ADT Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter filing. ADT provides monitored security, automation and smart-home services, commercial security and fire offerings, and, following its 2021 acquisition of ADT Solar, residential solar and storage solutions. It reported approximately 6.7 million recurring-revenue customers.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Revenue | $6.395 billion | $5.307 billion | +$1.088 billion, 20.5% |
| Operating income | $560 million | $15 million | +$545 million |
| Net income (loss) | $173 million | $(341) million | Turned profitable |
| Adjusted EBITDA (non-GAAP) | $2.447 billion | $2.213 billion | +$234 million, 10.6% |
| Cash from operating activities | $1.888 billion | $1.650 billion | +$238 million |
| Cash used in investing activities | $(1.533) billion | $(1.696) billion | Outflow narrowed |
- Operating margin was approximately 8.8% of revenue; net margin was approximately 2.7%. Adjusted EBITDA margin was approximately 38.3%, but this is a company-defined non-GAAP measure and excludes significant items.
- Revenue included $4.589 billion from monitoring and related services, $1.020 billion from security installation and other, and $786 million from solar installation and other. Solar revenue rose sharply because 2022 included a full year of operations versus a partial month in 2021.
- Ending recurring monthly revenue (RMR) was $374 million, up 4%. Gross customer revenue attrition improved to 12.5% from 13.1%, mainly due to fewer relocations, partly offset by more non-payment disconnects.
- Cash and cash equivalents were $257 million; restricted cash was $116 million, including approximately $101 million of State Farm funds not yet used and restricted to approved purposes. Available capacity was $575 million under the revolving credit facility and $45 million under the receivables facility.
- Debt carrying value was $9.829 billion; face-value principal excluding finance leases was $9.937 billion. Approximately $827 million of principal was scheduled for 2023, primarily the $700 million notes due June 2023. Net cash interest paid during 2022 was approximately $471 million.
Material changes versus FY2021
- Revenue growth reflected higher monitoring revenue in CSB and Commercial, increased security installation revenue, and the first full year of ADT Solar. CSB monitoring revenue benefited from higher average prices and subscriber growth.
- ADT reported positive operating and net income after losses in 2021. Lower interest expense and lower amortization contributed to the comparison; results also included a $149 million non-cash Solar goodwill impairment and a $63 million loss from the fair-value change in the State Farm-related forward contract.
- Operating cash flow increased by $238 million, primarily reflecting lower net radio-conversion cash outlays, partly offset by incentive-compensation payments and working-capital timing. Investing outflow remained substantial, including $622 million for customer-account purchases and $735 million for subscriber-system assets.
- ADT issued $1.2 billion of shares to State Farm at $9 per share and used the proceeds to repurchase 133.3 million shares for $1.2 billion. The transaction therefore was not a net cash funding source before related costs. State Farm also committed up to $300 million for development initiatives; $100 million received in 2022 was restricted.
Outlook, commentary and principal risks
- Management said cash, borrowing capacity and operating cash flows should be adequate for operational and business needs over the next 12 months and for longer-term liquidity needs. No specific revenue, earnings or cash-flow guidance was provided.
- ADT expected to introduce its integrated next-generation platform for professional installations by the end of 2023. The Google integration had missed its revised September 2022 target; until integration, Google had contractual rights concerning Google-device offerings for certain installations. The ADT+ app for DIY customers launched in early 2023.
- Solar was a key uncertainty: the segment recorded a $149 million goodwill impairment after consecutive underperformance and higher interest rates. Its carrying value approximated fair value after the charge, leaving it at risk of further impairment. Solar Adjusted EBITDA was $5 million and included approximately $21 million of lender- and installation-related charges.
- ADT disclosed an $88 million liability for solar loans it might have to repurchase if specified installation milestones are not met. A large third-party lender entered insolvency proceedings, and another major lender announced new loan-repurchase policies for 2023. ADT also cited lender concentration, installation delays and permission-to-operate delays as risks.
- Other material risks include substantial leverage and interest-rate exposure; competition and customer attrition; technology execution and Google-partnership dependencies; cybersecurity, privacy and system reliability; supply-chain and labor constraints; regulatory changes affecting solar incentives, net metering and interconnection; and litigation or false-alarm liability.
- ADT said it was in compliance with debt covenants at year-end. The audit firm issued an unqualified opinion on the financial statements and internal control over financial reporting. Goodwill impairment testing for Solar and Commercial was identified as a critical audit matter.
Most important facts for investors to verify
- Whether Solar improves installation throughput, margins and cash conversion, and whether additional goodwill impairment or loan repurchases arise.
- How the $827 million of 2023 scheduled debt principal was refinanced or repaid, including the planned Term Loan A borrowing and partial redemption of the 2023 notes.
- Whether the Google integration and professional platform launch meet stated timing, and whether partnership funding milestones and State Farm initiatives produce measurable customer or revenue benefits.
- Whether RMR growth and attrition trends persist, particularly as non-payment disconnects, price changes and competition affect customer retention.
- Whether liquidity remains adequate after debt service, subscriber-acquisition investment, dividends and restricted-fund obligations; distinguish unrestricted cash from restricted cash and non-GAAP Adjusted EBITDA from GAAP earnings and cash flow.