ADT Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone Q4 report; quarterly results are included below. ADT provides monitored security and home and business automation in the U.S. and Canada, serving approximately 7.2 million recurring customers. It reports one operating and reportable segment.
Financial performance and liquidity
Amounts are in U.S. dollars. Margins below are calculated from reported GAAP figures.
| Metric | FY 2018 | FY 2017 | Change / context |
|---|---|---|---|
| Revenue | $4.582 billion | $4.316 billion | Up 6.2% |
| Monitoring and related services | $4.110 billion | $4.029 billion | Up 2.0% |
| Operating income | $278 million | $282 million | Down 1.6%; operating margin 6.1% vs. 6.5% |
| Net income (loss) | $(609) million | $343 million | Net margin (13.3%) vs. 7.9% |
| Operating cash flow | $1.788 billion | $1.592 billion | Up approximately 12% |
| Adjusted EBITDA | $2.453 billion | $2.353 billion | Up 4.3%; non-GAAP |
| Free cash flow | $391 million | $225 million | Up approximately 73%; non-GAAP |
| Cash and cash equivalents | $363 million | $123 million | At year-end |
| Total debt | $10.002 billion carrying value | $10.169 billion carrying value | Face principal was $10.220 billion at year-end |
Capital investment and acquisition of customer accounts were substantial: cash outlays included $694 million for dealer-generated and bulk accounts, $576 million for subscriber system assets and deferred installation costs, and $127 million for capital expenditures. Free cash flow is the company-defined non-GAAP measure and deducts these items from operating cash flow.
Fourth-quarter results
Q4 2018 revenue was $1.185 billion, operating income $11 million, and net loss $149 million (loss per share $0.20). Q4 2017 revenue was $1.106 billion, operating income $95 million, and net income $638 million (income per share $1.00). The Q4 comparison is affected by the $88 million Canada goodwill impairment in 2018 and the significant Tax Reform-related tax benefit in Q4 2017.
Material changes and notable items
- Recurring monthly revenue (RMR) rose to $347 million from $335 million; the company attributed about 2 percentage points of the 4% increase to the Red Hawk acquisition. Gross customer revenue attrition improved to 13.3% from 13.7%.
- Installation and other revenue increased $186 million, largely reflecting more outright security-equipment sales, including acquisition-related revenue. Associated installation costs also increased.
- ADT recorded an $88 million goodwill impairment for Canada, citing underperformance against expectations and a revised outlook. The remaining Canada reporting-unit goodwill was approximately $200 million and was considered at risk of further impairment.
- Net loss included $275 million of loss on extinguishment of debt, principally from redeeming Koch preferred securities and partially redeeming Prime Notes; it also included the Canada impairment and $135 million of share-based compensation expense. IPO-related award changes contributed significantly to the compensation expense.
- The effective tax rate was 3.7% in 2018, versus 181.3% in 2017. The 2017 tax benefit was primarily affected by U.S. Tax Reform; the company reported no material change in 2018 to its finalized accounting for that reform.
Capital structure, outlook, and risks
- The January 2018 IPO generated approximately $1.406 billion net proceeds. ADT used approximately $649 million to redeem $594 million of Prime Notes and approximately $949 million, including cash on hand, to redeem the $750 million stated value of Koch preferred securities plus premium, tax reimbursements, and accumulated dividends.
- Year-end liquidity included $363 million cash and $350 million available under the revolving credit facility. Management said cash, available borrowing capacity, and operating cash flow should be adequate for operational and business needs over the next twelve months and for long-term needs; this is subject to operating performance and other conditions.
- Debt remains substantial. The First Lien Term B-1 Loan bears variable interest, while $3.5 billion of interest-rate swaps were outstanding at year-end. Scheduled debt principal and estimated interest obligations in the filing total approximately $13.0 billion through the periods shown, before operating and capital lease and purchase obligations.
- ADT acquired Red Hawk Fire & Security in December 2018 for approximately $318 million total consideration, expanding commercial fire and life-safety offerings. The acquisition’s 2018 revenue and earnings impact was not material.
- Approximately 4 million customer sites used 3G or CDMA cellular equipment scheduled for network retirement by Q1 2022. Plans were not finalized; estimated hardware cost was less than $90 per site, before any cost sharing or revenue opportunities.
- Management provided no quantified forward revenue or earnings guidance in the supplied filing text. It emphasized customer retention, disciplined customer additions, efficient acquisition costs, service quality, and cost control.
- Key risks include high leverage and refinancing/interest-rate exposure; competitive pricing and DIY alternatives; customer attrition; costly communications-equipment upgrades; cybersecurity, privacy, and system reliability; integration of acquisitions; regulatory and marketing compliance; tariffs and supplier dependence; and legal proceedings. IPO-related shareholder class actions remained pending, and the company could not assure a favorable outcome.
- In February 2019, ADT authorized a share repurchase program of up to $150 million through February 2021; repurchases are discretionary. It also approved a dividend reinvestment plan and declared a subsequent $0.035-per-share dividend.
Important facts for investors to verify
- Whether customer additions and pricing can sustain RMR growth while attrition remains controlled, especially amid DIY competition.
- The cost, execution schedule, customer impact, and potential revenue offset of upgrading the approximately 4 million 3G/CDMA sites before network retirement.
- Debt maturities, floating-rate exposure, covenant headroom, and the assumptions underlying management’s liquidity assessment.
- Whether Canada’s performance recovers or triggers additional impairment, and how the Red Hawk acquisition performs after integration.
- The quality and sustainability of reported free cash flow after customer-account purchases and subscriber-system investment, and the company’s reconciliation of non-GAAP measures.
- Developments in IPO-related litigation, other material claims, and any resulting costs or liabilities.