AMC Networks Inc. — Q1 2012 Form 10-Q
Business context and reporting period. The filing is by AMC Networks Inc. (not “AMC Global Media Inc.”). It covers the three months ended March 31, 2012, compared with Q1 2011. AMC Networks operates National Networks, including AMC, WE tv, IFC and Sundance Channel, and International and Other businesses, including international programming, IFC Films and technical services. The company became independent of Cablevision in June 2011; the periods compared therefore reflect different financing and corporate cost structures.
Key financial results
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $326.2 million | $272.9 million | +20% |
| Operating income / margin | $97.0 million / 29.7% | $70.7 million / 25.9% | +37% |
| Adjusted operating cash flow (AOCF), non-GAAP | $125.7 million | $99.5 million | +26% |
| Income from continuing operations | $43.1 million | $29.7 million | +45% |
| Net income / net margin | $43.2 million / 13.2% | $29.8 million / 10.9% | +45% |
| Diluted EPS | $0.60 | $0.43 | Up |
| Operating cash flow | $77.0 million | $48.4 million | +$28.5 million |
| Capital expenditures | $2.8 million | $1.6 million | +$1.2 million |
AOCF is a company-defined non-GAAP measure; it is not a substitute for GAAP operating income or cash flow.
Financial position and liquidity
- At March 31, 2012, cash and cash equivalents were $224.2 million, versus $215.8 million at December 31, 2011. Current assets were $835.9 million and current liabilities were $329.5 million.
- Total debt carrying value was approximately $2.241 billion, excluding capital leases; this comprised $1.554 billion of credit-facility debt and $686.7 million of senior notes. Capital lease obligations totaled $16.9 million. The $500 million revolving facility was undrawn.
- Debt decreased by approximately $50.5 million from year-end. The company voluntarily prepaid $50 million of Term A debt and made a scheduled Term B payment. It reported compliance with credit-facility covenants.
- Net cash provided by operating activities was $77.0 million; investing activities used $2.8 million and financing activities used $65.9 million. Cash increased $8.2 million from continuing operations.
- Management said cash, operating cash flow and revolver availability should be sufficient for debt service and other needs over the next 12 months. It also warned that operating cash flow is not expected to repay all debt at maturity, making refinancing or capital-market access necessary.
Material changes and segment performance
- National Networks revenue rose 21% to $304.2 million; segment AOCF increased 25% to $133.4 million. Advertising revenue benefited from higher AMC ratings, pricing and original programming, including The Walking Dead. Affiliation fees and other revenues also increased.
- International and Other revenue rose 4% to $26.3 million, but the segment’s operating loss widened to $12.7 million from $11.5 million and its AOCF deficit widened to $8.2 million from $7.1 million. Higher programming, transmission and selling costs contributed.
- Consolidated operating expenses increased 13% to $229.2 million, slower than revenue growth. Technical and operating costs rose 16%, mainly from program-rights amortization; SG&A increased 14%, including higher marketing and stand-alone company costs.
- Net interest expense increased materially: reported interest expense was $29.8 million versus $18.4 million. Management attributed the increase chiefly to post-distribution debt, partly offset by repayment of prior Rainbow debt; interest-rate swaps added $2.1 million of expense.
Outlook, risks and unusual items
- No full-year revenue or earnings guidance is provided. Management expected an effective tax rate of approximately 39% in future quarters and expected programming-rights amortization to rise for the rest of 2012 as original-programming investment increased.
- DISH Network notified AMC in April that it intended to end Sundance Channel carriage effective May 20, 2012, and in May that it intended to end carriage of AMC, WE tv and IFC effective July 1, 2012. The company said the financial impact could be material and depended on how long the networks were not carried and the outcome of litigation.
- The VOOM HD contract dispute with DISH remained pending. An appellate ruling affirmed sanctions against DISH and exclusion of its damages expert; further appeal of those rulings was denied in April 2012, and trial-court proceedings resumed. Any recovery is shared equally with Cablevision under an agreement.
- The company recorded no goodwill or indefinite-lived intangible impairment in its Q1 test. Sundance Channel had limited headroom: an 11% decline in estimated fair value would trigger step-two testing. A hypothetical 20% decline in the fair value of indefinite-lived trademarks would not cause impairment.
- Interest-rate swaps had $935 million notional value and a $19.9 million liability; management estimated a 100-basis-point rate increase could add about $15.5 million to annual interest expense absent offsets. About 64% of debt excluding leases was fixed-rate or effectively fixed.
- Other notable items included a $312,000 write-off of deferred financing costs following the Term A prepayment, a $517,000 after-tax other comprehensive loss on swaps, and $15.9 million of shares acquired for employee tax withholding and recorded as treasury stock. The filing reports no material adverse effect expected from other ordinary-course claims; a compensation lawsuit seeking approximately $11 million is indemnified by Cablevision.
- Key stated risks include programming costs and availability, advertising demand and ratings, distributor negotiations and concentration, substantial leverage and refinancing access, economic conditions, competition, litigation and international expansion challenges.
Important facts for investors to verify
- Whether DISH carriage actually ended, how long any interruption lasted, and the resulting revenue, profit and subscriber effects.
- Debt maturities, refinancing plans and credit-facility covenant headroom, especially given management’s warning that it cannot repay all debt from operating cash flow at maturity.
- Whether strong AMC advertising performance and higher original-programming costs continued beyond Q1; management cautioned that the quarter’s advertising increase was not necessarily indicative of the rest of 2012.
- Subscriber trends, affiliation-rate changes and distributor concentration; two customers represented 12% and 9% of Q1 revenue, respectively.
- Performance of International and Other, including continued segment losses and the winding down of VOOM HD.
- Assumptions behind goodwill valuations, particularly Sundance Channel’s reported 11% sensitivity threshold, and developments in the DISH litigation.