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) March 31, 2024 December 31, 2023 Assets Current assets: Cash and cash equivalents $ 4,041 $ 14,621 Restricted cash and restricted cash equivalents 114,655 115,329 Accounts receivable, net of allowance for credit losses of $ 66,927 and $ 53,229 , respectively 387,498 390,471 Inventories, net 209,765 230,108 Prepaid expenses and other current assets 285,035 254,165 Total current assets 1,000,994 1,004,694 Property and equipment, net 261,275 283,170 Subscriber system assets, net 3,011,419 3,005,936 Intangible assets, net 4,843,986 4,877,493 Goodwill 4,903,899 4,903,899 Deferred subscriber acquisition costs, net 1,210,302 1,175,904 Other assets 712,308 712,998 Total assets $ 15,944,183 $ 15,964,094 Liabilities and stockholders' equity Current liabilities: Current maturities of long-term debt $ 322,070 $ 320,612 Accounts payable 260,137 293,883 Deferred revenue 252,080 264,398 Accrued expenses and other current liabilities 574,779 601,315 Total current liabilities 1,409,066 1,480,208 Long-term debt 7,566,878 7,523,349 Deferred subscriber acquisition revenue 1,975,886 1,914,954 Deferred tax liabilities 1,039,113 1,027,189 Other liabilities 217,459 229,748 Total liabilities 12,208,402 12,175,448 Commitments and contingencies (See Note 12) Stockholders' equity: Preferred stock—authorized 1,000,000 shares of $ 0.01 par value; zero issued and outstanding as of March 31, 2024 and December 31, 2023 — — Common stock—authorized 3,999,000,000 shares of $ 0.01 par value; issued and outstanding shares of 855,629,403 and 867,432,337 as of March 31, 2024 and December 31, 2023, respectively 8,556 8,674 Class B common stock—authorized 100,000,000 shares of $ 0.01 par value; issued and outstanding shares of 54,744,525 as of March 31, 2024 and December 31, 2023 547 547 Additional paid-in capital 7,317,895 7,413,305 Accumulated deficit ( 3,576,763 ) ( 3,617,718 ) Accumulated other comprehensive income (loss) ( 14,454 ) ( 16,162 ) Total stockholders' equity 3,735,781 3,788,646 Total liabilities and stockholders' equity $ 15,944,183 $ 15,964,094 See Notes to Condensed Consolidated Financial Statements 1 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (in thousands, except per share data) Three Months Ended March 31, 2024 2023 Revenue: Monitoring and related services $ 1,062,652 $ 1,028,634 Security installation, product, and other 127,020 103,842 Solar installation, product, and other 19,639 144,835 Total revenue 1,209,311 1,277,311 Cost of revenue (exclusive of depreciation and amortization shown separately below) : Monitoring and related services 154,713 161,788 Security installation, product, and other 39,592 29,836 Solar installation, product, and other 41,522 98,344 Total cost of revenue 235,827 289,968 Selling, general, and administrative expenses 398,453 393,374 Depreciation and intangible asset amortization 334,353 362,351 Merger, restructuring, integration, and other 45,182 15,537 Goodwill impairment — 241,630 Operating income (loss) 195,496 ( 25,549 ) Interest expense, net ( 88,931 ) ( 171,302 ) Other income (expense) 15,622 ( 1,190 ) Income (loss) from continuing operations before income taxes and equity in net earnings (losses) of equity method investee 122,187 ( 198,041 ) Income tax benefit (expense) ( 30,655 ) 73,937 Income (loss) from continuing operations before equity in net earnings (losses) of equity method investee 91,532 ( 124,104 ) Equity in net earnings (losses) of equity method investee — ( 2,677 ) Income (loss) from continuing operations 91,532 ( 126,781 ) Income (loss) from discontinued operations, net of tax 19 7,944 Net income (loss) $ 91,551 $ ( 118,837 ) Common Stock: Income (loss) from continuing operations per share - basic $ 0.10 $ ( 0.14 ) Income (loss) from continuing operations per share - diluted $ 0.10 $ ( 0.14 ) Net income (loss) per share - basic $ 0.10 $ ( 0.13 ) Net income (loss) per share - diluted $ 0.10 $ ( 0.13 ) Weighted-average shares outstanding - basic 855,893 854,299 Weighted-average shares outstanding - diluted 918,394 854,299 Class B Common Stock: Income (loss) from continuing operations per share - basic $ 0.10 $ ( 0.14 ) Income (loss) from continuing operations per share - diluted $ 0.10 $ ( 0.14 ) Net income (loss) per share - basic $ 0.10 $ ( 0.13 ) Net income (loss) per share - diluted $ 0.10 $ ( 0.13 ) Weighted-average shares outstanding - basic 54,745 54,745 Weighted-average shares outstanding - diluted 54,745 54,745 See Notes to Condensed Consolidated Financial Statements 2 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited) (in thousands) Three Months Ended March 31, 2024 2023 Net income (loss) $ 91,551 $ ( 118,837 ) Other comprehensive income (loss), net of tax: Cash flow hedges 1,617 4,135 Other 91 ( 28 ) Total other comprehensive income (loss), net of tax 1,708 4,107 Comprehensive income (loss) $ 93,259 $ ( 114,730 ) See Notes to Condensed Consolidated Financial Statements 3 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Unaudited) (in thousands) Three Months Ended March 31, 2024 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 867,432 54,745 $ 8,674 $ 547 $ 7,413,305 $ ( 3,617,718 ) $ ( 16,162 ) $ 3,788,646 Net income (loss) — — — — — 91,551 — 91,551 Other comprehensive income (loss), net of tax — — — — — — 1,708 1,708 Dividends — — — — — ( 50,070 ) — ( 50,070 ) Share-based compensation expense — — — — 7,971 — — 7,971 Repurchases of common stock (including excise tax) ( 15,000 ) — ( 150 ) — ( 93,969 ) — — ( 94,119 ) Transactions related to employee share-based compensation plans and other 3,197 — 32 — ( 9,412 ) ( 526 ) — ( 9,906 ) Ending balance 855,629 54,745 $ 8,556 $ 547 $ 7,317,895 $ ( 3,576,763 ) $ ( 14,454 ) $ 3,735,781 Three Months Ended March 31, 2023 Number of Common Shares Number of Class B Common Shares Common Stock Class B Common Stock Additional Paid-In Capital Accumulated Deficit Accumulated Other Comprehensive Income (Loss) Total Stockholders' Equity Beginning balance 862,098 54,745 $ 8,621 $ 547 $ 7,380,759 $ ( 3,949,579 ) $ ( 47,200 ) $ 3,393,148 Net income (loss) — — — — — ( 118,837 ) — ( 118,837 ) Other comprehensive income (loss), net of tax — — — — — — 4,107 4,107 Dividends — — — — — ( 32,258 ) — ( 32,258 ) Share-based compensation expense — — — — 15,982 — — 15,982 Transactions related to employee share-based compensation plans and other 4,819 — 47 — ( 15,874 ) ( 883 ) — ( 16,710 ) Ending balance 866,917 54,745 $ 8,668 $ 547 $ 7,380,867 $ ( 4,101,557 ) $ ( 43,093 ) $ 3,245,432 See Notes to Condensed Consolidated Financial Statements 4 ADT INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three Months Ended March 31, 2024 2023 Cash flows from operating activities: Net income (loss) $ 91,551 $ ( 118,837 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and intangible asset amortization 334,353 383,055 Amortization of deferred subscriber acquisition costs 54,605 46,684 Amortization of deferred subscriber acquisition revenue ( 83,376 ) ( 72,022 ) Share-based compensation expense 7,971 15,982 Deferred income taxes 11,414 ( 69,740 ) Provision for losses on receivables and inventory 60,765 26,479 Goodwill, intangible, and other asset impairments 20,446 242,630 Unrealized (gain) loss on interest rate swap contracts ( 10,146 ) 32,516 Other non-cash items, net 20,845 28,601 Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: Deferred subscriber acquisition costs ( 89,086 ) ( 87,161 ) Deferred subscriber acquisition revenue 65,918 73,529 Other, net ( 121,458 ) ( 195,076 ) Net cash provided by (used in) operating activities 363,802 306,640 Cash flows from investing activities: Dealer generated customer accounts and bulk account purchases ( 117,594 ) ( 115,818 ) Subscriber system asset expenditures ( 140,515 ) ( 159,433 ) Purchases of property and equipment ( 40,689 ) ( 59,215 ) Proceeds (payments) from interest rate swaps ( 1,816 ) — Other investing, net 544 ( 1,574 ) Net cash provided by (used in) investing activities ( 300,070 ) ( 336,040 ) Cash flows from financing activities: Proceeds from long-term borrowings 95,000 600,000 Proceeds from receivables facility 65,910 63,749 Proceeds (payments) from interest rate swaps 23,908 16,322 Repurchases of common stock ( 93,356 ) — Repayment of long-term borrowings, including call premiums ( 56,646 ) ( 607,444 ) Repayment of receivables facility ( 57,984 ) ( 44,432 ) Dividends on common stock ( 32,207 ) ( 32,038 ) Payments on finance leases ( 7,237 ) ( 10,982 ) Other financing, net ( 12,374 ) ( 25,803 ) Net cash provided by (used in) financing activities ( 74,986 ) ( 40,628 ) Cash and cash equivalents and restricted cash and restricted cash equivalents: Net increase (decrease) ( 11,254 ) ( 70,028 ) Beginning balance 129,950 373,580 Ending balance $ 118,696 $ 303,552 See Notes to Condensed Consolidated Financial Statements 5 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business and Organization ADT Inc., together with its wholly-owned subsidiaries (collectively, “ADT” or the “Company”), provides security, interactive, and smart home solutions to consumer and small business customers in the United States (“U.S.”). Prior to March 11, 2024, the Company was 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”). Following a registered secondary offering of the Company’s common stock (“Common Stock”) by certain Apollo affiliates (and the Company’s concurrent repurchase from the underwriters of 15 million shares of Common Stock that were the subject of the offering), including the exercise of the underwriters’ overallotment option which closed on March 19, 2024, Apollo beneficially owns less than 50 % of the Company’s outstanding common stock, which includes Common Stock and Class B common stock (“Class B Common Stock”) combined, and less than 50 % of the Company’s outstanding Common Stock, and the Company ceased to be a “controlled company” under the New York Stock Exchange (the “NYSE”) rules. 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 (if applicable) are included from the effective dates of acquisition, and all intercompany transactions have been eliminated. In August 2023, ADT entered into an agreement to divest its commercial business (the “Commercial Business”), which was completed in October 2023 (the “Commercial Divestiture”). Beginning in the third quarter of 2023, the Company presented its Commercial Business as a discontinued operation. Refer to Note 4 “Divestitures” for additional information. Unless otherwise noted, amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements relate to the Company’s continuing operations. The Company sold its shares in SNTNL LLC (“Canopy”) during the fourth quarter of 2023. Prior to the sale, the Company used the equity method of accounting to account for its investment in Canopy as it had the ability to exercise significant influence but did not control. The condensed consolidated financial statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for the interim periods presented. The interim results reported herein should not be taken as indicative of results that may be expected for future interim periods or the full year. The Condensed Consolidated Balance Sheet as of December 31, 2023 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 Annual Report on Form 10-K for the year ended December 31, 2023 (the “2023 Annual Report”). Certain prior period amounts have been reclassified to conform with the current period presentation. 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. 6 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Segments The Company reports its results in two operating and reportable segments, Consumer and Small Business (“CSB”) and Solar. 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. Accounting Pronouncements Recently Adopted Accounting Pronouncements 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 the roll-forward requirement effective January 1, 2024. The Company does not currently have any material supplier finance programs, and the guidance will be applied prospectively to any future arrangements. 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 that 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. The Company adopted this guidance effective January 1, 2024. This guidance did not impact the Company. Recently Issued Accounting Pronouncements Disclosure Improvements - ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative , represents changes to clarify or improve disclosure and presentation requirements of a variety of topics. The effective date for each amendment will be the date on which the SEC’s removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company is currently evaluating the potential impact of this guidance on its financial statements and disclosures. Segment Reporting - ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures , improves reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. In addition, the guidance, among other requirements, enhances interim disclosures, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, and provides new segment disclosure requirements for entities with a single reportable segment. The amendments in this guidance are effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. This guidance should be applied retrospectively to all periods presented. Early adoption is permitted. The Company is currently evaluating the impact of this guidance. Income Taxes - ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures , focuses on improvements to income tax disclosures, primarily related to the rate reconciliation and income tax paid information. In addition, the update includes certain other amendments to improve the effectiveness of income tax disclosures. The guidance is effective for annual periods beginning after December 15, 2024, and should be applied prospectively, with retrospective application also a permitted option. Early adoption is permitted. The Company is currently evaluating the impact of this guidance. Significant Accounting Policies Unless otherwise noted, the Company’s accounting policies discussed below, or included within the respective footnotes herein, do not materially differ from those disclosed in the 2023 Annual Report. 7 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Cash and Cash Equivalents and Restricted Cash and Restricted Cash Equivalents The following table reconciles the amounts below reported in the Condensed Consolidated Balance Sheets to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows: (in thousands) March 31, 2024 December 31, 2023 Cash and cash equivalents $ 4,041 $ 14,621 Restricted cash and restricted cash equivalents (1) 114,655 115,329 Ending balance $ 118,696 $ 129,950 ________________ (1) Primarily includes funds received, net of payments, 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 14 “Related Party Transactions”). The remaining amount of restricted cash relates to the Company’s uncommitted receivables securitization financing agreement (the “ 2020 Receivables Facility”). Refer to Note 6 “Debt.” Inventories, net Inventories, net includes finished goods and work-in-progress. Work-in-progress is not material. 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, and which the Company may retrieve upon termination of the contract with the customer. Deferred subscriber acquisition costs represent selling expenses (primarily commissions) that are incremental to acquiring customers. Subscriber system assets and any related deferred subscriber acquisition costs are accounted for on a pooled basis based on the month and year of customer acquisition. The Company depreciates and amortizes these pooled costs using an accelerated method over the estimated life of the customer relationship, which is 15 years. (in thousands) March 31, 2024 December 31, 2023 Gross carrying amount $ 6,534,535 $ 6,404,479 Accumulated depreciation ( 3,523,116 ) ( 3,398,543 ) Subscriber system assets, net $ 3,011,419 $ 3,005,936 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 March 31, (in thousands) 2024 2023 Depreciation of subscriber system assets $ 138,303 $ 137,431 Amortization of deferred subscriber acquisition costs $ 54,605 $ 44,232 Accrued Expenses and Other Current Liabilities (in thousands) March 31, 2024 December 31, 2023 Accrued interest $ 85,514 $ 111,204 Payroll-related accruals 71,365 118,495 Opportunity Fund (see Note 14 “Related Party Transactions”) 91,686 93,950 Operating lease liabilities (see Note 13 “Leases”) 16,672 15,979 Accrued dividends 49,965 32,207 Other accrued liabilities 259,577 229,480 Accrued expenses and other current liabilities $ 574,779 $ 601,315 8 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Merger, Restructuring, Integration, and Other Merger, restructuring, integration, and other represents certain direct and incremental costs resulting from acquisitions made by the Company, integration and optimization 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 March 31, 2024 and December 31, 2023, investments in money market mutual funds were $ 41 million and $ 55 million, respectively. Long-Term Debt Instruments - The fair values of the Company’s long-term debt instruments are determined using broker-quoted market prices, which represent quoted prices for similar assets or liabilities as well as other observable market data, and are classified as Level 2 fair value measurements. The carrying amounts of debt outstanding, if any, under the Company’s first lien revolving credit facility (the “First Lien Revolving Credit Facility”) and the 2020 Receivables Facility approximate their fair values as interest rates on these borrowings approximate current market rates. March 31, 2024 December 31, 2023 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Long-term debt instruments subject to fair value disclosures (1) $ 7,808,512 $ 7,716,887 $ 7,756,800 $ 7,732,159 ________________ (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 7 “Derivative Financial Instruments” for the fair values of the Company’s derivative financial instruments. CSB Retail Installment Contract Receivables - The fair values of the Company’s CSB retail installment contract receivables are determined using a discounted cash flow model and are classified as Level 3 fair value measurements. March 31, 2024 December 31, 2023 (in thousands) Carrying Amount Fair Value Carrying Amount Fair Value Retail installment contract receivables, net $ 673,813 $ 489,869 $ 673,635 $ 487,685 2. REVENUE AND RECEIVABLES Revenue 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. 9 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In addition to details provided below, the Company’s disaggregated revenue is presented on the face of the Condensed Consolidated Statements of Operations, which includes monitoring and related services and security installation, product, and other revenue presented for its CSB segment, as well as Solar installation, product, and other revenue. CSB Company-Owned - In transactions in which the Company provides monitoring and related services but retains ownership of the security system (referred to as Company-owned transactions), the Company’s performance obligations primarily include (i) monitoring and related services, which are recognized when these services are provided to the customer, and (ii) a material right associated with the one-time non-refundable fees in connection with the initiation of a monitoring contract which the customer will not be required to pay again upon a renewal of the contract (referred to as deferred subscriber acquisition revenue). Deferred subscriber acquisition revenue is amortized on a pooled basis over the estimated life of the customer relationship using an accelerated method consistent with the treatment of subscriber system assets and deferred subscriber acquisition costs and is reflected in security installation, product, and other revenue. Three Months Ended March 31, ( in thousands ) 2024 2023 Amortization of deferred subscriber acquisition revenue $ 83,376 $ 69,698 CSB 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 - As discussed in Note 4 “Divestitures,” the Company began exiting the residential solar business in January 2024. During the three months ended March 31, 2024, revenue and cost of revenue from the sale of solar equipment was not material. During the three months ended March 31, 2023, revenue and cost of revenue from the sale of solar equipment was approximately $ 75 million and $ 52 million, respectively. Allowance for Credit Losses The Company evaluates its allowance for credit losses on accounts receivable in pools based on customer type. For each customer pool, the allowance for credit losses is estimated based on the delinquency status of the underlying receivables and the related historical loss experience, as adjusted for current and expected future conditions, if applicable. The allowance for credit losses is not material for the individual pools of customers. Three Months Ended March 31, (in thousands) 2024 2023 Beginning balance $ 53,229 $ 35,482 Provision for credit losses 53,465 23,648 Write-offs, net of recoveries (1) ( 39,767 ) ( 24,646 ) Ending balance $ 66,927 $ 34,484 ________________ (1) Recoveries were not material for the periods presented. As such, the Company presented write-offs, net of recoveries. Retail Installment Contract Receivables, Net For security system transactions occurring under both Company-owned and customer-owned equipment models, the Company’s retail installment contract option allows qualifying residential customers to pay the fees due at installation over a 24-, 36-, or 60-month interest-free period, and there is no significant financing component. Upon origination of a retail installment contract, the Company utilizes external credit scores to assess customer credit quality and determine eligibility. Subsequent to origination, the Company monitors the delinquency status of retail installment contract receivables as the key credit quality indicator. 10 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The balance of unbilled retail installment contract receivables comprises: (in thousands) March 31, 2024 December 31, 2023 Retail installment contract receivables, gross $ 676,367 $ 674,827 Allowance for credit losses ( 2,554 ) ( 1,192 ) Retail installment contract receivables, net $ 673,813 $ 673,635 Balance Sheet Classification: Accounts receivable, net $ 245,887 $ 238,961 Other assets 427,926 434,674 Retail installment contract receivables, net $ 673,813 $ 673,635 The allowance for credit losses relates to retail installment contract receivables from CSB outright sales transactions. As of March 31, 2024, the current and delinquent billed retail installment contract receivables were not material. As of March 31, 2024 and December 31, 2023, retail installment contract receivables, net, used as collateral for borrowings under the 2020 Receivables Facility were $ 619 million and $ 610 million, respectively. Refer to Note 6 “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. There is no significant financing component. During the three months ended March 31, 2024 and 2023, contract assets recognized were not material. The balance of contract assets for residential transactions comprises: (in thousands) March 31, 2024 December 31, 2023 Contract assets, gross $ 39,787 $ 39,627 Allowance for credit losses ( 5,054 ) ( 9,025 ) Contract assets, net $ 34,733 $ 30,602 Balance Sheet Classification: Prepaid expenses and other current assets $ 16,969 $ 15,365 Other assets 17,764 15,237 Contract assets, net $ 34,733 $ 30,602 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,” the Company reports results in two operating and reportable segments: CSB and Solar. The Company organizes its segments based on customer type as follows: • CSB - Customers in the CSB segment comprise 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 comprise residential homeowners. The Solar segment includes the sale and installation of solar systems, energy storage solutions, roofing services, and other related offerings. 11 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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 (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; (vii) impairment charges; and (viii) non-cash, non-routine, or other adjustments or charges not necessary to operate our business. 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 March 31, (in thousands) 2024 2023 CSB $ 1,189,672 $ 1,132,476 Solar 19,639 144,835 Total Revenue $ 1,209,311 $ 1,277,311 12 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 March 31, (in thousands) 2024 2023 Adjusted EBITDA by segment: CSB $ 637,691 $ 590,031 Solar ( 23,501 ) ( 10,545 ) Total $ 614,190 $ 579,486 Reconciliation: Total segment Adjusted EBITDA $ 614,190 $ 579,486 Less: Interest expense, net 88,931 171,302 Depreciation and intangible asset amortization 334,353 362,351 Amortization of deferred subscriber acquisition costs 54,605 44,232 Amortization of deferred subscriber acquisition revenue ( 83,376 ) ( 69,698 ) Share-based compensation expense 7,971 12,774 Merger, restructuring, integration, and other (1) 45,182 15,537 Goodwill impairment (2) — 241,630 Other solar exit costs (3) 38,370 — Other, net (4) 5,967 2,076 Equity in net earnings (losses) of equity method investee — ( 2,677 ) Income (loss) from continuing operations before income taxes and equity in net earnings (losses) of equity method investee $ 122,187 $ ( 198,041 ) ________________ (1) During 2024, primarily includes $ 37 million of charges related to asset impairments and other write-offs, employee separation costs, and other charges related to the ADT Solar Exit (Refer to Note 4 “Divestitures”). During 2023, primarily includes restructuring costs primarily related to certain facility exits, as well as integration and third-party costs related to the strategic optimization of the solar business operations following the ADT Solar acquisition. (2) Represents impairment charges associated with the Company’s Solar reporting unit. Refer to Note 5 “Goodwill and Other Intangible Assets.” (3) Includes other costs associated with the ADT Solar Exit, including charges of $ 19 million primarily associated with the disposition of the existing installation pipeline and $ 15 million associated with the write-down and disposition of inventory on hand. Refer to Note 4 “Divestitures.” (4) During 2024, primarily includes unrealized (gains) / losses on interest rate swaps presented within other income (expense). Refer to Note 7 “Derivative Financial Instruments.” 4. DIVESTITURES The Company may decide to divest or exit 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. ADT Solar Exit In November 2023, the Company announced a plan to streamline the solar business to focus on the top performing markets and rationalize the overhead and infrastructure of the business. As part of this plan, the Company closed a significant number of branches that operated the solar business along with making associated headcount reductions. On January 19, 2024, after a strategic review of the business and continued macroeconomic and industry pressures, the Company’s board of directors (the “Board of Directors” or the “Board”) approved a plan to fully exit the residential solar business (the “ADT Solar Exit”). The solar business is currently reflected in the solar operating and reportable segment. 13 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) During the three months ended March 31, 2024, the Company incurred aggregate charges (in thousands) which have been recognized within their respective line items as follows: Solar Installation, Product, and Other Cost of Revenue Selling, general, and administrative expenses Merger, restructuring, integration, and other Total Employee separation costs $ — $ — $ 10,933 $ 10,933 Asset impairments and write-offs (1) — 3,124 17,244 20,368 Contract termination charges 1,404 — 3,797 5,201 Write-down and disposition of inventory 14,574 — — 14,574 Other (2) 4,950 14,318 5,012 24,280 Total $ 20,928 $ 17,442 $ 36,986 $ 75,356 ________________ (1) Primarily relates to long-lived asset impairments and write-off of deferred implementation costs associated with cloud computing arrangements. (2) Primarily relates to charges associated with the disposition of the existing installation pipeline. During the three months ended March 31, 2024, the Company paid approximately $ 11 million primarily related to employee separation costs associated with the ADT Solar Exit. Commercial Divestiture On October 2, 2023, the Company completed the Commercial Divestiture for a total purchase price of approximately $ 1,613 million and received net proceeds of approximately $ 1,585 million, subject to certain customary post-closing adjustments as set forth in the purchase agreement. The results of the Commercial Business are classified as a discontinued operation in the Company’s Condensed Consolidated Statements of Operations for the historical periods presented. Additionally, for periods prior to the Commercial Divestiture, the cash flows and comprehensive income (loss) of the Commercial Business have not been segregated and are included in the Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Comprehensive Income (Loss), respectively, for any period presented prior to the Commercial Divestiture. Refer to Note 11 “Net Income (Loss) per Share” for basic and diluted earnings per share information for discontinued operations. The following reconciliations represent the major classes of line items of the Commercial Business presented as discontinued operations within the Condensed Consolidated Statements of Operations and certain information within the Condensed Consolidated Statements of Cash Flows for any period presented prior to the Commercial Divestiture. Statements of Operations Information During the three months ended March 31, 2024, activity relating to the Commercial Divestiture was not material. (in thousands) Three Months Ended March 31, 2023 Revenue $ 335,043 Cost of revenue 224,033 Selling, general, and administrative expenses 68,855 Depreciation and intangible asset amortization 20,704 Other income and expense items 2,434 Income (loss) from discontinued operations before income taxes 19,017 Income tax benefit (expense) ( 11,073 ) Income (loss) from discontinued operations, net of tax $ 7,944 14 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Cash Flow Information (in thousands) Three Months Ended March 31, 2023 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and intangible asset amortization $ 20,704 Share-based compensation expense $ 3,208 Cash flows from investing activities: Subscriber system asset expenditures $ ( 3,676 ) Purchases of property and equipment $ ( 1,079 ) Transition Services Agreement In connection with the Commercial Divestiture, the Company entered into a Transition Services Agreement (the “Commercial TSA”). During the three months ended March 31, 2024, the Company recognized $ 12 million of income from the Commercial TSA, which is reflected in other income (expense). 5. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill There were no changes in the carrying amounts of goodwill since December 31, 2023. As of March 31, 2024 and December 31, 2023, the Company had accumulated goodwill impairment losses of $ 712 million associated with the Company’s Solar reporting unit, and as of December 31, 2023, the balance of goodwill in the Solar reporting unit was zero . During the three months ended March 31, 2023, the Company recorded goodwill impairment charges of $ 242 million in its Solar reporting unit. Other Intangible Assets March 31, 2024 December 31, 2023 (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 $ 5,688,746 $ ( 3,067,312 ) $ 2,621,434 $ 5,571,456 $ ( 2,937,245 ) $ 2,634,211 Dealer relationships 1,518,020 ( 637,963 ) 880,057 1,518,020 ( 618,154 ) 899,866 Other 209,773 ( 200,278 ) 9,495 209,773 ( 199,357 ) 10,416 Total definite-lived intangible assets 7,416,539 ( 3,905,553 ) 3,510,986 7,299,249 ( 3,754,756 ) 3,544,493 Indefinite-lived intangible assets: Trade name 1,333,000 — 1,333,000 1,333,000 — 1,333,000 Intangible assets $ 8,749,539 $ ( 3,905,553 ) $ 4,843,986 $ 8,632,249 $ ( 3,754,756 ) $ 4,877,493 15 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 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, 2023 $ 2,634,211 Customer contract additions, net of dealer charge-backs (1) 117,391 Amortization ( 130,168 ) Balance as of March 31, 2024 $ 2,621,434 ________________ (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. Definite-Lived Intangible Asset Amortization Expense Three Months Ended March 31, (in thousands) 2024 2023 Definite-lived intangible asset amortization expense $ 150,898 $ 177,480 16 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6. DEBT The Company’s debt is comprised of the following (in thousands) : Description Issued Maturity Interest Rate (1) Interest Payable March 31, 2024 December 31, 2023 First Lien Term Loan B due 2030 10/13/2023 10/13/2030 Term SOFR + 2.50 % Quarterly $ 1,371,563 $ 1,375,000 First Lien Revolving Credit Facility 3/16/2018 6/23/2026 Term SOFR + 2.75 % Quarterly 50,000 — Term Loan A Facility 3/14/2023 3/14/2028 Term SOFR + 2.25 % Quarterly 617,500 625,625 First Lien Notes due 2024 4/4/2019 4/15/2024 5.250 % 2/15 and 8/15 99,999 99,999 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 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 (2) 3/5/2020 2/20/2029 Various Monthly 443,930 436,004 Other debt (3) 668 751 Total debt principal, excluding finance leases 7,983,572 7,937,291 Plus: Finance lease liabilities (4) 80,436 87,161 Less: Unamortized debt discount, net ( 14,814 ) ( 15,005 ) Less: Unamortized deferred financing costs ( 37,079 ) ( 39,620 ) Less: Unamortized purchase accounting fair value adjustment and other ( 123,167 ) ( 125,866 ) Total debt 7,888,948 7,843,961 Less: Current maturities of long-term debt, net of unamortized debt discount ( 322,070 ) ( 320,612 ) Long-term debt $ 7,566,878 $ 7,523,349 _________________ (1) Interest rate as of March 31, 2024 . Interest on the 2020 Receivables Facility is primarily based on the Secured Overnight Financing Rate (“SOFR”) + 0.95 % and Cost of Funds (“COF”) + 0.85 %. (2) Maturity date for the 2020 Receivables Facility represents the final maturity date of current loans borrowed under the facility. (3) Other debt primarily consists of vehicle loans at various interest rates and maturities. (4) Refer to Note 13 “Leases” for additional information regarding the Company’s finance leases. As of March 31, 2024, 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 three months ended March 31, 2024 were as follows: First Lien Credit Agreement The Company’s first lien credit agreement, dated as of July 1, 2015 (together with subsequent amendments and restatements, the “First Lien Credit Agreement”), contains a term loan (the “First Lien Term Loan B due 2030”) and the First Lien Revolving Credit Facility. During the three months ended March 31, 2024, the Company borrowed $ 95 million and repaid $ 45 million under the First Lien Revolving Credit Facility; and as of March 31, 2024, the available borrowing capacity was $ 525 million. During the three months ended March 31, 2023, there were no borrowings or repayments under the First Lien Revolving Credit Facility. Subsequent Event - The Company amended and restated the First Lien Credit Agreement, which reduced the interest rate on the First Lien Term Loan B due 2030 from Term SOFR + 2.50 % to Term SOFR + 2.25 %. 17 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Other than as described above, the loans under the amended and restated First Lien Credit Agreement continue to have the same terms as provided under the existing First Lien Credit Agreement and the parties to the amended and restated First Lien Credit Agreement continue to have the same obligations set forth in the existing First Lien Credit Agreement. First Lien Notes due 2024 Redemption Subsequent Event - In April 2024, the Company redeemed the remaining outstanding principal balance of $ 100 million of the First Lien Notes due 2024, excluding accrued and unpaid interest, using proceeds from the Company’s First Lien Revolving Credit Facility. 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 (the “SPE”), which then grants a security interest in those retail installment contract receivables as collateral for cash borrowings. In March 2024, the Company amended the agreement governing the 2020 Receivables Facility, pursuant to which the uncommitted revolving period was extended from March 2024 to April 2024. As of March 31, 2024, the Company had an uncommitted available borrowing capacity under the 2020 Receivables Facility of approximately $ 56 million. Subsequent Event - In April 2024, the Company amended the agreement governing the 2020 Receivables Facility, pursuant to which, among other things, the borrowing capacity was increased from $ 500 million to $ 550 million and the uncommitted revolving period was extended from April 2024 to April 2025. Variable Interest Entity The SPE meets the definition of a variable interest entity (“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. The 2020 Receivables Facility did not have a material impact to the Condensed Consolidated Statements of Operations during the periods presented. 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”). As of March 31, 2024, the Company has not borrowed any amounts under the Solar Receivable Facility, and given the ADT Solar Exit, the Company does not expect to borrow any amounts under the Solar Receivables Facility. The Solar Receivables Facility’s uncommitted revolving period will expire in August 2024, unless terminated beforehand. 7. 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. 18 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For interest rate swap contracts that are: • Not designated as cash flow hedges: Unrealized gains and losses are recognized in interest expense, net, and other income (expense) depending on the nature of the underlying that the swaps are economically hedging. • 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. The cash flows associated with interest rate swap contracts that were entered into with the intention of offsetting the economic overhedged position of a portion of our existing interest rate swaps are reflected as cash flows from investing activities. Interest Rate Swaps As of March 31, 2024 and December 31, 2023, the Company’s interest rate swaps consisted of the following (in thousands) : Execution Maturity Designation Notional Amount October 2019 September 2026 Not designated $ 2,800,000 March 2023 (1) March 2028 Not designated 100,000 April 2023 (1) March 2028 Not designated 200,000 December 2023 (2) September 2026 Not designated 700,000 Total notional amount $ 3,800,000 _________________ (1) Interest rate swaps entered into to partially hedge the Term Loan A Facility. (2) Interest rate swaps entered into to offset the excess notional interest rate swaps as a result of the partial redemption of the First Lien Term Loan due 2026. The changes in fair value associated with these swaps and the over-hedged swaps are reflected in other income (expense). Classification and Fair Value of Interest Rate Swaps (in thousands) March 31, 2024 December 31, 2023 Prepaid expenses and other current assets $ 82,423 $ 74,974 Other assets $ 88,996 $ 76,493 Accrued expenses and other current liabilities $ 7,266 $ 5,312 Other liabilities $ 256 $ 1,325 Unrealized Gain (Loss) on Interest Rate Swaps Three Months Ended March 31, Statement of Operations Classification (in thousands) 2024 2023 Interest expense, net $ 16,747 $ ( 32,516 ) Other income (expense) $ ( 6,601 ) $ — 19 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Cash Flow Hedges Reclassifications out of AOCI Three Months Ended March 31, ( in thousands ) 2024 2023 Interest expense, net $ 2,129 $ 5,449 Income tax (benefit) expense $ ( 512 ) $ ( 1,314 ) As of March 31, 2024 and December 31, 2023, AOCI, net of tax, related to previously designated cash flow hedges was $ 12 million and $ 13 million, respectively. As of March 31, 2024, 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. 8. INCOME TAXES Unrecognized Tax Benefits The Company’s unrecognized tax benefits relate to tax years that remain subject to audit by the taxing authorities in the U.S. federal, state and local, and foreign jurisdictions. During the three months ended March 31, 2024, the Company did not have a material change to its unrecognized tax benefits from those disclosed in the 2023 Annual Report. Based on the current status of its income tax audits, the Company expects approximately $ 29 million 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. The Company’s income tax expense for the three months ended March 31, 2024 was $ 31 million, resulting in an effective tax rate for the period of 25.1 %. The effective tax rate primarily represents the federal statutory rate of 21.0 %, a state tax rate, net of federal benefits, of 5.5 %, partially offset by a favorable impact of 2.1 % related to a decrease in unrecognized tax benefits related to prior years. The Company’s income tax benefit for the three months ended March 31, 2023 was $ 74 million, resulting in an effective tax rate for the period of 37.3 %. The effective tax rate primarily represents the federal statutory tax rate of 21.0 %, a state tax rate, net of federal benefits, of 8.9 % and unfavorable impacts of 5.6 % related to the Solar goodwill impairment, partially offset by favorable impacts of 5.0 % from federal tax credits. 9. EQUITY Common Stock and Class B Common Stock The Company has two classes of common stock, including Common Stock and Class B Common Stock. During the three months ended March 31, 2024, shares issued resulted from the vesting of restricted stock units (“RSUs”) and stock option exercises related to share-based compensation awards. Share Repurchase Plan On January 24, 2024, the Company's Board of Director's announced a share repurchase plan (the “Share Repurchase Plan”), pursuant to which the Company is authorized to repurchase, through January 29, 2025, up to a maximum aggregate amount of $ 350 million of shares of the Company's Common Stock under this Share Repurchase Plan. The Company may effect these repurchases pursuant to one or more open market or private transactions, including pursuant to a plan that qualifies for the affirmative defense provided by Rule 10b5‐1 under the Exchange Act, or pursuant to one or more accelerated share repurchase agreements. 20 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The Company is not obligated to repurchase any of its shares of Common Stock, and the timing and amount of any repurchases will depend on legal requirements, market conditions, stock price, the availability of the safe harbor provided by Rule 10b-18 under the Exchange Act, alternative uses of capital, and other factors. During the three months ended March 31, 2024, the Company repurchased and retired 15 million shares of its Common Stock under the Share Repurchase Plan and paid approximately $ 93 million (or approximately $ 6.22 per share). As of March 31, 2024, the Company had approximately $ 257 million remaining under the Share Repurchase Plan. Refer to Note 14 “Related Party Transactions” for further information. Dividends (in thousands, except per share data) Common Stock Class B Common Stock Declaration Date Record Date Payment Date Per Share Aggregate Per Share Aggregate Three Months Ended March 31, 2024 1/24/2024 3/14/2024 4/4/2024 $ 0.055 $ 47,059 $ 0.055 $ 3,011 Three Months Ended March 31, 2023 2/28/2023 3/16/2023 4/4/2023 $ 0.035 $ 30,342 $ 0.035 $ 1,916 Subsequent Event - On April 25, 2024, the Company announced a dividend of $ 0.055 per share to holders of Common Stock and Class B Common Stock of record on June 13, 2024, which will be paid on July 9, 2024. Accumulated Other Comprehensive Income (Loss) There were no material reclassifications out of AOCI. Refer to Note 7 “Derivative Financial Instruments” for AOCI reclassifications associated with cash flow hedges. 10. SHARE-BASED COMPENSATION RSUs During the first quarter of 2024, the Company completed its annual long-term incentive plan equity award to employees and granted approximately 3.9 million RSUs under its 2018 Omnibus Incentive Plan, as amended (the “2018 Plan”) with a grant date fair value of $ 6.51 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. Options During the first quarter of 2024, the Company granted approximately 6.8 million options under the 2018 Plan. These options are service-based awards with a three -year graded vesting period from the date of grant and have an exercise price of $ 6.51 , which is equal to the closing price per share of the Company’s common stock on the date of grant, and a contractual term of ten years from the grant date. The weighted-average grant date fair value for the options granted was $ 2.56 . The Company used a binomial lattice model to determine the grant date fair value for options granted and included the following assumptions: Expected exercise term (years) 7 Expected volatility (1) 49.9 % Expected dividend yield (2) 3.4 % Risk-free interest rate (3) 4.0 % _________________ (1) Estimated using historical and implied stock price volatility of the Company. (2) Calculated by taking the annual dividend run-rate and dividing by the stock price at date of grant. (3) Based on the U.S. Treasury yield curve. 21 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 11. 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 March 31, in thousands, except per share amounts 2024 2023 Allocation of income (loss) from continuing operations - basic $ 86,041 $ ( 119,130 ) Dilutive effect 3,169 — Allocation of income (loss) from continuing operations - diluted $ 89,210 $ ( 119,130 ) Allocation of income (loss) from discontinued operations, net of tax - basic $ 18 $ 7,466 Dilutive effect — — Allocation of income (loss) from discontinued operations, net of tax - diluted $ 18 $ 7,466 Weighted-average shares outstanding - basic 855,893 854,299 Dilutive effect (1) 62,501 — Weighted-average shares outstanding - diluted 918,394 854,299 Income (loss) from continuing operations per share - basic $ 0.10 $ ( 0.14 ) Income (loss) from continuing operations per share - diluted $ 0.10 $ ( 0.14 ) Income (loss) per share from discontinued operations, net of tax - basic $ — $ 0.01 Income (loss) per share from discontinued operations, net of tax - diluted $ — $ 0.01 _________________ (1) During the three months ended March 31, 2024, 17 million shares of Common Stock that would be dilutive were excluded from the diluted earnings per share calculations because their effects would have been anti-dilutive. During the three months ended March 31, 2023, all potential shares of Common Stock that would be dilutive were excluded from the diluted earnings per share calculations because their effects would have been anti-dilutive. 22 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Class B Common Stock Three Months Ended March 31, in thousands, except per share amounts 2024 2023 Allocation of net income (loss) from continuing operations - basic $ 5,491 $ ( 7,651 ) Dilutive effect ( 158 ) — Allocation of net income (loss) from continuing operations - diluted $ 5,333 $ ( 7,651 ) Allocation of income (loss) from discontinued operations, net of tax - basic $ 1 $ 478 Dilutive effect — — Allocation of income (loss) from discontinued operations, net of tax - diluted $ 1 $ 478 Weighted-average shares outstanding - basic 54,745 54,745 Dilutive effect (1) — — Weighted-average shares outstanding - diluted 54,745 54,745 Net income (loss) from continuing operations per share - basic $ 0.10 $ ( 0.14 ) Net income (loss) from continuing operations per share - diluted $ 0.10 $ ( 0.14 ) Income (loss) per share from discontinued operations, net of tax - basic $ — $ 0.01 Income (loss) per share from discontinued operations, net of tax - diluted $ — $ 0.01 ________________ (1) There were no potential shares of Class B Common Stock during the periods presented. 12. COMMITMENTS AND CONTINGENCIES Contractual Obligations There have been no significant changes to the Company’s contractual obligations as compared to December 31, 2023, except as discussed below: 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 toward joint marketing, customer acquisition, training of the Company’s employees, and product technology updates related to the Google Devices and Services. In August 2022, the Company and Google executed an amendment to the Google Commercial Agreement, pursuant to which Google has agreed to commit an additional $ 150 million to fund growth, data and insights, product innovation and technology advancements, customer acquisition, and marketing, as mutually agreed by the Company and Google, (together with the initial amounts, the “Google Success Funds”). During the three months ended March 31, 2024 and 2023, $ 7.4 million and $ 12.5 million, respectively, of the Google Success Funds were approved for reimbursement to the Company for certain joint marketing and customer acquisition expenses incurred by the Company. Google Cloud Agreement Addendum In December 2023, the Company and Google entered into an addendum to the Company’s existing agreement with Google for using Google cloud services (the “Google Cloud Agreement Addendum”), pursuant to which Google has agreed to provide certain credits, discounts, and other incentives for use of the Google Cloud Platform to the Company, and the Company has committed to purchasing $ 200 million of Google Cloud Platform services over seven years (through December 2030), with 23 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) $ 35 million in the first two years , $ 65 million in the next two years after that, and $ 100 million in the last three years of the commitment. The Company may elect to cancel the commitment in return for a cancellation fee of 30 % of the total remaining commitment amount and loss of any discounts, remaining credits, or other incentives provided under the Google Cloud Agreement Addendum. During the three months ended March 31, 2024, the Company made purchases toward this commitment of $ 5 million. Other Commitments During the fourth quarter of 2023, the Company entered into an agreement with one of its vendors to purchase at least $ 190 million of security system equipment and components through March 2025. This commitment is also satisfied through purchases made by the Company’s dealer network. During the three months ended March 31, 2024, purchases toward this commitment were $ 43 million. Guarantees In the normal course of business, the Company is liable for contract completion and product performance. As of March 31, 2024 and December 31, 2023, the Company’s guarantees primarily relate to standby letters of credit related to its insurance programs and totaled $ 78 million for both periods, 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 2023 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 March 31, 2024 and December 31, 2023, the Company’s accrual for ongoing claims and lawsuits within the scope of an insurance program totaled $ 104 million and $ 110 million, respectively. The Company’s accrual related to ongoing claims and lawsuits not within the scope of an insurance program is not material. 24 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 13. LEASES Company as Lessee As part of normal operations, the Company leases real estate, vehicles, and equipment. Right-of-Use Assets and Lease Liabilities (in thousands) March 31, 2024 December 31, 2023 Presentation and Classification: Operating Current Prepaid expenses and other current assets $ 71 $ 75 Operating Non-current Other assets 82,447 91,725 Finance Non-current Property and equipment, net (1) 75,001 82,803 Total right-of-use assets $ 157,519 $ 174,603 Operating Current Accrued expenses and other current liabilities $ 16,672 $ 15,979 Finance Current Current maturities of long-term debt 28,893 33,934 Operating Non-current Other liabilities 81,028 84,695 Finance Non-current Long-term debt 51,543 53,227 Total lease liabilities $ 178,136 $ 187,835 _________________ (1) Finance right-of-use assets are recorded net of accumulated depreciation, which was approximately $ 57 million and $ 60 million as of March 31, 2024 and December 31, 2023, respectively. Lease Cost Three Months Ended March 31, ( in thousands ) 2024 2023 Operating lease cost $ 6,728 $ 8,102 Finance lease cost: Amortization of right-of-use assets 5,281 5,210 Interest on lease liabilities 1,205 726 Variable lease costs 7,744 14,209 Total lease cost $ 20,958 $ 28,247 Right-of-Use Assets Obtained in Exchange for Lease Obligations (1) Three Months Ended March 31, ( in thousands ) 2024 2023 Operating leases $ 3,061 $ 2,332 Finance leases $ 10,403 $ 9,222 _________________ (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. 25 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) For transactions in which (i) the timing and pattern of transfer is the same for the lease and non-lease components and (ii) the lease component would be classified as an operating lease if accounted for separately, the Company applies the practical expedient to aggregate the lease and non-lease components and accounts for the combined transaction based upon its predominant characteristic, which is the non-lease component. The Company accounts for the combined component as a single performance obligation under the applicable revenue guidance and recognizes the underlying assets within subscriber system assets, net. 14. 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 Offering and Share Repurchase On March 6, 2024, the Company and certain entities managed by affiliates of Apollo Global Management, Inc. (the “Selling Stockholders”) entered into an underwriting agreement (the “Underwriting Agreement”) with Morgan Stanley & Co. LLC and Barclays Capital Inc., as representatives of the underwriters named therein, including Apollo Global Securities, LLC, an affiliate of Apollo (collectively, the “Underwriters”), in connection with the offer and sale by the Selling Stockholders (the “Offering”) of 65 million shares of the Company’s Common Stock, and, at the option of the Underwriters, up to an additional 9.75 million shares of Common Stock (the “Underwriters’ Option”). As part of the Offering, the Company purchased 15 million shares of Common Stock under its Share Repurchase Plan from the Underwriters (the “Share Repurchase”). The Company paid approximately $ 93 million (or approximately $ 6.22 per share) for the Share Repurchase, which was the same per share price paid by the Underwriters to the Selling Stockholders. The repurchase is reflected as a reduction to additional paid-in-capital and as a financing cash outflow. The Offering and the Share Repurchase closed on March 11, 2024. On March 15, 2024, the Underwriters exercised the Underwriters’ Option in full, which subsequently closed on March 19, 2024. The Company did not pay any underwriting fees in connection with the Share Repurchase, including on behalf of the Selling Stockholders or otherwise. All the shares in the Offering were sold by the Selling Stockholders. The Company did not receive any of the proceeds from the sale of shares by the Selling Stockholders in the Offering. Other During the three months ended March 31, 2023, the Company incurred fees to Apollo of $ 1 million related to Apollo’s performance of placement agent services related to the initial funding of the Term Loan A Facility. State Farm State Farm owns approximately 15 % of the Company’s issued and outstanding common stock, and as a result, is a related party. In October 2022, 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”) in connection with State Farm’s strategic investment in ADT. Pursuant to the State Farm Development Agreement, 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”), of which the Company has received $ 100 million. Amounts held by the Company in the Opportunity Fund will be restricted until the Company uses the funds, as agreed upon with State Farm, in accordance with the State Farm Development Agreement. As of March 31, 2024 and December 31, 2023, the balance in the portion of the Opportunity Fund held by the Company was $ 92 million and $ 94 million, respectively. During the three months ended March 31, 2024 and 2023, the Company made payments from the Opportunity Fund of $ 3 million and $ 2 million, respectively. Interest earned on the Opportunity Fund was not material. 26 ADT INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Sunlight Financial LLC ADT Solar used Sunlight Financial LLC (“Sunlight”), an entity previously affiliated with Apollo, to access certain loan products for ADT Solar customers. As of December 2023, Sunlight was no longer affiliated with Apollo, and as a result, was no longer a related party. During the three months ended March 31, 2023, total loans funded by Sunlight were $ 45 million, and the Company incurred financing fees of $ 6 million. 27