AMC NETWORKS INC. 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 theU.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 theU.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; 22 -------------------------------------------------------------------------------- •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 theSecurities 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 toAMC 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 months endedMarch 31, 2020 compared to the three months endedMarch 31, 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 ofMarch 31, 2020 , as well as an analysis of our cash flows for the three months endedMarch 31, 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 atMarch 31, 2020 as compared toDecember 31, 2019 . Critical Accounting Policies and Estimates. This section provides an update, if any, to our significant accounting policies or critical accounting estimates sinceDecember 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 andAMC Broadcasting & Technology . Our national programming networks are AMC, WE tv, BBC AMERICA, IFC, and SundanceTV and also include our AMC Premiere service. OurAMC 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, and UMC; Levity, our production services and comedy venues business; andIFC Films , our independent film distribution business. 23
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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.
Three Months Ended March 31,
(In thousands) 2020 2019
Revenues, net
National Networks $ 566,939 $ 616,118
International and Other 170,494 171,088
Inter-segment eliminations (3,058) (2,985)
Consolidated revenues, net $ 734,375 $ 784,221
Operating income (loss)
National Networks $ 195,224 $ 251,502
International and Other (19,450) (13,748)
Inter-segment eliminations (2,804) 7,109
Consolidated operating income $ 172,970 $ 244,863
AOI
National Networks $ 217,587 $ 276,686
International and Other 7,671 9,941
Inter-segment eliminations (2,804) 6,413
Consolidated AOI $ 222,454 $ 293,040
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 and related 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:
Three Months Ended March 31,
(In thousands) 2020 2019
Operating income $ 172,970 $ 244,863
Share-based compensation expense 15,512 19,899
Depreciation and amortization 26,730 24,056
Restructuring and other related charges 5,966 2,642
Majority owned equity investees AOI 1,276 1,580
AOI $ 222,454 $ 293,040
24-------------------------------------------------------------------------------- Impact of COVID-19 on Our Business InMarch 2020 , theWorld Health Organization characterized the novel coronavirus ("COVID-19") a pandemic, and the President ofthe 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 and suspended content production, which has led to delays in the creation and availability of some of our television programming. 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 ultimate impact of the COVID-19 pandemic, including the extent of any adverse impact on our business, results of operations and financial condition, 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, and global economic conditions. Although the effect of the pandemic may not be fully reflected in the Company's business until future periods, the Company believes that the adverse impact of the COVID-19 pandemic will be material to its results of operations. 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. 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 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. There were no program rights write-offs, included in technical and operating expense, for the three months endedMarch 31, 2020 . Program rights write-offs for the three months 25 -------------------------------------------------------------------------------- endedMarch 31, 2019 were$3.3 million . International and Other Our International and Other segment primarily includes the operations of AMCNI, AMC Networks SVOD, Levity, andIFC 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 ourAMC Networks SVOD business, (iii) the distribution of content ofIFC 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 three months endedMarch 31, 2020 , distribution revenues represented 89% 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 inEurope and to a lesser extent,Latin America as well as from our owned subscription streaming services available inthe United States ,Canada ,Latin America , parts ofEurope ,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. 26
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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. Three Months EndedMarch 31, 2020 Compared to Three Months EndedMarch 31, 2019 The following table sets forth our consolidated results of operations for the periods indicated.
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