Business context and reporting period
The filing is AMC Networks Inc.’s unaudited Form 10-Q for the quarter ended September 30, 2013; the registrant named in the filing differs from the request metadata, which identifies AMC Global Media Inc. AMC Networks operates National Networks (AMC, WE tv, IFC and Sundance Channel) and International and Other businesses. Amounts below are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $395.3 | $332.1 | $1,156.6 | $985.9 |
| Operating income | $122.4 | $86.9 | $497.2 | $282.2 |
| Net income attributable to AMC Networks stockholders | $58.1 | $36.6 | $255.4 | $121.3 |
| Diluted EPS | $0.80 | $0.51 | $3.51 | $1.68 |
| Adjusted operating cash flow (AOCF), non-GAAP | $137.4 | $109.6 | $425.9 | $362.5 |
Q3 revenue rose 19.1% year over year; operating margin increased to 31.0% from 26.2%, and net margin to 14.7% from 11.0%. Nine-month revenue grew 17.3%. Reported nine-month operating income includes a $132.9 million one-time litigation settlement gain; excluding it, operating income was approximately $364.3 million. Nine-month AOCF margin was approximately 36.8%, essentially flat year over year. AOCF is a company-defined non-GAAP measure and should not be treated as operating cash flow.
- Revenue drivers: National Networks generated $367.9 million in Q3 revenue, up 20.2%; advertising rose 36.3% and distribution 11.4%. Management attributed growth to stronger programming demand and pricing, original-series schedules, subscriber growth and recovery from the 2012 DISH carriage interruption. Q3 International and Other revenue increased 6.9% to $31.3 million.
- Costs and segments: Q3 technical and operating expense rose 21.2%, chiefly with increased programming investment. National Networks AOCF rose 24.5% to $144.9 million. International and Other recorded a $13.9 million operating loss and an $8.5 million AOCF deficit in Q3.
- Cash flow: Nine-month operating cash flow was negative $74.1 million, versus positive $224.0 million in 2012. The filing attributes the change principally to program-rights cash payments, settlement-related deferred revenue/proceeds movements, lower income taxes payable and higher prepaid expenses. Capital expenditures were $18.3 million; cash declined $101.3 million to $509.7 million.
- Debt and liquidity: Long-term debt, net of discount, was $2,155.4 million; face principal was $2,180 million. Cash less reported debt was approximately negative $1,645.7 million, excluding capital leases. The $500 million revolver was undrawn. The company reported covenant compliance and said it expects cash, operating cash flow and revolver availability to cover needs, while noting it does not expect to repay all debt at maturity from operating cash flow and will need to refinance or otherwise obtain capital.
- Balance sheet: Total assets were $2,524.8 million and total liabilities $3,136.7 million at September 30. Stockholders’ deficiency was $611.9 million. Program rights, net, were $1,158.4 million across current and noncurrent assets.
Material changes, outlook and risks
- The $132.9 million settlement gain followed the April 2013 final allocation of DISH Network litigation proceeds: AMC Networks received $175 million overall and paid $175 million to Cablevision from funds previously distributed pending allocation. The gain is nonrecurring and excluded from management’s AOCF measure.
- Management expected 2013 program-rights expense to exceed the prior year as investment in original programming increased, and expected a full-year effective tax rate of approximately 38%. It noted revenue and AOCF can vary by quarter with programming schedules, ratings, licensing timing and programming costs.
- After quarter-end, AMC Networks agreed to acquire substantially all of Liberty Global’s Chellomedia international content division for €750 million (approximately $1.035 billion), subject to customary adjustments and closing conditions. Closing was expected in Q1 2014. A bank commitment provided up to $600 million of financing, with the remainder expected to be funded from cash on hand.
- Key risks cited include high leverage and future refinancing access; advertising and subscriber demand; negotiations and renewals with concentrated distributors; rising programming costs and possible program-rights write-offs; international expansion costs and execution; and litigation, tax and acquisition risks. A 100-basis-point rate increase was not expected to materially affect annual interest expense, with approximately 93% of debt effectively fixed at quarter-end.
- During the nine months, programming write-offs were $9.3 million. No goodwill or indefinite-lived intangible impairment was recorded in the February 2013 annual tests; management noted Sundance Channel goodwill fair value would require further testing after a 12% decline. Tax authorities were auditing the company’s 2008 New York City unincorporated business tax return and 2011 federal corporate return.
Important facts for investors to verify
- Whether the Chellomedia acquisition closed as expected, its final purchase-price adjustments, financing and resulting leverage.
- Whether operating cash flow recovers as programming payments, settlement-related movements and tax payments normalize; track cash conversion against reported earnings.
- Whether advertising, affiliation-fee revenue and subscriber trends persist after the recovery from the 2012 DISH interruption.
- Whether rising original-programming investment supports audience, revenue and AOCF growth without further material write-offs.
- Debt maturities, covenant headroom, refinancing terms and the availability of the undrawn revolver.
- Resolution and financial effects of tax audits, uncertain tax positions and other contingencies.