ADT INC. INTRODUCTION
To obtain a more comprehensive understanding of our financial condition, changes in financial condition, and results of operations, the following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year endedDecember 31, 2021 (the "2021 Annual Report"), which was filed withthe United States ("U.S.")Securities and Exchange Commission (the "SEC") onMarch 1, 2022 . The following discussion and analysis contains forward-looking statements about our business, operations, and financial performance based on current plans and estimates that involve risks, uncertainties, and assumptions. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled "Cautionary Statements Regarding Forward-Looking Statements" and Item 1A "Risk Factors."
OVERVIEW AND BASIS OF PRESENTATION
Business Overview
ADT Inc. , together with its wholly-owned subsidiaries (collectively, the "Company," "we," "our," "us," and "ADT"), is a leading provider of security, interactive, and smart home solutions serving residential, small business, and commercial customers in theU.S. With the acquisition ofCompass Solar Group, LLC (now namedADT Solar LLC ) ("ADT Solar") (the "ADT Solar Acquisition") inDecember 2021 , we are now also a leading provider of residential solar and energy storage solutions. Our mission is to empower people to protect and connect to what matters most - their families, homes, and businesses - by delivering safe, smart, and sustainable lifestyle-driven solutions through professionally installed, DIY, and mobile or other digital-based offerings supported by our 24/7 professional monitoring services.
Basis of Presentation
All financial information presented in this section has been prepared inU.S. dollars in accordance with generally accepted accounting principles inthe United States of America ("GAAP") and includes the accounts ofADT Inc. and its wholly-owned subsidiaries. All intercompany transactions have been eliminated. We report financial and operating information in the following three segments: •Consumer and Small Business - The Consumer and Small Business ("CSB") segment primarily includes the sale, installation, servicing, and monitoring of integrated security and automation systems and other related offerings to residential homeowners, small business operators, and other individual consumers, as well as general corporate costs and other income and expense items not included in another segment. •Commercial - The Commercial segment primarily includes the sale, installation, servicing, and monitoring of integrated security and automation systems, fire detection and suppression systems, and other related offerings to larger businesses and/or multi-site operations, which often require more sophisticated integrated solutions, as well as dedicated corporate and other costs. •Solar - The Solar segment primarily includes the design and installation of solar and related solutions and services to residential homeownerswho purchase solar and energy storage solutions, energy efficiency upgrades, and roofing services, as well as dedicated corporate and other costs. Our chief operating decision maker (the "CODM") uses Adjusted EBITDA, which is the segment profit measure, to evaluate segment performance. Our definition of Adjusted EBITDA, a reconciliation of Adjusted EBITDA to net income (loss), and additional information, including a description of the limitations relating to the use of Adjusted EBITDA, are provided under "-Non-GAAP Measures."
Refer to Note 3 "Segment Information" for additional information on the Company's segments.
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--------------------------------------------------------------------------------COVID-19 Pandemic Update
DuringMarch 2020 , theWorld Health Organization declared the outbreak of a novel coronavirus as a pandemic (the "COVID-19 Pandemic"). While responses have varied by individuals, businesses, and state and local governments, the COVID-19 Pandemic, including recent variants, caused certain notable impacts on general economic conditions, including temporary and permanent closures of many businesses, increased governmental regulations, supply chain disruptions, and changes in consumer spending. To protect our employees and serve our customers, we have implemented and are continuously evolving certain measures, such as (i) detailed protocols for infectious disease safety for employees, (ii) employee daily wellness checks, and (iii) certain work from home actions, including for the majority of our call center professionals. We believe our overall recurring revenue and highly variable subscriber acquisition cost model provides a solid financial foundation for strong cash flow generation despite the impact from the COVID-19 Pandemic. We anticipate maintaining sufficient liquidity and capital resources to continue (i) providing essential services, (ii) satisfying our debt requirements, and (iii) having the ability to return capital to our stockholders in the form of a regular quarterly dividend during this challenging macroeconomic environment. We considered the on-going and pervasive economic impact of the COVID-19 Pandemic in our assessment of our financial position, results of operations, and cash flows, as well as certain accounting estimates as of and for the periods presented. However, the evolving and uncertain nature of the COVID-19 Pandemic, as well as the evolving nature of the regulatory environment which may require vaccines or vaccine boosters or other actions that could impact our employee base or impose additional costs on our business, could materially impact our estimates and financial results in future reporting periods.
FACTORS AFFECTING OPERATING RESULTS
We have been focused on building the right platform for growth, which includes: improving customer satisfaction, increasing our recurring monthly revenue through customer acquisition, improving customer retention, reducing our revenue payback period, increasing the value of our offerings to customers through new products and services, and increasing the rate at which new customers opt for our interactive services. InDecember 2021 , we completed the ADT Solar Acquisition, which expanded our offerings and allowed us to enter the residential solar market. Consumer acceptance of solar energy and battery storage as the future of energy technology is growing. We believe solar is the next logical extension for our offerings, which provides us with the ability to offer an integrated home experience and increase our share in both markets. Our ability to add new customers depends on the overall demand for our products and services, which is driven by a number of external factors. The overall economic condition in the geographies in which we operate can impact our ability to attract new customers and grow our business in all customer channels. Other factors include the following:
•Growth in our residential and small business customer base can be influenced by the overall state of the housing market, the perceived threat of crime, significant life events such as the birth of a child or opening of a new business, or incentives provided by insurance carriers.
•Growth in our commercial customer base can be influenced by the rate at which new businesses begin operations or existing businesses grow, as well as applicable building codes and insurance policies. In addition, changes in the market or competition, such as the acquisition or disposition of similar businesses by our competitors, may impact our ability to compete. •Growth in our solar customer base can be influenced by the availability of rebates, tax credits, and other financial incentives, as well as traditional energy prices and grid reliability.
The demand for our products and services is also impacted by the price and quality of our products and services compared to those of our competitors.
As ofMarch 31, 2022 , we served approximately 6.7 million subscribers. Although our subscriber-based offerings require significant upfront investment to generate new customers, they also provide ongoing and predictable recurring revenue generated from our monitoring and other services. While the economics of an installation can vary depending on the customer acquisition channel, type of customer, and product offering, we generally achieve revenue break-even in less than two and a half years, which remains relatively consistent period-over-period. We believe advancements in technology, younger generations of consumers, and shifts to de-urbanization have increased consumer interest in smart home offerings and other mobile technology applications; and we have made significant progress toward increasing the variety of our offerings to accommodate these changing interests. As a result of this, we may experience an increase in costs associated with items such as (i) offering a wider variety of products and services, (ii) providing more 29 -------------------------------------------------------------------------------- interactive and smart home solutions, (iii) replacing or upgrading certain system components due to technological advancements or otherwise, and (iv) rising costs due to supply chain disruptions, inflation, other changes in prices or terms from our vendors, or rising labor costs. We have implemented certain actions across our business segments such as our virtual service support program inJuly 2021 , which provides customers the ability to live video stream with our skilled technicians to troubleshoot and resolve service issues. This reduces the cost for us to provide certain services, and it also provides customers with more options for receiving service that best fits their lifestyles. In addition, our results are impacted by the mix of transactions under a Company-owned model versus a customer-owned model due to the different accounting treatment applicable to each model. As we introduce new products and services, enhance our current offerings, continue building our partnership withGoogle LLC ("Google"), seek to satisfy consumer preferences, and refine our go-to-market approach, we expect to see a shift toward more outright sales, which will impact results in future periods. Attrition has a direct impact on our financial results, including revenue, operating income, and cash flows. A portion of our customer base can be expected to cancel its service every year as customers may choose not to renew or may terminate their contracts for a variety of reasons, including relocation, cost, loss to competition, or service issues. In addition, customerswho we are not able to effectively transition prior to the applicable network sunset date, as discussed below, will experience a loss of signal, which could impact attrition in the future. Prior to 2020, new customer additions and our disconnect rates on residential customers were typically higher during the second and third calendar quarters of each year relative to the first and fourth quarters due to several factors, such as the timing of household moves. We believe the COVID-19 Pandemic affected these seasonal trends beginning in 2020. We also believe the lower volume of customer relocations we experienced during 2020 and our use of temporary pricing and retention initiatives for existing customers helped counterbalance any increase in gross customer revenue attrition as a result of changes in consumer or business spending caused by the COVID-19 Pandemic. In addition, we believe uncertainties around the economic environment and COVID-19 Pandemic have increased consumer and business awareness of the need for security. We are currently unable to determine whether there will be any ongoing impact on our seasonality, and we may continue to experience fluctuations in certain trends, such as relocations, in the future. We have not sought or requested government assistance as a result of the COVID-19 Pandemic, but we did experience a favorable cash flow impact during 2020 and other benefits associated with certain income tax and payroll tax provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), including the deferral of remittance of certain 2020 payroll taxes. We paid the majority of the first 50% of the deferred amount during the fourth quarter of 2021, with the remainder due by the end of 2022.
The factors described herein could have a material adverse effect on our business, financial condition, results of operations, cash flows, and key performance indicators.
Other Events and Updates
•Radio Conversion Costs - During 2019, we commenced a program to replace the 3G
and Code-Division Multiple Access ("CDMA") cellular equipment used in many of
our security systems as a result of the cellular network providers notifying us
they will be retiring their 3G and CDMA networks beginning in February 2022 . As
of the start of the 3G sunset process in February 2022 , we had converted
substantially all of our remaining 3G customers. For those customers we are not
or were not able to transition prior to or since the completion of the
applicable network sunset, the loss of signal to the systems and certain
services we provide may impact our ability to bill and/or collect from these
customers in the future. Until the cellular network providers complete the
applicable sunset processes, we cannot estimate the impact of the conversion on
our attrition rate.
We do not expect the remaining radio conversion costs and related incremental revenue to be material.
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•Google - The Company and Google entered into a Master Supply, Distribution, and
Marketing Agreement (the "Google Commercial Agreement"), pursuant to which
Google has agreed to supply the Company with certain Google devices as well as
certain Google video and analytics services ("Google Devices and Services") for
sale to the Company's customers. Subject to customary termination rights related
to breach and change of control, the Google Commercial Agreement has an initial
term of seven years from the date that the Google Devices and Services are
successfully integrated into our end-user security and automation platform.
Further, subject to certain carve-outs, we have agreed to exclusively sell
Google Devices and Services to our customers.
If the integrated Google Devices and Services are not launched by June 30, 2022 ,
Google has the contractual right to require us, with certain exceptions, to
exclusively offer the Google Devices and Services without integration for all
new professional installations and for existing customers who do not have ADT
Pulse or ADT Control interactive services, until such integration has been made.
The Company has already begun providing Google video services and devices and
will continue to do so on a non-integrated basis as of June 30, 2022 and is
working closely with Google toward an integrated solution. The Company launched
the Google Nest doorbell during the first quarter of 2022, rolled out mesh Wi-Fi
during the second quarter of 2022, and expects to launch Google indoor and
outdoor cameras by the end of the third quarter of 2022.
The Google Commercial Agreement further specifies each party shall contribute
$150 million towards the joint marketing of devices and services; customer
acquisition; training of our employees on the sales, installation, customer
service, and maintenance of the product and service offerings; and technology
updates for products included in such offerings. Each party is required to
contribute such funds in three equal tranches, subject to the attainment of
certain milestones.
•Canopy Investment - In April 2022 , we closed on our previously announced
transaction with Ford Motor Company ("Ford") to form a new entity, Canopy, which
will combine ADT's professional security monitoring and Ford's AI-driven video
camera technology to help customers strengthen security of new and existing
vehicles across automotive brands. ADT and Ford expect to invest approximately
$100 million collectively during the next three years, of which ADT will
contribute 40%. As part of the initial funding at closing, our contribution
totaled approximately $11 million .
Updates Related to Existing and Potential Tax Legislation
Delayed Effective Dates for Tax Law Changes under the Tax Cuts and Jobs Act
Certain changes toU.S. federal tax law included in the Tax Cuts and Jobs Act had a delayed effective date and have taken effect for tax years beginning afterDecember 31, 2021 . These changes include a limitation on net business interest expense deductions under the Internal Revenue Code ("IRC") Section 163(j) no longer being increased by deductions for depreciation, amortization or depletion, and, under IRC Section 174, specified research and experimentation expenditures being capitalized and amortized. These items could result in increased taxable income and acceleration of net operating loss utilization, which could impact our tax expense and ultimately, our net income or loss.
Potential Federal Tax Legislation
TheWhite House released its fiscal year 2023 budget inMarch 2022 , which includes a proposal to raise the corporate tax rate to 28%. If the proposed tax rate increase is passed, the Company would need to revalue its deferred tax liabilities, which could further increase the Company's effective tax rate. The fiscal year 2023 budget also includes a provision that would reinstate current deductibility for IRC Section 174 research and experimentation expenditures that became subject to capitalization and amortization beginning this year. As discussed in our 2021 Annual Report, we had a significant amount of deferred tax assets as ofDecember 31, 2021 , against which we take valuation allowances that relate to the uncertainty of our ability to utilize these deferred tax assets in future periods. These valuation allowances were not material in 2021. We review periodically those matters that can influence our decision as to whether or not a valuation allowance is appropriate. Among those matters considered are pending and enacted legislation such as the updates described above. We will consider each quarter whether any developments to such legislation, together with the other factors we consider, require a valuation allowance. We believe that our deferred tax assets will grow meaningfully during 2022 and in subsequent years from theirDecember 31, 2021 level. There is currently significant uncertainty in the matters we consider when determining whether it is appropriate to take additional valuation allowances and while we have not reported any material changes to our valuation allowances during the first quarter of 2022, we may determine to do so in any of the remaining quarters in 2022 and in subsequent years. Any material change to our valuation allowance that we have to take would materially and adversely affect our operating results and may result in a net loss position for any given period. 31 --------------------------------------------------------------------------------
KEY PERFORMANCE INDICATORS
In evaluating our results, we utilize key performance indicators, which include
the non-GAAP measure Adjusted EBITDA, as well as certain other operating metrics
such as recurring monthly revenue ("RMR") and gross customer revenue attrition.
Computations of our key performance indicators may not be comparable to other
similarly titled measures reported by other companies. Certain operating metrics
are approximated, as there may be variations to reported results in each period
due to certain adjustments we might make in connection with the integration over
several periods of acquired companies that calculated these metrics differently,
or otherwise, including periodic reassessments and refinements in the ordinary
course of business. These refinements, for example, may include changes due to
systems conversions or historical methodology differences in legacy systems.
Adjusted EBITDA
We believe the non-GAAP measure Adjusted EBITDA is useful to investors to measure the operational strength and performance of our business. Our definition of Adjusted EBITDA, a reconciliation of Adjusted EBITDA to net income (loss) (the most comparable GAAP measure), and additional information, including a description of the limitations relating to the use of Adjusted EBITDA, are provided under "-Non-GAAP Measures."
Recurring Monthly Revenue
RMR is generated by contractual recurring fees for monitoring and other recurring services provided to our customers.
We use RMR to evaluate our overall sales, installation, and retention performance. Additionally, we believe the presentation of RMR is useful because it measures the volume of revenue under contract at a given point in time. RMR is also a useful measure for forecasting future revenue performance as the majority of our revenue comes from recurring sources.
Gross Customer Revenue Attrition
Gross customer revenue attrition is defined as RMR lost as a result of customer attrition, net of dealer charge-backs and reinstated customers, excluding contracts monitored but not owned and DIY customers. Customer sites are considered canceled when all services are terminated. Dealer charge-backs represent customer cancellations charged back to the dealers because the customer canceled service during the charge-back period, which is generally thirteen months.
Gross customer revenue attrition is calculated on a trailing twelve-month basis,
the numerator of which is the RMR lost during the period due to attrition, net
of dealer charge-backs and reinstated customers, and the denominator of which is
total annualized RMR based on an average of RMR under contract at the beginning
of each month during the period, in each case, excluding contracts monitored but
not owned and DIY customers.
We use gross customer revenue attrition to evaluate our retention and customer
satisfaction performance, as well as evaluate subscriber trends by vintage year.
Additionally, we believe the presentation of gross customer revenue attrition is
useful as it provides a means to evaluate drivers of customer attrition and the
impact of retention initiatives.
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--------------------------------------------------------------------------------RESULTS OF OPERATIONS
The following table presents our condensed consolidated results of operations and key performance indicators:
(in thousands, except as otherwise indicated) Three Months Ended March 31, Results of Operations: 2022 2021 $ Change Monitoring and related services$ 1,121,296 $ 1,062,766 $ 58,530 Installation, product, and other 423,451 241,938 181,513 Total revenue 1,544,747 1,304,704 240,043 Cost of revenue (exclusive of depreciation and amortization shown separately below) 509,768 381,166 128,602 Selling, general, and administrative expenses 482,348 449,602 32,746 Depreciation and intangible asset amortization 476,123 469,809 6,314 Merger, restructuring, integration, and other 528 20,507 (19,979) Operating income (loss) 75,980 (16,380) 92,360 Interest expense, net (6,307) (47,724) 41,417 Loss on extinguishment of debt - (156) 156 Other income (expense) 1,496 1,803 (307) Income (loss) before income taxes 71,169 (62,457) 133,626 Income tax benefit (expense) (19,524) 14,563 (34,087) Net income (loss)$ 51,645
Key Performance Indicators: (1) RMR$ 364,936 $ 349,058 $ 15,878 Gross customer revenue attrition (percent) 12.9% 13.1% N/A Adjusted EBITDA (2)$ 600,997 $ 542,131 $ 58,866 _______________________ (1)Refer to the "Key Performance Indicators" section for the definitions of these key performance indicators. (2)Adjusted EBITDA is a non-GAAP measure. Refer to the "Non-GAAP Measures" section for the definition of this term and a reconciliation to the most comparable GAAP measure. N/A - Not applicable.
Monitoring and Related Services Revenue ("M&S Revenue"):
Three Months Ended March 31,
(in thousands) 2022 2021 $ Change
CSB $ 993,028 $ 951,248 $ 41,780
Commercial 128,268 111,518 16,750
Total M&S Revenue(1) $ 1,121,296 $ 1,062,766 $ 58,530
_________________
(1) M&S Revenue is not applicable to our Solar segment.
The increase in total M&S Revenue was primarily attributable to higher recurring revenue in CSB, which was driven by (i) improvements in average pricing as new and existing customers selected higher priced interactive and other services and (ii) an increase in the number of active subscribers since the prior year primarily due to investments in subscriber growth. The increase in Commercial was driven by higher recurring revenue primarily due to an increase in average prices and higher revenue per service call. Total RMR was approximately$365 million and$349 million as ofMarch 31, 2022 and 2021, respectively. The increase in RMR was primarily due to RMR added since 2021 and reflects growth initiatives and improvements in average pricing.
Gross customer revenue attrition was 12.9% and 13.1% as of
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--------------------------------------------------------------------------------Installation, Product, and Other Revenue:
Three Months Ended March 31,
(in thousands) 2022 2021 $ Change
CSB $ 69,561 $ 87,357 $ (17,796)
Commercial 161,909 154,581 7,328
Solar 191,981
- 191,981
Total installation, product, and other revenue
Total installation, product, and other revenue increased primarily due to revenue from Solar installations, which includes a reduction of approximately$30 million from the amortization of purchase accounting adjustments, as a result of the ADT Solar Acquisition inDecember 2021 . The decrease in CSB was driven by a lower volume of outright sales transactions partially offset by additional amortization of deferred subscriber acquisition revenue as a result of our transition to a predominately Company-owned model, which was completed duringMarch 2021 . Cost of Revenue: Three Months Ended March 31, (in thousands) 2022 2021 $ Change CSB$ 171,180 $ 193,371 $ (22,191) Commercial 203,184 187,795 15,389 Solar 135,404 - 135,404 Total cost of revenue$ 509,768 $ 381,166 $ 128,602 Total cost of revenue increased primarily due to cost of revenue from Solar installations as a result of the ADT Solar Acquisition inDecember 2021 . The decrease in CSB was driven by a decrease in installation costs due to a lower volume of outright sales transactions as a result of our transition to a predominately Company-owned model, which was completed duringMarch 2021 . In addition, CSB field service and call center costs remained relatively flat despite rising costs and providing service to a larger number of customers, including a higher mix of interactive services. CSB field service and call center costs also reflected cost savings primarily due to the virtual service program implemented in 2021. The increase in Commercial cost of revenue was driven by an increase in field service and call center costs primarily due to higher prices on parts, labor, and fuel.
Selling, General, and Administrative Expenses:
The increase in selling, general, and administrative expenses was primarily driven by higher selling, general, and administrative expenses of approximately$76 million as a result of the ADT Solar Acquisition inDecember 2021 . This increase was partially offset by a decrease in radio conversion costs of$52 million primarily due to a decrease in the number of conversions as we approach the end of the program, as well as a decrease in advertising costs primarily due to our efforts to optimize our advertising model.
Depreciation and Intangible Asset Amortization:
Depreciation and intangible asset amortization remained relatively flat and primarily reflected increases in (i) amortization of customer contracts acquired under the ADT Authorized Dealer Program as a result of customer contract additions through our Authorized Dealer Network and from other third parties and (ii) depreciation of subscriber system assets as a result of an increase in Company-owned transactions, partially offset by a decrease in the amortization of customer relationships acquired as part of the acquisition ofThe ADT Security Corporation in 2016 (the "ADT Acquisition").
The majority of the remaining net book value of customer relationships acquired in the ADT Acquisition will be amortized during 2022 with the remainder amortized during 2023.
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--------------------------------------------------------------------------------Merger, Restructuring, Integration, and Other:
During the three months ended
During the three months endedMarch 31, 2021 , merger, restructuring, integration, and other primarily included an$18 million impairment charge in CSB due to lower than expected benefits from our developed-technology intangible asset acquired duringNovember 2020 .
Interest Expense, net:
The decrease in interest expense, net, was primarily driven by unrealized gains on interest rate swap contracts not designated as cash flow hedges of$145 million during the three months endedMarch 31, 2022 as compared to$107 million during the prior year period, primarily due to an increase in the forwardLondon Interbank Offered Rate ("LIBOR").
Income Tax Benefit (Expense):
The effective tax rate can vary from period to period due to permanent tax adjustments, discrete items such as the settlement of income tax audits and changes in tax laws, as well as recurring factors such as changes in the overall state tax rate.
Income tax expense for the three months endedMarch 31, 2022 was$20 million , resulting in an effective tax rate for the period of 27.4%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 6.7%, and a 2.6% favorable impact of share-based compensation, partially offset by a 2.7% unfavorable impact of permanent items. Income tax benefit for the three months endedMarch 31, 2021 was$15 million , resulting in an effective tax rate for the period of 23.3%. The effective tax rate primarily represents the federal statutory tax rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.8%, and a 2.8% favorable impact of share-based compensation, partially offset by a 1.6% unfavorable impact of state legislative changes.
NON-GAAP MEASURES
To provide investors with additional information in connection with our results as determined in accordance with GAAP, we disclose Adjusted EBITDA as a non-GAAP measure. This measure is not a financial measure calculated in accordance with GAAP, and it should not be considered as a substitute for net income, operating income, or any other measure calculated in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies.
Adjusted EBITDA
We believe the presentation of Adjusted EBITDA is useful as it provides
investors additional information about our operating profitability adjusted for
certain non-cash items, non-routine items we do not expect to continue at the
same level in the future, as well as other items not core to our operations.
Further, we believe Adjusted EBITDA provides a meaningful measure of operating
profitability because we use it for evaluating our business performance, making
budgeting decisions, and comparing our performance against other peer companies
using similar measures.
We define Adjusted EBITDA as net income or loss adjusted for (i) interest; (ii)
taxes; (iii) depreciation and amortization, including depreciation of subscriber
system assets and other fixed assets and amortization of dealer and other
intangible assets; (iv) amortization of deferred costs and deferred revenue
associated with subscriber acquisitions; (v) share-based compensation expense;
(vi) merger, restructuring, integration, and other; (vii) losses on
extinguishment of debt; (viii) radio conversion costs, net; and (ix) other
income/gain or expense/loss items such as impairment charges, financing and
consent fees, or acquisition-related adjustments.
There are material limitations to using Adjusted EBITDA. Adjusted EBITDA does
not take into account certain significant items, including depreciation and
amortization, interest, taxes, and other adjustments which directly affect our
net income (loss). These limitations are best addressed by considering the
economic effects of the excluded items independently and by considering Adjusted
EBITDA in conjunction with net income or loss as calculated in accordance with
GAAP.
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--------------------------------------------------------------------------------The table below reconciles Adjusted EBITDA to net income (loss):
Three Months Ended March
31,
(in thousands) 2022 2021 $ Change
Net income (loss) $ 51,645 $ (47,894) $ 99,539
Interest expense, net 6,307 47,724 (41,417)
Income tax expense (benefit) 19,524 (14,563) 34,087
Depreciation and intangible asset amortization 476,123 469,809 6,314
Amortization of deferred subscriber acquisition costs 36,939 28,642 8,297
Amortization of deferred subscriber acquisition revenue (53,423) (37,159) (16,264)
Share-based compensation expense 16,020 16,019 1
Merger, restructuring, integration, and other 528 20,507 (19,979)
Loss on extinguishment of debt - 156 (156)
Radio conversion costs, net 9,940 58,729 (48,789)
Acquisition related adjustments(1) 36,295 (248) 36,543
Other 1,099 409 690
Adjusted EBITDA ________________
(1) During 2022, primarily represents the amortization of the customer backlog intangible asset, which was fully amortized as ofMarch 2022 , related to the ADT Solar Acquisition.
Adjusted EBITDA in total and by segment was as follows:
Three Months Ended March 31,
(in thousands) 2022 2021 $ Change
CSB $ 560,545 $ 519,478 $ 41,067
Commercial 23,630 22,653 977
Solar 16,822 - 16,822
Adjusted EBITDA $ 600,997 $ 542,131 $ 58,866 The explanations below exclude amounts outside of our definition of Adjusted EBITDA, as applicable.
The increase in total Adjusted EBITDA was primarily attributable to CSB, which was driven by an increase in M&S Revenue and a decrease in advertising costs, partially offset by (i) an increase in general and administrative expenses and (ii) a decrease in installation revenue, net of the associated installation costs and commissions, as discussed above. Commercial Adjusted EBITDA remained relatively flat and primarily included an increase in M&S Revenue, offset by (i) an increase in field service and call center costs and (ii) an increase in selling, general, and administrative expenses.
Solar Adjusted EBITDA primarily reflects installation revenue, net of the associated installation costs and commissions, partially offset by selling, general, and administrative expenses.
Refer to the discussions above under "-Results of Operations" for further details.
LIQUIDITY AND CAPITAL RESOURCES
As ofMarch 31, 2022 , liquidity and capital resources primarily consisted of the following: (in thousands) Cash and cash equivalents$ 17,404 Availability under First Lien Revolving Credit Facility$ 405,000 Uncommitted available borrowing capacity under Receivables Facility$ 175,024 Carrying amount of total debt outstanding
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--------------------------------------------------------------------------------Liquidity
We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our first lien revolving credit facility (the "First Lien Revolving Credit Facility") and our uncommitted receivables securitization financing agreement (the "Receivables Facility"), and the issuance of equity and/or debt securities as appropriate given market conditions. Our future cash needs are expected to include cash for operating activities, working capital, capital expenditures, strategic investments, periodic principal and interest payments on our debt, and potential dividend payments to our stockholders. We are a highly leveraged company with significant debt service requirements. We may periodically seek to repay, redeem, repurchase, or refinance our indebtedness, or seek to retire or purchase our outstanding securities through cash purchases in the open market, privately negotiated transactions, a 10b5-1 repurchase plan, or otherwise, and any such transactions may involve material amounts. We believe our cash position, borrowing capacity available under our First Lien Revolving Credit Facility and Receivables Facility, and cash provided by operating activities are, and will continue to be, adequate to meet our operational and business needs in the next twelve months as well as our long-term liquidity needs. ByJune 2023 , LIBOR will be replaced with the Secured Overnight Financing Rate ("SOFR") (the "SOFR Transition Date"), at which point the applicable benchmark for all existing and new issuances with a variable rate debt component will be based on SOFR. Our first lien term loan facility (the "First Lien Term Loan due 2026") and First Lien Revolving Credit Facility are and will continue to be based on LIBOR until the SOFR Transition Date. However, any modification, such as a repricing entered into afterDecember 31, 2021 , will require transition to SOFR. Additionally, any new issuances with a variable rate debt component entered into afterDecember 31, 2021 will utilize SOFR per the terms of the credit agreement. InApril 2022 , the Receivables Facility was amended to provide for an interim early transition to SOFR for the period beginningApril 2022 . The impact of the transition to SOFR is not expected to be material.
Material Cash Requirements
There have been no material changes to our short-term or long-term material cash requirements, or our commitments and contractual obligations from those disclosed in our 2021 Annual Report, except as discussed below:
Customer Account Purchases
In 2021, we entered into agreements for potential future customer account
purchases from two distinct third parties, assuming certain conditions are met,
over the course of those agreements. As of
Off-Balance Sheet Arrangements
During the three months ended
DuringMarch 2022 , we entered into an unsecured Credit Agreement withGoldman Sachs Mortgage Company , as administrative agent and issuing lender (the "Issuing Lender"), together with other lenders party thereto, pursuant to which we may request the Issuing Lender to issue one or more letters of credit for its own account or the account of its subsidiaries, in an aggregate face amount not to exceed$75 million at any one time.
Long-Term Debt
There have been no material changes to our long-term debt from those disclosed in our 2021 Annual Report, except as discussed below:
First Lien Credit Agreement
As of
Receivables Facility
As of
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--------------------------------------------------------------------------------Debt Covenants
As ofMarch 31, 2022 , we were in compliance with all financial covenant and other maintenance tests for all our debt obligations. We do not believe there is a material risk of future noncompliance with our financial covenant and other maintenance tests as a result of the COVID-19 Pandemic, or otherwise.
Dividends
During the three months endedMarch 31, 2022 , we declared aggregate dividends of$30 million ($0.035 per share) on our Common Stock and$2 million ($0.035 per share) on our Class B Common Stock.
In comparison, during the three months ended
OnMay 5, 2022 , we announced a dividend of$0.035 per share to holders of Common Stock and Class B Common Stock of record onJune 16, 2022 , which will be distributed onJuly 5, 2022 . Cash Flow Analysis Three Months Ended March 31, (in thousands) 2022 2021 $ Change Net cash provided by (used in) operating activities$ 308,072 $ 359,334 $ (51,262) Net cash provided by (used in) investing activities$ (405,123) $ (399,112) $ (6,011) Net cash provided by (used in) financing activities$ 91,845 $ (40,685) $ 132,530
Cash Flows from Operating Activities
The decrease in cash provided by operating activities was primarily due to:
•an increase in payments related to our annual incentive compensation plan of
•timing of payments to and receipts from vendors primarily related to accounts payable and inventory.
These activities were partially offset by:
•a decrease in payments related to radio conversion costs, net of the related
incremental revenue, of
•a decrease in cash interest of
The remainder of the activity related to changes in assets and liabilities due to the volume and timing of other operating cash receipts and payments with respect to when the transactions are reflected in earnings.
Refer to the discussions above under "-Results of Operations" for further details.
Cash Flows from Investing Activities
Cash flows used in investing activities remained relatively flat and included an increase in subscriber system assets expenditures as a result of an increase in Company-owned transactions and our growth initiatives, partially offset by a decrease in dealer generated customer accounts and bulk account purchases primarily as a result of fewer accounts purchased from third parties in 2022 as compared to 2021.
Cash Flows from Financing Activities
During the three months endedMarch 31, 2022 , net cash provided by financing activities primarily consisted of (i)$145 million of net proceeds under the First Lien Revolving Credit Facility and (ii)$26 million of net proceeds under the Receivables Facility, partially offset by$32 million of dividend payments on common stock and$13 million of payments related to interest rate swap contracts that included an other-than-insignificant financing element at inception. During the three months endedMarch 31, 2021 , net cash used in financing activities primarily consisted of (i)$29 million of dividend payments on common stock and (ii)$14 million of payments on interest rate swap contracts that included an other-than-insignificant financing element at inception, partially offset by$22 million of net proceeds under the Receivables Facility. 38 --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying condensed consolidated financial statements are prepared in accordance with GAAP, which requires us to select accounting policies and make estimates that affect amounts reported in the condensed consolidated financial statements and the accompanying notes. Management's estimates are based on the relevant information available at the end of each period. Actual results could differ materially from these estimates under different assumptions or market conditions.
We disclosed our accounting policies and critical accounting estimates in our 2021 Annual Report, which are based on, among other things, estimates and judgments made by management that include inherent risks and uncertainties.
Refer to Note 1 "Description of Business and Summary of Significant Accounting Policies" to the condensed consolidated financial statements for further information about recent accounting pronouncements and adoptions.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain information that may constitute "forward-looking statements" within the meaning of theU.S. Private Securities Litigation Reform Act of 1995. While we have specifically identified certain information as being forward-looking in the context of its presentation, we caution you that all statements contained in this report that are not clearly historical in nature, including statements regarding anticipated financial performance; management's plans and objectives for future operations; business prospects; outcomes of regulatory proceedings; market conditions; our ability to successfully respond to the challenges posed by the COVID-19 Pandemic; our strategic partnership and ongoing relationship withFord ; our recent acquisition of ADT Solar; and other matters are forward-looking. Forward-looking statements are contained principally in the sections of this report entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." Without limiting the generality of the preceding sentences, any time we use the words "expects," "intends," "will," "anticipates," "believes," "confident," "continue," "propose," "seeks," "could," "may," "should," "estimates," "forecasts," "might," "goals," "objectives," "targets," "planned," "projects," and, in each case, their negative or other various or comparable terminology, and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. For ADT, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include, without limitation: •our ability to keep pace with rapid technological changes, including the development of our next-generation platform, and industry changes; •our ability to effectively implement our strategic partnership with or utilize any of the amounts invested in us by
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Forward-looking statements and information involve risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements, including without limitation, the risks and uncertainties disclosed or referenced under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A in our 2021 Annual Report. Therefore, caution should be taken not to place undue reliance on any such forward-looking statements. Much of the information in this report that looks toward future performance of the Company is based on various factors and important assumptions about future events that may or may not actually occur. As a result, our operations and financial results in the future could differ materially and substantially from those we have discussed in the forward-looking statements included in this Quarterly Report on Form 10-Q. We assume no obligation (and specifically disclaim any such obligation) to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
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