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ASCMA > SEC Filings for ASCMA > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for ASCENT CAPITAL GROUP, INC.

Form 10-Q for ASCENT CAPITAL GROUP, INC.


9-May-2014

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 assets and 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:

Factors relating to the Company and its consolidated subsidiaries:

general business conditions and industry trends;

macroeconomic conditions and their effect on the general economy and on the U.S. 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 new market entrants, including telecommunications and cable companies;

the development of new services or service innovations by competitors;

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;

          integration of acquired assets and businesses, including Security
Networks;

          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;

technological changes which could result in the obsolescence of currently utilized technology and the need for significant upgrade expenditures, including the phase-out of 2G networks by cellular carriers;

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

the operating performance of Monitronics' network, including the potential for service disruptions at both the main monitoring facility and back-up monitoring facilities due to acts of nature or technology deficiencies;

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

our ability to continue to obtain insurance coverage sufficient to hedge our risk exposures, including as a result of acts of third parties and/or alleged regulatory violations;

changes in the nature of strategic relationships with original equipment manufacturers, dealers and other Monitronics business partners;

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

          changes in Monitronics' expected rate of subscriber attrition;

          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; and

          availability of qualified personnel.

For additional risk factors, please see Part I, Item 1A, Risk Factors, in the 2013 Form 10-K. 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 the 2013 Form 10-K.


Table of Contents

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. On August 16, 2013, Monitronics acquired all of the equity interests of Security Networks LLC ("Security Networks") and certain affiliated entities (the "Security Networks Acquisition"). Monitronics monitors signals arising from burglaries, fires, medical alerts and other events through security systems at subscribers' premises, as well as provides customer service and technical support. 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.

Ascent Capital's attrition analysis and results of operations for the three months ended March 31, 2014 include the operations of the Security Networks business.

Attrition

Account cancellation, otherwise referred to as subscriber attrition, has a direct impact on the number of subscribers that Monitronics services 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 terminate their contract for a variety of reasons, including relocation, cost and switching to a competitor's 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 of 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, 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 to Monitronics the cost paid to acquire the contract. To help ensure the dealer's obligation to Monitronics, Monitronics typically maintains a dealer funded holdback reserve ranging from 5-10% of subscriber accounts in the guarantee period. In some cases, the amount of the holdback liability may be less than actual attrition experience.

The table below presents subscriber data for the twelve months ended March 31, 2014 and 2013:

                                                        Twelve Months Ended
                                                             March 31,
                                                        2014           2013

Beginning balance of accounts                            818,335        706,881
Accounts acquired                                        357,855        206,665
Accounts cancelled                                      (118,688 )      (92,696 )
Canceled accounts guaranteed by dealer and
acquisition adjustment (a) (b)                           (10,717 )       (2,515 )
Ending balance of accounts                             1,046,785        818,335
Monthly weighted average accounts                        962,527        759,180
Attrition rate                                             (12.3 )%       (12.2 )%



(a) Canceled accounts that are contractually guaranteed to be refunded from holdback.

(b) Includes 2,064 subscriber accounts that were proactively cancelled following the acquisition of Security Networks in August 2013 because they were active with both Monitronics and Security Networks.

Monitronics analyzes its attrition by classifying accounts into annual pools based on the year of acquisition. Monitronics then tracks the number of accounts that cancel as a percentage of the initial number of accounts acquired for each pool for each year subsequent to its acquisition. 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 few 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 following the end of the initial contract term, which is typically three to five years. The peak following the end of the initial contract term is primarily a result of the buildup of subscribers that moved or no longer had need for the service but did not cancel their service until the end of their initial contract term. Subsequent to the peak following the end of the initial contract term, the number of subscribers that cancel as a percentage of the initial number of subscribers in that pool declines.


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Accounts Acquired

During the three months ended March 31, 2014 and 2013, Monitronics acquired 31,774 and 28,460 subscriber accounts, respectively. Acquired contracts for the twelve months ended March 31, 2014 include 203,898 accounts acquired in the Security Networks Acquisition, which was completed on August 16, 2013. In addition, subscriber accounts acquired for the twelve months ended March 31, 2013 include approximately 93,000 accounts purchased in a bulk buy on October 25, 2012.

Recurring monthly revenue acquired during the three months ended March 31, 2014 and 2013 was approximately $1,451,000 and $1,277,000, respectively.

Adjusted EBITDA

We evaluate the performance of our operations based on financial measures such as revenue and "Adjusted EBITDA." Adjusted EBITDA is defined as net income
(loss) 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 business, including the business' ability to fund its ongoing acquisition of subscriber accounts, its capital expenditures and to service its 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.

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
                                                                March 31,
                                                           2014            2013

Net revenue                                            $     132,864        100,158
Cost of services                                              22,090         15,202
Selling, general, and administrative                          26,537         19,737
Amortization of subscriber accounts, dealer network
and other intangible assets                                   61,780         44,315
Restructuring charges                                            547              -
Interest expense                                              28,773         21,143
Income tax expense from continuing operations                  1,621            774
Net income (loss) from continuing operations                  (9,378 )        2,314
Earnings (loss) from discontinued
operations, net of income tax                                   (354 )          446
Net income (loss)                                             (9,732 )        2,760

Adjusted EBITDA (a)
Monitronics business Adjusted EBITDA                   $      89,275         69,414
Corporate Adjusted EBITDA                                     (1,331 )        1,886
Total Adjusted EBITDA                                  $      87,944         71,300

Adjusted EBITDA as a percentage of Revenue
Monitronics business                                            67.2 %         69.3 %
Corporate                                                       (1.0 )%         1.9 %



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


Table of Contents

Net revenue. Net revenue increased $32,706,000, or 32.7%, for the three months ended March 31, 2014 as compared to the corresponding prior year period. The increase in net revenue is attributable to the growth in the number of subscriber accounts and the increase in average monthly revenue per subscriber. The growth in subscriber accounts reflects the effects of the Security Networks Acquisition in August 2013, which included over 200,000 subscriber accounts, acquisition of over 135,000 accounts through Monitronics' authorized dealer program subsequent to March 31, 2013, and the purchase of approximately 18,200 accounts in various bulk buys over the last 12 months. In addition, average monthly revenue per subscriber increased from $39.74 as of March 31, 2013 to $41.15 as of March 31, 2014.

Cost of services. Cost of services increased $6,888,000, or 45.3%, for the three months ended March 31, 2014 as compared to the corresponding prior year period. The increase is primarily attributable to subscriber growth over the last twelve months, as well as increases in cellular and service costs. Cellular costs have increased due to more accounts being monitored across the cellular network, which often include interactive and home automation services. This has also resulted in higher service costs as existing subscribers upgrade their systems. Cost of services as a percent of net revenue increased from 15.2% for the three months ended March 31, 2013 to 16.6% for the three months ended March 31, 2014.

Selling, general and administrative. Selling, general and administrative costs ("SG&A") increased $6,800,000, or 34.5%, for the three months ended March 31, 2014 as compared to the corresponding prior year period. The increase is attributable to increases in Monitronics SG&A costs which include $3,940,000 of Security Networks SG&A costs for the three months ended March 31, 2014. Increased Monitronics SG&A costs are also attributable to redundant staffing and operating costs at our Dallas, Texas headquarters and integration costs incurred in advance of transitioning Security Networks' operations from Florida to Texas. This transition was completed in April 2014. Integration costs for the three months ended March, 31, 2014, were $1,059,000, which primarily relate to professional services rendered. SG&A as a percent of net revenue increased from 19.7% for the three months ended March 31, 2013 to 20.0% for the three months ended March 31, 2014.

Amortization of subscriber accounts, dealer network and other intangible assets. Amortization of subscriber accounts, dealer network and other intangible assets increased $17,465,000 for the three months ended March 31, 2014 as compared to the corresponding prior year period. The increase is attributable to amortization of subscriber accounts acquired subsequent to March 31, 2013, including amortization of approximately $16,517,000 related to the definite lived intangible assets acquired in the Security Networks Acquisition.

Restructuring charges. In connection with the Security Networks Acquisition, management approved a restructuring plan to transition Security Networks operations in West Palm Beach and Kissimmee, Florida to Dallas, Texas (the "2013 Restructuring Plan"). The 2013 Restructuring Plan provides certain employees with a severance package that entitles them to benefits upon completion of the transition in 2014. Severance costs related to the 2013 Restructuring Plan are recognized ratably over the future service period. During the three months ended March 31, 2014, the Company recorded $547,000 of restructuring charges related to employee termination benefits.

There were no restructuring charges recorded in continuing operations for the three months ended March 31, 2013.

In 2008 through 2010, the Company completed a restructuring plan (the "2008 Restructuring Plan") to align the Company's organization with its strategic goals and how it operated, managed and sold its services. The 2008 Restructuring Plan 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 the Company's Mexico operations.


Table of Contents

The following tables provide the activity and balances of the Company's restructuring plans (amounts in thousands):

                           December 31, 2013    Additions   Payments   March 31, 2014

2013 Restructuring Plan
Severance and retention   $             1,570         547       (504 )          1,613

2008 Restructuring Plan
Excess facility costs     $               141           -          -              141




                           December 31, 2012    Additions   Payments   March 31, 2013

2008 Restructuring Plan
Excess facility costs     $               141           -          -              141

Interest expense. Interest expense increased $7,630,000 for the three months ended March 31, 2014 as compared to the corresponding prior year period. The increase in interest expense is primarily attributable to increases in the Company's consolidated debt balance related to the borrowings incurred to fund the Security Networks Acquisition. This increase is partially offset by the favorable repricing of Monitronics credit facility interest rates effective March 25, 2013.

Income tax expense from continuing operations. The Company had a pre-tax loss from continuing operations of $7,757,000 and income tax expense of $1,621,000 for the three months ended March 31, 2014. The Company had pre-tax income from continuing operations of $3,088,000 and income tax expense of $774,000 for the three months ended March 31, 2013. Income tax expense for the three months ended March 31, 2014 is attributable to Monitronics' state tax expense and the deferred tax impact from amortization of deductible goodwill related to the Security Networks Acquisition. Income tax expense for the three months ended March 31, 2013 is primarily attributable to Monitronics state tax expense.

Earnings (loss) from discontinued operations, net of income taxes. Earnings
(loss) from discontinued operations, net of income taxes, were $(354,000) and $446,000 for the three months ended March 31, 2014 and 2013, respectively. Loss from discontinued operations includes contract termination costs and other loss contingencies for the three months ended March 31, 2014. Earnings from discontinued operations include recoveries of prior period expenses associated with discontinued operations for the three months ended March 31, 2013.

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

                                                        Three months ended
                                                            March 31,
                                                      2014              2013

Total Adjusted EBITDA                            $        87,944           71,300
Amortization of subscriber accounts, dealer
network and other intangible assets                      (61,780 )        (44,315 )
Depreciation                                              (2,758 )         (1,914 )
Stock-based and long-term incentive
compensation                                              (1,662 )         (1,820 )
Restructuring charges                                       (547 )              -
Security Networks integration costs                       (1,059 )              -
Interest income                                              878              980
Interest expense                                         (28,773 )        (21,143 )
Income tax expense from continuing operations             (1,621 )           (774 )

Net income (loss) from continuing operations     $        (9,378 )          2,314

Adjusted EBITDA increased $16,644,000, or 23.3%, for the three months ended March 31, 2014 as compared to the respective prior year period. The increase in Adjusted EBITDA was primarily due to revenue growth. Monitronics Adjusted EBITDA was $89,275,000 for the three months ended March 31, 2014 as compared to $69,414,000 for the three months ended March 31, 2013.


Table of Contents

Liquidity and Capital Resources

At March 31, 2014, we had $59,663,000 of cash and cash equivalents, $119,000 of current restricted cash, and $129,841,000 of marketable securities on a consolidated basis. We may use a portion of these assets to decrease debt obligations, fund stock repurchases, or fund potential strategic acquisitions or investment opportunities.

Additionally, our other source of funds is our cash flows from operating activities which are primarily generated from the operations of Monitronics. During the three months ended March 31, 2014 and 2013, our cash flow from operating activities was $69,084,000 and $60,542,000, respectively. The primary driver of our cash flow from operating activities is Adjusted EBITDA. Fluctuations in our Adjusted EBITDA and the components of that measure are discussed in "Results of Operations" above. In addition, our cash flow from operating activities may be significantly impacted by changes in working capital.

During the three months ended March 31, 2014 and 2013, the Company used cash of $53,789,000 and $46,043,000, respectively, to fund subscriber account acquisitions, net of holdback and guarantee obligations. In addition, during the three months ended March 31, 2014 and 2013, the Company used cash of $1,938,000 and $1,277,000, respectively, to fund its capital expenditures. In order to improve our investment rate of return, the Company purchased marketable securities consisting primarily of diversified corporate bond funds for cash of $1,003,000 during the three months ended March 31, 2013.

On March 31, 2014, Monitronics borrowed $33,000,000 on the Credit Facility revolver to fund its April 1, 2014 interest payment due under the Senior Notes of approximately $26,691,000 and other business activities.

On November 14, 2013, the Company's Board of Directors authorized the repurchase of an additional $25,000,000 of its Series A common stock (the "2013 Share Repurchase Authorization"). As of March 31, 2014, 192,100 shares had been purchased, at an approximate average price paid of $76.33, pursuant to the 2013 Share Repurchase Authorization. Approximately $10,336,000 of Series A common stock may still be purchased under the 2013 Share Repurchase Authorization.

In considering our liquidity requirements for 2014, we evaluated our known future commitments and obligations. We will require the availability of funds to finance the strategy of our primary operating subsidiary, Monitronics, which is to grow through the acquisition of subscriber accounts. Additionally, as a result of announcements by AT&T and certain other telecommunication providers that they intend to discontinue 2G services in the near future, we expect to incur expenditures over the next few years as we replace the 2G equipment used in many of our subscribers' security systems. Costs incurred and subscriber attrition resulting from the 2G phase-out will, to some extent, be dependent on the level of advance notice received from the telecommunication providers. We expect costs associated with the phase-out to be relatively small in 2014 and then increase in 2015 and 2016. We considered the expected cash flow from Monitronics, as this business is the driver of our operating cash flows. In addition, we considered the borrowing capacity of Monitronics' Credit Facility revolver, under which Monitronics could borrow an additional $187,500,000 as of March 31, 2014. Based on this analysis, we expect that cash on hand, cash flow generated from operations and borrowings under the Monitronics' Credit Facility will provide sufficient liquidity, given our anticipated current and future requirements.

The existing long-term debt of the Company at March 31, 2014 includes the principal balance of $1,631,173,000 under its Convertible Notes, Senior Notes, . . .

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