ADT Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. ADT provides security, automation, and smart-home services, primarily in the U.S.; it reported one operating segment and approximately 6.5 million recurring customers.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $1,369.8 million | $1,243.1 million |
| Monitoring and related services revenue | $1,046.0 million | $1,070.4 million |
| Installation and other revenue | $323.8 million | $172.6 million |
| Operating income (loss) | $(89.4) million | $90.4 million |
| Net income (loss) | $(300.3) million | $(66.5) million |
| Net loss per share, diluted | $(0.40) | $(0.09) |
| Operating cash flow | $250.2 million | $509.3 million |
| Free cash flow (non-GAAP) | $88.6 million | $163.3 million |
| Adjusted EBITDA (non-GAAP) | $539.5 million | $621.3 million |
Revenue increased 10.2%, largely because more equipment was sold outright under the new residential sales model and following the Defenders acquisition. Monitoring revenue declined, reflecting the sale of ADT Canada and customer attrition, partly offset by pricing improvements and acquisitions. The reported operating loss included elevated merger, restructuring, integration and other costs. Net loss also reflected higher interest expense and a debt-extinguishment charge.
At March 31, 2020, cash was $118.1 million, total debt was approximately $10.0 billion, and $180 million was available on the revolving credit facility. Total current assets were $719.0 million and current liabilities were $1,248.1 million. Operating cash flow fell by $259.0 million year over year; management cited the Defenders relationship settlement, interest-payment timing, higher expenses, equipment-sale activity, and the Canada divestiture. Free cash flow is a company-defined non-GAAP measure that deducts specified investment outlays from operating cash flow.
Material changes and unusual items
- ADT acquired its largest independent dealer, Defenders, for approximately $288.9 million, including $172 million cash (net of cash acquired) and approximately 16 million shares valued at $113.8 million. The acquisition added approximately $250.6 million of goodwill.
- A $81 million charge related to settling a pre-existing relationship with Defenders was recorded in merger, restructuring, integration and other expenses.
- ADT issued $1.3 billion of 6.25% second-lien notes due 2028 and redeemed $1.2 billion of 9.25% notes due 2023. Debt-extinguishment loss was $65.8 million. Debt increased from $9.69 billion at year-end 2019 to $9.96 billion at quarter-end.
- Interest expense included approximately $70 million of losses on interest-rate swaps. $3 billion of cash-flow hedges were de-designated after becoming ineffective amid interest-rate-market changes.
- ADT launched a customer-owned equipment model in February, including installment contracts. It expected to transition back to predominantly company-owned systems by year-end 2020 and cautioned that the Q1 revenue increase from outright equipment sales would not continue at the same level.
- Gross customer revenue attrition was 13.5%, versus 13.3%; recurring monthly revenue was $339.2 million, down from $349.3 million. The company attributed much of the RMR decline to the sale of ADT Canada.
Outlook, risks and contingencies
ADT provided no specific financial guidance in the supplied filing text. Management said it expected cash, operating cash generation, revolving-credit capacity and potential receivables securitization to be adequate for liquidity needs over the next 12 months, while emphasizing its high leverage and debt-service obligations. The receivables facility allows up to $200 million of financing; no receivables had been sold under it by March 31. An April amendment expanded eligible receivables.
COVID-19 led to suspended door-to-door sales and some channel activity, employee work-from-home measures, health precautions, hiring freezes and voluntary furloughs. Management described recurring revenue as a support to cash generation, but warned that the pandemic’s uncertain effects could materially affect estimates and future results. Risks include customer cancellations or nonpayment, restrictions on in-home service and installations, dealer or supplier disruption, monitoring-center continuity, cybersecurity, and access to financing. The company also reported unauthorized technician access to 220 customers’ accounts; legal claims and financial exposure could not yet be estimated.
Other notable exposures include radio conversions for retiring 3G/CDMA networks: estimated net program costs of $200 million to $325 million through 2022, with $50 million to $100 million expected in 2020. No goodwill impairment was recorded after a COVID-related test, but reporting units were considered at risk of future impairment. The filing discusses ongoing shareholder, employment, alarm-permit and other legal matters; certain settlements remained subject to documentation or court approval. ADT reported compliance with debt covenants at quarter-end.
Key facts for investors to verify
- Whether the new equipment ownership and financing model can sustain customer additions and economics as ADT shifts back toward company-owned systems.
- Subsequent trends in recurring monthly revenue, customer attrition, receivables, bad-debt expense and cash conversion amid COVID-19.
- Debt-service capacity and refinancing needs, including variable-rate exposure, swap valuation and available liquidity.
- Actual use and terms of the receivables securitization facility and the availability of eligible receivables.
- Final purchase accounting and realized synergies from Defenders, and the resolution or potential costs of disclosed litigation and the customer-account access incident.
- Radio-conversion spending versus the stated cost range, and whether pandemic-related assumptions could trigger goodwill impairment.