ADT Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Table of Contents • Introduction • 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 INTRODUCTION 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.” 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 2023 Annual Report. BUSINESS AND BASIS OF PRESENTATION Our Business ADT (or “we,” “our,” and “us”), provides security, interactive, and smart home solutions to consumer and small business customers in the U.S. As of March 31, 2024, we served approximately 6.4 million security monitoring service subscribers. Our mission is to empower people to protect and connect what matters most with safe, smart, and sustainable solutions, delivered through innovative offerings, unrivaled safety, and a premium experience because we believe that everyone deserves to feel safe. Basis of Presentation We report financial and operating information 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. Business Updates ADT Solar Exit On January 19, 2024, after a strategic review of the business and continued macroeconomic and industry pressures, our Board of Directors approved a plan to fully exit the residential solar business. The Company discontinued all sales and marketing activities during the first quarter and expects to discontinue substantially all field operations by the end of the second quarter. 28 During the three months ended March 31, 2024, we incurred aggregate charges of $75 million, related to (a) employee separation costs of $11 million, (b) long-lived asset impairments and write-off of deferred implementation costs associated with cloud computing arrangements of $20 million, (c) contract termination charges of $5 million, (d) the write-down and disposition of inventory on hand of $15 million, and (e) other charges of $24 million primarily related to charges associated with the disposition of the existing installation pipeline. We expect to incur up to approximately an additional $35 million associated with the ADT Solar Exit. Additionally, during the three months ended March 31, 2024, we paid $11 million, and we expect to spend an additional $40 million - $60 million, associated with the ADT Solar Exit. The estimated charges and cash expenditures resulting from these actions could change materially, and we may incur additional charges and cash expenditures due to various factors including unknown or unforeseen costs as part of these actions. Commercial Divestiture As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies” and Note 4 “Divestitures,” we divested our Commercial Business during the fourth quarter of 2023. 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. The Company’s reported operating metrics, gross customer revenue attrition and recurring monthly revenue (as defined and discussed below), have been recast for any period prior to the sale to reflect only the CSB segment. Income received in connection with the Commercial TSA is recognized in other income (expense), and the expenses incurred by the Company to support the transition are recorded based on the nature of the expense. During 2023, we utilized a significant portion of our net operating losses (“NOLs”) to offset the gain generated from the sale of the Commercial Business. As of December 31, 2023, we disclosed that we expect to utilize our remaining NOLs during 2024. The Company expects to become a federal cash taxpayer in 2024 or 2025 depending on future losses generated by the business, specifically with regard to the ADT Solar Exit. Unless otherwise noted, our results of operations discussed below relate to continuing operations and may be impacted by the Commercial Divestiture. 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 approximately two years. 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. We have been experiencing 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. 29 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 have experienced, and we expect to continue to experience, an increase in the proportion of ADT self set-up customers, which are considered outright sales and typically have lower monthly recurring fees than our professional installations but we believe will allow us to grow our subscriber base through access to the fast-growing do-it-yourself (“DIY”) market. 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. As part of our response to changes or pressures in the current 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. 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.” 30 RESULTS OF OPERATIONS Three Months Ended March 31, (in thousands, except as otherwise indicated) 2024 2023 $ Change Revenue: Monitoring and related services $ 1,062,652 $ 1,028,634 $ 34,018 Security installation, product, and other 127,020 103,842 23,178 Solar installation, product, and other 19,639 144,835 (125,196) Total revenue 1,209,311 1,277,311 (68,000) Cost of revenue (exclusive of depreciation and amortization shown separately below) : Monitoring and related services 154,713 161,788 (7,075) Security installation, product, and other 39,592 29,836 9,756 Solar installation, product, and other 41,522 98,344 (56,822) Total cost of revenue 235,827 289,968 (54,141) Selling, general, and administrative expenses 398,453 393,374 5,079 Depreciation and intangible asset amortization 334,353 362,351 (27,998) Merger, restructuring, integration, and other 45,182 15,537 29,645 Goodwill impairment — 241,630 (241,630) Operating income (loss) 195,496 (25,549) 221,045 Interest expense, net (88,931) (171,302) 82,371 Other income (expense) 15,622 (1,190) 16,812 Income (loss) from continuing operations before income taxes and equity in net earnings (losses) of equity method investee 122,187 (198,041) 320,228 Income tax benefit (expense) (30,655) 73,937 (104,592) Income (loss) from continuing operations before equity in net earnings (losses) of equity method investee 91,532 (124,104) 215,636 Equity in net earnings (losses) of equity method investee — (2,677) 2,677 Income (loss) from continuing operations 91,532 (126,781) 218,313 Income (loss) from discontinued operations, net of tax 19 7,944 (7,925) Net income (loss) $ 91,551 $ (118,837) $ 210,388 Key Performance Indicators: (1) RMR $ 353,274 $ 344,417 $ 8,857 Gross customer revenue attrition (percent) 13.1% 12.9% N/A* Adjusted EBITDA (2) $ 614,190 $ 579,486 $ 34,704 _______________________ (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. Revenue Revenue, as compared to the prior period, primarily reflects: • CSB Monitoring and related services (“M&S Revenue”) : higher recurring revenue of $34 million primarily driven by an increase in average prices. • CSB Security installation, product, and other : (i) an increase in the amortization of deferred subscriber acquisition revenue of $14 million associated with customers under a Company-owned model, as well as (ii) an increase in installation revenue of $9 million primarily driven by a higher volume of outright sales transactions and higher installation revenue per unit associated with new customers under the outright sales transaction model. • Solar installation, product, and other : fewer sales and installations as a result of the ADT Solar Exit. 31 The increase in RMR, as compared to the prior period, was primarily driven by an increase in average prices on new and existing subscribers. Gross customer revenue attrition, as compared to the prior period, increased primarily due to higher non-payment disconnects partially offset by a decrease in relocations. Cost of Revenue Cost of revenue, as compared to the prior period, primarily reflects: • CSB: an increase in installation costs due to a higher volume of outright sales transactions partially offset by a decrease in monitoring and related service costs due to a lower volume of in-person service tickets as a result of our Virtual Assistance Program. • Solar: a decrease in installation costs primarily due to fewer sales and installations as a result of the ADT Solar Exit, including $21 million primarily associated with the write-down and disposition of inventory. Selling, General, and Administrative Expenses During the three months ended March 31, 2024, the increase in SG&A, as compared to the prior period, was primarily driven by: • an increase of $13 million in CSB selling costs primarily related to the amortization of deferred subscriber acquisition costs and commissions and • an increase of $11 million in the CSB allowance for credit losses primarily related to residential customers, partially offset by • a decrease in Solar of $18 million, which includes a decrease associated with reduced operations offset by impairment charges associated with the ADT Solar Exit. Depreciation and Intangible Asset Amortization During the three months ended March 31, 2024, 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 $32 million primarily related to certain assets acquired as part of the acquisition of The ADT Security Corporation in 2016, partially offset by an increase in the amortization of acquired customer contracts of $7 million. Merger, restructuring, integration, and other During the three months ended March 31, 2024, merger, restructuring, integration, and other primarily includes asset impairments and other write-offs, employee separation costs, and other charges associated with the ADT Solar Exit. Refer to Note 4 “Divestitures” for additional information. During the three months ended March 31, 2023, merger, restructuring, integration, and other primarily includes restructuring costs primarily related to certain facility exits, as well as integration and third-party costs related to the strategic optimization of our Solar business operations following the acquisition of ADT Solar. Goodwill Impairment During the three months ended March 31, 2024, we did not record any goodwill impairment charges. During the three months ended March 31, 2023, we recorded goodwill impairment charges associated with our Solar reporting unit of $242 million as a result of then current macroeconomic conditions, including the impact of rising interest rates and financial market conditions on the Company’s third-party lenders and customer demand, as well as ADT Solar’s underperformance of operating results in the first quarter of 2023 relative to expectations. Interest Expense, Net During the three months ended March 31, 2024, the decrease in interest expense, net, as compared to the prior year period, was primarily driven by (i) an increase in unrealized gains (losses) of $49 million on our interest rate swaps and (ii) lower interest expense primarily related to lower principal amounts outstanding on our First Lien Term Loan due 2030 and our ADT Notes due 2024. 32 Other Income (Expense) During the three months ended March 31, 2024, the increase in other income (expense), as compared to the prior period, was primarily due to income received under the Commercial TSA. Income Tax Benefit (Expense) During the three months ended March 31, 2024, income tax expense impacted our annual effective tax rate primarily as a result of 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. During the three months ended March 31, 2023 income tax benefit impacted our annual effective tax rate primarily as a result of 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. Refer to Note 8 “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 2023 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. 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. 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 (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. There are material limitations to using Adjusted EBITDA as it does not include certain significant items, including interest, taxes, depreciation and amortization, and other adjustments which directly affect our income (loss) from continuing operations (the most comparable GAAP measure). These limitations are best addressed by considering the economic effects of the excluded items independently and by considering Adjusted EBITDA in conjunction with income (loss) from continuing operations as calculated in accordance with GAAP. 33 The table below reconciles Adjusted EBITDA to income (loss) from continuing operations: Three Months Ended March 31, (in thousands) 2024 2023 $ Change Income (loss) from continuing operations $ 91,532 $ (126,781) $ 218,313 Interest expense, net 88,931 171,302 (82,371) Income tax expense (benefit) 30,655 (73,937) 104,592 Depreciation and intangible asset amortization 334,353 362,351 (27,998) Amortization of deferred subscriber acquisition costs 54,605 44,232 10,373 Amortization of deferred subscriber acquisition revenue (83,376) (69,698) (13,678) Share-based compensation expense 7,971 12,774 (4,803) Merger, restructuring, integration, and other (1) 45,182 15,537 29,645 Goodwill impairment (2) — 241,630 (241,630) Other solar exits costs (3) 38,370 — 38,370 Other, net (4) 5,967 2,076 3,891 Adjusted EBITDA (from continuing operations) $ 614,190 $ 579,486 $ 34,704 ________________ (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 our 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.” Adjusted EBITDA in total and by segment are set forth below. As noted above, Adjusted EBITDA is our segment profit measure pursuant to GAAP and is therefore not a non-GAAP financial measure with respect to our segments. Three Months Ended March 31, (in thousands) 2024 2023 $ Change CSB $ 637,691 $ 590,031 $ 47,660 Solar (23,501) (10,545) (12,956) Adjusted EBITDA (from continuing operations) $ 614,190 $ 579,486 $ 34,704 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. CSB: During the three months ended March 31, 2024, the increase, as compared to the prior period, was primarily due to: • higher M&S Revenue, net of the associated costs, of $43 million, • higher other income of $20 million, including TSA income, partially offset by • higher selling, general, and administrative expenses, excluding commissions, of $15 million, including higher provision for credit losses. Solar: During the three months ended March 31, 2024, respectively, the decrease, as compared to the prior period, was primarily due to: • lower installation revenue, net of the associated costs and commissions, of $36 million, partially offset by • lower selling, general and administrative expenses, excluding commissions, of $22 million. 34 LIQUIDITY AND CAPITAL RESOURCES Liquidity and capital resources primarily consisted of the following: (in thousands) March 31, 2024 Cash and cash equivalents $ 4,041 Restricted cash and restricted cash equivalents $ 114,655 Availability under First Lien Revolving Credit Facility $ 525,000 Uncommitted available borrowing capacity under 2020 Receivables Facility $ 56,070 Carrying amount of total debt outstanding, including finance leases $ 7,888,948 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, potential share repurchases under our Share Repurchase Plan, 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. 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. 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 2023 Annual Report, except as discussed below. Share Repurchase Plan On January 24, 2024, the Company's Board of Directors announced the 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 the Share Repurchase Plan. As of March 31, 2024, we have approximately $257 million remaining under the Share Repurchase Plan. ADT Solar Exit During the three months ended March 31, 2024, we paid $11 million, and we expect to spend an additional $40 million - $60 million, associated with the ADT Solar Exit Other Contractual Obligations As discussed in Note 12 “Commitments and Contingencies,” during the three months ended March 31, 2024, we made purchases toward our commitment under the Google Cloud Agreement of $5 million. In addition, during the three months ended March 31, 2024, purchases toward our commitment to one of our vendors to purchase at least $190 million of security system equipment and components were $43 million. 35 Long-Term Debt Significant changes and activity related to our long-term debt since our 2023 Annual Report are discussed below. Refer to Note 6 “Debt” for further discussion on our debt agreements and activity. First Lien Credit Agreement During the three months ended March 31, 2024, we borrowed $95 million and repaid $45 million under the First Lien Revolving Credit Facility. In April 2024, we amended and restated the First Lien Credit Agreement, which reduced the interest rate on our First Lien Term Loan B due 2030 from Term SOFR +2.50% to Term SOFR +2.25%. First Lien Notes due 2024 Redemption In April 2024, we redeemed the remaining outstanding principal balance of $100 million of our First Lien Notes due 2024, excluding accrued and unpaid interest, using proceeds from the First Lien Revolving Credit Facility. 2020 Receivables Facility In March 2024, we 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 outstanding balance was $444 million. In April 2024, we 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. 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 March 31, 2024, we have not borrowed any amounts under the Solar Receivable Facility, and given the ADT Solar Exit, we do 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. Debt Covenants As of March 31, 2024, 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 three months ended March 31, 2024 and 2023, we declared aggregate dividends of $47 million ($0.055 per share) and $30 million ($0.035 per share) on our Common Stock, respectively, and $3 million ($0.055 per share) and $2 million ($0.035 per share) on our Class B Common Stock, respectively. On April 25, 2024, we 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. 36 Cash Flow Analysis The amounts and discussion below includes cash flows from both continuing operations and discontinued operations consistent with the presentation on the Statements of Cash Flows for periods prior to the Commercial Divestiture. Three Months Ended March 31, (in thousands) 2024 2023 $ Change Net cash provided by (used in): Operating activities $ 363,802 $ 306,640 $ 57,162 Investing activities $ (300,070) $ (336,040) $ 35,970 Financing activities $ (74,986) $ (40,628) $ (34,358) Cash Flows from Operating Activities The increase in net cash provided by operating activities, as compared to the prior period, was primarily due to a decrease in cash interest of $54 million primarily related to reduced principal balances on our First Lien Term Loan due 2030 and our ADT Notes due 2024 and lower payroll-related payments, partially offset by results of the Commercial Business included only in the prior period due to the Commercial Divestiture. 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. 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 subscriber system assets expenditures of $19 million due to fewer adds and • a decrease in purchases of property, plant, and equipment of $19 million. Cash Flows from Financing Activities The increase in net cash used in financing activities, as compared to the prior period, was primarily due to: • share repurchases during the current period of $93 million, partially offset by • an increase in net borrowings on our long-term debt of $46 million primarily related to our First Lien Revolving Credit Facility and • an increase in proceeds from our interest rate swaps of $8 million. CRITICAL ACCOUNTING ESTIMATES We disclosed our critical accounting estimates in our 2023 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 2023 Annual Report. 37 CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains certain information that may constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and are made in reliance on the safe harbor protections provided thereunder. While we have specifically identified certain information as being forward-looking in the context of its presentation, we caution you that all statements contained in this Form 10-Q that are not clearly historical in nature, including statements regarding the ADT Solar restructuring activities and our subsequent announcement related to the ADT Solar Exit; the Commercial Divestiture; the expected timetable for realizing expected benefits and synergies of the Commercial Divestiture; 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; business prospects; outcomes of regulatory proceedings; market conditions; our ability to deploy our business continuity and disaster plans and procedures to successfully respond to catastrophic events; 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. Any stated or implied outcomes with regards to the foregoing are forward-looking. Without limiting the generality of the preceding sentences, any time we use the words “ expects,” “intends,” “will,” “anticipates,” “believes,” “confident,” “continue,” “propose,” “seeks,” “could,” “may,” “should,” “estimates,” “forecasts,” “might,” “goals,” “objectives,” “targets,” “planned,” “projects,” and, in each case, their negative or other various or comparable terminology, and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. For ADT, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward- looking statements include, without limitation: • our ability to effectively implement our strategic partnership with, commercialize products with, or utilize any of the amounts invested in us by State Farm or provided by State Farm for research and development or other purposes; • our ability to keep pace with rapid technological changes, including the development of our next-generation platform, and industry changes; • our ability to effectively implement our strategic partnership with or utilize any of the amounts invested in us by Google; • the impact of 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; 38 • 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; and • the other factors that are described under the heading “Risk Factors” in our last Annual Report on Form 10-K for the year ended December 31, 2023. 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 2023 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.