ADT(US:ADT)2023-08-07 16:00Part I Financial Information This section presents ADT Inc.'s unaudited condensed consolidated financial statements for Q2 2023, detailing financial position, performance, and cash flows with explanatory notes Financial Statements This section presents ADT Inc.'s unaudited condensed consolidated financial statements for Q2 2023, covering key financial positions and performance with detailed notes Condensed Consolidated Balance Sheets The balance sheets show total assets decreased to $17.33 billion and total liabilities decreased to $14.02 billion as of June 30, 2023 Condensed Consolidated Balance Sheets (in thousands) | Assets & Liabilities | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total current assets | $1,554,967 | $1,721,996 | | Total assets | $17,334,379 | $17,821,236 | | Total current liabilities | $2,318,906 | $2,661,103 | | Total liabilities | $14,016,367 | $14,428,088 | | Total stockholders' equity | $3,318,012 | $3,393,148 | | Total liabilities and stockholders' equity | $17,334,379 | $17,821,236 | Condensed Consolidated Statements of Operations The statements of operations highlight a slight revenue increase to $3.21 billion for the six months, but a net loss of $26.6 million due to goodwill impairment Statements of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total revenue | $1,593,128 | $1,601,030 | $3,205,482 | $3,145,777 | | Operating income (loss) | $122,574 | $210,577 | $116,366 | $286,557 | | Goodwill impairment | $181,179 | $0 | $422,809 | $0 | | Net income (loss) | $92,211 | $91,517 | $(26,626) | $143,162 | | Diluted EPS (Common Stock) | $0.10 | $0.10 | $(0.03) | $0.15 | Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive income for the six months ended June 30, 2023, was a loss of $18.9 million, compared to income of $160.8 million in the prior year Comprehensive Income (Loss) (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $92,211 | $91,517 | $(26,626) | $143,162 | | Other comprehensive income (loss) | $3,588 | $6,556 | $7,695 | $17,639 | | Comprehensive income (loss) | $95,799 | $98,073 | $(18,931) | $160,801 | Condensed Consolidated Statements of Stockholders' Equity Total stockholders' equity decreased to $3.32 billion by June 30, 2023, primarily due to net loss and dividends - Total stockholders' equity decreased from $3.39 billion at the beginning of the year to $3.32 billion as of June 30, 2023. The decrease was primarily driven by a net loss of $26.6 million and dividends of $64.4 million, partially offset by share-based compensation expense and other comprehensive income19 Condensed Consolidated Statements of Cash Flows Net cash from operating activities remained strong at $799.4 million, while investing activities used $654.7 million and financing activities used $257.5 million Cash Flow Summary (in thousands) | Cash Flow Activity | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $799,435 | $822,636 | | Net cash used in investing activities | $(654,700) | $(807,440) | | Net cash from (used in) financing activities | $(257,515) | $7,073 | | Net increase (decrease) in cash | $(112,780) | $22,269 | | Cash and equivalents, ending balance | $260,800 | $55,546 | Notes to Condensed Consolidated Financial Statements The notes detail accounting policies, corrections for prior period goodwill impairment errors, and the pending divestiture of the Commercial business - The company identified and corrected errors in previously reported non-cash goodwill impairment losses for its Solar reporting unit for Q3 2022 and Q1 2023, leading to the filing of an Amended 2022 Annual Report and restated quarterly reports29 - On August 7, 2023, ADT entered into an agreement to sell its Commercial business to an affiliate of GTCR for $1.613 billion in cash. The results of the Commercial Business will be reported as discontinued operations starting in Q3 20233435 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses ADT's financial condition and operational results, highlighting business updates, key performance indicators, segment performance, and liquidity Business Updates Key business updates include the launch of the ADT+ app for DIY smart home security and the agreement to sell the Commercial Business for $1.613 billion - The company introduced the ADT+ app for its DIY smart home security products in Q1 2023 and expects to roll it out for professional installations by year-end177 - ADT entered into an agreement to sell its Commercial Business for $1.613 billion in cash, with net proceeds expected to be used to redeem approximately $1.5 billion of debt179 Key Performance Indicators Key performance indicators show Recurring Monthly Revenue increased by 4% to $382 million, and gross customer revenue attrition improved to 12.5% Key Performance Indicators | Indicator | As of June 30, 2023 | As of June 30, 2022 | | :--- | :--- | :--- | | RMR (in thousands) | $382,222 | $368,768 | | Gross customer revenue attrition | 12.5% | 12.7% | - Recurring Monthly Revenue (RMR) increased by 4% year-over-year to $382 million, primarily driven by higher average prices for new and existing subscribers201 - Gross customer revenue attrition improved to 12.5% from 12.7% in the prior year, driven by a decrease in customer relocations, though partially offset by higher non-payment disconnects201 Results of Operations Results of operations show total revenue increased slightly, driven by CSB and Commercial growth, but offset by a significant decline and goodwill impairment in Solar Revenue by Segment (in thousands) | Segment | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | $ Change | | :--- | :--- | :--- | :--- | | CSB | $2,300,552 | $2,151,078 | $149,474 | | Commercial | $682,563 | $587,663 | $94,900 | | Solar | $222,367 | $407,036 | $(184,669) | | Total revenue | $3,205,482 | $3,145,777 | $59,705 | - For the six months ended June 30, 2023, SG&A expenses decreased by $65.4 million, primarily due to cost reduction initiatives in the Solar segment, lower radio conversion costs, and reduced advertising spend partially offset by higher selling costs207 - The company recorded goodwill impairment charges of $242 million in Q1 2023 and $181 million in Q2 2023, totaling $422.8 million for the six-month period, related to its Solar reporting unit210 Non-GAAP Measures Adjusted EBITDA increased to $1.28 billion for the six months ended June 30, 2023, driven by CSB and Commercial segments, despite a loss in Solar Adjusted EBITDA by Segment (in thousands) | Segment | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | $ Change | | :--- | :--- | :--- | :--- | | CSB | $1,238,398 | $1,141,246 | $97,152 | | Commercial | $85,758 | $54,993 | $30,765 | | Solar | $(47,985) | $2,007 | $(49,992) | | Total Adjusted EBITDA | $1,276,171 | $1,198,246 | $77,925 | Liquidity and Capital Resources The company's liquidity position includes $146.4 million in cash and $575 million available under its revolving credit facility, with total debt outstanding at $9.67 billion Liquidity Position as of June 30, 2023 (in thousands) | Item | Amount | | :--- | :--- | | Cash and cash equivalents | $146,435 | | Availability under First Lien Revolving Credit Facility | $575,000 | | Uncommitted available borrowing capacity under Receivables Facility | $97,447 | | Carrying amount of total debt outstanding | $9,670,800 | - In March 2023, the company borrowed $600 million under a new Term Loan A Facility and an additional $50 million in June 2023. Proceeds were used to redeem the $700 million ADT Notes due 2023235236 - On May 2, 2023, the company redeemed $150 million of its outstanding First Lien Notes due 2024 using cash on hand237 Critical Accounting Estimates Critical accounting estimates include significant goodwill impairment charges totaling $422.8 million for the Solar reporting unit due to macroeconomic conditions and underperformance - The company performed interim goodwill impairment tests on its Solar reporting unit, resulting in a $242 million charge in Q1 2023 and an additional $181 million charge in Q2 2023 due to macroeconomic conditions and underperformance249250252 - Following the impairment charges, the Solar reporting unit's carrying value approximates its fair value, and it remains at risk of future impairment. A 16.7% decrease in 2024 projected revenues could result in an additional impairment of approximately $40 million253 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate exposure from its debt, which is partially mitigated by interest rate swaps - The company's operations are exposed to market risks from changes in interest rates on its variable-rate debt259 - In H1 2023, the company borrowed $650 million under a variable-rate Term Loan A Facility and redeemed $650 million of fixed-rate notes. To partially hedge this, it entered into interest rate swaps with a total notional amount of $300 million260 Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of June 30, 2023, due to a material weakness in internal control over financial reporting - The CEO and CFO concluded that as of June 30, 2023, the company's disclosure controls and procedures were not effective at a reasonable assurance level263 - This ineffectiveness is due to a previously disclosed material weakness in ICFR concerning the recognition of tax impacts related to goodwill impairments263264 - A remediation plan has been developed, which includes updating procedures for recognizing tax impacts of goodwill impairments, but the material weakness will not be considered remediated until controls are tested and proven effective over time264 Part II Other Information This section provides additional information on legal proceedings, risk factors, equity sales, defaults, mine safety, and other disclosures Legal Proceedings The company is subject to various claims and lawsuits in the ordinary course of business. For details on these legal proceedings and related matters, the report refers to Note 13, "Commitments and Contingencies," in the financial statements - The company is subject to various legal proceedings in the ordinary course of business. Further details are provided in Note 13 of the financial statements267 Risk Factors This section highlights new material risks related to the pending divestiture of the company's Commercial Business. Key risks include the uncertainty of the transaction's completion, potential diversion of management's attention, failure to realize expected benefits, damage to the ADT brand, and increased vulnerability due to being a less diversified company post-divestiture - The pending divestiture of the Commercial Business is subject to risks and may not be completed on the expected timeline, if at all268 - Risks during the pre-closing period include diversion of management attention, disruption to business relationships, and potential loss of key employees270 - Following the divestiture, ADT will be a smaller, less diversified company, making it more vulnerable to market conditions affecting consumers and small businesses275 Unregistered Sales of Equity Securities and Use of Proceeds The company reports that there were no sales of unregistered equity securities during the six months ended June 30, 2023. Additionally, there were no proceeds from sales of registered equity securities and no repurchases of its common stock during the three months ended June 30, 2023 - There were no sales of unregistered equity securities during the six months ended June 30, 2023276 - No repurchases of the company's common stock were made during the three months ended June 30, 2023276 Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None276 Mine Safety Disclosures The company reported no mine safety disclosures - None276 Other Information During the fiscal quarter ended June 30, 2023, no directors or executive officers of the company adopted or terminated any Rule 10b5-1 trading plans or any non-Rule 10b5-1 trading arrangements - No directors or executive officers adopted or terminated any Rule 10b5-1 trading plans during the quarter ended June 30, 2023278 Exhibits This section lists the exhibits filed or furnished as part of the Quarterly Report on Form 10-Q, including corporate governance documents, material agreements, and certifications by the CEO and CFO - This section provides an index of all exhibits filed with the Form 10-Q279