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Item 7. Management’s Discussion and Analysis

2022-03-01 compared with 2021-02-25 · 405 added, 432 removed, 207 unchanged (80% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report to enhance the understanding of our financial condition, changes in financial condition, and results of operations.

The following discussion and analysis represents year-to-year comparisons between 2020 and 2019.

Discussion and analysis of year-to-year comparisons between 2019 and 2018 are omitted from this Annual Report and are located in Item 7.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report on Form 10-K for the year ended December 31, 2019, which was filed with the SEC on March 10, 2020.

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 Annual Report titled “Item 1A.

Risk Factors” and “Cautionary Statements Regarding Forward-Looking Statements.”

We are a leading provider of security, automation, and smart home solutions serving consumer and business customers 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 DIFM, DIY, mobile, and digital-based offerings for residential, small business, and larger commercial customers.

Our baseline 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.

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 according to the type of service contract and customer preference.

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 residential and commercial environments.

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

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

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

As part of our innovative and dynamic emerging markets, 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.

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

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

Additionally, we offer personal emergency response system products and services, which 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.

We have been successful in improving certain of our operating key performance indicators in recent years, such as customer acquisition efficiency and customer retention.

We believe these improvements in our fundamentals have positioned us well to achieve long-term capital efficient growth.

During 2020, we commenced certain ongoing strategic initiatives that we believe will be transformative to our business.

We have seen an increase in interest in smart home offerings and other mobile technology applications that we believe is attributable to a variety of factors, including advancements in technology, younger

generations of consumers, and shifts to de-urbanization.

Our strategic initiatives are intended to help us satisfy consumer and commercial demands in light of these macro-level dynamics and to position us for sustainable growth for years to come.

As of December 31, 2020, we served approximately 6.5 million recurring 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.

BASIS OF PRESENTATION

The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto included elsewhere in this Annual Report.

This section is intended to (i) provide material information relevant to the assessment of our results of operations and cash flows from operations and from outside sources;

(ii) enhance the understanding of our financial condition, changes in financial condition, and results of operations;

and (iii) discuss material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future performance or of future financial condition.

Included below are year-over-year comparisons between 2021 and 2020, as well as 2020 and 2019, where applicable, reflecting our current segment structure.

Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” for details regarding our segment change.

For further information on year-over-year comparisons between 2020 and 2019 for those items not affected by our segment change, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report for the year ended December 31, 2020, which was filed with the SEC on February 25, 2021.

The following discussion and analysis contains forward-looking statements about our business, operations, and financial performance based on current plans and estimates involving risks, uncertainties, and assumptions, which could differ materially from actual results.

Factors that could cause such differences are discussed in the sections of this Annual Report titled Item 1A “Risk Factors” and “Cautionary Statements Regarding Forward-Looking Statements.”

OVERVIEW AND BASIS OF PRESENTATION

We are a leading provider of security, interactive, and smart home solutions serving residential, small business, and commercial customers in the U.S, and with the acquisition of Sunpro Solar in December 2021, we are now also a leading provider of residential solar and energy storage solutions.

Our mission is to empower people to protect and connect to what matters most - their families, homes, and businesses - by delivering safe, smart, and sustainable lifestyle-driven solutions through professionally installed, DIY, and mobile or other digital-based offerings supported by our 24/7 professional monitoring services.

All financial information presented in this section has been prepared in U.S.

2 unchanged sentences

All intercompany transactions have been eliminated.

We report financial and operating information in one segment.

However, we expect the manner in which the CODM evaluates results to change during the first quarter of 2021, and as a result, we anticipate a change in our operating and reportable segment structure.

Beginning in the fourth quarter of 2021, we report financial and operating information in the following three segments:

CSB, Commercial, and Solar.

For a more detailed discussion of our business and segments, refer to Item 1 “Business” and Note 1 “Description of Business and Summary of Significant Accounting Policies” in the Notes to Consolidated Financial Statements in Item 15 “Exhibit and Financial Statement Schedules,” respectively.

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

We have been focused on building the right platform for growth, which includes:

improving customer satisfaction, increasing our recurring monthly revenue through customer acquisition, improving customer retention, reducing our revenue payback period, increasing the value of our offerings to customers through new products and services, and increasing the rate at which new customers opt for our interactive services.

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

The overall economic condition in the geographies in which we operate can impact our ability to attract new customers and grow our business in all customer channels:

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

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

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

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

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

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

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

• Growth in our residential and small business customer bases can be influenced by the overall state of the housing market, the perceived threat of crime, significant life events such as the birth of a child or opening of a new business, or incentives provided by insurance carriers.

• Growth in our commercial customer base can be influenced by the rate at which new businesses begin operations or existing businesses grow, as well as applicable building codes and insurance policies.

• Growth in our solar customer base can be influenced by the availability of rebates, tax credits, and other financial incentives, as well as traditional energy prices and grid reliability.

The demand for our products and services is also impacted by the price and quality of our products and services compared to those of our competitors.

As of December 31, 2021, we served approximately 6.6 million recurring revenue customers, excluding contracts monitored, but not owned.

Our subscriber-based offerings require significant upfront investment to generate new customers, which in turn provides predictable recurring revenue generated from our monitoring and other services.

While the economics of an installation can vary depending on the customer acquisition channel, type of customer, and product offering, we generally achieve revenue break-even in less than two and a half years, which remains relatively consistent year-over-year.

A portion of our subscriber 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.

COVID-19 Pandemic

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

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

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

The COVID-19 Pandemic has had a notable adverse impact on general economic conditions, including 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 channel to a greater extent than our residential channel, we believe our overall recurring revenue and highly variable subscriber acquisition cost model provides a solid financial foundation for strong cash flow generation.

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

We have not sought or requested government assistance as a result of the COVID-19 Pandemic, but we 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 personal protective equipment for our employees and work from home actions, we also instituted various temporary cost control measures.

Furthermore, we believe the economic downturn, the recent civil unrest, and continued economic and COVID-19 Pandemic uncertainties increase awareness of the need for security, which together with 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 believe advancements in technology, younger generations of consumers, and shifts to de-urbanization have increased consumer interest in smart home offerings and other mobile technology applications;

and we have made significant progress toward increasing the variety of our offerings to accommodate these changing interests.

As a result of this, we may experience an increase in service costs associated with items such as (i) offering a wider variety of products and services, (ii) providing more interactive and smart home solutions, (iii) replacing or upgrading certain system components due to technological advancements or otherwise, and (iv) rising costs due to supply chain disruptions.

To aid in reducing the potential increase in service costs, we implemented Virtual Service Support in July 2021, which provides customers the ability to live video stream with our skilled technicians to troubleshoot and resolve service issues.

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.

We expect this platform will offer a seamless experience across security, life safety, automation, and analytics through a common application.

Additionally, we expect the platform will integrate the user experience, customer service experience, and back-end support.

In December 2021, we completed the Sunpro Solar Acquisition, which expanded our offerings and allowed us to enter the residential solar market.

Consumer acceptance of solar and battery storage as the future of energy technology is growing.

We believe solar is the next logical extension for our offerings, which will provide us with the ability to offer an integrated home experience and increase our share in both markets.

COVID-19 Pandemic Update

The COVID-19 Pandemic, including recent variants such as Delta and Omicron, caused certain notable adverse impacts on general economic conditions, including temporary and permanent closures of many businesses, increased governmental regulations, supply chain disruptions, and changes in consumer spending.

The COVID-19 Pandemic impacted our commercial businesses to a greater extent than our residential businesses.

However, we believe our recurring revenue and highly variable subscriber acquisition cost model provides a solid financial foundation for strong cash flow generation.

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

In addition, we believe uncertainties around the economic environment and COVID-19 Pandemic have increased consumer and business awareness of the need for security.

We 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”).

This included the delayed payment of payroll taxes, 50% of which we paid as of December 31, 2021, and the other 50% of which we expect to pay by the 2022 deadline.

Prior to 2020, new customer additions and our disconnect rates on residential security customers have typically been higher during the second and third calendar quarters of each year relative to the first and fourth quarters due to several factors, such as the timing of household moves.

We believe the COVID-19 Pandemic affected these seasonal trends beginning in 2020.

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

During the second half of 2021, we began to experience an increase in relocations in line with pre-pandemic trends.

However, we are currently unable to determine whether there will be any ongoing impact on our seasonality, and we may continue to experience fluctuations in certain trends, such as relocations, in the future.

We considered the emergence and pervasive economic impact of the COVID-19 Pandemic in our assessment of our financial position, results of operations, cash flows, and certain accounting estimates as of and for the year ended December 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 consolidated financial statements in future reporting periods.

Equipment Ownership Model Changes

In 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 allowing 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 transitioned our security system ownership model from a predominately Company-owned model to a predominately customer-owned model.

In 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.

In 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 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 Defenders Acquisition in January 2020.

Substantially all new CSB transactions since March 2021 take place under a Company-owned model.

These equipment ownership model changes impacted our results of operations and cash flow presentation, as described in the following sections, during 2021 and 2020 due to different accounting policies applicable to a Company-owned model versus a customer-owned model.

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

As we introduce new products and services, enhance our current offerings, continue building our partnership with Google, and seek to satisfy consumer preferences, we may see additional shifts between ownership models, which could impact results in future periods;

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

Radio Conversion Costs

The providers of 3G and CDMA cellular networks have notified us that they will be retiring their 3G and CDMA networks during 2022.

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

We continue to estimate the range of net costs for this replacement program at $225 million to $300 million through 2022, of which we have incurred $77 million through December 31, 2020.

We expect to incur approximately $145 million to $220 million of net costs during 2021.

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

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

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

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

Commercial Agreement

In addition to the issuance and sale of Class B Common Stock to Google, we entered into the Commercial Agreement, pursuant to which Google has agreed to supply us with certain Google devices as well as certain Google video and analytics services (“Google Services”), for sale to our customers.

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

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

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

During 2019, we commenced a program to replace the 3G and CDMA cellular equipment used in many of our security systems as a result of the cellular network providers notifying us they will be retiring their 3G and CDMA networks during 2022.

From inception of this program through December 31, 2021, we incurred approximately $288 million of net radio conversion costs, of which $211 million was incurred during 2021.

The cost and pace of this program have been influenced by our ability to access customer sites due to the COVID-19 Pandemic, among other reasons, and cost-sharing opportunities with suppliers, carriers, and customers, as well as new and innovative technologies.

As of December 31, 2021, we provided services to approximately 250 thousand customer sites transmitting signals via 3G or CDMA networks and having sunset dates in February and December 2022, respectively.

As of the start of the 3G sunset process in February 2022, we do not expect the remaining radio conversion costs and related incremental revenue to be material.

Google Commercial Agreement

Pursuant to the Google Commercial Agreement, Google has agreed to supply us with Google Services for sale to our customers.

Subject to customary termination rights related to breach and change of control, the Google Commercial Agreement has an initial term of seven years from the date that the Google Service is successfully integrated into our end-user security and automation platform.

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

Further, subject to certain carve-outs, we have agreed to exclusively sell Google Services and smart-home, security, and safety devices to our customers.

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

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

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

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

Upon termination of the Commercial Agreement, we will no longer have rights to sell the Google Service or devices to new customers, subject to an applicable transition period.

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

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

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

Next Generation Platform

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 approximately $50 million during 2021 associated with the development of our next generation platform.

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:

Initial Public Offering

During January 2018, we completed our IPO in which we issued and sold 105,000,000 shares of common stock at an initial public offering price of $14.00 per share.

Net proceeds from the IPO were $1.4 billion, after deducting underwriting discounts, commissions, and offering expenses.

The proceeds received from the IPO were used to reduce our debt and redeem the mandatorily redeemable preferred securities in full, which resulted in an aggregate loss on extinguishment of debt of $275 million.

In addition, we modified certain share-based compensation awards as well as granted one-time awards in connection with the IPO, which represented approximately $116 million of share-based compensation expense during 2018.

As a result of our IPO, we incur additional legal, accounting, board compensation, and other expenses that we did not previously incur prior to becoming a public company, including costs associated with SEC reporting and corporate governance requirements.

These requirements include compliance with the Sarbanes-Oxley Act of 2002, as amended, as well as other rules implemented by the SEC and the national securities exchanges.

Our consolidated financial statements following our IPO reflect the impact of these expenses.

Red Hawk Acquisition

During December 2018, we acquired all of the issued and outstanding capital stock of Red Hawk, a leader in commercial fire, life safety, and security services, for total consideration of approximately $316 million and cash paid of $299 million, net of cash acquired.

We funded the Red Hawk Acquisition from a combination of debt financing and cash on hand.

This acquisition accelerated our growth in the commercial security market and expanded our product portfolio with the introduction of commercial fire safety related solutions.

Disposition of Canadian Operations

During November 2019, we sold ADT Canada to TELUS for a selling price of $514 million (CAD $676 million).

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

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

Finally, we entered into a patent and trademark license agreement with TELUS granting (i) the use of our patents in Canada for a period of seven years and (ii) exclusive use of our trademarks in Canada for a period of five years and non-exclusive use for an additional two years thereafter.

In January 2022, we successfully launched the integrated Google doorbell, and we are jointly solidifying the timeline for subsequent product launches with a focus on optimal customer experience and quality.

The Google Commercial Agreement specifies that each party will contribute $150 million in three equal tranches, subject to the attainment of certain milestones, towards the joint marketing of devices and services, customer acquisition, training of our

employees for the sales, installation, customer service, and maintenance for the product and service offerings, and technology updates for products included in such offerings.

For a more detailed discussion of the Google Commercial Agreement, refer to Note 12 “Commitments and Contingencies” in the Notes to Consolidated Financial Statements in Item 15 and below under “—Material Cash Requirements.”

Significant Acquisitions and Dispositions

• Sunpro Solar Acquisition - In December 2021, we acquired Sunpro Solar, a leading solar installer in the United States, for total consideration of approximately $750 million, which consisted of cash paid of $142 million, net of cash acquired, and approximately 75 million shares of our Common Stock with a fair value of $569 million at closing, of which approximately 5 million shares will be issued in 2022.

• Defenders Acquisition - In January 2020, we acquired Defenders for total consideration of approximately $290 million, which consisted of cash paid of $173 million, net of cash acquired, and the issuance of approximately 16 million shares of our Common Stock with a fair value of $114 million.

Defenders was our largest independent dealer prior to the Defenders Acquisition.

• Disposition of Canadian Operations - In November 2019, we sold ADT Canada to TELUS for a selling price of $514 million (CAD $676 million).

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

Defenders Acquisition

During January 2020, we acquired our largest independent dealer, Defender Holdings, Inc.

(“Defenders”) (the “Defenders Acquisition”), for total consideration of approximately $290 million, which consisted of cash paid of $173 million, net of cash acquired, and the issuance of approximately 16 million shares of our Common Stock with a fair value of $114 million.

In connection with the Defenders Acquisition, we recorded a loss from the settlement of a pre-existing relationship with Defenders in the amount of $81 million in merger, restructuring, integration, and other in the Consolidated Statements of Operations.

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 which allows qualifying residential customers to repay the fees due at installation over the course of a 24, 36, or 60 month interest-free period.

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 the Receivables Facility.

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

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

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

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

We expect our transition to a Company-owned model to negatively impact revenue during 2021 due to different revenue recognition policies applicable to each ownership model.

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

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

Refer to Note 4 “Acquisitions and Disposition” in the Notes to Consolidated Financial Statements for further information on these acquisitions and disposition.

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.

We primarily evaluate our results using Adjusted EBITDA, a non-GAAP measure, as well as operating metrics such as recurring monthly revenue and gross customer revenue attrition.

Computations of our key performance indicators may not be comparable to other similarly titled measures reported by other companies.

Certain operating metrics are approximated, as there may be variations to reported results in each period due to certain adjustments we might make in connection with the integration over several periods of acquired companies that calculated these metrics differently, or otherwise, including periodic reassessments and refinements in the ordinary course of business.

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

Adjusted EBITDA

We believe the non-GAAP measure Adjusted EBITDA is useful to investors to measure the operational strength and performance of our business.

Our definition of Adjusted EBITDA, a reconciliation of Adjusted EBITDA to net income (loss) (the most comparable GAAP measure), and additional information, including a description of the limitations relating to the use of Adjusted EBITDA, are provided under “—Non-GAAP Measures.”

Recurring Monthly Revenue (“RMR”)

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.

We use RMR to evaluate our overall sales, installation, and retention performance.

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

RMR is also a useful measure for forecasting future revenue performance as the majority of our revenue comes from recurring sources.

Gross Customer Revenue Attrition

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.

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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.

As of January 1, 2019, in conjunction with the acquisition of LifeShield LLC, we began presenting gross customer revenue attrition excluding existing and new DIY customers.

As a result, trailing twelve-month gross customer revenue attrition excludes DIY customers for all periods presented in this Annual Report.

For all prior reports covering periods prior to January 1, 2019, trailing twelve-month gross customer revenue attrition included DIY customers.

Including DIY customers as of December 31, 2018 rounds to the same percentage as presented in this Annual Report.

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.

Free Cash Flow

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

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

Gross customer revenue attrition is calculated on a trailing twelve-month basis, the numerator of which is the RMR lost during the period due to attrition, net of dealer charge-backs and reinstated customers, and the denominator of which is total annualized RMR based on an average of RMR under contract at the beginning of each month during the period, in each case, excluding contracts monitored but not owned and DIY customers.

We use gross customer revenue attrition to evaluate our retention and customer satisfaction performance, as well as evaluate subscriber trends by vintage year.

Additionally, we believe the presentation of gross customer revenue attrition is useful as it provides a means to evaluate drivers of customer attrition and the impact of retention initiatives.

RESULTS OF OPERATIONS

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

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

(in thousands, except as otherwise indicated)

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Loss on sale of business — 738 61,951 (738) (61,213)

Operating income 40,640 196,444 277,840 (155,804) (81,396)

Operating income (loss) 15,278 40,640 196,444 (25,362) (155,804)

Interest expense, net (457,667) (708,189) (619,573) 250,522 (88,616)

Loss on extinguishment of debt (37,113) (119,663) (104,075) 82,550 (15,588)

Other income 8,293 5,012 27,582 3,281 (22,570)

Loss before income taxes (778,919) (522,192) (632,618) (256,727) 110,426

Other income (expense) 8,313 8,293 5,012 20 3,281

Income (loss) before income taxes (471,189) (778,919) (522,192) 307,730 (256,727)

Income tax benefit 130,369 146,726 98,042 (16,357) 48,684

Net loss $ (632,193) $ (424,150) $ (609,155) $ (208,043) $ 185,005

Summary Cash Flow Data:

Net cash provided by operating activities $ 1,366,749 $ 1,873,117 $ 1,787,607 $ (506,368) $ 85,510

Net cash used in investing activities $ (1,137,477) $ (978,177) $ (1,738,210) $ (159,300) $ 760,033

Net cash (used in) provided by financing activities $ (70,261) $ (1,214,204) $ 193,001 $ 1,143,943 $ (1,407,205)

Net income (loss) $ (340,820) $ (632,193) $ (424,150) $ 291,373 $ (208,043)

Key Performance Indicators:

RMR $ 359,445 $ 343,243 $ 336,128 $ 16,202 $ 7,115

Gross customer revenue attrition (percentage) (2)

13.1 % 13.4 % 13.3 % (30) bps (10) bps

Gross customer revenue attrition (percentage) 13.1 % 13.1 % 13.4 % N/A N/A

Adjusted EBITDA (2)

$ 2,212,579 $ 2,199,237 $ 2,483,210 $ 13,342 $ (283,973)

Free Cash Flow (3)

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

(2) Trailing twelve-month gross customer revenue attrition excludes DIY customers for all periods presented in this Annual Report.

For all prior reports covering periods prior to January 1, 2019, trailing twelve-month gross customer revenue attrition included DIY customers.

Including DIY customers as of December 31, 2018 rounds to the same percentage as presented in this Annual Report.

Refer to the “—Key Performance Indicators” section for further details.

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

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

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

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

N/A—Not applicable.

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

M&S Revenue in total and by segment were as follows:

Years Ended December 31, $ Change

(in thousands)

2021 2020 2019 2021 vs.

2020 2020 vs.

CSB $ 3,873,285 $ 3,760,614 $ 3,891,075 $ 112,671 $ (130,461)

Commercial 474,428 426,373 416,507 48,055 9,866

Total M&S Revenue (1)

$ 4,347,713 $ 4,186,987 $ 4,307,582 $ 160,726 $ (120,595)

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(1) M&S revenue is not applicable to the Solar segment.

2021 Compared to 2020

Monitoring and Related Services Revenue

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

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

largely due to improvements in average pricing as new and existing residential customers selected higher priced interactive services as well as temporary price escalations on our existing customer base.

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

The increase in RMR to $343 million as of December 31, 2020 from $336 million as of December 31, 2019 was primarily due to improvements in average pricing and net customer additions.

As of December 31, 2020 and December 31, 2019, gross customer revenue attrition was 13.1% and 13.4%, respectively.

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

The increase in total M&S revenue for 2021 compared to 2020 was primarily due 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, as well as, improvements in customer retention.

2020 Compared to 2019

The decrease in total M&S revenue for 2020 compared to 2019 was primarily due to lower recurring revenue in CSB, which was driven by the sale of ADT Canada in November 2019.

The decrease was partially offset by higher recurring revenue in the U.S.

primarily due to improvements in average pricing as new and existing customers selected higher priced interactive and other services, as well as temporary price escalations on our existing customer base.

Commercial remained relatively flat and included higher recurring revenue primarily due to acquisitions, offset by a decrease due to the COVID-19 Pandemic in 2020.

RMR and Gross Customer Revenue Attrition

Total RMR was $359 million, $343 million, and $336 million as of December 31, 2021, 2020, and 2019, respectively.

The increase in RMR period over period was primarily due to RMR added as a result of improvements in average pricing and net customer additions.

Gross customer revenue attrition was 13.1%, 13.1%, and 13.4% as of December 31, 2021, 2020, and 2019 respectively.

Gross customer revenue attrition for 2021 was flat compared to 2020 and primarily included increases in relocations during 2021 as the COVID-19 Pandemic temporarily caused fewer relocations during 2020, and a lower volume of dealer charge-backs during 2021 primarily related to the Defenders Acquisition in 2020, offset by fewer non-payment disconnects and the benefit of customer retention initiatives.

The decrease in gross customer revenue attrition for 2020 compared to 2019 was primarily due to fewer customer relocations during 2020 as a result of the COVID-19 Pandemic and the benefit of customer retention initiatives.

Installation and Other Revenue

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

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

We expect our transition to a Company-owned model for our residential transactions to negatively impact revenue during 2021 due to different revenue recognition policies applicable to each ownership model.

Installation and other revenue in total and by segment were as follows:

Years Ended December 31, $ Change

(in thousands)

2021 2020 2019 2021 vs.

2020 2020 vs.

CSB $ 272,743 $ 564,575 $ 189,272 $ (291,832) $ 375,303

Commercial 639,304 563,225 628,803 76,079 (65,578)

Solar 47,351 — — 47,351 —

Total installation and other revenue $ 959,398 $ 1,127,800 $ 818,075 $ (168,402) $ 309,725

2021 Compared to 2020

The decrease in total installation and other revenue for 2021 compared to 2020 was primarily due to CSB, which was driven by a lower volume of outright sales transactions, partially offset by additional amortization of deferred subscriber acquisition revenue as a result of our transition to a predominately Company-owned model.

The increase in Commercial was driven by an increase in installation revenue in the current period as compared to the prior period, which was impacted by the COVID-19

Pandemic, as well as from acquisitions.

Installation and other revenue in Solar was due to the Sunpro Solar Acquisition in December 2021.

2020 Compared to 2019

The increase in total installation and other revenue for 2020 compared to 2019 was primarily due to CSB, which was driven by a higher volume of outright sales transactions, primarily due to the Defenders Acquisition and our temporary transition to a predominately customer-owned model, partially offset by the sale of ADT Canada.

The decrease in Commercial was driven by a lower volume of outright sales transactions during 2020, which was impacted by the COVID-19 Pandemic, partially offset by acquisitions.

Cost of Revenue

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

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

We expect our transition to a Company-owned model for our residential transactions to favorably impact cost of revenue during 2021 due to different accounting policies applicable to each ownership model.

Cost of revenue in total and by segment were as follows:

Years Ended December 31, $ Change

(in thousands)

2021 2020 2019 2021 vs.

2020 2020 vs.

CSB $ 725,221 $ 816,589 $ 661,840 $ (91,368) $ 154,749

Commercial 790,194 699,939 728,444 90,255 (28,505)

Solar 34,758 — — 34,758 —

Total cost of revenue $ 1,550,173 $ 1,516,528 $ 1,390,284 $ 33,645 $ 126,244

2021 Compared to 2020

The increase in cost of revenue for 2021 compared to 2020 was due to the decrease in CSB which was more than offset by an increase in Commercial and Solar from the Sunpro Solar Acquisition.

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, partially offset by higher field service and call center costs in 2021 as compared to the prior period, which was impacted by the COVID-19 Pandemic.

The increase in Commercial was driven by an increase in installation costs, as well as field service and call center costs in 2021 as compared to the prior period, which was impacted by the COVID-19 Pandemic, as well as from acquisitions.

2020 Compared to 2019

The increase in total cost of revenue for 2020 compared to 2019 was primarily due to an increase in CSB, which was driven by an increase in installation costs primarily due to a higher volume of outright sales transactions as a result of the Defenders Acquisition and our temporary transition to a predominately customer-owned model, partially offset by the sale of ADT Canada.

The decrease in Commercial was driven by a decrease in installation costs due to a lower volume of outright sales transactions during 2020, which was impacted by the COVID-19 Pandemic, partially offset by acquisitions.

Selling, General, and Administrative Expenses

The increase in selling, general and administrative expenses was primarily due to (i) an increase in expenses, excluding provision for credit losses, of $282 million associated with the Defenders Acquisition;

(ii) a greater provision for credit losses of $58 million due to the estimated impact of the COVID-19 Pandemic, a higher volume of longer duration receivables, and from recent acquisitions;

(iii) an increase in radio conversion costs of $59 million;

and (iv) an increase in selling costs, which includes amortization of deferred subscriber acquisition costs.

These increases were partially offset by (i) a decrease in advertising expenses, exclusive of incremental advertising expenses from recent acquisitions;

(ii) a decrease of $43 million as a result of the sale of ADT Canada, (iii) a decrease of $20 million as a result of recoveries on notes receivable from a former strategic investment, and (iv) a decrease of $18 million from financing and consent associated with financing transactions.

2021 Compared to 2020

The increase in selling, general, and administrative expenses for 2021 compared to 2020 was primarily driven by:

• an increase in radio conversion costs of $162 million primarily due to an increase in the number and cost of conversions, partially offset by;

• decreases in the provision for credit losses of $46 million and $30 million in our CSB and Commercial segments, respectively, primarily due to the impact of the COVID-19 Pandemic in the prior year, as well as a lower volume of outright sales transactions in our CSB segment;

• a decrease in commissions, partially offset by an increase in amortization of deferred subscriber acquisition costs, as a result of our transition to a predominantly Company-owned model.

The remainder of the change was attributable to higher general and administrative expenses primarily due to investments in our information technology infrastructure and higher selling costs, offset by lower share-based compensation expense.

2020 Compared to 2019

The increase in selling, general, and administrative expenses for 2020 compared to 2019 was primarily driven by:

• an increase in expenses, excluding provision for credit losses, of $282 million due to the Defenders Acquisition;

• an increase in radio conversion costs of $59 million primarily due to an increase in the number and cost of conversions;

• increases in the provision for credit losses of $37 million and $21 million in our CSB and Commercial segments, respectively, primarily due to the impact of the COVID-19 Pandemic during 2020, as well as a higher volume of longer duration receivables and acquisitions.

These increases were partially offset by lower advertising costs, excluding recent acquisitions, a decrease in expenses of $43 million due to the sale of ADT Canada, as well as recoveries on notes receivable from a former strategic investment and a decrease in financing and consent fees.

Depreciation and Intangible Asset Amortization

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

2021 Compared to 2020

Depreciation and intangible asset amortization remained relatively flat for 2021 compared to 2020 and included a decrease in the amortization of customer relationships acquired in the ADT Acquisition, offset by increases in the amortization of (i) customer contracts acquired under the ADT Authorized Dealer Program and from other third parties and (ii) other intangible assets.

The majority of the remaining net book value of customer relationships acquired in the ADT Acquisition will be fully amortized during 2022 with the remainder amortized during 2023.

2020 Compared to 2019

The decrease in depreciation and intangible asset amortization for 2020 compared to 2019 was primarily due to a decrease of $70 million associated with the sale of ADT Canada as well as a decrease in the depreciation of subscriber system assets.

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

Merger, Restructuring, Integration, and Other

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

This increase was partially offset by $12 million of losses on a strategic investment, substantially all of which was recognized in 2019.

Goodwill Impairment

During 2019, we recorded a goodwill impairment loss of $45 million in connection with the sale of ADT Canada.

We did not record a goodwill impairment loss during 2020.

Loss on Sale of Business

During 2019, we recorded a loss on sale of business of $62 million in connection with the sale of ADT Canada.

The impact in connection with the sale of ADT Canada was not material during 2020.

Merger, restructuring, integration, and other represents certain direct and incremental costs resulting from acquisitions, integration costs as a result of those acquisitions, costs related to restructuring efforts, as well as fair value remeasurements and impairment charges on certain strategic investments.

These amounts vary year over year and included:

• For 2021, costs primarily included an $18 million impairment charge in CSB due to lower than expected benefits from the developed technology intangible asset acquired as part of our acquisition of Cell Bounce as a result of recent worldwide shortages for certain electronic components, as well as acquisitions costs related to the Sunpro Solar Acquisition.

• For 2020, costs primarily included losses of $81 million in CSB associated with the settlement of a pre-existing relationship in connection with the Defenders Acquisition.

• For 2019, costs primarily related to restructuring and integration activities and the sale of ADT Canada, as well as losses on a strategic investment.

Goodwill Impairment and Loss on Sale of Business

During 2019, we recorded a goodwill impairment loss of $45 million and a loss on sale of business of $62 million in connection with the sale of ADT Canada, which was included in the CSB segment prior to sale.

Interest Expense, net

The increase in interest expense, net, was primarily due to (i) an increase of $52 million related to the reclassification of accumulated unrealized losses associated with interest rate swap contracts that have been de-designated as cash flow hedges, (ii) an increase of $52 million related to unrealized losses on interest rate swap contracts as a result of cash flow hedges no longer being highly effective, and (iii) an increase of $27 million related to an increase in outstanding principal on our fixed-rate first lien notes due to our financing transactions during 2020 and 2019.

These increases were partially offset by a decrease in interest expense of $53 million related to our second lien notes due to partial redemptions during 2019 and a reduced interest rate as a result of refinancing during January 2020.

The decrease in interest expense, net, was primarily driven by an unrealized gain of $158 million on interest rate swap contracts not designated as cash flow hedges in 2021 as compared to an unrealized loss of $60 million in 2020 primarily due to an increase in forward LIBOR and the redemption of the ADT Notes due 2021 during September 2020, as well as the $300 million prepayment in December 2020 and the January 2021 refinance on the First Lien Term Loan due 2026.

The decrease was partially offset by the issuance of the First Lien Notes due 2029 during 2021 and the First Lien Notes due 2027 during 2020.

Loss on Extinguishment of Debt

During 2020, loss on extinguishment of debt totaled $120 million and included (i) $66 million associated with the call premium and write-off of unamortized deferred financing costs in connection with the $1.2 billion redemption of second lien notes in February 2020, (ii) $49 million associated with the call premium and write-off of unamortized fair value adjustments in connection with the $1 billion redemption of first lien notes in September 2020, and (iii) $5 million associated with the partial write-off of unamortized deferred financing costs and discount in connection with the $300 million repayment on a first lien term loan in December 2020.

During 2019, loss on extinguishment of debt totaled $104 million and included (i) $22 million associated with the call premium and partial write-off of unamortized deferred financing costs in connection with the $300 million partial redemption of the second lien notes in February 2019, (ii) $61 million associated with the call premium and partial write-off of unamortized deferred financing costs in connection with the $1 billion partial redemption of second lien notes in April 2019, (iii) $6 million associated with the partial write-off of unamortized deferred financing costs and discount in connection with the $500 million repayment of a first lien term loan in April 2019, and (iv) $13 million associated with the partial write-off of unamortized deferred financing costs and discount in connection with the amendment and restatement to our first lien credit agreement in September 2019.

For 2021, loss on extinguishment of debt totaled $37 million and was primarily due to the call premium and write-off of unamortized fair value adjustments in connection with the $1.0 billion redemption of the 3.50% notes due 2022 (“ADT Notes due 2022”) in August 2021 (“ADT Notes due 2022 Redemption”).

For 2020, loss on extinguishment of debt totaled $120 million and primarily included (i) $66 million associated with the call premium and write-off of unamortized deferred financing costs in connection with the $1.2 billion redemption of second lien notes in February 2020, and (ii) $49 million associated with the call premium and write-off of unamortized fair value adjustments in connection with the $1.0 billion redemption of first lien notes in September 2020.

Income Tax Benefit

Income tax benefit for 2020 was $147 million, resulting in an effective tax rate for the period of 18.8%.

For 2021, income tax benefit was $130 million, resulting in an effective tax rate for the period of 27.7%.

The effective tax rate primarily represents the federal income tax rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.7% , and a 1.3% favorable impact related to the revaluation of our deferred tax liabilities in connection with our 2021 acquisitions.

For 2020, income tax benefit was $147 million, resulting in an effective tax rate for the period of 18.8%.

The effective tax rate primarily represents the federal income tax rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.9% , a 3.1% unfavorable impact from non-deductible charges primarily due to the Defenders Acquisition, and a 1.5% unfavorable impact from an increase in valuation allowances primarily due to tax credits and state net operating losses not expected to be utilized prior to expiration.

Income tax benefit for 2019 was $98 million, resulting in an effective tax rate for the period of 18.8%.

The effective tax rate primarily represents the federal income tax rate of 21.0%, a state statutory tax rate, net of federal benefits, of 1.4%, a 6.8% favorable impact from net capital losses generated in the U.S.

and Canada related to the sale of ADT Canada, a 1.9% favorable impact from amendments to prior year tax returns, a 9.4% unfavorable impact from valuation allowances established on the net capital losses generated in the U.S.

and Canada related to the sale of ADT Canada, and a 2.3% unfavorable impact from non-deductible goodwill impairment loss.

NON-GAAP MEASURES

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

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

To provide investors with additional information in connection with our results as determined in accordance with GAAP, we disclose Adjusted EBITDA, a non-GAAP measure.

Adjusted EBITDA is not a financial measure calculated in accordance with GAAP and 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, (ix) financing and consent fees, (x) foreign currency gains/losses, (xi) acquisition related adjustments, and (xii) other charges and non-cash items.

We believe the presentation of Adjusted EBITDA is useful as it provides investors additional information about our operating profitability adjusted for certain non-cash items, non-routine items we do not expect to continue at the same level in the future, as well as other items not core to our operations.

We define Adjusted EBITDA as net income or loss adjusted for (i) interest;

(iii) depreciation and amortization, including depreciation of subscriber system assets and other fixed assets and amortization of dealer and other intangible assets;

(iv) amortization of deferred costs and deferred revenue associated with subscriber acquisitions;

(v) share-based compensation expense;

(vi) merger, restructuring, integration, and other;

(vii) losses on extinguishment of debt;

(viii) radio conversion costs, net;

and (ix) other income/gain or expense/loss items such as impairment charges, financing and consent fees, or acquisition-related adjustments.

There are material limitations to using Adjusted EBITDA.

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These limitations are best addressed by considering the economic effects of the excluded items independently and by considering Adjusted EBITDA in conjunction with net income or loss as calculated in accordance with GAAP.

Free Cash Flow

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

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

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

subscriber system asset expenditures;

and purchases of property and equipment.

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

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

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

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

Adjusted EBITDA

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

The table below reconciles Adjusted EBITDA to net income (loss):

Years Ended December 31, $ Change

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2020 2020 vs.

Net loss $ (632,193) $ (424,150) $ (609,155) $ (208,043) $ 185,005

Net income (loss) $ (340,820) $ (632,193) $ (424,150) $ 291,373 $ (208,043)

Interest expense, net 457,667 708,189 619,573 (250,522) 88,616

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3,672 5,263 23,250 (1,591) (17,987)

Foreign currency (gains)/losses (3)

— (1,250) 3,228 1,250 (4,478)

Acquisition related adjustments (3)

12,945 438 22,285 12,507 (21,847)

Licensing fees (5)

(6,908) (10,031) 20,369 3,123 (30,400)

(10,031) 21,619 4,895 (31,650) 16,724

Adjusted EBITDA $ 2,199,237 $ 2,483,210 $ 2,453,497 $ (283,973) $ 29,713

Total Adjusted EBITDA $ 2,212,579 $ 2,199,237 $ 2,483,210 $ 13,342 $ (283,973)

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(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.

(1) Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” for further details.

(2) Represents fees expensed associated with financing transactions.

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

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

(5) Represents other income related to $22 million of one-time licensing fees.

During 2021, primarily related to the Sunpro Solar Acquisition.

During 2019, primarily related to compensation arrangements as a result of Commercial acquisitions.

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

During 2020, included recoveries of $10 million associated with notes receivable from a former strategic investment.

During 2019, included losses of $10 million associated with notes receivable from a former strategic investment and $6 million associated with an estimated legal settlement, net of insurance.

During 2018, included a gain of $7.5 million from the sale of equity in a third-party that we received as part of a settlement.

2020 Compared to 2019

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

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

We expect our transition to a Company-owned model for our residential transactions to negatively impact Adjusted EBITDA during 2021 due to different accounting policies applicable to each ownership model.

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

Free Cash Flow

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

2020 included recoveries of $10 million associated with notes receivable from a former strategic investment.

2019 included losses of $10 million associated with notes receivable from a former strategic investment and $6 million associated with an estimated legal settlement, net of insurance.

Adjusted EBITDA in total and by segment were as follows:

Years Ended December 31, $ Change

(in thousands) 2020 2019 2018 2020 vs.

(in thousands)

2021 2020 2019 2021 vs.

Net cash provided by operating activities $ 1,366,749 $ 1,873,117 $ 1,787,607 $ (506,368) $ 85,510

Dealer generated customer accounts and bulk account purchases (380,716) (669,683) (693,525) 288,967 23,842

Subscriber system asset expenditures (418,355) (542,305) (576,290) 123,950 33,985

Purchases of property and equipment (157,191) (158,846) (126,799) 1,655 (32,047)

Free Cash Flow $ 410,487 $ 502,283 $ 390,993 $ (91,796) $ 111,290

Cash Flows from Operating Activities

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

Cash Outlays Related to Capital Expenditures

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

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

2020 2020 vs.

CSB $ 2,110,879 $ 2,153,899 $ 2,374,165 $ (43,020) $ (220,266)

Commercial 96,112 45,338 109,045 50,774 (63,707)

Solar 5,588 — — 5,588 —

Total Adjusted EBITDA $ 2,212,579 $ 2,199,237 $ 2,483,210 $ 13,342 $ (283,973)

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

2021 Compared to 2020

Adjusted EBITDA remained relatively flat for 2021 compared to 2020 and included an increase in Commercial partially offset by a decrease in CSB.

The increase in Commercial was primarily attributable to (i) an increase in M&S Revenue, (ii) a decrease in the provision for credit losses, and (iii) an increase in installation revenue, net of the associated installation costs and commissions.

These increases were partially offset by an increase in field service and call center costs.

The decrease in CSB was primarily attributable to (i) a decrease in installation revenue, net of the associated installation costs and commissions, from a lower volume of outright sales transactions, (ii) an increase in field service and call center costs, and (iii) an increase in selling and general and administrative expenses.

These decreases were partially offset by an increase in M&S Revenue and a decrease in the provision for credit losses.

2020 Compared to 2019

The decrease in total Adjusted EBITDA for 2020 compared to 2019 was primarily attributable to CSB, which was driven by an increase in selling and general and administrative costs primarily due to the Defenders Acquisition and an increase in the provision for credit losses, as well as the sale of ADT Canada.

These decreases were partially offset by higher installation revenue, net of the associated installation costs and commissions, from a higher volume of outright sales transactions.

The decrease in Commercial was primarily attributable to a decrease in installation revenue, net of the associated installation costs and commissions, and an increase in the provision for credit losses primarily as a result of the COVID-19 Pandemic, partially offset by acquisitions.

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

LIQUIDITY AND CAPITAL RESOURCES

As of December 31, 2021, liquidity and capital resources primarily consisted of the following:

(in thousands)

Cash and cash equivalents $ 24,453

Availability under First Lien Revolving Credit Facility $ 550,000

Uncommitted available borrowing capacity under Receivables Facility $ 200,944

Carrying amount of total debt outstanding $ 9,692,690

Our principal liquidity requirements are to finance current operations, invest in acquiring and retaining customers, purchase property and equipment, service our debt, and finance potential mergers and acquisitions.

Our liquidity requirements are primarily funded by our cash flows from operations, which include cash received from monthly recurring revenue and upfront fees received from customers, less cash costs to provide services to our customers, including general and administrative costs, certain costs associated with acquiring new customers, and interest payments.

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.

Our liquidity requirements are primarily funded by our cash flows from operations, which include cash received from customers related to monthly recurring revenue from providing monitoring and other services, as well as cash from the sale and installation of our security and solar systems (including cash received from third-party lenders who provide loan products for customers), less cash costs to provide services to our customers, including general and administrative costs, certain costs associated with acquiring new customers, and interest payments.

In addition to cash generated from operations, we expect our ongoing sources of liquidity to include borrowings under our revolving credit facility and Receivables Facility, as well as the issuance of equity and/or debt securities as appropriate given market conditions.

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

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.

Our ability to meet our debt service obligations and other capital requirements, including capital expenditures, as well as finance acquisitions, will depend on our future operating performance, which is subject to future general economic, financial, business, competitive, legislative, regulatory, and other conditions, many of which are beyond our control.

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Debt financing, if available, could impose additional cash payment obligations and subject us to additional covenants and operating restrictions.

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

As of December 31, 2020, we had $205 million in cash and cash equivalents and $400 million available under our revolving credit facility.

In addition, we had an uncommitted available borrowing capacity of $124 million under our Receivables Facility, which is dependent on the volume of eligible retail installment contract receivables that can be sold under our Receivables Facility.

The carrying amount of total debt outstanding was approximately $9.5 billion as of December 31, 2020.

Material Cash Requirements

Our cash requirements within the next twelve months primarily include current maturities of long-term debt and leases, accounts payable and other current liabilities, and purchase commitments and other obligations entered into in the ordinary course of business.

As of December 31, 2021, our significant short-term and long-term cash requirements, excluding cash required for operations, under our various contractual obligations and commitments primarily included:

• Debt principal – As of December 31, 2021, our expected future debt principal payments, excluding finance leases, totaled approximately $9.8 billion, with approximately $79 million due in 2022.

Refer to Note 6 “Debt” for further details of our debt and the timing of expected future principal payments.

• Interest payments – Interest payments on our fixed-rate debt are calculated based on the contractual terms.

Interest payments on our variable-rate debt, including the effects of our interest rate swaps, are calculated based on a forward LIBOR curve plus the applicable margin in effect as of December 31, 2021.

As of December 31, 2021, our expected future interest payments related to our debt and interest rate swap contracts totaled approximately $2.6 billion, with approximately $494 million due in 2022.

As of December 31, 2021, we expect to incur annual interest payments related to our debt and interest rate swap contracts of approximately $350 - $450 million during the years 2023 - 2026.

• Operating and finance leases – As of December 31, 2021, our expected future lease payments, including interest, totaled approximately $249 million, with approximately $84 million due in 2022.

Refer to Note 13 “Leases” for further details of our obligations and the timing of expected future payments.

• Purchase obligations – Our material cash requirements for purchases of goods or services entered into in the ordinary course of business, including purchase orders and contractual obligations, primarily consist of information technology services and equipment, including investments in our information technology infrastructure, direct materials, and telecommunication services.

As of December 31, 2021, our contractual obligations entered into in the ordinary course of business, including agreements that are enforceable and legally binding and have a remaining term in excess of one year, totaled approximately $320 million, with approximately $120 million expected to be paid in 2022.

Refer to Note 12 “Commitments and Contingencies” for the amounts and timing of such payments.

In addition, as of December 31, 2021, we had outstanding purchase orders of approximately $200 million primarily related to direct materials and information technology and marketing services, which are expected to be materially satisfied in 2022.

Our future purchase obligations may be impacted by changes in our business or other internal or external factors.

As our business continues to grow organically and through acquisitions, our obligations may grow as well.

• Google Commercial Agreement – The Google Commercial Agreement requires us and Google to each contribute $150 million towards certain joint commercial efforts.

As of December 31, 2021, we expect to contribute the majority of these amounts by the end of 2024.

However, the timing of these contributions is still uncertain.

• Customer account purchases – In 2021, we entered into agreements for potential future purchases of customer accounts from two distinct third parties, assuming certain conditions are met over the course of those agreements.

As of December 31, 2021, remaining commitments for those potential future customer account purchases could total approximately $100 million through January 2023.

• Sunlight Financial LLC (“Sunlight”) – We use Sunlight, a related party controlled by Apollo, to provide financing alternatives to certain ADT Solar customers.

Amounts paid to Sunlight since the Sunpro Solar Acquisition were not material;

however, these amounts may be material in future periods.

• Unrecognized tax benefits – We have approximately $66 million of unrecognized tax benefits, excluding interest and penalties, related to various tax positions we have taken.

These liabilities may increase or decrease over time primarily as a result of tax examinations, and given the status of the examinations, we cannot reliably estimate the period of any cash settlement with the respective taxing authorities.

Refer to Note 8 “Income Taxes” for further details.

• Off-balance sheet arrangements – We have guarantees primarily related to standby letters of credit on our insurance programs totaling $76 million.

We do not have any other arrangements giving rise to material obligations that are not reported in our consolidated balance sheets, as described in Item 303 of SEC Regulation S-K.

Long-Term Debt

As of December 31, 2020, we had the following outstanding debt balances (excluding finance leases, deferred financing costs, discount, premium, and fair value adjustments):

(in thousands)

As of December 31, 2021, our debt (excluding finance leases, deferred financing costs, discount, premium, and fair value adjustments) consisted of the following (in thousands) :

Debt Description Issued Maturity Interest Rate Interest Payable Principal

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LIBOR + 2.75% Quarterly $ 2,758,058

First Lien Revolving Credit Facility 3/16/2018 6/23/2026 Adj.

LIBOR + 2.75% Quarterly 25,000

Second Lien Notes due 2028 1/28/2020 1/15/2028 6.250% 1/15 and 7/15 1,300,000

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First Lien Notes due 2027 8/20/2020 8/31/2027 3.375% 6/15 and 12/15 1,000,000

ADT Notes due 2022 7/5/2012 7/15/2022 3.500% 1/15 and 7/15 1,000,000

First Lien Notes due 2029 7/29/2021 8/1/2029 4.125% 2/1 and 8/1 1,000,000

ADT Notes due 2023 1/14/2013 6/15/2023 4.125% 6/15 and 12/15 700,000

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Receivables Facility 3/5/2020 11/20/2026 LIBOR + 0.85% Monthly 199,056

Other debt 4,732

Total $ 9,836,758

First Lien Credit Agreement

Concurrently with the consummation of the Formation Transactions, we entered into a first lien credit agreement dated as of July 1, 2015 (together with subsequent amendments and restatements, the “First Lien Credit Agreement”), which has since been amended and restated on May 2, 2016, June 23, 2016, December 28, 2016, February 13, 2017, June 29, 2017, March 16, 2018, December 3, 2018, March 15, 2019 (effective April 4, 2019), and September 23, 2019.

As of December 31, 2020, the First Lien Credit Agreement consisted of the following:

• A term loan facility (“The First Lien Term Loan due 2026”) with an outstanding aggregate principal balance of $2.8 billion.

Below is a summary of key events related to the First Lien Term Loan due 2026 during 2020 and 2019:

◦ September 2019 - In connection with the amendment and restatement dated as of September 23, 2019 and with a $300 million repayment, we refinanced and replaced the $3.4 billion aggregate principal amount of the first lien term loan due in May 2022 (the “First Lien Term B-1 Loan”) with $3.1 billion aggregate principal amount of the First Lien Term Loan due 2026;

◦ December 2020 - We made a $300 million prepayment, which was applied to the remaining required principal payments of $8 million per quarter.

The First Lien Term Loan due 2026 is payable at maturity and we may make voluntary prepayments on the First Lien Term Loan due 2026 at any time prior to maturity at par.

In addition, we are required to make annual prepayments on the outstanding First Lien Term Loan due 2026 with a percentage of our excess cash flow, as defined in the First Lien Credit Agreement, if our excess cash flow exceeds a certain specified threshold.

We were not required to make any annual prepayments based on our excess cash flow as of December 31, 2020.

The First Lien Term Loan due 2026 had an interest rate calculated as, at our option, either (a) LIBOR determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs (“Adjusted LIBOR”) with a floor of 1.00%, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50% per annum, (ii) the prime rate published by the Wall Street Journal, and (iii) one-month Adjusted LIBOR plus 1.00% per annum (“Base Rate”), in each case, plus the applicable margin of 3.25% for Adjusted LIBOR loans and 2.25% for Base Rate loans and is payable at least quarterly.

In January 2021, we amended the First Lien Credit Agreement to refinance the First Lien Term Loan due 2026, which reduced the applicable margin for Adjusted LIBOR loans from 3.25% to 2.750% and reduced the floor from 1.00% to 0.75%.

Additionally, the amendment requires us to make quarterly payments equal to 0.250% 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.

• The first lien revolving credit facility with an aggregate available commitment of up to $400 million through March 16, 2023 (the “First Lien Revolving Credit Facility”).

As of December 31, 2020, there were no amounts outstanding under the First Lien Revolving Credit Facility.

The First Lien Credit Agreement consists of a term loan facility (the “First Lien Term Loan due 2026”) and a revolving credit facility (the “First Lien Revolving Credit Facility”).

Below is a summary of key events related to the First Lien Credit Agreement during 2021 and 2020:

• In December 2020, we made a $300 million prepayment on the First Lien Term Loan due 2026.

• In January 2021, we amended and restated the First Lien Credit Agreement to refinance the First Lien Term Loan due 2026, which reduced the applicable margin for Adjusted LIBOR loans from 3.25% to 2.75% and reduced the floor from 1.00% to 0.75%.

• 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 this amendment and restatement, aggregate commitments under the First Lien Revolving Credit Facility were $575 million.

• In December 2021, we borrowed $185 million under the First Lien Revolving Credit Facility in connection with the Sunpro Solar Acquisition and repaid $160 million.

As a result of the January 2021 amendment to the First Lien Credit Agreement, beginning in the second quarter of 2021, we are required to make scheduled quarterly principal payments equal to 0.25% of the then-outstanding aggregate principal amount of the First Lien Term Loan due 2026, with the remaining balance payable at maturity.

We may make voluntary prepayments on the First Lien Term Loan due 2026 at any time prior to maturity at par.

Additionally, we are required to make annual prepayments on the outstanding First Lien Term Loan due 2026 with a percentage of our excess cash flow, as defined in the First Lien Credit Agreement, if our excess cash flow exceeds a certain specified threshold.

As of December 31, 2021, we were not required to make any annual prepayments based on our excess cash flow.

The First Lien Term Loan due 2026 has an interest rate calculated as, at our option, either (a) LIBOR determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional

costs (“Adjusted LIBOR”) with a floor of 0.75%, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50% per annum, (ii) the prime rate published by The Wall Street Journal, and (iii) one-month Adjusted LIBOR plus 1.00% per annum (“Base Rate”), in each case, plus the applicable margin of 2.75% for Adjusted LIBOR loans and 1.75% for Base Rate loans and is payable on each interest payment date, at least quarterly, in arrears.

Borrowings under the First Lien Revolving Credit Facility will bear interest at a rate equal to, at our option, either (a) Adjusted LIBOR, or (b) the Base Rate, plus the applicable margin of 2.75% for Adjusted LIBOR loans and 1.75% for Base Rate loans.

Additionally, we are required to pay a commitment fee between 0.375% and 0.50% (determined based on a net first lien leverage ratio) with respect to the unused commitments under the First Lien Revolving Credit Facility.

By June 2023, USD LIBOR will be replaced with SOFR (the “SOFR Transition Date”), at which point the applicable benchmark for all existing and new issuances with a variable rate debt component will be based on SOFR.

Our First Lien Term Loan due 2026 and First Lien Revolving Credit Facility will continue to be based on LIBOR until the SOFR Transition Date.

However, any modification, such as a repricing, entered into after December 31, 2021 will require transition to SOFR.

Additionally, any new issuances with a variable rate debt component entered into after December 31, 2021 will utilize SOFR per the terms of the credit agreement.

Second Lien Notes due 2028

As of December 31, 2020, the 6.250% second-priority senior secured notes due 2028 (the “Second Lien Notes due 2028”) had an outstanding balance of $1.3 billion.

The Second Lien Notes due 2028 were issued in January 2020 to refinance and redeem the then outstanding $1.2 billion aggregate principal amount of our 9.250% second-priority senior secured notes due 2023 (the “Prime Notes”).

The 6.250% second-priority senior secured notes due 2028 (the “Second Lien Notes due 2028”) were issued in January 2020 to refinance and redeem the then-outstanding $1.2 billion aggregate principal amount of our 9.250% second-priority senior secured notes due 2023 (the “Prime Notes”).

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

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First Lien Notes due 2024 and First Lien Notes due 2026

As of December 31, 2020, the 5.250% first-priority senior secured notes due 2024 (the “First Lien Notes due 2024”) had an outstanding balance of $750 million and the 5.750% first-priority senior secured notes due 2026 (the “First Lien Notes due 2026”) had an outstanding balance of $1.4 billion.

Below is a summary of key events related to the First Lien Notes due 2024 and First Lien Notes due 2026 during 2020 and 2019:

• April 2019 - We issued $750 million of First Lien Notes due 2024 and $750 million First Lien Notes due 2026, the proceeds of which were used to repurchase and cancel $1 billion of the Prime Notes and repay $500 million of the First Lien Term B-1 Loan (prior to refinancing as discussed above);

• September 2019 - We issued an additional $600 million of the First Lien Notes due 2026, the proceeds of which were used to repay approximately $300 million of the First Lien Term B-1 Loan and repurchase and cancel $300 million of the 5.250% notes due 2020 issued by The ADT Corporation (our notes originally issued by The ADT Corporation, collectively, the “ADT Notes”).

Both the First Lien Notes due 2024 and the First Lien Notes due 2026 are due at maturity, and may be redeemed, in whole or in part, at any time at a make-whole premium plus accrued and unpaid interest to, but excluding, the redemption date.

The 5.250% first-priority senior secured notes due 2024 (the “First Lien Notes due 2024”) and the 5.750% first-priority senior secured notes due 2026 (the “First Lien Notes due 2026”) are due at maturity, and may be redeemed, in whole or in part, at any time at a make-whole premium plus accrued and unpaid interest to, but excluding, the redemption date.

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

First Lien Notes due 2027

As of December 31, 2020, the 3.375% first-priority senior secured notes due 2027 (the “First Lien Notes due 2027”) had an outstanding balance of $1 billion.

The First Lien Notes due 2027 were issued in August 2020 to refinance and redeem the then outstanding $1 billion aggregate principal amount of the 6.250% ADT Notes due 2021 (the “ADT Notes due 2021”).

The 3.375% first-priority senior secured notes due 2027 (the “First Lien Notes due 2027”) were issued in August 2020 to refinance and redeem the then-outstanding $1.0 billion aggregate principal amount of the 6.250% ADT Notes due 2021 (the “ADT Notes due 2021”).

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

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

As of December 31, 2020, the ADT Notes had an outstanding balance of $2.4 billion.

First Lien Notes due 2029

The 4.125% first-priority senior secured notes due 2029 (the “First Lien Notes due 2029”) were issued in July 2021 to refinance and redeem the then-outstanding $1.0 billion aggregate principal amount of the 3.50% ADT Notes due 2022.

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, and may be redeemed at our option as follows:

• Prior to August 1, 2028, in whole at any time or in part from time to time, at a redemption price equal to the greater of (i) 100% of the principal amount of the First Lien Notes due 2029 to be redeemed and (ii) the sum of the present values of the aggregate principal amount of the First Lien Notes due 2029 to be redeemed and the remaining scheduled interest payments due on any date after the redemption date, to and including August 1, 2028, discounted at an adjusted treasury rate plus 50 basis points, plus, in either case accrued and unpaid interest as of, but excluding, the redemption date.

• On or after August 1, 2028, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the First Lien Notes due 2029 to be redeemed and accrued and unpaid interest as of, but excluding, the redemption date.

Additionally, upon the occurrence of specified change of control events, we may be required to purchase the First Lien Notes due 2029 at 101% of the principal amount, plus accrued and unpaid interest, if any, to, but not including, the purchase date.

The indenture also provides for customary events of default.

Below is a summary of key events related to the ADT Notes during 2021 and 2020:

• September 2019 - We repurchased and cancelled $147 million aggregate principal amount of the ADT Notes due 2020 at a price of $149 million;

• October 2019 - We redeemed the remaining $153 million aggregate principal amount of the ADT Notes due 2020 at a price of $155 million;

• September 2020 - We redeemed the outstanding $1.0 billion aggregate principal amount of the ADT Notes due 2021 at a price of $1.1 billion;

The ADT Notes are due at maturity, and may be redeemed, in whole at any time or in part from time to time, at a redemption price equal to the principal amount of the notes to be redeemed, plus a make-whole premium, plus accrued and unpaid interest as of, but excluding, the redemption date.

• August 2021 - We redeemed the outstanding $1.0 billion aggregate principal amount of the ADT Notes due 2022 at a price of $1.0 billion.

The remaining outstanding ADT Notes are due at maturity, and may be redeemed, in whole at any time or in part from time to time, at a redemption price equal to the principal amount of the notes to be redeemed, plus a make-whole premium, plus accrued and unpaid interest as of, but excluding, the redemption date.

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

Receivables Facility

During March 2020, we entered into the Receivables Facility.

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

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

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

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

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

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

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

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

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

We are required to deposit payments received from the transferred retail installment contract receivables into a segregated account subject to the control of the creditors under the Receivables Facility.

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

During 2020, we received proceeds of $83 million under the Receivables Facility and repaid $7 million.

As of December 31, 2020, we had an outstanding balance of $76 million and an uncommitted available borrowing capacity of $124 million under the Receivables Facility.

During March 2020, we entered into the Receivables Facility whereby we obtain financing by selling or contributing certain retail installment contract receivables to our wholly-owned consolidated bankruptcy-remote special purpose entity (“SPE”).

The SPE grants a security interest in those retail installment contract receivables as collateral for cash borrowings under the Receivables Facility.

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

Accordingly, the assets of the SPE are not available to pay our creditors (other than the SPE), although collections from the transferred retail installment contract receivables in excess of amounts required to repay amounts then due and payable to the SPE’s creditors may be released to us and subsequently used by us (including to pay other creditors).

The SPE’s creditors under the Receivables Facility have legal recourse to the transferred retail installment contract receivables owned by the SPE, and to us for certain performance and operational obligations relating to the Receivables Facility, but do not have any recourse to us (other than the SPE) for the payment of principal and interest on the advances under the Receivables Facility.

Significant amendments to the Receivables Facility were as follows:

• In March 2021, the Receivables Facility was amended to, among other things, extend the scheduled termination date for the uncommitted revolving period to March 4, 2022, and reduce the spread over LIBOR payable in respect of borrowings thereunder from 1.00% to 0.85%.

• In July 2021, the Receivables Facility was amended into the form of a Receivables Financing Agreement, which continued the uncommitted secured lending arrangement contemplated among the parties and, among other things, provided for certain revisions to funding, prepayment, reporting, and other provisions in preparation for a potential future syndication of the advances made under the Receivables Facility.

• In October 2021, the documentation governing the Receivables Facility was further amended in connection with the syndication of the advances thereunder to two additional lenders:

MUFG Bank, Ltd.

and Starbird Funding Corporation (a conduit lender related to BNP Paribas).

As part of the amendment, the Receivables Facility’s uncommitted lending limit was increased from $200 million to $400 million, and the scheduled termination date for the Receivables Facility’s uncommitted revolving period was extended to October 28, 2022.

We service the transferred retail installment contract receivables and are responsible for ensuring related collections are remitted to a segregated account in the SPE’s name.

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

The segregated account is considered restricted cash and is reflected in prepaid expenses and other current assets in our Consolidated Balance Sheets.

During 2021 and 2020, proceeds under the Receivables Facility were $254 million and $83 million, respectively, and repayments were $130 million and $7 million, respectively.

Both the proceeds and repayments during 2021 include the non-cash impact of approximately $88 million from the Receivables Facility amendment in October 2021.

Debt Covenants

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The covenant is tested if the outstanding loans under the First Lien Revolving Credit Facility, subject to certain exceptions, exceed 30% of the total commitments under the First Lien Revolving Credit Facility at the testing date (i.e., the last day of any fiscal quarter).

As of December 31, 2020, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations, and we do not believe there is a material risk of future noncompliance with our financial covenant and other maintenance tests as a result of the COVID-19 Pandemic.

During February 2019, we approved a dividend reinvestment plan (the “DRIP”), which allows 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.

The number of shares issued is determined based on the volume weighted average closing price per share of our common stock for the five trading days preceding the dividend payment and adjusted for any discounts, as applicable.

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

We declared the following dividends on common stock during 2020, 2019, and 2018:

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

March 15, 2018 March 26, 2018 April 5, 2018 $0.035 $—

May 9, 2018 June 25, 2018 July 10, 2018 $0.035 $—

August 8, 2018 September 18, 2018 October 2, 2018 $0.035 $—

November 7, 2018 December 14, 2018 January 4, 2019 $0.035 $—

March 11, 2019 April 2, 2019 April 12, 2019 $0.035 $—

May 7, 2019 June 11, 2019 July 2, 2019 $0.035 $—

August 6, 2019 September 11, 2019 October 2, 2019 $0.035 $—

November 12, 2019 December 13, 2019 December 23, 2019 $0.700 $—

November 12, 2019 December 13, 2019 January 3, 2020 $0.035 $—

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

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

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

November 5, 2020 December 21, 2020 January 4, 2021 $0.035 $0.035

Apollo elected to discontinue participation in the DRIP with respect to dividends on our Common Stock subsequent to the October 2, 2019 dividend payment.

On February 25, 2021, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on March 18, 2021, which will be distributed on April 1, 2021.

As of December 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, or otherwise.

Stockholders are entitled to receive dividends when, as, and if declared by the Company’s board of directors out of funds legally available for that purpose.

During 2021, we declared aggregate dividends of $0.14 per share on Common Stock ($111 million) and $0.14 per share on Class B Common Stock ($8 million).

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

During 2019, we declared aggregate dividends of $0.84 per share on Common Stock ($633 million), which included a special dividend of $0.70 per share on Common Stock.

The amount of dividends settled in shares of Common Stock was approximately $68 million, which resulted in the issuance of 11 million shares of Common Stock.

Share Repurchase Program

On February 27, 2019, we approved the Share Repurchase Program, which authorized us to repurchase up to $150 million of our shares of Common Stock through February 27, 2021.

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

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

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

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

During 2020, there were no material repurchases of shares of our Common Stock under the Share Repurchase Program.

As of December 31, 2020, we had approximately $75 million remaining under the Share Repurchase Program.

During 2019, we repurchased 24 million shares of Common Stock for approximately $150 million under the Share Repurchase Program.

During 2020, we declared aggregate dividends of $0.14 per share on Common Stock ($108 million) and $0.07 per share on Class B Common Stock ($4 million).

Refer to Note 9 “Equity” in the Notes to Consolidated Financial Statements for further information.

On March 1, 2022, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on March 17, 2022, which will be distributed on April 4, 2022.

Other Share Activity

In 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.

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 2021 or 2020.

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

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 2021 or 2020.

Refer to Note 9 “Equity” in the Notes to Consolidated Financial Statements for further information.

Cash Flow Analysis

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2020 2020 vs.

Net cash provided by operating activities $ 1,366,749 $ 1,873,117 $ 1,787,607 $ (506,368) $ 85,510

Net cash used in investing activities $ (1,137,477) $ (978,177) $ (1,738,210) $ (159,300) $ 760,033

Net cash (used in) provided by financing activities $ (70,261) $ (1,214,204) $ 193,001 $ 1,143,943 $ (1,407,205)

Net cash provided by (used in) operating activities $ 1,649,723 $ 1,366,749 $ 1,873,117 $ 282,974 $ (506,368)

Net cash provided by (used in) investing activities $ (1,695,745) $ (1,137,477) $ (978,177) $ (558,268) $ (159,300)

Net cash provided by (used in) financing activities $ (128,448) $ (70,261) $ (1,214,204) $ (58,187) $ 1,143,943

Cash Flows from Operating Activities

The decrease in net cash flows provided by operating activities during 2020 was primarily due to (i) an increase in selling, general and administrative expenses largely due to the Defenders Acquisition, (ii) an increase in the volume of transactions in which equipment was sold outright to residential customers, (iii) the sale of ADT Canada, (iv) $81 million related to the settlement of a pre-existing relationship in connection with the Defenders Acquisition, and (v) the acceleration of a portion of our 2020 incentive compensation payments into 2020.

These decreases were partially offset by the favorable cash flow benefit associated with the deferral of payroll tax payments provided by the CARES Act and a decrease in interest payments of $35 million due to changes to the timing and amount of interest payments as a result of our recent financing transactions.

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.

We expect our transition to a Company-owned model for our residential transactions to favorably impact net cash provided by operating activities during 2021 due to different accounting policies applicable to each ownership model.

The increase in net cash provided by operating activities for 2021 compared to 2020 was primarily due to:

• a lower volume of residential outright sales transactions as compared to Company-owned transactions as a result of our equipment ownership model changes;

• a decrease in outflows of $81 million related to a payment in the first quarter of 2020 for the settlement of a pre-existing relationship in connection with the Defenders Acquisition;

• a decrease in outflows of $58 million related to lower incentive compensation payments in 2021 as compared to 2020 primarily due to our 2019 annual incentive payment and the acceleration of the majority of our 2020 annual incentive payment, which were both paid in 2020;

• a decrease in cash interest of $54 million from various long-term debt refinancing transactions.

These activities were partially offset by:

• an increase of $155 million in payments related to radio conversion costs, net of the related incremental revenue;

• an increase in payroll tax payments primarily related to deferrals of such payments in 2020 under the CARES Act, a portion of which were paid in 2021.

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 net cash used in investing activities during 2020 was primarily due to the non-recurrence of $496 million of proceeds received as a result of the sale of ADT Canada during 2019 and an increase in cash used for business acquisitions, net of cash acquired, of $116 million primarily due to the Defenders Acquisition during 2020.

These increases were partially offset by (i) a decrease in the volume of dealer and bulk account purchases primarily due to the Defenders Acquisition, (ii) a decrease in the volume of subscriber system asset expenditures as a result of the Equipment Ownership Model Change and the sale of ADT Canada, and (iii) a decrease as a result of proceeds received associated with the sale of a strategic investment during 2020.

We expect our transition to a Company-owned model for our residential transactions to negatively impact net cash used in investing activities during 2021 due to different accounting policies applicable to each ownership model.

The increase in net cash used in investing activities for 2021 compared to 2020 was primarily due to:

• an increase in dealer generated customer account and bulk account purchases of $294 million due to a higher volume of purchases including the impact from bulk purchases;

• an increase in subscriber system assets expenditures of $276 million primarily due to a higher volume of residential Company-owned transactions as compared to outright sales transactions as a result of our equipment ownership model changes, partially offset by;

• a decrease in cash paid for business acquisitions, net of cash acquired.

Cash Flows from Financing Activities

During 2020, net cash used in financing activities primarily consisted of (i) $415 million related to the net repayments of long-term borrowings, including call premiums, (ii) $109 million related to dividend payments on common stock, (iii) $38 million related to payments on interest rate swap contracts that included an other-than-insignificant financing element at inception, and (iv) $29 million related to the payment of deferred financing fees.

These cash outflows were partially offset by (i) $448 million of proceeds, net of expenses, associated with the issuance of Class B Common Stock and (ii) $76 million of net proceeds under the Receivables Facility.

During 2019, net cash used in financing activities primarily consisted of (i) $565 million related to dividend payments on common stock, (ii) $442 million related to the net repayment of long-term borrowings, including call premiums, (iii) $150 million related to repurchases of common stock, and (iv) $54 million related to the payment of deferred financing fees.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

The following table provides a summary of our commitments and contractual obligations for debt, leases, and other purchase obligations as of December 31, 2020:

(in thousands) 2021 2022 2023 2024 2025 Thereafter Total

Debt principal (1)

$ 17,809 $ 1,018,507 $ 717,248 $ 764,035 $ 8,176 $ 7,178,812 $ 9,704,587

Interest payments (2)

522,340 514,148 457,458 423,147 388,103 694,663 2,999,859

Operating leases (3)

36,440 38,981 33,160 21,541 14,884 21,518 166,524

Finance leases (4)

29,174 23,218 10,056 2,229 12 — 64,689

Contractual obligations (5)

177,024 58,714 48,245 17,201 12,324 19,578 333,086

Total $ 782,787 $ 1,653,568 $ 1,266,167 $ 1,228,153 $ 423,499 $ 7,914,571 $ 13,268,745

______________________

(1) Represents the contractual principal payments of our debt obligations as of December 31, 2020.

Finance lease obligations, discounts, deferred financing costs, and purchase accounting fair value adjustments are excluded.

(2) Represents the estimated interest payments on our debt obligations as of December 31, 2020.

Interest payments on our fixed-rate debt are calculated based on the contractual terms.

Interest payments on our variable-rate debt, including the effects of our interest rate swaps, are calculated based on a forward LIBOR curve (or floor, whichever is higher) plus the applicable margin in effect as of December 31, 2020.

(3) Represents lease payments on our operating lease obligations as of December 31, 2020.

(4) Represents the principal and interest payments on our finance lease obligations as of December 31, 2020.

(5) Represents contractual obligations for purchases of goods or services, including purchase orders, related to agreements entered into in the ordinary course of business that are enforceable and legally binding and that specify all significant terms of the transaction as of December 31, 2020.

Excludes contractual obligations related to the Commercial Agreement with Google, which requires us and Google to each contribute $150 million towards certain joint commercial efforts.

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

Refer to Note 9 “Equity” for further details.

We have not included in the contractual obligations table approximately $66 million of unrecognized tax benefits, excluding interest and penalties, related to various tax positions we have taken.

In addition, we have not included the minimum required contributions to our defined benefit pension plans as the aggregate contributions are not material.

Finally, we have not included our off-balance sheet guarantees of $83 million, which primarily relate to standby letters of credit on our insurance programs.

During the first quarter of 2021, we entered into commitments of approximately $54 million to purchase certain parts used in the program to replace 3G and CDMA cellular equipment used in our security systems.

OFF-BALANCE SHEET ARRANGEMENTS

As of December 31, 2020, our guarantees totaled $83 million and primarily related to standby letters of credit on our insurance programs.

We do not have any other material off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The increase in net cash used in financing activities for 2021 compared to 2020 was primarily due to:

• a decrease in inflows of $448 million related to proceeds, net of expenses, received in 2020 from the issuance of Class B Common Stock;

• an increase in payments on interest rate swap contracts that included an other-than-insignificant financing element at inception.

These activities were partially offset by:

• a decrease in net outflows on long-term borrowings of $359 million primarily due to the $300 million prepayment in December 2020 on the First Lien Term Loan due 2026, as well as a decrease in call premiums related to various debt redemptions during 2020;

• an increase in net proceeds of $47 million from the Receivables Facility due to additional months of activity in 2021 as compared to 2020;

• a decrease in payments for deferred financing costs.

CRITICAL ACCOUNTING ESTIMATES

The accompanying 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 consolidated financial statements and the accompanying notes.

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Actual results could differ materially from these estimates under different assumptions or market conditions.

The following accounting policies are based on, among other things, estimates and judgments made by management that include inherent risks and uncertainties.

The following critical accounting estimates include estimates prepared in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations, and are based on, among other things, estimates, assumptions, and judgments made by management that include inherent risks and uncertainties.

We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances.

Refer to the Notes to Consolidated Financial Statements included in this Annual Report for further discussion of our significant accounting policies and the effect on our financial statements.

Revenue Recognition

We generate revenue primarily through contractual monthly recurring fees received for monitoring and related services provided to customers.

In transactions in which we provide monitoring and related services but retain ownership of the security system, our performance obligations primarily include monitoring, related services (such as maintenance agreements), and a material right associated with the one-time non-refundable fees received in connection with the initiation of a monitoring contract that the customer will not be required to pay again upon a renewal of the contract, which is referred to as deferred subscriber acquisition revenue.

The portion of the transaction price associated with monitoring and related services revenue is recognized when the services are provided to the customer and is reflected in monitoring and related services revenue in the Consolidated Statements of Operations.

Deferred subscriber acquisition revenue is deferred and recorded as deferred subscriber acquisition revenue in the Consolidated Balance Sheets upon initiation of a monitoring contract.

Deferred subscriber acquisition revenue is amortized on a pooled basis into installation and other revenue in the Consolidated Statements of Operations over the estimated life of the customer relationship using an accelerated method consistent with the amortization of subscriber system assets and deferred subscriber acquisition costs associated with the transaction.

In transactions involving a security system that is sold outright to the customer, our performance obligations generally include monitoring, related services, and the sale and installation of the security system.

For such arrangements, we allocate a portion of the transaction price to each performance obligation based on relative standalone selling price, which is determined using observable internal or external pricing and profitability metrics.

Revenue associated with the sale and installation of a security system is recognized either at a point in time or over time based upon the nature of the transaction and contractual terms and is reflected in installation and other revenue in the Consolidated Statements of Operations.

The Company generates revenue primarily through contractual monthly recurring fees received for monitoring and related services provided to customers.

For CSB and Commercial, the Company’s performance obligations generally include monitoring, related services (such as maintenance agreements), and the sale and installation of a security system or a material right in transactions in which the Company retains ownership of the security system (as discussed below).

For Solar, the Company’s performance obligations generally include the sale and installation of a solar system, and may include additional performance obligations such as roofing services or the sale and installation of additional products such as batteries.

The transaction price is allocated to each performance obligation based on relative standalone selling price, which is determined using observable internal and external pricing, profitability, and operational metrics.

The portion of the transaction price associated with the material right is deferred upon initiation of a monitoring contract and reflected as deferred subscriber acquisition revenue in the Consolidated Balance Sheets.

Deferred subscriber acquisition revenue is amortized on a pooled basis over the estimated life of the customer relationship using an accelerated method consistent with the treatment of subscriber system assets and deferred subscriber acquisition costs (discussed below).

Revenue associated with the sale and installation of a security system is recognized either at a point in time or over time based upon the nature of the transaction and contractual terms.

For revenue recognized over time, progress toward complete satisfaction of the performance obligation is primarily measured using a cost-to-cost measure of progress method.

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This measure of progress method includes forecasts based on the best information available and reflects our judgment to faithfully depict the value of the services transferred to the customer.

Subscriber System Assets, net and Deferred Subscriber Acquisition Costs, net

We capitalize certain costs associated with transactions in which we retain ownership of the security system as well as incremental selling expenses related to acquiring customers.

These costs include equipment, installation costs, and other incremental costs and are recorded in subscriber system assets, net and deferred subscriber acquisition costs, net in the Consolidated Balance Sheets.

These assets embody a probable future economic benefit as they contribute to the generation of future monitoring and related services revenue for us.

Subscriber system assets represent capitalized equipment and installation costs incurred in connection with transactions in which we retain ownership of the security system.

Upon customer termination, we may retrieve such assets.

Deferred subscriber acquisition costs represent incremental selling expenses (primarily commissions) related to acquiring customers.

Subscriber system assets and any related deferred subscriber acquisition costs resulting from customer acquisitions are accounted for on a pooled basis based on the month and year of acquisition.

We depreciate and amortize our pooled subscriber system assets and related deferred subscriber acquisition costs using an accelerated method over the estimated life of the customer relationship, which is 15 years.

We periodically perform lifing studies to estimate the expected life of the customer relationship and the attrition pattern of our customers.

We periodically perform lifing studies to estimate the expected life of the customer relationship and the attrition pattern of our customers and assess the continued reasonableness of our existing depreciation and amortization policies.

The lifing studies are based on historical customer terminations and are used to establish the amortization rates of our customer account pools in order to reflect the pattern of future benefit.

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therefore, an accelerated method best matches the future amortization cost with the estimated revenue stream from these customer pools.

and converts to straight-line methodology when the resulting charge is greater than that from the accelerated method, resulting in an average charge of approximately 55% of the pool within the first five years, 25% within the second five years, and 20% within the final five years.

In order to align the depreciation and amortization of subscriber system assets and related deferred costs to the pattern in which their economic benefits are consumed, the accelerated method utilizes an average declining balance rate of approximately 250% and converts to straight-line methodology when the resulting charge is greater than that from the accelerated method, resulting in an average charge of approximately 55% of the pool within the first five years, 25% within the second five years, and 20% within the final five years.

The accelerated method and estimated life used have not changed during the periods presented.

Definite-Lived Intangible Assets

Definite-lived intangible assets relate to customer relationships, dealer relationships, and other definite-lived intangible assets that originated from business acquisitions as well as contracts with customers purchased under the ADT Authorized Dealer Program or from other third parties.

Customer relationships, which primarily originated from the Formation Transactions and the ADT Acquisition, are amortized over a period of up to 20 years based on management estimates about the amounts and timing of estimated future revenue from customer accounts and average customer account life that existed at the time of the related business acquisition.

Definite-lived intangible assets primarily relate to customer relationships and dealer relationships that originated from business acquisitions, as well as contracts with customers purchased under the ADT Authorized Dealer Program or from other third parties.

Customer relationships are amortized over a period of up to 20 years based on management estimates about the amounts and timing of estimated future revenue from customer accounts and average customer account life that existed at the time of the related business acquisition.

Dealer relationships originated from the Formation Transactions and the ADT Acquisition and are primarily amortized over 19 years based on management estimates about the longevity of the underlying dealer network and the attrition of those respective dealers that existed at the time of the related business acquisition.

Other definite-lived intangible assets are amortized over a period of up to 10 years on a straight-line basis.

We maintain a network of agreements with third-party independent alarm dealers who sell alarm equipment and ADT Authorized Dealer-branded monitoring and interactive services to end users.

The dealers in this program generate new end-user contracts with customers which we have the right, but not the obligation, to purchase from the dealer.

Purchases of contracts with customers under the ADT Authorized Dealer Program, or from other third parties, are considered asset acquisitions and are recorded at their contractually determined purchase price.

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We record the amount of the charge back as a reduction to the purchase price.

Purchases of contracts with customers under the ADT Authorized Dealer Program, or from other third parties, are accounted for on a pooled basis based on the month and year of acquisition.

Similar to above, we periodically perform lifing studies to estimate the expected life of the customer relationship and the attrition pattern of our customers and assess the continued reasonableness of our existing depreciation and amortization policies.

These purchases of contracts with customers are accounted for on a pooled basis based on the month and year of acquisition.

We amortize our pooled contracts with customers using an accelerated method over the estimated life of the customer relationship, which is 15 years.

The accelerated method for amortizing these contracts utilizes an average declining balance rate of approximately 300% and converts to straight-line methodology when the resulting amortization charge is greater than that from the accelerated method, resulting in an average amortization of approximately 65% of the pool within the first five years, 25% within the second five years, and 10% within the final five years.

Long-Lived Asset Impairments

We review long-lived assets for impairment whenever events or changes in business circumstances indicate that the carrying amount of an asset or asset group may not be fully recoverable.

We group assets at the lowest level for which cash flows are separately identified.

Recoverability is measured by a comparison of the carrying amount of the asset group to its expected future undiscounted cash flows.

If the expected future undiscounted cash flows of the asset group are less than its carrying amount, an impairment loss is recognized based on the amount by which the carrying amount exceeds the fair value less costs to sell.

The calculation of the fair value less costs to sell of an asset group is based on assumptions concerning the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of perceived risk.

The accelerated method and estimated life used have not changed during the periods presented.

Goodwill and Indefinite-Lived Intangible Assets Impairment

Goodwill and indefinite-lived intangible assets are not amortized and are tested for impairment at least annually as of the first day of the fourth quarter of each year and more often if an event occurs or circumstances change which indicate it is more-likely-than-not that fair value is less than carrying amount.

The annual impairment tests of goodwill and indefinite-lived intangible assets may be completed through qualitative assessments.

We may elect to bypass the qualitative assessment and proceed directly to a quantitative impairment test for any reporting unit or indefinite-lived intangible asset in any period.

We may resume the qualitative assessment for any reporting unit or indefinite-lived intangible asset in any subsequent period.

Under a qualitative approach, the impairment test for goodwill consists of an assessment of whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount.

If we elect to bypass the qualitative assessment for any reporting unit, or if a qualitative assessment indicates it is more-likely-than-not that the estimated fair value of a reporting unit is less than its carrying amount, we proceed to a quantitative approach.

We make certain estimates and judgments in relation to goodwill and indefinite-lived intangible assets, which include considerations made in the valuation of certain acquired identifiable indefinite-lived assets as a result of business combinations as well as considerations in impairment assessments of goodwill.

Under a qualitative approach, we assess whether it is more-likely-than-not that a reporting unit’s fair value is less than its carrying amount.

Under a quantitative approach, we estimate the fair value of a reporting unit and compare it to its carrying amount.

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As a result, there are inherent uncertainties related to these judgments and factors in applying them to the goodwill impairment tests.

During the fourth quarter 2020, and in connection with a reporting unit change, we qualitatively tested our former reporting units immediately prior to the change and quantitatively tested our new reporting units immediately following the change.

Based on the results of these tests, the fair values of both reporting units exceeded their carrying amounts.

During the fourth quarter of 2020, subsequent to our annual goodwill impairment tests, our reporting units changed in connection with the integration of Red Hawk and other commercial acquisitions, which reflected the finalization and integration of financial information and internal reporting structure, as well as changes in the review and availability of discrete financial information.

Since the fourth quarter of 2020, the Commercial reporting unit is comprised of the former Red Hawk reporting unit, as well as assets and liabilities and accompanying financial results related to operations associated with commercial customers that were previously assigned to the U.S.

reporting unit.

The Company also reallocated a portion of goodwill from the former U.S.

reporting unit to the Commercial reporting unit on a relative fair value basis using a market approach that consisted of the application of earnings before interest, taxes, depreciation, and amortization (“EBITDA”) multiples from a selected peer group of publicly-traded companies to arrive at the estimated fair values.

In addition, we qualitatively tested our former reporting units immediately prior to the reporting unit change during the fourth quarter of 2020 and quantitatively tested our new reporting units immediately following the change.

Based on the results of these tests, no impairment charges were recorded.

On October 1, 2021, we completed our annual goodwill impairment tests by qualitatively testing the goodwill associated with the CSB reporting unit and quantitatively testing the goodwill associated with the Commercial reporting unit.

Additionally, we did not test the goodwill associated with the Solar reporting unit due to the recency of the Sunpro Solar Acquisition in December 2021.

Based on the results of the qualitative testing for the CSB reporting unit, we concluded it is more likely than not that the fair value of the CSB reporting unit exceeds its carrying value.

Based on the results of the quantitative testing for the Commercial reporting unit, we concluded the fair value of the Commercial reporting unit exceeds its carrying value by approximately 20%.

The Commercial reporting unit continues to deal with the impact of the COVID-19 pandemic, and should certain pandemic-related issues continue, the reporting unit fair value could be adversely impacted and may decline below its carrying value.

Based on the results of these tests, we did not record any impairment losses associated with our reporting units.

Indefinite-Lived Intangible Assets

As of December 31, 2021, our only indefinite-lived intangible asset is the ADT trade name, which has a carrying value of $1.3 billion and was recognized in connection with the ADT Acquisition in May 2016.

Under a qualitative approach, the impairment test for an indefinite-lived intangible asset consists of an assessment of whether it is more-likely-than-not that an asset’s fair value is less than its carrying amount.

If we elect to bypass the qualitative assessment for any indefinite-lived intangible asset, or if a qualitative assessment indicates it is more-likely-than-not that the estimated carrying amount of such asset exceeds its fair value, we proceed to a quantitative approach.

Under a quantitative approach, we estimate the fair value of an asset and compare it to its carrying amount.

If the carrying amount exceeds fair value, an impairment loss is recognized in an amount equal to that excess.

The fair value of an indefinite-lived intangible asset is determined based on the nature of the underlying asset.

Our only indefinite-lived intangible asset is the ADT trade name.

Under a quantitative approach, we estimate the fair value of an asset, which is determined based on the nature of the underlying asset.

The fair value of the ADT trade name is determined under a relief from royalty method, which is an income approach that estimates the cost savings that accrue to us that we would otherwise have to pay in the form of royalties or license fees on revenue earned through the use of the asset.

The utilization of the relief from royalty method requires us to make significant assumptions including revenue growth rates, the implied royalty rate, and the discount rate.

As of our October 1, 2021 impairment test, the fair value of the ADT trade name significantly exceeded its carrying value.

In connection with our quantitative impairment test, we performed a sensitivity analysis on the key assumptions used to determine the fair value of the ADT trade name.

The results of our sensitivity analysis did not have a material impact on the conclusions reached.

Business Combinations

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The assets acquired and liabilities assumed in connection with business acquisitions are recorded at the date of acquisition at their estimated fair values, with any excess of the purchase price over the estimated fair values of the net assets acquired recorded as goodwill.

Significant judgment is required in estimating the fair value of assets acquired and liabilities assumed and in assigning useful lives to certain definite-lived intangible and tangible assets.

Significant judgment is required in estimating the fair value of assets acquired and liabilities assumed and in assigning useful lives to certain definite-lived

intangible and tangible assets.

Accordingly, we may engage third-party valuation specialists to assist in these determinations.

The fair value estimates are based on available information as of the acquisition date and assumptions deemed reasonable by management but are inherently uncertain.

We have not recorded any material measurement period adjustments to purchase price allocations during 2021, 2020, and 2019.

Loss Contingencies

We record accruals for losses that are probable and reasonably estimable.

These accruals are based on a variety of factors such as judgment, probability of loss, opinions of internal and external legal counsel, and actuarially determined estimates of claims incurred but not yet reported based upon historical claims experience.

Legal costs in connection with claims and lawsuits in the ordinary course of business are expensed as incurred.

We are subject to legal proceedings and claims that arise in the ordinary course of business, the outcomes of which are inherently uncertain.

We record a liability for losses that are probable and the amount can be reasonably estimated, the determination of which requires significant judgement.

Additionally, we record insurance recovery receivables from third-party insurers when recovery has been determined to be probable.

We file a consolidated federal return for our U.S.

entities and separate returns for each Canadian entity.

The Company’s reasonably possible losses related to ongoing claims and lawsuits not within scope of an insurance program were not material, and in most cases, the Company has not accrued for any losses as the likelihood of loss cannot be assessed or the range of probable loss cannot be estimated.

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the temporary differences between the recognition of revenue and expenses for income tax and financial reporting purposes and between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis