ADT Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION 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. Actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled “Cautionary Statements Regarding Forward-Looking Statements” and “Item 1A. Risk Factors.” OVERVIEW 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; sense movement, smoke, fire, carbon monoxide, flooding, temperature, and other environmental conditions and hazards; and address personal emergencies, such as injuries, medical emergencies, or incapacitation. 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 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 All financial information presented in this section has been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and includes the accounts of ADT Inc. and its subsidiaries. All intercompany transactions have been eliminated. 25 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 Our subscriber-based business requires significant upfront investment to generate new customers, which in turn provides predictable recurring revenue generated from our monitoring and other services. In order to optimize returns on customer acquisitions and cash flow generation, we focus on the following key drivers of our business: 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 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 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 relocation, cost, loss to competition, or service issues. Attrition has a direct impact on our financial results, including revenue, operating income, and cash flows. 26 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 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 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. 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. 27 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 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 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”), 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. 28 KEY PERFORMANCE INDICATORS In evaluating our results, we utilize key performance indicators, which include non-GAAP measures as well as certain other operating metrics such as recurring monthly revenue and gross customer revenue attrition. Our computations of key performance indicators may not be comparable to other similarly titled measures reported by other companies. 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 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. We believe the presentation of RMR is useful because it measures the volume of revenue under contract at a given point in time. Gross Customer Revenue Attrition 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 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. Gross customer revenue attrition is defined as RMR lost as a result of customer attrition, net of dealer charge-backs and reinstated customers, excluding contracts monitored but not owned and DIY customers. Customer sites are considered canceled when all services are terminated. Dealer charge-backs represent customer cancellations charged back to the dealers because the customer canceled service during the charge-back period, which is generally thirteen months. Gross customer revenue attrition is calculated on a trailing twelve-month basis, the numerator of which is the RMR lost during the period due to attrition, net of dealer charge-backs and reinstated customers, 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. Adjusted EBITDA 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 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.” 29 RESULTS OF OPERATIONS 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) Three Months Ended Results of Operations: March 31, 2021 March 31, 2020 $ Change Monitoring and related services $ 1,062,766 $ 1,045,957 $ 16,809 Installation and other 241,938 323,795 (81,857) Total revenue 1,304,704 1,369,752 (65,048) Cost of revenue (exclusive of depreciation and amortization shown separately below) 381,166 407,986 (26,820) Selling, general and administrative expenses 449,602 453,304 (3,702) Depreciation and intangible asset amortization 469,809 489,024 (19,215) Merger, restructuring, integration, and other 20,507 108,794 (88,287) Operating loss (16,380) (89,356) 72,976 Interest expense, net (47,724) (225,367) 177,643 Loss on extinguishment of debt (156) (65,843) 65,687 Other income 1,803 2,309 (506) Loss before income taxes (62,457) (378,257) 315,800 Income tax benefit 14,563 77,964 (63,401) Net loss $ (47,894) $ (300,293) $ 252,399 Key Performance Indicators: (1) RMR $ 349,058 $ 339,182 $ 9,876 Gross customer revenue attrition (percent) 13.1% 13.5% (40) bps Adjusted EBITDA (2) $ 542,131 $ 539,489 $ 2,642 _______________________ (1) Refer to the “—Key Performance Indicators” section for the definitions of these key performance indicators. (2) Adjusted EBITDA is a non-GAAP measure. Refer to the “—Non-GAAP Measures” section for the definition of this term and a reconciliation to the most comparable GAAP measure. 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. 30 Installation and Other Revenue 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 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 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; and • 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 decreases related to contracts and related customer relationships and subscriber system assets. Merger, Restructuring, Integration, and Other 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. 31 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 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 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 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. 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. NON-GAAP MEASURES To provide investors with additional information in connection with our results as determined in accordance with GAAP, we disclose Adjusted EBITDA as a non-GAAP measure. This measure is not a financial measure calculated in accordance with GAAP, and it should not be considered as a substitute for net income, operating income, or any other measure calculated in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies. Adjusted EBITDA We believe that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about our operating profitability adjusted for certain non-cash items, non-routine items that we do not expect to continue at the same level in the future, as well as other items that are not core to our operations. Further, we believe Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against 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, 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. Adjusted EBITDA does not take into account certain significant items, including depreciation and amortization, interest, taxes, and other adjustments which directly affect our net income or loss. These limitations are best addressed by considering the economic effects of the excluded items independently and by considering Adjusted EBITDA in conjunction with net income or loss as calculated in accordance with GAAP. 32 Adjusted EBITDA 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 Interest expense, net 47,724 225,367 (177,643) Income tax benefit (14,563) (77,964) 63,401 Depreciation and intangible asset amortization 469,809 489,024 (19,215) Amortization of deferred subscriber acquisition costs 28,642 22,627 6,015 Amortization of deferred subscriber acquisition revenue (37,159) (29,477) (7,682) Share-based compensation expense 16,019 23,499 (7,480) Merger, restructuring, integration, and other 20,507 108,794 (88,287) Loss on extinguishment of debt 156 65,843 (65,687) Radio conversion costs, net (1) 58,729 6,639 52,090 Financing and consent fees (2) 3,346 5,250 (1,904) Acquisition related adjustments (3) (248) 1,377 (1,625) Other (4) (2,937) (1,197) (1,740) Adjusted EBITDA $ 542,131 $ 539,489 $ 2,642 ___________________ (1) Represents costs, net of any incremental revenue earned, associated with replacing cellular technology used in many of our security systems pursuant to a replacement program. (2) Represents fees expensed associated with financing transactions. (3) Represents amortization of purchase accounting adjustments and compensation arrangements related to acquisitions. (4) Represents other charges and non-cash items. 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. 33 LIQUIDITY AND CAPITAL RESOURCES Liquidity We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our revolving credit facility and Receivables Facility, and the issuance of equity and/or debt securities as appropriate given market conditions. Our future cash needs are expected to include cash for operating activities, working capital, capital expenditures, strategic investments, periodic principal and interest payments on our debt, and potential dividend payments to our stockholders. 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 are a highly leveraged company with significant debt service requirements. 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 three months ended March 31, 2021 were as follows: First Lien Credit Agreement 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 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 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. 34 Dividends 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 Dividends 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 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 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 (used in) provided by financing activities $ (40,685) $ 157,611 $ (198,296) Cash Flows from Operating Activities 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. Refer to the discussions above under “—Results of Operations” for further details. Cash Flows from Investing Activities 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. 35 Cash Flows from Financing Activities 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 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. OFF-BALANCE SHEET ARRANGEMENTS 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 The accompanying condensed consolidated financial statements are prepared in accordance with GAAP, which requires us to select accounting policies and make estimates that affect amounts reported in the condensed consolidated financial statements and the accompanying notes. Management’s estimates are based on the relevant information available at the end of each period. Actual results could differ materially from these estimates under different assumptions or market conditions. 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 pronouncements and adoptions. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report contains certain information that may constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. While we have specifically identified certain information as being forward-looking in the context of its presentation, we caution you that all statements contained in this report that are not clearly historical in nature, including statements regarding anticipated financial performance; management’s plans and objectives for future operations; business prospects; 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. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. 36 Forward-looking information involves risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements, including without limitation, the risks and uncertainties disclosed or referenced in Part II Item 1A. of this report under the heading “Risk Factors.” Therefore, caution should be taken not to place undue reliance on any such forward-looking statements. Much of the information in this report that looks toward future performance of the Company is based on various factors and important assumptions about future events that may or may not actually occur. As a result, our operations and financial results in the future could differ materially and substantially from those we have discussed in the forward-looking statements included in this Quarterly Report. 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.