What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-11-02 compared with 2023-08-08 · 150 added, 139 removed, 294 unchanged (50% of the section changed)

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BUSINESS AND BASIS OF PRESENTATION

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

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

As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies,” we divested our Commercial Business on October 2, 2023.

As of September 30, 2023, we served approximately 6.4 million security monitoring service subscribers, excluding commercial subscribers that were part of the Commercial Divestiture.

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 for our three segments:

CSB, Commercial, and Solar.

As of the third quarter of 2023, and following the Commercial Divestiture, we report financial and operating information for our two segments:

CSB and Solar.

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

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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.

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.

We expect to introduce our ADT+ app for professional installations through a phased rollout in the fourth quarter along with a new interactive platform and hardware lineup.

During the three and nine months ended September 30, 2023, $15 million and $40 million, respectively of the first tranche of the Google Success Funds were approved for reimbursement to the Company for Google’s portion of certain joint marketing expenses incurred by us, and we received cash of $27.5 million and $40 million, respectively.

Refer to Note 14 “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.

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 of the transaction.

Refer to Note 16 “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.

As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies” and Note 5 “Divestitures,” on October 2, 2023, GTCR acquired all of the issued and outstanding equity interests of the entities comprising our Commercial Business for a total purchase price of approximately $1,613 million in cash, subject to certain customary adjustments as set forth in the Commercial Purchase Agreement and received net proceeds of approximately $1,585 million.

The results of the Commercial Business are reported as a discontinued operation for current and historical periods through the date of sale.

Additionally, the cash flows and comprehensive income (loss) of the Commercial Business have not been segregated and are included in the interim Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Comprehensive Income (Loss), respectively, for all periods presented.

The Company’s reported operating metrics, gross customer revenue attrition and recurring monthly revenue (as defined and discussed below), have been presented for the current period and recast for prior periods to reflect only the CSB segment.

As discussed in Note 8 “Debt,” in October 2023, we used a portion of the net proceeds from the Commercial Transaction to redeem approximately $1.3 billion of the First Lien Term Loan due 2026.

The remaining net proceeds along with cash on hand are expected to be used for debt redemption and repayments of the First Lien Notes due 2024 during the fourth quarter of 2023, which will reduce future cash interest payments accordingly.

Beginning in the fourth quarter of 2023, income expected to be received in connection with the TSA will be recognized in other income (expense).

The expenses expected to be incurred by the Company to support the transition will be recorded based on the nature of the expense.

We expect to record a significant gain on the sale, which will be recognized in income (loss) from discontinued operations, net of tax during the fourth quarter of 2023.

Further, 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.

Unless otherwise noted, our results of operations discussed below relate to continuing operations and will be impacted by the Commercial Divestiture.

Solar Restructuring

On November 2, 2023, the Company announced a plan to close a significant number of branches that operate our Solar business along with the associated headcount reductions as a result of continued macroeconomic and industry pressures and the continued underperformance of the Solar business.

In addition, the Company concluded there was a triggering event as of September 30, 2023, related to its Solar reporting unit as a result of continued deterioration of industry conditions and macroeconomic decline, as well as the Company’s recent plan to significantly reduce the footprint of its Solar reporting unit.

As a result, the Company determined that the remaining balance of goodwill was not recoverable and recorded a goodwill impairment charge of $88 million in the third quarter of 2023.

Following the impairments during 2023, the balance of goodwill in the Solar reporting unit was zero.

The Company also assessed the recoverability of other long-lived assets related to its Solar business, and impairment charges recorded were not material.

In addition, we expect to incur severance and other costs in connection with these current plans, which we do not expect to be material.

FACTORS AFFECTING OPERATING RESULTS

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

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

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

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

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.

Our CSB 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.

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

For example, during the third quarter of 2023, we entered into an agreement with SunPower Financial to offer lease and power purchase agreement (“PPA”) financing options to new Solar customers.

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

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Additionally, non-payment disconnects generally increase in a 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.

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

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

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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 and includes customers within both the CSB and Commercial segments.

RMR is generated by contractual recurring fees for monitoring and other recurring services provided to our CSB customers, including contracts monitored but not owned.

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

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Gross Customer Revenue Attrition

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

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

Customer sites are considered canceled when all services are terminated.

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

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.

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.

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

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

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Adjusted EBITDA is a non-GAAP measure.

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

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

RESULTS OF OPERATIONS

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

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

(in thousands, except as otherwise indicated)

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Other income (expense) 661 (156,118) 156,779 (10) (153,165) 153,155

Income (loss) before income taxes and equity in net earnings (losses) of equity method investee 38,811 130,389 (91,578) (140,213) 201,558 (341,771)

Income (loss) from continuing operations before income taxes and equity in net earnings (losses) of equity method investee 20,787 (183,321) 204,108 (155,089) 5,044 (160,133)

Income tax benefit (expense) (38,764) 15,800 (54,564) 12,438 (37,806) 50,244

Income (loss) before equity in net earnings (losses) of equity method investee 93,949 92,465 1,484 (22,211) 144,110 (166,321)

Income (loss) from continuing operations before equity in net earnings (losses) of equity method investee (17,977) (167,521) 149,544 (142,651) (32,762) (109,889)

Equity in net earnings (losses) of equity method investee (2,688) (1,594) (1,094) (7,103) (2,542) (4,561)

Income (loss) from continuing operations (20,665) (169,115) 148,450 (149,754) (35,304) (114,450)

Income (loss) from discontinued operations, net of tax

(65,572) 7,866 (73,438) 36,891 17,217 19,674

Net income (loss) $ (86,237) $ (161,249) $ 75,012 $ (112,863) $ (18,087) $ (94,776)

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* N/A — Not applicable.

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

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

(in thousands)

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Total CSB 1,179,873 1,110,640 69,233 3,480,426 3,264,815 215,611

Monitoring and related services 143,809 134,350 9,459 288,493 262,618 25,875

Security installation, product, and other 203,711 163,136 40,575 394,070 325,045 69,025

Total Commercial 347,520 297,486 50,034 682,563 587,663 94,900

Solar installation, product, and other 57,611 179,153 (121,542) 279,978 586,189 (306,211)

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Total revenue $ 1,237,484 $ 1,289,793 $ (52,309) $ 3,760,404 $ 3,851,004 $ (90,600)

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

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

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

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(i) an increase in installation revenue of $22 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 $16 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:

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

• M&S Revenue :

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(i) an increase in installation revenue of $68 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 $52 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 $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.

During the three and nine months ended September 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 nine months ended September 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.

In addition, future revenue in the segment may be impacted by the restructuring discussed above.

RMR and Gross Customer Revenue Attrition:

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.

As of September 30, 2023, our ending RMR balance was $350 million, up $11 million or 3% compared to the prior period, primarily driven by an increase in average prices on new and existing subscribers.

Gross customer revenue attrition was 12.9% as of September 30, 2023, flat compared to September 30, 2022, reflecting a decrease in relocations, offset primarily by higher non-payment disconnects.

Cost of Revenue

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

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

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

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Total CSB 187,396 164,419 22,977 566,730 512,713 54,017

Monitoring and related services 82,456 81,942 514 167,258 163,037 4,221

Security installation, product, and other 149,770 121,762 28,008 290,346 243,851 46,495

Total Commercial 232,226 203,704 28,522 457,604 406,888 50,716

Solar installation, product, and other 49,424 114,236 (64,812) 212,666 382,545 (169,879)

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Total cost of revenue $ 236,820 $ 278,655 $ (41,835) $ 779,396 $ 895,258 $ (115,862)

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.

During the three and nine months ended September 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.

During the three and nine months ended September 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 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 $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,

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

• a decrease of $22 million in Solar, primarily due to recent cost reduction initiatives, and

• a decrease of $13 million in general and administrative expenses in CSB, partially offset by

• an increase of $14 million in the allowance for credit losses primarily related to residential customers.

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

• a decrease of $86 million in Solar, primarily due to recent cost reduction initiatives,

• a decrease of $28 million in advertising costs, primarily due to utilization of a portion of the Google Success Funds, and

• a decrease of $26 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.

• a decrease of $26 million in radio conversion costs due to the wind down of the replacement program,

• an increase of $38 million in selling costs primarily related to the amortization of deferred subscriber acquisition costs and commissions, and

• an increase of $32 million in the allowance for credit losses primarily related to residential customers.

Depreciation and Intangible Asset Amortization

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 three and nine months ended September 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 $245 million, respectively, primarily related to certain assets acquired as part of the ADT Acquisition.

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 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.

During the three months ended September 30, 2023, the increase in merger, restructuring, integration, and other, as compared to the prior period, was driven by an increase in restructuring costs of approximately $7 million primarily related to severance benefits and third-party costs of approximately $4 million primarily related to the strategic optimization of our Solar business operations following the acquisition of ADT Solar.

During the nine months ended September 30, 2023, the increase in merger, restructuring, integration, and other, as compared to the prior period, was driven by increases in restructuring costs of approximately $19 million primarily related to severance benefits and third-party costs of approximately $18 million primarily related to the strategic optimization of our Solar business operations following the acquisition of ADT Solar.

Goodwill Impairment

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.

During the three and nine months ended September 30, 2023, we recorded goodwill impairment charges associated with our Solar reporting unit of $88 million and $511 million, respectively, compared to $201 million during the three and nine months ended September 30, 2022.

Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies,” Note 7 “Goodwill and Other Intangible Assets,” and the section “—Critical Accounting Estimates” below for further discussion.

Interest Expense, net

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.

During the three and nine months ended September 30, 2023, the increase in interest expense, net, as compared to the prior year period, was primarily driven by a decrease in unrealized gains of $92 million and $274 million, respectively on our interest rate swaps not designated as cash flow hedges.

Additionally, during the three months ended September 30, 2023, we recorded $25 million of expense associated with the reclassification from AOCI of historical losses related to certain interest rate swaps as those cash flows are probable of not occurring as a result of the partial redemption of our First Lien Term Loan due 2026 in October 2023.

In addition, the increase in interest expense, net, included higher interest expense primarily related to our First Lien Term Loan due 2026 offset by interest rate swap settlements.

Other income (expense)

During the three and nine months ended September 30, 2022, other income (expense) primarily included the change in fair value of a contingent forward purchase contract related to the tender offer in connection with the State Farm Transaction of approximately $158 million.

Income Tax Benefit (Expense)

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.

During the three and nine months ended September 30, 2023, income tax benefit (expense) impacted our annual effective tax rate primarily as a result of the Solar goodwill impairment charges.

Refer to Note 10 “Income Taxes” for details on our effective tax rate.

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

Beginning in the third quarter of 2023, the Company presented its Commercial Business as a discontinued operation.

Prior periods have been recast to reflect the presentation of Adjusted EBITDA from continuing operations to conform with the current period presentation.

In addition, certain costs previously reflected in the Commercial segment that do not qualify to be presented as discontinued operations are now reflected in the CSB segment.

Adjusted EBITDA

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

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

We define Adjusted EBITDA as income or loss from continuing operations adjusted for (i) interest;

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

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(v) share-based compensation expense;

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

(vi) merger, restructuring, integration, and other items such as separation costs;

(vii) losses on extinguishment of debt;

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

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

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

The table below reconciles Adjusted EBITDA to income (loss) from continuing operations:

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

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

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

Income (loss) from continuing operations

$ (20,665) $ (169,115) $ 148,450 $ (149,754) $ (35,304) $ (114,450)

Interest expense, net 147,187 29,832 117,355 402,381 117,331 285,050

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Merger, restructuring, integration, and other (1)

16,296 4,745 11,551 42,339 1,165 41,174

Goodwill impairment (2)

88,367 200,974 (112,607) 511,176 200,974 310,202

Acquisition-related adjustments (2)

Change in fair value of financial instruments (3)

— 157,550 (157,550) — 157,550 (157,550)

Other, net (3)

Non-cash acquisition-related adjustments and other, net (4)

(705) (4,682) 3,977 2,003 33,452 (31,449)

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

Adjusted EBITDA (from continuing operations)

$ 582,688 $ 583,164 $ (476) $ 1,765,545 $ 1,719,316 $ 46,229

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(1) During 2023, includes integration and third-party costs related to the strategic optimization of the Solar business operations following the ADT Solar acquisition, as well as restructuring costs.

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

Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” and Note 7 “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 the gain on sale of a business of $10 million and net radio conversion costs.

(3) Represents the change in fair value of a contingent forward purchase contract associated with the State Farm Transaction.

(4) Nine months ended September 30, 2022 primarily includes customer backlog intangible asset amortization related to the ADT Solar Acquisition of $30 million, which was fully amortized as of March 2022.

The remaining balance primarily included ADT Solar purchase accounting adjustments and net radio conversion costs, offset by gain on sale of a business.

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 June 30, Six Months Ended June 30,

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

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

CSB $ 623,446 $ 589,640 $ 33,806 $ 1,854,288 $ 1,723,785 $ 130,503

Commercial 44,970 31,363 13,607 85,758 54,993 30,765

Solar (40,758) (6,476) (34,282) (88,743) (4,469) (84,274)

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

Adjusted EBITDA (from continuing operations)

$ 582,688 $ 583,164 $ (476) $ 1,765,545 $ 1,719,316 $ 46,229

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 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:

During the three months ended September 30, 2023, the increases, as compared to the prior periods, were primarily due to:

• higher M&S Revenue, net of the associated costs, of $26 million,

• lower general and administrative expenses of $13 million,

• and higher installation revenue, net of the associated costs and commissions, of $7 million,

• partially offset by higher provision for credit losses of $14 million.

During the nine months ended September 30, 2023, the increases, as compared to the prior periods, were primarily due to:

• higher M&S Revenue, net of the associated costs, of $106 million,

• lower advertising costs of $28 million,

• lower general and administrative expenses of $26 million,

• and higher installation revenue, net of the associated costs and commissions, of $11 million,

• partially offset by higher provision for credit losses of $32 million.

During the three and nine months ended September 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 $50 million and $154 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.

• lower general and administrative expenses, of $26 million and $72 million.

LIQUIDITY AND CAPITAL RESOURCES

Liquidity and capital resources primarily consisted of the following:

(in thousands) June 30, 2023

(in thousands) September 30, 2023

Cash and cash equivalents $ 238,582

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Uncommitted available borrowing capacity under 2020 Receivables Facility

Uncommitted available borrowing capacity under Solar Receivables Facility

Carrying amount of total debt outstanding $ 9,667,701

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

We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our credit facilities, and the issuance of equity and/or debt securities as appropriate given market conditions.

Our future cash needs are expected to include cash for operating activities including working capital, principal and interest payments on our debt, capital expenditures, potential dividend payments to our stockholders, and from time to time, strategic investments or other initiatives that we may undertake.

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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.

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.

As of September 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 issued a notice to redeem approximately $500 million of the First Lien Notes due 2024 by the end of 2023 using the remaining net proceeds from the Commercial Divestiture and cash on hand, with the rest to be redeemed in 2024 prior to maturity.

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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Repurchase of Solar 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.

As of September 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 $16 million.

This liability is partially offset by a net receivable of $6 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.

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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.

Refer to Note 8 “Debt” for further discussion on our debt agreements and activity.

First Lien Term Loan due 2026

In October 2023, the Company redeemed approximately $1.3 billion of the First Lien Term Loan due 2026 using net proceeds from the Commercial Divestiture.

Further, during October 2023, we refinanced the remaining outstanding balance of the First Lien Term Loan due 2026 with a new $1,375 million 7-year term loan B due 2030 (the “First Lien Term Loan B due 2030”) through an amendment to the existing First Lien Credit Agreement.

Term Loan A Facility

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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.

During 2023, we issued a notice to redeem $500 million principal amount of the outstanding First Lien Notes due 2024 by the end of 2023 using remaining net proceeds from the Commercial Divestiture and cash on hand.

2020 Receivables Facility

In March 2023, we amended the agreement governing the 2020 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 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.

During the nine months ended September 30, 2023, we received proceeds of $212 million and repaid $145 million, and as of September 30, 2023, the outstanding balance was $423 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.

As of September 30, 2023, we have not borrowed any amounts under the Solar Receivable Facility.

Debt Covenants

As of June 30, 2023, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations.

As of September 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 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.

During the nine months ended September 30, 2023 and 2022, we declared aggregate dividends of $91 million ($0.035 per share) and $90 million ($0.035 per share) on our Common Stock, respectively, and $6 million ($0.035 per share) on our Class B Common Stock during each period.

On November 2, 2023, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on December 14, 2023, which will be paid on January 9, 2024.

Cash Flow Analysis

Six Months Ended June 30,

Nine Months Ended September 30,

(in thousands) 2023 2022 $ Change

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Financing activities $ (275,129) $ (85,772) $ (189,357)

The discussion below includes cash flows from both continuing operations and discontinued operations consistent with the presentation on the Statements of Cash Flows.

Cash Flows from Operating Activities

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• an increase in cash interest of $124 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

• the timing of payments to vendors primarily related to inventory.

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

During 2023, we also received approximately $19 million related to a legal settlement and approximately $40 million of the Google Success Funds.

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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 cash paid for dealer generated customer account and bulk account purchases of $115 million primarily related to fewer bulk purchases and lower volume,

• a decrease in subscriber system assets expenditures of $92 million due to fewer adds,

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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

• an increase in net repayments of long-term borrowings of approximately $191 million primarily as a result of the ADT Notes due 2023 Redemption and ADT Notes due 2024 Partial Redemption in 2023, partially offset by borrowings under the Term Loan A Facility in 2023, and

• an increase in net repayments under the 2020 Receivables Facility of $63 million, partially offset by

• proceeds from interest rate swap contracts that included an other-than-insignificant financing element at inception of $59 million during 2023 compared to payments of $27 million during 2022.

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

As 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.

In developing these assumptions, we 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 our assumptions in timing or degree, volatility in equity and debt markets resulting in higher discount rates, and unexpected regulatory changes.

During the first and second quarters of 2023, we performed interim impairment quantitative assessments on the Solar reporting unit as a result of triggering events as of March 31, 2023 and June 30, 2023 and recorded goodwill impairment charges of $242 million and $181 million during the first and second quarters of 2023, respectively.

These triggering events resulted from the then-current macroeconomic conditions, including the impact of rising interest rates, as well as ADT Solar’s continued underperformance of operating results in each quarter relative to expectations.

As a result, the Solar reporting unit was considered at risk for future impairment following the impairments in the first and second quarters of 2023.

In addition, we concluded there was a triggering event as of September 30, 2023, related to the Solar reporting unit as a result of continued deterioration of industry conditions and macroeconomic decline, as well as the Company’s recent plan to significantly reduce the footprint of its Solar reporting unit, including certain existing underperforming branches and related headcount reductions.

As a result, we determined that the remaining balance of goodwill was not recoverable and recorded a goodwill impairment charge of $88 million in the third quarter of 2023.

Following the impairments during 2023, the balance of goodwill in the Solar reporting unit was zero.

The Company also assessed the recoverability of other long-lived assets related to its Solar business, and impairment charges recorded were not material.

The fair value of the Solar reporting unit is estimated using the income approach, which includes 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 relies 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.

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.

As the carrying value of the Solar reporting unit approximates its fair value following the impairment charge, the Solar reporting unit is considered at risk of future impairment.

If 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 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 7 “Goodwill and Other Intangible Assets” to the condensed consolidated financial statements for further discussion.

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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;

These forward-looking statements relate to, among other things, planned ADT Solar restructuring activities;

the Commercial Transaction between ADT and GTCR, the expected timetable for realizing expected benefits and synergies of the Commercial Transaction;

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

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

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;

the expected timing of product commercialization with State Farm or any changes thereto, including the ADT home security program for State Farm;

our acquisition of ADT Solar and its anticipated impact on our business and financial condition including the subsequent announcement of planned ADT Solar restructuring activities;

business prospects;

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the successful internal development, commercialization, and timing of our next generation platform and innovative offerings;

the successful commercialization of our joint venture with Ford;

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

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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;

• any difficulties with respect to planned ADT Solar restructuring activities, including expenses associated with the separation of certain Solar branches and personnel;

• the effect of the Commercial Transaction and of the announcement of the planned ADT Solar restructuring activities on our ability to retain and hire key personnel and to maintain relationships with customers, suppliers and other business partners;

• risks related to the Commercial Transaction and planned ADT Solar restructuring activities and the possible diversion of management’s attention from ADT’s core CSB business operations;

• uncertainties as to our ability and the amount of time necessary to realize the expected benefits of the Commercial Transaction and planned ADT Solar restructuring activities;

• 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;

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

• 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;

• continued risks and uncertainties related to the Company’s ability to successfully integrate and operate the ADT Solar business, including the planned ADT Solar restructuring activities;

• risks related to the various financing arrangements, including third party owned arrangements, that the Company facilitates for some ADT Solar customers;

• our ability to continuously and successfully commercialize innovative offerings;

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• our ability to maintain and grow our existing customer base;

• our ability to sell our products and services or launch new products and services in highly competitive markets, including the home security and automation market, the commercial fire and security markets, and the solar market, and to achieve market acceptance with acceptable margins;

• our ability to sell our products and services or launch new products and services in highly competitive markets, including the home security and automation market and the solar market, and to achieve market acceptance with acceptable margins;

• our ability to successfully upgrade obsolete equipment installed at our customers’ premises in an efficient and cost-effective manner;

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis