AMC Global Media Inc. quarterly report, Q3 FY2011

Business context and reporting period

The filing is AMC Networks Inc.’s unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. The request metadata names AMC Global Media Inc.; the filing itself identifies AMC Networks Inc. AMC Networks operates National Networks (AMC, WE tv, IFC and Sundance Channel) and International and Other businesses. Cablevision spun off AMC Networks on June 30, 2011, making it an independent public company. Pre-spin financial results reflect Cablevision allocations and may not represent standalone results.

Financial performance and position

Unless stated otherwise, amounts below are in millions of dollars; the filing presents dollar amounts in thousands.

• Revenue increased 5% for the quarter and 9% for the nine-month period. Operating margin was approximately 33% in Q3 2011 versus 28% in Q3 2010; net margin was approximately 14% versus 9%.
• Operating cash flow was $202.4 million for the first nine months, compared with $194.4 million. Capital expenditures were $7.1 million. Cash at September 30 was $225.0 million, up from $80.0 million at December 31, 2010.
• At September 30, total debt was $2.342 billion excluding capital leases and $2.359 billion including them. The company had $1.656 billion of credit-facility debt and $686.2 million of senior notes; its $500 million revolving facility was undrawn. Current assets were $815.4 million and current liabilities $295.9 million.
• National Networks generated Q3 revenue of $258.3 million and operating income of $98.7 million. International and Other had revenue of $30.7 million and an operating loss of $4.0 million. For the nine months, that segment’s operating loss was $24.7 million.
• Interest expense was $31.8 million in Q3 and $65.5 million for nine months. The effective tax rate was 36% for Q3 and 40% for nine months.

Material changes versus prior periods

• National Networks drove most growth: nine-month revenue rose $54.9 million, with higher advertising and affiliation revenue. International and Other revenue increased $16.1 million, primarily from IFC Films and international distribution.
• Q3 National Networks advertising revenue was lower, chiefly due to weaker ratings at WE tv and lower Sundance Channel sponsorship revenue; IFC partially offset the decline. Nine-month advertising revenue benefited from higher pricing and increased demand.
• Technical and operating costs increased 10% in Q3 and 11% for nine months, reflecting program-rights amortization and programming costs. Q3 selling, general and administrative costs fell 15%, in part because Cablevision management fees ended at the spin-off; nine-month SG&A increased 3%.
• Debt rose materially following the spin-off financing and debt refinancing. Nine-month results include $14.5 million of debt-extinguishment losses and $5.7 million of deferred-financing-cost write-offs. Prior-year discontinued-operation losses were substantially higher because transferred Cablevision businesses were included in 2010 comparative results.

Outlook, risks and contingencies

• No specific earnings or revenue guidance is provided. Management said cash on hand, operating cash flow and the undrawn revolver were expected to meet liquidity needs, but warned the company would need capital-market access to repay or refinance debt at maturity.
• Management highlighted substantial leverage, higher debt service, potential limits on programming investment and financial flexibility, and exposure to higher interest rates. A 100-basis-point rate increase was estimated to raise annual interest expense by about $8.8 million. Swaps covered $972.5 million of notional debt; approximately 62% of debt excluding leases was fixed-rate or effectively fixed-rate.
• The company reported compliance with its credit-facility covenants at September 30. Debt agreements impose financial tests and restrictions, including limits on dividends and stock repurchases under the senior-note indenture.
• Off-balance-sheet arrangements were approximately $333.3 million, up from $217.0 million at year-end, primarily due to future program-rights commitments. Program-rights assets and obligations are significant cash-flow considerations.
• VOOM HD litigation with DISH Network remained pending; the parties share specified litigation proceeds and certain future legal costs. A roughly $11 million compensation claim against Cablevision and RMH is indemnified by Cablevision, and no provision was recorded. BMI license-fee terms were settled for approximately the amount previously accrued.
• Key business risks include advertising demand and ratings, subscriber distribution and affiliation renewals, programming costs and competition, distributor bargaining power, economic conditions, and access to capital. Management noted that standalone operating costs and results may differ from historical Cablevision-allocated figures.

Important facts for investors to verify

1. Confirm the legal registrant: this filing is for AMC Networks Inc., not the company name supplied in the request metadata.
2. Review the post-spin debt structure, refinancing terms, maturities, covenants, and capacity to refinance the substantial obligations due after 2015.
3. Assess whether operating cash generation can sustain programming commitments and debt service; compare reported operating cash flow with program-rights cash needs.
4. Track National Networks ratings, subscribers, advertising trends and affiliation renewals, and whether growth offsets higher content costs.
5. Monitor the DISH litigation, program-rights commitments, and other contingencies; confirm the status and terms of Cablevision-related indemnities.
6. Interpret year-over-year comparisons cautiously because the spin-off, discontinued operations, and historical Cablevision cost allocations affect comparability.