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Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-03-01 · 410 added, 378 removed, 234 unchanged (77% of the section changed)

1 unchanged sentence

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

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

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

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

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

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

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

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

Included below are year-over-year comparisons between 2022 and 2021.

For information on year-over-year comparisons between 2021 and 2020, refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Annual Report for the year ended December 31, 2021, which was filed with the SEC on March 1, 2022.

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

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

OVERVIEW AND BASIS OF PRESENTATION

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

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

• Business and Basis of Presentation

• Factors Affecting Operating Results

• Key Performance Indicators

• Results of Operations

• Non-GAAP Measures

• Liquidity and Capital Resources

• Critical Accounting Estimates

• Accounting Pronouncements

BUSINESS AND BASIS OF PRESENTATION

is a leading provider of security, interactive, and smart home solutions serving residential, small business, and commercial customers in the U.S.

Since the acquisition of ADT Solar in December 2021, we also provide residential solar and energy storage solutions.

We believe solar is a logical extension of our offerings as it enhances our ability to deliver an integrated home experience.

Our mission is to empower people to protect and connect what matters most with safe, smart, and sustainable solutions, delivered through innovative offerings, unrivaled safety, and a premium experience because we believe that everyone deserves to feel safe.

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

dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and includes the accounts of ADT Inc.

dollars in accordance with GAAP, excluding our Non-GAAP measures, and includes the accounts of ADT Inc.

and its subsidiaries.

All intercompany transactions have been eliminated.

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

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

CSB, Commercial, and Solar.

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

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

FACTORS AFFECTING OPERATING RESULTS

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

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

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

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

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

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

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

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

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

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

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

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

Customers may choose not to renew or may terminate their contracts for a variety of reasons, including relocation, cost, loss to competition, or service issues.

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

We believe advancements in technology, younger generations of consumers, and shifts to de-urbanization have increased consumer interest in smart home offerings and other mobile technology applications;

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

As of December 31, 2022, we served approximately 6.7 million security monitoring service subscribers.

Generally, a significant upfront investment is required to acquire new subscribers, that in turn provide ongoing and predictable recurring revenue generated from our monitoring services and other subscriber-based offerings.

Although the economics of an installation may vary depending on the customer type, acquisition channel, and product offering, we generally achieve revenue break-even in less than two and a half years.

For our subscriber-based offerings, our results are impacted by the mix of transactions under a Company-owned equipment model versus a customer-owned equipment model (referred to as outright sales), as there are different accounting treatments applicable to each model, as discussed in Note 2 “Revenue and Receivables.” Previous changes to our equipment ownership model impacted results during 2021 and 2020, and substantially all new CSB transactions since March 2021 take place under a Company-owned model.

As we continue to build our partnership with Google, introduce new or enhance current offerings, and refine our go-to-market approach, including, for example, transitioning our DIY/self setup business to an outright sales model, we expect to see a shift toward an increasing proportion of outright sales transactions in our CSB and Commercial segments, which will impact results in future periods when these changes occur.

Our ability to increase our average prices for individual customers depends on a number of factors, including the type and complexity of service, the quality of our service, the introduction of additional features and offerings that increase the value to the customer, and the competitive and macroeconomic environments in which we operate.

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

Each year, a portion of our recurring customer base can be expected to cancel or may choose not to renew service for a variety of reasons such as relocation, loss to competition, cost, or service issues.

We experienced a lower volume of customer relocations during 2020 primarily as a result of the COVID-19 Pandemic, followed by a slight increase during 2021.

During 2022, we saw favorable trends in gross customer revenue attrition primarily as a result of a lower volume of customer relocations, partially offset by an increase in non-payment disconnects.

As a result of continued changes in the macroeconomic environment, we are currently unable to determine whether there will be any ongoing or further impacts on these trends and we may continue to experience fluctuations in these or other trends in the future.

The overall demand for our products and services is driven by a number of external factors such as the overall economic conditions in the geographies in which we operate, the price and quality of our products and services compared to those of our competitors, as well as changes in competition such as from the acquisition or disposition of similar businesses by us or our competitors.

Our ability to add new customers and grow our businesses is also impacted by the following:

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

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

• Growth in our solar customer base can be impacted by the availability of certain rebates, tax credits, and other financial incentives;

the availability and costs of consumer financing options;

and traditional energy prices and grid reliability.

We may also be impacted by seasonality and weather-related incidents or natural disasters.

Hurricanes Fiona and Ian during the third quarter of 2022 and winter storms during the fourth quarter of 2022 impacted certain areas in which we operate resulting in power outages and service disruptions to certain of our customers.

We did not experience any material impacts from these incidents.

We believe advancements in technology, younger generations of consumers, and shifts to de-urbanization have increased consumer interest in automated security and other mobile technology applications;

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

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

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

In November 2020, we announced the ongoing development of our ADT-owned next-generation professional security and automation technology platform, which is currently being developed in coordination with Google.

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

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

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

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

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

COVID-19 Pandemic Update

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

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

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

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

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

Accordingly, we anticipate having sufficient liquidity and capital resources to continue (i) providing essential services, (ii) satisfying our debt requirements, and (iii) having the ability to return capital to our stockholders in the form of a regular quarterly dividend.

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

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

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

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

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

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

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

We considered the emergence and pervasive economic impact of the COVID-19 Pandemic in our assessment of our financial position, results of operations, cash flows, and certain accounting estimates as of and for the year ended December 31, 2021.

Due to the evolving and uncertain nature of the COVID-19 Pandemic, it is possible that the effects of the COVID-19 Pandemic could materially impact our estimates and consolidated financial statements in future reporting periods.

Equipment Ownership Model Changes

In February 2020, we launched a new revenue model initiative for certain residential customers, which (i) revised the amount and nature of fees due at installation, (ii) introduced a 60-month monitoring contract option, and (iii) introduced a new retail installment contract option allowing qualifying residential customers to pay the fees due at installation over a 24-, 36-, or 60-month interest-free period.

Due to the requirements of our initial third-party consumer financing program, we transitioned our security system ownership model from a predominately Company-owned model to a predominately customer-owned model.

In March 2020, we entered into an uncommitted receivables securitization financing agreement (the “Receivables Facility”), which allowed us to receive financing secured by retail installment contract receivables from transactions under a customer-owned model.

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

As a result, we began transitioning our security system ownership model to a predominately Company-owned model in May 2020.

In addition, our residential transactions included a temporary increase in transactions sold under a customer-owned model as a result of, and subsequent to, the Defenders Acquisition in January 2020.

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

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

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

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

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

Radio Conversion Costs

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

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

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

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

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

Advances in technology are also helping us to improve our products and services and reduce certain costs.

For example, our innovative virtual support program (the “Virtual Assistance Program”), which launched for our residential customers in July 2021, provides our customers the ability to troubleshoot and resolve certain service issues through a live video stream with our skilled technicians.

This provides customers with more options for receiving certain services that best fit their lifestyles while reducing the cost for us to provide these services and lowering our carbon footprint by eliminating thousands of vehicle trips each day.

Factors that may impact the overall costs required to serve our current and potential customers include (i) offering a wider variety of products and services;

(ii) providing a greater mix of interactive and smart home solutions;

(iii) replacing or upgrading certain system components due to technological advancements or otherwise;

(iv) supply chain disruptions;

(v) inflationary pressures on costs such as materials, labor, and fuel;

and (vi) other changes in prices, interest rates, or terms from our suppliers, vendors, or third party lenders.

Changes in interest rates or terms from third-party lenders or our other financing partners, including those that provide loan products to our Solar customers, are impacted by factors such as increases in the benchmark interest rate.

As part of our response to changes or pressures in the macroeconomic environment, we may evaluate cost saving opportunities such as reducing headcount or our physical facilities footprint when appropriate.

While we have experienced some increase in costs as a result of inflation, we have, for the most part, been able to offset the rising costs through price increases to our customers, as well as cost saving opportunities.

For example, in our Solar business, we were able to drive efficiencies in the current year through job eliminations, intentional slowed hiring, and organic turnover.

In addition, as a portion of our employees continue to work from home, and with the expansion and success of our Virtual Assistance Program, we are evaluating the changing needs of our physical locations, while keeping our customers’ needs and safety a top priority.

We believe we are building a strong platform for growth through our strategic partnerships discussed below, as well as through focusing on improving customer satisfaction and retention, increasing our recurring monthly revenue through subscriber acquisition and the introduction of new products and services, increasing the rate at which new subscribers opt for our interactive services, and reducing our revenue payback period.

Strategic Partnerships and Acquisitions

Google Commercial Agreement

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

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

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

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

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

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

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

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

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

Significant Acquisitions and Dispositions

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

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

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

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

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

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

In July 2020, we entered into the Google Commercial Agreement, pursuant to which Google has agreed to supply us with certain Google Devices and Services for sale to our customers.

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

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

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

Since September 30, 2022, Google has the contractual right to require us, with certain exceptions, until such integration, to exclusively offer Google Devices and Services without integration for all new professional installations and for existing customer who do not have ADT Pulse or ADT Control interactive services.

We have already begun providing Google Devices and Services, and we will continue to do so on a non-integrated basis, as we work closely with Google toward an integrated solution.

We launched the Google Nest doorbell during the first quarter of 2022, rolled out mesh Wi-Fi during the second quarter of 2022, and launched Google indoor and outdoor cameras during the third quarter of 2022.

During the first quarter of 2023, we introduced our own new ADT+ app for our self setup line of DIY smart home security products, including Google Nest offerings, which we expect to introduce for professional installations by the end of 2023.

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

customer acquisition;

training of our employees on the sales, installation, customer service, and maintenance of 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, we amended the Google Commercial Agreement, pursuant to which Google has agreed to commit an additional $150 million to further fund growth, data and insights, product innovation and technology advancements, customer acquisition, and marketing, as mutually agreed to by us and Google.

The additional funds will be contributed in three equal tranches, subject to the attainment of certain milestones.

ADT Solar Acquisition

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

This acquisition establishes ADT in the residential solar market and leverages our brand awareness and trust among consumers to provide solar and energy storage solutions, energy efficiency upgrades, and roofing services to consumers.

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

Canopy Investment

In April 2022, together with Ford, we formed a new entity, Canopy, which combines ADT’s professional security monitoring and Ford’s AI-driven video camera technology, to help customers strengthen the security of new and existing vehicles across various automotive brands.

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

In addition, we entered into several commercial agreements (the “Canopy Commercial Agreements”), which are discussed in Note 5 “Equity Method Investments.”

State Farm Strategic Investment and Tender Offer

On September 5, 2022, we entered into the State Farm Securities Purchase Agreement, pursuant to which we agreed to issue and sell in a private placement to State Farm 133,333,333 shares of our Common Stock ( State Farm Shares ) at a per share price of $9.00 for an aggregate purchase price of $1.2 billion.

In connection with the State Farm Strategic Investment, we commenced the Tender Offer to purchase up to 133,333,333 shares of our Common Stock (including shares issued upon conversion of Class B Common Stock) ( Tender Shares ) at a price of $9.00 per share.

Concurrently with the execution of the State Farm Securities Purchase Agreement, (i) Apollo delivered to us the Apollo 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 and (ii) Google delivered to us a Support Agreement, pursuant to which Google agreed to not convert and tender any of its shares of Class B Common Stock.

In October 2022, we issued and sold the State Farm shares at a per share price of $9.00 and received $1.2 billion (the “Closing”).

The Tender Offer expired on October 20, 2022 (the “Tender Expiration Date”), and on October 26, 2022, we used proceeds from the State Farm Strategic Investment to repurchase an aggregate of 133,333,333 shares of our Common Stock at a purchase price of $9.00 per share, subject to the terms and conditions described in the Offer to Purchase dated September 12, 2022.

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.

Additionally, we entered into the State Farm Development Agreement, pursuant to which State Farm committed up to $300 million to fund product and technology innovation, customer growth, and marketing initiatives.

Upon the Closing, we received $100 million of such commitment from State Farm, which is restricted until we use the funds in accordance with the State Farm Development Agreement.

Our use of the funds is also subject to the approval by State Farm.

Other Events and Updates

Radio Conversion Program

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

For those customers who did not transition prior to or have not transitioned since the applicable network sunset, the loss of signal to our security systems and certain services we provide may impact our ability to bill and/or collect from these customers in the future and may impact our attrition, which we cannot estimate until some time after the retirements have occurred.

From inception of this program through December 31, 2022, we incurred approximately $292 million of net radio conversion costs, the majority of which was incurred in 2021 prior to the network sunset dates.

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

COVID-19 Pandemic Update

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

While we have incurred additional costs associated with providing personal protective equipment for our employees and in response to supply chain constraints, as well as rising costs due to inflation, we believe our recurring revenue and highly variable subscriber acquisition cost model continues to provide a solid financial foundation for strong cash flow generation.

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

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

However, the evolving and uncertain nature of the COVID-19 Pandemic, as well as any related economic or regulatory impacts, could materially impact our estimates and financial results in future reporting periods.

Tax Legislation

Federal Tax Legislation

Certain changes to U.S.

federal tax law included in the Tax Cuts and Jobs Act of 2017 had a delayed effective date and have taken effect for 2022.

Under 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.

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

The IRA was signed into law in August 2022.

The IRA, among other provisions, implements (i) a 15% corporate alternative minimum tax (the “CAMT”) on book income for corporations whose annual adjusted financial statement income during the most recently completed three-year period exceeds $1 billion, (ii) a 1% excise tax on net stock repurchases, and (iii) several tax incentives to promote clean energy including an extension of the ITC.

Both the CAMT and the excise tax provisions are effective for tax years beginning after December 31, 2022.

We do not anticipate any material impacts in the short-term at this time.

Under the IRA, the ITC was extended until 2032 to allow a qualifying homeowner to deduct 30% of the cost of installing residential solar systems from their U.S.

federal income taxes.

Under the current terms, the ITC will remain at 30% through the end of 2032 and be further reduced in increments down to 0.0% after the end of 2034, unless extended.

We believe this incentive will be favorable for our Solar business.

Potential for Future Valuation Allowance

As of December 31, 2022, we had a significant amount of deferred tax assets, against which we take valuation allowances that relate to the uncertainty of our ability to utilize these deferred tax assets in future periods.

We periodically review matters, including pending and enacted legislation such as the updates described above, that can influence our decision as to whether or not a valuation allowance is appropriate;

and we consider whether any developments to such legislation, together with other factors, require a valuation allowance.

We believe that our deferred tax assets for disallowed interest under IRC Section 163(j) will continue to grow from their current level.

There is currently significant uncertainty in the matters we consider when determining whether it is appropriate to take additional valuation allowances.

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

KEY PERFORMANCE INDICATORS

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

We evaluate our results using certain key performance indicators, including the operating metrics recurring monthly revenue (“RMR”) and gross customer revenue attrition, as well as the non-GAAP measure Adjusted EBITDA.

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

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

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

Adjusted EBITDA

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

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

Recurring Monthly Revenue (“RMR”)

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

RMR is generated by contractual recurring fees for monitoring and other recurring services provided to our customers.

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

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

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

Additionally, we believe the presentation of RMR is useful to investors because it measures the volume of revenue under contract at a given point in time, which is a useful measure for forecasting future revenue performance as the majority of our revenue comes from recurring sources.

Gross Customer Revenue Attrition

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

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

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

Adjusted EBITDA

Adjusted EBITDA is a non-GAAP measure.

RESULTS OF OPERATIONS

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

(in thousands, except as otherwise indicated)

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Monitoring and related services $ 4,589,265 $ 4,347,713 $ 4,186,987 $ 241,552 $ 160,726

Installation and other 959,398 1,127,800 818,075 (168,402) 309,725

Security installation, product, and other 1,019,619 912,047 1,127,800 107,572 (215,753)

Solar installation, product, and other 786,426 47,351 — 739,075 47,351

Total revenue 6,395,310 5,307,111 5,314,787 1,088,199 (7,676)

Cost of revenue (exclusive of depreciation and amortization shown separately below) 1,550,173 1,516,528 1,390,284 33,645 126,244

Cost of revenue (excluding depreciation and amortization) :

Monitoring and related services 918,048 912,948 789,906 5,100 123,042

Security installation, product, and other 620,090 602,467 726,622 17,623 (124,155)

Solar installation, product, and other 501,710 34,758 — 466,952 34,758

Total cost of revenue 2,039,848 1,550,173 1,516,528 489,675 33,645

Selling, general, and administrative expenses 1,930,021 1,789,009 1,723,644 141,012 65,365

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Goodwill impairment 149,385 — — 149,385 —

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

Operating income (loss) 560,249 15,278 40,640 544,971 (25,362)

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Other income (expense) (57,561) 8,313 8,293 (65,874) 20

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

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

Income (loss) before income taxes and equity in net earnings (losses) of equity method investee 237,403 (471,189) (778,919) 708,592 307,730

Income tax benefit (expense) (60,184) 130,369 146,726 (190,553) (16,357)

Income (loss) before equity in net earnings (losses) of equity method investee 177,219 (340,820) (632,193) 518,039 291,373

Equity in net earnings (losses) of equity method investee (4,601) — — (4,601) —

Net income (loss) $ 172,618 $ (340,820) $ (632,193) $ 513,438 $ 291,373

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N/A—Not applicable.

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

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

Monitoring and related services revenue (“M&S Revenue”) primarily comprises revenue generated from providing recurring monthly monitoring and other services, as well as revenue from time and materials billings.

Security installation, product, and other revenue comprises installation revenue from the sale and installation of our security systems sold under a customer-owned model, as well as the recognition of revenue that is deferred upon initiation of a monitoring contract in transactions occurring under a Company-owned model (amortization of deferred subscriber acquisition revenue).

Solar installation, product, and other revenue comprises revenue from the sale and installation of our solar systems and energy-storage solutions.

Years Ended December 31, $ Change

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2021 2021 vs.

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

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

Total M&S Revenue (1)

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

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

2021 Compared to 2020

The increase in total M&S revenue for 2021 compared to 2020 was primarily due to higher recurring revenue in CSB, which was driven by (i) improvements in average pricing as new and existing customers selected higher priced interactive and other services, and (ii) an increase in the number of customers over the period primarily due to a higher volume of dealer-generated and bulk account purchases.

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

2020 Compared to 2019

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

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

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

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

Monitoring and related services $ 4,050,019 $ 3,873,285 $ 3,760,614 $ 176,734 $ 112,671

Security installation, product, and other 328,786 272,743 564,575 56,043 (291,832)

Total CSB 4,378,805 4,146,028 4,325,189 232,777 (179,161)

Monitoring and related services 539,246 474,428 426,373 64,818 48,055

Security installation, product, and other 690,833 639,304 563,225 51,529 76,079

Total Commercial 1,230,079 1,113,732 989,598 116,347 124,134

Solar installation, product, and other 786,426 47,351 — 739,075 47,351

Total Solar 786,426 47,351 — 739,075 47,351

Total revenue $ 6,395,310 $ 5,307,111 $ 5,314,787 $ 1,088,199 $ (7,676)

During 2022, the increases in CSB revenue included:

• M&S Revenue :

(i) higher recurring revenue of $156 million, reflecting approximately $100 million related to the estimated impact from an increase in average prices and approximately $70 million related to the estimated impact from an increase in subscribers, partially offset by a decrease of $14 million in other revenue primarily due to radio conversion revenue, as well as (ii) higher revenue of $21 million primarily related to time and materials billings.

• Security installation, product, and other :

an increase in the amortization of deferred subscriber acquisition revenue of $71 million as a result of a higher population of existing customers under a Company-owned model as compared to the prior year, partially offset by a decrease in installation revenue of $15 million related to a lower volume of outright sales transactions primarily as a result of our transition to a predominately Company-owned model in the first quarter of 2021.

During 2022, the increases in Commercial revenue included:

• M&S Revenue :

higher revenue from time and materials billings of $43 million driven by higher revenue per service call, as well as higher recurring revenue of $22 million driven by improvements in average revenue per subscriber.

• Security installation, product, and other :

higher installation revenue related to strong sales performance, despite supply chain delays.

The increase in Solar revenue during 2022, as compared to the prior year period, was primarily due to a full year compared to a partial month of revenue from Solar installations, as a result of the ADT Solar Acquisition in December 2021.

During 2022 and 2021, solar installation, product, and other revenue included approximately $30 million and $10 million, respectively, from the amortization of purchase accounting adjustments related to a customer backlog intangible asset.

RMR and Gross Customer Revenue Attrition:

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

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

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

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

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

Installation and Other Revenue

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

Years Ended December 31, $ Change

(in thousands)

2021 2020 2019 2021 vs.

2020 2020 vs.

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

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

Solar 47,351 — — 47,351 —

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

2021 Compared to 2020

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

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

Pandemic, as well as from acquisitions.

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

2020 Compared to 2019

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

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

As of December 31, 2022, our ending RMR balance was $374 million, up $15 million or 4% compared to the prior year, primarily driven by our CSB segment and included the following:

• an increase in average revenue per subscriber of 3%, as new and existing customers selected higher priced interactive and other services, and

• an increase in our subscriber base of 1% primarily due to subscriber growth initiatives and improvements in customer retention.

Gross customer revenue attrition was 12.5% as of December 31, 2022 compared to 13.1% as of December 31, 2021.

The improvement in gross customer revenue attrition was driven by a decrease in relocations, partially offset by higher non-payment disconnects.

Cost of Revenue:

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

Monitoring and related services costs primarily comprises field service and call center costs incurred from providing recurring monthly monitoring and other services in our CSB and Commercial segments.

Security and solar installation, product, and other costs comprise costs incurred from the installation of our security and solar systems, respectively.

Years Ended December 31, $ Change

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2021 2021 vs.

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

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

Solar 34,758 — — 34,758 —

Monitoring and related services $ 593,088 $ 620,220 $ 538,176 $ (27,132) $ 82,044

Security installation, product, and other 97,549 105,001 278,413 (7,452) (173,412)

Total CSB 690,637 725,221 816,589 (34,584) (91,368)

Monitoring and related services 324,960 292,728 251,730 32,232 40,998

Security installation, product, and other 522,541 497,466 448,209 25,075 49,257

Total Commercial 847,501 790,194 699,939 57,307 90,255

Solar installation, product, and other 501,710 34,758 — 466,952 34,758

Total Solar 501,710 34,758 — 466,952 34,758

Total cost of revenue $ 2,039,848 $ 1,550,173 $ 1,516,528 $ 489,675 $ 33,645

2021 Compared to 2020

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

The decrease in CSB was primarily driven by a decrease in installation costs due to a lower volume of outright sales transactions as a result of our transition to a predominately Company-owned model, partially offset by higher field service and call center costs in 2021 as compared to the prior period, which was impacted by the COVID-19 Pandemic.

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

2020 Compared to 2019

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

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

During 2022, the decrease in CSB monitoring and related services costs was primarily attributable to a decrease in field service and call center costs driven by a lower volume of in-person service tickets as a result of our Virtual Assistance Program.

During 2022, the increase in Commercial cost of revenue was primarily attributable to an increase in installations and services performed in connection with strong sales performance as discussed above and reflects higher prices for materials, labor, and fuel.

The increase in total cost of revenue during 2022, as compared to the prior year period, was primarily due to a full year compared to a partial month as a result of the ADT Solar Acquisition in December 2021.

Selling, General, and Administrative Expenses:

2021 Compared to 2020

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

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

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

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

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

2020 Compared to 2019

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

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

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

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

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

During 2022, the increase in selling, general, and administrative expenses (“SG&A”), as compared to the prior year period, was primarily driven by incremental expenses of approximately $296 million as a result of the ADT Solar Acquisition in December 2021, as well as the following which exclude ADT Solar:

• an increase in the provision for credit losses of approximately $54 million, primarily in our CSB segment due to lower provision in the prior year associated with impacts from the COVID-19 Pandemic,

• an increase in selling costs of approximately $51 million, primarily in our CSB segment due to additional amortization of deferred subscriber acquisition costs, and

• an increase in general and administrative costs of approximately $40 million primarily in our CSB segment due to investments in our information technology infrastructure and other operational costs.

These increases were partially offset by:

• a decrease in radio conversion costs of $219 million, primarily due to a decrease in the number of conversions, and

• a decrease in advertising costs of approximately $82 million, primarily due to our efforts to optimize our advertising model.

Depreciation and Intangible Asset Amortization:

2021 Compared to 2020

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

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

2020 Compared to 2019

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

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

During 2022, the decrease in depreciation and intangible asset amortization, as compared to the prior year period, was primarily driven by a decrease in the amortization of customer relationship intangible assets of $320 million, which was primarily due to certain assets acquired as part of the ADT Acquisition becoming fully amortized beginning with the fourth quarter of 2021.

The remaining customer relationship intangible assets acquired as part of the ADT Acquisition will be fully amortized during the first quarter of 2023.

The decrease was partially offset by investments in subscriber growth resulting in:

• an increase in the amortization of customer contracts acquired under our authorized dealer program and from other third parties of $53 million, and

• an increase in the depreciation of subscriber system assets of $45 million.

Merger, Restructuring, Integration, and Other:

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

These amounts vary year over year and included:

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

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

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

Goodwill Impairment and Loss on Sale of Business

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

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

During 2022, the decrease in merger, restructuring, integration, and other, as compared to the prior year period, primarily resulted from an $18 million impairment charge in CSB during 2021 due to lower than expected benefits from the developed technology intangible asset acquired during November 2020.

Goodwill Impairment:

We recorded a goodwill impairment charge of $149 million associated with our Solar reporting unit during the third quarter of 2022.

Refer to Note 6 “Goodwill and Other Intangible Assets” for further discussion.

Interest Expense, net:

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

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

During 2022, the decrease in interest expense, net, as compared to the prior year period, was driven by higher unrealized gains of $144 million, as well as a decrease of approximately $53 million related to settlements on our interest rate swaps partially offset by higher interest expense of $28 million on our First Lien Term Loan due 2026.

These changes were primarily due to fluctuations in the forward LIBOR.

Loss on Extinguishment of Debt:

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

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

Income Tax Benefit

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

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

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

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

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

Other Income (Expense):

During 2022, in connection with the Tender Offer, we recorded a net loss of $63 million associated with the change in fair value of the Forward Contract.

In October 2022, upon closing of the State Farm Strategic Investment, the contingency associated with the Forward Contract was resolved, and the Forward Contract was settled upon closing of the Tender Offer.

Income Tax Benefit (Expense):

Our income tax expense during 2022 was $60 million, resulting in an effective tax rate for the period of 25.4%.

The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits and legislative changes, of 2.8%, and unfavorable impacts related to the fair value adjustment of the Forward Contract, goodwill impairment, and other items, partially offset by favorable impacts from research and development credits, as well as uncertain tax positions and other items.

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

The effective tax rate primarily represents the federal income tax rate of 21.0%, a state statutory tax rate, net of federal benefits and legislative changes, of 3.5%, and a 1.3% favorable impact related to the revaluation of our deferred tax liabilities in connection with our 2021 acquisitions.

NON-GAAP MEASURES

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

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

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

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

Adjusted EBITDA

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

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

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

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

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

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

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(viii) radio conversion costs, net;

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

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.

There are material limitations to using Adjusted EBITDA.

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

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

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

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

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Interest expense, net 265,285 457,667 708,189 (192,382) (250,522)

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

Income tax expense (benefit) 60,184 (130,369) (146,726) 190,553 16,357

Depreciation and intangible asset amortization 1,693,575 1,914,779 1,913,767 (221,204) 1,012

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Merger, restructuring, integration, and other (1)

22,232 37,872 120,208 (15,640) (82,336)

Goodwill impairment (2)

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

149,385 — — 149,385 —

Loss on extinguishment of debt (3)

Radio conversion costs, net (1)

— 37,113 119,663 (37,113) (82,550)

Financing and consent fees (2)

Change in fair value of financial instruments (4)

63,396 — — 63,396 —

Radio conversion costs, net (5)

3,353 211,363 51,889 (208,010) 159,474

Acquisition-related adjustments (6)

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(3,935) (3,236) (4,030) (699) 794

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

Adjusted EBITDA $ 2,446,728 $ 2,212,579 $ 2,199,237 $ 234,149 $ 13,342

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(1) During 2020, primarily included losses of $81 million in CSB associated with the settlement of a pre-existing relationship in connection with the Defenders Acquisition.

Refer to Note 4 “Acquisitions and Disposition.”

(2) During 2022, represents a goodwill impairment charge associated with our Solar reporting unit.

Refer to Note 6 “Goodwill and Other Intangible Assets.”

(3) During 2020, primarily includes $66 million associated with the redemption of the Prime Notes in February 2020 and $49 million associated with the redemption of the ADT Notes due 2021 in September 2020.

Refer to Note 7 “Debt.”

(4) During 2022, represents the change in fair value of the Forward Contract.

Refer to Note 10 “Equity.”

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

(2) Represents fees expensed associated with financing transactions.

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

During 2021, primarily related to the Sunpro Solar Acquisition.

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

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

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

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

(6) During 2022 and 2021, primarily represents the amortization of the customer backlog intangible asset acquired in the ADT Solar Acquisition, which was fully amortized as of March 2022.

Refer to Note 4 “Acquisitions and Disposition.”

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

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

Adjusted EBITDA in total and by segment were as follows:

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Solar 5,155 5,588 — (433) 5,588

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

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

2021 Compared to 2020

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

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

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

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

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

2020 Compared to 2019

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

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

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

Adjusted EBITDA $ 2,446,728 $ 2,212,579 $ 2,199,237 $ 234,149 $ 13,342

The drivers listed below exclude amounts that are outside of our definition of Adjusted EBITDA.

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

During 2022, the increase was primarily due to higher M&S Revenue of $188 million, lower advertising costs of $83 million, and lower field service and call center costs of $28 million, partially offset by higher provision for credit losses of $42 million.

The remainder of the change was primarily due to higher general and administrative expenses of $36 million.

During 2022, the increase was primarily due to higher M&S Revenue of $65 million and higher installation revenue, net of the associated installation costs, of $25 million, partially offset by higher field service and call center costs of $32 million and higher provision for credit losses of $12 million.

The remainder of the change was primarily due to higher selling expenses.

During 2022, Solar Adjusted EBITDA was impacted by installation delays and lower install throughput and reflects cost-reduction efforts and other initiatives to improve long-term operational efficiencies, and included approximately $21 million of charges associated with (i) receivables and rebates that are not expected to be collected from a former third party lender entering a formal insolvency proceeding to effectuate the wind-down of its operations, as well as (ii) third party loans for systems not expected to achieve permission to operate.

LIQUIDITY AND CAPITAL RESOURCES

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

(in thousands)

Liquidity and capital resources primarily consisted of the following:

(in thousands) December 31, 2022

Cash and cash equivalents $ 257,223

Restricted cash and restricted cash equivalents $ 116,357

Availability under First Lien Revolving Credit Facility $ 575,000

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Carrying amount of total debt outstanding $ 9,828,588

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

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

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

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

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

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

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

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

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

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

Changes in our operating plans, material changes in anticipated sales, increased expenses, acquisitions, or other events may cause us to seek equity and/or debt financing in future periods.

There can be no guarantee that financing will be available on acceptable terms or at all.

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

We believe our cash position, borrowing capacity available under our revolving credit facility and Receivables Facility, and cash provided by operating activities are, and will continue to be, adequate to meet our operational and business needs in the next twelve months, as well as our long-term liquidity needs.

We are a highly leveraged company with significant debt service requirements and have both fixed-rate and variable-rate debt.

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

Cash outflows for interest payments are not consistent between quarters, with larger outflows occurring in the first and third quarters, and may vary as a result of our variable rate debt.

Certain of our variable rate debt instruments are currently based on LIBOR.

The SOFR will replace the forward LIBOR as the applicable benchmark rate for all existing and future issuances of our debt instruments, including our interest rate swaps, with a variable rate component (the “SOFR Transition”) by June 2023 (the “SOFR Transition Date”).

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.

As of December 31, 2022, we do not anticipate any material impacts from the SOFR Transition.

We are closely monitoring the impact of recent inflationary pressures and changes in interest rates on our cash position.

However, we believe our cash position, borrowing capacity available under our First Lien Revolving Credit Facility and Receivables Facility, and cash provided by operating activities are, and will continue to be, adequate to meet our operational and business needs in the next twelve months, as well as our long-term liquidity needs.

Material Cash Requirements

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As of December 31, 2022, our significant short-term and long-term cash requirements, excluding cash required for operations, under our various contractual obligations and commitments primarily included:

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

• Debt principal – As of December 31, 2022, our expected future debt principal payments, excluding finance leases, totaled approximately $9.9 billion, with approximately $827 million due in 2023 primarily related to the ADT Notes due 2023 (defined below).

In addition, we are required to make scheduled quarterly principal payments of approximately $7 million on our First Lien Term Loan due 2026, as well as repay amounts due under our Receivables Facility.

In addition, upon funding of the Term Loan A Facility during the first quarter of 2023, we expect to make scheduled quarterly principal payments of approximately $8 million with the remaining balance due at maturity.

Refer to Note 7 “Debt” for further details of our debt and the timing of expected future principal payments.

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

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

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

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

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

Future interest payments on our variable-rate debt and the effects of our interest rate swaps (including interest rate swaps presented within financing activities), are based on the forward LIBOR curve, except for our Receivables Facility, which is based on SOFR, plus the applicable margin in effect as of December 31, 2022.

During 2022, we paid net cash interest of approximately $471 million, including interest on interest rate swaps presented within financing activities.

Our expected future interest payments related to our debt and interest rate swap contracts as of December 31, 2022, including interest related to the Term Loan A Facility described below, totaled approximately $2.3 billion, with approximately $510 million due in 2023.

Additionally, we expect to incur annual interest payments of approximately $370 - $480 million during each of the years 2024 - 2026.

• Operating and finance leases – As of December 31, 2022, our expected future lease payments, including interest, totaled approximately $275 million, with approximately $78 million due in 2023.

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

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

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

As of December 31, 2022, our contractual obligations entered into in the ordinary course of business, including agreements that are enforceable and legally binding and have a remaining term in excess of one year, totaled approximately $312 million, with approximately $176 million expected to be paid in 2023.

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In addition, as of December 31, 2022, we had outstanding purchase orders of approximately $150 million primarily related to direct materials and information technology and marketing services, which are expected to be materially satisfied in 2023.

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

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

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

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

However, the timing of these contributions is still uncertain.

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

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

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

Additionally, during 2022 we entered into the Google Commercial Agreement Amendment in which Google agreed to commit an additional $150 million.

While the timing of these contributions is still uncertain, we expect to contribute the majority of our $150 million commitment under the Google Commercial Agreement by the end of 2025.

• State Farm Opportunity Fund – Pursuant to the State Farm Development Agreement, State Farm committed up to $300 million to fund product and technology innovation, customer growth, and marketing initiatives.

Upon the Closing of the State Farm Strategic Investment, we received $100 million of such commitment from State Farm, which is restricted until we use the funds for investment, as agreed upon with State Farm, in accordance with the State Farm Development Agreement.

• Customer account purchases – Our indirect channel customers are generated mainly through our ADT Authorized Dealer Program.

As opportunities arise, we have in the past engaged, and we may continue to engage, in selective third-party account purchases, which typically involve the purchase of a set of customer accounts from other security service providers.

• Repurchase of Solar loans – As of December 31, 2022, we recognized a liability of approximately $88 million related to certain loans provided to customers within our Solar business that we may be required to repurchase from our third party lenders.

We recorded a receivable related to the amount we expect to recover if permission to operate is achieved in the event the third party lenders do require us to repurchase such loans.

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

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

however, these amounts may be material in future periods.

We incurred $54 million of financing fees during 2022, and future amounts due to Sunlight will be based on the volume of loans provided.

• Unrecognized tax benefits – We have approximately $56 million of unrecognized tax benefits, excluding interest and penalties, related to various tax positions we have taken.

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• Off-balance sheet arrangements – We have guarantees primarily related to standby letters of credit on our insurance programs totaling $93 million.

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

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

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

On February 28, 2023, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on March 16, 2023, which will be distributed on April 4, 2023.

During 2022, we declared aggregate dividends of $0.14 per share on Common Stock ($120 million) and $0.14 per share on Class B Common Stock ($8 million).

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

Refer to Note 10 “Equity” for further details.

Cash Flow Analysis

The following table is a summary of our cash flow activity for the periods presented:

Years Ended December 31, $ Change

(in thousands) 2022 2021 2020 2022 vs.

2021 2021 vs.

Net cash provided by (used in):

Operating activities $ 1,887,920 $ 1,649,723 $ 1,366,749 $ 238,197 $ 282,974

Investing activities $ (1,532,784) $ (1,695,745) $ (1,137,477) $ 162,961 $ (558,268)

Financing activities $ (14,833) $ (128,448) $ (70,261) $ 113,615 $ (58,187)

Cash Flows from Operating Activities

The increase in net cash provided by operating activities for 2022 compared to 2021 was primarily due to:

• a decrease in payments related to radio conversion costs, net of the related incremental revenue, of $194 million, partially offset by

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

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

The remainder of the activity related to changes in assets and liabilities due to the volume and timing of other operating cash receipts and payments with respect to when the transactions are reflected in earnings.

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

Cash Flows from Investing Activities

The decrease in net cash used in investing activities for 2022 compared to 2021 was primarily due to:

• a decrease in net outflows of $150 million related to acquisitions as a result of the ADT Solar acquisition during 2021 and

• a decrease in net outflows of $53 million related to dealer generated customer account and bulk account purchases, partially offset by

• an increase in net outflows of $40 million related to subscriber system assets expenditures as a result of more Company-owned transactions and our growth initiatives.

Cash Flows from Financing Activities

During 2022, net cash used in financing activities primarily consisted of:

• $1.2 billion issuance of State Farm shares and corresponding repurchase of $1.2 billion related to the Tender Shares, as well as Opportunity fund proceeds of $101 million related to the State Farm Development Agreement,

• dividend payments of $127 million, and

• net debt payments of $55 million, finance lease payments of $45 million, and interest rate swap payments of $19 million, partially offset by

• net proceeds under the Receivables Facility of $156 million.

During 2021, net cash used in financing activities primarily consisted of:

• dividend payments of $116 million, and

• interest rate swap payments of $56 million, finance leases payments of $32 million, and net debt payments of $23 million;

partially offset by

• net proceeds under the Receivables Facility of $123 million.

Long-Term Debt

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

As of December 31, 2022, our debt (excluding finance leases and any deferred financing costs, discounts, premiums, or fair value adjustments) consisted of the following (in thousands) :

Debt Description Issued Maturity Interest Rate Interest Payable Principal

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LIBOR +2.75% Quarterly $ 2,730,269

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

LIBOR + 2.75% Quarterly 25,000

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

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

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

Receivables Facility 3/5/2020 11/20/2027 Adj.

Daily SOFR +0.85% Monthly 354,741

Other debt 2,446

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Concurrently with the consummation of the Formation Transactions, we entered into a first lien credit agreement dated as of July 1, 2015 (together with subsequent amendments and restatements, the “First Lien Credit Agreement”), which has since been amended and restated on May 2, 2016, June 23, 2016, December 28, 2016, February 13, 2017, June 29, 2017, March 16, 2018, December 3, 2018, March 15, 2019 (effective April 4, 2019), September 23, 2019, January 27, 2021, and July 2, 2021.

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

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

Below is a summary of key events related to the First Lien Credit Agreement during 2022, 2021, and 2020:

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

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

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

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

After giving effect to this amendment and restatement, aggregate commitments under the First Lien Revolving Credit Facility were $575 million.

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

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

• In July 2021, we amended and restated the First Lien Credit Agreement to extend the maturity date of the First Lien Revolving Credit Facility to June 23, 2026, subject to certain conditions.

We also obtained an additional $175 million of commitments, which increased the aggregate commitments under the First Lien Revolving Credit Facility to $575 million.

In 2022, we borrowed $550 million and repaid $575 million under the First Lien Revolving Credit Facility.

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

We are required to make scheduled quarterly principal payments of approximately $7 million on the First Lien Term Loan due 2026, with the remaining balance payable at maturity.

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

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As of December 31, 2022, we were not required to make any annual prepayments based on our excess cash flow.

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

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

The First Lien Term Loan due 2026 has an interest rate calculated as, at our option, either (a) LIBOR determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs (“Adjusted LIBOR”) with a floor of 0.75%, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50% per annum;

(ii) the prime rate published by The Wall Street Journal;

and (iii) one-month Adjusted LIBOR plus 1.00% per annum (“Base Rate”), in each case, plus the applicable margin of 2.75% for Adjusted LIBOR loans and 1.75% for Base Rate loans and is payable on each interest payment date, at least quarterly, in arrears.

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

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

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

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

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

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

Term Loan A Facility

In September 2022, we entered into a debt commitment letter with various banks to provide 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”) on or before March 15, 2023 (the “Commitment Termination Date”) under a term loan credit agreement (the “Term Loan A Credit Agreement”).

The proceeds of any borrowings under the Term Loan A Facility are required to be used to redeem a portion of our senior notes due 2023 (the “ADT Notes due 2023”) and pay related fees and expenses (as discussed below).

As of December 31, 2022, we have not incurred indebtedness under the Term Loan A Facility.

However, we intend to execute the Term Loan A Credit Agreement and incur indebtedness under the Term Loan A Facility in the first quarter of 2023.

Second Lien Notes due 2028

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

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

• Prior to January 15, 2023, in whole at any time or in part from time to time, (a) at a redemption price equal to 100% of the principal amount of the Second Lien Notes due 2028 redeemed, plus a make-whole premium and accrued and unpaid interest as of, but excluding, the redemption date or (b) for up to 40% of the original aggregate principal amount of the Second Lien Notes due 2028 and in an aggregate amount equal to the net cash proceeds of any equity offerings, at a redemption price equal to 106.250%, plus accrued and unpaid interest, so long as at least 50% of the original aggregate principal amount of the Second Lien Notes due 2028 shall remain outstanding after each such redemption.

• On or after January 15, 2023, in whole at any time or in part from time to time, at a redemption price equal to 103.125% of the principal amount of the Second Lien Notes due 2028 redeemed and accrued and unpaid interest as of, but excluding, the redemption date.

As of January 15, 2023, the Second Lien Notes due 2028 may be redeemed at our option, in whole at any time or in part from time to time, at a redemption price equal to 103.125% of the principal amount of the Second Lien Notes due 2028 redeemed and accrued and unpaid interest as of, but excluding, the redemption date.

The redemption price decreases to 101.563% on or after January 15, 2024 and decreases to 100% on or after January 15, 2025.

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

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

The First Lien Notes due 2027 may be redeemed at our option as follows:

• Prior to August 31, 2026, in whole at any time or in part from time to time, at a make-whole premium plus accrued and unpaid interest, if any, thereon to the redemption date.

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

The First Lien Notes due 2029 will mature on August 1, 2029, with semi-annual interest payment dates of February 1 and August 1 of each year, beginning February 1, 2022, and may be redeemed at our option as follows:

The First Lien Notes due 2029 may be redeemed at our option as follows:

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

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The indenture also provides for customary events of default.

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

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

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

Below is a summary of key events related to the ADT Notes since 2021:

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

• As of December 31, 2022, we had an outstanding balance of $700 million under the ADT Notes due 2023 that was classified as a current liability, net of any unamortized discount.

Under the Term Loan A Credit Agreement, we are required to use the proceeds from the issuance of the Term Loan A Facility to redeem a portion of the ADT Notes due 2023 during the first quarter of 2023, and we intend to redeem the remaining outstanding balance upon or before maturity, in both instances including the payment of related expenses, using available cash.

• On February 10, 2023, we delivered a partial redemption notice to the holders of the ADT Notes due 2023 to redeem approximately $600 million of the $700 million ADT Notes due 2023 on March 15, 2023, including accrued and unpaid interest on the ADT Notes due 2023 so redeemed (the “ADT Notes due 2023 Partial Redemption”).

We expect to draw the Term Loan A Facility for the ADT Notes due 2023 Partial Redemption and use cash on hand to redeem the remaining approximately $100 million of the ADT Notes due 2023 on or before maturity in June 2023.

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

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

Significant amendments to the Receivables Facility were as follows:

Significant amendments to the Receivables Facility since 2021 were as follows:

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

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

• In May 2022, the Receivables Facility was amended 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.

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

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

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

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

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

The segregated account is considered restricted cash in our Consolidated Balance Sheets.

During 2022, proceeds and repayments were $277 million and $121 million, respectively.

During 2021, proceeds and repayments were $254 million and $130 million, respectively, both of which include the non-cash impact of approximately $88 million from the October 2021 amendment.

Debt Covenants

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

As of December 31, 2021, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations, and we do not believe there is a material risk of future noncompliance with our financial covenant and other maintenance tests as a result of the COVID-19 Pandemic, or otherwise.

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

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

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

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

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

Other Share Activity

In February 2019, we approved a dividend reinvestment plan (the “DRIP”), which allowed stockholders to designate all or a portion of the cash dividends on their shares of common stock for reinvestment in additional shares of our Common Stock.

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

Prior to termination, dividends settled in shares of Common Stock were not material during 2021 or 2020.

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

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

Prior to termination, repurchases of shares of Common Stock under the Share Repurchase Program were not material during 2021 or 2020.

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

Cash Flow Analysis

The following table is a summary of our cash flow activity for the periods presented:

Years Ended December 31, $ Change

(in thousands) 2021 2020 2019 2021 vs.

2020 2020 vs.

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

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

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

Cash Flows from Operating Activities

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

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

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

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

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

These activities were partially offset by:

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

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

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

Cash Flows from Investing Activities

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

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

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

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

Cash Flows from Financing Activities

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

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

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

These activities were partially offset by:

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

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

• a decrease in payments for deferred financing costs.

As of December 31, 2022, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations, and we do not believe there is a material risk of future noncompliance with our financial covenant and other maintenance tests.

CRITICAL ACCOUNTING ESTIMATES

The accompanying consolidated financial statements are prepared in accordance with GAAP, which requires us to select accounting policies and make estimates that affect amounts reported in the consolidated financial statements and the accompanying notes.

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

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

and uncertainties.

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

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Revenue Recognition

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

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

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

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

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

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

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

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

The cost input 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 our judgment to faithfully depict the value of the services transferred to the customer.

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

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

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

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

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

The results of the lifing studies indicate that we can expect attrition to be the greatest in the initial years of asset life;

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

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

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

Definite-Lived Intangible Assets

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

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

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

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

We may charge back the purchase price of any end-user contract if the contract is canceled during the charge-back period, which is generally thirteen months from the date of purchase.

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

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

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

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

We generate revenue through contractual monthly recurring fees received for monitoring and related services provided to customers as well as the sale and installation of security, fire, and solar systems.

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

Approximately half of Commercial security installation, product, and other revenue is recognized over time.

Progress toward complete satisfaction of the performance obligation is primarily measured using a cost-to-cost measure of progress method.

This method uses cost inputs that are based primarily on the contract cost incurred to date compared to the total estimated contract cost.

The total estimated contract cost can vary period to period based on, for example, project delays or changes in material costs, which may impact the estimated progress.

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

There were no material adjustments or impacts from changes in estimates during the periods presented.

Estimated Life of Customer Relationships

A significant portion of our depreciation and intangible asset amortization is based on the expected life of our customer relationships.

We periodically perform lifing studies to (i) estimate the expected life of our customer relationships and the attrition pattern of our customers;

(ii) establish the amortization rates of our customer account pools discussed below in order to reflect the pattern of future benefit;

and (iii) assess the continued reasonableness of our existing depreciation and amortization policies.

The results of the lifing studies are based on historical customer terminations.

The lifing studies indicate that we can expect attrition to be the greatest in the initial years of asset life.

Therefore, to align our depreciation and amortization to the pattern in which the related economic benefits are consumed, we use an accelerated method that best matches the future amortization cost with the estimated revenue stream from these customer pools.

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

We depreciate and amortize these assets using an accelerated method over the estimated life of the customer relationship, which is 15 years, using an average declining balance rate of approximately 250% that converts to straight-line methodology when the resulting charge is greater than that from the accelerated method.

This results in an average charge of approximately 55% of the pool within the first five years, 25% within the second five years, and 20% within the final five years.

Customer Account Purchases - Purchases of contracts with customers under the ADT Authorized Dealer Program, or from other third parties, are considered asset acquisitions and are recognized based on the cost to acquire the assets, which may include cash consideration, non-cash consideration, contingent consideration, and directly-attributable transaction costs.

These assets are accounted for on a pooled basis based on the month and year of acquisition.

Based on the results of our lifing studies, we amortize our pooled contracts with customers using an accelerated method over the estimated life of the customer relationship, which is 15 years.

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

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

Goodwill and Indefinite-Lived Intangible Assets Impairment

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

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

The accelerated methods and estimated lives used to calculate depreciation and amortization expense have not changed during the periods presented.

Additionally, these estimates remain relatively consistent year over year due to the large and homogenous nature of our customer pools.

Significant changes in our business model, such as a reduction in the number of customers under multi-year contracts, or a prolonged shift in our attrition patterns, could impact the expected life of our customer pools.

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

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

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If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.

We estimate the fair value of a reporting unit using the income approach, which discounts projected cash flows using market participant assumptions.

The income approach includes significant assumptions including, but not limited to, forecasted revenue, operating profit margins, operating expenses, cash flows, perpetual growth rates, and discount rates.

The estimated fair value of a reporting unit calculated using the income approach is sensitive to changes in the underlying assumptions.

On October 1, 2022, we completed our annual goodwill impairment tests by qualitatively testing the goodwill assigned to the CSB reporting unit and quantitatively testing the goodwill assigned to the Commercial and Solar reporting units.

We estimated the fair value of our Commercial and Solar reporting unit using the income approach, which discounts projected cash flows using market participant assumptions.

The income approach includes significant assumptions including, but not limited to, forecasted revenue, operating profit margins, Adjusted EBITDA margins, operating expenses, cash flows, perpetual growth rates, and discount rates.

In developing these assumptions, we rely on various factors including operating results, business plans, economic projections, anticipated future cash flows, and other market data.

The estimated fair value of a reporting unit calculated using the income approach is sensitive to changes in the underlying assumptions.

Examples of events or circumstances that could reasonably be expected to negatively affect the underlying judgments and factors and ultimately impact the estimated fair value determinations may include such items as a prolonged downturn in the business environment, changes in economic conditions that significantly differ from our assumptions in timing or degree, volatility in equity and debt markets resulting in higher discount rates, and unexpected regulatory changes.

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

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

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

reporting unit.

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

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

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

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

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

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

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

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

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

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

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

Commercial - The reporting unit performed above expectations in 2022, thus driving an increase in projected future period growth, which more than offset negative impacts from macroeconomic conditions.

Based on the results of a quantitative test, we concluded the fair value of the Commercial reporting unit exceeded its carrying value by approximately 50%.

As of our October 1, 2021 goodwill impairment test, we concluded the fair value of the Commercial reporting unit exceeded its carrying value by approximately 20%.

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

Solar - 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 a continued increase in interest rates, we performed an interim impairment quantitative assessment as of September 30, 2022, and recorded a goodwill impairment loss of $149 million.

Additionally, on October 1, 2022, we quantitatively tested the goodwill associated with the Solar reporting unit as part of our annual goodwill impairment test.

Based on the results of the quantitative test, the Solar reporting unit is considered at risk of future impairment as the carrying value of the Solar reporting unit approximates its fair value following the impairment charge in the third quarter of 2022.

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.

For example, a decrease of approximately 8% in 2023 projected revenues, a decrease in the Adjusted EBITDA margin across all periods of 0.5%, or an increase in the weighted average cost of capital by 1.5%, holding other assumptions constant, would result in approximately $40 million of additional impairment.

Indefinite-Lived Intangible Assets

As of December 31, 2022, our only indefinite-lived intangible asset is the ADT trade name, which has a carrying value of $1.3 billion and was recognized in connection with the ADT Acquisition in May 2016.

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

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

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

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

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

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

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

As of our October 1, 2022 and October 1, 2021 impairment tests, the fair value of the ADT trade name significantly exceeded its carrying value.

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

During the periods presented, the results of our sensitivity analysis did not have a material impact on the conclusions reached.

Business Combinations

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

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

intangible and tangible assets.

We use various methods to determine fair value depending on the type of assets acquired and liabilities assumed.

We make estimates and assumptions about projected future cash flows including, but not limited to, forecasted revenue, Adjusted EBITDA margins, operating expenses, cash flows, perpetual growth rates, and discount rates.

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

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

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

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

Loss Contingencies

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

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

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

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

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

The majority of our customer relationships acquired in business combinations originated from the Formation Transactions and the ADT Acquisition, the majority of which will be fully amortized during 2023.

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

During 2022, 2021, and 2020, other definite-lived intangible assets acquired in business acquisitions were not material, and we have not recorded any material measurement period adjustments to purchase price allocations.

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

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We adjust the liabilities for unrecognized tax benefits in light of changing facts and circumstances;

however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a change to the estimated liabilities.

however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a change to the estimated liabilities, along with impacts to the effective tax rate and cash tax.

As of December 31, 2022, there were no material changes to our valuation allowances or unrecognized tax benefits since the prior year.

ACCOUNTING PRONOUNCEMENTS

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What changed 10-K

Item 7. Management’s Discussion and Analysis