Business context and reporting period
AMC Networks Inc. (the registrant; not “AMC Global Media Inc.”) filed this Form 10-K for the fiscal year ended December 31, 2012. It operates AMC, WE tv, IFC and Sundance Channel, plus international programming, IFC Films and technical services. Revenue is generated principally from distributor affiliation fees and advertising. The company became independent of Cablevision in June 2011; pre-spin-off comparisons reflect allocated Cablevision costs and may not be directly comparable.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $1,352.6 million | $1,187.7 million |
| Operating income | $362.8 million | $326.5 million |
| Operating margin | 26.8% | 27.5% |
| Net income | $136.5 million | $126.5 million |
| Diluted EPS | $1.89 | $1.79 |
| Adjusted operating cash flow (AOCF; non-GAAP) | $465.4 million | $441.7 million |
| Cash from continuing operating activities | $569.1 million | $255.2 million |
| Capital expenditures | $18.6 million | $15.4 million |
| Cash and cash equivalents at year-end | $611.0 million | $215.8 million |
| Debt principal, excluding capital leases | $2,180.0 million | $2,322.0 million |
National Networks generated $1,254.2 million of revenue and $492.1 million of AOCF; International and Other generated $114.5 million of revenue and an AOCF deficit of $30.0 million. National Networks revenue was 93% of consolidated revenue. Advertising was 39% of consolidated revenue and distribution and other revenue was 61%.
Operating cash flow included a substantial nonrecurring timing effect: a $337.2 million increase in deferred revenue and deferred litigation-settlement proceeds, primarily related to the DISH settlement. Accordingly, reported operating cash flow should not be viewed as a recurring run rate. Cash less debt principal implies net debt of approximately $1.57 billion, before capital leases. The company reported stockholders’ deficiency of $882.4 million.
Fourth-quarter 2012 revenue was $366.7 million, operating income $80.7 million and net income $15.2 million, versus $339.0 million, $79.1 million and $29.5 million, respectively, in Q4 2011. Revenue grew, but quarterly net income fell substantially.
Material changes versus prior comparable period
- FY revenue rose 13.9%; National Networks revenue increased 15.9%, led by higher advertising (up 16.9%) and distribution and other revenue (up 15.2%). Higher original-programming licensing revenue and affiliation rates contributed.
- Operating income rose 11.1% and net income 8.0%, but operating margin declined 0.7 percentage point as technical and operating expense and SG&A grew faster than revenue. National Networks AOCF margin declined from 41.3% to 39.2%.
- Programming amortization and write-offs increased; the company recorded $10.0 million of program-rights write-offs in 2012, compared with $18.3 million in 2011. Management said it expected program-rights amortization to increase in 2013.
- International and Other revenue declined 8.8%, and its AOCF deficit widened from $5.0 million to $30.0 million, reflecting lower technical-services and IFC Films revenue and higher selling and administrative costs, including DISH-related legal expense.
- Net interest expense increased to $127.3 million from $94.8 million, largely reflecting the post-spin debt structure. The 2012 results also included a $10.8 million debt-extinguishment loss, a $1.9 million deferred-financing-cost write-off and an $8.7 million unrealized swap loss.
- Subscriber counts increased year over year: AMC 98.9 million, WE tv 81.5 million, IFC 69.6 million Nielsen subscribers; Sundance Channel 50.2 million viewing subscribers. The company attributed increases primarily to carriage repositioning; measurement bases differ for Sundance.
Outlook, commentary, risks and unusual items
- No specific consolidated revenue or earnings guidance was provided. Management expected AMC to air six scripted original series in 2013, versus five in 2012, and expected increased original-programming investment and amortization expense.
- Management said cash on hand, operating cash flow and the undrawn $500 million revolving facility should fund debt service and other needs over the next 12 months. It also said operating cash flow would not be sufficient to repay all debt at maturity, leaving the company dependent on capital and credit markets or other actions.
- In December 2012, the company issued $600 million of 4.75% senior notes due 2022 and used net proceeds principally to repay approximately $587.6 million of term-loan B borrowings. Year-end debt principal was $2.18 billion; the company reported compliance with its debt covenants.
- Of $700 million paid by DISH Network in settlement of the VOOM litigation, $350 million was temporarily allocated to AMC Networks and held in cash. The final allocation is unresolved and may be significantly less. The balance sheet included approximately $308 million of deferred litigation-settlement proceeds; no settlement gain was recognized, and any gain is contingent on final allocation.
- The settlement also restored DISH carriage under a long-term affiliation agreement. A $31 million fair-value difference was deferred as revenue; approximately $26 million remained deferred at year-end for recognition over 2013.
- Major risks include dependence on a limited number of distributors (Comcast and DirecTV each represented at least approximately 10% of 2012 revenue), changing audience tastes, programming availability and cost, advertising cyclicality, competition from digital platforms, leverage and refinancing needs, and regulatory and international risks.
- The Dolan family held approximately 66% of total voting power through Class B shares. Related-party relationships and potential conflicts, as well as restrictions under the tax-disaffiliation agreement, may affect governance and strategic flexibility. The company paid no cash dividend in 2012 and did not expect one in the foreseeable future.
- The DISH settlement litigation was resolved with prejudice. A separate compensation-related lawsuit seeking approximately $11 million was indemnified by Cablevision; no provision was recorded. Management said other ordinary-course matters were not expected to materially affect financial position.
Most important facts for investors to verify
- Final allocation of the DISH settlement proceeds to AMC Networks, including the amount ultimately retained and any recognized gain or tax effect.
- How much of 2012 operating cash flow is sustainable after excluding settlement-related deferrals and other working-capital movements.
- Execution and economics of the renewed DISH carriage agreement, and whether subscriber growth and affiliation rates offset carriage discounts and programming costs.
- Debt maturities, covenant headroom, refinancing access and sensitivity to interest rates; the filing estimates a 100-basis-point rate increase could add about $8 million to annual interest expense.
- Whether rising original-programming investment translates into durable audience ratings, advertising pricing and margins, particularly given the deterioration in National Networks’ AOCF margin.
- International and Other’s continuing operating losses and the assumptions supporting the carrying values of Sundance Channel goodwill and other intangible assets.