ADT Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. ADT provides monitored security, automation and smart-home services to residential, small-business and commercial customers; it reported approximately 6.6 million recurring customers at quarter-end.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1,304.4 million | $1,331.4 million | $2,609.1 million | $2,701.1 million |
| Operating income (loss) | ($1.9) million | $50.4 million | ($18.3) million | ($38.9) million |
| Net loss | ($125.9) million | ($106.7) million | ($173.7) million | ($407.0) million |
| Adjusted EBITDA | $541.9 million | $563.1 million | $1,084.0 million | $1,102.6 million |
| Operating cash flow | Not provided separately for quarter | Not provided separately for quarter | $785.7 million | $629.0 million |
Q2 operating margin was approximately negative 0.1% and net margin negative 9.7%; six-month margins were approximately negative 0.7% and negative 6.7%, respectively. Adjusted EBITDA margin was approximately 41.5% in both periods. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, radio conversion costs.
- Monitoring and related services revenue rose 4.0% in Q2 to $1,083.5 million; installation and other revenue fell 23.8% to $220.9 million. For the six months, those categories were up 2.8% and down 24.6%, respectively.
- Q2 revenue declined 2.0% year over year. For six months, revenue declined 3.4%; recurring-service growth was more than offset by lower installation revenue, principally reflecting ADT’s shift to a predominantly company-owned residential equipment model.
- Q2 net loss widened by $19.1 million, while six-month net loss improved by $233.3 million, largely reflecting lower interest expense and the absence of the prior-year debt-extinguishment loss.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $150.4 million, total debt carrying value was approximately $9.56 billion, and current liabilities were $1.42 billion. Cash was down from $205.0 million at December 2020.
- ADT reported $400 million of available borrowing capacity under its revolving credit facility and $70 million of uncommitted capacity under its receivables facility, dependent on eligible receivables. It stated that available liquidity and operating cash flow were adequate for anticipated needs, and that it was in compliance with debt covenants.
- Six-month investing cash outflow was $777.2 million, primarily reflecting subscriber-system investment and customer-account purchases; financing cash outflow was $59.7 million. Cash and restricted cash together declined $51.2 million.
- In January 2021, ADT refinanced its 2026 term loan, lowering the LIBOR margin from 3.25% to 2.75%, while accepting quarterly principal payments of approximately $7 million.
- After quarter-end, ADT issued $1.0 billion of 4.125% secured notes due 2029 and planned to use the proceeds and cash on hand to redeem $1.0 billion of 3.50% notes due 2022. It also extended and increased revolving-credit commitments to $575 million.
Material changes and management commentary
- Recurring monthly revenue was $352.4 million, up from $338.8 million a year earlier, attributed to pricing, customer additions and account purchases. Gross customer revenue attrition increased to 13.3% from 13.1%.
- Commercial segment revenue and Adjusted EBITDA grew, while Consumer and Small Business (CSB) revenue and Adjusted EBITDA declined. Q2 segment Adjusted EBITDA was $509.9 million for CSB and $32.0 million for Commercial, versus $550.7 million and $12.4 million, respectively, a year earlier.
- ADT incurred $140 million of gross radio-conversion costs in the first half and recognized $21 million of related incremental revenue; net costs were approximately $119 million. The company estimated total program net costs of $250–$300 million, with $196 million incurred through June 30. It served about 800,000 sites using 3G/CDMA, around 80% of which faced network sunsets in early 2022. Component shortages constrain use of its Cell Bounce solution, and most remaining costs were expected in 2021.
- ADT expected approximately $50 million of 2021 spending on its next-generation platform being developed with Google; management cautioned that development costs could rise. The filing gives no formal revenue or earnings guidance.
- Management cited COVID-19-related uncertainty, supply-chain constraints, possible customer relocations and attrition, and changing seasonality as factors that could affect future results. The transition in equipment ownership and revenue model may also affect results and cash-flow presentation.
Risks, contingencies and unusual items
- ADT recorded an $18 million impairment in Q1 on Cell Bounce-related technology, citing lower expected benefits amid electronic-component shortages.
- Legal matters include claims following a former technician’s unauthorized access to approximately 200 customer accounts, wage-and-hour litigation, and other ordinary-course claims. The company reported $93 million of accrued claims within insurance programs; accruals for matters outside those programs were not material.
- Interest-rate exposure remains relevant: swaps had a $3.2 billion notional amount and a net liability fair value of $183.8 million. ADT reported debt fair value of $10.1 billion versus carrying value of $9.5 billion.
- The filing identifies possible effects from COVID-19, proposed and enacted tax-law changes, and the LIBOR transition. It states that future effects may materially affect estimates or results; actual outcomes may differ from forward-looking statements.
Investor verification priorities
- Track whether recurring-revenue gains can offset installation-revenue declines and the rise in gross customer attrition.
- Verify remaining radio-conversion costs, execution before network sunsets, component availability and any cost-sharing or customer-revenue offsets.
- Review leverage, interest expense, debt maturities and the completed use of proceeds from the 2029 notes to refinance 2022 notes.
- Assess cash generation against subscriber-system investment, dealer-account purchases, dividends and other capital needs; note that six-month operating cash flow does not represent free cash flow.
- Monitor platform spending and milestones with Google, and developments in the unauthorized-access and other legal matters.