ADT Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share and per share data) June 30, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 43,609 $ 24,453 Accounts receivable, net of allowance for credit losses of $ 61,597 and $ 54,032 , respectively 528,113 442,158 Inventories, net 313,829 277,323 Work-in-progress 82,789 70,528 Prepaid expenses and other current assets 215,353 178,069 Total current assets 1,183,693 992,531 Property and equipment, net 368,651 364,108 Subscriber system assets, net 2,981,419 2,867,528 Intangible assets, net 5,237,681 5,413,351 Goodwill 5,967,424 5,943,403 Deferred subscriber acquisition costs, net 968,952 850,489 Other assets 607,318 462,941 Total assets $ 17,315,138 $ 16,894,351 Liabilities and stockholders' equity Current liabilities: Current maturities of long-term debt $ 844,195 $ 117,592 Accounts payable 462,265 474,976 Deferred revenue 388,125 373,532 Accrued expenses and other current liabilities 670,265 737,245 Total current liabilities 2,364,850 1,703,345 Long-term debt 8,998,735 9,575,098 Deferred subscriber acquisition revenue 1,431,311 1,199,293 Deferred tax liabilities 926,932 867,203 Other liabilities 213,911 300,693 Total liabilities 13,935,739 13,645,632 Commitments and contingencies (See Note 13) Stockholders' equity: Preferred stock—authorized 1,000,000 shares of $ 0.01 par value; 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 856,642,103 and 846,825,868 as of June 30, 2022 and December 31, 2021, respectively. 8,566 8,468 Class B common stock—authorized 100,000,000 shares of $ 0.01 par value; issued and outstanding shares of 54,744,525 as of June 30, 2022 and December 31, 2021. 547 547 Additional paid-in capital 7,295,665 7,261,267 Accumulated deficit ( 3,874,045 ) ( 3,952,590 ) Accumulated other comprehensive loss ( 51,334 ) ( 68,973 ) Total stockholders' equity 3,379,399 3,248,719 Total liabilities and stockholders' equity $ 17,315,138 $ 16,894,351 See Notes to Condensed Consolidated Financial Statements 1 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data) 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 Installation, product, and other 455,238 220,897 878,689 462,835 Total revenue 1,601,030 1,304,417 3,145,777 2,609,121 Cost of revenue (exclusive of depreciation and amortization shown separately below) 507,813 381,585 1,017,581 762,751 Selling, general, and administrative expenses 487,069 445,636 969,417 895,238 Depreciation and intangible asset amortization 399,416 474,271 875,539 944,080 Merger, restructuring, integration, and other ( 3,845 ) 4,804 ( 3,317 ) 25,311 Operating income (loss) 210,577 ( 1,879 ) 286,557 ( 18,259 ) Interest expense, net ( 81,651 ) ( 166,525 ) ( 87,958 ) ( 214,249 ) Loss on extinguishment of debt — — — ( 156 ) Other income (expense) 1,463 1,533 2,959 3,336 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 ) Net income (loss) per share - basic: Common Stock $ 0.10 $ ( 0.15 ) $ 0.16 $ ( 0.21 ) Class B Common Stock $ 0.10 $ ( 0.15 ) $ 0.16 $ ( 0.21 ) Weighted-average shares outstanding - basic: Common Stock 848,242 765,922 846,048 764,322 Class B Common Stock 54,745 54,745 54,745 54,745 Net income (loss) per share - diluted: Common Stock $ 0.10 $ ( 0.15 ) $ 0.15 $ ( 0.21 ) Class B Common Stock $ 0.10 $ ( 0.15 ) $ 0.15 $ ( 0.21 ) Weighted-average shares outstanding - diluted: Common Stock 910,809 765,922 911,005 764,322 Class B Common Stock 54,745 54,745 54,745 54,745 See Notes to Condensed Consolidated Financial Statements 2 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (in thousands) 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 ) Other comprehensive income (loss), net of tax: Cash flow hedges 6,561 11,371 17,653 23,037 Other ( 5 ) 38 ( 14 ) 884 Total other comprehensive income (loss), net of tax 6,556 11,409 17,639 23,921 Comprehensive income (loss) $ 98,073 $ ( 114,441 ) $ 160,801 $ ( 149,823 ) See Notes to Condensed Consolidated Financial Statements 3 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands) 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 Beginning balance 851,324 54,745 $ 8,513 $ 547 $ 7,262,237 $ ( 3,933,140 ) $ ( 57,890 ) $ 3,280,267 Net income (loss) — — — — — 91,517 — 91,517 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 ) Share-based compensation expense — — — — 16,932 — — 16,932 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 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 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 4 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands) Six 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 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 Six Months Ended June 30, 2021 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 Beginning balance 771,014 54,745 $ 7,710 $ 547 $ 6,640,763 $ ( 3,491,069 ) $ ( 118,615 ) $ 3,039,336 Net income (loss) — — — — — ( 173,744 ) — ( 173,744 ) Other comprehensive income (loss), net of tax — — — — — — 23,921 23,921 Dividends, including dividends reinvested in common stock — — — — 4 ( 58,320 ) — ( 58,316 ) Share-based compensation expense — — — — 29,606 — — 29,606 Transactions related to employee share-based compensation plans and other 5,296 — 53 — ( 5,228 ) ( 1,006 ) — ( 6,181 ) 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 5 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Six Months Ended June 30, 2022 2021 Cash flows from operating activities: Net income (loss) $ 143,162 $ ( 173,744 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and intangible asset amortization 875,539 944,080 Amortization of deferred subscriber acquisition costs 75,989 58,830 Amortization of deferred subscriber acquisition revenue ( 111,884 ) ( 77,888 ) Share-based compensation expense 32,952 29,606 Deferred income taxes 50,251 ( 62,596 ) Provision for losses on receivables and inventory 45,835 18,568 Loss on extinguishment of debt — 156 Intangible asset impairments — 17,883 Unrealized (gain) loss on interest rate swap contracts ( 204,562 ) ( 92,057 ) Other non-cash items, net 78,604 70,800 Changes in operating assets and liabilities, net of effects of acquisitions: Deferred subscriber acquisition costs ( 195,746 ) ( 147,593 ) Deferred subscriber acquisition revenue 166,452 129,854 Other, net ( 133,956 ) 69,761 Net cash provided by (used in) operating activities 822,636 785,660 Cash flows from investing activities: Dealer generated customer accounts and bulk account purchases ( 341,586 ) ( 339,655 ) Subscriber system asset expenditures ( 378,571 ) ( 339,250 ) Purchases of property and equipment ( 87,621 ) ( 83,991 ) 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 Net cash provided by (used in) investing activities ( 807,440 ) ( 777,162 ) Cash flows from financing activities: Proceeds from long-term borrowings 380,000 10,729 Proceeds from receivables facility 139,642 71,276 Repayment of long-term borrowings, including call premiums ( 340,099 ) ( 32,068 ) Repayment of receivables facility ( 46,980 ) ( 16,693 ) 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 ) Other financing, net ( 14,952 ) 7,199 Net cash provided by (used in) financing activities 7,073 ( 59,740 ) Cash and cash equivalents and restricted cash and restricted cash equivalents: Net increase (decrease) during the period 22,269 ( 51,242 ) Beginning balance 33,277 207,747 Ending balance $ 55,546 $ 156,505 See Notes to Condensed Consolidated Financial Statements 6 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Organization 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.”). 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. ADT Inc. was incorporated in the State of Delaware in May 2015 as a holding company with no assets or liabilities. In July 2015, the Company acquired Protection One, Inc. and ASG Intermediate Holding Corp. (collectively, the “Formation Transactions”), which were instrumental in the commencement of the Company’s operations. In May 2016, the Company acquired The ADT Security Corporation (formerly named The ADT Corporation) (“The ADT Corporation”) (the “ADT Acquisition”). The Company is majority-owned by Prime Security Services TopCo (ML), L.P., which is majority-owned by Prime Security Services TopCo Parent, L.P. (“Ultimate Parent”). Ultimate Parent is majority-owned by Apollo Investment Fund VIII, L.P. and its related funds that are directly or indirectly managed by affiliates of Apollo Global Management, Inc. (together with its subsidiaries and affiliates, “Apollo” or the “Sponsor”). Basis of Presentation The condensed consolidated financial statements include the consolidated results of ADT Inc. and its wholly-owned subsidiaries and have been prepared in U.S. 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. The results of companies acquired are included in the condensed consolidated financial statements from the effective date of acquisition. Certain prior period amounts have been reclassified to conform with the current period presentation. The condensed consolidated financial statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary to summarize fairly the Company’s financial position, results of operations, and cash flows for the interim periods presented. The interim results reported herein should not be taken as indicative of results that may be expected for future interim periods or the full year. The Condensed Consolidated Balance Sheet as of December 31, 2021 included herein was derived from the audited consolidated financial statements as of that date but does not include all the footnote disclosures required in the annual consolidated financial statements. For a more comprehensive understanding of the Company and its interim results, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Annual Report”), which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 1, 2022. Segments 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. Use of Estimates The preparation of the condensed consolidated financial statements in accordance with GAAP requires the Company to select accounting policies and make estimates that affect amounts reported in the condensed consolidated financial statements and the accompanying notes. The Company’s estimates are based on the relevant information available at the end of each period. Actual results could differ materially from these estimates under different assumptions or market conditions. 7 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 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 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 Recently Adopted Accounting Pronouncements Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2021-01, Reference Rate Reform (Topic 848) : Scope, amends ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and clarifies the scope and guidance of Topic 848 to allow derivatives impacted by the reference rate reform to qualify for certain optional expedients and exceptions for contract modifications and hedge accounting. The guidance is optional and is effective for a limited period of time through December 31, 2022. 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. Recently Issued Accounting Pronouncements ASU 2022-02, Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”), eliminates the accounting guidance for troubled debt restructurings by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. ASU 2022-02 also requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. It should also be applied prospectively, with an option to apply a modified retrospective transition method in relation to the recognition and measurement of troubled debt restructurings, resulting in a cumulative-effect adjustment to retained earnings in the period of adoption. Early adoption is permitted, including adoption in an interim period, in which case the guidance should be applied as of the beginning of the fiscal year that includes the interim period. 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. 8 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Summary of Significant Accounting Policies Unless otherwise noted, the Company’s accounting policies used in the preparation of these condensed consolidated financial statements as discussed below, or included within the respective footnotes herein, do not materially differ from those disclosed in the 2021 Annual Report. Cash and Cash Equivalents and Restricted Cash and Restricted Cash Equivalents All highly liquid investments with original maturities of three months or less from the time of purchase are considered to be cash equivalents. 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) June 30, 2022 December 31, 2021 Cash and cash equivalents $ 43,609 $ 24,453 Restricted cash and restricted cash equivalents 11,937 8,824 Ending balance $ 55,546 $ 33,277 Subscriber System Assets and Deferred Subscriber Acquisition Costs Subscriber system assets represent capitalized equipment and installation costs incurred in connection with transactions in which the Company retains ownership of the security system. Upon termination of the contract with the customer, the Company may retrieve such assets. Deferred subscriber acquisition costs represent selling expenses (primarily commissions) that are incremental to acquiring customers. The Company records subscriber system assets and deferred subscriber acquisition costs in the Condensed Consolidated Balance Sheets as these assets embody a probable future economic benefit for the Company through the generation of future monitoring and related services revenue. Subscriber system assets and any related deferred subscriber acquisition costs are accounted for on a pooled basis based on the month and year of customer acquisition. The Company depreciates and amortizes these pooled costs using an accelerated method over the estimated life of the customer relationship, which is 15 years. (in thousands) June 30, 2022 December 31, 2021 Gross carrying amount $ 5,867,896 $ 5,499,703 Accumulated depreciation ( 2,886,477 ) ( 2,632,175 ) Subscriber system assets, net $ 2,981,419 $ 2,867,528 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 Depreciation of subscriber system assets $ 137,486 $ 123,912 $ 270,608 $ 246,906 Amortization of deferred subscriber acquisition costs $ 39,050 $ 30,188 $ 75,989 $ 58,830 9 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Accrued Expenses and Other Current Liabilities (in thousands) June 30, 2022 December 31, 2021 Accrued interest $ 134,644 $ 124,579 Payroll-related accruals 146,371 196,165 Operating lease liabilities 39,656 37,359 Fair value of interest rate swaps (1) — 50,360 Other accrued liabilities 349,594 328,782 Accrued expenses and other current liabilities $ 670,265 $ 737,245 ________________ (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 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 June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Radio conversion costs $ 8,242 $ 70,758 $ 26,375 $ 140,427 Radio conversion revenue $ 7,698 $ 10,123 $ 15,891 $ 21,063 Fair Value of Financial Instruments The Company’s financial instruments primarily consist of cash and cash equivalents, restricted cash and restricted cash equivalents, accounts receivable, retail installment contract receivables, accounts payable, debt, and derivative financial instruments. Due to their short-term and/or liquid nature, the fair values of cash, restricted cash, accounts receivable, and accounts payable approximate their respective carrying amounts. Cash Equivalents - Included in cash and cash equivalents as applicable from time to time are investments in money market mutual funds. These investments are classified as Level 1 fair value measurements, which represent unadjusted quoted prices in active markets for identical assets or liabilities. 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 Amount Fair Value Carrying Amount Fair Value 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 10 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 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 Amount Fair Value Carrying Amount Fair Value Retail installment contract receivables, net $ 444,514 $ 340,939 $ 330,605 $ 255,147 2. REVENUE AND RECEIVABLES Revenue 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. Disaggregated Revenue Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 CSB: Monitoring and related services $ 1,011,442 $ 965,233 $ 2,004,470 $ 1,916,481 Installation, product, and other 77,047 57,414 146,608 144,771 Total CSB 1,088,489 1,022,647 2,151,078 2,061,252 Commercial: Monitoring and related services 134,350 118,287 262,618 229,805 Installation, product, and other 163,136 163,483 325,045 318,064 Total Commercial 297,486 281,770 587,663 547,869 Solar: Installation, product, and other 215,055 — 407,036 — Total Solar 215,055 — 407,036 — Total revenue $ 1,601,030 $ 1,304,417 $ 3,145,777 $ 2,609,121 Revenue is recognized in the Condensed Consolidated Statements of Operations net of sales and other taxes. Amounts collected from customers for sales and other taxes are reported as a liability net of the related amounts remitted. 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. 11 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. 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 Customer-Owned - In transactions involving security systems sold outright to the customer (referred to as outright sales), the Company’s performance obligations generally include the sale and installation of the system and any monitoring and related services. The portion of the transaction price associated with the sale and installation of a system is recognized either at a point in time or over time based upon the nature of the transaction and contractual terms and is reflected in installation, product, and other revenue in the Condensed Consolidated Statements of Operations. For revenue recognized over time, progress toward complete satisfaction of the performance obligation is primarily measured using a cost-to-cost measure of progress method. The cost input driving revenue recognition for these contracts is based primarily on contract cost incurred to date compared to total estimated contract cost. This measure of progress method includes forecasts based on the best information available and reflects the Company’s judgment to faithfully depict the value of the services transferred to the customer. Approximately half of installation, product, and other revenue generated by the Commercial segment is recognized over time. 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 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 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 12 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Deferred Revenue Deferred revenue represents customer billings for services not yet rendered and is primarily related to recurring monitoring and related services. In addition, payments received for the sale and installation of a system after the agreement is signed but before performance obligations are satisfied are recorded as deferred revenue. These amounts are recorded as current deferred revenue in the Condensed Consolidated Balance Sheets as the Company expects to satisfy any remaining performance obligations, as well as recognize the related revenue, within the next twelve months when performance obligations are satisfied. Accordingly, the Company has applied the practical expedient regarding deferred revenue to exclude the value of remaining performance obligations if (i) the contract has an original expected term of one year or less or (ii) the Company recognizes revenue in proportion to the amount it has the right to invoice for services performed. Accounts Receivable Accounts receivable represent unconditional rights to consideration from customers in the ordinary course of business and are generally due in one year or less. The Company’s accounts receivable are recorded at amortized cost less an allowance for credit losses not expected to be recovered. The allowance for credit losses is recognized at inception and reassessed each reporting period. The Company evaluates its allowance for credit losses on accounts receivable in pools based on customer type. For each customer pool, the allowance for credit losses is estimated based on the delinquency status of the underlying receivables and the related historical loss experience, as adjusted for current and expected future conditions, if applicable. The allowance for credit losses is not material for the individual pools of customers. Changes in the Allowance for Credit Losses: Six Months Ended June 30, (in thousands) 2022 2021 Beginning balance $ 54,032 $ 68,342 Provision for credit losses 47,582 25,745 Write-offs, net of recoveries (1) ( 40,017 ) ( 31,867 ) Ending balance $ 61,597 $ 62,220 ________________ (1) Recoveries were not material for the periods presented. As such, the Company presented write-offs, net of recoveries. Retail Installment Contract Receivables 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. The Company’s retail installment contract receivables are recorded at amortized cost less an allowance for credit losses not expected to be recovered. The allowance for credit losses is recognized at inception and reassessed each reporting period. The allowance for credit losses relates to retail installment contract receivables from outright sales transactions and is not material. Upon origination of a retail installment contract, the Company utilizes external credit scores to assess customer credit quality and determine eligibility. In addition, customers are required to enroll in the Company’s automated payment process in order to enter into a retail installment contract. Subsequent to origination, the Company monitors the delinquency status of retail installment contract receivables as the key credit quality indicator. As of June 30, 2022, the current and delinquent billed retail installment contract receivables were not material. 13 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 Allowance for credit losses ( 737 ) ( 907 ) Retail installment contract receivables, net $ 444,514 $ 330,605 Classification: Accounts receivable, net $ 138,738 $ 100,385 Other assets 305,776 230,220 Retail installment contract receivables, net $ 444,514 $ 330,605 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. Contract Assets Contract assets represent the Company’s right to consideration in exchange for goods or services transferred to the customer. The contract asset is reclassified to accounts receivable when the Company’s right to the consideration becomes unconditional as additional services are performed and billed. The Company has the right to bill customers as services are provided over time, which generally occurs over the course of a 24-, 36-, or 60-month period. The financing component of contract assets is not significant. The Company records an allowance for credit losses against its contract assets for amounts not expected to be recovered. The allowance is recognized at inception and is reassessed each reporting period. 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) June 30, 2022 December 31, 2021 Contract assets, gross $ 76,282 $ 106,810 Allowance for credit losses ( 7,470 ) ( 12,300 ) Contract assets, net $ 68,812 $ 94,510 Classification: Prepaid expenses and other current assets $ 48,249 $ 58,452 Other assets 20,563 36,058 Contract assets, net $ 68,812 $ 94,510 3. SEGMENT INFORMATION As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies,” the Company reports results in three operating and reportable segments based on the manner in which the CODM evaluates performance and makes decisions about how to allocate resources. The Company organizes its segments based on customer type as follows: • CSB - The 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 related offerings; (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 and Solar segments. Customers in the CSB segment are comprised of residential homeowners, small business operators, and other individual consumers. 14 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) • 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) 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. • Solar - The Solar segment primarily includes (i) revenue and operating costs from the design and installation of solar and related solutions and services; (ii) other operating costs associated with support functions related to these operations; 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. The CODM uses Adjusted EBITDA, which is the segment profit measure, to evaluate segment performance. Adjusted EBITDA is defined as net income or loss adjusted for (i) interest; (ii) taxes; (iii) depreciation and amortization, including depreciation of subscriber system assets and other fixed assets and amortization of dealer and other intangible assets; (iv) amortization of deferred costs and deferred revenue associated with subscriber acquisitions; (v) share-based compensation expense; (vi) merger, restructuring, integration, and other; (vii) losses on extinguishment of debt; (viii) radio conversion costs, net; and (ix) other income/gain or expense/loss items such as impairment charges, financing and consent fees, or acquisition-related adjustments. The CODM does not review the Company's assets by segment; therefore, such information is not presented. The following table presents total revenue by segment and a reconciliation to consolidated total revenue: Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 CSB $ 1,088,489 $ 1,022,647 $ 2,151,078 $ 2,061,252 Commercial 297,486 281,770 587,663 547,869 Solar 215,055 — 407,036 — Total Revenue $ 1,601,030 $ 1,304,417 $ 3,145,777 $ 2,609,121 15 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 Adjusted EBITDA by segment: CSB $ 580,701 $ 509,897 $ 1,141,246 $ 1,029,375 Commercial 31,363 31,968 54,993 54,621 Solar ( 14,815 ) — 2,007 — Total $ 597,249 $ 541,865 $ 1,198,246 $ 1,083,996 Reconciliation: Total segment Adjusted EBITDA $ 597,249 $ 541,865 $ 1,198,246 $ 1,083,996 Less: Interest expense, net 81,651 166,525 87,958 214,249 Depreciation and intangible asset amortization 399,416 474,271 875,539 944,080 Amortization of deferred subscriber acquisition costs 39,050 30,188 75,989 58,830 Amortization of deferred subscriber acquisition revenue ( 58,461 ) ( 40,729 ) ( 111,884 ) ( 77,888 ) Share-based compensation expense 16,932 13,587 32,952 29,606 Merger, restructuring, integration, and other ( 3,845 ) 4,804 ( 3,317 ) 25,311 Loss on extinguishment of debt — — — 156 Radio conversion costs, net 544 60,635 10,484 119,364 Acquisition related adjustments (1) 1,328 ( 229 ) 37,623 ( 477 ) Equity in net earnings (losses) of equity method investee ( 948 ) — ( 948 ) — Other (2) ( 8,807 ) ( 316 ) ( 7,708 ) 93 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. 4. 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. 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. 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. 16 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Disposition 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. 5. 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. 17 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Changes in the carrying amounts of goodwill by reportable segment were as follows: (in thousands) CSB Commercial Solar Total Balance as of December 31, 2021 $ 4,915,832 $ 332,845 $ 694,726 $ 5,943,403 Acquisitions (1) 17,270 6,804 11,678 35,752 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 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 June 30, 2022 December 31, 2021 (in thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Definite-lived intangible assets: Contracts and related customer relationships $ 6,735,224 $ ( 3,876,871 ) $ 2,858,353 $ 8,719,363 $ ( 5,753,345 ) $ 2,966,018 Dealer relationships 1,518,020 ( 499,051 ) 1,018,969 1,518,020 ( 459,248 ) 1,058,772 Other 224,783 ( 197,424 ) 27,359 263,133 ( 207,572 ) 55,561 Total definite-lived intangible assets 8,478,027 ( 4,573,346 ) 3,904,681 10,500,516 ( 6,420,165 ) 4,080,351 Indefinite-lived intangible assets: Trade name 1,333,000 — 1,333,000 1,333,000 — 1,333,000 Intangible assets $ 9,811,027 $ ( 4,573,346 ) $ 5,237,681 $ 11,833,516 $ ( 6,420,165 ) $ 5,413,351 The change in the net carrying amount of contracts and related customer relationships during the period was as follows: (in thousands) Balance as of December 31, 2021 $ 2,966,018 Acquisition of customer relationships 3,000 Customer contract additions, net of dealer charge-backs (1) 347,361 Amortization ( 456,388 ) Other ( 1,638 ) Balance as of June 30, 2022 $ 2,858,353 ________________ (1) The weighted-average amortization period for customer contract additions was 14 years. 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. 18 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 7. DEBT 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. LIBOR + 2.75 % Quarterly $ 2,744,164 $ 2,758,058 First Lien Revolving Credit Facility 3/16/2018 6/23/2026 Adj. LIBOR + 2.75 % Quarterly 80,000 25,000 Second Lien Notes due 2028 1/28/2020 1/15/2028 6.250 % 1/15 and 7/15 1,300,000 1,300,000 First Lien Notes due 2024 4/4/2019 4/15/2024 5.250 % 2/15 and 8/15 750,000 750,000 First Lien Notes due 2026 4/4/2019 4/15/2026 5.750 % 3/15 and 9/15 1,350,000 1,350,000 First Lien Notes due 2027 8/20/2020 8/31/2027 3.375 % 6/15 and 12/15 1,000,000 1,000,000 First Lien Notes due 2029 7/29/2021 8/1/2029 4.125 % 2/1 and 8/1 1,000,000 1,000,000 ADT Notes due 2023 1/14/2013 6/15/2023 4.125 % 6/15 and 12/15 700,000 700,000 ADT Notes due 2032 5/2/2016 7/15/2032 4.875 % 1/15 and 7/15 728,016 728,016 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 5/20/2027 SOFR + 0.85 % Monthly 291,638 199,056 Other debt (2) 3,528 4,732 Total debt principal, excluding finance leases 9,969,242 9,836,758 Plus: Finance lease liabilities (3) 94,055 93,080 Less: Unamortized debt discount, net ( 15,071 ) ( 16,678 ) Less: Unamortized deferred financing costs ( 57,291 ) ( 64,014 ) Less: Unamortized purchase accounting fair value adjustment and other ( 148,005 ) ( 156,456 ) Total debt 9,842,930 9,692,690 Less: 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) 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. 19 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Significant changes in the Company’s debt during the six months ended June 30, 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 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. 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. On a monthly basis, the segregated account is utilized to make required principal, interest, and other payments due under the Receivables Facility. 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. 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 The SPE borrower under the Receivables Facility is a separate legal entity with its own creditors who will be entitled, prior to and upon the liquidation of the SPE, to be satisfied out of the SPE’s assets prior to any assets of the SPE becoming available to the Company (other than the SPE). Accordingly, the assets of the SPE are not available to pay creditors of the Company (other than the SPE), although collections from the transferred retail installment contract receivables in excess of amounts required to repay amounts then due and payable to the SPE’s creditors may be released to the Company and subsequently used by the Company (including to pay other creditors). The SPE’s creditors under the Receivables Facility have legal recourse to the transferred retail installment contract receivables owned by the SPE, and to 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. 20 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 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, 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. 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. 8. DERIVATIVE FINANCIAL INSTRUMENTS The Company's derivative financial instruments primarily consist of LIBOR-based interest rate swap contracts, which were entered into with the objective of managing exposure to variability in interest rates on the Company's debt. All interest rate swap contracts are reported in the Condensed Consolidated Balance Sheets at fair value. For interest rate swap contracts that are: • Not designated as cash flow hedges: Unrealized gains and losses are recognized in interest expense, net, in the Condensed Consolidated Statements of Operations. • Designated as cash flow hedges: Unrealized gains and losses are recognized as a component of accumulated other comprehensive income (loss) (“AOCI”) in the Condensed Consolidated Balance Sheets and are reclassified into interest expense, net, in the same period in which the related interest on debt affects earnings. For interest rate swap contracts that have been de-designated as cash flow hedges and for which forecasted cash flows are: • Probable or reasonably possible of occurring: Unrealized gains and losses previously recognized as a component of AOCI are reclassified into interest expense, net, in the same period in which the related interest on variable-rate debt affects earnings through the original maturity date of the related interest rate swap contracts. • Probable of not occurring: Unrealized gains and losses previously recognized as a component of AOCI are immediately reclassified into interest expense, net. The cash flows associated with interest rate swap contracts that included an other-than-insignificant financing element at inception are reflected as cash flows from financing activities in the Condensed Consolidated Statements of Cash Flows. Beginning in March 2020, the Company de-designated interest rate swap contracts previously designated as cash flow hedges with an aggregate notional amount of $ 3.0 billion. 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 June 30, 2022 consisted of the following (in thousands) : Execution Maturity Designation Notional Amount October 2019 September 2026 Not designated $ 2,800,000 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. 21 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Fair Value of Interest Rate Swaps: Balance Sheet Classification (in thousands) June 30, 2022 December 31, 2021 Assets Prepaid expenses and other current assets $ 24,220 $ — Other assets $ 62,006 $ — Liabilities Accrued expenses and other current liabilities $ — $ 50,360 Other liabilities $ — $ 67,976 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 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 ) 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. 9. INCOME TAXES Unrecognized Tax Benefits The Company’s unrecognized tax benefits relate to tax years that remain subject to audit by the taxing authorities in the U.S. federal, state and local, and foreign jurisdictions. 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. Effective Tax Rate 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. 22 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 In response to the COVID-19 Pandemic, the American Rescue Plan Act of 2021 and the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) were signed into law in March 2021 and March 2020, respectively, and included significant corporate income tax and payroll tax provisions intended to provide economic relief to address the impact of the COVID-19 Pandemic. During 2020, the Company recognized favorable cash flow impacts related to the accelerated refund of previously generated alternative minimum tax credits, as well as from the deferral of remittance of certain 2020 payroll taxes, with 50 % of the deferred amount due by the end of 2021, and the remainder due by the end of 2022. The Company also recognized a benefit from an increase in the interest expense limitation from 30 % to 50 % for tax years 2019 and 2020. 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. 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. 10. EQUITY Common Stock and Class B Common Stock The Company has two classes of common stock, including common stock (“Common Stock”) and Class B common stock (“Class B Common Stock”), both of which entitle stockholders to one vote per share except as described below. The Company’s Common Stock trades on the New York Stock Exchange under the symbol “ADT” since the Company’s initial public offering in January 2018. Class B Common Stock was issued in September 2020 to Google LLC (“Google”) in a private placement pursuant to a securities purchase agreement dated July 31, 2020 (the “Securities Purchase Agreement”). Each share of Class B Common Stock has equal status and rights to dividends as a share of Common Stock. The holders of Class B Common Stock have one vote for each share of Class B Common Stock held on all matters on which stockholders are entitled to vote generally except for voting on the election, appointment, or removal of directors of the Company. 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. 23 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Dividends (in thousands, except per share data) Common Stock Class B Common Stock Declaration Date Record Date Payment Date Per Share Aggregate Per Share Aggregate Six Months Ended June 30, 2022 3/1/2022 3/17/2022 4/4/2022 $ 0.035 $ 29,842 $ 0.035 $ 1,916 5/5/2022 6/16/2022 7/5/2022 0.035 30,028 0.035 1,916 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) Refer to Note 8 “Derivative Financial Instruments” for AOCI reclassifications associated with cash flow hedges. There were no other reclassifications out of AOCI. 11. SHARE-BASED COMPENSATION Share-Based Compensation Expense Share-based compensation expense recognized in selling, general, and administrative expenses in the Condensed Consolidated Statements of Operations was as follows: 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 Restricted Stock Units 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 . The RSUs’ retirement provisions allow awards to continue to vest in accordance with the granted terms in its entirety when a participant reaches retirement eligibility, as long as 12 months of service have been provided since the grant date. 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. 24 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 12. NET INCOME (LOSS) PER SHARE The Company applies the two-class method for computing and presenting net income (loss) per share for each class of common stock, which allocates current period net income (loss) to each class of common stock and participating securities based on (i) dividends declared and (ii) participation rights in the remaining undistributed earnings (losses). 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. 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. Potential shares of Common Stock include (i) incremental shares of Common Stock calculated using the treasury stock method for share-based compensation awards, (ii) incremental shares of Common Stock issuable upon the conversion of Class B Common Stock, and (iii) incremental shares of Common Stock calculated using the treasury stock method for warrants to purchase additional shares of Common Stock issued in connection with a business combination. There were no potential shares of Class B Common Stock during the periods presented. 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 (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 (including conversion of Class B Common Stock) 62,567 — 64,957 — Weighted-average shares outstanding - diluted 910,809 765,922 911,005 764,322 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 ) 25 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 ) 13. COMMITMENTS AND CONTINGENCIES Contractual Obligations There have been no material changes to the Company’s contractual obligations as compared to December 31, 2021, except as discussed below: Google Commercial Agreement 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 the Company’s end-user security and automation platform. Further, subject to certain carve-outs, the Company has agreed to exclusively sell Google Devices and Services to its customers. 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 June 30, 2022, remaining commitments for those potential future customer account purchases were not material. Guarantees 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 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. 26 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. Legal Proceedings The Company is subject to various claims and lawsuits in the ordinary course of business, which include contractual disputes; worker’s compensation; employment matters; product, general, and auto liability claims; claims that the Company has infringed on the intellectual property rights of others; claims related to alleged security system failures; and consumer and employment class actions. The Company is also subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations, and threatened legal actions and proceedings. In connection with such formal and informal inquiries, the Company receives numerous requests, subpoenas, and orders for documents, testimony, and information in connection with various aspects of its activities. There have been no material changes to these matters from those disclosed in the 2021 Annual Report except as described below. The Company records accruals for losses that are probable and reasonably estimable. These accruals are based on a variety of factors such as judgment, probability of loss, opinions of internal and external legal counsel, and actuarially determined estimates of claims incurred but not yet reported based upon historical claims experience. Legal costs in connection with claims and lawsuits in the ordinary course of business are expensed as incurred. 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, 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. Unauthorized Access by a Former Technician In April 2020, after investigating a customer inquiry, the Company self-disclosed that a former technician based in Dallas, Texas had, during service visits, added his personal email address to approximately 200 of the Company’s customers’ accounts, which provided this employee with varying levels of unauthorized personal access to such customers’ in-home security systems. In response, the Company initiated an affirmative outreach effort to notify all customers affected by this activity and to address their concerns. Since the disclosure, seven lawsuits have been filed against the Company, and the Company intervened in an eighth lawsuit filed against the former technician. Four of these lawsuits were originally filed as putative class actions and four as individual 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. v. 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. 14. LEASES Company as Lessee As part of normal operations, the Company leases real estate, vehicles, and equipment from various counterparties with lease terms and maturities through 2033. For these transactions, the Company applies the practical expedient to not separate the lease and non-lease components and accounts for the combined component as a lease. Additionally, the Company’s right-of-use assets and lease liabilities include leases with initial lease terms of 12 months or less. 27 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. Lease payments are recognized as lease cost on a straight-line basis over the lease term, which is determined as the non-cancelable period, including periods in which termination options are reasonably certain of not being exercised and periods in which renewal options are reasonably certain of being exercised. The discount rate is determined using the Company’s incremental borrowing rate coinciding with the lease term at the commencement of a lease. The incremental borrowing rate is estimated based on publicly available data for the Company’s debt instruments and other instruments with similar characteristics. Lease payments that are neither fixed nor dependent on an index or rate and vary because of changes in usage or other factors are included in variable lease costs. Variable lease costs are recorded in the period in which the obligation is incurred and primarily relate to fuel, repair, and maintenance payments as they vary based on the usage of leased vehicles and buildings. The Company’s leases do not contain material residual value guarantees or restrictive covenants. The Company’s subleases are not material. Right-of-Use Assets and Lease Liabilities: (in thousands) June 30, 2022 December 31, 2021 Presentation and Classification: Operating Current Prepaid expenses and other current assets $ 288 $ 230 Operating Non-current Other assets 121,708 125,945 Finance Non-current Property and equipment, net (1) 92,044 88,962 Total right-of-use assets $ 214,040 $ 215,137 Operating Current Accrued expenses and other current liabilities $ 39,656 $ 37,359 Finance Current Current maturities of long-term debt 43,248 38,730 Operating Non-current Other liabilities 93,202 99,734 Finance Non-current Long-term debt 50,807 54,350 Total lease liabilities $ 226,913 $ 230,173 _________________ (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. Lease Cost: 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 Finance lease cost: Amortization of right-of-use assets 10,791 6,867 20,643 13,178 Interest on lease liabilities 869 681 1,700 1,376 Variable lease costs 25,864 20,154 48,998 33,132 Total lease cost $ 49,556 $ 39,861 $ 95,858 $ 72,738 28 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Cash Flow and Supplemental Information: Six Months Ended June 30, ( in thousands ) 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating leases: Operating cash flows $ 23,572 $ 24,072 Finance leases: Operating cash flows $ 1,700 $ 1,376 Financing cash flows $ 22,165 $ 14,392 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 16,322 $ 7,861 Finance leases $ 23,670 $ 17,353 Company as Lessor The Company is a lessor in certain Company-owned transactions as the Company has identified a lease component associated with the right-of-use of the security system and a non-lease component associated with the monitoring and related services. For transactions in which (i) the timing and pattern of transfer is the same for the lease and non-lease components and (ii) the lease component would be classified as an operating lease if accounted for separately, the Company applies the practical expedient to aggregate the lease and non-lease components and accounts for the combined transaction based upon its predominant characteristic, which is the non-lease component. The Company accounts for the combined component as a single performance obligation under the applicable revenue guidance and recognizes the underlying assets within subscriber system assets, net, in the Condensed Consolidated Balance Sheets. For transactions that do not qualify for the practical expedient as the lease component represents a sales-type lease, the Company accounts for the lease and non-lease components separately. The Company’s sales-type leases are not material. 15. RELATED PARTY TRANSACTIONS The Company’s related party transactions primarily relate to products and services received from, or monitoring and related services provided to, other entities controlled by Apollo, as well as management, consulting, and transaction advisory services provided by Apollo to the Company. There were no significant related party transactions during the periods presented other than as described below: 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.” 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. During October 2020, the Company entered into a master services agreement with Rackspace US, Inc., a related party controlled by Apollo, for the provision of cloud storage, equipment, and services to facilitate the implementation of the Company’s cloud migration strategy for certain applications. The master services agreement includes a minimum purchase commitment of $ 50 million over a seven year term. 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. 29 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 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. 30