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) September 30, 2022 December 31, 2021 Assets Current assets: Cash and cash equivalents $ 45,734 $ 24,453 Accounts receivable, net of allowance for credit losses of $ 61,228 and $ 54,032 , respectively 539,573 442,158 Inventories, net 331,615 277,323 Work-in-progress 91,925 70,528 Prepaid expenses and other current assets 355,468 178,069 Total current assets 1,364,315 992,531 Property and equipment, net 376,968 364,108 Subscriber system assets, net 3,039,577 2,867,528 Intangible assets, net 5,185,952 5,413,351 Goodwill 5,822,076 5,943,403 Deferred subscriber acquisition costs, net 1,035,144 850,489 Other assets 743,863 462,941 Total assets $ 17,567,895 $ 16,894,351 Liabilities and stockholders' equity Current liabilities: Current maturities of long-term debt $ 857,746 $ 117,592 Accounts payable 489,948 474,976 Deferred revenue 428,861 373,532 Accrued expenses and other current liabilities 909,172 737,245 Total current liabilities 2,685,727 1,703,345 Long-term debt 8,945,314 9,575,098 Deferred subscriber acquisition revenue 1,554,764 1,199,293 Deferred tax liabilities 927,606 867,203 Other liabilities 247,630 300,693 Total liabilities 14,361,041 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 September 30, 2022 and December 31, 2021 — — Common stock—authorized 3,999,000,000 shares of $ 0.01 par value; issued and outstanding shares of 858,629,554 and 846,825,868 as of September 30, 2022 and December 31, 2021, respectively 8,586 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 September 30, 2022 and December 31, 2021 547 547 Additional paid-in capital 7,273,501 7,261,267 Accumulated deficit ( 4,028,519 ) ( 3,952,590 ) Accumulated other comprehensive income (loss) ( 47,261 ) ( 68,973 ) Total stockholders' equity 3,206,854 3,248,719 Total liabilities and stockholders' equity $ 17,567,895 $ 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Monitoring and related services $ 1,159,641 $ 1,098,389 $ 3,426,729 $ 3,244,675 Installation, product, and other 444,450 218,613 1,323,139 681,448 Total revenue 1,604,091 1,317,002 4,749,868 3,926,123 Cost of revenue (exclusive of depreciation and amortization shown separately below) 494,321 371,985 1,511,902 1,134,736 Selling, general, and administrative expenses 480,427 448,634 1,449,844 1,343,872 Depreciation and intangible asset amortization 406,332 480,010 1,281,871 1,424,090 Merger, restructuring, integration, and other 6,285 ( 6,723 ) 2,968 18,588 Goodwill impairment 149,385 — 149,385 — Operating income (loss) 67,341 23,096 353,898 4,837 Interest expense, net ( 30,084 ) ( 133,275 ) ( 118,042 ) ( 347,524 ) Loss on extinguishment of debt — ( 36,957 ) — ( 37,113 ) Other income (expense) ( 156,116 ) 1,511 ( 153,157 ) 4,847 Income (loss) before income taxes and equity in net earnings (losses) of equity method investee ( 118,859 ) ( 145,625 ) 82,699 ( 374,953 ) Income tax benefit (expense) ( 1,534 ) 36,496 ( 58,982 ) 92,080 Income (loss) before equity in net earnings (losses) of equity method investee ( 120,393 ) ( 109,129 ) 23,717 ( 282,873 ) Equity in net earnings (losses) of equity method investee ( 1,594 ) — ( 2,542 ) — Net income (loss) $ ( 121,987 ) $ ( 109,129 ) $ 21,175 $ ( 282,873 ) Net income (loss) per share - basic: Common Stock $ ( 0.13 ) $ ( 0.13 ) $ 0.02 $ ( 0.35 ) Class B Common Stock $ ( 0.13 ) $ ( 0.13 ) $ 0.02 $ ( 0.35 ) Weighted-average shares outstanding - basic: Common Stock 850,230 766,814 847,456 765,162 Class B Common Stock 54,745 54,745 54,745 54,745 Net income (loss) per share - diluted: Common Stock $ ( 0.13 ) $ ( 0.13 ) $ 0.02 $ ( 0.35 ) Class B Common Stock $ ( 0.13 ) $ ( 0.13 ) $ 0.02 $ ( 0.35 ) Weighted-average shares outstanding - diluted: Common Stock 850,230 766,814 857,696 765,162 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 September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net income (loss) $ ( 121,987 ) $ ( 109,129 ) $ 21,175 $ ( 282,873 ) Other comprehensive income (loss), net of tax: Cash flow hedges 4,088 11,790 21,741 34,827 Other ( 15 ) ( 2 ) ( 29 ) 882 Total other comprehensive income (loss), net of tax 4,073 11,788 21,712 35,709 Comprehensive income (loss) $ ( 117,914 ) $ ( 97,341 ) $ 42,887 $ ( 247,164 ) See Notes to Condensed Consolidated Financial Statements 3 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands) Three Months Ended September 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 856,642 54,745 $ 8,566 $ 547 $ 7,295,665 $ ( 3,874,045 ) $ ( 51,334 ) $ 3,379,399 Net income (loss) — — — — — ( 121,987 ) — ( 121,987 ) Other comprehensive income (loss), net of tax — — — — — — 4,073 4,073 Issuance of common stock 1,322 — 13 — ( 13 ) — — — Dividends — — — — — ( 32,028 ) — ( 32,028 ) Share-based compensation expense — — — — 16,692 — — 16,692 Contingent forward purchase contract — — — — ( 41,938 ) — — ( 41,938 ) Transactions related to employee share-based compensation plans and other 666 — 7 — 3,095 ( 459 ) — 2,643 Ending balance 858,630 54,745 $ 8,586 $ 547 $ 7,273,501 $ ( 4,028,519 ) $ ( 47,261 ) $ 3,206,854 Three Months Ended September 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 776,310 54,745 $ 7,763 $ 547 $ 6,665,145 $ ( 3,724,139 ) $ ( 94,694 ) $ 2,854,622 Net income (loss) — — — — — ( 109,129 ) — ( 109,129 ) Other comprehensive income (loss), net of tax — — — — — — 11,788 11,788 Dividends — — — — — ( 29,186 ) — ( 29,186 ) Share-based compensation expense — — — — 16,242 — — 16,242 Transactions related to employee share-based compensation plans and other 100 — 1 — ( 3,512 ) ( 510 ) — ( 4,021 ) Ending balance 776,410 54,745 $ 7,764 $ 547 $ 6,677,875 $ ( 3,862,964 ) $ ( 82,906 ) $ 2,740,316 See Notes to Condensed Consolidated Financial Statements 4 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands) Nine Months Ended September 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) — — — — — 21,175 — 21,175 Other comprehensive income (loss), net of tax — — — — — — 21,712 21,712 Issuance of common stock 6,026 — 60 — 15,308 — — 15,368 Dividends — — — — — ( 95,730 ) — ( 95,730 ) Share-based compensation expense — — — — 49,644 — — 49,644 Contingent forward purchase contract — — — — ( 41,938 ) — — ( 41,938 ) Transactions related to employee share-based compensation plans and other 5,778 — 58 — ( 10,780 ) ( 1,374 ) — ( 12,096 ) Ending balance 858,630 54,745 $ 8,586 $ 547 $ 7,273,501 $ ( 4,028,519 ) $ ( 47,261 ) $ 3,206,854 Nine Months Ended September 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) — — — — — ( 282,873 ) — ( 282,873 ) Other comprehensive income (loss), net of tax — — — — — — 35,709 35,709 Dividends, including dividends reinvested in common stock — — — — 4 ( 87,506 ) — ( 87,502 ) Share-based compensation expense — — — — 45,848 — — 45,848 Transactions related to employee share-based compensation plans and other 5,396 — 54 — ( 8,740 ) ( 1,516 ) — ( 10,202 ) Ending balance 776,410 54,745 $ 7,764 $ 547 $ 6,677,875 $ ( 3,862,964 ) $ ( 82,906 ) $ 2,740,316 See Notes to Condensed Consolidated Financial Statements 5 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30, 2022 2021 Cash flows from operating activities: Net income (loss) $ 21,175 $ ( 282,873 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and intangible asset amortization 1,281,871 1,424,090 Amortization of deferred subscriber acquisition costs 118,233 91,364 Amortization of deferred subscriber acquisition revenue ( 175,680 ) ( 122,908 ) Share-based compensation expense 49,644 45,848 Deferred income taxes 48,138 ( 101,986 ) Provision for losses on receivables and inventory 68,417 29,579 Loss on extinguishment of debt — 37,113 Goodwill impairment 149,385 — Intangible asset impairments — 17,883 Unrealized (gain) loss on interest rate swap contracts ( 312,603 ) ( 115,090 ) Change in fair value of financial instruments 157,550 — Other non-cash items, net 104,293 99,654 Changes in operating assets and liabilities, net of effects of acquisitions: Deferred subscriber acquisition costs ( 304,404 ) ( 234,715 ) Deferred subscriber acquisition revenue 255,760 201,541 Other, net ( 140,710 ) 65,853 Net cash provided by (used in) operating activities 1,321,069 1,155,353 Cash flows from investing activities: Dealer generated customer accounts and bulk account purchases ( 500,487 ) ( 512,304 ) Subscriber system asset expenditures ( 572,595 ) ( 518,780 ) Purchases of property and equipment ( 135,677 ) ( 126,678 ) Acquisition of businesses, net of cash acquired ( 13,096 ) ( 16,411 ) Proceeds from sale of business, net of cash sold 26,729 — Other investing, net ( 13,664 ) 3,524 Net cash provided by (used in) investing activities ( 1,208,790 ) ( 1,170,649 ) Cash flows from financing activities: Proceeds from long-term borrowings 480,000 1,010,729 Proceeds from receivables facility 212,166 117,922 Repayment of long-term borrowings, including call premiums ( 527,595 ) ( 1,052,123 ) Repayment of receivables facility ( 81,487 ) ( 28,215 ) Dividends on common stock ( 95,164 ) ( 87,164 ) Payments on finance leases ( 33,749 ) ( 22,566 ) Payments on interest rate swaps ( 26,953 ) ( 42,189 ) Deferred financing costs ( 233 ) ( 12,358 ) Other financing, net ( 12,757 ) ( 8,117 ) Net cash provided by (used in) financing activities ( 85,772 ) ( 124,081 ) Cash and cash equivalents and restricted cash and restricted cash equivalents: Net increase (decrease) during the period 26,507 ( 139,377 ) Beginning balance 33,277 207,747 Ending balance $ 59,784 $ 68,370 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. 7 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. The Company considered recent impacts from macroeconomic conditions such as inflationary pressures, rising interest rates, and supply chain disruptions as well as the on-going impacts of the COVID-19 Pandemic (as defined below) 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. COVID-19 Pandemic - During March 2020, the World Health Organization declared the outbreak of a novel coronavirus as a pandemic (the “COVID-19 Pandemic”). As of September 30, 2022, the Company’s response plan has not materially changed from that described in the 2021 Annual Report. Recent Accounting Pronouncements Recently Adopted Accounting Pronouncements Reference Rate Reform - 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 may be applied prospectively to contract modifications made on or before December 31, 2022. As of September 30, 2022, this guidance had no impact on the condensed consolidated financial statements. However, the Company will continue to evaluate this guidance. Recently Issued Accounting Pronouncements Vintage Disclosures for Financing Receivables - ASU 2022-02, Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , requires reporting entities to disclose current-period gross write-offs by year of origination for financing receivables, among other requirements. This guidance becomes effective January 1, 2023, and should be applied prospectively. Early adoption is permitted. The Company is currently evaluating this guidance. Fair Value of Equity Investments - ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, states an entity should not consider the contractual sale restriction when measuring the equity security’s fair value and introduces new disclosure requirements related to such equity securities. This guidance becomes effective January 1, 2024, and should be applied prospectively with any adjustments recognized in earnings and disclosed on the date of adoption. Early adoption is permitted. The Company is currently evaluating this guidance. Supplier Finance Program Obligations - ASU 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, requires that a reporting entity who is a buyer in a supplier finance program disclose qualitative and quantitative information about its supplier finance programs, including a roll-forward of the obligations. This guidance becomes effective January 1, 2023, and should be applied retrospectively, except for the amendment on roll-forward information, which becomes effective January 1, 2024, and should be applied prospectively. Early adoption is permitted. The Company is currently evaluating 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 Cash and cash equivalents that are restricted for a specific purpose and cannot be presented within the general cash and cash equivalents account are included in restricted cash and restricted cash equivalents, which is reflected in prepaid expenses and other current assets. The following table reconciles the amounts below reported in the Condensed Consolidated Balance Sheets to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows: (in thousands) September 30, 2022 December 31, 2021 Cash and cash equivalents $ 45,734 $ 24,453 Restricted cash and restricted cash equivalents 14,050 8,824 Ending balance $ 59,784 $ 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) September 30, 2022 December 31, 2021 Gross carrying amount $ 6,054,439 $ 5,499,703 Accumulated depreciation ( 3,014,862 ) ( 2,632,175 ) Subscriber system assets, net $ 3,039,577 $ 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, as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Depreciation of subscriber system assets $ 138,975 $ 129,131 $ 409,583 $ 376,037 Amortization of deferred subscriber acquisition costs $ 42,244 $ 32,534 $ 118,233 $ 91,364 9 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Accrued Expenses and Other Current Liabilities (in thousands) September 30, 2022 December 31, 2021 Accrued interest $ 69,435 $ 124,579 Payroll-related accruals 198,667 196,165 Operating lease liabilities 31,022 37,359 Fair value of interest rate swaps (1) — 50,360 Fair value of other financial instruments (2) 199,488 — Other accrued liabilities 410,560 328,782 Accrued expenses and other current liabilities $ 909,172 $ 737,245 ________________ (1) Refer to Note 8 “Derivative Financial Instruments” for presentation of the aggregate fair value of interest rate swaps. (2) Represents a contingent forward purchase contract (the “Forward Contract”) (as defined and discussed in Note 10 “Equity”). 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 September 30, 2022, the Company incurred $ 295 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, as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Radio conversion costs $ 3,082 $ 61,648 $ 29,457 $ 202,075 Radio conversion revenue $ 7,160 $ 9,353 $ 23,051 $ 30,416 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 and other 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 - All highly liquid investments with original maturities of three months or less from the time of purchase are considered to be 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 September 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 first lien revolving credit facility (the “First Lien Revolving Credit Facility”) and its uncommitted receivables securitization financing agreement (the “Receivables Facility”) approximate their fair values as interest rates on these borrowings approximate current market rates. September 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 $ 9,707,310 $ 9,043,489 $ 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. 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. Forward Contract - The Forward Contract is reported at fair value within accrued and other current liabilities as disclosed above. The fair value was calculated using a discounted cash flow analysis as the difference between the present value of the cash consideration to be paid and the value of the Common Stock to be tendered as of the measurement dates. The resulting fair value is classified as Level 2 fair value measurements. During the three and nine months ended September 30, 2022, changes in fair value of $ 158 million are included in other income (expense). Refer to Note 10 “Equity” for additional information. 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. September 30, 2022 December 31, 2021 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Retail installment contract receivables, net $ 497,799 $ 375,653 $ 330,605 $ 255,147 2. REVENUE AND RECEIVABLES Revenue The Company allocates the 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 September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 CSB: Monitoring and related services $ 1,021,811 $ 975,810 $ 3,026,281 $ 2,892,291 Installation, product, and other 88,829 59,790 235,437 204,561 Total CSB 1,110,640 1,035,600 3,261,718 3,096,852 Commercial: Monitoring and related services 137,830 122,579 400,448 352,384 Installation, product, and other 176,468 158,823 501,513 476,887 Total Commercial 314,298 281,402 901,961 829,271 Solar: Installation, product, and other 179,153 — 586,189 — Total Solar 179,153 — 586,189 — Total revenue $ 1,604,091 $ 1,317,002 $ 4,749,868 $ 3,926,123 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 when collectability is probable. 11 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. 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. 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. Three Months Ended September 30, Nine Months Ended September 30, ( in thousands ) 2022 2021 2022 2021 Amortization of deferred subscriber acquisition revenue $ 63,796 $ 45,020 $ 175,680 $ 122,908 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. 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 revenue is recognized when services are provided to the customer. 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. 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 $ 29 million and $ 107 million during the three and nine months ended September 30, 2022, respectively. In the second quarter of 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. During the nine months ended September 30, 2022, charges to the provision for credit losses and revenue associated with the estimated amount of receivables and rebates that are not expected to be collected from this lender were $ 11 million. 12 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Product and System Sales Revenue from product and system sales is included in installation, product, and other revenue. Cost of revenue from product and system sales is exclusive of depreciation and amortization. Three Months Ended September 30, Nine Months Ended September 30, ( in thousands ) 2022 2021 2022 2021 Revenue from product and system sales $ 291,367 $ 171,030 $ 891,129 $ 551,652 Cost of revenue from product and system sales $ 225,575 $ 145,397 $ 666,869 $ 452,852 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: Nine Months Ended September 30, (in thousands) 2022 2021 Beginning balance $ 54,032 $ 68,342 Provision for credit losses 69,997 40,105 Write-offs, net of recoveries (1) ( 62,801 ) ( 48,337 ) Ending balance $ 61,228 $ 60,110 ________________ (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. 13 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 September 30, 2022, the current and delinquent billed retail installment contract receivables were not material. The balance of unbilled retail installment contract receivables comprises: (in thousands) September 30, 2022 December 31, 2021 Retail installment contract receivables, gross $ 498,607 $ 331,512 Allowance for credit losses ( 808 ) ( 907 ) Retail installment contract receivables, net $ 497,799 $ 330,605 Balance Sheet Classification: Accounts receivable, net $ 156,806 $ 100,385 Other assets 340,993 230,220 Retail installment contract receivables, net $ 497,799 $ 330,605 As of September 30, 2022 and December 31, 2021, retail installment contract receivables, net, used as collateral for borrowings under the Receivables Facility were $ 462 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 nine months ended September 30, 2022 and 2021, contract assets recognized were not material. The balance of contract assets for residential transactions comprises: (in thousands) September 30, 2022 December 31, 2021 Contract assets, gross $ 64,263 $ 106,810 Allowance for credit losses ( 6,220 ) ( 12,300 ) Contract assets, net $ 58,043 $ 94,510 Balance Sheet Classification: Prepaid expenses and other current assets $ 41,284 $ 58,452 Other assets 16,759 36,058 Contract assets, net $ 58,043 $ 94,510 14 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. • 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 Company’s 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 changes in fair value of certain financial instruments, 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 September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 CSB $ 1,110,640 $ 1,035,600 $ 3,261,718 $ 3,096,852 Commercial 314,298 281,402 901,961 829,271 Solar 179,153 — 586,189 — Total Revenue $ 1,604,091 $ 1,317,002 $ 4,749,868 $ 3,926,123 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 September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Adjusted EBITDA by segment: CSB $ 592,107 $ 528,680 $ 1,733,353 $ 1,558,055 Commercial 34,310 25,630 89,303 80,251 Solar ( 6,476 ) — ( 4,469 ) — Total $ 619,941 $ 554,310 $ 1,818,187 $ 1,638,306 Reconciliation: Total segment Adjusted EBITDA $ 619,941 $ 554,310 $ 1,818,187 $ 1,638,306 Less: Interest expense, net 30,084 133,275 118,042 347,524 Depreciation and intangible asset amortization 406,332 480,010 1,281,871 1,424,090 Amortization of deferred subscriber acquisition costs 42,244 32,534 118,233 91,364 Amortization of deferred subscriber acquisition revenue ( 63,796 ) ( 45,020 ) ( 175,680 ) ( 122,908 ) Share-based compensation expense 16,692 16,242 49,644 45,848 Merger, restructuring, integration, and other 6,285 ( 6,723 ) 2,968 18,588 Goodwill impairment (1) 149,385 — 149,385 — Loss on extinguishment of debt — 36,957 — 37,113 Change in fair value of financial instruments (2) 157,550 — 157,550 — Radio conversion costs, net ( 4,078 ) 52,295 6,406 171,659 Acquisition related adjustments (3) ( 1,226 ) 1,526 36,397 1,049 Equity in net earnings (losses) of equity method investee ( 1,594 ) — ( 2,542 ) — Other (4) 922 ( 1,161 ) ( 6,786 ) ( 1,068 ) Income (loss) before income taxes and equity in net earnings (losses) of equity method investee $ ( 118,859 ) $ ( 145,625 ) $ 82,699 $ ( 374,953 ) ________________ (1) Represents an impairment charge associated with the Company’s Solar reporting unit. Refer to Note 6 “Goodwill and Other Intangible Assets.” (2) Represents the change in fair value of the Forward Contract (as defined and discussed in Note 10 “Equity”). (3) 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. (4) During 2022, primarily represents the gain on sale of a business. 4. ACQUISITIONS AND DISPOSITION During the nine months ended September 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 the Equity Consideration 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. 16 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Company issued approximately 2.6 million shares of the Delayed Shares in June 2022 and approximately 1.3 million shares of the Delayed Shares in September 2022. The remaining Delayed Shares are expected to be issued in December 2022. There were no material adjustments to the preliminary purchase price allocation during the nine months ended September 30, 2022. Refer to Note 6 “Goodwill and Other Intangible Assets” for information on an impairment loss recognized during the third quarter of 2022 associated with goodwill acquired in the ADT Solar Acquisition. Disposition During the nine months ended September 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. 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. The Company recognizes its proportionate share of the investee’s net income or loss in equity in net earnings (losses) of equity method investee. 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 September 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”) Canopy meets the definition of a VIE because the Company holds a variable interest through its 40 % investment in Canopy’s preferred class of equity (the “Canopy Investment”) 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. As a result, the Company accounts for its investment in Canopy under the equity method of accounting. The Company records its proportionate share of Canopy’s net income or loss on a one-month delay. As of September 30, 2022, the Canopy Investment’s carrying amount was approximately $ 8 million and is presented in other assets. The balance reflects the Initial Contribution as well as the Company’s proportionate share of Canopy’s net loss during the period. As of September 30, 2022, Canopy’s net assets primarily consisted of cash. Canopy Commercial Agreements In connection with the Canopy Investment, 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 and Canopy are also parties to a trade name licensing agreement. 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) 16,863 6,816 16,110 39,789 Impairment (2) — — ( 149,385 ) ( 149,385 ) Disposition — ( 11,731 ) — ( 11,731 ) Balance as of September 30, 2022 $ 4,932,695 $ 327,930 $ 561,451 $ 5,822,076 ________________ (1) Includes the impact of measurement period adjustments. During the nine months ended September 30, 2022, measurement period adjustments were not material. (2) The Company had no accumulated goodwill impairment losses as of December 31, 2021. Solar Goodwill Impairment As discussed in the Company’s 2021 Annual Report, the Company acquired ADT Solar in December 2021 and assigned all goodwill to the newly created Solar reporting unit. During the third quarter of 2022, as a result of ADT Solar’s underperformance of recent operating results in successive quarters relative to expectations, as well as current macroeconomic conditions, including the impact of the Federal Reserve further increasing the risk-free interest rate, the Company performed an interim impairment quantitative assessment on the Solar reporting unit as of September 30, 2022. Based on the results of the Company’s interim goodwill impairment quantitative analysis, the Company recorded a non-cash goodwill impairment charge of $ 149 million in the Condensed Consolidated Statements of Operations during the third quarter of 2022. The Company estimated the fair value of the Solar reporting unit using the income approach, which included significant assumptions such as forecasted revenue, Adjusted EBITDA margins, and discount rates, as well as other assumptions including operating expenses and cash flows. In developing these assumptions, the Company relied on various factors including operating results, business plans, economic projections, anticipated future cash flows, and other market data. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying judgments and factors may include such items as a prolonged downturn in the business environment, changes in economic conditions that significantly differ from the Company’s assumptions in timing or degree, volatility in equity and debt markets resulting in higher discount rates, and unexpected regulatory changes. There are inherent uncertainties related to these judgments and factors that may ultimately impact the estimated fair value determinations. As the carrying value of the Solar reporting unit approximates its fair value following the impairment charge, the Solar reporting unit is considered at risk of future impairment. If the Company’s assumptions are not realized, or if there are future changes in any of the assumptions due to a change in economic conditions or otherwise, it is possible that a further impairment charge may need to be recorded in the future. 18 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Other Intangible Assets September 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 $ 6,898,733 $ ( 4,068,817 ) $ 2,829,916 $ 8,719,363 $ ( 5,753,345 ) $ 2,966,018 Dealer relationships 1,518,020 ( 518,932 ) 999,088 1,518,020 ( 459,248 ) 1,058,772 Other 224,783 ( 200,835 ) 23,948 263,133 ( 207,572 ) 55,561 Total definite-lived intangible assets 8,641,536 ( 4,788,584 ) 3,852,952 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 $ 9,974,536 $ ( 4,788,584 ) $ 5,185,952 $ 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) 510,870 Amortization ( 648,335 ) Other ( 1,637 ) Balance as of September 30, 2022 $ 2,829,916 ________________ (1) The weighted-average amortization period for customer contract additions was 14 years. During the nine months ended September 30, 2022, the Company paid $ 500 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. Contracts and related customer relationships includes customer accounts purchased from certain other third parties during the nine months ended September 30, 2022 for an aggregate contractual purchase price of $ 101 million, subject to reduction based on customer retention. The Company paid initial cash in the aggregate amount of $ 78 million at the closings, 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 nine months ended September 30, 2022. Aggregate Amortization Expense: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2022 2021 2022 2021 Definite-lived intangible asset amortization expense $ 215,239 $ 301,828 $ 717,924 $ 901,363 19 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. DEBT The Company’s debt is comprised of the following (in thousands) : Description Issued Maturity Interest Rate (1) Interest Payable September 30, 2022 December 31, 2021 First Lien Term Loan due 2026 9/23/2019 9/23/2026 Adj. LIBOR + 2.75 % Quarterly $ 2,737,217 $ 2,758,058 First Lien Revolving Credit Facility 3/16/2018 6/23/2026 Adj. LIBOR + 2.75 % Quarterly — 25,000 Second Lien Notes due 2028 1/28/2020 1/15/2028 6.250 % 1/15 and 7/15 1,300,000 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 8/20/2027 Adj. Daily SOFR + 0.85 % Monthly 329,655 199,056 Other debt (2) 2,958 4,732 Total debt principal, excluding finance leases 9,919,742 9,836,758 Plus: Finance lease liabilities (3) 95,750 93,080 Less: Unamortized debt discount, net ( 14,244 ) ( 16,678 ) Less: Unamortized deferred financing costs ( 54,471 ) ( 64,014 ) Less: Unamortized purchase accounting fair value adjustment and other ( 143,717 ) ( 156,456 ) Total debt 9,803,060 9,692,690 Less: Current maturities of long-term debt, net of unamortized debt discount ( 857,746 ) ( 117,592 ) Long-term debt $ 8,945,314 $ 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. Significant changes in the Company’s debt during the nine months ended September 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 the First Lien Revolving Credit Facility. During the nine months ended September 30, 2022, the Company borrowed $ 480 million and repaid $ 505 million under its First Lien Revolving Credit Facility. As of September 30, 2022, the Company had $ 575 million in available borrowing capacity under the First Lien Revolving Credit Facility. 20 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Term Loan A Facility In September 2022, Prime Security Services Borrower, LLC (“Prime Borrower”), a Delaware limited liability company and a wholly owned indirect subsidiary of the Company, as borrower, and The ADT Corporation, a Delaware corporation and a wholly owned direct subsidiary of Prime Borrower (together with Prime Borrower, the “Term Loan A Facility Borrowers”), entered into a debt commitment letter (the “Commitment Letter”) with various lenders, pursuant to which the lenders have committed, at the option of the Term Loan A Facility Borrowers (in their sole discretion) and subject to the satisfaction or waiver of customary conditions, to provide the Term Loan A Facility Borrowers up to an aggregate principal amount of $ 600 million of term loans under a senior secured term loan A facility (the “Term Loan A Facility”) under a term loan credit agreement (the “Term Loan A Credit Agreement”) on or before March 15, 2023 (the “Commitment Termination Date”). On or before the Commitment Termination Date, the Term Loan A Facility Borrowers may, but are not required to, execute the Term Loan A Credit Agreement and incur indebtedness under the Term Loan A Facility (the “Execution Date”). Additionally, at the option of the Term Loan A Facility Borrowers, the commitments set forth in the Commitment Letter may be terminated at any time prior to the Commitment Termination Date. The proceeds of any borrowings under the Term Loan A Facility are required to be used to redeem a portion of the 4.125 % senior notes due June 15, 2023 issued by the ADT Corporation (the “ADT Notes due 2023”). The Term Loan A Facility will have a maturity date of five years from the Execution Date and will be subject to a springing maturity of 91 days prior to the maturity date of certain long-term indebtedness of Prime Borrower and its subsidiaries if, on such date, the aggregate principal amount of such indebtedness equals or exceeds $ 100 million. The Term Loan A Facility will require scheduled quarterly principal payments in annual amounts equal to 5.00 % of the original principal amount of the Term Loan A Facility, with the balance payable at maturity. The Term Loan A Facility Borrowers may make voluntary prepayments on the Term Loan A Facility at any time prior to maturity at par. Borrowings under the Term Loan A Facility, if any, will bear interest at a rate equal to, at Prime Borrower’s option, either (a) a term SOFR rate plus an adjustment of 0.10 % (“Adjusted SOFR”) or (b) a base rate (“Base Rate”) determined by reference to the highest of (i) the federal funds rate plus 0.50 % per annum, (ii) the prime rate published by The Wall Street Journal, and (iii) the one-month Adjusted SOFR plus 1.00 % per annum , in each case, plus an applicable margin of 2.50 % per annum for Adjusted SOFR loans and 1.50 % per annum for Base Rate loans, subject to adjustments based on certain specified net first lien leverage ratios. Indebtedness incurred under the Term Loan A Facility will be guaranteed, jointly and severally, on a senior secured first-priority basis, by substantially all of Prime Borrower’s wholly owned material domestic subsidiaries, and by Prime Borrower’s direct parent, on a limited recourse basis, and will be secured by a pledge of Prime Borrower’s capital stock directly held by its direct parent and by first-priority security interests in substantially all of the assets of Prime Borrower and the subsidiary guarantors, in each case subject to certain permitted liens and exceptions. The Term Loan A Facility will be subject to customary mandatory prepayment provisions, covenants and restrictions, including a financial maintenance covenant requiring the Term Loan A Facility Borrowers to comply as of the last day of each fiscal quarter with a specified maximum consolidated net first lien leverage ratio. As of September 30, 2022, the Company has not incurred indebtedness under the Term Loan A Facility. Fees associated with the Term Loan A Facility were not material during the three and nine months ended September 30, 2022. ADT Notes due 2023 As of September 30, 2022, the Company had an outstanding balance of $ 700 million under its ADT Notes due 2023 that was classified as a current liability, net of any unamortized debt discount. The Company is required to use borrowings under the Term Loan A Facility to redeem a portion of the ADT Notes due 2023 and pay related fees and expenses incurred in connection with the transaction. 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. 21 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 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 nine months ended September 30, 2022, the Company received proceeds of $ 212 million and repaid $ 81 million under the Receivables Facility. As of September 30, 2022, the Company had an uncommitted available borrowing capacity under the Receivables Facility of $ 70 million. The Receivables Facility did not have a material impact to the Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2022 and 2021, respectively. 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. 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 Company consolidates the SPE’s assets, liabilities, and financial results of operations. The SPE’s assets and liabilities primarily consist of a portion of the Company’s unbilled retail installment contract receivables, net, as discussed in Note 2 “Revenue and Receivables,” and borrowings under the Receivables Facility, as presented above. SOFR Transition By June 2023 (the “SOFR Transition Date”), SOFR will replace the forward LIBOR as the applicable benchmark rate for all existing and future issuances of the Company’s debt instruments with a variable rate component. Existing instruments under the First Lien Credit Agreement will continue to be based on LIBOR until the SOFR Transition Date, unless transitioned to SOFR prior to such date pursuant to the terms of the First Lien Credit Agreement. In addition, any modification, such as a repricing, or any new debt issuances with a variable rate component, will utilize SOFR. 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. • Designated as cash flow hedges: Unrealized gains and losses are recognized as a component of accumulated other comprehensive income (loss) (“AOCI”) and are reclassified into interest expense, net, in the same period in which the related interest on debt affects earnings. 22 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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. Interest Rate Swaps: 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. In 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. As of September 30, 2022, t he Company’s interest rate swaps consisted of the following (in thousands) : Execution Maturity Designation Notional Amount October 2019 September 2026 Not designated $ 2,800,000 Fair Value of Interest Rate Swaps: Balance Sheet Classification (in thousands) September 30, 2022 December 31, 2021 Prepaid expenses and other current assets $ 58,928 $ — Other assets $ 135,339 $ — Accrued expenses and other current liabilities $ — $ 50,360 Other liabilities $ — $ 67,976 Unrealized Gain (Loss) on Interest Rate Swaps: Three Months Ended September 30, Nine Months Ended September 30, Statement of Operations Classification (in thousands) 2022 2021 2022 2021 Interest expense, net $ 108,041 $ 23,033 $ 312,603 $ 115,090 Reclassifications out of AOCI: The following reclassifications out of AOCI relate to previously designated cash flow hedges: Three Months Ended September 30, Nine Months Ended September 30, ( in thousands ) 2022 2021 2022 2021 Reclassifications to interest expense $ 5,389 $ 15,581 $ 28,656 $ 46,024 Reclassifications to income tax benefit $ ( 1,301 ) $ ( 3,791 ) $ ( 6,915 ) $ ( 11,197 ) As of September 30, 2022 and December 31, 2021, AOCI, net of tax, related to previously designated cash flow hedges was $ 50 million and $ 71 million, respectively. As of September 30, 2022, approximately $ 20 million of AOCI associated with previously designated cash flow hedges is estimated to be reclassified to interest expense, net, within the next twelve months. 23 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Other Information During the nine months ended September 30, 2022 and 2021, the Company paid $ 27 million and $ 42 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 nine months ended September 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. The Company’s income tax expense for the three months ended September 30, 2022 was $ 2 million, resulting in an effective tax rate for the period of ( 1.3 )%. The effective tax rate primarily represents the federal statutory rate of 21.0 % plus a state statutory tax rate, net of federal benefits, of 6.5 %, favorable impacts from research and development (“R&D”) credits and other items, partially offset by an unfavorable impact related to the fair value adjustment of the Forward Contract. The Company’s income tax benefit for the three months ended September 30, 2021 was $ 36 million, resulting in an effective tax rate for the period of 25.1 %. The effective tax rate primarily represents the federal statutory rate of 21.0 % and a state statutory tax rate, net of federal benefits, of 3.1 %. The Company’s income tax expense for the nine months ended September 30, 2022 was $ 59 million, resulting in an effective tax rate for the period of 71.3 %. The effective tax rate primarily represents the federal statutory rate of 21.0 %, a state statutory tax rate, net of federal benefits, of 5.0 %, unfavorable impacts related to the fair value adjustment of the Forward Contract and other items, partially offset by favorable impacts from R&D credits and other items. The Company’s income tax benefit for the nine months ended September 30, 2021 was $ 92 million, resulting in an effective tax rate for the period of 24.6 %. The effective tax rate primarily represents the federal statutory tax rate of 21.0 %, a state statutory tax rate, net of federal benefits, of 2.9 %, and a 0.6 % favorable impact of share-based compensation. 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. 24 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Inflation Reduction Act The Inflation Reduction Act (the “IRA”) was signed into law in August 2022. The IRA, among other provisions, implements (i) a 15% corporate alternative minimum tax (“CAMT”) on book income for corporations whose average annual adjusted financial statement income during the most recently-completed three-year period exceeds $1.0 billion, (ii) a 1% excise tax on net stock repurchases, and (iii) several tax incentives to promote clean energy including an extension of the investment tax credit. Both the CAMT and the excise tax provisions are effective for tax years beginning after December 31, 2022, and as of September 30, 2022, the Company does not anticipate any material impact. 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. Each share of Class B Common Stock has equal status and rights to dividends as a share of Common Stock. The holder of Class B Common Stock has 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. State Farm Strategic Investment and Tender Offer On September 5, 2022, the Company entered into a securities purchase agreement with State Farm Fire & Casualty Company (“State Farm”) (the “State Farm Securities Purchase Agreement”), pursuant to which the Company agreed to issue and sell in a private placement to State Farm 133,333,333 shares of the Company’s Common Stock (the “State Farm Shares”) at a per share price of $ 9.00 for an aggregate purchase price of $ 1.2 billion (the “State Farm Strategic Investment”). On September 12, 2022, and in connection with the State Farm Strategic Investment, the Company commenced a tender offer to purchase up to 133,333,333 shares of the Company’s Common Stock (including shares issued upon conversion of shares of Class B Common Stock ) (the “Tender Shares”) at a price of $ 9.00 per share (the “Tender Offer”) using proceeds from the State Farm Strategic Investment. The State Farm Strategic Investment closed on October 13, 2022 (the “Closing”), and the Company issued and sold the State Farm Shares at a price of $ 9.00 per share. After giving effect to the State Farm Strategic Investment and the Tender Offer, State Farm owned approximately 15 % of the Company’s issued and outstanding Common Stock (assuming conversion of Class B Common Stock), and as a result, became a related party at the Closing. State Farm Investor Rights Agreement At the Closing, the Company and State Farm entered into an Investor Rights Agreement (the “State Farm Investor Rights Agreement”), pursuant to which the Board of Directors of the Company (the “Board”) increased its size by one director and appointed a designee of State Farm as a member of the Board. Pursuant to the terms of the State Farm Investor Rights Agreement, State Farm will also be bound by customary transfer and standstill restrictions and drag-along rights, and be afforded customary registration rights with respect to the State Farm Shares. In particular, State Farm (a) will be prohibited, subject to certain customary exceptions, from transferring any of the State Farm Shares until the earlier of (i) the three-year anniversary of the Closing and (ii) the date on which the State Farm Development Agreement has been validly terminated, other than in the event of termination by the Company for a material breach thereof by State Farm, and (b) will be subject to certain standstill restrictions, including that State Farm will be restricted from acquiring additional equity securities of the Company if such acquisition would result in State Farm (and its affiliates) acquiring beneficial ownership in excess of 18 % of the issued and outstanding Common Stock, taking into account on an as-converted 25 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) basis the issued and outstanding Class B Common Stock, until five (5) days after the date that no designee of State Farm serves on the Board and State Farm has no rights (or has irrevocably waived its right) to nominate a designee to the Board. Notwithstanding the standstill restrictions described above, State Farm will not be restricted from acquiring shares of Common Stock or other equity securities of the Company from Prime Security Services TopCo Parent, L.P. and its affiliates so long as State Farm and its affiliates would not, subject to certain exceptions, beneficially own in excess of 25 % of the issued and outstanding Common Stock, taking into account on an as-converted basis the issued and outstanding Class B Common Stock, as a result of such acquisition. In addition, under the terms of the State Farm Investor Rights Agreement, in the event that the Company proposes to issue and sell shares of Common Stock, Class B Common Stock, or other equity securities of the Company to certain homeowners’ insurance and reinsurance companies, State Farm will have a right of first refusal with respect to such proposed issuance and sale on the same terms and conditions (the “ROFR”). The ROFR will terminate upon the earliest to occur of (i) State Farm and its permitted transferees no longer collectively owning shares of Common Stock equal to at least 50 % of the State Farm Shares, (ii) the termination of the State Farm Development Agreement by the Company for a material breach by State Farm and (iii) to the extent that the State Farm Development Agreement does not remain in effect on such date, the five (5) year anniversary of the Closing. State Farm Development Agreement At the Closing, the Company, ADT LLC (an indirect wholly owned subsidiary of the Company), and State Farm entered into a Development Agreement (the “State Farm Development Agreement”) pursuant to which State Farm committed up to $ 300 million to an opportunity fund that will fund certain product and technology innovation, customer growth, and marketing initiatives to be agreed between State Farm and the Company (the “Opportunity Fund”). Additionally at Closing, the Company received $ 100 million of the Opportunity Fund, which will be restricted until such time as the Company uses the funds in accordance with the State Farm Development Agreement. The Company’s use of the funds is also subject to approval by State Farm. Tender Offer Concurrently with the execution of the State Farm Securities Purchase Agreement, (i) Apollo delivered to the Company a Tender and Support Agreement, pursuant to which Apollo agreed to collectively tender (and not withdraw) no fewer than 133,333,333 shares of Common Stock in the Tender Offer (the “Apollo Support Agreement”), and (ii) Google delivered to the Company a Support Agreement, pursuant to which Google agreed to not convert and tender any of its shares of Class B Common Stock. The Tender Offer is considered a contingent forward purchase contract (the “Forward Contract”), which is recorded at fair value in the Condensed Consolidated Balance Sheet. The fair value of the Forward Contract is estimated as the difference between the present value of the cash consideration to be paid and the value of the Company’s Common Stock to be tendered. At the commencement of the Tender Offer, the Company recorded a liability and a reduction to additional paid in capital of $ 42 million, which is a non-cash financing activity for the three and nine months ended September 30, 2022. Changes in fair value since inception through September 30, 2022 of $ 158 million are recognized in other income (expense). As of September 30, 2022, the fair value of the Forward Contract was $ 199 million, which is reflected in accrued and other current liabilities. Fees associated with the Forward Contract were not material during the three and nine months ended September 30, 2022. In the fourth quarter of 2022, the Company expects to record a gain of approximately $ 95 million related to changes in fair value of the Forward Contract. The Tender Offer expired on October 20, 2022. On October 26, 2022, the Company used proceeds from the State Farm Strategic Investment to repurchase an aggregate of 133,333,333 shares of the Company’s Common Stock at a purchase price of $ 9.00 per share for $ 1.2 billion, excluding fees and expenses, subject to the terms and conditions described in the Offer to Purchase dated September 12, 2022 (as amended from time to time, the “Offer to Purchase”). The Tender Shares were subject to the “odd lot” priority and proration provisions described in the Offer to Purchase as the Tender Offer was substantially over-subscribed. No shares of Class B Common Stock were converted and tendered in the Tender Offer. The portion of the Company’s issued and outstanding Common Stock (assuming conversion of Class B Common Stock) owned by Apollo prior and subsequent to the Tender Offer was 67 % and 55 %, respectively. 26 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 Nine Months Ended September 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 8/4/2022 9/15/2022 10/4/2022 0.035 30,112 0.035 1,916 Total $ 0.105 $ 89,982 $ 0.105 $ 5,748 Nine Months Ended September 30, 2021 2/25/2021 3/18/2021 4/1/2021 $ 0.035 $ 27,220 $ 0.035 $ 1,916 5/5/2021 6/17/2021 7/1/2021 0.035 27,268 0.035 1,916 8/4/2021 9/16/2021 10/5/2021 0.035 27,270 0.035 1,916 Total $ 0.105 $ 81,758 $ 0.105 $ 5,748 Subsequent Event - On November 3, 2022, the Company announced a dividend of $ 0.035 per share to holders of Common Stock and Class B Common Stock of record on December 15, 2022, which will be distributed on January 4, 2023. Accumulated Other Comprehensive Income (Loss) Refer to Note 8 “Derivative Financial Instruments” for AOCI reclassifications associated with cash flow hedges. There were no other material reclassifications out of AOCI. 11. SHARE-BASED COMPENSATION Share-based compensation expense recognized in selling, general, and administrative expenses was as follows: Three Months Ended September 30, Nine Months Ended September 30, ( in thousands ) 2022 2021 2022 2021 Share-based compensation expense $ 16,692 $ 16,242 $ 49,644 $ 45,848 Restricted Stock Units During the nine months ended September 30, 2022, the Company granted approximately 6.4 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 $ 7.85 . 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 granted 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. 27 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 and excludes potentially dilutive securities whose effect would have been anti-dilutive. Common Stock: Potential shares of Common Stock include (i) incremental shares related to the vesting or exercise of share-based compensation awards, warrants, and other options to purchase additional shares of the Company’s Common Stock calculated using the treasury stock method and (ii) incremental shares of Common Stock issuable upon the conversion of Class B Common Stock. Three Months Ended September 30, Nine Months Ended September 30, in thousands, except per share amounts 2022 2021 2022 2021 Allocation of net income (loss) - basic $ ( 114,600 ) $ ( 101,850 ) $ 19,911 $ ( 263,957 ) Dilutive effect — — ( 50 ) — Allocation of net income (loss) - diluted $ ( 114,600 ) $ ( 101,850 ) $ 19,861 $ ( 263,957 ) Weighted-average shares outstanding - basic 850,230 766,814 847,456 765,162 Dilutive effect — — 10,240 — Weighted-average shares outstanding - diluted 850,230 766,814 857,696 765,162 Net income (loss) per share - basic $ ( 0.13 ) $ ( 0.13 ) $ 0.02 $ ( 0.35 ) Net income (loss) per share - diluted $ ( 0.13 ) $ ( 0.13 ) $ 0.02 $ ( 0.35 ) For the three months ended September 30, 2022 and the three and nine months ended September 30, 2021, all potential shares of Common Stock that would be dilutive were excluded from the diluted earnings per share calculations because their effects would have been anti-dilutive. Excluded from the diluted earnings per share calculations for the nine months ended September 30, 2022 because their effects would have been anti-dilutive were (i) shares of Class B Common Stock, (ii) weighted-average shares of approximately 16.2 million primarily related to share-based compensation awards, and (iii) the impact from the State Farm Strategic Investment. Additionally, the basic and diluted earnings per share computations for Common Stock exclude 9.4 million unvested shares as their vesting is contingent upon achievement of certain performance requirements which have not been met as of September 30, 2022. 28 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Class B Common Stock: Three Months Ended September 30, Nine Months Ended September 30, in thousands, except per share amounts 2022 2021 2022 2021 Allocation of net income (loss) - basic $ ( 7,387 ) $ ( 7,279 ) $ 1,264 $ ( 18,916 ) Dilutive effect (1) — — — — Allocation of net income (loss) - diluted $ ( 7,387 ) $ ( 7,279 ) $ 1,264 $ ( 18,916 ) Weighted-average shares outstanding - basic 54,745 54,745 54,745 54,745 Dilutive effect (1) — — — — Weighted-average shares outstanding - diluted 54,745 54,745 54,745 54,745 Net income (loss) per share - basic $ ( 0.13 ) $ ( 0.13 ) $ 0.02 $ ( 0.35 ) Net income (loss) per share - diluted $ ( 0.13 ) $ ( 0.13 ) $ 0.02 $ ( 0.35 ) ________________ (1) There were no potential shares of Class B Common Stock during the periods presented. 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 In July 2020, 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. As of 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. The Google Commercial Agreement also specifies that each party shall contribute $ 150 million towards the joint marketing of devices and services; customer acquisition; training of the Company’s employees for the sales, installation, customer service, and maintenance for the product and service offerings; and technology updates for products included in such offerings. Each party is required to contribute such funds in three equal tranches, subject to the attainment of certain milestones. In August 2022, the Company and Google executed an amendment to the Google Commercial Agreement (the “Google Commercial Agreement Amendment”), pursuant to which Google has agreed to commit an additional $ 150 million to fund growth, data and insights, product innovation and technology advancements, customer acquisition, and marketing, as mutually agreed by the Company and Google. The additional success funds will be funded in three equal tranches, subject to the attainment of certain milestones. 29 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 September 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 September 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. 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 among other things commercial general liability claims, automobile liability claims, contractual disputes, worker’s compensation claims, labor law and employment claims, claims that the Company infringed on the intellectual property of others, 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 September 30, 2022 and December 31, 2021, the Company’s accrual for ongoing claims and lawsuits within the scope of an insurance program totaled $ 94 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 certain of the Company’s customers’ accounts, which provided this employee with varying levels of unauthorized personal access to such customers’ in-home security systems. As of September 30, 2022, the Company and its insurers had settled or have reached agreements in principle to settle all material pending lawsuits, arbitrations, and demands arising from this incident. 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 2034. 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. 30 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) September 30, 2022 December 31, 2021 Presentation and Classification: Operating Current Prepaid expenses and other current assets $ 271 $ 230 Operating Non-current Other assets 135,316 125,945 Finance Non-current Property and equipment, net (1) 94,088 88,962 Total right-of-use assets $ 229,675 $ 215,137 Operating Current Accrued expenses and other current liabilities $ 31,022 $ 37,359 Finance Current Current maturities of long-term debt 46,001 38,730 Operating Non-current Other liabilities 115,050 99,734 Finance Non-current Long-term debt 49,749 54,350 Total lease liabilities $ 241,822 $ 230,173 _________________ (1) Finance right-of-use assets are recorded net of accumulated depreciation of approximately $ 101 million and $ 78 million as of September 30, 2022 and December 31, 2021, respectively. Lease Cost: Three Months Ended September 30, Nine Months Ended September 30, ( in thousands ) 2022 2021 2022 2021 Operating lease cost $ 11,530 $ 11,418 $ 36,047 $ 36,470 Finance lease cost: Amortization of right-of-use assets 11,276 7,481 31,919 20,659 Interest on lease liabilities 945 707 2,645 2,083 Variable lease costs 23,117 20,448 72,115 53,580 Total lease cost $ 46,868 $ 40,054 $ 142,726 $ 112,792 31 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Cash Flow and Supplemental Information: Nine Months Ended September 30, ( in thousands ) 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating leases: Operating cash flows $ 35,698 $ 34,622 Finance leases: Operating cash flows $ 2,645 $ 2,083 Financing cash flows $ 33,749 $ 22,566 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 40,400 $ 14,999 Finance leases $ 37,275 $ 36,465 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. 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 affiliated with 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: Apollo Upon initial funding of the Term Loan A Facility, the Company will owe fees to Apollo, which are not expected to be material, related to Apollo’s performance of placement agent services related to such debt. Sunlight Financial LLC ADT Solar uses Sunlight Financial LLC (“Sunlight”), an entity affiliated with 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 $ 116 million and $ 359 million, respectively, for the three and nine months ended September 30, 2022. As of September 30, 2022, approximately $ 42 million may be subject to a temporary clawback. Additionally, the Company incurred $ 14 million and $ 44 million, respectively, of financing fees for the three and nine months ended September 30, 2022. As of September 30, 2022, there were no significant amounts due to/from Sunlight. 32 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Rackspace US, Inc. During October 2020, the Company entered into a master services agreement with Rackspace US, Inc. (“Rackspace”), an entity affiliated with 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, which can be satisfied through spend with other parties. As of September 30, 2022, total purchases towards the satisfaction of this commitment were approximately $ 19 million since inception. During the three and nine months ended September 30, 2022, the Company incurred fees to Rackspace of $ 3 million and $ 9 million, respectively. 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 significant related party transactions with Canopy during the period. Other Transactions During the nine months ended September 30, 2022, the Company incurred fees in the ordinary course of business with certain entities affiliated with Apollo including (i) $ 2.4 million for a digital customer experience partner; (ii) $ 2.4 million for certain technical services encompassing the purchase and support of IT equipment; and (iii) $ 1.7 million for certain technology and communications services. 33