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 September 30, 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 As a result of the Commercial Divestiture and ADT Solar Exit, we currently report our results as a single operating and reportable segment, which reflects the business operations of our former CSB segment. All financial information presented in this section has been prepared in U.S. dollars in accordance with GAAP, excluding any non-GAAP measures, and includes the accounts of ADT Inc. and its wholly-owned subsidiaries. All intercompany transactions have been eliminated. Results of our Solar and former Commercial businesses are presented within discontinued operations. 30 Business Updates ADT Solar Exit As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies” and Note 3 “Divestitures,” in January 2024, the Board approved a plan to fully exit the Solar Business. Beginning in the second quarter of 2024, the results of operations and financial position of the Solar Business are classified as discontinued operations in the Company’s Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets, respectively, for all periods presented. Additionally, the cash flows and comprehensive income (loss) of the Solar 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. During the three months ended September 30, 2024, aggregate exit charges incurred were not material. During the nine months ended September 30, 2024, we incurred aggregate exit charges of $88 million, which have been recognized within income (loss) from discontinued operations, net of tax, related to (i) $34 million, associated with the write-down and disposition of inventory and asset impairments, (ii) $29 million, associated with the disposition of the existing installation pipeline, (iii) $13 million, associated with employee separation costs, and (iv) $11 million, associated with contract termination and other charges. Additionally, during the nine months ended September 30, 2024, we paid approximately $21 million in connection with the ADT Solar Exit, primarily related to employee separation and other restructuring costs. We do not expect the remaining charges and cash expenditures to be material. The estimated charges and cash expenditures resulting from the ADT Solar Exit could change materially due to various factors including unknown or unforeseen costs. Our reported operating metrics, gross customer revenue attrition and recurring monthly revenue (as defined and discussed below), were not impacted by the ADT Solar Exit. Commercial Divestiture As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies” and Note 3 “Divestitures,” we divested our Commercial Business during the fourth quarter of 2023. The Commercial Business is presented as a discontinued operation in the Company’s Condensed Consolidated Statements of Operations for all periods presented. Additionally, 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 all periods presented. Our 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 exclude the Commercial Business. Income received in connection with the Commercial TSA is recognized in other income (expense), and the expenses incurred by us to support the transition are recorded based on the nature of the expense. FACTORS AFFECTING OPERATING RESULTS The factors described herein could have a material effect on our business, financial condition, results of operations, cash flows, and key performance indicators. Unless otherwise noted, our results of operations discussed below relate to continuing operations and may be impacted by the ADT Solar Exit and Commercial Divestiture. Generally, a significant upfront investment is required to acquire new subscribers that in turn provide ongoing and predictable recurring revenue generated from our monitoring services and other subscriber-based offerings. 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 31 continue to experience fluctuations in these or other trends in the future as changes in the general macroeconomic environment or housing market develop. Our results are also 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. Beginning in the second quarter of 2024, a growing number of our direct channel new customer adds are outright sales. 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 continue to see a shift toward an increasing proportion of outright sales transactions, which will impact results in future periods when those changes occur. We believe ADT self set-up customers sold under an outright sales model, which typically have lower monthly recurring fees than our professional installations, 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, but not limited to, (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 leveraging technology, 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. Hurricanes and other natural disasters may impact certain areas in which we operate and may result in service, sales, and installation disruptions to certain of our customers. At the end of September 2024, Hurricane Helene made landfall in the southeastern part of the U.S. We determined there were no material financial or business impacts from Hurricane Helene for the quarter ended September 30, 2024. Subsequently, at the beginning of October 2024, Hurricane Milton made landfall in Florida. We are currently evaluating the financial and business impacts Hurricanes Helene and Milton may have on future periods. KEY PERFORMANCE INDICATORS We evaluate our results using certain key performance indicators, including operating metrics such as recurring monthly revenue 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. End-of-Period Recurring Monthly Revenue (“RMR”) RMR is generated by contractual recurring fees for monitoring and other recurring services provided to our 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 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 set-up/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 set-up/DIY customers. 32 We use gross customer revenue attrition to evaluate our 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.” RESULTS OF OPERATIONS Three Months Ended September 30, Nine Months Ended September 30, (in thousands, except as otherwise indicated) 2024 2023 $ Change 2024 2023 $ Change Revenue: Monitoring and related services $ 1,077,550 $ 1,053,456 $ 24,094 $ 3,208,267 $ 3,125,344 $ 82,923 Security installation, product, and other 166,286 126,417 39,869 429,800 355,082 74,718 Total revenue 1,243,836 1,179,873 63,963 3,638,067 3,480,426 157,641 Cost of revenue (exclusive of depreciation and amortization shown separately below) : Monitoring and related services 154,744 148,533 6,211 460,649 452,809 7,840 Security installation, product, and other 67,362 38,863 28,499 151,996 113,921 38,075 Total cost of revenue 222,106 187,396 34,710 612,645 566,730 45,915 Selling, general, and administrative expenses 358,520 346,444 12,076 1,105,523 1,000,861 104,662 Depreciation and intangible asset amortization 335,270 329,653 5,617 1,002,131 1,008,773 (6,642) Merger, restructuring, integration, and other 1,590 9,817 (8,227) 15,094 32,441 (17,347) Operating income (loss) 326,350 306,563 19,787 902,674 871,621 31,053 Interest expense, net (161,830) (146,850) (14,980) (358,980) (401,261) 42,281 Other income (expense) 17,735 661 17,074 44,907 (10) 44,917 Income (loss) from continuing operations before income taxes and equity in net earnings (losses) of equity method investee 182,255 160,374 21,881 588,601 470,350 118,251 Income tax benefit (expense) (50,235) (34,427) (15,808) (166,505) (119,987) (46,518) Income (loss) from continuing operations before equity in net earnings (losses) of equity method investee 132,020 125,947 6,073 422,096 350,363 71,733 Equity in net earnings (losses) of equity method investee — (2,688) 2,688 — (7,103) 7,103 Income (loss) from continuing operations 132,020 123,259 8,761 422,096 343,260 78,836 Income (loss) from discontinued operations, net of tax (4,869) (209,496) 204,627 (111,000) (456,123) 345,123 Net income (loss) $ 127,151 $ (86,237) $ 213,388 $ 311,096 $ (112,863) $ 423,959 Key Performance Indicators: (1) RMR $ 358,881 $ 350,392 $ 8,489 $ 358,881 $ 350,392 $ 8,489 Gross customer revenue attrition (percent) 12.8% 12.9% N/A* 12.8% 12.9% N/A* Adjusted EBITDA (2) $ 658,691 $ 623,445 $ 35,246 $ 1,925,669 $ 1,854,288 $ 71,381 _______________________ (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. * Not applicable. 33 Revenue During the three and nine months ended September 30, 2024, revenue, as compared to the prior periods, primarily reflects: • Monitoring and related services (“M&S Revenue”) : higher recurring revenue of $21 million and $80 million, respectively, primarily driven by an increase in average prices. • Security installation, product, and other : (i) an increase in installation revenue of $29 million and $38 million, respectively, primarily driven by a higher volume of sales transactions with new customers under the outright sales model, as well as (ii) an increase in the amortization of deferred subscriber acquisition revenue of $11 million and $37 million, respectively, associated with customers under the Company-owned model. The increase in RMR, as compared to the prior period, was primarily driven by an increase in average prices on new and existing subscribers as well as the impact of customer accounts purchased from a third party. Gross customer revenue attrition, as compared to the prior period, remained relatively flat and included a decrease in voluntary and other disconnects offset by higher non-payment disconnects. Cost of Revenue During the three and nine months ended September 30, 2024, cost of revenue, as compared to the prior period, reflects an increase in installation and product costs of $28 million and $38 million, respectively, primarily due to a higher volume of outright sales transactions, as well as an increase in monitoring and related service costs during the nine months ended September 30, 2024 of $8 million, primarily due to higher interactive fees and other customer service initiatives. Selling, General, and Administrative Expenses During the three months ended September 30, 2024, as compared to the prior period, SG&A remained relatively flat, and included increased investments in technology, partially offset by improved cost efficiencies. The increase in SG&A during the nine months ended September 30, 2024, as compared to the prior period, was primarily driven by: • an increase in general and administrative costs of $48 million, which includes a current year charge and prior year credit related to legal settlements in an aggregate amount of approximately $35 million, • an increase in the allowance for credit losses of $37 million, as a result of an increase in customer delinquencies, and • an increase in selling costs of $26 million, primarily related to the amortization of deferred subscriber acquisition costs. Depreciation and Intangible Asset Amortization During the three months ended September 30, 2024, as compared to the prior period, depreciation and intangible asset amortization remained relatively flat. During the nine months ended September 30, 2024, as compared to the prior period, depreciation and intangible asset amortization reflects a decrease in the amortization of customer relationship intangible assets of $33 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 $23 million. Merger, Restructuring, Integration, and other During the three and nine months ended September 30, 2024, merger, restructuring, integration, and other decreased $8 million and $17 million, respectively, primarily due to third-party strategic optimization costs incurred during the prior period. Interest Expense, Net During the three months ended September 30, 2024, the increase in interest expense, net, as compared to the prior year period, was primarily driven by: 34 • a decrease in net unrealized gains of $74 million on our interest rate swaps, partially offset by • lower interest expense of $38 million primarily related to lower principal amounts outstanding on our First Lien Term Loan B and the redemption of our Term Loan A Facility and First Lien Notes due 2024 and, • a non-recurring expense of $25 million recorded during the third quarter of 2023 associated with the reclassification from AOCI of historical losses related to certain interest rate swaps for which cash flows were probable of not occurring as a result of the partial redemption of our First Lien Term Loan B. During the nine months ended September 30, 2024, the decrease in interest expense, net, as compared to the prior year period, was primarily driven by: • lower interest expense of $103 million primarily related to lower principal amounts outstanding on our First Lien Term Loan B and the redemption of our Term Loan A Facility and First Lien Notes due 2024, as well as • a non-recurring expense of $25 million as discussed above, partially offset by • a decrease in net unrealized gains of $85 million on our interest rate swaps. Other Income (Expense) During the three and nine months ended September 30, 2024, the increases in other income (expense), as compared to the prior periods, was primarily due to income received under the Commercial TSA of $14 million and $36 million, respectively. Income Tax Benefit (Expense) During the three months ended September 30, 2024, income tax expense was $50 million, resulting in an effective tax rate for the period of 27.6%. This primarily represents the federal statutory tax rate of 21.0%, a state tax rate, net of federal benefits, of 6.2%, and an unfavorable impact from unrecognized tax benefits of 4.0%, partially offset by a favorable impact from a prior year tax return adjustment of 4.0%. During the three months ended September 30, 2023, income tax expense was $34 million, resulting in an effective tax rate for the period of 21.5%. The effective tax rate primarily represents the federal statutory tax rate of 21.0%, and a state tax rate, net of federal benefits, of 5.1%, partially offset by favorable impacts from dispositions of 3.1% and prior year tax return adjustments of 1.2%. During the nine months ended September 30, 2024, income tax expense was $167 million, resulting in an effective tax rate for the period of 28.3%. This primarily represents the federal statutory tax rate of 21.0%, a state tax rate, net of federal benefits, of 5.8%, unfavorable impacts from dispositions of 1.6%, and unrecognized tax benefits of 0.8%, partially offset by a favorable impact from a prior year tax return adjustment of 1.2%. During the nine months ended September 30, 2023, income tax expense was $120 million, resulting in an effective tax rate for the period of 25.5%. The effective tax rate primarily represents the federal statutory tax rate of 21.0%, a state tax rate, net of federal benefits, of 5.8%, and an unfavorable impact from permanent non-deductible items of 1.2%, partially offset by a favorable impact from dispositions of 1.0%. 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. 35 Net Operating Losses 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. We expect to become a federal cash taxpayer in 2025 depending on future losses generated by the business, specifically with regard to the ADT Solar Exit. 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, income (loss) from continuing operations, 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. The table below reconciles Adjusted EBITDA to income (loss) from continuing operations: Three Months Ended September 30, Nine Months Ended September 30, (in thousands) 2024 2023 $ Change 2024 2023 $ Change Income (loss) from continuing operations $ 132,020 $ 123,259 $ 8,761 $ 422,096 $ 343,260 $ 78,836 Interest expense, net 161,830 146,850 14,980 358,980 401,261 (42,281) Income tax expense (benefit) 50,235 34,427 15,808 166,505 119,987 46,518 Depreciation and intangible asset amortization 335,270 329,653 5,617 1,002,131 1,008,773 (6,642) Amortization of deferred subscriber acquisition costs 56,119 47,945 8,174 165,454 138,145 27,309 Amortization of deferred subscriber acquisition revenue (87,980) (77,471) (10,509) (257,538) (220,779) (36,759) Share-based compensation expense 10,107 9,683 424 39,466 30,678 8,788 Merger, restructuring, integration, and other 1,590 9,817 (8,227) 15,094 32,441 (17,347) Other, net (1) (500) (718) 218 13,481 522 12,959 Adjusted EBITDA (from continuing operations) $ 658,691 $ 623,445 $ 35,246 $ 1,925,669 $ 1,854,288 $ 71,381 ________________ (1) During 2024, primarily includes unrealized (gains) / losses on interest rate swaps presented within other income (expense). 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. 36 During the three months ended September 30, 2024, the increase in Adjusted EBITDA, as compared to the prior period, was primarily due to: • higher M&S Revenue, net of the associated costs, of approximately $20 million, and • improved cost efficiencies, including the benefit of $14 million of TSA income, partially offset by increased investments in technology. During the nine months ended September 30, 2024, the increase in Adjusted EBITDA, as compared to the prior period, was primarily due to: • higher M&S Revenue, net of the associated costs, of approximately $81 million, and • higher other income of $51 million, which primarily includes $36 million of TSA income, partially offset by • higher selling, general, and administrative expenses, excluding commissions of $68 million, associated with negative impacts from legal settlements of $35 million, higher provision for credit losses of $37 million, and increased investments in technology, partially offset by improved cost efficiencies. LIQUIDITY AND CAPITAL RESOURCES Liquidity and capital resources primarily consisted of the following: (in thousands) September 30, 2024 Cash and cash equivalents $ 95,338 Restricted cash and restricted cash equivalents $ 109,411 Availability under First Lien Revolving Credit Facility $ 575,000 Uncommitted available borrowing capacity under 2020 Receivables Facility $ 126,882 Carrying amount of total debt outstanding, including finance leases $ 7,721,086 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, bulk account purchases, 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, our Board of Directors announced the Share Repurchase Plan (the “Share Repurchase Plan”), pursuant to which we are authorized to repurchase, through January 29, 2025, up to a maximum aggregate amount of $350 million of shares of our Common Stock under the Share Repurchase Plan. As of September 30, 2024, we have approximately $257 million remaining under the Share Repurchase Plan. 37 Subsequent event - In October 2024, we repurchased 5 million shares of Common Stock at a price per share of $6.40 for an aggregate purchase price of $32 million. As a result, we have approximately $225 million remaining under the Share Repurchase Plan. ADT Solar Exit During the nine months ended September 30, 2024, we paid approximately $21 million associated with the ADT Solar Exit. We do not expect the remaining cash expenditures to be material. Other Contractual Obligations As discussed in Note 11 “Commitments and Contingencies,” during the three and nine months ended September 30, 2024, we made purchases toward our $200 million commitment under the Google Cloud Agreement Addendum of $9 million and $19 million, respectively. In addition, during the three and nine months ended September 30, 2024, purchases toward our commitment to one of our vendors to purchase at least $320 million of security system equipment and components were approximately $44 million and $144 million, respectively. Long-Term Debt Significant changes and activity related to our long-term debt since our 2023 Annual Report are discussed below. Refer to Note 5 “Debt” for further discussion on our debt agreements and activity. First Lien Credit Agreement 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%. In May 2024, we amended and restated the First Lien Credit Agreement, which included the exchange of $143 million principal amount of loans under our Term Loan A Facility for its First Lien Term Loan B due 2030. In addition, later that month, we further amended and restated the First Lien Credit Agreement, pursuant to which we incurred an additional $474 million of outstanding principal under the First Lien Term B Loan due 2030 and used the proceeds used to pay off the remaining outstanding balance of the Term Loan A Facility. Proceeds and repayments of long-term borrowings include the impact of $646 million from the amendments described above. In addition, loss on extinguishment of debt and financing and consent fees were not material as a result of these amendments. During the nine months ended September 30, 2024, we borrowed $325 million and repaid $325 million under the First Lien Revolving Credit Facility. Subsequent event - In October 2024, we amended and restated the First Lien Credit Agreement to extend the maturity date of the First Lien Revolving Credit Facility to October 2029 (as extended, the “Extended First Lien Revolving Credit Facility”), subject to a springing maturity of 91 days prior to the maturity date of certain long-term indebtedness, and obtain an additional $225 million of Extended First Lien Revolving Credit Facility commitments. After giving effect to the amendment, the aggregate amount of commitments under the Extended First Lien Revolving Credit Facility is $800 million. Borrowings under the Extended First Lien Revolving Credit Facility bear interest at a rate equal to either (a) Term SOFR with a floor of zero or (b) a base rate (“Base Rate”) determined by reference to the highest of (i) the federal funds rate plus 0.50% per annum, (ii) the rate of interest per annum last quoted by The Wall Street Journal as the “Prime Rate” in the United States and (iii) the one-month adjusted term SOFR plus 1.00% per annum, in each case, plus an applicable margin of 2.00% per annum for Term SOFR loans and 1.00% per annum for Base Rate loans, subject to two step-downs based on certain specified net first lien leverage ratios. In addition, the amendment reduced the commitment fee in respect of the Extended First Lien Revolving Credit Facility to 0.30% per annum in respect of the unutilized commitments thereunder, subject to two step-downs based on certain specified net first lien leverage ratios. Term Loan A Facility Redemption In May 2024 we exchanged $143 million of loans under our Term Loan A Facility for our First Lien Term Loan B due 2030, as discussed above. In addition, later that month, we redeemed the remaining outstanding principal balance of $474 million of our Term Loan A Facility, excluding accrued and unpaid interest, using proceeds under the First Lien Term Loan B due 2030, as discussed above. As a result, the Term Loan A Facility has been terminated. 38 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. In April 2024, we further 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. In addition, proceeds and repayments of long-term borrowings include the impact of $32 million from the amendments described above. As of September 30, 2024, the outstanding balance was $423 million. Solar Receivables Facility On August 2, 2023, we entered into the Solar Receivables Facility Financing Agreement to finance receivables generated by the installation of residential solar systems, which, among other things, provides for an uncommitted revolving loan facility in the aggregate principal amount of up to $300 million. During August 2024, the Solar Receivables Facility’s uncommitted revolving period expired. We did not borrow any amounts under the Solar Receivables Facility prior to its expiration. Debt Covenants As of September 30, 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 nine months ended September 30, 2024 and 2023, we declared aggregate dividends of $141 million ($0.055 per share per quarter) and $91 million ($0.035 per share per quarter) on our Common Stock, respectively, and $9 million ($0.055 per share per quarter) and $6 million ($0.035 per share per quarter) on our Class B Common Stock, respectively. On October 24, 2024, we announced a dividend of $0.055 per share to holders of Common Stock and Class B Common Stock of record on December 12, 2024, which will be paid on January 9, 2025. Cash Flow Analysis The amounts and discussion below include cash flows from both continuing operations and discontinued operations, as appropriate, consistent with the presentation on the Statements of Cash Flows. Nine Months Ended September 30, (in thousands) 2024 2023 $ Change Net cash provided by (used in): Operating activities $ 1,425,223 $ 1,245,694 $ 179,529 Investing activities $ (1,034,364) $ (988,081) $ (46,283) Financing activities $ (316,060) $ (275,129) $ (40,931) 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 $130 million primarily related to reduced principal balances on our debt, the benefit of lower outflows in the current year related to our Solar business, improved operating performance, and lower employee-related payments. This 39 increase was partially offset by the benefit received in the prior period associated with the results of the former Commercial Business as well as legal settlements during the current and prior period. 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 increase in net cash used in investing activities, as compared to the prior period, was primarily due to: • an increase in dealer generated customer accounts and bulk account purchases of $88 million primarily due to higher bulk account purchases from a third party, and • a $21 million payment associated with the settlement of post-closing adjustments related to the sale of the former Commercial Business, partially offset by • a decrease in subscriber system assets expenditures of $74 million primarily due to a higher volume of outright sales and fewer customer additions. 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, and • an increase in net repayments on our 2020 Receivables Facility of $80 million, partially offset by • a decrease in net repayments on our long-term debt of $122 million primarily related to higher redemptions during the prior period. 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. 40 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 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 Exit and the expected costs and benefits of such exit; the Commercial Divestiture; the expected timetable for realizing expected benefits and synergies of the Commercial Divestiture and ADT Solar Exit including that the costs of the ADT Solar Exit may exceed our best estimates; the integration of strategic bulk purchases of customer accounts; the strategic investment by and long term partnership with State Farm; repurchases of shares of the Company’s common stock under the authorized share repurchase program, anticipated financial performance, including the Company’s ability to achieve its stated guidance metrics and to reduce debt or improve leverage ratios, or to achieve or maintain its long-term leverage goals; 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 “ongoing,” “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. 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 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 information technology, cybersecurity, or data security breaches, including the incidents disclosed in the Current Reports on Form 8-K filed with the SEC on August 8, 2024 (the “August Incident”) and October 7, 2024 (the “October Incident” and together with the August Incident, the “Cybersecurity Incidents”); • the Company's ongoing assessments of the impacts of the Cybersecurity Incidents; the Company's expectations regarding its ability to contain and remediate the Cybersecurity Incidents and to effectively implement counter measures intended to safeguard the Company’s information technology assets and operations; the impact of the Cybersecurity Incidents on the Company's relationships with customers, employees and regulators; the Company’s ability to coordinate effectively with its third party business partner to address the October Incident; legal, reputational and financial risks resulting from the Cybersecurity Incidents; and that any future, or still undetected, cybersecurity 41 related incident, whether an attack, disruption, intrusion, denial of service, theft or other breach, including any such incident related to or arising from ADT’s business partners or other third parties, could result in unauthorized access to, or disclosure of, data, resulting in claims, costs and reputational harm that could negatively affect our actual results of operations or financial condition; • our dependence on third-party providers, suppliers, and dealers to enable us to produce and distribute our products and services in a cost-effective manner that protects our brand; • our ability to successfully implement an equipment ownership model that best satisfies the needs of our customers and to successfully implement and maintain our receivables securitization financing agreement or similar arrangements; • our ability to successfully pursue alternate business opportunities and strategies; • our ability to integrate various companies we have acquired in an efficient and cost-effective manner; • the amount and timing of our cash flows and earnings, which may be impacted by customer, competitive, supplier and other dynamics and conditions; • our ability to maintain or improve margins through business efficiencies; 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.