10-Q 1 amcx-3312018x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
þ
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2018
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from          to
Commission File Number: 1-35106
 
AMC Networks Inc.
(Exact name of registrant as specified in its charter)
 
Delaware
27-5403694
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
 
11 Penn Plaza,
New York, NY
10001
(Address of principal executive offices)
(Zip Code)
(212) 324-8500
(Registrant's telephone number, including area code)
 
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.    Yes  þ    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, 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).    Yes  þ    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).
Large accelerated filer
þ
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
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  ¨    No  þ
The number of shares of common stock outstanding as of May 4, 2018:
Class A Common Stock par value $0.01 per share
45,975,467
Class B Common Stock par value $0.01 per share
11,484,408




AMC NETWORKS INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
 




PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements.
AMC NETWORKS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
(unaudited)
 
March 31, 2018
 
December 31, 2017
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
529,200

 
$
558,783

Accounts receivable, trade (including amounts due from related parties, net, less allowance for doubtful accounts of $9,687 and $9,691)
793,275

 
775,891

Current portion of program rights, net
464,921

 
453,450

Prepaid expenses and other current assets
102,058

 
91,726

Total current assets
1,889,454

 
1,879,850

Property and equipment, net of accumulated depreciation of $271,443 and $259,919
185,440

 
183,514

Program rights, net
1,279,589

 
1,319,279

Deferred carriage fees, net
27,172

 
29,924

Intangible assets, net
452,395

 
457,242

Goodwill
707,654

 
695,158

Deferred tax asset, net
21,731

 
20,081

Other assets
549,932

 
447,937

Total assets
$
5,113,367

 
$
5,032,985

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable
$
96,816

 
$
102,197

Accrued liabilities
235,301

 
263,076

Current portion of program rights obligations
326,862

 
327,549

Deferred revenue
51,916

 
46,433

Current portion of capital lease obligations
4,771

 
4,847

Total current liabilities
715,666

 
744,102

Program rights obligations
491,527

 
534,980

Long-term debt
3,101,138

 
3,099,257

Capital lease obligations
25,233

 
26,277

Deferred tax liability, net
145,159

 
109,698

Other liabilities
153,167

 
136,122

Total liabilities
4,631,890

 
4,650,436

Commitments and contingencies


 


Redeemable noncontrolling interests
220,366

 
218,604

Stockholders' equity:
 
 
 
Class A Common Stock, $0.01 par value, 360,000 shares authorized, 63,139 and 62,721 shares issued and 48,372 and 49,601 shares outstanding, respectively
631

 
627

Class B Common Stock, $0.01 par value, 90,000 shares authorized, 11,484 shares issued and outstanding
115

 
115

Preferred stock, $0.01 par value, 45,000 shares authorized; none issued

 

Paid-in capital
182,278

 
191,303

Accumulated earnings
936,379

 
766,725

Treasury stock, at cost (14,767 and 13,120 shares Class A Common Stock, respectively)
(793,078
)
 
(709,440
)
Accumulated other comprehensive loss
(95,581
)
 
(114,386
)
Total AMC Networks stockholders' equity
230,744

 
134,944

Non-redeemable noncontrolling interests
30,367

 
29,001

Total stockholders' equity
261,111

 
163,945

Total liabilities and stockholders' equity
$
5,113,367

 
$
5,032,985

See accompanying notes to condensed consolidated financial statements.

1


AMC NETWORKS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Revenues, net (including revenues, net from related parties of $1,627 and $1,567, respectively)
$
740,823

 
$
720,189

Operating expenses:
 
 
 
Technical and operating (excluding depreciation and amortization)
320,365

 
298,612

Selling, general and administrative (including charges from related parties of $462 and $575, respectively)
166,449

 
163,709

Depreciation and amortization
20,354

 
23,493

Restructuring expense

 
2,704

Total operating expenses
507,168

 
488,518

Operating income
233,655

 
231,671

Other income (expense):
 
 
 
Interest expense
(38,205
)
 
(30,500
)
Interest income
5,019

 
3,493

Miscellaneous, net
16,946

 
11,049

Total other income (expense)
(16,240
)
 
(15,958
)
Income from operations before income taxes
217,415

 
215,713

Income tax expense
(56,879
)
 
(73,082
)
Net income including noncontrolling interests
160,536

 
142,631

Net income attributable to noncontrolling interests
(3,666
)
 
(6,414
)
Net income attributable to AMC Networks' stockholders
$
156,870

 
$
136,217

 
 
 
 
Net income per share attributable to AMC Networks' stockholders:
 
 
 
Basic
$
2.57

 
$
2.00

Diluted
$
2.54

 
$
1.98

 
 
 
 
Weighted average common shares:
 
 
 
Basic weighted average common shares
60,967

 
68,020

Diluted weighted average common shares
61,719

 
68,764

See accompanying notes to condensed consolidated financial statements.

2


AMC NETWORKS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
 
 
Three Months Ended March 31,
 
2018
 
2017
Net income including noncontrolling interests
$
160,536

 
$
142,631

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustment
18,805

 
9,864

Unrealized gain on interest rate swaps

 
319

Unrealized gain on available for sale securities

 
4,021

Other comprehensive income, before income taxes
18,805

 
14,204

Income tax expense

 
(1,597
)
Other comprehensive income, net of income taxes
18,805

 
12,607

Comprehensive income
179,341

 
155,238

Comprehensive income attributable to noncontrolling interests
(4,563
)
 
(6,805
)
Comprehensive income attributable to AMC Networks' stockholders
$
174,778

 
$
148,433

See accompanying notes to condensed consolidated financial statements.

3


AMC NETWORKS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income including noncontrolling interests
$
160,536

 
$
142,631

Adjustments to reconcile income from operations to net cash from operating activities:
 
 
 
Depreciation and amortization
20,354

 
23,493

Share-based compensation expense related to equity classified awards
15,319

 
12,464

Amortization and write-off of program rights
218,626

 
199,517

Amortization of deferred carriage fees
4,401

 
4,401

Unrealized foreign currency transaction gain
(4,582
)
 
(754
)
Unrealized gain on derivative contracts, net
(13,984
)
 
(11,486
)
Amortization of deferred financing costs and discounts on indebtedness
1,881

 
2,282

Bad debt expense
914

 
961

Deferred income taxes
31,800

 
4,061

Other, net
(2,348
)
 
278

Changes in assets and liabilities:
 
 
 
Accounts receivable, trade (including amounts due from related parties, net)
(17,877
)
 
(15,980
)
Prepaid expenses and other assets
(5,512
)
 
(18,160
)
Program rights and obligations, net
(248,642
)
 
(211,280
)
Income taxes payable
15,723

 
57,627

Deferred revenue
4,980

 
(11,104
)
Deferred carriage fees, net
(1,610
)
 
(430
)
Accounts payable, accrued liabilities and other liabilities
(63,007
)
 
(33,651
)
Net cash provided by operating activities
116,972

 
144,870

Cash flows from investing activities:
 
 
 
Capital expenditures
(11,942
)
 
(20,206
)
Return of capital from investees
172

 

Investment in and loans to investees
(42,318
)
 
(28,000
)
Net cash used in investing activities
(54,088
)
 
(48,206
)
Cash flows from financing activities:
 
 
 
Principal payments on long-term debt

 
(55,500
)
Deemed repurchases of restricted stock units
(15,354
)
 
(12,796
)
Purchase of treasury stock
(83,637
)
 
(91,423
)
Principal payments on capital lease obligations
(1,406
)
 
(1,401
)
Distributions to noncontrolling interests
(1,435
)
 
(11,712
)
Net cash used in financing activities
(101,832
)
 
(172,832
)
Net decrease in cash and cash equivalents from operations
(38,948
)
 
(76,168
)
Effect of exchange rate changes on cash and cash equivalents
9,365

 
(1,573
)
Cash and cash equivalents at beginning of period
558,783

 
481,389

Cash and cash equivalents at end of period
$
529,200

 
$
403,648


See accompanying notes to condensed consolidated financial statements.

4

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


Note 1. Description 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 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 in the U.S.; and AMC and IFC in Canada. 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: Principally includes AMC Networks International (AMCNI), the Company's international programming businesses consisting of a portfolio of channels in Europe, Latin America, the Middle East and parts of Asia and Africa; IFC Films, the Company's independent film distribution business; and our subscription streaming services, Sundance Now and Shudder. AMCNI – DMC, the broadcast solutions unit of certain networks of AMCNI and third-party networks is included through the date sold, July 12, 2017.
Basis of Presentation
Principles of Consolidation
These unaudited condensed consolidated financial statements include the accounts of AMC Networks and its majority owned or controlled subsidiaries. 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, 2017 contained in the Company's Annual Report on Form 10-K ("2017 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, 2018.
Program Rights
The Company periodically reviews the programming usefulness of its licensed and owned original program rights based on a series of 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, a write-off of the unamortized cost is included in technical and operating expense. Program rights write-offs were $5.2 million and $0.4 million for the three months ended March 31, 2018 and March 31, 2017, respectively.
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 derivative assets and liabilities, certain stock compensation awards, the useful lives and methodologies used to amortize and assess recoverability of program rights, the estimated useful lives of intangible assets, valuation and recoverability of goodwill and intangible assets and income tax assets and liabilities.
Financial Assets and Liabilities
The Company adopted Accounting Standards Update ("ASU") No. 2016-01 Financial Instruments-Recognition and Measurement of Financial Assets and Financial Liabilities on January 1, 2018, which requires that investments in equity securities

5

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

(excluding equity method investments) be measured at fair value with changes in fair value recognized in net earnings. Under prior accounting guidance, changes in fair value of available-for-sale equity securities were recorded in other comprehensive income. The adoption did not have a significant impact to these condensed consolidated financial statements.
Adoption of New Revenue Recognition Standard
The Company adopted ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) on January 1, 2018, using the modified retrospective method for all contracts not completed as of the date of adoption. The reported results as of and for the three-month period ended March 31, 2018 reflect the application of the new standard, while the reported results for 2017 have not been adjusted to reflect the new standard and were prepared under prior revenue recognition accounting guidance.
The adoption of the new standard did not result in significant changes in the way the Company records distribution and advertising revenues. However, as a result of applying the new standard, there are certain components of the Company’s distribution revenues where the new standard generally results in earlier recognition of revenue compared to its historical policies due to: (i) the requirement to estimate and recognize variable consideration prior to such amounts becoming fixed and determinable, (ii) recognition of royalties in the period of usage, and (iii) recognition of certain arrangements with minimum guarantees on a time-based (straight-line) basis. See Note 2 for more information. As a result of adopting Topic 606, the Company recorded an increase to opening retained earnings of approximately $12.8 million, net of tax, as of January 1, 2018.
The following table provides changes to the opening balances of current assets, total assets, current liabilities and total liabilities resulting from the adoption of the new guidance.
(In thousands)
 
December 31,
2017
 
Impact of
Adoption
 
January 1,
2018
Current assets
 
$
1,879,850

 
$
3,658

 
$
1,883,508

Total assets
 
5,032,985

 
19,899

 
5,052,884

Current liabilities
 
744,102

 
835

 
744,937

Total liabilities
 
4,650,436

 
7,115

 
4,657,551

The amount by which each financial statement line item has been affected in the current reporting period by the application of Topic 606 compared to historical policies is not material, therefore, comparative disclosures have been omitted.
Recently Issued Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 requires lessees to record most of their leases on the balance sheet, which will be recognized as a right-of-use asset and a lease liability. The Company will be required to classify each separate lease component as an operating or finance lease at the lease commencement date. Initial measurement of the right-of-use asset and lease liability is the same for operating and finance leases, however expense recognition and amortization of the right-of-use asset differs. Operating leases will reflect lease expense on a straight-line basis similar to current operating leases. The straight-line expense will reflect the interest expense on the lease liability (effective interest method) and amortization of the right-of-use asset, which will be presented as a single line item in the operating expense section of the income statement. Finance leases will reflect a front-loaded expense pattern similar to the pattern for current capital leases. ASU 2016-02 is effective for the first quarter of 2019, with early adoption permitted. The Company is currently determining its implementation approach and assessing the impact the adoption will have on its consolidated financial statements.
Note 2. Revenue Recognition
Revenue is recognized when, or as, performance obligations under the terms of a contract are satisfied, which generally occurs when, or as, control of the promised products or services is transferred to customers. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or services to a customer ("transaction price"). To the extent the transaction price includes variable consideration, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing the most likely amount to which the Company expects to be entitled. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information that is reasonably available. Amounts collected on behalf of others (including taxes), where the Company is an agent, are excluded from revenue.

6

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

When determining the transaction price of a contract, an adjustment is made if payment from a customer occurs either significantly before or significantly after performance, resulting in a significant financing component. Applying a practical expedient in the new standard, the Company does not assess whether a significant financing component exists if the period between when the Company performs its obligations under the contract and when the customer pays is one year or less.
Contracts with customers may contain multiple performance obligations. For such arrangements, the transaction price is allocated to each performance obligation based on the estimated relative standalone selling prices of the promised products or services underlying each performance obligation. The Company determines standalone selling prices based on the price at which the performance obligation is sold separately. If the standalone selling price is not observable through past transactions, the Company estimates the standalone selling price considering available information such as market conditions and internal pricing guidelines related to the performance obligations.
Contracts may be modified to account for changes in contract specifications and requirements. Contract modifications exist when the modification either creates new or changes existing enforceable rights and obligations. The effect of a contract modification on the transaction price and measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue (either as an increase in or a reduction of revenue) on a cumulative catch-up basis.
The Company primarily earns revenue from the distribution of its programming services, including licensing of its programming and other content, and advertising. The Company’s revenue recognition policies that summarize the nature, amount, timing and uncertainty associated with each major source of revenue from contracts with customers is described below.
Distribution
The majority of the Company’s distribution revenues relate to sales-based and usage-based royalties which are recognized the later of (i) when the subsequent sale or usage occurs and (ii) the performance obligation to which some or all of the sales-based or usage-based royalty has been allocated has been satisfied or partially satisfied. Occasionally, the Company incurs costs to obtain a distribution contract and these costs are amortized over the period of the related distribution contract as a reduction of revenue.
Subscription fee revenue: Subscription fees are earned from cable and other multichannel video programming distribution platforms, including direct broadcast satellite ("DBS"), platforms operated by telecommunications providers and virtual multichannel video programming distributors (collectively "distributors"), for the rights to use the Company's network programming under multi-year contracts, commonly referred to as "affiliation agreements." The Company's performance obligations under affiliation agreements are satisfied as the Company provides its programming over the term of the agreement. The transaction price is represented by subscription fees that are generally based upon (i) contractual rates applied to the number of the distributor's subscribers who receive or can receive our programming ("rate-per-subscriber"), or (ii) fixed contractual monthly fees ("fixed fee").
For rate-per-subscriber agreements, the Company applies the sales-based or usage-based royalty guidance, and accordingly, recognizes revenue in the period of the distributor’s usage, based on the subscription fee earned during the period.
Fixed fee affiliation agreements are generally billed in monthly installments, and such amounts may vary over the term of the contract. In cases where the invoice amount corresponds directly with the value to the affiliate of the performance to-date, the Company recognizes revenue based on the invoiced amount. In cases where changes in fees during the contract term do not correspond directly to the value of the performance to-date (for example, if the fees vary over the contract term due to a significant financing or credit risk component), the Company recognizes the total amount of fixed transaction price over the contract period using a time-based (e.g., straight-line) measure of progress.
Certain of the Company’s fixed fee affiliation agreements contain guaranteed minimum fees that are recoupable during the term of the agreement, and variable fees based on rates-per-subscriber after the guaranteed minimum is recouped. The Company recognizes revenue for the fixed consideration over the minimum guarantee period and recognizes variable fees only when cumulative consideration exceeds the minimum guarantee.
Subscription revenue from the Company's direct-to-consumer subscription streaming services is recognized as the streaming service is provided to customers.
Content licensing revenue: The Company licenses its original programming content to certain distributors under subscription video on-demand ("SVOD"), pay-per-view ("PPV") and electronic sell-through ("EST") arrangements. Under these arrangements, our performance obligation is to provide the distributor the right to use our programming as it exists at a point in time.
For SVOD arrangements, the Company adjusts the transaction price for the time value of money in cases where license fees are paid over several years. SVOD licensing revenue is recognized at the later of the beginning of the license period, or when we provide the programming to the distributor. The Company recognizes a contract asset for the difference between the revenue recognized and the amount we are permitted to invoice.

7

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

For PPV and EST license fee arrangements, the Company applies the sales-based or usage-based royalty guidance and recognizes revenue in the period of end-customer purchases, based on the fees earned during the period.
The Company also licenses trademarks, logos, brands, derivative character copyrights, etc. under multi-year arrangements. Under these arrangements, the Company may receive a non-refundable minimum guarantee that is recoupable against a volume-based royalty throughout the term of the agreement. The Company adjusts the transaction price for the time value of money in cases where license fees are paid over several years. The Company recognizes revenue for the minimum guarantee on a straight-line basis over the term of the agreement, and recognizes variable fees only when cumulative consideration exceeds the minimum guarantee.
The Company’s payment terms vary by the type and location of customer. Generally, payment terms are 30-45 days after revenue is earned. In certain limited circumstances, agreements with customers have payment terms in excess of one-year after satisfaction of the performance obligation.
Advertising
The Company generates revenues from the sale of advertising time on its networks. In such arrangements, the Company generally promises to air a certain number of commercials (spots) and to generate guaranteed viewer ratings for an audience demographic (impressions) over a period that generally does not exceed one year. The promise to deliver impressions by airing spots represents the Company’s performance obligation. Advertising revenues are recognized, net of agency commissions, as commercials are aired, to the extent that guaranteed viewer ratings are achieved. A contract liability is recognized to the extent the guaranteed viewer ratings are not met, and is subsequently recognized as revenue either when the Company provides the required additional advertising or the guarantee obligation contractually expires, which is generally within one year. Generally, payment terms are 30 days after revenue is earned.
Transaction Price Allocated to Future Performance Obligations
The new standard requires disclosure of the aggregate amount of transaction price that is allocated to performance obligations that have not yet been satisfied as of March 31, 2018. However, the guidance does not apply to sales-based or usage-based royalty arrangements and also provides certain practical expedients that allow companies to omit this disclosure requirement for (i) contracts with an original expected length of one year or less, (ii) contracts for which revenue is recognized at the amount to which the Company has the right to invoice for services performed and (iii) variable consideration related to a wholly unsatisfied performance obligation.
As of March 31, 2018, other than contracts for which the Company has applied the practical expedients, the aggregate amount of transaction price allocated to remaining performance obligations was not material to our consolidated revenues.
Contract Balances from Contracts with Customers
The timing of revenue recognition, billings and cash collections results in billed receivables, contract assets and contract liabilities on the Consolidated Balance Sheet.
For certain types of contracts with customers, the Company may recognize revenue in advance of the contractual right to invoice the customer, resulting in an amount recorded to contract assets. Once the Company has an unconditional right to consideration under a contract, the contract assets are reclassified to account receivables.
When consideration is received, or such consideration is unconditionally due, from a customer prior to transferring goods or services to the customer under the terms of a contract, a contract liability is recorded. Contract liabilities are recognized as revenue when, or as, control of the products or services is transferred to the customer and all revenue recognition criteria have been met. The primary source of the Company’s contract liabilities relates to advertising sales arrangements and content licensing arrangements. As noted above, the Company’s programming networks generally guarantee viewer ratings for its programming. If these guaranteed viewer ratings are not met, the Company is required to provide additional advertising units to the advertiser. For these types of arrangements, a portion of the related revenue is deferred if the guaranteed ratings are not met, representing a contract liability, and is subsequently recognized either when the Company provides the required additional advertising time or the guarantee obligation contractually expires. In certain content licensing arrangements, payment may be received in advance of a distributor's ability to exhibit a program. Such payments are recorded as a contract liability and subsequently recognized when the program becomes available for exhibition.

8

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers.
(In thousands)
 
March 31, 2018
 
December 31, 2017 (a)
Balances from contracts with customers:
 
 
 
 
     Accounts receivable (including long-term, included in Other assets)
 
$
981,266

 
$
926,089

     Contract assets, short-term (included in Other current assets)
 
1,891

 

     Contract assets, long-term (included in Other assets)
 
14,646

 

    Contract liabilities (Deferred revenue)
 
51,916

 
46,433

(a)
As noted above, prior period amounts have not been adjusted under the modified retrospective method.
Revenue recognized for the three months ended March 31, 2018 relating to the contract liability at December 31, 2017 was $12.2 million.
Note 3. Net Income per Share
The following is a reconciliation between basic and diluted weighted average shares outstanding:
(In thousands)
Three Months Ended March 31,
2018
 
2017
Basic weighted average common shares outstanding
60,967

 
68,020

Effect of dilution:
 
 
 
Restricted stock units
752

 
744

Diluted weighted average common shares outstanding
61,719

 
68,764

For the three months ended March 31, 2018, there were 388,000 stock options and 170,000 restricted stock units that would have been anti-dilutive to the diluted weighted average common shares outstanding. Approximately 195,000 and 175,000 restricted stock units for the three months ended March 31, 2018 and March 31, 2017, 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. The Company did not include performance restricted stock units in the calculation of diluted EPS, since the performance conditions for these awards were not met.
Stock Repurchase Program
On March 7, 2016, the Company announced that its Board of Directors authorized a program to repurchase up to $500 million of its outstanding shares of common stock (the "2016 Stock Repurchase Program"). On June 6, 2017, the Board of Directors approved an increase of $500 million in the amount authorized for a total of $1.0 billion authorized under the 2016 Stock Repurchase Program. The 2016 Stock Repurchase Program has no pre-established closing date and may be suspended or discontinued at any time. For the three months ended March 31, 2018, the Company repurchased 1.6 million shares of its Class A common stock at an average purchase price of approximately $50.77 per share. As of March 31, 2018, the Company has $258.9 million available for repurchase under the 2016 Stock Repurchase Program.
Note 4. Investments
The Company holds several investments and loans in non-consolidated entities. Equity method investments were $81.4 million at March 31, 2018 and $61.3 million at December 31, 2017. Cost method investments were $71.8 million at March 31, 2018 and $46.8 million at December 31, 2017. Equity and cost method investments are included in Other assets in the condensed consolidated balance sheet.
RLJE
On January 5, 2018, a subsidiary of the Company entered into a Stock Purchase Agreement (the "Stock Purchase Agreement") with JH Partners Evergreen Fund, L.P., Forrestal, LLC, JH Investment Partners III, L.P., and JH Investment Partners GP Fund III, LLC (collectively, "JH Partners"). Under the terms of the Stock Purchase Agreement, the Company purchased (i) 678,095 shares of common stock of RLJ Entertainment, Inc., ("RLJE"), (ii) 747,945 warrants to purchase shares of common stock of RLJE with an adjusted exercise price of $1.50 per share issued, and (iii) 7,479.432 shares of Series D-1 preferred stock of RLJE. The total purchase price was $17.2 million.

9

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

On February 26, 2018, the Company delivered a letter to RLJE pursuant to which the Company proposed to acquire all of the outstanding shares of RLJE not currently owned by the Company or entities affiliated with Robert L. Johnson for a purchase price of $4.25 per share in cash. Through this offer, the Company intends for RLJE to become a majority-owned subsidiary of the Company, with a minority stake held by Mr. Johnson. The board of directors of RLJE has formed a special committee of independent directors to consider the proposal. There can be no assurance that the proposal made by the Company to RLJE will result in a transaction or the terms upon which any transaction may occur.
Other Investments
On March 5, 2018, the Company made an investment in fuboTV Inc. of $25.0 million, which is accounted for as a cost method investment.
Note 5. Goodwill and Other Intangible Assets
The carrying amount of goodwill, by operating segment is as follows:
(In thousands)
National Networks
 
International
and Other
 
Total
December 31, 2017
$
239,759

 
$
455,399

 
$
695,158

Amortization of "second component" goodwill
(328
)
 

 
(328
)
Foreign currency translation

 
12,824

 
12,824

March 31, 2018
$
239,431

 
$
468,223

 
$
707,654

The reduction of $0.3 million in the carrying amount of goodwill for the 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.

10

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

The following tables summarize information relating to the Company's identifiable intangible assets:
(In thousands)
March 31, 2018
 
 
Gross
 
Accumulated
Amortization
 
Net
 
Estimated Useful Lives
Amortizable intangible assets:
 
 
 
 
 
 
 
Affiliate and customer relationships
$
532,555

 
$
(177,019
)
 
$
355,536

 
6 to 25 years
Advertiser relationships
46,282

 
(14,457
)
 
31,825

 
11 years
Trade names
55,201

 
(15,422
)
 
39,779

 
20 years
Other amortizable intangible assets
11,704

 
(6,349
)
 
5,355

 
2 to 15 years
Total amortizable intangible assets
645,742

 
(213,247
)
 
432,495

 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
Trademarks
19,900

 

 
19,900

 
 
Total intangible assets
$
665,642

 
$
(213,247
)
 
$
452,395

 
 
(In thousands)
December 31, 2017
 
 
Gross
 
Accumulated
Amortization
 
Net
 
 
Amortizable intangible assets:
 
 
 
 
 
 
 
Affiliate and customer relationships
$
527,713

 
$
(167,911
)
 
$
359,802

 
 
Advertiser relationships
46,282

 
(13,405
)
 
32,877

 
 
Trade names
53,761

 
(14,420
)
 
39,341

 
 
Other amortizable intangible assets
11,401

 
(6,079
)
 
5,322

 
 
Total amortizable intangible assets
639,157

 
(201,815
)
 
437,342

 
 
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
Trademarks
19,900

 

 
19,900

 
 
Total intangible assets
$
659,057

 
$
(201,815
)
 
$
457,242

 
 
Aggregate amortization expense for amortizable intangible assets for the three months ended March 31, 2018 and 2017 was $9.3 million and $9.1 million, respectively. Estimated aggregate amortization expense for intangible assets subject to amortization for each of the following five years is:
(In thousands)
 
Years Ending December 31,
 
2018
$
36,491

2019
36,488

2020
36,102

2021
36,099

2022
36,087

Note 6. Accrued Liabilities
Accrued liabilities consist of the following:
(In thousands)
March 31, 2018
 
December 31, 2017
Interest
$
40,093

 
$
30,262

Employee related costs
55,181

 
117,850

Income taxes payable
35,025

 
19,558

Other accrued expenses
105,002

 
95,406

Total accrued liabilities
$
235,301

 
$
263,076


11

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

Note 7. Long-term Debt
The Company's long-term debt consists of the following:
(In thousands)
March 31, 2018
 
December 31, 2017
Senior Secured Credit Facility: (a)
 
 
 
Term Loan A Facility
$
750,000

 
$
750,000

Senior Notes:
 
 
 
4.75% Notes due August 2025
800,000

 
800,000

5.00% Notes due April 2024
1,000,000

 
1,000,000

4.75% Notes due December 2022
600,000

 
600,000

Total long-term debt
3,150,000

 
3,150,000

Unamortized discount
(32,663
)
 
(33,776
)
Unamortized deferred financing costs
(16,199
)
 
(16,967
)
Long-term debt, net
$
3,101,138

 
$
3,099,257

(a)
The Company's $500 million revolving credit facility remains undrawn at March 31, 2018. Total undrawn revolver commitments are available to be drawn for general corporate purposes of the Company.
Note 8. Fair 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.

12

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

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 March 31, 2018 and December 31, 2017:
(In thousands)
 
Level I
 
Level II
 
Level III
 
Total
At March 31, 2018:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Cash equivalents 
 
$
65,955

 
$

 
$

 
$
65,955

Marketable securities
 
8,457

 

 

 
8,457

Investments
 
31,632

 

 

 
31,632

Interest rate swap contracts
 

 
1,298

 

 
1,298

Foreign currency derivatives
 

 
3,027

 

 
3,027

Other derivatives
 

 
9,712

 
41,097

 
50,809

Liabilities:
 
 
 
 
 
 
 
 
Foreign currency derivatives
 
$

 
$
4,064

 
$

 
$
4,064

At December 31, 2017:
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
 
Cash equivalents
 
$
100,615

 
$

 
$

 
$
100,615

Marketable securities
 
10,709

 

 

 
10,709

Investments
 
9,948

 

 

 
9,948

Interest rate swap contracts
 

 
1,444

 

 
1,444

Foreign currency derivatives
 

 
3,801

 

 
3,801

Other derivatives
 

 
6,174

 
30,891

 
37,065

Liabilities:
 
 
 
 
 
 
 
 
Foreign currency derivatives
 
$

 
$
4,475

 
$

 
$
4,475

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, foreign currency derivatives and the embedded derivative for the interest on the RLJE Term Loans to be paid in shares of RLJE common stock (see Note 9) are classified within Level II of the fair value hierarchy and their fair values are determined based on a market approach valuation technique that uses readily observable market parameters and the consideration of counterparty risk.
On October 14, 2016, Digital Entertainment Holdings LLC (“DEH”), a wholly-owned subsidiary of the Company, and RLJE entered into a Credit and Guaranty Agreement pursuant to which DEH provided term loans to RLJE (the “RLJE Term Loans”). In connection with the RLJE Credit and Guaranty Agreement, DEH received warrants to purchase at least 20 million shares of RLJE’s common stock, at a price of $3.00 per share (the “RLJE Warrants”). The RLJE Warrants held by the Company are classified within Level III of the fair value hierarchy and the Company determines the value of the RLJE Warrants using a Black Scholes option pricing model. Inputs to the model are stock price volatility, contractual warrant terms (remaining life of the warrants), exercise price, risk-free interest rate, and the RLJE stock price. The equity volatility used is based on the equity volatility of RLJE with an adjustment for the changes in the capital structure of RLJE. In arriving at the concluded value of the warrants, a discount for the lack of marketability (DLOM) of 32% was applied. The DLOM, which is unobservable, is determined using the Finnerty Average-Strike Put Option Marketability Discount Model (Finnerty Model), which was applied with a security-specific volatility for the warrants. For the three months ended March 31, 2018 and 2017, the Company recorded a gain of $8.1 million and $8.9 million, respectively, related to the RLJE Warrants which is included in Miscellaneous, net in the condensed consolidated statement of income.
At March 31, 2018, the Company does not have any other 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. These nonrecurring valuations primarily include the valuation of affiliate and customer relationships intangible assets, advertiser relationship 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.

13

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

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:
(In thousands)
March 31, 2018
Carrying
Amount
 
Estimated
Fair Value
Debt instruments:
 
 
 
Term Loan A Facility
$
737,774

 
$
748,125

4.75% Notes due August 2025
785,171

 
771,000

5.00% Notes due April 2024
984,591

 
988,750

4.75% Notes due December 2022
593,602

 
604,500

 
$
3,101,138

 
$
3,112,375

(In thousands)
December 31, 2017
Carrying
Amount
 
Estimated
Fair Value
Debt instruments:
 
 
 
Term Loan A Facility
$
737,140

 
$
748,125

4.75% Notes due August 2025
784,757

 
793,000

5.00% Notes due April 2024
984,056

 
1,012,500

4.75% Notes due December 2022
593,304

 
612,750

 
$
3,099,257

 
$
3,166,375

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 9. Derivative 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 March 31, 2018, the Company had interest rate swap contracts outstanding with notional amounts aggregating $200.0 million that are not designated as hedging instruments. The Company's outstanding interest rate swap contracts mature in October 2018.
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.
Other Derivatives
The RLJE Warrants held by the Company meet the definition of a derivative and are included in Other assets in the consolidated balance sheet. In addition, the interest on the RLJE Term Loans to be paid in shares of RLJE common stock is an embedded derivative. Both the RLJE Warrants and the embedded derivative for the future interest to be paid in shares of RLJE common stock are remeasured at the end of each period with changes in fair value recorded in the consolidated statements of income. For the three months ended March 31, 2018 and 2017, the Company recorded a gain of $11.7 million and $11.1 million, respectively, related to these derivatives, which is included in Miscellaneous, net in the condensed consolidated statement of income.

14

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

The fair values of the Company's derivative financial instruments included in the condensed consolidated balance sheets are as follows:
(In thousands)
Balance Sheet 
Location
 
March 31, 2018
 
December 31, 2017
Derivatives not designated as hedging instruments:
 
 
 
 
Assets:
 
 
 
 
 
Foreign currency derivatives
Prepaid expenses and other current assets
 
$
785

 
$
943

Foreign currency derivatives
Other assets
 
2,241

 
2,858

Interest rate swap contracts
Prepaid expenses and other current assets
 
1,298

 
1,444

Other derivatives
Other assets
 
50,809

 
37,065

Liabilities:
 
 
 
 
 
Foreign currency derivatives
Accrued liabilities
 
1,069

 
1,223

Foreign currency derivatives
Other liabilities
 
2,995

 
3,252

The amounts of gains and losses related to the Company's derivative financial instruments designated as hedging instruments are as follows:
(In thousands)
Gain or (Loss) on Derivatives
 Recognized in OCI
 
Location of Gain or (Loss) in Earnings
 
Gain or (Loss) Reclassified 
from Accumulated OCI
 into Earnings (a)
Three Months Ended March 31,
 
 
 
Three Months Ended March 31,
2018
 
2017
 
 
 
2018
 
2017
Derivatives in cash flow hedging relationships:
 
 
 
 
 
 
 
 
 
Interest rate swap contracts
$

 
$
321

 
Interest expense
 
$

 
$
2

(a)
There were no gains or losses recognized in earnings related to any ineffective portion of hedging relationships or related to any amount excluded from the assessment of hedge effectiveness for the three months ended March 31, 2018 and 2017.
The amounts of gains and losses related to the Company's derivative financial instruments not designated as hedging instruments are as follows:
(In thousands)
Location of Gain or (Loss) Recognized in Earnings
 on Derivatives
 
Amount of Gain or (Loss) Recognized in Earnings on Derivatives
 
 
Three Months Ended March 31,
 
 
2018
 
2017
Derivatives not designated as hedging relationships:
 
 
 
 
 
Interest rate swap contracts
Interest expense
 
$
(146
)
 
$
2

Foreign currency derivatives
Miscellaneous, net
 
(293
)
 
(267
)
Other derivatives
Miscellaneous, net
 
11,687

 
11,117

Total
 
 
$
11,248

 
$
10,852

Note 10. Income Taxes
For the three months ended March 31, 2018, income tax expense was $56.9 million, representing an effective tax rate of 26%. The effective tax rate differs from the federal statutory rate of 21% due primarily to tax expense of $16.4 million for an increase in valuation allowances for foreign taxes and U.S. foreign tax credits, tax benefit of $8.3 million for the one-time rate change on deferred tax assets and liabilities that resulted from the extension of certain television production cost deductions included in the Bipartisan Budget Act of 2018 (enacted February 9, 2018), tax benefit from foreign subsidiary earnings indefinitely reinvested outside the U.S. of $4.9 million and state income tax expense of $3.8 million.
For the three months ended March 31, 2017, income tax expense was $73.1 million, representing an effective tax rate of 34%. The effective tax rate differs from the federal statutory rate of 35% due primarily to tax benefit from domestic production activities deduction of $5.9 million, tax benefit from foreign subsidiary earnings indefinitely reinvested outside the U.S. of $4.1

15

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

million, state income tax expense of $3.4 million and tax expense of $2.3 million for an increase in valuation allowances for foreign taxes.
At March 31, 2018, the Company had foreign tax credit carry forwards of approximately $15.6 million, expiring on various dates from 2024 through 2025. These carryforwards have been reduced by a valuation allowance of $15.6 million as it is more likely than not that these carry forwards will not be realized. For the three months ended March 31, 2018, $0.3 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 11. Commitments and Contingencies
Commitments
As of March 31, 2018, the Company's contractual obligations not reflected on the Company's condensed consolidated balance sheet decreased $154.7 million to $1.2 billion. The decrease relates primarily to the expiration of payment guarantees to a production service company for certain production related costs.
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 $280 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, the Court granted the Company’s motion for leave to submit supplemental summary judgment briefing, which will be fully submitted by May 21, 2018. A hearing on the supplemental summary judgment submissions will be held on June 13, 2018. The Company has opposed Plaintiffs' claims. The Company believes that the asserted 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 $20 million in damages on claims for breach of contract, breach of the covenant of good faith and fair dealing, and declaratory relief. Plaintiffs also seek a judicial determination that their contracts with the Company entitle them to an "actual fair market license fee" in connection with AMC Networks telecasting of The Walking Dead, which they allege is "substantially better than" what they received. The Company file an Answer to the Complaint on April 16, and 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. 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 production companies), along with Charles Eglee and his production 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 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

16

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

on April 30, 2018 and believes that the asserted claims are without merit and will vigorously defend against them. 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 12. Equity Plans
In March 2018, AMC Networks granted 684,737 restricted stock units ("RSUs") and 537,403 performance restricted stock units ("PRSUs") 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 195,028 RSUs include the achievement of certain performance targets by the Company. The PRSUs vest on the third anniversary of the grant date.
The target number of PRSUs granted represents the right to receive a corresponding number of shares, subject to adjustment based on the performance of the Company against target performance criteria for a three-year period. The number of shares issuable at the end of the applicable measurement period ranges from 0% to 200% of the target PRSU award.
During the three months ended March 31, 2018, 707,624 RSUs of AMC Networks Class A Common Stock previously issued to employees of the Company vested. On the vesting date, 289,555 RSUs were surrendered to the Company to cover the required statutory tax withholding obligations and 418,069 new shares of AMC Networks Class A Common Stock were issued in respect of the remaining RSUs. 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 $15.4 million, which has been reflected as a financing activity in the condensed consolidated statement of cash flows for the three months ended March 31, 2018.
Share-based compensation expense included in selling, general and administrative expense, for the three months ended March 31, 2018 and March 31, 2017 was $15.3 million and $12.5 million, respectively.
As of March 31, 2018, there was $133.8 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 approximately 2.7 years.
Note 13. Redeemable Noncontrolling Interests
The following table summarizes activity related to redeemable noncontrolling interest for the three months ended March 31, 2018.
(In thousands)
Three Months Ended March 31, 2018
December 31, 2017
$
218,604

Net earnings
3,197

Distributions
(1,435
)
March 31, 2018
$
220,366

Note 14. Related Party Transactions
Members of the Dolan Family, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, including trusts for the benefit of the Dolan Family, collectively beneficially own all of the AMC Networks outstanding Class B Common Stock and own approximately 2% of the AMC Networks' outstanding Class A Common Stock. Such shares of the AMC Networks Class A Common Stock and Class B Common Stock, collectively, represent approximately 71% of the aggregate voting power of AMC Networks' outstanding common stock. Members of the Dolan Family are also the controlling stockholders of The Madison Square Garden Company ("MSG") and MSG Networks Inc. ("MSG Networks").
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 $1.6 million for the three months ended March 31, 2018 and 2017, respectively. Amounts charged to the Company, included in selling, general and administrative expenses, pursuant to transactions with its related parties amounted to $0.5 million and $0.6 million for the three months ended March 31, 2018 and 2017, respectively.

17

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

On June 16, 2016, AMC Networks entered into an arrangement with the Dolan Family Office, LLC ("DFO"), MSG and MSG Networks providing for the sharing of certain expenses associated with executive office space which will be available to Charles F. Dolan (the Executive Chairman and a director of the Company and a director of MSG and MSG Networks), James L. Dolan (the Executive Chairman and a director of MSG and MSG Networks and a director of the Company), and the DFO which is controlled by Charles F. Dolan. The Company's share of office expenses is not material.
Note 15. Cash Flows
The Company's non-cash investing and financing activities and other supplemental data are as follows:
(In thousands)
Three Months Ended March 31,
2018
 
2017
Non-Cash Investing and Financing Activities:
 
 
 
Treasury stock not yet settled
9,980

 
5,988

Capital expenditures incurred but not yet paid
6,070

 
3,362

Supplemental Data:
 
 
 
Cash interest paid
25,634

 
8,605

Income taxes paid, net
6,243

 
7,498

Note 16. Segment Information
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 two 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, defined as operating income (loss) before depreciation and amortization, share-based compensation expense or benefit, impairment and related charges (including gains or losses on sales or dispositions of businesses), and restructuring expense or credit. 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.
(In thousands)
Three Months Ended March 31, 2018
National
Networks
 
International
and Other
 
Inter-segment
eliminations
 
Consolidated
Revenues, net
 
 
 
 
 
 
 
Advertising
$
225,730

 
$
22,510

 
$

 
$
248,240

Distribution
407,298

 
88,880

 
(3,595
)
 
492,583

Consolidated revenues, net
$
633,028

 
$
111,390

 
$
(3,595
)
 
$
740,823

Operating income (loss)
$
249,852

 
$
(16,814
)
 
$
617

 
$
233,655

Share-based compensation expense
12,527

 
2,792

 

 
15,319

Depreciation and amortization
8,495

 
11,859

 

 
20,354

Adjusted operating income (loss)
$
270,874

 
$
(2,163
)
 
$
617

 
$
269,328

Capital expenditures
$
2,148

 
$
9,794

 
$

 
$
11,942


18

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

(In thousands)
Three Months Ended March 31, 2017
National
Networks
 
International
and Other
 
Inter-segment
eliminations
 
Consolidated
Revenues, net
 
 
 
 
 
 
 
Advertising
$
247,542

 
$
20,070

 
$

 
$
267,612

Distribution
367,605

 
86,727

 
(1,755
)
 
452,577

Consolidated revenues, net
$
615,147

 
$
106,797

 
$
(1,755
)
 
$
720,189

Operating income (loss)
$
249,607

 
$
(19,217
)
 
$
1,281

 
$
231,671

Share-based compensation expense
9,908

 
2,556

 

 
12,464

Restructuring expense
54

 
2,650

 

 
2,704

Depreciation and amortization
8,404

 
15,089

 

 
23,493

Adjusted operating income
$
267,973

 
$
1,078

 
$
1,281

 
$
270,332

Capital expenditures
$
5,135

 
$
15,071

 
$

 
$
20,206

Inter-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.
(In thousands)
Three Months Ended March 31,
2018
 
2017
Inter-segment revenues
 
 
 
National Networks
$
(2,535
)
 
$
(1,724
)
International and Other
(1,060
)
 
(31
)
 
$
(3,595
)
 
$
(1,755
)
The table below summarizes revenues based on customer location:
(In thousands)
Three Months Ended March 31,
2018
 
2017
Revenues
 
 
 
United States
$
586,568

 
$
600,055

Europe
86,264

 
78,675

Other
67,991

 
41,459

 
$
740,823

 
$
720,189

The table below summarizes property and equipment based on asset location:
(In thousands)
March 31, 2018
 
December 31, 2017
Property and equipment, net
 
 
 
United States
$
138,912

 
$
136,203

Europe
28,449

 
28,261

Other
18,079

 
19,050

 
$
185,440

 
$
183,514

Note 17. Condensed Consolidating Financial Statements
Debt of AMC Networks includes $600 million of 4.75% senior notes due December 2022, $1 billion of 5.00% senior notes due April 2024 and $800 million of 4.75% senior notes due August 2025. All outstanding senior notes issued by AMC Networks (for purposes of this Note 18, "Parent Company") are guaranteed on a senior unsecured basis by certain of its existing and future domestic restricted subsidiaries (the "Guarantor Subsidiaries"). All Guarantor Subsidiaries are owned 100% by AMC Networks. The outstanding notes are fully and unconditionally guaranteed by the Guarantor Subsidiaries on a joint and several basis.

19

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

Set forth below are condensed consolidating financial statements presenting the financial position, results of operations, comprehensive income, and cash flows of (i) the Parent Company, (ii) the Guarantor Subsidiaries on a combined basis (as such guarantees are joint and several), (iii) the direct and indirect non-guarantor subsidiaries of the Parent Company (the "Non-Guarantor Subsidiaries") on a combined basis and (iv) reclassifications and eliminations necessary to arrive at the information for the Company on a consolidated basis.
Basis of Presentation
 In presenting the condensed consolidating financial statements, the equity method of accounting has been applied to (i) the Parent Company's interests in the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries, and (ii) the Guarantor Subsidiaries' interests in the Non-Guarantor Subsidiaries, even though all such subsidiaries meet the requirements to be consolidated under GAAP. All intercompany balances and transactions between the Parent Company, the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries have been eliminated, as shown in the column "Eliminations."
 The accounting basis in all subsidiaries, including goodwill and identified intangible assets, have been allocated to the applicable subsidiaries.

20

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

Condensed Consolidating Balance Sheet
March 31, 2018
(In thousands)
 Parent Company
 
 Guarantor Subsidiaries
 
 Non- Guarantor Subsidiaries
 
 Eliminations
 
 Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
184

 
$
354,419

 
$
174,597

 
$

 
$
529,200

Accounts receivable, trade (including amounts due from related parties, net,
less allowance for doubtful accounts)

 
588,633

 
204,642

 

 
793,275

Current portion of program rights, net

 
315,628

 
149,293

 

 
464,921

Prepaid expenses, other current assets and intercompany receivable
1,419

 
212,382

 
10,592

 
(122,335
)
 
102,058

Total current assets
1,603

 
1,471,062

 
539,124

 
(122,335
)
 
1,889,454

Property and equipment, net of accumulated depreciation

 
138,866

 
46,574

 

 
185,440

Investment in affiliates
3,616,931

 
1,013,078

 

 
(4,630,009
)
 

Program rights, net

 
1,092,691

 
186,898

 

 
1,279,589

Long-term intercompany notes receivable

 
490,380

 
343

 
(490,723
)
 

Deferred carriage fees, net

 
26,008

 
1,164

 

 
27,172

Intangible assets, net

 
168,117

 
284,278

 

 
452,395

Goodwill

 
66,282

 
641,372

 

 
707,654

Deferred tax asset, net

 

 
21,731

 

 
21,731

Other assets

 
173,988

 
375,944

 

 
549,932

Total assets
$
3,618,534

 
$
4,640,472

 
$
2,097,428

 
$
(5,243,067
)
 
$
5,113,367

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
32

 
$
47,245

 
$
49,539

 
$

 
$
96,816

Accrued liabilities and intercompany payable
86,500

 
121,433

 
149,703

 
(122,335
)
 
235,301

Current portion of program rights obligations

 
255,744

 
71,118

 

 
326,862

Deferred revenue

 
34,738

 
17,178

 

 
51,916

Current portion of capital lease obligations

 
3,001

 
1,770

 

 
4,771

Total current liabilities
86,532

 
462,161

 
289,308

 
(122,335
)
 
715,666

Program rights obligations

 
470,626

 
20,901

 

 
491,527

Long-term debt, net
3,101,138

 

 

 

 
3,101,138

Capital lease obligations

 
2,963

 
22,270

 

 
25,233

Deferred tax liability, net
150,247

 

 
(5,088
)
 

 
145,159

Other liabilities and intercompany notes payable
49,873

 
87,791

 
506,226

 
(490,723
)
 
153,167

Total liabilities
3,387,790

 
1,023,541

 
833,617

 
(613,058
)
 
4,631,890

Commitments and contingencies

 

 

 

 

Redeemable noncontrolling interests

 

 
220,366

 

 
220,366

Stockholders' equity:
 
 
 
 
 
 
 
 
 
AMC Networks stockholders' equity
230,744

 
3,616,931

 
1,013,078

 
(4,630,009
)
 
230,744

Non-redeemable noncontrolling interests

 

 
30,367

 

 
30,367

Total stockholders' equity
230,744

 
3,616,931

 
1,043,445

 
(4,630,009
)
 
261,111

Total liabilities and stockholders' equity
$
3,618,534

 
$
4,640,472

 
$
2,097,428

 
$
(5,243,067
)
 
$
5,113,367



21

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

Condensed Consolidating Balance Sheet
December 31, 2017
(In thousands)
 Parent Company
 
 Guarantor Subsidiaries
 
 Non- Guarantor Subsidiaries
 
 Eliminations
 
 Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
320

 
$
391,248

 
$
167,215

 
$

 
$
558,783

Accounts receivable, trade (including amounts due from related parties, net,
less allowance for doubtful accounts)

 
581,270

 
194,621

 

 
775,891

Current portion of program rights, net

 
304,149

 
149,301

 

 
453,450

Prepaid expenses, other current assets and intercompany receivable
3,760

 
183,815

 
8,540

 
(104,389
)
 
91,726

Total current assets
4,080

 
1,460,482

 
519,677

 
(104,389
)
 
1,879,850

Property and equipment, net of accumulated depreciation

 
136,032

 
47,482

 

 
183,514

Investment in affiliates
3,443,013

 
934,612

 

 
(4,377,625
)
 

Program rights, net

 
1,128,021

 
191,258

 

 
1,319,279

Long-term intercompany notes receivable

 
489,939

 
436

 
(490,375
)
 

Deferred carriage fees, net

 
29,346

 
578

 

 
29,924

Intangible assets, net

 
170,554

 
286,688

 

 
457,242

Goodwill

 
66,609

 
628,549

 

 
695,158

Deferred tax asset, net

 

 
20,081

 

 
20,081

Other assets

 
142,115

 
305,822

 

 
447,937

Total assets
$
3,447,093

 
$
4,557,710

 
$
2,000,571

 
$
(4,972,389
)
 
$
5,032,985

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
 
 
Current Liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
350

 
$
50,282

 
$
51,565

 
$

 
$
102,197

Accrued liabilities and intercompany payable
51,692

 
179,003

 
136,770

 
(104,389
)
 
263,076

Current portion of program rights obligations

 
262,004

 
65,545

 

 
327,549

Deferred revenue

 
27,530

 
18,903

 

 
46,433

Current portion of long-term debt

 

 

 

 

Current portion of capital lease obligations

 
2,939

 
1,908

 

 
4,847

Total current liabilities
52,042

 
521,758

 
274,691

 
(104,389
)
 
744,102

Program rights obligations

 
511,996

 
22,984

 

 
534,980

Long-term debt, net
3,099,257

 

 

 

 
3,099,257

Capital lease obligations

 
3,745

 
22,532

 

 
26,277

Deferred tax liability, net
114,717

 

 
(5,019
)
 

 
109,698

Other liabilities and intercompany notes payable
46,133

 
77,198

 
503,166

 
(490,375
)
 
136,122

Total liabilities
3,312,149

 
1,114,697

 
818,354

 
(594,764
)
 
4,650,436

Commitments and contingencies
 
 
 
 
 
 
 
 
 
Redeemable noncontrolling interests

 

 
218,604

 

 
218,604

Stockholders' equity:
 
 
 
 
 
 
 
 
 
AMC Networks stockholders' equity
134,944

 
3,443,013

 
934,612

 
(4,377,625
)
 
134,944

Non-redeemable noncontrolling interests

 

 
29,001

 

 
29,001

Total stockholders' equity
134,944

 
3,443,013

 
963,613

 
(4,377,625
)
 
163,945

Total liabilities and stockholders' equity
$
3,447,093

 
$
4,557,710

 
$
2,000,571

 
$
(4,972,389
)
 
$
5,032,985


22

AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(unaudited)

Condensed Consolidating Statement of Income
Three Months Ended March 31, 2018
(In thousands)
Parent Company
 
Guarantor Subsidiaries
 
Non- Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
$

 
$
574,917

 
$
170,386

 
$
(4,480
)
 
$
740,823

Operating expenses:
 
 
 
 
 
 
 
 
 
Technical and operating (excluding depreciation and amortization)

 
222,621

 
98,522

 
(778
)
 
320,365

Selling, general and administrative

 
122,059

 
48,089

 
(3,699
)
 
166,449

Depreciation and amortization

 
10,804

 
9,550

 

 
20,354

Total operating expenses

 
355,484

 
156,161

 
(4,477
)
 
507,168

Operating income

 
219,433

 
14,225

 
(3
)
 
233,655

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense, net
(36,907
)
 
11,897

 
(8,176
)
 

 
(33,186
)
Share of affiliates' income
247,482

 
17,498

 

 
(264,980
)
 

Miscellaneous, net
(206
)
 
734

 
16,415

 
3

 
16,946

Total other income (expense)
210,369

 
30,129

 
8,239

 
(264,977
)
 
(16,240
)
Income from operations before income taxes
210,369

 
249,562

 
22,464

 
(264,980
)
 
217,415

Income tax expense
(53,499
)
 
(2,080
)
 
(1,300
)
 

 
(56,879
)
Net income including noncontrolling interests
156,870

 
247,482

 
21,164

 
(264,980
)
 
160,536

Net income attributable to noncontrolling interests

 

 
(3,666
)
 

 
(3,666
)
Net income attributable to Parent Company's stockholders
$
156,870

 
$
247,482

 
$
17,498

 
$
(264,980
)
 
$
156,870


Condensed Consolidating Statement of Income
Three Months Ended March 31, 2017
(In thousands)
Parent Company
 
Guarantor Subsidiaries
 
Non- Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenues, net
$

 
$
579,382

 
$
143,132

 
$
(2,325
)
 
$
720,189

Operating expenses:
 
 
 
 
 
 
 
 
 
Technical and operating (excluding depreciation and amortization)

 
221,754

 
77,617

 
(759
)
 
298,612

Selling, general and administrative

 
119,681

 
45,479

 
(1,451
)
 
163,709

Depreciation and amortization

 
10,204

 
13,289

 

 
23,493

Restructuring expense

 
2,704

 

 

 
2,704

Total operating expenses

 
354,343

 
136,385

 
(2,210
)
 
488,518

Operating income

 
225,039

 
6,747

 
(115
)
 
231,671

Other income (expense):
 
 
 
 
 
 
 
 
 
Interest expense, net
(29,412
)
 
9,823

 
(7,418
)
 

 
(27,007
)
Share of affiliates' income
235,774

 
3,145

 

 
(238,919
)
 

Miscellaneous, net
(112
)
 
431

 
10,615

 
115

 
11,049