AMC Networks Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. The filing is for AMC Networks Inc., not “AMC Global Media Inc.” The company operates National Networks and International and Other, including AMC, WE tv, IFC, SundanceTV, AMC Networks International and IFC Films. Financial statements are unaudited.
Key financial results
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $522.1 million | $379.3 million | $1,046.6 million | $761.3 million |
| Operating income | $129.5 million | $247.3 million | $277.1 million | $374.8 million |
| Net income attributable to AMC Networks | $58.7 million | $135.7 million | $130.0 million | $197.2 million |
| Diluted EPS | $0.81 | $1.87 | $1.80 | $2.72 |
| Adjusted operating cash flow (AOCF) | $156.9 million | $138.3 million | $324.0 million | $288.5 million |
Q2 revenue rose 37.6%; six-month revenue rose 37.5%. GAAP operating margin was 24.8% in Q2 and 26.5% for the first half, versus 65.2% and 49.2%, respectively, in 2013. Comparisons are heavily affected by the $132.9 million DISH Network litigation settlement gain recorded in 2013. Excluding that gain through the company’s non-GAAP AOCF measure, Q2 AOCF increased 13.5% and first-half AOCF increased 12.3%. AOCF is not a GAAP measure.
For the first half, operating cash flow was $177.5 million, versus cash used of $140.5 million a year earlier. Capital expenditures were $18.8 million. Investing cash outflow was $1.01 billion, principally reflecting the Chellomedia acquisition. Cash and equivalents were $284.0 million at June 30, down from $522.0 million at year-end 2013.
At June 30, debt carrying value was $2.76 billion, excluding capital leases; capital lease obligations were $31.9 million. The $500 million revolving facility was undrawn. Total liabilities were $4.08 billion and stockholders’ deficiency was $396.1 million.
Material changes and business drivers
- The January 31 acquisition of substantially all of Chellomedia for approximately $1.0 billion brought international networks reaching over 390 million subscribers in more than 130 countries. Chellomedia contributed $167.5 million of revenue and $21.9 million of operating income from acquisition through June 30. The preliminary allocation recorded $514.2 million of goodwill.
- National Networks revenue grew 8.7% in Q2 and 14.8% in the first half. Advertising benefited from pricing, demand for programming and original series; distribution growth reflected subscriber increases and programming licensing.
- International and Other revenue increased substantially with Chellomedia included, but comparisons with 2013 are not like-for-like. National Networks AOCF declined 9.4% in Q2 and was nearly flat for the first half, as higher programming and marketing costs offset revenue growth.
- Higher programming costs drove technical and operating expense growth. Management said it expects program-rights expense to increase for full-year 2014 as investment in original programming continues.
- Atmedia, Chellomedia’s advertising sales unit, was classified as held for sale and discontinued operations. It produced a $2.5 million after-tax loss for the five months from acquisition through June 30.
Outlook, risks and contingencies
- Management expected a roughly 37% effective tax rate for 2014. It cautioned that first-half operating cash flow is not necessarily indicative of the remainder of the year and that advertising, distribution revenue and AOCF can vary by quarter. No specific revenue or earnings guidance was provided.
- Management said cash on hand, operating cash flow and the undrawn revolver should cover liquidity needs over the next 12 months and longer term, but does not expect operating cash flow alone to repay all debt at maturity. Repayment or refinancing will depend on access to capital and credit markets.
- Key exposures include substantial leverage, rising programming costs, dependence on distributors and affiliation renewals, advertising demand, acquisition integration, international operating and currency risks, and interest rates. Approximately 70% of debt excluding capital leases was effectively fixed-rate after swaps; a 100-basis-point rate increase was not expected to materially affect annual interest expense.
- Contractual obligations not reflected on the balance sheet were approximately $543.0 million, up from $329.2 million at year-end, primarily due to Chellomedia program-rights and transmission commitments. The company reported compliance with debt covenants at June 30.
- The Chellomedia purchase-price allocation remained preliminary. Management reported no impairment in its February 2014 annual goodwill and indefinite-lived intangible asset tests. Disclosure controls were deemed effective; integration of Chellomedia’s internal-control processes was ongoing.
Important facts for investors to verify
- How much reported growth reflects Chellomedia and whether its international operations can sustain profitable growth.
- Whether National Networks’ programming investment and rising costs translate into stronger AOCF and margins.
- Debt maturities, refinancing access, covenant headroom and the availability of the undrawn revolver.
- Final acquisition accounting, goodwill and intangible-asset valuations, and progress on the Atmedia disposal.
- Subscriber trends, advertising performance, affiliation renewals, foreign-exchange exposure and the timing of programming-related cash outlays.