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 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, streaming and programming industries; •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 film distribution businesses; •market demand for our owned original programming and our film content; •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 security of our program rights and other electronic data; •our ability to maintain and renew distribution or affiliation agreements with distributors; •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; •the impact of existing and proposed federal, state and international laws and regulations relating to data protection, privacy and security, including theEuropean Union's General Data Protection Regulation ("GDPR"); •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 and streaming businesses; •financial community and rating agency perceptions of our business, operations, financial condition and the industry in which we operate; •events that are outside our control, such as political unrest in international markets, terrorist attacks, natural disasters and other similar events; and 23 -------------------------------------------------------------------------------- •the factors described under Item 1A, "Risk Factors" in our 2020 Annual Report on Form 10-K (the "2020 Form 10-K"), as filed with theSecurities and Exchange Commission ("SEC"). 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 2020 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 and six months endedJune 30, 2021 compared to the three and six months endedJune 30, 2020 . Our discussion is presented on both a consolidated and operating segment basis. Our two operating segments are: (i) Domestic Operations and (ii) International and Other. Liquidity and Capital Resources. This section provides a discussion of our financial condition as ofJune 30, 2021 , as well as an analysis of our cash flows for the six months endedJune 30, 2021 and 2020. The discussion of our financial condition and liquidity includes summaries of (i) our primary sources of liquidity and (ii) our contractual obligations that existed atJune 30, 2021 as compared toDecember 31, 2020 . Critical Accounting Policies and Estimates. This section provides an update, if any, to our significant accounting policies or critical accounting estimates sinceDecember 31, 2020 . Business Overview Segment Reporting Changes In the first quarter of 2021, we changed our presentation of operating segments, reflecting a reorganized operating structure focused on a multi-platform distribution approach to content monetization. Our streaming services andIFC Films , previously included in the International and Other segment, are now included within Domestic Operations (formerly referred to as the National Networks segment). In addition, certain corporate overhead costs will no longer be allocated to the operating segments. Operating segment information for the prior period has been recast to reflect these changes. The new reporting structure consists of the following two operating segments: •Domestic Operations: Includes activities of our five national programming networks, our streaming services,AMC Studios operation,IFC Films andAMC Broadcasting & Technology . Our national programming networks are AMC, WE tv,BBC AMERICA, IFC, and SundanceTV. Our streaming services consist of our targeted subscription streaming services (Acorn TV, Shudder, Sundance Now, and ALLBLK), AMC+ and other streaming initiatives. OurAMC Studios operation produces original programming for our programming networks and also licenses such programming worldwide.IFC Films is our film distribution business andAMC 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 and 25/7 Media (formerly Levity), our production services business. See Note 4 to the unaudited condensed consolidated financial statements for additional information relating to the spin-off of the Levity comedy venues business. 24 -------------------------------------------------------------------------------- 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 June 30, Six Months Ended June 30, (In thousands) 2021 2020 2021 2020 Revenues, net Domestic Operations$ 639,015 $
562,932
138,277 90,682 259,444 215,510
Inter-segment Eliminations (5,900) (7,323) (9,295) (9,669)
Consolidated revenues, net $ 771,392 $
646,291
$ 88,116 $
217,586
19,963 (125,562) 16,801 (121,201)
Corporate / Inter-segment Eliminations (39,823) (43,222) (83,412) (99,214)
Consolidated operating income $ 68,256 $
48,802
$ 250,140 $
236,353
25,105 15,583 48,668 33,426
Corporate / Inter-segment Eliminations (24,608) (26,658) (52,725) (63,080)
Consolidated AOI $ 250,637 $ 225,278 $ 488,616 $ 447,732
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 other 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.
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--------------------------------------------------------------------------------The following is a reconciliation of consolidated operating income to AOI for the periods indicated:
Three Months Ended June 30, Six Months Ended June 30,
(In thousands) 2021 2020 2021 2020
Operating income $ 68,256 $ 48,802 $ 237,964 $ 221,772
Share-based compensation expense 16,262 15,235 29,708 30,747
Depreciation and amortization 22,604 25,905 47,850 52,635
Restructuring and other related charges 155 3,507 8,780 9,473
Impairment and other charges 142,918 130,411 158,973 130,411
Cloud computing amortization 642 - 906 -
Majority-owned equity investees AOI (200) 1,418 4,435 2,694
AOI $ 250,637 $ 225,278 $ 488,616 $ 447,732
Domestic Operations
In our Domestic Operations segment, we earn revenue principally from: (i) the
distribution of our programming, through our programming networks and owned
subscription streaming services, (ii) the sale of advertising, and (iii) the
licensing of our original programming to distributors, including the
distribution of programming of IFC Films . Distribution revenue primarily
includes subscription fees paid by distributors to carry our programming
networks and streaming services, 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 for our
programming networks 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 programming services, but are generally
based upon the number of each distributor's subscribers who receive our
programming, referred to as viewing subscribers. Subscription fees for our
streaming services are paid on a monthly basis. 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 Domestic Operations 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.
The success of our business depends on original programming, both scripted and
unscripted, across all of our programming services. These original 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.
International and Other
Our International and Other segment primarily includes the operations of AMCNI
and 25/7 Media (formerly Levity).
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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 through
production services from 25/7 Media. For the six months ended June 30, 2021 ,
distribution revenues represented 82% 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 and production
services revenue generated from 25/7 Media. 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. 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 .
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.
Corporate / Inter-segment Eliminations
Corporate operations primarily consist of executive management and
administrative support services, such as executive salaries and benefits costs,
costs of maintaining corporate headquarters, facilities and common support
functions (such as human resources, legal, finance, strategic planning and
information technology). 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 COVID-19 on Our Business
The Company continues to monitor the ongoing impact of the COVID-19 pandemic on
all aspects of its business. 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 vaccines, 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.
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 services from
our distributors. Events such as these may adversely impact our results of
operations, cash flows and financial position.
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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 EndedJune 30, 2021 Compared to Three Months EndedJune 30, 2020 The following table sets forth our consolidated results of operations for the periods indicated.
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