Attached files
| file | filename |
|---|---|
| EX-32 - EXHIBIT 32 - Ascent Capital Group, Inc. | acgex32q32017.htm |
| EX-31.2 - EXHIBIT 31.2 - Ascent Capital Group, Inc. | acgex312q32017.htm |
| EX-31.1 - EXHIBIT 31.1 - Ascent Capital Group, Inc. | acgex311q32017.htm |
| EX-10.2 - EXHIBIT 10.2 - Ascent Capital Group, Inc. | ex102q31710q.htm |
| EX-10.1 - EXHIBIT 10.1 - Ascent Capital Group, Inc. | ex101q31710q.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
OR
o 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 001-34176
ASCENT CAPITAL GROUP, INC.
(Exact name of Registrant as specified in its charter)
State of Delaware | 26-2735737 | |
(State or other jurisdiction of | (I.R.S. Employer Identification No.) | |
incorporation or organization) | ||
5251 DTC Parkway, Suite 1000 | ||
Greenwood Village, Colorado | 80111 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code: (303) 628-5600
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 ý No o
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 (Section 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 ý No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company, as defined in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer x | |
Non-accelerated filer o | Smaller reporting company o | |
(Do not check if a smaller reporting company) | Emerging growth company o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
The number of outstanding shares of Ascent Capital Group, Inc.’s common stock as of October 19, 2017 was:
Series A common stock 11,945,471 shares; and
Series B common stock 381,528 shares.
1
TABLE OF CONTENTS
Page | ||
PART I — FINANCIAL INFORMATION | ||
1
Item 1. Financial Statements (unaudited).
ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
Amounts in thousands, except share amounts
(unaudited)
September 30, 2017 | December 31, 2016 | ||||||
Assets | |||||||
Current assets: | |||||||
Cash and cash equivalents | $ | 34,920 | $ | 12,319 | |||
Marketable securities, at fair value | 100,498 | 77,825 | |||||
Trade receivables, net of allowance for doubtful accounts of $3,381 in 2017 and $3,043 in 2016 | 13,206 | 13,869 | |||||
Prepaid and other current assets | 11,759 | 10,347 | |||||
Assets held for sale | — | 10,673 | |||||
Total current assets | 160,383 | 125,033 | |||||
Property and equipment, net of accumulated depreciation of $35,506 in 2017 and $29,071 in 2016 | 30,993 | 28,331 | |||||
Subscriber accounts, net of accumulated amortization of $1,383,804 in 2017 and $1,212,468 in 2016 | 1,333,627 | 1,386,760 | |||||
Dealer network and other intangible assets, net of accumulated amortization of $40,348 in 2017 and $32,976 in 2016 | 9,452 | 16,824 | |||||
Goodwill | 563,549 | 563,549 | |||||
Other assets | 6,875 | 11,935 | |||||
Total assets | $ | 2,104,879 | $ | 2,132,432 | |||
Liabilities and Stockholders’ Equity | |||||||
Current liabilities: | |||||||
Accounts payable | $ | 10,521 | $ | 11,516 | |||
Accrued payroll and related liabilities | 6,345 | 5,067 | |||||
Other accrued liabilities | 66,873 | 34,970 | |||||
Deferred revenue | 14,191 | 15,147 | |||||
Holdback liability | 10,706 | 13,916 | |||||
Current portion of long-term debt | 11,000 | 11,000 | |||||
Liabilities of discontinued operations | — | 3,500 | |||||
Total current liabilities | 119,636 | 95,116 | |||||
Non-current liabilities: | |||||||
Long-term debt | 1,789,810 | 1,754,233 | |||||
Long-term holdback liability | 1,982 | 2,645 | |||||
Derivative financial instruments | 16,122 | 16,948 | |||||
Deferred income tax liability, net | 20,959 | 17,769 | |||||
Other liabilities | 6,671 | 7,076 | |||||
Total liabilities | 1,955,180 | 1,893,787 | |||||
Commitments and contingencies | |||||||
Stockholders’ equity: | |||||||
Preferred stock, $0.01 par value. Authorized 5,000,000 shares; no shares issued | — | — | |||||
Series A common stock, $.01 par value. Authorized 45,000,000 shares; issued and outstanding 11,947,767 and 11,969,152 shares at September 30, 2017 and December 31, 2016, respectively | 119 | 120 | |||||
Series B common stock, $.01 par value. Authorized 5,000,000 shares; issued and outstanding 381,528 and 381,859 shares at September 30, 2017 and December 31, 2016, respectively | 4 | 4 | |||||
Series C common stock, $0.01 par value. Authorized 45,000,000 shares; no shares issued | — | — | |||||
Additional paid-in capital | 1,422,608 | 1,417,505 | |||||
Accumulated deficit | (1,261,098 | ) | (1,169,559 | ) | |||
Accumulated other comprehensive loss, net | (11,934 | ) | (9,425 | ) | |||
Total stockholders’ equity | 149,699 | 238,645 | |||||
Total liabilities and stockholders’ equity | $ | 2,104,879 | $ | 2,132,432 | |||
See accompanying notes to condensed consolidated financial statements.
2
ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
Amounts in thousands, except per share amounts
(unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||
Net revenue | $ | 138,211 | 142,765 | $ | 419,909 | 429,689 | ||||||||
Operating expenses: | ||||||||||||||
Cost of services | 30,213 | 29,049 | 89,799 | 86,161 | ||||||||||
Selling, general and administrative, including stock-based compensation | 35,793 | 32,897 | 136,809 | 97,148 | ||||||||||
Radio conversion costs | 74 | 1,263 | 383 | 17,938 | ||||||||||
Amortization of subscriber accounts, dealer network and other intangible assets | 59,384 | 62,156 | 178,896 | 185,415 | ||||||||||
Depreciation | 2,176 | 2,152 | 6,435 | 6,329 | ||||||||||
Gain on disposal of operating assets | — | — | (21,217 | ) | — | |||||||||
127,640 | 127,517 | 391,105 | 392,991 | |||||||||||
Operating income | 10,571 | 15,248 | 28,804 | 36,698 | ||||||||||
Other income (expense), net: | ||||||||||||||
Interest income | 617 | 548 | 1,575 | 1,593 | ||||||||||
Interest expense | (38,360 | ) | (31,794 | ) | (114,011 | ) | (94,805 | ) | ||||||
Refinancing expense | — | (9,348 | ) | — | (9,348 | ) | ||||||||
Other income (expense), net | (222 | ) | 240 | 242 | (1,079 | ) | ||||||||
(37,965 | ) | (40,354 | ) | (112,194 | ) | (103,639 | ) | |||||||
Loss from continuing operations before income taxes | (27,394 | ) | (25,106 | ) | (83,390 | ) | (66,941 | ) | ||||||
Income tax expense from continuing operations | (1,766 | ) | (1,927 | ) | (8,241 | ) | (5,514 | ) | ||||||
Net loss from continuing operations | (29,160 | ) | (27,033 | ) | (91,631 | ) | (72,455 | ) | ||||||
Discontinued operations: | ||||||||||||||
Income from discontinued operations, net of income tax of $0 | — | — | 92 | — | ||||||||||
Net loss | (29,160 | ) | (27,033 | ) | (91,539 | ) | (72,455 | ) | ||||||
Other comprehensive income (loss): | ||||||||||||||
Foreign currency translation adjustments | (16 | ) | (224 | ) | 626 | (780 | ) | |||||||
Unrealized holding gain on marketable securities, net | 279 | 301 | 1,366 | 3,164 | ||||||||||
Unrealized gain (loss) on derivative contracts, net | 227 | (2,459 | ) | (4,501 | ) | (19,001 | ) | |||||||
Total other comprehensive income (loss), net of tax | 490 | (2,382 | ) | (2,509 | ) | (16,617 | ) | |||||||
Comprehensive loss | $ | (28,670 | ) | (29,415 | ) | $ | (94,048 | ) | $ | (89,072 | ) | |||
Basic and diluted income (loss) per share: | ||||||||||||||
Continuing operations | $ | (2.39 | ) | (2.23 | ) | $ | (7.53 | ) | (5.89 | ) | ||||
Discontinued operations | — | — | 0.01 | — | ||||||||||
Net loss | $ | (2.39 | ) | (2.23 | ) | $ | (7.52 | ) | (5.89 | ) | ||||
See accompanying notes to condensed consolidated financial statements.
3
ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Amounts in thousands
(unaudited)
Nine Months Ended September 30, | ||||||
2017 | 2016 | |||||
Cash flows from operating activities: | ||||||
Net loss | $ | (91,539 | ) | (72,455 | ) | |
Adjustments to reconcile net loss to net cash provided by operating activities: | ||||||
Income from discontinued operations, net of income tax | (92 | ) | — | |||
Amortization of subscriber accounts, dealer network and other intangible assets | 178,896 | 185,415 | ||||
Depreciation | 6,435 | 6,329 | ||||
Stock-based compensation | 5,968 | 5,205 | ||||
Deferred income tax expense | 3,158 | 3,158 | ||||
Gain on disposal of operating assets | (21,217 | ) | — | |||
Legal settlement reserve, net of cash payments | 23,000 | — | ||||
Amortization of debt discount and deferred debt costs | 8,227 | 8,063 | ||||
Refinancing expense | — | 9,348 | ||||
Bad debt expense | 7,888 | 7,855 | ||||
Other non-cash activity, net | 4,887 | 4,231 | ||||
Changes in assets and liabilities: | ||||||
Trade receivables | (7,225 | ) | (7,906 | ) | ||
Prepaid expenses and other assets | (3,535 | ) | 717 | |||
Subscriber accounts - deferred contract costs | (2,299 | ) | (2,080 | ) | ||
Payables and other liabilities | 4,770 | 10,667 | ||||
Operating activities from discontinued operations, net | (3,408 | ) | — | |||
Net cash provided by operating activities | 113,914 | 158,547 | ||||
Cash flows from investing activities: | ||||||
Capital expenditures | (9,999 | ) | (5,071 | ) | ||
Cost of subscriber accounts acquired | (119,081 | ) | (160,117 | ) | ||
Purchases of marketable securities | (22,633 | ) | (5,036 | ) | ||
Proceeds from sale of marketable securities | 1,108 | 12,909 | ||||
Decrease in restricted cash | — | 55 | ||||
Proceeds from the disposal of operating assets | 32,612 | — | ||||
Net cash used in investing activities | (117,993 | ) | (157,260 | ) | ||
Cash flows from financing activities: | ||||||
Proceeds from long-term debt | 159,850 | 1,249,000 | ||||
Payments on long-term debt | (132,500 | ) | (1,200,009 | ) | ||
Value of shares withheld for share-based compensation | (670 | ) | (347 | ) | ||
Payments of financing costs | — | (16,711 | ) | |||
Purchases and retirement of common stock | — | (7,140 | ) | |||
Net cash provided by financing activities | 26,680 | 24,793 | ||||
Net increase in cash and cash equivalents | 22,601 | 26,080 | ||||
Cash and cash equivalents at beginning of period | 12,319 | 5,577 | ||||
Cash and cash equivalents at end of period | $ | 34,920 | 31,657 | |||
Supplemental cash flow information: | ||||||
State taxes paid, net | $ | 3,107 | 2,759 | |||
Interest paid | 93,753 | 73,521 | ||||
Accrued capital expenditures | 386 | 638 | ||||
See accompanying notes to condensed consolidated financial statements.
4
ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statement of Stockholders’ Equity
Amounts in thousands
(unaudited)
Additional Paid-in Capital | Accumulated Other Comprehensive Loss | Total Stockholders' Equity | ||||||||||||||||||||||
Preferred Stock | Common Stock | Accumulated Deficit | ||||||||||||||||||||||
Series A | Series B | Series C | ||||||||||||||||||||||
Balance at December 31, 2016 | $ | — | 120 | 4 | — | 1,417,505 | (1,169,559 | ) | (9,425 | ) | 238,645 | |||||||||||||
Net loss | — | — | — | — | — | (91,539 | ) | — | (91,539 | ) | ||||||||||||||
Other comprehensive loss | — | — | — | — | — | — | (2,509 | ) | (2,509 | ) | ||||||||||||||
Stock-based compensation | — | — | — | — | 5,772 | — | — | 5,772 | ||||||||||||||||
Value of shares withheld for minimum tax liability | — | (1 | ) | — | — | (669 | ) | — | — | (670 | ) | |||||||||||||
Balance at September 30, 2017 | $ | — | 119 | 4 | — | 1,422,608 | (1,261,098 | ) | (11,934 | ) | 149,699 | |||||||||||||
See accompanying notes to condensed consolidated financial statements.
5
ASCENT CAPITAL GROUP, INC. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(1) Basis of Presentation
The accompanying Ascent Capital Group, Inc. ("Ascent Capital" or the "Company") condensed consolidated financial statements represent the financial position and results of operations of Ascent Capital and its consolidated subsidiaries. Monitronics International, Inc. ("MONI") is the primary, wholly owned, operating subsidiary of the Company. MONI provides residential customers and commercial client accounts with monitored home and business security systems, as well as interactive and home automation services. MONI is supported by a network of independent Authorized Dealers providing products and support to customers in the United States, Canada and Puerto Rico. MONI’s wholly owned subsidiary, LiveWatch Security LLC (“LiveWatch”) is a Do-It-Yourself home security firm, offering professionally monitored security services through a direct-to-consumer sales channel.
The unaudited interim financial information of the Company has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s (the "SEC") Regulation S-X. Accordingly, it does not include all of the information required by generally accepted accounting principles in the United States ("U.S. GAAP") for complete financial statements. The Company’s unaudited condensed consolidated financial statements as of September 30, 2017, and for the three and nine months ended September 30, 2017 and 2016, include Ascent Capital and all of its direct and indirect subsidiaries. The accompanying interim condensed consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results for such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. These condensed consolidated financial statements should be read in conjunction with the Ascent Capital Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 8, 2017 (the "2016 Form 10-K").
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of revenue and expenses for each reporting period. The significant estimates made in preparation of the Company’s condensed consolidated financial statements primarily relate to valuation of goodwill, other intangible assets, long-lived assets, deferred tax assets, derivative financial instruments, and the amount of the allowance for doubtful accounts. These estimates are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors and adjusts them when facts and circumstances change. As the effects of future events cannot be determined with any certainty, actual results could differ from the estimates upon which the carrying values were based.
(2) Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the "FASB") issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). Under the update, revenue will be recognized based on a five-step model. The core principle of the model is that revenue will be recognized when the transfer of promised goods or services to customers is made in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In the third quarter of 2015, the FASB deferred the effective date of the standard to annual and interim periods beginning after December 15, 2017. In March and April 2016, the FASB issued amendments to provide clarification on assessment of collectability criteria, presentation of sales taxes and measurement of non-cash consideration. In addition, the amendment provided clarification and included simplification to transaction guidance on contract modifications and completed contracts at transaction. In December 2016, the FASB issued amendments to provide clarification on codification and guidance application. The standard allows the option of either a full retrospective adoption, meaning the standard is applied to all periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period.
The Company currently plans to adopt ASU 2014-09 using the modified retrospective approach. However, a final decision regarding the adoption method has not been made at this time. The Company's final determination will depend on the significance of the impact of the new standard on the Company's financial results.
The Company is continuing its evaluation of the impact of ASU 2014-09 on the accounting policies, processes, and system requirements. The Company has assigned internal resources in addition to the engagement of a third party service provider to assist in the evaluation. While the Company is in the process of assessing revenue recognition and cost deferral policies across each type of its contracts, the Company does not know or cannot reasonably estimate the impact of the adoption ASU 2014-09 on its financial position, results of operations and cash flows.
6
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) ("ASU 2016-02"). ASU 2016-02 requires the lessee to recognize assets and liabilities for leases with lease terms of more than twelve months. For leases with a term of twelve months or less, the Company is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. Further, ASU 2016-02 requires a finance lease to be recognized as both an interest expense and an amortization of the associated expense. Operating leases generally recognize the associated expense on a straight line basis. ASU 2016-02 requires the Company to adopt the standard using a modified retrospective approach and becomes effective on January 1, 2019. The Company is currently evaluating the impact that ASU 2016-02 will have on its financial position, results of operations and cash flows.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment ("ASU 2017-04"). Currently, the fair value of the reporting unit is compared with the carrying value of the reporting unit (identified as "Step 1"). If the fair value of the reporting unit is lower than its carrying amount, then the implied fair value of goodwill is calculated. If the implied fair value of goodwill is lower than the carrying value of goodwill an impairment is recognized (identified as "Step 2"). ASU 2017-04 eliminates Step 2 from the impairment test; therefore, a goodwill impairment will be recognized as the difference of the fair value and the carrying value. ASU 2017-04 becomes effective on January 1, 2020 with early adoption permitted. The Company is currently evaluating when to adopt the standard.
In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting ("ASU 2017-09"). ASU 2017-09 requires modification accounting in Topic 718 to be applied to a change to the terms or conditions of a share-based payment award unless the fair value, vesting conditions and classification of the modified award are the same immediately before and after the modification of the award. ASU 2017-09 is effective for annual and interim periods beginning after December 15, 2017, and requires a prospective approach. Early adoption is permitted. The Company plans to adopt the standard when it becomes effective. The adoption is not expected to have a material impact on the Company's financial position, results of operations and cash flows.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities ("ASU 2017-12") to amend the hedge accounting rules to align risk management activities and financial reporting by simplifying the application of hedge accounting guidance. The guidance expands the ability to hedge nonfinancial and financial risk components and eliminates the requirement to separately measure and report hedge ineffectiveness. Additionally, certain hedge effectiveness assessment requirements may be accomplished qualitatively instead of quantitatively. ASU 2017-12 is effective for annual and interim periods beginning after December 15, 2018 with early adoption permitted. The Company is currently evaluating the impact that ASU 2017-12 will have on its financial position, results of operations and cash flows.
(3) Investments in Marketable Securities
Ascent Capital owns marketable securities primarily consisting of diversified corporate bond funds. The following table presents a summary of amounts recorded on the condensed consolidated balance sheets (amounts in thousands):
As of September 30, 2017 | ||||||||||||||||
Cost Basis (b) | Unrealized Gains | Unrealized Losses | Total | |||||||||||||
Equity securities | $ | 3,432 | $ | — | $ | — | $ | 3,432 | ||||||||
Mutual funds (a) | 94,628 | 2,438 | — | 97,066 | ||||||||||||
Ending balance | $ | 98,060 | $ | 2,438 | $ | — | $ | 100,498 | ||||||||
As of December 31, 2016 | ||||||||||||||||
Cost Basis (b) | Unrealized Gains | Unrealized Losses | Total | |||||||||||||
Equity securities | $ | 3,767 | $ | — | $ | (396 | ) | $ | 3,371 | |||||||
Mutual funds (a) | 72,986 | 1,483 | (15 | ) | 74,454 | |||||||||||
Ending balance | $ | 76,753 | $ | 1,483 | $ | (411 | ) | $ | 77,825 | |||||||
(a) | Primarily consists of corporate bond funds. |
(b) | When an other-than-temporary impairment occurs, the Company reduces the cost basis of the marketable security involved. In the third quarter of 2017, the Company recognized a non-cash charge for an other-than-temporary impairment of $220,000 on its equity securities. In the second quarter of 2016, the Company recognized non-cash charges for an other-than-temporary impairment of $1,068,000 on its mutual funds and $836,000 on its equity |
7
securities for a total other-than-temporary impairment loss on marketable securities of $1,904,000. The mutual fund impairments were attributable to a low interest rate environment and widening credit spreads. The equity security impairments were primarily attributable to foreign exchange losses based on weakening of the trading currency of the underlying investment.
The following table provides the realized investment gains and losses and the total proceeds received from the sale of marketable securities (amounts in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||
Gross realized gains | $ | — | — | $ | 6 | 244 | |||||||
Gross realized losses | $ | 2 | 26 | $ | 5 | 236 | |||||||
Total proceeds | $ | 51 | 959 | $ | 1,108 | 12,909 | |||||||
(4) Assets Held for Sale
In the first and second quarters of 2017, the Company completed the sale of assets held for sale with a net book value of $11,395,000 for a gain of approximately $21,217,000.
(5) Other Accrued Liabilities
Other accrued liabilities consisted of the following (amounts in thousands):
September 30, 2017 | December 31, 2016 | ||||||
Interest payable | $ | 28,048 | $ | 15,675 | |||
Income taxes payable | 5,149 | 2,989 | |||||
Legal accrual, including settlement reserve | 23,534 | (a) | 476 | ||||
LiveWatch acquisition retention bonus | — | 4,990 | |||||
Derivative financial instruments | 1,631 | — | |||||
Other | 8,511 | 10,840 | |||||
Total Other accrued liabilities | $ | 66,873 | $ | 34,970 | |||
(a) Amount includes $23,000,000 related to a legal settlement reserve. See note 11, Commitments, Contingencies and Other Liabilities, for further information.
(6) Long-Term Debt
Long-term debt consisted of the following (amounts in thousands):
September 30, 2017 | December 31, 2016 | ||||||
Ascent Capital 4.00% Convertible Senior Notes due July 15, 2020 with an effective rate of 8.4% | $ | 81,473 | $ | 78,279 | |||
MONI 9.125% Senior Notes due April 1, 2020 with an effective rate of 9.4% | 579,669 | 578,254 | |||||
MONI term loan, matures September 30, 2022, LIBOR plus 5.50%, subject to a LIBOR floor of 1.00% with an effective rate of 7.2% | 1,061,199 | 1,066,130 | |||||
MONI $295 million revolving credit facility, matures September 30, 2021, LIBOR plus 4.00%, subject to a LIBOR floor of 1.00% with an effective rate of 5.1% | 78,469 | 42,570 | |||||
1,800,810 | 1,765,233 | ||||||
Less current portion of long-term debt | (11,000 | ) | (11,000 | ) | |||
Long-term debt | $ | 1,789,810 | $ | 1,754,233 | |||
8
Convertible Senior Notes
The convertible senior notes total $96,775,000 in aggregate principal amount, mature on July 15, 2020 and bear interest at 4.00% per annum (the "Convertible Notes"). Interest on the Convertible Notes is payable semi-annually on January 15 and July 15 of each year. The Convertible Notes are convertible, under certain circumstances, into cash, shares of Ascent Capital's Series A common stock, par value $0.01 per share (the "Series A Common Stock"), or any combination thereof at Ascent Capital’s election.
Holders of the Convertible Notes ("Noteholders") have the right, at their option, to convert all or any portion of such Convertible Notes, subject to the satisfaction of certain conditions, at an initial conversion rate of 9.7272 shares of Series A Common Stock per $1,000 principal amount of Convertible Notes (subject to adjustment in certain situations), which represents an initial conversion price per share of Series A Common Stock of approximately $102.804 (the "Conversion Price"). Ascent Capital is entitled to settle any such conversion by delivery of cash, shares of Series A Common Stock or any combination thereof at Ascent Capital's election. In addition, Noteholders have the right to submit Convertible Notes for conversion, subject to the satisfaction of certain conditions, in the event of certain corporate transactions.
In the event of a fundamental change (as such term is defined in the indenture governing the Convertible Notes) at any time prior to the maturity date, each Noteholder shall have the right, at such Noteholder’s option, to require Ascent Capital to repurchase for cash any or all of such Noteholder’s Convertible Notes on the repurchase date specified by Ascent Capital at a repurchase price equal to 100% of the principal amount thereof, together with accrued and unpaid interest, including unpaid additional interest, if any, unless the repurchase date occurs after an interest record date and on or prior to the related interest payment date, as specified in the indenture.
The Convertible Notes are within the scope of FASB ASC Subtopic 470-20, Debt with Conversion and Other Options, and as such are required to be separated into a liability and equity component. The carrying amount of the liability component is calculated by measuring the fair value of a similar liability (including any embedded features other than the conversion option) that does not have an associated conversion option. The carrying amount of the equity component is determined by deducting the fair value of the liability component from the initial proceeds ascribed to the Convertible Notes as a whole. The excess of the principal amount of the liability component over its carrying amount, treated as a debt discount, is amortized to interest cost over the expected life of a similar liability that does not have an associated conversion option using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification as prescribed in FASB ASC Subtopic 815-40, Contracts in an Entity’s Own Equity.
The Convertible Notes are presented on the consolidated balance sheet as follows (amounts in thousands):
As of September 30, 2017 | As of December 31, 2016 | ||||||
Principal | $ | 96,775 | $ | 96,775 | |||
Unamortized discount | (14,332 | ) | (17,324 | ) | |||
Deferred debt costs | (970 | ) | (1,172 | ) | |||
Carrying value | $ | 81,473 | $ | 78,279 | |||
The Company is using an effective interest rate of 14.0% to calculate the accretion of the debt discount, which is being recorded as interest expense over the expected remaining term to maturity of the Convertible Notes. The Company recognized contractual interest expense of $967,000 and $2,903,000 for both the three and nine months ended September 30, 2017 and 2016. The Company amortized $1,102,000 and $3,194,000 of the Convertible Notes debt discount and deferred debt costs into interest expense for the three and nine months ended September 30, 2017, compared to $958,000 and $2,779,000 for three and nine months ended September 30, 2016.
Hedging Transactions Relating to the Offering of the Convertible Notes
In connection with the issuance of the Convertible Notes, Ascent Capital entered into separate privately negotiated purchased call options (the "Bond Hedge Transactions"). The Bond Hedge Transactions require the counterparties to offset Series A Common Stock deliverable or cash payments made by Ascent Capital upon conversion of the Convertible Notes in the event that the volume-weighted average price of Series A Common Stock on each trading day of the relevant valuation period is greater than the strike price of $102.804, which corresponds to the Conversion Price of the Convertible Notes. The Bond Hedge Transactions cover, subject to anti-dilution adjustments, approximately 1,007,000 shares of Series A Common Stock,
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which is equivalent to the number of shares initially issuable upon conversion of the Convertible Notes, and are expected to reduce the potential dilution with respect to the Series A Common Stock, and/or offset potential cash payments Ascent Capital is required to make in excess of the principal amount of the Convertible Notes upon conversion.
Concurrently with the Bond Hedge Transactions, Ascent Capital also entered into separate privately negotiated warrant transactions with each of the call option counterparties (the "Warrant Transactions"). The warrants are European options, and are exercisable in tranches on consecutive trading days starting after the maturity of the Convertible Notes. The warrants cover the same initial number of shares of Series A Common Stock, subject to anti-dilution adjustments, as the Bond Hedge Transactions. The Warrant Transactions require Ascent Capital to deliver Series A Common Stock or make cash payments to the counterparties on each expiration date with a value equal to the number of warrants exercisable on that date times the excess of the volume-weighted average price of the Series A Common Stock over the strike price of $118.62, which effectively reflects a 50% conversion premium on the Convertible Notes. As such, the Warrant Transactions may have a dilutive effect with respect to the Common Stock to the extent the Warrant Transactions are settled with shares of Series A Common Stock. Ascent Capital may elect to settle its delivery obligation under the Warrant Transactions in cash.
The Bond Hedge Transactions and Warrant Transactions are separate transactions entered into by Ascent Capital, are not part of the terms of the Convertible Notes and will not affect the Noteholders’ rights under the Convertible Notes. The Noteholders will not have any rights with respect to the Bond Hedge Transactions or the Warrant Transactions.
Senior Notes
The senior notes total $585,000,000 in principal, mature on April 1, 2020 and bear interest at 9.125% per annum (the "Senior Notes"). Interest payments are due semi-annually on April 1 and October 1 of each year. The Senior Notes are guaranteed by all of MONI’s existing domestic subsidiaries. Ascent Capital has not guaranteed any of MONI's obligations under the Senior Notes. As of September 30, 2017, the Senior Notes had deferred financing costs and unamortized premium, net of accumulated amortization of $5,331,000.
Credit Facility
On September 30, 2016, MONI entered into an amendment ("Amendment No. 6") with the lenders of its existing senior secured credit agreement dated March 23, 2012, and as amended and restated on April 9, 2015, February 17, 2015, August 16, 2013, March 25, 2013, and November 7, 2012 (the "Existing Credit Agreement"). Amendment No. 6 provided for, among other things, the issuance of a $1,100,000,000 senior secured term loan at a 1.5% discount and a new $295,000,000 super priority revolver (the Existing Credit Agreement together with Amendment No. 6, the "Credit Facility").
On September 28, 2017, MONI borrowed an incremental $26,691,000 on its Credit Facility revolver to fund its October 2, 2017 interest payment due under the Senior Notes.
As of September 30, 2017, the Credit Facility term loan has a principal amount of $1,089,000,000, maturing on September 30, 2022. The term loan requires quarterly interest payments and quarterly principal payments of $2,750,000. The term loan bears interest at LIBOR plus 5.5%, subject to a LIBOR floor of 1.0%. The Credit Facility revolver has a principal amount outstanding of $80,400,000 as of September 30, 2017 and matures on September 30, 2021. The Credit Facility revolver bears interest at LIBOR plus 4.0%, subject to a LIBOR floor of 1.0%. There is a commitment fee of 0.5% on unused portions of the Credit Facility Revolver. As of September 30, 2017, $214,600,000 is available for borrowing under the Credit Facility revolver.
At any time after the occurrence of an event of default under the Credit Facility, the lenders may, among other options, declare any amounts outstanding under the Credit Facility immediately due and payable and terminate any commitment to make further loans under the Credit Facility. In addition, failure to comply with restrictions contained in the Senior Notes could lead to an event of default under the Credit Facility.
The Credit Facility is secured by a pledge of all of the outstanding stock of MONI and all of its existing subsidiaries and is guaranteed by all of MONI's existing domestic subsidiaries. Ascent Capital has not guaranteed any of MONI's obligations under the Credit Facility.
As of September 30, 2017, MONI has deferred financing costs and unamortized discounts, net of accumulated amortization, of $29,732,000 related to the Credit Facility.
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In order to reduce the financial risk related to changes in interest rates associated with the floating rate term loan under the Credit Facility term loan, MONI has entered into interest rate swap agreements with terms similar to the Credit Facility term loan (all outstanding interest rate swap agreements are collectively referred to as the “Swaps”). The Swaps have been designated as effective hedges of the Company’s variable rate debt and qualify for hedge accounting. As a result of these interest rate swaps, MONI's current effective weighted average interest rate on the borrowings under the Credit Facility term loan is 7.18%. See note 7, Derivatives, for further disclosures related to these derivative instruments.
The terms of the Convertible Notes, the Senior Notes and the Credit Facility provide for certain financial and nonfinancial covenants. As of September 30, 2017, the Company was in compliance with all required covenants under these financing arrangements.
As of September 30, 2017, principal payments scheduled to be made on the Company’s debt obligations are as follows (amounts in thousands):
Remainder of 2017 | $ | 2,750 | |
2018 | 11,000 | ||
2019 | 11,000 | ||
2020 | 692,775 | ||
2021 | 91,400 | ||
2022 | 1,042,250 | ||
Thereafter | — | ||
Total principal payments | $ | 1,851,175 | |
Less: | |||
Unamortized deferred debt costs, discounts and premium, net | 50,365 | ||
Total debt on condensed consolidated balance sheet | $ | 1,800,810 | |
(7) Derivatives
Interest Rate Risk
MONI utilizes interest rate swap agreements to reduce the interest rate risk inherent in MONI's variable rate Credit Facility term loan. The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatility. The Company incorporates credit valuation adjustments to appropriately reflect the respective counterparty’s nonperformance risk in the fair value measurements. See note 8, Fair Value Measurements, for additional information about the credit valuation adjustments.
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As of September 30, 2017, the Swaps’ outstanding notional balances, effective dates, maturity dates and interest rates paid and received are noted below:
Notional | Effective Date | Maturity Date | Fixed Rate Paid | Variable Rate Received | ||||||
$ | 519,750,000 | March 28, 2013 | March 23, 2018 | 1.884% | 3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a) | |||||
137,750,000 | March 28, 2013 | March 23, 2018 | 1.384% | 3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a) | ||||||
107,694,723 | September 30, 2013 | March 23, 2018 | 1.959% | 3 mo. USD-LIBOR-BBA, subject to a 1.00% floor | ||||||
107,694,723 | September 30, 2013 | March 23, 2018 | 1.850% | 3 mo. USD-LIBOR-BBA, subject to a 1.00% floor | ||||||
191,475,002 | March 23, 2018 | April 9, 2022 | 3.110% | 3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a) | ||||||
250,000,000 | March 23, 2018 | April 9, 2022 | 3.110% | 3 mo. USD-LIBOR-BBA, subject to a 1.00% floor (a) | ||||||
50,000,000 | March 23, 2018 | April 9, 2022 | 2.504% | 3 mo. USD-LIBOR-BBA, subject to a 1.00% floor | ||||||
377,000,000 | March 23, 2018 | September 30, 2022 | 1.833% | 3 mo. USD-LIBOR-BBA, subject to a 1.00% floor | ||||||
(a) | On March 25, 2013 and September 30, 2016, MONI negotiated amendments to the terms of these interest rate swap agreements (the "Existing Swap Agreements," as amended, the "Amended Swaps"). The Amended Swaps are held with the same counterparties as the Existing Swap Agreements. Upon entering into the Amended Swaps, MONI simultaneously dedesignated the Existing Swap Agreements and redesignated the Amended Swaps as cash flow hedges for the underlying change in the swap terms. The amounts previously recognized in Accumulated other comprehensive loss relating to the dedesignation are recognized in Interest expense over the remaining life of the Amended Swaps. |
All of the Swaps are designated and qualify as cash flow hedging instruments, with the effective portion of the Swaps' change in fair value recorded in Accumulated other comprehensive loss. Any ineffective portions of the Swaps' change in fair value are recognized in current earnings in Interest expense. Changes in the fair value of the Swaps recognized in Accumulated other comprehensive loss are reclassified to Interest expense when the hedged interest payments on the underlying debt are recognized. Amounts in Accumulated other comprehensive loss expected to be recognized in Interest expense in the coming 12 months total approximately $5,775,000.
The impact of the derivatives designated as cash flow hedges on the condensed consolidated financial statements is depicted below (amounts in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||
Effective portion of loss recognized in Accumulated other comprehensive loss | $ | (914 | ) | (4,284 | ) | $ | (8,890 | ) | (24,447 | ) | |||
Effective portion of loss reclassified from Accumulated other comprehensive loss into Net loss (a) | $ | (1,141 | ) | (1,825 | ) | $ | (4,389 | ) | (5,446 | ) | |||
Ineffective portion of amount of loss recognized into Net loss (a) | $ | (65 | ) | 16 | $ | (157 | ) | (61 | ) | ||||
(a) Amounts are included in Interest expense in the unaudited condensed consolidated statements of operations and comprehensive income (loss).
Foreign Exchange Risk
Ascent Capital entered into a foreign currency forward exchange contract to hedge British Pound exposure associated with the sale of a property in the United Kingdom. This foreign currency forward exchange contract matured on June 30, 2017. The notional amount of the foreign exchange contract was £13,500,000. For the nine months ended September 30, 2017, Ascent
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Capital recognized a loss on the settlement of this instrument of approximately $1,150,000. The loss on this instrument is recognized in Selling, general and administrative, including stock-based compensation expense on the condensed consolidated statements of operations and comprehensive income (loss).
(8) Fair Value Measurements
According to the FASB ASC Topic 820, Fair Value Measurement, fair value is defined as the amount that would be received for selling an asset or paid to transfer a liability in an orderly transaction between market participants and requires that assets and liabilities carried at fair value are classified and disclosed in the following three categories:
• | Level 1 - Quoted prices for identical instruments in active markets. |
• | Level 2 - Quoted prices for similar instruments in active or inactive markets and valuations derived from models where all significant inputs are observable in active markets. |
• | Level 3 - Valuations derived from valuation techniques in which one or more significant inputs are unobservable in any market. |
The following summarizes the fair value level of assets and liabilities that are measured on a recurring basis at September 30, 2017 and December 31, 2016 (amounts in thousands):
Level 1 | Level 2 | Level 3 | Total | ||||||||||
September 30, 2017 | |||||||||||||
Investments in marketable securities (a) | 100,498 | — | — | 100,498 | |||||||||
Interest rate swap agreement - assets (b) | — | 4,664 | — | 4,664 | |||||||||
Interest rate swap agreements - liabilities (b) | — | (17,753 | ) | — | (17,753 | ) | |||||||
Total | $ | 100,498 | (13,089 | ) | — | $ | 87,409 | ||||||
December 31, 2016 | |||||||||||||
Investments in marketable securities (a) | 77,825 | — | — | 77,825 | |||||||||
Interest rate swap agreement - assets (b) | — | 8,521 | — | 8,521 | |||||||||
Interest rate swap agreements - liabilities (b) | — | (16,948 | ) | — | (16,948 | ) | |||||||
Total | $ | 77,825 | (8,427 | ) | — | $ | 69,398 | ||||||
(a) | Level 1 investments primarily consist of diversified corporate bond funds. |
(b) | Interest rate swap agreement asset values are included in Other assets and interest rate swap agreement liability values are included in current Other accrued liabilities or non-current Derivative financial instruments on the consolidated balance sheets depending on the maturity date of the swap. |
The Company has determined that the significant inputs used to value the Swaps fall within Level 2 of the fair value hierarchy. As a result, the Company has determined that its derivative valuations are classified in Level 2 of the fair value hierarchy.
Carrying values and fair values of financial instruments that are not carried at fair value are as follows (amounts in thousands):
September 30, 2017 | December 31, 2016 | ||||||
Long term debt, including current portion: | |||||||
Carrying value | $ | 1,800,810 | $ | 1,765,233 | |||
Fair value (a) | 1,756,742 | 1,770,694 | |||||
(a) | The fair value is based on market quotations from third party financial institutions and is classified as Level 2 in the hierarchy. |
Ascent Capital’s other financial instruments, including cash and cash equivalents, accounts receivable and accounts payable are carried at cost, which approximates their fair value because of their short-term maturity.
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(9) Stockholders’ Equity
Common Stock
The following table presents the activity in the Series A Common Stock and Ascent Capital's Series B common stock, par value $0.01 per share (the "Series B Common Stock"), for the nine months ended September 30, 2017:
Series A Common Stock | Series B Common Stock | ||||
Outstanding balance at December 31, 2016 | 11,969,152 | 381,859 | |||
Conversion from Series B to Series A Shares | 331 | (331 | ) | ||
Issuance of stock awards | 37,805 | — | |||
Restricted stock forfeitures and tax withholding | (59,521 | ) | — | ||
Outstanding balance at September 30, 2017 | 11,947,767 | 381,528 | |||
Accumulated Other Comprehensive Income (Loss)
The following table provides a summary of the changes in Accumulated other comprehensive income (loss) for the period presented (amounts in thousands):
Foreign currency translation adjustments | Unrealized holding gains and losses on marketable securities, net (a) | Unrealized gains and losses on derivative instruments, net (b) | Accumulated other comprehensive loss | ||||||||||
As of December 31, 2016 | $ | (1,540 | ) | 1,072 | (8,957 | ) | $ | (9,425 | ) | ||||
Gain (loss) through Accumulated other comprehensive loss, net of income tax of $0 | 626 | 1,147 | (8,890 | ) | (7,117 | ) | |||||||
Reclassifications of loss (gain) into Net loss, net of income tax of $0 | — | 219 | 4,389 | 4,608 | |||||||||
Net current period other comprehensive income (loss) | 626 | 1,366 | (4,501 | ) | (2,509 | ) | |||||||
As of September 30, 2017 | $ | (914 | ) | 2,438 | (13,458 | ) | $ | (11,934 | ) | ||||
(a) | Amounts reclassified into net loss are included in Other income, net on the condensed consolidated statement of operations. See note 3, Investments in Marketable Securities, for further information. |
(b) | Amounts reclassified into net loss are included in Interest expense on the condensed consolidated statement of operations. See note 7, Derivatives, for further information. |
(10) Basic and Diluted Earnings (Loss) Per Common Share—Series A and Series B
Basic earnings (loss) per common share ("EPS") is computed by dividing net earnings (loss) by the weighted average number of shares of Series A Common Stock and Series B Common Stock outstanding for the period. Diluted EPS is computed by dividing net earnings (loss) by the sum of the weighted average number of shares of Series A Common Stock and Series B Common Stock outstanding and the effect of dilutive securities such as outstanding stock options, unvested restricted stock and restricted stock units.
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||
Weighted average Series A and Series B shares — basic and diluted | 12,207,649 | 12,101,214 | 12,170,367 | 12,304,879 | |||||||
For all periods presented, diluted EPS is computed the same as basic EPS because the Company recorded a loss from continuing operations, which would make potentially dilutive securities anti-dilutive. For the three and nine months ended September 30, 2017, diluted shares outstanding excluded the effect of 247,148 potentially dilutive unvested restricted stock awards and performance stock units because their inclusion would have been anti-dilutive. For the three and nine months ended September 30, 2016, diluted shares outstanding excluded the effect of 332,403 potentially dilutive stock options and unvested restricted stock awards because their inclusion would have been anti-dilutive.
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(11) Commitments, Contingencies and Other Liabilities
MONI was named as a defendant in multiple putative class actions consolidated in U.S. District Court (Northern District of West Virginia) on behalf of purported class(es) of persons who claim to have received telemarketing calls in violation of various state and federal laws. The actions were brought by plaintiffs seeking monetary damages on behalf of all plaintiffs who received telemarketing calls made by a Monitronics Authorized Dealer, or any Authorized Dealer’s lead generator or sub-dealer. In the second quarter of 2017, MONI and the plaintiffs agreed to settle this litigation for $28,000,000 ("the Settlement Amount"). MONI is actively seeking to recover the Settlement Amount under its insurance policies. The settlement agreement remains subject to court approval and the court’s entry of a final order dismissing the actions. In the third quarter of 2017, MONI paid $5,000,000 of the Settlement Amount pursuant to the settlement agreement with the plaintiffs.
In addition to the above, the Company is also involved in litigation and similar claims incidental to the conduct of its business, including from time to time, contractual disputes, claims related to alleged security system failures and claims related to alleged violations of the U.S. Telephone Consumer Protection Act. Matters that are probable of unfavorable outcome to the Company and which can be reasonably estimated are accrued. Such accruals are based on information known about the matters, management's estimate of the outcomes of such matters and experience in contesting, litigating and settling similar matters. In management's opinion, none of the pending actions are likely to have a material adverse impact on the Company's financial position or results of operations. The Company accrues and expenses legal fees related to loss contingency matters as incurred.
(12) Reportable Business Segments
Description of Segments
The Company operates through two reportable business segments according to the nature and economic characteristics of its services as well as the manner in which the information issued internally by the Company's key decision maker, who is the Company's Chief Executive Officer. The Company's business segments are as follows:
MONI
The MONI segment is engaged in the business of providing security alarm monitoring services: monitoring signals arising from burglaries, fires, medical alerts and other events through security systems at subscribers' premises, as well as providing customer service and technical support. MONI primarily outsources the sales, installation and most of its field service functions to its dealers.
LiveWatch
LiveWatch is a Do-It-Yourself home security provider offering professionally monitored security services through a direct-to-consumer sales channel. LiveWatch offers a differentiated go-to-market strategy through direct response TV, internet and radio advertising. When a customer initiates the process to obtain monitoring services, LiveWatch pre-configures the alarm monitoring system based on customer specifications. LiveWatch then packages and ships the equipment directly to the customer. The customer self-installs the equipment on-site and activates the monitoring service over the phone.
Other Activities
Other Activities primarily consists of Ascent Capital's corporate costs, including administrative and other activities not associated with the operation of the reportable segments, and eliminations.
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As they arise, transactions between segments are recorded on an arm's length basis using relevant market prices. The following table sets forth selected data from the accompanying condensed consolidated statements of operations for the periods indicated (amounts in thousands):
MONI | LiveWatch | Other | Consolidated | |||||||||||||
Three Months Ended September 30, 2017 | ||||||||||||||||
Net revenue | $ | 130,963 | $ | 7,248 | $ | — | $ | 138,211 | ||||||||
Depreciation and amortization | $ | 60,390 | $ | 1,164 | $ | 6 | $ | 61,560 | ||||||||
Net loss from continuing operations before income taxes | $ | (17,943 | ) | $ | (5,826 | ) | $ | (3,625 | ) | $ | (27,394 | ) | ||||
Three Months Ended September 30, 2016 | ||||||||||||||||
Net revenue | $ | 136,910 | $ | 5,855 | $ | — | $ | 142,765 | ||||||||
Depreciation and amortization | $ | 63,117 | $ | 1,123 | $ | 68 | $ | 64,308 | ||||||||
Net loss from continuing operations before income taxes | $ | (15,238 | ) | $ | (5,835 | ) | $ | (4,033 | ) | $ | (25,106 | ) | ||||
Nine Months Ended September 30, 2017 | ||||||||||||||||
Net revenue | $ | 398,907 | $ | 21,002 | $ | — | $ | 419,909 | ||||||||
Depreciation and amortization | $ | 181,873 | $ | 3,438 | $ | 20 | $ | 185,331 | ||||||||
Net income (loss) from continuing operations before income taxes | $ | (74,722 | ) | $ | (16,601 | ) | $ | 7,933 | $ | (83,390 | ) | |||||
Nine Months Ended September 30, 2016 | ||||||||||||||||
Net revenue | $ | 413,180 | $ | 16,509 | $ | — | $ | 429,689 | ||||||||
Depreciation and amortization | $ | 188,146 | $ | 3,353 | $ | 245 | $ | 191,744 | ||||||||
Net loss from continuing operations before income taxes | $ | (38,092 | ) | $ | (16,167 | ) | $ | (12,682 | ) | $ | (66,941 | ) | ||||
The following table sets forth selected data from the accompanying condensed consolidated balance sheets for the periods indicated (amounts in thousands):
MONI | LiveWatch | Other | Consolidated | |||||||||||||
Balance at September 30, 2017 | ||||||||||||||||
Subscriber accounts, net of amortization | $ | 1,312,214 | $ | 21,413 | $ | — | $ | 1,333,627 | ||||||||
Goodwill | $ | 527,502 | $ | 36,047 | $ | — | $ | 563,549 | ||||||||
Total assets | $ | 2,044,106 | $ | 62,830 | $ | (2,057 | ) | $ | 2,104,879 | |||||||
Balance at December 31, 2016 | ||||||||||||||||
Subscriber accounts, net of amortization | $ | 1,364,804 | $ | 21,956 | $ | — | $ | 1,386,760 | ||||||||
Goodwill | $ | 527,502 | $ | 36,047 | $ | — | $ | 563,549 | ||||||||
Total assets | $ | 2,062,838 | $ | 63,916 | $ | 5,678 | $ | 2,132,432 | ||||||||
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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:
• | 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 MONI's largest demographic; |
• | uncertainties in the development of our business strategies, including MONI's increased direct marketing efforts and 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; |
• | MONI's 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; |
• | the regulatory environment in which we operate, including the multiplicity of jurisdictions, state and federal consumer protection laws and licensing requirements to which MONI and/or its dealers are 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 MONI's network, including the potential for service disruptions at both the main monitoring facility and back-up monitoring facility, due to acts of nature or technology deficiencies, and the potential of security breaches related to network or customer information; |
• | the outcome of any pending, threatened, or future litigation, including potential liability for failure to respond adequately to alarm activations; |
• | the 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 MONI business partners; |
• | the reliability and creditworthiness of MONI's independent alarm systems dealers and subscribers; |
• | changes in MONI's expected rate of subscriber attrition; |
• | the availability and terms of capital, including the ability of MONI to obtain future financing to grow its business; |
• | MONI's 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 our Annual Report on Form 10-K for the year ended December 31, 2016 (the "2016 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 2016 Form 10-K.
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Overview
Ascent Capital Group, Inc. ("Ascent Capital" or the "Company") is a holding company and its assets primarily consist of its wholly-owned subsidiary, Monitronics International, Inc ("MONI"). MONI provides residential customers and commercial client accounts with monitored home and business security systems, as well as interactive and home automation services. MONI is supported by a network of independent Authorized Dealers providing products and support to customers in the United States, Canada and Puerto Rico. MONI’s wholly owned subsidiary, LiveWatch Security LLC (“LiveWatch”) is a Do-It-Yourself home security firm, offering professionally monitored security services through a direct-to-consumer sales channel.
Attrition
Account cancellation, otherwise referred to as subscriber attrition, has a direct impact on the number of subscribers that MONI 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 categories of canceled accounts relate to subscriber relocation or the inability to contact the subscriber. MONI 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. MONI 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. MONI 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 MONI the cost paid to acquire the contract. To help ensure the dealer’s obligation to MONI, MONI typically maintains a dealer funded holdback reserve ranging from 5-8% of subscriber accounts in the guarantee period. In some cases, the amount of the holdback liability is less than actual attrition experience.
The table below presents subscriber data for the twelve months ended September 30, 2017 and 2016:
Twelve Months Ended September 30, | |||||||
2017 | 2016 | ||||||
Beginning balance of accounts | 1,059,634 | 1,091,627 | |||||
Accounts acquired | 103,650 | 136,414 | |||||
Accounts canceled | (152,951 | ) | (150,091 | ) | |||
Canceled accounts guaranteed by dealer and other adjustments (a) (b) | (12,246 | ) | (18,316 | ) | |||
Ending balance of accounts | 998,087 | 1,059,634 | |||||
Monthly weighted average accounts | 1,033,150 | 1,079,100 | |||||
Attrition rate - Unit | 14.8 | % | 13.9 | % | |||
Attrition rate - RMR (c) | 13.5 | % | 12.2 | % | |||
(a) | Includes canceled accounts that are contractually guaranteed to be refunded from holdback. |
(b) | Includes an estimated 4,945 and 10,488 accounts included in our Radio Conversion Program that primarily canceled in excess of their expected attrition for the twelve months ending September 30, 2017 and 2016, respectively. |
(c) | The recurring monthly revenue ("RMR") of canceled accounts follows the same definition as subscriber unit attrition as noted above. RMR attrition is defined as the RMR of canceled accounts in a given period, adjusted for the impact of price increases or decreases in that period, divided by the weighted average of RMR for that period. |
The unit attrition rate for the twelve months ended September 30, 2017 and 2016 was 14.8% and 13.9%, respectively. Contributing to the increase in attrition was the number of subscriber accounts with 5-year contracts reaching the end of their initial contract term in the period, as well as MONI's more aggressive price increase strategy. Overall attrition reflects the impact of the Pinnacle Security bulk buys, where MONI purchased approximately 113,000 accounts from Pinnacle Security in 2012 and 2013, which are now experiencing normal end-of-term attrition. The unit attrition rate without the Pinnacle Security accounts (core attrition) for the twelve months ended September 30, 2017 and 2016 was 14.0% and 13.3%, respectively.
MONI analyzes its attrition by classifying accounts into annual pools based on the year of acquisition. MONI then tracks the number of accounts that cancel as a percentage of the initial number of accounts acquired for each pool for each year
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subsequent to its acquisition. Based on the average cancellation rate across the pools, MONI's attrition rate is very low within the initial 12 month period after considering the accounts which were replaced or refunded by the dealers at no additional cost to MONI. 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 subscribers that moved, no longer had need for the service or switched to a competitor. 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.
Accounts Acquired
During the three months ended September 30, 2017 and 2016, MONI acquired 21,268 and 32,570 subscriber accounts, respectively. During the nine months ended September 30, 2017 and 2016, MONI acquired 77,423 and 99,065 subscriber accounts, respectively. Accounts acquired for the nine months ended September 30, 2017 reflect bulk buys of approximately 3,500 accounts. Accounts acquired for the nine months ended September 30, 2016 reflect bulk buys of approximately 6,700 accounts. The decrease in accounts acquired for the three and nine months is primarily due to general softness in the dealer channel. The softness in the dealer channel is generally related to a longer than expected transition from their traditional go-to-market strategies, such as door to door sales, to more sophisticated methods including online sales and marketing. Additionally, during the three months ended September 30, 2017, MONI discontinued its relationship with its largest dealer in connection with the TCPA settlement. The decrease was partially offset by year over year growth in the direct to consumer sales channels.
RMR acquired during the three months ended September 30, 2017 and 2016 was $1,028,000 and $1,545,000, respectively. RMR acquired during the nine months ended September 30, 2017 and 2016 was $3,768,000 and $4,603,000, respectively.
Impact from Natural Disasters
Hurricanes Harvey, Irma and Maria, which made landfall in Texas, Florida and Puerto Rico, respectively, did not materially impact our results for the third quarter of 2017. MONI has approximately 38,000 and 55,000 subscribers in areas impacted by hurricanes Harvey and Irma, respectively. In addition, MONI has approximately 36,000 subscribers in the areas impacted by hurricane Maria. As a result of these events, we may experience increased revenue credits, field service costs, and attrition in future periods. However, the extent to which we may experience these impacts cannot currently be estimated. We will continue to assess the impact of these events.
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, dealer network and other intangible assets), restructuring charges, stock-based and long-term incentive compensation, and other non-cash or non-recurring 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 MONI's 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 in the United States ("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.
Pre-SAC Adjusted EBITDA
In addition to MONI's dealer sales channel, MONI and LiveWatch also generate leads and acquire accounts through their direct-to-consumer sales channels. As such, certain expenditures and related revenue associated with subscriber acquisition
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(subscriber acquisition costs, or "SAC") are recognized as incurred. This is in contrast to the dealer sales channel, which capitalizes payments to dealers to acquire accounts. "Pre-SAC Adjusted EBITDA" is a measure that eliminates the impact of generating leads and acquiring accounts through the direct-to-consumer sales channels that is recognized in operating income. Pre-SAC Adjusted EBITDA is defined as total Adjusted EBITDA excluding SAC related to internally generated subscriber leads and accounts through the direct-to-consumer sales channels, as well as any related revenue. We believe Pre-SAC Adjusted EBITDA is a meaningful measure of the Company's financial performance in servicing its customer base. Pre-SAC 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. Pre-SAC Adjusted EBITDA is a non-GAAP financial measure. As companies often define non-GAAP financial measures differently, Pre-SAC Adjusted EBITDA as calculated by the Company 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 September 30, | Nine Months Ended September 30, | ||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||
Net revenue | $ | 138,211 | 142,765 | $ | 419,909 | 429,689 | |||||||
Cost of services | 30,213 | 29,049 | 89,799 | 86,161 | |||||||||
Selling, general, and administrative | 35,793 | 32,897 | 136,809 | 97,148 | |||||||||
Amortization of subscriber accounts, dealer network and other intangible assets | 59,384 | 62,156 | 178,896 | 185,415 | |||||||||
Interest expense | (38,360 | ) | (31,794 | ) | (114,011 | ) | (94,805 | ) | |||||
Income tax expense from continuing operations | (1,766 | ) | (1,927 | ) | (8,241 | ) | (5,514 | ) | |||||
Net loss from continuing operations | (29,160 | ) | (27,033 | ) | (91,631 | ) | (72,455 | ) | |||||
Net loss | (29,160 | ) | (27,033 | ) | (91,539 | ) | (72,455 | ) | |||||
Adjusted EBITDA (a) | |||||||||||||
MONI business Adjusted EBITDA | $ | 76,910 | 86,795 | $ | 239,786 | 262,454 | |||||||
Corporate Adjusted EBITDA | (1,239 | ) | (1,852 | ) | (6,379 | ) | (5,446 | ) | |||||
Total Adjusted EBITDA | $ | 75,671 | 84,943 | $ | 233,407 | 257,008 | |||||||
Adjusted EBITDA as a percentage of Net revenue | |||||||||||||
MONI business | 55.6 | % | 60.8 | % | 57.1 | % | 61.1 | % | |||||
Corporate | (0.9 | )% | (1.3 | )% | (1.5 | )% | (1.3 | )% | |||||
Pre-SAC Adjusted EBITDA (b) | |||||||||||||
MONI business Pre-SAC Adjusted EBITDA | $ | 87,134 | 92,776 | $ | 265,850 | 279,044 | |||||||
Corporate Pre-SAC Adjusted EBITDA | (1,239 | ) | (1,852 | ) | (6,379 | ) | (5,446 | ) | |||||
Total Pre-SAC Adjusted EBITDA | $ | 85,895 | 90,924 | $ | 259,471 | 273,598 | |||||||
Pre-SAC Adjusted EBITDA as a percentage of Pre-SAC net revenue (c) | |||||||||||||
MONI business | 63.5 | % | 65.6 | % | 63.9 | % | 65.5 | % | |||||
Corporate | (0.9 | )% | (1.3 | )% | (1.5 | )% | (1.3 | )% | |||||
(a) | See reconciliation of net loss from continuing operations to Adjusted EBITDA below. |
(b) | See reconciliation of Adjusted EBITDA to Pre-SAC Adjusted EBITDA below. |
(c) | Presented below is the reconciliation of Net revenue to Pre-SAC net revenue (amounts in thousands): |
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Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||
2017 | 2016 | 2017 | 2016 | ||||||||||
Net revenue, as reported | $ | 138,211 | 142,765 | $ | 419,909 | 429,689 | |||||||
Revenue associated with subscriber acquisition cost | (1,051 | ) | (1,332 | ) | (3,694 | ) | (3,884 | ) | |||||
Pre-SAC net revenue | $ | 137,160 | 141,433 | $ | 416,215 | 425,805 | |||||||
Net revenue. Net revenue decreased $4,554,000, or 3.2%, and $9,780,000, or 2.3%, for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding prior year periods. The decrease in net revenue is attributable to the lower average number of subscribers in 2017. This decrease was partially offset by an increase in average RMR per subscriber due to certain price increases enacted during the past twelve months and an increase in average RMR per new subscriber acquired. Average RMR per subscriber increased from $42.84 as of September 30, 2016 to $43.79 as of September 30, 2017.
Cost of services. Cost of services increased $1,164,000, or 4.0%, and $3,638,000, or 4.2%, for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding prior year periods. The increase is primarily attributable to increased field service costs due to a higher volume of retention jobs being completed and an increase in expensed subscriber acquisition costs attributable to MONI, as a result of the initiation of MONI's direct installation sales channel. Subscriber acquisition costs, which include expensed equipment and labor costs associated with the creation of new subscribers for MONI and LiveWatch, of $3,307,000 and $8,774,000 for the three and nine months ended September 30, 2017, respectively, as compared to $2,132,000 and $6,466,000 for the three and nine months ended September 30, 2016, respectively. Cost of services as a percent of net revenue increased from 20.3% and 20.1% for the three and nine months ended September 30, 2016, respectively, to 21.9% and 21.4% for the three and nine months ended September 30, 2017, respectively.
Selling, general and administrative. Selling, general and administrative costs ("SG&A") increased $2,896,000, or 8.8%, for the three months ended September 30, 2017 as compared to the corresponding prior year period. The increase is primarily attributable to increased subscriber acquisition costs, $1,248,000 of severance charges related to a reduction in force event and transitioning executive leadership at MONI's Dallas, Texas headquarters and consulting fees related to implementation of strategic company initiatives. Subscriber acquisition costs increased to $7,968,000 for the three months ended September 30, 2017 as compared to $5,181,000 for the three months ended September 30, 2016 primarily as a result of increased direct-to-consumer sales activities at MONI. These increases were offset by decreases to the LiveWatch acquisition contingent bonus expense as the Company settled a portion of the bonus earlier in 2017. SG&A as a percent of net revenue increased from 23.0% for the three months ended September 30, 2016 to 25.9% for the three months ended September 30, 2017.
SG&A increased $39,661,000, or 40.8%, for the nine months ended September 30, 2017 as compared to the corresponding prior year period. The increase is primarily attributable to a putative $28,000,000 legal settlement reserve recognized in the second quarter of 2017 in relation to class action litigation that alleged violation of telemarketing laws. Subscriber acquisition costs increased to $20,984,000 for the nine months ended September 30, 2017 as compared to $14,008,000 for the nine months ended September 30, 2016, primarily as a result of increased direct-to-consumer sales activities at MONI. Other increases are attributed to consulting fees incurred on strategic company initiatives as well as the severance event and transitioning executive leadership discussed above. Additionally, in the first quarter of 2017, Ascent Capital entered into a foreign currency forward exchange contract to hedge British Pound exposure associated with the sale of a property in the United Kingdom. Included in SG&A is a realized loss of $1,150,000 on the maturity and settlement of this contract. These increases were offset by decreases to the LiveWatch acquisition contingent bonus expense as the Company settled a portion of the bonus earlier in 2017. SG&A as a percent of net revenue increased from 22.6% for the nine months ended September 30, 2016 to 32.6% for the nine months ended September 30, 2017.
Amortization of subscriber accounts, dealer network and other intangible assets. Amortization of subscriber accounts, dealer network and other intangible assets decreased $2,772,000 and $6,519,000, or 4.5% and 3.5%, for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding prior year periods. The decrease is related to the timing of amortization of subscriber accounts acquired prior to the third quarter of 2016, which have a lower rate of amortization in 2017 based on the applicable double declining balance amortization method. The decrease is partially offset by increased amortization related to accounts acquired subsequent to September 30, 2016.
Interest expense. Interest expense increased $6,566,000 and $19,206,000, for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding prior year periods. The increase in interest expense is
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attributable to increases in the Company's consolidated debt balance and higher applicable margins on Credit Facility borrowings as a result of the September 2016 Credit Facility refinancing.
Income tax expense from continuing operations. The Company had pre-tax loss from continuing operations of $27,394,000 and $83,390,000 and income tax expense of $1,766,000 and $8,241,000 for the three and nine months ended September 30, 2017, respectively. The Company had pre-tax loss from continuing operations of $25,106,000 and $66,941,000 and income tax expense of $1,927,000 and $5,514,000 for the three and nine months ended September 30, 2016, respectively. Income tax expense for the three months ended September 30, 2017 is attributable to MONI's state tax expense and the deferred tax impact from amortization of deductible goodwill related to MONI's business acquisitions. Income tax expense for the nine months ended September 30, 2017 is attributable to United Kingdom estimated corporation tax primarily related to the gain on sale of property in the second quarter of 2017, MONI's state tax expense and the deferred tax impact from amortization of deductible goodwill related to MONI's business acquisitions. Income tax expense for the three and nine months ended September 30, 2016 is attributable to MONI's state tax expense and the deferred tax impact from amortization of deductible goodwill related to MONI's business acquisitions.
Net loss from continuing operations. The Company had net loss from continuing operations of $29,160,000 and $91,631,000 for the three and nine months ended September 30, 2017, respectively, as compared to $27,033,000 and $72,455,000 for the three and nine months ended September 30, 2016, respectively. The increase in net loss from continuing operations for the three months ended September 30, 2017 is primarily driven by the decreases in operating income (which is discussed above) and increases in interest expense. These loss increases were offset by the $9,348,000 in refinancing expenses that was a non-recurring charge incurred in the third quarter of 2016 related to MONI's Credit Facility refinancing. The increase in net loss from continuing operations for the nine months ended September 30, 2017 is primarily related to the $28,000,000 legal settlement reserve recognized in the second quarter of 2017, as well as decreases in operating income. These changes were offset by a reduction in Radio conversion costs in 2017, as MONI has substantially completed its radio conversion program in 2016, and gains on disposal of assets held for sale recognized during the nine months ended September 30, 2017, respectively.
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Adjusted EBITDA and Pre-SAC Adjusted EBITDA. The following table provides a reconciliation of net loss from continuing operations to total Adjusted EBITDA to Pre-SAC Adjusted EBITDA for the periods indicated (amounts in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||
Net loss from continuing operations | (29,160 | ) | (27,033 | ) | (91,631 | ) | (72,455 | ) | ||||
Amortization of subscriber accounts, dealer network and other intangible assets | 59,384 | 62,156 | 178,896 | 185,415 | ||||||||
Depreciation | 2,176 | 2,152 | 6,435 | 6,329 | ||||||||
Stock-based compensation | 2,393 | 1,760 | 5,968 | 5,205 | ||||||||
Radio conversion costs | 74 | 1,263 | 383 | 17,938 | ||||||||
Rebranding marketing program | — | 602 | 880 | 839 | ||||||||
LiveWatch acquisition contingent bonus charges | 391 | 1,104 | 1,746 | 3,096 | ||||||||
Integration / implementation of company initiatives | 390 | — | 2,420 | — | ||||||||
Severance expense (a) | 1,248 | — | 1,275 | 245 | ||||||||
Impairment of capitalized software | — | — | 713 | — | ||||||||
Gain on revaluation of acquisition dealer liabilities | (954 | ) | — | (1,358 | ) | — | ||||||
Gain on disposal of operating assets | — | — | (21,217 | ) | — | |||||||
Legal settlement reserve | — | — | 28,000 | — | ||||||||
Software implementation/integration | — | 418 | — | 418 | ||||||||
Other-than-temporary impairment losses on marketable securities | 220 | — | 220 | 1,904 | ||||||||
Interest income | (617 | ) | (548 | ) | (1,575 | ) | (1,593 | ) | ||||
Interest expense | 38,360 | 31,794 | 114,011 | 94,805 | ||||||||
Refinancing expense | — | 9,348 | — | 9,348 | ||||||||
Income tax expense from continuing operations | 1,766 | 1,927 | 8,241 | 5,514 | ||||||||
Adjusted EBITDA | 75,671 | 84,943 | 233,407 | 257,008 | ||||||||
Gross subscriber acquisition costs (b) | 11,275 | 7,313 | 29,758 | 20,474 | ||||||||
Revenue associated with subscriber acquisition costs (b) | (1,051 | ) | (1,332 | ) | (3,694 | ) | (3,884 | ) | ||||
Pre-SAC Adjusted EBITDA | $ | 85,895 | 90,924 | 259,471 | 273,598 | |||||||
(a) | Severance expense related to a reduction in headcount event and transitioning executive leadership at MONI. |
(b) | Gross subscriber acquisition costs and Revenue associated with subscriber acquisition costs for the three and nine months ended September 30, 2016 has been restated to include $665,000 and $2,006,000 of costs, respectively, and $207,000 and $584,000 of revenue, respectively, related to MONI's direct-to-consumer sales channel activities for the period. |
Adjusted EBITDA decreased $9,272,000, or 10.9%, and $23,601,000, or 9.2%, for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding prior year periods. The decrease is primarily the result of lower revenues, as discussed above, and an increase in subscriber acquisition costs, net of related revenue, which is primarily associated with an increase in MONI's direct-to-consumer sales activities. Subscriber acquisition costs, net of related revenue, increased from $5,981,000 and $16,590,000 for the three and nine months ended September 30, 2016, respectively, to $10,224,000 and $26,064,000 for the three and nine months ended September 30, 2017, respectively.
Pre-SAC Adjusted EBITDA decreased $5,029,000, or 5.5%, and $14,127,000, or 5.2%, for the three and nine months ended September 30, 2017, respectively, as compared to the corresponding prior year periods which is primarily attributable to lower Pre-SAC revenues and increased field service retention costs as discussed above.
MONI's consolidated Adjusted EBITDA was $76,910,000 and $239,786,000 for the three and nine months ended September 30, 2017, respectively, as compared to $86,795,000 and $262,454,000 for the three and nine months ended September 30, 2016, respectively. MONI's consolidated Pre-SAC Adjusted EBITDA was $87,134,000 and $265,850,000 for the three and nine months ended September 30, 2017, respectively, as compared to $92,776,000 and $279,044,000 for the three and nine months ended September 30, 2016, respectively.
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Liquidity and Capital Resources
At September 30, 2017, we had $34,920,000 of cash and cash equivalents and $100,498,000 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 MONI. During the nine months ended September 30, 2017 and 2016, our cash flow from operating activities was $113,914,000 and $158,547,000, 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 nine months ended September 30, 2017 and 2016, the Company used cash of $119,081,000 and $160,117,000, respectively, to fund subscriber account acquisitions, net of holdback and guarantee obligations. In addition, during the nine months ended September 30, 2017 and 2016, the Company used cash of $9,999,000 and $5,071,000, respectively, to fund its capital expenditures.
On September 28, 2017, MONI borrowed an incremental $26,691,000 on its Credit Facility revolver to fund its October 2, 2017 interest payment due under the Senior Notes.
The existing long-term debt of the Company at September 30, 2017 includes the principal balance of $1,851,175,000 under its Convertible Notes, Senior Notes, Credit Facility term loan, and Credit Facility revolver. The Convertible Notes have an outstanding principal balance of $96,775,000 as of September 30, 2017 and mature July 15, 2020. The Senior Notes have an outstanding principal balance of $585,000,000 as of September 30, 2017 and mature on April 1, 2020. The Credit Facility term loan has an outstanding principal balance of $1,089,000,000 as of September 30, 2017 and requires principal payments of $2,750,000 per quarter with the remaining amount becoming due on September 30, 2022. The Credit Facility revolver has an outstanding balance of $80,400,000 as of September 30, 2017 and becomes due on September 30, 2021.
In considering our liquidity requirements for the remainder of 2017, we evaluated our known future commitments and obligations. We will require the availability of funds to finance the strategy of our primary operating subsidiary, MONI, which is to grow through the acquisition of subscriber accounts. We considered the expected cash flow from MONI, as this business is the driver of our operating cash flows. In addition, we considered the borrowing capacity of MONI's Credit Facility revolver, under which MONI could borrow an additional $214,600,000 as of September 30, 2017. Based on this analysis, we expect that cash on hand, cash flow generated from operations and available borrowings under the MONI's Credit Facility revolver will provide sufficient liquidity, given our anticipated current and future requirements.
We may seek external equity or debt financing in the event of any new investment opportunities, additional capital expenditures or our operations requiring additional funds, but there can be no assurance that we will be able to obtain equity or debt financing on terms that would be acceptable to us or at all. Our ability to seek additional sources of funding depends on our future financial position and results of operations, which are subject to general conditions in or affecting our industry and our customers and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control.
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Item 3. Quantitative and Qualitative Disclosure about Market Risk
Interest Rate Risk
Due to the terms of our debt obligations, we have exposure to changes in interest rates related to these debt obligations. MONI uses derivative financial instruments to manage the exposure related to the movement in interest rates. The derivatives are designated as hedges and were entered into with the intention of reducing the risk associated with variable interest rates on the debt obligations. We do not use derivative financial instruments for trading purposes.
Tabular Presentation of Interest Rate Risk
The table below provides information about our outstanding debt obligations and derivative financial instruments that are sensitive to changes in interest rates. Interest rate swaps are presented at their fair value amount and by maturity date as of September 30, 2017. Debt amounts represent principal payments by maturity date as of September 30, 2017.
Year of Maturity | Fixed Rate Derivative Instruments, net (a) | Variable Rate Debt | Fixed Rate Debt | Total | ||||||||||||
(Amounts in thousands) | ||||||||||||||||
Remainder of 2017 | $ | — | $ | 2,750 | $ | — | $ | 2,750 | ||||||||
2018 | 1,631 | 11,000 | — | 12,631 | ||||||||||||
2019 | — | 11,000 | — | 11,000 | ||||||||||||
2020 | — | 11,000 | 681,775 | 692,775 | ||||||||||||
2021 | — | 91,400 | — | 91,400 | ||||||||||||
2022 | 11,458 | 1,042,250 | — | 1,053,708 | ||||||||||||
Thereafter | — | — | — | — | ||||||||||||
Total | $ | 13,089 | $ | 1,169,400 | $ | 681,775 | $ | 1,864,264 | ||||||||
(a) | The derivative financial instruments reflected in this column include four interest rate swaps with a maturity date in 2018 and four interest rate swaps with a maturity date in 2022. As a result of these interest rate swaps, MONI's current effective weighted average interest rate on the borrowings under the Credit Facility term loans is 7.18%. See notes 6, 7 and 8 to our condensed consolidated financial statements included in this Quarterly Report for further information. |
Item 4. Controls and Procedures
In accordance with Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company carried out an evaluation, under the supervision and with the participation of management, including its chief executive officer and chief financial officer (the "Executives"), of the effectiveness of its disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Executives concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2017 to provide reasonable assurance that information required to be disclosed in its reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.
There has been no change in the Company’s internal controls over financial reporting that occurred during the three months ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, its internal controls over financial reporting.
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PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Purchases of Equity Securities by the Issuer
The following table sets forth information concerning shares withheld in payment of withholding taxes, in each case, during the three months ended September 30, 2017.
Period | Total number of shares purchased (surrendered) (1) | Average price paid per share | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) or Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1) | ||||||||||||
7/1/2017 - 7/31/2017 | 98 | (2) | $ | 15.43 | — | |||||||||||
8/1/2017 - 8/31/2017 | 1,978 | (2) | 11.28 | — | ||||||||||||
9/1/2017 - 9/30/2017 | 22,134 | (2) | 9.74 | — | ||||||||||||
Total | 24,210 | $ | 9.88 | — | ||||||||||||
(1) | On June 16, 2011, the Company announced that it received authorization to implement a share repurchase program, pursuant to which it could purchase up to $25,000,000 of its shares of Series A Common Stock, par value $0.01, from time to time. On November 14, 2013, November 10, 2014 and September 4, 2015, the Company’s Board of Directors authorized, at each date, the repurchase of an incremental $25,000,000 of its Series A Common Stock. As of September 30, 2017, 2,391,604 shares of Series A Common Stock had been purchased, at an average price paid of $40.65 per share, pursuant to these authorizations. As of September 30, 2017, the remaining availability under the Company's existing share repurchase program will enable the Company to purchase up to an aggregate of approximately $2,771,000 of Series A Common Stock. The Company may also purchase shares of its Series B Common Stock, par value $0.01 per share, under the remaining availability of the program. |
(2) | Represents shares withheld in payment of withholding taxes upon vesting of employees' restricted share awards. |
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Item 6. Exhibits
Listed below are the exhibits which are included as a part of this Report (according to the number assigned to them in Item 601 of Regulation S-K):
10.1 | ||
10.2 | ||
31.1 | ||
31.2 | ||
32 | ||
101.INS | XBRL Instance Document. * | |
101.SCH | XBRL Taxonomy Extension Schema Document. * | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. * | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. * | |
101.LAB | XBRL Taxonomy Extension Labels Linkbase Document. * | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. * | |
* | Filed herewith. |
** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ASCENT CAPITAL GROUP, INC. | ||||
Date: | November 2, 2017 | By: | /s/ William R. Fitzgerald | |
William R. Fitzgerald | ||||
Chairman, Chief Executive Officer, and President | ||||
Date: | November 2, 2017 | By: | /s/ Fred A. Graffam | |
Fred A. Graffam | ||||
Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | ||||
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