AMC Networks Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; the filing also reports fourth-quarter results. The filing is by AMC Networks Inc., not “AMC Global Media Inc.” Amounts below are in U.S. dollars, generally rounded to millions.
Business context
AMC Networks operates National Networks (AMC, WE tv, IFC and SundanceTV) and an International and Other segment that includes international channels, IFC Films and broadcasting services. Revenue is principally from distributor affiliation fees and advertising. For 2013, distribution represented 58% and advertising 42% of consolidated revenue. DIRECTV accounted for approximately 10% of revenue.
Key financial metrics
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $1,591.9m | $1,352.6m | +17.7% |
| Operating income | $582.2m | $362.8m | +60.4% |
| Net income attributable to AMC Networks stockholders | $290.7m | $136.5m | +112.9% |
| Diluted EPS | $4.00 | $1.89 | — |
| Adjusted operating cash flow (AOCF; non-GAAP) | $524.2m | $465.4m | +12.6% |
| Cash from operating activities | $(49.5)m | $569.1m | — |
| Cash and cash equivalents at year-end | $522.0m | $611.0m | $(89.0)m |
| Debt principal, excluding capital leases | $2,180.0m | $2,180.0m | No change |
Reported operating margin was 36.6%, versus 26.8% in 2012. The 2013 figure includes a $132.9m one-time DISH Network litigation settlement gain; excluding that gain, operating income was approximately $449.2m, or a 28.2% margin. Net margin was 18.3%. AOCF margin was approximately 32.9%, compared with 34.4% in 2012.
National Networks revenue increased 18.4% to $1,485.0m. Advertising revenue rose 26.7% to $662.8m, while distribution revenue increased 12.4% to $822.2m. International and Other revenue grew 6.9% to $122.4m, but its AOCF deficit widened to $35.5m from $30.0m.
Operating cash flow was negative despite higher net income. The filing attributes the result principally to $517.3m of program-rights payments, a $337.7m net decrease in deferred revenue and deferred litigation proceeds, lower income taxes payable, and higher receivables. Capital expenditures were $24.3m. Year-end total assets were $2,636.7m and stockholders’ equity was a deficit of $571.3m.
Fourth-quarter results
Fourth-quarter 2013 revenue was $435.2m, compared with $366.7m in Q4 2012. Operating income was $85.0m versus $80.7m, and net income attributable to stockholders was $35.4m versus $15.2m. Fourth-quarter results reflect the timing of programming, promotion and program-rights write-downs; reported quarterly operating expenses were $350.3m.
Material changes and unusual items
- Revenue growth benefited from stronger advertising demand, particularly around AMC programming, and higher affiliation rates. Comparisons also benefited from the temporary 2012 DISH carriage interruption, which lasted approximately four months.
- Technical and operating expense increased 30.5% to $662.2m, driven largely by higher original-programming investment. The company recorded $61.0m of program-rights write-offs, primarily associated with canceled series The Killing and Low Winter Sun.
- The $132.9m DISH settlement gain was recognized in 2013 after the proceeds allocation with Cablevision was finalized. It is nonrecurring and excluded from the company’s AOCF measure.
- On January 31, 2014, after year-end, the company acquired substantially all of Chellomedia for €750m (approximately $1.0bn). It used cash and drew an additional $600m of term debt. Chellomedia’s channels reach more than 390 million subscribers in over 130 countries.
- The company reported $2.18bn of debt principal at December 31, 2013 and $522.0m of cash; the $500m revolving facility was undrawn. The Chellomedia borrowing increased debt after year-end, and management expected interest expense to rise.
Outlook, risks and contingencies
No formal numerical revenue or earnings guidance is provided. Management expected original-programming investment to continue increasing and program-rights expense to rise in 2014 versus the prior-year comparable period. It expects revenue, AOCF and cash flows to vary with the timing and performance of programming. Management stated that cash, operating cash flow and revolver availability should support needs over the next twelve months, but also said operating cash flow would not be sufficient to repay all debt at maturity; refinancing or other capital-market access will be necessary.
Key risks include dependence on a limited number of distributors and renewal terms, competition for viewers, advertising and content, programming cost overruns or unsuccessful shows, and integration of Chellomedia. Debt covenants restrict certain actions, and the company identified refinancing, variable-rate exposure and leverage as significant concerns. Other disclosed risks include international regulation and currency movements, content piracy and cybersecurity, and a potential tax indemnity to Cablevision if the 2011 spin-off’s tax-free treatment were jeopardized.
The company was in compliance with credit-facility covenants at year-end. It reported no material off-balance-sheet arrangements. A compensation-related lawsuit seeking approximately $11m was indemnified by Cablevision; management made no provision. Other ordinary-course litigation was not expected by management to materially affect financial position or ability to meet obligations. The company paid no cash dividend in 2013 and did not expect to pay one in the foreseeable future.
Important facts for investors to verify
- How much of 2013 earnings growth reflects recurring operations versus the $132.9m settlement gain, and whether program-rights write-offs remain elevated.
- Cash conversion and programming cash requirements, including the causes of negative 2013 operating cash flow and expected working-capital movements.
- Post-acquisition debt, interest expense, covenant headroom and refinancing needs after the $600m Chellomedia borrowing.
- Whether Chellomedia integration delivers expected international growth and whether its results improve the International and Other segment’s operating performance.
- Affiliation-agreement renewals, subscriber trends, and continued concentration in major distributors, including the company’s reliance on DIRECTV.