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 2022 Annual Report, which was filed with theSEC onFebruary 28, 2023 . 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, which could differ materially from actual results. 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." Table of Contents
• Business and Basis of Presentation • Factors Affecting Operating Results • Key Performance Indicators • Results of Operations • Non-GAAP Measures • Liquidity and Capital Resources • Critical Accounting Estimates • Cautionary Statements Regarding Forward-Looking Statements
BUSINESS AND BASIS OF PRESENTATION
Our Business
ADT Inc. , together with its wholly-owned subsidiaries (collectively, the "Company," "we," "our," "us," and "ADT"), provides security, interactive, and smart home solutions in theU.S. to residential, small business, and commercial customers, as well as residential solar and energy storage solutions. As ofMarch 31, 2023 , we served approximately 6.7 million security monitoring service subscribers. Our mission is to empower people to protect and connect what matters most with safe, smart, and sustainable solutions, delivered through innovative offerings, unrivaled safety, and a premium experience because we believe that everyone deserves to feel safe.
Basis of Presentation
We report financial and operating information in the following three segments: CSB, Commercial, and Solar. All financial information presented in this section has been prepared inU.S. dollars in accordance with GAAP, excluding our non-GAAP measures, and includes the accounts ofADT Inc. and its wholly-owned subsidiaries. All intercompany transactions have been eliminated. We considered recent impacts from macroeconomic conditions such as inflationary pressures, rising interest rates, the uncertainty and volatility in the financial markets, and supply chain disruptions, as well as any on-going impacts of the COVID-19 Pandemic, in the assessment of our financial position, results of operations, and cash flows, as well as certain accounting estimates, as of and for the periods presented. As ofMarch 31, 2023 , the impact to the Company, as well as our response plan, has not materially changed from that described in the 2022 Annual Report. 26 --------------------------------------------------------------------------------
Business Updates
During the first quarter of 2023, we introduced our new ADT+ app for our
self-setup line of do-it-yourself ("DIY") smart home security products,
including
During the three months endedMarch 31, 2023 , approximately$12.5 million of the first tranche of the
Refer to Note 13 "Commitments and Contingencies," for further information on the
In connection with the State Farm Development Agreement,State Farm committed up to$300 million to anOpportunity Fund , of which we received$100 million upon Closing.
During the three months ended
Refer to Note 15 "Related Party Transactions" for further information on the
FACTORS AFFECTING OPERATING RESULTS
The factors described herein could have a material adverse effect on our business, financial condition, results of operations, cash flows, and key performance indicators.
Generally, a significant upfront investment is required to acquire new subscribers that in turn provide ongoing and predictable recurring revenue generated from our monitoring services and other subscriber-based offerings. Although the economics of an installation may vary depending on the customer type, acquisition channel, and product offering, we generally achieve revenue break-even in less than two and a half years. For our subscriber-based offerings, our results are impacted by the mix of transactions under a Company-owned equipment model versus a customer-owned equipment model (referred to as outright sales), as there are different accounting treatments applicable to each model, as well as the mix, price, and type of offerings sold. As we continue to build our partnership withVirtual Assistance Program "), which we launched for our residential customers inJuly 2021 , provides our customers the ability to troubleshoot and resolve certain service issues through a live video stream with our skilled technicians. This provides customers with more options for receiving certain services that best fit their lifestyles while reducing the cost for us to provide these services and lowering our carbon footprint by eliminating thousands of vehicle trips each day. We may experience an increase in costs associated with factors such as (i) offering a wider variety of products and services; (ii) providing a greater mix of interactive and smart home solutions; (iii) replacing or upgrading certain system components or technology due to technological advancements, cybersecurity upgrades, or otherwise; (iv) supply chain disruptions; (v) inflationary pressures on costs such as materials, labor, and fuel; and (vi) other changes in prices, interest rates, or terms from our suppliers, vendors, or third-party lenders. Changes in interest rates or terms from third-party lenders that provide loan products to our Solar customers are impacted by factors such as theFederal Reserve increasing the risk-free interest rate or other developments in the financial markets. Refer to Note 6 "Goodwill and Other Intangible Assets" and Critical Accounting Estimates below for further discussion. 27 -------------------------------------------------------------------------------- New customer additions and customer attrition have a direct impact on our financial results, including revenue, operating income, and cash flows. A portion of our recurring customer base can be expected to cancel its service each year as customers may choose to terminate or not to renew their contracts for a variety of reasons, including relocation, cost, loss to competition, or service issues. Relocations are sensitive to changes in the residential housing market, and fewer relocations generally lead to improvements in gross customer revenue attrition, but fewer new customer additions. Additionally, non-payment disconnects generally increase in a weaker macroeconomic environment. During 2022 and through the first quarter of 2023, we experienced fewer relocation disconnects and higher non-pay disconnects largely related to housing market conditions and the weaker macroeconomic environment. We may continue to experience fluctuations in these or other trends in the future as changes in the general macroeconomic environment or housing market develop. As part of our response to changes or pressures in the macroeconomic environment, we may evaluate cost saving opportunities such as reducing headcount or our physical facilities footprint when appropriate. While we have experienced some increase in costs as a result of inflation, we have, for the most part, been able to offset the rising costs through price increases to our customers, as well as cost saving opportunities.
KEY PERFORMANCE INDICATORS
We evaluate our results using certain key performance indicators, including
operating metrics such as recurring monthly revenue ("RMR") and gross customer
revenue attrition, as well as the non-GAAP measure Adjusted EBITDA. 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 due to certain adjustments we might make in connection with the
integration over several periods of acquired companies that calculated these
metrics differently or periodic reassessments and refinements in the ordinary
course of business, including changes due to system conversions or historical
methodology differences in legacy systems.
RMR
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 to investors because it measures the volume of revenue under contract at a given point in time, which is useful 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 self-setup/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 self-setup/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 to investors as it provides a means to evaluate drivers of customer attrition and the impact of retention initiatives.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measure. 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."
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RESULTS OF OPERATIONS
Three Months Ended March
31,
(in thousands, except as otherwise indicated) 2023 2022 $ Change
Revenue:
Monitoring and related services
294,201 231,470 62,731
Solar installation, product, and other 144,835 191,981 (47,146)
Total revenue 1,612,354 1,544,747 67,607
Cost of revenue (exclusive of depreciation and amortization shown separately below): Monitoring and related services
246,403 235,614 10,789
Security installation, product, and other 169,254 138,750 30,504
Solar installation, product, and other 98,344 135,404 (37,060)
Total cost of revenue 514,001 509,768 4,233
Selling, general, and administrative expenses 462,229 482,348 (20,119)
Depreciation and intangible asset amortization 383,055 476,123 (93,068)
Merger, restructuring, integration, and other 17,647 528 17,119
Goodwill impairment 192,700 - 192,700
Operating income (loss) 42,722 75,980 (33,258)
Interest expense, net (171,626) (6,307) (165,319)
Other income (expense) (1,190) 1,496 (2,686)Income (loss) before income taxes and equity in net earnings (losses) of equity method investee
(130,094) 71,169 (201,263)
Income tax benefit (expense) 43,073 (19,524) 62,597
Income (loss) before equity in net earnings (losses) of equity method investee
(87,021) 51,645 (138,666)
Equity in net earnings (losses) of equity method investee (2,677) - (2,677)
Net income (loss) Key Performance Indicators:(1) RMR
12.5% 12.9% N/A*
Adjusted EBITDA(2) $ 624,916 $ 600,997 $ 23,919
_______________________
(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.
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Revenue:
Three Months Ended March
31,
(in thousands) 2023 2022 $ Change
CSB:
Monitoring and related services
103,842 69,561 34,281
Total CSB 1,132,476 1,062,589 69,887
Commercial:
Monitoring and related services 144,684 128,268 16,416
Security installation, product, and other 190,359 161,909 28,450
Total Commercial 335,043 290,177 44,866
Solar:
Solar installation, product, and other 144,835 191,981 (47,146)
Total Solar 144,835 191,981 (47,146)
Total revenue $ 1,612,354 $ 1,544,747 $ 67,607
CSB:
During the three months ended
•Monitoring and related services revenue ("M&S Revenue"): higher recurring
revenue of $35 million , reflecting approximately $31 million related to the
estimated impact from an increase in average prices and approximately $8 million
related to the estimated impact from an increase in subscribers, partially
offset by a decrease of $4 million in other revenue primarily due to lower radio
conversion revenue.
•Security installation, product, and other: (i) an increase in the amortization
of deferred subscriber acquisition revenue of $18 million as a result of a
higher population of existing customers under a Company-owned model, as well as
(ii) an increase in installation revenue of $16 million primarily driven by a
higher volume of outright sales transactions.
Commercial:
During the three months ended
•M&S Revenue: (i) higher revenue from time and materials billings of
•Security installation, product, and other: higher installation revenue of
Solar:
During the three months ended
•a decrease of approximately
•the amortization of purchase accounting adjustments of$30 million related to a customer backlog intangible asset, which was recorded as a reduction to revenue during the first quarter of 2022. 30 --------------------------------------------------------------------------------
RMR and Gross Customer Revenue Attrition:
As ofMarch 31, 2023 , our ending RMR balance was$378 million , up$13 million or 4%, compared to the prior period, primarily driven by an increase in average prices on new and existing subscribers. Gross customer revenue attrition was 12.5% as ofMarch 31, 2023 compared to 12.9% as ofMarch 31, 2022 . The improvement in gross customer revenue attrition was driven by a decrease in relocations, partially offset by higher non-payment disconnects. Cost of Revenue: Three Months Ended March 31, (in thousands) 2023 2022 $ Change CSB: Monitoring and related services
28,678 16,661 12,017
Total CSB 190,279 171,180 19,099
Commercial:
Monitoring and related services 84,802 81,095 3,707
Security installation, product, and other 140,576 122,089 18,487
Total Commercial 225,378 203,184 22,194
Solar:
Solar installation, product, and other 98,344 135,404 (37,060)
Total Solar 98,344 135,404 (37,060)
Total cost of revenue $ 514,001 $ 509,768 $ 4,233
CSB:
During the three months ended March 31, 2023 , cost of revenue, as compared to
the prior period, included an increase in installation costs due to a higher
volume of outright sales transactions, as well as an increase in monitoring and
related services costs due to providing services to more interactive customers,
partially offset by cost efficiencies as a result of our Virtual Assistance
Program .
Commercial:
During the three months endedMarch 31, 2023 , the increase in cost of revenue, as compared to the prior period, was primarily attributable to an increase in installations and services performed in connection with strong sales performance as discussed above. Solar:
During the three months ended
31
--------------------------------------------------------------------------------Selling, General, and Administrative Expenses:
During the three months ended
•a decrease of
•a decrease of
•a decrease of
•an increase of
These changes were also partially offset by an increase in CSB and Commercial general and administrative expenses, including the allowance for credit losses.
Depreciation and Intangible Asset Amortization:
During the three months endedMarch 31, 2023 , the decrease in depreciation and intangible asset amortization, as compared to the prior period, was primarily driven by a decrease in the amortization of customer relationship intangible assets of$115 million primarily related to certain assets acquired as part of the ADT Acquisition, partially offset by increases in the amortization of subscriber system assets and contracts and related customer relationship intangible assets.
During the first quarter of 2023, the remaining customer relationship intangible assets acquired as part of the ADT Acquisition became fully amortized.
Merger, restructuring, integration, and other:
During the three months ended
Goodwill Impairment:
For the three months endedMarch 31, 2023 , we recorded a goodwill impairment charge of$193 million , which was the result of an interim impairment analysis associated with our Solar reporting unit. Refer to Note 6 "Goodwill and Other Intangible Assets" and the section "-Critical Accounting Estimates" below for further discussion. Interest Expense, net: The increase in interest expense, net was driven by unrealized losses on our interest rate swaps not designated as cash flow hedges of$33 million during the three months endedMarch 31, 2023 compared to unrealized gains of$145 million during the three months endedMarch 31, 2022 . The increase also reflects higher interest expense of$27 million related to our First Lien Term Loan due 2026 offset by a decrease of$33 million related to settlements on our interest rate swaps.
Income Tax Benefit (Expense):
Our income tax benefit for the three months endedMarch 31, 2023 was$43 million , resulting in an effective tax rate for the period of 33.1%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 8.1%, and unfavorable impacts related to non-deductible executive compensation, Solar goodwill impairment, and other items, partially offset by favorable impacts from federal tax credits and other items. Our 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 tax rate of 21.0%, a state statutory tax rate, net of federal benefits, of 6.7%, and a favorable impact of share-based compensation, offset by an unfavorable impact of permanent items. 32 --------------------------------------------------------------------------------
Deferred Tax Assets
We have a significant amount of deferred tax assets, against which we take
valuation allowances that relate to the uncertainty of our ability to utilize
these deferred tax assets in future periods. 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. 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 for disallowed interest under Internal
Revenue Code ("IRC") Section 163(j) will continue to grow from their current
level. There is currently significant uncertainty in the matters we consider
when determining whether it is appropriate to take additional valuation
allowances. While we have not reported any material changes to our valuation
allowances since our 2022 Annual Report, we may determine to do so in subsequent
periods. Any material change to our valuation allowance would materially and
adversely affect our operating results and may result in a net loss position for
any given period.
Inflation Reduction Act
Under the Inflation Reduction Act ("IRA"), the Investment Tax Credit ("ITC") was
extended until 2032 to allow a qualifying homeowner to deduct 30% of the cost of
installing residential solar systems from their U.S. federal income taxes. Under
the current terms, the ITC will remain at 30% through the end of 2032 and be
further reduced in increments down to 0.0% after the end of 2034, unless
extended. We believe this incentive could be favorable for our Solar business.
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 Adjusted EBITDA is useful to investors to measure the operational
strength and performance of our business. 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 items; (vii) losses on
extinguishment of debt; (viii) radio conversion costs, net; (ix) adjustments
related to acquisitions, such as contingent consideration and purchase
accounting adjustments, or dispositions; (x) impairment charges; and (xi) other
income/gain or expense/loss items such as changes in fair value of certain
financial instruments or financing and consent fees.
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) 2023 2022 $ Change
Net income (loss) $ (89,698) $ 51,645 $ (141,343)
Interest expense, net 171,626 6,307 165,319
Income tax expense (benefit) (43,073) 19,524 (62,597)
Depreciation and intangible asset amortization 383,055 476,123 (93,068)
Amortization of deferred subscriber acquisition costs 46,684 36,939 9,745
Amortization of deferred subscriber acquisition revenue (72,022) (53,423) (18,599)
Share-based compensation expense 15,982 16,020 (38)
Merger, restructuring, integration, and other 17,647 528 17,119
Goodwill impairment(1) 192,700 - 192,700
Acquisition-related adjustments(2) 1,630 36,295 (34,665)
Other, net(3) 385 11,039 (10,654)
Adjusted EBITDA $ 624,916 $ 600,997 $ 23,919
________________
(1) Represents an impairment charge associated with our Solar reporting unit.
Refer to Note 6 "Goodwill and Other Intangible Assets."
(2) During 2022, primarily represents the amortization of the customer backlog
intangible asset related to the ADT Solar Acquisition, which was fully amortized
as of March 2022 .
(3) During 2022, primarily includes net radio conversion costs.
Adjusted EBITDA in total and by segment are set forth below. As noted above,
Adjusted EBITDA is our segment profit measure pursuant to GAAP and is therefore
not a non-GAAP financial measure with respect to our segments.
Three Months Ended March 31,
(in thousands) 2023 2022 $ Change
CSB $ 594,673 $ 560,545 $ 34,128
Commercial 40,788 23,630 17,158
Solar (10,545) 16,822 (27,367)
Adjusted EBITDA $ 624,916 $ 600,997 $ 23,919
The drivers listed below exclude amounts that are outside of our definition of
Adjusted EBITDA. Refer to the discussions above under "-Results of Operations"
for further details.
CSB:
During the three months ended March 31, 2023 , the increase, as compared to the
prior period, was primarily due to higher M&S Revenue, net of the associated
costs, of $34 million .
Commercial:
During the three months ended March 31, 2023 , the increase, as compared to the
prior period, was primarily due to higher M&S Revenue, net of associated costs,
of $13 million and higher installation revenue, net of the associated costs, of
$10 million , partially offset by higher SG&A.
Solar:
During the three months ended
34
--------------------------------------------------------------------------------LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital resources primarily consisted of the following:
(in thousands) March 31, 2023 Cash and cash equivalents$ 186,316 Restricted cash and restricted cash equivalents$ 117,236 Availability under First Lien Revolving Credit Facility$ 575,000 Availability under Term Loan A Facility$ 50,000 Uncommitted available borrowing capacity under Receivables Facility$ 125,892 Carrying amount of total debt outstanding$ 9,840,134 Liquidity We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our First Lien Revolving Credit Facility and 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 including working capital, principal and interest payments on our debt, capital expenditures, potential dividend payments to our stockholders, and from time to time, strategic investments or other initiatives that we may undertake. We are a highly leveraged company with significant debt service requirements and have both fixed-rate and variable-rate debt. 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. Cash outflows for interest payments are not consistent between quarters, with larger outflows occurring in the first and third quarters, and may vary as a result of our variable rate debt. Certain of our variable rate debt instruments are currently based on LIBOR. The SOFR will replace the forward LIBOR as the applicable benchmark rate for all existing and future issuances of our debt instruments with a variable rate component byJune 2023 . Existing instruments under the FirstLien Credit Agreement will continue to be based on LIBOR until the SOFR Transition Date. However, any modification, such as a repricing, or any new debt issuances with a variable rate component, will utilize SOFR per the terms of the First Lien Credit Agreement. As ofMarch 31, 2023 , we do not anticipate any material impacts from the SOFR Transition. We are closely monitoring the impact of recent developments in the financial markets and banking industry, inflationary pressures, and changes in interest rates on our cash position. However, we believe our cash position, available borrowing capacity under our credit agreements, 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. Material Cash Requirements
There have been no significant changes to our material cash requirements, commitments and contingencies, or off-balance sheet arrangements from those disclosed in our 2022 Annual Report.
Repurchase of Solar Loans
As ofMarch 31, 2023 , the liability related to certain loans provided to customers within our Solar business that we may be required to repurchase from third party lenders was approximately$71 million . This liability is partially offset by a net receivable related to the amount we ultimately expect to recover from any loans required to be repurchased, either through ongoing loan payments from the customer or proceeds from subsequent resale of the loans.
Long-Term Debt
Significant changes and activity related to our long-term debt since our 2022
Annual Report are discussed below. Refer to Note 7 "Debt" for further discussion
on our debt agreements.
35
--------------------------------------------------------------------------------Term Loan A Facility
InMarch 2023 , we issued an aggregate principal amount of$600 million of term loans under the Term Loan A Facility. Additionally, we amended the Term Loan A Credit Agreement, pursuant to which the lenders have agreed, at our option, to provide an additional aggregate principal amount of$50 million of term loans on or before the scheduled maturity date of the ADT Notes due 2023. We expect to borrow the Incremental Term Loan A on or around the stated maturity date of the ADT Notes due 2023 and use the proceeds to complete the redemption of at least$50 million of the ADT Notes due 2023 at maturity.
Receivables Facility
InMarch 2023 , we amended the agreement governing the Receivables Facility, pursuant to which, among other things, the borrowing capacity was increased from$400 million to$500 million and the uncommitted revolving period was extended fromMay 2023 toMarch 2024 .
During the three months ended
ADT Notes due 2023 Partial Redemption
InMarch 2023 , we used the proceeds from the Term Loan A Facility to redeem approximately$600 million of the ADT Notes due 2023 for a total redemption price of approximately$600 million , excluding accrued and unpaid interest. We intend to redeem inJune 2023 the remaining outstanding balance of approximately$100 million of the ADT Notes due 2023 prior to maturity using proceeds from the Incremental Term Loan A and cash on hand.
ADT Notes due 2024 Partial Redemption
OnMay 2, 2023 , we redeemed$150 million principal amount of the outstanding ADT Notes due 2024 for a redemption price of$150 million , excluding accrued and unpaid interest, using cash on hand.
Debt Covenants
As ofMarch 31, 2023 , 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. Dividends During the three months endedMarch 31, 2023 and 2022, we declared aggregate dividends of$30 million ($0.035 per share) and$30 million ($0.035 per share) on our Common Stock, respectively, and$2 million ($0.035 per share) on our Class B Common Stock during both periods. OnMay 2, 2023 , we announced a dividend of$0.035 per share to holders of Common Stock and Class B Common Stock of record onJune 15, 2023 , which will be distributed onJuly 6, 2023 . Cash Flow Analysis Three Months Ended March 31, (in thousands) 2023 2022 $ Change Net cash provided by (used in): Operating activities$ 306,640 $ 308,072 $ (1,432) Investing activities$ (336,040) $ (405,123) $ 69,083 Financing activities$ (40,628) $ 91,845 $ (132,473) 36
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Cash Flows from Operating Activities
Cash provided by operating activities remained relatively flat, as compared to the prior period, and primarily included:
•an increase in cash interest of
•an increase in payroll tax payments of
•a decrease in payments related to radio conversion costs, net of the related
incremental revenue, 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
The decrease in cash used in investing activities for the three months ended
•a decrease in cash paid for dealer generated customer account and bulk account
purchases of
•a decrease in subscriber system assets expenditures of
•an increase in purchases of property and equipment of
Cash Flows from Financing Activities
The decrease in cash flows from financing activities for the three months ended
•a decrease in net proceeds of long-term borrowings of approximately
•an increase in other financing payments of
•an increase related to proceeds from interest rate swap contracts that included an other-than-insignificant financing element at inception of$16 million during 2023 compared to payments of$13 million during 2022.
CRITICAL ACCOUNTING ESTIMATES
We disclosed our critical accounting estimates in our 2022 Annual Report, which include estimates prepared in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations. Critical accounting estimates are based on, among other things, estimates, assumptions, and judgments made by management that include inherent risks and uncertainties. Our estimates are based on relevant information available at the end of each period. Actual results could differ materially from these estimates under different assumptions or market conditions.
There were no material changes in our critical accounting estimates since our 2022 Annual Report, except as discussed below:
Goodwill Impairment
We perform our annual goodwill impairment test onOctober 1 of each year or more often if events occur or circumstances change which indicate it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. Under a quantitative approach, we estimate the fair value of a reporting unit and compare it to the reporting unit's carrying amount. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. 37 -------------------------------------------------------------------------------- During the first quarter of 2023, due to the at-risk nature of the goodwill attributed to our Solar reporting unit following a goodwill impairment charge during the third quarter of 2022, and as a result of current macroeconomic conditions, including the impact of rising interest rates and financial market conditions on the Company's third party lenders and customer demand, as well as ADT Solar's underperformance of operating results in the first quarter relative to expectations, we identified a triggering event related to our Solar reporting unit. As a result, we performed an interim impairment quantitative assessment on our Solar reporting unit as ofMarch 31, 2023 . We estimated the fair value of the Solar reporting unit using the income approach, which included significant assumptions such as forecasted revenue, Adjusted EBITDA margins, and discount rates, as well as other assumptions including operating expenses and cash flows. In developing these assumptions, we relied on various factors including operating results, business plans, economic projections, anticipated future cash flows, and other market data. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying judgments and factors may include such items as a prolonged downturn in the business environment, changes in economic conditions that significantly differ from our assumptions in timing or degree, volatility in equity and debt markets resulting in higher discount rates, and unexpected regulatory changes. There are inherent uncertainties related to these judgments and factors that may ultimately impact the estimated fair value determinations. Based on the results of our interim impairment analysis, we recorded a non-cash impairment charge of$193 million during the first quarter of 2023. Following the impairment loss, the remaining balance of goodwill attributable to our Solar reporting unit is approximately$370 million . As the carrying value of the Solar reporting unit approximates its fair value following the impairment charge, the Solar reporting unit is considered at risk of future impairment. If our assumptions are not realized, or if there are future changes in any of the assumptions due to a change in economic conditions or otherwise, it is possible that a further impairment charge may need to be recorded in the future. For example, a decrease of approximately 8% in 2024 projected revenues, a decrease in the Adjusted EBITDA margin across all periods of 0.5%, or an increase in the weighted average cost of capital by 0.8%, holding other assumptions constant, would result in approximately$40 million of additional impairment.
Refer to Note 6 "
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 and are made in reliance on the safe harbor protections provided thereunder. 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 the strategic investment by and long term partnership withState Farm ; anticipated financial performance; management's plans and objectives for future operations; the successful development, commercialization, and timing of new or joint products; expected timing of product commercialization withState Farm or any changes thereto; our acquisition of ADT Solar and its anticipated impact on our business and financial condition; 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 ; the successful conversion of customers who continue to utilize outdated technology; the current and future market size for existing, new, or joint products; any stated or implied outcomes with regards to the foregoing; 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 the Company, 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 effectively implement our strategic partnership with, commercialize products with, or utilize any of the amounts invested in us byState Farm or provided byState Farm for research and development or other purposes; •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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•the impact of the COVID-19 pandemic on our employees, our customers, our suppliers and our ability to carry on our normal operations; •the impact of supply chain disruptions; •our ability to maintain and grow our existing customer base; •our ability to sell our products and services or launch new products and services in highly competitive markets, including the home security and automation market, the commercial fire and security markets, and the solar market, and to achieve market acceptance with acceptable margins; •our ability to successfully upgrade obsolete equipment installed at our customers' premises in an efficient and cost-effective manner; •changes in law, economic and financial conditions, including tax law changes, changes to privacy requirements, changes to telemarketing, email marketing and similar consumer protection laws, interest volatility, and trade tariffs and restrictions applicable to the products we sell; •any material change to the valuation allowances we take with respect to our deferred tax assets; •the impact of potential information technology, cybersecurity or data security breaches; •our dependence on third-party providers, suppliers, and dealers to enable us to produce and distribute our products and services in a cost-effective manner that protects our brand; •our ability to successfully implement an equipment ownership model that best satisfies the needs of our customers and to successfully implement and maintain our receivables securitization financing agreement or similar arrangements; •our ability to successfully pursue alternate business opportunities and strategies; •our ability to integrate various companies we have acquired in an efficient and cost-effective manner; •the amount and timing of our cash flows and earnings, which may be impacted by customer, competitive, supplier and other dynamics and conditions; •and our ability to maintain or improve margins through business efficiencies. 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 2022 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 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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