes and we only enter into interest rate swap contracts
with financial institutions that we believe are credit worthy counterparties. We monitor the financial institutions that are counterparties to our interest rate swap contracts and to the extent possible diversify our swap contracts among various counterparties to mitigate exposure to any single financial institution.
As of June 30, 2020, we had $2.9 billion of debt outstanding (excluding finance leases), of which $0.7 billion is outstanding under our loan facility and is subject to variable interest rates (before consideration of the interest rate swaps contracts described below).
46
As
of June 30, 2020, we had interest rate swap contracts outstanding with notional amounts aggregating $100 million. The aggregate fair value of interest rate swap contracts at June 30, 2020 was a net liability of $3.6 million. As a result of these transactions, the interest rate paid on approximately 79% of our debt (excluding finance leases) as of June 30, 2020 is effectively fixed (76% being fixed rate obligations and 3% effectively fixed through utilization of these interest rate swap contracts).
A hypothetical
100 basis point increase in interest rates prevailing at June 30, 2020 would not have a material impact on our annual interest expense.
Managing our Foreign Currency Exchange Rate Risk
We are exposed to foreign currency risk to the extent that we enter into transactions denominated in currencies other than our subsidiaries' respective functional currencies (non-functional currency risk), such as affiliation agreements, programming contracts, certain trade receivables and accounts payable (including intercompany amounts) that are denominated in a currency other than the applicable functional currency. Changes in exchange rates with respect to amounts
recorded in our consolidated balance sheets related to these items will result in unrealized (based upon period-end exchange rates) or realized foreign currency transaction gains and losses upon settlement of the transactions. Moreover, to the extent that our revenue, costs and expenses are denominated in currencies other than our respective functional currencies, we will experience fluctuations in our revenue, costs and expenses solely as a result of changes in foreign currency exchange rates. The Company recognized a $6.8 million loss and $16.4 million loss net, for the three and six months ended June 30, 2020, respectively, related to foreign currency transactions. Such amounts are included in miscellaneous, net in the condensed consolidated statement of income.
To
manage foreign currency exchange rate risk, we may enter into foreign currency contracts from time to time with financial institutions to limit our exposure to fluctuations in foreign currency exchange rates. We do not enter into foreign currency contracts for speculative or trading purposes.
We also are exposed to fluctuations of the U.S. dollar (our reporting currency) against the currencies of our operating subsidiaries when their respective financial statements are translated into U.S. dollars for inclusion in our condensed consolidated financial statements. Cumulative translation adjustments are recorded in accumulated other comprehensive income (loss)
as a separate component of equity. Any increase (decrease) in the value of the U.S. dollar against any foreign currency that is the functional currency of one of our operating subsidiaries will cause us to experience unrealized foreign currency translation losses (gains) with respect to amounts already invested in such foreign currencies. Accordingly, we may experience a negative impact on our comprehensive income (loss) and equity with respect to our holdings solely as a result of changes in foreign currency exchange rates.
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
An evaluation was carried out under
the supervision and with the participation of the Company's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based upon that evaluation as of June 30, 2020, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
During
the three months ended June 30, 2020, there were no changes in the Company's internal control over financial reporting, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
47
PART II. OTHER INFORMATION
Item 1. Legal
Proceedings.
Since our 2019 Form 10-K, there have been no material developments in legal proceedings in which we are involved. See Note 14, Commitments and Contingencies to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors
In addition to the other information set forth in this Form 10-Q, you should carefully consider the risk factors disclosed under the caption “Risk Factors” in our 2019 Form 10-K, as well as the following additional risk factor.
General Risks
The COVID-19 pandemic has significantly impacted worldwide economic conditions and could have
a material adverse effect on our operations and business
In March 2020, the World Health Organization characterized the novel coronavirus ("COVID-19") a pandemic, and the President of the United States declared the COVID-19 outbreak a national emergency. The rapid spread of the pandemic and the continuously evolving responses to combat it have had an increasingly negative impact on the global economy.
The impact of COVID-19 and measures to prevent its spread are affecting our businesses in a number of ways. To date, we have experienced adverse advertising sales impacts, suspended content production, which has led to delays in the creation and availability of some of our television programming, and the temporary closure of our comedy venues.
Operationally, nearly all of our employees are working remotely, and we have restricted
business travel. If significant portions of our workforce, including key personnel, are unable to work effectively because of illness, government actions or other restrictions in connection with the COVID-19 pandemic, the impact of the pandemic on our businesses could be exacerbated. In addition, the remote work environment has placed additional strain on our resources and the effects of the COVID-19 pandemic will heighten the other risks described in the section entitled “Risk Factors” in our 2019 Form 10-K, including evolving cybersecurity risks, which could result in the disclosure, theft or destruction of confidential information, disruption of our programming, damage to our brands and reputation, legal exposure and financial losses.
The Company has evaluated and continues to evaluate the potential impact of the COVID-19 pandemic
on its consolidated financial statements, including the impairment of goodwill (see Note 7) and indefinite-lived intangible assets and the fair value and collectibility of receivables. The COVID-19 pandemic has had a material impact on the Company's operations since mid-March 2020. The Company cannot reasonably predict the ultimate impact of the COVID-19 pandemic, including the extent of any adverse impact on our business, results of operations and financial condition, which will depend on, among other things, the duration and spread of the pandemic, the impact of governmental regulations that have been, and may continue to be, imposed in response to the pandemic, the effectiveness of actions taken to contain or mitigate the outbreak, the availability, safety and efficacy of a vaccine, and global
economic conditions. The COVID-19 pandemic may also affect our business, operations or financial condition in a manner that is not presently known to us or that we currently do not consider to present significant risks. In addition, the COVID-19 pandemic may also exacerbate other risks described in Item 1A, "Risk Factors" in our 2019 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The
Company's Board of Directors has authorized a program to repurchase up to $1.5 billion of its outstanding shares of common stock (the "Stock Repurchase Program"). The authorization of up to $500 million was announced on March 7, 2016, an additional authorization of $500 million was announced on June 7, 2017, and an additional authorization of $500 million was announced on June 13, 2018. The Stock Repurchase Program has no pre-established closing date and may be suspended or discontinued at any time.
Set forth below is information concerning acquisitions of AMC Networks Class A Common Stock by the Company during the three months ended June 30,
2020.
Period
Total Number of Shares (or Units) Purchased
Average Price Paid per Share (or Unit)
Total
Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within Inline XBRL document.
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101).
49
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
