AMC Networks Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. The company became an independent public company on June 30, 2011, following its spin-off from Cablevision. Accordingly, results before the spin-off reflect Cablevision allocations and may not represent standalone costs. The filing reports annual results and comparative quarterly data, not a separate Q4 10-K.
Business context
AMC Networks operates AMC, WE tv, IFC and Sundance Channel, plus international programming, IFC Films and network technical services. It earns revenue mainly from distributor affiliation fees and advertising; in 2011, affiliation fees and other revenue were 62% of consolidated revenue and advertising was 38%. National Networks generated about 91% of revenue.
Financial performance
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $1,187.7 million | $1,078.3 million | +10% |
| Operating income | $326.5 million | $279.8 million | +17% |
| Operating margin | 27.5% | 26.0% | +1.5 percentage points |
| Adjusted operating cash flow (AOCF; non-GAAP) | $441.7 million | $401.3 million | +10% |
| Income from continuing operations | $126.4 million | $118.2 million | +7% |
| Net income | $126.5 million | $80.1 million | +58% |
| Cash from operating activities | $255.2 million | $266.0 million | −4% |
| Capital expenditures | $15.4 million | $17.2 million | −11% |
FY2011 net income included only $0.1 million of income from discontinued operations, versus a $38.1 million discontinued-operations loss in FY2010; this materially affects the comparison in reported net income. Continuing-operations diluted EPS was $1.79, compared with $1.71.
Fourth-quarter 2011 revenue was $339.0 million versus $298.5 million in Q4 2010; operating income was $79.1 million versus $70.2 million, and net income was $29.5 million versus $19.3 million. Quarterly results varied with advertising and programming costs.
Segments and material changes
- National Networks: Revenue increased 9% to $1,082.4 million; operating income rose 12% to $349.3 million; AOCF increased 7% to $447.6 million. Higher advertising revenue, led by AMC, and affiliation and digital licensing revenue drove growth. Programming costs and program-rights write-offs increased.
- International and Other: Revenue grew 20% to $125.6 million. Operating loss narrowed to $21.9 million from $29.6 million, and AOCF deficit narrowed to $5.0 million from $14.7 million, supported by international distribution and IFC Films growth and lower VOOM-related legal costs.
- AMC had 96.3 million Nielsen subscribers at year-end; WE tv 76.1 million; IFC 65.3 million; Sundance Channel 42.1 million viewing subscribers. AMC and WE tv counts edged down from 2010; IFC and Sundance grew.
- Technical and operating expense increased 16% to $426.0 million, including $18.1 million of program-rights write-offs, primarily at AMC. SG&A increased 2% to $335.7 million.
Cash, debt and liquidity
- Year-end cash and equivalents were $215.8 million. Current assets were $870.0 million and current liabilities $344.2 million.
- Total debt excluding capital leases was $2,291.3 million; including capital leases, reported total debt was $2,307.0 million. Debt excluding leases rose from $1,098.6 million at year-end 2010, largely reflecting financing associated with the spin-off and refinancing of legacy debt.
- The company had a $500 million revolving credit facility, undrawn at year-end. Management said cash, operating cash flow and revolver availability were expected to cover needs, but it did not expect operating cash flow alone to repay all debt at maturity and anticipated needing capital-market access or other actions to refinance.
- FY2011 interest expense, net was $94.8 million, up from $73.4 million. A $14.7 million debt-extinguishment loss and $6.2 million write-off of deferred financing costs reflected debt redemptions and refinancing. About 62% of debt excluding leases was fixed-rate or effectively fixed through swaps; a 100-basis-point rate increase was estimated to increase annual interest expense by about $16 million.
- Operating cash flow less capital expenditures was approximately $239.9 million. This is a simple derived measure, not a company-reported free-cash-flow metric.
Outlook, risks and unusual items
- No numerical revenue or earnings guidance was provided. Management expected an effective tax rate of approximately 39% in future periods and described international expansion as a small part of projected overall financial results over the next five years.
- Key risks include programming success and cost, distributor renewals and bargaining power, advertising-market sensitivity, digital-content competition, international execution, and substantial leverage. About 41% of subscribers were under affiliation agreements expiring before December 31, 2013; agreements expire through 2018.
- Comcast and DirecTV each accounted for at least 10% of 2011 revenue. Debt agreements impose financial tests and restrictions on borrowing, dividends, investments and other actions. The company reported compliance with covenants at year-end.
- The DISH Network/VOOM contract dispute remained pending. In January 2012, an appellate court affirmed sanctions and exclusion of DISH’s damages expert; further proceedings were stayed while DISH sought leave to appeal. Settlement or judgment proceeds and certain legal costs are shared with Cablevision under an agreement.
- The spin-off carries potential tax-indemnity exposure to Cablevision if specified conditions are breached or the transaction’s tax-free treatment is challenged. The company also disclosed control by the Dolan family and potential conflicts involving Cablevision and Madison Square Garden.
- Management reported effective disclosure controls. A management assessment and auditor attestation of internal control over financial reporting were omitted under the SEC transition period for newly public companies.
Important facts for investors to verify
- Debt maturity schedule, refinancing capacity, covenant headroom and availability of the undrawn revolver.
- Renewal terms and pricing for affiliation agreements, particularly those expiring before year-end 2013, and revenue exposure to major distributors.
- Whether advertising growth and audience ratings can persist as programming costs rise; review the $18.1 million program-rights write-offs.
- Cash-flow conversion relative to reported AOCF, including continuing programming investment and contractual program-rights obligations.
- Progress and financial exposure in the VOOM litigation and any tax-indemnity obligations arising from the Cablevision separation.
- Comparability of pre- and post-spin results, including Cablevision allocations, discontinued operations and the newly incurred debt burden.