What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-08 compared with 2023-05-02 · 171 added, 123 removed, 262 unchanged (53% 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 2022 Annual Report, which was filed with the SEC on February 28, 2023.

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 Amended 2022 Annual Report, which was filed with the SEC on July 27, 2023.

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, which could differ materially from actual results.

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BUSINESS AND BASIS OF PRESENTATION

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.

ADT Inc., together with its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our,” “us,” and “ADT”), provides security, interactive, and smart home solutions to residential, small business, and commercial customers, as well as residential solar and energy storage solutions, in the U.S.

As of June 30, 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:

We report financial and operating information for our three segments:

CSB, Commercial, and Solar.

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All intercompany transactions have been eliminated.

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.

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 from 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 June 30, 2023, the impact to the Company of the factors referenced above, as well as our response plan, has not materially changed from that described in our Amended 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.

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.

We expect to introduce our ADT+ app for professional installations by the end of 2023 along with a new interactive platform and hardware lineup.

During the six months ended June 30, 2023, $25 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.

We received $12.5 million during the second quarter of 2023 and the remaining $12.5 million in July 2023.

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.

Commercial Divestiture

As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies,” we entered into the Commercial Purchase Agreement, pursuant to which GTCR agreed to acquire all of the issued and outstanding equity interests of F&S Holdings, which directly or indirectly holds all of the issued and outstanding equity interests in the subsidiaries of ADT that operate our Commercial Business.

The purchase price to be paid to ADT in connection with the Commercial Transaction is $1,613 million in cash, subject to certain customary adjustments as set forth in the Commercial Purchase Agreement.

We will report the results of the Commercial Business as discontinued operations beginning in the third quarter of 2023.

We expect to use the net proceeds from the Commercial Transaction to redeem approximately $1.5 billion of our debt, which will reduce future cash interest payments accordingly.

In addition, we expect to utilize a significant portion of our existing net operating losses (“NOLs”) to offset an expected gain in connection with the sale of the Commercial Business.

We believe that we will utilize our remaining NOLs during 2024.

Thereafter, without additional NOLs, we expect to begin paying federal cash taxes as such taxes are incurred.

FACTORS AFFECTING OPERATING RESULTS

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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 well as the mix, price, and type of offerings sold.

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.

Our CSB and Commercial 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 well as the mix, price, and type of offerings sold.

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, which will impact results in future periods when those changes occur.

We also expect an increase in the proportion of ADT self-set up customers, which typically have lower monthly recurring fees than our professional installations but will allow us to grow our subscriber base through access to the fast-growing do-it-yourself (“DIY”) market.

In addition, in our Solar business, we are exploring options for our customers seeking greater flexibility and accessibility in their rooftop solar financing.

For example, in August 2023, we entered into an agreement in principle with SunPower Financial to offer lease and power purchase agreement (“PPA”) financing options to new Solar customers.

We expect to have a final agreement in place which will enable us to offer a PPA financing option to our Solar customers beginning in the fourth quarter of 2023.

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

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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 or other developments in the financial markets.

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

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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.

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

Further, in connection with the divestiture of our Commercial Business, our gross customer revenue attrition may increase as residential customers typically have slightly higher attrition rates than our commercial customers.

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.

As part of our response to changes or pressures in the macroeconomic environment, we have been evaluating, and continue to evaluate, cost saving opportunities such as reducing headcount or our physical facilities footprint when appropriate, and reducing non-essential spend.

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.

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

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

RMR is generated by contractual recurring fees for monitoring and other recurring services provided to our customers and includes customers within both the CSB and Commercial segments.

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

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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 self-setup/DIY customers.

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 self-setup/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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RESULTS OF OPERATIONS

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands, except as otherwise indicated)

2023 2022 $ Change

2023 2022 $ Change 2023 2022 $ Change

Monitoring and related services $ 1,187,063 $ 1,145,792 $ 41,271 $ 2,360,381 $ 2,267,088 $ 93,293

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RMR $ 382,222 $ 368,768 $ 13,454 $ 382,222 $ 368,768 $ 13,454

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

Gross customer revenue attrition (percent) 12.5% 12.7% N/A* 12.5% 12.7% N/A*

Adjusted EBITDA (2)

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* N/A — Not applicable.

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

(in thousands)

2023 2022 $ Change

2023 2022 $ Change 2023 2022 $ Change

Monitoring and related services $ 1,043,254 $ 1,011,442 $ 31,812 $ 2,071,888 $ 2,004,470 $ 67,418

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Total revenue $ 1,593,128 $ 1,601,030 $ (7,902) $ 3,205,482 $ 3,145,777 $ 59,705

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

During the three months ended June 30, 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.

higher recurring revenue of $32 million primarily driven by an increase in average prices.

• 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:

(i) an increase in installation revenue of $30 million primarily driven by a higher volume of outright sales transactions and higher installation revenue per unit, as well as (ii) an increase in the amortization of deferred subscriber acquisition revenue of $17 million as a result of a higher population of existing customers under a Company-owned model.

During the six months ended June 30, 2023, the increases in revenue, as compared to the prior period, included:

• M&S Revenue :

higher recurring revenue of $67 million primarily driven by an increase in average prices.

• Security installation, product, and other :

(i) an increase in installation revenue of $46 million primarily driven by a higher volume of outright sales transactions and higher installation revenue per unit, as well as (ii) an increase in the amortization of deferred subscriber acquisition revenue of $36 million as a result of a higher population of existing customers under a Company-owned model.

During the three months ended June 30, 2023, the increases in revenue, as compared to the prior period, included:

• M&S Revenue :

(i) higher recurring revenue of $5 million driven by improvements in average revenue per subscriber, as well as (ii) higher revenue from time and materials billings of $4 million driven by higher revenue per service call.

• Security installation, product, and other :

higher installation revenue of $41 million primarily related to strong sales performance and improvements in supply chain delays.

During the six months ended June 30, 2023, the increases in revenue, as compared to the prior period, included:

• M&S Revenue :

(i) higher revenue from time and materials billings of $16 million driven by higher revenue per service call, as well as (ii) higher recurring revenue of $10 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.

higher installation revenue of $69 million primarily related to strong sales performance and improvements in supply chain delays.

During the three and six months ended June 30, 2023, the decrease in revenue, as compared to the prior period, was primarily due to fewer sales and installations as a result of prior cost reduction efforts, delays in certain operational initiatives, and impacts from macroeconomic conditions, including higher interest rates.

In addition, the decrease in revenue for the six months ended June 30, 2023 as compared to the prior period was impacted 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.

As of June 30, 2023, our ending RMR balance was $382 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 June 30, 2023, compared to 12.7% as of June 30, 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

Three Months Ended March 31,

(in thousands) 2023 2022 $ Change

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2023 2022 $ Change 2023 2022 $ Change

Monitoring and related services $ 142,302 $ 150,564 $ (8,262) $ 303,903 $ 305,083 $ (1,180)

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Total cost of revenue $ 483,676 $ 507,813 $ (24,137) $ 997,677 $ 1,017,581 $ (19,904)

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.

During the three and six months ended June 30, 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, partially offset by cost reduction initiatives primarily in monitoring and related services.

During the three and six months ended June 30, 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 above.

During the three and six months ended June 30, 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

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:

During the three months ended June 30, 2023, the decrease in SG&A, as compared to the prior period, was primarily driven by:

• a decrease of $46 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.

• a decrease of $19 million in general and administrative expenses in CSB primarily related to a legal settlement, and

• a decrease of $12 million in advertising costs, primarily due to utilization of a portion of the Google Success Funds, partially offset by

• an increase of $19 million in selling costs, primarily related to the amortization of deferred subscriber acquisition costs, and

• an increase of $13 million in the allowance for credit losses primarily related to residential retail installment contract receivables.

During the six months ended June 30, 2023, the decrease in SG&A, as compared to the prior period, was primarily driven by:

• a decrease of $64 million in Solar SG&A, primarily due to recent cost reduction initiatives, including lower selling and advertising costs,

• a decrease of $25 million in radio conversion costs due to the wind down of the replacement program,

• a decrease of $27 million in advertising costs, primarily due to utilization of a portion of the Google Success Funds, and

• a decrease of $14 million in general and administrative expenses in CSB primarily related to a legal settlement, partially offset by

• an increase of $35 million in selling costs, primarily related to the amortization of deferred subscriber acquisition costs, and

• an increase of $20 million in the allowance for credit losses primarily related to residential retail installment contract receivables.

Depreciation and Intangible Asset Amortization

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 three and six months ended June 30, 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 $65 million and $181 million, respectively, 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 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.

During the three and six months ended June 30, 2023, the increase in merger, restructuring, integration, and other, as compared to the prior period, was primarily due to increases of approximately (i) $6 million and $14 million, respectively, in integration and third-party costs related to the strategic optimization of our Solar business operations following the acquisition of ADT Solar and (ii) $5 million and $13 million, respectively, of restructuring costs.

Goodwill Impairment

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.

During the first and second quarters of 2023, we recorded goodwill impairment charges of $242 million and $181 million, respectively, which were the result of interim impairment quantitative analyses associated with our Solar reporting unit.

Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” and Note 6 “Goodwill and Other Intangible Assets” and the section “—Critical Accounting Estimates” below for further discussion.

Interest Expense, net

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.

During the six months ended June 30, 2023, the increase in interest expense, net, as compared to the prior year period, was driven by a decrease in unrealized gains of $182 million on our interest rate swaps not designated as cash flow hedges, partially offset by higher interest expense primarily related to our First Lien Term Loan due 2026.

Income Tax Benefit (Expense)

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.

During the three and six months ended June 30, 2023, the increase in income tax benefit was due to increases in our annual effective tax rate primarily as a result of the Solar goodwill impairment charges.

Refer to Note 9 “Income Taxes” for details on our effective tax rate.

Deferred Tax Assets

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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.

While we have not reported any material changes to our valuation allowances since our Amended 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

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

Three Months Ended March 31,

(in thousands) 2023 2022 $ Change

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2023 2022 $ Change 2023 2022 $ Change

Net income (loss) $ 92,211 $ 91,517 $ 694 $ (26,626) $ 143,162 $ (169,788)

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________________

(1) Represents an impairment charge associated with our Solar reporting unit.

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

(1) Represents impairment charges associated with our Solar reporting unit.

Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” and Note 6 “Goodwill and Other Intangible Assets.”

(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.

(3) During 2022, primarily includes the gain on sale of a business of $10 million and 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 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

Three Months Ended June 30, Six Months Ended June 30,

(in thousands) 2023 2022 $ Change 2023 2022 $ Change

CSB $ 643,725 $ 580,701 $ 63,024 $ 1,238,398 $ 1,141,246 $ 97,152

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Adjusted EBITDA $ 651,255 $ 597,249 $ 54,006 $ 1,276,171 $ 1,198,246 $ 77,925

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

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

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

During 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.

During the three and six months ended June 30, 2023, respectively, the increases, as compared to the prior periods, were primarily due to:

• higher M&S Revenue, net of the associated costs, of $46 million and $80 million,

• lower advertising costs of $11 million and $25 million, and

• lower general and administrative expenses of $19 million and $14 million, partially offset by

• higher provision for credit losses of $13 million and $18 million.

During the three and six months ended June 30, 2023, respectively, the increases, as compared to the prior periods, were primarily due to:

• higher M&S Revenue, net of associated costs, of $9 million and $22 million, and

• higher installation revenue, net of the associated costs and commissions, of $10 million and $15 million, partially offset by

• higher general and administrative expenses of $5 million and $7 million.

During the three and six months ended June 30, 2023, respectively, the decreases, as compared to the prior periods, were primarily due to:

• lower installation revenue, net of the associated costs and commissions, of $59 million and $104 million, partially offset by

• lower SG&A expenses, including the non-recurrence of an $11 million charge during 2022 associated with the estimated amount of receivables and rebates not expected to be collected from a former third-party lender.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and capital resources primarily consisted of the following:

(in thousands) March 31, 2023

(in thousands) June 30, 2023

Cash and cash equivalents $ 146,435

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Availability under First Lien Revolving Credit Facility $ 575,000

Availability under Term Loan A Facility $ 50,000

Uncommitted available borrowing capacity under Receivables Facility $ 97,447

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

All of our remaining variable rate debt instruments previously based on LIBOR are now based on SOFR, and we do not anticipate any material impacts from the SOFR transition.

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

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

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

The SOFR will replace the forward LIBOR as the applicable benchmark rate for all existing and future issuances of our debt instruments 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 March 31, 2023, we do not anticipate any material impacts from the SOFR Transition.

As of June 30, 2023, our next debt maturity will occur in April 2024 with respect to the remaining outstanding balance of $600 million of our First Lien Notes due 2024.

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.

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Material Cash Requirements

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.

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

As of June 30, 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 $33 million.

This liability is partially offset by a net receivable of $23 million 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

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

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

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

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.

In March 2023, we borrowed an aggregate principal amount of $600 million of term loans under the Term Loan A Facility, and in June 2023, we borrowed an additional aggregate principal amount of $50 million of Incremental Term Loan A Loans.

ADT Notes due 2023 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.

On June 15, 2023, we redeemed the remaining outstanding balance of approximately $100 million of the ADT Notes due 2023 using $50 million of proceeds from the Incremental Term Loan A Loans and cash on hand.

First Lien Notes due 2024 Partial Redemption

On May 2, 2023, we redeemed $150 million principal amount of the $750 million outstanding First Lien Notes due 2024 for a redemption price of $150 million, excluding accrued and unpaid interest, using cash on hand.

Receivables Facility

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

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.

During the six months ended June 30, 2023, we received proceeds from the Receivables Facility of $140 million and repaid $92 million, and as of June 30, 2023, the Receivables Facility had an outstanding balance of $403 million.

Solar Receivables Facility

On August 2, 2023, we entered into the Solar Receivables Facility Financing Agreement to finance receivables generated by the installation of residential solar systems, which, among other things, provides for an uncommitted revolving loan facility in the aggregate principal amount of up to $300 million.

Debt Covenants

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

As of June 30, 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.

During the six months ended June 30, 2023 and 2022, we declared aggregate dividends of $61 million ($0.035 per share) and $60 million ($0.035 per share) on our Common Stock, respectively, and $4 million ($0.035 per share) on our Class B Common Stock during each period.

On August 8, 2023, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on September 15, 2023, which will be paid on October 4, 2023.

Cash Flow Analysis

Three Months Ended March 31,

Six Months Ended June 30,

(in thousands) 2023 2022 $ Change

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Cash Flows from Operating Activities

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

The decrease in net cash provided by operating activities, as compared to the prior period, was primarily due to:

• an increase in cash interest of $97 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 timing of payments to vendors primarily related to inventory.

During 2023, we also received approximately $19 million related to a legal settlement and approximately $13 million of the Google Success Funds.

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

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.

The decrease in net cash used in investing activities, 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 $89 million primarily related to fewer bulk purchases,

• a decrease in subscriber system assets expenditures of $58 million due to fewer adds,

• a decrease in net cash paid of $20 million primarily related to other investments, and

• a decrease in cash paid for the acquisition of businesses, net of cash acquired, of $13 million as a result of activity during the prior year, partially offset by

• a decrease in proceeds from the sale of a business of $27 million due to activity during the prior year.

Cash Flows from Financing Activities

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.

The change in cash flows from financing activities, as compared to the prior period, was primarily due to:

• a decrease in net proceeds of long-term borrowings of approximately $263 million primarily as a result of the ADT Notes due 2023 Redemption and ADT Notes due 2024 Partial Redemption in 2023, as well as a reduction of net borrowings under the First Lien Revolving Credit Facility compared to the prior year, partially offset by borrowings under the Term Loan A Facility in 2023, and

• a decrease in net proceeds under the Receivables Facility of $45 million, partially offset by

• proceeds from interest rate swap contracts that included an other-than-insignificant financing element at inception of $36 million during 2023 compared to payments of $25 million during 2022.

CRITICAL ACCOUNTING ESTIMATES

We disclosed our critical accounting estimates in our 2022 Annual Report, which include estimates prepared in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations.

We disclosed our critical accounting estimates in our Amended 2022 Annual Report, which include estimates prepared in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations.

Critical accounting estimates are based on, among other things, estimates, assumptions, and judgments made by management that include inherent risks and uncertainties.

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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 since our 2022 Annual Report, except as discussed below:

There were no material changes in our critical accounting estimates since our Amended 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.

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.

As previously disclosed, we performed an interim impairment quantitative assessment on the Solar reporting unit as a result of a triggering event as of March 31, 2023 and recorded a goodwill impairment charge of $242 million during the first quarter of 2023.

Also as previously disclosed, the Solar reporting unit was considered at risk for future impairment following the impairment in the first quarter 2023.

During the second quarter of 2023, we concluded there was an additional triggering event related to the Solar reporting unit as a result of the then-current macroeconomic conditions, including the impact of rising interest rates, as well as ADT Solar’s continued underperformance of operating results in the second quarter of 2023 relative to expectations.

As a result, we performed an interim impairment quantitative assessment on the Solar reporting unit as of June 30, 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 $193 million during the first quarter of 2023.

Based on the results of our interim impairment analysis, we recorded a non-cash impairment charge of $181 million during the second quarter of 2023.

Following the impairment loss, the remaining balance of goodwill attributable to our Solar reporting unit is approximately $88 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.

For example, a decrease of approximately 16.7% in 2024 projected revenues, a decrease in the Adjusted EBITDA margin across all periods of 0.7%, or an increase in the weighted average cost of capital by 1.1%, holding other assumptions constant, would result in approximately $40 million of additional impairment before applying the simultaneous equation method which would have the effect of increasing the amount of any additional impairment.

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

CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains certain information that may constitute “forward-looking statements” within the meaning of the U.S.

Private Securities Litigation Reform Act of 1995 and are made in reliance on the safe harbor protections provided thereunder.

While we have specifically identified certain information as being forward-looking in the context of its presentation, we caution you that all statements contained in this report that are not clearly historical in nature, including statements regarding the strategic investment by and long term partnership with State Farm;

anticipated financial performance;

This Quarterly Report on Form 10-Q contains certain information and disclosures that are forward-looking and therefore subject to risks and uncertainties, including those described below.

All statements, other than statements of historical fact, included in this document are, or could be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the applicable rules and regulations of the SEC and are made in reliance on the safe harbor protections provided thereunder.

These forward-looking statements relate to, among other things, the Commercial Transaction between ADT and GTCR, the expected timetable for completing the Commercial Transaction and the benefits and synergies of the Commercial Transaction;

the strategic investment by and long term partnership with State Farm;

anticipated financial performance, including the Company’s ability to achieve its stated guidance metrics and its progress toward its medium-term targets;

management’s plans and objectives for future operations;

the successful development, commercialization, and timing of new or joint products;

expected timing of product commercialization with State Farm or any changes thereto;

the expected timing of product commercialization with State Farm or any changes thereto;

our acquisition of ADT Solar and its anticipated impact on our business and financial condition;

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any stated or implied outcomes with regards to the foregoing;

and other matters are forward-looking.

Forward-looking statements are contained principally in the sections of this report entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Without limiting the generality of the preceding sentences, any time we use the words “expects,” “intends,” “will,” “anticipates,” “believes,” “confident,” “continue,” “propose,” “seeks,” “could,” “may,” “should,” “estimates,” “forecasts,” “might,” “goals,” “objectives,” “targets,” “planned,” “projects,” and, in each case, their negative or other various or comparable terminology, and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature.

and other matters.

Forward-looking statements are contained principally in the sections of this report titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Without limiting the generality of the preceding sentences, any time the Company uses the words “expects,” “intends,” “will,” “anticipates,” “believes,” “confident,” “continue,” “propose,” “seeks,” “could,” “may,” “should,” “estimates,” “forecasts,” “might,” “goals,” “objectives,” “targets,” “planned,” “projects,” and, in each case, their negative or other various or comparable terminology, and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature.

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

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 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 research and development or other purposes;

These forward-looking statements are based on management’s current beliefs and assumptions and on information currently available to management.

We caution that these statements are subject to risks and uncertainties, many of which are outside of our control, and could cause future events or results to be materially different from those stated or implied in this document, including among others, factors relating to:

• uncertainties as to the timing of the sale of the Commercial Business and the risk that the Divestiture may not be completed in a timely manner or at all;

• the possibility that any or all of the conditions to the consummation of the sale of the Commercial Business may not be satisfied or waived;

• the effect of the announcement or dependency of the Commercial Transaction on our ability to retain and hire key personnel and to maintain relationships with customers, suppliers and other business partners;

• risks related to diverting management’s attention from ADT’s ongoing business operations;

• uncertainties as to our ability and the amount of time necessary to realize the expected benefits of the Commercial Transaction;

• the achievement of potential benefits of the equity investment by and long-term partnership with State Farm, including as a result of restrictions on or required prior regulatory approval of, various actions by regulated insurers;

• our ability to effectively implement our strategic partnership with, commercialize products with, or utilize the incremental funding committed by State Farm or Google;

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

• our ability to effectively implement our strategic partnership with or utilize any of the amounts invested in us by Google;

• the impact of the COVID-19 pandemic on our employees, our customers, our suppliers and our ability to carry on our normal operations;

• risks and uncertainties related to the Company’s ability to successfully integrate and operate the ADT Solar business, including the possibility of future impairments to the value of goodwill at ADT Solar;

• risks related to the various financing arrangements that the Company facilitates for some ADT Solar customers;

• our ability to commercialize our joint venture with Ford;

• our ability to continuously and successfully commercialize innovative offerings;

• our ability to successfully implement an Environmental, Social, and Governance program across the Company;

• the impact of supply chain disruptions;

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• changes in law, economic and financial conditions, including tax law changes, changes to privacy requirements, changes to telemarketing, email marketing and similar consumer protection laws, interest volatility, and trade tariffs and restrictions applicable to the products we sell;

• any material change to the valuation allowances we take with respect to our deferred tax assets;

• any material changes to the valuation allowances we take with respect to our deferred tax assets;

• the impact of potential information technology, cybersecurity, or data security breaches;

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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;

• 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.

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

• risks related to the restatement of our consolidated financial statements included in our Amended 2022 Annual Report and in our Reports on Form 10-Q/A for the quarters ended September 30, 2022, and March 31, 2023, each as filed with the SEC on July 27, 2023;

• any litigation or investigation related to such restatements;

• the Company’s ability to maintain effective ICFR and disclosure controls and procedures (“DCPs”), including its ability to remediate any existing material weakness in its ICFR and the timing of any such remediation, as well as the ability to reestablish effective DCPs at a reasonable assurance level.

Therefore, caution should be taken not to place undue reliance on any such forward-looking statements.

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As a result, our operations and financial results in the future could differ materially and substantially from those we have discussed in the forward-looking statements included in this Quarterly Report on Form 10-Q.

We assume no obligation (and specifically disclaim any such obligation) to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.

Any forward-looking statement made in this Quarterly Report on Form 10-Q speaks only as of the date on which it is made.

We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise unless required by law.

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