Commercial RMR Additions Increased 6%
Conference Call Scheduled for 10 a.m. Eastern Time Today
to Review Results
LAWRENCE, Kan., Nov. 7, 2008 (GLOBE NEWSWIRE) -- Protection One, Inc. (Nasdaq:PONE), one of the leading providers of security monitoring services in the United States, today reported financial results for the third quarter ended September 30, 2008. All comparisons below are to the quarter ended September 30, 2007 unless otherwise indicated.
Richard Ginsburg, Protection One's president and chief executive officer, said, "Despite the difficult economic environment, our results this quarter indicate progress in the key areas we've previously identified. Internal commercial RMR additions increased 6% this quarter. Internal residential additions outside the Southeast also increased 3%. Commercial and residential average revenue per unit increased year over year and on a sequential quarter basis. Sales of e-Secure, our web-based interactive monitoring service, continued to grow in units and as a percentage of total sales. We've also made significant process improvements in our Retail business, which we expect will help monitoring margin in coming quarters. Finally, attrition on the acquired IASG portfolio was lower than last year."
Ginsburg closed, "We are pleased to have ample liquidity and are not anticipating a need to access the capital markets any time soon to refinance debt. We believe we have more than adequate financial resources to execute our plans."
Consolidated third quarter revenue increased slightly to $94.1 million. Consolidated RMR increased to $26.9 million as of September 30, 2008 from $26.7 million as of September 30, 2007. The Company's net loss for the quarter ended September 30, 2008 increased to $(11.1) million, or $(0.44) per share, from $(8.7) million, or $(0.34) per share in 2007 and adjusted EBITDA declined to $27.1 million from $30.2 million. The decline in EBITDA is due to the Company spending more on brand awareness and lead generation activities to create RMR additions; experiencing higher costs to service its Retail account base, which it is addressing with process improvements; incurring higher health benefit costs; and realizing less contribution from Multifamily due to attrition.
Adjusted EBITDA, Recurring Monthly Revenue ("RMR") and net debt, as described in this release, are all non-GAAP financial measures and are described in greater detail in the attached schedules. For a reconciliation of these non-GAAP measures, see the attached schedules.
Segment Results
Retail
The Company's Retail segment directly sells, installs, monitors and maintains electronic security and life safety systems for residential and commercial customers. As of September 30, 2008, the Company served approximately 582,000 retail customers, generating approximately $20.6 million RMR.
Total Retail segment revenue of $73.6 million in the third quarter of 2008 was slightly higher than revenue reported in the same period last year. Retail installation revenue increased from higher levels of amortization on previously deferred revenue. Monitoring and service revenue decreased by less than one percent to $64.0 million in the third quarter of 2008 as a result of slightly lower RMR during the period. The Retail segment's operating income was in a break even position compared to operating income of $1.2 million in the third quarter of 2007, due to increased spending on brand awareness and lead generation activities and higher costs to service its customer base, as mentioned above, as well as higher amortization of previously deferred customer acquisition costs. Retail is presently centralizing certain customer care functions to improve efficiency and reduce costs, the benefits of which are expected to be realized in 2009.
Retail RMR decreased by only 0.2%, or $40,000, from the year ago period. RMR additions of $617,000, including account purchases, were 1.0% higher than in the third quarter of 2007. Protection One increased internal residential RMR additions outside the Southeast region by 3% despite a difficult housing market, and increased internal commercial additions by 6%, both of which indicate that the Company's marketing initiatives are gaining traction. RMR additions decreased in the Southeast region as the Company wound down its relationship with BellSouth this quarter. Average revenue per new residential and commercial customer continued to increase as the Company's distinctive e-Secure offering represented an increasing percentage of sales.
Retail gross attrition in the third quarter of 2008 increased from the prior year period to 14.6% in 2008 from 14.4% in 2007. Attrition on the non-IASG Retail base increased slightly due primarily to higher incidence of non-payment and other financial cancelations. Attrition on the IASG base improved compared to one year ago since peaking in the fourth quarter of 2007.
Wholesale
The Company's Wholesale business, CMS, contracts with independent security alarm dealers nationwide to provide alarm system monitoring services to residential and business customers. As of September 30, 2008, this unit served approximately 4,600 dealers by monitoring over 1.0 million homes and businesses on their behalf.
Wholesale monitoring and service revenue increased 7.6% to $12.6 million in the third quarter of 2008 as a result of growth by its largest dealer customer. RMR additions more than doubled from $149,000 one year ago to $337,000 in the third quarter of 2008.
Wholesale monitoring and service margin decreased slightly to $5.4 million in the third quarter of 2008 from $5.5 million one year ago, although the business unit recorded sequential quarter improvement that exceeded $0.6 million. Operating income was $0.5 million in 2008 compared to $1.4 million in the same period in 2007. Excluding the impact of an increase in Wholesale's portion of corporate shared service costs, Wholesale operating income would have increased from the prior year.
Multifamily
The Company's Multifamily business unit provides monitoring and maintenance of electronic security systems for tenants of multifamily residences under long-term contracts with building owners and managers. As of September 30, 2008, Multifamily had $2.3 million of RMR arising from approximately 250,000 units in more than 1,500 rental properties.
Multifamily total revenue decreased 3.5% in the third quarter of 2008 compared to 2007. Monitoring and related services revenue also declined by 4.7% to $7.6 million due to a decrease in RMR of 7.6% from the third quarter of 2007. Multifamily RMR was $2.3 million versus $2.5 million in the year ago period. Multifamily operating income decreased to $0.4 million compared to $1.6 million in the third quarter of 2007 principally from lower revenues, increased monitoring and general and administrative costs as well as a $0.5 million trade name impairment recorded in the third quarter of 2008. Multifamily is scaling its operations to keep future costs in alignment with revenue levels.
Multifamily experienced elevated attrition from the uncertain collection status of a few large customers. The Company's policy is to consider these at-risk customers as attrition which caused Multifamily's annualized gross attrition rate to increase to 21.2% in 2008 from 9.6% in 2007. As of September 30, 2008, Multifamily's backlog of sold but uninstalled units and installed units not yet billed was nearly 6,500 units.
Balance Sheet
The Company is not expected to require any refinancing of its existing debt until November 15, 2011, the date on which its Senior Secured Notes mature. The Company ended the third quarter of 2008 with $40.5 million cash on hand, with excess cash and cash equivalents conservatively invested in United States treasury portfolios. As of November 5, 2008, the Company also had a minimum of $19.7 million available for borrowing under its revolving credit facility.
The Company's net debt decreased to $483.2 million at September 30, 2008 from $485.0 million at December 31, 2007, as free cash flow offset fees and expenses associated with the first quarter refinancing. With the execution of hedge transactions during 2008, $365.3 million, or approximately 70%, of the Company's debt effectively carries a fixed interest rate. Interest costs on approximately 8%, or $42.5 million, of the Company's debt is variable corresponding to changes in LIBOR. Interest costs on the remaining 22%, or $110.3 million, is variable with the prime rate. The recent reductions in the prime rate lowered the Company's annualized cash interest expense by $1.1 million.
The senior secured credit facility is the only instrument that requires periodic principal payments, which are $750,000 per quarter as well as annual excess cash flow prepayments commencing with the year ending December 31, 2008. Based on projections of excess cash flow through the end of 2008, the Company expects to make a prepayment of approximately $10 million under the senior secured credit facility during the first quarter of 2009.
See "Non-GAAP Reconciliations" in the attached schedules for a reconciliation of net debt to reported debt and cash and equivalents.
Conference Call and Webcast
Protection One will host a conference call and audio webcast today at 10:00 a.m. Eastern time to review these results. The call may be accessed by dialing (877) 681-3377 (inside the United States and Canada) or via a webcast at www.ProtectionOne.com. The reference code associated with the call is 6479194.
A webcast replay will be available shortly after the call at www.ProtectionOne.com. A telephonic replay of the call also will be available until Nov.14, 2008. To listen to the telephonic replay, dial (719) 457-0820 or (888) 203-1112 and enter the following passcode: 6479194.
Forward-looking Statements: Certain matters discussed in this news release are "forward-looking statements." The Private Securities Litigation Reform Act of 1995 has established that these statements qualify for safe harbors from liability. Forward-looking statements may include words or phrases such as "we believe," "we anticipate," "we expect" or words of similar meaning. Forward-looking statements may describe our future plans, objectives, expectations or goals, including, but not limited to, with respect to our earnings and financial condition, customer account acquisition strategy and attrition, liquidity and sources of funding and capital expenditures and debt service capacity. Our actual results may differ materially from those discussed here as a result of numerous factors, including, but not limited to, our significant debt obligations, net losses and competition. See our Quarterly Report on Form 10-Q for the period ended September 30, 2008, which is expected to be filed with the SEC on November 10, 2008 and our Annual Report on Form 10-K for the year ended December 31, 2007, which was filed with the SEC on March 17, 2008, for a further discussion of factors affecting our performance. Protection One disclaims any obligation to update any forward-looking statements as a result of developments occurring after the date of this news release.
Protection One is one of the largest vertically integrated national providers of sales, installation, monitoring, and maintenance of electronic security systems to homes and businesses and has been recognized as one of "America's Most Trustworthy Companies" by Forbes.com. Network Multifamily, Protection One's wholly owned subsidiary, is the largest security provider to the multifamily housing market. The company also owns the nation's largest provider of wholesale monitoring services, the combined operations of CMS and Criticom International. For more information about Protection One, visit www.ProtectionOne.com. (PONENR)
The Protection One, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=5001
PROTECTION ONE, INC.
and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ --------------------
(in thousands, except per
share amounts) 2008 2007 2008 2007
---- ---- ---- ----
Revenue
Monitoring & related
services $ 84,192 $ 84,253 $ 250,020 $ 230,034
Installation and other 9,864 9,270 28,014 25,294
-------- -------- --------- ---------
Total revenue 94,056 93,523 278,034 255,328
Cost of revenue (exclusive
of amortization and
depreciation shown below):
Monitoring & related
services 27,948 26,656 83,766 71,650
Installation and other 13,194 11,173 36,166 30,215
-------- -------- --------- ---------
Total cost of revenue
(exclusive of
amortization and
depreciation shown
below) 41,142 37,829 119,932 101,865
Selling expenses 14,647 12,308 42,133 35,080
General & administrative 20,442 20,178 59,551 57,433
Merger related severance -- 1,185 -- 3,603
Amortization and depre-
ciation 16,431 17,829 50,065 44,387
Impairment of trade name 475 -- 475 --
-------- -------- --------- ---------
Total operating expenses 51,995 51,500 152,224 140,503
-------- -------- --------- ---------
Operating income 919 4,194 5,878 12,960
Other expense (income)
Interest expense 12,219 13,262 36,876 36,409
Interest income (175) (474) (752) (1,940)
Loss on retirement of debt -- -- 12,788 --
Other (31) (22) (77) (67)
-------- -------- --------- ---------
Total other expense 12,013 12,766 48,835 34,402
-------- -------- --------- ---------
Loss before income taxes (11,094) (8,572) (42,957) (21,442)
Income tax expense 50 112 354 602
-------- -------- --------- ---------
Net loss $(11,144) $ (8,684) $ (43,311) $ (22,044)
Other comprehensive income
net of tax
Unrealized gain on cash
flow hedging instruments (1,120) (133) 1,004 (124)
-------- -------- --------- ---------
Comprehensive loss $ (12,264) $ (8,817) $ (42,307) $ (22,168)
======== ======== ========= =========
Basic and diluted net loss
per common share(a) $ (0.44) $ (0.34) $ (1.71) $ (0.96)
Weighted average common
shares outstanding 25,311 25,307 25,308 22,925
(a) - Options are not included in the computation of diluted earnings
per share because to do so would have been antidilutive for each of
the periods presented
PROTECTION ONE, INC
and Subsidiaries
Supplemental Financial Information
(unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
(in thousands) 2008 2007 2008 2007
Segment Information ---- ---- ---- ----
Retail
Revenue
Monitoring & related
services $ 64,013 $ 64,584 $191,262 $180,250
Installation and
other 9,546 8,934 27,039 24,577
-------- -------- -------- --------
Total revenue 73,559 73,518 218,301 204,827
Cost of revenue
(exclusive of
amortization and
depreciation shown
below):
Monitoring & related
services 18,737 18,628 57,027 53,202
Installation and
other 12,535 10,485 34,306 28,306
-------- -------- -------- --------
Total cost of
revenue (exclusive
of amortization
and depreciation
shown below) 31,272 29,113 91,333 81,508
Selling expenses 13,836 11,436 39,121 33,070
General & admini-
strative expense 15,514 16,514 45,938 46,405
Merger related
severance -- 1,185 -- 3,603
Amortization of
intangibles and depre-
ciation expense 12,968 14,022 39,546 35,413
-------- -------- -------- --------
Total operating
expenses 42,318 43,157 124,605 118,491
Operating income $ (31) $ 1,248 $ 2,363 $ 4,828
Operating margin 0.0% 1.7% 1.1% 2.3%
Wholesale
Revenue
Monitoring & related
services $ 12,574 $ 11,687 $ 35,761 $ 25,722
Other 184 301 646 301
-------- -------- -------- --------
Total revenue 12,758 11,988 36,407 26,023
Cost of revenue
(exclusive of
amortization and
depreciation
shown below):
Monitoring & related
services 7,189 6,147 20,928 12,714
Selling expenses 466 539 1,800 962
General & admini-
strative expense 2,655 1,718 7,289 5,157
Amortization of intan-
gibles and depreci-
ation expense 1,925 2,229 5,913 4,230
-------- ------- -------- --------
Total operating
expenses 5,046 4,486 15,002 10,349
Operating income $ 523 $ 1,355 $ 477 $ 2,960
Operating margin 4.1% 11.3% 1.3% 11.4%
Multifamily
Revenue
Monitoring & related
services $ 7,605 $ 7,982 $ 22,997 $ 24,062
Installation and other 134 35 329 416
-------- -------- -------- --------
Total revenue 7,739 8,017 23,326 24,478
Cost of revenue
(exclusive of amorti-
zation and depreci-
ation shown below):
Monitoring & related
services 2,022 1,881 5,811 5,734
Installation and other 659 688 1,860 1,909
-------- -------- -------- --------
Total cost of
revenue (exclusive
of amortization
and depreciation
shown below) 2,681 2,569 7,671 7,643
Selling expenses 345 333 1,212 1,048
General & adminis-
trative expense 2,273 1,946 6,324 5,871
Amortization of intan-
gibles and depreci-
ation expense 1,538 1,578 4,606 4,744
Impairment of trade
name 475 -- 475 --
-------- -------- -------- --------
Total operating
expenses 4,631 3,857 12,617 11,663
Operating income $ 427 $ 1,591 $ 3,038 $ 5,172
Operating margin 5.5% 19.8% 13.0% 21.1%
PROTECTION ONE, INC.
and Subsidiaries
Supplemental Financial Information (cont.)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
(in thousands) 2008 2007 2008 2007
Supplemental Financial ---- ---- ---- ----
Information
FAS 123(R) Expense in G&A
Retail $ 376 $ 385 $ 1,090 $ 1,128
Wholesale -- -- -- --
Multifamily -- -- -- --
-------- -------- -------- --------
FAS 123(R) expense in G&A 376 385 1,090 1,128
Amortization of Deferred Costs
in Excess of Amort. of
Deferred Rev
Retail $ 7,994 $ 5,969 $ 21,316 $ 16,472
Wholesale -- -- -- --
Multifamily 521 656 1,499 1,398
-------- -------- -------- --------
Amort. of deferred costs in
excess of amort. of deferred
rev. 8,515 6,625 22,815 17,870
Investment in New Accounts and
Rental Equipment, Net
Retail $ 9,409 $ 8,318 $ 29,248 $ 23,690
Wholesale -- -- -- --
Multifamily 1,316 1,019 3,012 2,475
-------- -------- -------- --------
Investment in new accounts
and rental equipment, net 10,725 9,337 32,260 26,165
Property Additions, Exclusive
of Rental Equipment
Retail $ 1,223 $ 3,638 $ 4,343 $ 6,166
Wholesale 819 317 1,407 545
Multifamily 315 19 433 266
-------- -------- -------- --------
Property additions, exclusive
of rental equipment 2,357 3,974 6,183 6,977
PROTECTION ONE, INC.
and Subsidiaries
Supplemental Financial Information (cont.)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
(in thousands) 2008 2007 2008 2007
---- ---- ---- ----
Supplemental Financial
Information (Non-GAAP)
Recurring Monthly Revenue
(RMR) $ 26,883 $ 26,651 $ 26,883 $ 26,651
======== ======== ======== ========
RMR Rollforward - Retail
Beginning RMR $ 20,572 $ 20,661 $ 20,628 $ 16,429
RMR additions from direct
sales 594 600 1,784 1,732
Additions from the Merger -- -- -- 4,133
RMR additions from account
purchases 23 11 29 30
RMR losses (749) (744) (2,111) (1,896)
Price increases and other 111 63 221 163
-------- -------- -------- --------
Ending RMR $ 20,551 $ 20,591 $ 20,551 $ 20,591
RMR Rollforward - Wholesale
Beginning RMR $ 3,965 $ 3,679 $ 3,615 $ 963
RMR additions from direct
sales 337 149 1,107 571
Additions from the Merger -- -- -- 2,549
RMR losses (264) (211) (694) (465)
Price increases and other -- (39) 10 (40)
-------- -------- -------- --------
Ending RMR $ 4,038 $ 3,578 $ 4,038 $ 3,578
RMR Rollforward - Multifamily
Beginning RMR $ 2,378 $ 2,505 $ 2,463 $ 2,596
RMR additions from direct
sales 24 26 86 61
RMR losses (124) (61) (308) (213)
Price increases and other 16 12 53 38
-------- -------- -------- --------
Ending RMR $ 2,294 $ 2,482 $ 2,294 $ 2,482
RMR Rollforward -
Consolidated
Beginning RMR $ 26,915 $ 26,845 $ 26,706 $ 19,988
RMR additions from direct
sales 955 775 2,977 2,364
Additions from the Merger -- -- -- 6,682
RMR additions from account
purchases 23 11 29 30
RMR losses (1,137) (1,016) (3,113) (2,574)
Price increases and other 127 36 284 161
-------- -------- -------- --------
Ending RMR $ 26,883 $ 26,651 $ 26,883 $ 26,651
Annualized Three Twelve Months
Months Ended Ended
September 30, September 30,
RMR Attrition ----------------- ---------------
2008 2007 2008 2007
---- ---- ---- ----
RMR Attrition - Gross
Retail 14.6% 14.4% 13.6% 12.8%
Wholesale 26.4% 23.3% 23.4% 22.3%
Multifamily 21.2% 9.6% 15.2% 13.7%
RMR Attrition - Net of
New Owners Retail 12.7% 12.5% 11.8% 10.8%
September 30,
2008 2007
------ -----
Monitored Sites
Retail Monitored Sites 582,293 608,752
Wholesale Monitored Sites 1,004,947 839,571
Multifamily Monitored Sites 254,840 281,265
PROTECTION ONE, INC.
and Subsidiaries
Non-GAAP Reconciliations
(unaudited)
Recurring Monthly Revenues (RMR)
RMR is the sum of all the monthly revenue we are entitled to receive
under contracts with customers in effect at the end of a period.
A reconciliation of RMR to Protection One, Inc.'s reported total
revenue follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
(in millions) 2008 2007 2008 2007
---- ---- ---- ----
RMR at September 30 $ 26,883 $ 26,651 $ 26,883 $ 26,651
Amounts excluded from RMR:
Amortization of deferred
revenue 1,211 941 1,211 941
Installation and other
revenue(a) 3,232 3,414 3,232 3,414
-------- -------- -------- --------
Revenue (GAAP basis)
September $ 31,326 $ 31,006 $ 31,326 $ 31,006
July - August 62,730 62,517 -- --
January - August -- -- 246,708 224,322
-------- -------- -------- --------
Total period revenue $ 94,056 $ 93,523 $278,034 $255,328
(a) Revenue that is not pursuant to periodic contractual billings
The Company believes the presentation of RMR is useful to investors
because the measure is often used by investors and lenders to
evaluate companies such as Protection One with recurring revenue
streams. Management monitors RMR, among other things, to evaluate the
Company's ongoing performance.
Adjusted EBITDA
A reconciliation of Adjusted EBITDA to Protection One, Inc.'s
reported loss before income taxes follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
(in thousands) 2008 2007 2008 2007
---- ---- ---- ----
Loss before income taxes $(11,094) $ (8,572) $(42,957) $(21,442)
Plus:
Interest expense, net 12,044 12,788 36,124 34,469
Amortization and depreciation
expense 16,431 17,829 50,065 44,387
Amort. of deferred costs in
excess of amort. of deferred
revenue 8,515 6,625 22,815 17,870
Stock based compensation
expense 376 385 1,090 1,128
Other costs including
merger-related items 374 1,185 685 3,603
Loss on retirement of debt -- -- 12,788 --
Impairment of trade name 475 -- 475 --
Less:
Other income (31) (22) (77) (67)
-------- -------- -------- --------
Adjusted EBITDA $ 27,090 $ 30,218 $ 81,008 $ 79,948
Adjusted EBITDA is used by management in evaluating segment
performance and allocating resources, and management believes it is
used by many analysts following the security industry. This
information should not be considered as an alternative to any measure
of performance as promulgated under accounting principles generally
accepted in the United States of America, such as loss before income
taxes or cash flow from operations. Items excluded from Adjusted
EBITDA are significant components in understanding and assessing the
consolidated financial performance of the Company. See the table
above for the reconciliation of Adjusted EBITDA to consolidated loss
before income taxes. The Company's calculation of Adjusted EBITDA may
be different from the calculation used by other companies and
comparability may be limited. Management believes the presentation of
non-GAAP financial measures such as Adjusted EBITDA is useful because
it allows investors and management to evaluate and compare the
Company's operating results from period to period in a meaningful and
consistent manner in addition to standard GAAP financial measures.
Net Debt reconciled to GAAP measures
September 30, December 31,
(in thousands) 2008 2007
------------ ------------
Senior credit facility, maturing March 31,
2012, variable $ 292,500 $ 294,750
Senior secured notes, maturing November
2011, fixed 12.00%, face value 115,345 115,345
Unsecured term loan, maturing March 14,
2013, variable 110,340 --
Senior subordinated notes, maturing
January 2009, fixed 8.125%, face value 110,340
Capital leases 5,519 5,599
------------ ------------
$ 523,704 $ 526,034
Less cash and cash equivalents (40,478) (40,999)
------------ ------------
Net Debt $ 483,226 $ 485,035
Net Debt is utilized by management as a measure of the Company's
financial leverage and the Company believes that investors also may
find Net Debt to be helpful in evaluating the Company's financial
leverage. This supplemental non-GAAP information should be viewed in
conjunction with the Company's consolidated balance sheets in the
Company's report on Form 10-Q for the period ended September 30, 2008.
While not included in net debt, the Company also had notes receivable
due from its Wholesale dealers of approximately $3.6 million and
$5.9 million as of September 30, 2008 and December 31, 2007,
respectively.