ADT Inc. — FY 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing also presents unaudited fourth-quarter results. Financial amounts below are in U.S. dollars; millions are abbreviated as “$m.”
Business context and reporting period
ADT provides monitored security, automation, smart-home, fire-safety, and related services, primarily in the United States. It reported one operating segment and approximately 6.5 million recurring customers at year-end, excluding contracts it monitored but did not own. In November 2019, ADT sold its Canadian business to TELUS; in January 2020, it acquired Defenders, its largest independent dealer.
Key financial results
| Metric | FY 2019 | FY 2018 | Change |
|---|---|---|---|
| Total revenue | $5,125.7m | $4,581.7m | Up $544.0m, or 11.9% |
| Monitoring and related services revenue | $4,307.6m | $4,109.9m | Up 4.8% |
| Installation and other revenue | $818.1m | $471.7m | Up 73.4% |
| Operating income | $196.4m | $277.8m | Down 29.3% |
| Net loss | $(424.2)m | $(609.2)m | Loss narrowed by $185.0m |
| Net loss per share, diluted | $(0.57) | $(0.81) | Improved by $0.24 |
| Cash from operating activities | $1,873.1m | $1,787.6m | Up $85.5m |
| Free cash flow, non-GAAP | $502.3m | $391.0m | Up $111.3m |
| Adjusted EBITDA, non-GAAP | $2,483.2m | $2,453.5m | Up $29.7m |
| Recurring monthly revenue at year-end | $336.1m | $346.8m | Down $10.6m |
| Gross customer revenue attrition | 13.4% | 13.3% | Up 10 basis points |
GAAP operating margin was approximately 3.8%, versus 6.1% in 2018. The increase in installation revenue largely reflected sales of equipment outright to customers, which also raised related costs. Adjusted EBITDA and free cash flow are company-defined non-GAAP measures and are not substitutes for GAAP results.
Fourth quarter: Revenue was $1,298.3m, compared with $1,185.5m in Q4 2018. Operating income was $64.1m versus $10.7m; net loss was $72.0m versus $149.5m.
Cash, debt, and liquidity: Year-end cash and cash equivalents were $48.7m; $400m remained available under the revolving credit facility. Debt had a $9,898.1m face value and $9,692.3m balance-sheet carrying amount, excluding differences such as discounts and financing costs. Operating cash flow included $541m of interest paid on debt; debt service cash outflow, excluding finance leases, was $559m. Management stated that cash, revolver availability, and operating cash flow were expected to meet near-term and long-term needs.
Total assets were $16,083.7m, total liabilities $12,899.3m, and stockholders’ equity $3,184.4m. Current assets of $625.5m were below current liabilities of $1,119.7m. ADT declared $633m of dividends in 2019, including a $0.70-per-share special dividend, and repurchased approximately $150m of shares.
Material changes versus the prior comparable period
- Revenue rose, supported by acquisitions, commercial growth, higher average pricing, and equipment sales. Recurring revenue growth was partly offset by attrition, fewer customer additions, and the Canadian sale.
- Year-end recurring monthly revenue fell mainly because the Canadian disposition reduced it by approximately $16m. Gross revenue attrition edged higher, reflecting more voluntary and non-payment disconnects.
- Operating income declined despite higher revenue, with increased installation costs, acquisition-related expenses, and other costs. Results included a $62m loss on sale of the Canadian business and a $45m goodwill impairment; 2018 included an $88m Canadian goodwill impairment.
- Net loss included a $104m loss on extinguishment of debt in 2019, compared with $275m in 2018. Lower interest expense and a higher tax benefit also contributed to the smaller net loss.
- Operating cash flow increased, while investing outflows declined partly because ADT received $496m of net cash proceeds from the Canadian sale and spent less on acquisitions than in 2018.
Outlook, management commentary, risks, and unusual items
- No specific revenue or earnings guidance for 2020 is provided. Management estimated net costs of $200m–$325m through 2022 to replace 3G/CDMA equipment, including expected 2020 costs of $100m–$150m. Approximately 3.1 million customer sites used those networks.
- In January 2020, ADT completed the Defenders acquisition for a stated base cash price of $260m, partly funded by the revolver, plus approximately 16 million common shares. Defenders represented about 55% of ADT’s indirect channel in 2019. ADT cautioned that it could not be certain the acquisition or its new business initiatives would achieve intended results.
- In February 2020, ADT launched a residential model initiative offering financing for certain upfront installation costs, revised equipment and installation pricing, and a 60-month term for certain transactions. In March 2020, it entered a receivables financing agreement allowing up to $200m of financing, maturing in March 2021 subject to extension.
- In January 2020, ADT issued $1.3bn of 6.25% second-priority notes due 2028, using proceeds with cash and revolver borrowings to redeem its $1.2bn Prime Notes. This extends that debt while adding new secured debt and associated interest obligations.
- Key risks include substantial leverage, variable-rate exposure, competitive pricing and DIY alternatives, customer attrition, integration of acquisitions, and the cost and execution of cellular network upgrades. The filing also identifies cybersecurity, privacy, supplier, regulatory, tariff, and customer-service risks.
- The filing discusses COVID-19 as an emerging uncertainty that could disrupt staffing, installations, customer access, and supply chains; its effects were not yet clear. Legal matters include ongoing consumer, employment, and other claims. ADT reported that ordinary-course claims outside insurance were not material in aggregate, but some ultimate outcomes or ranges of loss could not be estimated.
- Apollo beneficially owned approximately 87.7% of outstanding common stock at year-end. The company is controlled by Apollo and uses exemptions from certain NYSE corporate-governance requirements.
Most important facts for investors to verify
- Whether recurring revenue and customer additions recover after the Canadian sale, and whether attrition stabilizes.
- Actual spending, customer impact, and completion pace for the 3G/CDMA replacement program.
- Post-acquisition performance of Defenders, including account generation, dealer-channel effects, integration costs, and share dilution.
- Cash generation after customer acquisition investment, dividends, capital spending, and debt service; also monitor refinancing needs and covenant headroom.
- The economics and customer uptake of the new residential financing and equipment-ownership models, including the receivables facility’s terms and use.
- Resolution and potential financial impact of disclosed litigation, tax matters, and other contingencies, and any material effects from COVID-19 or supply disruptions.