UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
þ | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2012
or
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 1-35106
AMC Networks Inc.
(Exact name of registrant as specified in its charter)
Delaware | 27-5403694 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
11 Penn Plaza, New York, NY |
10001 | |
(Address of principal executive offices) | (Zip Code) |
(212) 324-8500
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2).
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | þ | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ
The number of shares of common stock outstanding as of August 1, 2012:
Class A Common Stock par value $0.01 per share |
58,164,199 | |||
Class B Common Stock par value $0.01 per share |
13,534,408 |
AMC NETWORKS INC. AND SUBSIDIARIES
FORM 10-Q
Page | ||||||
PART I. |
FINANCIAL INFORMATION |
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Item 1. |
Financial Statements |
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Consolidated Balance Sheets - June 30, 2012 and December 31, 2011 (unaudited) |
3 | |||||
Consolidated Statements of Income - Three and Six Months Ended June 30, 2012 and 2011 (unaudited) |
4 | |||||
5 | ||||||
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2012 and 2011 (unaudited) |
6 | |||||
7 | ||||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
23 | ||||
Item 3. |
47 | |||||
Item 4. |
47 | |||||
PART II. |
OTHER INFORMATION |
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Item 1. |
48 | |||||
Item 2. |
48 | |||||
Item 6. |
49 | |||||
50 |
PART I. FINANCIAL INFORMATION
Item 1. | Financial Statements. |
AMC NETWORKS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(unaudited)
June 30, 2012 |
December 31, 2011 |
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ASSETS | ||||||||
Current Assets: |
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Cash and cash equivalents |
$ | 307,803 | $ | 215,836 | ||||
Accounts receivable, trade (less allowance for doubtful accounts of $2,599 and $3,092) |
293,930 | 286,810 | ||||||
Amounts due from related parties, net |
4,795 | 5,540 | ||||||
Program rights, net |
236,986 | 235,171 | ||||||
Prepaid expenses and other current assets |
49,488 | 67,370 | ||||||
Deferred tax asset, net |
12,652 | 59,272 | ||||||
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Total current assets |
905,654 | 869,999 | ||||||
Property and equipment, net of accumulated depreciation of $142,815 and $132,745 |
63,300 | 63,814 | ||||||
Program rights, net |
768,554 | 765,609 | ||||||
Amounts due from related parties, net |
3,369 | 3,214 | ||||||
Deferred carriage fees, net |
42,937 | 47,304 | ||||||
Intangible assets, net |
266,723 | 305,673 | ||||||
Goodwill |
83,173 | 83,173 | ||||||
Other assets |
39,729 | 45,148 | ||||||
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Total assets |
$ | 2,173,439 | $ | 2,183,934 | ||||
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LIABILITIES AND STOCKHOLDERS DEFICIENCY | ||||||||
Current Liabilities: |
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Accounts payable |
$ | 69,148 | $ | 61,605 | ||||
Accrued liabilities: |
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Interest |
28,681 | 31,254 | ||||||
Employee related costs |
48,718 | 57,160 | ||||||
Other accrued expenses |
14,335 | 11,385 | ||||||
Amounts due to related parties, net |
722 | 5,336 | ||||||
Program rights obligations |
161,425 | 146,339 | ||||||
Deferred revenue |
32,687 | 23,853 | ||||||
Credit facility debt |
5,950 | 5,950 | ||||||
Capital lease obligations |
1,484 | 1,314 | ||||||
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Total current liabilities |
363,150 | 344,196 | ||||||
Program rights obligations |
419,951 | 472,690 | ||||||
Senior notes |
686,917 | 686,434 | ||||||
Credit facility debt |
1,547,280 | 1,598,896 | ||||||
Capital lease obligations |
14,902 | 14,363 | ||||||
Deferred tax liability, net |
43,040 | 51,905 | ||||||
Other liabilities |
57,320 | 52,445 | ||||||
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Total liabilities |
3,132,560 | 3,220,929 | ||||||
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Commitments and contingencies |
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Stockholders deficiency: |
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Class A Common Stock, $0.01 par value, 360,000,000 shares authorized, 58,798,794 and 58,628,764 shares issued and 58,170,976 and 58,434,704 shares outstanding, respectively |
588 | 586 | ||||||
Class B Common Stock, $0.01 par value, 90,000,000 shares authorized, 13,534,408 shares issued and outstanding |
135 | 135 | ||||||
Preferred stock, $0.01 par value, 45,000,000 shares authorized; none issued |
| | ||||||
Paid-in capital |
17,913 | 5,942 | ||||||
Accumulated deficit |
(945,263 | ) | (1,029,954 | ) | ||||
Treasury stock, at cost (627,818 and 194,060 shares Class A Common Stock, respectively) |
(17,665 | ) | (1,677 | ) | ||||
Accumulated other comprehensive loss |
(14,829 | ) | (12,027 | ) | ||||
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Total stockholders deficiency |
(959,121 | ) | (1,036,995 | ) | ||||
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Total liabilities and stockholders deficiency |
$ | 2,173,439 | $ | 2,183,934 | ||||
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See accompanying notes to consolidated financial statements.
3
AMC NETWORKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Three and Six Months Ended June 30, 2012 and 2011
(In thousands, except per share amounts)
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues, net (including revenues, net from related parties of $8,102, $8,028, $16,175 and $15,968, respectively) |
$ | 327,570 | $ | 291,965 | $ | 653,809 | $ | 564,868 | ||||||||
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Operating expenses: |
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Technical and operating (excluding depreciation and amortization shown below and including charges from related parties of $310, $1,396, $310 and $2,601, respectively) |
114,349 | 95,883 | 219,279 | 186,294 | ||||||||||||
Selling, general and administrative (including charges from related parties of $1,108, $26,459, $3,104 and $50,750, respectively) |
90,878 | 88,564 | 190,100 | 175,485 | ||||||||||||
Restructuring credit |
| (15 | ) | (3 | ) | (49 | ) | |||||||||
Depreciation and amortization |
24,067 | 25,259 | 49,118 | 50,185 | ||||||||||||
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229,294 | 209,691 | 458,494 | 411,915 | |||||||||||||
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Operating income |
98,276 | 82,274 | 195,315 | 152,953 | ||||||||||||
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Other income (expense): |
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Interest expense |
(29,431 | ) | (15,353 | ) | (59,228 | ) | (33,703 | ) | ||||||||
Interest income |
102 | 163 | 207 | 620 | ||||||||||||
Write-off of deferred financing costs |
| (5,703 | ) | (312 | ) | (5,703 | ) | |||||||||
Loss on extinguishment of debt |
| (14,518 | ) | | (14,518 | ) | ||||||||||
Miscellaneous, net |
(644 | ) | 7 | (632 | ) | 79 | ||||||||||
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(29,973 | ) | (35,404 | ) | (59,965 | ) | (53,225 | ) | |||||||||
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Income from continuing operations before income taxes |
68,303 | 46,870 | 135,350 | 99,728 | ||||||||||||
Income tax expense |
(26,898 | ) | (19,812 | ) | (50,868 | ) | (42,948 | ) | ||||||||
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Income from continuing operations |
41,405 | 27,058 | 84,482 | 56,780 | ||||||||||||
Income from discontinued operations, net of income taxes |
105 | 97 | 209 | 193 | ||||||||||||
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Net income |
$ | 41,510 | $ | 27,155 | $ | 84,691 | $ | 56,973 | ||||||||
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Basic net income per share: |
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Income from continuing operations |
$ | 0.59 | $ | 0.39 | $ | 1.20 | $ | 0.82 | ||||||||
Income from discontinued operations |
$ | | $ | | $ | | $ | | ||||||||
Net income |
$ | 0.59 | $ | 0.39 | $ | 1.21 | $ | 0.82 | ||||||||
Diluted net income per share: |
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Income from continuing operations |
$ | 0.57 | $ | 0.39 | $ | 1.17 | $ | 0.82 | ||||||||
Income from discontinued operations |
$ | | $ | | $ | | $ | | ||||||||
Net income |
$ | 0.58 | $ | 0.39 | $ | 1.17 | $ | 0.82 | ||||||||
Weighted average common shares: |
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Basic weighted average common shares |
70,479 | 69,161 | 70,175 | 69,161 | ||||||||||||
Diluted weighted average common shares |
72,183 | 69,161 | 72,157 | 69,161 |
See accompanying notes to consolidated financial statements.
4
AMC NETWORKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three and Six Months Ended June 30, 2012 and 2011
(Dollars in thousands)
(unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Net income |
$ | 41,510 | $ | 27,155 | $ | 84,691 | $ | 56,973 | ||||||||
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Other comprehensive loss: |
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Unrealized loss on interest rate swaps |
(3,628 | ) | | (4,448 | ) | | ||||||||||
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Other comprehensive loss, before income taxes |
(3,628 | ) | | (4,448 | ) | | ||||||||||
Income tax benefit |
1,343 | | 1,646 | | ||||||||||||
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Other comprehensive loss, net of income taxes |
(2,285 | ) | | (2,802 | ) | | ||||||||||
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Comprehensive income |
$ | 39,225 | $ | 27,155 | $ | 81,889 | $ | 56,973 | ||||||||
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See accompanying notes to consolidated financial statements.
5
AMC NETWORKS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2012 and 2011
(Dollars in thousands)
(unaudited)
2012 | 2011 | |||||||
Cash flows from operating activities: |
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Income from continuing operations |
$ | 84,482 | $ | 56,780 | ||||
Adjustments to reconcile income from continuing operations to net cash provided by operating activities: |
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Depreciation and amortization |
49,118 | 50,185 | ||||||
Share-based compensation expense related to equity classified awards |
8,484 | 8,343 | ||||||
Amortization and write-off of program rights |
145,044 | 112,872 | ||||||
Amortization of deferred carriage fees |
4,369 | 11,981 | ||||||
Amortization and write-off of financing and other costs |
4,563 | 7,449 | ||||||
Loss on extinguishment of debt |
| 14,518 | ||||||
(Recovery of) provision for doubtful accounts |
(96 | ) | 547 | |||||
Deferred income taxes |
39,401 | 36,008 | ||||||
Excess tax benefits from share-based compensation arrangements |
(1,492 | ) | | |||||
Changes in assets and liabilities: |
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Accounts receivable, trade |
(7,024 | ) | 172 | |||||
Amounts due from/to related parties, net |
(3,675 | ) | 580 | |||||
Prepaid expenses and other assets |
21,651 | (16,081 | ) | |||||
Program rights and obligations, net |
(187,457 | ) | (131,642 | ) | ||||
Deferred carriage fees and deferred carriage fees payable, net |
(434 | ) | (2,622 | ) | ||||
Accounts payable, accrued expenses and other liabilities |
8,670 | (29,968 | ) | |||||
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Net cash provided by operating activities |
165,604 | 119,122 | ||||||
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Cash flows from investing activities: |
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Capital expenditures |
(6,619 | ) | (4,340 | ) | ||||
Acquisition of investment securities |
(750 | ) | | |||||
Payment for acquisition of a business |
(185 | ) | (135 | ) | ||||
Proceeds from sale of equipment, net of costs of disposal |
100 | 13 | ||||||
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Net cash used in investing activities |
(7,454 | ) | (4,462 | ) | ||||
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Cash flows from financing activities: |
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Capital contributions from Cablevision |
| 20,813 | ||||||
Capital distributions to Cablevision |
| (20,813 | ) | |||||
Repayment of credit facility debt |
(52,975 | ) | (775,000 | ) | ||||
Redemption of senior notes |
| (300,000 | ) | |||||
Redemption of senior subordinated notes, including tender premium and fees |
| (338,365 | ) | |||||
Payments for financing costs |
(211 | ) | (23,900 | ) | ||||
Proceeds from credit facility debt |
| 1,442,364 | ||||||
Purchase of treasury stock |
(15,988 | ) | | |||||
Proceeds from stock option exercises |
1,997 | | ||||||
Excess tax benefits from share-based compensation arrangements |
1,492 | | ||||||
Principal payments on capital lease obligations |
(690 | ) | (2,242 | ) | ||||
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Net cash (used in) provided by financing activities |
(66,375 | ) | 2,857 | |||||
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Net increase in cash and cash equivalents from continuing operations |
91,775 | 117,517 | ||||||
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Cash flows from discontinued operations: |
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Net cash provided by (used in) operating activities |
192 | (16 | ) | |||||
Net cash provided by investing activities |
| 376 | ||||||
Net cash provided by (used in) financing activities |
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Net increase in cash and cash equivalents from discontinued operations |
192 | 360 | ||||||
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Cash and cash equivalents at beginning of period |
215,836 | 79,960 | ||||||
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Cash and cash equivalents at end of period |
$ | 307,803 | $ | 197,837 | ||||
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See accompanying notes to consolidated financial statements.
6
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(unaudited)
Note 1. Description of Business and Basis of Presentation
Description of Business
AMC Networks Inc. (AMC Networks) and collectively with its subsidiaries (the Company) own and operate entertainment businesses and assets. The Company is comprised of two reportable segments:
| National Networks: Includes four nationally distributed programming networks: AMC, WE tv, IFC and Sundance Channel. These programming networks are distributed throughout the United States (U.S.) via cable and other multichannel video programming distribution platforms, including direct broadcast satellite (DBS) and platforms operated by telecommunications providers (we refer collectively to these cable and other multichannel video programming distributors as multichannel video programming distributors or distributors); and |
| International and Other: Principally includes AMC/Sundance Channel Global, the Companys international programming business; IFC Films, the Companys independent film distribution business; and AMC Networks Broadcasting & Technology, the Companys network technical services business, which primarily services the programming networks of the Company. AMC and Sundance Channel are distributed in Canada and Sundance Channel and WE tv are distributed in other countries throughout Europe and Asia. The International and Other reportable segment also includes VOOM HD Holdings LLC (VOOM HD), which the Company is winding down, and which continues to sell certain limited amounts of programming internationally through program license agreements. |
On June 30, 2011, Cablevision Systems Corporation (Cablevision Systems Corporation and its subsidiaries are referred to as Cablevision) spun-off the Company (the Distribution) and AMC Networks became an independent public company. In connection with the Distribution, Cablevision contributed all of the membership interests of Rainbow Media Holdings LLC (RMH) to AMC Networks, which was an indirect wholly-owned subsidiary of Cablevision immediately prior to the Distribution. RMH owned, directly or indirectly, the businesses included in Cablevisions Rainbow segment. On June 30, 2011, Cablevision effected the Distribution of all of AMC Networks outstanding common stock to its shareholders. Both Cablevision and the Company continue to be controlled by Charles F. Dolan, certain members of his immediate family and certain family related entities (collectively the Dolan Family).
Basis of Presentation
These unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) and Article 10 of Regulation S-X of the Securities and Exchange Commission (SEC) for interim financial information. Accordingly, these unaudited consolidated financial statements do not include all the information and notes required for complete annual financial statements.
These unaudited consolidated financial statements should be read in conjunction with the Companys audited consolidated financial statements and notes thereto for the year ended December 31, 2011 contained in the Companys 2011 Annual Report on Form 10-K (2011 Form 10-K) filed with the SEC.
7
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
The consolidated financial statements as of June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 are unaudited; however, in the opinion of management, such consolidated financial statements include all adjustments, consisting solely of normal recurring adjustments, necessary for a fair presentation of the results for the periods presented. All intercompany transactions and balances have been eliminated in consolidation.
The results of operations for the interim periods are not necessarily indicative of the results that might be expected for future interim periods or for the full year ending December 31, 2012.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates. Significant estimates and judgments inherent in the preparation of the consolidated financial statements include the determination of ultimate revenues as it relates to accounting for amortization of owned original programming costs, valuation and recoverability of long-lived assets, income taxes and contingencies and litigation matters.
The Companys consolidated financial statements for periods prior to the Distribution have been derived from the consolidated financial statements and accounting records of Cablevision and reflect certain assumptions and allocations. The results of operations and cash flows of the Company for those periods could differ from those that might have resulted had the Company been operated autonomously or as an entity independent of Cablevision. The Companys consolidated financial statements after the Distribution reflect certain revenues and expenses related to transactions with or charges from Cablevision and The Madison Square Garden Company and its subsidiaries (MSG) as described in Note 11.
Discontinued Operations
Discontinued operations consists of receipts related to the sale of the Lifeskool and Sportskool video-on-demand services in September and October 2008, respectively, which were recorded under the installment sales method.
Recently Adopted Accounting Pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment (ASU 2011-08), to allow entities to use a qualitative approach to test goodwill for impairment. ASU 2011-08 permits an entity to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not required. The Company adopted ASU 2011-08 effective January 1, 2012 and applied it to the Companys annual impairment test as of the end of February 2012 (see Note 3).
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (ASU 2011-05). The provisions of ASU 2011-05 provide that an entity that reports items of other comprehensive income has the option to present comprehensive income as (i) a single statement that presents the components of net income and total net income, the components of other comprehensive income and total other comprehensive income and a total for comprehensive income or (ii) in a two-statement approach, whereby an entity must present the components of net income and total net income in the first statement and that statement is immediately followed by a financial statement that presents the components of other comprehensive income, a total for other comprehensive income and a total for comprehensive income. The previous option under GAAP that permitted the presentation of other comprehensive income in the statement of stockholders equity has been eliminated. In December 2011, the FASB issued ASU No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU 2011-12). ASU 2011-12 defers the requirement in ASU 2011-05 to present reclassification adjustments for each component of accumulated other comprehensive income (AOCI) in both other comprehensive income and net income on the face of the financial statements, and the presentation of reclassification adjustments is not required in interim periods. The Company adopted ASU 2011-05 and ASU 2011-12 effective January 1, 2012 and presents comprehensive income using the two-statement approach.
8
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in GAAP and IFRSs (ASU 2011-04). ASU 2011-04 provides amendments to Topic 820 that change the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements. The Company adopted ASU 2011-04 effective January 1, 2012. The adoption of this authoritative guidance did not have any impact on the Companys consolidated financial statements.
Recently Issued Accounting Pronouncements
In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (ASU 2012-02), to allow entities to use a qualitative approach to test indefinite-lived intangible assets for impairment. ASU 2012-02 permits an entity to first perform a qualitative assessment to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If it is concluded that this is the case, an entity is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. Otherwise, the quantitative impairment test is not required. This guidance will be effective for the Companys 2013 annual impairment test and earlier adoption is permitted. The Company will evaluate performing a qualitative assessment in 2013.
Note 2. Net Income per Share
The consolidated statements of income present basic and diluted net income per share (EPS). Basic EPS is based upon net income divided by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the dilutive effects of AMC Networks stock options (including those held by directors and employees of related parties of the Company) and AMC Networks restricted shares/units (including those held by employees of related parties of the Company).
The following is a reconciliation between basic and diluted weighted average shares outstanding:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Basic weighted average shares outstanding |
70,479,000 | 69,161,000 | 70,175,000 | 69,161,000 | ||||||||||||
Effect of dilution: |
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Stock options |
819,000 | | 859,000 | | ||||||||||||
Restricted shares/units |
885,000 | | 1,123,000 | | ||||||||||||
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Diluted weighted average shares outstanding |
72,183,000 | 69,161,000 | 72,157,000 | 69,161,000 | ||||||||||||
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|
The number of shares used to compute basic and diluted EPS for the three and six months ended June 30, 2011 of approximately 69,161,000, represents the number of shares of AMC Networks common stock issued to Cablevision shareholders on the Distribution date, and excludes unvested outstanding restricted shares, based on a distribution ratio of one share of AMC Networks common stock for every four shares of Cablevision common stock outstanding. The dilutive effect of the Companys share-based awards that were issued in connection with the adjustment or conversion of Cablevisions share-based awards upon the Distribution (including Cablevision stock options and restricted share awards granted prior to the Distribution) and subsequent Company grants, are included in the computation of diluted EPS in periods subsequent to the Distribution.
For the three and six months ended June 30, 2012, approximately 231,000 restricted shares/units have been excluded from diluted weighted average common shares outstanding since the performance criteria on these awards has not yet been satisfied. As of June 30, 2012, approximately 334,000 restricted shares/units have been excluded from diluted weighted average common shares outstanding since they would have been anti-dilutive.
9
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
Note 3. Goodwill and Other Intangible Assets
The carrying amount of goodwill, by reporting unit and reportable segment, as of both June 30, 2012 and December 31, 2011 is as follows:
Reporting Unit and Segment |
||||
AMC |
$ | 34,251 | ||
WE tv |
5,214 | |||
IFC |
13,582 | |||
Sundance Channel |
28,930 | |||
|
|
|||
Total National Networks |
81,977 | |||
|
|
|||
AMC Networks Broadcasting & Technology |
1,196 | |||
|
|
|||
Total International and Other |
1,196 | |||
|
|
|||
$ | 83,173 | |||
|
|
The following tables summarize information relating to the Companys identifiable intangible assets:
June 30, 2012 | ||||||||||||
Gross | Accumulated Amortization |
Net | ||||||||||
Amortizable intangible assets: |
||||||||||||
Affiliation agreements and affiliate relationships |
$ | 911,357 | $ | (672,457 | ) | $ | 238,900 | |||||
Advertiser relationships |
74,248 | (66,514 | ) | 7,734 | ||||||||
Other amortizable intangible assets |
644 | (455 | ) | 189 | ||||||||
|
|
|
|
|
|
|||||||
Total amortizable intangible assets |
986,249 | (739,426 | ) | 246,823 | ||||||||
|
|
|
|
|
|
|||||||
Indefinite-lived intangible assets: |
||||||||||||
Trademarks |
19,900 | | 19,900 | |||||||||
|
|
|
|
|
|
|||||||
Total intangible assets |
$ | 1,006,149 | $ | (739,426 | ) | $ | 266,723 | |||||
|
|
|
|
|
|
|||||||
December 31, 2011 | ||||||||||||
Gross | Accumulated Amortization |
Net | ||||||||||
Amortizable intangible assets: |
||||||||||||
Affiliation agreements and affiliate relationships |
$ | 911,357 | $ | (637,394 | ) | $ | 273,963 | |||||
Advertiser relationships |
103,723 | (92,166 | ) | 11,557 | ||||||||
Other amortizable intangible assets |
644 | (391 | ) | 253 | ||||||||
|
|
|
|
|
|
|||||||
Total amortizable intangible assets |
1,015,724 | (729,951 | ) | 285,773 | ||||||||
|
|
|
|
|
|
|||||||
Indefinite-lived intangible assets: |
||||||||||||
Trademarks |
19,900 | | 19,900 | |||||||||
|
|
|
|
|
|
|||||||
Total intangible assets |
$ | 1,035,624 | $ | (729,951 | ) | $ | 305,673 | |||||
|
|
|
|
|
|
During the six months ended June 30, 2012, the Company retired $29,475 of fully amortized advertiser relationships.
10
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
Aggregate amortization expense for amortizable intangible assets for the six months ended June 30, 2012 and 2011 was $38,950 and $39,554, respectively. The Company expects its future aggregate amortization expense for existing intangible assets subject to amortization to be as follows:
Years Ending December 31, |
||||
2012 |
$ | 64,489 | ||
2013 |
31,631 | |||
2014 |
9,759 | |||
2015 |
9,746 | |||
2016 |
9,746 |
Impairment of Goodwill and Identifiable Indefinite-Lived Intangible Assets
In accordance with the accounting guidance adopted on January 1, 2012, the annual goodwill impairment test allows for the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. An entity may choose to perform the qualitative assessment on none, some or all of its reporting units or an entity may bypass the qualitative assessment for any reporting unit and proceed directly to step one of the quantitative impairment test. If it is determined, on the basis of qualitative factors, that the fair value of a reporting unit is, more likely than not, less than its carrying value, the quantitative impairment test is required. The quantitative impairment test is a two-step process. The first step compares the carrying amount of a reporting unit, including goodwill, with its fair value utilizing an enterprise-value based approach. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the goodwill impairment loss, if any. The second step compares the implied fair value of the reporting units goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting units goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill that would be recognized in a business combination.
In assessing the recoverability of goodwill and other long-lived assets, the Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Estimates of fair value are primarily determined using discounted cash flows and comparable market transactions. These valuations are based on estimates and assumptions including projected future cash flows, discount rate and determination of appropriate market comparables and determination of whether a premium or discount should be applied to comparables. These valuations also include assumptions for renewals of affiliation agreements, the projected number of subscribers and the projected average rates per basic and viewing subscribers and growth in fixed price contractual arrangements used to determine affiliation fee revenue, access to program rights and the cost of such program rights, amount of programming time that is advertiser supported, number of advertising spots available and the sell through rates for those spots, average fee per advertising spot and operating margins, among other assumptions. If these estimates or material related assumptions change in the future, we may be required to record impairment charges related to our long-lived assets.
The impairment test for identifiable indefinite-lived intangible assets consists of a comparison of the estimated fair value of the intangible asset with its carrying value. If the carrying value exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. Significant judgments inherent in a valuation include the selection of appropriate discount and royalty rates, estimating the amount and timing of estimated future cash flows and identification of appropriate continuing growth rate assumptions. The discount rates used in the analysis are intended to reflect the risk inherent in the projected future cash flows generated by the respective intangible assets.
Based on the Companys annual impairment test for goodwill and identifiable indefinite-lived intangible assets as of the end of February 2012, no impairment charge was required for any of the reporting units. The Company performed a qualitative assessment for the AMC, WE tv, IFC and AMC Networks Broadcasting and Technology reporting units, which included, but was not limited to, consideration of the historical significant excesses of the estimated fair value of each reporting unit over its respective carrying value (including allocated goodwill), macroeconomic conditions, industry and market considerations, cost factors and historical and
11
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
projected cash flows. The Company performed a quantitative assessment for the Sundance Channel reporting unit. Based on the quantitative assessment, if the fair value of the Sundance Channel reporting unit decreased by 11%, the Company would be required to perform step-two of the quantitative assessment.
The Companys indefinite-lived trademark intangible assets relate to Sundance Channel trademarks, which were valued using a relief-from-royalty method in which the expected benefits are valued by discounting estimated royalty revenue over projected revenues covered by the trademarks. In order to evaluate the sensitivity of the fair value calculations for the Companys identifiable indefinite-lived intangible assets, the Company applied a hypothetical 20% decrease to the estimated fair value of the identifiable indefinite-lived intangible assets. This hypothetical decrease in estimated fair value would not result in an impairment.
Note 4. Income Taxes
For the three and six months ended June 30, 2012, income tax expense attributable to continuing operations was $26,898 and $50,868, respectively, representing an effective tax rate of 39% and 38%, respectively. The effective tax rate differs from the federal statutory rate of 35% due primarily to state income tax expense of $1,710 and $3,064, and tax expense of $866 and $1,630 related to uncertain tax positions, including accrued interest, for the three and six months ended June 30, 2012, respectively, partially offset by a tax benefit of $1,800 resulting from a decrease in the valuation allowance with regard to certain local income tax credit carry forwards, for the six months ended June 30, 2012.
For the three and six months ended June 30, 2011, income tax expense attributable to continuing operations was $19,812 and $42,948, respectively, representing an effective tax rate of 42% and 43%, respectively. The effective tax rate differs from the federal statutory rate of 35% due primarily to state income tax expense of $2,487 and $5,290, tax expense of $546 and $2,069 related to uncertain tax positions, including accrued interest, and tax expense of $107 and $492 resulting from an increase in the valuation allowance with regard to certain local income tax credit carry forwards, for the three and six months ended June 30, 2011, respectively.
At June 30, 2012, the Company had federal net operating loss carry forwards (NOLs) of approximately $6,000 expiring in 2031 and 2032, alternative minimum tax credit carry forwards of $5,000 with no expiration and foreign tax credit carry forwards of approximately $15,900, expiring on various dates from 2014 through 2022. The NOLs and the alternative minimum tax credit carry forwards relate to excess tax benefits that have not yet been realized (as determined on a with-and-without approach), including windfall deductions on share-based compensation awards and amortization of certain tax deductible goodwill. Upon realization as a reduction in tax liability, excess tax benefits are recorded as an increase to paid-in capital with regard to share-based compensation awards and as a decrease in goodwill with regard to certain tax deductible goodwill. For the six months ended June 30, 2012, an increase to paid-in capital of $1,492 was recorded for excess tax benefits realized from share-based compensation awards. For the six months ended June 30, 2012, the utilization of NOLs reduced current deferred income tax assets by $50,000.
Under the Companys Tax Disaffiliation Agreement with Cablevision, Cablevision is liable for all income taxes of the Company for periods prior to the Distribution except for New York City Unincorporated Business Tax. The City of New York is currently auditing the Companys Unincorporated Business Tax Returns for the years 2006 through 2008.
12
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
Note 5. Debt
Long-term debt consists of:
June 30, 2012 |
December 31, 2011 |
|||||||
Credit facility debt: (a) |
||||||||
Term A Facility |
$ | 975,665 | $ | 1,025,065 | ||||
Term B Facility |
577,565 | 579,781 | ||||||
Senior notes |
686,917 | 686,434 | ||||||
|
|
|
|
|||||
2,240,147 | 2,291,280 | |||||||
Less: current portion |
5,950 | 5,950 | ||||||
|
|
|
|
|||||
Total |
$ | 2,234,197 | $ | 2,285,330 | ||||
|
|
|
|
(a) | The Companys $500,000 revolving credit facility remains undrawn at June 30, 2012. Total undrawn revolver commitments are available to be drawn for general corporate purposes of the Company. |
In March 2012, the Company voluntarily prepaid $50,000 under the Term A Facility. In July 2012, the Company voluntarily prepaid an additional $50,000 of the outstanding balance under the Term A Facility. These voluntary prepayments were applied to the earliest required quarterly installments due, and were in addition to the regularly scheduled quarterly principal payments made under the Term B Facility. As a result of these voluntary prepayments, the next required quarterly installment under the Term A Facility will be due on September 30, 2014 in the amount of $11,875. The Company wrote-off $312 of deferred financing costs associated with the voluntary prepayment that was made during the six months ended June 30, 2012.
Pursuant to a registration rights agreement, dated as of June 30, 2011, among AMC Networks, the Subsidiary Guarantors (as defined in the agreement) and the initial purchasers of the $700,000 of AMC Networks 7.75% Senior Notes due July 15, 2021 (the Notes), AMC Networks filed a registration statement with the SEC on April 24, 2012 with respect to an offer to exchange the Notes for registered notes (the Exchange Offer) with terms identical in all material respects to the Notes except that the registered notes do not contain terms that provide for restrictions on transfer (the Registered Notes), which was declared effective by the SEC on June 7, 2012. On July 10, 2012, the Exchange Offer was completed and all of AMC Networks original Notes were exchanged for Registered Notes.
Note 6. Derivative Financial Instruments
To manage interest rate risk, the Company enters into interest rate swap contracts to adjust the amount of total debt that is subject to variable interest rates. Such contracts effectively fix the borrowing rates on floating rate debt to limit the exposure against the risk of rising interest rates. The Company does not enter into interest rate swap contracts for speculative or trading purposes and it has only entered into interest rate swap contracts with financial institutions that it believes are creditworthy counterparties. The Company monitors the financial institutions that are counterparties to its interest rate swap contracts and to the extent possible diversifies its swap contracts among various counterparties to mitigate exposure to any single financial institution.
The Companys risk management objective and strategy with respect to interest rate swap contracts is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. The Company is meeting its objective by hedging the risk of changes in its cash flows (interest payments) attributable to changes in the LIBOR index rate, the designated benchmark interest rate being hedged (the hedged risk), on an amount of the Companys debt principal equal to the then-outstanding swap notional. The forecasted interest payments are deemed to be probable of occurring.
The Companys interest rate swap contracts are designated as cash flow hedges for accounting and tax purposes. The Company assesses, both at the hedges inception and on an ongoing basis, hedge effectiveness based on the overall changes in the fair value of the interest rate swap contracts. Hedge effectiveness of the interest rate swap contracts is based on a hypothetical derivative methodology. Any ineffective portion of the interest rate swap contracts is recorded in current-period earnings.
13
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
As of June 30, 2012, the Company had interest rate swap contracts outstanding with notional amounts aggregating $935,000, which includes interest rate swap contracts with notional amounts aggregating $200,000 that are effective beginning July 2012. The Companys outstanding interest rate swap contracts have varying maturities ranging from September 2015 to July 2017. At June 30, 2012, the Companys interest rate cash flow hedges were highly effective, in all material respects.
The fair values of the Companys derivative financial instruments included in the consolidated balance sheets are as follows:
Liability Derivatives | ||||||||||||
Balance Sheet Location | Fair Value | |||||||||||
June 30, 2012 |
December 31, 2011 |
|||||||||||
Derivatives designated as hedging instruments: |
||||||||||||
Interest rate swap contracts |
Other liabilities | $ | 23,539 | $ | 19,091 | |||||||
|
|
|
|
|||||||||
Total derivatives |
$ | 23,539 | $ | 19,091 | ||||||||
|
|
|
|
The amounts of the gains and losses related to the Companys derivative financial instruments designated as hedging instruments are as follows:
Amount of Loss Recognized in Other Comprehensive Income (OCI) on Derivatives (Effective Portion) |
Location of Loss Reclassified from Accumulated OCI into Earnings (Effective Portion) |
Amount of Loss Reclassified from Accumulated OCI into Earnings (Effective Portion)(a) |
||||||||||||||||||
Three Months Ended June 30, 2012 |
Six Months Ended June 30, 2012 |
Three Months Ended June 30, 2012 |
Six Months Ended June 30, 2012 |
|||||||||||||||||
Derivatives in Cash Flow Hedging Relationships: |
||||||||||||||||||||
Interest rate swap contracts |
$ | 5,794 | $ | 8,728 | Interest expense | $ | 2,166 | $ | 4,280 | |||||||||||
|
|
|
|
|
|
|
|
(a) | There were no gains or losses recognized in earnings related to any ineffective portion of the hedging relationship or related to any amount excluded from the assessment of hedge effectiveness for the three and six months ended June 30, 2012. |
Note 7. Commitments and Contingencies
Commitments
As of June 30, 2012, the Companys off-balance sheet arrangements not reflected on the Companys consolidated balance sheet decreased approximately $42,300 to approximately $301,300 as compared to approximately $343,600 at December 31, 2011. The decrease relates primarily to future program rights obligations.
Legal Matters
DISH Network Contract Dispute
In 2005, subsidiaries of the Company entered into agreements with EchoStar Communications Corporation and its affiliates by which EchoStar Media Holdings Corporation acquired a 20% interest in VOOM HD and EchoStar Satellite LLC (the predecessor to DISH Network LLC (DISH Network)) agreed to distribute VOOM on the satellite delivered programming of DISH Network for a 15-year term. The affiliation agreement with DISH Network for such distribution provides that if VOOM HD fails to spend $100,000 per year (subject to reduction to the extent that the number of offered channels is reduced to fewer than 21), up to a maximum of $500,000 in the aggregate, on VOOM, DISH Network may seek to terminate the agreement under certain circumstances. On January 30, 2008, DISH Network purported to terminate the affiliation agreement, effective February 1, 2008, based on its assertion that VOOM HD had failed to comply with this spending provision in 2006. On January 31, 2008, VOOM HD sought and obtained a
14
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
temporary restraining order from the New York Supreme Court for New York County prohibiting DISH Network from terminating the affiliation agreement. In conjunction with its request for a temporary restraining order, VOOM HD also requested a preliminary injunction and filed a lawsuit against DISH Network asserting that DISH Network did not have the right to terminate the affiliation agreement. In a decision filed on May 5, 2008, the court denied VOOM HDs motion for a preliminary injunction. On or about May 13, 2008, DISH Network ceased distribution of VOOM on its DISH Network. On May 27, 2008, VOOM HD amended its complaint to seek damages for DISH Networks improper termination of the affiliation agreement. On June 24, 2008, DISH Network answered VOOM HDs amended complaint and asserted counterclaims alleging breach of contract and breach of the duty of good faith and fair dealing with respect to the affiliation agreement. On July 14, 2008, VOOM HD replied to DISH Networks counterclaims. The Company believes that the counterclaims asserted by DISH Network are without merit. VOOM HD and DISH Network each filed cross-motions for summary judgment. In November 2010, the court denied both parties cross-motions for summary judgment but granted VOOM HDs motion for sanctions based on DISH Networks spoliation of evidence as well as its motion to exclude DISH Networks principal damages expert. DISH Network appealed these latter two rulings. On January 31, 2012, the Appellate Division of the New York Supreme Court issued a decision affirming (i) the trial courts finding of spoliation and imposition of the sanction of an adverse inference at trial; and (ii) the trial courts decision to exclude DISH Networks damages expert. On February 6, 2012, DISH Network filed a motion seeking leave from the Appellate Division to appeal the order. On April 26, 2012, the Appellate Division denied DISH Networks motion, thereby precluding any further appeal of the trial court rulings. The stay of the pending trial court proceedings was lifted on May 1, 2012 and a trial date has been set for September 2012.
In connection with the Distribution, CSC Holdings, LLC (CSC Holdings), a wholly-owned subsidiary of Cablevision and AMC Networks and Rainbow Programming Holdings, LLC, an indirect wholly-owned subsidiary of AMC Networks (collectively, the AMC Parties) entered into an agreement which provides that from and after the Distribution date, CSC Holdings retains full control over the pending litigation with DISH Network. Any decision with respect to settlement will be made jointly by CSC Holdings and the AMC Parties. CSC Holdings and the AMC Parties will share equally in the proceeds (including in the value of any non-cash consideration) of any settlement or final judgment in the pending litigation with DISH Network that are received by subsidiaries of the Company from VOOM HD. The AMC Parties are responsible for the legal fees and costs until such costs reach an agreed upon threshold, at which point CSC Holdings and the AMC Parties will bear such fees and expenses equally, which the Company expects will occur in the third quarter of 2012.
Other Legal Matters
On April 15, 2011, Thomas C. Dolan, a director of the Company and Executive Vice President, Strategy and Development, in the Office of the Chairman and a director of Cablevision, filed a lawsuit against Cablevision and RMH in New York Supreme Court. The lawsuit raises compensation-related claims (seeking approximately $11,000) related to events in 2005. The matter is being handled under the direction of an independent committee of the board of directors of Cablevision. In connection with the Distribution Agreement, Cablevision indemnified the Company and RMH against any liabilities and expenses related to this lawsuit. Based on the indemnification and Cablevisions and the Companys assessment of this possible loss contingency, no provision has been made for this matter in the consolidated financial statements.
In addition to the matters discussed above, the Company is party to various lawsuits and claims in the ordinary course of business. Although the outcome of these other matters cannot be predicted with certainty and the impact of the final resolution of these other matters on the Companys results of operations in a particular subsequent reporting period is not known, management does not believe that the resolution of these matters will have a material adverse effect on the financial position of the Company or the ability of the Company to meet its financial obligations as they become due.
Note 8. Equity and Long-Term Incentive Plans
In connection with the Distribution, the Company adopted the AMC Networks Inc. 2011 Employee Stock Plan (the 2011 Employee Stock Plan), the AMC Networks Inc. 2011 Stock Plan for Non-Employee Directors (the 2011 Non-Employee Director Plan) and the AMC Networks Inc. 2011 Cash Incentive Plan (the 2011 Cash Incentive Plan). All Plans were amended and restated and approved by the Companys shareholders on June 5, 2012.
15
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
On March 15, 2012, AMC Networks granted 441,111 restricted share units to certain executive officers and employees under the 2011 Employee Stock Plan that vest on the third anniversary of the grant date. The vesting criteria for 97,915 of those restricted share units include the achievement of certain performance targets by the Company. Also in March 2012, AMC Networks granted three-year performance based awards to certain executive officers and employees under the 2011 Cash Incentive Plan.
On June 5, 2012, AMC Networks granted 30,393 restricted share units under the 2011 Non-Employee Director Plan to non-employee directors that vested on the date of grant.
Share-based compensation expense included in continuing operations, a component of selling, general and administrative expense, for the three and six months ended June 30, 2012 was $4,901 and $8,484, respectively, related to equity classified awards. For the three and six months ended June 30, 2011, share-based compensation expense allocated by Cablevision was $4,412 and $8,343, respectively, related to equity classified awards. For the six months ended June 30, 2012, there was no share-based compensation expense included in continuing operations for liability classified awards (stock appreciation rights). For the three and six months ended June 30, 2011, there was $101 and $147, respectively, of share-based compensation expense included in continuing operations for liability classified awards. For periods prior to the Distribution, the Companys share-based compensation expense includes amounts related to Company employees participating in the Cablevision equity awards programs, as well as amounts related to Cablevision corporate employees and non-employee directors to the extent allocated to the Company. For periods after the Distribution, the Company no longer receives an allocation of share-based compensation expense for Cablevision corporate employees and non-employee directors, including expense related to the Companys Executive Chairman with respect to his participation in the Cablevision equity awards program (since he remained an executive officer of Cablevision).
As of June 30, 2012, there was $33,764 of total unrecognized share-based compensation cost related to Company employees who held unvested AMC Networks and Cablevision restricted shares/units. The unrecognized compensation cost is expected to be recognized over a weighted-average remaining period of approximately 2.2 years.
During the six months ended June 30, 2012, 1,032,018 shares of AMC Networks Class A common stock previously issued to employees of Cablevision, MSG and the Company vested. In connection with the employees satisfaction of the statutory minimum tax withholding obligations for the applicable income and other employment taxes, 352,910 of these shares, with an aggregate value of $15,988, were surrendered to the Company. These acquired shares, as well as 80,848 forfeited unvested restricted shares, have been classified as treasury stock.
Long-term incentive plan compensation expense included in continuing operations for the three and six months ended June 30, 2012 was $2,045 and $5,070, respectively. For the three and six months ended June 30, 2011, long-term incentive plan compensation expense allocated by Cablevision was $3,967 and $7,285, respectively. Such amount is accrued for performance-based awards for which the performance criteria had not yet been met as the awards are based on achievement of certain performance criteria through December 31, 2014. The Company has accrued the pro-rata amount earned that it currently believes will ultimately be paid based upon the performance criteria established for these performance-based awards. If the Company subsequently determines that the performance criteria for the awards are not probable of being achieved, the Company would reverse the accrual in respect of the award at that time.
Note 9. Fair Value Measurement
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entitys pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
| Level I - Quoted prices for identical instruments in active markets. |
| Level II - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
| Level III - Instruments whose significant value drivers are unobservable. |
16
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
The following table presents for each of these hierarchy levels, the Companys financial assets and liabilities that are measured at fair value on a recurring basis:
Level I | Level II | Level III | Total | |||||||||||||
At June 30, 2012: |
||||||||||||||||
Assets: |
||||||||||||||||
Cash equivalents (a) |
$ | 294,068 | $ | | $ | | $ | 294,068 | ||||||||
Liabilities: |
||||||||||||||||
Interest rate swap contracts |
$ | | $ | 23,539 | $ | | $ | 23,539 | ||||||||
At December 31, 2011: |
||||||||||||||||
Assets: |
||||||||||||||||
Cash equivalents (a) |
$ | 202,276 | $ | | $ | | $ | 202,276 | ||||||||
Liabilities: |
||||||||||||||||
Interest rate swap contracts |
$ | | $ | 19,091 | $ | | $ | 19,091 |
(a) | Represents the Companys investment in money market funds. |
The Companys cash equivalents are classified within Level I of the fair value hierarchy because they are valued using quoted market prices.
The Companys interest rate swap contracts are classified within Level II of the fair value hierarchy and their fair values are determined based on a market approach valuation technique that uses readily observable market parameters and the consideration of counterparty risk.
Credit Facility Debt and Senior Notes
The fair values of each of the Companys debt instruments are based on quoted market prices for the same or similar issues or on the current rates offered to the Company for instruments of the same remaining maturities.
The carrying values and estimated fair values of the Companys financial instruments, excluding those that are carried at fair value in the consolidated balance sheets are summarized as follows:
June 30, 2012 | ||||||||
Carrying Amount |
Estimated Fair Value |
|||||||
Debt instruments: |
||||||||
Credit facility debt |
$ | 1,553,230 | $ | 1,522,982 | ||||
Senior notes |
686,917 | 771,750 | ||||||
|
|
|
|
|||||
$ | 2,240,147 | $ | 2,294,732 | |||||
|
|
|
|
|||||
December 31, 2011 | ||||||||
Carrying Amount |
Estimated Fair Value |
|||||||
Debt instruments: |
||||||||
Credit facility debt |
$ | 1,604,846 | $ | 1,550,960 | ||||
Senior notes |
686,434 | 761,250 | ||||||
|
|
|
|
|||||
$ | 2,291,280 | $ | 2,312,210 | |||||
|
|
|
|
Fair value estimates related to the Companys debt instruments presented above are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
17
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
Note 10. Concentration of Risk
Financial Instruments
Financial instruments that potentially subject the Company to a concentration of credit risk consist primarily of cash and cash equivalents and trade accounts receivable. Cash is invested in money market funds and bank time deposits. The Company monitors the financial institutions and money market funds where it invests its cash and cash equivalents with diversification among counterparties to mitigate exposure to any single financial institution. The Companys emphasis is primarily on safety of principal and liquidity and secondarily on maximizing the yield on its investments.
Customers
Two customers accounted for the following percentages of the Companys revenues, net:
Six Months Ended June 30, | ||||||||
2012 | 2011 | |||||||
Customer 1 |
* | 11 | % | |||||
Customer 2 |
12 | % | 13 | % |
* | Less than 10%. |
The Companys programming networks have affiliation agreements that expire at various dates through 2018. Failure to renew affiliation agreements with the Companys largest customers, or renewal on less favorable terms, or the termination of those agreements could have a material adverse effect on the Companys business. A reduced distribution of the Companys programming networks would adversely affect the Companys affiliation fee revenue, and impact the Companys ability to sell advertising or the rates the Company charges for such advertising.
At June 30, 2012, no single customer accounted for 10% or more of the Companys net trade receivable balances.
Note 11. Related Party Transactions
Members of the Dolan Family, for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended, including trusts for the benefit of the Dolan Family, collectively beneficially own all of the Companys outstanding Class B Common Stock and own approximately 3% of the Companys outstanding Class A Common Stock. Such shares of the Companys Class A Common Stock and Class B Common Stock, collectively, represent approximately 70% of the aggregate voting power of the Companys outstanding common stock. Members of the Dolan Family are also the controlling stockholders of both Cablevision and MSG.
In connection with the Distribution, the Company entered into various agreements with Cablevision, such as a distribution agreement, a tax disaffiliation agreement, a transition services agreement, an employee matters agreement and certain related party arrangements. These agreements govern certain of the Companys relationships with Cablevision subsequent to the Distribution and provide for the allocation of employee benefits, taxes and certain other liabilities and obligations attributable to periods prior to the Distribution. These agreements also include arrangements with respect to transition services and a number of on-going commercial relationships. The distribution agreement includes an agreement that the Company and Cablevision agree to provide each other with indemnities with respect to liabilities arising out of the businesses Cablevision transferred to the Company.
The Company provides services to and receives services from Cablevision and MSG. Until the Distribution date, the consolidated financial statements of the Company reflect the application of certain cost allocation policies of Cablevision. Management believes that these allocations were made on a reasonable basis. However, it is not practicable to determine whether the charged amounts represent amounts that might have been incurred on a stand-alone basis, including as a separate independent publicly owned company, as there are no company-specific or comparable industry benchmarks with which to make such estimates. Further, as many of these transactions are conducted between subsidiaries under common control of the Dolan Family, amounts
18
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
charged for these services may not represent amounts that might have been received or incurred if the transactions were based upon arms-length negotiations. Through the Distribution date, the Company paid Cablevision a management fee pursuant to a consulting agreement between Cablevision and certain of the Companys subsidiaries. The consulting agreement was terminated on the Distribution date and the Company did not replace it.
The Company records affiliation fee revenues earned, net of amortization of deferred carriage fees, under affiliation agreements with subsidiaries of Cablevision. In addition, AMC Networks Broadcasting & Technology has entered into agreements with MSG to provide various transponder, technical and support services through 2020. Revenues, net from related parties amounted to $8,102 and $8,028 for the three months ended June 30, 2012 and 2011, respectively. Revenues, net from related parties amounted to $16,175 and $15,968 for the six months ended June 30, 2012 and 2011, respectively.
In addition, the Company and its related parties routinely enter into transactions with each other in the ordinary course of business. Amounts charged to the Company, included in technical and operating expenses, pursuant to transactions with its related parties amounted to $310 for the three and six months ended June 30, 2012 and $1,396 and $2,601 for the three and six months ended June 30, 2011, respectively. Amounts charged to the Company, included in selling, general and administrative expenses, pursuant to the transition services agreement and for other transactions, including management fees allocated by Cablevision for periods through the Distribution date, with its related parties amounted to $1,108 and $26,459 for the three months ended June 30, 2012 and 2011, respectively, and $3,104 and $50,750 for the six months ended June 30, 2012 and 2011, respectively.
Note 12. Cash Flows
The Companys non-cash investing and financing activities and other supplemental data were as follows:
Six Months Ended June 30, |
||||||||
2012 | 2011 | |||||||
Non-Cash Investing and Financing Activities: |
||||||||
Continuing Operations: |
||||||||
Deemed capital contributions related to the utilization of Cablevision tax losses |
$ | | $ | 39,982 | ||||
Deemed capital contribution, net related to adjustments to liability for uncertain tax positions and net deferred tax assets as a result of the Distribution |
| 44,259 | ||||||
Capital distribution for the transfer of a promissory note receivable to Cablevision (see Promissory Note discussion below) |
| (17,113 | ) | |||||
Deemed capital distribution to Cablevision related to employee benefit plans as a result of the Distribution (see Employee Matters Agreement discussion below) |
| (6,602 | ) | |||||
Deemed capital distribution associated with the issuance of debt to Cablevision (see Issuance of Debt to Cablevision discussion below) |
| (1,250,000 | ) | |||||
Deemed capital contribution related to the allocation of Cablevision share-based compensation expense |
| 8,343 | ||||||
Leasehold improvements paid by landlord |
2,071 | | ||||||
Increase in capital lease obligations and related assets |
1,399 | 39 | ||||||
Supplemental Data: |
||||||||
Cash interest paid continuing operations |
57,564 | 51,630 | ||||||
Income taxes paid, net continuing operations (see Income Taxes Paid discussion below) |
13,535 | 5,574 |
19
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
Promissory Note
In September 2009, RMH and one of its subsidiaries that was transferred by the Company to Cablevision on December 31, 2010 agreed to the terms of a promissory note having an initial principal amount of $0 and increasing from time to time by advances made by RMH, with an interest rate of 8.625%. Interest income recognized by RMH related to this note amounted to $120 for the three and six months ended June 30, 2011. On January 31, 2011, RMH distributed to a subsidiary of Cablevision all of its rights, title and interest in and to the promissory note. This distribution, which amounted to $17,113, including principal and accrued and unpaid interest, is reflected as a non-cash capital distribution for the six months ended June 30, 2011.
Employee Matters Agreement
In connection with the Distribution, AMC Networks entered into an Employee Matters Agreement with Cablevision which allocated assets, liabilities and responsibilities with respect to certain employee compensation and benefit plans and programs and certain other related matters. As a result of such agreement, as of June 30, 2011, AMC Networks recorded a net receivable from Cablevision of $876, an increase in accrued employee related costs of $7,478 and a capital distribution of $6,602 which decreased additional paid-in capital for the transfer to the Company from Cablevision of the obligations related to the Companys employees participant accounts in the Cablevision Excess Savings Plan $(3,616) and the Cablevision Excess Cash Balance Pension Plan $(3,862) and for the Companys obligation to Cablevision for the $6,193 unfunded liability associated with Company employee participants in Cablevisions Cash Balance Pension Plan. In addition, the Company reduced its long-term incentive plan and stock appreciation rights liabilities and increased amounts due to related parties by $6,742 for its obligation to pay Cablevision for its allocated share of the related expense for Cablevision corporate employees through June 30, 2011. As of December 31, 2011, these related party balances were settled.
Issuance of Debt to Cablevision
In connection with the Distribution, as partial consideration for Cablevisions contribution of the membership interests in RMH to the Company, $1,250,000, net of discount, of AMC Networks debt was issued to CSC Holdings, which was reflected as a deemed capital distribution in the consolidated statement of stockholders deficiency for the year ended December 31, 2011.
Income Taxes Paid, Net
Income taxes paid, net increased by $7,961 primarily due to federal estimated tax payments during the six months ended June 30, 2012, which were based on annualized taxable income after utilization of NOLs.
Note 13. Segment Information
As discussed in Note 1, the Company classifies its operations into two reportable segments: National Networks, and International and Other. These reportable segments are strategic business units that are managed separately.
The Company generally allocates all corporate overhead costs to the Companys two reportable segments based upon their proportionate estimated usage of services, including such costs as executive salaries and benefits, costs of maintaining corporate headquarters, facilities and common support functions (such as human resources, legal, finance, tax, accounting, audit, treasury, risk management, strategic planning and information technology) as well as sales support functions and creative and production services.
The Company evaluates segment performance based on several factors, of which the primary financial measure is business segment adjusted operating cash flow (defined as operating income (loss) before depreciation and amortization, share-based compensation expense or benefit and restructuring expense or credit), a non-GAAP measure. The Company has presented the components that reconcile adjusted operating cash flow to operating income, an accepted GAAP measure. Information as to the continuing operations of the Companys reportable segments is set forth below.
20
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
Three Months Ended June 30, 2012 | ||||||||||||||||
National Networks |
International and Other |
Inter-segment eliminations |
Consolidated | |||||||||||||
Revenues, net |
||||||||||||||||
Advertising |
$ | 129,528 | $ | 10 | $ | | $ | 129,538 | ||||||||
Affiliation fee and other |
175,656 | 26,259 | (3,883 | ) | 198,032 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated revenues, net |
$ | 305,184 | $ | 26,269 | $ | (3,883 | ) | $ | 327,570 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted operating cash flow (deficit) |
$ | 135,623 | $ | (9,414 | ) | $ | 1,035 | $ | 127,244 | |||||||
Depreciation and amortization |
(20,527 | ) | (3,540 | ) | | (24,067 | ) | |||||||||
Share-based compensation expense |
(3,799 | ) | (1,102 | ) | | (4,901 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income (loss) |
$ | 111,297 | $ | (14,056 | ) | $ | 1,035 | $ | 98,276 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Three Months Ended June 30, 2011 | ||||||||||||||||
National Networks |
International and Other |
Inter-segment eliminations |
Consolidated | |||||||||||||
Revenues, net |
||||||||||||||||
Advertising |
$ | 114,213 | $ | 5 | $ | | $ | 114,218 | ||||||||
Affiliation fee and other |
152,515 | 30,221 | (4,989 | ) | 177,747 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated revenues, net |
$ | 266,728 | $ | 30,226 | $ | (4,989 | ) | $ | 291,965 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted operating cash flow (deficit) |
$ | 116,892 | $ | (4,758 | ) | $ | (103 | ) | $ | 112,031 | ||||||
Depreciation and amortization |
(21,741 | ) | (3,518 | ) | | (25,259 | ) | |||||||||
Share-based compensation expense |
(3,635 | ) | (878 | ) | | (4,513 | ) | |||||||||
Restructuring credit |
| 15 | | 15 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income (loss) |
$ | 91,516 | $ | (9,139 | ) | $ | (103 | ) | $ | 82,274 | ||||||
|
|
|
|
|
|
|
|
21
AMC NETWORKS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share amounts)
(unaudited)
Six Months Ended June 30, 2012 | ||||||||||||||||
National Networks |
International and Other |
Inter-segment eliminations |
Consolidated | |||||||||||||
Revenues, net |
||||||||||||||||
Advertising |
$ | 258,765 | $ | 10 | $ | | $ | 258,775 | ||||||||
Affiliation fee and other |
350,642 | 52,605 | (8,213 | ) | 395,034 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated revenues, net |
$ | 609,407 | $ | 52,615 | $ | (8,213 | ) | $ | 653,809 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted operating cash flow (deficit) |
$ | 268,995 | $ | (17,621 | ) | $ | 1,540 | $ | 252,914 | |||||||
Depreciation and amortization |
(41,832 | ) | (7,286 | ) | | (49,118 | ) | |||||||||
Share-based compensation expense |
(6,648 | ) | (1,836 | ) | | (8,484 | ) | |||||||||
Restructuring credit |
| 3 | | 3 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income (loss) |
$ | 220,515 | $ | (26,740 | ) | $ | 1,540 | $ | 195,315 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Capital Expenditures |
$ | 860 | $ | 5,759 | $ | | $ | 6,619 | ||||||||
Six Months Ended June 30, 2011 | ||||||||||||||||
National Networks |
International and Other |
Inter-segment eliminations |
Consolidated | |||||||||||||
Revenues, net |
||||||||||||||||
Advertising |
$ | 213,836 | $ | 10 | $ | | $ | 213,846 | ||||||||
Affiliation fee and other |
304,737 | 55,597 | (9,312 | ) | 351,022 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated revenues, net |
$ | 518,573 | $ | 55,607 | $ | (9,312 | ) | $ | 564,868 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted operating cash flow (deficit) |
$ | 223,248 | $ | (11,862 | ) | $ | 193 | $ | 211,579 | |||||||
Depreciation and amortization |
(43,052 | ) | (7,133 | ) | | (50,185 | ) | |||||||||
Share-based compensation expense |
(6,785 | ) | (1,705 | ) | | (8,490 | ) | |||||||||
Restructuring credit |
| 49 | | 49 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income (loss) |
$ | 173,411 | $ | (20,651 | ) | $ | 193 | $ | 152,953 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Capital Expenditures |
$ | 1,850 | $ | 2,490 | $ | | $ | 4,340 |
Inter-segment eliminations are primarily revenues recognized by the International and Other segment for transmission revenues recognized by AMC Networks Broadcasting & Technology and the licensing of its program rights by the national programming networks.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Inter-segment revenues |
||||||||||||||||
National Networks |
$ | (201 | ) | $ | (185 | ) | $ | (504 | ) | $ | (255 | ) | ||||
International and Other |
(3,682 | ) | (4,804 | ) | (7,709 | ) | (9,057 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | (3,883 | ) | $ | (4,989 | ) | $ | (8,213 | ) | $ | (9,312 | ) | |||||
|
|
|
|
|
|
|
|
Substantially all revenues and assets of the Company are attributed to or located in the U.S.
22
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations. |
This Managements Discussion and Analysis of Financial Condition and Results of Operations contains statements that constitute forward-looking information within the meaning of the Private Securities Litigation Reform Act of 1995. In this Managements Discussion and Analysis of Financial Condition and Results of Operations there are statements concerning our future operating results and future financial performance. Words such as expects, anticipates, believes, estimates, may, will, should, could, potential, continue, intends, plans and similar words and terms used in the discussion of future operating results and future financial performance identify forward-looking statements. You are cautioned that any such forward-looking statements are not guarantees of future performance or results and involve risks and uncertainties and that actual results or developments may differ materially from the forward-looking statements as a result of various factors. Factors that may cause such differences to occur include, but are not limited to:
| the level of our revenues; |
| market demand for new programming services; |
| demand for advertising inventory; |
| the demand for our programming among cable and other multichannel video programming distribution platforms, including direct broadcast satellite (DBS) and platforms operated by telecommunications providers (we refer collectively to these cable and other multichannel video programming distributors as multichannel video programming distributors or distributors) and our ability to maintain and renew affiliation agreements with multichannel video programming distributors (see also DISH Network Carriage Termination discussion below); |
| the cost of, and our ability to obtain or produce, desirable programming content for our networks and film distribution businesses; |
| market demand for our services internationally and for our film distribution business, and our ability to profitably provide those services; |
| the security of our program rights and other electronic data; |
| the loss of any of our key personnel and artistic talent; |
| the highly competitive nature of the cable programming industry; |
| changes in both domestic and foreign laws or regulations under which we operate; |
| the outcome of litigation and other proceedings, including the matters described in the notes to our consolidated financial statements; |
| general economic conditions in the areas in which we operate; |
| our substantial debt and high leverage; |
| reduced access to capital markets or significant increases in costs to borrow; |
| the level of our expenses; |
| the level of our capital expenditures; |
| future acquisitions and dispositions of assets; |
| whether pending uncompleted transactions, if any, are completed on the terms and at the times set forth (if at all); |
| other risks and uncertainties inherent in our programming businesses; |
| financial community and rating agency perceptions of our business, operations, financial condition and the industry in which we operate, and the additional factors described herein, and |
| the factors described under Item 1A, Risk Factors in our 2011 Annual Report on Form 10-K (the 2011 Form 10-K), as filed with the Securities and Exchange Commission (SEC). |
23
We disclaim any obligation to update or revise the forward-looking statements contained herein, except as otherwise required by applicable federal securities laws.
All dollar amounts and subscriber data included in the following Managements Discussion and Analysis of Financial Condition and Results of Operations are presented in thousands.
Introduction
Managements discussion and analysis, or MD&A, of our results of operations and financial condition is provided as a supplement to, and should be read in conjunction with, the unaudited consolidated financial statements and notes thereto included elsewhere herein and our 2011 Form 10-K to enhance the understanding of our financial condition, changes in financial condition and results of our operations. Unless the context otherwise requires, all references to we, us, our, AMC Networks or the Company refer to AMC Networks Inc., together with its direct and indirect subsidiaries. Our MD&A is organized as follows:
Business Overview. This section provides a general description of our business, as well as other matters that we believe are important in understanding our results of operations and financial condition and in anticipating future trends.
Results of Operations. This section provides an analysis of our results of operations for the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011. Our discussion is presented on both a consolidated and segment basis. Our two segments are: (i) National Networks and (ii) International and Other.
Liquidity and Capital Resources. This section provides a discussion of our financial condition as of June 30, 2012, as well as an analysis of our cash flows for the six months ended June 30, 2012 and 2011. The discussion of our financial condition and liquidity includes summaries of (i) our primary sources of liquidity and (ii) our off-balance sheet arrangements that existed at June 30, 2012 and December 31, 2011.
Critical Accounting Policies. This section provides an update to, and should be read in conjunction with, the critical accounting policies and estimates summarized in our 2011 Form 10-K under Item 7- Management Discussion and Analysis of Financial Condition and Results of Operations. Specifically, our goodwill and identifiable indefinite-lived intangible assets policy is updated in order to provide the results of our annual impairment testing performed as of the end of February 2012. In addition, our program rights policy is updated to provide additional clarification regarding the role this policy has in understanding our results of operations.
Business Overview
We manage our business through the following two reportable segments:
| National Networks: Includes four nationally distributed programming networks: AMC, WE tv, IFC and Sundance Channel. These programming networks are distributed throughout the United States (U.S.) via multichannel video programming distributors; |
| International and Other: Principally includes AMC/Sundance Channel Global, our international programming business; IFC Films, our independent film distribution business; and AMC Networks Broadcasting & Technology, our network technical services business, which supplies services primarily to our national programming networks. AMC and Sundance Channel are distributed in Canada and Sundance Channel and WE tv are distributed in other countries throughout Europe and Asia. The International and Other reportable segment also includes VOOM HD, which we are winding down, and which continues to sell certain limited amounts of programming internationally through program license agreements. |
The tables presented below set forth our consolidated revenues, net, operating income (loss) and adjusted operating cash flow (AOCF), defined below, for the periods indicated.
24
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues, net |
||||||||||||||||
National Networks |
$ | 305,184 | $ | 266,728 | $ | 609,407 | $ | 518,573 | ||||||||
International and Other |
26,269 | 30,226 | 52,615 | 55,607 | ||||||||||||
Inter-segment eliminations |
(3,883 | ) | (4,989 | ) | (8,213 | ) | (9,312 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated revenues, net |
$ | 327,570 | $ | 291,965 | $ | 653,809 | $ | 564,868 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income (loss) |
||||||||||||||||
National Networks |
$ | 111,297 | $ | 91,516 | $ | 220,515 | $ | 173,411 | ||||||||
International and Other |
(14,056 | ) | (9,139 | ) | (26,740 | ) | (20,651 | ) | ||||||||
Inter-segment eliminations |
1,035 | (103 | ) | 1,540 | 193 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated operating income |
$ | 98,276 | $ | 82,274 | $ | 195,315 | $ | 152,953 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
AOCF |
||||||||||||||||
National Networks |
$ | 135,623 | $ | 116,892 | $ | 268,995 | $ | 223,248 | ||||||||
International and Other |
(9,414 | ) | (4,758 | ) | (17,621 | ) | (11,862 | ) | ||||||||
Inter-segment eliminations |
1,035 | (103 | ) | 1,540 | 193 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated AOCF |
$ | 127,244 | $ | 112,031 | $ | 252,914 | $ | 211,579 | ||||||||
|
|
|
|
|
|
|
|
We evaluate segment performance based on several factors, of which the primary financial measure is business segment AOCF. We define AOCF, which is not a generally accepted accounting principles (GAAP) financial measure, as operating income (loss) before depreciation and amortization, share-based compensation expense or benefit and restructuring expense or credit.
We believe that AOCF is an appropriate measure for evaluating the operating performance on both a business segment and consolidated basis. AOCF and similar measures with similar titles are common performance measures used by investors, analysts and peers to compare performance in the industry.
Internally, we use revenues, net and AOCF measures as the most important indicators of our business performance, and evaluate managements effectiveness with specific reference to these indicators. AOCF should be viewed as a supplement to and not a substitute for operating income (loss), net income (loss), cash flows from operating activities and other measures of performance and/or liquidity presented in accordance with GAAP. Since AOCF is not a measure of performance calculated in accordance with GAAP, this measure may not be comparable to similar measures with similar titles used by other companies.
The following is a reconciliation of consolidated operating income to AOCF for the periods indicated:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Operating income |
$ | 98,276 | $ | 82,274 | $ | 195,315 | $ | 152,953 | ||||||||
Share-based compensation expense |
4,901 | 4,513 | 8,484 | 8,490 | ||||||||||||
Restructuring credit |
| (15 | ) | (3 | ) | (49 | ) | |||||||||
Depreciation and amortization |
24,067 | 25,259 | 49,118 | 50,185 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
AOCF |
$ | 127,244 | $ | 112,031 | $ | 252,914 | $ | 211,579 | ||||||||
|
|
|
|
|
|
|
|
National Networks
In our National Networks segment, which accounted for 93% of our consolidated revenues for the six months ended June 30, 2012, we earn revenues in two principal ways. First, we receive distribution revenue from affiliation fees paid by distributors. These revenues are generally based on a per subscriber fee under multi-year contracts, commonly referred to as affiliation agreements, which generally provide for annual affiliation rate increases. The specific affiliation fee revenues we earn vary from period to period, distributor to distributor and also vary among our networks, but are generally based upon the number of each distributors subscribers who receive our programming, referred to as viewing subscribers. The terms of certain other affiliation agreements provide that the
25
affiliation fee revenues we earn are a fixed contractual monthly fee, which could be adjusted for acquisitions and dispositions of multichannel video programming systems by the distributor. Other sources of distribution revenue include the licensing of original programming for foreign and digital distribution to distributors, which is recognized upon availability for distribution by the licensee.
Advertising is our second principal source of revenues. Under our affiliation agreements with our distributors, we have the right to sell a specified amount of national advertising time on certain of our programming networks. Our advertising revenues are more variable than affiliation fee revenues because virtually all of our advertising is sold on a short-term basis, not under long-term contracts. Our advertising arrangements with advertisers provide for a set number of advertising units to air over a specific period of time at a negotiated price per unit. In certain advertising sales arrangements, our programming networks guarantee specified viewer ratings for their programming. If these guaranteed viewer ratings are not met, we are generally required to provide additional advertising units to the advertiser at no charge. For these types of arrangements, a portion of the related revenue is deferred if the guaranteed viewer ratings are not met and is subsequently recognized either when we provide the required additional advertising time, the guarantee obligation contractually expires or performance requirements become remote. Most of our advertising revenues vary based upon the popularity of our programming as measured by Nielsen Media Research (Nielsen). As of June 30 2012, our national programming networks had approximately 1,000 advertisers representing companies in a broad range of sectors, including the health, insurance, food, automotive and retail industries. Our AMC, WE tv and IFC programming networks use a traditional advertising sales model, while Sundance Channel principally sells sponsorships. Prior to December 2010, IFC principally sold sponsorships.
Changes in revenue are primarily derived from changes in contractual affiliation rates charged for our services, changes in the number of subscribers and changes in the prices and level of advertising on our networks. We seek to grow our revenues by increasing the number of viewing subscribers of the distributors that carry our services. We refer to this as our penetration. AMC, which is widely distributed, has a more limited ability to increase its penetration than WE tv, IFC and Sundance Channel. WE tv, IFC and Sundance Channel, although carried by substantially all of the larger distributors, have higher growth opportunities due to their current penetration levels with those distributors. IFC and Sundance Channel are currently carried primarily on digital tiers, while WE tv is carried on either analog expanded basic or digital tiers. Therefore, WE tv, IFC and Sundance Channel penetration rates may increase if distributors are successful in converting their analog subscribers to digital tiers of service that include those networks. Our revenues may also increase over time through contractual rate increases stipulated in most of our affiliation agreements. In negotiating for increased or extended carriage, we have in some instances made upfront payments in exchange for additional subscribers or extended carriage, which we record as deferred carriage fees and which are amortized as a reduction to revenue over the period of the related affiliation agreements, or agreed to waive for a specified period or accept lower per subscriber fees if certain additional subscribers are provided. We also may help fund the distributors efforts to market our channels. We believe that these transactions generate a positive return on investment over the contract period. We seek to increase our advertising revenues by increasing the number of minutes of national advertising sold and by increasing the rates we charge for such advertising, but, ultimately, the level of our advertising revenues, in most cases, is directly related to the overall distribution of our programming, penetration of our services and the popularity (including within desirable demographic groups) of our services as measured by Nielsen.
Programming expense, including the amortization and impairments of programming rights, such as those for original programming, feature films and licensed series, included in technical and operating expense, represents the largest expense of the National Networks segment. The other components of technical and operating expense primarily include participation and residual costs, distribution and production related costs and program operating costs, such as origination, transmission, uplinking and encryption.
Our principal goal is to increase our revenues by increasing distribution and penetration of our services, and increasing our ratings. To do this, we must continue to contract for and produce high-quality, attractive programming. As competition for programming from programming services increases and alternative distribution technologies continue to emerge and develop in the industry, costs for content acquisition and original programming may increase. There is a concentration of subscribers in the hands of a few distributors, which could create disparate bargaining power between the largest distributors and us by giving those distributors greater leverage in negotiating the price and other terms of affiliation agreements.
26
To an increasing extent, the success of our business depends on original programming, both scripted and unscripted, across all of our networks. In recent years, we have introduced a number of scripted original series, primarily on AMC, that have been critically acclaimed, award winning and commercially successful. These successful series have resulted in higher audience ratings for our networks. Historically, in periods when we air original programming, our ratings have increased. In 2012, AMC expects to air five scripted original series. This may result in higher audience ratings for AMC. Among other things, higher audience ratings drive increased revenues particularly through higher advertising revenues. The timing of exhibition and distribution of original programming varies from period to period, which results in greater variability in our revenues, earnings and cash flows from operating activities.
Scripted original series require us to make up-front investments, which are often significant amounts. Not all of our programming efforts are commercially successful, which could result in a write-off of program rights. If it is determined that programming rights have no future programming usefulness based on actual demand or market conditions, a write-off of the unamortized cost is recorded in technical and operating expense.
See Critical Accounting Policies and Estimates for a discussion of the amortization and write-off of program rights.
DISH Network Carriage Termination
Effective May 20, 2012 with regard to Sundance Channel and July 1, 2012 with regard to AMC, WE tv and IFC, DISH Network, LLC (DISH Network) terminated carriage of our national networks. We believe that DISH Networks termination of carriage is directly related to the ongoing litigation between DISH Network and VOOM HD (see Note 7, Commitments and Contingencies in the unaudited consolidated financial statements included elsewhere herein). The financial impact on us will depend on several factors, including the length of time our networks are not carried on DISH Networks platform and if, when and on what terms DISH Network and the Company enter into new carriage agreements. The termination of DISH Networks carriage will have a material impact on our revenues, net, AOCF and operating income in future periods. Although DISH Networks termination has reduced the Companys total subscribers under affiliation agreements by approximately 13%, the impact on our AOCF and operating income, if it continues, will be materially higher.
International and Other
Our International and Other segment primarily includes the operations of AMC/Sundance Channel Global, IFC Films, AMC Networks Broadcasting & Technology and VOOM HD.
VOOM HD historically offered a suite of channels, produced exclusively in high definition (HD) and marketed for distribution to DBS and other multichannel video programming distributors. VOOM was available in the U.S. only on the cable television systems of Cablevision Systems Corporation (Cablevision Systems Corporation and its subsidiaries are referred to as Cablevision) and on the satellite delivered programming of DISH Network. In December 2008, we decided to discontinue funding the domestic offerings of VOOM, which were subsequently terminated. VOOM HD discontinued the VOOM international channel as of December 31, 2009 but continued distributing the Rush HD channel in Europe through April 2011. VOOM HD, which we are winding down, continues to sell certain limited amounts of programming internationally through program license agreements. See also Note 7, Commitments and Contingencies in the unaudited consolidated financial statements included elsewhere herein.
Although we view our international expansion as an important long-term strategy, international expansion is currently expected to represent only a small amount of our projected overall financial results over the next five years. However, international expansion could provide a benefit to our financial results if we are able to grow this portion of our business faster than expected. Similar to our domestic businesses, the most significant business challenges we expect to encounter in our international business include programming competition (from both foreign and domestic programmers), limited channel capacity on distributors platforms, the growth of subscribers on those platforms and economic pressures on affiliation fees. Other significant business challenges unique to international expansion include increased programming costs for international rights and translation (i.e., dubbing and subtitling), a lack of availability of international rights for a portion of our domestic programming content, increased distribution costs for cable, satellite or fiber feeds and a limited physical presence in each territory.
Spin-off from Cablevision
On June 30, 2011, Cablevision spun-off the Company (the Distribution) and we became an independent public company. In connection with the Distribution, Cablevision contributed all of the membership interests of Rainbow Media Holdings LLC (RMH) to us. Both Cablevision and the Company continue to be controlled by the Dolan family.
27
Corporate Expenses
Our historical results of operations reflected in our consolidated financial statements, for periods prior to the Distribution, include management fee charges and the allocation of expenses related to certain corporate functions historically provided by Cablevision. Our results of operations after the Distribution reflect certain revenues and expenses related to transactions with or charges from related parties as described in Note 11 in the unaudited consolidated financial statements included elsewhere herein. As a separate, stand-alone public company, we have expanded our financial, administrative and other staff to support the related new requirements. In addition, we continue to add staff and are adding systems to replace some of the functions previously provided by Cablevision. However, our corporate operating costs as a separate company subsequent to the Distribution, including those associated with being a publicly-traded company, through June 30, 2012 have been, and are expected to continue to be, lower than the historical allocation of expenses related to certain corporate functions (including management fee charges). Pursuant to a consulting agreement with Cablevision, until the Distribution date, the Company paid a management fee calculated based on certain of our subsidiaries gross revenues (as defined under the terms of the consulting agreement) on a monthly basis. We terminated the consulting agreement on the Distribution date and did not replace it.
We allocate corporate overhead to each segment based upon their proportionate estimated usage of services. The segment financial information set forth below, including the discussion related to individual line items, does not reflect inter-segment eliminations unless specifically indicated.
Cautionary Note Concerning Historical Financial Statements
As noted above, our consolidated financial statements for periods prior to the Distribution have been derived from the consolidated financial statements and accounting records of Cablevision and reflect certain assumptions and allocations. Our results of operations and cash flows could differ from those that might have resulted had we operated autonomously or as an entity independent of Cablevision.
Our capital structure after the Distribution is different from the capital structure presented in the historical consolidated financial statements for periods prior to the Distribution and, accordingly, our interest expense in periods after June 30, 2011 as a separate independent entity is, and we expect will continue to be, materially higher than the interest expense reflected in our historical consolidated financial statements in periods prior to June 30, 2011.
Impact of Economic Conditions
Our future performance is dependent, to a large extent, on general economic conditions including the impact of direct competition, our ability to manage our businesses effectively, and our relative strength and leverage in the marketplace, both with suppliers and customers.
Additional capital and credit market disruptions could cause economic downturns, which may lead to lower demand for our products, such as lower demand for television advertising and a decrease in the number of subscribers receiving our programming networks from our distributors. We have experienced some of the effects of the recent economic downturn. Continuation of events such as these may adversely impact our results of operations, cash flows and financial position.
28
Consolidated Results of Operations
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
The following table sets forth our consolidated results of operations for the periods indicated.
Three Months Ended June 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Amount | % of Revenues, net |
Amount | % of Revenues, net |
$ change | % change |
|||||||||||||||||||
Revenues, net |
$ | 327,570 | 100 | % | $ | 291,965 | 100 | % | $ | 35,605 | 12 | % | ||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Technical and operating (excluding depreciation and amortization) |
114,349 | 35 | 95,883 | 33 | 18,466 | 19 | ||||||||||||||||||
Selling, general and administrative |
90,878 | 28 | 88,564 | 30 | 2,314 | 3 | ||||||||||||||||||
Restructuring credit |
| | (15 | ) | | 15 | (100 | ) | ||||||||||||||||
Depreciation and amortization |
24,067 | 7 | 25,259 | 9 | (1,192 | ) | (5 | ) | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total operating expenses |
229,294 | 70 | 209,691 | 72 | 19,603 | 9 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Operating income |
98,276 | 30 | 82,274 | 28 | 16,002 | 19 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Interest expense, net |
(29,329 | ) | (9 | ) | (15,190 | ) | (5 | ) | (14,139 | ) | 93 | |||||||||||||
Write-off of deferred financing costs |
| | (5,703 | ) | (2 | ) | 5,703 | (100 | ) | |||||||||||||||
Loss on extinguishment of debt |
| | (14,518 | ) | (5 | ) | 14,518 | (100 | ) | |||||||||||||||
Miscellaneous, net |
(644 | ) | | 7 | | (651 | ) | (9300 | ) | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total other income (expense) |
(29,973 | ) | (9 | ) | (35,404 | ) | (12 | ) | 5,431 | (15 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Income from continuing operations before income taxes |
68,303 | 21 | 46,870 | 16 | 21,433 | 46 | ||||||||||||||||||
Income tax expense |
(26,898 | ) | (8 | ) | (19,812 | ) | (7 | ) | (7,086 | ) | 36 | |||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Income from continuing operations |
41,405 | 13 | 27,058 | 9 | 14,347 | 53 | ||||||||||||||||||
Income from discontinued operations, net of income taxes |
105 | | 97 | | 8 | 8 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Net Income |
$ | 41,510 | 13 | % | $ | 27,155 | 9 | % | $ | 14,355 | 53 | % | ||||||||||||
|
|
|
|
|
|
The following is a reconciliation of our consolidated operating income to AOCF:
Three Months Ended June 30, | ||||||||||||||||
2012 | 2011 | $ change | % change | |||||||||||||
Operating income |
$ | 98,276 | $ | 82,274 | $ | 16,002 | 19 | % | ||||||||
Share-based compensation expense |
4,901 | 4,513 | 388 | 9 | ||||||||||||
Restructuring credit |
| (15 | ) | 15 | (100 | ) | ||||||||||
Depreciation and amortization |
24,067 | 25,259 | (1,192 | ) | (5 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Consolidated AOCF |
$ | 127,244 | $ | 112,031 | $ | 15,213 | 14 | % | ||||||||
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|
|
|
|
|
29
National Networks Segment Results
The following table sets forth our National Networks segment results for the periods indicated.
Three Months Ended June 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Amount | % of Revenues, net |
Amount | % of Revenues, net |
$ change | % change |
|||||||||||||||||||
Revenues, net |
$ | 305,184 | 100 | % | $ | 266,728 | 100 | % | $ | 38,456 | 14 | % | ||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Technical and operating (excluding depreciation and amortization) |
99,306 | 33 | 79,726 | 30 | 19,580 | 25 | ||||||||||||||||||
Selling, general and administrative |
74,054 | 24 | 73,745 | 28 | 309 | | ||||||||||||||||||
Depreciation and amortization |
20,527 | 7 | 21,741 | 8 | (1,214 | ) | (6 | ) | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Operating income |
$ | 111,297 | 36 | % | $ | 91,516 | 34 | % | $ | 19,781 | 22 | % | ||||||||||||
|
|
|
|
|
|
The following is a reconciliation of our National Networks segment operating income to AOCF:
Three Months Ended June 30, | ||||||||||||||||
2012 | 2011 | $ change | % change |
|||||||||||||
Operating income |
$ | 111,297 | $ | 91,516 | $ | 19,781 | 22 | % | ||||||||
Share-based compensation expense |
3,799 | 3,635 | 164 | 5 | ||||||||||||
Depreciation and amortization |
20,527 | 21,741 | (1,214 | ) | (6 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
AOCF |
$ | 135,623 | $ | 116,892 | $ | 18,731 | 16 | % | ||||||||
|
|
|
|
|
|
International and Other Segment Results
The following table sets forth our International and Other segment results for the periods indicated.
Three Months Ended June 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Amount | % of Revenues, net |
Amount | % of Revenues, net |
$ change | % change |
|||||||||||||||||||
Revenues, net |
$ | 26,269 | 100 | % | $ | 30,226 | 100 | % | $ | (3,957 | ) | (13 | )% | |||||||||||
Operating expenses: |
||||||||||||||||||||||||
Technical and operating (excluding depreciation and amortization) |
19,842 | 76 | 20,773 | 69 | (931 | ) | (4 | ) | ||||||||||||||||
Selling, general and administrative |
16,943 | 64 | 15,089 | 50 | 1,854 | 12 | ||||||||||||||||||
Restructuring credit |
| | (15 | ) | | 15 | (100 | ) | ||||||||||||||||
Depreciation and amortization |
3,540 | 13 | 3,518 | 12 | 22 | 1 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Operating loss |
$ | (14,056 | ) | (54 | )% | $ | (9,139 | ) | (30 | )% | $ | (4,917 | ) | 54 | % | |||||||||
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|
|
|
|
|
30
The following is a reconciliation of our International and Other segment operating loss to AOCF deficit:
Three Months Ended June 30, | ||||||||||||||||
2012 | 2011 | $ change | % change |
|||||||||||||
Operating loss |
$ | (14,056 | ) | $ | (9,139 | ) | $ | (4,917 | ) | 54 | % | |||||
Share-based compensation expense |
1,102 | 878 | 224 | 26 | ||||||||||||
Restructuring credit |
| (15 | ) | 15 | (100 | ) | ||||||||||
Depreciation and amortization |
3,540 | 3,518 | 22 | 1 | ||||||||||||
|
|
|
|
|
|
|||||||||||
AOCF deficit |
$ | (9,414 | ) | $ | (4,758 | ) | $ | (4,656 | ) | 98 | % | |||||
|
|
|
|
|
|
Revenues, net
Revenues, net increased $35,605 to $327,570 for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. The net increase by segment was as follows:
Three Months Ended June 30, | ||||||||||||||||||||||||
2012 | % of total |
2011 | % of total |
$ change | % change |
|||||||||||||||||||
National Networks |
$ | 305,184 | 93 | % | $ | 266,728 | 91 | % | $ | 38,456 | 14 | % | ||||||||||||
International and Other |
26,269 | 8 | 30,226 | 10 | (3,957 | ) | (13 | ) | ||||||||||||||||
Inter-segment eliminations |
(3,883 | ) | (1 | ) | (4,989 | ) | (2 | ) | 1,106 | (22 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Consolidated revenues, net |
$ | 327,570 | 100 | % | $ | 291,965 | 100 | % | $ | 35,605 | 12 | % | ||||||||||||
|
|
|
|
|
|
National Networks
The increase in National Networks revenues, net is attributable to the following:
Three Months Ended June 30, | ||||||||||||||||||||||||
2012 | % of total |
2011 | % of total |
$ change | % change |
|||||||||||||||||||
Advertising |
$ | 129,528 | 42 | % | $ | 114,213 | 43 | % | $ | 15,315 | 13 | % | ||||||||||||
Affiliation fee and other |
175,656 | 58 | 152,515 | 57 | 23,141 | 15 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
$ | 305,184 | 100 | % | $ | 266,728 | 100 | % | $ | 38,456 | 14 | % | |||||||||||||
|
|
|
|
|
|
| Advertising revenues increased $15,315 primarily at AMC resulting from higher pricing per unit sold due to an increased demand for our programming by advertisers and an increased number of original programming series, as compared to the number of original programming series that aired on AMC during the three months ended June 30, 2011. As previously discussed, most of our advertising revenues vary based on the timing of our original programming series and the popularity of our programming as measured by Nielsen. Due to this variability, the increase in advertising revenues at AMC for the three months ended June 30, 2012 as compared to the same period in 2011 is not necessarily indicative of what we expect for the remainder of 2012; and |
| Affiliation fee and other revenues increased $23,141 due to an increase in affiliation fee revenues of $12,732 primarily attributable to an increase in rates, including the impact of lower amortization of deferred carriage fees, and subscribers and an increase in other revenues of $10,409 due primarily to increased digital distribution, home video and international revenues derived from licensing our National Networks programming, primarily at AMC. |
31
The following table presents certain subscriber information at June 30, 2012, March 31, 2012 and June 30, 2011:
Estimated Domestic Subscribers | ||||||||||||
National Programming Networks: |
June 30, 2012 | March 31, 2012 | June 30, 2011 | |||||||||
AMC (1) |
96,900 | 96,400 | 97,000 | |||||||||
WE tv (1) |
78,500 | 76,600 | 77,300 | |||||||||
IFC (1) |
66,900 | 66,300 | 62,200 | |||||||||
Sundance Channel (2) |
40,400 | 42,400 | 40,300 |
(1) | Estimated U.S. subscribers as measured by Nielsen. |
(2) | Subscriber counts are based on internal management reports and represent viewing subscribers. |
The Company believes the WE tv, IFC and Sundance Channel programming services would benefit from increased distribution, especially on the digital tiers of cable television distributors as digital penetration increases, and increased advertising/sponsorship revenues as cable networks, including advertiser-supported niche programming networks (such as WE tv and IFC), attract a greater advertising market share. These increases could potentially be offset by lower net effective rates per viewing subscriber for our programming services due to the consolidation of distributors. Opportunities are more limited for increases in distribution in the U.S. for our substantially fully penetrated AMC programming service. The decline in Sundance Channel subscribers shown as of June 30, 2012 as compared to March 31, 2012 principally reflects the impact of carriage being terminated by DISH Network on May 20, 2012. This termination did not have a material impact to revenues, net for the three months ended June 30, 2012 compared to the same period in 2011.
International and Other
The decrease in International and Other revenues, net is attributable to the following:
Three Months Ended June 30, | ||||||||||||||||||||||||
2012 | % of total |
2011 | % of total |
$ change | % change |
|||||||||||||||||||
Advertising |
$ | 10 | | % | $ | 5 | | % | $ | 5 | 100 | % | ||||||||||||
Affiliation fee and other |
26,259 | 100 | 30,221 | 100 | (3,962 | ) | (13 | ) | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
$ | 26,269 | 100 | % | $ | 30,226 | 100 | % | $ | (3,957 | ) | (13 | )% | ||||||||||||
|
|
|
|
|
|
| Affiliation fee and other revenues (excluding VOOM HD) decreased $3,084 primarily related to a decrease in theatrical revenue at IFC Films and decreased transmission revenue at AMC Networks Broadcasting & Technology due to the expiration of certain agreements, partially offset by increased foreign affiliation fee revenues from our international distribution of Sundance and WE tv channels due to expanded distribution in Asia and Europe; and |
| Affiliation fees and other revenues at VOOM HD decreased $878 primarily related to lower foreign licensing revenues. |
Technical and operating expense (excluding depreciation and amortization)
The components of technical and operating expense primarily include the amortization of program rights, such as those for original programming, feature films and licensed series, participation and residual costs, distribution and production related costs and program operating costs, such as origination, transmission, uplinking and encryption.
32
Technical and operating expense (excluding depreciation and amortization) increased $18,466 to $114,349 for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. The net increase by segment was as follows:
Three Months Ended June 30, | ||||||||||||||||
2012 | 2011 | $ change | % change |
|||||||||||||
National Networks |
$ | 99,306 | $ | 79,726 | $ | 19,580 | 25 | % | ||||||||
International and Other |
19,842 | 20,773 | (931 | ) | (4 | ) | ||||||||||
Inter-segment eliminations |
(4,799 | ) | (4,616 | ) | (183 | ) | 4 | |||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | 114,349 | $ | 95,883 | $ | 18,466 | 19 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Percentage of revenues, net |
35 | % | 33 | % |
National Networks
The increase in the National Networks segment is primarily attributable to the increased amortization of program rights at AMC. There may be significant changes in the level of our technical and operating expenses due to content acquisition and/or original programming costs and/or the impact of managements periodic assessment of programming usefulness. As additional competition for programming increases from programming services and alternate distribution technologies continue to develop in the industry, costs for content acquisition and original programming may increase. As we continue to increase our investment in original programming, we expect the amortization of program rights to increase for the remainder of 2012 over the prior year comparable period.
International and Other
The decrease in the International and Other segment (excluding VOOM HD) consists of a net decrease of $1,168 related to program acquisition costs at IFC Films, partially offset by an increase of $325 in transmission and programming related costs at AMC/Sundance Channel Global due to increased distribution in Asia and Europe. Programming costs at VOOM HD decreased $88.
Selling, general and administrative expense
The components of selling, general and administrative expense primarily include sales, marketing and advertising expenses, administrative costs and costs of facilities.
Selling, general and administrative expenses increased $2,314 to $90,878 for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011. The net increase by segment was as follows:
Three Months Ended June 30, | ||||||||||||||||
2012 | 2011 | $ change | % change |
|||||||||||||
National Networks |
$ | 74,054 | $ | 73,745 | $ | 309 | | % | ||||||||
International and Other |
16,943 | 15,089 | 1,854 | 12 | ||||||||||||
Inter-segment eliminations |
(119 | ) | (270 | ) | 151 | (56 | ) | |||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | 90,878 | $ | 88,564 | $ | 2,314 | 3 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Percentage of revenues, net |
28 | % | 30 | % |
National Networks
The net $309 increase in the National Networks segment consists of a $9,607 increase for sales and marketing expenses principally at AMC due to the airing of a higher number of original programming series during the three months ended June 30, 2012 compared to the same period in 2011, a net decrease in other general and administrative costs of $431 primarily due to a reduction of corporate allocations from Cablevision following the Distribution, partially offset by an increase in higher employee related expenses and costs incurred in connection with becoming a stand-alone public company, a decrease in management fees (see below) of $7,218 and a decrease of $1,649 in share-based compensation expense and expenses relating to long-term incentive plans.
Prior to the Distribution, pursuant to a consulting agreement with Cablevision, we paid a management fee calculated based on certain subsidiaries gross revenues (as defined under the terms of the consulting agreement) on a monthly basis. We terminated the consulting agreement on the Distribution date and did not replace it.
33
There may be significant changes in the level of our selling, general and administrative expenses from quarter to quarter and year to year due to the timing of promotion and marketing of original programming.
International and Other
The increase in the International and Other segment consists of a net increase of $131 for selling, marketing and advertising costs primarily due to an increase at AMC/Sundance Channel Global due to increased distribution in Asia and Europe, partially offset by a decrease at IFC Films due to decreased spending on titles being distributed and a net increase of $891 for general and administrative costs incurred in connection with becoming a stand-alone public company, net of a reduction of corporate allocations from Cablevision following the Distribution. In addition, selling, general and administrative expenses increased due to an increase of $717 related to VOOM HD principally due to increased legal fees and other related costs and expenses in connection with the DISH Network contract dispute and an increase in share-based compensation expense and expenses relating to long-term incentive plans of $115.
Depreciation and amortization
Depreciation and amortization decreased $1,192 to $24,067 for the three months ended June 30, 2012, as compared to the three months ended June 30, 2011. The net decrease by segment was as follows:
Three Months Ended June 30, | ||||||||||||||||
2012 | 2011 | $ change | % change |
|||||||||||||
National Networks |
$ | 20,527 | $ | 21,741 | $ | (1,214 | ) | (6 | )% | |||||||
International and Other |
3,540 | 3,518 | 22 | 1 | ||||||||||||
|
|
|
|
|
|
|||||||||||
$ | 24,067 | $ | 25,259 | $ | (1,192 | ) | (5 | )% | ||||||||
|
|
|
|
|
|
The decrease in the National Networks segment consists of a decrease in depreciation expense of $611 and a decrease in amortization expense of $603. The decrease in depreciation expense is due to certain assets becoming fully depreciated and the decrease in amortization expense is primarily due to a decrease in amortization expense at Sundance Channel as certain intangible assets became fully amortized in the second quarter of 2012.
AOCF
AOCF increased $15,213 for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011. The net increase by segment was as follows:
Three Months Ended June 30, | ||||||||||||||||
2012 | 2011 | $ change | % change |
|||||||||||||
National Networks |
$ | 135,623 | $ | 116,892 | $ | 18,731 | 16 | % | ||||||||
International and Other |
(9,414 | ) | (4,758 | ) | (4,656 | ) | 98 | |||||||||
Inter-segment eliminations |
1,035 | (103 | ) | 1,138 | (1105 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
AOCF |
$ | 127,244 | $ | 112,031 | $ | 15,213 | 14 | % | ||||||||
|
|
|
|
|
|
National Networks AOCF increased due to an increase in revenues, net of $38,456 and a decrease in management fees, partially offset by an increase in technical and operating expenses resulting primarily from an increase in amortization of program rights expense and marketing expense due to the increase in the number of original programming series.
International and Other AOCF deficit increased due primarily to a decrease in revenues, net of $3,957 primarily at AMC Networks Broadcasting & Technology and an increase in legal fees and other costs in connection with the DISH Network contract dispute.
34
Interest expense, net
The increase in interest expense, net of $14,139 for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011 was attributable to the following:
Three Months Ended June 30, 2012 |
||||
Indebtedness incurred in connection with the Distribution |
$ | 26,862 | ||
Repayment of the RNS senior notes in May 2011 and the RNS credit facility and the RNS senior subordinated notes in June 2011 |
(15,004 | ) | ||
Interest rate swap contracts |
2,166 | |||
Decrease in interest income |
61 | |||
Other |
54 | |||
|
|
|||
$ | 14,139 | |||
|
|
Write-off of deferred financing costs
The write-off of deferred financing costs of $5,703 for the three months ended June 30, 2011 represents $1,186 of deferred financing costs written off in connection with the redemption of the Rainbow National Services LLC (RNS) 8 3/4% senior notes in May 2011, and $2,062 and $2,455 of deferred financing costs written off in connection with the repayment of the outstanding borrowings under the RNS credit facility and the RNS 10 3/8% senior subordinated notes, respectively, in June 2011 in connection with the Distribution.
Loss on extinguishment of debt
The loss on extinguishment of debt of $14,518 for the three months ended June 30, 2011 primarily represents $14,168 for the excess of the redemption price, premium paid and related fees along with the accretion to principal over the carrying value of the $325,000 RNS 10 3/8% senior subordinated notes redeemed June 30, 2011 associated with the tender offer which occurred in connection with the Distribution.
Income tax expense
For the three months ended June 30, 2012, income tax expense attributable to continuing operations was $26,898, representing an effective tax rate of 39%. The effective tax rate differs from the federal statutory rate of 35% due primarily to state income tax expense of $1,710 and tax expense of $866 related to uncertain tax positions, including accrued interest. We expect to fully utilize our net operating loss carry forward in the third quarter of 2012. We expect our effective tax rate to be approximately 39% in future quarters.
For the three months ended June 30, 2011, income tax expense attributable to continuing operations was $19,812, representing an effective tax rate of 42%. The effective tax rate differs from the federal statutory rate of 35% due primarily to state income tax expense of $2,487, tax expense of $546 related to uncertain tax positions, including accrued interest and tax expense of $107 resulting from an increase in the valuation allowance with regard to certain local income tax credit carry forwards.
35
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
The following table sets forth our consolidated results of operations for the periods indicated.
Six Months Ended June 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Amount | % of Revenues, net |
Amount | % of Revenues, net |
$ change | % change |
|||||||||||||||||||
Revenues, net |
$ | 653,809 | 100 | % | $ | 564,868 | 100 | % | $ | 88,941 | 16 | % | ||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Technical and operating (excluding depreciation and amortization) |
219,279 | 34 | 186,294 | 33 | 32,985 | 18 | ||||||||||||||||||
Selling, general and administrative |
190,100 | 29 | 175,485 | 31 | 14,615 | 8 | ||||||||||||||||||
Restructuring credit |
(3 | ) | | (49 | ) | | 46 | (94 | ) | |||||||||||||||
Depreciation and amortization |
49,118 | 8 | 50,185 | 9 | (1,067 | ) | (2 | ) | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total operating expenses |
458,494 | 70 | 411,915 | 73 | 46,579 | 11 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Operating income |
195,315 | 30 | 152,953 | 27 | 42,362 | 28 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Interest expense, net |
(59,021 | ) | (9 | ) | (33,083 | ) | (6 | ) | (25,938 | ) | 78 | |||||||||||||
Write-off of deferred financing costs |
(312 | ) | | (5,703 | ) | (1 | ) | 5,391 | (95 | ) | ||||||||||||||
Loss on extinguishment of debt |
| | (14,518 | ) | (3 | ) | 14,518 | (100 | ) | |||||||||||||||
Miscellaneous, net |
(632 | ) | | 79 | | (711 | ) | (900 | ) | |||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Total other income (expense) |
(59,965 | ) | (9 | ) | (53,225 | ) | (9 | ) | (6,740 | ) | 13 | |||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Income from continuing operations before income taxes |
135,350 | 21 | 99,728 | 18 | 35,622 | 36 | ||||||||||||||||||
Income tax expense |
(50,868 | ) | (8 | ) | (42,948 | ) | (8 | ) | (7,920 | ) | 18 | |||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Income from continuing operations |
84,482 | 13 | 56,780 | 10 | 27,702 | 49 | ||||||||||||||||||
Income from discontinued operations, net of income taxes |
209 | | 193 | | 16 | 8 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Net Income |
$ | 84,691 | 13 | % | $ | 56,973 | 10 | % | $ | 27,718 | 49 | % | ||||||||||||
|
|
|
|
|
|
The following is a reconciliation of our consolidated operating income to AOCF:
Six Months Ended June 30, | ||||||||||||||||
2012 | 2011 | $ change | % change | |||||||||||||
Operating income |
$ | 195,315 | $ | 152,953 | $ | 42,362 | 28 | % | ||||||||
Share-based compensation expense |
8,484 | 8,490 | (6 | ) | | |||||||||||
Restructuring credit |
(3 | ) | (49 | ) | 46 | (94 | ) | |||||||||
Depreciation and amortization |
49,118 | 50,185 | (1,067 | ) | (2 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Consolidated AOCF |
$ | 252,914 | $ | 211,579 | $ | 41,335 | 20 | % | ||||||||
|
|
|
|
|
|
36
National Networks Segment Results
The following table sets forth our National Networks segment results for the periods indicated.
Six Months Ended June 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
% of | % of | |||||||||||||||||||||||
Revenues, | Revenues, | % | ||||||||||||||||||||||
Amount | net | Amount | net | $ change | change | |||||||||||||||||||
Revenues, net |
$ | 609,407 | 100 | % | $ | 518,573 | 100 | % | $ | 90,834 | 18 | % | ||||||||||||
Operating expenses: |
||||||||||||||||||||||||
Technical and operating (excluding depreciation and amortization) |
189,390 | 31 | 155,620 | 30 | 33,770 | 22 | ||||||||||||||||||
Selling, general and administrative |
157,670 | 26 | 146,490 | 28 | 11,180 | 8 | ||||||||||||||||||
Depreciation and amortization |
41,832 | 7 | 43,052 | 8 | (1,220 | ) | (3 | ) | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Operating income |
$ | 220,515 | 36 | % | $ | 173,411 | 33 | % | $ | 47,104 | 27 | % | ||||||||||||
|
|
|
|
|
|
The following is a reconciliation of our National Networks segment operating income to AOCF:
Six Months Ended June 30, | ||||||||||||||||
% | ||||||||||||||||
2012 | 2011 | $ change | change | |||||||||||||
Operating income |
$ | 220,515 | $ | 173,411 | $ | 47,104 | 27 | % | ||||||||
Share-based compensation expense |
6,648 | 6,785 | (137 | ) | (2 | ) | ||||||||||
Depreciation and amortization |
41,832 | 43,052 | (1,220 | ) | (3 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
AOCF |
$ | 268,995 | $ | 223,248 | $ | 45,747 | 20 | % | ||||||||
|
|
|
|
|
|
International and Other Segment Results
The following table sets forth our International and Other segment results for the periods indicated.
Six Months Ended June 30, | ||||||||||||||||||||||||
2012 | 2011 | |||||||||||||||||||||||
Amount | % of Revenues, net |
Amount | % of Revenues, net |
$ change | % change |
|||||||||||||||||||
Revenues, net |
$ | 52,615 | 100 | % | $ | 55,607 | 100 | % | $ | (2,992 | ) | (5 | )% | |||||||||||
Operating expenses: |
||||||||||||||||||||||||
Technical and operating (excluding depreciation and amortization) |
39,437 | 75 | 39,738 | 71 | (301 | ) | (1 | ) | ||||||||||||||||
Selling, general and administrative |
32,635 | 62 | 29,436 | 53 | 3,199 | 11 | ||||||||||||||||||
Restructuring credit |
(3 | ) | | (49 | ) | | 46 | (94 | ) | |||||||||||||||
Depreciation and amortization |
7,286 | 14 | 7,133 | 13 | 153 | 2 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Operating loss |
$ | (26,740 | ) | (51 | )% | $ | (20,651 | ) | (37 | )% | $ | (6,089 | ) | 29 | % | |||||||||
|
|
|
|
|
|
37
The following is a reconciliation of our International and Other segment operating loss to AOCF deficit:
Six Months Ended June 30, | % | |||||||||||||||
2012 | 2011 | $ change | change | |||||||||||||
Operating loss |
$ | (26,740 | ) | $ | (20,651 | ) | $ | (6,089 | ) | 29 | % | |||||
Share-based compensation expense |
1,836 | 1,705 | 131 | 8 | ||||||||||||
Restructuring credit |
(3 | ) | (49 | ) | 46 | (94 | ) | |||||||||
Depreciation and amortization |
7,286 | 7,133 | 153 | 2 | ||||||||||||
|
|
|
|
|
|
|||||||||||
AOCF deficit |
$ | (17,621 | ) | $ | (11,862 | ) | $ | (5,759 | ) | 49 | % | |||||
|
|
|
|
|
|
Revenues, net
Revenues, net increased $88,941 to $653,809, for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. The net increase by segment was as follows:
Six Months Ended June 30, | ||||||||||||||||||||||||
2012 | % of total |
2011 | % of total |
$ change | % change |
|||||||||||||||||||
National Networks |
$ | 609,407 | 93 | % | $ | 518,573 | 92 | % | $ | 90,834 | 18 | % | ||||||||||||
International and Other |
52,615 | 8 | 55,607 | 10 | (2,992 | ) | (5 | ) | ||||||||||||||||
Inter-segment eliminations |
(8,213 | ) | (1 | ) | (9,312 | ) | (2 | ) | 1,099 | (12 | ) | |||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
Consolidated revenues, net |
$ | 653,809 | 100 | % | $ | 564,868 | 100 | % | $ | 88,941 | 16 | % | ||||||||||||
|
|
|
|
|
|
National Networks
The increase in National Networks revenues, net is attributable to the following:
Six Months Ended June 30, | ||||||||||||||||||||||||
2012 | % of total |
2011 | % of total |
$ change | % change |
|||||||||||||||||||
Advertising |
$ | 258,765 | 42 | % | $ | 213,836 | 41 | % | $ | 44,929 | 21 | % | ||||||||||||
Affiliation fee and other |
350,642 | 58 | 304,737 | 59 | 45,905 | 15 | ||||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
$ | 609,407 | 100 | % | $ | 518,573 | 100 | % | $ | 90,834 | 18 | % | |||||||||||||
|
|
|
|
|
|
| Advertising revenues increased $44,929 primarily at AMC resulting from higher pricing per unit sold due to an increased demand for our programming by advertisers and an increased number of original programming series, as compared to the number of original programming series that aired on AMC during the six months ended June 30, 2011. Most of our advertising revenues vary based on the timing of our original programming series and the popularity of our programming as measured by Nielsen. Due to this variability, the increase in advertising revenues at AMC for the six months ended June 30, 2012 as compared to the same period in 2011 is not necessarily indicative of what we expect for the remainder of 2012; and |
| Affiliation fee and other revenues increased $45,905 due to an increase in affiliation fee revenues of $24,098 primarily attributable to an increase in rates, including the impact of lower amortization of deferred carriage fees, and subscribers and an increase in other revenues of $21,807 due primarily to increased digital distribution, international and home video revenues derived from licensing our National Networks programming, primarily at AMC. |
38
International and Other
The decrease in International and Other revenues, net is attributable to the following:
Six Months Ended June 30, | ||||||||||||||||||||||||
2012 | % of total |
2011 | % of total |
$ change | % change |
|||||||||||||||||||
Advertising |
$ | 10 | | % | $ | 10 | | % | $ | | | % | ||||||||||||
Affiliation fee and other |
52,605 | 100 | 55,597 | 100 | (2,992 | ) | (5 | ) | ||||||||||||||||
|
|
|
|
|
|
|||||||||||||||||||
$ | 52,615 | 100 | % | $ | 55,607 | 100 | % | $ | (2,992 | ) | (5 | )% | ||||||||||||
|
|
|
|
|
|
| Affiliation fees and other revenues (excluding VOOM HD) decreased $1,377 primarily related to decreased transmission revenue at AMC Networks Broadcasting & Technology due to the expiration of certain agreements and decreased digital distribution revenue at IFC Films, partially offset by increased foreign affiliation fee revenues from our international distribution of Sundance and WE tv channels due to expanded distribution in Asia and Europe; and |
| Affiliation fees and other revenues at VOOM HD decreased $1,615 primarily related to lower foreign affiliation fee and licensing revenue and ceasing distribution of the Rush HD channel in Europe in April 2011. |
Technical and operating expense (excluding depreciation and amortization)
Technical and operating expense (excluding depreciation and amortization) increased $32,985 to $219,279 for the six months ended June 30, 2012, respectively, as compared to the six months ended June 30, 2011. The net increase by segment was as follows:
Six Months Ended June 30, | % | |||||||||||||||
2012 | 2011 | $ change | change | |||||||||||||
National Networks |
$ | 189,390 | $ | 155,620 | $ | 33,770 | 22 | % | ||||||||
International and Other |
39,437 | 39,738 | (301 | ) | (1 | ) | ||||||||||
Inter-segment eliminations |
(9,548 | ) | (9,064 | ) | (484 | ) | 5 | |||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | 219,279 | $ | 186,294 | $ | 32,985 | 18 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Percentage of revenues, net |
34 | % | 33 | % |
National Networks
The increase in the National Networks segment consists of $34,894 for the increased amortization of program rights primarily at AMC and WE tv, partially offset by a decrease of $1,124 for programming related costs. There may be significant changes in the level of our technical and operating expenses due to content acquisition and/or original programming costs and/or the impact of managements periodic assessment of programming usefulness. As additional competition for programming from other programming services increases and alternate distribution technologies continue to develop in the industry, costs for content acquisition and original programming may increase. As we continue to increase our investment in original programming, we expect the amortization of program rights to increase for the remainder of 2012 over the prior year comparable period.
International and Other
The International and Other segment (excluding VOOM HD) increased primarily due to an increase of $412 related to programming costs and an increase of $1,393 in transmission and programming related expenses primarily at AMC/Sundance Channel Global due to increased distribution in Asia and Europe, partially offset by a decrease in transmission expenses at AMC Networks Broadcasting & Technology due to a reduction in revenue. Overall technical and operating expenses in the International and Other segment decreased because programming costs at VOOM HD decreased $2,106 resulting primarily from ceasing distribution of the Rush HD channel in Europe in April 2011.
39
Selling, general and administrative expense
Selling, general and administrative expense increased $14,615 to $190,100 for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. The increase by segment was as follows:
Six Months Ended June 30, | % change |
|||||||||||||||
2012 | 2011 | $ change | ||||||||||||||
National Networks |
$ | 157,670 | $ | 146,490 | $ | 11,180 | 8 | % | ||||||||
International and Other |
32,635 | 29,436 | 3,199 | 11 | ||||||||||||
Inter-segment eliminations |
(205 | ) | (441 | ) | 236 | (54 | ) | |||||||||
|
|
|
|
|
|
|||||||||||
Total |
$ | 190,100 | $ | 175,485 | $ | 14,615 | 8 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Percentage of revenues, net |
29 | % | 31 | % |
National Networks
The increase in the National Networks segment consists of a $26,285 increase for sales and marketing expenses principally due to the airing of a higher number of original programming series during the six months ended June 30, 2012 as well as a net increase in other general and administrative costs of $1,100 primarily due to higher employee related expenses and costs incurred in connection with becoming a stand-alone public company net of a reduction of corporate allocations from Cablevision following the Distribution. These increases were partially offset by a reduction of $13,958 in management fees as well as a decrease of $2,247 in share-based compensation expense and expenses relating to long-term incentive plans.
Prior to the Distribution, pursuant to a consulting agreement with Cablevision, we paid a management fee calculated based on certain subsidiaries gross revenues (as defined under the terms of the consulting agreement) on a monthly basis. We terminated the consulting agreement on the Distribution date and did not replace it.
There may be significant changes in the level of our selling, general and administrative expenses from quarter to quarter and year to year due to the timing of promotion and marketing of original programming.
International and Other
The increase in the International and Other segment (excluding VOOM HD) consists of an increase of $2,926 for selling, marketing and advertising costs primarily at AMC/Sundance Channel Global and IFC Films due to increased spending on titles being distributed, a net increase of $1,533 for general and administrative costs incurred in connection with becoming a stand-alone public company, net of a reduction of corporate allocations from Cablevision following the Distribution and an increase in share-based compensation expense and expenses relating to long-term incentive plans of $26. Such increases are partially offset by a decrease of $1,286 related to VOOM HD due primarily to lower legal fees and other related costs and expenses in connection with the DISH Network contract dispute.
Depreciation and amortization
Depreciation and amortization decreased $1,067 to $49,118 for the six months ended June 30, 2012, as compared to the six months ended June 30, 2011. The net decrease by segment was as follows:
Six Months Ended June 30, | % change |
|||||||||||||||
2012 | 2011 | $ change | ||||||||||||||
National Networks |
$ | 41,832 | $ | 43,052 | $ | (1,220 | ) | (3 | )% | |||||||
International and Other |
7,286 | 7,133 | 153 | 2 | ||||||||||||
|
|
|
|
|
|
|||||||||||
$ | 49,118 | $ | 50,185 | $ | (1,067 | ) | (2 | )% | ||||||||
|
|
|
|
|
|
The decrease in the National Networks segment consists of a decrease in depreciation expense of $616 and a decrease in amortization expense of $604. The decrease in depreciation expense is due to certain assets becoming fully depreciated and the decrease in amortization expense is primarily due to a decrease in amortization expense at Sundance Channel as certain intangible assets became fully amortized in the second quarter of 2012.
40
AOCF
AOCF increased $41,335 for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011. The net increase by segment was as follows:
Six Months Ended June 30, | % change |
|||||||||||||||
2012 | 2011 | $ change | ||||||||||||||
National Networks |
$ | 268,995 | $ | 223,248 | $ | 45,747 | 20 | % | ||||||||
International and Other |
(17,621 | ) | (11,862 | ) | (5,759 | ) | 49 | |||||||||
Inter-segment eliminations |
1,540 | 193 | 1,347 | 698 | ||||||||||||
|
|
|
|
|
|
|||||||||||
AOCF |
$ | 252,914 | $ | 211,579 | $ | 41,335 | 20 | % | ||||||||
|
|
|
|
|
|
National Networks AOCF increased due to an increase in revenues, net of $90,834 and a decrease in management fees, partially offset by an increase in technical and operating expenses resulting primarily from an increase in amortization of program rights expense and marketing expense due to the increase in the number of original programming premieres.
International and Other AOCF deficit increased primarily due a decrease in revenues, net of $2,992 and an increase in selling, general and administrative expenses and programming and transmission related costs and selling costs at AMC/Sundance Channel Global, partially offset by a decrease in legal fees and other costs in connection with the DISH Network contract dispute.
Interest expense, net
The increase in interest expense, net of $25,938 for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011 is attributable to the following:
Six Months Ended | ||||
June 30, 2012 | ||||
Indebtedness incurred in connection with the Distribution |
$ | 54,134 | ||
Repayment of the RNS senior notes in May 2011 and the RNS credit facility and the RNS senior subordinated notes in June 2011 |
(32,904 | ) | ||
Interest rate swap contracts |
4,280 | |||
Decrease in interest income |
413 | |||
Other |
15 | |||
|
|
|||
$ | 25,938 | |||
|
|
Write-off of deferred financing costs
In connection with the $50,000 voluntary prepayment in March 2012 of our Term A Facility (as defined below), deferred financing costs of $312 were written off in the six months ended June 30, 2012. The write-off of deferred financing costs of $5,703 for the six months ended June 30, 2011 represents $1,186 of deferred financing costs written off in connection with the redemption of the RNS 8 3/4% senior notes in May 2011, and $2,062 and $2,455 of deferred financing costs written off in connection with the repayment of the outstanding borrowings under the RNS credit facility and the RNS 10-3/8% senior subordinated notes, respectively, in June 2011 in connection with the Distribution.
Loss on extinguishment of debt
The loss on extinguishment of debt of $14,518 for the six months ended June 30, 2011 primarily represents $14,168 for the excess of the redemption price, premium paid and related fees along with the accretion to principal over the carrying value of the $325,000 RNS 10 3/8% senior subordinated notes redeemed June 30, 2011 associated with the tender offer which occurred in connection with the Distribution.
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Income tax expense
For the six months ended June 30, 2012, income tax expense attributable to continuing operations was $50,868, representing an effective tax rate of 38%. The effective tax rate differs from the federal statutory rate of 35% due primarily to state income tax expense of $3,064 and tax expense of $1,630 related to uncertain tax positions, including accrued interest, partially offset by a tax benefit of $1,800 resulting from a decrease in the valuation allowance with regard to certain local income tax credit carry forwards. We expect to fully utilize our net operating loss carry forward in the third quarter of 2012. We expect our effective tax rate to be approximately 39% in future quarters.
For the six months ended June 30, 2011, income tax expense attributable to continuing operations was $42,948, representing an effective tax rate of 43%. The effective tax rate differs from the federal statutory rate of 35% due primarily to state income tax expense of $5,290, tax expense of $2,069 related to uncertain tax positions, including accrued interest and tax expense of $492 resulting from an increase in the valuation allowance with regard to certain local income tax credit carry forwards.
Liquidity and Capital Resources
The operations of the businesses that are included in our consolidated financial statements collectively have historically generated positive net cash flow from operating activities. However, each of our programming businesses has substantial programming acquisition and production expenditure requirements.
Sources of cash primarily include cash flow from operations and amounts available under our revolving credit facility. Although we currently believe that amounts available under our revolving credit facility will be available when and if needed, we can provide no assurance that access to such funds will not be impacted by adverse conditions in the financial markets. The obligations of the financial institutions under our revolving credit facility are several and not joint and, as a result, a funding default by one or more institutions does not need to be made up by the others.
Our principal uses of cash include our debt service and the acquisition and production of programming. We continue to increase our investment in original programming, the funding of which generally occurs six to nine months in advance of a programs airing. We expect this increased investment to continue for the remainder of 2012. Historically, our businesses have not required significant capital expenditures. However, since the Distribution, as we continue to invest in infrastructure, we expect that our capital expenditures may be higher in future periods. In the six months ended June 30, 2012, we voluntarily prepaid $50,000 of the outstanding balance of the Term A Facility (as defined below) and also paid quarterly installments of $2,975 under the Term B Facility (as defined below). The required term loan repayments over the next twelve months will be $5,950. We believe that a combination of cash-on-hand, cash generated from operating activities and availability under our revolving credit facility will provide sufficient liquidity to service the principal and interest payments on our indebtedness, along with our other funding and investment requirements over the next twelve months and over the longer term. However, we do not expect to generate sufficient cash from operations to repay at maturity the entirety of the then outstanding balances of our debt. As a result, we will then be dependent upon our ability to access the capital and credit markets in order to repay or refinance the outstanding balances of our indebtedness. Failure to raise significant amounts of funding to repay these obligations at maturity would adversely affect our business. In such a circumstance, we would need to take other actions including selling assets, seeking strategic investments from third parties or reducing other discretionary uses of cash.
Our level of debt could have important consequences for our business including, but not limited to, increasing our vulnerability to general adverse economic and industry conditions, limiting the availability of our cash flow to fund future programming investments, capital expenditures, working capital, business activities and other general corporate requirements, and limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate.
In addition, economic or market disruptions could lead to lower demand for our services, such as lower levels of advertising. These events would adversely impact our results of operations, cash flows and financial position.
On June 30, 2011 AMC Networks, as Borrower, and substantially all of its subsidiaries, as restricted subsidiaries, entered into a credit agreement (the Credit Facility). The Credit Facility provides AMC Networks with senior secured credit facilities consisting of a $1,130,000 term loan A facility (the Term A Facility), a $595,000 term loan B facility (the Term B Facility) and a $500,000 revolving credit facility (the Revolving Facility). The Term A Facility and the Term B Facility were discounted $5,650 and
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$12,986, respectively, upon original issuance. The Term A Facility matures June 30, 2017, the Term B Facility matures December 31, 2018 and the Revolving Facility matures June 30, 2016. As of June 30, 2012, amounts outstanding, net of discount, under the Term A Facility and Term B Facility were $975,665 and $577,565, respectively.
The Revolving Facility remains undrawn at June 30, 2012. Total undrawn revolver commitments are available to be drawn for our general corporate purposes.
The borrowings under the Term A Facility and Revolving Facility portions of the Credit Facility may be voluntarily prepaid without premiums and penalty at any time. During 2011 and during the six months ended June 30, 2012, we voluntarily prepaid $100,000 and $50,000, respectively, of the outstanding balance under the Term A Facility. In July 2012, the Company voluntarily prepaid an additional $50,000 of the outstanding balance under the Term A Facility. These voluntary prepayments were applied to the earliest required quarterly installments due. As a result, the next required quarterly installment under the Term A Facility will be due on September 30, 2014 in the amount of $11,875.
AMC Networks was in compliance with all of its covenants under its Credit Facility as of June 30, 2012.
We may request an increase in the Term A Facility and/or Revolving Facility by an aggregate amount not exceeding the greater of $400,000 and an amount, which after giving effect to such increase, would not cause the ratio of senior secured debt to annual operating cash flow, as defined in the Credit Facility, to exceed 4.75:1. As of June 30, 2012, the Company does not have any commitments for an incremental facility.
Cash Flow Discussion
The following table is a summary of cash flows provided by (used in) continuing operations and discontinued operations for the six months ended June 30:
2012 | 2011 | |||||||
Continuing operations: |
||||||||
Cash flow provided by operating activities |
$ | 165,604 | &n |