ADT Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2018. ADT provides monitored security, automation, installation, and related services in the U.S. and Canada; it reported approximately 7.2 million customers. Figures below are unaudited and in U.S. dollars.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $1,148 million | $1,083 million | $3,396 million | $3,210 million |
| Operating income | $122 million | $92 million | $267 million | $187 million |
| Operating margin | 10.6% | 8.5% | 7.9% | 5.8% |
| Net loss | $236 million | $62 million | $460 million | $296 million |
| Operating cash flow | Not separately stated | Not separately stated | $1,406 million | $1,262 million |
| Free cash flow (non-GAAP) | Not separately stated | Not separately stated | $357 million | $228 million |
| Adjusted EBITDA (non-GAAP) | $610 million | $594 million | $1,840 million | $1,754 million |
Q3 revenue increased 6.0%; monitoring and related services revenue rose 1.7%, while installation and other revenue increased by $48 million, including $40 million from outright equipment sales. For the nine months, revenue increased 5.8%. Gross customer revenue attrition improved to 13.4% from 13.8%, and recurring monthly revenue rose to $340 million from $334 million.
Operating cash flow increased 11%. Free cash flow is management’s non-GAAP measure and deducts dealer account purchases, subscriber system additions, and capital expenditures from operating cash flow. It is not a substitute for GAAP cash flow.
Balance sheet, debt, and liquidity
- At September 30, 2018, cash and cash equivalents were $257 million; total debt, including capital lease obligations, was $9.568 billion. Debt on the balance sheet totaled approximately $9.568 billion, including current maturities.
- ADT had $350 million of undrawn capacity under its revolving credit facility, which matures in 2023. Management said cash, borrowing capacity, and operating cash flow should meet near-term and long-term needs, while emphasizing that the company is highly leveraged.
- Total assets were $16.968 billion and stockholders’ equity was $4.436 billion. Current liabilities were $1.010 billion.
- The company reported compliance with its debt covenants and no material off-balance-sheet arrangements.
Material changes and unusual items
- ADT completed its January 2018 IPO, issuing 105 million shares at $14 per share and receiving $1.406 billion in net proceeds. It used approximately $649 million to redeem $594 million principal of Prime Notes and placed $750 million in a segregated account for the preferred securities redemption.
- In July, ADT redeemed the $750 million stated value of Koch Preferred Securities for approximately $949 million, including redemption premium, tax reimbursements, and accumulated dividends. The redemption contributed $213 million to Q3 and nine-month debt-extinguishment losses. The February Prime Notes redemption generated a further approximately $62 million nine-month loss.
- Despite higher operating income, Q3 net loss widened principally because of the preferred securities redemption charge. Nine-month net loss also increased year over year.
- Net interest expense declined by $32 million in Q3 and $52 million for the nine months, reflecting debt reduction and the preferred securities redemption.
- Revenue-standard adoption increased opening equity by $34 million, net of tax. For the nine months, ADT said adoption increased operating income by $22 million and reduced net loss by $17 million versus the prior accounting method.
- Share-based compensation expense rose to $113 million for the nine months from $8 million, largely related to IPO-linked awards. Reported SG&A was broadly flat year over year for the nine months.
Outlook, commentary, and risks
- The filing provides no quantified earnings or revenue guidance. Management described recurring revenue growth, customer retention, disciplined customer additions, and cost efficiency as key business priorities.
- Management said the financial effects of 2017 and 2018 hurricanes were not material as of September 30, 2018. ADT expected to finalize its Tax Reform accounting by year-end 2018.
- After quarter-end, ADT agreed to acquire Red Hawk Fire & Security for approximately $317.5 million in cash; closing was expected in Q4 2018, subject to customary conditions. ADT obtained financing commitments for up to an additional $317.5 million.
- Risks include substantial leverage and debt service, customer attrition and competition, IPO-related shareholder and derivative litigation, and claims concerning independent-contractor classification. The filing also cites new U.S. tariffs on certain China-made equipment, including a planned increase of some tariffs to 25% in January 2019, and a scheduled 2019 federal restriction affecting specified suppliers’ equipment.
- Ongoing legal matters include IPO-related securities litigation and an unresolved California electronic-waste investigation. ADT also disclosed tax-sharing exposure related to pre-2013 tax periods, which could affect tax attributes or future cash taxes; the IRS withdrew its proposed trademark amortization adjustment after ADT defended its position.
Important facts for investors to verify
- Debt maturities, interest costs, covenant headroom, and the company’s ability to sustain cash generation and service its substantial leverage.
- Whether recurring revenue, pricing, and improved attrition continue to offset competition and customer cancellations.
- The cash and earnings effects of the Red Hawk acquisition, including its financing and integration.
- Potential equipment-cost increases from tariffs or supplier restrictions, and whether ADT can pass higher costs on without losing customers.
- Developments and potential exposure in IPO litigation, contractor-classification claims, environmental matters, and pre-Separation tax matters.
- The sustainability and comparability of Adjusted EBITDA and Free Cash Flow, which are non-GAAP measures, and the contribution of one-time items to reported results.