AMC Networks Inc. — Q2 2013 Form 10-Q
Business and period: The filing is by AMC Networks Inc. (the supplied metadata names AMC Global Media Inc.). It covers the quarter and six months ended June 30, 2013, compared with the same periods in 2012. Its segments are National Networks (AMC, WE tv, IFC and Sundance Channel) and International and Other. Figures below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $379.3 | $327.6 | $761.3 | $653.8 |
| Operating income | $247.3 | $98.3 | $374.8 | $195.3 |
| Net income | $135.7 | $41.5 | $197.2 | $84.7 |
| Adjusted operating cash flow (AOCF) | $138.3 | $127.2 | $288.5 | $252.9 |
- Revenue grew 15.8% in Q2 and 16.4% in the first half. National Networks drove most of the increase, with higher advertising prices and demand, affiliation revenue and sales/licensing of original programming. AMC’s first-half advertising growth was led by The Walking Dead.
- Q2 reported operating income included a one-time $132.9 litigation settlement gain; excluding it, operating income was approximately $114.4. First-half operating income excluding the gain was approximately $241.9. Reported operating margins were 65.2% for Q2 and 49.2% for the first half; excluding the gain, approximately 30.2% and 31.8%, respectively.
- AOCF, a non-GAAP measure, rose 8.7% in Q2 and 14.1% in the first half. AOCF margins were approximately 36.5% in Q2 versus 38.9% a year earlier, and 37.9% for the first half versus 38.7%. National Networks AOCF increased, while International and Other continued to report an AOCF deficit.
- First-half operating cash flow was negative $140.5, versus positive $165.6 in 2012. Management attributed the outflow principally to the final settlement-proceeds allocation, program-rights payments and tax payments. Capital expenditures were $13.7, versus $6.6; cash declined $162.3 to $448.6.
- At June 30, cash was $448.6, long-term debt net of discount was $2,154.7, and the $500.0 revolving facility was undrawn. Approximate net debt, excluding leases, was $1,706.1. Current assets were $1,145.9 and current liabilities $410.9. Stockholders’ deficiency was $680.1.
- Interest expense was $27.8 in Q2 and $57.1 in the first half. The company reported that about 97% of debt was fixed-rate or effectively fixed through swaps. The effective tax rate was 38% in both 2013 periods.
Changes, outlook and risks
- Higher programming investment increased first-half technical and operating expense 25.1%; management said program-rights expense was expected to continue increasing in 2013. A $6.7 program-rights write-off was recorded, primarily at Sundance Channel. SG&A also rose in Q2, mainly with marketing and advertising-sales activity.
- The DISH Network settlement was allocated in April: AMC Networks received $175.0 of settlement funds and paid $175.0 to Cablevision. The resulting $132.9 gain was recognized in Q2; it is non-recurring and excluded from the company’s AOCF definition.
- Management expected a roughly 38% full-year 2013 effective tax rate, higher 2013 capital expenditures than in 2012, and continued investment in original programming. It expected cash on hand, operating cash and revolver availability to cover needs over the next twelve months, but said operations would not generate enough cash to repay all debt at maturity; refinancing or other capital-market access will be needed.
- Sundance Channel was expected to transition toward a traditional advertising-sales model beginning in September 2013, with programming changes prepared for the fourth quarter. The filing notes that revenue and AOCF can vary with programming schedules, licensing timing, ratings, advertising demand and program costs.
- Key risks include substantial leverage, distributor concentration and affiliation renewals, competition and rising content costs, advertising and subscriber demand, economic conditions, international investment, litigation and tax matters. The company reported no material developments in legal proceedings since its 2012 Form 10-K; tax audits included a 2008 New York City business-tax audit and an IRS audit of the 2011 federal return.
Investor verification points
- Separate recurring operating trends from the $132.9 settlement gain; compare AOCF with GAAP earnings and cash flow.
- Track whether revenue growth and audience demand continue to offset higher programming, marketing and content-acquisition costs.
- Reconcile negative first-half operating cash flow with settlement allocation, program-rights spending and tax payments; monitor cash conversion in subsequent quarters.
- Assess leverage, debt maturities, refinancing access, covenant compliance and availability of the undrawn revolver.
- Monitor Sundance’s advertising-model transition, impairment sensitivity (the filing said a 12% decline in its reporting unit’s fair value would require a further quantitative test), and the status of tax audits and contingencies.