ADT Inc. 10-Q/A

ITEM 1. FINANCIAL STATEMENTS. ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share and per share data) March 31, 2023 (Restated) December 31, 2022 Assets Current assets: Cash and cash equivalents $ 186,316 $ 257,223 Restricted cash and restricted cash equivalents 117,236 116,357 Accounts receivable, net of allowance for credit losses of $ 64,869 and $ 65,655 , respectively 598,163 597,313 Inventories, net 326,617 329,490 Work-in-progress 72,273 80,765 Prepaid expenses and other current assets 323,962 340,848 Total current assets 1,624,567 1,721,996 Property and equipment, net 356,067 375,968 Subscriber system assets, net 3,079,049 3,061,303 Intangible assets, net 5,019,815 5,091,747 Goodwill 5,525,995 5,767,016 Deferred subscriber acquisition costs, net 1,119,908 1,079,638 Other assets 719,777 723,568 Total assets $ 17,445,178 $ 17,821,236 Liabilities and stockholders' equity Current liabilities: Current maturities of long-term debt $ 464,566 $ 871,917 Accounts payable 397,666 486,715 Deferred revenue 395,201 402,691 Accrued expenses and other current liabilities 741,110 899,780 Total current liabilities 1,998,543 2,661,103 Long-term debt 9,375,568 8,956,671 Deferred subscriber acquisition revenue 1,735,298 1,645,478 Deferred tax liabilities 824,378 892,994 Other liabilities 265,959 271,842 Total liabilities 14,199,746 14,428,088 Commitments and contingencies (See Note 13) Stockholders' equity: Preferred stock—authorized 1,000,000 shares of $ 0.01 par value; zero issued and outstanding as of March 31, 2023 and December 31, 2022 — — Common stock—authorized 3,999,000,000 shares of $ 0.01 par value; issued and outstanding shares of 866,916,570 and 862,098,041 as of March 31, 2023 and December 31, 2022, respectively 8,668 8,621 Class B common stock—authorized 100,000,000 shares of $ 0.01 par value; issued and outstanding shares of 54,744,525 as of March 31, 2023 and December 31, 2022 547 547 Additional paid-in capital 7,380,867 7,380,759 Accumulated deficit ( 4,101,557 ) ( 3,949,579 ) Accumulated other comprehensive income (loss) ( 43,093 ) ( 47,200 ) Total stockholders' equity 3,245,432 3,393,148 Total liabilities and stockholders' equity $ 17,445,178 $ 17,821,236 See Notes to Condensed Consolidated Financial Statements 1 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data) Three Months Ended March 31, 2023 (Restated) 2022 Revenue: Monitoring and related services $ 1,173,318 $ 1,121,296 Security installation, product, and other 294,201 231,470 Solar installation, product, and other 144,835 191,981 Total revenue 1,612,354 1,544,747 Cost of revenue (exclusive of depreciation and amortization shown separately below) : Monitoring and related services 246,403 235,614 Security installation, product, and other 169,254 138,750 Solar installation, product, and other 98,344 135,404 Total cost of revenue 514,001 509,768 Selling, general, and administrative expenses 462,229 482,348 Depreciation and intangible asset amortization 383,055 476,123 Merger, restructuring, integration, and other 17,647 528 Goodwill impairment 241,630 — Operating income (loss) ( 6,208 ) 75,980 Interest expense, net ( 171,626 ) ( 6,307 ) Other income (expense) ( 1,190 ) 1,496 Income (loss) before income taxes and equity in net earnings (losses) of equity method investee ( 179,024 ) 71,169 Income tax benefit (expense) 62,864 ( 19,524 ) Income (loss) before equity in net earnings (losses) of equity method investee ( 116,160 ) 51,645 Equity in net earnings (losses) of equity method investee ( 2,677 ) — Net income (loss) $ ( 118,837 ) $ 51,645 Net income (loss) per share - basic: Common Stock $ ( 0.13 ) $ 0.06 Class B Common Stock $ ( 0.13 ) $ 0.06 Weighted-average shares outstanding - basic: Common Stock 854,299 843,830 Class B Common Stock 54,745 54,745 Net income (loss) per share - diluted: Common Stock $ ( 0.13 ) $ 0.06 Class B Common Stock $ ( 0.13 ) $ 0.06 Weighted-average shares outstanding - diluted: Common Stock 854,299 911,313 Class B Common Stock 54,745 54,745 See Notes to Condensed Consolidated Financial Statements 2 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (in thousands) Three Months Ended March 31, 2023 (Restated) 2022 Net income (loss) $ ( 118,837 ) $ 51,645 Other comprehensive income (loss), net of tax: Cash flow hedges 4,135 11,092 Other ( 28 ) ( 9 ) Total other comprehensive income (loss), net of tax 4,107 11,083 Comprehensive income (loss) $ ( 114,730 ) $ 62,728 See Notes to Condensed Consolidated Financial Statements 3 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands) Three Months Ended March 31, 2023 Number of Common Shares Number of Class B Common Shares Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Beginning balance 862,098 54,745 $ 8,621 $ 547 $ 7,380,759 $ ( 3,949,579 ) $ ( 47,200 ) $ 3,393,148 Net income (loss) — — — — — ( 118,837 ) — ( 118,837 ) Other comprehensive income (loss), net of tax — — — — — — 4,107 4,107 Dividends — — — — — ( 32,258 ) — ( 32,258 ) Share-based compensation expense — — — — 15,982 — — 15,982 Transactions related to employee share-based compensation plans and other 4,819 — 47 — ( 15,874 ) ( 883 ) ( 16,710 ) Ending balance (Restated) 866,917 54,745 $ 8,668 $ 547 $ 7,380,867 $ ( 4,101,557 ) $ ( 43,093 ) $ 3,245,432 Three Months Ended March 31, 2022 Number of Common Shares Number of Class B Common Shares Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Beginning balance 846,826 54,745 $ 8,468 $ 547 $ 7,261,267 $ ( 3,952,590 ) $ ( 68,973 ) $ 3,248,719 Net income (loss) — — — — — 51,645 — 51,645 Other comprehensive income (loss), net of tax — — — — — — 11,083 11,083 Dividends — — — — — ( 31,758 ) — ( 31,758 ) Share-based compensation expense — — — — 16,020 — — 16,020 Transactions related to employee share-based compensation plans and other 4,498 — 45 — ( 15,050 ) ( 437 ) — ( 15,442 ) Ending balance 851,324 54,745 $ 8,513 $ 547 $ 7,262,237 $ ( 3,933,140 ) $ ( 57,890 ) $ 3,280,267 See Notes to Condensed Consolidated Financial Statements 4 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended March 31, 2023 (Restated) 2022 Cash flows from operating activities: Net income (loss) $ ( 118,837 ) $ 51,645 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and intangible asset amortization 383,055 476,123 Amortization of deferred subscriber acquisition costs 46,684 36,939 Amortization of deferred subscriber acquisition revenue ( 72,022 ) ( 53,423 ) Share-based compensation expense 15,982 16,020 Deferred income taxes ( 69,740 ) 16,172 Provision for losses on receivables and inventory 26,479 19,314 Goodwill, intangible, and other asset impairments 242,630 — Unrealized (gain) loss on interest rate swap contracts 32,516 ( 145,289 ) Other non-cash items, net 28,601 65,445 Changes in operating assets and liabilities, net of effects of acquisitions: Deferred subscriber acquisition costs ( 87,161 ) ( 92,837 ) Deferred subscriber acquisition revenue 73,529 81,073 Other, net ( 195,076 ) ( 163,110 ) Net cash provided by (used in) operating activities 306,640 308,072 Cash flows from investing activities: Dealer generated customer accounts and bulk account purchases ( 115,818 ) ( 185,070 ) Subscriber system asset expenditures ( 159,433 ) ( 182,141 ) Purchases of property and equipment ( 59,215 ) ( 38,317 ) Other investing, net ( 1,574 ) 405 Net cash provided by (used in) investing activities ( 336,040 ) ( 405,123 ) Cash flows from financing activities: Proceeds from long-term borrowings 600,000 280,000 Proceeds from receivables facility 63,749 46,876 Proceeds (payments) from interest rate swaps 16,322 ( 13,461 ) Repayment of long-term borrowings, including call premiums ( 607,444 ) ( 142,567 ) Repayment of receivables facility ( 44,432 ) ( 20,876 ) Dividends on common stock ( 32,038 ) ( 31,596 ) Payments on finance leases ( 10,982 ) ( 10,691 ) Other financing, net ( 25,803 ) ( 15,840 ) Net cash provided by (used in) financing activities ( 40,628 ) 91,845 Cash and cash equivalents and restricted cash and restricted cash equivalents: Net increase (decrease) ( 70,028 ) ( 5,206 ) Beginning balance 373,580 33,277 Ending balance $ 303,552 $ 28,071 See Notes to Condensed Consolidated Financial Statements 5 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Organization ADT Inc., together with its wholly-owned subsidiaries (collectively, the “Company”), provides security, interactive, and smart home solutions, in the United States (“U.S.”), to consumer, small business, and commercial customers, as well as residential solar and energy storage solutions. The Company primarily conducts business under the ADT brand name. The Company is majority-owned by Prime Security Services TopCo (ML), L.P., which is majority-owned by Prime Security Services TopCo Parent, L.P. (“Ultimate Parent”). Ultimate Parent is majority-owned by Apollo Investment Fund VIII, L.P. and its related funds that are directly or indirectly managed by affiliates of Apollo Global Management, Inc. (together with its subsidiaries and affiliates, “Apollo” or the “Sponsor”). Basis of Presentation The condensed consolidated financial statements included herein have been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Certain prior period amounts have been reclassified to conform with the current period presentation. The financial statements included herein comprise the consolidated results of ADT Inc. and its wholly-owned subsidiaries. The results of companies acquired are included from the effective date of acquisition; and all intercompany transactions have been eliminated. The Company uses the equity method of accounting to account for an investment in which it has the ability to exercise significant influence but does not control. The condensed consolidated financial statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for the interim periods presented. The interim results reported herein should not be taken as indicative of results that may be expected for future interim periods or the full year. The Condensed Consolidated Balance Sheet as of December 31, 2022 included herein was derived from the audited consolidated financial statements as of that date. Certain information and footnote disclosures required in the annual consolidated financial statements have been omitted as appropriate. For a more comprehensive understanding of the Company and its interim results, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Amended Annual Report on Form 10-K/A for the year ended December 31, 2022 (the Amended “2022 Annual Report”), which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on July 27, 2023. Restatement The Company restated its previously issued Condensed Consolidated Financial Statements and related notes for the three months ended March 31, 2023. In connection with the preparation of the Company’s second quarter 2023 condensed consolidated financial statements, the Company identified errors in the non-cash goodwill impairment losses associated with its Solar reporting unit and related tax impacts recognized during the third quarter of 2022 and the first quarter of 2023 as a result of the Company not applying the simultaneous equation method prescribed by Accounting Standards Update 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). The simultaneous equation method is not universally applicable. It only applies when a reporting unit has tax deductible goodwill. When a reporting unit contains tax deductible goodwill, a goodwill impairment results in an increase in the related deferred tax asset (or reduction in deferred tax liability), which in turn, results in greater goodwill impairment. The simultaneous equation solves for the amount of goodwill impairment and related deferred taxes that yield a carrying amount of the reporting unit equal to its fair value at the point of impairment. 6 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The impacts from the restatement as of and for the three months ended March 31, 2023 are as follows: Condensed Consolidated Balance Sheet: As of March 31, 2023 (in thousands) As Reported Adjustments As Restated Goodwill $ 5,626,514 $ ( 100,519 ) $ 5,525,995 Total assets $ 17,545,697 $ ( 100,519 ) $ 17,445,178 Deferred tax liabilities $ 855,803 $ ( 31,425 ) $ 824,378 Total liabilities $ 14,231,171 $ ( 31,425 ) $ 14,199,746 Accumulated deficit $ ( 4,032,463 ) $ ( 69,094 ) $ ( 4,101,557 ) Total stockholders’ equity $ 3,314,526 $ ( 69,094 ) $ 3,245,432 Total liabilities and stockholders’ equity $ 17,545,697 $ ( 100,519 ) $ 17,445,178 Condensed Consolidated Statement of Operations: For the three months ended March 31, 2023 (in thousands, except per share amounts) As Reported Adjustments As Restated Goodwill impairment $ 192,700 $ 48,930 $ 241,630 Operating income (loss) $ 42,722 $ ( 48,930 ) $ ( 6,208 ) Income (loss) before income taxes and equity in net earnings (losses) of equity method investee $ ( 130,094 ) $ ( 48,930 ) $ ( 179,024 ) Income tax benefit (expense) $ 43,073 $ 19,791 $ 62,864 Income (loss) before equity in net earnings (losses) of equity method investee $ ( 87,021 ) $ ( 29,139 ) $ ( 116,160 ) Net income (loss) $ ( 89,698 ) $ ( 29,139 ) $ ( 118,837 ) Net income (loss) per share - basic: Common Stock $ ( 0.10 ) $ ( 0.03 ) $ ( 0.13 ) Class B Common Stock $ ( 0.10 ) $ ( 0.03 ) $ ( 0.13 ) Weighted-average shares outstanding - basic: Common Stock 854,299 — 854,299 Class B Common Stock 54,745 — 54,745 Net income (loss) per share - diluted: Common Stock $ ( 0.10 ) $ ( 0.03 ) $ ( 0.13 ) Class B Common Stock $ ( 0.10 ) $ ( 0.03 ) $ ( 0.13 ) Weighted-average shares outstanding - diluted: Common Stock 854,299 — 854,299 Class B Common Stock 54,745 — 54,745 Condensed Consolidated Statement of Comprehensive Income (Loss): For the three months ended March 31, 2023 (in thousands) As Reported Adjustments As Restated Net income (loss) $ ( 89,698 ) $ ( 29,139 ) $ ( 118,837 ) Comprehensive income (loss) $ ( 85,591 ) $ ( 29,139 ) $ ( 114,730 ) 7 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Condensed Consolidated Statement of Stockholders’ Equity: For the three months ended March 31, 2023 (in thousands) As Reported Adjustments As Restated Net income (loss) $ ( 89,698 ) $ ( 29,139 ) $ ( 118,837 ) Accumulated deficit $ ( 4,032,463 ) $ ( 69,094 ) $ ( 4,101,557 ) Total stockholders’ equity $ 3,314,526 $ ( 69,094 ) $ 3,245,432 Condensed Consolidated Statement of Cash Flows: For the three months ended March 31, 2023 (in thousands) As Reported Adjustments As Restated Net income (loss) $ ( 89,698 ) $ ( 29,139 ) $ ( 118,837 ) Deferred income taxes $ ( 49,949 ) $ ( 19,791 ) $ ( 69,740 ) Goodwill, intangible, and other asset impairments $ 193,700 $ 48,930 $ 242,630 In addition, the following footnotes have been updated to reflect the restated amounts: • Note 1 “Description of Business and Summary of Significant Accounting Policies” • Note 3 “Segment Information” • Note 6 “Goodwill and Other Intangible Assets” • Note 9 “Income Taxes” • Note 12 “Net Income (Loss) per Share” Use of Estimates The preparation of these condensed consolidated financial statements in accordance with GAAP requires the Company to select accounting policies and make estimates that affect amounts reported in the condensed consolidated financial statements and the accompanying notes. The Company’s estimates are based on the relevant information available at the end of each period. Actual results could differ materially from these estimates under different assumptions or market conditions. The Company considered recent impacts from macroeconomic conditions such as inflationary pressures, rising interest rates, the uncertainty and volatility in the financial markets, and supply chain disruptions, as well as any on-going impacts of the COVID-19 Pandemic (as defined below), in the assessment of its financial position, results of operations, and cash flows, as well as certain accounting estimates, as of and for the periods presented. COVID-19 Pandemic - During March 2020, the World Health Organization declared the outbreak of a novel coronavirus as a pandemic (the “COVID-19 Pandemic”). As of March 31, 2023, the impact to the Company, as well as its response plan, has not materially changed from that described in the Amended 2022 Annual Report. Segments The Company has three operating and reportable segments organized based on customer type: Consumer and Small Business (“CSB”), Commercial, and Solar. The accounting policies of the Company’s reportable segments are the same as those of the Company. Refer to Note 3 “Segment Information” for additional information. Accounting Pronouncements Recently Adopted Accounting Pronouncements Vintage Disclosures for Financing Receivables - ASU 2022-02, Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , requires reporting entities to disclose current-period gross write-offs by year of origination for financing receivables, among other requirements. This disclosure-only guidance became effective January 1, 2023. The impact to the Company’s condensed consolidated financial statements was not material. 8 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Supplier Finance Program Obligations - ASU 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, requires that a reporting entity who is a buyer in a supplier finance program disclose qualitative and quantitative information about its supplier finance programs, including a roll-forward of the obligations. The Company adopted this guidance effective January 1, 2023, except the roll-forward requirement, which becomes effective January 1, 2024 (early adoption is permitted), and should be applied prospectively. The Company does not currently have any material supplier finance programs. Recently Issued Accounting Pronouncements Fair Value of Equity Investments - ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, states an entity should not consider the contractual sale restriction when measuring the equity security’s fair value and introduces new disclosure requirements related to such equity securities. This guidance becomes effective January 1, 2024, and should be applied prospectively with any adjustments recognized in earnings and disclosed on the date of adoption. Early adoption is permitted. The Company is currently evaluating this guidance. Significant Accounting Policies Unless otherwise noted, the Company’s accounting policies discussed below, or included within the respective footnotes herein, do not materially differ from those disclosed in the Amended 2022 Annual Report. Cash and Cash Equivalents and Restricted Cash and Restricted Cash Equivalents The following table reconciles the amounts below reported in the Condensed Consolidated Balance Sheets to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows: (in thousands) March 31, 2023 December 31, 2022 Cash and cash equivalents $ 186,316 $ 257,223 Restricted cash and restricted cash equivalents (1) 117,236 116,357 Ending balance $ 303,552 $ 373,580 ________________ (1) Primarily includes amounts received during 2022 from State Farm Fire & Casualty Company (“State Farm”), inclusive of accrued interest, in connection with the State Farm Development Agreement (as defined and discussed in Note 15 “Related Party Transactions”). Subscriber System Assets, net and Deferred Subscriber Acquisition Costs, net Subscriber system assets represent capitalized equipment and installation costs incurred in connection with transactions in which the Company retains ownership of the security system, which the Company may retrieve upon termination of the contract with the customer. Deferred subscriber acquisition costs represent selling expenses (primarily commissions) that are incremental to acquiring customers. Subscriber system assets and any related deferred subscriber acquisition costs are accounted for on a pooled basis based on the month and year of customer acquisition. The Company depreciates and amortizes these pooled costs using an accelerated method over the estimated life of the customer relationship, which is 15 years. (in thousands) March 31, 2023 December 31, 2022 Gross carrying amount $ 6,353,853 $ 6,205,762 Accumulated depreciation ( 3,274,804 ) ( 3,144,459 ) Subscriber system assets, net $ 3,079,049 $ 3,061,303 9 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Depreciation of subscriber system assets and amortization of deferred subscriber acquisition costs are reflected in depreciation and intangible asset amortization and selling, general, and administrative expenses, respectively, as follows: Three Months Ended March 31, (in thousands) 2023 2022 Depreciation of subscriber system assets $ 143,803 $ 133,122 Amortization of deferred subscriber acquisition costs $ 46,684 $ 36,939 Accrued Expenses and Other Current Liabilities (in thousands) March 31, 2023 December 31, 2022 Accrued interest $ 103,508 $ 156,495 Payroll-related accruals 151,392 208,111 Opportunity Fund (see Note 15 “Related Party Transactions”) 99,775 100,802 Operating lease liabilities (see Note 14 "Leases") 26,964 28,696 Other accrued liabilities 359,471 405,676 Accrued expenses and other current liabilities $ 741,110 $ 899,780 Fair Value of Financial Instruments The Company’s financial instruments primarily consist of cash and cash equivalents, restricted cash and restricted cash equivalents, accounts receivable, retail installment contract receivables, accounts payable, debt, and derivative financial instruments. Due to their short-term and/or liquid nature, the fair values of cash, restricted cash, accounts receivable, and accounts payable approximate their respective carrying amounts. Cash Equivalents - Included in cash and cash equivalents and restricted cash and restricted cash equivalents, as applicable from time to time, are investments in money market mutual funds. These investments are generally classified as Level 1 fair value measurements, which represent unadjusted quoted prices in active markets for identical assets or liabilities. Investments in money market mutual funds were $ 122 million and $ 145 million as of March 31, 2023 and December 31, 2022, respectively. Long-Term Debt Instruments - The fair values of the Company’s long-term debt instruments are determined using broker-quoted market prices, which represent quoted prices for similar assets or liabilities as well as other observable market data, and are classified as Level 2 fair value measurements. The carrying amounts of debt outstanding, if any, under the Company’s first lien revolving credit facility (the “First Lien Revolving Credit Facility”) and its uncommitted receivables securitization financing agreement (the “Receivables Facility”) approximate their fair values as interest rates on these borrowings approximate current market rates. March 31, 2023 December 31, 2022 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt instruments subject to fair value disclosures (1) $ 9,748,108 $ 9,521,276 $ 9,733,700 $ 9,312,932 ________________ (1) Excludes finance leases. Derivative Financial Instruments - Derivative financial instruments are reported at fair value as either assets or liabilities that are primarily calculated using discounted cash flow models utilizing observable inputs, such as quoted forward interest rates, and incorporate credit risk adjustments to reflect the risk of default by the counterparty or the Company. The resulting fair values are classified as Level 2 fair value measurements. Refer to Note 8 “Derivative Financial Instruments” for the fair values of the Company’s derivative financial instruments. 10 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Retail Installment Contract Receivables - The fair values of the Company’s retail installment contract receivables are determined using a discounted cash flow model and are classified as Level 3 fair value measurements. March 31, 2023 December 31, 2022 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Retail installment contract receivables, net $ 575,764 $ 415,563 $ 531,516 $ 385,114 2. REVENUE AND RECEIVABLES Revenue Disaggregated Revenue Three Months Ended March 31, (in thousands) 2023 2022 CSB: Monitoring and related services $ 1,028,634 $ 993,028 Security installation, product, and other 103,842 69,561 Total CSB 1,132,476 1,062,589 Commercial: Monitoring and related services 144,684 128,268 Security installation, product, and other 190,359 161,909 Total Commercial 335,043 290,177 Solar: Solar installation, product, and other 144,835 191,981 Total Solar 144,835 191,981 Total revenue $ 1,612,354 $ 1,544,747 The Company allocates the transaction price to each performance obligation based on relative standalone selling price, which is determined using observable internal and external pricing, profitability, and operational metrics. Company-Owned - In transactions in which the Company provides monitoring and related services but retains ownership of the security system (referred to as Company-owned transactions), the Company’s performance obligations primarily include (i) monitoring and related services, which are recognized when these services are provided to the customer, and (ii) a material right associated with the one-time non-refundable fees in connection with the initiation of a monitoring contract which the customer will not be required to pay again upon a renewal of the contract (referred to as deferred subscriber acquisition revenue). Deferred subscriber acquisition revenue is amortized on a pooled basis over the estimated life of the customer relationship using an accelerated method consistent with the treatment of subscriber system assets and deferred subscriber acquisition costs and is reflected in security installation, product, and other revenue. Three Months Ended March 31, ( in thousands ) 2023 2022 Amortization of deferred subscriber acquisition revenue $ 72,022 $ 53,423 Customer-Owned - In transactions involving security systems sold outright to the customer (referred to as outright sales), the Company’s performance obligations generally include the sale and installation of the system and any monitoring and related services. The portion of the transaction price associated with the sale and installation of a system is recognized either at a point in time or over time based upon the nature of the transaction and contractual terms. Approximately half of security installation, product, and other revenue generated by the Commercial segment is recognized over time primarily using a cost-to-cost measure of progress method. 11 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Solar - The Company enters into agreements with third-party lenders in order to access loan products for the Company’s Solar customers. Fees incurred under these agreements are recorded as a reduction of solar installation, product, and other revenue and were approximately $ 19 million and $ 38 million during the three months ended March 31, 2023 and 2022, respectively. During the three months ended March 31, 2023 and 2022, revenue from the sale of solar equipment was approximately $ 75 million and $ 126 million, respectively, and cost of revenue was approximately $ 52 million and $ 82 million, respectively. Allowance for Credit Losses The Company evaluates its allowance for credit losses on accounts receivable in pools based on customer type. For each customer pool, the allowance for credit losses is estimated based on the delinquency status of the underlying receivables and the related historical loss experience, as adjusted for current and expected future conditions, if applicable. The allowance for credit losses is not material for the individual pools of customers. Three Months Ended March 31, (in thousands) 2023 2022 Beginning balance $ 65,655 $ 54,032 Provision for credit losses 26,743 20,457 Write-offs, net of recoveries (1) ( 27,529 ) ( 18,762 ) Ending balance $ 64,869 $ 55,727 ________________ (1) Recoveries were not material for the periods presented. As such, the Company presented write-offs, net of recoveries. Retail Installment Contract Receivables, net For security system transactions occurring under both Company-owned and customer-owned equipment models, the Company’s retail installment contract option allows qualifying residential customers to pay the fees due at installation over a 24-, 36-, or 60-month interest-free period, and there is no significant financing component. Upon origination of a retail installment contract, the Company utilizes external credit scores to assess customer credit quality and determine eligibility. Subsequent to origination, the Company monitors the delinquency status of retail installment contract receivables as the key credit quality indicator. The balance of unbilled retail installment contract receivables comprises: (in thousands) March 31, 2023 December 31, 2022 Retail installment contract receivables, gross $ 576,759 $ 532,406 Allowance for credit losses ( 995 ) ( 890 ) Retail installment contract receivables, net $ 575,764 $ 531,516 Balance Sheet Classification: Accounts receivable, net $ 188,710 $ 169,242 Other assets 387,054 362,274 Retail installment contract receivables, net $ 575,764 $ 531,516 The allowance for credit losses relates to retail installment contract receivables from outright sales transactions. As of March 31, 2023, the current and delinquent billed retail installment contract receivables were not material. As of March 31, 2023 and December 31, 2022, retail installment contract receivables, net, used as collateral for borrowings under the Receivables Facility were $ 538 million and $ 506 million, respectively. Refer to Note 7 “Debt” for further discussion regarding the Receivables Facility. Contract Assets Contract assets represent the Company’s right to consideration in exchange for goods or services transferred to the customer. The contract asset is reclassified to accounts receivable when the Company’s right to the consideration becomes unconditional, 12 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) which generally occurs over the course of a 24-, 36-, or 60-month period as additional services are performed and billed. The financing component of contract assets is not significant. During the three months ended March 31, 2023 and 2022, contract assets recognized were not material. The balance of contract assets for residential transactions comprises: (in thousands) March 31, 2023 December 31, 2022 Contract assets, gross $ 46,002 $ 54,305 Allowance for credit losses ( 4,994 ) ( 5,453 ) Contract assets, net $ 41,008 $ 48,852 Balance Sheet Classification: Prepaid expenses and other current assets $ 26,066 $ 33,632 Other assets 14,942 15,220 Contract assets, net $ 41,008 $ 48,852 3. SEGMENT INFORMATION As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies,” the Company reports results in three operating and reportable segments: CSB, Commercial, and Solar. The Company’s segments are based on the manner in which the Company’s Chief Executive Officer, who is the chief operating decision maker (the “CODM”) evaluates performance and makes decisions about how to allocate resources. There have been no changes to the Company’s segments from that disclosed in the Amended 2022 Annual Report. The Company organizes its segments based on customer type as follows: • CSB - Customers in the CSB segment are comprised of owners and renters of residential properties, small business operators, and other individual consumers. The CSB segment primarily includes the sale, installation, servicing, and monitoring of integrated security and automation systems, as well as other related offerings. • Commercial - Customers in the Commercial segment are comprised of larger businesses with more expansive facilities (typically larger than 10,000 square feet) and multi-site operations, which often require more sophisticated integrated solutions. 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. • Solar - Customers in the Solar segment are comprised of residential homeowners. The Solar segment primarily includes the sale and installation of solar systems, energy storage solutions, roofing services, and other related solutions and services. Each of the Company’s segments includes revenue and operating costs related to the activities noted above, other operating costs associated with support functions related to these operations, and certain dedicated corporate costs and other income and expense items. The CSB segment includes general corporate costs and other income and expense items not included in the Commercial and Solar segments. The CODM uses Adjusted EBITDA, which is the Company’s segment profit measure, to evaluate segment performance. Adjusted EBITDA is defined as net income or loss adjusted for (i) interest; (ii) taxes; (iii) depreciation and amortization, including depreciation of subscriber system assets and other fixed assets and amortization of dealer and other intangible assets; (iv) amortization of deferred costs and deferred revenue associated with subscriber acquisitions; (v) share-based compensation expense; (vi) merger, restructuring, integration, and other items; (vii) losses on extinguishment of debt; (viii) radio conversion costs, net; (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. The CODM does not review the Company's assets by segment; therefore, such information is not presented. 13 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Reconciliations The following table presents total revenue by segment and a reconciliation to consolidated total revenue: Three Months Ended March 31, (in thousands) 2023 2022 CSB $ 1,132,476 $ 1,062,589 Commercial 335,043 290,177 Solar 144,835 191,981 Total Revenue $ 1,612,354 $ 1,544,747 The following table presents Adjusted EBITDA by segment and a reconciliation to consolidated income (loss) before income taxes and equity in net earnings (losses) of equity method investee: Three Months Ended March 31, (in thousands) 2023 (Restated) 2022 Adjusted EBITDA by segment: CSB $ 594,673 $ 560,545 Commercial 40,788 23,630 Solar ( 10,545 ) 16,822 Total $ 624,916 $ 600,997 Reconciliation: Total segment Adjusted EBITDA (1) $ 624,916 $ 600,997 Less: Interest expense, net 171,626 6,307 Depreciation and intangible asset amortization 383,055 476,123 Amortization of deferred subscriber acquisition costs 46,684 36,939 Amortization of deferred subscriber acquisition revenue ( 72,022 ) ( 53,423 ) Share-based compensation expense 15,982 16,020 Merger, restructuring, integration, and other (2) 17,647 528 Goodwill impairment (3) 241,630 — Acquisition-related adjustments (4) 1,630 36,295 Equity in net earnings (losses) of equity method investee ( 2,677 ) — Other, net (5) 385 11,039 Income (loss) before income taxes and equity in net earnings (losses) of equity method investee $ ( 179,024 ) $ 71,169 ________________ (1) Except for the presentation of goodwill impairment and income (loss) before income taxes and equity in net earnings (losses) of equity method investee, total segment Adjusted EBITDA did not change as a result of the restatement. (2) During 2023, includes restructuring costs primarily related to certain facility exits, as well as integration and third-party costs related to the strategic optimization of the Solar business operations following the ADT Solar acquisition. (3) Represents an impairment charge associated with the Company’s Solar reporting unit. Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” and Note 6 “Goodwill and Other Intangible Assets.” (4) 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. (5) During 2022, primarily includes net radio conversion costs. 4. ACQUISITIONS AND DISPOSITIONS There were no acquisitions or dispositions during the periods presented. 14 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 5. EQUITY METHOD INVESTMENTS Canopy Investment In April 2022, the Company and Ford Motor Company (“Ford”) formed the entity, SNTNL LLC (“Canopy”). Canopy meets the definition of a variable interest entity (“VIE”) because the Company holds a variable interest through its 40 % investment in Canopy’s preferred class of equity (the “Canopy Investment”) and fees received under various commercial agreements between the Company and Canopy. The Company is not the primary beneficiary, and therefore, does not consolidate Canopy’s assets, liabilities, and financial results of operations. As a result, the Company accounts for its investment in Canopy under the equity method of accounting. The impact to the Company’s condensed consolidated financial statements as a result of the Canopy Investment or the commercial agreements was not material during the periods presented. As of March 31, 2023 and December 31, 2022, the Canopy Investment’s carrying amount was approximately $ 10 million and $ 7 million, respectively, and is presented in other assets. The balance primarily reflects the initial contribution, plus an additional investment of approximately $ 5 million during the first quarter of 2023, as well as the Company’s proportionate share of Canopy’s cumulative net earnings or losses. 6. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Changes in the carrying amounts of goodwill by reportable segment were as follows: (in thousands) CSB Commercial Solar Total Balance as of December 31, 2022 $ 4,919,251 $ 336,589 $ 511,176 $ 5,767,016 Acquisitions (1) 609 — — 609 Impairment (2) — — ( 241,630 ) ( 241,630 ) Balance as of March 31, 2023 (Restated) $ 4,919,860 $ 336,589 $ 269,546 $ 5,525,995 ________________ (1) Includes the impact of measurement period adjustments. (2) Amount presented as restated. Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies.” As of March 31, 2023 and December 31, 2022, the Company had accumulated goodwill impairment losses of $ 443 million (as restated) and $ 201 million, respectively, associated with the Company’s Solar reporting unit. Solar Goodwill Impairment During the first quarter of 2023, the Company concluded that there was a triggering event related to its Solar reporting unit 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 of 2023 relative to expectations. As a result, the Company performed an interim impairment quantitative assessment on the Solar reporting unit as of March 31, 2023. Based on the results of the Company’s interim goodwill impairment quantitative analysis, the Company recorded a goodwill impairment charge of $ 242 million (as restated) during the first quarter of 2023. The Company estimated the fair value of the Solar reporting unit using the income approach, which included significant assumptions such as forecasted revenue, Adjusted EBITDA margins, and discount rates, as well as other assumptions including operating expenses and cash flows. In developing these assumptions, the Company relied on various factors including operating results, business plans, economic projections, anticipated future cash flows, and other market data. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying judgments and factors may include such items as a prolonged downturn in the business environment, changes in economic conditions that significantly differ from the Company’s assumptions in timing or degree, volatility in equity and debt markets resulting in higher discount rates, and unexpected regulatory changes. There are inherent uncertainties related to these judgments and factors that may ultimately impact the estimated fair value determinations. 15 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As the carrying value of the Solar reporting unit approximates its fair value following the impairment charge, the Solar reporting unit continues to be considered at risk of future impairment. If the Company’s assumptions are not realized, or if there are future changes in any of the assumptions due to a change in economic conditions or otherwise, it is possible that a further impairment charge may need to be recorded in the future. The Company did not identify any triggering events associated with its other reporting units. Other Intangible Assets March 31, 2023 December 31, 2022 (in thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Definite-lived intangible assets: Contracts and related customer relationships $ 5,401,122 $ ( 2,691,468 ) $ 2,709,654 $ 7,021,305 $ ( 4,262,383 ) $ 2,758,922 Dealer relationships 1,518,020 ( 558,657 ) 959,363 1,518,020 ( 538,801 ) 979,219 Other 224,283 ( 206,485 ) 17,798 224,783 ( 204,177 ) 20,606 Total definite-lived intangible assets 7,143,425 ( 3,456,610 ) 3,686,815 8,764,108 ( 5,005,361 ) 3,758,747 Indefinite-lived intangible assets: Trade name 1,333,000 — 1,333,000 1,333,000 — 1,333,000 Intangible assets $ 8,476,425 $ ( 3,456,610 ) $ 5,019,815 $ 10,097,108 $ ( 5,005,361 ) $ 5,091,747 The change in the net carrying amount of contracts and related customer relationships during the period was as follows: (in thousands) Balance as of December 31, 2022 $ 2,758,922 Customer contract additions, net of dealer charge-backs (1) 111,717 Amortization ( 160,985 ) Balance as of March 31, 2023 $ 2,709,654 ________________ (1) The weighted-average amortization period for customer contract additions was approximately 15 years. Payments for customer contract additions under the Company’s authorized dealer program and from other third parties are reflected as dealer generated customer accounts and bulk account purchases on the Condensed Consolidated Statements of Cash Flows. Additionally, the Company retired approximately $ 1.7 billion of customer relationship intangible assets that were acquired as part of the 2016 acquisition of The ADT Security Corporation (formerly named The ADT Corporation) (“The ADT Corporation”) (the “ADT Acquisition”) that became fully amortized during the first quarter of 2023. Definite-Lived Intangible Asset Amortization Expense Three Months Ended March 31, (in thousands) 2023 2022 Definite-lived intangible asset amortization expense $ 183,149 $ 291,947 16 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 7. DEBT The Company’s debt is comprised of the following (in thousands) : Description Issued Maturity Interest Rate (1) Interest Payable March 31, 2023 December 31, 2022 First Lien Term Loan due 2026 9/23/2019 9/23/2026 Adj. LIBOR + 2.75 % Quarterly $ 2,723,322 $ 2,730,269 Term Loan A Facility 3/14/2023 3/14/2028 Term SOFR + 2.25 % Quarterly 600,000 — First Lien Notes due 2024 4/4/2019 4/15/2024 5.250 % 2/15 and 8/15 750,000 750,000 First Lien Notes due 2026 4/4/2019 4/15/2026 5.750 % 3/15 and 9/15 1,350,000 1,350,000 First Lien Notes due 2027 8/20/2020 8/31/2027 3.375 % 6/15 and 12/15 1,000,000 1,000,000 First Lien Notes due 2029 7/29/2021 8/1/2029 4.125 % 2/1 and 8/1 1,000,000 1,000,000 ADT Notes due 2023 1/14/2013 6/15/2023 4.125 % 6/15 and 12/15 99,999 700,000 ADT Notes due 2032 5/2/2016 7/15/2032 4.875 % 1/15 and 7/15 728,016 728,016 ADT Notes due 2042 7/5/2012 7/15/2042 4.875 % 1/15 and 7/15 21,896 21,896 Second Lien Notes due 2028 1/28/2020 1/15/2028 6.250 % 1/15 and 7/15 1,300,000 1,300,000 Receivables Facility 3/5/2020 2/20/2028 COF + 0.85 % Monthly 374,108 354,741 Other debt (2) 1,927 2,446 Total debt principal, excluding finance leases 9,949,268 9,937,368 Plus: Finance lease liabilities (3) 92,026 94,888 Less: Unamortized debt discount, net ( 12,611 ) ( 13,415 ) Less: Unamortized deferred financing costs ( 55,060 ) ( 50,896 ) Less: Unamortized purchase accounting fair value adjustment and other ( 133,489 ) ( 139,357 ) Total debt 9,840,134 9,828,588 Less: Current maturities of long-term debt, net of unamortized debt discount ( 464,566 ) ( 871,917 ) Long-term debt $ 9,375,568 $ 8,956,671 _________________ (1) Interest rate as of March 31, 2023 . LIBOR refers to the London Interbank Offered Rate. SOFR refers to the Secured Overnight Financing Rate. COF refers to Cost of Funds. (2) Other debt primarily consists of vehicle loans at various interest rates and maturities. (3) Refer to Note 14 “Leases” for additional information regarding the Company’s finance leases. Significant changes in the Company’s debt during the three months ended March 31, 2023 were as follows: First Lien Credit Agreement The Company’s first lien credit agreement, dated as of July 1, 2015 (together with subsequent amendments and restatements, the “First Lien Credit Agreement”), contains a first lien term loan facility (the “First Lien Term Loan due 2026”) and the First Lien Revolving Credit Facility. During the three months ended March 31, 2023, there were no borrowings under the First Lien Revolving Credit Facility; and as of March 31, 2023, the Company had $ 575 million in available borrowing capacity. During the three months ended March 31, 2022, the Company borrowed $ 280 million and repaid $ 135 million under its First Lien Revolving Credit Facility. 17 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Term Loan A Facility On March 14, 2023, Prime Security Services Holdings, LLC (“Holdings”), a Delaware limited liability company and a wholly owned direct subsidiary of the Company, Prime Security Services Borrower, LLC (“Prime Borrower”), a Delaware limited liability company and a wholly owned direct subsidiary of Holdings, and The ADT Corporation, a Delaware corporation and a wholly owned direct subsidiary of Prime Borrower (together with Prime Borrower, the “Term Loan A Borrowers”), entered into a term loan credit agreement (the “Term Loan A Credit Agreement”) with Barclays Bank PLC, as administrative agent, and the lenders party thereto, pursuant to which such lenders have provided the Term Loan A Borrowers with an aggregate principal amount of $ 600 million of term loans (the “Closing Date Term Loan A Loans”) under a senior secured term loan A facility (the “Term Loan A Facility”). Also on March 14, 2023, Holdings, the Term Loan A Borrowers, the subsidiary loan parties thereto, Barclays Bank PLC, and the lender parties thereto amended the Term Loan A Credit Agreement, pursuant to which the lenders have agreed, at the option of the Term Loan A Borrowers and subject to the satisfaction or waiver of customary conditions, to provide the Term Loan A Borrowers with an aggregate principal amount of $ 50 million of incremental term loans (the “Incremental Term Loan A”) under the Term Loan A Facility on or before the scheduled maturity date of the Company’s 4.125 % senior notes due June 15, 2023 (the “ADT Notes due 2023”). The Incremental Term Loan A will have the same terms as, and constitute one class with, the Closing Date Term Loan A Loans. Amounts borrowed under the Incremental Term Loan A are expected to be borrowed on or around the stated maturity date of the ADT Notes due 2023 and the proceeds from the Incremental Term Loan A will be used to complete the redemption of at least $ 50 million of the ADT Notes due 2023 at maturity. The Term Loan A Facility has a maturity date of March 14, 2028, subject to a springing maturity of 91 days prior to the maturity date of certain long-term indebtedness of Prime Borrower and its subsidiaries if, on such date, the aggregate principal amount of such indebtedness equals or exceeds $ 100 million. The Term Loan A Facility requires scheduled amortization payments in annual amounts equal to 5.00 % of the original principal amount of the Term Loan A Facility, payable quarterly, with the balance payable at maturity. The Term Loan A Borrowers may make voluntary prepayments under the Term Loan A Facility at any time prior to maturity at par. Borrowings under the Term Loan A Facility bear interest at a rate equal to, at Prime Borrower’s option, either (a) a term SOFR rate plus an adjustment of 0.10 % (“Term SOFR”) or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50 % per annum, (ii) the rate of interest per annum last quoted by The Wall Street Journal as the “Prime Rate” in the U.S., and (iii) the one-month adjusted term SOFR plus 1.00 % per annum, in each case, plus an applicable margin of 2.50 % per annum for SOFR loans and 1.50 % per annum for base rate loans, subject to adjustments based on certain specified net first lien leverage ratios. Prime Borrower has elected the Term SOFR alternative to apply to borrowings under the Term Loan A Facility. Indebtedness incurred under the Term Loan A Facility is guaranteed, jointly and severally, on a senior secured first-priority basis, by Holdings, on a limited recourse basis, and by substantially all of Prime Borrower’s wholly owned material domestic subsidiaries, and is secured by a pledge of Prime Borrower’s capital stock directly held by Holdings and by first-priority security interests in substantially all of the assets of Prime Borrower and the subsidiary guarantors, in each case subject to certain permitted liens and exceptions. The Term Loan A Facility is subject to customary mandatory prepayment provisions, covenants, and restrictions, including a financial maintenance covenant requiring the Term Loan A Facility Borrowers to comply as of the last day of each fiscal quarter with a specified maximum consolidated net first lien leverage ratio. Fees associated with the Term Loan A Facility were not material during the periods presented. ADT Notes due 2023 Partial Redemption On March 15, 2023, the Company used the proceeds from the Closing Date Term Loan A Loans to redeem approximately $ 600 million of the ADT Notes due 2023 (the “2023 Notes Partial Redemption”) for a total redemption price of approximately $ 600 million, excluding any accrued and unpaid interest. Loss on extinguishment of debt was not material. The Company intends to redeem the remaining balance of the ADT Notes due 2023 in June 2023 prior to maturity using proceeds from the Incremental Term Loan A and cash on hand. 18 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) ADT Notes due 2024 Partial Redemption On March 17, 2023, Prime Borrower and Prime Finance Inc., a Delaware corporation and an indirect wholly-owned subsidiary of the Company (together with Prime Borrower, the “Issuers”), delivered a Notice of Partial Redemption (the “ADT 2024 Notes Partial Redemption Notice”) to holders of the outstanding 5.250 % First-Priority Senior Secured Notes due 2024 (the “ADT Notes due 2024”). The ADT 2024 Notes Partial Redemption Notice was issued pursuant to the terms of the Indenture, dated as of April 4, 2019, as amended and supplemented through the date hereof (the “2024 Notes Indenture”), among the Issuers, the guarantors party thereto from time to time and Wells Fargo Bank, National Association, as trustee. The ADT 2024 Notes Partial Redemption Notice provides for the partial redemption by the Issuers of $ 150 million principal amount of the outstanding ADT Notes due 2024 on May 2, 2023 (the “2024 Notes Redemption Date”) at a redemption price calculated pursuant to the ADT Notes due 2024 Indenture, plus the accrued and unpaid interest. Subsequent Event - On May 2, 2023, the Company 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. Receivables Facility Under the Receivables Facility, the Company obtains financing by selling or contributing certain retail installment contract receivables to the Company’s wholly-owned consolidated bankruptcy-remote special purpose entity (“SPE”), which then grants a security interest in those retail installment contract receivables as collateral for cash borrowings. In March 2023, the Company 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. As of March 31, 2023, the Company had an uncommitted available borrowing capacity under the Receivables Facility of approximately $ 126 million. The Receivables Facility did not have a material impact to the Condensed Consolidated Statements of Operations during the periods presented. Variable Interest Entity The SPE meets the definition of a VIE for which the Company is the primary beneficiary as it has the power to direct the SPE’s activities and the obligation to absorb losses or the right to receive benefits of the SPE. As such, the Company consolidates the SPE’s assets, liabilities, and financial results of operations. The SPE’s assets and liabilities primarily consist of a portion of the Company’s unbilled retail installment contract receivables, net, as discussed in Note 2 “Revenue and Receivables,” and borrowings under the Receivables Facility, as presented above. SOFR Transition By June 2023 (the “SOFR Transition Date”), SOFR will replace the forward LIBOR as the applicable benchmark rate for all existing and future issuances of the Company’s debt instruments with a variable rate component. Existing instruments under the First Lien Credit Agreement will continue to be based on LIBOR until the SOFR Transition Date, unless transitioned to SOFR prior to such date pursuant to the terms of the First Lien Credit Agreement. In addition, any modification, such as a repricing, or any new debt issuances with a variable rate component, will utilize SOFR. 8. DERIVATIVE FINANCIAL INSTRUMENTS The Company's derivative financial instruments primarily consist of LIBOR-based and SOFR-based interest rate swap contracts, which were entered into with the objective of managing exposure to variability in interest rates on the Company's debt. All interest rate swap contracts are reported in the Condensed Consolidated Balance Sheets at fair value. 19 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For interest rate swap contracts that are: • Not designated as cash flow hedges: Unrealized gains and losses are recognized in interest expense, net. • Designated as cash flow hedges: Unrealized gains and losses are recognized as a component of accumulated other comprehensive income (loss) (“AOCI”) and are reclassified into interest expense, net, in the same period in which the related interest on debt affects earnings. For interest rate swap contracts that have been de-designated as cash flow hedges and for which forecasted cash flows are: • Probable or reasonably possible of occurring: Unrealized gains and losses previously recognized as a component of AOCI are reclassified into interest expense, net, in the same period in which the related interest on variable-rate debt affects earnings through the original maturity date of the related interest rate swap contracts. • Probable of not occurring: Unrealized gains and losses previously recognized as a component of AOCI are immediately reclassified into interest expense, net. The cash flows associated with interest rate swap contracts that included an other-than-insignificant financing element at inception are reflected as cash flows from financing activities. Interest Rate Swaps : As of March 31, 2023, the Company’s interest rate swaps consisted of the following (in thousands) : Execution Maturity Designation Notional Amount October 2019 September 2026 Not designated $ 2,800,000 March 2023 March 2028 Not designated $ 100,000 During the three months ended March 31, 2023, the Company entered into floating-to-fixed interest rate swaps with an aggregate notional amount of $ 100 million to partially hedge the Term Loan A Facility. Subsequent Event - During April 2023, the Company entered into additional floating-to-fixed interest rate swaps with an aggregate notional amount of $ 200 million to partially hedge the Term Loan A Facility. Classification and Fair Value of Interest Rate Swaps: (in thousands) March 31, 2023 December 31, 2022 Prepaid expenses and other current assets $ 78,800 $ 78,110 Other assets 72,357 105,405 Other liabilities ( 158 ) — Fair value of interest rate swaps - net asset (liability) $ 150,999 $ 183,515 Unrealized Gain (Loss) on Interest Rate Swaps: Three Months Ended March 31, (in thousands) 2023 2022 Gain (loss) included in interest expense, net $ ( 32,516 ) $ 145,289 20 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Cash Flow Hedges Reclassifications out of AOCI: Three Months Ended March 31, ( in thousands ) 2023 2022 Interest expense, net $ 5,449 $ 14,620 Income tax (benefit) expense $ ( 1,314 ) $ ( 3,528 ) As of March 31, 2023 and December 31, 2022, AOCI, net of tax, related to previously designated cash flow hedges was $ 41 million and $ 46 million, respectively. As of March 31, 2023, approximately $ 19 million of AOCI associated with previously designated cash flow hedges is estimated to be reclassified to interest expense, net, within the next twelve months. 9. INCOME TAXES Unrecognized Tax Benefits The Company’s unrecognized tax benefits relate to tax years that remain subject to audit by the taxing authorities in the U.S. federal, state and local, and foreign jurisdictions. During the three months ended March 31, 2023, the Company did not have a material change to its unrecognized tax benefits. Based on the current status of its income tax audits, the Company does not believe a significant portion of its unrecognized tax benefits will be resolved in the next twelve months. Effective Tax Rate The effective tax rate can vary from period to period due to permanent tax adjustments, discrete items such as the settlement of income tax audits and changes in tax laws, as well as recurring factors such as changes in the overall state tax rate. The Company’s income tax benefit (as restated) for the three months ended March 31, 2023 was $ 63 million, resulting in an effective tax rate for the period of 35.1 %. The effective tax rate primarily represents the federal statutory rate of 21.0 %, a state statutory tax rate, net of federal benefits, of 8.9 %, 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. The Company’s income tax expense for the three months ended March 31, 2022 was $ 20 million, resulting in an effective tax rate for the period of 27.4 %. The effective tax rate primarily represents the federal statutory tax rate of 21.0 %, a state statutory tax rate, net of federal benefits, of 6.7 %, as well as a favorable impact of share-based compensation offset by an unfavorable impact of permanent items. 10. EQUITY Common Stock and Class B Common Stock The Company has two classes of common stock, including common stock (“Common Stock”) and Class B common stock (“Class B Common Stock”). During the three months ended March 31, 2023, shares issued resulted from the vesting of restricted stock units (“RSUs”) and stock option exercises related to share-based compensation awards. 21 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Dividends (in thousands, except per share data) Common Stock Class B Common Stock Declaration Date Record Date Payment Date Per Share Aggregate Per Share Aggregate Three Months Ended March 31, 2023 2/28/2023 3/16/2023 4/4/2023 $ 0.035 $ 30,342 $ 0.035 $ 1,916 Three Months Ended March 31, 2022 3/1/2022 3/17/2022 4/4/2022 $ 0.035 $ 29,842 $ 0.035 $ 1,916 Subsequent Event - On May 2, 2023, the Company 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. Accumulated Other Comprehensive Income (Loss) Refer to Note 8 “Derivative Financial Instruments” for AOCI reclassifications associated with cash flow hedges. There were no other material reclassifications out of AOCI. 11. SHARE-BASED COMPENSATION During the three months ended March 31, 2023, the Company completed its annual long-term incentive plan equity award to employees and granted approximately 6.6 million RSUs under its 2018 Omnibus Incentive Plan, as amended (the “2018 Plan”) with a weighted-average grant date fair value of $ 7.60 equal to the closing price per share of the Company’s Common Stock on the date of grant. These RSUs are service-based awards with a three-year graded vesting period from the date of grant. 12. NET INCOME (LOSS) PER SHARE The Company applies the two-class method for computing and presenting net income (loss) per share for each class of common stock, which allocates current period net income (loss) to each class of common stock and participating securities based on dividends declared and participation rights in the remaining undistributed earnings or losses. Basic net income (loss) per share is computed by dividing the net income (loss) allocated to each class of common stock by the related weighted-average number of shares outstanding during the period. Diluted net income (loss) per share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period for each class of common stock and excludes potentially dilutive securities whose effect would have been anti-dilutive. 22 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Common Stock: Potential shares of Common Stock include (i) incremental shares related to the vesting or exercise of share-based compensation awards, warrants, and other options to purchase additional shares of the Company’s Common Stock calculated using the treasury stock method and (ii) incremental shares of Common Stock issuable upon the conversion of Class B Common Stock. Additionally, the basic and diluted earnings per share computations for Common Stock exclude approximately 9 million unvested shares as their vesting is contingent upon achievement of certain performance requirements. Three Months Ended March 31, in thousands, except per share amounts 2023 (Restated) 2022 Allocation of net income (loss) - basic $ ( 111,720 ) $ 48,510 Dilutive effect (including conversion of Class B Common Stock) — 2,001 Allocation of net income (loss) - diluted $ ( 111,720 ) $ 50,511 Weighted-average shares outstanding - basic 854,299 843,830 Dilutive effect (including conversion of Class B Common Stock) (1) — 67,483 Weighted-average shares outstanding - diluted 854,299 911,313 Net income (loss) per share - basic $ ( 0.13 ) $ 0.06 Net income (loss) per share - diluted $ ( 0.13 ) $ 0.06 _________________ (1) During the three months ended March 31, 2023, all potential shares of Common Stock that would be dilutive were excluded from the diluted earnings per share calculations because their effects would have been anti-dilutive. During the three months ended March 31, 2022, the diluted earnings per share calculations excluded weighted average shares of approximately 18 million shares as their effects would have been anti-dilutive. Class B Common Stock: Three Months Ended March 31, in thousands, except per share amounts 2023 (Restated) 2022 Allocation of net income (loss) - basic $ ( 7,117 ) $ 3,135 Dilutive effect (1) — ( 85 ) Allocation of net income (loss) - diluted $ ( 7,117 ) $ 3,050 Weighted-average shares outstanding - basic 54,745 54,745 Dilutive effect (1) — — Weighted-average shares outstanding - diluted 54,745 54,745 Net income (loss) per share - basic $ ( 0.13 ) $ 0.06 Net income (loss) per share - diluted $ ( 0.13 ) $ 0.06 ________________ (1) There were no potential shares of Class B Common Stock during the periods presented. 23 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 13. COMMITMENTS AND CONTINGENCIES Contractual Obligations There have been no significant changes to the Company’s contractual obligations as compared to December 31, 2022, except as discussed below: Repurchase of Solar Loans As of March 31, 2023, the liability related to certain loans provided to customers within the Company’s Solar business that the Company 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 the Company ultimately expects 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. Google Commercial Agreement In July 2020, the Company and Google entered into a Master Supply, Distribution, and Marketing Agreement (the “Google Commercial Agreement”), pursuant to which Google has agreed to supply the Company with certain Google devices as well as certain Google video and analytics services (“Google Devices and Services”), for sale to the Company’s customers. The Google Commercial Agreement also specifies that each party shall contribute $ 150 million towards joint marketing, customer acquisition, training of the Company’s employees, and product technology updates related to the Google Devices and Services. In August 2022, the Company and Google executed an amendment to the Google Commercial Agreement, pursuant to which Google has agreed to commit an additional $ 150 million to fund growth, data and insights, product innovation and technology advancements, customer acquisition, and marketing, as mutually agreed by the Company and Google, (together with the initial amounts, the “Google Success Funds”). During the three months ended March 31, 2023, approximately $ 12.5 million of the Google Success Funds were approved for reimbursement to the Company for certain joint marketing expenses incurred by the Company and recorded as a reduction to advertising expenses. Guarantees In the normal course of business, the Company is liable for contract completion and product performance. The Company’s guarantees primarily relate to standby letters of credit related to its insurance programs and totaled $ 84 million and $ 93 million as of March 31, 2023 and December 31, 2022, respectively. The Company does not believe such obligations will materially affect its financial position, results of operations, or cash flows. Legal Proceedings The Company is subject to various claims and lawsuits in the ordinary course of business, which include among other things commercial general liability claims, automobile liability claims, contractual disputes, worker’s compensation claims, labor law and employment claims, claims that the Company infringed on the intellectual property of others, and consumer and employment class actions. The Company is also subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations, and threatened legal actions and proceedings. In connection with such formal and informal inquiries, the Company receives numerous requests, subpoenas, and orders for documents, testimony, and information in connection with various aspects of its activities. There have been no material changes to these matters from those disclosed in the Amended 2022 Annual Report. The Company records accruals for losses that are probable and reasonably estimable. These accruals are based on a variety of factors such as judgment, probability of loss, opinions of internal and external legal counsel, and actuarially determined estimates of claims incurred but not yet reported based upon historical claims experience. Legal costs in connection with claims and lawsuits in the ordinary course of business are expensed as incurred. Additionally, the Company records insurance recovery receivables from third-party insurers when recovery has been determined to be probable. The Company has not accrued for any losses for which the likelihood of loss cannot be assessed, is less than probable, or the range of possible loss cannot be estimated. 24 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As of March 31, 2023 and December 31, 2022, the Company’s accrual for ongoing claims and lawsuits within the scope of an insurance program totaled $ 100 million and $ 90 million, respectively. The Company’s accrual related to ongoing claims and lawsuits not within the scope of an insurance program is not material. 14. LEASES Company as Lessee As part of normal operations, the Company leases real estate, vehicles, and equipment. Right-of-Use Assets and Lease Liabilities: (in thousands) March 31, 2023 December 31, 2022 Presentation and Classification: Operating Current Prepaid expenses and other current assets $ 388 $ 210 Operating Non-current Other assets 122,489 128,455 Finance Non-current Property and equipment, net (1) 89,924 93,013 Total right-of-use assets $ 212,801 $ 221,678 Operating Current Accrued expenses and other current liabilities $ 26,964 $ 28,696 Finance Current Current maturities of long-term debt 50,446 48,512 Operating Non-current Other liabilities 110,473 116,823 Finance Non-current Long-term debt 41,580 46,376 Total lease liabilities $ 229,463 $ 240,407 _________________ (1) Finance right-of-use assets are recorded net of accumulated depreciation, which was approximately $ 114 million and $ 106 million as of March 31, 2023 and December 31, 2022, respectively. Lease Cost: Three Months Ended March 31, ( in thousands ) 2023 2022 Operating lease cost $ 10,222 $ 12,485 Finance lease cost: Amortization of right-of-use assets 11,385 9,852 Interest on lease liabilities 1,049 831 Variable lease costs 20,232 23,134 Total lease cost $ 42,888 $ 46,302 Cash Flow and Supplemental Information: Three Months Ended March 31, ( in thousands ) 2023 2022 Right-of-use assets obtained in exchange for lease obligations: Operating leases $ 2,332 $ 9,061 Finance leases $ 9,222 $ 8,217 Company as Lessor The Company is a lessor in certain Company-owned transactions as the Company has identified a lease component associated with the right-of-use of the security system and a non-lease component associated with the monitoring and related services. 25 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For transactions in which (i) the timing and pattern of transfer is the same for the lease and non-lease components and (ii) the lease component would be classified as an operating lease if accounted for separately, the Company applies the practical expedient to aggregate the lease and non-lease components and accounts for the combined transaction based upon its predominant characteristic, which is the non-lease component. The Company accounts for the combined component as a single performance obligation under the applicable revenue guidance and recognizes the underlying assets within subscriber system assets, net. For transactions that do not qualify for the practical expedient as the lease component represents a sales-type lease, the Company accounts for the lease and non-lease components separately. The Company’s sales-type leases are not material. 15. RELATED PARTY TRANSACTIONS The Company’s related party transactions primarily relate to products and services received from, or monitoring and related services provided to, other entities affiliated with Apollo, and, from time to time, management, consulting, and transaction advisory services provided by Apollo to the Company, as well as transactions between the Company and State Farm. There were no notable related party transactions during the periods presented other than as described below. Apollo Upon initial funding of the Term Loan A Facility in March 2023, the Company incurred fees to Apollo of $ 1 million related to Apollo’s performance of placement agent services related to such debt. State Farm On October 13, 2022 (the “Closing”), the Company issued and sold in a private placement to State Farm 133,333,333 shares of the Company’s Common Stock at a per share price of $ 9.00 for an aggregate purchase price of $ 1.2 billion (the “State Farm Strategic Investment”) pursuant to a securities purchase agreement dated September 5, 2022. State Farm owns approximately 15 % of the Company’s issued and outstanding Common Stock (assuming conversion of Class B Common Stock), and as a result, is a related party. At the Closing, the Company, ADT LLC (an indirect wholly owned subsidiary of the Company), and State Farm entered into a Development Agreement (the “State Farm Development Agreement”) pursuant to which State Farm committed up to $ 300 million to fund certain initiatives as agreed to between the Company and State Farm related to the partnership (the “Opportunity Fund”). Additionally at the Closing, the Company received $ 100 million of the Opportunity Fund, which will be restricted until such time as the Company uses the funds in accordance with the State Farm Development Agreement. The Company’s use of the funds is also subject to approval by State Farm. During three months ended March 31, 2023, the Company made payments from the Opportunity Fund of approximately $ 2 million to fund project development initiatives. As of March 31, 2023, the balance in the Opportunity Fund was approximately $ 100 million, including interest earned on the funds. Sunlight Financial LLC ADT Solar uses Sunlight Financial LLC (“Sunlight”), an entity affiliated with Apollo, to access certain loan products for ADT Solar customers, as discussed in Note 2 “Revenue and Receivables.” During the three months ended March 31, 2023 and 2022, total loans funded by Sunlight were approximately $ 45 million and $ 100 million, respectively. The Company may be required to repurchase loans previously funded by Sunlight in the amount of approximately $ 45 million and $ 56 million as of March 31, 2023 and December 31, 2022, respectively. The Company also recorded an offsetting net receivable. During the three months ended March 31, 2023 and 2022, the Company incurred financing fees of approximately $ 6 million and $ 15 million, respectively. 26 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Rackspace During October 2020, the Company entered into a master services agreement with Rackspace US, Inc. (“Rackspace”), an entity affiliated with Apollo, for the provision of cloud storage, equipment, and services to facilitate the implementation of the Company’s cloud migration strategy for certain applications. The master services agreement includes a minimum purchase commitment of $ 50 million over a seven year term, which can be satisfied through spend with other parties. During the three months ended March 31, 2023 and 2022, fees incurred to Rackspace were not material. Canopy Canopy is considered a related party under GAAP as the Company accounts for its investment in Canopy under the equity method of accounting. During the three months ended March 31, 2023, the Company made an additional equity investment of approximately $ 5 million in Canopy. 27