AMC Networks Inc. — FY 2014 Form 10-K
Reporting period and business: The filing is for the fiscal year ended December 31, 2014; it also reports fourth-quarter results. The registrant is AMC Networks Inc. (not “AMC Global Media Inc.” as stated in the request). It operates National Networks, including AMC, WE tv, BBC AMERICA, IFC and SundanceTV, and an International and Other segment. Revenue principally comes from distribution fees and advertising.
Financial performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Revenue | $2,175.6 million | $1,591.9 million |
| Operating income | $546.4 million | $582.2 million |
| Net income attributable to AMC Networks stockholders | $260.8 million | $290.7 million |
| Diluted EPS | $3.58 | $4.00 |
| Adjusted operating cash flow (AOCF; non-GAAP) | $659.5 million | $524.2 million |
| Cash from operating activities | $375.8 million | $(49.5) million |
| Cash and cash equivalents at year-end | $201.4 million | $522.0 million |
FY 2014 revenue grew 36.7%, reflecting principally the Chellomedia acquisition, completed January 31, and consolidation of BBC AMERICA from October 23. National Networks revenue increased 13.5% to $1,743.9 million; International and Other revenue was $434.2 million, up from $55.9 million, largely because of Chellomedia. National Networks operating income rose 13.5% to $586.9 million. International and Other reported an operating loss of $42.0 million, compared with income of $61.3 million in 2013, which included a $132.9 million DISH settlement gain.
Advertising revenue in National Networks rose 15.4% to $764.6 million, led by demand and pricing associated with popular programming, including The Walking Dead. Distribution revenue rose 12.1% to $979.3 million, supported by affiliation-rate increases, subscribers and content licensing. FY 2014 operating margin was 25.1%, versus 36.6% in 2013; the prior year benefited from the settlement gain, while 2014 included higher programming, acquisition-related and restructuring costs. AOCF increased 25.8%; it is management’s non-GAAP measure and excludes specified items, including depreciation and amortization, share-based compensation and restructuring.
Fourth-quarter 2014 revenue was $609.4 million, operating income $159.0 million, net income attributable to stockholders $77.6 million, and diluted EPS $1.06. Fourth-quarter 2013 revenue was $435.2 million, operating income $85.0 million, net income $35.4 million and diluted EPS $0.49. Acquisition timing affects this comparison.
Debt, liquidity and financial position
- Principal debt outstanding at year-end was $2.780 billion, excluding capital leases: $1.480 billion of secured term loans, $700 million of 7.75% notes due 2021 and $600 million of 4.75% notes due 2022. Debt net of unamortized discount was $2.760 billion; $74 million of principal was classified current.
- The $500 million revolving facility was undrawn. Cash plus the undrawn revolver was approximately $701 million, before other obligations. Current assets were $1.329 billion and current liabilities $731.7 million.
- Management said cash, operating cash generation and revolver availability should cover liquidity needs over the next 12 months and longer term, but does not expect operating cash alone to repay all debt at maturity; refinancing or capital-market access will be needed.
- Cash used in investing was $1.223 billion, principally acquisition payments of $1.185 billion; capital expenditures were $39.7 million. Operating cash flow less capital expenditures was approximately $336.0 million. Financing activities provided $574.9 million, including $600 million of new term debt.
- Stockholders’ deficiency was $371.8 million. No cash dividend was paid in 2014, and the company did not expect to pay one for the foreseeable future.
Material changes, outlook and risks
- Chellomedia was acquired for approximately $1.0 billion, funded with cash and $600 million of additional borrowing; the purchase expanded international distribution. The company acquired a 49.9% interest in BBC AMERICA for $200 million and consolidates the venture because it has operational control. BBC Worldwide Americas retained a 50.1% interest with specified put rights.
- Management expected continued increased investment in original programming during 2015 and said 2015 capital expenditures would exceed historical levels, primarily for broadcasting and technology facilities. No quantified earnings or revenue guidance is provided.
- Program-rights write-offs were $44.2 million in 2014, mainly for pilots and unscripted projects at AMC and a canceled WE tv scripted series. Restructuring expense was $15.7 million, primarily severance and exit costs; most related payments were expected in 2015.
- Key risks include high leverage and refinancing dependence; variable-rate exposure; distributor concentration and renewal terms; competition for viewers, content and advertising; uncertain audience demand and programming returns; technology and changing viewing behavior; international, currency, regulatory and tax risks; and acquisition integration. A 100-basis-point rate increase was estimated to raise annual interest expense by about $14.1 million.
- Management reported compliance with debt covenants at year-end. The annual goodwill impairment test found no impairment, although the International Programming Networks reporting unit’s estimated fair value could fall 4% before triggering a second-step quantitative test.
- The Atmedia advertising-sales unit acquired with Chellomedia was sold in September 2014 and reported as discontinued operations, with a $3.4 million after-tax loss. The filing identifies an approximately $11 million compensation lawsuit against Cablevision and RMH, for which Cablevision indemnified the company; management did not record a provision. Management did not expect other ordinary-course legal matters to have a material adverse effect.
- Internal controls were reported effective, but the assessment excluded Chellomedia and BBC AMERICA, representing 17% of FY revenue and 15% of year-end assets.
Important facts for investors to verify
- Acquisition-adjusted growth and profitability, particularly Chellomedia’s contribution, integration costs and the sustainability of International and Other segment performance.
- Programming investment, ratings, write-offs and content amortization, and whether audience success continues to support advertising pricing and licensing revenue.
- Debt repayment schedule, covenant headroom, variable-rate exposure, refinancing access and the cash needs arising from programming commitments and BBC AMERICA put rights.
- Distributor affiliation renewals, subscriber trends and the effect of carriage changes; Nielsen subscriber counts are estimates and may differ from fee-paying viewing subscribers.
- Foreign-exchange effects, acquisition accounting estimates and the excluded acquired businesses’ internal controls as integration proceeds.