ADT Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. ADT provides security, monitoring, smart-home and commercial solutions; following its December 2021 acquisition of ADT Solar, it also sells residential solar and energy-storage systems. The filing is unaudited.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1.601 billion | $1.304 billion | $3.146 billion | $2.609 billion |
| Operating income (loss) | $211 million | $(2) million | $287 million | $(18) million |
| Net income (loss) | $92 million | $(126) million | $143 million | $(174) million |
| Adjusted EBITDA | $597 million | $542 million | $1.198 billion | $1.084 billion |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $823 million | $786 million |
Q2 revenue increased 23% year over year. Monitoring and related-services revenue rose 6% to $1.146 billion; installation, product and other revenue more than doubled to $455 million, principally reflecting Solar revenue of $215 million. Q2 operating margin was approximately 13.2%, versus a slight operating loss a year earlier. Adjusted EBITDA margin was approximately 37.3%. These margins are calculated from reported figures; Adjusted EBITDA is a non-GAAP measure.
Q2 diluted earnings were $0.10 per share, compared with a loss of $0.15 per share. Six-month diluted earnings were $0.15 per share, versus a loss of $0.21. Six-month operating cash flow exceeded investing cash outflow by approximately $15 million; investing outflow was $807 million, including subscriber-system spending and customer-account purchases.
Balance sheet and liquidity
- At June 30, cash and cash equivalents were $44 million; total assets were $17.315 billion and stockholders’ equity was $3.379 billion.
- Total debt carrying amount was $9.843 billion, including finance leases; principal debt excluding finance leases was $9.969 billion. Long-term debt was $8.999 billion, and current maturities were $844 million.
- ADT reported $495 million available under its revolving credit facility and $108 million of uncommitted capacity under its receivables facility. Management said operating cash flow, cash and available borrowing capacity should be adequate for operational and business needs over the next 12 months and for long-term liquidity needs.
- The $700 million ADT Notes due June 15, 2023 were classified as current liabilities. The company said it was seeking financing to replace them before maturity. It reported compliance with debt covenants.
Material changes and management commentary
- Revenue growth included the contribution from the acquired Solar business. Solar reported Q2 Adjusted EBITDA loss of $15 million and six-month Adjusted EBITDA of $2 million.
- Recurring monthly revenue (RMR) reached $369 million, up from $352 million a year earlier. Trailing-twelve-month gross customer revenue attrition improved to 12.7% from 13.3%, which management attributed primarily to fewer relocations and voluntary disconnects and customer-retention initiatives. ADT reported approximately 6.7 million security-monitoring subscribers.
- Six-month Adjusted EBITDA increased 11% to $1.198 billion. Management cited CSB recurring-revenue growth and lower advertising and service costs; Commercial results were broadly flat.
- Interest expense declined substantially year over year, partly because of unrealized gains on interest-rate swaps. The cash-flow statement also reflects a $205 million unrealized swap gain adjustment for the six-month period; reported earnings and interest expense therefore include material non-cash effects.
- Six-month operating cash flow increased $37 million, with lower radio-conversion payments and cash interest partly offset by incentive-compensation payments and working-capital timing. Investing outflow increased $30 million, including higher subscriber-system spending and the Canopy investment.
- ADT and Ford formed Canopy in April 2022 to combine ADT monitoring with Ford video technology. ADT holds a 40% investment and expects to fund 40% of approximately $100 million in collective investment over three years.
Outlook, risks and unusual items
- No quantified full-year revenue, earnings or cash-flow guidance is provided in the supplied filing text. Management described liquidity as adequate but highlighted inflation and interest-rate changes as matters it was monitoring.
- ADT cited risks from high leverage and refinancing the 2023 notes; variable interest rates and the LIBOR-to-SOFR transition; inflation and supply-chain disruptions; customer attrition; competition and technology changes; and execution of the Google and Solar strategies.
- A Solar lender entered insolvency proceedings. ADT recorded $11 million of charges for estimated receivables and rebates it does not expect to collect.
- The Google product integration launch deadline was extended to September 30, 2022. If integration was not launched by then, Google could require ADT, subject to exceptions, to offer Google devices and services without integration for specified customers and installations until integration.
- Changes to tax rules effective in 2022 may increase taxable income through limitations on interest deductions and required capitalization of research costs. ADT said future valuation-allowance changes could materially adversely affect results, potentially causing a net loss in a period.
- Substantially all remaining 3G customers had been converted by the start of the February 2022 network-sunset process; customers not transitioned could lose signal, potentially affecting billing, collections and attrition. Remaining conversion costs and related revenue were not expected to be material.
- In the former-technician unauthorized-access matter, ADT said that by July 27, 2022, all pending claims except one immaterial lawsuit had been settled or were subject to agreements in principle, within insured levels. Accrued insured claims and lawsuits were $101 million at June 30.
Important facts for investors to verify
- Progress and terms of refinancing the $700 million notes due June 2023, and the cost and availability of borrowing amid rising rates.
- Whether Google integration launched by the extended deadline and the commercial impact of any delay or exclusivity requirements.
- Solar segment profitability, cash collection and exposure to third-party customer-financing lenders, including the lender insolvency charge.
- Underlying earnings and cash generation excluding material non-cash swap valuation effects and non-GAAP adjustments.
- Trends in subscriber growth, RMR, attrition, supply-chain and inflation costs, and remaining 3G conversions.