What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-05 compared with 2020-11-05 · 219 added, 347 removed, 145 unchanged (80% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF 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 thereto, included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”), which was filed with the United States Securities and Exchange Commission (the “SEC”) on March 10, 2020, to enhance the 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 ended December 31, 2020 (the “2020 Annual Report”), which was filed with the United States (“U.S.”) Securities and Exchange Commission (the “SEC”) on February 25, 2021, to obtain a more comprehensive understanding of our financial condition, changes in financial condition, and results of operations.

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.

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Risk Factors.”

ADT Inc., together with its wholly-owned subsidiaries (collectively, the “Company”, “we”, “our”, “us”, and “ADT”), is a leading provider of security, automation, and smart home solutions serving consumer and business customers in the United States (“U.S.”).

We offer many ways to help protect customers by providing 24/7 professional monitoring services as well as delivering lifestyle-driven solutions via professionally installed, do-it-yourself (“DIY”), mobile, and digital-based offerings for consumer, small business, and larger commercial customers.

Our security and automation offerings involve the installation and monitoring of security and premises automation systems designed to detect intrusion;

ADT Inc., together with its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our,” “us,” and “ADT”), is a leading provider of security, automation, and smart home solutions serving consumers and businesses in the U.S.

We offer many ways to help protect and connect customers by providing 24/7 professional monitoring services as well as delivering lifestyle-driven solutions through professionally installed, do-it-yourself (“DIY”), mobile, and digital-based offerings for residential, small business, and larger commercial customers.

We are one of the largest full-service security companies with a national footprint, and we deliver an integrated customer experience by maintaining the industry’s largest sales, installation, and service field force, as well as a 24/7 professional monitoring network.

As of March 31, 2021, we served approximately 6.6 million recurring customers.

Our security and automation offerings involve the sale, installation, and monitoring of security and premises automation systems designed to detect intrusion;

control access;

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and address personal emergencies, such as injuries, medical emergencies, or incapacitation.

Our products and services include interactive and smart home solutions which allow our customers to remotely monitor and manage their residential and commercial environments.

Depending on the service plan and type of product

installation, customers are able to remotely access information regarding the security of their residential or commercial environment, arm and disarm their security systems, adjust lighting or thermostat levels, monitor and react to defined events, or view real-time video from cameras covering different areas of their premises from web-enabled devices (such as smart phones, laptops, and tablet computers) and a customized web portal.

Additionally, our interactive and smart home solutions enable customers to create customized and automated schedules for managing lights, thermostats, appliances, garage doors, cameras, and other connected devices.

Upon the occurrence of certain initiating events, monitored security systems send event-specific signals to our monitoring centers.

According to the type of service contract and customer preference, our monitoring center personnel respond to alarms by relaying appropriate information to first responders, such as local police, fire departments, or medical emergency response centers;

the customer;

or others on the customer’s emergency contact list.

We continue to invest and innovate in our alarm verification technologies as well as partner with industry associations and various first responder agencies to help prioritize response events and enhance response policies.

The breadth of our solutions allows us to meet a wide variety of customer needs.

The vast majority of our new customers enroll in our interactive and smart home solutions, which allow our customers to remotely monitor and manage their environments.

Depending on the service plan and type of product installation, customers are able to remotely access information regarding the security of their residential or commercial environment, arm and disarm their security systems, adjust lighting or thermostat levels, monitor and react to defined events, or view real-time video from cameras covering different areas of their premises through a customized web portal from web-enabled devices (such as smart phones, laptops, and tablet computers).

Additionally, our interactive and smart home solutions enable customers to create customized and automated schedules for managing connected devices such as lights, thermostats, appliances, garage doors, and cameras.

These systems can also be programmed to perform additional functions such as recording and viewing live video and sending text messages or other alerts based on triggering events or conditions.

As part of our innovative and dynamic growth markets, we are extending the concept of security from the physical home or business to personal on-the-go security and safety and cybersecurity.

Customers’ increasingly mobile and active lifestyles have created new opportunities for us in the fast-growing market for self-monitored DIY products and mobile technology.

Our technology also allows us to integrate with various third-party connected and wearable devices so that we can service our customers whether they are at home or on-the-go.

As of September 30, 2020, we served approximately 6.5 million recurring customers, excluding contracts monitored but not owned.

We are one of the largest full-service companies with a national footprint and we deliver an integrated customer experience by maintaining the industry’s largest sales, installation, and service field force, as well as a 24/7 professional monitoring network.

As part of our product innovation, we are extending the concept of security from the physical home or business to personal on-the-go security and safety with SoSecure, our mobile safety application, and other offerings.

Our technology allows us to integrate with various third-party connected and wearable devices enabling us to serve our customers whether they are at home or on-the-go.

Customers’ increasingly mobile and active lifestyles have also created new opportunities for us in the fast-growing market for self-monitored DIY products and mobile technology.

Additionally, we offer personal emergency response system products and services that are supported by our monitoring centers and utilize our security monitoring infrastructure to provide customers with solutions helping to sustain independent living and encourage better self-care activities.

BASIS OF PRESENTATION

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All intercompany transactions have been eliminated.

We report financial and operating information in one segment.

Segment Change

Effective in the first quarter of 2021, the manner in which our Chief Executive Officer, who is the chief operating decision maker (the “CODM”), evaluates performance and makes decisions about how to allocate resources changed.

Therefore, we now report results in two operating and reportable segments, Consumer and Small Business (“CSB”) and Commercial, rather than a single operating and reportable segment.

Where applicable, prior periods have been retrospectively adjusted to reflect the new operating and reportable segment structure.

We organize our segments based on customer type as follows:

• Consumer and Small Business (CSB) - Customers in our CSB segment are comprised of residential homeowners, small business operators, and other individual consumers.

Our CSB segment primarily includes (i) revenue and operating costs from the sale, installation, servicing, and monitoring of integrated security and automation systems, as well as other offerings such as mobile security and home health solutions;

(ii) other operating costs associated with support functions related to these operations;

and (iii) general corporate costs and other income and expense items not included in the Commercial segment.

Results for our Canadian operations prior to its sale in the fourth quarter of 2019 are included in the CSB segment based on the primary customer market served in Canada.

• Commercial - Customers in our Commercial segment are comprised of larger businesses with more expansive facilities (typically larger than 10,000 square feet) and/or multi-site operations, which often require more sophisticated integrated solutions.

Our Commercial segment primarily includes (i) revenue and operating costs from the sale, installation, servicing, and monitoring of integrated security and automation systems, fire detection and suppression systems, and other related offerings;

(ii) other operating costs associated with support functions of these operations;

and (iii) dedicated corporate and other costs.

Our 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 loss, and additional information, including a description of the limitations relating to the use of Adjusted EBITDA, are provided under “—Non-GAAP Measures.”

FACTORS AFFECTING OPERATING RESULTS

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In order to optimize returns on customer acquisitions and cash flow generation, we focus on the following key drivers of our business:

best-in-class customer service;

customer retention;

disciplined, high-quality customer additions;

efficient customer acquisition;

best-in-class customer service;

customer retention;

and costs incurred to provide ongoing services to customers.

Our ability to add new subscribers depends on the overall demand for our products and services, which is driven by a number of external factors.

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.

Growth in our residential customer base can be influenced by the overall state of the housing market.

Growth in our commercial customer base can be influenced by the rate at which new businesses begin operations or existing businesses grow.

The demand for our products and services is also impacted by the perceived threat of crime, as well as the quality of the service of our competitors.

The monthly fees that we generate from any individual customer vary based on the level of service provided and customer tenure.

We offer a wide range of services at various price points from basic burglar alarm monitoring to our full suite of interactive services.

Our ability to increase monthly fees at the individual customer level depends on a number of factors, including our ability to effectively introduce and market additional features and services that increase the value of our offerings to customers, which we believe drives customers to purchase higher levels of service and supports our ability to make periodic adjustments to pricing.

Growth in our commercial customer base can be influenced by the rate at which new businesses are formed or existing businesses grow.

The demand for our products and services is also impacted by the perceived threat of crime, as well as the price and quality of our offerings compared to our competitors.

Monthly fees generated from any individual customer vary based on the level of service provided and customer tenure.

We offer a wide range of services at various price points from basic burglar alarm monitoring to our full suite of interactive services, as well as our fire detection and suppression systems and other Commercial offerings.

Our ability to increase monthly fees at the individual customer level depends on a number of factors, including our ability to effectively introduce and market additional features and services that increase the value of our offerings, which we believe drives customers to purchase higher levels of service and supports our ability to make periodic adjustments to pricing.

A portion of our customer base can be expected to cancel its service every year.

Customers may choose not to renew or may terminate their contracts for a variety of reasons, including, but not limited to, relocation, cost, loss to competition, or service issues.

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.

Attrition has a direct impact on our financial results, including revenue, operating income, and cash flows.

COVID-19 Pandemic

During March 2020, the World Health Organization declared the outbreak of a novel coronavirus as a pandemic (the “COVID-19 Pandemic”), which has become increasingly widespread in the U.S.

Containment efforts and responses to the COVID-19 Pandemic have varied by individuals, businesses, and state and local municipalities, and in certain areas of the U.S, initial and precautionary measures helped mitigate the spread of the coronavirus.

However, subsequent easing of such measures resulted in the re-emergence of the coronavirus.

The COVID-19 Pandemic has had a notable adverse impact on general economic conditions, including but not limited to the temporary closures of many businesses, increased governmental regulations, and reduced consumer spending due to significant unemployment and other effects attributable to the COVID-19 Pandemic.

In order to continue to service our customers, we have adjusted and are continuously evolving certain aspects of our

operations to protect employees and customers, which includes (i) detailed protocols for infectious disease safety for employees, (ii) the implementation of daily wellness checks for employees, and (iii) the implementation of work from home actions, including the majority of our call center professionals.

While the COVID-19 Pandemic has impacted our commercial channel to a greater extent than our residential channel, we believe our overall recurring revenue and highly variable subscriber acquisition cost model provides a solid financial foundation for strong cash flow generation.

Accordingly, we anticipate having sufficient liquidity and capital resources to continue (1) providing essential services, (2) satisfying our debt requirements, and (3) having the ability to return capital to our stockholders in the form of a regular quarterly dividend during the current challenging macroeconomic environment and the slowdown brought on by the COVID-19 Pandemic.

We have not sought or requested government assistance as a result of the COVID-19 Pandemic, but we do expect to recognize favorable cash flows and other benefits associated with certain income tax and payroll tax provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

While we have incurred additional costs associated with personal protective equipment for our employees and work from home actions, we also instituted various temporary cost control measures.

Furthermore, we believe the economic downturn, the recent civil unrest, and continued economic and COVID-19 Pandemic uncertainties increase awareness of the need for security, which together with an anticipated lower volume of customer relocations and the utilization of temporary pricing and retention initiatives for existing customers, may help counterbalance any increase in gross customer revenue attrition that we may experience as a result of reduced consumer or business spending caused by the COVID-19 Pandemic.

During March 2020, the World Health Organization declared the outbreak of a novel coronavirus as a pandemic (the “COVID-19 Pandemic”), which has become widespread in the U.S.

Containment efforts and responses to the COVID-19 Pandemic have varied by individuals, businesses, and state and local municipalities, and in certain areas of the U.S., initial and precautionary measures helped mitigate the spread of the coronavirus, while subsequent easing of such measures has resulted in the re-emergence of the coronavirus.

The COVID-19 Pandemic has had a notable adverse impact on general economic conditions, including the temporary closures of many businesses, increased governmental regulations, and reduced consumer spending due to significant unemployment and other effects attributable to the COVID-19 Pandemic.

In order to continue to both protect our employees and serve our customers, we have adjusted and are continuously evolving certain aspects of our operations, which includes (i) detailed protocols for infectious disease safety for employees, (ii) daily wellness checks for employees, and (iii) certain work from home actions, including for the majority of our call center professionals.

While the COVID-19 Pandemic has impacted our commercial businesses to a greater extent than our residential businesses, we believe our overall recurring revenue and highly variable subscriber acquisition cost model provides a solid financial foundation for strong cash flow generation.

Accordingly, during the current challenging macroeconomic environment and the slowdown brought on by the COVID-19 Pandemic, we anticipate having 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.

We have not sought or requested government assistance as a result of the COVID-19 Pandemic, but we did benefit from favorable cash flows and other benefits associated with certain income tax and payroll tax provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

While we have incurred additional costs associated with providing personal protective equipment for our employees and work from home actions, we also instituted various temporary cost control measures.

Furthermore, we believe the economic downturn, the recent civil unrest, and continued uncertainties around the economic environment and COVID-19 Pandemic increase consumer and business awareness of the need for security, which together with a lower volume of customer relocations and the utilization of temporary pricing and retention initiatives for existing customers, may help counterbalance any increase in gross customer revenue attrition that we may experience as a result of reduced consumer or business spending caused by the COVID-19 Pandemic.

Finally, we may see opportunities for additional acquisitions, continued investment in potential new revenue streams or capabilities, and low-cost bulk account purchases.

We considered the emergence and pervasive economic impact of the COVID-19 Pandemic in our assessment of our financial position, results of operations, cash flows, and certain accounting estimates as of and for the three and nine months ended September 30, 2020.

We considered the on-going and pervasive economic impact of the COVID-19 Pandemic in our assessment of our financial position, results of operations, cash flows, and certain accounting estimates as of and for the three months ended March 31, 2021.

Due to the evolving and uncertain nature of the COVID-19 Pandemic, it is possible that the effects of the COVID-19 Pandemic could materially impact our estimates and condensed consolidated financial statements in future reporting periods.

Radio Conversion Costs

The providers of 3G and Code-Division Multiple Access (“CDMA”) cellular networks have notified us that they will be retiring their 3G and CDMA networks during 2022.

Accordingly, during 2019 we commenced a program to replace the 3G and CDMA cellular equipment used in many of our security systems.

We continue to estimate the range of net costs for this replacement program at $200 million to $325 million through 2022, of which we have incurred $49 million through September 30, 2020.

We expect to incur $50 million to $75 million of net costs during 2020, of which we have incurred $24 million for the nine months ended September 30, 2020.

These amounts and ranges are net of any revenue we collect from customers associated with these radio replacements and cellular network conversions.

During 2019, we commenced a program to replace 3G and Code-Division Multiple Access (“CDMA”) cellular equipment used in many of our security systems as a result of the 3G and CDMA cellular network providers notifying us that they will be retiring their 3G and CDMA networks during 2022.

We continue to estimate that we will incur between $225 million and $300 million of net costs over the course of the program, which consists of costs, net of any revenue we collect from customers, associated with these radio replacements and cellular network conversions.

From inception of this program through March 31, 2021, we have incurred $136 million of net costs, of which $59 million was incurred during the three months ended March 31, 2021.

We seek to minimize these costs by converting customers during routine service visits whenever possible.

The replacement program and pace of replacement are subject to change and may be influenced by our ability to access customer sites due to the COVID-19 Pandemic, cost-sharing opportunities with suppliers, carriers, and customers, as well as new and innovative technologies.

Commercial Agreement

Concurrently with the issuance and sale of common stock to Google LLC (“Google”), we entered into a Master Supply, Distribution, and Marketing Agreement with Google (the “Commercial Agreement”), pursuant to which Google has agreed to supply us with certain Google devices as well as certain Google video and analytics services (“Google Services”), for sale to our customers.

Subject to customary termination rights related to breach and change of control, the Commercial Agreement has an initial term of seven years from the date that the Google Service is successfully integrated into our end-user security and automation platform, which is targeted for no later than June 30, 2022.

If the integrated service is not launched by June 30, 2022 then we will be required to offer Google Services without integration for professional installations except for existing customers who already have ADT Pulse or ADT Control interactive services until such integration has been made.

Further, subject to certain carveouts, we have agreed to exclusively sell Google end‐user video and sensing analytics services and smart-home, security and safety devices to our customers;

the exclusivity does not apply to, among others, Blue by ADT DIY products and services, certain of our legacy platforms, sales large commercial customers, and certain devices that Google does not supply to us.

The Commercial Agreement also contains customary termination rights for both parties.

In addition, Google has rights to terminate the Commercial Agreement if (i) we divest any part of our direct to consumer business and the acquiring entity does not agree to assume all obligations under the Commercial Agreement, or (ii) we breach certain provisions of the Commercial Agreement and do not cure such breaches.

In the event that we breach the Commercial Agreement in a manner reasonably likely to result in a material adverse effect on Google’s business or brand, or we breach certain data security and privacy obligations under the Commercial Agreement, we must suspend the sale of Google Services and certain devices during the applicable cure period.

Upon termination of the Commercial Agreement, we will no longer have rights to sell the Google

Service or devices to new customers, subject to an applicable transition period.

In addition, the Google Services may not be accessible by our customers through our integrated end-user application during any cure period for our breach of certain data security and privacy provisions of the Commercial Agreement or upon termination of the agreement for a breach of such provisions.

The Commercial Agreement specifies that each party will contribute $150 million towards the joint marketing of devices and services, customer acquisition, training of our employees for the sales, installation, customer service, and maintenance for the product and service offerings, and technology updates for products included in such offerings.

Each party will contribute such funds in three equal tranches, subject to the attainment of certain milestones.

However, the replacement program and pace of replacement are subject to change and may be influenced by our ability to access customer sites due to the COVID-19 Pandemic;

cost-sharing opportunities with suppliers, carriers, and customers;

and the extent to which we are able to implement our Cell Bounce solution, as described below.

Given the current network retirement dates, we estimate that we will incur most of the remaining net costs during 2021, and we expect to continue to collect a portion of the incremental revenue thereafter.

During November 2020, we acquired Cell Bounce, a technology company with proprietary radio conversion technology in the form of a user-installable device, which was intended to facilitate the transition of customers on 3G networks in a cost efficient and timely manner.

However, as a result of recent worldwide shortages for certain electronic components, we may be unable to produce the expected volume of Cell Bounce product in order to achieve the expected benefits.

As a result, we expect to continue to replace 3G radios primarily using traditional methods, and we will utilize Cell Bounce product to complement these traditional methods to the extent possible.

Google Commercial Agreement

In 2020, we entered into a Master Supply, Distribution, and Marketing Agreement (the “Google Commercial Agreement”) with Google LLC (“Google”), pursuant to which Google has agreed to supply us with certain Google devices, as well as certain Google video and analytics services (“Google Services”), for sale to our customers.

The Google Commercial Agreement also sets forth certain termination rights of the parties, certain exclusivity obligations of the Company in favor of Google, and certain other rights and obligations of the parties, all as described in our public filings with the SEC.

The Google Commercial Agreement further specifies that each party will 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.

Next Generation Platform

On November 5, 2020, we announced our ongoing development work in connection with the internal build of a next generation professional security and home automation technology platform in coordination with Google.

The differentiated platform will leverage artificial intelligence and machine learning, including intelligent alarm and video verification, to improve ADT’s security offering and create a more connected, helpful home.

In November 2020, we announced the ongoing development of our ADT-owned next generation professional security and automation technology platform, which is currently being developed in coordination with Google.

Our comprehensive interactive platform is expected to provide customers with a seamless experience across security, life safety, automation, and analytics through a common application.

Additionally, our platform is expected to integrate the user experience, customer service experience, and back-end support.

We expect to incur costs of approximately $50 million associated with the development of our next generation platform in 2021.

These initiatives are in the early stages, and it is possible that we could experience a material increase in the costs associated with these initiatives.

SIGNIFICANT EVENTS

The comparability of our results of operations has been impacted by the following:

Disposition of Canadian Operations

During November 2019, we sold ADT Security Services Canada, Inc.

(“ADT Canada”) to TELUS Corporation (“TELUS”) for a selling price of $514 million (CAD $676 million).

In connection with the sale of ADT Canada, we entered into a transition services agreement with TELUS whereby we will provide certain post-closing services to TELUS related to the business of ADT Canada.

Additionally, we entered into a non-competition and non-solicitation agreement with TELUS pursuant to which we will not have any operations in Canada, subject to limited exceptions for cross-border commercial customers and mobile safety applications, for a period of seven years.

Finally, we entered into a patent and trademark license agreement with TELUS granting the usage of our trademarks and patents in Canada to TELUS for a period of seven years.

The sale of ADT Canada did not represent a strategic shift that will have a major effect on our operations and financial results, and therefore, did not meet the criteria to be reported as discontinued operations.

Defenders Acquisition

During January 2020, we acquired Defender Holdings, Inc.

(“Defenders”) (the “Defenders Acquisition”), which represented the acquisition of our largest independent dealer, for total consideration of approximately $290 million, which consisted of cash paid of $173 million, net of cash acquired, and the issuance of approximately 16 million shares of our common stock, par value of $0.01 per share, (“Common Stock”) with a fair value of $114 million.

In connection with the Defenders Acquisition, we settled a pre-existing relationship with Defenders in the amount of $81 million.

Equipment Ownership Model Change

During February 2020, we launched a new revenue model initiative for certain residential customers which revised the amount and nature of fees due at installation, introduced a 60 month monitoring contract option, and introduced a new retail installment contract which allows qualifying residential customers to repay the fees due at installation over the course of a 24, 36, or 60 month interest-free period.

The comparability of our results of operations has been impacted by the following events:

Revenue Model Initiative and Equipment Ownership Model Change

During February 2020, we launched a new revenue model initiative for certain residential customers, which (i) revised the amount and nature of fees due at installation, (ii) introduced a 60-month monitoring contract option, and (iii) introduced a new retail installment contract option that allows qualifying residential customers to repay the fees due at installation over a 24-, 36-, or 60-month interest-free period.

Due to the requirements of our initial third-party consumer financing program, we also transitioned our security system ownership model from a predominately Company-owned model to a predominately customer-owned model (the “Equipment Ownership Model Change”).

During March 2020, we entered into an uncommitted receivables securitization financing agreement (the “Receivables Facility”).

Under the terms of the Receivables Facility, we may receive up to $200 million of financing secured by retail installment contract receivables from transactions involving security systems that were sold under a customer-owned model.

During April 2020, we amended the Receivables Facility to also permit financing secured by retail installment contract receivables from transactions occurring under the Company-owned model.

During May 2020, we started to transition our security system ownership model back to a predominately Company-owned model as a result of this amendment.

In connection with the above, and with respect to transactions arising through Defenders, which has historically used a customer-owned ownership model, subsequent to the Defenders Acquisition, our residential transactions during the three and nine months ended September 30, 2020 included an increase in transactions based on a customer-owned model.

In connection

with our transition back to a Company-owned model, we do not expect to experience the same level of revenue growth subsequent to September 30, 2020 as reported in our results of operations for the three and nine months ended September 30, 2020.

We are in the early stages of our new revenue model initiative and we cannot be certain that this initiative or our transition back to a predominately Company-owned model, which is anticipated to include transactions arising through Defenders beginning in 2021, will achieve the desired outcomes.

Accordingly, the results of the new revenue model initiative and impact of our transition back to a predominately Company-owned model could have a material adverse effect on our business, financial condition, results of operations, cash flows, and key performance indicators.

During March 2020, we entered into an uncommitted receivables securitization financing agreement (the “Receivables Facility”), which allowed us to receive financing secured by retail installment contract receivables from transactions under a customer-owned model.

During April 2020, we amended the Receivables Facility to also permit financing secured by retail installment contract receivables from transactions occurring under a Company-owned model.

As a result, we started to transition our security system ownership model to a predominately Company-owned model in May 2020.

In addition, our residential transactions included a temporary increase in transactions sold under a customer-owned model as a result of, and subsequent to, the acquisition of Defender Holdings, Inc.

(“Defenders”) (the “Defenders Acquisition”) in January 2020.

However, as of March 31, 2021, substantially all new residential transactions take place under a Company-owned model.

The transition to a predominately Company-owned model is expected to continue to impact our results of operations and cash flow presentation during 2021 compared to 2020 due to different accounting policies applicable to a Company-owned model versus a customer-owned model.

We cannot be certain that our revenue model initiative, as described above, or the transition to a predominately Company-owned model, will achieve the desired outcomes.

Accordingly, these actions could have a material adverse effect on our business, financial condition, results of operations, cash flows, and key performance indicators.

KEY PERFORMANCE INDICATORS

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Additionally, our operating metric key performance indicators 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 conversion or historical methodology differences in legacy systems.

These refinements, for example, may include changes due to systems conversions or historical methodology differences in legacy systems.

Recurring Monthly Revenue (“RMR”)

RMR is generated by contractual recurring fees for monitoring and other recurring services provided to our customers, including contracts monitored but not owned.

RMR is generated by contractual recurring fees for monitoring and other recurring services provided to our customers.

We believe the presentation of RMR is useful because it measures the volume of revenue under contract at a given point in time.

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A portion of our customer base can be expected to cancel its service every year.

Customers may choose not to renew or may terminate their contracts for a variety of reasons, including, but not limited to, relocation, cost, loss to competition, or service issues.

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.

Gross customer revenue attrition has a direct impact on our financial results, including revenue, operating income, and cash flows.

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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 twelve to fifteen months.

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, excluding contracts monitored but not owned and DIY 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.

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Adjusted EBITDA is a non-GAAP measure that we believe 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.”

Free Cash Flow

Free Cash Flow is a non-GAAP measure that our management employs to measure cash that is available to repay debt, make other investments, and pay dividends.

Our definition of Free Cash Flow, a reconciliation of Free Cash Flow to cash flows from operating activities (the most comparable GAAP measure), and additional information, including a description of the limitations relating to the use of Free Cash Flow, are provided under “—Non-GAAP Measures.”

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

The following table sets forth our condensed consolidated results of operations, and key performance indicators for the periods presented.

(in thousands, except as otherwise indicated)

For the Three Months Ended

Our definition of Adjusted EBITDA, a reconciliation of Adjusted EBITDA to net 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.”

RESULTS OF OPERATIONS

September 30, 2020 September 30, 2019 $

Monitoring and related services $ 1,045,677 $ 1,093,564 $ (47,887)

Installation and other 253,247 207,006 46,241

Total revenue 1,298,924 1,300,570 (1,646)

Cost of revenue (exclusive of depreciation and amortization shown separately below)

357,895 356,556 1,339

Selling, general and administrative expenses 410,933 378,645 32,288

Depreciation and intangible asset amortization 473,346 505,832 (32,486)

Merger, restructuring, integration, and other (6,117) 9,800 (15,917)

Goodwill impairment — 45,482 (45,482)

Loss on sale of business (19) 55,489 (55,508)

Operating income (loss) 62,886 (51,234) 114,120

Interest expense, net (156,759) (152,431) (4,328)

Loss on extinguishment of debt (48,916) (14,532) (34,384)

Other income 1,992 200 1,792

Loss before income taxes (140,797) (217,997) 77,200

Income tax benefit 27,699 36,367 (8,668)

Net loss $ (113,098) $ (181,630) $ 68,532

Key Performance Indicators:

RMR $ 341,367 $ 351,381 $ (10,014)

Gross customer revenue attrition (percent) 12.9 % 13.5 % (60) bps

Adjusted EBITDA (2)

$ 563,809 $ 624,476 $ (60,667)

_______________________

(1) Refer to the “—Key Performance Indicators” section for the definitions of these key performance indicator.

(2) Adjusted EBITDA is a non-GAAP measure.

Refer to the “—Non-GAAP Measures” section for the definition of this term and reconciliation to the most comparable GAAP measure.

Monitoring and Related Services Revenue

The decrease in monitoring and related services revenue was driven by a decrease in recurring revenue due to the sale of ADT Canada.

This decrease was partially offset by an increase in recurring revenue in the U.S.

largely due to improvements in average pricing as new and existing residential customers selected higher priced interactive services.

Average customer count remained relatively flat due to recent improvements in attrition and customer additions.

The decrease in RMR to $341 million as of September 30, 2020 from $351 million as of September 30, 2019 was primarily due to the sale of ADT Canada, which decreased RMR by approximately $16 million.

The decrease in RMR was partially offset by improvements in average pricing in the U.S.

As of September 30, 2020 and September 30, 2019, gross customer revenue attrition was 12.9% and 13.5%, respectively.

The improvement in attrition was primarily due to fewer customer relocations and the benefit of customer retention initiatives.

Installation and Other Revenue

The increase in installation and other revenue was primarily due to higher volume of revenue from equipment sold outright to residential customers as a result of the Defenders Acquisition.

This increase was partially offset by (i) a decrease in the volume of revenue from equipment sold outright to commercial customers as a result of the COVID-19 Pandemic and (ii) the sale of ADT Canada.

In connection with the anticipated transition of residential transactions arising through Defenders to a predominately Company-owned model in 2021, we do not expect to experience the same level of revenue growth in future periods as compared to our results of operations for the three months ended September 30, 2020.

Cost of Revenue

Cost of revenue was relatively flat and included an increase in installation costs associated with a higher volume of transactions in which equipment was sold outright to residential customers as a result of the Defenders Acquisition.

This increase was partially offset by (i) a decrease in installation costs associated with a lower volume of transactions in which equipment was sold outright to commercial customers as a result of the COVID-19 Pandemic and (ii) the sale of ADT Canada.

In connection with the anticipated transition of residential transactions arising through Defenders to a predominately Company-owned model in 2021, we do not expect to experience the same level of increase in cost of revenue in future periods as compared to our results of operations for the three months ended September 30, 2020.

Selling, General and Administrative Expenses

The increase in selling, general and administrative expenses was primarily due to $78 million of incremental expenses associated with the Defenders Acquisition and an increase in radio conversion costs of $9 million.

These increases were partially offset by (i) a reduction in financing and consent fees of $22 million associated with financing transactions in 2019, (ii) a $16 million decrease in advertising expenses (exclusive of incremental advertising expenses from recent acquisitions), (iii) $6 million from an estimated legal settlement, net of insurance, in 2019, and (iv) a reduction of expenses of $6 million due to the sale of ADT Canada.

Depreciation and Intangible Asset Amortization

The decrease in depreciation and intangible asset amortization expense was primarily due to a decrease of $24 million associated with the sale of ADT Canada as well as a decrease in the depreciation of subscriber system assets.

Merger, Restructuring, Integration, and Other

The decrease in merger, restructuring, integration, and other was primarily due to gains and losses recognized on a strategic investment, which had a gain of $11 million during the three months ended September 30, 2020 compared to a loss of $5 million during the three months ended September 30, 2019.

Interest Expense, net

The increase in interest expense, net, was primarily due to (i) $19 million related to our variable-rate first lien term loans, net of the impact of our interest rate swaps, and (ii) $3 million related to our fixed-rate first lien notes due to our refinancing transactions during September 2020 and September 2019.

These increases were partially offset by (i) a decrease in interest expense of $9 million related to the changes in fair value of interest rate swap contracts as a result of cash flow hedges no longer being highly effective, and (ii) $9 million related to our second lien notes as a result of a reduction in interest rate due to our refinancing during January 2020.

Loss on Extinguishment of Debt

During the three months ended September 30, 2020, loss on extinguishment of debt totaled $49 million and related to the call premium and write-off of unamortized fair value adjustments in connection with the $1 billion redemption of our 6.250% notes due 2021 (the “ADT Notes due 2021”) in September 2020.

During the three months ended September 30, 2019, loss on extinguishment of debt totaled $15 million, which primarily related to the partial write-off of unamortized deferred financing costs and discount in connection with the amendment and restatement to our first lien credit agreement in September 2019.

Income Tax Benefit

Income tax benefit for the three months ended September 30, 2020 was $28 million, resulting in an effective tax rate for the period of 19.7%.

The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.5%, and a 3.9% unfavorable impact from non-deductible charges primarily due to the Defenders Acquisition.

Income tax benefit for the three months ended September 30, 2019 was $36 million, resulting in an effective tax rate for the period of 16.7%.

The effective tax rate primarily represents the federal income tax rate of 21.0%, a 21.9% unfavorable impact from valuation allowances established on the net capital losses generated in the U.S.

and Canada related to the sale of ADT Canada, a 5.6% unfavorable impact from non-deductible goodwill impairment loss, offset by a 20.7% favorable impact from

net capital losses generated in the U.S.

and Canada related to the sale of ADT Canada, and a 4.6% favorable impact from amendments to prior year tax returns.

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.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

The following table sets forth our condensed consolidated results of operations, summary cash flow data, and key performance indicators for the periods presented.

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

The following table presents our condensed consolidated results of operations and key performance indicators:

(in thousands, except as otherwise indicated)

For the Nine Months Ended

Three Months Ended

Results of Operations:

September 30, 2020 September 30, 2019 $

March 31, 2021 March 31, 2020 $ Change

Monitoring and related services $ 1,062,766 $ 1,045,957 $ 16,809

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Merger, restructuring, integration, and other 20,507 108,794 (88,287)

Goodwill impairment — 45,482 (45,482)

Loss on sale of business 738 55,489 (54,751)

Operating income 23,952 132,339 (108,387)

Operating loss (16,380) (89,356) 72,976

Interest expense, net (47,724) (225,367) 177,643

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Net loss $ (47,894) $ (300,293) $ 252,399

Summary Cash Flow Data:

Net cash provided by operating activities $ 993,269 $ 1,459,249 $ (465,980)

Net cash used in investing activities $ (800,275) $ (1,156,921) $ 356,646

Net cash provided by (used in) financing activities $ 249,156 $ (509,716) $ 758,872

Key Performance Indicators:

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$ 542,131 $ 539,489 $ 2,642

Free Cash Flow (2)

_______________________

(1) Refer to the “—Key Performance Indicators” section for the definitions of these key performance indicators.

(2) Adjusted EBITDA and Free Cash Flow are non-GAAP measures.

Refer to the “—Non-GAAP Measures” section for the definitions of these terms and reconciliations to the most comparable GAAP measures.

Monitoring and Related Services Revenue

The decrease in monitoring and related services revenue was driven by a decrease in recurring revenue due to the sale of ADT Canada.

This decrease was partially offset by an increase in recurring revenue in the U.S.

largely due to improvements in average pricing as new and existing residential customers selected higher priced interactive services.

Average customer count remained relatively flat due to recent improvements in attrition and customer additions.

The decrease in RMR to $341 million as of September 30, 2020 from $351 million as of September 30, 2019 was primarily due to the sale of ADT Canada, which decreased RMR by approximately $16 million.

The decrease in RMR was partially offset by improvements in average pricing in the U.S.

As of September 30, 2020 and September 30, 2019, gross customer revenue

attrition was 12.9% and 13.5%, respectively.

The improvement in attrition was primarily due to fewer customer relocations and the benefit of customer retention initiatives.

(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.

Monitoring and Related Services Revenue (“M&S Revenue”)

The following table presents M&S Revenue in total and by segment:

Three Months Ended

(in thousands)

March 31, 2021 March 31, 2020 $ Change

CSB $ 951,248 $ 938,032 $ 13,216

Commercial 111,518 107,925 3,593

Total M&S Revenue $ 1,062,766 $ 1,045,957 $ 16,809

The increase in total M&S Revenue was primarily attributable to CSB, which was driven by an increase in recurring revenue primarily due to improvements in average pricing as new and existing customers select higher priced interactive and other services and an increase in the average number of customers, which primarily reflects an improvement in gross customer revenue attrition.

The increase in Commercial M&S Revenue was driven by an increase in monitoring revenue primarily due to the acquisitions of businesses and customer accounts.

Total RMR was $349 million and $339 million as of March 31, 2021 and 2020, respectively.

The increase in RMR was due to improvements in average pricing on our customer base and net customer additions.

Gross customer revenue attrition was 13.1% and 13.5% as of March 31, 2021 and 2020, respectively.

The improvement in gross customer revenue attrition was attributable to fewer non-payment disconnects, fewer customer relocations, and the benefit of customer retention initiatives, partially offset by lower dealer charge-backs.

Installation and Other Revenue

The increase in installation and other revenue was primarily due to higher volume of revenue from equipment sold outright to residential customers as a result of the Defenders Acquisition and the Equipment Ownership Model Change.

These increases were partially offset by (i) a decrease in the volume of revenue from equipment sold outright to commercial customers as a result of the COVID-19 Pandemic and (ii) the sale of ADT Canada.

In connection with our transition back to a predominately Company-owned model for our residential transactions, we do not expect to experience the same level of revenue growth subsequent to September 30, 2020 as reported in our results of operations for the nine months ended September 30, 2020.

The following table presents installation and other revenue in total and by segment:

Three Months Ended

(in thousands)

March 31, 2021 March 31, 2020 $ Change

CSB $ 87,357 $ 173,135 $ (85,778)

Commercial 154,581 150,660 3,921

Total installation and other revenue $ 241,938 $ 323,795 $ (81,857)

The decrease in total installation and other revenue was primarily attributable to CSB, which was driven by a lower volume of transactions in which equipment was sold outright to the customer as a result of our transition to a predominately Company-owned model.

The increase in installation and other revenue in Commercial was attributable to an increase in outright sales revenue primarily due to acquisitions.

Cost of Revenue

The increase in cost of revenue was primarily due to an increase in installation costs associated with a higher volume of transactions in which equipment was sold outright to residential customers as a result of the Defenders Acquisition and the Equipment Ownership Model Change.

These increases were partially offset by (i) a decrease in installation costs associated with a lower volume of transactions in which equipment was sold outright to commercial customers as a result of the COVID-19 Pandemic and (ii) the sale of ADT Canada.

In connection with our transition back to a predominately Company-owned model for our residential transactions, we do not expect to experience the same level of increase in cost of revenue subsequent to September 30, 2020 as reported in our results of operations for the nine months ended September 30, 2020.

The following table presents cost of revenue in total and by segment:

Three Months Ended

(in thousands)

March 31, 2021 March 31, 2020 $ Change

CSB $ 193,371 $ 225,001 $ (31,630)

Commercial 187,795 182,985 4,810

Total cost of revenue $ 381,166 $ 407,986 $ (26,820)

The decrease in total cost of revenue was primarily attributable to CSB, which was driven by a decrease in installation costs from a lower volume of residential transactions in which equipment was sold outright to the customer as a result of our transition to a predominately Company-owned model, partially offset by an increase in field service and call center costs.

The increase in cost of revenue in Commercial was primarily due to an increase in customer service costs, as well as an increase in installation costs primarily due to acquisitions.

Selling, General and Administrative Expenses

The increase in selling, general and administrative expenses was primarily due to $226 million of incremental expenses associated with the Defenders Acquisition, an increase of $38 million in the provision for credit losses (exclusive of incremental provision from recent acquisitions) due to the estimated impact of the COVID-19 Pandemic and an increase in the volume of longer duration receivables, an increase in radio conversion costs of $36 million, as well as increases in selling costs, which includes amortization of deferred subscriber acquisition costs.

These increases were partially offset by (i) a reduction in expenses of $38 million due to the sale of ADT Canada, (ii) a reduction in financing and consent fees of $18 million associated with financing transactions, (iii) recoveries of $7 million in 2020 compared to write-offs of $5 million in 2019 associated with notes receivable from a former strategic investment, (iv) $6 million from an estimated legal settlement, net of insurance, in 2019, and (v) a decrease in advertising expenses (exclusive of incremental advertising expenses from recent acquisitions).

Selling, general and administrative expenses remained relatively flat year over year and included the following changes:

• increases of $54 million in radio conversion costs primarily related to an increase in the number of conversions of customers in our CSB segment;

• decreases in the provision for credit losses of $21 million and $11 million in our CSB and Commercial segments, respectively, primarily due to the impact in the prior year of the economic downturn associated with the COVID-19 Pandemic beginning in March 2020;

• decreases in total selling costs primarily due to lower commissions as well as lower share-based compensation expense.

Depreciation and Intangible Asset Amortization

The decrease in depreciation and intangible asset amortization expense was primarily due to a decrease of $70 million associated with the sale of ADT Canada as well as a decrease in the depreciation of subscriber system assets.

These decreases were partially offset by an increase of the amortization of customer contracts acquired under the ADT Authorized Dealer Program.

The decrease in depreciation and intangible asset amortization expense was primarily due to decreases related to contracts and related customer relationships and subscriber system assets.

Merger, Restructuring, Integration, and Other

The increase in merger, restructuring, integration, and other was primarily due to a charge of $81 million associated with the settlement of a pre-existing relationship.

This increase was partially offset by a $9 million decrease in loss recognized on a strategic investment, which had a loss of $1 million during the nine months ended September 30, 2020 compared to a loss of $9 million during the nine months ended September 30, 2019.

During the three months ended March 31, 2021, merger, restructuring, integration, and other primarily included an $18 million impairment charge due to lower than expected benefits from the Cell Bounce developed technology intangible asset as a result of recent worldwide shortages for certain electronic components.

During the three months ended March 31, 2020, merger, restructuring, integration, and other primarily included a loss of $81 million associated with the settlement of a pre-existing relationship in connection with the Defenders Acquisition and $8 million due to fair value remeasurements on a strategic investment.

During the three months ended March 31, 2021 and 2020, amounts included in merger, restructuring, integration, and other primarily related to our CSB segment.

Interest Expense, net

The increase in interest expense, net, was primarily due to (i) $80 million related to the changes in fair value of interest rate swap contracts as a result of cash flow hedges no longer being highly effective, (ii) $34 million related to our fixed-rate first lien notes due to our refinancing transactions during 2020 and 2019, and (iii) $30 million related to our variable-rate first lien term loans, net of the impact of our interest rate swaps.

These increases were partially offset by a decrease in interest expense of $44 million related to our second lien notes due to the timing of partial redemptions during 2019 as well as a reduction in interest rate due to our refinancing during January 2020.

The decrease in interest expense, net, was primarily driven by the unrealized impact of interest rate swap contracts, which was a gain of $107 million and a loss of $70 million during the three months ended March 31, 2021 and 2020, respectively.

Loss on Extinguishment of Debt

During the nine months ended September 30, 2020, loss on extinguishment of debt totaled $115 million and included $66 million associated with the call premium and write-off of unamortized deferred financing costs in connection with the $1.2 billion redemption of second lien notes in February 2020 and $49 million associated with the call premium and write-off of unamortized fair value adjustments in connection with the $1 billion redemption of the ADT Notes due 2021 in September 2020.

During the nine months ended September 30, 2019, loss on extinguishment of debt totaled $103 million and included (i) $22 million associated with the call premium and the partial write-off of unamortized deferred financing costs in connection with the $300 million partial redemption of second lien notes in February 2019, (ii) $61 million associated with the call premium and partial write-off of unamortized deferred financing costs in connection with the $1 billion partial redemption of second lien notes in April 2019, (iii) $6 million associated with the partial write-off of unamortized deferred financing costs and discount in connection with the $500 million repayment of a first lien term loan in April 2019, and (iv) $13 million associated with the partial write-off of unamortized deferred financing costs and discount in connection with the amendment and restatement to our first lien credit agreement in September 2019.

During the three months ended March 31, 2021, loss on extinguishment of debt was not material.

During the three months ended March 31, 2020, loss on extinguishment of debt totaled $66 million and related to the call premium and write-off of unamortized deferred financing costs in connection with the $1.2 billion redemption of second lien notes in February 2020.

Income Tax Benefit

Income tax benefit for the nine months ended September 30, 2020 was $133 million, resulting in an effective tax rate for the period of 20.4%.

The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.9%, a 3.0% unfavorable impact from non-deductible charges primarily due to the Defenders Acquisition, and a 1.2% unfavorable impact from an increase in valuation allowances primarily due to tax credits not expected to be utilized prior to expiration.

Income tax benefit for the nine months ended September 30, 2019 was $82 million, resulting in an effective tax rate for the period of 18.8%.

The effective tax rate primarily represents the federal income tax rate of 21.0%, an 11.0% unfavorable impact from valuation allowances established on the net capital losses generated in the U.S.

and Canada related to the sale of ADT Canada, a 2.8% unfavorable impact from non-deductible goodwill impairment loss, offset by a 10.4% favorable impact from net capital losses generated in the U.S.

and Canada related to the sale of ADT Canada, and a 2.3% favorable impact from amendments to prior year tax returns.

Income tax benefit for the three months ended March 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 rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.8%, a 2.8% favorable impact of share-based compensation, partially offset by a 1.6% unfavorable impact of state legislative changes.

Income tax benefit for the three months ended March 31, 2020 was $78 million, resulting in an effective tax rate for the period of 20.6%.

The effective tax rate primarily represents the federal income tax rate of 21.0%, a state statutory tax rate, net of federal benefits, of 3.0% and a 2.4% unfavorable impact related to an increase in unrecognized tax benefits, and a 1.7% unfavorable impact from an increase in valuation allowances, primarily related to tax credits not expected to be utilized prior to expiration.

NON-GAAP MEASURES

To provide investors with additional information in connection with our results as determined in accordance with GAAP, we disclose Adjusted EBITDA and Free Cash Flow as non-GAAP measures.

These measures are not financial measures calculated in accordance with GAAP and should not be considered as a substitute for net income, operating income, cash flows, or any other measure calculated in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies.

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

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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 that of 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, (ix) financing and consent fees, (x) foreign currency gains/losses, (xi) acquisition related adjustments, and (xii) other charges and non-cash items.

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, (ix) financing and consent fees, (x) acquisition related adjustments, and (xi) other charges and non-cash items.

There are material limitations to using Adjusted EBITDA.

1 unchanged sentence

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.

Free Cash Flow

We believe that the presentation of Free Cash Flow is appropriate to provide additional information to investors about our ability to repay debt, make other investments, and pay dividends.

We define Free Cash Flow as cash flows from operating activities less cash outlays related to capital expenditures.

We define capital expenditures to include accounts purchased through our network of authorized dealers or third parties outside of our authorized dealer network;

subscriber system asset expenditures;

and purchases of property and equipment.

These items are subtracted from cash flows from operating activities because they represent long-term investments that are required for normal business activities.

Free Cash Flow adjusts for cash items that are ultimately within management’s discretion to direct, and therefore, may imply that there is less or more cash that is available than the most comparable GAAP measure.

Free Cash Flow is not intended to represent residual cash flow for discretionary expenditures since debt repayment requirements and other non-discretionary expenditures are not deducted.

These limitations are best addressed by using Free Cash Flow in combination with the cash flows as calculated in accordance with GAAP.

Adjusted EBITDA

The table below reconciles Adjusted EBITDA to net loss for the periods presented.

For the Three Months Ended For the Nine Months Ended

(in thousands) September 30, 2020 September 30, 2019 $

Change September 30, 2020 September 30, 2019 $

The table below reconciles Adjusted EBITDA to net loss:

Three Months Ended

(in thousands) March 31, 2021 March 31, 2020 $ Change

Net loss $ (47,894) $ (300,293) $ 252,399

6 unchanged sentences

Merger, restructuring, integration, and other 20,507 108,794 (88,287)

Goodwill impairment — 45,482 (45,482) — 45,482 (45,482)

Loss on sale of business (19) 55,489 (55,508) 738 55,489 (54,751)

Loss on extinguishment of debt 156 65,843 (65,687)

3 unchanged sentences

3,346 5,250 (1,904)

Foreign currency losses (gains) (3)

— 207 (207) — (531) 531

Acquisition related adjustments (3)

5 unchanged sentences

(2) Represents fees expensed associated with financing transactions.

(3) Represents the conversion of intercompany loans that are denominated in Canadian dollars to U.S.

(3) Represents amortization of purchase accounting adjustments and compensation arrangements related to acquisitions.

(4) Represents other charges and non-cash items.

The three and nine months ended September 30, 2020 include recoveries of $3 million and $7 million, respectively, of notes receivable from a former strategic investment that were previously written-off, $5 million of which is included in the nine months ended September 30, 2019.

The three and nine months ended September 30, 2019 include an estimated legal settlement, net of insurance, of $6 million.

Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

The decrease in Adjusted EBITDA was primarily related to (i) an increase in selling, general and administrative expenses, excluding items outside of our definition of Adjusted EBITDA, largely due to the Defenders Acquisition and (ii) the sale of

The decrease was partially offset by an increase from transactions in which equipment is sold outright to customers, net of the associated costs.

In connection with the anticipated transition of residential transactions arising through Defenders to a predominately Company-owned model in 2021, we could experience an adverse impact to Adjusted EBITDA related to a decrease in volume of transactions in which equipment is sold outright to residential customers in future periods as compared to our results of operations for the three months ended September 30, 2020.

Refer to the discussions above under “—Results of Operations” for further details.

Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

The decrease was partially offset by an increase from transactions in which equipment is sold outright to customers, net of the associated costs.

In connection with our transition back to a predominately Company-owned model for our residential transactions, we could experience an adverse impact to Adjusted EBITDA related to a decrease in volume of transactions in which equipment is sold outright to residential customers subsequent to September 30, 2020 as reported in our results of operations for the nine months ended September 30, 2020.

The following table presents Adjusted EBITDA in total and by segment:

Three Months Ended

(in thousands) March 31, 2021 March 31, 2020 $ Change

CSB $ 519,478 $ 537,075 $ (17,597)

Commercial 22,653 2,414 20,239

Adjusted EBITDA $ 542,131 $ 539,489 $ 2,642

Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020

Total Adjusted EBITDA remained relatively flat and includes an increase in Commercial partially offset by a decrease in CSB.

The $18 million decrease in Adjusted EBITDA in our CSB segment is primarily due to a decrease in installation and other revenue, net of the associated costs, from transactions in which equipment was sold outright to the customer due to our transition to a predominately Company-owned model and an increase in field service and call center costs.

These decreases were partially offset by a lower provision for credit losses, a reduction in total selling expenses, and an increase in recurring revenue, excluding amounts outside of our definition of Adjusted EBITDA.

The $20 million increase in Adjusted EBITDA in our Commercial segment is primarily due to lower provision for credit losses, lower general and administrative costs, and an increase in recurring revenue, excluding amounts outside of our definition of Adjusted EBITDA.

Refer to the discussions above under “—Results of Operations” for further details.

Free Cash Flow

The table below reconciles Free Cash Flow to cash flows from operating activities for the periods presented.

For the Nine Months Ended

(in thousands) September 30, 2020 September 30, 2019 $

Net cash provided by operating activities $ 993,269 $ 1,459,249 $ (465,980)

Dealer generated customer accounts and bulk account purchases (265,131) (514,487) 249,356

Subscriber system asset expenditures (272,512) (430,586) 158,074

Purchases of property and equipment (112,317) (120,140) 7,823

Free Cash Flow $ 343,309 $ 394,036 $ (50,727)

Cash Flows from Operating Activities

Refer to the discussion below under “—Liquidity and Capital Resources” for further details regarding cash flows from operating activities.

Cash Outlays Related to Capital Expenditures

Dealer generated customer accounts and bulk account purchases, subscriber system asset expenditures, and purchases of property and equipment are included in cash flows from investing activities.

Refer to the discussions below under “—Liquidity and Capital Resources” for further details regarding cash flows from investing activities.

LIQUIDITY AND CAPITAL RESOURCES

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We may, from time to time, 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 or through privately negotiated transactions or through 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 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.

We believe our cash position, borrowing capacity available under our 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.

We are a highly leveraged company with significant debt service requirements.

As of September 30, 2020, we had $489 million in cash and cash equivalents and $400 million available under our revolving credit facility.

In addition, we had an uncommitted available borrowing capacity of $159 million under our Receivables Facility, which is dependent on the volume of eligible retail installment contract receivables that can be sold under our Receivables Facility.

The carrying amount of total debt outstanding was approximately $9.7 billion as of September 30, 2020.

As of March 31, 2021, we had $123 million in cash and cash equivalents.

In addition, we had $400 million available under our revolving credit facility and an uncommitted available borrowing capacity of $102 million under our Receivables Facility that is dependent on the volume of eligible retail installment contract receivables that can be sold under our Receivables Facility.

The carrying amount of total debt outstanding was approximately $9.5 billion as of March 31, 2021.

Long-Term Debt

Significant changes in our debt during the nine months ended September 30, 2020 were as follows:

Significant changes in our debt during the three months ended March 31, 2021 were as follows:

First Lien Credit Agreement

As of September 30, 2020, we had an available borrowing capacity of $400 million under our first lien revolving credit facility (the “First Lien Revolving Credit Facility”), with no borrowings outstanding.

Second Lien Notes due 2028

During January 2020, we issued $1.3 billion aggregate principal amount of 6.250% second-priority senior secured notes due 2028 (the “Second Lien Notes due 2028”).

The proceeds from the Second Lien Notes due 2028, along with cash on hand and borrowings under the First Lien Revolving Credit Facility, were used to redeem the outstanding $1.2 billion aggregate principal amount of our 9.250% second-priority senior secured notes due 2023 (the “Prime Notes”) and pay any related fees and expenses, including the call premium on the outstanding Prime Notes.

The deferred financing costs incurred in connection with the issuance of the Second Lien Notes due 2028 were not material.

The Second Lien Notes due 2028 will mature on January 15, 2028 with semi-annual interest payment dates of January 15 and July 15, and may be redeemed at our option as follows:

• Prior to January 15, 2023, in whole at any time or in part from time to time, (a) at a redemption price equal to 100% of the principal amount of the Second Lien Notes due 2028 redeemed, plus a make-whole premium and accrued and unpaid interest as of, but excluding, the redemption date or (b) for up to 40% of the original aggregate principal amount of the Second Lien Notes due 2028 and in an aggregate amount equal to the net cash proceeds of any equity offerings, at a redemption price equal to 106.250%, plus accrued and unpaid interest, so long as at least 50% of the original aggregate principal amount of the Second Lien Notes due 2028 shall remain outstanding after each such redemption.

• On or after January 15, 2023, in whole at any time or in part from time to time, at a redemption price equal to 103.125% of the principal amount of the Second Lien Notes due 2028 redeemed and accrued and unpaid interest as of, but excluding, the redemption date.

The redemption price decreases to 101.563% on or after January 15, 2024 and decreases to 100% on or after January 15, 2025.

Additionally, upon the occurrence of specified change of control events, we must offer to repurchase the Second Lien Notes due 2028 at 101% of the principal amount, plus accrued and unpaid interest, if any, to, but not including, the purchase date.

The indenture governing the Second Lien Notes due 2028 also provides for customary events of default.

The indenture underlying the outstanding $1.2 billion aggregate principal amount of the Prime Notes was discharged during January 2020 and the Prime Notes were redeemed during February 2020 for a total redemption price of approximately $1.3 billion, which included the related call premium.

In January 2021, we amended and restated the first lien credit agreement dated as of July 1, 2015 (together with subsequent amendments and restatements, the “First Lien Credit Agreement”) to refinance the term loan facility (the “First Lien Term Loan due 2026”), which reduced the applicable margin for Adjusted London Interbank Offered Rate (“LIBOR”) loans from 3.25% to 2.75% and reduced the LIBOR floor from 1.00% to 0.75%.

Additionally, the amendment requires us to make quarterly payments equal to 0.25% of the aggregate outstanding principal amount of the First Lien Term Loan due 2026, or approximately $7 million per quarter.

We may make voluntary prepayments on the First Lien Term Loan due 2026 at any time prior to maturity at par, subject to a 1.00% prepayment premium in the event of certain specified events at any time during the six months after the closing date of the amendment.

As of March 31, 2021, we had no borrowings outstanding under our first lien revolving credit facility (the “First Lien Revolving Credit Facility”).

Receivables Facility

During March 2020, we entered into the Receivables Facility.

During April 2020, we amended the Receivables Facility to also permit financing secured by retail installment contract receivables from transactions occurring under our Company-owned model.

The Receivables Facility has a one year revolving period until March 5, 2021, which may be extended, and bears interest at a variable rate.

If the revolving period is not extended, we are required to repay the Receivables Facility in a manner consistent with the contractual collections of the underlying retail installment contract receivables.

We may make voluntary prepayments on the Receivables Facility at any time prior to maturity at par.

We obtain financing by selling or contributing certain retail installment contract receivables to our wholly-owned consolidated bankruptcy-remote special purpose entity (the “SPE”), which, pursuant to the Receivables Facility, borrows funds secured by the transferred retail installment contract receivables.

The SPE is a separate legal entity with its own creditors who will be entitled, prior to and upon the liquidation of the SPE, to be satisfied out of the SPE’s assets prior to any assets in the SPE becoming available to us (other than the SPE).

Accordingly, the assets of the SPE are not available to pay our creditors (other than the SPE), although collections from the transferred retail installment contract receivables in excess of amounts required to repay the SPE’s creditors may be remitted to us during and after the term of the Receivables Facility.

The SPE’s creditors have legal recourse to the transferred retail installment contract receivables owned by the SPE, but do not have any recourse to us (other than the SPE) for the payment of principal and interest on the SPE’s financing.

We service the transferred retail installment contract receivables and are responsible for ensuring that amounts collected from the transferred retail installment contract receivables are remitted to the SPE.

We are required to deposit payments received from the transferred retail installment contract receivables into a segregated account maintained by a third party.

On a monthly basis, the segregated account is utilized to make required principal, interest, and other payments due under the Receivables Facility.

During the nine months ended September 30, 2020, we received proceeds of $44 million under the Receivables Facility and repaid $2 million.

As of September 30, 2020, we had an outstanding balance of $41 million and an uncommitted available borrowing capacity of $159 million under the Receivables Facility.

First Lien Notes due 2027

During August 2020, we issued $1 billion aggregate principal amount of 3.375% first-priority senior secured notes due 2027 (the “First Lien Notes due 2027”).

The proceeds from the First Lien Notes due 2027, along with cash on hand, were used to redeem the outstanding $1 billion aggregate principal amount of the ADT Notes due 2021, pay accrued and unpaid interest on the ADT Notes due 2021, and pay any related fees and expenses, including the call premium on the ADT Notes due 2021.

The deferred financing costs incurred in connection with the issuance of the First Lien Notes due 2027 were not material.

The First Lien Notes due 2027 will mature on August 31, 2027 with semi-annual interest payment dates of June 15 and December 15, and may be redeemed at our option as follows:

• Prior to August 31, 2026, in whole at any time or in part from time to time, at a make-whole premium plus accrued and unpaid interest, if any, thereon to the redemption date.

• On or after August 31, 2026, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the First Lien Notes due 2027 redeemed plus accrued and unpaid interest, if any, thereon to the redemption date.

Additionally, upon the occurrence of specified change of control events, we must offer to repurchase the First Lien Notes due 2027 at 101% of the principal amount, plus accrued and unpaid interest, if any, to, but not including, the purchase date.

The indenture governing the First Lien Notes due 2027 also provides for customary events of default.

In September 2020, we redeemed $1 billion aggregate principal amount of the ADT Notes due 2021 for a total repurchase price of approximately $1.1 billion, which included the related call premium.

During the three months ended March 31, 2021, we received proceeds of $30 million under the Receivables Facility and repaid $7 million.

As of March 31, 2021, we had an outstanding balance of $98 million and an uncommitted available borrowing capacity of $102 million under the Receivables Facility that is dependent on the volume of eligible retail installment contract receivables that can be sold.

In March 2021, we amended the Receivables Facility to, among other things, extend the revolving period until March 4, 2022 and reduced the LIBOR floor from 1.00% to 0.85%.

Debt Covenants

As of September 30, 2020, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations and 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.

Issuance of Class B Common Stock

During September 2020, we amended our articles of incorporation to authorize the issuance of 100,000,000 shares of Class B common stock, par value of $0.01 per share, (“Class B Common Stock”) as well as to increase the number of authorized shares of preferred stock, par value of $0.01 per share, to 1,000,000.

The Class B Common Stock represents a new class of common stock of ADT.

Each share of Class B Common Stock has equal status and rights to dividends with a share of Common Stock.

The holders of Class B Common Stock have one vote for each share of Class B Common Stock held of record by such holder on all matters on which stockholders are entitled to vote

provided, however, that holders of Class B Common Stock, as such, are not entitled to vote on the election, appointment, or removal of directors of ADT.

Additionally, each share of Class B Common Stock will immediately become convertible into one share of Common Stock, at the option of the holder thereof, at any time following the earlier of (i) the expiration or early termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Clearance”), required prior to such holder’s conversion of all such shares of Class B Common Stock, and (ii) to the extent HSR Clearance is not required prior to such holder’s conversion of such shares of Class B Common Stock, the date that such holder owns such shares of Class B Common Stock.

During September 2020, we issued and sold 54,744,525 shares of Class B Common Stock for an aggregate purchase price of $450 million to Google in a private placement pursuant to a securities purchase agreement dated July 31, 2020 (the “Securities Purchase Agreement”).

As of the date of closing, Google held approximately 6.6% of the issued and outstanding Common Stock of ADT on an as-converted basis.

Prior to closing, the Securities Purchase Agreement provided Google with the option to purchase additional shares of Class B Common Stock, for the same price per share, up to 9.9% of the issued and outstanding Common Stock of ADT on an as-converted basis.

Google did not exercise this option.

The proceeds received will be used to reduce debt and fund growth over time.

In connection with the issuance of the Class B Common Stock, Google entered into an Investor Rights Agreement (the “Investor Rights Agreement”) with us, pursuant to which Google agreed to be bound by customary transfer restrictions and drag-along rights, and be afforded customary registration rights with respect to shares of Class B Common Stock held directly by Google.

Under the terms of the Investor Rights Agreement, Google is prohibited, subject to certain exceptions, from transferring any shares of Class B Common Stock or any shares of Common Stock issuable upon conversion of the Class B Common Stock beneficially owned by Google until the earlier of (i) the three-year anniversary of issuance, (ii) the date on which the Commercial Agreement has been terminated under certain specified circumstances, and (iii) June 30, 2022 if we breach certain of our obligations under the Commercial Agreement.

During the nine months ended September 30, 2020, we declared the following dividends on common stock:

Declaration Date Record Date Payment Date Common Stock Dividend per Share Class B Common Stock Dividend per Share

March 5, 2020 March 19, 2020 April 2, 2020 $0.035 $—

May 7, 2020 June 18, 2020 July 2, 2020 $0.035 $—

August 5, 2020 September 18, 2020 October 2, 2020 $0.035 $0.035

During the three months ended September 30, 2020, we declared dividends of $0.035 per share on Common Stock ($27 million) and $0.035 per share on Class B Common Stock ($2 million).

The amount of dividends settled in shares of Common Stock during the period was not material.

During the nine months ended September 30, 2020, we declared aggregate dividends of $0.105 per share on Common Stock ($81 million) and $0.035 per share on Class B Common Stock ($2 million).

The amount of dividends settled in shares of Common Stock during the period was not material.

On November 5, 2020, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on December 21, 2020, which will be distributed on January 4, 2021.

As of March 31, 2021, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations, and 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.

The following table presents our dividends declared on common stock during the three months ended March 31, 2021 and 2020:

(in thousands, except per share data) Common Stock

Dividends Class B Common Stock

Declaration Date Record Date Payment Date Per Share Aggregate Per Share Aggregate

2/25/2021 3/18/2021 4/1/2021 $ 0.035 $ 27,220 $ 0.035 $ 1,916

3/5/2020 3/19/2020 4/2/2020 $ 0.035 $ 27,117 $ — $ —

On May 5, 2021, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on June 17, 2021, which will be distributed on July 1, 2021.

During February 2019, we approved a dividend reinvestment plan (the “DRIP”), which allowed stockholders to designate all or a portion of the cash dividends on their shares of common stock for reinvestment in additional shares of our Common Stock.

Dividends settled in shares of Common Stock were not material during the three months ended March 31, 2021 and 2020.

The DRIP terminated in accordance with its terms on February 27, 2021.

Share Repurchase Program

On February 27, 2019, we approved a share repurchase program (the “Share Repurchase Program”), which permits us to repurchase up to $150 million of our shares of Common Stock through February 27, 2021.

We announced the Share Repurchase Program on March 11, 2019.

On March 23, 2020, we approved an increase of $75 million, inclusive of the amount then remaining under the Share Repurchase Program, in the authorized repurchase amount and an extension of the Share Repurchase Program through March 23, 2021.

We may effect these repurchases pursuant to one or more trading plans to be adopted in accordance with Rule 10b5-1 (each, a “10b5-1 plan”) under the Securities Exchange Act of 1934 (the “Exchange Act”), in privately negotiated transactions, in open market transactions, or pursuant to an accelerated share repurchase program.

We intend to conduct the Share Repurchase Program in accordance with Rule 10b-18 under the Exchange Act.

We are not obligated to repurchase any of our shares of Common Stock and the timing and amount of any repurchases will depend on legal requirements, market conditions, stock price, alternative uses of capital, and other factors.

During the three and nine months ended September 30, 2020, there were no material repurchases of shares of our Common Stock under the Share Repurchase Program.

As of September 30, 2020, we had approximately $75 million remaining in the Share Repurchase Program.

During February 2019, we approved a share repurchase program (the “Share Repurchase Program”), which authorized us to repurchase shares of our Common Stock (up to a certain amount).

There were no repurchases of any shares of Common Stock under the Share Repurchase Program during the three months ended March 31, 2021 and 2020.

The Share Repurchase Program terminated in accordance with its terms on March 23, 2021.

Cash Flow Analysis

The following table is a summary of our cash flow activity for the periods presented:

For the Nine Months Ended

(in thousands) September 30, 2020 September 30, 2019 $

The following table presents a summary of our cash flow activity:

Three Months Ended

(in thousands) March 31, 2021 March 31, 2020 $ Change

Net cash provided by operating activities $ 359,334 $ 250,229 $ 109,105

Net cash used in investing activities $ (399,112) $ (338,435) $ (60,677)

Net cash provided by (used in) financing activities $ 249,156 $ (509,716) $ 758,872

Net cash (used in) provided by financing activities $ (40,685) $ 157,611 $ (198,296)

Cash Flows from Operating Activities

The decrease in cash flows provided by operating activities was primarily due to (i) an increase in selling, general and administrative expenses largely due to the Defenders Acquisition, (ii) an increase in the volume of transactions in which equipment was sold outright to residential customers, (iii) the sale of ADT Canada, (iv) $81 million related to the settlement of a pre-existing relationship in connection with the Defenders Acquisition, and (v) an increase in interest payments of $40 million due to changes to the timing and amount of interest payments as a result of our recent financing transactions.

The increase in cash flows provided by operating activities was primarily due to (i) a payment of $81 million in the first quarter of 2020 related to the settlement of a pre-existing relationship in connection with the Defenders Acquisition and (ii) a decrease in the volume of transactions in which equipment was sold outright to residential customers.

These increases were partially offset by an increase in net payments for radio conversion costs.

The remainder of the activity in cash flows provided by operating activities 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.

In connection with our transition back to a predominately Company-owned model for our residential transactions, we expect to experience an increase in cash flows from operating activities related to a decrease in the volume of transactions in which equipment is sold outright to residential customers subsequent to September 30, 2020 as reported in our results of operations for the nine months ended September 30, 2020.

Refer to the discussions above under “—Results of Operations” for further details.

Cash Flows from Investing Activities

The decrease in cash flows used in investing activities was primarily due to (i) a decrease in the volume of dealer and bulk account purchases and an advance payment received for dealer charge-backs in connection with the Defenders Acquisition, (ii) a decrease in the volume of subscriber system asset expenditures as a result of the Equipment Ownership Model Change and the sale of ADT Canada, and (iii) proceeds received associated with the sale of a strategic investment.

These decreases were partially offset by an increase in cash used for business acquisitions, net of cash acquired, of $87 million primarily due to the Defenders Acquisition.

In connection with our transition back to a predominately Company-owned model for our residential transactions, we expect to experience an increase in cash flows used in investing activities related to an increase in the volume of subscriber system asset expenditures subsequent to September 30, 2020 as compared to the volume of subscriber system asset expenditures for the nine months ended September 30, 2020.

The increase in cash flows used in investing activities was primarily due to (i) an increase of $137 million due to a higher volume of dealer and bulk account purchases primarily related to accounts purchased from a third party in February 2021 and an advance payment received in 2020 for dealer charge-backs in connection with the Defenders Acquisition and (ii) an increase of $80 million due to a higher volume of subscriber system assets expenditures primarily as a result of the transition in 2020 to a predominately Company-owned model.

These increases were partially offset by a decrease in cash paid for business acquisitions, net of cash acquired, of $164 million primarily due to the Defenders Acquisition in 2020.

Cash Flows from Financing Activities

During the nine months ended September 30, 2020, net cash provided by financing activities primarily consisted of (i) $450 million of proceeds associated with the issuance of Class B Common Stock and (ii) $41 million of net proceeds under the Receivables Facility.

These cash inflows were partially offset by (i) $108 million related to the net repayments of long-term borrowings, (ii) $80 million related to dividend payments on common stock, and (iii) $28 million related to the payment of deferred financing fees.

During the nine months ended September 30, 2019, net cash used in financing activities primarily consisted of (i) $272 million related to the net repayments of long-term borrowings, (ii) $150 million related to repurchases of common stock, (iii) $53 million related to the payment of deferred financing fees, and (iv) $34 million related to dividend payments on common stock.

During the three months ended March 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.

During the three months ended March 31, 2020, net cash provided by financing activities primarily consisted of $202 million of net proceeds of long-term borrowings, which was partially offset by (i) $26 million of dividend payments on common stock, and (ii) $14 million related to the payment of deferred financing fees.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

In our 2020 Annual Report, we disclosed our commitments and contractual obligations.

There have been no material changes to these commitments and contractual obligations except for certain commitments pursuant to the Commercial Agreement and the changes to our long-term debt during the nine months ended September 30, 2020, as described above.

There have been no material changes to these commitments and contractual obligations, except as discussed below.

During the three months ended March 31, 2021, we entered into various commitments to purchase certain parts used in our program to replace 3G and CDMA cellular equipment used in our security systems.

As of March 31, 2021, we had $ 85 million outstanding related to these obligations.

In addition, we entered into an agreement in February 2021 with a third party to purchase customer accounts, if certain conditions are met, up to approximately $ 67 million over the remaining course of the agreement.

However, the timing and ultimate amount of these purchases are uncertain.

Refer to the discussion above under “—Liquidity and Capital Resources” for further details regarding significant changes to our long-term debt.

During October 2020, we entered into a master services agreement with Rackspace US, Inc., a related party, for the provision of cloud storage, equipment, and services to facilitate the implementation of our cloud migration strategy for certain applications.

The master services agreement includes a minimum purchase commitment of $50 million over a 7 year term.

OFF-BALANCE SHEET ARRANGEMENTS

There have been no material changes to our off-balance sheet arrangements as disclosed in our 2019 Annual Report during the nine months ended September 30, 2020.

There have been no material changes to our off-balance sheet arrangements as disclosed in our 2020 Annual Report during the three months ended March 31, 2021.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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In our 2020 Annual Report, we identified our accounting policies that 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 adoptions and pronouncements.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

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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, outcome 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 with Google, the expected timing of product commercialization with Google or any changes thereto, the successful internal development, commercialization and timing of our next generation platform and other matters are forward-looking.

management’s plans and objectives for future operations;

business prospects;

outcome 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 with Google;

the expected timing of product commercialization with Google or any changes thereto;

the successful internal development, commercialization, and timing of our next generation platform;

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 sentence, 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 similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature.

3 unchanged sentences

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 the Quarterly Report.

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.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis