What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2021-08-04 compared with 2021-05-05 · 200 added, 98 removed, 266 unchanged (53% of the section changed)

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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.

We are one of the largest full-service security and home automation 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 June 30, 2021, we served approximately 6.6 million recurring customers, excluding contracts monitored but not owned.

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

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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.

and its wholly-owned subsidiaries.

All intercompany transactions have been eliminated.

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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;

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

and (iii) dedicated corporate and other costs.

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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.

Our subscriber-based offerings require significant upfront investment to generate new customers, which in turn provide 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:

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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.

In addition, we may experience an increase in costs associated with offering a wider variety of products and services, as well as an increase in costs associated with providing more interactive services.

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

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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.

During March 2020, the World Health Organization declared the outbreak of a novel coronavirus as a pandemic (the “COVID-19 Pandemic”).

While responses have varied by individuals, businesses, and state and local municipalities, the COVID-19 Pandemic has had certain notable adverse impacts on general economic conditions, including the temporary closures of many businesses, increased governmental regulations, supply chain disruptions, and changes in 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, such as (i) detailed protocols for infectious disease safety for employees, (ii) employee daily wellness checks, and (iii) certain work from home actions, including for the majority of our call center professionals.

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.

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

We have not sought or requested government assistance as a result of the COVID-19 Pandemic, but we did experience a favorable cash flow impact 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 implementing certain work from home actions, we also instituted various cost control measures.

Furthermore, we believe uncertainties around the economic environment and COVID-19 Pandemic increase consumer and business awareness of the need for security.

In 2020, we experienced a lower volume of customer relocations and used temporary pricing and retention initiatives for existing customers, which we believe helped counterbalance any increase in gross customer revenue attrition as a result of changes in consumer or business spending caused by the COVID-19 Pandemic.

As the economic environment continues to evolve in response to the COVID-19 Pandemic, we may continue to experience an increase in the number of relocations or other factors, which could impact our results including gross customer revenue attrition.

In addition, we believe the COVID-19 Pandemic affected the seasonal trends we have historically experienced with respect to residential customers.

Prior to 2020, new customer additions and our disconnect rates have typically been higher during the second and third calendar quarters of each year relative to the first and fourth quarters.

Several factors, including the timing of household moves, caused deviations in these trends during 2020.

We are currently unable to determine the ongoing impact the COVID-19 Pandemic will have on our seasonality, and we may experience fluctuations in certain trends in the future.

Due to the evolving and uncertain nature of the COVID-19 Pandemic, it is possible that its effects could materially impact our estimates and financial results 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 estimate that we will incur between $250 million to $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 June 30, 2021, we have incurred $196 million of net costs, of which $119 million was incurred during the six months ended June 30, 2021.

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

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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.

As of June 30, 2021, we provided services to approximately 800 thousand customer sites that transmit signals via 3G or CDMA networks, of which approximately 80% have sunset dates in early 2022.

Given the current network retirement dates, we estimate that we will incur most of the remaining 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.

However, as a result of recent worldwide shortages for certain electronic components, we expect to

continue to replace 3G radios primarily using traditional methods, and we will use Cell Bounce product to complement these traditional methods to the extent possible.

Google Commercial Agreement

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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.

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

SIGNIFICANT EVENTS

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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.

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 pay 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”).

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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.

As a result, we began transitioning 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.

Since March 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.

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RESULTS OF OPERATIONS

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

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

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

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Results of Operations:

March 31, 2021 March 31, 2020 $ Change

June 30, 2021 June 30, 2020 $ Change

Monitoring and related services $ 1,083,520 $ 1,041,379 $ 42,141

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

381,585 376,347 5,238

Selling, general, and administrative expenses 445,636 414,711 30,925

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Merger, restructuring, integration, and other 4,804 12,038 (7,234)

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

Operating (loss) income (1,879) 50,422 (52,301)

Interest expense, net (166,525) (187,265) 20,740

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RMR $ 352,428 $ 338,780 $ 13,648

Gross customer revenue attrition (percent) 13.1% 13.5% (40) bps

Gross customer revenue attrition (percent) 13.3 % 13.1 % N/A

Adjusted EBITDA (2)

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(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.

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

N/A—Not applicable.

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

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(in thousands)

March 31, 2021 March 31, 2020 $ Change

June 30, 2021 June 30, 2020 $ Change

CSB $ 965,233 $ 935,957 $ 29,276

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Total M&S Revenue $ 1,083,520 $ 1,041,379 $ 42,141

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.

The increase in total M&S Revenue was primarily attributable to higher recurring revenue in CSB, which was driven by (i) improvements in average pricing as new and existing customers selected higher priced interactive and other services and (ii) an increase in the number of customers over the period primarily due to a higher volume of dealer-generated and bulk account purchases.

The increase in Commercial was driven by higher recurring revenue primarily due to an increase in the number of customers over the period, including the acquisition of businesses and customer accounts and improvements in customer retention.

Refer to the discussion below under “—M&S Revenue” for the six months ended June 30, 2021 compared to 2020 for changes in RMR and gross customer revenue attrition.

Installation and Other Revenue

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(in thousands)

March 31, 2021 March 31, 2020 $ Change

June 30, 2021 June 30, 2020 $ Change

CSB $ 57,414 $ 166,229 $ (108,815)

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Total installation and other revenue $ 220,897 $ 290,008 $ (69,111)

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.

Total installation and other revenue decreased primarily due to a lower volume of outright sales transactions in CSB, driven by our transition to a predominately Company-owned model, partially offset by an increase in the current period in outright sales transactions in Commercial as compared to the prior period that was impacted by the COVID-19 Pandemic, as well as from acquisitions.

Cost of Revenue

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(in thousands)

March 31, 2021 March 31, 2020 $ Change

June 30, 2021 June 30, 2020 $ Change

CSB $ 187,766 $ 215,301 $ (27,535)

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Total cost of revenue $ 381,585 $ 376,347 $ 5,238

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.

Total cost of revenue remained relatively flat year over year and included a decrease in CSB offset by an increase in Commercial.

The decrease in CSB was primarily driven by a decrease in installation costs due to a lower volume of outright sales transactions as a result of our transition to a predominately Company-owned model.

The decrease was partially offset by higher field service and call center costs primarily due to an increase in service ticket and call volume as compared to the prior period that was impacted by the COVID-19 Pandemic.

The increase in Commercial was driven by an increase in installation costs in the current period as compared to the prior period that was impacted by the COVID-19 Pandemic, partially offset by cost savings initiatives.

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;

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

The increase in selling, general, and administrative expenses was primarily driven by:

• increases in radio conversion costs of $57 million primarily related to an increase in the number of conversions of customers in our CSB segment;

• decreases in the provision for credit losses of $18 million and $4 million in our CSB and Commercial segments, respectively, primarily due to the impact of the COVID-19 Pandemic in the prior year;

• decreases in share-based compensation, as well as lower selling costs (primarily commissions) partially offset by an increase in amortization of deferred subscriber acquisition costs.

Interest Expense, net

The decrease in interest expense, net, was primarily driven by an unrealized loss of $14 million on interest rate swaps contracts not designated as cash flow hedges during the three months ended June 30, 2021, as compared to an unrealized loss of $28 million during the prior period.

Income Tax Benefit

Income tax benefit for the three months ended June 30, 2021 was $41 million, resulting in an effective tax rate for the period of 24.6%.

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%, and a 0.6% favorable impact from prior year tax return adjustments.

Income tax benefit for the three months ended June 30, 2020 was $28 million, resulting in an effective tax rate for the period of 20.7%.

The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.9%, a 9.7% unfavorable impact from non-deductible charges primarily due to the Defenders Acquisition, partially offset by a 6.7% favorable impact related to a decrease in unrecognized tax benefits.

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.

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

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

(in thousands, except as otherwise indicated)

Six Months Ended

Results of Operations:

June 30, 2021 June 30, 2020 $ Change

Monitoring and related services $ 2,146,286 $ 2,087,336 $ 58,950

Installation and other 462,835 613,803 (150,968)

Total revenue 2,609,121 2,701,139 (92,018)

Cost of revenue (exclusive of depreciation and amortization shown separately below) 762,751 784,333 (21,582)

Selling, general, and administrative expenses 895,238 868,015 27,223

Depreciation and intangible asset amortization 944,080 966,893 (22,813)

Merger, restructuring, integration, and other 25,311 120,832 (95,521)

Operating loss (18,259) (38,934) 20,675

Interest expense, net (214,249) (412,632) 198,383

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

Other income 3,336 4,580 (1,244)

Loss before income taxes (229,328) (512,829) 283,501

Income tax benefit 55,584 105,795 (50,211)

Net loss $ (173,744) $ (407,034) $ 233,290

Key Performance Indicators:

RMR $ 352,428 $ 338,780 $ 13,648

Gross customer revenue attrition (percent) 13.3% 13.1% N/A

Adjusted EBITDA (2)

$ 1,083,996 $ 1,102,599 $ (18,603)

_______________________

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

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

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

N/A—Not applicable.

Monitoring and Related Services Revenue

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

Six Months Ended

(in thousands)

June 30, 2021 June 30, 2020 $ Change

CSB $ 1,916,481 $ 1,873,989 $ 42,492

Commercial 229,805 213,347 16,458

Total M&S Revenue $ 2,146,286 $ 2,087,336 $ 58,950

Total RMR was $352 million and $339 million as of June 30, 2021 and 2020, respectively.

The increase in RMR was primarily due to improvements in average pricing and net customer additions.

Gross customer revenue attrition was 13.3% and 13.1% as of June 30, 2021 and 2020, respectively.

The increase in gross customer revenue attrition was attributable to a lower volume of dealer charge-backs primarily related to the Defenders Acquisition in 2020 and an increase in relocations, partially offset by fewer non-payment disconnects and the benefit of customer retention initiatives.

Installation and Other Revenue

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

Six Months Ended

(in thousands)

June 30, 2021 June 30, 2020 $ Change

CSB $ 144,771 $ 339,364 $ (194,593)

Commercial 318,064 274,439 43,625

Total installation and other revenue $ 462,835 $ 613,803 $ (150,968)

Cost of Revenue

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

Six Months Ended

(in thousands)

June 30, 2021 June 30, 2020 $ Change

CSB $ 381,137 $ 440,302 $ (59,165)

Commercial 381,614 344,031 37,583

Total cost of revenue $ 762,751 $ 784,333 $ (21,582)

The decrease in total cost of revenue was primarily attributable to CSB partially offset by an increase in Commercial.

The decrease in CSB was primarily driven by a decrease in installation costs due to a lower volume of outright sales transactions as a result of our transition to a predominately Company-owned model.

Selling, General, and Administrative Expenses

The increase in selling, general, and administrative expenses was driven by:

• increases in radio conversion costs of $111 million primarily related to an increase in the number of conversions of customers in our CSB segment;

• decreases in the provision for credit losses of $39 million and $15 million in our CSB and Commercial segments, respectively, primarily due to the impact of the COVID-19 Pandemic in the prior year;

• decreases in share-based compensation, as well as lower selling costs (primarily commissions) partially offset by an increase in amortization of deferred subscriber acquisition costs.

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.

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.

During the six months ended June 30, 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 six months ended June 30, 2020, merger, restructuring, integration, and other primarily included losses of $81 million associated with the settlement of a pre-existing relationship in connection with the Defenders Acquisition and $12 million due to fair value remeasurements on a strategic investment.

During the six months ended June 30, 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.

The decrease in interest expense, net, was primarily driven by an unrealized gain of $92 million on interest rate swap contracts not designated as cash flow hedges during the six months ended June 30, 2021, as compared to an unrealized loss of $98 million during the prior year.

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.

During the six months ended June 30, 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.

Income tax benefit for the six months ended June 30, 2021 was $56 million, resulting in an effective tax rate for the period of 24.2%.

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%, and a 1.0% favorable impact of share-based compensation.

Income tax benefit for the six months ended June 30, 2020 was $106 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%, a 2.8% unfavorable impact from non-deductible charges primarily due to the Defenders Acquisition, and a 1.3% unfavorable impact from an increase in valuation allowances primarily due to tax credits not expected to be utilized prior to expiration.

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The table below reconciles Adjusted EBITDA to net loss:

Three Months Ended

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

Three Months Ended Six Months Ended

(in thousands) June 30, 2021 June 30, 2020 $ Change June 30, 2021 June 30, 2020 $ Change

Net loss $ (125,850) $ (106,741) $ (19,109) $ (173,744) $ (407,034) $ 233,290

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399 10 389 3,745 5,260 (1,515)

Acquisition related adjustments (3)

(944) (2,608) 1,664 (4,129) (2,428) (1,701)

(2,937) (1,197) (1,740)

Adjusted EBITDA $ 541,865 $ 563,110 $ (21,245) $ 1,083,996 $ 1,102,599 $ (18,603)

2 unchanged sentences

(2) Represents fees expensed associated with financing transactions.

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

(3) 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

Three Months Ended Six Months Ended

(in thousands) June 30, 2021 June 30, 2020 $ Change June 30, 2021 June 30, 2020 $ Change

CSB $ 509,897 $ 550,686 $ (40,789) $ 1,029,375 $ 1,087,761 $ (58,386)

1 unchanged sentence

Adjusted EBITDA $ 541,865 $ 563,110 $ (21,245) $ 1,083,996 $ 1,102,599 $ (18,603)

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.

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

The decrease in total Adjusted EBITDA was primarily attributable to CSB, which was driven by a decrease in installation and other revenue, net of the associated costs, from a lower volume of outright sales transactions primarily due to our transition to a predominately Company-owned model, as well as higher field service and call center costs.

This decrease was partially offset by (i) higher recurring revenue, (ii) lower selling expenses (primarily commissions), and (iii) a lower provision for credit losses.

The increase in Adjusted EBITDA in Commercial was driven by higher installation and other revenue, net of the associated costs, in the current period as compared to the prior period that was impacted by the COVID-19 Pandemic, as well as cost savings initiatives.

The explanations above exclude amounts outside of our definition of Adjusted EBITDA, as applicable.

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

Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

This decrease was partially offset by (i) higher recurring revenue, (ii) a lower provision for credit losses, and (iii) lower selling expenses (primarily commissions).

The increase in Adjusted EBITDA in Commercial was driven by (i) higher installation and other revenue, net of the associated costs, in the current period as compared to the prior period that was impacted by the COVID-19 Pandemic, as well as cost savings initiatives, (ii) higher recurring revenue, and (iii) a lower provision for credit losses.

The explanations above exclude amounts outside of our definition of Adjusted EBITDA, as applicable.

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

LIQUIDITY AND CAPITAL RESOURCES

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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.

As of June 30, 2021, we had $150 million in cash and cash equivalents.

In addition, we had $400 million available under our first lien revolving credit facility (the “First Lien Revolving Credit Facility”) and an uncommitted available borrowing capacity of $70 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 $9.6 billion as of June 30, 2021.

Long-Term Debt

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

Significant changes in our debt during the six months ended June 30, 2021 were as follows:

First Lien Credit Agreement

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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”).

As of June 30, 2021, we had no borrowings outstanding under our First Lien Revolving Credit Facility.

In July 2021, we further amended and restated the First Lien Credit Agreement with respect to the First Lien Revolving Credit Facility, which extended its maturity date to June 23, 2026, subject to certain conditions, and obtained an additional $175 million of commitments.

After giving effect to the Amendment and Restatement dated as of July 2, 2021, aggregate commitments under the First Lien Revolving Credit Facility were $575 million.

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.

During the six months ended June 30, 2021, we received proceeds of $71 million under the Receivables Facility and repaid $17 million.

As of June 30, 2021, we had an outstanding balance of $130 million and an uncommitted available borrowing capacity of $70 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%.

In July 2021, we entered into a Receivables Financing Agreement (the “Receivables Financing Agreement”), which amended and restated our Receivables Purchase Agreement related to our Receivables Facility.

The Receivables Financing Agreement, among other things, maintains an uncommitted secured lending arrangement among the parties, and provides for certain associated revisions to funding, prepayment, reporting, and similar mechanics;

and make certain revisions relating to and facilitating the potential future syndication of the loans made under the Receivables Facility to other lenders.

First-Lien Notes Due 2029

In July 2021, we issued $1.0 billion aggregate principal amount of 4.125% first-priority senior secured notes due 2029 (the “First Lien Notes Due 2029”).

The First Lien Notes Due 2029 will mature on August 1, 2029 with semi-annual interest payment dates of February 1 and August 1 of each year, beginning February 1, 2022.

We intend to use the proceeds from the issuance of the First Lien Notes Due 2029, along with cash on hand, to redeem all of the $1.0 billion outstanding aggregate principal amount of the Company’s 3.50% notes due 2022 (the “ADT Notes due 2022”) that mature on July 15, 2022, and pay related fees and expenses in connection with these transactions.

In July 2021, we issued a Notice of Redemption with respect to all of the outstanding ADT Notes Due 2022, and we expect to redeem the ADT Notes Due 2022 on August 28, 2021, at a redemption price calculated pursuant to the ADT Notes Due 2022 Indenture, plus accrued and unpaid interest.

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.

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

As of June 30, 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 six months ended June 30, 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

Six Months Ended June 30, 2021

5/5/2021 6/17/2021 7/1/2021 $ 0.035 $ 27,268 $ 0.035 $ 1,916

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

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.

Total $ 0.070 $ 54,488 $ 0.070 $ 3,832

Six Months Ended June 30, 2020

5/7/2020 6/18/2020 7/2/2020 $ 0.035 $ 26,767 $ — $ —

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

Total $ 0.070 $ 53,884 $ — $ —

On August 4, 2021, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on September 16, 2021, which will be distributed on October 5, 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.

Prior to termination, dividends settled in shares of Common Stock were not material during the three and six months ended June 30, 2021 and 2020.

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.

Prior to termination, repurchases of shares of Common Stock under the Share Repurchase Program were not material during the three and six months ended June 30, 2021 and 2020.

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

Six Months Ended

(in thousands) June 30, 2021 June 30, 2020 $ Change

Net cash provided by operating activities $ 785,660 $ 629,007 $ 156,653

Net cash used in investing activities $ (777,162) $ (535,574) $ (241,588)

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

Net cash used in financing activities $ (59,740) $ (96,027) $ 36,287

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.

The increase in net cash provided by operating activities was primarily due to (i) a decrease in the volume of residential outright sales transactions, (ii) a payment in the first quarter of 2020 of $81 million related to the settlement of a pre-existing relationship in connection with the Defenders Acquisition, and (iii) a decrease in cash interest of $23 million.

The increase in net cash provided by operating activities was partially offset by higher net payments for radio conversion costs of $116 million.

The remainder of the activity related to changes in assets and liabilities due to the volume and timing of other operating cash receipts and payments with respect to when the transactions are reflected in earnings.

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

Cash Flows from Investing Activities

The 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.

The increase in net cash used in investing activities was primarily due to (i) an increase of $202 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 and (ii) an increase of $195 million due to a higher volume of dealer generated customer accounts and bulk account purchases including 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.

The increase in net cash used in investing activities was partially offset by a decrease in cash paid for business acquisitions, net of cash acquired, of $163 million primarily due to the Defenders Acquisition in 2020.

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.

During the six months ended June 30, 2021, net cash used in financing activities primarily consisted of $58 million of dividend payments on common stock and $28 million of payments on interest rate swap contracts that included an other-than-insignificant financing element at inception.

These outflows were partially offset by $55 million of net proceeds under the Receivables Facility.

During the six months ended June 30, 2020, net cash used in financing activities primarily consisted of $53 million of dividend payments on common stock, $34 million of net repayments of long-term borrowings, and $16 million related to the payment of deferred financing fees.

These outflows were partially offset by $19 million of net proceeds under the Receivables Facility.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

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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.

During the six months ended June 30, 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 June 30, 2021, we had $ 55 million outstanding related to these obligations.

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.

During the six months ended June 30, 2021, there have been no material changes to our off-balance sheet arrangements as disclosed in our 2020 Annual Report.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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What changed 10-Q

Item 2. Management’s Discussion and Analysis