What changed in this filing

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Item 1. Financial Statements

2022-08-04 compared with 2022-05-06 · 329 added, 238 removed, 626 unchanged (48% of the section changed)

3 unchanged sentences

(in thousands, except share and per share data)

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Current assets:

28 unchanged sentences

Preferred stock—authorized 1,000,000 shares of $ 0.01 par value;

zero issued and outstanding as of March 31, 2022 and December 31, 2021.

zero issued and outstanding as of June 30, 2022 and December 31, 2021.

Common stock—authorized 3,999,000,000 shares of $ 0.01 par value;

issued and outstanding shares of 851,323,652 and 846,825,868 as of March 31, 2022 and December 31, 2021, respectively.

issued and outstanding shares of 856,642,103 and 846,825,868 as of June 30, 2022 and December 31, 2021, respectively.

Class B common stock—authorized 100,000,000 shares of $ 0.01 par value;

issued and outstanding shares of 54,744,525 as of March 31, 2022 and December 31, 2021.

issued and outstanding shares of 54,744,525 as of June 30, 2022 and December 31, 2021.

Additional paid-in capital 7,295,665 7,261,267

7 unchanged sentences

(in thousands, except per share data)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Monitoring and related services $ 1,145,792 $ 1,083,520 $ 2,267,088 $ 2,146,286

9 unchanged sentences

Other income (expense) 1,463 1,533 2,959 3,336

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

Income (loss) before income taxes and equity in net earnings (losses) of equity method investee 130,389 ( 166,871 ) 201,558 ( 229,328 )

Income tax benefit (expense) ( 37,924 ) 41,021 ( 57,448 ) 55,584

Income (loss) before equity in net earnings (losses) of equity method investee 92,465 ( 125,850 ) 144,110 ( 173,744 )

Equity in net earnings (losses) of equity method investee ( 948 ) — ( 948 ) —

Net income (loss) $ 91,517 $ ( 125,850 ) $ 143,162 $ ( 173,744 )

15 unchanged sentences

(in thousands)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Net income (loss) $ 91,517 $ ( 125,850 ) $ 143,162 $ ( 173,744 )

1 unchanged sentence

Cash flow hedges 6,561 11,371 17,653 23,037

Defined benefit pension plans ( 9 ) 846

Other ( 5 ) 38 ( 14 ) 884

Total other comprehensive income (loss), net of tax 6,556 11,409 17,639 23,921

4 unchanged sentences

(in thousands)

Three Months Ended March 31, 2022

Three Months Ended June 30, 2022

Number of Common Shares Number of Class B Common Shares Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity

2 unchanged sentences

Other comprehensive income (loss), net of tax — — — — — — 6,556 6,556

Issuance of common stock 4,704 — 47 — 15,321 — — 15,368

Dividends — — — — — ( 31,944 ) — ( 31,944 )

1 unchanged sentence

Transactions related to employee share-based compensation plans and other 614 — 6 — 1,175 ( 478 ) — 703

Ending balance 856,642 54,745 $ 8,566 $ 547 $ 7,295,665 $ ( 3,874,045 ) $ ( 51,334 ) $ 3,379,399

Three Months Ended June 30, 2021

Beginning balance 774,884 54,745 $ 7,749 $ 547 $ 6,644,332 $ ( 3,568,615 ) $ ( 106,103 ) $ 2,977,910

Net income (loss) — — — — — ( 125,850 ) — ( 125,850 )

Other comprehensive income (loss), net of tax — — — — — — 11,409 11,409

Dividends — — — — — ( 29,184 ) — ( 29,184 )

Share-based compensation expense — — — — 13,587 — — 13,587

Transactions related to employee share-based compensation plans and other 1,426 — 14 — 7,226 ( 490 ) — 6,750

Ending balance 776,310 54,745 $ 7,763 $ 547 $ 6,665,145 $ ( 3,724,139 ) $ ( 94,694 ) $ 2,854,622

See Notes to Condensed Consolidated Financial Statements

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands)

Six Months Ended June 30, 2022

Beginning balance 846,826 54,745 $ 8,468 $ 547 $ 7,261,267 $ ( 3,952,590 ) $ ( 68,973 ) $ 3,248,719

Net income (loss) — — — — — 143,162 — 143,162

Other comprehensive income (loss), net of tax — — — — — — 17,639 17,639

Issuance of common stock 4,704 — 47 — 15,321 — — 15,368

Dividends — — — — — ( 63,702 ) — ( 63,702 )

Share-based compensation expense — — — — 32,952 — — 32,952

Transactions related to employee share-based compensation plans and other

5,112 — 51 — ( 13,875 ) ( 915 ) — ( 14,739 )

Ending balance 856,642 54,745 $ 8,566 $ 547 $ 7,295,665 $ ( 3,874,045 ) $ ( 51,334 ) $ 3,379,399

Three Months Ended March 31, 2021

Six Months Ended June 30, 2021

12 unchanged sentences

(in thousands)

Three Months Ended March 31,

Six Months Ended June 30,

Cash flows from operating activities:

21 unchanged sentences

Acquisition of businesses, net of cash acquired ( 13,154 ) ( 16,411 )

Proceeds from sale of business, net of cash sold 26,681 —

Other investing, net ( 13,189 ) 2,145

6 unchanged sentences

Dividends on common stock ( 63,288 ) ( 58,049 )

Payments on finance leases ( 22,165 ) ( 14,392 )

Payments on interest rate swaps ( 24,903 ) ( 27,568 )

Deferred financing costs ( 182 ) ( 174 )

11 unchanged sentences

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

With the acquisition of Compass Solar Group, LLC (now named ADT Solar LLC) (“ADT Solar”) (the “ADT Solar Acquisition”) in December 2021, the Company is now also a leading provider of residential solar and energy storage solutions.

Since the acquisition of Compass Solar Group, LLC (now named ADT Solar LLC) (“ADT Solar”) (the “ADT Solar Acquisition”) in December 2021, the Company also provides residential solar and energy storage solutions.

The Company primarily conducts business under the ADT brand name.

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dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”).

In addition, the Company uses the equity method of accounting to account for an investment in which it has the ability to exercise significant influence but does not control.

All intercompany transactions have been eliminated.

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Securities and Exchange Commission (the “SEC”) on March 1, 2022.

The Company organizes its segments based on customer type and reports results in three operating and reportable segments, which are Consumer and Small Business (“CSB”), Commercial, and Solar, based on the manner in which the Company’s Chief Executive Officer, who is the chief operating decision maker (the “CODM”), evaluates performance and makes decisions about how to allocate resources.

The Company has three operating and reportable segments organized based on customer type:

Consumer and Small Business (“CSB”), Commercial, and Solar.

The Company’s segments are based on the manner in which the Company’s Chief Executive Officer, who is the chief operating decision maker (the “CODM”), evaluates performance and makes decisions about how to allocate resources.

The accounting policies of the Company’s reportable segments are the same as those of the Company.

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

Refer to Note 3 “Segment Information” for additional information.

Use of Estimates

6 unchanged sentences

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 its employees and serve its customers, the Company implemented and is 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 the Company’s call center professionals.

While responses have varied by individuals, businesses, and state and local governments, the COVID-19 Pandemic, including subsequent variants of the coronavirus, 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 its employees and serve its customers, the Company implemented and is continuously monitoring and evolving certain measures as necessary, 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 the Company’s call center professionals.

The Company’s response plan has not materially changed from that described in the 2021 Annual Report, and the Company continues to provide relevant updates to management, employees, and customers as necessary.

The Company considered the on-going and pervasive economic impact of the COVID-19 Pandemic in the assessment of its 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 the Company’s employee base or impose additional costs on the business, could materially impact the Company’s estimates and financial results in future reporting periods.

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

Recent Accounting Pronouncements

4 unchanged sentences

The guidance is optional and is effective for a limited period of time through December 31, 2022.

As of March 31, 2022, this guidance had no impact on the condensed consolidated financial statements.

As of June 30, 2022, this guidance had no impact on the condensed consolidated financial statements.

However, the Company will continue to evaluate this guidance in subsequent periods.

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The Company is currently evaluating the impact of this guidance.

ASU 2022-03, Fair Value Measurement (Topic 820):

Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions (“ASU 2022-03”), clarifies the accounting guidance for equity securities subject to contractual sale restrictions, stating an entity should not consider the contractual sale restriction when measuring the equity security’s fair value.

ASU 2022-03 also introduces new disclosure requirements related to equity securities subject to contractual sale restrictions, including the fair value of such equity securities reflected in the balance sheet, the nature and remaining duration of the restrictions, and circumstances that could cause a lapse in the restrictions.

The guidance is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years.

It should be applied prospectively with any adjustments from the adoption of the amendments recognized in earnings and disclosed on the date of adoption.

Early adoption is permitted, including adoption in an interim period.

The Company is currently evaluating the impact of this guidance.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies

2 unchanged sentences

All highly liquid investments with original maturities of three months or less from the time of purchase are considered to be cash equivalents.

Restricted cash and restricted cash equivalents are cash and cash equivalents that are restricted for a specific purpose and cannot be presented within the general cash and cash equivalents account.

Restricted cash and restricted cash equivalents are reflected in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Cash and cash equivalents that are restricted for a specific purpose and cannot be presented within the general cash and cash equivalents account are considered restricted cash and restricted cash equivalents and are reflected in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets.

Cash and cash equivalents and restricted cash and restricted cash equivalents as reported in the Condensed Consolidated Balance Sheets reconcile to the amounts shown in the Condensed Consolidated Statements of Cash Flows as follows:

(in thousands) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

Cash and cash equivalents $ 43,609 $ 24,453

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The Company depreciates and amortizes these pooled costs using an accelerated method over the estimated life of the customer relationship, which is 15 years.

Subscriber system assets reflected in the Condensed Consolidated Balance Sheets includes:

(in thousands) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

Gross carrying amount $ 5,867,896 $ 5,499,703

1 unchanged sentence

Subscriber system assets, net $ 2,981,419 $ 2,867,528

Depreciation and amortization of subscriber system assets and deferred subscriber acquisition costs are reflected in depreciation and intangible asset amortization and selling, general, and administrative expenses, respectively, in the Condensed Consolidated Statements of Operations as follows:

Three Months Ended March 31,

Depreciation of subscriber system assets and amortization of deferred subscriber acquisition costs are reflected in depreciation and intangible asset amortization and selling, general, and administrative expenses, respectively, in the Condensed Consolidated Statements of Operations as follows:

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2022 2021 2022 2021

2 unchanged sentences

$ 39,050 $ 30,188 $ 75,989 $ 58,830

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities includes:

(in thousands) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

Accrued interest $ 134,644 $ 124,579

4 unchanged sentences

Accrued expenses and other current liabilities $ 670,265 $ 737,245

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Radio Conversion Costs

________________

(1) Refer to Note 8 “Derivative Financial Instruments” for presentation of the aggregate fair value of interest rate swaps within the Condensed Consolidated Balance Sheets.

Radio Conversion Program

The Company commenced a program in 2019 to replace the 3G and Code-Division Multiple Access (“CDMA”) cellular equipment used in many of its security systems to prepare for the retirement of the 3G and CDMA networks during 2022.

From inception of this program through March 31, 2022, the Company incurred $ 298 million of radio conversion costs, net of related incremental radio conversion revenue.

From inception of this program through June 30, 2022, the Company incurred $ 299 million of radio conversion costs, net of related incremental radio conversion revenue.

Radio conversion costs and radio conversion revenue are reflected in selling, general, and administrative expenses and monitoring and related services revenue, respectively, in the Condensed Consolidated Statements of Operations as follows:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2022 2021 2022 2021

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These investments are classified as Level 1 fair value measurements, which represent unadjusted quoted prices in active markets for identical assets or liabilities.

The Company had no material investments in money market mutual funds as of March 31, 2022, or December 31, 2021.

Long-Term Debt Instruments - The fair values of the Company’s long-term debt instruments were determined using broker-quoted market prices, which represent quoted prices for similar assets or liabilities as well as other observable market data.

The resulting fair values are classified as Level 2 fair value measurements.

The carrying amounts of debt outstanding, if any, under the Company’s revolving credit facility and receivables facility approximate fair values as interest rates on these borrowings approximate current market rates.

The total carrying amount and fair value of long-term debt instruments subject to fair value disclosures were as follows:

March 31, 2022 December 31, 2021

Investments in money market mutual funds were not material as of June 30, 2022, or December 31, 2021.

Long-Term Debt Instruments - The fair values of the Company’s long-term debt instruments are determined using broker-quoted market prices, which represent quoted prices for similar assets or liabilities as well as other observable market data, and are classified as Level 2 fair value measurements.

The carrying amounts of debt outstanding, if any, under the Company’s revolving credit facility and receivables facility approximate their fair values as interest rates on these borrowings approximate current market rates.

June 30, 2022 December 31, 2021

(in thousands) Carrying

Value Carrying

Long-term debt instruments, excluding finance lease obligations $ 9,771,351 $ 9,802,804 $ 9,599,610 $ 10,043,877

Derivative Financial Instruments - Derivative financial instruments are reported at fair value as either assets or liabilities in the Condensed Consolidated Balance Sheets.

These fair values are primarily calculated using discounted cash flow models utilizing observable inputs, such as quoted forward interest rates, and incorporate credit risk adjustments to reflect the risk of default by the counterparty or the Company.

The resulting fair values are classified as Level 2 fair value measurements.

Refer to Note 7 “Derivative Financial Instruments” for the fair values of the Company’s derivative financial instruments included in the Condensed Consolidated Balance Sheets.

Long-term debt instruments, excluding finance lease obligations, subject to fair value disclosures $ 9,748,875 $ 8,992,157 $ 9,599,610 $ 10,043,877

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Retail Installment Contract Receivables - The fair values of the Company’s retail installment contract receivables were determined using a discounted cash flow model.

Derivative Financial Instruments - Derivative financial instruments are reported at fair value as either assets or liabilities in the Condensed Consolidated Balance Sheets.

The resulting fair values are classified as Level 2 fair value measurements.

The total carrying amount and fair value of retail installment contract receivables were as follows:

March 31, 2022 December 31, 2021

Refer to Note 8 “Derivative Financial Instruments” for the fair values of the Company’s derivative financial instruments.

Retail Installment Contract Receivables - The fair values of the Company’s retail installment contract receivables are determined using a discounted cash flow model and are classified as Level 3 fair value measurements.

June 30, 2022 December 31, 2021

(in thousands) Carrying

1 unchanged sentence

Retail installment contract receivables, net $ 444,514 $ 340,939 $ 330,605 $ 255,147

Subsequent Event - Canopy Investment

In April 2022, the Company closed on its 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, the Company’s initial contribution totaled approximately $ 11 million.

REVENUE AND RECEIVABLES

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

The following table presents the Company’s disaggregated revenue:

Three Months Ended March 31,

Disaggregated Revenue

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2022 2021 2022 2021

10 unchanged sentences

Amounts collected from customers for sales and other taxes are reported as a liability net of the related amounts remitted.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Contract termination charges are assessed in accordance with the terms of the contract when customers terminate a contract early and are recognized in monitoring and related services revenue in the Condensed Consolidated Statements of Operations when collectability is probable.

When customers terminate a contract early, contract termination charges are assessed in accordance with the contract terms and are recognized in monitoring and related services revenue in the Condensed Consolidated Statements of Operations when collectability is probable.

Company-Owned - In transactions in which the Company provides monitoring and related services but retains ownership of the security system (referred to as Company-owned transactions), the Company’s performance obligations primarily include (i) monitoring and related services and (ii) a material right associated with the one-time non-refundable fees in connection with the initiation of a monitoring contract which the customer will not be required to pay again upon a renewal of the contract (referred to as deferred subscriber acquisition revenue).

Since March 2021, substantially all new CSB transactions have taken place under a Company-owned model.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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

Amortization of deferred subscriber acquisition revenue is reflected in installation, product, and other revenue in the Condensed Consolidated Statements of Operations as follows:

Three Months Ended March 31,

Deferred subscriber acquisition revenue is amortized on a pooled basis over the estimated life of the customer relationship using an accelerated method consistent with the treatment of subscriber system assets and deferred subscriber acquisition costs and is reflected in installation, product, and other revenue in the Condensed Consolidated Statements of Operations.

Three Months Ended June 30, Six Months Ended June 30,

( in thousands )

2022 2021 2022 2021

Amortization of deferred subscriber acquisition revenue $ 58,461 $ 40,729 $ 111,884 $ 77,888

6 unchanged sentences

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

Solar - In transactions within our Solar business, the Company’s performance obligations generally include the sale and installation of a solar system, and may also include additional performance obligations such as roofing services or the sale and installation of additional products such as batteries.

Solar - In transactions within the Solar business, the Company’s performance obligations generally include the sale and installation of a solar system, and may also include additional performance obligations such as roofing services or the sale and installation of additional products such as batteries.

Revenue is recognized when control over the products and services are transferred to the customer and is reflected in installation, product, and other revenue in the Condensed Consolidated Statements of Operations.

The Company also enters into agreements with third-party lenders in order to access loan products for the Company’s Solar customers.

These lenders have the exclusive right to determine if a loan application will be accepted or rejected, and the Company is not a party to the loan agreement.

There are no guarantees related to the repayment of the loan, and as such, there is no liability associated with these arrangements.

These lenders remit the loan amount, net of fees related to obtaining favorable interest rates for customers, to the Company once the loan is approved or upon installation.

These fees are recorded as a reduction of installation, product, and other revenue and were approximately $ 38 million during the three months ended March 31, 2022.

These lenders remit the amount of such loans, net of fees, upon installation or based on other contractual terms with the third-party lenders.

These fees are recorded as a reduction of installation, product, and other revenue and were approximately $ 40 million and $ 78 million during the three and six months ended June 30, 2022, respectively.

During the three months ended June 30, 2022, one of the Company’s third-party lenders that provided loan products for the Company’s Solar customers entered a formal insolvency proceeding to effectuate the wind-down of its operations.

The Company recorded charges to the provision for credit losses and revenue in an aggregate amount of $ 11 million associated with the estimated amount of receivables and rebates that are not expected to be collected from this lender.

Product and System Sales

Revenue from product and system sales is included in installation, product, and other revenue in the Condensed Consolidated Statements of Operations.

Cost of revenue from product and system sales is exclusive of depreciation and amortization.

Three Months Ended June 30, Six Months Ended June 30,

( in thousands )

2022 2021 2022 2021

Revenue from product and system sales $ 298,912 $ 177,876 $ 599,762 $ 380,622

Cost of revenue from product and system sales $ 220,729 $ 147,269 $ 441,294 $ 307,455

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Product Sales

Revenue and cost of revenue from product and system sales included in the Condensed Consolidated Statements of Operations were as follows:

Three Months Ended March 31,

( in thousands )

Installation, product, and other $ 300,850 $ 202,746

Cost of revenue (exclusive of depreciation and amortization shown separately below) $ 220,565 $ 160,186

Deferred Revenue

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The allowance for credit losses is not material for the individual pools of customers.

Changes in the allowance for credit losses on accounts receivable were as follows:

Three Months Ended March 31,

Changes in the Allowance for Credit Losses:

Six Months Ended June 30,

(in thousands) 2022 2021

8 unchanged sentences

Retail Installment Contract Receivables

The Company’s retail installment contract option allows qualifying residential customers to pay the fees due at installation over a 24-, 36-, or 60-month interest-free period and is available for security system transactions occurring under both Company-owned and customer-owned models.

The Company’s retail installment contract option for security system transactions occurring under both Company-owned and customer-owned equipment models allows qualifying residential customers to pay the fees due at installation over a 24-, 36-, or 60-month interest-free period.

The financing component of retail installment contract receivables is not significant.

2 unchanged sentences

The allowance for credit losses relates to retail installment contract receivables from outright sales transactions and is not material.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Upon origination of a retail installment contract, the Company utilizes external credit scores to assess customer credit quality and determine eligibility.

1 unchanged sentence

Subsequent to origination, the Company monitors the delinquency status of retail installment contract receivables as the key credit quality indicator.

As of March 31, 2022, the current and delinquent billed retail installment contract receivables were not material.

Unbilled retail installment contract receivables reflected in the Condensed Consolidated Balance Sheets includes:

(in thousands) March 31, 2022 December 31, 2021

As of June 30, 2022, the current and delinquent billed retail installment contract receivables were not material.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Unbilled retail installment contract receivables reflected in the Condensed Consolidated Balance Sheets include:

(in thousands) June 30, 2022 December 31, 2021

Retail installment contract receivables, gross $ 445,251 $ 331,512

5 unchanged sentences

Retail installment contract receivables, net $ 444,514 $ 330,605

As of March 31, 2022 and December 31, 2021, retail installment contract receivables, net, used as collateral for borrowings under the Company’s uncommitted receivables securitization financing agreement (the “Receivables Facility”) were $ 341 million and $ 299 million, respectively.

As of June 30, 2022 and December 31, 2021, retail installment contract receivables, net, used as collateral for borrowings under the Company’s uncommitted receivables securitization financing agreement (the “Receivables Facility”) were $ 402 million and $ 299 million, respectively.

Refer to Note 7 “Debt” for further discussion regarding the Receivables Facility.

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The allowance for credit losses on contract assets was not material for the periods presented.

During the three and six months ended June 30, 2022 and 2021, contract assets recognized were not material.

Contract assets for residential transactions reflected in the Condensed Consolidated Balance Sheets includes:

(in thousands) March 31, 2022 December 31, 2021

(in thousands) June 30, 2022 December 31, 2021

Contract assets, gross $ 76,282 $ 106,810

5 unchanged sentences

Contract assets, net $ 68,812 $ 94,510

During the three months ended March 31, 2022 and 2021, contract assets recognized were not material.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEGMENT INFORMATION

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Customers in the CSB segment are comprised of residential homeowners, small business operators, and other individual consumers.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

• Commercial - The 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 costs and other income and expense items.

and (iii) certain dedicated corporate costs and other income and expense items.

Customers in the 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.

1 unchanged sentence

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

and (iii) dedicated corporate costs and other income and expense items.

and (iii) certain dedicated corporate costs and other income and expense items.

Customers in the Solar segment are comprised of residential homeowners who purchase solar and energy storage solutions, energy efficiency upgrades, and roofing services.

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The following table presents total revenue by segment and a reconciliation to consolidated total revenue:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2022 2021 2022 2021

5 unchanged sentences

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table presents Adjusted EBITDA by segment and a reconciliation to consolidated net income (loss) before taxes:

Three Months Ended March 31,

The following table presents Adjusted EBITDA by segment and a reconciliation to consolidated income (loss) before income taxes and equity in net earnings (losses) of equity method investee:

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2022 2021 2022 2021

4 unchanged sentences

Total $ 597,249 $ 541,865 $ 1,198,246 $ 1,083,996

Reconciliation to consolidated net income (loss) before taxes:

Reconciliation:

Total segment Adjusted EBITDA $ 597,249 $ 541,865 $ 1,198,246 $ 1,083,996

9 unchanged sentences

1,328 ( 229 ) 37,623 ( 477 )

Other 1,099 409

Net income (loss) before taxes $ 71,169 $ ( 62,457 )

Equity in net earnings (losses) of equity method investee ( 948 ) — ( 948 ) —

( 8,807 ) ( 316 ) ( 7,708 ) 93

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

During the three months ended March 31, 2022, total consideration related to business acquisitions was not material.

Income (loss) before income taxes and equity in net earnings (losses) of equity method investee $ 130,389 $ ( 166,871 ) $ 201,558 $ ( 229,328 )

________________

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

(2) During 2022, primarily represents the gain on sale of a business.

ACQUISITIONS AND DISPOSITION

During the six months ended June 30, 2022, total consideration related to business acquisitions was approximately $ 31 million, including approximately $ 15 million in shares of the Company’s common stock.

This resulted in the recognition of approximately $ 24 million of goodwill.

ADT Solar Acquisition

In December 2021, the Company acquired ADT Solar, a leading solar installer in the U.S.

Total consideration was approximately $ 750 million, which consisted of cash paid of $ 142 million, net of cash acquired, and approximately 75 million unregistered shares of the Company’s common stock, par value of $ 0.01 per share, with a fair value of $ 569 million, including $ 40 million related to approximately 5 million shares of the Company’s common stock to be issued in various increments over the twelve-month period subsequent to the acquisition date.

In December 2021, the Company acquired ADT Solar.

Total consideration was approximately $ 750 million, which consisted of cash paid of $ 142 million, net of cash acquired, and approximately 75.0 million unregistered shares of the Company’s common stock, par value of $ 0.01 per share, with a fair value of $ 569 million (the “Equity Consideration”), including $ 40 million related to approximately 5.3 million shares of the Company’s common stock that were unissued as of the acquisition date (the “Delayed Shares”).

The total fair value of $ 569 million was based on the closing stock price of the Company’s common stock on December 8, 2021, the acquisition date, adjusted for the impact of contractual restrictions on the ability for the holders to sell their shares.

There were no material adjustments to the preliminary purchase price allocation during the three months ended March 31, 2022.

In June 2022, approximately 2.6 million shares of the Delayed Shares were issued.

The remaining Delayed Shares are expected to be issued in equal installments in September and December 2022.

There were no material adjustments to the preliminary purchase price allocation during the six months ended June 30, 2022.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the six months ended June 30, 2022, proceeds related to disposal activities totaled approximately $ 27 million, resulting in a gain of approximately $ 10 million recognized in selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations.

EQUITY METHOD INVESTMENTS

The Company uses the equity method of accounting to account for an investment in which it has the ability to exercise significant influence but does not control.

The carrying amount of the investment is reflected in other assets in the Condensed Consolidated Balance Sheets and is subsequently adjusted to recognize the Company’s proportionate share of the investee’s net income or loss, which is reflected in equity in net earnings (losses) of equity method investee in the Condensed Consolidated Statements of Operations.

The Company evaluates an equity method investment whenever events or changes in circumstances indicate the carrying amounts of such investments may be impaired.

If a decline in the value of an equity method investment is determined to be other than temporary, the Company records a loss in earnings in the current period.

Canopy Investment

In April 2022, the Company closed on its previously announced transaction with Ford Motor Company (“Ford”) to form a new entity, SNTNL LLC (“Canopy”), which combines 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 three years following the closing of the transaction, of which ADT will contribute 40 %.

As part of the initial funding at closing, the Company contributed cash of approximately $ 11 million (the “Initial Contribution”).

As of June 30, 2022, Canopy did not have any common stock equivalents or dilutive securities that would, if converted, exercised, or issued, significantly change the Company’s proportionate share of Canopy’s net assets or net income or loss.

Variable Interest Entity (“VIE”)

The Company accounts for its investment in Canopy under the equity method of accounting.

In addition, Canopy meets the definition of a VIE, as the Company holds a variable interest through its 40 % investment held in Canopy’s preferred class of equity (the “Preferred Units”) and fees received under the Canopy Commercial Agreements described below.

The Company is not the primary beneficiary, and therefore, does not consolidate Canopy’s assets, liabilities, and financial results of operations.

The Company records its proportionate share of Canopy’s net income or loss on a one-month delay.

As of June 30, 2022, the carrying amount of the Company’s investment in Canopy was approximately $ 10 million and is presented in other assets in the Condensed Consolidated Balance Sheets.

The balance reflects the Initial Contribution as well as the Company’s proportionate share of Canopy’s net loss during the period.

As of June 30, 2022, Canopy’s assets and liabilities primarily consisted of approximately $ 20 million of cash, the majority of which was received from the initial contributions made by the Company and Ford.

Canopy Commercial Agreements

In connection with the investment in Canopy, the Company entered into various commercial agreements (the “Canopy Commercial Agreements”) through which it will be performing various services on behalf of Canopy, including supply chain support, product engineering support, and monitoring services for Canopy customers.

The Company is also party to a trade name licensing agreement with Canopy.

The impact to the condensed consolidated financial statements from the Canopy Commercial Agreements was not material for the periods presented.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

GOODWILL AND OTHER INTANGIBLE ASSETS

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17,270 6,804 11,678 35,752

Reclassification to held for sale — ( 11,731 ) — ( 11,731 )

Balance as of March 31, 2022 $ 4,915,832 $ 321,294 $ 703,632 $ 5,940,758

Disposition — ( 11,731 ) — ( 11,731 )

Balance as of June 30, 2022 $ 4,933,102 $ 327,918 $ 706,404 $ 5,967,424

________________

(1) Includes the impact of measurement period adjustments.

During the three months ended March 31, 2022, measurement period adjustments were not material.

The Company had no accumulated goodwill impairment losses as of March 31, 2022 or December 31, 2021.

During the six months ended June 30, 2022, measurement period adjustments were not material.

The Company had no accumulated goodwill impairment losses as of June 30, 2022 or December 31, 2021.

Other Intangible Assets

Other intangible assets reflected in the Condensed Consolidated Balance Sheets consisted of the following:

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

(in thousands) Gross Carrying

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Balance as of December 31, 2021 $ 2,966,018

Acquisition of customer relationships 3,000

Customer contract additions, net of dealer charge-backs (1)

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Other ( 1,638 )

Balance as of March 31, 2022 $ 2,893,587

Balance as of June 30, 2022 $ 2,858,353

________________

(1) The weighted-average amortization period for customer contract additions was 14 years.

During the three months ended March 31, 2022, the Company paid $ 185 million related to customer contract additions under the ADT Authorized Dealer Program and from other third parties, which is included in dealer generated customer accounts and bulk account purchases on the Condensed Consolidated Statements of Cash Flows.

In addition, contracts and related customer relationships includes customer accounts purchased from certain other third parties during the three months ended March 31, 2022 for an aggregate contractual purchase price of $ 68 million, subject to reduction based on customer retention.

The Company paid initial cash at the closings in the aggregate amount of $ 55 million, which is included in the payments for dealer generated customer accounts and bulk account purchases described above.

During the six months ended June 30, 2022, the Company paid $ 342 million related to customer contract additions under the Company’s authorized dealer program and from other third parties, which is included in dealer generated customer accounts and bulk account purchases on the Condensed Consolidated Statements of Cash Flows.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Definite-lived intangible asset amortization expense reflected in the Condensed Consolidated Statements of Operations was as follows:

Three Months Ended March 31,

Contracts and related customer relationships includes customer accounts purchased from certain other third parties during the six months ended June 30, 2022 for an aggregate contractual purchase price of $ 84 million, subject to reduction based on customer retention.

The Company paid initial cash at the closings in the aggregate amount of $ 63 million, which is included in the payments for dealer generated customer accounts and bulk account purchases described above.

Additionally, the Company retired certain customer relationship intangible assets acquired in the ADT Acquisition that became fully amortized during the six months ended June 30, 2022.

Aggregate Amortization Expense:

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2022 2021 2022 2021

Definite-lived intangible asset amortization expense $ 210,738 $ 300,208 $ 502,685 $ 599,535

The Company’s debt is comprised of the following (in thousands, except as otherwise indicated) :

Description Issued Maturity Interest Rate Interest Payable March 31, 2022 December 31, 2021

The Company’s debt is comprised of the following (in thousands) :

Description Issued Maturity Interest Rate (1)

Interest Payable June 30, 2022 December 31, 2021

First Lien Term Loan due 2026 9/23/2019 9/23/2026 Adj.

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ADT Notes due 2042 7/5/2012 7/15/2042 4.875 % 1/15 and 7/15 21,896 21,896

Receivables Facility 3/5/2020 2/20/2027 LIBOR + 0.85 %

Receivables Facility 3/5/2020 5/20/2027 SOFR + 0.85 %

Monthly 291,638 199,056

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Total debt 9,842,930 9,692,690

Current maturities of long-term debt ( 126,363 ) ( 117,592 )

Current maturities of long-term debt, net of unamortized debt discount ( 844,195 ) ( 117,592 )

Long-term debt $ 8,998,735 $ 9,575,098

_________________

(1) Other debt includes vehicle loans attributable to ADT Solar and were not material during the periods presented.

(1) LIBOR refers to the London Interbank Offered Rate.

SOFR refers to the Secured Overnight Financing Rate.

(2) Other debt primarily consists of vehicle loans at various interest rates and maturities.

(3) Refer to Note 14 “Leases” for additional information regarding the Company’s finance leases.

Significant changes in the Company’s debt during the three months ended March 31, 2022 were as follows:

First Lien Credit Agreement

The Company’s first lien credit agreement, dated as of July 1, 2015 (together with subsequent amendments and restatements, the “First Lien Credit Agreement”), contains a first lien term loan facility (the “First Lien Term Loan due 2026”) and a first lien revolving credit facility (the “First Lien Revolving Credit Facility”).

As of March 31, 2022 and December 31, 2021, the Company had $ 405 million and $ 550 million, respectively, in available borrowing capacity under the First Lien Revolving Credit Facility.

During the three months ended March 31, 2021, the Company borrowed $ 280 million and repaid $ 135 million under its First Lien Revolving Credit Facility.

Loss on Extinguishment of Debt

Loss on extinguishment of debt was not material during the three months ended March 31, 2022 or 2021.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Significant changes in the Company’s debt during the six months ended June 30, 2022 were as follows:

First Lien Credit Agreement

As of June 30, 2022 and December 31, 2021, the Company had $ 495 million and $ 550 million, respectively, in available borrowing capacity under the First Lien Revolving Credit Facility.

During the six months ended June 30, 2021, the Company borrowed $ 380 million and repaid $ 325 million under its First Lien Revolving Credit Facility.

ADT Notes due 2023

As of June 30, 2022, the Company had an outstanding balance of $ 700 million under its notes due 2023 (the “ADT Notes due 2023”) that was classified as a current liability, net of any unamortized debt discount, in the Condensed Consolidated Balance Sheets.

The Company is in the process of seeking financing to replace the ADT Notes due 2023 prior to June 15, 2023, which is the maturity date.

Receivables Facility

Under the Receivables Facility, the Company obtains financing by selling or contributing certain retail installment contract receivables to the Company’s wholly-owned consolidated bankruptcy-remote special purpose entity (“SPE”), which then grants a security interest in those retail installment contract receivables as collateral for cash borrowings.

The Receivables Facility permits up to $ 400 million of uncommitted financing secured by the Company’s retail installment contract receivables owned by the SPE and has a scheduled termination date for the uncommitted revolving period of October 2022.

The Receivables Facility permits up to $ 400 million of uncommitted financing secured by the Company’s retail installment contract receivables owned by the SPE.

The Company services the transferred retail installment contract receivables and is responsible for ensuring the related collections are remitted to a segregated bank account in the name of the SPE.

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The segregated account is considered restricted cash, and any outstanding balance is reflected in prepaid expenses and other current assets in the Company’s Condensed Consolidated Balance Sheets.

During the three months ended March 31, 2022, the Company received proceeds of $ 47 million under the Receivables Facility and repaid $ 21 million, which are reflected as cash flows from financing activities in the Condensed Consolidated Statements of Cash Flows.

As of March 31, 2022 and December 31, 2021, the Company had an uncommitted available borrowing capacity under the Receivables Facility of $ 175 million and $ 201 million, respectively.

The Receivables Facility did not have a material impact to the Condensed Consolidated Statements of Operations during the three months ended March 31, 2022 and 2021.

In May 2022, the Company amended the Receivables Facility to change the benchmark rate from 1-month LIBOR to Daily SOFR.

In addition, the May 2022 amendment extended the scheduled termination date for the uncommitted revolving period from October 2022 to May 2023, and amended certain other terms to increase the advance rate on pledged collateral.

During the six months ended June 30, 2022, the Company received proceeds of $ 140 million under the Receivables Facility and repaid $ 47 million, which are reflected as cash flows from financing activities in the Condensed Consolidated Statements of Cash Flows.

As of June 30, 2022 and December 31, 2021, the Company had an uncommitted available borrowing capacity under the Receivables Facility of $ 108 million and $ 201 million, respectively.

The Receivables Facility did not have a material impact to the Condensed Consolidated Statements of Operations during the six months ended June 30, 2022 and 2021.

Variable Interest Entity

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

The SPE meets the definition of a variable interest entity (“VIE”) for which the Company is the primary beneficiary as it has the power to direct the SPE’s activities and the obligation to absorb losses or the right to receive benefits of the SPE.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The SPE meets the definition of a VIE for which the Company is the primary beneficiary as it has the power to direct the SPE’s activities and the obligation to absorb losses or the right to receive benefits of the SPE.

As such, the SPE’s assets, liabilities, and financial results of operations are consolidated in the Company’s condensed consolidated financial statements.

As of March 31, 2022 and December 31, 2021, the SPE’s assets and liabilities primarily consisted of unbilled retail installment contract receivables, net, as discussed in Note 2 “Revenue and Receivables,” of $ 341 million and $ 299 million, respectively, and borrowings under the Receivables Facility, as presented above.

As of June 30, 2022 and December 31, 2021, the SPE’s assets and liabilities primarily consisted of unbilled retail installment contract receivables, net, as discussed in Note 2 “Revenue and Receivables,” of $ 402 million and $ 299 million, respectively, and borrowings under the Receivables Facility, as presented above.

SOFR Transition

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.

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

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.

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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.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

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As the forecasted cash flows are probable or reasonably possible of occurring, unrealized losses previously recognized as a component of AOCI are reclassified into interest expense, net.

The Company’s interest rate swaps as of March 31, 2022 and December 31, 2021 consisted of the following (in thousands) :

The Company’s interest rate swaps as of June 30, 2022 consisted of the following (in thousands) :

Execution Maturity Designation Notional Amount

January 2019 April 2022 Not designated $ 125,000

February 2019 April 2022 Not designated 300,000

October 2019 September 2026 Not designated $ 2,800,000

Total notional amount $ 3,225,000

The fair value of interest rate swaps recognized in the Condensed Consolidated Balance Sheets was as follows:

(in thousands) March 31, 2022 December 31, 2021

During April 2022, the Company’s January and February 2019 interest rate swaps with an aggregate notional amount of $ 425 million reached maturity.

The impact related to this was not material.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Fair Value of Interest Rate Swaps:

Balance Sheet Classification (in thousands)

June 30, 2022 December 31, 2021

Prepaid expenses and other current assets $ 24,220 $ —

Other assets $ 62,006 $ —

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Other liabilities $ — $ 67,976

Fair value of interest rate swaps - net asset $ 26,953 $ —

Fair value of interest rate swaps - net liability $ — $ 118,336

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The unrealized impact of interest rate swaps recognized in interest expense, net, in the Condensed Consolidated Statements of Operations was as follows:

Three Months Ended March 31,

( in thousands )

Unrealized Gain (Loss) on Interest Rate Swaps:

Three Months Ended June 30, Six Months Ended June 30,

Statement of Operations Classification (in thousands)

2022 2021 2022 2021

Interest expense, net $ 59,273 $ ( 14,460 ) $ 204,562 $ 92,057

Reclassifications out of AOCI:

Amounts reclassified out of AOCI associated with previously designated cash flow hedges were as follows:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

( in thousands )

2022 2021 2022 2021

Reclassifications to interest expense $ 8,647 $ 15,027 $ 23,267 $ 30,443

Reclassifications to income tax benefit $ ( 2,086 ) $ ( 3,656 ) $ ( 5,614 ) $ ( 7,406 )

As of March 31, 2022 and December 31, 2021, AOCI, net of tax, related to previously designated cash flow hedges was $ 60 million and $ 71 million, respectively.

As of March 31, 2022, approximately $ 25 million of AOCI associated with previously designated cash flow hedges is estimated to be reclassified to interest expense, net, within the next twelve months.

During the three months ended March 31, 2022 and 2021, the Company paid $ 13 million and $ 14 million, respectively, related to settlements on interest rate swap contracts that included an other-than-insignificant financing element at inception.

Other Information

As of June 30, 2022 and December 31, 2021, AOCI, net of tax, related to previously designated cash flow hedges was $ 54 million and $ 71 million, respectively.

As of June 30, 2022, approximately $ 21 million of AOCI associated with previously designated cash flow hedges is estimated to be reclassified to interest expense, net, within the next twelve months.

During the six months ended June 30, 2022 and 2021, the Company paid $ 25 million and $ 28 million, respectively, related to settlements on interest rate swap contracts that included an other-than-insignificant financing element at inception.

Unrecognized Tax Benefits

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federal, state and local, and foreign jurisdictions.

During the three months ended March 31, 2022, the Company did not have a material change to its unrecognized tax benefits.

During the six months ended June 30, 2022, the Company did not have a material change to its unrecognized tax benefits.

Based on the current status of its income tax audits, the Company does not believe a significant portion of its unrecognized tax benefits will be resolved in the next twelve months.

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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.

The Company’s 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, offset by a 2.7 % unfavorable impact of permanent items.

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

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

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s income tax expense for the three months ended June 30, 2022 was $ 38 million, resulting in an effective tax rate for the period of 29.1 %.

The effective tax rate primarily represents the federal statutory rate of 21.0 %, a state statutory tax rate, net of federal benefits, of 5.5 %, and a 3.0 % unfavorable impact of prior year return adjustments related to executive compensation, partially offset by a 1.6 % favorable impact from the release of a capital loss valuation allowance related to disposal activities.

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

The effective tax rate primarily represents the federal statutory rate of 21.0 %, a state statutory tax rate, net of federal benefits, of 2.8 %, and a 0.6 % favorable impact from prior year tax return adjustments.

The Company’s income tax expense for the six months ended June 30, 2022 was $ 57 million, resulting in an effective tax rate for the period of 28.5 %.

The effective tax rate primarily represents the federal statutory rate of 21.0 %, a state statutory tax rate, net of federal benefits, of 5.9 %, a 2.0 % unfavorable impact of prior year return adjustments related to executive compensation, and a 1.4 % unfavorable impact of permanent items, partially offset by a 1.0 % favorable impact from the release of a capital loss valuation allowance related to disposal activities.

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

The effective tax rate primarily represents the federal statutory tax rate of 21.0 %, a state statutory tax rate, net of federal benefits, of 2.8 %, and a 1.0 % favorable impact of share-based compensation.

COVID-19 Pandemic

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The Company also recognized a benefit from an increase in the interest expense limitation from 30 % to 50 % for tax years 2019 and 2020.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

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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 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.

Under Internal Revenue Code (“IRC”) Section 163(j), the limitation on net business interest expense deductions will no longer be increased by deductions for depreciation, amortization, or depletion.

Under IRC Section 174, specified research and experimentation expenditures must now be capitalized and amortized.

Common Stock and Class B Common Stock

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Additionally, each share of Class B Common Stock will immediately become convertible into one share of Common Stock, at the option of the holder, subject to certain timing and restrictions.

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

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except per share data)

Common Stock Class B Common Stock

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

Three Months Ended March 31, 2022

Six Months Ended June 30, 2022

3/1/2022 3/17/2022 4/4/2022 $ 0.035 $ 29,842 $ 0.035 $ 1,916

Three Months Ended March 31, 2021

5/5/2022 6/16/2022 7/5/2022 0.035 30,028 0.035 1,916

Subsequent Event - On May 5, 2022, the Company 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.

Total $ 0.070 $ 59,870 $ 0.070 $ 3,832

Six Months Ended June 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

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

Subsequent Event - On August 4, 2022, the Company announced a dividend of $ 0.035 per share to holders of Common Stock and Class B Common Stock of record on September 15, 2022, which will be distributed on October 4, 2022.

Accumulated Other Comprehensive Income (Loss)

There were no material reclassifications out of AOCI.

Refer to Note 8 “Derivative Financial Instruments” for AOCI reclassifications associated with cash flow hedges.

There were no other reclassifications out of AOCI.

SHARE-BASED COMPENSATION

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Share-based compensation expense recognized in selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations was as follows:

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

( in thousands )

2022 2021 2022 2021

Share-based compensation expense $ 16,932 $ 13,587 $ 32,952 $ 29,606

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Restricted Stock Units

During the three months ended March 31, 2022, the Company granted approximately 6.2 million restricted stock units (“RSUs”) under its 2018 Omnibus Incentive Plan, as amended (the “2018 Plan”).

These RSUs are service-based awards with a three-year graded vesting period from the date of grant.

During the six months ended June 30, 2022, the Company granted approximately 6.3 million restricted stock units (“RSUs”) under its 2018 Omnibus Incentive Plan, as amended (the “2018 Plan”).

These RSUs are service-based awards, primarily with a three-year graded vesting period from the date of grant.

The fair value of the RSUs is equal to the closing price per share of the Company’s Common Stock on the date of grant, which resulted in a weighted-average grant date fair value of $ 7.87 .

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RSUs are entitled to dividend equivalent units (unless otherwise stipulated in the applicable award agreement), which are granted as additional RSUs and are subject to the same vesting and forfeiture conditions as the underlying RSUs.

Performance Share Units

In June 2022, the Company issued 1.6 million performance share units (“PSUs”) in connection with a business combination that the Company will account for as share-based compensation.

These PSUs contain both service and performance vesting conditions that must be met on an annual basis with the final vesting date in October 2025.

The fair value of the PSUs is equal to the closing price per share of the Company’s Common Stock on the date of grant, which resulted in a weighted-average grant date fair value of $ 7.46 .

The PSUs are not entitled to dividend equivalent units.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NET INCOME (LOSS) PER SHARE

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Basic net income (loss) per share is computed by dividing the net income (loss) allocated to each class of common stock by the related weighted-average number of shares outstanding during the period.

In addition, basic weighted-average shares outstanding for the three months ended March 31, 2022 includes approximately 5 million shares of Common Stock to be issued in various increments throughout 2022 in connection with the ADT Solar Acquisition.

Diluted net income (loss) per share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period for each class of common stock.

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There were no potential shares of Class B Common Stock during the periods presented.

For the three months ended March 31, 2022, the computation of diluted earnings per share for Common Stock excludes potentially dilutive securities whose effect would have been anti-dilutive in the amounts of approximately 17 million shares from share-based compensation awards and approximately 0.1 million warrants to purchase additional shares of Common Stock.

Approximately 9 million unvested shares are excluded from the basic and diluted earnings per share computations, as their vesting is contingent upon achievement of certain performance requirements, which have not been met as of March 31, 2022.

The computations of basic and diluted net income (loss) per share under the two-class method for each class of common stock are as follows:

Three Months Ended March 31,

Common Stock Class B Common Stock Common Stock Class B Common Stock

For the three and six months ended June 30, 2022, the computation of diluted earnings per share for Common Stock excludes potentially dilutive securities whose effect would have been anti-dilutive in the amounts of approximately 19.9 million shares and 18.6 million shares, respectively, from share-based compensation awards and approximately 0.1 million warrants, respectively, to purchase additional shares of Common Stock.

Approximately 9.4 million unvested shares of the Company’s Common Stock are excluded from the basic and diluted earnings per share computations, as their vesting is contingent upon achievement of certain performance requirements which have not been met as of June 30, 2022.

The computations of basic and diluted net income (loss) per share under the two-class method are shown below (in thousands, except per share amounts) :

Common Stock:

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Allocation of net income (loss) - basic $ 85,994 $ ( 117,446 ) $ 134,499 $ ( 162,109 )

Dilutive effect 2,001 ( 85 ) — —

Dilutive effect (including conversion of Class B Common Stock) 2,149 — 4,156 —

Allocation of net income (loss) - diluted $ 88,143 $ ( 117,446 ) $ 138,655 $ ( 162,109 )

Weighted-average shares outstanding - basic 848,242 765,922 846,048 764,322

Dilutive effect 67,483 — — —

Dilutive effect (including conversion of Class B Common Stock) 62,567 — 64,957 —

Weighted-average shares outstanding - diluted 910,809 765,922 911,005 764,322

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Class B Common Stock:

Three Months Ended June 30, Six Months Ended June 30,

2022 2021 2022 2021

Allocation of net income (loss) - basic $ 5,523 $ ( 8,404 ) $ 8,663 $ ( 11,635 )

Dilutive effect ( 233 ) — ( 323 ) —

Allocation of net income (loss) - diluted $ 5,290 $ ( 8,404 ) $ 8,340 $ ( 11,635 )

Weighted-average shares outstanding - basic 54,745 54,745 54,745 54,745

Dilutive effect — — — —

Weighted-average shares outstanding - diluted 54,745 54,745 54,745 54,745

Net income (loss) per share - basic $ 0.10 $ ( 0.15 ) $ 0.16 $ ( 0.21 )

Net income (loss) per share - diluted $ 0.10 $ ( 0.15 ) $ 0.15 $ ( 0.21 )

COMMITMENTS AND CONTINGENCIES

5 unchanged sentences

Further, subject to certain carve-outs, the Company has agreed to exclusively sell Google Devices and Services to its customers.

If the integrated Google Devices and Services are not launched by June 30, 2022, Google has the contractual right to require the Company, 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.

In June 2022, the Company amended the Google Commercial Agreement to extend the date for the launch of the integrated Google Devices and Services until September 30, 2022.

If the integrated Google Devices and Services are not launched by September 30, 2022, Google has the contractual right to require the Company, with certain exceptions, until such integration, to exclusively offer 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.

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

Other Obligations

In 2021, the Company 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, remaining commitments for those potential future customer account purchases could total approximately $ 33 million through January 2023.

As of June 30, 2022, remaining commitments for those potential future customer account purchases were not material.

In the normal course of business, the Company is liable for contract completion and product performance.

The Company’s guarantees primarily relate to standby letters of credit related to its insurance programs and totaled $ 86 million and $ 76 million as of March 31, 2022 and December 31, 2021, respectively.

The Company’s guarantees primarily relate to standby letters of credit related to its insurance programs and totaled $ 86 million and $ 76 million as of June 30, 2022 and December 31, 2021, respectively.

The Company does not believe such obligations will materially affect its financial position, results of operations, or cash flows.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During March 2022, the Company 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 the Company 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.

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There have been no material changes to these matters from those disclosed in the 2021 Annual Report except as described below.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company records accruals for losses that are probable and reasonably estimable.

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Additionally, the Company records insurance recovery receivables from third-party insurers when recovery has been determined to be probable.

The Company has not accrued for any losses for which the likelihood of loss cannot be assessed or the range of possible loss cannot be estimated.

As of March 31, 2022 and December 31, 2021, the Company’s accrual for ongoing claims and lawsuits within the scope of an insurance program totaled $ 89 million and $ 90 million, respectively.

The Company has not accrued for any losses for which the likelihood of loss cannot be assessed, is less than probable, or the range of possible loss cannot be estimated.

As of June 30, 2022 and December 31, 2021, the Company’s accrual for ongoing claims and lawsuits within the scope of an insurance program totaled $ 101 million and $ 90 million, respectively.

The Company’s accrual related to ongoing claims and lawsuits not within the scope of an insurance program is not material.

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Four of these lawsuits were originally filed as putative class actions and four as individual claims.

One of the individual claims and one of the putative class actions subsequently settled.

In May 2020, the Company was served with a class action complaint in a case captioned Shana Doty v.

ADT LLC and filed in the U.S.

District Court for the Southern District of Florida.

By an amended complaint, the plaintiff asserted causes of action on behalf of herself and other Company customers similarly situated, and sought to recover damages for breach of contract, negligence, intrusion upon seclusion, violations of the Computer Fraud and Abuse Act and of the Texas Deceptive Trade Practices Act, negligent hiring, supervision and retention, and intentional infliction of emotional distress.

The Company moved to dismiss the plaintiff’s amended complaint.

In December 2020, the federal district court dismissed the causes of action for intrusion upon seclusion and violation of the Computer Fraud and Abuse Act, and further ruled that plaintiff may not seek to hold the Company vicariously liable for any intentional torts committed by the former technician.

In December 2021, the Company moved for summary judgment on Plaintiff’s remaining claims.

In January 2022, plaintiff filed a notice withdrawing motion for class certification and dismissing class allegations.

The case will now proceed as an individual action and is in discovery.

In March 2022, the court entered an order on the Company’s summary judgment motion and dismissed Plaintiff’s claims for gross negligence, negligent hiring, supervision and retention, and intentional infliction of emotional distress.

The court also limited Plaintiff’s damages to $ 500 for the breach of contract and negligence claims under the limitation of liability terms contained in the customer’s contract.

The Company’s motion was denied as to plaintiff’s claim that the Company violated the Texas Deceptive Trade Practices Act.

The case is set for trial in September 2022.

In June 2020, the Company was served with a class action complaint in a case captioned Alexia Preddy v.

ADT LLC and filed in the U.S.

District Court for the Southern District of Florida.

By an amended complaint, the plaintiff asserted causes of action on behalf of herself and others similarly situated as individuals residing in homes of Company customers, and sought to recover damages for negligence, intrusion upon seclusion, violation of the Computer Fraud and Abuse Act, negligent hiring, supervision and retention, and intentional infliction of emotional distress.

The Company moved to dismiss the plaintiff’s amended complaint and to compel arbitration.

In December 2020, the federal district court granted the Company’s motion to compel arbitration.

The case is stayed and administratively closed and is proceeding in arbitration as an individual claim.

An arbitration hearing is currently set for August 2022.

In April 2021, the Company was served with a class action complaint filed in the U.S.

District Court for the Southern District of Florida on behalf of Randy Doty, the husband of the plaintiff in Shana Doty v.

The claims alleged in the complaint are substantially similar to the claims asserted in Alexa Preddy v.

ADT LLC, the case which has been stayed pending arbitration.

In July 2021, the federal district court dismissed the claim for intrusion upon seclusion and ruled that the plaintiff cannot proceed on theories of vicarious liability for the technician’s intentional torts.

As with the Shana Doty matter, plaintiff filed a notice withdrawing motion for class certification and dismissing class allegations.

The case is proceeding as an individual action, which has been consolidated with the Shana Doty v.

ADT LLC case, and a ruling is pending on the Company’s motion for summary judgment.

This case is also set for trial in September 2022.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Following the November 2021 abandonment of their class action allegations, the lawyers in the Doty and Preddy cases filed a new complaint in the U.S.

District Court for the Southern District of Florida on behalf of seven different customers and fourteen members of their respective households.

The case is captioned Stefanie Bryant, et al.

The claims alleged in the new complaint are substantially similar to the claims asserted in Alexa Preddy v.

ADT LLC, Shana Doty v.

ADT LLC, and Randy Doty v.

The Company may also be subject to future legal claims.

The Company was also served with arbitration demands from fifteen separate customers affected by this incident.

As of July 27, 2022, the Company and its insurers had settled or have reached agreements in principle to settle all pending lawsuits, arbitrations, and demands arising from this incident, with the exception of one immaterial lawsuit.

This includes all of the Company’s previously reported matters, which were all filed and pending in the U.S.

District Court for the Southern District of Florida, as follows:

Shana Doty v.

ADT LLC (filed May 18, 2020);

Alexia Preddy v.

ADT LLC (filed May 18, 2020), Randy Doty v.

ADT LLC (filed April 2, 2021) and Stefanie Bryant, et al.

ADT LLC (filed December 15, 2021).

These matters alleged actions for damages relating to some or all of the following:

breach of contract, negligence, intrusion upon seclusion, violation of the Computer Fraud and Abuse Act, negligent hiring, supervision and retention, and intentional infliction of emotional distress.

All such pending settlements and agreements are for monetary amounts within the Company’s insured levels.

Company as Lessee

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Additionally, the Company’s right-of-use assets and lease liabilities include leases with initial lease terms of 12 months or less.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s right-of-use assets and lease liabilities primarily represent lease payments fixed at the commencement of a lease and variable lease payments dependent on an index or rate.

8 unchanged sentences

(in thousands)

March 31, 2022 December 31, 2021

June 30, 2022 December 31, 2021

Presentation and Classification:

10 unchanged sentences

_________________

(1) Finance right-of-use assets are recorded net of accumulated depreciation of approximately $ 88 million and $ 78 million as of March 31, 2022 and December 31, 2021, respectively.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three Months Ended March 31,

(1) Finance right-of-use assets are recorded net of accumulated depreciation of approximately $ 97 million and $ 78 million as of June 30, 2022 and December 31, 2021, respectively.

Three Months Ended June 30, Six Months Ended June 30,

( in thousands )

2022 2021 2022 2021

Operating lease cost $ 12,032 $ 12,159 $ 24,517 $ 25,052

4 unchanged sentences

Total lease cost $ 49,556 $ 39,861 $ 95,858 $ 72,738

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Cash Flow and Supplemental Information:

Three Months Ended March 31,

Six Months Ended June 30,

( in thousands )

17 unchanged sentences

There were no significant related party transactions during the periods presented other than as described below:

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Sunlight Financial LLC

ADT Solar uses Sunlight Financial LLC (“Sunlight”), a related party controlled by Apollo, to access certain loan products for ADT Solar customers, as discussed in Note 2 “Revenue and Receivables.” The Company is not a party to these loan agreements.

Sunlight remits the loan amount, net of financing fees, to the Company once the loan is approved or upon installation.

For the three months ended March 31, 2022, the Company incurred $ 15 million of financing fees based on approximately $ 100 million of loan proceeds remitted by Sunlight to the Company.

Intrado Corporation

The Company uses Intrado Corporation (“Intrado”), a related party controlled by Apollo, for certain technology and communications services in the ordinary course of business.

The Company is party to an agreement with Intrado for the provision of certain emergency response and telecommunication services, which includes commitments of approximately $ 4 million through 2025.

Intrado fees totaled approximately $ 0.7 million for the three months ended March 31, 2022.

ADT Solar uses Sunlight Financial LLC (“Sunlight”), a related party controlled by Apollo, to access certain loan products for ADT Solar customers, as discussed in Note 2 “Revenue and Receivables.” Total loans funded by Sunlight were approximately $ 131 million and $ 243 million, respectively, for the three and six months ended June 30, 2022.

As of June 30, 2022, $ 6 million was reflected in accounts receivable, net, and $ 10 million was reflected in deferred revenue in the Condensed Consolidated Balance Sheets related to such funded loans.

Additionally, the Company incurred $ 15 million and $ 30 million, respectively, of financing fees for the three and six months ended June 30, 2022.

Rackspace US, Inc.

1 unchanged sentence

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

As of March 31, 2022, total purchases under this agreement since inception were approximately $ 9 million, with approximately $ 3 million occurring during the three months ended March 31, 2022.

As of June 30, 2022, total purchases under this agreement since inception were approximately $ 12 million, with approximately $ 3 million and $ 6 million occurring during the three and six months ended June 30, 2022, respectively.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

TD SYNNEX Corporation

The Company uses TD SYNNEX Corporation (“TD SYNNEX”), a related party controlled by Apollo, for certain technical services encompassing the purchase and support of IT equipment in the ordinary course of business.

TD SYNNEX fees totaled approximately $ 0.4 million and $ 1.9 million during the three and six months ended June 30, 2022, respectively.

Intrado Corporation

The Company uses Intrado Corporation (“Intrado”), a related party controlled by Apollo, for certain technology and communications services in the ordinary course of business.

The Company is party to an agreement with Intrado for the provision of certain emergency response and telecommunication services, which includes remaining commitments through 2025 of approximately $ 4 million as of June 30, 2022.

Intrado fees totaled approximately $ 0.5 million and $ 1.2 million for the three and six months ended June 30, 2022, respectively.

Alorica, Inc.

The Company uses Alorica Inc.

(“Alorica”), a related party controlled by Apollo, as a digital customer experience partner in the ordinary course of business.

Alorica fees totaled approximately $ 0.9 million and $ 1.6 million during the three and six months ended June 30, 2022, respectively.

The Company also provides monitoring and related services to Alorica in the ordinary course of business.

Amounts received from Alorica during the three and six months ended June 30, 2022 were not material.

Canopy is considered a related party under GAAP, as the Company accounts for its investment in Canopy under the equity method of accounting.

Except for the transactions described in Note 5 “Equity Method Investments,” there were no other material related party transactions with Canopy during the period.

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 1. Financial Statements