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ASCMA > SEC Filings for ASCMA > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for ASCENT CAPITAL GROUP, INC.

Form 10-Q for ASCENT CAPITAL GROUP, INC.


9-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our business, marketing and operating strategies, integration of acquired businesses, new service offerings, financial prospects, and anticipated sources and uses of capital. Where, in any forward-looking statement, we express an expectation or belief as to future results or events, such expectation or belief is expressed in good faith and believed to have a reasonable basis, but there can be no assurance that the expectation or belief will result or be achieved or accomplished. The following include some but not all of the factors that could cause actual results or events to differ materially from those anticipated:

general business conditions and industry trends;

macroeconomic conditions and their effect on the general economy and on the US housing market, in particular single family homes which represent Monitronics' largest demographic;

uncertainties in the development of our business strategies, including market acceptance of new products and services;

the competitive environment in which we operate, in particular increasing competition in the alarm monitoring industry from larger existing competitors and potential new market entrants;

integration of acquired assets and businesses;

the regulatory environment in which we operate, including the multiplicity of jurisdictions and licensing requirements to which Monitronics is subject and the risk of new regulations, such as the increasing adoption of false alarm ordinances;

rapid technological changes which could result in the obsolescence of currently utilized technology and the need for significant upgrade expenditures;

the availability and terms of capital, including the ability of Monitronics to obtain additional funds to grow its business;

Monitronics' high degree of leverage and the restrictive covenants governing its indebtedness;

the outcome of any pending, threatened, or future litigation, including potential liability for failure to respond adequately to alarm activations;

availability of qualified personnel;

Monitronics' anticipated growth strategies;

Monitronics' ability to acquire and integrate additional accounts, including competition for dealers with other alarm monitoring companies which could cause an increase in expected subscriber acquisition costs;

the operating performance of Monitronics' network, including the potential for service disruptions due to acts of nature or technology deficiencies;

the reliability and creditworthiness of Monitronics' independent alarm systems dealers and subscribers;

changes in Monitronics' expected rate of subscriber attrition; and

the trend away from the use of public switched telephone network lines and resultant increase in servicing costs associated with alternative methods of communication.


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For additional risk factors, please see Part II, Item 1A, Risk Factors, in our Quarterly Report on Form 10-Q for the three months ended March 31, 2012. These forward-looking statements and such risks, uncertainties and other factors speak only as of the date of this Quarterly Report, and we expressly disclaim any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in our expectations with regard thereto, or any other change in events, conditions or circumstances on which any such statement is based.

The following discussion and analysis provides information concerning our results of operations and financial condition. This discussion should be read in conjunction with our accompanying condensed consolidated financial statements and the notes thereto included elsewhere herein and our 2011 Form 10-K.

Overview

Ascent Capital Group, Inc. is a holding company and its assets primarily consist of its wholly-owned subsidiary, Monitronics International, Inc.

The Monitronics business provides security alarm monitoring and related services to residential and business subscribers throughout the United States and parts of Canada. Monitronics monitors signals arising from burglaries, fires and other events through security systems at subscribers' premises. Nearly all of its revenues are derived from monthly recurring revenues under security alarm monitoring contracts purchased from independent dealers in its exclusive nationwide network.

Attrition

Account cancellation, otherwise referred to as subscriber attrition, has a direct impact on the number of subscribers that Monitronics serves and on its financial results, including revenues, operating income and cash flow. A portion of the subscriber base can be expected to cancel its service every year. Subscribers may choose not to renew or may terminate their contract for a variety of reasons, including relocation, cost, and switching to a competitors' service. The largest category of canceled accounts relate to subscriber relocation or the inability to contact the subscriber. Monitronics defines its attrition rate as the number of canceled accounts in a given period divided by the weighted average number of subscribers for that period. Monitronics considers an account canceled if payment from the subscriber is deemed uncollectible or if the subscriber cancels for various reasons. If a subscriber relocates but continues its service, this is not a cancellation. If the subscriber relocates, discontinues its service and a new subscriber takes over the original subscriber's service continuing the revenue stream (a "new owner takeover"), this is also not a cancellation. Monitronics adjusts the number of canceled accounts by excluding those that are contractually guaranteed by its dealers. The typical dealer contract provides that if a subscriber cancels in the first year of its contract, the dealer must either replace the canceled account with a new one or refund the purchase price. To help ensure the dealer's obligation to Monitronics, Monitronics typically holds back a portion of the purchase price for every account purchased, ranging from 5-10%. In some cases, the amount of the purchase holdback may be less than actual attrition experienced.

The table below presents subscriber data for the twelve months ended September 30, 2012 and 2011:

                                                             Twelve Months Ended
                                                                September 30,
                                                              2012         2011

Beginning balance of accounts                                 697,581     646,478
Accounts purchased (a)                                        106,582     133,091
Accounts canceled (b)                                         (84,523 )   (73,828 )
Canceled accounts guaranteed to be refunded from holdback      (2,152 )    (8,160 )
Ending balance of accounts                                    717,488     697,581
Monthly weighted average accounts                             706,752     679,304
Attrition rate                                                  (12.0 )%    (10.9 )%



(a) During the three months ended September 30, 2012 and 2011, Monitronics purchased 31,187 and 33,205 subscriber accounts, respectively. Monthly recurring revenue purchased during the three months ended September 30, 2012 and 2011 was approximately $1,387,000 and $1,467,000, respectively. During the nine months ended September 30, 2012 and 2011, Monitronics purchased 81,719 and 89,828 subscriber accounts, respectively. Monthly recurring revenue purchased during the nine months ended September 30, 2012 and 2011 was approximately $3,601,000 and $3,916,000, respectively.

(b) Net of canceled accounts that are contractually guaranteed to be refunded from holdback.


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The attrition rate for the twelve months ended September 30, 2012 and September 30, 2011 was 12.0% and 10.9%, respectively. Increased attrition reflects the current age of accounts in the portfolio and an increase in disconnections due to household relocations.

Monitronics also analyzes its attrition by classifying accounts into annual pools based on the year of origination. Monitronics then tracks the number of accounts that cancel as a percentage of the initial number of accounts purchased for each pool for each year subsequent to its purchase. Based on the average cancellation rate across the pools, in recent years Monitronics has averaged less than 1% attrition within the initial 12-month period after considering the accounts which were replaced or refunded by the dealers at no additional cost to Monitronics. Over the next three years of the subscriber account life, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool gradually increases and historically has peaked between the third and fourth years. The peak between the third and fourth years is primarily a result of the buildup of subscribers that moved or no longer had need for the service prior to the third year but did not cancel their service until the end of their three-year contract. After the fourth year, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool declines.

Adjusted EBITDA

Ascent Capital defines "Adjusted EBITDA" as net income before interest expense, interest income, income taxes, depreciation, amortization (including the amortization of subscriber accounts and dealer network), realized and unrealized gain/(loss) on derivative instruments, restructuring charges, stock-based and other non-cash long-term incentive compensation, and other non-cash or nonrecurring charges. Ascent Capital believes that Adjusted EBITDA is an important indicator of the operational strength and performance of its businesses, including the businesses' ability to fund their ongoing acquisition of subscriber accounts, their capital expenditures and to service their debt. In addition, this measure is used by management to evaluate operating results and perform analytical comparisons and identify strategies to improve performance. Adjusted EBITDA is also a measure that is customarily used by financial analysts to evaluate the financial performance of companies in the security alarm monitoring industry and is one of the financial measures, subject to certain adjustments, by which Monitronics' covenants are calculated under the agreements governing their debt obligations. Adjusted EBITDA does not represent cash flow from operations as defined by generally accepted accounting principles ("GAAP"), should not be construed as an alternative to net income or loss and is indicative neither of our results of operations nor of cash flows available to fund all of our cash needs. It is, however, a measurement that Ascent Capital believes is useful to investors in analyzing its operating performance. Accordingly, Adjusted EBITDA should be considered in addition to, but not as a substitute for, net income, cash flow provided by operating activities and other measures of financial performance prepared in accordance with GAAP. Adjusted EBITDA is a non-GAAP financial measure. As companies often define non-GAAP financial measures differently, Adjusted EBITDA as calculated by Ascent Capital should not be compared to any similarly titled measures reported by other companies.


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Results of Operations



The following table sets forth selected data from the accompanying condensed
consolidated statements of operations and comprehensive income (loss) for the
periods indicated (dollar amounts in thousands).



                                      Three months ended          Nine months ended
                                        September 30,               September 30,
                                      2012          2011          2012         2011

Net revenue                        $    84,667       79,515    $  249,863      230,962  (a)
Cost of services                        12,881       10,692        35,331       29,419
Selling, general, and
administrative                          18,256       17,554        54,093       55,977
Amortization of subscriber
accounts and dealer network             40,815       41,203       118,245      117,944
Restructuring charges                        -           72             -        4,258
Loss (gain) on sale of
operating assets                            15          106        (1,298 )        565
Interest expense                        19,299       11,357        50,258       32,155
Realized and unrealized loss on
derivative financial
instruments                                  -        3,807         2,044       10,114
Income tax benefit (expense)
from continuing operations                (604 )        208        (2,052 )      3,497
Net loss from continuing
operations                             (13,725 )     (5,152 )     (24,416 )    (17,135 )
Earnings (loss) from
discontinued operations, net of
income tax                              (1,882 )     (4,715 )      (3,598 )     44,173
Net income (loss)                      (15,607 )     (9,867 )     (28,014 )     27,038

Adjusted EBITDA (b)
Monitronics business Adjusted
EBITDA                             $    57,420       55,706    $  171,123      161,315
Corporate Adjusted EBITDA               (1,449 )     (1,359 )      (2,518 )     (8,982 )
Total Adjusted EBITDA              $    55,971       54,347    $  168,605      152,333

Adjusted EBITDA as a percentage
of Revenue
Monitronics business                      67.8 %       70.1 %        68.5 %       69.8 %

Corporate (1.7 )% (1.7 )% (1.0 )% (3.9 )%



(a) Net revenue for the nine months ended September 30, 2011 reflects the negative impact of a $2,295,000 fair value adjustment that reduced deferred revenue acquired in the Monitronics acquisition.

(b) See reconciliation to net loss from continuing operations below.

Net revenue. Net revenue increased $5,152,000, or 6.5%, and $18,901,000, or 8.2%, for the three and nine months ended September 30, 2012, respectively, as compared to the corresponding prior year periods. The increase in net revenue is attributable to an increase in the number of subscriber accounts from 697,581 as of September 30, 2011 to 717,488 as of September 30, 2012. In addition, average monthly revenue per subscriber increased from $37.24 as of September 30, 2011 to $38.28 as of September 30, 2012. The increase in net revenue for the nine months ended September 30, 2012 is also attributable to a $2,295,000 fair value adjustment, associated with deferred revenue acquired in the Monitronics acquisition, which reduced net revenue for the nine months ended September 30, 2011.

Cost of services. Cost of services increased $2,189,000, or 20.5%, and $5,912,000, or 20.1%, for the three and nine months ended September 30, 2012, respectively, as compared to the corresponding prior year periods. The increase is primarily attributable to an increased number of accounts monitored across the cellular network and having interactive services, which result in higher telecommunications and service costs. Cost of services as a percent of net revenue increased from 13.4% for the three months ended September 30, 2011 to 15.2% for the three months ended September 30, 2012. Cost of services as percent of net revenue increased from 12.7% for the nine months ended September 30, 2011 to 14.1% for the nine months ended September 30, 2012.

Selling, general and administrative. Selling, general and administrative costs ("SG&A") increased $702,000, or 4.0%, for the three months ended September 30, 2012 as compared to the corresponding prior year period. The increase is primarily attributable to increases in Monitronics SG&A costs. The increased Monitronics SG&A costs are primarily attributable to increased payroll, contract service, and stock-based compensation expenses of $832,000 as compared to the corresponding prior year period. The increase in stock-based compensation expense is related to restricted stock and stock option awards granted to certain employees and directors during 2011 and 2012. SG&A as a percent of net revenue decreased from 22.1% for the three months ended September 30, 2011 to 21.6% for the three months ended September 30, 2012.


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SG&A decreased $1,884,000 or 3.4%, for the nine months ended September 30, 2012 as compared to the corresponding prior year period. The decrease is primarily attributable to decreased administrative and corporate expenses as a result of the sale of the Content Distribution business and shutdown of the Systems Integration business in the first two quarters of 2011. The decrease was partially offset by increases in Monitronics SG&A costs. The increased Monitronics SG&A costs are primarily attributable to increased payroll, marketing, and stock-based compensation expenses of $2,094,000 as compared to the corresponding prior year period. The increase in stock-based compensation expense is related to restricted stock and stock option awards granted to certain employees and directors during 2011 and 2012. SG&A as a percent of net revenue decreased from 24.2% for the nine months ended September 30, 2011 to 21.6% for the nine months ended September 30, 2012.

Amortization of subscriber accounts and dealer network. Amortization of subscriber accounts and dealer networks decreased $388,000 and increased $301,000 for the three and nine months ended September 30, 2012, respectively, as compared to the corresponding prior year periods. The decrease in subscriber account amortization for the three months ended September 30, 2012 is related to the timing of amortization of subscriber accounts acquired prior to the third quarter of 2011, including the subscriber accounts purchased in the December 2010 Monitronics acquisition, which have a lower rate of amortization in 2012 as compared to 2011 based on the applicable double declining balance method. The decrease is partially offset by increased amortization expense related to 2012 subscriber account purchases. The increase in subscriber account amortization for the nine months ended, September 30, 2012 is primarily attributable to amortization of subscriber accounts purchased subsequent to September 30, 2011.

Restructuring Charges. The Company recorded restructuring charges from continuing operations of $72,000 and $4,258,000 for the three and nine months ended September 30, 2011, respectively. There were no restructuring charges recorded during the three and nine months ended September 30, 2012.

In the fourth quarter of 2010, we began a new restructuring plan (the "2010 Restructuring Plan") in conjunction with the expected sales of the Creative/Media and Content Distribution businesses. The 2010 Restructuring Plan was implemented to meet the changing strategic needs of the Company as we sold most of our media and entertainment services assets and acquired Monitronics, an alarm monitoring business. Such changes include retention costs for corporate employees to remain employed until the sales were complete, severance costs for certain employees and costs for facilities that were no longer being used by us due to the Creative/Media and Content Distribution sales.

Before we implemented the 2010 Restructuring Plan, we had just completed a restructuring plan that was implemented in 2008 and concluded in September 2010 (the "2008 Restructuring Plan"). The 2008 Restructuring Plan was implemented to align our organization with our strategic goals and how we operated, managed and sold our services. The 2008 Restructuring Plan charges included severance costs from labor cost mitigation measures undertaken across all of the businesses and facility costs in conjunction with the consolidation of certain facilities in the United Kingdom and the closing of our Mexico operations. The following table provides the activity and balances of the restructuring reserve (amounts in thousands).

                                December 31, 2010     Additions     Deductions (a)    September 30, 2011

2010 Restructuring Plan
Severance and retention        $             3,590         4,186            (5,813 )               1,963

2008 Restructuring Plan
Severance                      $                 9             -                (9 )                   -
Excess facility costs                          211            72               (16 )                 267
Total                          $               220            72               (25 )                 267

                                December 31, 2011     Additions     Deductions (a)    September 30, 2012

2010 Restructuring Plan
Severance and retention        $             1,886             -            (1,886 )                   -

2008 Restructuring Plan
Excess facility costs          $               236             -               (95 )                 141



(a) Primarily represents cash payments.


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Loss (gain) on the sale of assets. During the nine months ended September 30, 2012, the Company sold land and building improvements for $5,095,000 resulting in a pre-tax gain of $1,847,000. In addition, during the nine months ended September 30, 2012, the Company sold its 50% interest in an equity method investment for $1,420,000 resulting in a pre-tax loss of $532,000. During the nine months ended September 30, 2011, the Company disposed of certain property and equipment resulting in a pre-tax loss of $565,000.

Interest Expense. Interest expense increased $7,942,000 and $18,103,000 for the three and nine months ended September 30, 2012, respectively, as compared to the corresponding prior year periods. The increase in 2012 interest expense as compared to the respective prior year period is primarily due to the presentation of interest cost related to the Company's current derivative instrument. Interest cost related to the Company's current derivative instrument is presented in Interest expense on the statement of operations as the related derivative instrument is an effective hedge of the Company's interest rate risk for which hedge accounting is applied. As the Company did not apply hedge accounting on its prior derivative instruments, the related interest costs incurred prior to March 23, 2012 are presented in Realized and unrealized loss on derivative financial instruments in the condensed consolidated statements of operations and comprehensive income (loss). In addition, the increase in interest expense is due to the increase in debt and the increase in interest rates associated with the Senior Notes and Credit Facility as compared to the Company's prior debt obligations. Interest expense for the three and nine months ended September 30, 2012 includes amortization of debt discount of $184,000 and $4,285,000, respectively. Interest expense for the three and nine months ended September 30, 2011 includes amortization of debt discount of $4,309,000 and $12,640,000, respectively.

Realized and unrealized loss on derivative financial instruments. Realized and unrealized loss on derivative financial instruments for the three and nine months ended September 30, 2012 was $0 and $2,044,000, respectively. Realized and unrealized loss on derivative financial instruments for the three and nine months ended September 30, 2011 was $3,807,000 and $10,114,000, respectively. For the nine months ended September 30, 2012, the realized and unrealized loss on derivative financial instruments includes settlement payments of $8,837,000 partially offset by a $6,793,000 unrealized gain related to the change in the fair value of these derivatives prior to their termination on March 23, 2012. For the three months ended September 30, 2011, the realized and unrealized loss on derivative financial instruments includes settlement payments of $9,984,000 partially offset by a $6,177,000 unrealized gain related to the change in the fair value of these derivatives. For the nine months ended September 30, 2011, the realized and unrealized loss on derivative financial instruments includes settlement payments of $29,050,000 partially offset by an $18,936,000 unrealized gain related to the change in the fair value of these derivatives.

Income tax benefit (expense) from continuing operations. The Company had a pre-tax loss from continuing operations of $13,121,000 and $22,364,000 for the three and nine months ended September 30, 2012, respectively, and an income tax expense of $604,000 and $2,052,000 for the three and nine months ended September 30, 2012, respectively. Income tax expense for the three and nine months ended September 30, 2012 primarily relates to state taxes recognized on the Monitronics business. The Company had a pre-tax loss from continuing operations of $5,360,000 and $20,632,000 for the three months and nine months ended September 30, 2011, respectively, and an income tax benefit of $208,000 and $3,497,000 for the three and nine months ended September 30, 2011, respectively. Income tax benefit for the three and nine months ended September 30, 2011 primarily relates to federal and state benefits from operating losses recognized at Ascent Capital, partially offset by state tax expense recognized on the Monitronics business. The Company recorded charges of $2,584,000 and $4,198,000 to increase the valuation allowance which reduced our net income tax benefit (expense) from continuing operations for the nine months ended September 30, 2012 and 2011, respectively.

Earnings (loss) from discontinued operations, net of income taxes. Earnings
(loss) from discontinued operations, net of income taxes, were $(1,882,000) and $(3,598,000) for the three and nine months ended September 30, 2012, respectively, and $(4,715,000) and $44,173,000 for the three and nine months ended September 30, 2011, respectively. The 2012 amounts include costs related to contract termination and other loss contingencies associated with discontinued operations. The 2011 amounts include the results of the Systems Integration business which was shut down in June 2011 and the Content Distribution business which was sold at the end of February 2011. The 2011 amount also includes the gain on sale of the Content Distribution business of $66,136,000 and the related income tax expense of $6,716,000.


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Adjusted EBITDA. The following table provides a reconciliation of total Adjusted EBITDA to net loss from continuing operations (amounts in thousands):

                                      Three months ended          Nine months ended
. . .
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