ADT Inc. 10-Q

ITEM 1. FINANCIAL STATEMENTS. ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except share and per share data) September 30, 2023 December 31, 2022 Assets Current assets: Cash and cash equivalents $ 238,582 $ 257,223 Restricted cash and restricted cash equivalents 117,482 116,357 Accounts receivable, net of allowance for credit losses of $ 50,281 and $ 35,482 , respectively 384,393 334,556 Inventories, net 199,203 225,351 Work-in-progress 7,299 11,983 Prepaid expenses and other current assets 238,137 306,603 Current assets held for sale 450,297 469,923 Total current assets 1,635,393 1,721,996 Property and equipment, net 276,179 306,191 Subscriber system assets, net 2,990,694 2,918,540 Intangible assets, net 4,823,473 4,926,964 Goodwill 4,903,899 5,430,427 Deferred subscriber acquisition costs, net 1,135,018 990,672 Other assets 771,077 640,932 Noncurrent assets held for sale 895,379 885,514 Total assets $ 17,431,112 $ 17,821,236 Liabilities and stockholders' equity Current liabilities: Current maturities of long-term debt $ 835,292 $ 857,624 Accounts payable 275,557 417,860 Deferred revenue 271,900 309,907 Accrued expenses and other current liabilities 582,272 776,739 Current liabilities held for sale 314,101 298,973 Total current liabilities 2,279,122 2,661,103 Long-term debt 8,832,409 8,946,719 Deferred subscriber acquisition revenue 1,849,142 1,580,873 Deferred tax liabilities 908,823 892,994 Other liabilities 215,991 240,129 Noncurrent liabilities held for sale 106,960 106,270 Total liabilities 14,192,447 14,428,088 Commitments and contingencies (See Note 14) Stockholders' equity: Preferred stock—authorized 1,000,000 shares of $ 0.01 par value; zero issued and outstanding as of September 30, 2023 and December 31, 2022 — — Common stock—authorized 3,999,000,000 shares of $ 0.01 par value; issued and outstanding shares of 866,793,978 and 862,098,041 as of September 30, 2023 and December 31, 2022, respectively 8,668 8,621 Class B common stock—authorized 100,000,000 shares of $ 0.01 par value; issued and outstanding shares of 54,744,525 as of September 30, 2023 and December 31, 2022 547 547 Additional paid-in capital 7,407,164 7,380,759 Accumulated deficit ( 4,160,955 ) ( 3,949,579 ) Accumulated other comprehensive income (loss) ( 16,759 ) ( 47,200 ) Total stockholders' equity 3,238,665 3,393,148 Total liabilities and stockholders' equity $ 17,431,112 $ 17,821,236 See Notes to Condensed Consolidated Financial Statements 1 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenue: Monitoring and related services $ 1,053,456 $ 1,021,811 $ 3,125,344 $ 3,029,309 Security installation, product, and other 126,417 88,829 355,082 235,506 Solar installation, product, and other 57,611 179,153 279,978 586,189 Total revenue 1,237,484 1,289,793 3,760,404 3,851,004 Cost of revenue (exclusive of depreciation and amortization shown separately below) : Monitoring and related services 148,533 137,243 452,809 445,720 Security installation, product, and other 38,863 27,176 113,921 66,993 Solar installation, product, and other 49,424 114,236 212,666 382,545 Total cost of revenue 236,820 278,655 779,396 895,258 Selling, general, and administrative expenses 395,600 415,373 1,159,088 1,254,401 Depreciation and intangible asset amortization 333,088 387,417 1,021,103 1,223,666 Merger, restructuring, integration, and other 16,296 4,745 42,339 1,165 Goodwill impairment 88,367 200,974 511,176 200,974 Operating income (loss) 167,313 2,629 247,302 275,540 Interest expense, net ( 147,187 ) ( 29,832 ) ( 402,381 ) ( 117,331 ) Other income (expense) 661 ( 156,118 ) ( 10 ) ( 153,165 ) Income (loss) from continuing operations before income taxes and equity in net earnings (losses) of equity method investee 20,787 ( 183,321 ) ( 155,089 ) 5,044 Income tax benefit (expense) ( 38,764 ) 15,800 12,438 ( 37,806 ) Income (loss) from continuing operations before equity in net earnings (losses) of equity method investee ( 17,977 ) ( 167,521 ) ( 142,651 ) ( 32,762 ) Equity in net earnings (losses) of equity method investee ( 2,688 ) ( 1,594 ) ( 7,103 ) ( 2,542 ) Income (loss) from continuing operations ( 20,665 ) ( 169,115 ) ( 149,754 ) ( 35,304 ) Income (loss) from discontinued operations, net of tax ( 65,572 ) 7,866 36,891 17,217 Net income (loss) $ ( 86,237 ) $ ( 161,249 ) $ ( 112,863 ) $ ( 18,087 ) Common Stock: Income (loss) from continuing operations per share - basic $ ( 0.02 ) $ ( 0.19 ) $ ( 0.16 ) $ ( 0.04 ) Income (loss) from continuing operations per share - diluted $ ( 0.02 ) $ ( 0.19 ) $ ( 0.16 ) $ ( 0.04 ) Net income (loss) per share - basic $ ( 0.09 ) $ ( 0.18 ) $ ( 0.12 ) $ ( 0.02 ) Net income (loss) per share - diluted $ ( 0.09 ) $ ( 0.18 ) $ ( 0.12 ) $ ( 0.02 ) Weighted-average shares outstanding - basic 857,423 850,230 856,446 847,456 Weighted-average shares outstanding - diluted 857,423 850,230 856,446 847,456 Class B Common Stock: Income (loss) from continuing operations per share - basic $ ( 0.02 ) $ ( 0.19 ) $ ( 0.16 ) $ ( 0.04 ) Income (loss) from continuing operations per share - diluted $ ( 0.02 ) $ ( 0.19 ) $ ( 0.16 ) $ ( 0.04 ) Net income (loss) per share - basic $ ( 0.09 ) $ ( 0.18 ) $ ( 0.12 ) $ ( 0.02 ) Net income (loss) per share - diluted $ ( 0.09 ) $ ( 0.18 ) $ ( 0.12 ) $ ( 0.02 ) Weighted-average shares outstanding - basic 54,745 54,745 54,745 54,745 Weighted-average shares outstanding - diluted 54,745 54,745 54,745 54,745 See Notes to Condensed Consolidated Financial Statements 2 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net income (loss) $ ( 86,237 ) $ ( 161,249 ) $ ( 112,863 ) $ ( 18,087 ) Other comprehensive income (loss), net of tax: Cash flow hedges 22,763 4,088 30,484 21,741 Other ( 17 ) ( 15 ) ( 43 ) ( 29 ) Total other comprehensive income (loss), net of tax 22,746 4,073 30,441 21,712 Comprehensive income (loss) $ ( 63,491 ) $ ( 157,176 ) $ ( 82,422 ) $ 3,625 See Notes to Condensed Consolidated Financial Statements 3 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands) Three Months Ended September 30, 2023 Number of Common Shares Number of Class B Common Shares Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Beginning balance 866,409 54,745 $ 8,664 $ 547 $ 7,390,269 $ ( 4,041,963 ) $ ( 39,505 ) $ 3,318,012 Net income (loss) — — — — — ( 86,237 ) — ( 86,237 ) Other comprehensive income (loss), net of tax — — — — — — 22,746 22,746 Dividends — — — — — ( 32,321 ) — ( 32,321 ) Share-based compensation expense — — — — 15,580 — — 15,580 Transactions related to employee share-based compensation plans and other 385 — 4 — 1,315 ( 434 ) 885 Ending balance 866,794 54,745 $ 8,668 $ 547 $ 7,407,164 $ ( 4,160,955 ) $ ( 16,759 ) $ 3,238,665 Three Months Ended September 30, 2022 Number of Common Shares Number of Class B Common Shares Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Beginning balance 856,642 54,745 $ 8,566 $ 547 $ 7,295,665 $ ( 3,874,045 ) $ ( 51,334 ) $ 3,379,399 Net income (loss) — — — — — ( 161,249 ) — ( 161,249 ) Other comprehensive income (loss), net of tax — — — — — — 4,073 4,073 Issuance of common stock, net of expenses 1,322 — 13 — ( 13 ) — — — Dividends — — — — — ( 32,028 ) — ( 32,028 ) Share-based compensation expense — — — — 16,692 — — 16,692 Contingent forward purchase contract — — — — ( 41,938 ) — — ( 41,938 ) Transactions related to employee share-based compensation plans and other 666 — 7 — 3,095 ( 459 ) — 2,643 Ending balance 858,630 54,745 $ 8,586 $ 547 $ 7,273,501 $ ( 4,067,781 ) $ ( 47,261 ) $ 3,167,592 See Notes to Condensed Consolidated Financial Statements 4 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands) Nine Months Ended September 30, 2023 Number of Common Shares Number of Class B Common Shares Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Beginning balance 862,098 54,745 $ 8,621 $ 547 $ 7,380,759 $ ( 3,949,579 ) $ ( 47,200 ) $ 3,393,148 Net income (loss) — — — — — ( 112,863 ) — ( 112,863 ) Other comprehensive income (loss), net of tax — — — — — — 30,441 30,441 Dividends — — — — — ( 96,751 ) — ( 96,751 ) Share-based compensation expense — — — — 43,068 — — 43,068 Transactions related to employee share-based compensation plans and other 4,696 — 47 — ( 16,663 ) ( 1,762 ) ( 18,378 ) Ending balance 866,794 54,745 $ 8,668 $ 547 $ 7,407,164 $ ( 4,160,955 ) $ ( 16,759 ) $ 3,238,665 Nine Months Ended September 30, 2022 Number of Common Shares Number of Class B Common Shares Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Beginning balance 846,826 54,745 $ 8,468 $ 547 $ 7,261,267 $ ( 3,952,590 ) $ ( 68,973 ) $ 3,248,719 Net income (loss) — — — — — ( 18,087 ) — ( 18,087 ) Other comprehensive income (loss), net of tax — — — — — — 21,712 21,712 Issuance of common stock, net of expenses 6,026 — 60 — 15,308 — — 15,368 Dividends — — — — — ( 95,730 ) — ( 95,730 ) Share-based compensation expense — — — — 49,644 — — 49,644 Contingent forward purchase contract — — — — ( 41,938 ) — — ( 41,938 ) Transactions related to employee share-based compensation plans and other 5,778 — 58 — ( 10,780 ) ( 1,374 ) — ( 12,096 ) Ending balance 858,630 54,745 $ 8,586 $ 547 $ 7,273,501 $ ( 4,067,781 ) $ ( 47,261 ) $ 3,167,592 See Notes to Condensed Consolidated Financial Statements 5 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Nine Months Ended September 30, 2023 2022 Cash flows from operating activities: Net income (loss) $ ( 112,863 ) $ ( 18,087 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and intangible asset amortization 1,058,794 1,281,871 Amortization of deferred subscriber acquisition costs 145,688 118,233 Amortization of deferred subscriber acquisition revenue ( 227,651 ) ( 175,680 ) Share-based compensation expense 43,068 49,644 Deferred income taxes 6,804 35,811 Provision for losses on receivables and inventory 104,469 68,417 Goodwill, intangible, and other asset impairments 521,663 200,974 Unrealized (gain) loss on interest rate swap contracts ( 38,477 ) ( 312,603 ) Change in fair value of other financial instruments — 157,550 Other non-cash items, net 102,843 104,293 Changes in operating assets and liabilities, net of effects of acquisitions and divestitures: Deferred subscriber acquisition costs ( 295,440 ) ( 304,404 ) Deferred subscriber acquisition revenue 221,747 255,760 Other, net ( 284,951 ) ( 140,710 ) Net cash provided by (used in) operating activities 1,245,694 1,321,069 Cash flows from investing activities: Dealer generated customer accounts and bulk account purchases ( 385,462 ) ( 500,487 ) Subscriber system asset expenditures ( 480,947 ) ( 572,595 ) Purchases of property and equipment ( 130,520 ) ( 135,677 ) Acquisition of businesses, net of cash acquired — ( 13,096 ) Proceeds from sale of business, net of cash sold — 26,729 Other investing, net 8,848 ( 13,664 ) Net cash provided by (used in) investing activities ( 988,081 ) ( 1,208,790 ) Cash flows from financing activities: Proceeds from long-term borrowings 650,000 480,000 Proceeds from receivables facility 212,188 212,166 Proceeds (payments) from interest rate swaps 59,184 ( 26,953 ) Repayment of long-term borrowings, including call premiums ( 888,716 ) ( 527,595 ) Repayment of receivables facility ( 144,620 ) ( 81,487 ) Dividends on common stock ( 96,400 ) ( 95,164 ) Payments on finance leases ( 32,268 ) ( 33,749 ) Other financing, net ( 34,497 ) ( 12,990 ) Net cash provided by (used in) financing activities ( 275,129 ) ( 85,772 ) Cash and cash equivalents and restricted cash and restricted cash equivalents: Net increase (decrease) ( 17,516 ) 26,507 Beginning balance 373,580 33,277 Ending balance $ 356,064 $ 59,784 See Notes to Condensed Consolidated Financial Statements 6 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Organization ADT Inc., together with its wholly-owned subsidiaries (collectively, “ADT” or the “Company”), provides security, interactive, and smart home solutions to consumer and small business customers, as well as residential solar and energy storage solutions, in the United States (“U.S.”). As discussed below, on October 2, 2023, the Company divested its Commercial Business (as defined below), which provided security and other solutions to commercial customers. The Company is majority-owned by Prime Security Services TopCo (ML), L.P., which is majority-owned by Prime Security Services TopCo Parent, L.P. (“Ultimate Parent”). Ultimate Parent is majority-owned by Apollo Investment Fund VIII, L.P. and its related funds that are directly or indirectly managed by affiliates of Apollo Global Management, Inc. (together with its subsidiaries and affiliates, “Apollo” or the “Sponsor”). Basis of Presentation The condensed consolidated financial statements included herein have been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”). The financial statements included herein comprise the consolidated results of ADT Inc. and its wholly-owned subsidiaries. The results of companies acquired are included from the effective dates of acquisition; and all intercompany transactions have been eliminated. The Company uses the equity method of accounting to account for an investment in which it has the ability to exercise significant influence but does not control. As discussed below under the heading “Commercial Divestiture,” beginning in the third quarter of 2023, the Company presented its Commercial Business as discontinued operations. Certain prior period amounts have been reclassified to conform with the current period presentation. The condensed consolidated financial statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for the interim periods presented. The interim results reported herein should not be taken as indicative of results that may be expected for future interim periods or the full year. The Condensed Consolidated Balance Sheet as of December 31, 2022 included herein was derived from the audited consolidated financial statements as of that date. Certain information and footnote disclosures required in the annual consolidated financial statements have been omitted as appropriate. For a more comprehensive understanding of the Company and its interim results, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Amended 2022 Annual Report (as defined and discussed below). Restatement As disclosed in the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on July 10, 2023, in connection with the preparation of the Company’s second quarter 2023 condensed consolidated financial statements, the Company identified errors in the non-cash goodwill impairment losses associated with its Solar reporting unit and related tax impacts recognized during the third quarter of 2022 and the first quarter of 2023 as a result of the Company not applying the simultaneous equation method prescribed by Accounting Standards Update 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). As a result, on July 27, 2023, the Company filed an Amendment No. 1 to its Annual Report on Form 10-K for the year ended December 31, 2022 (the “Amended 2022 Annual Report”), which was originally filed with the SEC on February 28, 2023 (the “Original 2022 Annual Report”). The Company also restated its Quarterly Reports on Form 10-Q for the quarters ended September 30, 2022, and March 31, 2023, by filing amendments to the respective original Quarterly Reports on Form 10-Q with the SEC on July 27, 2023. 7 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Commercial Divestiture On August 7, 2023, ADT, Iris Buyer LLC, a Delaware limited liability company and affiliate of GTCR LLC (“GTCR”), and, solely for certain purposes set forth in the Commercial Purchase Agreement (as defined below), Fire & Security Holdings, LLC (“F&S Holdings”), a Delaware limited liability company and an indirect, wholly owned subsidiary of ADT, entered into an Equity Purchase Agreement (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 held all of the issued and outstanding equity interests in the subsidiaries of ADT that operated ADT’s commercial business (the “Commercial Business”) (the “Commercial Divestiture”). On October 2, 2023, the Company completed the previously announced Commercial Divestiture for a total purchase price of approximately $ 1,613 million in cash, subject to customary post-closing adjustments, and received net proceeds of approximately $ 1,585 million, excluding transaction costs. Beginning in the third quarter of 2023, the Company presented its Commercial Business as a discontinued operation as the Commercial Divestiture met all of the held for sale criteria for the disposal group and represented a strategic shift that has and will continue to have a major effect on the Company’s operations and financial statements. The change is reflected in all periods presented. 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. Unless otherwise noted, amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements relate to the Company’s continuing operations. Refer to Note 5 “Divestitures” for additional information. Use of Estimates The preparation of these condensed consolidated financial statements in accordance with GAAP requires the Company to select accounting policies and make estimates that affect amounts reported in the condensed consolidated financial statements and the accompanying notes. The Company’s estimates are based on the relevant information available at the end of each period. Actual results could differ materially from these estimates under different assumptions or market conditions. The Company considered recent impacts from macroeconomic conditions such as inflationary pressures, rising interest rates, the uncertainty and volatility in the financial markets, and supply chain disruptions, as well as any on-going impacts from the COVID-19 Pandemic (as defined below), in the assessment of its financial position, results of operations, and cash flows, as well as certain accounting estimates, as of and for the periods presented. COVID-19 Pandemic - During March 2020, the World Health Organization declared the outbreak of a novel coronavirus as a pandemic (the “COVID-19 Pandemic”). As of September 30, 2023, the impact to the Company, as well as its response plan, has not materially changed from that described in the Amended 2022 Annual Report. Segments The Company has historically reported results for three operating and reportable segments organized based on customer type: Consumer and Small Business (“CSB”), Commercial, and Solar. As a result of the Commercial Divestiture, results of the Commercial Business are classified as discontinued operations and thus excluded from both continuing operations and segment results for all periods presented. Accordingly, the Company now reports its results in two operating and reportable segments, CSB and Solar, with the change reflected in all periods presented. Prior to the third quarter of 2023, the Commercial Business was reflected in the Commercial reportable segment. The accounting policies of the Company’s reportable segments are the same as those of the Company. Refer to Note 3 “Segment Information” for additional information. 8 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Accounting Pronouncements Recently Adopted Accounting Pronouncements Vintage Disclosures for Financing Receivables - ASU 2022-02, Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures , requires reporting entities to disclose current-period gross write-offs by year of origination for financing receivables, among other requirements. This disclosure-only guidance became effective January 1, 2023. The impact to the Company’s condensed consolidated financial statements was not material. Supplier Finance Program Obligations - ASU 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, requires that a reporting entity who is a buyer in a supplier finance program disclose qualitative and quantitative information about its supplier finance programs, including a roll-forward of the obligations. The Company adopted this guidance effective January 1, 2023, except the roll-forward requirement, which becomes effective January 1, 2024 (early adoption is permitted), and should be applied prospectively. The Company does not currently have any material supplier finance programs. Recently Issued Accounting Pronouncements Fair Value of Equity Investments - ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, states an entity should not consider the contractual sale restriction when measuring the equity security’s fair value and introduces new disclosure requirements related to such equity securities. This guidance becomes effective January 1, 2024, and should be applied prospectively with any adjustments recognized in earnings and disclosed on the date of adoption. Early adoption is permitted. The Company is monitoring any potential impact. Significant Accounting Policies Unless otherwise noted, the Company’s accounting policies discussed below, or included within the respective footnotes herein, do not materially differ from those disclosed in the Amended 2022 Annual Report. Cash and Cash Equivalents and Restricted Cash and Restricted Cash Equivalents The following table reconciles the amounts below reported in the Condensed Consolidated Balance Sheets to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows: (in thousands) September 30, 2023 December 31, 2022 Cash and cash equivalents $ 238,582 $ 257,223 Restricted cash and restricted cash equivalents (1) 117,482 116,357 Ending balance $ 356,064 $ 373,580 ________________ (1) Primarily includes amounts received from State Farm Fire & Casualty Company (“State Farm”), inclusive of accrued interest, in connection with the State Farm Development Agreement (as defined and discussed in Note 16 “Related Party Transactions”). Subscriber System Assets, net and Deferred Subscriber Acquisition Costs, net Subscriber system assets represent capitalized equipment and installation costs incurred in connection with transactions in which the Company retains ownership of the security system, which the Company may retrieve upon termination of the contract with the customer. Deferred subscriber acquisition costs represent selling expenses (primarily commissions) that are incremental to acquiring customers. 9 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Subscriber system assets and any related deferred subscriber acquisition costs are accounted for on a pooled basis based on the month and year of customer acquisition. The Company depreciates and amortizes these pooled costs using an accelerated method over the estimated life of the customer relationship, which is 15 years. (in thousands) September 30, 2023 December 31, 2022 Gross carrying amount $ 6,261,940 $ 5,981,008 Accumulated depreciation ( 3,271,246 ) ( 3,062,468 ) Subscriber system assets, net $ 2,990,694 $ 2,918,540 Depreciation of subscriber system assets and amortization of deferred subscriber acquisition costs are reflected in depreciation and intangible asset amortization and selling, general, and administrative expenses (“SG&A”), respectively, as follows: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Depreciation of subscriber system assets $ 135,414 $ 134,405 $ 407,739 $ 394,280 Amortization of deferred subscriber acquisition costs $ 47,945 $ 40,036 $ 138,145 $ 111,741 Accrued Expenses and Other Current Liabilities (in thousands) September 30, 2023 December 31, 2022 Accrued interest $ 69,757 $ 156,495 Payroll-related accruals 113,484 139,709 Opportunity Fund (see Note 16 “Related Party Transactions”) 97,367 100,802 Operating lease liabilities (see Note 15 “Leases”) 16,006 20,741 Other accrued liabilities 285,658 358,992 Accrued expenses and other current liabilities $ 582,272 $ 776,739 Merger, Restructuring, Integration, and Other Merger, restructuring, integration, and other represents certain direct and incremental costs resulting from acquisitions made by the Company, integration costs as a result of those acquisitions, costs related to the Company’s restructuring efforts, as well as fair value remeasurements and impairment charges on certain strategic investments. Fair Value of Financial Instruments The Company’s financial instruments primarily consist of cash and cash equivalents, restricted cash and restricted cash equivalents, accounts receivable, retail installment contract receivables, accounts payable, debt, and derivative financial instruments. Due to their short-term and/or liquid nature, the fair values of cash, restricted cash, accounts receivable, and accounts payable approximate their respective carrying amounts. Cash Equivalents - Included in cash and cash equivalents and restricted cash and restricted cash equivalents, as applicable from time to time, are investments in money market mutual funds. These investments are generally classified as Level 1 fair value measurements, which represent unadjusted quoted prices in active markets for identical assets or liabilities. As of September 30, 2023 and December 31, 2022, investments in money market mutual funds were $ 263 million and $ 145 million, respectively. 10 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Long-Term Debt Instruments - The fair values of the Company’s long-term debt instruments are determined using broker-quoted market prices, which represent quoted prices for similar assets or liabilities as well as other observable market data, and are classified as Level 2 fair value measurements. The carrying amounts of debt outstanding, if any, under the Company’s first lien revolving credit facility (the “First Lien Revolving Credit Facility”) and its uncommitted receivables securitization financing agreement (the “2020 Receivables Facility”) approximate their fair values as interest rates on these borrowings approximate current market rates. September 30, 2023 December 31, 2022 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt instruments subject to fair value disclosures (1) $ 9,579,225 $ 9,207,198 $ 9,733,700 $ 9,312,932 ________________ (1) Excludes finance leases. Derivative Financial Instruments - Derivative financial instruments are reported at fair value as either assets or liabilities that are primarily calculated using discounted cash flow models utilizing observable inputs, such as quoted forward interest rates, and incorporate credit risk adjustments to reflect the risk of default by the counterparty or the Company. The resulting fair values are classified as Level 2 fair value measurements. Refer to Note 9 “Derivative Financial Instruments” for the fair values of the Company’s derivative financial instruments. Retail Installment Contract Receivables - The fair values of the Company’s retail installment contract receivables are determined using a discounted cash flow model and are classified as Level 3 fair value measurements. September 30, 2023 December 31, 2022 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Retail installment contract receivables, net $ 664,000 $ 479,686 $ 531,516 $ 385,114 2. REVENUE AND RECEIVABLES Revenue Disaggregated Revenue Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 CSB: Monitoring and related services $ 1,053,456 $ 1,021,811 $ 3,125,344 $ 3,029,309 Security installation, product, and other 126,417 88,829 355,082 235,506 Total CSB 1,179,873 1,110,640 3,480,426 3,264,815 Solar: Solar installation, product, and other 57,611 179,153 279,978 586,189 Total Solar 57,611 179,153 279,978 586,189 Total revenue $ 1,237,484 $ 1,289,793 $ 3,760,404 $ 3,851,004 The Company allocates the transaction price to each performance obligation based on relative standalone selling price, which is determined using observable internal and external pricing, profitability, and operational metrics. 11 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Company-Owned - In transactions in which the Company provides monitoring and related services but retains ownership of the security system (referred to as Company-owned transactions), the Company’s performance obligations primarily include (i) monitoring and related services, which are recognized when these services are provided to the customer, and (ii) a material right associated with the one-time non-refundable fees in connection with the initiation of a monitoring contract which the customer will not be required to pay again upon a renewal of the contract (referred to as deferred subscriber acquisition revenue). Deferred subscriber acquisition revenue is amortized on a pooled basis over the estimated life of the customer relationship using an accelerated method consistent with the treatment of subscriber system assets and deferred subscriber acquisition costs and is reflected in security installation, product, and other revenue. Three Months Ended September 30, Nine Months Ended September 30, ( in thousands ) 2023 2022 2023 2022 Amortization of deferred subscriber acquisition revenue $ 77,471 $ 61,530 $ 220,779 $ 169,048 Customer-Owned - In transactions involving security systems sold outright to the customer (referred to as outright sales), the Company’s performance obligations generally include the sale and installation of the system, which is primarily recognized at a point in time based upon the nature of the transaction and contractual terms, and any monitoring and related services, which are recognized when these services are provided to the customer. Solar - The Company enters into agreements with third-party lenders in order to access loan products for the Company’s Solar customers. Fees incurred under these agreements are recorded as a reduction of solar installation, product, and other revenue. Three Months Ended September 30, Nine Months Ended September 30, ( in thousands ) 2023 2022 2023 2022 Third-party lender financing fees $ 11,596 $ 28,933 $ 40,066 $ 107,005 Revenue and cost of revenue from the sale of solar equipment are reflected in the statements of operations as follows: Three Months Ended September 30, Nine Months Ended September 30, ( in thousands ) 2023 2022 2023 2022 Solar installation, product, and other revenue $ 24,955 $ 93,387 $ 133,466 $ 339,760 Solar installation, product, and other cost of revenue $ 22,076 $ 64,283 $ 102,919 $ 224,425 Allowance for Credit Losses The Company evaluates its allowance for credit losses on accounts receivable in pools based on customer type. For each customer pool, the allowance for credit losses is estimated based on the delinquency status of the underlying receivables and the related historical loss experience, as adjusted for current and expected future conditions, if applicable. The allowance for credit losses is not material for the individual pools of customers. Nine Months Ended September 30, (in thousands) 2023 2022 Beginning balance $ 35,482 $ 22,104 Provision for credit losses 85,865 64,914 Write-offs, net of recoveries (1) ( 71,066 ) ( 54,978 ) Ending balance $ 50,281 $ 32,040 ________________ (1) Recoveries were not material for the periods presented. As such, the Company presented write-offs, net of recoveries. 12 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Retail Installment Contract Receivables, net For security system transactions occurring under both Company-owned and customer-owned equipment models, the Company’s retail installment contract option allows qualifying residential customers to pay the fees due at installation over a 24-, 36-, or 60-month interest-free period, and there is no significant financing component. Upon origination of a retail installment contract, the Company utilizes external credit scores to assess customer credit quality and determine eligibility. Subsequent to origination, the Company monitors the delinquency status of retail installment contract receivables as the key credit quality indicator. The balance of unbilled retail installment contract receivables comprises: (in thousands) September 30, 2023 December 31, 2022 Retail installment contract receivables, gross $ 665,339 $ 532,406 Allowance for credit losses ( 1,339 ) ( 890 ) Retail installment contract receivables, net $ 664,000 $ 531,516 Balance Sheet Classification: Accounts receivable, net $ 229,021 $ 169,242 Other assets 434,979 362,274 Retail installment contract receivables, net $ 664,000 $ 531,516 The allowance for credit losses relates to retail installment contract receivables from outright sales transactions. As of September 30, 2023, the current and delinquent billed retail installment contract receivables were not material. As of September 30, 2023 and December 31, 2022, retail installment contract receivables, net, used as collateral for borrowings under the 2020 Receivables Facility were $ 594 million and $ 506 million, respectively. Refer to Note 8 “Debt” for further discussion regarding the 2020 Receivables Facility. Contract Assets Contract assets represent the Company’s right to consideration in exchange for goods or services transferred to the customer. The contract asset is reclassified to accounts receivable when the Company’s right to the consideration becomes unconditional, which generally occurs over the course of a 24-, 36-, or 60-month period as additional services are performed and billed. The financing component of contract assets is not significant. During the nine months ended September 30, 2023 and 2022, contract assets recognized were not material. The balance of contract assets for residential transactions comprises: (in thousands) September 30, 2023 December 31, 2022 Contract assets, gross $ 39,785 $ 52,591 Allowance for credit losses ( 5,113 ) ( 5,453 ) Contract assets, net $ 34,672 $ 47,138 Balance Sheet Classification: Prepaid expenses and other current assets $ 17,039 $ 32,495 Other assets 17,633 14,643 Contract assets, net $ 34,672 $ 47,138 13 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3. SEGMENT INFORMATION The Company’s segments are based on the manner in which the Company’s Chief Executive Officer, who is the chief operating decision maker (the “CODM”) evaluates performance and makes decisions about how to allocate resources. As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies,” effective in the third quarter of 2023, the Company reports results in two operating and reportable segments: CSB and Solar. Prior to the third quarter of 2023, the Commercial Business was reflected in the Commercial reportable segment. Certain allocated shared costs that were previously included in the Commercial reportable segment that do not qualify to be presented within discontinued operations are now reflected in the CSB reportable segment consistent with other unallocated corporate and other costs as discussed below. There have been no other changes to the Company’s segments from that disclosed in the Amended 2022 Annual Report. The Company organizes its segments based on customer type as follows: • CSB - Customers in the CSB segment are comprised of owners and renters of residential properties, small business operators, and other individual consumers. The CSB segment includes the sale, installation, servicing, and monitoring of integrated security and automation systems and other related offerings. • Solar - Customers in the Solar segment are comprised of residential homeowners. The Solar segment includes the sale and installation of solar systems, energy storage solutions, roofing services, and other related offerings. The CSB and Solar segments include the respective revenue and operating costs related to the activities noted above, other operating costs associated with support functions related to these operations, and certain dedicated corporate costs and other income and expense items. The CSB segment includes general corporate costs and other income and expense items not included in the Solar segment. The CODM uses Adjusted EBITDA from continuing operations (“Adjusted EBITDA”), which is the Company’s segment profit measure, to evaluate segment performance. Adjusted EBITDA is defined as income or loss from continuing operations adjusted for (i) interest; (ii) taxes; (iii) depreciation and amortization, including depreciation of subscriber system assets and other fixed assets and amortization of dealer and other intangible assets; (iv) amortization of deferred costs and deferred revenue associated with subscriber acquisitions; (v) share-based compensation expense; (vi) merger, restructuring, integration, and other items such as separation costs; (vii) losses on extinguishment of debt; (viii) radio conversion costs, net; (ix) adjustments related to acquisitions, such as contingent consideration and purchase accounting adjustments, or dispositions; (x) impairment charges; and (xi) other income/gain or expense/loss items such as changes in fair value of certain financial instruments or financing and consent fees. The CODM does not review the Company's assets by segment; therefore, such information is not presented. Reconciliations The following table presents total revenue by segment and a reconciliation to consolidated total revenue: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 CSB $ 1,179,873 $ 1,110,640 $ 3,480,426 $ 3,264,815 Solar 57,611 179,153 279,978 586,189 Total Revenue $ 1,237,484 $ 1,289,793 $ 3,760,404 $ 3,851,004 14 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table presents Adjusted EBITDA by segment and a reconciliation to consolidated income (loss) from continuing operations before income taxes and equity in net earnings (losses) of equity method investee: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Adjusted EBITDA by segment: CSB $ 623,446 $ 589,640 $ 1,854,288 $ 1,723,785 Solar ( 40,758 ) ( 6,476 ) ( 88,743 ) ( 4,469 ) Total $ 582,688 $ 583,164 $ 1,765,545 $ 1,719,316 Reconciliation: Total segment Adjusted EBITDA $ 582,688 $ 583,164 $ 1,765,545 $ 1,719,316 Less: Interest expense, net 147,187 29,832 402,381 117,331 Depreciation and intangible asset amortization 333,088 387,417 1,021,103 1,223,666 Amortization of deferred subscriber acquisition costs 47,945 40,036 138,145 111,741 Amortization of deferred subscriber acquisition revenue ( 77,471 ) ( 61,530 ) ( 220,779 ) ( 169,048 ) Share-based compensation expense 9,882 13,737 31,369 39,983 Merger, restructuring, integration, and other (1) 16,296 4,745 42,339 1,165 Goodwill impairment (2) 88,367 200,974 511,176 200,974 Change in fair value of financial instruments (3) — 157,550 — 157,550 Non-cash acquisition-related adjustments and other, net (4) ( 705 ) ( 4,682 ) 2,003 33,452 Equity in net earnings (losses) of equity method investee ( 2,688 ) ( 1,594 ) ( 7,103 ) ( 2,542 ) Income (loss) from continuing operations before income taxes and equity in net earnings (losses) of equity method investee $ 20,787 $ ( 183,321 ) $ ( 155,089 ) $ 5,044 ________________ (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 the Company’s Solar reporting unit. Refer to Note 7 “Goodwill and Other Intangible Assets.” (3) Represents the change in fair value of the Forward 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. 4. ACQUISITIONS There was no acquisition activity during the nine months ended September 30, 2023. During the nine months ended September 30, 2022, total consideration for continuing and discontinued operations related to acquisitions was approximately $ 31 million, including approximately $ 15 million in shares of the Company’s common stock. This resulted in the recognition of approximately $ 24 million of goodwill. 5. DIVESTITURES The Company may decide to divest a portion of its business for various reasons, including efforts to focus on its other businesses. The Company presents discontinued operations for components of the business that are either disposed of through sale (or qualify as held for sale), abandonment, or spin-off if these actions also represent a strategic shift that has or will have a major effect on the Company’s financial results. Commercial Divestiture As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies,” as a result of the Commercial Divestiture, the disposal group met the established held for sale criteria, and the Company classified the assets and 15 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) liabilities related to the Commercial Business as held for sale in the Condensed Consolidated Balance Sheets for the periods presented. The Commercial Divestiture supports the Company’s strategic journey and strengthens its financial profile. Furthermore, the Commercial Divestiture represents a strategic shift that has and will continue to have a major effect on the Company’s operations and financial statements, and therefore, the results of operations of the Commercial Business are classified as discontinued operations in the Company’s Condensed Consolidated Statements of Operations for the periods presented. As the agreed upon sale price was substantially higher than the carrying value of the Commercial Business, the Company did not record any impairment or adjustments when recognizing the disposal group at the lower of its carrying amount or fair value less cost to sell. As discussed in Note 3 “Segment Information,” the Commercial Business was previously reflected in the Commercial reportable segment. On October 2, 2023, the Company completed the Commercial Divestiture, and received net proceeds of approximately $ 1,585 million, subject to certain customary post-closing adjustments as set forth in the Commercial Purchase Agreement. In addition, the Company will recognize a significant gain on sale, which will be recognized in income (loss) from discontinued operations during the fourth quarter of 2023. The Company used a portion of the net proceeds to redeem approximately $ 1.3 billion of the Company’s first lien term loan facility due 2026 (the “First Lien Term Loan due 2026”). The Company intends to use the remaining net proceeds and cash on hand to redeem $ 500 million of the Company’s outstanding 5.250 % First-Priority Senior Secured Notes due 2024 (the “First Lien Notes due 2024”) during the Company’s fourth quarter of 2023. Refer to Note 8 “Debt” for further discussion. Refer to Note 13 “Net Income (Loss) per Share” for basic and diluted earnings per share information for discontinued operations. 16 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following reconciliations represent the major classes of line items of the Commercial Business within the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations and certain information within the Condensed Consolidated Statements of Cash Flows for the periods presented. Balance Sheet Information (in thousands) September 30, 2023 December 31, 2022 Assets Accounts receivable, net $ 254,787 $ 262,757 Inventories, net 102,927 104,139 Work-in-progress 48,106 68,782 Prepaid expenses and other current assets 42,012 34,245 Total current assets of discontinued operations held for sale 447,832 469,923 Property and equipment, net 76,843 69,777 Subscriber system assets, net 138,087 142,763 Intangible assets, net 151,287 164,783 Goodwill 336,589 336,589 Deferred subscriber acquisition costs, net 89,762 88,966 Other assets 82,196 82,636 Total assets of discontinued operations held for sale $ 1,322,596 $ 1,355,437 Liabilities Current maturities of long-term debt $ 18,372 $ 14,293 Accounts payable 77,631 68,855 Deferred revenue 108,123 92,784 Accrued expenses and other current liabilities 107,535 123,041 Total current liabilities of discontinued operations held for sale 311,661 298,973 Long-term debt 11,418 9,952 Deferred subscriber acquisition revenue 63,075 64,605 Other liabilities 32,468 31,713 Total liabilities of discontinued operations held for sale $ 418,622 $ 405,243 17 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Statements of Operations Information Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Revenue $ 351,400 $ 314,298 $ 1,033,962 $ 898,864 Cost of revenue 233,204 215,665 688,305 616,644 Selling, general, and administrative expenses 72,601 65,054 213,113 195,444 Depreciation and intangible asset amortization ( 3,186 ) 18,915 37,691 58,205 Other income and expense items 8,814 1,792 19,222 2,506 Income (loss) from discontinued operations before income taxes 39,967 12,872 75,631 26,065 Income tax benefit (expense) ( 105,539 ) ( 5,006 ) ( 38,740 ) ( 8,848 ) Income (loss) from discontinued operations, net of tax $ ( 65,572 ) $ 7,866 $ 36,891 $ 17,217 Cash Flow Information Nine Months Ended September 30, (in thousands) 2023 2022 Depreciation and intangible asset amortization $ 37,691 $ 58,205 Share-based compensation expense $ 11,699 $ 9,661 Subscriber system asset expenditures $ 8,902 $ 23,725 Purchases of property and equipment $ 4,399 $ 3,378 Transition Services Agreement In connection with the Commercial Divestiture, the Company entered into a Transition Services Agreement (the “TSA”), pursuant to which the Company and the Commercial Business will provide certain transitional services relating to ongoing support and other administrative functions to each other for a transitional period of up to 24 months after the closing of the Commercial Divestiture. TSA fees charged to the Commercial Business represent charges for internal labor as well as certain third-party costs identified in connection with providing such services. Income from the TSA will be recognized in other income (expense), and expenses incurred by the Company to support the transition will be recorded based on the nature of the expense. ADT Brand License and Intellectual Property (“IP”) Rights The Company and GTCR entered into an agreement granting GTCR a license to continue to use the ADT brand and other Company trademarks for a period of twelve months to transition from Company branding (the “Brand License”). The Company has also agreed to a covenant not to assert a claim against GTCR for infringement of Company's patents as of the Commercial Divestiture for products and services that were used in the Commercial Business prior to the Commercial Divestiture, and has provided GTCR with a paid-up, irrevocable, non-assignable (with limited exceptions) license to continue to use certain software and other Company IP in the same manner. Other Divestitures During the three months ended September 30, 2023, the Company entered into an Asset Purchase Agreement to sell substantially all of the assets and certain specified liabilities of its Vintage Security business (the “Vintage Security Divestiture”). As a result, the disposal group was classified as held for sale as of September 30, 2023, and the assets and liabilities of the Vintage Security business were reflected as held for sale in the Condensed Consolidated Balance Sheet as of September 30, 2023. The results of operations of the Vintage Security business are reflected in the CSB segment and did not meet the criteria to be presented as a discontinued operation. On October 2, 2023, the Company completed the Vintage Security Divestiture for net proceeds of approximately $ 36 million, subject to certain customary post-closing adjustments. 18 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) During the nine months ended September 30, 2022, proceeds related to disposal activities totaled approximately $ 27 million, resulting in a gain on sale of approximately $ 10 million recognized in SG&A. 6. EQUITY METHOD INVESTMENTS Canopy Investment In April 2022, the Company and Ford Motor Company (“Ford”) formed the entity, SNTNL LLC (“Canopy”). Canopy meets the definition of a variable interest entity (“VIE”) because the Company holds a variable interest through its 40 % investment in Canopy’s preferred class of equity (the “Canopy Investment”) and fees received under various commercial agreements between the Company and Canopy. The Company is not the primary beneficiary, and therefore, does not consolidate Canopy’s assets, liabilities, and financial results of operations. As a result, the Company accounts for its investment in Canopy under the equity method of accounting. The impact to the Company’s condensed consolidated financial statements as a result of the Canopy Investment or the commercial agreements was not material during the periods presented. As of September 30, 2023 and December 31, 2022, the Canopy Investment’s carrying amount was approximately $ 5 million and $ 7 million, respectively, and is presented in other assets. The balance primarily reflects the initial contribution, plus an additional investment of approximately $ 5 million during the first quarter of 2023, as well as the Company’s proportionate share of Canopy’s cumulative net earnings or losses. Subsequent event - In October 2023, the Company began discussions with Ford to sell its shares in Canopy, in accordance with the terms of the agreement between the Company and Ford, which includes a put right under which the Company is entitled to recover its full equity investment in Canopy plus a premium. The sale of ADT’s equity investment in Canopy is expected to close by the first quarter of 2024, after which the Company will no longer hold an investment in Canopy. 7. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Changes in the carrying amounts of goodwill by reportable segment were as follows: (in thousands) CSB Solar Total Balance as of December 31, 2022 $ 4,919,251 $ 511,176 $ 5,430,427 Acquisitions (1) 123 — 123 Impairment — ( 511,176 ) ( 511,176 ) Reclassification to held for sale (2) ( 15,475 ) — ( 15,475 ) Balance as of September 30, 2023 $ 4,903,899 $ — $ 4,903,899 ________________ (1) Includes the impact of measurement period adjustments which were not material during the nine months ended September 30, 2023. (2) Relates to the presentation of Vintage Security as held for sale as discussed in Note 5 “Divestitures.” As of September 30, 2023 and December 31, 2022, the Company had accumulated goodwill impairment losses of $ 712 million and $ 201 million, respectively, associated with the Company’s Solar reporting unit. Solar Goodwill Impairment During the first and second quarters of 2023, the Company 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 and as previously disclosed, the Solar reporting unit was considered at risk for future impairment following the impairments in the first and second quarters of 2023. 19 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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, including certain existing underperforming branches and related headcount reductions. 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. 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. Other Intangible Assets September 30, 2023 December 31, 2022 (in thousands) Gross Carrying Amount Accumulated Amortization Net Carrying Amount Gross Carrying Amount Accumulated Amortization Net Carrying Amount Definite-lived intangible assets: Contracts and related customer relationships $ 5,370,644 $ ( 2,812,359 ) $ 2,558,285 $ 6,739,004 $ ( 4,143,469 ) $ 2,595,535 Dealer relationships 1,518,020 ( 598,333 ) 919,687 1,518,020 ( 538,801 ) 979,219 Other 209,773 ( 197,272 ) 12,501 212,773 ( 193,563 ) 19,210 Total definite-lived intangible assets 7,098,437 ( 3,607,964 ) 3,490,473 8,469,797 ( 4,875,833 ) 3,593,964 Indefinite-lived intangible assets: Trade name 1,333,000 — 1,333,000 1,333,000 — 1,333,000 Intangible assets $ 8,431,437 $ ( 3,607,964 ) $ 4,823,473 $ 9,802,797 $ ( 4,875,833 ) $ 4,926,964 The change in the net carrying amount of contracts and related customer relationships during the period was as follows: (in thousands) Balance as of December 31, 2022 $ 2,595,535 Customer contract additions, net of dealer charge-backs (1) 363,540 Amortization ( 400,790 ) Balance as of September 30, 2023 $ 2,558,285 ________________ (1) The weighted-average amortization period for customer contract additions was approximately 15 years. Payments for customer contract additions under the Company’s authorized dealer program and from other third parties are reflected as dealer generated customer accounts and bulk account purchases on the Condensed Consolidated Statements of Cash Flows. Additionally, during the first quarter of 2023, the Company retired approximately $ 1.7 billion of customer relationship intangible assets that became fully amortized. These assets were originally acquired as part of the 2016 acquisition of The ADT Security Corporation (formerly named The ADT Corporation) (“The ADT Corporation”) (the “ADT Acquisition”). 20 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Definite-Lived Intangible Asset Amortization Expense Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Definite-lived intangible asset amortization expense $ 143,243 $ 209,370 $ 466,886 $ 700,489 8. DEBT The Company’s debt is comprised of the following (in thousands) : Description Issued Maturity Interest Rate (1) Interest Payable September 30, 2023 December 31, 2022 First Lien Term Loan due 2026 9/23/2019 9/23/2026 Term SOFR + 2.75 % Quarterly $ 2,709,428 $ 2,730,269 Term Loan A Facility 3/14/2023 3/14/2028 Term SOFR + 2.25 % Quarterly 633,750 — First Lien Notes due 2024 4/4/2019 4/15/2024 5.250 % 2/15 and 8/15 600,000 750,000 First Lien Notes due 2026 4/4/2019 4/15/2026 5.750 % 3/15 and 9/15 1,350,000 1,350,000 First Lien Notes due 2027 8/20/2020 8/31/2027 3.375 % 6/15 and 12/15 1,000,000 1,000,000 First Lien Notes due 2029 7/29/2021 8/1/2029 4.125 % 2/1 and 8/1 1,000,000 1,000,000 ADT Notes due 2023 1/14/2013 6/15/2023 4.125 % 6/15 and 12/15 — 700,000 ADT Notes due 2032 5/2/2016 7/15/2032 4.875 % 1/15 and 7/15 728,016 728,016 ADT Notes due 2042 7/5/2012 7/15/2042 4.875 % 1/15 and 7/15 21,896 21,896 Second Lien Notes due 2028 1/28/2020 1/15/2028 6.250 % 1/15 and 7/15 1,300,000 1,300,000 2020 Receivables Facility 3/5/2020 8/20/2028 Various Monthly 423,047 354,741 Other debt (2) 839 2,446 Total debt principal, excluding finance leases 9,766,976 9,937,368 Plus: Finance lease liabilities (3) 88,476 70,643 Less: Unamortized debt discount, net ( 10,957 ) ( 13,415 ) Less: Unamortized deferred financing costs ( 46,657 ) ( 50,896 ) Less: Unamortized purchase accounting fair value adjustment and other ( 130,137 ) ( 139,357 ) Total debt 9,667,701 9,804,343 Less: Current maturities of long-term debt, net of unamortized debt discount ( 835,292 ) ( 857,624 ) Long-term debt $ 8,832,409 $ 8,946,719 _________________ (1) Interest rate as of September 30, 2023 . During June 2023, the Secured Overnight Financing Rate (“SOFR”) replaced the forward London Interbank Offered Rate (“LIBOR”) as the applicable benchmark rate for all remaining existing and future issuances of the Company’s debt instruments with a variable rate component. Interest on the 2020 Receivables Facility is primarily based on SOFR + 0.95 % and Cost of Funds (“COF”) + 0.85 %. (2) Other debt primarily consists of vehicle loans at various interest rates and maturities. (3) Refer to Note 15 “Leases” for additional information regarding the Company’s finance leases. As of September 30, 2023, the Company was in compliance with all financial covenant and other maintenance tests for all of its debt obligations. Significant changes in the Company’s debt during the nine months ended September 30, 2023 were as follows: First Lien Credit Agreement The Company’s first lien credit agreement, dated as of July 1, 2015 (together with subsequent amendments and restatements, the “First Lien Credit Agreement”), contains the First Lien Term Loan due 2026 and the First Lien Revolving Credit Facility. During the nine months ended September 30, 2023, there were no borrowings under the First Lien Revolving Credit Facility; and as of September 30, 2023, the Company had $ 575 million in available borrowing capacity. 21 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) During the nine months ended September 30, 2022, the Company borrowed $ 480 million and repaid $ 505 million under its First Lien Revolving Credit Facility. Subsequent Event - 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, the Company 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. The First Lien Term Loan B due 2030 requires scheduled quarterly amortization payments, commencing on March 31, 2024, equal to 0.25 % of the original principal amount of the First Lien Term Loan B due 2030, with the remaining balance payable at maturity. The Company may make voluntary prepayments on the First Lien Term Loan B due 2030 at any time prior to maturity at par, subject to a 1.00 % prepayment premium in the event of certain specified refinancing events at any time during the first six months after the Closing Date. The First Lien Term Loan B due 2030 bears interest at a rate equal to, at the Company’s option, either (a) a term SOFR rate (“Term SOFR”) with a floor of zero or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50 % per annum, (ii) the rate of interest per annum last quoted by The Wall Street Journal as the “Prime Rate” in the United States and (iii) the one-month adjusted term SOFR plus 1.00 % per annum (“Base Rate”), in each case, plus an applicable margin of 2.50 % per annum for Term SOFR loans and 1.50 % per annum for Base Rate loans. The Company has elected the Term SOFR alternative to apply to borrowings of the First Lien Term Loan B due 2030. Other than as described above, the First Lien Term Loan B due 2030 continues to have the same terms as provided under the existing First Lien Credit Agreement. Term Loan A Facility On March 14, 2023, Prime Security Services Holdings, LLC (“Holdings”), a Delaware limited liability company and a wholly owned direct subsidiary of the Company, Prime Security Services Borrower, LLC (“Prime Borrower”), a Delaware limited liability company and a wholly owned direct subsidiary of Holdings, and The ADT Corporation, a Delaware corporation and a wholly owned direct subsidiary of Prime Borrower (together with Prime Borrower, the “Term Loan A Borrowers”), entered into a term loan credit agreement (the “Term Loan A Credit Agreement”) with Barclays Bank PLC, as administrative agent, and the lenders party thereto, pursuant to which such lenders provided the Term Loan A Borrowers with an aggregate principal amount of $ 600 million of term loans (the “Closing Date Term Loan A Loans”) under a senior secured term loan A facility (the “Term Loan A Facility”). Also on March 14, 2023, Holdings, the Term Loan A Borrowers, the subsidiary loan parties thereto, Barclays Bank PLC, and the lender party thereto entered into an amendment to the Term Loan A Credit Agreement, pursuant to which the lender party thereto agreed, at the option of the Term Loan A Borrowers and subject to the satisfaction or waiver of customary conditions, to provide the Term Loan A Borrowers with an aggregate principal amount of $ 50 million of incremental term loans (the “Incremental Term Loan A Loans”) under the Term Loan A Facility on or before the scheduled maturity date of the Company’s 4.125 % senior notes due June 15, 2023 (the “ADT Notes due 2023”). On June 15, 2023, the Company borrowed the Incremental Term Loan A Loans and used the proceeds to complete the redemption of approximately $ 50 million of the ADT Notes due 2023. The Incremental Term Loan A Loans have the same terms as, and constitutes one class with, the Closing Date Term Loan A Loans. The Term Loan A Facility has a maturity date of March 14, 2028, subject to a springing maturity of 91 days prior to the maturity date of certain long-term indebtedness of Prime Borrower and its subsidiaries if, on such date, the aggregate principal amount of such indebtedness equals or exceeds $ 100 million. The Term Loan A Facility requires scheduled amortization payments in annual amounts equal to 5.00 % of the original principal amount of the Term Loan A Facility, payable quarterly, with the balance payable at maturity. The Term Loan A Borrowers may make voluntary prepayments under the Term Loan A Facility at any time prior to maturity at par. Borrowings under the Term Loan A Facility bear interest at a rate equal to, at Prime Borrower’s option, either (a) a term SOFR rate plus an adjustment of 0.10 % (“Term SOFR”) or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50 % per annum, (ii) the rate of interest per annum last quoted by The Wall Street Journal as the “Prime Rate” in the U.S., and (iii) the one-month adjusted term SOFR plus 1.00 % per annum, in each case, plus an applicable margin of 2.50 % per annum for SOFR loans and 1.50 % per annum for base rate loans, subject to adjustments based on certain specified 22 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) net first lien leverage ratios. Prime Borrower has elected the Term SOFR alternative to apply to borrowings under the Term Loan A Facility. Indebtedness incurred under the Term Loan A Facility is guaranteed, jointly and severally, on a senior secured first-priority basis, by Holdings, on a limited recourse basis, and by substantially all of Prime Borrower’s wholly owned material domestic subsidiaries, and is secured by a pledge of Prime Borrower’s capital stock directly held by Holdings and by first-priority security interests in substantially all of the assets of Prime Borrower and the subsidiary guarantors, in each case subject to certain permitted liens and exceptions. The Term Loan A Facility is subject to customary mandatory prepayment provisions, covenants, and restrictions, including a financial maintenance covenant requiring the Term Loan A Facility Borrowers to comply as of the last day of each fiscal quarter with a specified maximum consolidated net first lien leverage ratio. Fees associated with the Term Loan A Facility were not material during the periods presented. ADT Notes due 2023 Redemption On March 15, 2023, the Company used the proceeds from the Closing Date Term Loan A Loans to redeem approximately $ 600 million of the ADT Notes due 2023 (the “2023 Notes Partial Redemption”) for a total redemption price of approximately $ 600 million, excluding any accrued and unpaid interest. Loss on extinguishment of debt was not material. On June 15, 2023, the Company 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, the Company 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. Loss on extinguishment of debt was not material. Subsequent Event - In October 2023, the Company issued a notice of redemption to redeem approximately $ 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 Under the 2020 Receivables Facility, the Company obtains financing by selling or contributing certain retail installment contract receivables to the Company’s wholly-owned consolidated bankruptcy-remote special purpose entity (“SPE”), which then grants a security interest in those retail installment contract receivables as collateral for cash borrowings. In March 2023, the Company amended the agreement governing the 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. As of September 30, 2023, the Company had an uncommitted available borrowing capacity under the 2020 Receivables Facility of approximately $ 77 million. The 2020 Receivables Facility did not have a material impact to the Condensed Consolidated Statements of Operations during the periods presented. Variable Interest Entity The SPE meets the definition of a VIE for which the Company is the primary beneficiary as it has the power to direct the SPE’s activities and the obligation to absorb losses or the right to receive benefits of the SPE. As such, the Company consolidates the SPE’s assets, liabilities, and financial results of operations. The SPE’s assets and liabilities primarily consist of a portion of the Company’s unbilled retail installment contract receivables, net, as discussed in Note 2 “Revenue and Receivables,” and borrowings under the 2020 Receivables Facility, as presented above. 23 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Solar Receivables Facility On August 2, 2023, Compass Solar Group, LLC (“Compass”) and ADT Solar Finance LLC (“ADT Solar Finance”), each an indirect wholly-owned subsidiary of ADT Inc. entered into a Receivables Financing Agreement with Mizuho Bank, Ltd. (the “Solar Receivables Financing Agreement”) to finance receivables generated by the installation of residential solar systems. The Solar Receivables Financing Agreement, among other things, provides for an uncommitted revolving loan facility in the aggregate principal amount of up to $ 300 million, which loans are secured by substantially all the assets of ADT Solar Finance (the “Solar Receivables Facility”). The Solar Receivables Financing Agreement has an initial revolving period of one year (which may be extended by agreement of the parties) followed by an amortization period of 300 months to maturity where all collections on the receivables during such period will be applied to prepay the loan until reduced to zero, which will occur only if the Solar Receivables Financing Agreement is not mutually extended on a revolving basis. The interest rate under the Solar Receivables Financing Agreement is the sum of (x) term SOFR (plus a credit adjustment spread of 0.1 %) plus (y) 1.0 % (increased to 3.5 % after the termination date) or, with respect to loans funded by a Conduit Lender (as defined in the Solar Receivables Financing Agreement), the sum of (x) the applicable rate set forth in the Receivables Financing Agreement plus (y) 1.0 % (increased to 3.5 % after the termination date). In connection with such Solar Receivables Financing Agreement, certain other agreements relating to the transaction were entered into, including ADT Solar Finance’s limited liability company agreement, a Receivables Sale Agreement between Compass and ADT Solar Finance, pursuant to which Compass sells such receivables from time to time to ADT Solar Finance, a Performance Support Agreement entered into by ADT Inc., pursuant to which ADT Inc. guaranteed certain obligations under the Solar Receivables Financing Agreement and related transaction documents and certain account control agreements and security agreements, were also entered into. As of September 30, 2023, we have not borrowed any amounts under the Solar Receivable Facility. 9. DERIVATIVE FINANCIAL INSTRUMENTS The Company's derivative financial instruments primarily consist of interest rate swap contracts, which were entered into with the objective of managing exposure to variability in interest rates on the Company's debt. As of July 2023, SOFR is the applicable benchmark for all of the Company's interest rate swap contracts. All interest rate swap contracts are reported in the Condensed Consolidated Balance Sheets at fair value. For interest rate swap contracts that are: • Not designated as cash flow hedges: Unrealized gains and losses are recognized in interest expense, net. • Designated as cash flow hedges: Unrealized gains and losses are recognized as a component of accumulated other comprehensive income (loss) (“AOCI”) and are reclassified into interest expense, net, in the same period in which the related interest on debt affects earnings. For interest rate swap contracts that have been de-designated as cash flow hedges and for which forecasted cash flows are: • Probable or reasonably possible of occurring: Unrealized gains and losses previously recognized as a component of AOCI are reclassified into interest expense, net, in the same period in which the related interest on variable-rate debt affects earnings through the original maturity date of the related interest rate swap contracts. • Probable of not occurring: Unrealized gains and losses previously recognized as a component of AOCI are immediately reclassified into interest expense, net. The cash flows associated with interest rate swap contracts that included an other-than-insignificant financing element at inception are reflected as cash flows from financing activities. Interest Rate Swaps : During the nine months ended September 30, 2023, the Company entered into floating-to-fixed interest rate swaps with an aggregate notional amount of $ 300 million to partially hedge the Term Loan A Facility. 24 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) As of September 30, 2023, the Company’s interest rate swaps consisted of the following (in thousands) : Execution Maturity Designation Notional Amount October 2019 September 2026 Not designated $ 2,800,000 March 2023 March 2028 Not designated $ 100,000 April 2023 March 2028 Not designated $ 200,000 Classification and Fair Value of Interest Rate Swaps: (in thousands) September 30, 2023 December 31, 2022 Prepaid expenses and other current assets $ 94,579 $ 78,110 Other assets 127,413 105,405 Fair value of interest rate swaps - net asset (liability) $ 221,992 $ 183,515 Unrealized Gain (Loss) on Interest Rate Swaps: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 2023 2022 Gain (loss) included in interest expense, net $ 16,380 $ 108,041 $ 38,477 $ 312,603 Cash Flow Hedges Reclassifications out of AOCI: Three Months Ended September 30, Nine Months Ended September 30, ( in thousands ) 2023 2022 2023 2022 Interest expense, net $ 30,008 $ 5,389 $ 40,186 $ 28,656 Income tax (benefit) expense $ ( 7,245 ) $ ( 1,301 ) $ ( 9,702 ) $ ( 6,915 ) During the nine months ended September 30, 2023, the Company recorded an additional $ 25 million to interest expense, net associated with the reclassification from AOCI of historical losses related to certain interest rate swaps for which the Company previously applied hedge accounting but for which the cash flows are probable of not occurring as a result of the partial redemption of the Company’s First Lien Term Loan due 2026 in October 2023, as discussed in Note 8 “Debt”. As of September 30, 2023 and December 31, 2022, AOCI, net of tax, related to previously designated cash flow hedges was $ 15 million and $ 46 million, respectively. As of September 30, 2023, AOCI associated with previously designated cash flow hedges that is estimated to be reclassified to interest expense, net, within the next twelve months is not material. 10. INCOME TAXES Unrecognized Tax Benefits The Company’s unrecognized tax benefits relate to tax years that remain subject to audit by the taxing authorities in the U.S. federal, state and local, and foreign jurisdictions. During the nine months ended September 30, 2023, the Company did not have a material change to its unrecognized tax benefits. Based on the current status of its income tax audits, the Company does not believe a significant portion of its unrecognized tax benefits will be resolved in the next twelve months. Effective Tax Rate The effective tax rate can vary from period to period due to permanent tax adjustments, discrete items such as the settlement of income tax audits and changes in tax laws, as well as recurring factors such as changes in the overall state tax rate. The discussion below is based on the continuing operations of the Company. 25 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Company’s income tax benefit (expense) for the three months ended September 30, 2023 was $( 39 ) million, resulting in an effective tax rate for the period of 186.5 %. The effective tax rate primarily represents the federal statutory rate of 21.0 %, a state statutory tax rate, net of federal benefits, of 34.0 %, and unfavorable impacts related to the Solar goodwill impairment, non-deductible executive compensation, non-U.S. earnings, and other items, partially offset by favorable impacts from federal tax credits, impacts from dispositions and acquisitions, and losses from equity method investee and other items. The Company’s income tax benefit (expense) for the three months ended September 30, 2022 was $ 16 million, resulting in an effective tax rate for the period of 8.6 %. The effective tax rate primarily represents the federal statutory rate of 21.0 %, a state statutory tax rate, net of federal benefits, of 6.0 %, and favorable impacts from research and development (“R&D”) credits and other items, partially offset by an unfavorable impact related to the fair value adjustment of the Forward Contract. The Company’s income tax benefit (expense) for the nine months ended September 30, 2023 was $ 12 million, resulting in an effective tax rate for the period of 8.0 %. The effective tax rate primarily represents the federal statutory rate of 21.0 %, a state statutory tax rate, net of federal benefits, of 21.4 %, and unfavorable impacts related to the Solar goodwill impairment, non-deductible executive compensation, and non-U.S. earnings and other items, partially offset by favorable impacts from federal tax credits, losses from equity method investee, impacts from dispositions and acquisitions and other items. The Company’s income tax benefit (expense) for the nine months ended September 30, 2022 was $( 38 ) million, resulting in an effective tax rate for the period of 749.5 %. The effective tax rate primarily represents the federal statutory tax rate of 21.0 %, a state statutory tax rate, net of federal benefits, of 5.1 %, as well as unfavorable impacts related to the fair value adjustment of the Forward Contract, prior year return adjustments, and other items, partially offset by favorable impacts from R&D credits, changes in the Company’s valuation allowances, legislative changes, and other items. 11. EQUITY Common Stock and Class B Common Stock The Company has two classes of common stock, including common stock (“Common Stock”) and Class B common stock (“Class B Common Stock”). During the nine months ended September 30, 2023, shares issued resulted from the vesting of restricted stock units (“RSUs”) and stock option exercises related to share-based compensation awards. Dividends (in thousands, except per share data) Common Stock Class B Common Stock Declaration Date Record Date Payment Date Per Share Aggregate Per Share Aggregate Nine Months Ended September 30, 2023 2/28/2023 3/16/2023 4/4/2023 $ 0.035 $ 30,342 $ 0.035 $ 1,916 5/2/2023 6/15/2023 7/6/2023 0.035 30,256 0.035 1,916 8/8/2023 9/15/2023 10/4/2023 0.035 30,405 0.035 1,916 Total $ 0.105 $ 91,003 $ 0.105 $ 5,748 Nine Months Ended September 30, 2022 3/1/2022 3/17/2022 4/4/2022 $ 0.035 $ 29,842 $ 0.035 $ 1,916 5/5/2022 6/16/2022 7/5/2022 0.035 30,028 0.035 1,916 8/4/2022 9/15/2022 10/4/2022 0.035 30,112 0.035 1,916 Total $ 0.105 $ 89,982 $ 0.105 $ 5,748 Subsequent Event - On November 2, 2023, the Company announced a dividend of $ 0.035 per share to holders of Common Stock and Class B Common Stock of record on December 14, 2023, which will be paid on January 9, 2024. Accumulated Other Comprehensive Income (Loss) Refer to Note 9 “Derivative Financial Instruments” for AOCI reclassifications associated with cash flow hedges. There were no other material reclassifications out of AOCI. 26 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 12. SHARE-BASED COMPENSATION During the first quarter of 2023, the Company completed its annual long-term incentive plan equity award to employees and granted approximately 6.6 million RSUs under its 2018 Omnibus Incentive Plan, as amended (the “2018 Plan”) with a weighted-average grant date fair value of $ 7.60 equal to the closing price per share of the Company’s Common Stock on the date of grant. These RSUs are service-based awards with a three-year graded vesting period from the date of grant. Share-based compensation expense included in discontinued operations was approximately $ 6 million and $ 12 million during the three and nine months ended September 30, 2023, respectively, and approximately $ 3 million and $ 10 million during the three and nine months ended September 30, 2022, respectively. 13. NET INCOME (LOSS) PER SHARE The Company applies the two-class method for computing and presenting net income (loss) per share for each class of common stock, which allocates current period net income (loss) to each class of common stock and participating securities based on dividends declared and participation rights in the remaining undistributed earnings or losses. Basic net income (loss) per share is computed by dividing the net income (loss) allocated to each class of common stock by the related weighted-average number of shares outstanding during the period. Diluted net income (loss) per share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period for each class of common stock and excludes potentially dilutive securities whose effect would have been anti-dilutive. Common Stock: Potential shares of Common Stock include (i) incremental shares related to the vesting or exercise of share-based compensation awards, warrants, and other options to purchase additional shares of the Company’s Common Stock calculated using the treasury stock method and (ii) incremental shares of Common Stock issuable upon the conversion of Class B Common Stock. Additionally, the basic and diluted earnings per share computations for Common Stock exclude approximately 9 million unvested shares as their vesting is contingent upon achievement of certain performance requirements. Three Months Ended September 30, Nine Months Ended September 30, in thousands, except per share amounts 2023 2022 2023 2022 Allocation of income (loss) from continuing operations - basic $ ( 19,424 ) $ ( 158,877 ) $ ( 140,750 ) $ ( 33,141 ) Dilutive effect (including conversion of Class B Common Stock) — — — — Allocation of income (loss) from continuing operations - diluted $ ( 19,424 ) $ ( 158,877 ) $ ( 140,750 ) $ ( 33,141 ) Allocation of income (loss) from discontinued operations, net of tax - basic $ ( 61,637 ) $ 7,390 $ 34,675 $ 16,172 Dilutive effect (including conversion of Class B Common Stock) — — — — Allocation of income (loss) from discontinued operations, net of tax - diluted $ ( 61,637 ) $ 7,390 $ 34,675 $ 16,172 Weighted-average shares outstanding - basic 857,423 850,230 856,446 847,456 Dilutive effect (including conversion of Class B Common Stock) (1) — — — — Weighted-average shares outstanding - diluted 857,423 850,230 856,446 847,456 Income (loss) from continuing operations per share - basic $ ( 0.02 ) $ ( 0.19 ) $ ( 0.16 ) $ ( 0.04 ) Income (loss) from continuing operations per share - diluted $ ( 0.02 ) $ ( 0.19 ) $ ( 0.16 ) $ ( 0.04 ) Income (loss) per share from discontinued operations, net of tax - basic $ ( 0.07 ) $ 0.01 $ 0.04 $ 0.02 Income (loss) per share from discontinued operations, net of tax - diluted $ ( 0.07 ) $ 0.01 $ 0.04 $ 0.02 _________________ (1) During the three and nine months ended September 30, 2023 and September 30, 2022, all potential shares of Common Stock that would be dilutive were excluded from the diluted earnings per share calculations because their effects would have been anti-dilutive. 27 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Class B Common Stock: Three Months Ended September 30, Nine Months Ended September 30, in thousands, except per share amounts 2023 2022 2023 2022 Allocation of net income (loss) from continuing operations - basic $ ( 1,241 ) $ ( 10,238 ) $ ( 9,004 ) $ ( 2,163 ) Dilutive effect — — — — Allocation of net income (loss) from continuing operations - diluted $ ( 1,241 ) $ ( 10,238 ) $ ( 9,004 ) $ ( 2,163 ) Allocation of income (loss) from discontinued operations, net of tax - basic $ ( 3,935 ) $ 476 $ 2,216 $ 1,045 Dilutive effect — — — — Allocation of income (loss) from discontinued operations, net of tax - diluted $ ( 3,935 ) $ 476 $ 2,216 $ 1,045 Weighted-average shares outstanding - basic 54,745 54,745 54,745 54,745 Dilutive effect (1) — — — — Weighted-average shares outstanding - diluted 54,745 54,745 54,745 54,745 Net income (loss) from continuing operations per share - basic $ ( 0.02 ) $ ( 0.19 ) $ ( 0.16 ) $ ( 0.04 ) Net income (loss) from continuing operations per share - diluted $ ( 0.02 ) $ ( 0.19 ) $ ( 0.16 ) $ ( 0.04 ) Income (loss) per share from discontinued operations, net of tax - basic $ ( 0.07 ) $ 0.01 $ 0.04 $ 0.02 Income (loss) per share from discontinued operations, net of tax - diluted $ ( 0.07 ) $ 0.01 $ 0.04 $ 0.02 ________________ (1) There were no potential shares of Class B Common Stock during the periods presented. 14. COMMITMENTS AND CONTINGENCIES Contractual Obligations There have been no significant changes to the Company’s contractual obligations as compared to December 31, 2022, except as discussed below: Repurchase of Solar Loans As of September 30, 2023, the liability related to certain loans provided to customers within the Company’s Solar business that the Company may be required to repurchase from third party lenders was approximately $ 16 million. This liability is partially offset by a net receivable of $ 6 million related to the amount the Company ultimately expects to recover from any loans required to be repurchased, either through ongoing loan payments from the customer or proceeds from subsequent resale of the loans. Google Commercial Agreement In July 2020, the Company and Google entered into a Master Supply, Distribution, and Marketing Agreement (the “Google Commercial Agreement”), pursuant to which Google has agreed to supply the Company with certain Google devices as well as certain Google video and analytics services (“Google Devices and Services”), for sale to the Company’s customers. The Google Commercial Agreement also specifies that each party shall contribute $ 150 million towards joint marketing, customer acquisition, training of the Company’s employees, and product technology updates related to the Google Devices and Services. In August 2022, the Company and Google executed an amendment to the Google Commercial Agreement, pursuant to which Google has agreed to commit an additional $ 150 million to fund growth, data and insights, product innovation and technology advancements, customer acquisition, and marketing, as mutually agreed by the Company and Google, (together with the initial amounts, the “Google Success Funds”). During the three and nine months ended September 30, 2023, $ 27.5 million and $ 40 million, respectively, of the Google Success Funds were reimbursed to the Company for certain joint marketing expenses incurred by the Company. 28 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Guarantees In the normal course of business, the Company is liable for contract completion and product performance. The Company’s guarantees primarily relate to standby letters of credit related to its insurance programs and totaled $ 79 million and $ 93 million as of September 30, 2023 and December 31, 2022, respectively. The Company does not believe such obligations will materially affect its financial position, results of operations, or cash flows. Legal Proceedings The Company is subject to various claims and lawsuits in the ordinary course of business, which include among other things commercial general liability claims, automobile liability claims, contractual disputes, worker’s compensation claims, labor law and employment claims, claims that the Company infringed on the intellectual property of others, and consumer and employment class actions. The Company is also subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations, and threatened legal actions and proceedings. In connection with such formal and informal inquiries, the Company receives numerous requests, subpoenas, and orders for documents, testimony, and information in connection with various aspects of its activities. There have been no material changes to these matters from those disclosed in the Amended 2022 Annual Report. The Company records accruals for losses that are probable and reasonably estimable. These accruals are based on a variety of factors such as judgment, probability of loss, opinions of internal and external legal counsel, and actuarially determined estimates of claims incurred but not yet reported based upon historical claims experience. Legal costs in connection with claims and lawsuits in the ordinary course of business are expensed as incurred. Additionally, the Company records insurance recovery receivables from third-party insurers when recovery has been determined to be probable. The Company has not accrued for any losses for which the likelihood of loss cannot be assessed, is less than probable, or the range of possible loss cannot be estimated. As of September 30, 2023 and December 31, 2022, the Company’s accrual for ongoing claims and lawsuits within the scope of an insurance program totaled $ 110 million and $ 90 million, respectively. The Company’s accrual related to ongoing claims and lawsuits not within the scope of an insurance program is not material. 15. LEASES Company as Lessee As part of normal operations, the Company leases real estate, vehicles, and equipment. Right-of-Use Assets and Lease Liabilities: (in thousands) September 30, 2023 December 31, 2022 Presentation and Classification: Operating Current Prepaid expenses and other current assets $ 97 $ 121 Operating Non-current Other assets 86,876 93,057 Finance Non-current Property and equipment, net (1) 82,275 66,704 Total right-of-use assets $ 169,248 $ 159,882 Operating Current Accrued expenses and other current liabilities $ 16,006 $ 20,741 Finance Current Current maturities of long-term debt 43,414 34,219 Operating Non-current Other liabilities 78,928 85,249 Finance Non-current Long-term debt 45,062 36,424 Total lease liabilities $ 183,410 $ 176,633 _________________ (1) Finance right-of-use assets are recorded net of accumulated depreciation, which was approximately $ 68 million and $ 61 million as of September 30, 2023 and December 31, 2022, respectively. 29 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Lease Cost: Three Months Ended September 30, Nine Months Ended September 30, ( in thousands ) 2023 2022 2023 2022 Operating lease cost $ 8,568 $ 5,742 $ 24,414 $ 25,329 Finance lease cost: Amortization of right-of-use assets 6,611 5,079 17,422 14,181 Interest on lease liabilities 1,026 694 2,544 1,935 Variable lease costs 9,759 15,764 36,002 50,200 Total lease cost $ 25,964 $ 27,279 $ 80,382 $ 91,645 Right-of-Use Assets Obtained in Exchange for Lease Obligations (1) : Nine Months Ended September 30, ( in thousands ) 2023 2022 Operating leases $ 28,786 $ 40,400 Finance leases $ 62,203 $ 37,275 _________________ (1) Includes both continuing and discontinued operations. Company as Lessor The Company is a lessor in certain Company-owned transactions as the Company has identified a lease component associated with the right-of-use of the security system and a non-lease component associated with the monitoring and related services. For transactions in which (i) the timing and pattern of transfer is the same for the lease and non-lease components and (ii) the lease component would be classified as an operating lease if accounted for separately, the Company applies the practical expedient to aggregate the lease and non-lease components and accounts for the combined transaction based upon its predominant characteristic, which is the non-lease component. The Company accounts for the combined component as a single performance obligation under the applicable revenue guidance and recognizes the underlying assets within subscriber system assets, net. 16. RELATED PARTY TRANSACTIONS The Company’s related party transactions primarily relate to products and services received from, or monitoring and related services provided to, other entities affiliated with Apollo, and, from time to time, management, consulting, and transaction advisory services provided by Apollo to the Company, as well as transactions between the Company and State Farm. There were no notable related party transactions during the periods presented other than as described below. Apollo Upon initial funding of the Term Loan A Facility in March 2023, the Company incurred fees to Apollo of $ 1 million related to Apollo’s performance of placement agent services related to such debt. State Farm On October 13, 2022 (the “Closing”), the Company issued and sold in a private placement to State Farm 133,333,333 shares of the Company’s Common Stock at a per share price of $ 9.00 for an aggregate purchase price of $ 1.2 billion (the “State Farm Strategic Investment”) pursuant to a securities purchase agreement dated September 5, 2022. State Farm owns approximately 15 % of the Company’s issued and outstanding Common Stock (assuming conversion of Class B Common Stock), and as a result, is a related party. At the Closing, the Company, ADT LLC (an indirect wholly owned subsidiary of the Company), and State Farm entered into a Development Agreement (the “State Farm Development Agreement”) pursuant to which State Farm committed up to $ 300 million to fund certain initiatives as agreed to between the Company and State Farm related to the partnership (the “Opportunity Fund”). 30 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Additionally at the Closing, the Company received $ 100 million of the Opportunity Fund, which will be restricted until such time as the Company uses the funds in accordance with the State Farm Development Agreement. The Company’s use of the funds is also subject to approval by State Farm. As of September 30, 2023 and December 31, 2022, the balance in the Opportunity Fund was approximately $ 97 million and $ 101 million, respectively, and includes payments of $ 6 million partially offset by interest earned during 2023. Sunlight Financial LLC ADT Solar uses Sunlight Financial LLC (“Sunlight”), an entity affiliated with Apollo, to access certain loan products for ADT Solar customers, as discussed in Note 2 “Revenue and Receivables.” During the three and nine months ended September 30, 2023, total loans funded by Sunlight were approximately $ 9 million and $ 71 million, respectively, and the Company incurred financing fees of approximately $ 2 million and $ 11 million, respectively. During the three and nine months ended September 30, 2022, total loans funded by Sunlight were approximately $ 116 million and $ 359 million, respectively, and the Company incurred financing fees of approximately $ 14 million and $ 44 million, respectively. As of September 30, 2023, the Company may be required to repurchase loans previously funded by Sunlight in the amount of approximately $ 10 million. Rackspace During October 2020, the Company entered into a master services agreement with Rackspace US, Inc. (“Rackspace”), an entity affiliated with Apollo, for the provision of cloud storage, equipment, and services to facilitate the implementation of the Company’s cloud migration strategy for certain applications. The master services agreement included a minimum purchase commitment of $ 50 million over a seven year term, which the Company has met through spend with Rackspace as well as other parties. During the nine months ended September 30, 2023 and 2022, fees incurred to Rackspace were not material. Canopy Canopy is considered a related party under GAAP as the Company accounts for its investment in Canopy under the equity method of accounting. During the first quarter of 2023, the Company made an additional equity investment of approximately $ 5 million in Canopy. 31