ADT Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. ADT provides security, automation, and smart-home services; most revenue comes from recurring monitoring fees. Results are unaudited. Amounts below are rounded to millions unless otherwise stated.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $1,300.6 | $1,148.3 | $3,827.4 | $3,396.2 |
| Operating income (loss) | $(51.2) | $121.8 | $132.3 | $267.2 |
| Net loss | $(181.6) | $(235.5) | $(352.2) | $(459.7) |
| Net loss per share | $(0.25) | $(0.31) | $(0.47) | $(0.62) |
| Adjusted EBITDA (non-GAAP) | $624.5 | $609.8 | $1,876.1 | $1,839.9 |
Q3 monitoring and related services revenue was $1,093.6 million; installation and other revenue was $207.0 million. For the nine-month period, operating cash flow was $1,459.2 million, investing cash outflow $1,156.9 million, and financing cash outflow $509.7 million. Free cash flow, a company-defined non-GAAP measure, was $394.0 million, up from $356.9 million.
At September 30, cash and cash equivalents were $155.8 million; total debt, including finance leases, was approximately $9.9 billion. A $400 million revolving credit facility had no borrowings. Current assets were $1,319.2 million and current liabilities $1,474.0 million. Management described the company as highly leveraged but said cash, available borrowing capacity, and operating cash flow were expected to meet near- and long-term needs. Debt covenants were reported in compliance.
Changes versus the prior comparable periods
- Revenue increased 13% in Q3 and 13% for the nine months. Management attributed recurring-revenue growth to acquisitions and improved average pricing, partly offset by customer attrition and fewer customer additions. Increased outright equipment sales also lifted installation revenue and associated costs.
- Recurring monthly revenue was $351.4 million, up 3% year over year; management attributed 2% of the increase to the Red Hawk acquisition. Gross customer revenue attrition rose to 13.5% from 13.4%, primarily due to more non-payment disconnects.
- Q3 operating results included a $45.5 million goodwill impairment and a $55.5 million loss on the Canadian business held for sale. For the nine months, operating income fell to $132.3 million from $267.2 million, despite higher revenue.
- Net losses narrowed year over year, partly reflecting lower debt-extinguishment losses and higher tax benefits. Nine-month interest expense also declined, while refinancing and new debt issuances changed the debt mix and extended some maturities.
Outlook, transactions, and notable items
- Radio conversions: Approximately 3.4 million customer sites used 3G or CDMA equipment scheduled for network retirement in 2022. Plans were not finalized; estimated net expenditures were $200–$325 million through 2022, including $25–$35 million expected in 2019. Estimated hardware cost was under $90 per site, before potential cost-sharing or other offsets.
- ADT Canada sale: The sale to TELUS closed November 5, 2019, after the reporting date, for CAD $683 million (approximately $519 million at closing), subject to post-closing adjustments. ADT recorded the disposal group as held for sale and recognized the impairment and sale-measurement losses noted above. The sale was not classified as discontinued operations. The company agreed to a seven-year non-compete and non-solicitation arrangement, subject to exceptions, and related licensing and transition-service agreements.
- Debt and capital returns: 2019 refinancing included $3.1 billion of term debt due 2026 and secured notes due 2024 and 2026. Nine-month debt-extinguishment loss was $103.0 million. The $150 million share repurchase authorization was substantially completed by September 30. After quarter-end, ADT announced a regular $0.035-per-share dividend and a special $0.70-per-share dividend, both with December 13, 2019 record dates.
- Contingencies and risks: The filing describes shareholder litigation related to the 2018 IPO, a certified Los Angeles alarm-permit class action with trial scheduled for February 2020, and other claims and inquiries. Accruals for insured claims and lawsuits were $109 million, versus $74 million at year-end; accruals for matters outside insurance were not material. The filing says previously disclosed risk factors had no material changes. Other exposures include customer attrition, substantial debt and interest-rate sensitivity, network migration costs, and legal claims.
ADT reported no full-year revenue or earnings guidance in the provided filing text. Its stated outlook primarily covers radio-conversion spending and liquidity expectations. Adjusted EBITDA and free cash flow are non-GAAP measures and should be considered alongside GAAP results.
Important facts for investors to verify
- Final net cash proceeds and any purchase-price adjustments for the TELUS sale, and the use of proceeds.
- Actual radio-conversion costs, cost-sharing, customer uptake of replacement products, and progress toward the 2022 network retirement.
- Whether pricing and acquisitions can sustain recurring-revenue growth while attrition and customer additions remain pressure points.
- Debt-service capacity, variable-rate exposure, refinancing terms, and the effects of dividends on liquidity and leverage.
- Developments and potential exposure in the IPO, alarm-permit, and other legal matters.