ADT Inc. — Q3 2022 Form 10-Q
Business context and period. ADT provides monitored security, smart-home and commercial services, and, following its December 2021 acquisition of ADT Solar, residential solar solutions. This unaudited report covers the quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods.
Financial performance and position
- Revenue: Q3 revenue was $1.604 billion, up 21.8%; nine-month revenue was $4.750 billion, up 21.0%. Q3 monitoring and related services revenue rose 5.6% to $1.160 billion. Solar contributed $179 million in Q3 and $586 million year to date; it was not included in 2021 comparative revenue.
- Profit and margins: Q3 operating income was $67 million, versus $23 million; net loss was $122 million, versus $109 million. Q3 operating margin was approximately 4.2% versus 1.8%, and net margin approximately -7.6% versus -8.3%. For nine months, operating income was $354 million versus $5 million, and net income was $21 million versus a $283 million net loss. Nine-month diluted EPS was $0.02 versus $(0.35).
- Adjusted EBITDA: Q3 was $620 million, up $66 million; nine-month amount was $1.818 billion, up $180 million. This is a company-defined measure with exclusions and is not a substitute for GAAP results.
- Cash flow: Nine-month operating cash flow was $1.321 billion, up $166 million. Investing cash outflow was $1.209 billion, including $573 million of subscriber-system expenditures and $500 million for dealer-generated and bulk account purchases. Financing cash outflow was $86 million. Management attributed much of the operating cash flow increase to lower radio-conversion spending.
- Liquidity and debt: At September 30, cash was $46 million and total debt carrying value was $9.803 billion. ADT reported $575 million available under its revolving facility and $70 million of uncommitted capacity under its receivables facility. The $700 million 2023 notes were classified as current debt. The company reported covenant compliance.
- Operating indicators: Ending recurring monthly revenue was $372 million, up 4% year over year. Gross customer revenue attrition improved to 12.6% from 13.4%.
Material changes and unusual items
- Revenue growth reflects the addition of Solar as well as higher monitoring revenue. ADT said subscriber growth, higher average revenue per subscriber, and improved retention supported monitoring revenue.
- ADT recorded a $149 million non-cash goodwill impairment for Solar after successive quarters of underperformance relative to expectations and higher risk-free rates. The Solar reporting unit remained at risk of further impairment.
- Q3 other expense was $156 million, primarily reflecting a $158 million fair-value loss on the contingent forward purchase contract associated with the State Farm tender offer. ADT expected to recognize an approximately $95 million gain from further fair-value changes in Q4.
- Interest expense fell year over year partly because of larger unrealized gains on interest-rate swaps; these gains are non-cash and can fluctuate with rates.
- In October, after quarter-end, State Farm invested $1.2 billion for shares at $9 each, and ADT used the proceeds to repurchase 133.3 million shares for $1.2 billion. State Farm also committed up to $300 million to an opportunity fund, subject to agreement terms and approval of uses; $100 million was received and restricted. These events are subsequent to the reporting date.
Outlook, risks and contingencies
- No specific consolidated revenue or earnings guidance is provided in the supplied filing text. Management said available cash, borrowing capacity, and operating cash flow should be adequate for operational and business needs over the next twelve months and for long-term liquidity needs.
- ADT remains highly leveraged and exposed to variable interest rates, inflation, supply-chain constraints, and the planned transition from LIBOR to SOFR. It had $700 million of 2023 notes outstanding at quarter-end and a commitment for up to $600 million of term loans, not yet borrowed, intended to redeem part of those notes.
- Solar results face uncertainty from operating underperformance, customer-financing availability and costs, and a former solar lender’s insolvency; ADT recorded $11 million of related credit-loss and revenue charges in the first nine months.
- ADT was still working toward an integrated Google offering after the integration launch date was extended to September 30, 2022. Until integration, contractual exclusivity provisions may apply. State Farm partnership benefits are also uncertain and could affect relationships with other insurers.
- Other disclosed exposures include customer attrition and non-payment disconnects, technology and cybersecurity risks, legal claims, and potential changes in estimates or tax laws. ADT said the former-technician unauthorized-access matter had been settled or agreements in principle reached for all material pending claims, within insured levels.
Investor verification points
- Track Solar sales, segment profitability, cash generation, and goodwill assumptions for any further impairment indicators.
- Separate recurring monitoring growth from acquisition-driven Solar and installation revenue; monitor attrition, subscriber additions, and margins.
- Assess debt refinancing and repayment plans for the 2023 notes, variable-rate exposure, and available facility capacity.
- Review the State Farm and Google agreements’ milestones, restrictions, funding availability, and realized customer or financial benefits.
- Reconcile reported GAAP earnings with Adjusted EBITDA, including the effects of swap valuations, the tender-offer contract, impairment, and other exclusions.