What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-05-06 compared with 2021-11-09 · 221 added, 341 removed, 143 unchanged (80% of the section changed)

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

The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2020 (the “2020 Annual Report”), which was filed with the United States (“U.S.”) Securities and Exchange Commission (the “SEC”) on February 25, 2021, to obtain a more comprehensive understanding of our financial condition, changes in financial condition, and results of operations.

To obtain a more comprehensive understanding of our financial condition, changes in financial condition, and results of operations, the following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and the related notes included in our Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”), which was filed with the United States (“U.S.”) Securities and Exchange Commission (the “SEC”) on March 1, 2022.

The following discussion and analysis contains forward-looking statements about our business, operations, and financial performance based on current plans and estimates that involve risks, uncertainties, and assumptions.

Actual results could differ materially from those discussed in the forward-looking statements.

Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled “Cautionary Statements Regarding Forward-Looking Statements” and “Item 1A.

Risk Factors.”

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

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

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

As of September 30, 2021, we served approximately 6.6 million recurring customers, excluding contracts monitored but not owned.

Our security and automation offerings are designed to detect intrusion;

control access;

sense movement, smoke, fire, carbon monoxide, flooding, temperature, and other environmental conditions and hazards;

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

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

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

the customer;

or others on the customer’s emergency contact list.

We continue to innovate and invest 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 vast majority of new customers enroll in interactive and smart home solutions, which allow customers to remotely monitor and manage their environments, arm and disarm their security systems, adjust lighting or thermostat levels, monitor and react to defined events, or view real-time video, all through a customized web portal from web-enabled devices (such as smart phones).

Customers can also create and automate custom schedules for managing connected devices such as lights, thermostats, appliances, garage doors, and cameras, as well as program their systems to perform additional functions including recording and viewing live video and sending text messages or other alerts based on certain triggering events or conditions.

We are also extending the concept of security from the physical home or business to personal, on-the-go security and safety solutions by integrating our technology with various third-party connected and wearable devices.

Additionally, we utilize our security monitoring infrastructure to help customers sustain independent living and encourage better self-care activities with our personal emergency response system products and services.

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 LLC (“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.

Actual results could differ materially from those discussed in these forward-looking statements.

Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled “Cautionary Statements Regarding Forward-Looking Statements” and Item 1A “Risk Factors.”

OVERVIEW AND BASIS OF PRESENTATION

Business Overview

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

With the acquisition of Compass Solar Group, LLC (now named ADT Solar LLC) (“ADT Solar”) (the “ADT Solar Acquisition”) 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.

Basis of Presentation

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All intercompany transactions have been eliminated.

Segment Change

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

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

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

We organize our segments based on customer type as follows:

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

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

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

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

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

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

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

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

and (iii) dedicated corporate and other costs.

Our CODM uses Adjusted EBITDA, which is the segment profit measure, to evaluate segment performance.

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

We report financial and operating information in the following three segments:

• Consumer and Small Business - The Consumer and Small Business (“CSB”) segment primarily includes the sale, installation, servicing, and monitoring of integrated security and automation systems and other related offerings to residential homeowners, small business operators, and other individual consumers, as well as general corporate costs and other income and expense items not included in another segment.

• Commercial - The Commercial segment primarily includes the sale, installation, servicing, and monitoring of integrated security and automation systems, fire detection and suppression systems, and other related offerings to larger businesses and/or multi-site operations, which often require more sophisticated integrated solutions, as well as dedicated corporate and other costs.

• Solar - The Solar segment primarily includes the design and installation of solar and related solutions and services to residential homeowners who purchase solar and energy storage solutions, energy efficiency upgrades, and roofing services, as well as dedicated corporate and other costs.

Our chief operating decision maker (the “CODM”) uses Adjusted EBITDA, which is the segment profit measure, to evaluate segment performance.

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

Refer to Note 3 “Segment Information” for additional information on the Company’s segments.

COVID-19 Pandemic Update

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

While responses have varied by individuals, businesses, and state and local governments, the COVID-19 Pandemic, including recent variants, caused certain notable impacts on general economic conditions, including temporary and permanent closures of many businesses, increased governmental regulations, supply chain disruptions, and changes in consumer spending.

To protect our employees and serve our customers, we have implemented and are continuously evolving certain measures, such as (i) detailed protocols for infectious disease safety for employees, (ii) employee daily wellness checks, and (iii) certain work from home actions, including for the majority of our call center professionals.

We believe our overall recurring revenue and highly variable subscriber acquisition cost model provides a solid financial foundation for strong cash flow generation despite the impact from the COVID-19 Pandemic.

We anticipate maintaining sufficient liquidity and capital resources to continue (i) providing essential services, (ii) satisfying our debt requirements, and (iii) having the ability to return capital to our stockholders in the form of a regular quarterly dividend during this challenging macroeconomic environment.

We considered the on-going and pervasive economic impact of the COVID-19 Pandemic in our assessment of our financial position, results of operations, and cash flows, as well as certain accounting estimates as of and for the periods presented.

However, the evolving and uncertain nature of the COVID-19 Pandemic, as well as the evolving nature of the regulatory environment which may require vaccines or vaccine boosters or other actions that could impact our employee base or impose additional costs on our business, could materially impact our estimates and financial results in future reporting periods.

FACTORS AFFECTING OPERATING RESULTS

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

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

disciplined, high-quality customer additions;

efficient customer acquisition;

best-in-class customer service;

customer retention;

and costs incurred to provide ongoing services to customers.

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.

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

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

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

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

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

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.

Other factors include the following:

• Growth in our residential and small business customer base 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.

In addition, changes in the market or competition, such as the acquisition or disposition of similar businesses by our competitors, may impact our ability to compete.

• 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 March 31, 2022, we served approximately 6.7 million subscribers.

Although our subscriber-based offerings require significant upfront investment to generate new customers, they also provide ongoing and 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 period-over-period.

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 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, inflation, other changes in prices or terms from our vendors, or rising labor costs.

We have implemented certain actions across our business segments such as our virtual service support program in July 2021, which provides customers the ability to live video stream with our skilled technicians to troubleshoot and resolve service issues.

This reduces the cost for us to provide certain services, and it also provides customers with more options for receiving service that best fits their lifestyles.

In addition, our results are impacted by the mix of transactions under a Company-owned model versus a customer-owned model due to the different accounting treatment applicable to each model.

As we introduce new products and services, enhance our current offerings, continue building our partnership with Google LLC (“Google”), seek to satisfy consumer preferences, and refine our go-to-market approach, we expect to see a shift toward more outright sales, which will impact results in future periods.

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

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

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

Our ability to increase monthly fees at the individual customer level depends on a number of factors, including our ability to effectively introduce and market additional features and services.

We believe this increases the value of our offerings and drives customers to purchase higher levels of service, as well as supports our ability to make periodic adjustments to pricing.

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

We are subject to risk associated with certain supply chain disruptions.

While we have only experienced minimal impact in our Commercial operations and in the development of new products due to supply chain disruptions, we continue to monitor and

react to events impacting the global supply chain as we could experience a material impact to our sales and revenue, operating results, cash flows, and ability to commercialize new products in the future.

COVID-19 Pandemic

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

While responses have varied by individuals, businesses, and state and local municipalities, the COVID-19 Pandemic has had certain notable adverse impacts on general economic conditions, including the temporary and permanent closures of many businesses, increased governmental regulations, supply chain disruptions, and changes in consumer spending due to significant unemployment and other effects attributable to the COVID-19 Pandemic.

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

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

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

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

Prior to 2020, new customer additions and our disconnect rates on residential 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.

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

In addition, customers who we are not able to effectively transition prior to the applicable network sunset date, as discussed below, will experience a loss of signal, which could impact attrition in the future.

Prior to 2020, new customer additions and our disconnect rates on residential customers were typically 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.

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 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 on-going and pervasive economic impact of the COVID-19 Pandemic in our assessment of our financial position, results of operations, cash flows, and certain accounting estimates as of and for the three and nine months ended September 30, 2021.

However, the evolving and uncertain nature of the COVID-19 Pandemic, as well as the evolving nature of the regulatory environment which may require vaccine mandates or other actions that could impact our employee base or impose additional costs on our business, could materially impact our estimates and financial results in future reporting periods.

Radio Conversion Costs

During 2019, we commenced a program to replace the 3G and Code-Division Multiple Access (“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.

We estimate that we will incur approximately $260 million - $290 million of net costs related to this program.

From inception of this program through September 30, 2021, we incurred $249 million of net costs, of which $172 million was incurred during 2021.

As of September 30, 2021, we provided services to approximately 480 thousand remaining customer sites transmitting signals via 3G or CDMA networks, which have sunset dates in February and December 2022.

Given these current network retirement dates, we expect to incur any remaining costs through 2022, with the majority of costs expected to be incurred during the fourth quarter of 2021.

We also expect to continue to collect incremental revenue related to the program through 2023, some of which may be received after the applicable sunset dates.

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

As a result of worldwide shortages for certain electronic components impacting Cell Bounce device production, we expect to continue to replace 3G radios primarily using traditional methods and to use Cell Bounce product to complement these methods to the extent possible.

The cost and pace of the program is influenced by our ability to access customer sites due to various factors such as the COVID-19 Pandemic;

our ability to convert customers during routine service

visits whenever possible;

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

and the extent to which we are able to implement our Cell Bounce solution.

Any supply chain disruptions may impact our ability to convert customers prior to the sunset dates, and we may see revenue attrition for any customers not converted by such time.

Google Commercial Agreement

Google has agreed to supply us with certain Google devices, as well as certain Google video and analytics services, for sale to our customers pursuant to a Master Supply, Distribution, and Marketing Agreement (the “Google Commercial Agreement”), which also sets forth certain termination rights of the parties, certain exclusivity obligations of the Company in favor of Google, and certain other rights and obligations of the parties, all as described in our public filings with the SEC.

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 during 2020 and other benefits associated with certain income tax and payroll tax provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), including the deferral of remittance of certain 2020 payroll taxes.

We paid the majority of the first 50% of the deferred amount during the fourth quarter of 2021, with the remainder due by the end of 2022.

The factors described herein could have a material adverse effect on our business, financial condition, results of operations, cash flows, and key performance indicators.

Other Events and Updates

• Radio Conversion Costs - During 2019, we commenced a program to replace the 3G and Code-Division Multiple Access (“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 beginning in February 2022.

As of the start of the 3G sunset process in February 2022, we had converted substantially all of our remaining 3G customers.

For those customers we are not or were not able to transition prior to or since the completion of the applicable network sunset, the loss of signal to the systems and certain services we provide may impact our ability to bill and/or collect from these customers in the future.

Until the cellular network providers complete the applicable sunset processes, we cannot estimate the impact of the conversion on our attrition rate.

We do not expect the remaining radio conversion costs and related incremental revenue to be material.

• Google - The Company and Google entered into a Master Supply, Distribution, and Marketing Agreement (the “Google Commercial Agreement”), pursuant to which Google has agreed to supply the Company with certain Google devices as well as certain Google video and analytics services (“Google Devices and Services”) for sale to the Company’s 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 Devices and Services are successfully integrated into our end-user security and automation platform.

Further, subject to certain carve-outs, we have agreed to exclusively sell Google Devices and Services to our customers.

If the integrated Google Devices and Services are not launched by June 30, 2022, Google has the contractual right to require us, with certain exceptions, to exclusively offer the Google Devices and Services without integration for all new professional installations and for existing customers who do not have ADT Pulse or ADT Control interactive services, until such integration has been made.

The Company has already begun providing Google video services and devices and will continue to do so on a non-integrated basis as of June 30, 2022 and is working closely with Google toward an integrated solution.

The Company launched the Google Nest doorbell during the first quarter of 2022, rolled out mesh Wi-Fi during the second quarter of 2022, and expects to launch Google indoor and outdoor cameras by the end of the third quarter of 2022.

The Google Commercial Agreement further specifies each party shall contribute $150 million towards the joint marketing of devices and services;

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

SIGNIFICANT EVENTS

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

Revenue Model Initiative and Equipment Ownership Model Change

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 also 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 acquisition of Defender Holdings, Inc.

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

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

We expect these changes to continue to impact our results of operations and cash flow presentation during 2021 compared to 2020 due to different accounting policies applicable to a Company-owned model versus a customer-owned model.

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

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

Sunpro Solar Acquisition

In November 2021, we entered into a Purchase Agreement to acquire Compass Solar Group, LLC (“Sunpro Solar”) (the “Sunpro Solar Acquisition”), a leading provider of residential solar installation.

Pursuant to the Purchase Agreement, the base purchase price consists of $160 million in cash and approximately 77.8 million shares of our common stock, subject to adjustment as set forth in the Purchase Agreement.

Upon the consummation of this transaction, Sunpro Solar will become our indirect wholly-owned subsidiary.

The consummation of this transaction is subject to customary closing conditions and regulatory approvals and is expected to occur in the fourth quarter of 2021.

• Canopy Investment - In April 2022, we closed on our previously announced transaction with Ford Motor Company (“Ford”) to form a new entity, Canopy, which will combine ADT’s professional security monitoring and Ford’s AI-driven video camera technology to help customers strengthen security of new and existing vehicles across automotive brands.

ADT and Ford expect to invest approximately $100 million collectively during the next three years, of which ADT will contribute 40%.

As part of the initial funding at closing, our contribution totaled approximately $11 million.

Updates Related to Existing and Potential Tax Legislation

Delayed Effective Dates for Tax Law Changes under the Tax Cuts and Jobs Act

Certain changes to U.S.

federal tax law included in the Tax Cuts and Jobs Act had a delayed effective date and have taken effect for tax years beginning after December 31, 2021.

These changes include a limitation on net business interest expense deductions under the Internal Revenue Code (“IRC”) Section 163(j) no longer being increased by deductions for depreciation, amortization or depletion, and, under IRC Section 174, specified research and experimentation expenditures being capitalized and amortized.

These items could result in increased taxable income and acceleration of net operating loss utilization, which could impact our tax expense and ultimately, our net income or loss.

Potential Federal Tax Legislation

The White House released its fiscal year 2023 budget in March 2022, which includes a proposal to raise the corporate tax rate to 28%.

If the proposed tax rate increase is passed, the Company would need to revalue its deferred tax liabilities, which could further increase the Company’s effective tax rate.

The fiscal year 2023 budget also includes a provision that would reinstate current deductibility for IRC Section 174 research and experimentation expenditures that became subject to capitalization and amortization beginning this year.

As discussed in our 2021 Annual Report, we had a significant amount of deferred tax assets as of December 31, 2021, against which we take valuation allowances that relate to the uncertainty of our ability to utilize these deferred tax assets in future periods.

These valuation allowances were not material in 2021.

We review periodically those matters that can influence our decision as to whether or not a valuation allowance is appropriate.

Among those matters considered are pending and enacted legislation such as the updates described above.

We will consider each quarter whether any developments to such legislation, together with the other factors we consider, require a valuation allowance.

We believe that our deferred tax assets will grow meaningfully during 2022 and in subsequent years from their December 31, 2021 level.

There is currently significant uncertainty in the matters we consider when determining whether it is appropriate to take additional valuation allowances and while we have not reported any material changes to our valuation allowances during the first quarter of 2022, we may determine to do so in any of the remaining quarters in 2022 and in subsequent years.

Any material change to our valuation allowance that we have to take would materially and adversely affect our operating results and may result in a net loss position for any given period.

KEY PERFORMANCE INDICATORS

In evaluating our results, we utilize key performance indicators, which include the non-GAAP measure Adjusted EBITDA, as well as certain other 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.

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

Recurring Monthly Revenue (“RMR”)

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 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

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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.

We believe the presentation of gross customer revenue attrition is useful as it has a direct impact on our financial results, including revenue, operating income, and cash flows.

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 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.”

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

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

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

(in thousands, except as otherwise indicated)

Three Months Ended September 30,

Three Months Ended March 31,

Results of Operations:

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Monitoring and related services $ 1,121,296 $ 1,062,766 $ 58,530

Installation and other 218,613 253,247 (34,634)

Installation, product, and other 423,451 241,938 181,513

Total revenue 1,544,747 1,304,704 240,043

Cost of revenue (exclusive of depreciation and amortization shown separately below) 509,768 381,166 128,602

371,985 357,895 14,090

Selling, general, and administrative expenses 482,348 449,602 32,746

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Merger, restructuring, integration, and other 528 20,507 (19,979)

Operating income 23,096 62,886 (39,790)

Operating income (loss) 75,980 (16,380) 92,360

Interest expense, net (6,307) (47,724) 41,417

Loss on extinguishment of debt — (156) 156

Other income 1,511 1,992 (481)

Loss before income taxes (145,625) (140,797) (4,828)

Income tax benefit 36,496 27,699 8,797

Net loss $ (109,129) $ (113,098) $ 3,969

Other income (expense) 1,496 1,803 (307)

Income (loss) before income taxes 71,169 (62,457) 133,626

Income tax benefit (expense) (19,524) 14,563 (34,087)

Net income (loss) $ 51,645 $ (47,894) $ 99,539

Key Performance Indicators:

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

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

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

N/A — Not applicable.

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

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

Three Months Ended September 30,

Three Months Ended March 31,

(in thousands)

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Total M&S Revenue (1)

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

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

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

Installation and Other Revenue

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

Three Months Ended September 30,

(in thousands)

2021 2020 $ Change

CSB $ 59,790 $ 119,895 $ (60,105)

Commercial 158,823 133,352 25,471

Total installation and other revenue $ 218,613 $ 253,247 $ (34,634)

Total installation and other revenue decreased 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.

Cost of Revenue

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

Three Months Ended September 30,

(in thousands)

2021 2020 $ Change

CSB $ 172,483 $ 190,827 $ (18,344)

Commercial 199,502 167,068 32,434

Total cost of revenue $ 371,985 $ 357,895 $ 14,090

The increase in total cost of revenue was driven by an increase in Commercial, which was primarily due to higher installation costs, as well as field service and call center costs, in the current period as compared to the prior period which was impacted by the COVID-19 Pandemic, as well as from acquisitions.

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

Selling, General, and Administrative Expenses

The increase in selling, general, and administrative expenses was driven by a $41 million increase in radio conversion costs primarily related to an increase in the number and cost of conversions.

Depreciation and Intangible Asset Amortization

The increase in depreciation and intangible asset amortization was primarily driven by increases in amortization of customer contracts acquired under the ADT Authorized Dealer Program and from other third parties and depreciation of subscriber system assets, partially offset by a decrease in amortization of customer relationships.

Merger, Restructuring, Integration, and Other

Merger, restructuring, integration, and other was primarily comprised of gains related to the remeasurement of liability-classified contingent consideration during the three months ended September 30, 2021, and fair value adjustments associated with strategic equity investments during the three months ended September 30, 2020.

Interest Expense, net

The decrease in interest expense, net, was primarily driven by a $15 million increase in unrealized gains on interest rate swap contracts not designated as cash flow hedges primarily due to an increase in the London Interbank Offered Rate (“LIBOR”).

The remainder of the decrease was primarily due to our first lien term loan refinancing in January 2021.

Loss on Extinguishment of Debt

During the three months ended September 30, 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”).

During the three months ended September 30, 2020, loss on extinguishment of debt totaled $49 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 our 6.25% notes due 2021 in September 2020.

Income Tax Benefit

Income tax benefit for the three months ended September 30, 2021 was $36 million, resulting in an effective tax rate for the period of 25.1%.

The effective tax rate primarily represents the federal statutory rate of 21.0% and a state statutory tax rate, net of federal benefits, of 3.1%.

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

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

The effective tax rate can vary from period to period due to permanent tax adjustments, discrete items such as the settlement of income tax audits and changes in tax laws, as well as recurring factors such as changes in the overall state tax rate.

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

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

(in thousands, except as otherwise indicated)

Nine Months Ended September 30,

Results of Operations:

2021 2020 $ Change

Monitoring and related services $ 3,244,675 $ 3,133,013 $ 111,662

Installation and other 681,448 867,050 (185,602)

Total revenue 3,926,123 4,000,063 (73,940)

Cost of revenue (exclusive of depreciation and amortization shown separately below) 1,134,736 1,142,228 (7,492)

Selling, general, and administrative expenses 1,343,872 1,278,929 64,943

Depreciation and intangible asset amortization 1,424,090 1,440,239 (16,149)

Merger, restructuring, integration, and other 18,588 114,715 (96,127)

Operating income 4,837 23,952 (19,115)

Interest expense, net (347,524) (569,391) 221,867

Loss on extinguishment of debt (37,113) (114,759) 77,646

Other income 4,847 6,572 (1,725)

Loss before income taxes (374,953) (653,626) 278,673

Income tax benefit 92,080 133,494 (41,414)

Net loss $ (282,873) $ (520,132) $ 237,259

Key Performance Indicators:

RMR $ 356,341 $ 341,367 $ 14,974

Gross customer revenue attrition (percent) 13.4% 12.9% N/A

Adjusted EBITDA (2)

$ 1,121,296 $ 1,062,766 $ 58,530

_________________

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

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

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

N/A—Not applicable.

Monitoring and Related Services Revenue

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

Nine Months Ended September 30,

(in thousands)

2021 2020 $ Change

CSB $ 2,892,291 $ 2,814,482 $ 77,809

Commercial 352,384 318,531 33,853

Total M&S Revenue $ 3,244,675 $ 3,133,013 $ 111,662

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

Total RMR was $356 million and $341 million as of September 30, 2021 and 2020, respectively.

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

Gross customer revenue attrition was 13.4% and 12.9% as of September 30, 2021 and 2020, respectively.

The increase in gross customer revenue attrition was primarily attributable to an increase in relocations during 2021 as compared to the prior year when the COVID-19 Pandemic temporarily caused fewer relocations, and a lower volume of dealer charge-backs primarily related to the Defenders Acquisition in 2020, partially offset by fewer non-payment disconnects and the benefit of customer retention initiatives.

Installation and Other Revenue

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

Nine Months Ended September 30,

(1) M&S Revenue is not applicable to our Solar segment.

The increase in total M&S Revenue was primarily attributable to higher recurring revenue in CSB, which was driven by (i) improvements in average pricing as new and existing customers selected higher priced interactive and other services and (ii) an increase in the number of active subscribers since the prior year primarily due to investments in subscriber growth.

The increase in Commercial was driven by higher recurring revenue primarily due to an increase in average prices and higher revenue per service call.

Total RMR was approximately $365 million and $349 million as of March 31, 2022 and 2021, respectively.

The increase in RMR was primarily due to RMR added since 2021 and reflects growth initiatives and improvements in average pricing.

Gross customer revenue attrition was 12.9% and 13.1% as of March 31, 2022 and 2021, respectively.

The decrease in gross customer revenue attrition was primarily attributable to lower voluntary and non-payment disconnects as a result of customer retention initiatives.

Installation, Product, and Other Revenue:

Three Months Ended March 31,

(in thousands)

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Commercial 161,909 154,581 7,328

Total installation and other revenue $ 681,448 $ 867,050 $ (185,602)

Solar 191,981 — 191,981

Total installation, product, and other revenue $ 423,451 $ 241,938 $ 181,513

Total installation, product, and other revenue increased primarily due to revenue from Solar installations, which includes a reduction of approximately $30 million from the amortization of purchase accounting adjustments, as a result of the ADT Solar Acquisition in December 2021.

The decrease in CSB 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, which was completed during March 2021.

Cost of Revenue:

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

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands)

2 unchanged sentences

Commercial 203,184 187,795 15,389

Solar 135,404 — 135,404

Total cost of revenue $ 509,768 $ 381,166 $ 128,602

The decrease in cost of revenue 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 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 the current period as compared to the prior period which was impacted by the COVID-19 Pandemic, as well as from acquisitions.

Total cost of revenue increased primarily due to cost of revenue from Solar installations as a result of the ADT Solar Acquisition in December 2021.

The decrease in CSB was 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, which was completed during March 2021.

In addition, CSB field service and call center costs remained relatively flat despite rising costs and providing service to a larger number of customers, including a higher mix of interactive services.

CSB field service and call center costs also reflected cost savings primarily due to the virtual service program implemented in 2021.

The increase in Commercial cost of revenue was driven by an increase in field service and call center costs primarily due to higher prices on parts, labor, and fuel.

Selling, General, and Administrative Expenses:

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

• an increase in radio conversion costs of $152 million primarily related to an increase in the number and cost of conversions, partially offset by

• decreases in the provision for credit losses of $42 million and $20 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 CSB as a result of our transition to a predominately Company-owned model, and

• a decrease in commissions, partially offset by an increase in amortization of deferred subscriber acquisition costs, as a result of our transition to a predominately 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, higher selling costs, and lower share-based compensation expense.

The increase in selling, general, and administrative expenses was primarily driven by higher selling, general, and administrative expenses of approximately $76 million as a result of the ADT Solar Acquisition in December 2021.

This increase was partially offset by a decrease in radio conversion costs of $52 million primarily due to a decrease in the number of conversions as we approach the end of the program, as well as a decrease in advertising costs primarily due to our efforts to optimize our advertising model.

Depreciation and Intangible Asset Amortization:

The decrease in depreciation and intangible asset amortization was primarily driven by a decrease in amortization of customer relationships, partially offset by increases in amortization of (i) customer contracts acquired under the ADT Authorized Dealer Program and from other third parties and (ii) other intangible assets.

Depreciation and intangible asset amortization remained relatively flat and primarily reflected increases in (i) amortization of customer contracts acquired under the ADT Authorized Dealer Program as a result of customer contract additions through our Authorized Dealer Network and from other third parties and (ii) depreciation of subscriber system assets as a result of an increase in Company-owned transactions, partially offset by a decrease in the amortization of customer relationships acquired as part of the acquisition of The ADT Security Corporation in 2016 (the “ADT Acquisition”).

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

Merger, Restructuring, Integration, and Other:

During the nine months ended September 30, 2021, merger, restructuring, integration, and other primarily included an $18 million impairment charge in our CSB segment due to lower than expected benefits from the Cell Bounce developed technology intangible asset as a result of recent worldwide shortages for certain electronic components.

During the nine months ended September 30, 2020, merger, restructuring, integration, and other primarily related to losses of $81 million associated with the settlement of a pre-existing relationship in connection with the Defenders Acquisition.

During the three months ended March 31, 2022, merger, restructuring, integration, and other was not material.

During the three months ended March 31, 2021, merger, restructuring, integration, and other primarily included an $18 million impairment charge in CSB due to lower than expected benefits from our developed-technology intangible asset acquired during November 2020.

Interest Expense, net:

The decrease in interest expense, net, was primarily driven by an unrealized gain of $115 million on interest rate swap contracts not designated as cash flow hedges during the nine months ended September 30, 2021, as compared to an unrealized loss of $90 million during the prior year, primarily due to an increase in LIBOR.

Loss on Extinguishment of Debt

In addition to the amounts discussed above for the three months ended September 30, 2021 as compared to 2020, the nine months ended September 30, 2020 also included $66 million related to the call premium and write-off of unamortized deferred financing costs in connection with the $1.2 billion redemption of the Company’s second-priority secured notes in February 2020.

Income Tax Benefit

Income tax benefit for the nine months ended September 30, 2021 was $92 million, resulting in an effective tax rate for the period of 24.6%.

The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.9%, and a 0.6% favorable impact of share-based compensation.

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

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

The decrease in interest expense, net, was primarily driven by unrealized gains on interest rate swap contracts not designated as cash flow hedges of $145 million during the three months ended March 31, 2022 as compared to $107 million during the prior year period, primarily due to an increase in the forward London Interbank Offered Rate (“LIBOR”).

Income Tax Benefit (Expense):

Income tax expense for the three months ended March 31, 2022 was $20 million, resulting in an effective tax rate for the period of 27.4%.

The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 6.7%, and a 2.6% favorable impact of share-based compensation, partially offset by a 2.7% unfavorable impact of permanent items.

Income tax benefit for the three months ended March 31, 2021 was $15 million, resulting in an effective tax rate for the period of 23.3%.

The effective tax rate primarily represents the federal statutory tax rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.8%, and a 2.8% favorable impact of share-based compensation, partially offset by a 1.6% unfavorable impact of state legislative changes.

NON-GAAP MEASURES

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Adjusted EBITDA

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 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.

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

Further, we believe Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against other peer companies using similar measures.

8 unchanged sentences

There are material limitations to using Adjusted EBITDA.

Adjusted EBITDA does not take into account certain significant items, including depreciation and amortization, interest, taxes, and other adjustments which directly affect our net income or loss.

Adjusted EBITDA does not take into account certain significant items, including depreciation and amortization, interest, taxes, and other adjustments which directly affect our net income (loss).

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

The table below reconciles Adjusted EBITDA to net loss:

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2021 2020 $ Change 2021 2020 $ Change

Net loss $ (109,129) $ (113,098) $ 3,969 $ (282,873) $ (520,132) $ 237,259

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

Three Months Ended March 31,

(in thousands) 2022 2021 $ Change

Net income (loss) $ 51,645 $ (47,894) $ 99,539

Interest expense, net 6,307 47,724 (41,417)

Income tax benefit (36,496) (27,699) (8,797) (92,080) (133,494) 41,414

Income tax expense (benefit) 19,524 (14,563) 34,087

Depreciation and intangible asset amortization 476,123 469,809 6,314

5 unchanged sentences

Radio conversion costs, net 9,940 58,729 (48,789)

Acquisition related adjustments (1)

36,295 (248) 36,543

2 unchanged sentences

________________

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

Adjusted EBITDA in total and by segment were as follows:

Three Months Ended September 30, Nine Months Ended September 30,

(in thousands) 2021 2020 $ Change 2021 2020 $ Change

(1) During 2022, primarily represents the amortization of the customer backlog intangible asset, which was fully amortized as of March 2022, related to the ADT Solar Acquisition.

Adjusted EBITDA in total and by segment was as follows:

Three Months Ended March 31,

(in thousands) 2022 2021 $ Change

CSB $ 560,545 $ 519,478 $ 41,067

Commercial 23,630 22,653 977

Solar 16,822 — 16,822

Adjusted EBITDA $ 600,997 $ 542,131 $ 58,866

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

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

The decrease in total Adjusted EBITDA was primarily attributable to CSB, which was driven by (i) a decrease in installation revenue, net of the associated installation costs and commissions, from a lower volume of outright sales transactions and (ii) an increase in selling and general and administrative expenses, partially offset by an increase in M&S Revenue.

The increase in Commercial was primarily driven by (i) an increase in M&S Revenue, (ii) an increase in installation revenue, net of the associated installation costs and commissions, and (iii) a decrease in the provision for credit losses, partially offset by an increase in field service and call center costs.

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

Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 2020

The decrease in total Adjusted EBITDA was primarily attributable to CSB, which was driven by (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, partially offset by an increase in M&S Revenue and a decrease in the provision for credit losses.

The increase in total Adjusted EBITDA was primarily attributable to CSB, which was driven by an increase in M&S Revenue and a decrease in advertising costs, partially offset by (i) an increase in general and administrative expenses and (ii) a decrease in installation revenue, net of the associated installation costs and commissions, as discussed above.

Commercial Adjusted EBITDA remained relatively flat and primarily included an increase in M&S Revenue, offset by (i) an increase in field service and call center costs and (ii) an increase in selling, general, and administrative expenses.

Solar Adjusted EBITDA primarily reflects installation revenue, net of the associated installation costs and commissions, partially offset by selling, general, and administrative expenses.

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

LIQUIDITY AND CAPITAL RESOURCES

As of September 30, 2021, liquidity and capital resources primarily consisted of the following:

As of March 31, 2022, liquidity and capital resources primarily consisted of the following:

(in thousands)

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Carrying amount of total debt outstanding $ 9,861,667

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.

We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our first lien revolving credit facility (the “First Lien Revolving Credit Facility”) and our uncommitted receivables securitization financing agreement (the “Receivables Facility”), and the issuance of equity and/or debt securities as appropriate given market conditions.

Our future cash needs are expected to include cash for operating activities, working capital, capital expenditures, strategic investments, periodic principal and interest payments on our debt, and potential dividend payments to our stockholders.

We 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.

We may periodically seek to repay, redeem, repurchase, or refinance our indebtedness, or seek to retire or purchase our outstanding securities through cash purchases in the open market, privately negotiated transactions, a 10b5-1 repurchase plan, or otherwise, and any such transactions may involve material amounts.

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

By June 2023, LIBOR will be replaced with the Secured Overnight Financing Rate (“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 facility (the “First Lien Term Loan due 2026”) and First Lien Revolving Credit Facility are and 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.

In April 2022, the Receivables Facility was amended to provide for an interim early transition to SOFR for the period beginning April 2022.

The impact of the transition to SOFR is not expected to be material.

Material Cash Requirements

There have been no material changes to our short-term or long-term material cash requirements, or our commitments and contractual obligations from those disclosed in our 2021 Annual Report, except as discussed below:

Customer Account Purchases

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

As of March 31, 2022, we expect that remaining commitments for those potential future customer account purchases could total approximately $33 million through January 2023.

Off-Balance Sheet Arrangements

During the three months ended March 31, 2022, there have been no material changes to our off-balance sheet arrangements as disclosed in our 2021 Annual Report, except as discussed below:

During March 2022, we entered into an unsecured Credit Agreement with Goldman Sachs Mortgage Company, as administrative agent and issuing lender (the “Issuing Lender”), together with other lenders party thereto, pursuant to which we may request the Issuing Lender to issue one or more letters of credit for its own account or the account of its subsidiaries, in an aggregate face amount not to exceed $75 million at any one time.

Long-Term Debt

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

There have been no material changes to our long-term debt from those disclosed in our 2021 Annual Report, except as discussed below:

First Lien Credit Agreement

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

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

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

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

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

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

First Lien Notes due 2029

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

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

The related deferred financing costs were not material.

Refer to Note 6 “Debt” for further discussion regarding the First Lien Notes due 2029.

ADT Notes due 2022 Redemption

In August 2021, we used the proceeds from the First Lien Notes due 2029, along with cash on hand, to (i) redeem all of the $1.0 billion outstanding aggregate principal amount of the ADT Notes due 2022 for approximately $1.0 billion, including the related call premium of $28 million, plus accrued and unpaid interest, and (ii) pay related fees and expenses.

As of March 31, 2022, we had $170 million in outstanding borrowings under our First Lien Revolving Credit Facility;

and during the three months ended March 31, 2022, we borrowed $280 million and repaid $135 million.

Receivables Facility

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 that is currently in place, which continued the uncommitted secured lending arrangement contemplated among the parties and, among other things, provided for certain revisions relating to funding, prepayment, reporting, and other provisions in preparation for a potential future syndication of the advances made under the Receivables Facility.

As of September 30, 2021, we had an outstanding balance of $165 million and an uncommitted available borrowing capacity of $35 million under the Receivables Facility.

During the nine months ended September 30, 2021, we received proceeds of $118 million under the Receivables Facility and repaid $28 million.

In October 2021, we further amended the documentation governing the Receivables Facility 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 2022.

As of March 31, 2022, we had an outstanding balance of $225 million under the Receivables Facility;

and during the three months ended March 31, 2022, we received proceeds of $47 million and repaid $21 million.

Debt Covenants

As of September 30, 2021, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations, and we do not believe there is a material risk of future noncompliance with our financial covenant and other maintenance tests as a result of the COVID-19 Pandemic, or otherwise.

Dividends declared on common stock during the periods presented were as follows (in thousands, except per share data):

Common Stock Class B Common Stock

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

Nine Months Ended September 30, 2021

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

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

8/4/2021 9/16/2021 10/5/2021 0.035 27,270 0.035 1,916

Total $ 0.105 $ 81,758 $ 0.105 $ 5,748

Nine Months Ended September 30, 2020

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

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

8/5/2020 9/18/2020 10/2/2020 0.035 27,047 0.035 1,916

Total $ 0.105 $ 80,931 $ 0.035 $ 1,916

On November 9, 2021, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on December 16, 2021, which will be distributed on January 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 the periods presented.

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

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

Prior to termination, repurchases of shares of Common Stock under the Share Repurchase Program were not material during the periods presented.

As of March 31, 2022, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations.

We do not believe there is a material risk of future noncompliance with our financial covenant and other maintenance tests as a result of the COVID-19 Pandemic, or otherwise.

During the three months ended March 31, 2022, we declared aggregate dividends of $30 million ($0.035 per share) on our Common Stock and $2 million ($0.035 per share) on our Class B Common Stock.

In comparison, during the three months ended March 31, 2021, we declared aggregate dividends of $27 million ($0.035 per share) on our Common Stock and $2 million ($0.035 per share) on our Class B Common Stock.

On May 5, 2022, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on June 16, 2022, which will be distributed on July 5, 2022.

Cash Flow Analysis

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

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2022 2021 $ Change

Net cash provided by operating activities $ 1,155,353 $ 993,269 $ 162,084

Net cash used in investing activities $ (1,170,649) $ (800,275) $ (370,374)

Net cash (used in) provided by financing activities $ (124,081) $ 249,156 $ (373,237)

Net cash provided by (used in) operating activities $ 308,072 $ 359,334 $ (51,262)

Net cash provided by (used in) investing activities $ (405,123) $ (399,112) $ (6,011)

Net cash provided by (used in) financing activities $ 91,845 $ (40,685) $ 132,530

Cash Flows from Operating Activities

The increase in cash flows from operating activities was primarily due to:

• a lower volume of residential outright sales transactions as compared to Company-owned transactions resulting from the transition in 2020 to a predominately Company-owned model;

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

The decrease in cash provided by operating activities was primarily due to:

• an increase in payments related to our annual incentive compensation plan of $49 million due to a partial payment in the prior year, and

• timing of payments to and receipts from vendors primarily related to accounts payable and inventory.

These activities were partially offset by:

• a decrease in payments related to radio conversion costs, net of the related incremental revenue, of $39 million, and

• a decrease in cash interest of $11 million from various refinancing transactions of our long-term debt.

The increase was partially offset by an increase of $155 million in payments related to radio conversion costs, net of the related incremental revenue.

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.

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Cash Flows from Investing Activities

The increase in cash used in investing activities was primarily due to:

• an increase in dealer generated customer account and bulk account purchases of $247 million due to a higher volume of dealer account purchases, including accounts purchased from a third party, and the impact of an advance payment received in 2020 for dealer charge-backs in connection with the Defenders Acquisition;

• an increase in subscriber system assets expenditures of $246 million due to a higher volume of Company-owned transactions as compared to outright sales transactions resulting from the transition in 2020 to a predominately Company-owned model;

partially offset by

• a decrease in cash paid for business acquisitions, net of cash acquired of $166 million primarily due to the Defenders Acquisition in 2020.

Cash flows used in investing activities remained relatively flat and included an increase in subscriber system assets expenditures as a result of an increase in Company-owned transactions and our growth initiatives, partially offset by a decrease in dealer generated customer accounts and bulk account purchases primarily as a result of fewer accounts purchased from third parties in 2022 as compared to 2021.

Cash Flows from Financing Activities

The change in cash flows from financing activities was primarily due to a decrease in proceeds from the issuance of common stock attributable to the $450 million of proceeds associated with the issuance of Class B Common Stock in 2020, partially offset by:

• a decrease of $44 million in net repayments of long-term borrowings, including finance leases, primarily due to a decrease in call premiums partially offset by higher net principal payments on long-term debt and

• an increase of $48 million in net proceeds from the Receivables Facility due to one additional quarter of activity in 2021.

The remainder of the change was primarily due to increases in (i) payments related to interest rate swap contracts that included an other-than-insignificant financing element at inception, (ii) transactions related to employee share-based compensation plans, and (iii) dividends on common stock, partially offset by a decrease in payments for deferred financing costs.

COMMITMENTS AND CONTRACTUAL OBLIGATIONS

During the nine months ended September 30, 2021, there have been no material changes to commitments and contractual obligations as disclosed in our 2020 Annual Report, except as discussed below:

We entered into an agreement in February 2021 with a third party to purchase customer accounts, if certain conditions are met, up to approximately $ 67 million over the course of the agreement, of which approximately half have not been purchased as of September 30, 2021.

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

OFF-BALANCE SHEET ARRANGEMENTS

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

During the three months ended March 31, 2022, net cash provided by financing activities primarily consisted of (i) $145 million of net proceeds under the First Lien Revolving Credit Facility and (ii) $26 million of net proceeds under the Receivables Facility, partially offset by $32 million of dividend payments on common stock and $13 million of payments related to interest rate swap contracts that included an other-than-insignificant financing element at inception.

During the three months ended March 31, 2021, net cash used in financing activities primarily consisted of (i) $29 million of dividend payments on common stock and (ii) $14 million of payments on interest rate swap contracts that included an other-than-insignificant financing element at inception, partially offset by $22 million of net proceeds under the Receivables Facility.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

We disclosed our accounting policies in our 2020 Annual Report, which are based on, among other things, estimates and judgments made by management that include inherent risks and uncertainties.

We disclosed our accounting policies and critical accounting estimates in our 2021 Annual Report, which are based on, among other things, estimates and judgments made by management that include inherent risks and uncertainties.

Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” to the condensed consolidated financial statements for further information about recent accounting pronouncements and adoptions.

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report contains certain information that may constitute “forward-looking statements” within the meaning of the U.S.

This Quarterly Report on Form 10-Q contains certain information that may constitute “forward-looking statements” within the meaning of the U.S.

Private Securities Litigation Reform Act of 1995.

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management’s plans and objectives for future operations;

our proposed acquisition of Sunpro Solar and its anticipated impact on our business and financial condition;

business prospects;

outcome of regulatory proceedings;

outcomes of regulatory proceedings;

market conditions;

2 unchanged sentences

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

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

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

the successful commercialization of our joint venture with Ford;

our recent acquisition of ADT Solar;

and other matters are forward-looking.

Forward-looking statements are contained principally in the sections of this report entitled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Without limiting the generality of the preceding sentence, any time we use the words “expects,” “intends,” “will,” “anticipates,” “believes,” “confident,” “continue,” “propose,” “seeks,” “could,” “may,” “should,” “estimates,” “forecasts,” “might,” “goals,” “objectives,” “targets,” “planned,” “projects,” and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature.

Forward-looking statements are contained principally in the sections of this report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Without limiting the generality of the preceding sentences, any time we use the words “expects,” “intends,” “will,” “anticipates,” “believes,” “confident,” “continue,” “propose,” “seeks,” “could,” “may,” “should,” “estimates,” “forecasts,” “might,” “goals,” “objectives,” “targets,” “planned,” “projects,” and, in each case, their negative or other various or comparable terminology, and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature.

However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.

Forward-looking information involves risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements, including without limitation, risks and uncertainties related to the parties’ ability to successfully close the Sunpro Solar acquisition, which is subject to various closing conditions;

our ability to integrate the acquired business successfully and to achieve synergies and other benefits;

the possibility that other anticipated benefits may not be timely realized, if at all;

the acquisition potentially causing disruption to the Sunpro Solar business and to its customers;

the acquisition potentially distracting our management team from our existing business;

the acquisition potentially adversely impacting our financial results;

other risks associated with our ability to execute on the transaction;

and the risks and uncertainties disclosed or referenced in Part II Item 1A.

of this report under the heading “Risk Factors.” Therefore, caution should be taken to not place undue reliance on any such forward-looking statements.

For ADT, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward-looking statements include, without limitation:

• our ability to keep pace with rapid technological changes, including the development of our next-generation platform, and industry changes;

• our ability to effectively implement our strategic partnership with or utilize any of the amounts invested in us by Google;

• the impact of the COVID-19 pandemic on our employees, our customers, our suppliers and our ability to carry on our normal operations;

• the impact of supply chain disruptions;

• our ability to maintain and grow our existing customer base;

• our ability to sell our products and services or launch new products and services in highly competitive markets, including the home security and automation market, the commercial fire and security markets, and the solar market, and to achieve market acceptance with acceptable margins;

• our ability to successfully upgrade obsolete equipment installed at our customers’ premises in an efficient and cost-effective manner;

• changes in law, economic and financial conditions, including tax law changes, changes to privacy requirements, changes to telemarketing, email marketing and similar consumer protection laws, interest volatility, and trade tariffs and restrictions applicable to the products we sell;

• any material change to the valuation allowances we take with respect to our deferred tax assets;

• the impact of potential information technology, cybersecurity or data security breaches;

• our dependence on third-party providers, suppliers, and dealers to enable us to produce and distribute our products and services in a cost-effective manner that protects our brand;

• our ability to successfully implement an equipment ownership model that best satisfies the needs of our customers and to successfully implement and maintain our receivables securitization financing agreement or similar arrangements;

• our ability to successfully pursue alternate business opportunities and strategies;

• our ability to integrate various companies we have acquired in an efficient and cost-effective manner;

• the amount and timing of our cash flows and earnings, which may be impacted by customer, competitive, supplier and other dynamics and conditions;

• our ability to maintain or improve margins through business efficiencies;

• and the other factors that are described in this report under the heading “Risk Factors.”

Forward-looking statements and information involve risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements, including without limitation, the risks and uncertainties disclosed or referenced under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A in our 2021 Annual Report.

Therefore, caution should be taken not to place undue reliance on any such forward-looking statements.

Much of the information in this report that looks toward future performance of the Company is based on various factors and important assumptions about future events that may or may not actually occur.

As a result, our operations and financial results in the future could differ materially and substantially from those we have discussed in the forward-looking statements included in this Quarterly Report.

We assume no obligation (and specifically disclaim any such obligation) to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis