AMC Networks Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2012; comparisons are with the same 2011 periods. The supplied filing is for AMC Networks Inc., notwithstanding the request metadata naming AMC Global Media Inc. Amounts below are in millions unless stated otherwise.
Business context and reporting period
AMC Networks owns and operates AMC, WE tv, IFC and Sundance Channel, as well as international programming, film distribution and network technical services businesses. It reports two segments: National Networks and International and Other. The company became independent from Cablevision in June 2011, so the 2011 comparisons include periods before and after the spin-off.
Financial performance and position
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $327.6 | $292.0 | $653.8 | $564.9 |
| Operating income | $98.3 | $82.3 | $195.3 | $153.0 |
| Operating margin | 30.0% | 28.2% | 29.9% | 27.1% |
| Net income | $41.5 | $27.2 | $84.7 | $57.0 |
| Diluted EPS | $0.58 | $0.39 | $1.17 | $0.82 |
| Adjusted operating cash flow (AOCF, non-GAAP) | $127.2 | $112.0 | $252.9 | $211.6 |
- For the six months, operating cash flow was $165.6, versus $119.1 in 2011. Investing cash outflow was $7.5, including $6.6 of capital expenditures. Operating cash flow included $187.5 of net cash used for program rights and obligations.
- Cash and cash equivalents were $307.8 at June 30, 2012, up from $215.8 at year-end 2011. Current assets were $905.7 and current liabilities $363.2.
- Debt instruments totaled $2,240.1, excluding capital leases: $1,553.2 of credit-facility debt and $686.9 of senior notes. The $500.0 revolving facility was undrawn. The company reported $14.9 of long-term and $1.5 of current capital-lease obligations.
- Stockholders’ deficiency was $959.1. The company reported a $50.0 voluntary Term A loan prepayment in March and another $50.0 prepayment in July, after the reporting date.
Material changes versus the prior comparable period
- First-half revenue rose 16%; operating income increased 28%, net income 49% and AOCF 20%. National Networks drove the growth: its first-half revenue increased 18% and AOCF 20%.
- National Networks revenue growth reflected higher advertising revenue, primarily at AMC, and higher affiliation fees and other revenue. Advertising benefited from stronger demand and more original programming; affiliation revenue benefited from rate increases, subscribers and lower amortization of deferred carriage fees.
- Technical and operating costs increased 18% in the first half, principally from greater program-rights amortization at AMC and WE tv. International and Other revenue declined 5%, and its operating loss widened to $26.7 from $20.7.
- Interest expense increased to $59.2 from $33.7 for the first half, largely reflecting debt incurred in connection with the spin-off. The prior-year period also included $20.2 of deferred-financing-cost write-offs and debt-extinguishment losses that did not recur in 2012.
Outlook, risks and unusual items
- DISH Network carriage: DISH ended carriage of Sundance Channel effective May 20, 2012, and AMC, WE tv and IFC effective July 1, 2012. The company estimated the terminations reduced subscribers under affiliation agreements by about 13% and warned of a material future impact on revenue, AOCF and operating income if carriage is not restored. The impact depends on duration and any new agreement terms.
- Management outlook: The company expected original-programming investment and related program amortization to rise during the remainder of 2012. It cautioned that first-half advertising growth was not necessarily indicative of the rest of the year. It expected to use its net operating loss carryforward in Q3 2012 and projected an effective tax rate of approximately 39% in future quarters. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Liquidity and leverage: Management said cash, operating cash flow and revolver availability should cover obligations and investment needs over the next twelve months. It also stated that operating cash flow would not be sufficient to repay all debt at maturity, making refinancing or capital-market access important. The company was in compliance with credit-facility covenants at June 30.
- Legal contingency: The VOOM HD–DISH Network contract dispute was scheduled for trial in September 2012. Appellate rulings affirmed evidence-related sanctions against DISH; the parties share certain litigation costs and any recovery under an agreement with Cablevision.
- Interest-rate exposure: $1,553.2 of debt was variable-rate. Management estimated a 100-basis-point rate increase could raise annual interest expense by about $15.5. Swaps covered $935.0 of notional debt; approximately 63% of debt excluding leases was fixed-rate or effectively fixed.
- Other matters: The annual impairment test found no impairment, but the Sundance Channel reporting unit’s fair value could decline 11% before step-two testing would be required. Two customers represented 12% and less than 10% of first-half revenue, respectively. The company also identified dependency on distributor renewals, advertising demand, programming costs, and successful original content as risks.
Important facts for investors to verify
- Whether and when DISH carriage is restored, and the resulting subscriber, revenue and profit impact.
- Program-rights spending, amortization and cash payments, particularly as original-programming investment increases.
- Debt maturities, refinancing capacity, covenant headroom and availability of the undrawn revolver.
- Whether National Networks growth persists while International and Other losses and costs evolve.
- Progress and potential financial exposure from the VOOM–DISH litigation and the scheduled trial.