What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-05-02 compared with 2022-11-03 · 189 added, 322 removed, 196 unchanged (72% of the section changed)

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

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

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

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

To obtain a more comprehensive understanding of our financial condition, changes in financial condition, and results of operations, the following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and the related notes included in our 2022 Annual Report, which was filed with the SEC on February 28, 2023.

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

• Overview and Basis of Presentation

• Business and Basis of Presentation

• Factors Affecting Operating Results

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• Cautionary Statements Regarding Forward-Looking Statements

OVERVIEW AND BASIS OF PRESENTATION

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

Since the acquisition of Compass Solar Group, LLC (now “ADT Solar”) (the “ADT Solar Acquisition”) 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 safe, smart, and sustainable home experience.

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, do-it-yourself (“DIY”), and mobile or other digital-based offerings supported by our 24/7 professional monitoring services.

We are building a strong platform for growth by 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.

Basis of Presentation and Segments

BUSINESS AND BASIS OF PRESENTATION

ADT Inc., together with its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our,” “us,” and “ADT”), provides security, interactive, and smart home solutions in the U.S.

to residential, small business, and commercial customers, as well as residential solar and energy storage solutions.

As of March 31, 2023, we served approximately 6.7 million security monitoring service subscribers.

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.

Basis of Presentation

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

CSB, Commercial, and Solar.

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 wholly-owned subsidiaries.

All intercompany transactions have been eliminated.

In addition, we use the equity method of accounting to account for our investment in Canopy (as defined below) as we have the ability to exercise significant influence but do not have control.

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

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

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

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

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

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

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

COVID-19 Pandemic Update

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

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

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

Our response plan has not materially changed from that described in the 2021 Annual Report, and we continue to provide relevant updates as necessary.

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

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

We 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.

During the third quarter of 2022, Hurricanes Fiona and Ian impacted certain areas in which we operate and resulted in power outages and service disruptions to certain of our customers.

We will continue to monitor and do not anticipate any material impacts from these hurricanes.

We considered recent impacts from macroeconomic conditions such as inflationary pressures, rising interest rates, the uncertainty and volatility in the financial markets, and supply chain disruptions, as well as any on-going impacts of the COVID-19 Pandemic, in the assessment of our financial position, results of operations, and cash flows, as well as certain accounting estimates, as of and for the periods presented.

As of March 31, 2023, the impact to the Company, as well as our response plan, has not materially changed from that described in the 2022 Annual Report.

Business Updates

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

During the three months ended March 31, 2023, approximately $12.5 million of the first tranche of the Google Success Funds was approved for reimbursement to the Company for Google’s portion of certain joint marketing expenses incurred by the Company.

Refer to Note 13 “Commitments and Contingencies,” for further information on the Google Commercial Agreement.

In connection with the State Farm Development Agreement, State Farm committed up to $300 million to an Opportunity Fund, of which we received $100 million upon Closing.

During the three months ended March 31, 2023, approximately $2 million of the Opportunity Fund was used to fund project development initiatives.

Refer to Note 15 “Related Party Transactions” for further information on the State Farm Strategic Investment.

FACTORS AFFECTING OPERATING RESULTS

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 September 30, 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 we continue to build our partnership with Google LLC (“Google”), introduce new or enhance our current offerings, and refine our go-to-market approach, we expect to see a shift toward an increasing proportion of outright sales transactions, which will impact results in future periods.

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 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 influenced by 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 such as those 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 certain rebates, tax credits, and other financial incentives, the availability and cost of consumer financing options, and traditional energy prices and grid reliability.

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

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

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

As we continue to build our partnership with Google, introduce new or enhance our current offerings, and refine our go-to-market approach, 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 those changes occur.

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

For example, our innovative virtual service 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.

For example, our innovative virtual service support program (the “Virtual Assistance Program”), which we 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.

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

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

(iii) replacing or upgrading certain system components or technology due to technological advancements, cybersecurity upgrades, or otherwise;

(iv) supply chain disruptions;

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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 that provide loan products to our Solar customers are impacted by factors such as the Federal Reserve increasing the risk-free interest rate.

Refer to Note 6 “Goodwill and Other Intangible Assets” and Critical Accounting Estimates below for further discussion.

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

A portion of our recurring customer base can be expected to cancel its service every year as customers may choose not to renew or may terminate their contracts for a variety of reasons, including relocation, cost, loss to competition, or service issues.

Prior to 2020, new customer additions and our disconnect rates on our residential monitored security customers were typically higher during the second and third calendar quarters of each year relative to the first and fourth quarters due to several factors including the timing of household moves and the overall state of the housing market.

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

During 2020, we experienced a lower volume of customer relocations which was followed by a slight increase during 2021 as the number of household moves increased.

During 2022, we have seen 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.

We are currently unable to determine whether there will be any ongoing or further impacts on our seasonality, and we may continue to experience fluctuations in these or other trends in the future.

We have not sought or requested government assistance as a result of the COVID-19 Pandemic, but we did experience a favorable cash flow impact during 2020 and other benefits associated with certain income tax and payroll tax provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), including the deferral of remittance of certain 2020 payroll taxes.

We paid the majority of the first 50% of the deferred amount during the fourth quarter of 2021, and expect to pay the remainder by January 2, 2023.

Strategic Partnerships

Google Commercial Agreement

In July 2020, we entered into a Master Supply, Distribution, and Marketing Agreement with Google (the “Google Commercial Agreement”), pursuant to which Google has agreed to supply us with certain Google devices as well as certain Google video and analytics services (“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.

As of 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 customers who do not have ADT Pulse or ADT Control interactive services.

We have already begun providing Google video services and devices, 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 in the third quarter of 2022.

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

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 entered into the Google Commercial Agreement Amendment, pursuant to which Google has agreed to commit an additional $150 million to fund growth, data and insights, product innovation and technology advancements, customer acquisition, and marketing, as mutually agreed by us and Google.

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

Canopy Investment

In April 2022, together with Ford Motor Company (“Ford”), we formed a new entity, SNTNL LLC (“Canopy”), which combines ADT’s professional security monitoring and Ford’s AI-driven video camera technology, to help customers strengthen 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%.

We have contributed approximately $11 million, which was part of the initial funding at closing.

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

As discussed in Note 10 “Equity,” in September 2022, we entered into a Securities Purchase Agreement with State Farm Fire & Casualty Company (“State Farm”) (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 (the “State Farm Shares”) at a per share price of $9.00 for an aggregate purchase price of $1.2 billion (the “State Farm Strategic Investment”).

Also, in September 2022, in connection with the State Farm Strategic Investment, we commenced a tender offer to purchase up to 133,333,333 shares of our Common Stock (including shares issued upon conversion of Class B Common Stock) (the “Tender Shares”) at a price of $9.00 per share (the “Tender Offer”).

Concurrently with the execution of the State Farm Securities Purchase Agreement, (i) Apollo delivered to us a Tender and Support Agreement, pursuant to which Apollo agreed to collectively tender (and not withdraw) no fewer than 133,333,333 shares of Common Stock in the Tender Offer (the “Apollo Support Agreement”) and (ii) Google delivered to us a Support Agreement, pursuant to which Google agreed to not convert and tender any of its shares of Class B Common Stock.

The Tender Offer is considered a contingent forward purchase contract (the “Forward Contract”), and we recorded changes in fair value of $158 million in other income (expense) during the three months ended September 30, 2022.

On October 13, 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 (as amended from time to time, the “Offer to Purchase”).

The Tender Shares were subject to the “odd lot” priority and proration provisions described in the Offer to Purchase as the Tender Offer was substantially over-subscribed.

No shares of Class B Common Stock were converted and tendered in the Tender Offer.

After giving effect to the State Farm Strategic Investment and the Tender Offer, State Farm owned approximately 15% of the Company’s issued and outstanding Common Stock (assuming conversion of Class B Common Stock).

The portion of our issued and outstanding Common Stock (assuming conversion of Class B Common Stock) owned by Apollo prior and subsequent to the Tender Offer was 67% and 55%, respectively.

Additionally, we entered into a Development Agreement with State Farm (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 approval by State Farm.

Radio Conversion Program

During 2019, we commenced a program to replace the 3G and Code-Division Multiple Access (“CDMA”) cellular equipment used in many of our security systems as a result of the cellular network providers notifying us they will be retiring their 3G and CDMA networks beginning in 2022.

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

Following the completion of the applicable network sunset, for those customers who do not transition prior to or have not transitioned since, 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, which may impact our attrition.

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

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

Tax Legislation

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

Certain changes to U.S.

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

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

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

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

Federal Tax Legislation

The Inflation Reduction Act (the “IRA”) was signed into law in August 2022.

The IRA, among other provisions, implements (i) a 15% corporate alternative minimum tax (the “CAMT”) on book income for corporations whose average 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 Investment Tax Credit (the “ITC”).

Both the CAMT and the excise tax provisions are effective for tax years beginning after December 31, 2021.

As of September 30, 2022, we do not anticipate any material impact 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 discussed in our 2021 Annual Report, we had a significant amount of deferred tax assets as of December 31, 2021, against which we take valuation allowances that relate to the uncertainty of our ability to utilize these deferred tax assets in future periods.

These valuation allowances were not material in 2021.

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

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

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

We believe that our deferred tax assets for disallowed interest under IRC Section 163(j) will grow meaningfully during 2022 and in subsequent years from their December 31, 2021 level.

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

While we have not reported any material changes to our valuation allowances as disclosed in our 2021 Annual Report, we may determine to do so in subsequent periods.

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

New customer additions and customer attrition have a direct impact on our financial results, including revenue, operating income, and cash flows.

A portion of our recurring customer base can be expected to cancel its service each year as customers may choose to terminate or not to renew their contracts for a variety of reasons, including relocation, cost, loss to competition, or service issues.

Relocations are sensitive to changes in the residential housing market, and fewer relocations generally lead to improvements in gross customer revenue attrition, but fewer new customer additions.

Additionally, non-payment disconnects generally increase in a weaker macroeconomic environment.

During 2022 and through the first quarter of 2023, we experienced fewer relocation disconnects and higher non-pay disconnects largely related to housing market conditions and the weaker macroeconomic environment.

We may continue to experience fluctuations in these or other trends in the future as changes in the general macroeconomic environment or housing market develop.

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.

KEY PERFORMANCE INDICATORS

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.

We evaluate our results using certain key performance indicators, including operating metrics such as 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 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.

Recurring Monthly Revenue

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 to investors 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 useful for forecasting future revenue performance as the majority of our revenue comes from recurring sources.

Gross Customer Revenue Attrition

Gross customer revenue attrition is defined as RMR lost as a result of customer attrition, net of dealer charge-backs and reinstated customers, excluding contracts monitored but not owned and DIY customers.

Customer sites are considered canceled when all services are terminated.

Dealer charge-backs represent customer cancellations charged back to the dealers because the customer canceled service during the charge-back period, which is generally thirteen months.

Gross customer revenue attrition is calculated on a trailing twelve-month basis, the numerator of which is the RMR lost during the period due to attrition, net of dealer charge-backs and reinstated customers, and the denominator of which is total annualized RMR based on an average of RMR under contract at the beginning of each month during the period, in each case, excluding contracts monitored but not owned and DIY customers.

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

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Adjusted EBITDA

We also disclose Adjusted EBITDA, which is a non-GAAP measure.

Adjusted EBITDA is a non-GAAP measure.

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.”

RESULTS OF OPERATIONS

Three Months Ended March 31,

(in thousands, except as otherwise indicated)

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

Results of Operations:

2022 2021 $ Change 2022 2021 $ Change

2023 2022 $ Change

Monitoring and related services $ 1,173,318 $ 1,121,296 $ 52,022

Installation, product, and other 444,450 218,613 225,837 1,323,139 681,448 641,691

Security installation, product, and other 294,201 231,470 62,731

Solar installation, product, and other 144,835 191,981 (47,146)

Total revenue 1,612,354 1,544,747 67,607

Cost of revenue (exclusive of depreciation and amortization shown separately below) :

Monitoring and related services 246,403 235,614 10,789

Security installation, product, and other 169,254 138,750 30,504

Solar installation, product, and other 98,344 135,404 (37,060)

Total cost of revenue 514,001 509,768 4,233

Selling, general, and administrative expenses 462,229 482,348 (20,119)

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Interest expense, net (171,626) (6,307) (165,319)

Loss on extinguishment of debt — (36,957) 36,957 — (37,113) 37,113

Other income (expense) (1,190) 1,496 (2,686)

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RMR $ 378,198 $ 364,936 $ 13,262

Gross customer revenue attrition (percent) 12.6% 13.4% N/A 12.6% 13.4% N/A

Gross customer revenue attrition (percent) 12.5% 12.9% N/A*

Adjusted EBITDA (2)

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* N/A — Not applicable.

Monitoring and Related Services Revenue:

Monitoring and related services revenue (“M&S Revenue”) is primarily comprised of revenue generated from providing recurring monthly monitoring and other services.

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

(in thousands)

2022 2021 $ Change 2022 2021 $ Change

CSB $ 1,021,811 $ 975,810 $ 46,001 $ 3,026,281 $ 2,892,291 $ 133,990

Commercial 137,830 122,579 15,251 400,448 352,384 48,064

Total M&S Revenue (1)

$ 1,159,641 $ 1,098,389 $ 61,252 $ 3,426,729 $ 3,244,675 $ 182,054

_________________

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

As of September 30, 2022, our ending RMR balance was $372 million, up $16 million or 4% compared to the prior year, primarily driven by our CSB segment.

The increases in M&S Revenue for the three and nine months ended September 30, 2022, as compared to the prior year periods, were driven by higher RMR and reflect:

• 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 2% primarily due to subscriber growth initiatives and improvements in customer retention.

Gross customer revenue attrition was 12.6% as of September 30, 2022 compared to 13.4% as of September 30, 2021.

The improvement in gross customer revenue attrition was driven by a decrease in relocations and fewer voluntary disconnects primarily resulting from customer retention initiatives, partially offset by higher non-payment disconnects.

During the three and nine months ended September 30, 2022, the increases in CSB M&S Revenue, as compared to the prior year periods, were primarily due to increases in recurring revenue of $41 million and $116 million, respectively, driven by the improvements in RMR described above.

For the three and nine months ended September 30, 2022, the increases in Commercial M&S Revenue, as compared to the prior year periods, included:

• increases in non-contracted service revenue of $12 million and $32 million, respectively, driven by higher revenue per service call, and

• increases in recurring revenue of $3 million and $16 million, respectively, driven by improvements in average revenue per subscriber.

Installation, Product, and Other Revenue:

Installation, product, and other revenue is comprised of revenue from the sale and installation of security and solar systems, as well as the amortization of deferred subscriber acquisition revenue primarily, in our CSB segment.

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

Three Months Ended March 31,

(in thousands)

2022 2021 $ Change 2022 2021 $ Change

CSB $ 88,829 $ 59,790 $ 29,039 $ 235,437 $ 204,561 $ 30,876

Commercial 176,468 158,823 17,645 501,513 476,887 24,626

Solar 179,153 — 179,153 586,189 — 586,189

Total installation, product, and other revenue $ 444,450 $ 218,613 $ 225,837 $ 1,323,139 $ 681,448 $ 641,691

The increase in total installation, product, and other revenue for the three and nine months ended September 30, 2022, as compared to the prior year periods, was primarily due to revenue from Solar installations, as shown above, as a result of the ADT Solar Acquisition in December 2021, and included a reduction of approximately $30 million in the first quarter of 2022 from the amortization of purchase accounting adjustments.

For the three months ended September 30, 2022, the increase in CSB installation, product, and other revenue included:

• an increase in the amortization of deferred subscriber acquisition revenue of $19 million due to an increase in ADT-owned transactions since the prior year period, and

• an increase in installation revenue on outright sales of $10 million primarily related to the sale of certain products in connection with our Google partnership.

For the nine months ended September 30, 2022, the increase in CSB installation, product, and other revenue included:

• an increase in the amortization of deferred subscriber acquisition revenue of $52 million due to an increase in ADT-owned transactions since the prior year period, partially offset by

• a net decrease in installation revenue of $21 million primarily driven by a lower volume of outright sales as a result of our transition to a predominately company-owned model in the first quarter of 2021.

For the three and nine months ended September 30, 2022, the increase in installation, product, and other revenue was primarily due to higher installation revenue of $17 million and $24 million, respectively, related to strong sales performance, despite supply chain delays.

2023 2022 $ Change

Monitoring and related services $ 1,028,634 $ 993,028 $ 35,606

Security installation, product, and other 103,842 69,561 34,281

Total CSB 1,132,476 1,062,589 69,887

Monitoring and related services 144,684 128,268 16,416

Security installation, product, and other 190,359 161,909 28,450

Total Commercial 335,043 290,177 44,866

Solar installation, product, and other 144,835 191,981 (47,146)

Total Solar 144,835 191,981 (47,146)

Total revenue $ 1,612,354 $ 1,544,747 $ 67,607

During the three months ended March 31, 2023, the increases in revenue, as compared to the prior period, included:

• Monitoring and related services revenue (“M&S Revenue”) :

higher recurring revenue of $35 million, reflecting approximately $31 million related to the estimated impact from an increase in average prices and approximately $8 million related to the estimated impact from an increase in subscribers, partially offset by a decrease of $4 million in other revenue primarily due to lower radio conversion revenue.

• Security installation, product, and other :

(i) an increase in the amortization of deferred subscriber acquisition revenue of $18 million as a result of a higher population of existing customers under a Company-owned model, as well as (ii) an increase in installation revenue of $16 million primarily driven by a higher volume of outright sales transactions.

During the three months ended March 31, 2023, the increases in revenue, as compared to the prior period, included:

• M&S Revenue :

(i) higher revenue from time and materials billings of $11 million driven by higher revenue per service call, as well as (ii) higher recurring revenue of $5 million driven by improvements in average revenue per subscriber.

• Security installation, product, and other :

higher installation revenue of $28 million primarily related to strong sales performance, despite supply chain delays.

During the three months ended March 31, 2023, the decrease in revenue, as compared to the prior period, included:

• a decrease of approximately $77 million primarily due to fewer sales and installations as a result of cost reduction efforts, delays in certain operational initiatives, and impacts from macroeconomic conditions, partially offset by

• the amortization of purchase accounting adjustments of $30 million related to a customer backlog intangible asset, which was recorded as a reduction to revenue during the first quarter of 2022.

RMR and Gross Customer Revenue Attrition:

As of March 31, 2023, our ending RMR balance was $378 million, up $13 million or 4%, compared to the prior period, primarily driven by an increase in average prices on new and existing subscribers.

Gross customer revenue attrition was 12.5% as of March 31, 2023 compared to 12.9% as of March 31, 2022.

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 is primarily comprised of costs related to the installation of our security and solar systems, as well as field service and call center costs in our CSB and Commercial segments.

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

(in thousands)

2022 2021 $ Change 2022 2021 $ Change

CSB $ 163,383 $ 172,483 $ (9,100) $ 505,767 $ 553,620 $ (47,853)

Commercial 216,702 199,502 17,200 623,590 581,116 42,474

Solar 114,236 — 114,236 382,545 — 382,545

Three Months Ended March 31,

(in thousands) 2023 2022 $ Change

Monitoring and related services $ 161,601 $ 154,519 $ 7,082

Security installation, product, and other 28,678 16,661 12,017

Total CSB 190,279 171,180 19,099

Monitoring and related services 84,802 81,095 3,707

Security installation, product, and other 140,576 122,089 18,487

Total Commercial 225,378 203,184 22,194

Solar installation, product, and other 98,344 135,404 (37,060)

Total Solar 98,344 135,404 (37,060)

Total cost of revenue $ 514,001 $ 509,768 $ 4,233

The increase in total cost of revenue for the three and nine months ended September 30, 2022, as compared to the prior year periods, was primarily due to higher installation costs, as shown above, as a result of the ADT Solar Acquisition in December 2021.

For the three months ended September 30, 2022, the decrease in CSB cost of revenue included:

• a decrease in field service and call center costs of $14 million, as compared to the prior year period, primarily driven by a lower volume of in-person service tickets as a result of cost savings initiatives such as our Virtual Assistance Program implemented in July 2021, despite rising costs and providing service to a larger number of customers, including a higher mix of interactive services, partially offset by

• an increase in installation costs of $5 million, as compared to the prior year period, due to a higher volume of outright sales transactions.

For the nine months ended September 30, 2022, the decrease in CSB cost of revenue included:

• a decrease in field service and call center costs of $27 million, as compared to the prior year period, primarily driven by a lower volume of in-person service tickets as a result of our Virtual Assistance Program described above, and

• a decrease in installation costs of $21 million, as compared to the prior year period, due to a lower volume of outright sales transactions.

For the three months ended September 30, 2022, the increase in Commercial cost of revenue included:

• an increase in installation costs of $11 million, and

• an increase in field service costs of $6 million.

For the nine months ended September 30, 2022, the increase in Commercial cost of revenue included:

• an increase in field service costs of $32 million, and

• an increase in installation costs of $11 million.

These increases were primarily attributable to an increase in installations and services performed in connection with strong sales performance as discussed above and reflect higher prices for materials, labor, and fuel.

During the three months ended March 31, 2023, cost of revenue, as compared to the prior period, included an increase in installation costs due to a higher volume of outright sales transactions, as well as an increase in monitoring and related services costs due to providing services to more interactive customers, partially offset by cost efficiencies as a result of our Virtual Assistance Program.

During the three months ended March 31, 2023, the increase in cost of revenue, as compared to the prior period, was primarily attributable to an increase in installations and services performed in connection with strong sales performance as discussed

During the three months ended March 31, 2023, the decrease in cost of revenue, as compared to the prior period, was primarily due to fewer sales and installations as discussed above.

Selling, General, and Administrative Expenses:

For the three and nine months ended September 30, 2022, the increases in selling, general, and administrative expenses (“SG&A”), as compared to the prior year periods, were primarily driven by:

• incremental expenses of approximately $71 million and $244 million, respectively, as a result of the ADT Solar Acquisition in December 2021,

• an increase in selling costs (excluding ADT Solar) of approximately $18 million and $39 million, respectively, primarily due to additional amortization of deferred subscriber acquisition costs, and

• increases in the provision for credit losses (excluding ADT Solar) of approximately $14 million and $33 million, respectively, primarily in our CSB segment due to lower provision in the prior year associated with impacts from the COVID-19 Pandemic.

These increases were partially offset by:

• decreases in radio conversion costs of $59 million and $173 million, respectively, primarily due to a decrease in the number of conversions, and

• decreases in advertising costs (excluding ADT Solar) of approximately $29 million and $67 million, respectively, primarily due to our efforts to optimize our advertising model in our CSB segment.

During the three months ended March 31, 2023, the decrease in selling, general, and administrative expenses (“SG&A”), as compared to the prior period, was primarily driven by:

• a decrease of $18 million in Solar SG&A, primarily due to recent cost reduction initiatives, including lower selling and advertising costs,

• a decrease of $17 million in radio conversion costs due to the wind down of the replacement program, and

• a decrease of $14 million in CSB advertising costs, primarily due to utilization of a portion of the Google Success Funds, partially offset by

• an increase of $10 million in the amortization of deferred subscriber acquisition costs, primarily related to CSB.

These changes were also partially offset by an increase in CSB and Commercial general and administrative expenses, including the allowance for credit losses.

Depreciation and Intangible Asset Amortization:

For the three and nine months ended September 30, 2022, the decrease in depreciation and intangible asset amortization, as compared to the prior year periods, was primarily driven by:

• decreases in the amortization of customer relationship intangible assets of $100 million and $218 million, respectively.

The decrease in the amortization of customer relationship intangible assets was primarily due to certain assets acquired as part of the acquisition of The ADT Security Corporation in 2016 (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 2023.

These decreases were partially offset by investments in subscriber growth resulting in:

• increases in the amortization of customer contracts acquired under our authorized dealer program and from other third parties of $14 million and $41 million, respectively, and

• increases in the depreciation of subscriber system assets of $10 million and $34 million, respectively.

During the three months ended March 31, 2023, the decrease in depreciation and intangible asset amortization, as compared to the prior period, was primarily driven by a decrease in the amortization of customer relationship intangible assets of $115 million primarily related to certain assets acquired as part of the ADT Acquisition, partially offset by increases in the amortization of subscriber system assets and contracts and related customer relationship intangible assets.

During the first quarter of 2023, the remaining customer relationship intangible assets acquired as part of the ADT Acquisition became fully amortized.

Merger, restructuring, integration, and other:

During the nine months ended September 30, 2021, merger, restructuring, integration, and other primarily included an $18 million impairment charge in CSB due to lower than expected benefits from our developed-technology intangible asset acquired during November 2020.

During the three months ended March 31, 2023, merger, restructuring, integration, and other includes restructuring costs primarily related to certain facility exits, as well as integration and third-party costs related to the strategic optimization of our Solar business operations following the acquisition of ADT Solar.

Goodwill Impairment:

For the three and nine months ended September 30, 2022, we recorded a goodwill impairment charge of $149 million associated with our Solar reporting unit, which was the result of an interim impairment analysis performed.

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

For the three months ended March 31, 2023, we recorded a goodwill impairment charge of $193 million, which was the result of an interim impairment analysis associated with our Solar reporting unit.

Refer to Note 6 “Goodwill and Other Intangible Assets” and the section “—Critical Accounting Estimates” below for further discussion.

Interest Expense, net:

For the three and nine months ended September 30, 2022, the decrease in interest expense, net was driven by higher unrealized gains of $85 million and $198 million, respectively, related to interest rate swap contracts not designated as cash flow hedges primarily due to fluctuations in the forward London Interbank Offered Rate (“LIBOR”).

Refer to Note 8 “Derivative Financial Instruments” for additional information.

Loss on Extinguishment of Debt:

During the three and nine months ended September 30, 2021, loss on extinguishment of debt of $37 million was related 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):

For the three and nine months ended September 30, 2022, other income (expense) primarily included the change in fair value of the Forward Contract related to the Tender Offer of $158 million.

In the fourth quarter of 2022, we expect to recognize a gain of approximately $95 million as a result of further adjustments to the fair value of the Forward Contract.

Refer to Note 10 “Equity” for additional information.

The increase in interest expense, net was driven by unrealized losses on our interest rate swaps not designated as cash flow hedges of $33 million during the three months ended March 31, 2023 compared to unrealized gains of $145 million during the three months ended March 31, 2022.

The increase also reflects higher interest expense of $27 million related to our First Lien Term Loan due 2026 offset by a decrease of $33 million related to settlements on our interest rate swaps.

Income Tax Benefit (Expense):

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

The Company’s income tax expense for the three months ended September 30, 2022 was $2 million, resulting in an effective tax rate for the period of (1.3)%.

The effective tax rate primarily represents the federal statutory rate of 21.0% plus a state statutory tax rate, net of federal benefits, of 6.5%, favorable impacts from research and development (“R&D”) credits and other items, partially offset by an unfavorable impact related to the fair value adjustment of the Forward Contract.

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

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

The Company’s income tax expense for the nine months ended September 30, 2022 was $59 million, resulting in an effective tax rate for the period of 71.3%.

The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 5.0%, unfavorable impacts related to the fair value adjustment of the Forward Contract and other items, partially offset by favorable impacts from R&D credits and other items.

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

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

Our income tax benefit for the three months ended March 31, 2023 was $43 million, resulting in an effective tax rate for the period of 33.1%.

The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 8.1%, and unfavorable impacts related to non-deductible executive compensation, Solar goodwill impairment, and other items, partially offset by favorable impacts from federal tax credits and other items.

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

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

Deferred Tax Assets

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

Among those matters considered are pending and enacted legislation.

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

We believe that our deferred tax assets for disallowed interest under Internal Revenue Code (“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.

While we have not reported any material changes to our valuation allowances since our 2022 Annual Report, we may determine to do so in subsequent periods.

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

Inflation Reduction Act

Under the Inflation Reduction Act (“IRA”), the Investment Tax Credit (“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 could be favorable for our Solar business.

NON-GAAP MEASURES

9 unchanged sentences

(v) share-based compensation expense;

(vi) merger, restructuring, integration, and other;

(vi) merger, restructuring, integration, and other items;

(vii) losses on extinguishment of debt;

(viii) radio conversion costs, net;

and (ix) other income/gain or expense/loss items such as changes in fair value of certain financial instruments, impairment charges, financing and consent fees, or acquisition-related adjustments.

(ix) adjustments related to acquisitions, such as contingent consideration and purchase accounting adjustments, or dispositions;

(x) impairment charges;

and (xi) other income/gain or expense/loss items such as changes in fair value of certain financial instruments or financing and consent fees.

There are material limitations to using Adjusted EBITDA.

2 unchanged sentences

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

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

(in thousands) 2022 2021 $ Change 2022 2021 $ Change

Three Months Ended March 31,

(in thousands) 2023 2022 $ Change

Net income (loss) $ (89,698) $ 51,645 $ (141,343)

8 unchanged sentences

192,700 — 192,700

Loss on extinguishment of debt — 36,957 (36,957) — 37,113 (37,113)

Change in fair value of financial instruments (2)

157,550 — 157,550 157,550 — 157,550

Radio conversion costs, net (4,078) 52,295 (56,373) 6,406 171,659 (165,253)

Acquisition-related adjustments (2)

1,630 36,295 (34,665)

Other, net (3)

385 11,039 (10,654)

3 unchanged sentences

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

(2) Represents the change in fair value of the Forward Contract.

Refer to Note 10 “Equity.”

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

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

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

(3) During 2022, primarily includes net radio conversion costs.

Adjusted EBITDA in total and by segment are set forth below.

As noted above, Adjusted EBITDA is our segment profit measure pursuant to U.S.

GAAP and is therefore not a non-GAAP financial measure with respect to our segments.

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

(in thousands) 2022 2021 $ Change 2022 2021 $ Change

As noted above, Adjusted EBITDA is our segment profit measure pursuant to GAAP and is therefore not a non-GAAP financial measure with respect to our segments.

Three Months Ended March 31,

(in thousands) 2023 2022 $ Change

CSB $ 594,673 $ 560,545 $ 34,128

4 unchanged sentences

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

For the three and nine months ended September 30, 2022, respectively, the increases were primarily due to:

• higher M&S Revenue of $48 million and $141 million,

• lower advertising costs of $29 million and $69 million, and

• lower field service and call center costs of $14 million and $27 million.

The increases were partially offset, respectively, by:

• higher selling and general and administrative expenses of $20 million and $34 million, and

• higher provision for credit losses of $11 million and $27 million.

For the three and nine months ended September 30, 2022, respectively, the increase was primarily due to:

• higher M&S Revenue of $15 million and $48 million and

• higher installation revenue, net of the associated installation costs of $6 million and $13 million, partially offset by

• higher field service and call center costs of $6 million and $32 million, and

• higher provision for credit losses of $4 million and $6 million.

The remainder was primarily due to higher selling, general and administrative expenses.

Solar Adjusted EBITDA for the nine months ended September 30, 2022 includes $11 million of charges in the second quarter associated with the estimated amount of receivables and rebates that are not expected to be collected from a former third-party lender that provided loan products for our Solar customers due to this third-party lender entering a formal insolvency proceeding to effectuate the wind-down of its operations.

During the three months ended March 31, 2023, the increase, as compared to the prior period, was primarily due to higher M&S Revenue, net of the associated costs, of $34 million.

During the three months ended March 31, 2023, the increase, as compared to the prior period, was primarily due to higher M&S Revenue, net of associated costs, of $13 million and higher installation revenue, net of the associated costs, of $10 million, partially offset by higher SG&A.

During the three months ended March 31, 2023, the decrease as compared to the prior period, was primarily due to lower installation revenue, net of the associated costs, of $43 million, partially offset by lower SG&A.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and capital resources primarily consisted of the following:

(in thousands) September 30, 2022

(in thousands) March 31, 2023

Cash and cash equivalents $ 186,316

Restricted cash and restricted cash equivalents $ 117,236

Availability under First Lien Revolving Credit Facility $ 575,000

Availability under Term Loan A Facility $ 50,000

Uncommitted available borrowing capacity under Receivables Facility $ 125,892

Carrying amount of total debt outstanding $ 9,840,134

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

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

We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our First Lien Revolving Credit Facility and 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 including working capital, principal and interest payments on our debt, capital expenditures, potential dividend payments to our stockholders, and from time to time, strategic investments or other initiatives that we may undertake.

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

2 unchanged sentences

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

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

The SOFR will replace the forward LIBOR as the applicable benchmark rate for all existing and future issuances of our debt instruments with a variable rate component by June 2023.

Existing instruments under the First Lien Credit Agreement will continue to be based on LIBOR until the SOFR Transition Date.

However, any modification, such as a repricing, or any new debt issuances with a variable rate component, will utilize SOFR per the terms of the First Lien Credit Agreement.

As of September 30, 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.

As of March 31, 2023, we do not anticipate any material impacts from the SOFR Transition.

We are closely monitoring the impact of recent developments in the financial markets and banking industry, inflationary pressures, and changes in interest rates on our cash position.

However, we believe our cash position, available borrowing capacity under our credit agreements, 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

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

Customer Account Purchases

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

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

Off-Balance Sheet Arrangements

During the nine months ended September 30, 2022, there have been no material changes to our off-balance sheet arrangements as disclosed in our 2021 Annual Report, except as discussed below:

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

There have been no significant changes to our material cash requirements, commitments and contingencies, or off-balance sheet arrangements from those disclosed in our 2022 Annual Report.

Repurchase of Solar Loans

As of March 31, 2023, the liability related to certain loans provided to customers within our Solar business that we may be required to repurchase from third party lenders was approximately $71 million.

This liability is partially offset by a net receivable related to the amount we ultimately expect to recover from any loans required to be repurchased, either through ongoing loan payments from the customer or proceeds from subsequent resale of the loans.

Long-Term Debt

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

Significant changes and activity related to our long-term debt since our 2022 Annual Report are discussed below.

Refer to Note 7 “Debt” for further discussion on our debt agreements.

First Lien Revolving Credit Facility

During the nine months ended September 30, 2022, we borrowed $480 million and repaid $505 million, and as of September 30, 2022, we had no outstanding borrowings.

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”).

We may execute the Term Loan A Credit Agreement and incur indebtedness under the Term Loan A Facility, or at our option, terminate the commitments at any time prior to the Commitment Termination Date.

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

As of September 30, 2022, we have not incurred indebtedness under the Term Loan A Facility.

In March 2023, we issued an aggregate principal amount of $600 million of term loans under the Term Loan A Facility.

Additionally, we amended the Term Loan A Credit Agreement, pursuant to which the lenders have agreed, at our option, to provide an additional aggregate principal amount of $50 million of term loans on or before the scheduled maturity date of the ADT Notes due 2023.

We expect to borrow the Incremental Term Loan A on or around the stated maturity date of the ADT Notes due 2023 and use the proceeds to complete the redemption of at least $50 million of the ADT Notes due 2023 at maturity.

Receivables Facility

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

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

During the nine months ended September 30, 2022, we received proceeds of $212 million and repaid $81 million, and as of September 30, 2022, the Receivables Facility had an outstanding balance of $330 million.

We are currently evaluating options for increasing our available borrowing capacity under the Receivables Facility.

ADT Notes due 2023

As of September 30, 2022, we had an outstanding balance of $700 million under our senior notes due 2023 (the “ADT Notes due 2023”) that was classified as a current liability, net of any unamortized discount.

We intend 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 redeem the remaining outstanding balance upon maturity, in both instances including the payment of related expenses, using available cash.

In March 2023, we amended the agreement governing the Receivables Facility, pursuant to which, among other things, the borrowing capacity was increased from $400 million to $500 million and the uncommitted revolving period was extended from May 2023 to March 2024.

During the three months ended March 31, 2023, we received proceeds from the Receivables Facility of $64 million and repaid $44 million, and as of March 31, 2023, the Receivables Facility had an outstanding balance of $374 million.

ADT Notes due 2023 Partial Redemption

In March 2023, we used the proceeds from the Term Loan A Facility to redeem approximately $600 million of the ADT Notes due 2023 for a total redemption price of approximately $600 million, excluding accrued and unpaid interest.

We intend to redeem in June 2023 the remaining outstanding balance of approximately $100 million of the ADT Notes due 2023 prior to maturity using proceeds from the Incremental Term Loan A and cash on hand.

ADT Notes due 2024 Partial Redemption

On May 2, 2023, we redeemed $150 million principal amount of the outstanding ADT Notes due 2024 for a redemption price of $150 million, excluding accrued and unpaid interest, using cash on hand.

Debt Covenants

As of September 30, 2022, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations.

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

During the nine months ended September 30, 2022 and 2021, we declared aggregate dividends of $90 million ($0.035 per share) and $82 million ($0.035 per share) on our Common Stock, respectively, and $6 million ($0.035 per share) on our Class B Common Stock during both periods.

On November 3, 2022, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on December 15, 2022, which will be distributed on January 4, 2023.

As of March 31, 2023, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations.

We do not believe there is a material risk of future noncompliance with our financial covenant and other maintenance tests.

During the three months ended March 31, 2023 and 2022, we declared aggregate dividends of $30 million ($0.035 per share) and $30 million ($0.035 per share) on our Common Stock, respectively, and $2 million ($0.035 per share) on our Class B Common Stock during both periods.

On May 2, 2023, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on June 15, 2023, which will be distributed on July 6, 2023.

Cash Flow Analysis

Nine Months Ended September 30,

Three Months Ended March 31,

(in thousands) 2023 2022 $ Change

Net cash provided by (used in) operating activities $ 1,321,069 $ 1,155,353 $ 165,716

Net cash provided by (used in) investing activities $ (1,208,790) $ (1,170,649) $ (38,141)

Net cash provided by (used in) financing activities $ (85,772) $ (124,081) $ 38,309

Net cash provided by (used in):

Operating activities $ 306,640 $ 308,072 $ (1,432)

Investing activities $ (336,040) $ (405,123) $ 69,083

Financing activities $ (40,628) $ 91,845 $ (132,473)

Cash Flows from Operating Activities

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

• a decrease in payments related to radio conversion costs, net of the related incremental revenue, of $162 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.

Cash provided by operating activities remained relatively flat, as compared to the prior period, and primarily included:

• an increase in cash interest of $39 million primarily related to our First Lien Term Loan due 2026, and

• an increase in payroll tax payments of $26 million primarily related to deferrals of such payments in 2020 under the CARES Act, partially offset by

• a decrease in payments related to radio conversion costs, net of the related incremental revenue, of $14 million.

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

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Cash Flows from Investing Activities

During the nine months ended September 30, 2022, the increase in cash flows used in investing activities as compared to the prior year primarily consisted of:

• an increase in net outflows of $54 million related to subscriber system assets expenditures as a result of more Company-owned transactions and our growth initiatives, as well as

• cash paid of $11 million related to our initial investment in Canopy during 2022, partially offset by

• proceeds of $27 million related to disposal activities during 2022.

The decrease in cash used in investing activities for the three months ended March 31, 2023, as compared to the prior period, was primarily due to:

• a decrease in cash paid for dealer generated customer account and bulk account purchases of $69 million primarily related to fewer bulk purchases, as well as

• a decrease in subscriber system assets expenditures of $23 million due to fewer adds, partially offset by

• an increase in purchases of property and equipment of $21 million primarily related to investments in our information technology infrastructure.

Cash Flows from Financing Activities

During the nine months ended September 30, 2022, net cash used in financing activities primarily consisted of:

• dividends on common stock of $95 million,

• net repayments of long-term borrowings of $48 million, which primarily included net payments of $25 million on our First Lien Revolving Credit Facility and $21 million of quarterly principal payments on our First Lien Term Loan due 2026,

• payments related to finance leases of $34 million, and

• payments related to interest rate swap contracts that included an other-than-insignificant financing element at inception of $27 million, partially offset by

• net proceeds of $131 million under the Receivables Facility

During the nine months ended September 30, 2021, net cash used in financing activities primarily consisted of:

• dividends on common stock of $87 million,

• net repayments of long-term borrowings of $41 million, which included $28 million in call premiums and $14 million of quarterly principal payments on our First Lien Term Loan due 2026.

• payments related to interest rate swap contracts that included an other-than-insignificant financing element at inception of $42 million, as well as

• payments related to finance leases of $23 million, partially offset by

• net proceeds under the Receivables Facility of $90 million.

The decrease in cash flows from financing activities for the three months ended March 31, 2023, as compared to the prior period, was due to:

• a decrease in net proceeds of long-term borrowings of approximately $145 million primarily as a result of net borrowings under the First Lien Revolving Credit Facility during the prior year, as well as

• an increase in other financing payments of $10 million primarily due to share-based compensation activity, partially offset by

• an increase related to proceeds from interest rate swap contracts that included an other-than-insignificant financing element at inception of $16 million during 2023 compared to payments of $13 million during 2022.

CRITICAL ACCOUNTING ESTIMATES

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

There were no material changes in our critical accounting estimates to that disclosed in our 2021 Annual Report, except as discussed below:

There were no material changes in our critical accounting estimates since our 2022 Annual Report, except as discussed below:

Goodwill Impairment

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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.

As disclosed in our 2021 Annual Report, we acquired ADT Solar in December 2021 and assigned the goodwill to our newly created Solar reporting unit at the time of acquisition.

During the third quarter of 2022, as a result of ADT Solar’s recent underperformance of operating results in successive quarters relative to expectations, as well as current macroeconomic conditions, including the impact of the Federal Reserve further increasing the risk-free interest rate, we performed an interim impairment quantitative assessment on our Solar reporting unit as of September 30, 2022.

During the first quarter of 2023, due to the at-risk nature of the goodwill attributed to our Solar reporting unit following a goodwill impairment charge during the third quarter of 2022, and as a result of current macroeconomic conditions, including the impact of rising interest rates and financial market conditions on the Company’s third party lenders and customer demand, as well as ADT Solar’s underperformance of operating results in the first quarter relative to expectations, we identified a triggering event related to our Solar reporting unit.

As a result, we performed an interim impairment quantitative assessment on our Solar reporting unit as of March 31, 2023.

We estimated the fair value of the Solar reporting unit using the income approach, which included significant assumptions such as forecasted revenue, Adjusted EBITDA margins, and discount rates, as well as other assumptions including operating expenses and cash flows.

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There are inherent uncertainties related to these judgments and factors that may ultimately impact the estimated fair value determinations.

Based on the results of our interim impairment analysis, we recorded a non-cash impairment charge of $149 million in the Condensed Consolidated Statements of Operations during the third quarter of 2022.

Based on the results of our interim impairment analysis, we recorded a non-cash impairment charge of $193 million during the first quarter of 2023.

Following the impairment loss, the remaining balance of goodwill attributable to our Solar reporting unit is approximately $370 million.

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If our 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 2024 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 0.8%, holding other assumptions constant, would result in approximately $40 million of additional impairment.

Refer to Note 6 “Goodwill and Other Intangible Assets” to the condensed consolidated financial statements for further discussion.

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the successful commercialization of our joint venture with Ford;

the successful conversion of customers who continue to utilize 3G services;

the successful conversion of customers who continue to utilize outdated technology;

the current and future market size for existing, new, or joint products;

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

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

• our ability to effectively implement our strategic partnership with, commercialize products with, or utilize any of the amounts invested in us by State Farm or provided by State Farm for R&D or other purposes;

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

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

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

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

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

• and our ability to maintain or improve margins through business efficiencies.

Forward-looking statements and information involve risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements, including without limitation, the risks and uncertainties disclosed or referenced under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A in our 2022 Annual Report.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis