ADT Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. INTRODUCTION To obtain a more comprehensive understanding of our financial condition, changes in financial condition, and results of operations, the following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and the related notes included in our Amended 2022 Annual Report, which was filed with the SEC on July 27, 2023. The following discussion and analysis contains forward-looking statements about our business, operations, and financial performance based on current plans and estimates that involve risks, uncertainties, and assumptions, which could differ materially from actual results. Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled “Cautionary Statements Regarding Forward-Looking Statements” and Item 1A “Risk Factors.” Table of Contents • Business and Basis of Presentation • Factors Affecting Operating Results • Key Performance Indicators • Results of Operations • Non-GAAP Measures • Liquidity and Capital Resources • Critical Accounting Estimates • Cautionary Statements Regarding Forward-Looking Statements BUSINESS AND BASIS OF PRESENTATION Our Business ADT Inc., together with its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our,” “us,” and “ADT”), provides security, interactive, and smart home solutions to consumer and small business customers, as well as residential solar and energy storage solutions, in the U.S. As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies,” we divested our Commercial Business on October 2, 2023. As of September 30, 2023, we served approximately 6.4 million security monitoring service subscribers, excluding commercial subscribers that were part of the Commercial Divestiture. Our mission is to empower people to protect and connect what matters most with safe, smart, and sustainable solutions, delivered through innovative offerings, unrivaled safety, and a premium experience because we believe that everyone deserves to feel safe. Basis of Presentation As of the third quarter of 2023, and following the Commercial Divestiture, we report financial and operating information for our two segments: CSB and Solar. All financial information presented in this section has been prepared in U.S. dollars in accordance with GAAP, excluding our non-GAAP measures, and includes the accounts of ADT Inc. and its wholly-owned subsidiaries. All intercompany transactions have been eliminated. We considered recent impacts from macroeconomic conditions such as inflationary pressures, rising interest rates, the uncertainty and volatility in the financial markets, and supply chain disruptions, as well as any on-going impacts from the COVID-19 Pandemic, in the assessment of our financial position, results of operations, and cash flows, as well as certain accounting estimates, as of and for the periods presented. 32 Business Updates Google During the first quarter of 2023, we introduced our new ADT+ app for our self-setup line of do-it-yourself (“DIY”) smart home security products, including Google Nest offerings. We expect to introduce our ADT+ app for professional installations through a phased rollout in the fourth quarter along with a new interactive platform and hardware lineup. During the three and nine months ended September 30, 2023, $15 million and $40 million, respectively of the first tranche of the Google Success Funds were approved for reimbursement to the Company for Google’s portion of certain joint marketing expenses incurred by us, and we received cash of $27.5 million and $40 million, respectively. Refer to Note 14 “Commitments and Contingencies” for further information on the Google Commercial Agreement. State Farm In connection with the State Farm Development Agreement, State Farm committed up to $300 million to an Opportunity Fund, of which we received $100 million upon closing of the transaction. Refer to Note 16 “Related Party Transactions” for further information on the State Farm Strategic Investment. Commercial Divestiture As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies” and Note 5 “Divestitures,” on October 2, 2023, GTCR acquired all of the issued and outstanding equity interests of the entities comprising our Commercial Business for a total purchase price of approximately $1,613 million in cash, subject to certain customary adjustments as set forth in the Commercial Purchase Agreement and received net proceeds of approximately $1,585 million. The results of the Commercial Business are reported as a discontinued operation for current and historical periods through the date of sale. Additionally, the cash flows and comprehensive income (loss) of the Commercial Business have not been segregated and are included in the interim Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Comprehensive Income (Loss), respectively, for all periods presented. The Company’s reported operating metrics, gross customer revenue attrition and recurring monthly revenue (as defined and discussed below), have been presented for the current period and recast for prior periods to reflect only the CSB segment. As discussed in Note 8 “Debt,” in October 2023, we used a portion of the net proceeds from the Commercial Transaction to redeem approximately $1.3 billion of the First Lien Term Loan due 2026. The remaining net proceeds along with cash on hand are expected to be used for debt redemption and repayments of the First Lien Notes due 2024 during the fourth quarter of 2023, which will reduce future cash interest payments accordingly. Beginning in the fourth quarter of 2023, income expected to be received in connection with the TSA will be recognized in other income (expense). The expenses expected to be incurred by the Company to support the transition will be recorded based on the nature of the expense. We expect to record a significant gain on the sale, which will be recognized in income (loss) from discontinued operations, net of tax during the fourth quarter of 2023. Further, we expect to utilize a significant portion of our existing net operating losses (“NOLs”) to offset an expected gain in connection with the sale of the Commercial Business. We believe that we will utilize our remaining NOLs during 2024. Thereafter, without additional NOLs, we expect to begin paying federal cash taxes as such taxes are incurred. Unless otherwise noted, our results of operations discussed below relate to continuing operations and will be impacted by the Commercial Divestiture. Solar Restructuring On November 2, 2023, the Company announced a plan to close a significant number of branches that operate our Solar business along with the associated headcount reductions as a result of continued macroeconomic and industry pressures and the continued underperformance of the Solar business. 33 In addition, the Company concluded there was a triggering event as of September 30, 2023, related to its Solar reporting unit as a result of continued deterioration of industry conditions and macroeconomic decline, as well as the Company’s recent plan to significantly reduce the footprint of its Solar reporting unit. As a result, the Company determined that the remaining balance of goodwill was not recoverable and recorded a goodwill impairment charge of $88 million in the third quarter of 2023. Following the impairments during 2023, the balance of goodwill in the Solar reporting unit was zero. The Company also assessed the recoverability of other long-lived assets related to its Solar business, and impairment charges recorded were not material. In addition, we expect to incur severance and other costs in connection with these current plans, which we do not expect to be material. FACTORS AFFECTING OPERATING RESULTS The factors described herein could have a material adverse effect on our business, financial condition, results of operations, cash flows, and key performance indicators. Generally, a significant upfront investment is required to acquire new CSB subscribers that in turn provide ongoing and predictable recurring revenue generated from our monitoring services and other subscriber-based offerings. Although the economics of an installation may vary depending on the customer type, acquisition channel, and product offering, we generally achieve revenue break-even in less than two and a half years. Our CSB results are impacted by the mix of transactions under a Company-owned equipment model versus a customer-owned equipment model (referred to as outright sales), as there are different accounting treatments applicable to each model, as well as the mix, price, and type of offerings sold. As we continue to build our partnership with Google, introduce new or enhance our current offerings, and refine our go-to-market approach, we expect to see a shift toward an increasing proportion of outright sales transactions, which will impact results in future periods when those changes occur. We also expect an increase in the proportion of ADT self set-up customers, which typically have lower monthly recurring fees than our professional installations but will allow us to grow our subscriber base through access to the fast-growing do-it-yourself (“DIY”) market. Additionally, in our Solar business, we are exploring options for our customers seeking greater flexibility and accessibility in their rooftop solar financing. For example, during the third quarter of 2023, we entered into an agreement with SunPower Financial to offer lease and power purchase agreement (“PPA”) financing options to new Solar customers. Advances in technology are also helping us to improve our products and services and reduce our costs. For example, our innovative virtual service support program (the “Virtual Assistance Program”), which we launched for our residential customers in July 2021, provides our customers the ability to troubleshoot and resolve certain service issues through a live video stream with our skilled technicians. This provides customers with more options for receiving certain services that best fit their lifestyles while reducing the cost for us to provide these services and lowering our carbon footprint by eliminating thousands of vehicle trips each day. We may experience an increase in costs associated with factors such as (i) offering a wider variety of products and services; (ii) providing a greater mix of interactive and smart home solutions; (iii) replacing or upgrading certain system components or technology due to technological advancements, cybersecurity upgrades, or otherwise; (iv) supply chain disruptions; (v) inflationary pressures on costs such as materials, labor, and fuel; and (vi) other changes in prices, interest rates, or terms from our suppliers, vendors, or third-party lenders. Changes in interest rates or terms from third-party lenders that provide loan products to our Solar customers are impacted by factors such as the Federal Reserve increasing the risk-free interest rate or other developments in the financial markets, and we expect these third-party costs to continue to increase in future periods. Refer to Note 7 “Goodwill and Other Intangible Assets” and Critical Accounting Estimates below for further discussion. New customer additions and customer attrition have a direct impact on our financial results, including revenue, operating income, and cash flows. A portion of our recurring customer base can be expected to cancel its service each year as customers may choose to terminate or not to renew their contracts for a variety of reasons, including relocation, cost, loss to competition, or service issues. Relocations are sensitive to changes in the residential housing market, and fewer relocations generally lead to improvements in gross customer revenue attrition, but fewer new customer additions. Additionally, non-payment disconnects generally increase in a weaker macroeconomic environment. During 2022 and through the third quarter of 2023, we experienced fewer relocation disconnects and higher non-pay disconnects largely related to housing market conditions and the weaker macroeconomic environment. We may continue to experience fluctuations in these or other trends in the future as changes in the general macroeconomic environment or housing market develop. As part of our response to changes or pressures in the macroeconomic environment, we have been evaluating, and continue to evaluate, cost saving opportunities such as reducing headcount or our physical facilities footprint when appropriate, and reducing non-essential spend. While we have experienced some increase in costs as a result of inflation, we have, for the most part, been able to offset the rising costs through price increases to our customers, as well as cost saving opportunities. 34 KEY PERFORMANCE INDICATORS We evaluate our results using certain key performance indicators, including operating metrics such as recurring monthly revenue (“RMR”) and gross customer revenue attrition, as well as the non-GAAP measure Adjusted EBITDA. Computations of our key performance indicators may not be comparable to other similarly titled measures reported by other companies. Certain operating metrics are approximated, as there may be variations to reported results due to certain adjustments we might make in connection with the integration over several periods of acquired companies that calculated these metrics differently or periodic reassessments and refinements in the ordinary course of business, including changes due to system conversions or historical methodology differences in legacy systems. RMR RMR is generated by contractual recurring fees for monitoring and other recurring services provided to our CSB customers, including contracts monitored but not owned. We use RMR to evaluate our overall sales, installation, and retention performance. Additionally, we believe the presentation of RMR is useful to investors because it measures the volume of revenue under contract at a given point in time, which is useful for forecasting future revenue performance as the majority of our revenue comes from recurring sources. Gross Customer Revenue Attrition Gross customer revenue attrition for our CSB segment is defined as RMR lost as a result of customer attrition, net of dealer charge-backs and reinstated customers, excluding contracts monitored but not owned and self-setup/DIY customers. Customer sites are considered canceled when all services are terminated. Dealer charge-backs represent customer cancellations charged back to the dealers because the customer canceled service during the charge-back period, which is generally thirteen months. Gross customer revenue attrition is calculated on a trailing twelve-month basis, the numerator of which is the RMR lost during the period due to attrition, net of dealer charge-backs and reinstated customers, and the denominator of which is total annualized RMR based on an average of RMR under contract at the beginning of each month during the period, in each case, excluding contracts monitored but not owned and self-setup/DIY customers. We use gross customer revenue attrition to evaluate our CSB retention and customer satisfaction performance, as well as evaluate subscriber trends by vintage year. Additionally, we believe the presentation of gross customer revenue attrition is useful to investors as it provides a means to evaluate drivers of customer attrition and the impact of retention initiatives. Adjusted EBITDA Adjusted EBITDA is a non-GAAP measure. Our definition of Adjusted EBITDA, a reconciliation of Adjusted EBITDA to income (loss) from continuing operations (the most comparable GAAP measure), and additional information, including a description of the limitations relating to the use of Adjusted EBITDA, are provided under “—Non-GAAP Measures.” 35 RESULTS OF OPERATIONS Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except as otherwise indicated) 2023 2022 $ Change 2023 2022 $ Change Revenue: Monitoring and related services $ 1,053,456 $ 1,021,811 $ 31,645 $ 3,125,344 $ 3,029,309 $ 96,035 Security installation, product, and other 126,417 88,829 37,588 355,082 235,506 119,576 Solar installation, product, and other 57,611 179,153 (121,542) 279,978 586,189 (306,211) Total revenue 1,237,484 1,289,793 (52,309) 3,760,404 3,851,004 (90,600) Cost of revenue (exclusive of depreciation and amortization shown separately below) : Monitoring and related services 148,533 137,243 11,290 452,809 445,720 7,089 Security installation, product, and other 38,863 27,176 11,687 113,921 66,993 46,928 Solar installation, product, and other 49,424 114,236 (64,812) 212,666 382,545 (169,879) Total cost of revenue 236,820 278,655 (41,835) 779,396 895,258 (115,862) Selling, general, and administrative expenses 395,600 415,373 (19,773) 1,159,088 1,254,401 (95,313) Depreciation and intangible asset amortization 333,088 387,417 (54,329) 1,021,103 1,223,666 (202,563) Merger, restructuring, integration, and other 16,296 4,745 11,551 42,339 1,165 41,174 Goodwill impairment 88,367 200,974 (112,607) 511,176 200,974 310,202 Operating income (loss) 167,313 2,629 164,684 247,302 275,540 (28,238) Interest expense, net (147,187) (29,832) (117,355) (402,381) (117,331) (285,050) Other income (expense) 661 (156,118) 156,779 (10) (153,165) 153,155 Income (loss) from continuing operations before income taxes and equity in net earnings (losses) of equity method investee 20,787 (183,321) 204,108 (155,089) 5,044 (160,133) Income tax benefit (expense) (38,764) 15,800 (54,564) 12,438 (37,806) 50,244 Income (loss) from continuing operations before equity in net earnings (losses) of equity method investee (17,977) (167,521) 149,544 (142,651) (32,762) (109,889) Equity in net earnings (losses) of equity method investee (2,688) (1,594) (1,094) (7,103) (2,542) (4,561) Income (loss) from continuing operations (20,665) (169,115) 148,450 (149,754) (35,304) (114,450) Income (loss) from discontinued operations, net of tax (65,572) 7,866 (73,438) 36,891 17,217 19,674 Net income (loss) $ (86,237) $ (161,249) $ 75,012 $ (112,863) $ (18,087) $ (94,776) Key Performance Indicators: (1) RMR $ 350,392 $ 339,648 $ 10,744 $ 350,392 $ 339,648 $ 10,744 Gross customer revenue attrition (percent) 12.9% 12.9% N/A* 12.9% 12.9% N/A* Adjusted EBITDA (2) $ 582,688 $ 583,164 $ (476) $ 1,765,545 $ 1,719,316 $ 46,229 _______________________ (1) Refer to the “—Key Performance Indicators” section for the definitions of these key performance indicators. (2) Adjusted EBITDA is a non-GAAP measure. Refer to the “—Non-GAAP Measures” section for the definition of this term and a reconciliation to the most comparable GAAP measure. * N/A — Not applicable. 36 Revenue Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 $ Change 2023 2022 $ Change CSB: Monitoring and related services $ 1,053,456 $ 1,021,811 $ 31,645 $ 3,125,344 $ 3,029,309 $ 96,035 Security installation, product, and other 126,417 88,829 37,588 355,082 235,506 119,576 Total CSB 1,179,873 1,110,640 69,233 3,480,426 3,264,815 215,611 Solar: Solar installation, product, and other 57,611 179,153 (121,542) 279,978 586,189 (306,211) Total Solar 57,611 179,153 (121,542) 279,978 586,189 (306,211) Total revenue $ 1,237,484 $ 1,289,793 $ (52,309) $ 3,760,404 $ 3,851,004 $ (90,600) CSB: During the three months ended September 30, 2023, the increases in revenue, as compared to the prior period, included: • Monitoring and related services revenue (“M&S Revenue”) : higher recurring revenue of $32 million primarily driven by an increase in average prices. • Security installation, product, and other : (i) an increase in installation revenue of $22 million primarily driven by a higher volume of outright sales transactions and higher installation revenue per unit, as well as (ii) an increase in the amortization of deferred subscriber acquisition revenue of $16 million as a result of a higher population of existing customers under a Company-owned model. During the nine months ended September 30, 2023, the increases in revenue, as compared to the prior period, included: • M&S Revenue : higher recurring revenue of $96 million primarily driven by an increase in average prices. • Security installation, product, and other : (i) an increase in installation revenue of $68 million primarily driven by a higher volume of outright sales transactions and higher installation revenue per unit, as well as (ii) an increase in the amortization of deferred subscriber acquisition revenue of $52 million as a result of a higher population of existing customers under a Company-owned model. Solar: During the three and nine months ended September 30, 2023, the decrease in revenue, as compared to the prior period, was primarily due to fewer sales and installations as a result of prior cost reduction efforts, delays in certain operational initiatives, and impacts from macroeconomic conditions, including higher interest rates. In addition, the decrease in revenue for the nine months ended September 30, 2023 as compared to the prior period was impacted by the amortization of purchase accounting adjustments of $30 million related to a customer backlog intangible asset, which was recorded as a reduction to revenue during the first quarter of 2022. In addition, future revenue in the segment may be impacted by the restructuring discussed above. RMR and Gross Customer Revenue Attrition: As of September 30, 2023, our ending RMR balance was $350 million, up $11 million or 3% compared to the prior period, primarily driven by an increase in average prices on new and existing subscribers. Gross customer revenue attrition was 12.9% as of September 30, 2023, flat compared to September 30, 2022, reflecting a decrease in relocations, offset primarily by higher non-payment disconnects. 37 Cost of Revenue Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 $ Change 2023 2022 $ Change CSB: Monitoring and related services $ 148,533 $ 137,243 $ 11,290 $ 452,809 $ 445,720 $ 7,089 Security installation, product, and other 38,863 27,176 11,687 113,921 66,993 46,928 Total CSB 187,396 164,419 22,977 566,730 512,713 54,017 Solar: Solar installation, product, and other 49,424 114,236 (64,812) 212,666 382,545 (169,879) Total Solar 49,424 114,236 (64,812) 212,666 382,545 (169,879) Total cost of revenue $ 236,820 $ 278,655 $ (41,835) $ 779,396 $ 895,258 $ (115,862) CSB: During the three and nine months ended September 30, 2023, cost of revenue, as compared to the prior period, included an increase in installation costs due to a higher volume of outright sales transactions. Solar: During the three and nine months ended September 30, 2023, the decrease in cost of revenue, as compared to the prior period, was primarily due to fewer sales and installations as discussed above. Selling, General, and Administrative Expenses During the three months ended September 30, 2023, the decrease in SG&A, as compared to the prior period, was primarily driven by: • a decrease of $22 million in Solar, primarily due to recent cost reduction initiatives, and • a decrease of $13 million in general and administrative expenses in CSB, partially offset by • an increase of $14 million in the allowance for credit losses primarily related to residential customers. During the nine months ended September 30, 2023, the decrease in SG&A, as compared to the prior period, was primarily driven by: • a decrease of $86 million in Solar, primarily due to recent cost reduction initiatives, • a decrease of $28 million in advertising costs, primarily due to utilization of a portion of the Google Success Funds, and • a decrease of $26 million in general and administrative expenses in CSB primarily related to a legal settlement, partially offset by • a decrease of $26 million in radio conversion costs due to the wind down of the replacement program, • an increase of $38 million in selling costs primarily related to the amortization of deferred subscriber acquisition costs and commissions, and • an increase of $32 million in the allowance for credit losses primarily related to residential customers. Depreciation and Intangible Asset Amortization During the three and nine months ended September 30, 2023, the decrease in depreciation and intangible asset amortization, as compared to the prior period, was primarily driven by a decrease in the amortization of customer relationship intangible assets of $65 million and $245 million, respectively, primarily related to certain assets acquired as part of the ADT Acquisition. During the first quarter of 2023, the remaining customer relationship intangible assets acquired as part of the ADT Acquisition became fully amortized. 38 Merger, restructuring, integration, and other During the three months ended September 30, 2023, the increase in merger, restructuring, integration, and other, as compared to the prior period, was driven by an increase in restructuring costs of approximately $7 million primarily related to severance benefits and third-party costs of approximately $4 million primarily related to the strategic optimization of our Solar business operations following the acquisition of ADT Solar. During the nine months ended September 30, 2023, the increase in merger, restructuring, integration, and other, as compared to the prior period, was driven by increases in restructuring costs of approximately $19 million primarily related to severance benefits and third-party costs of approximately $18 million primarily related to the strategic optimization of our Solar business operations following the acquisition of ADT Solar. Goodwill Impairment During the three and nine months ended September 30, 2023, we recorded goodwill impairment charges associated with our Solar reporting unit of $88 million and $511 million, respectively, compared to $201 million during the three and nine months ended September 30, 2022. Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies,” Note 7 “Goodwill and Other Intangible Assets,” and the section “—Critical Accounting Estimates” below for further discussion. Interest Expense, net During the three and nine months ended September 30, 2023, the increase in interest expense, net, as compared to the prior year period, was primarily driven by a decrease in unrealized gains of $92 million and $274 million, respectively on our interest rate swaps not designated as cash flow hedges. Additionally, during the three months ended September 30, 2023, we recorded $25 million of expense associated with the reclassification from AOCI of historical losses related to certain interest rate swaps as those cash flows are probable of not occurring as a result of the partial redemption of our First Lien Term Loan due 2026 in October 2023. In addition, the increase in interest expense, net, included higher interest expense primarily related to our First Lien Term Loan due 2026 offset by interest rate swap settlements. Other income (expense) During the three and nine months ended September 30, 2022, other income (expense) primarily included the change in fair value of a contingent forward purchase contract related to the tender offer in connection with the State Farm Transaction of approximately $158 million. Income Tax Benefit (Expense) During the three and nine months ended September 30, 2023, income tax benefit (expense) impacted our annual effective tax rate primarily as a result of the Solar goodwill impairment charges. Refer to Note 10 “Income Taxes” for details on our effective tax rate. Deferred Tax Assets We have a significant amount of deferred tax assets, against which we take valuation allowances that relate to the uncertainty of our ability to utilize these deferred tax assets in future periods. We review periodically those matters that can influence our decision as to whether or not a valuation allowance is appropriate. Among those matters considered are pending and enacted legislation. We will consider each quarter whether any developments to such legislation, together with the other factors we consider, require a valuation allowance. We believe that our deferred tax assets for disallowed interest under Internal Revenue Code (“IRC”) Section 163(j) will continue to grow from their current level. There is currently significant uncertainty in the matters we consider when determining whether it is appropriate to take additional valuation allowances. While we have not reported any material changes to our valuation allowances since our Amended 2022 Annual Report, we may determine to do so in subsequent periods. Any material change to our valuation allowance would materially and adversely affect our operating results and may result in a net loss position for any given period. 39 NON-GAAP MEASURES To provide investors with additional information in connection with our results as determined in accordance with GAAP, we disclose Adjusted EBITDA as a non-GAAP measure. This measure is not a financial measure calculated in accordance with GAAP, and it should not be considered as a substitute for net income, operating income, or any other measure calculated in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies. Beginning in the third quarter of 2023, the Company presented its Commercial Business as a discontinued operation. Prior periods have been recast to reflect the presentation of Adjusted EBITDA from continuing operations to conform with the current period presentation. In addition, certain costs previously reflected in the Commercial segment that do not qualify to be presented as discontinued operations are now reflected in the CSB segment. Adjusted EBITDA We believe Adjusted EBITDA is useful to investors to measure the operational strength and performance of our business. We believe the presentation of Adjusted EBITDA is useful as it provides investors additional information about our operating profitability adjusted for certain non-cash items, non-routine items we do not expect to continue at the same level in the future, as well as other items not core to our operations. Further, we believe Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against other peer companies using similar measures. We define Adjusted EBITDA as 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. There are material limitations to using Adjusted EBITDA. Adjusted EBITDA does not take into account certain significant items, including depreciation and amortization, interest, taxes, and other adjustments which directly affect our net income (loss). These limitations are best addressed by considering the economic effects of the excluded items independently and by considering Adjusted EBITDA in conjunction with net income or loss as calculated in accordance with GAAP. 40 The table below reconciles Adjusted EBITDA to income (loss) from continuing operations: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 $ Change 2023 2022 $ Change Income (loss) from continuing operations $ (20,665) $ (169,115) $ 148,450 $ (149,754) $ (35,304) $ (114,450) Interest expense, net 147,187 29,832 117,355 402,381 117,331 285,050 Income tax expense (benefit) 38,764 (15,800) 54,564 (12,438) 37,806 (50,244) Depreciation and intangible asset amortization 333,088 387,417 (54,329) 1,021,103 1,223,666 (202,563) Amortization of deferred subscriber acquisition costs 47,945 40,036 7,909 138,145 111,741 26,404 Amortization of deferred subscriber acquisition revenue (77,471) (61,530) (15,941) (220,779) (169,048) (51,731) Share-based compensation expense 9,882 13,737 (3,855) 31,369 39,983 (8,614) Merger, restructuring, integration, and other (1) 16,296 4,745 11,551 42,339 1,165 41,174 Goodwill impairment (2) 88,367 200,974 (112,607) 511,176 200,974 310,202 Change in fair value of financial instruments (3) — 157,550 (157,550) — 157,550 (157,550) Non-cash acquisition-related adjustments and other, net (4) (705) (4,682) 3,977 2,003 33,452 (31,449) Adjusted EBITDA (from continuing operations) $ 582,688 $ 583,164 $ (476) $ 1,765,545 $ 1,719,316 $ 46,229 ________________ (1) During 2023, includes integration and third-party costs related to the strategic optimization of the Solar business operations following the ADT Solar acquisition, as well as restructuring costs. (2) Represents impairment charges associated with our Solar reporting unit. Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” and Note 7 “Goodwill and Other Intangible Assets.” (3) Represents the change in fair value of a contingent forward purchase contract associated with the State Farm Transaction. (4) Nine months ended September 30, 2022 primarily includes customer backlog intangible asset amortization related to the ADT Solar Acquisition of $30 million, which was fully amortized as of March 2022. The remaining balance primarily included ADT Solar purchase accounting adjustments and net radio conversion costs, offset by gain on sale of a business. Adjusted EBITDA in total and by segment are set forth below. As noted above, Adjusted EBITDA is our segment profit measure pursuant to GAAP and is therefore not a non-GAAP financial measure with respect to our segments. Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2023 2022 $ Change 2023 2022 $ Change CSB $ 623,446 $ 589,640 $ 33,806 $ 1,854,288 $ 1,723,785 $ 130,503 Solar (40,758) (6,476) (34,282) (88,743) (4,469) (84,274) Adjusted EBITDA (from continuing operations) $ 582,688 $ 583,164 $ (476) $ 1,765,545 $ 1,719,316 $ 46,229 The factors listed below exclude amounts that are outside of our definition of Adjusted EBITDA. Refer to the discussions above under “—Results of Operations” for further details. 41 CSB: During the three months ended September 30, 2023, the increases, as compared to the prior periods, were primarily due to: • higher M&S Revenue, net of the associated costs, of $26 million, • lower general and administrative expenses of $13 million, • and higher installation revenue, net of the associated costs and commissions, of $7 million, • partially offset by higher provision for credit losses of $14 million. During the nine months ended September 30, 2023, the increases, as compared to the prior periods, were primarily due to: • higher M&S Revenue, net of the associated costs, of $106 million, • lower advertising costs of $28 million, • lower general and administrative expenses of $26 million, • and higher installation revenue, net of the associated costs and commissions, of $11 million, • partially offset by higher provision for credit losses of $32 million. Solar: During the three and nine months ended September 30, 2023, respectively, the decreases, as compared to the prior periods, were primarily due to: • lower installation revenue, net of the associated costs and commissions, of $50 million and $154 million, partially offset by • lower general and administrative expenses, of $26 million and $72 million. LIQUIDITY AND CAPITAL RESOURCES Liquidity and capital resources primarily consisted of the following: (in thousands) September 30, 2023 Cash and cash equivalents $ 238,582 Restricted cash and restricted cash equivalents $ 117,482 Availability under First Lien Revolving Credit Facility $ 575,000 Uncommitted available borrowing capacity under 2020 Receivables Facility $ 76,953 Uncommitted available borrowing capacity under Solar Receivables Facility $ 300,000 Carrying amount of total debt outstanding $ 9,667,701 Liquidity We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our credit facilities, and the issuance of equity and/or debt securities as appropriate given market conditions. Our future cash needs are expected to include cash for operating activities including working capital, principal and interest payments on our debt, capital expenditures, potential dividend payments to our stockholders, and from time to time, strategic investments or other initiatives that we may undertake. We are a highly leveraged company with significant debt service requirements and have both fixed-rate and variable-rate debt. All of our remaining variable rate debt instruments previously based on LIBOR are now based on SOFR, and we do not anticipate any material impacts from the SOFR transition. We may periodically seek to repay, redeem, repurchase, or refinance our indebtedness, or seek to retire or purchase our outstanding securities through cash purchases in the open market, privately negotiated transactions, a 10b5-1 repurchase plan, or otherwise, and any such transactions may involve material amounts. Cash outflows for interest payments are not consistent between quarters, with larger outflows occurring in the first and third quarters, and may vary as a result of our variable rate debt. As of September 30, 2023, our next debt maturity will occur in April 2024 with respect to the remaining outstanding balance of $600 million of our First Lien Notes due 2024. We issued a notice to redeem approximately $500 million of the First Lien Notes due 2024 by the end of 2023 using the remaining net proceeds from the Commercial Divestiture and cash on hand, with the rest to be redeemed in 2024 prior to maturity. 42 We are closely monitoring the impact of recent developments in the financial markets and banking industry, inflationary pressures, and changes in interest rates on our cash position. However, we believe our cash position, available borrowing capacity under our credit agreements, and cash provided by operating activities are, and will continue to be, adequate to meet our operational and business needs in the next twelve months, as well as our long-term liquidity needs. Material Cash Requirements There have been no significant changes to our material cash requirements, commitments and contingencies, or off-balance sheet arrangements from those disclosed in our Amended 2022 Annual Report. Repurchase of Solar Loans As of September 30, 2023, the liability related to certain loans provided to customers within our Solar business that we may be required to repurchase from third party lenders was approximately $16 million. This liability is partially offset by a net receivable of $6 million related to the amount we ultimately expect to recover from any loans required to be repurchased, either through ongoing loan payments from the customer or proceeds from subsequent resale of the loans. Long-Term Debt Significant changes and activity related to our long-term debt since our Amended 2022 Annual Report are discussed below. Refer to Note 8 “Debt” for further discussion on our debt agreements and activity. First Lien Term Loan due 2026 In October 2023, the Company redeemed approximately $1.3 billion of the First Lien Term Loan due 2026 using net proceeds from the Commercial Divestiture. Further, during October 2023, we refinanced the remaining outstanding balance of the First Lien Term Loan due 2026 with a new $1,375 million 7-year term loan B due 2030 (the “First Lien Term Loan B due 2030”) through an amendment to the existing First Lien Credit Agreement. Term Loan A Facility In March 2023, we borrowed an aggregate principal amount of $600 million of term loans under the Term Loan A Facility, and in June 2023, we borrowed an additional aggregate principal amount of $50 million of Incremental Term Loan A Loans. ADT Notes due 2023 Redemption In March 2023, we used the proceeds from the Term Loan A Facility to redeem approximately $600 million of the ADT Notes due 2023 for a total redemption price of approximately $600 million, excluding accrued and unpaid interest. On June 15, 2023, we redeemed the remaining outstanding balance of approximately $100 million of the ADT Notes due 2023 using $50 million of proceeds from the Incremental Term Loan A Loans and cash on hand. First Lien Notes due 2024 Partial Redemption On May 2, 2023, we redeemed $150 million principal amount of the $750 million outstanding First Lien Notes due 2024 for a redemption price of $150 million, excluding accrued and unpaid interest, using cash on hand. During 2023, we issued a notice to redeem $500 million principal amount of the outstanding First Lien Notes due 2024 by the end of 2023 using remaining net proceeds from the Commercial Divestiture and cash on hand. 2020 Receivables Facility In March 2023, we amended the agreement governing the 2020 Receivables Facility, pursuant to which, among other things, the borrowing capacity was increased from $400 million to $500 million and the uncommitted revolving period was extended from May 2023 to March 2024. During the nine months ended September 30, 2023, we received proceeds of $212 million and repaid $145 million, and as of September 30, 2023, the outstanding balance was $423 million. 43 Solar Receivables Facility On August 2, 2023, we entered into the Solar Receivables Facility Financing Agreement to finance receivables generated by the installation of residential solar systems, which, among other things, provides for an uncommitted revolving loan facility in the aggregate principal amount of up to $300 million. As of September 30, 2023, we have not borrowed any amounts under the Solar Receivable Facility. Debt Covenants As of September 30, 2023, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations. We do not believe there is a material risk of future noncompliance with our financial covenant and other maintenance tests. Dividends During the nine months ended September 30, 2023 and 2022, we declared aggregate dividends of $91 million ($0.035 per share) and $90 million ($0.035 per share) on our Common Stock, respectively, and $6 million ($0.035 per share) on our Class B Common Stock during each period. On November 2, 2023, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on December 14, 2023, which will be paid on January 9, 2024. Cash Flow Analysis Nine Months Ended September 30, (in thousands) 2023 2022 $ Change Net cash provided by (used in): Operating activities $ 1,245,694 $ 1,321,069 $ (75,375) Investing activities $ (988,081) $ (1,208,790) $ 220,709 Financing activities $ (275,129) $ (85,772) $ (189,357) The discussion below includes cash flows from both continuing operations and discontinued operations consistent with the presentation on the Statements of Cash Flows. Cash Flows from Operating Activities The decrease in net cash provided by operating activities, as compared to the prior period, was primarily due to: • an increase in cash interest of $124 million primarily related to our First Lien Term Loan due 2026, and • an increase in payroll tax payments of $26 million primarily related to deferrals of such payments in 2020 under the CARES Act. During 2023, we also received approximately $19 million related to a legal settlement and approximately $40 million of the Google Success Funds. The remainder of the activity related to changes in assets and liabilities due to the volume and timing of other operating cash receipts and payments with respect to when the transactions are reflected in earnings. Refer to the discussions above under “—Results of Operations” for further details. 44 Cash Flows from Investing Activities The decrease in net cash used in investing activities, as compared to the prior period, was primarily due to: • a decrease in cash paid for dealer generated customer account and bulk account purchases of $115 million primarily related to fewer bulk purchases and lower volume, • a decrease in subscriber system assets expenditures of $92 million due to fewer adds, • a decrease in net cash paid of $23 million primarily related to other investments, and • a decrease in cash paid for the acquisition of businesses, net of cash acquired, of $13 million as a result of activity during the prior year, partially offset by • a decrease in proceeds from the sale of a business of $27 million due to activity during the prior year. Cash Flows from Financing Activities The change in cash flows from financing activities, as compared to the prior period, was primarily due to: • an increase in net repayments of long-term borrowings of approximately $191 million primarily as a result of the ADT Notes due 2023 Redemption and ADT Notes due 2024 Partial Redemption in 2023, partially offset by borrowings under the Term Loan A Facility in 2023, and • an increase in net repayments under the 2020 Receivables Facility of $63 million, partially offset by • proceeds from interest rate swap contracts that included an other-than-insignificant financing element at inception of $59 million during 2023 compared to payments of $27 million during 2022. CRITICAL ACCOUNTING ESTIMATES We disclosed our critical accounting estimates in our Amended 2022 Annual Report, which include estimates prepared in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations. Critical accounting estimates are based on, among other things, estimates, assumptions, and judgments made by management that include inherent risks and uncertainties. Our estimates are based on relevant information available at the end of each period. Actual results could differ materially from these estimates under different assumptions or market conditions. There were no material changes in our critical accounting estimates since our Amended 2022 Annual Report, except as discussed below: Goodwill Impairment We perform our annual goodwill impairment test on October 1 of each year or more often if events occur or circumstances change which indicate it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. Under a quantitative approach, we estimate the fair value of a reporting unit and compare it to the reporting unit’s carrying amount. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess. During the first and second quarters of 2023, we performed interim impairment quantitative assessments on the Solar reporting unit as a result of triggering events as of March 31, 2023 and June 30, 2023 and recorded goodwill impairment charges of $242 million and $181 million during the first and second quarters of 2023, respectively. These triggering events resulted from the then-current macroeconomic conditions, including the impact of rising interest rates, as well as ADT Solar’s continued underperformance of operating results in each quarter relative to expectations. As a result, the Solar reporting unit was considered at risk for future impairment following the impairments in the first and second quarters of 2023. In addition, we concluded there was a triggering event as of September 30, 2023, related to the Solar reporting unit as a result of continued deterioration of industry conditions and macroeconomic decline, as well as the Company’s recent plan to significantly reduce the footprint of its Solar reporting unit, including certain existing underperforming branches and related headcount reductions. As a result, we determined that the remaining balance of goodwill was not recoverable and recorded a goodwill impairment charge of $88 million in the third quarter of 2023. Following the impairments during 2023, the balance of goodwill in the Solar reporting unit was zero. The Company also assessed the recoverability of other long-lived assets related to its Solar business, and impairment charges recorded were not material. 45 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. Refer to Note 7 “Goodwill and Other Intangible Assets” to the condensed consolidated financial statements for further discussion. CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains certain information and disclosures that are forward-looking and therefore subject to risks and uncertainties, including those described below. All statements, other than statements of historical fact, included in this document are, or could be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the applicable rules and regulations of the SEC and are made in reliance on the safe harbor protections provided thereunder. These forward-looking statements relate to, among other things, planned ADT Solar restructuring activities; the Commercial Transaction between ADT and GTCR, the expected timetable for realizing expected benefits and synergies of the Commercial Transaction; the strategic investment by and long term partnership with State Farm; anticipated financial performance, including the Company’s ability to achieve its stated guidance metrics and its progress toward its medium-term targets; management’s plans and objectives for future operations; the successful development, commercialization, and timing of new or joint products; the expected timing of product commercialization with State Farm or any changes thereto, including the ADT home security program for State Farm; our acquisition of ADT Solar and its anticipated impact on our business and financial condition including the subsequent announcement of planned ADT Solar restructuring activities; business prospects; outcomes of regulatory proceedings; market conditions; our ability to successfully respond to the challenges posed by the COVID-19 Pandemic; our strategic partnership and ongoing relationship with Google; the expected timing of product commercialization with Google or any changes thereto; the successful internal development, commercialization, and timing of our next generation platform and innovative offerings; the successful conversion of customers who continue to utilize outdated technology; the current and future market size for existing, new, or joint products; any stated or implied outcomes with regards to the foregoing; and other matters. Forward-looking statements are contained principally in the sections of this report titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Without limiting the generality of the preceding sentences, any time the Company uses the words “expects,” “intends,” “will,” “anticipates,” “believes,” “confident,” “continue,” “propose,” “seeks,” “could,” “may,” “should,” “estimates,” “forecasts,” “might,” “goals,” “objectives,” “targets,” “planned,” “projects,” and, in each case, their negative or other various or comparable terminology, and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. These forward-looking statements are based on management’s current beliefs and assumptions and on information currently available to management. We caution that these statements are subject to risks and uncertainties, many of which are outside of our control, and could cause future events or results to be materially different from those stated or implied in this document, including among others, factors relating to: • any difficulties with respect to planned ADT Solar restructuring activities, including expenses associated with the separation of certain Solar branches and personnel; • the effect of the Commercial Transaction and of the announcement of the planned ADT Solar restructuring activities on our ability to retain and hire key personnel and to maintain relationships with customers, suppliers and other business partners; • risks related to the Commercial Transaction and planned ADT Solar restructuring activities and the possible diversion of management’s attention from ADT’s core CSB business operations; • uncertainties as to our ability and the amount of time necessary to realize the expected benefits of the Commercial Transaction and planned ADT Solar restructuring activities; • the achievement of potential benefits of the equity investment by and long-term partnership with State Farm, including as a result of restrictions on or required prior regulatory approval of, various actions by regulated insurers; • our ability to effectively implement our strategic partnership with, commercialize products with, or utilize the incremental funding committed by State Farm or Google; • our ability to keep pace with rapid technological changes, including the development of our next-generation platform, and industry changes; 46 • our ability to effectively implement our strategic partnership with or utilize any of the amounts invested in us by Google; • continued risks and uncertainties related to the Company’s ability to successfully integrate and operate the ADT Solar business, including the planned ADT Solar restructuring activities; • risks related to the various financing arrangements, including third party owned arrangements, that the Company facilitates for some ADT Solar customers; • our ability to continuously and successfully commercialize innovative offerings; • our ability to successfully implement an Environmental, Social, and Governance program across the Company; • the impact of supply chain disruptions; • our ability to maintain and grow our existing customer base; • our ability to sell our products and services or launch new products and services in highly competitive markets, including the home security and automation market and the solar market, and to achieve market acceptance with acceptable margins; • our ability to successfully upgrade obsolete equipment installed at our customers’ premises in an efficient and cost-effective manner; • changes in law, economic and financial conditions, including tax law changes, changes to privacy requirements, changes to telemarketing, email marketing and similar consumer protection laws, interest volatility, and trade tariffs and restrictions applicable to the products we sell; • any material changes to the valuation allowances we take with respect to our deferred tax assets; • the impact of potential information technology, cybersecurity, or data security breaches; • our dependence on third-party providers, suppliers, and dealers to enable us to produce and distribute our products and services in a cost-effective manner that protects our brand; • our ability to successfully implement an equipment ownership model that best satisfies the needs of our customers and to successfully implement and maintain our receivables securitization financing agreement or similar arrangements; • our ability to successfully pursue alternate business opportunities and strategies; • our ability to integrate various companies we have acquired in an efficient and cost-effective manner; • the amount and timing of our cash flows and earnings, which may be impacted by customer, competitive, supplier and other dynamics and conditions; • our ability to maintain or improve margins through business efficiencies; • risks related to the restatement of our consolidated financial statements included in our Amended 2022 Annual Report and in our Reports on Form 10-Q/A for the quarters ended September 30, 2022, and March 31, 2023, each as filed with the SEC on July 27, 2023; • any litigation or investigation related to such restatements; and • the Company’s ability to maintain effective ICFR and disclosure controls and procedures (“DCPs”), including its ability to remediate any existing material weakness in its ICFR and the timing of any such remediation, as well as the ability to reestablish effective DCPs at a reasonable assurance level. Forward-looking statements and information involve risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements, including without limitation, the risks and uncertainties disclosed or referenced under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A in our Amended 2022 Annual Report. Therefore, caution should be taken not to place undue reliance on any such forward-looking statements. Much of the information in this report that looks toward future performance is based on various factors and important assumptions about future events that may or may not actually occur. As a result, our operations and financial results in the future could differ materially and substantially from those we have discussed in the forward-looking statements included in this Quarterly Report on Form 10-Q. Any forward-looking statement made in this Quarterly Report on Form 10-Q speaks only as of the date on which it is made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise unless required by law. 47