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ADT Inc. - Quarter Report: 2020 September (Form 10-Q)


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 FORM 10-Q
(Mark One)
☒Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2020
OR
☐Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________
Commission File Number: 001-38352
adt-20200930_g1.jpg
ADT Inc.
(Exact name of registrant as specified in its charter)
Delaware47-4116383
(State or other jurisdiction
of incorporation or organization)		(I.R.S. Employer
Identification No.)
1501 Yamato Road
Boca Raton, Florida 33431
(561) 988-3600
(Address of principal executive offices, including zip code, Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $0.01 per shareADTNew York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x   No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x  No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐Accelerated filer☒
Non-accelerated filer ☐Smaller reporting company☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒
As of October 29, 2020, there were 761,101,931 shares outstanding (excluding 9,611,770 of unvested shares) of the registrant’s common stock, $0.01 par value per share, and 54,744,525 shares outstanding of the registrant’s Class B common stock, $0.01 par value per share.


TABLE OF CONTENTS
Page


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share data) 
September 30, 2020December 31, 2019
Assets
Current assets:
Cash and cash equivalents$489,433 $48,736 
Accounts receivable, net of allowance for credit losses of $64,478 and $44,337, respectively
289,680 287,243 
Inventories, net155,159 104,219 
Work-in-progress45,238 34,183 
Prepaid expenses and other current assets200,401 151,102 
Total current assets1,179,911 625,483 
Property and equipment, net324,201 328,731 
Subscriber system assets, net2,649,718 2,739,296 
Intangible assets, net6,046,728 6,669,645 
Goodwill5,217,275 4,959,658 
Deferred subscriber acquisition costs, net611,334 513,320 
Other assets336,900 247,519 
Total assets$16,366,067 $16,083,652 
Liabilities and stockholders' equity
Current liabilities:
Current maturities of long-term debt$69,035 $58,049 
Accounts payable273,100 241,954 
Deferred revenue341,146 342,359 
Accrued expenses and other current liabilities566,167 477,366 
Total current liabilities1,249,448 1,119,728 
Long-term debt9,675,430 9,634,226 
Deferred subscriber acquisition revenue768,356 673,625 
Deferred tax liabilities1,002,916 1,166,269 
Other liabilities531,441 305,435 
Total liabilities13,227,591 12,899,283 
Commitments and contingencies (See Note 12)
Stockholders' equity:
Preferred stock—authorized 1,000,000 and 250,000 shares of $0.01 par value as of September 30, 2020 and December 31, 2019, respectively; zero issued and outstanding.
— — 
Common stock—authorized 3,999,000,000 shares of $0.01 par value; issued and outstanding shares of 770,723,162 and 753,622,044 as of September 30, 2020 and December 31, 2019, respectively
7,707 7,536 
Class B common stock—authorized 100,000,000 and zero shares of $0.01 par value as of September 30, 2020 and December 31, 2019, respectively; issued and outstanding shares of 54,744,525 and zero as of September 30, 2020 and December 31, 2019, respectively.
547 — 
Additional paid-in capital6,613,866 5,977,402 
Accumulated deficit(3,349,356)(2,742,193)
Accumulated other comprehensive loss(134,288)(58,376)
Total stockholders' equity3,138,476 3,184,369 
Total liabilities and stockholders' equity$16,366,067 $16,083,652 
See Notes to Condensed Consolidated Financial Statements
1


ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
For the Three Months EndedFor the Nine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Monitoring and related services$1,045,677 $1,093,564 $3,133,013 $3,249,401 
Installation and other253,247 207,006 867,050 577,973 
Total revenue1,298,924 1,300,570 4,000,063 3,827,374 
Cost of revenue (exclusive of depreciation and amortization shown separately below)357,895 356,556 1,142,228 1,020,603 
Selling, general and administrative expenses410,933 378,645 1,278,191 1,047,818 
Depreciation and intangible asset amortization473,346 505,832 1,440,239 1,502,574 
Merger, restructuring, integration, and other(6,117)9,800 114,715 23,069 
Goodwill impairment— 45,482 — 45,482 
Loss on sale of business(19)55,489 738 55,489 
Operating income (loss) 62,886 (51,234)23,952 132,339 
Interest expense, net(156,759)(152,431)(569,391)(465,977)
Loss on extinguishment of debt(48,916)(14,532)(114,759)(103,004)
Other income1,992 200 6,572 2,909 
Loss before income taxes(140,797)(217,997)(653,626)(433,733)
Income tax benefit27,699 36,367 133,494 81,576 
Net loss$(113,098)$(181,630)$(520,132)$(352,157)
Net (loss) income per share - basic:
Common stock$(0.15)$(0.25)$(0.68)$(0.47)
Class B common stock$0.05 $— $(0.10)$— 
Weighted-average shares outstanding - basic:
Common stock760,913 739,852 760,203 748,500 
Class B common stock8,331 — 2,797 — 
Net loss per share - diluted:
Common stock$(0.15)$(0.25)$(0.68)$(0.47)
Class B common stock$(0.07)$— $(0.44)$— 
Weighted-average shares outstanding - diluted:
Common stock760,913 739,852 760,203 748,500 
Class B common stock16,640 — 5,587 — 
See Notes to Condensed Consolidated Financial Statements
2


ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
(in thousands)
For the Three Months EndedFor the Nine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Net loss$(113,098)$(181,630)$(520,132)$(352,157)
Other comprehensive income (loss), net of tax:
Cash flow hedges11,607 (5,876)(75,891)(56,075)
Foreign currency translation— (6,340)— 13,711 
Defined benefit pension plans(16)(17)(21)(29)
Total other comprehensive income (loss), net of tax 11,591 (12,233)(75,912)(42,393)
Comprehensive loss$(101,507)$(193,863)$(596,044)$(394,550)
See Notes to Condensed Consolidated Financial Statements
3


ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands)
For the Three Months Ended September 30, 2020For the Three Months Ended September 30, 2019
Number of Common SharesNumber of Class B Common SharesCommon StockClass B Common StockAdditional
Paid-In
Capital		Accumulated
Deficit		Accumulated
Other
Comprehensive
Loss		Total
Stockholders'
Equity		Number of Common SharesCommon StockAdditional
Paid-In
Capital		Accumulated
Deficit		Accumulated
Other
Comprehensive
Loss		Total
Stockholders'
Equity
Balances at beginning of period770,429 — $7,704 $— $6,139,135 $(3,206,845)$(145,879)$2,794,115 746,360 $7,464 $5,888,576 $(1,904,242)$(101,939)$3,889,859 
Net loss— — — — — (113,098)— (113,098)— — — (181,630)— (181,630)
Other
    comprehensive
    income (loss),
    net of tax
— — — — — — 11,591 11,591 — — — — (12,233)(12,233)
Issuance of
    common
    stock, net of
    related fees
— 54,745 — 547 447,088 — — 447,635 — — — — — — 
Dividends,
    including
    dividends
    reinvested
    in common
    stock
1 — — — 4 (28,963)— (28,959)3,740 37 22,526 (26,253)— (3,690)
Share-based
    compensation
    expense
— — — — 26,431 — — 26,431 — — 18,876 — — 18,876 
Other293 — 3 — 1,208 (450)— 761 (68)(1)196 (193)— 2 
Balances at end of period770,723 54,745 $7,707 $547 $6,613,866 $(3,349,356)$(134,288)$3,138,476 750,032 $7,500 $5,930,174 $(2,112,318)$(114,172)$3,711,184 
See Notes to Condensed Consolidated Financial Statements









4


ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands)
For the Nine Months Ended September 30, 2020For the Nine Months Ended September 30, 2019
Number of Common SharesNumber of Class B Common SharesCommon StockClass B Common StockAdditional
Paid-In
Capital		Accumulated
Deficit		Accumulated
Other
Comprehensive
Loss		Total
Stockholders'
Equity		Number of Common SharesCommon StockAdditional
Paid-In
Capital		Accumulated
Deficit		Accumulated
Other
Comprehensive
Loss		Total
Stockholders'
Equity
Balances at beginning of period753,622 — $7,536 $— $5,977,402 $(2,742,193)$(58,376)$3,184,369 766,881 $7,669 $5,969,347 $(1,680,432)$(71,779)$4,224,805 
Adoption of
    accounting
    standard,
 net of tax
— — — — — (2,157)— (2,157)— — — — — — 
Net loss— — — — — (520,132)— (520,132)— — — (352,157)— (352,157)
Other
    comprehensive
    loss, net of
    tax
— — — — — — (75,912)(75,912)— — — — (42,393)(42,393)
Issuance of
    common stock,
    net of related
    fees
16,279 54,745 163 547 560,766 — — 561,476 — — — — — — 
Repurchases
    of common
    stock
(1)— — — (4)— — (4)(23,883)(239)(149,629)— — (149,868)
Dividends,
    including
    dividends
    reinvested
    in common
    stock
2 — — — 11 (82,847)— (82,836)7,147 71 44,933 (79,346)— (34,342)
Share-based
    compensation
    expense
— — — — 74,758 — — 74,758 — — 65,126 — — 65,126 
Other821 — 8 — 933 (2,027)(1,086)(113)(1)397 (383)— 13 
Balances at end of period770,723 54,745 $7,707 $547 $6,613,866 $(3,349,356)$(134,288)$3,138,476 750,032 $7,500 $5,930,174 $(2,112,318)$(114,172)$3,711,184 
See Notes to Condensed Consolidated Financial Statements
5


ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
For the Nine Months Ended
September 30, 2020September 30, 2019
Cash flows from operating activities:
Net loss$(520,132)$(352,157)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and intangible asset amortization1,440,239 1,502,574 
Amortization of deferred subscriber acquisition costs70,226 58,544 
Amortization of deferred subscriber acquisition revenue(90,346)(78,506)
Share-based compensation expense74,758 65,126 
Deferred income taxes(147,007)(86,339)
Provision for losses on receivables and inventory99,019 42,248 
Loss on extinguishment of debt114,759 103,004 
Goodwill impairment— 45,482 
Loss on sale of business738 55,489 
Unrealized loss on interest rate swap contracts89,589 9,380 
Other non-cash items, net102,950 94,504 
Changes in operating assets and liabilities, net of the effects of acquisitions and dispositions:
Deferred subscriber acquisition costs(170,247)(147,865)
Deferred subscriber acquisition revenue124,621 201,869 
Other, net(195,898)(54,104)
Net cash provided by operating activities993,269 1,459,249 
Cash flows from investing activities:
Dealer generated customer accounts and bulk account purchases(265,131)(514,487)
Subscriber system asset expenditures(272,512)(430,586)
Purchases of property and equipment(112,317)(120,140)
Acquisition of businesses, net of cash acquired(182,154)(95,312)
Sale of business, net of cash sold(2,448)— 
Other investing, net34,287 3,604 
Net cash used in investing activities(800,275)(1,156,921)
Cash flows from financing activities:
Proceeds from issuance of common stock450,000 — 
Proceeds from long-term borrowings2,640,000 3,378,022 
Proceeds from receivables facility43,748 — 
Repayment of long-term borrowings, including call premiums(2,748,095)(3,650,082)
Repayment of receivables facility(2,456)— 
Dividends on common stock(80,298)(33,855)
Repurchases of common stock(4)(149,868)
Deferred financing costs(27,962)(52,733)
Other financing, net(25,777)(1,200)
Net cash provided by (used in) financing activities249,156 (509,716)
Effect of currency translation on cash— 821 
Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents 442,150 (206,567)
Cash and cash equivalents and restricted cash and cash equivalents at beginning of period48,736 367,162 
Cash and cash equivalents and restricted cash and cash equivalents at end of period$490,886 $160,595 
Supplemental schedule of non-cash investing and financing activities:
Issuance of shares in lieu of cash dividend$11 $45,004 
Issuance of shares for acquisition of business$113,841 $— 
See Notes to Condensed Consolidated Financial Statements
6

ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Organization and Business
ADT Inc., together with its wholly-owned subsidiaries (collectively, the “Company”), is a leading provider of security, automation, and smart home solutions serving consumer and business customers in the United States (“U.S.”). ADT Inc. was incorporated in the State of Delaware in May 2015 as a holding company with no assets or liabilities. In July 2015, the Company acquired Protection One, Inc. and ASG Intermediate Holding Corp. (collectively, the “Formation Transactions”), which were instrumental in the commencement of the Company’s operations. In May 2016, the Company acquired The ADT Security Corporation (formerly named The ADT Corporation) (“The ADT Corporation”) (the “ADT Acquisition”). The Company primarily conducts business under the ADT brand name.
In January 2018, the Company completed an initial public offering (“IPO”) and its common stock began trading on the New York Stock Exchange under the symbol “ADT.”
The Company 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 Apollo Global Management, Inc. (together with its subsidiaries and affiliates, “Apollo” or the “Sponsor”).
Basis of Presentation and Significant Accounting Policies
The preparation of the condensed consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“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.
COVID-19 Pandemic
During March 2020, the World Health Organization declared the outbreak of a novel coronavirus as a pandemic (the “COVID-19 Pandemic”), which has become increasingly widespread in the U.S. Containment efforts and responses to the COVID-19 Pandemic have varied by individuals, businesses, and state and local municipalities, and in certain areas of the U.S., initial and precautionary measures helped mitigate the spread of the coronavirus. However, subsequent easing of such measures resulted in the re-emergence of the coronavirus. The COVID-19 Pandemic has had a notable adverse impact on general economic conditions, including but not limited to the temporary closures of many businesses, increased governmental regulations, and reduced consumer spending due to significant unemployment and other effects attributable to the COVID-19 Pandemic. In order to continue to service customers, the Company has adjusted and is continuously evolving certain aspects of its operations to protect employees and customers, which includes (i) detailed protocols for infectious disease safety for employees, (ii) the implementation of daily wellness checks for employees, and (iii) the implementation of work from home actions, including the majority of the Company’s call center professionals.
The Company considered the emergence and pervasive economic impact of the COVID-19 Pandemic in its assessment of its financial position, results of operations, cash flows, and certain accounting estimates as of and for the three and nine months ended September 30, 2020. Additional information on the impacted estimates is included in the respective footnotes that follow. Due to the evolving and uncertain nature of the COVID-19 Pandemic, it is possible that the effects of the COVID-19 Pandemic could materially impact the Company’s estimates and condensed consolidated financial statements in future reporting periods.
Basis of Presentation and Consolidation
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 to summarize fairly the Company’s financial position, results of operations, and cash flows for the interim periods presented. The interim results reported in these condensed consolidated financial statements should not be taken as indicative of results that may be expected for future interim periods or the full year. 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, 2019 (the “2019 Annual
7

Report”), which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 10, 2020. The Company’s accounting policies used in the preparation of these condensed consolidated financial statements do not differ from those used for the annual consolidated financial statements, unless otherwise noted.
The Condensed Consolidated Balance Sheet as of December 31, 2019 included herein was derived from the audited consolidated financial statements as of that date but does not include all the footnote disclosures from the annual consolidated financial statements.
The condensed consolidated financial statements include the accounts of ADT Inc. and its wholly-owned subsidiaries, and have been prepared in U.S. dollars in accordance with GAAP. All intercompany transactions have been eliminated. Certain prior period amounts have been reclassified to conform with the current period presentation.
The Company has a single operating and reportable segment based on the manner in which the Chief Executive Officer, who is the chief operating decision maker, evaluates performance and makes decisions about how to allocate resources.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less from the time of purchase are considered to be cash equivalents. Restricted cash and cash equivalents are cash and cash equivalents that are restricted for a specific purpose and cannot be included in the general cash and cash equivalents account. Restricted cash and cash equivalents are reflected in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets.
The following table provides a reconciliation of the amount of cash and cash equivalents and restricted cash and cash equivalents reported in the Condensed Consolidated Balance Sheets to the total of the same of such amounts shown in the Condensed Consolidated Statements of Cash Flows:
(in thousands)September 30, 2020December 31, 2019
Cash and cash equivalents$489,433 $48,736 
Restricted cash and cash equivalents in prepaid expenses and other current assets1,453 — 
Cash and cash equivalents and restricted cash and cash equivalents at end of period$490,886 $48,736 
Subscriber System Assets, net and Deferred Subscriber Acquisition Costs, net
The Company capitalizes certain costs associated with transactions in which the Company retains ownership of the security system as well as incremental selling expenses related to acquiring customers. These costs include equipment, installation costs, and other incremental costs and are recorded in subscriber system assets, net, and deferred subscriber acquisition costs, net, in the Condensed Consolidated Balance Sheets. These assets embody a probable future economic benefit as they contribute to the generation of future monitoring and related services revenue for the Company.
Subscriber system assets represent capitalized equipment and installation costs incurred in connection with transactions in which the Company retains ownership of the security system. Upon customer termination, the Company may retrieve such assets. Depreciation expense relating to subscriber system assets is included in depreciation and intangible asset amortization in the Condensed Consolidated Statements of Operations and was $120 million and $142 million for the three months ended September 30, 2020 and 2019, respectively, and $380 million and $423 million for the nine months ended September 30, 2020 and 2019, respectively.
The gross carrying amount, accumulated depreciation, and net carrying amount of subscriber system assets as of September 30, 2020 and December 31, 2019 were as follows:
(in thousands)September 30, 2020December 31, 2019
Gross carrying amount$4,683,816 $4,597,908 
Accumulated depreciation(2,034,098)(1,858,612)
Subscriber system assets, net$2,649,718 $2,739,296 
8

Deferred subscriber acquisition costs represent incremental selling expenses (primarily commissions) related to acquiring customers. Amortization expense relating to deferred subscriber acquisition costs included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations was $25 million and $21 million for the three months ended September 30, 2020 and 2019, respectively, and $70 million and $59 million for the nine months ended September 30, 2020 and 2019, respectively.
Subscriber system assets and any related deferred subscriber acquisition costs resulting from customer acquisitions are accounted for on a pooled basis based on the month and year of acquisition. The Company depreciates and amortizes its pooled subscriber system assets and related deferred subscriber acquisition costs using an accelerated method over the estimated life of the customer relationship, which is 15 years.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following as of September 30, 2020 and December 31, 2019:
(in thousands)September 30, 2020December 31, 2019
Accrued interest$66,992 $115,070 
Payroll-related accruals139,845 91,944 
Other accrued liabilities359,330 270,352 
Accrued expenses and other current liabilities$566,167 $477,366 
Radio Conversion Costs
In 2019, the providers of 3G and Code-Division Multiple Access (“CDMA”) cellular networks notified the Company that they will be retiring their 3G and CDMA networks during 2022. Accordingly, during 2019 the Company commenced a program to replace the 3G and CDMA cellular equipment used in many of its security systems. The Company estimates the range of net costs for this replacement program at $200 million to $325 million through 2022. The Company expects to incur approximately $50 million to $75 million of net costs during 2020. These ranges are net of any revenue the Company collects from customers associated with these radio replacements and cellular network conversions. The Company seeks to minimize these costs by converting customers during routine service visits whenever possible. The replacement program and pace of replacement are subject to change and may be influenced by the Company’s ability to access customer sites due to the COVID-19 Pandemic, cost-sharing opportunities with suppliers, carriers, and customers, as well as new and innovative technologies.
Radio conversion revenue associated with the replacement program is included in monitoring and related services revenue in the Condensed Consolidated Statement of Operations while radio conversion costs are included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. During the three months ended September 30, 2020 and 2019, the Company incurred $21 million and $12 million of radio conversion costs, respectively, and recognized $8 million and $1 million of incremental radio conversion revenue, respectively. During the nine months ended September 30, 2020 and 2019, the Company incurred $50 million and $14 million of radio conversion costs, respectively, and recognized $26 million and $1 million of incremental radio conversion revenue, respectively.
Fair Value of Financial Instruments
The Company’s financial instruments primarily consist of cash and cash equivalents, restricted cash and 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 are investments in money market mutual funds, which were $264 million as of September 30, 2020. The Company had no cash equivalents as of December 31, 2019. These investments are classified as a Level 1 fair value measurement, which represent unadjusted quoted prices in active markets for identical assets or liabilities.
Retail Installment Contract Receivables - The fair value of the Company’s retail installment contract receivables was determined using a discounted cash flow model. The resulting fair value is classified as a Level 3 fair value measurement.
9

The following table presents the carrying amount and fair value of retail installment contract receivables as of the periods presented below:
September 30, 2020
January 1, 2020(1)
(in thousands)Carrying
Amount		Fair
Value		Carrying
Amount		Fair
Value
Retail installment contract receivables, net$108,397 $89,447 $9,743 $8,946 
________________
(1)Balances reflected are subsequent to the adoption of CECL (as defined below) on January 1, 2020.
Long-Term Debt Instruments - The fair value of the Company’s debt instruments was determined using broker-quoted market prices, which represent prices based on quoted prices for similar assets or liabilities as well as other observable market data. The carrying amount of debt outstanding, if any, under the Company’s revolving credit facility and receivables facility approximate fair value as interest rates on these borrowings approximate current market rates. The resulting fair value is classified as a Level 2 fair value measurement.
The following table presents the carrying amount and fair value of long-term debt instruments as of the periods presented below:
September 30, 2020December 31, 2019
(in thousands)Carrying
Amount		Fair
Value		Carrying
Amount		Fair
Value
Debt instruments, excluding finance lease obligations$9,681,595 $10,137,127 $9,617,491 $10,177,751 
Derivative Financial Instruments - Derivative financial instruments are reported at fair value as either assets or liabilities in the Condensed Consolidated Balance Sheets. These fair values are primarily calculated using discounted cash flow models that utilize 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 value is classified as a Level 2 fair value measurement.
Guarantees
In the normal course of business, the Company is liable for contract completion and product performance. The Company’s guarantees primarily relate to standby letters of credit related to its insurance programs and totaled $83 million and $47 million as of September 30, 2020 and December 31, 2019, respectively. The Company does not believe such obligations will materially affect its financial position, results of operations, or cash flows.
Recently Adopted Accounting Pronouncements
Financial Accounting Standards Board Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instrument, and related amendments, introduces new guidance which makes substantive changes to the accounting for credit losses. This guidance introduces the current expected credit losses (“CECL”) model which applies to financial assets subject to credit losses and measured at amortized cost, as well as certain off-balance sheet credit exposures. The CECL model requires an entity to estimate credit losses expected over the life of an exposure, considering information about historical events, current conditions, and reasonable and supportable forecasts and is generally expected to result in earlier recognition of credit losses. The Company adopted this guidance as of January 1, 2020 using the modified retrospective approach and recognized a cumulative effect adjustment to the opening balance of accumulated deficit with no restatement of comparative periods. The impact of adoption was not material.
ASU 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is classified as a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted the guidance as of January 1, 2020 on a prospective basis, which will result in capitalized implementation costs being classified in the same line item as the fees associated with the cloud computing service agreement in the Condensed Consolidated Balance Sheets, Statements of Operations, and Cash Flows. The impact of adoption was not material.
ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, provides optional guidance for a limited period of time to ease the potential burden of accounting for reference rate reform. The guidance was effective for the Company beginning on March 12, 2020 and it will apply the amendments prospectively through December 31, 2022. The impact of adoption was not material.
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Recently Issued Accounting Pronouncements
ASU 2020-06, Debt with Conversion and Other Options and Derivatives and Hedging - Contracts in Entity’s Own Equity, provides guidance to ease the potential burden of accounting for convertible instruments, derivatives related to an entity’s own equity, and the related earnings per share considerations. This guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company intends to early adopt this guidance in the first quarter of 2021 and the impact of adoption is not anticipated to be material.
2. Revenue and Receivables
The Company generates revenue primarily through contractual monthly recurring fees received for monitoring and related services provided to customers. In transactions in which the Company provides monitoring and related services but retains ownership of the security system, the Company’s performance obligations primarily include monitoring, related services (such as maintenance agreements), and a material right associated with the non-refundable fees received in connection with the initiation of a monitoring contract (referred to as deferred subscriber acquisition revenue) that the customer will not need to pay upon a renewal of the contract. The portion of the transaction price associated with monitoring and related services revenue is recognized when the services are provided to the customer and is reflected in monitoring and related services revenue in the Condensed Consolidated Statements of Operations.
Deferred subscriber acquisition revenue is deferred and recorded as deferred subscriber acquisition revenue in the Condensed Consolidated Balance Sheets upon initiation of a monitoring contract. Deferred subscriber acquisition revenue is amortized on a pooled basis into installation and other revenue in the Condensed Consolidated Statements of Operations over the estimated life of the customer relationship using an accelerated method consistent with the amortization of subscriber system assets and deferred subscriber acquisition costs associated with the transaction. Amortization of deferred subscriber acquisition revenue was $31 million and $28 million for the three months ended September 30, 2020 and 2019, respectively, and $90 million and $79 million for the nine months ended September 30, 2020 and 2019, respectively.
In transactions involving a security system that is sold outright to the customer, the Company’s performance obligations generally include monitoring, related services, and the sale and installation of the security system. For such arrangements, the Company allocates a portion of the transaction price to each performance obligation based on relative standalone selling price, which is determined using observable internal or external pricing and profitability metrics. Revenue associated with the sale and installation of a security system is recognized either at a point in time or over time based upon the nature of the transaction and contractual terms and is reflected in installation and other revenue in the Condensed Consolidated Statements of Operations. Revenue associated with monitoring and related services is recognized as those services are provided and is reflected in monitoring and related services revenue in the Condensed Consolidated Statements of Operations.
Customer billings for services not yet rendered are deferred and recognized as revenue as services are provided. These fees are recorded as current deferred revenue in the Condensed Consolidated Balance Sheets as the Company expects to satisfy any remaining performance obligations, as well as recognize the related revenue, within the next twelve months. Accordingly, the Company has applied the practical expedient regarding deferred revenue to exclude the value of remaining performance obligations if (i) the contract has an original expected term of one year or less or (ii) the Company recognizes revenue in proportion to the amount it has the right to invoice for services performed.
The following table sets forth the Company’s revenue disaggregated by source:
For the Three Months EndedFor the Nine Months Ended
(in thousands)September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Monitoring and related services$1,045,677 $1,093,564 $3,133,013 $3,249,401 
Installation and other253,247 207,006 867,050 577,973 
Total revenue$1,298,924 $1,300,570 $4,000,063 $3,827,374 
Equipment Ownership Model Change
During February 2020, the Company launched a new revenue model initiative for certain residential customers which revised the amount and nature of fees due at installation, introduced a 60 month monitoring contract option, and introduced a new retail installment contract which allows qualifying residential customers to repay the fees due at installation over the course of a 24, 36, or 60 month interest-free period. Due to the requirements of the Company’s initial third-party consumer financing program, the Company also transitioned its security system ownership model from a predominately Company-owned model to a predominately customer-owned model (the “Equipment Ownership Model Change”).
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During March 2020, the Company entered into an uncommitted receivables securitization financing agreement (the “Receivables Facility”). Under the terms of the Receivables Facility, the Company may receive up to $200 million of financing secured by retail installment contract receivables from transactions involving security systems that were sold under a customer-owned model. During April 2020, the Company amended the Receivables Facility to also permit financing secured by retail installment contract receivables from transactions occurring under the Company-owned model. During May 2020, the Company started to transition its security system ownership model back to a predominately Company-owned model as a result of this amendment.
Accounts Receivable
Accounts receivable represent unconditional rights to consideration due from customers in the ordinary course of business and are generally due in one year or less. Accounts receivable are recorded at amortized cost less an allowance for credit losses that are not expected to be recovered. The allowance for credit losses is recognized at inception and is reassessed each reporting period.
The Company’s allowance for credit losses is evaluated on a pooled basis based on customer type. For each pool of customers, 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 was not material for the individual pools of customers for the periods presented.
The changes in the allowance for credit losses during the nine months ended September 30, 2020 were as follows:
(in thousands)
Balance as of January 1, 2020(1)
$42,960 
Provision for credit losses63,231 
Write-offs, net of recoveries(2)
(41,713)
Balance as of September 30, 2020$64,478 
________________
(1)Balance reflected is subsequent to the adoption of CECL on January 1, 2020.
(2)The amount of recoveries was not material for the period presented, as such, the Company presented write-offs, net of recoveries.
Retail Installment Contract Receivables
During February 2020, the Company launched a new retail installment contract which allows qualifying residential customers to repay the fees due at installation over a 24, 36, or 60 month interest-free period. The financing component of a retail installment contract receivable is not significant.
Retail installment contracts are available for residential transactions occurring under either a Company-owned model or a customer-owned model. When originating a retail installment contract, the Company utilizes external credit scores to assess credit quality of a customer and to determine eligibility for the retail installment contract. In addition, a customer is required to enroll in the Company’s automated payment process in order to enter into a retail installment contract. Subsequent to origination, the Company monitors the delinquency status of retail installment contract receivables as the key credit quality indicator. As of September 30, 2020, the amount of current and delinquent billed retail installment contract receivables were not material.
Retail installment contract receivables are recorded at amortized cost less an allowance for credit losses that are not expected to be recovered. The allowance for credit losses is recognized at inception and is reassessed each reporting period. The allowance for credit losses on retail installment contract receivables was not material for the periods presented.
The following is a summary of unbilled retail installment contract receivables, net, recognized in the Condensed Consolidated Balance Sheets as of the periods presented below:
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(in thousands)September 30, 2020
January 1, 2020(1)
Retail installment contract receivables, gross$114,610 $9,971 
Allowance for credit losses(6,213)(228)
Retail installment contract receivables, net$108,397 $9,743 
Classification:
Accounts receivable, net$39,368 $5,867 
Other assets69,029 3,876 
Retail installment contract receivables, net$108,397 $9,743 
________________
(1)Balances reflected are subsequent to the adoption of CECL on January 1, 2020.

As of September 30, 2020, $56 million of the Company’s retail installment contract receivables, net, were used as collateral for borrowings under the Receivables Facility. Refer to Note 6 “Debt” for further discussion.
Contract Assets
Contract assets represent rights to consideration in which the Company has transferred goods or services to the customer in the ordinary course of business, however, the Company does not have an unconditional right to such consideration. The contract asset is reclassified to accounts receivable as services are performed and billed, which results in the Company’s unconditional right to the consideration. The Company has the right to bill the customer as service is provided over time, which generally occurs over the course of a 24, 36, or 60 month period.
The Company records an allowance for credit losses against its contract assets for expected credit losses that are not expected to be recovered. The allowance for credit losses is recognized at inception and is reassessed each reporting period. The allowance for credit losses on contract assets was not material for the periods presented.
The following is a summary of contract assets, net, related to residential transactions recognized in the Condensed Consolidated Balance Sheets as of the periods presented below:
(in thousands)September 30, 2020
January 1, 2020(1)
Contract assets, gross$152,994 $24,411 
Allowance for credit losses(27,054)(3,228)
Contract assets, net$125,940 $21,183 
Classification:
Prepaid expenses and other current assets$53,320 $9,036 
Other assets72,620 12,147 
Contract assets, net$125,940 $21,183 
________________
(1)Balances reflected are subsequent to the adoption of CECL on January 1, 2020.

The Company recognized approximately $158 million of contract assets during the nine months ended September 30, 2020.
3. Leases
Company as Lessor
The Company is a lessor in certain transactions in which the Company provides monitoring and related services but retains ownership of the security system 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 monitoring and related services. For transactions in which the timing and pattern of transfer is the same for the lease and non-lease components, and 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 component based upon its predominant characteristic, which is the non-lease component. As a result, the Company accounts for the combined component as a single performance obligation under the applicable revenue guidance and the underlying assets are reflected within subscriber system assets, net, in the Condensed Consolidated Balance Sheets.
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Certain of the Company’s transactions do not qualify for the practical expedient as the lease component represents a sales-type lease, and as such, the Company separately accounts for the lease component and non-lease component. The Company’s sales-type leases are not material.
Company as Lessee
The Company leases real estate, vehicles, and equipment with various lease terms and maturities that extend out through 2030 from various counter parties as part of normal operations. The Company applies the practical expedient to not separate the lease and non-lease components and accounts for the combined component as a lease. Additionally, the Company’s right-of-use assets and lease liabilities include leases with an initial lease term of 12 months or less.
The Company’s right-of-use assets and lease liabilities primarily represent (a) lease payments that are fixed at the commencement of a lease and (b) variable lease payments that depend on an index or rate. Lease payments are recognized as lease cost on a straight-line basis over the lease term, which is determined as the non-cancelable period, periods in which termination options are reasonably certain of not being exercised, and periods in which renewal options are reasonably certain of being exercised. The discount rate for a lease is determined using the Company’s incremental borrowing rate that coincides with the lease term at the commencement of a lease. The incremental borrowing rate is estimated based on publicly available data for the Company’s debt instruments and other instruments with similar characteristics.
Lease payments that are not fixed or that are not dependent on an index or rate and vary because of changes in usage or other factors are included in variable lease costs. Variable lease costs, which primarily relate to fuel, repair, and maintenance payments that vary based on the usage of leased vehicles, are recorded in the period in which the obligation is incurred.
The Company’s leases do not contain material residual value guarantees or restrictive covenants. The Company’s subleases are not material.
The following table presents the amounts reported in the Company’s Condensed Consolidated Balance Sheets related to operating and finance leases as of the periods presented below:
Leases (in thousands)
ClassificationSeptember 30, 2020December 31, 2019
Assets
Current
OperatingPrepaid expenses and other current assets$923 $1,191 
Non-current
OperatingOther assets141,214 122,464 
Finance
Property and equipment, net(a)
54,971 66,001 
Total right-of-use assets$197,108 $189,656 
Liabilities
Current
OperatingAccrued expenses and other current liabilities$27,863 $29,745 
FinanceCurrent maturities of long-term debt28,064 26,949 
Non-current
OperatingOther liabilities121,554 99,999 
FinanceLong-term debt34,806 47,835 
Total lease liabilities$212,287 $204,528 
_________________
(a)Finance right-of-use assets are recorded net of accumulated depreciation of approximately $61 million and $44 million as of September 30, 2020 and December 31, 2019, respectively.
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The following is a summary of the Company’s lease cost for the presented periods:
For the Three Months EndedFor the Nine Months Ended
Lease Cost (in thousands)
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Operating lease cost$14,339 $14,618 $43,251 $44,691 
Finance lease cost
Amortization of right-of-use assets6,703 6,780 18,897 17,298 
Interest on lease liabilities778 1,017 2,393 2,674 
Variable lease costs10,803 11,096 34,952 35,955 
Total lease cost $32,623 $33,511 $99,493 $100,618 
The following is a summary of the cash flows and supplemental information associated with the Company’s leases for the presented periods:
For the Nine Months Ended
Other information (in thousands)
September 30, 2020September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases$42,901 $45,116 
Operating cash flows from finance leases2,393 2,674 
Financing cash flows from finance leases21,253 17,166 
Right-of-use assets obtained in exchange for new:
Operating lease liabilities40,015 41,307 
Finance lease liabilities$10,147 $49,053 
4. Acquisitions
Defenders Acquisition
During January 2020, the Company acquired Defender Holdings, Inc. (“Defenders”) (the “Defenders Acquisition”), which represented the acquisition of the Company’s largest independent dealer, for total consideration of approximately $290 million, which consisted of cash paid of $173 million, net of cash acquired, and the issuance of approximately 16 million shares of the Company’s common stock, par value of $0.01 per share, (“Common Stock”) with a fair value of $114 million.
The following table summarizes the purchase price allocation of the estimated fair values of the net assets acquired and liabilities assumed as reflected in the condensed consolidated financial statements as of the date of acquisition:
Fair value of assets acquired and liabilities assumed (in thousands):
Cash$3,437 
Accounts receivable15,269 
Inventories17,950 
Prepaid expenses and other current assets16,752 
Property and equipment16,486 
Goodwill253,784 
Contracts and related customer relationships17,000 
Other assets18,733 
Accounts payable(14,937)
Deferred revenue(1,170)
Accrued expenses and other current liabilities(29,130)
Deferred tax liabilities(8,051)
Other liabilities(15,760)
Total consideration transferred$290,363 
The purchase price allocation reflects preliminary fair value estimates based on management analysis, including preliminary work performed by third-party valuation specialists. The Company will finalize the purchase price allocation no later than one
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year from the acquisition date. The acquired contracts and related customer relationships are amortized over 14 years. The Company recorded approximately $254 million of goodwill, none of which is deductible for tax purposes, and reflects the strategic value and expected synergies of Defenders to the Company. Additionally, the Company allocated the goodwill recognized as a result of the Defenders Acquisition to the U.S. reporting unit.
In connection with the Defenders Acquisition, the Company settled a pre-existing relationship with Defenders related to customer accounts purchased from Defenders prior to the Defenders Acquisition. As a result, the Company recorded a charge in the amount of $81 million to merger, restructuring, integration, and other in the Condensed Consolidated Statements of Operations and reflected the associated cash payment as cash flows from operating activities in the Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020.
Other Acquisitions
In addition to the Defenders Acquisition, the Company paid $9 million, net of cash acquired, related to other business acquisitions, which resulted in the recognition of $3 million of goodwill, during the nine months ended September 30, 2020.
5. Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill during the nine months ended September 30, 2020 were as follows:
(in thousands)
Beginning balance$4,959,658 
Acquisitions257,278 
Other339 
Ending balance$5,217,275 
There were no material measurement period adjustments to purchase price allocations. The Company had no accumulated goodwill impairment losses as of September 30, 2020 and December 31, 2019.
Other Intangible Assets
The gross carrying amounts, accumulated amortization, and net carrying amounts of the Company’s other intangible assets as of September 30, 2020 and December 31, 2019 were as follows:
September 30, 2020December 31, 2019
(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$8,185,134 $(4,650,348)$3,534,786 $7,889,864 $(3,798,319)$4,091,545 
Dealer relationships1,518,020 (359,494)1,158,526 1,518,020 (299,459)1,218,561 
Other205,175 (184,759)20,416 210,775 (184,236)26,539 
Total definite-lived intangible assets9,908,329 (5,194,601)4,713,728 9,618,659 (4,282,014)5,336,645 
Indefinite-lived intangible assets:
Trade name1,333,000 — 1,333,000 1,333,000 — 1,333,000 
Intangible assets$11,241,329 $(5,194,601)$6,046,728 $10,951,659 $(4,282,014)$6,669,645 
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For the nine months ended September 30, 2020, the changes in the net carrying amount of contracts and related customer relationships were as follows:
(in thousands)
Beginning balance$4,091,545 
Acquisition of customer relationships20,438 
Customer contract additions, net of dealer charge-backs274,632 
Amortization(852,030)
Other201 
Ending balance$3,534,786 
The Company paid $265 million to purchase contracts with customers under the ADT Authorized Dealer Program and from other third parties during the nine months ended September 30, 2020. In connection with the Defenders Acquisition, the Company received an advance payment of $39 million for the estimated future dealer charge-backs related to accounts purchased from Defenders prior to the Defenders Acquisition. This amount is included in dealer generated customer accounts and bulk account purchases in the Condensed Consolidated Statement of Cash Flows and is anticipated to be materially realized as a reduction to contracts and related customer relationships over the course of a 13-month charge-back period.
The weighted-average amortization period for contracts with customers purchased under the ADT Authorized Dealer Program and from other third parties was 15 years during the nine months ended September 30, 2020.
Amortization expense for definite-lived intangible assets for the periods presented was as follows:
For the Three Months EndedFor the Nine Months Ended
(in thousands)September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Definite-lived intangible asset amortization expense$305,824 $315,732 $918,187 $933,260 
Goodwill and Indefinite-Lived Intangible Assets Impairment
Goodwill and indefinite-lived intangible assets are not amortized and are tested for impairment at least annually as of the first day of the fourth quarter of each year and more often if an event occurs or circumstances change which indicate it is more-likely-than-not that fair value is less than carrying amount.
Goodwill
As a result of the macroeconomic decline due to the ongoing COVID-19 Pandemic, the Company quantitatively tested the goodwill associated with its reporting units for impairment as of March 31, 2020.
Under the quantitative approach, the Company estimated the fair value of each reporting unit and compared it to its carrying amount. The fair values of the reporting units were determined using the income approach, which discounts projected cash flows using market participant assumptions. The income approach included significant assumptions including, but not limited to, forecasted revenue, operating profit margins, operating expenses, cash flows, perpetual growth rates, and long-term discount rates. In developing these assumptions, the Company relied on various factors including operating results, business plans, economic projections, anticipated future cash flows, and other market data.
Based on the results of the tests, the Company did not record any goodwill impairment losses associated with its reporting units. Due to the COVID-19 Pandemic, the assumptions made in connection with the Company’s goodwill impairment assessments could be impacted in the future as a result of the evolving and uncertain nature of economic conditions. As a result, the Company’s reporting units are considered at risk of future impairment. If the Company’s assumptions are not realized, or if there are changes in any of the assumptions in the future due to a change in economic conditions, it is possible that an impairment charge may need to be recorded in the future.
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6. Debt
Debt as of September 30, 2020 and December 31, 2019 was comprised of the following:
(in thousands)Balance as of
Debt DescriptionIssuedMaturityInterest RateInterest PayableSeptember 30, 2020December 31, 2019
First Lien Term Loan due 20269/23/20199/23/2026Adj. LIBOR +3.25%Quarterly$3,078,900 $3,102,225 
Second Lien Notes due 20281/28/20201/15/20286.250%1/15 and 7/151,300,000 — 
Prime Notes5/2/20165/15/20239.250%5/15 and 11/15— 1,246,000 
First Lien Notes due 20244/4/20194/15/20245.250%2/15 and 8/15750,000 750,000 
First Lien Notes due 20264/4/20194/15/20265.750%3/15 and 9/151,350,000 1,350,000 
First Lien Notes due 20278/20/20208/31/20273.375%6/15 and 12/151,000,000 — 
ADT Notes due 202110/1/201310/15/20216.250%4/15 and 10/15— 1,000,000 
ADT Notes due 20227/5/20127/15/20223.500%1/15 and 7/151,000,000 1,000,000 
ADT Notes due 20231/14/20136/15/20234.125%6/15 and 12/15700,000 700,000 
ADT Notes due 20325/2/20167/15/20324.875%1/15 and 7/15728,016 728,016 
ADT Notes due 20427/5/20127/15/20424.875%1/15 and 7/1521,896 21,896 
Receivables Facility3/5/20208/20/2025LIBOR +1.00%Monthly41,292 — 
Finance lease obligationsN/AN/AN/AN/A62,870 74,784 
Less: Unamortized debt discount, net(24,143)(26,840)
Less: Unamortized deferred financing costs(69,245)(58,075)
Less: Unamortized purchase accounting fair value adjustment and other(195,121)(195,731)
Total debt9,744,465 9,692,275 
Less: Current maturities of long-term debt(69,035)(58,049)
Long-term debt$9,675,430 $9,634,226 
__________________
N/A—Not applicable
Significant changes in the Company’s debt during the nine months ended September 30, 2020 were as follows:
First Lien Credit Agreement
As of September 30, 2020, the Company had an available borrowing capacity of $400 million under a first lien revolving credit facility (the “First Lien Revolving Credit Facility”), with no borrowings outstanding.
Second Lien Notes due 2028
During January 2020, the Company issued $1.3 billion aggregate principal amount of 6.250% second-priority senior secured notes due 2028 (the “Second Lien Notes due 2028”). The proceeds from the Second Lien Notes due 2028, along with cash on hand and borrowings under the First Lien Revolving Credit Facility, were used to redeem the outstanding $1.2 billion aggregate principal amount of the Company’s 9.250% second-priority senior secured notes due 2023 (the “Prime Notes”) and pay any related fees and expenses, including the call premium on the outstanding Prime Notes. The deferred financing costs incurred in connection with the issuance of the Second Lien Notes due 2028 were not material.
The Second Lien Notes due 2028 are due at maturity and may be redeemed at the Company’s option as follows:
•Prior to January 15, 2023, in whole at any time or in part from time to time, (a) at a redemption price equal to 100% of the principal amount of the Second Lien Notes due 2028 redeemed, plus a make-whole premium and accrued and unpaid interest as of, but excluding, the redemption date or (b) for up to 40% of the original aggregate principal amount of the Second Lien Notes due 2028 and in an aggregate amount equal to the net cash proceeds of any equity offerings, at a redemption price equal to 106.250%, plus accrued and unpaid interest, so long as at least 50% of the original aggregate principal amount of the Second Lien Notes due 2028 shall remain outstanding after each such redemption.
•On or after January 15, 2023, in whole at any time or in part from time to time, at a redemption price equal to 103.125% of the principal amount of the Second Lien Notes due 2028 redeemed and accrued and unpaid interest as of, but excluding, the redemption date. The redemption price decreases to 101.563% on or after January 15, 2024 and decreases to 100% on or after January 15, 2025.
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The Company’s obligations relating to the Second Lien Notes due 2028 are guaranteed, jointly and severally, on a senior secured second-priority basis, by each of the Company’s domestic subsidiaries that guarantees its First Lien Credit Agreement and by each of the Company’s future domestic subsidiaries that guarantees certain of the Company’s debt. The Second Lien Notes due 2028 and the related guarantees are secured by second-priority security interests in substantially all of the tangible and intangible assets owned by the issuers and each guarantor, subject to certain permitted liens and exceptions. Additionally, upon the occurrence of specified change of control events, the Company must offer to repurchase the Second Lien Notes due 2028 at 101% of the principal amount, plus accrued and unpaid interest, if any, to, but not including, the purchase date. The indenture governing the Second Lien Notes due 2028 also provides for customary events of default.
Prime Notes
The indenture underlying the outstanding $1.2 billion aggregate principal amount of the Prime Notes was discharged during January 2020 and the Prime Notes were redeemed during February 2020 for a total redemption price of approximately $1.3 billion, which included the related call premium.
Receivables Facility
During March 2020, the Company entered into the Receivables Facility. Under the terms of the Receivables Facility, the Company may receive up to $200 million of financing secured by retail installment contract receivables from transactions involving security systems that were sold under a customer-owned model. During April 2020, the Company amended the Receivables Facility to also permit financing secured by retail installment contract receivables from transactions occurring under a Company-owned model. The Receivables Facility has a one year revolving period until March 5, 2021, which may be extended, and bears interest at a variable rate. If the revolving period is not extended, the Company is required to repay the Receivables Facility in a manner consistent with the contractual collections of the underlying retail installment contract receivables. The Company may make voluntary prepayments on the Receivables Facility at any time prior to maturity at par.
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, pursuant to the Receivables Facility, borrows funds secured by the transferred retail installment contract receivables. The SPE is a separate legal entity with its own creditors who will be entitled, prior to and upon the liquidation of the SPE, to be satisfied out of the SPE’s assets prior to any assets in the SPE becoming available to the Company (other than the SPE). Accordingly, the assets of the SPE are not available to pay creditors of the Company (other than the SPE), although collections from the transferred retail installment contract receivables in excess of amounts required to repay the SPE’s creditors may be remitted to the Company during and after the term of the Receivables Facility. The SPE’s creditors have legal recourse to the transferred retail installment contract receivables owned by the SPE, but do not have any recourse to the Company (other than the SPE) for the payment of principal and interest on the SPE’s financing.
The Company services the transferred retail installment contract receivables and is responsible for ensuring that amounts collected from the transferred retail installment contract receivables are remitted to the SPE. The Company is required to deposit payments received from the transferred retail installment contract receivables into a segregated account maintained by a third party. On a monthly basis, the segregated account is utilized to make required principal, interest, and other payments due under the Receivables Facility. The segregated account is considered restricted cash and is reflected in prepaid expenses and other current assets in the Company’s Condensed Consolidated Balance Sheets.
Borrowings under the Receivables Facility along with the transferred retail installment contract receivables are included in the Condensed Consolidated Balance Sheets. Borrowings and repayments under the Receivables Facility are reflected as cash flows from financing activities in the Condensed Consolidated Statements of Cash Flows.
During the nine months ended September 30, 2020, the Company received proceeds of $44 million under the Receivables Facility and repaid $2 million. As of September 30, 2020, the Company had an outstanding balance of $41 million and an uncommitted available borrowing capacity of $159 million under the Receivables Facility. The Receivables Facility did not have a material impact to the Condensed Consolidated Statements of Operations.
Variable Interest Entity
The SPE, as described above, 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 assets, liabilities and financial results of operations of the SPE are consolidated in the Company’s condensed consolidated financial statements. As of September 30, 2020, the SPE’s assets and liabilities primarily consisted of unbilled retail installment contract receivables, net, of $56 million and borrowings under the Receivables Facility of $41 million.
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First Lien Notes due 2027
During August 2020, the Company issued $1 billion aggregate principal amount of 3.375% first-priority senior secured notes due 2027 (the “First Lien Notes due 2027”). The proceeds from the First Lien Notes due 2027, along with cash on hand, were used to redeem the outstanding $1 billion aggregate principal amount of the 6.250% notes due 2021 issued by The ADT Corporation (the “ADT Notes due 2021”), pay accrued and unpaid interest on the ADT Notes due 2021, and pay any related fees and expenses, including the call premium on the ADT Notes due 2021. The deferred financing costs incurred in connection with the issuance of the First Lien Notes due 2027 were not material.
The First Lien Notes due 2027 are due at maturity and may be redeemed at the Company’s option as follows:
•Prior to August 31, 2026, in whole at any time or in part from time to time, at a make-whole premium plus accrued and unpaid interest, if any, thereon to the redemption date.
•On or after August 31, 2026, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the First Lien Notes due 2027 redeemed plus accrued and unpaid interest, if any, thereon to the redemption date.
The Company’s obligations relating to the First Lien Notes due 2027 are guaranteed, jointly and severally, on a senior secured first-priority basis, by each of the Company’s domestic subsidiaries that guarantees its First Lien Credit Agreement and by each of the Company’s future domestic subsidiaries that guarantees certain of the Company’s debt. The First Lien Notes due 2027 and the related guarantees are secured by first-priority security interests in substantially all of the tangible and intangible assets owned by the issuers and each guarantor, subject to certain permitted liens and exceptions. Additionally, upon the occurrence of specified change of control events, the Company must offer to repurchase the First Lien Notes due 2027 at 101% of the principal amount, plus accrued and unpaid interest, if any, to, but not including, the purchase date. The indenture governing the First Lien Notes due 2027 also provides for customary events of default.
ADT Notes
In September 2020, the Company redeemed $1 billion aggregate principal amount of the ADT Notes due 2021 for a total repurchase price of approximately $1.1 billion, which included the related call premium.
Loss on Extinguishment of Debt
During the nine months ended September 30, 2020, loss on extinguishment of debt totaled $115 million and included $66 million associated with the call premium and write-off of unamortized deferred financing costs in connection with the $1.2 billion redemption of the Prime Notes in February 2020 and $49 million associated with the call premium and write-off of unamortized fair value adjustments in connection with the $1 billion redemption of the ADT Notes due 2021 in September 2020.
During the nine months ended September 30, 2019, loss on extinguishment of debt totaled $103 million and included (i) $22 million associated with the call premium and the partial write-off of unamortized deferred financing costs in connection with the $300 million partial redemption of the Prime Notes in February 2019, (ii) $61 million associated with the call premium and partial write-off of unamortized deferred financing costs in connection with the $1 billion partial redemption of the Prime Notes in April 2019, (iii) $6 million associated with the partial write-off of unamortized deferred financing costs and discount in connection with the $500 million repayment of the First Lien Term B-1 Loan in April 2019, and (iv) $13 million associated with the partial write-off of unamortized deferred financing costs and discount in connection with the amendment and restatement to the First Lien Credit Agreement in September 2019.
7. Derivative Financial Instruments
The Company's derivative financial instruments primarily consist of LIBOR-based interest rate swap contracts, which were entered into with the objective of managing exposure to variability in interest rates on the Company's debt. All interest rate swap contracts are reported in the Condensed Consolidated Balance Sheets at fair value. For the interest rate swap contracts that are not designated as hedges, changes in fair value are recognized in interest expense, net, in the Condensed Consolidated Statements of Operations. For the interest rate swap contracts that are designated as cash flow hedges, changes in fair value are recognized as a component of accumulated other comprehensive income (“AOCI”) in the Condensed Consolidated Balance Sheets 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, the amounts 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 as the forecasted cash flows are probable of occurring. Additionally, the changes in fair value for de-designated interest rate swap contracts are recognized in interest
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expense, net. The interest rate swap contracts entered into during October 2019 included a significant financing component at inception, and as such, the related cash flows are reflected in cash flows from financing activities in the Condensed Consolidated Statements of Cash Flows.
As a result of changes in the interest rate environment in response to macroeconomic decline, the Company's interest rate swap contracts designated as cash flow hedges with an aggregate notional amount of $3 billion were no longer highly effective beginning in March 2020. Accordingly, the Company de-designated the cash flow hedges and the changes in fair value for the period in which these cash flow hedges were no longer highly effective were recognized in interest expense, net. Amounts recognized as a component of AOCI prior to de-designation will be reclassified into interest expense, net, in the same period in which the related interest on variable-rate debt affects earnings through the maturity dates of the interest rate swap contracts as the forecasted cash flows are probable of occurring.
Below is a summary of the Company’s interest rate swap contracts as of September 30, 2020 (in thousands):
ExecutionMaturityDesignationNotional Amount
January 2019April 2022Not designated$125,000 
February 2019April 2022Not designated300,000 
October 2019September 2026Not designated2,800,000 
Total notional amount$3,225,000 
The changes in fair value of interest rate swap contracts recognized in interest expense, net, in the Condensed Consolidated Statements of Operations were a gain of $8 million and a loss of $1 million during the three months ended September 30, 2020 and 2019, respectively, and losses of $90 million and $9 million during the nine months ended September 30, 2020 and 2019, respectively. The interest rate swap contracts did not have a material impact to the Condensed Consolidated Statements of Cash Flows during the nine months ended September 30, 2020 and 2019.
The fair value of the Company’s interest rate swap contracts and related classification in the Condensed Consolidated Balance Sheets for the periods presented were as follows:
(in thousands)September 30, 2020December 31, 2019
Accrued expenses and other current liabilities$65,031 $15,334 
Other liabilities240,035 68,884 
Fair value of interest rate swaps$305,066 $84,218 
As of September 30, 2020 and December 31, 2019, AOCI, net of tax, related to cash flow hedges was $135 million and $59 million, respectively.
8. Equity
During September 2020, the Company amended its articles of incorporation to authorize the issuance of 100,000,000 shares of Class B common stock, par value of $0.01 per share, (“Class B Common Stock”) as well as to increase the number of authorized shares of preferred stock, par value of $0.01 per share, to 1,000,000.
The Class B Common Stock represents a new class of common stock of the Company. Each share of Class B Common Stock has equal status and rights to dividends with a share of Common Stock. The holders of Class B Common Stock have one vote for each share of Class B Common Stock held of record by such holder on all matters on which stockholders are entitled to vote generally; provided, however, that holders of Class B Common Stock, as such, are not entitled to vote on the election, appointment, or removal of directors of the Company. Additionally, each share of Class B Common Stock will immediately become convertible into one share of Common Stock, at the option of the holder thereof, at any time following the earlier of (i) the expiration or early termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Clearance”), required prior to such holder’s conversion of all such shares of Class B Common Stock, and (ii) to the extent HSR Clearance is not required prior to such holder’s conversion of such shares of Class B Common Stock, the date that such holder owns such shares of Class B Common Stock.
Issuance of Common Stock
During January 2020, the Company issued approximately 16 million shares of Common Stock with a fair value of $114 million in connection with the Defenders Acquisition.
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Issuance of Class B Common Stock
During September 2020, the Company issued and sold 54,744,525 shares of Class B Common Stock for an aggregate purchase price of $450 million to Google LLC (“Google”) in a private placement pursuant to a securities purchase agreement dated July 31, 2020 (the “Securities Purchase Agreement”). As of the date of closing, Google held approximately 6.6% of the issued and outstanding Common Stock of the Company on an as-converted basis. Prior to closing, the Securities Purchase Agreement provided Google with the option to purchase additional shares of Class B Common Stock, for the same price per share, up to 9.9% of the issued and outstanding Common Stock of the Company on an as-converted basis. Google did not exercise this option. The proceeds received will be used to reduce debt and fund growth over time.
In connection with the issuance of the Class B Common Stock, the Company and Google entered into an Investor Rights Agreement (the “Investor Rights Agreement”), pursuant to which Google agreed to be bound by customary transfer restrictions and drag-along rights, and be afforded customary registration rights with respect to shares of Class B Common Stock held directly by Google. Under the terms of the Investor Rights Agreement, Google is prohibited, subject to certain exceptions, from transferring any shares of Class B Common Stock or any shares of Common Stock issuable upon conversion of the Class B Common Stock beneficially owned by Google until the earlier of (i) the three-year anniversary of issuance, (ii) the date on which the Commercial Agreement (as subsequently defined) has been terminated under certain specified circumstances, and (iii) June 30, 2022 if the Company breaches certain of its obligations under the Commercial Agreement.
The Company estimated the fair value of the issued Class B Common Stock to be approximately $450 million, which represents a Level 3 fair value measurement. The estimation of the fair value included the following inputs: (i) the price per share of Common Stock, (ii) the length of the holding period restriction, (iii) an expected dividend-yield of 1.5% during the holding period restriction, which was based on the projected dividend run-rate and dividing by the stock price, and (iv) an expected share price volatility of 30% during the holding period restriction period, which was implied based upon an average of historical volatility of publicly traded companies in industries similar to the Company as well as consideration for the Company’s debt to equity ratio. The intrinsic value of the beneficial conversion feature related to the ability to convert Class B Common Stock to Common Stock as well as the fair value of Google’s option to purchase additional shares of Class B Common Stock were not material.
Commercial Agreement
Concurrently with the issuance and sale of Class B Common Stock to Google, the Company and Google entered into a Master Supply, Distribution, and Marketing Agreement (the “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 Services”), for sale to the Company’s customers. Subject to customary termination rights related to breach and change of control, the Commercial Agreement has an initial term of seven years from the date that the Google Service is successfully integrated into the Company’s end-user security and automation platform, which is targeted for no later than June 30, 2022. Further, subject to certain carveouts, the Company has agreed to exclusively sell Google end‐user video and sensing analytics services and smart-home, security and safety devices to the Company’s customers; the exclusivity does not apply to, among others, the Company’s Blue by ADT DIY products and services, certain legacy platforms of the Company, sales of wholesale monitoring services, sales to large commercial customers, and certain devices that Google does not supply to the Company.
The Commercial Agreement specifies that each party will contribute $150 million towards the joint marketing of devices and services, customer acquisition, training of the Company’s employees for the sales, installation, customer service, and maintenance for the product and service offerings, and technology updates for products included in such offerings. Each party will contribute such funds in three equal tranches, subject to the attainment of certain milestones.
Dividends
During the nine months ended September 30, 2020, the Company declared the following dividends on common stock:
Declaration DateRecord DatePayment DateCommon Stock Dividend per ShareClass B Common Stock Dividend per Share
March 5, 2020March 19, 2020April 2, 2020$0.035$—
May 7, 2020June 18, 2020July 2, 2020$0.035$—
August 5, 2020September 18, 2020October 2, 2020$0.035$0.035
During the three months ended September 30, 2020, the Company declared dividends of $0.035 per share on Common Stock ($27 million) and $0.035 per share on Class B Common Stock ($2 million). The amount of dividends settled in shares of Common Stock during the period was not material.
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During the three months ended September 30, 2019, the Company declared dividends of $0.035 per share on Common Stock ($26 million), of which $3 million represents the portion of the dividends settled in cash and $23 million represents the portion of the dividends settled in shares of Common Stock, which resulted in the issuance of approximately 4 million shares of Common Stock, on October 2, 2019.
During the nine months ended September 30, 2020, the Company declared aggregate dividends of $0.105 per share on Common Stock ($81 million) and $0.035 per share on Class B Common Stock ($2 million). The amount of dividends settled in shares of Common Stock during the period was not material.
During the nine months ended September 30, 2019, the Company declared aggregate dividends of $0.105 per share on Common Stock ($79 million). When including the October 2, 2019 payment date, approximately $11 million represents the portion of the dividends settled in cash and $68 million represents the portion of the dividends settled in shares of Common Stock, which resulted in the issuance of 11 million shares of Common Stock.
On November 5, 2020, the Company announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on December 21, 2020, which will be distributed on January 4, 2021.
Share Repurchase Program
In February 2019, the Company approved a share repurchase program (the “Share Repurchase Program”), which permits the Company to repurchase up to $150 million of the Company’s shares of Common Stock through February 27, 2021. On March 23, 2020, the Company approved an increase of $75 million, inclusive of the amount then remaining under the Share Repurchase Program, in the authorized repurchase amount and an extension of the Share Repurchase Program through March 23, 2021.
The Company may effect these repurchases pursuant to one or more trading plans to be adopted in accordance with Rule 10b5-1 (each, a “10b5-1 plan”) under the Securities Exchange Act of 1934 (the “Exchange Act”), in privately negotiated transactions, in open market transactions, or pursuant to an accelerated share repurchase program. The Company intends to conduct the Share Repurchase Program in accordance with Rule 10b-18 under the Exchange Act.
During the three and nine months ended September 30, 2020, there were no material repurchases of shares of Common Stock under the Share Repurchase Program. As of September 30, 2020, the Company had approximately $75 million remaining in the Share Repurchase Program.
During the nine months ended September 30, 2019, the Company repurchased 24 million shares of Common Stock for approximately $150 million. There were no share repurchases during the three months ended September 30, 2019. All of the shares repurchased were treated as retirements and reduced the number of shares issued and outstanding. In addition, the Company recorded the excess of the purchase price over the par value per share as a reduction to additional paid-in capital.
Accumulated Other Comprehensive Loss
During the three and nine months ended September 30, 2020, the Company reclassified $15 million and $31 million, respectively, of AOCI to interest expense, net, and $4 million and $8 million, respectively, of AOCI to income tax benefit associated with cash flow hedges. There were no material reclassification adjustments associated with cash flow hedges during the three and nine months ended September 30, 2019.
As of September 30, 2020, approximately $66 million of AOCI associated with cash flow hedges is estimated to be reclassified to interest expense, net, within the next twelve months.
9. Share-based Compensation
Share-based compensation expense totaled $26 million and $19 million during the three months ended September 30, 2020 and 2019, respectively, and $75 million and $65 million during the nine months ended September 30, 2020 and 2019, respectively.
Restricted Stock Units
During the nine months ended September 30, 2020, the Company granted approximately 12 million restricted stock units (“RSUs”) under the 2018 Omnibus Incentive Plan (the “2018 Plan”). These RSUs are service-based awards with a three-year graded vesting period from the date of grant. The fair value of the RSUs is equal to the closing price per share of the Company’s common stock on the date of grant, which resulted in a weighted-average grant date fair value of $5.95.
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Options
During the nine months ended September 30, 2020, the Company granted approximately 9 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 equal to the closing price per share of the Company’s common stock on the date of grant, which resulted in a weight-average exercise price of $5.31, and a contractual term of ten years from the grant date.
The grant date fair values of options granted under the 2018 Plan were determined using the Black-Scholes valuation approach with the following assumptions:
For the Nine Months Ended September 30, 2020
Risk-free interest rate
0.51% - 1.40%
Expected exercise term (years)6.0
Expected dividend yield
2.2% - 2.7%
Expected volatility
45% - 46%
The risk-free interest rate was based on U.S. Treasury bonds with a zero-coupon rate. The Company did not have sufficient historical exercise data, and, as such, the Company leveraged estimates from prior option valuations as its best estimate of expected exercise term. The dividend yield was calculated by taking the annual dividend run-rate and dividing by the stock price at date of grant. The stock price volatility was implied based upon an average of historical volatility of publicly traded companies in industries similar to the Company, as the Company did not have sufficient history to use as a basis for actual stock price volatility, as well as consideration for the Company’s debt to equity ratio.
During the nine months ended September 30, 2020, the weighted-average grant date fair value for options granted was $1.77.
10. Net (Loss) Income Per Share
The Company applies the two-class method for computing and presenting net (loss) income per share for each class of common stock. The two-class method allocates current period net (loss) income to each class of common stock and participating securities based on (i) dividends declared and (ii) participation rights in the remaining undistributed (losses) earnings.
Basic net (loss) income per share is computed by dividing the net (loss) income allocated to each class of common stock using the two-class method by the related weighted-average number of shares outstanding during the period.
Diluted net 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. Potential shares of Common Stock include (i) incremental shares of Common Stock calculated using the treasury stock method for share-based compensation awards and (ii) shares of Common Stock issuable upon the conversion of Class B Common Stock. Potential shares of Class B Common Stock include (i) incremental shares of Class B Common Stock calculated using the treasury stock method for the period in which the Securities Purchase Agreement was outstanding prior to closing and (ii) incremental shares of Class B Common Stock calculated using the treasury stock method for Google’s option to purchase additional shares of Class B Common Stock prior to closing.
For purposes of the diluted net loss per share of Common Stock computation, all potential shares of Common Stock that would be dilutive were excluded because their effect would be anti-dilutive. As a result, basic net loss per share of Common Stock is equal to diluted net loss per share of Common Stock for the periods presented.
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The computation of basic and diluted net (loss) income per share for each class of common stock for the periods presented was as follows:
For the Three Months EndedFor the Nine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
(in thousands, except per share amounts)Common StockClass B Common StockCommon StockClass B Common StockCommon StockClass B Common StockCommon StockClass B Common Stock
Allocation of net (loss) income - basic$(113,479)$381 $(181,630)$— $(519,841)$(291)$(352,157)$— 
Effect of dilutive potential shares of Class B common stock on allocated net loss— (1,498)— — — (2,185)— — 
Allocation of net loss - diluted$(113,479)$(1,117)$(181,630)$— $(519,841)$(2,476)$(352,157)$— 
Weighted-average shares outstanding - basic760,913 8,331 739,852 — 760,203 2,797 748,500 — 
Dilutive potential shares of Class B common stock— 8,309 — — — 2,790 — — 
Weighted-average shares outstanding - diluted760,913 16,640 739,852 — 760,203 5,587 748,500 — 
Net (loss) income per share - basic$(0.15)$0.05 $(0.25)$— $(0.68)$(0.10)$(0.47)$— 
Net loss per share - diluted$(0.15)$(0.07)$(0.25)$— $(0.68)$(0.44)$(0.47)$— 
11. Income Taxes
Unrecognized Tax Benefits
During the nine months ended September 30, 2020, the Company did not have a material change to its 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. Based on the current status of its income tax audits, the Company does not believe that a significant portion of its unrecognized tax benefits will be resolved in the next twelve months.
Effective Tax Rate
The Company’s income tax benefit for the three months ended September 30, 2020 was $28 million, resulting in an effective tax rate for the period of 19.7%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.5%, and a 3.9% unfavorable impact from non-deductible charges primarily due to the Defenders Acquisition.
Income tax benefit for the three months ended September 30, 2019 was $36 million, resulting in an effective tax rate for the period of 16.7%. The effective tax rate primarily represents the federal income tax rate of 21.0%, a 21.9% unfavorable impact from valuation allowances established on the net capital losses generated in the U.S. and Canada related to the sale of the Company’s Canadian operations, a 5.6% unfavorable impact from non-deductible goodwill impairment loss, offset by a 20.7% favorable impact from net capital losses generated in the U.S. and Canada related to the sale of the Company’s Canadian operations, and a 4.6% favorable impact from amendments to prior year tax returns.
The Company’s income tax benefit for the nine months ended September 30, 2020 was $133 million, resulting in an effective tax rate for the period of 20.4%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.9%, a 3.0% unfavorable impact from non-deductible charges primarily due to the Defenders Acquisition, and a 1.2% unfavorable impact from an increase in valuation allowances primarily due to tax credits not expected to be utilized prior to expiration.
Income tax benefit for the nine months ended September 30, 2019 was $82 million, resulting in an effective tax rate for the period of 18.8%. The effective tax rate primarily represents the federal income tax rate of 21.0%, an 11.0% unfavorable impact from valuation allowances established on the net capital losses generated in the U.S. and Canada related to the sale of the Company’s Canadian operations, a 2.8% unfavorable impact from non-deductible goodwill impairment loss, offset by a 10.4% favorable impact from net capital losses generated in the U.S. and Canada related to the sale of the Company’s Canadian operations, and a 2.3% favorable impact from amendments to prior year tax returns.
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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.
COVID-19 Pandemic
In response to the COVID-19 Pandemic, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law during March 2020 and included significant corporate income tax and payroll tax provisions aimed to provide economic relief to address the impact of the COVID-19 Pandemic. The Company is continuing to assess these corporate tax provisions and has recognized favorable cash flow impacts related to the accelerated refund of previously generated alternative minimum tax credits, as well as from the deferral of remittance of certain 2020 payroll taxes, with 50% of the deferred amount due by the end of 2021, and the remainder due by the end of 2022. The Company also expects to benefit from an increase in the interest expense limitation from 30% to 50% for tax years 2019 and 2020.
In addition, states have begun proposing and enacting legislation to address the unfavorable financial impacts of the COVID-19 Pandemic, which includes tax rate changes, decoupling from favorable federal legislation under the CARES Act (such as an increased interest expense limitation from 30% to 50%), and limiting the use of net operating losses. As of September 30, 2020, there has been no material impact to the Company from these state legislative changes. However, the Company expects the trend to continue through the remainder of 2020 and these changes could have material impacts to the Company’s results of operations and cash flows. The Company will continue to assess the impacts as states finalize and enact these legislative changes.
12. Commitments and Contingencies
Contractual Obligations
Except for certain commitments pursuant to the Commercial Agreement, there have been no material changes to the Company’s contractual obligations as compared to December 31, 2019.
Legal Proceedings
The Company is subject to various claims and lawsuits in the ordinary course of business, which include contractual disputes; worker’s compensation; employment matters; product, general, and auto liability claims; claims that the Company has infringed on the intellectual property rights of others; claims related to alleged security system failures; 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.
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’s accrual for ongoing claims and lawsuits not within scope of an insurance program was not material and in most cases the Company has not accrued for any losses as the ultimate outcome or the range of possible loss cannot be estimated. The Company’s accrual for ongoing claims and lawsuits within scope of an insurance program totaled $114 million and $105 million as of September 30, 2020 and December 31, 2019, respectively.
Environmental Matters
In October 2013, the Company was notified by subpoena that the Office of the Attorney General of California, in conjunction with the Alameda County District Attorney, is investigating whether the Company’s electronic waste disposal policies, procedures, and practices are in violation of the California Business and Professions Code and the California Health and Safety Code. During 2016, Protection One, Inc. was also notified by the same parties that it was subject to a similar investigation. The investigations have been inactive since December 2016 other than a status conference conducted in May 2019. The Company is coordinating joint handling of both investigations and continues to fully cooperate with the respective authorities.
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Shareholder Litigation
Five substantially similar shareholder class action lawsuits related to the IPO in January 2018 were filed in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida in March, April, and May 2018 and were consolidated for discovery and trial and entitled In re ADT Inc. Shareholder Litigation. The consolidated complaint in that action asserts claims on behalf of a putative class of shareholder plaintiffs and sought to represent a class of similarly situated shareholders for alleged violations of the Securities Act of 1933, as amended (the “Securities Act”). The complaint alleges that the Company defendants violated the Securities Act because the registration statement and prospectus used to effectuate the IPO were false and misleading in that they allegedly misled investors with respect to litigation involving the Company, the Company’s efforts to protect its intellectual property, and the competitive pressures faced by the Company. A similar shareholder class action lawsuit entitled Perdomo v ADT Inc., also related to the IPO in January 2018, was filed in the U.S. District Court for the Southern District of Florida in May 2018. In September 2019, the parties reached an agreement in principle to settle both the state court and the federal court actions. In connection with the agreement, the plaintiffs in the Perdomo action voluntarily dismissed the action without prejudice in October 2019. The parties agreed to a Stipulation of Settlement in September 2020, subject to approval by the State Court. In October 2020, the State Court entered an order preliminarily approving the settlement, providing for notice to settlement class members, and setting the date for a final approval hearing in January 2021.
California Independent Contractor Litigation
In August 2017, Jabra Shuheiber filed civil litigation in Marin County Superior Court on behalf of himself and two other individuals asserting wage and hour violations against the Company. The action is entitled Jabra Shuheiber v. ADT, LLC (Case Number CV 1702912, Superior Court, Marin County). Mr. Shuheiber was the owner/operator of a sub-contractor, Maximum Protection, Inc. (“MPI”), who employed the other two plaintiffs in the litigation. In August 2018, in response to the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, counsel for Mr. Shuheiber provided the Company with a proposed amended complaint that modified the wage and hour claims such that they were brought on a class basis. The proposed class is not clearly defined but appears to be composed of two groups of individuals: 1) individual owners of sub-contractors who performed services for the sub-contractor; and 2) individuals with no ownership interest in a sub-contractor who were employed by the sub-contractor and provided services pursuant to a contract between the sub-contractor and the Company. In October 2018, the Company answered the plaintiffs’ First Amended Complaint and filed a cross-complaint against the plaintiffs’ sub-contracting company for indemnification pursuant to the term of ADT’s sub-contract. In November 2019, the parties reached a settlement agreement in principle. The settlement has been documented and received preliminary approval from the court in July 2020.
Los Angeles Alarm Permit Class Action
In June 2013, the Company was served with a class action complaint in California State Court entitled Villegas v. ADT. In this complaint, the plaintiff asserted that the Company violated certain provisions of the California Alarm Act and the Los Angeles Municipal Alarm Ordinance for its alleged failures to obtain alarm permits for its Los Angeles customers and disclose the alarm permit fee in its customer contracts. The plaintiff seeks to recover damages for putative class members who were required to pay enhanced false alarm fines as a result of the Company not obtaining a valid alarm permit at the time of alarm system installation. The case was initially dismissed by the trial court and judgment was entered in the Company’s favor in October 2014, which the plaintiff appealed. In September 2016, the California Appellate Court reversed and remanded the case back to the trial court. In November 2018, the trial court granted the plaintiff’s motion for class certification and certified four subclasses of customers who received fines from the City of Los Angeles. The parties reached a settlement agreement in principle in January 2020. The settlement has been documented and a hearing on the parties’ motion for preliminary settlement approval and class certification has been scheduled for January 2021.
Wage and Hour Class Action
In January 2020, the Company acquired Defenders, which is defending against litigation brought by Teddy Archer and seven other security advisors who claim unpaid overtime under the Fair Labor Standards Act (“FLSA”), breach of contract under state law in all states, and a violation of state wage-hour laws in California, New Jersey, New York, and Washington. The lawsuit was originally filed in March 2018 in the United States District Court for the District of Delaware. During 2018, the court conditionally certified the case as an FLSA collective action. The plaintiffs seek to represent a nationwide class for unpaid wages. The parties are actively engaged in discovery.
Unauthorized Access by a Former Technician
In April 2020, after investigating a customer inquiry, the Company self-disclosed that a former technician based in Dallas, Texas had, during service visits, added his personal email address to 220 of the Company’s customers’ accounts, which provided this employee with varying levels of unauthorized personal access to such customers’ in-home security systems. In
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response, the Company initiated an affirmative outreach effort to notify all customers affected by this activity and to address their concerns. Since the disclosure, three lawsuits have been filed against the Company.
In May 2020, the Company was served with a class action complaint in a case captioned Shana Doty v. ADT LLC and filed in the U.S. District Court for the Southern District of Florida. By an amended complaint, the plaintiff asserts causes of action on behalf of herself and other Company customers similarly situated, and seeks to recover damages for breach of contract, negligence, intrusion upon seclusion, violation of the Computer Fraud and Abuse Act, negligent hiring, supervision and retention, and intentional infliction of emotional distress. The Company moved to dismiss the plaintiff’s amended complaint. The court has not ruled on the motion.
In June 2020, the Company was served with a class action complaint in a case captioned Alexia Preddy v. ADT LLC and filed in the U.S. District Court for the Southern District of Florida. By an amended complaint, the plaintiff asserts causes of action on behalf of herself and others similarly situated as individuals residing in homes of Company customers, and seeks to recover damages for negligence, intrusion upon seclusion, violation of the Computer Fraud and Abuse Act, negligent hiring, supervision and retention, and intentional infliction of emotional distress. The Company moved to dismiss the plaintiff’s amended complaint and to compel arbitration. The court has not ruled on the motions.
The Company was also served with a complaint filed in Texas state court by an individual Company customer and may be subject to future legal claims.
13. Related Party Transactions
The Company’s related party transactions primarily relate to management, consulting, and transaction advisory services provided by Apollo, as well as monitoring and related services provided to or products and services received from other entities controlled by Apollo. There were no significant related party transactions for the three or nine months ended September 30, 2020 and 2019.
During October 2020, the Company entered into a master services agreement with Rackspace US, Inc., a related party, for the provision of cloud storage, equipment, and services to facilitate the implementation of the Company’s cloud migration strategy for certain applications. The master services agreement includes a minimum purchase commitment of $50 million over a 7 year term.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements, and the related notes thereto, included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 (the “2019 Annual Report”), which was filed with the United States Securities and Exchange Commission (the “SEC”) on March 10, 2020, to enhance the understanding of our financial condition, changes in financial condition, and results of operations. 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. Actual results could differ materially from those discussed in the forward-looking statements. 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.”
OVERVIEW
ADT Inc., together with its wholly-owned subsidiaries (collectively, the “Company”, “we”, “our”, “us”, and “ADT”), is a leading provider of security, automation, and smart home solutions serving consumer and business customers in the United States (“U.S.”). We offer many ways to help protect customers by providing 24/7 professional monitoring services as well as delivering lifestyle-driven solutions via professionally installed, do-it-yourself (“DIY”), mobile, and digital-based offerings for consumer, small business, and larger commercial customers. 
Our security and automation offerings involve the installation and monitoring of security and premises automation systems designed to detect intrusion; control access; sense movement, smoke, fire, carbon monoxide, flooding, temperature, and other environmental conditions and hazards; and address personal emergencies, such as injuries, medical emergencies, or incapacitation. Our products and services include interactive and smart home solutions which allow our customers to remotely monitor and manage their residential and commercial environments. Depending on the service plan and type of product
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installation, customers are able to remotely access information regarding the security of their residential or commercial environment, arm and disarm their security systems, adjust lighting or thermostat levels, monitor and react to defined events, or view real-time video from cameras covering different areas of their premises from web-enabled devices (such as smart phones, laptops, and tablet computers) and a customized web portal. Additionally, our interactive and smart home solutions enable customers to create customized and automated schedules for managing lights, thermostats, appliances, garage doors, cameras, and other connected devices. These systems can also be programmed to perform additional functions such as recording and viewing live video and sending text messages or other alerts based on triggering events or conditions.
As part of our innovative and dynamic growth markets, we are extending the concept of security from the physical home or business to personal on-the-go security and safety and cybersecurity. Customers’ increasingly mobile and active lifestyles have created new opportunities for us in the fast-growing market for self-monitored DIY products and mobile technology. Our technology also allows us to integrate with various third-party connected and wearable devices so that we can service our customers whether they are at home or on-the-go.
As of September 30, 2020, we served approximately 6.5 million recurring customers, excluding contracts monitored but not owned. We are one of the largest full-service companies with a national footprint and we deliver an integrated customer experience by maintaining the industry’s largest sales, installation, and service field force, as well as a 24/7 professional monitoring network.
BASIS OF PRESENTATION
All financial information presented in this section has been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”) and includes the accounts of ADT Inc. and its subsidiaries. All intercompany transactions have been eliminated. We report financial and operating information in one segment.
FACTORS AFFECTING OPERATING RESULTS
Our subscriber-based business requires significant upfront investment to generate new customers, which in turn provides predictable recurring revenue generated from our monitoring and other services. In order to optimize returns on customer acquisitions and cash flow generation, we focus on the following key drivers of our business: best-in-class customer service; customer retention; disciplined, high-quality customer additions; efficient customer acquisition; and costs incurred to provide ongoing services to customers.
Our ability to add new subscribers depends on the overall demand for our products and services, which is driven by a number of external factors. The overall economic condition in the geographies in which we operate can impact our ability to attract new customers and grow our business in all customer channels. Growth in our residential customer base can be influenced by the overall state of the housing market. Growth in our commercial customer base can be influenced by the rate at which new businesses begin operations or existing businesses grow. The demand for our products and services is also impacted by the perceived threat of crime, as well as the quality of the service of our competitors.
The monthly fees that we generate from any individual customer vary based on the level of service provided and customer tenure. We offer a wide range of services at various price points from basic burglar alarm monitoring to our full suite of interactive services. Our ability to increase monthly fees at the individual customer level depends on a number of factors, including our ability to effectively introduce and market additional features and services that increase the value of our offerings to customers, which we believe drives customers to purchase higher levels of service and supports our ability to make periodic adjustments to pricing.
A portion of our customer base can be expected to cancel its service every year. Customers may choose not to renew or may terminate their contracts for a variety of reasons, including, but not limited to, relocation, cost, loss to competition, or service issues. Attrition has a direct impact on our financial results, including revenue, operating income, and cash flows.
COVID-19 Pandemic
During March 2020, the World Health Organization declared the outbreak of a novel coronavirus as a pandemic (the “COVID-19 Pandemic”), which has become increasingly widespread in the U.S. Containment efforts and responses to the COVID-19 Pandemic have varied by individuals, businesses, and state and local municipalities, and in certain areas of the U.S, initial and precautionary measures helped mitigate the spread of the coronavirus. However, subsequent easing of such measures resulted in the re-emergence of the coronavirus. The COVID-19 Pandemic has had a notable adverse impact on general economic conditions, including but not limited to the temporary closures of many businesses, increased governmental regulations, and reduced consumer spending due to significant unemployment and other effects attributable to the COVID-19 Pandemic. In order to continue to service our customers, we have adjusted and are continuously evolving certain aspects of our
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operations to protect employees and customers, which includes (i) detailed protocols for infectious disease safety for employees, (ii) the implementation of daily wellness checks for employees, and (iii) the implementation of work from home actions, including the majority of our call center professionals.
While the COVID-19 Pandemic has impacted our commercial channel to a greater extent than our residential channel, we believe our overall recurring revenue and highly variable subscriber acquisition cost model provides a solid financial foundation for strong cash flow generation. Accordingly, we anticipate having sufficient liquidity and capital resources to continue (1) providing essential services, (2) satisfying our debt requirements, and (3) having the ability to return capital to our stockholders in the form of a regular quarterly dividend during the current challenging macroeconomic environment and the slowdown brought on by the COVID-19 Pandemic. We have not sought or requested government assistance as a result of the COVID-19 Pandemic, but we do expect to recognize favorable cash flows and other benefits associated with certain income tax and payroll tax provisions of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). While we have incurred additional costs associated with personal protective equipment for our employees and work from home actions, we also instituted various temporary cost control measures. Furthermore, we believe the economic downturn, the recent civil unrest, and continued economic and COVID-19 Pandemic uncertainties increase awareness of the need for security, which together with an anticipated lower volume of customer relocations and the utilization of temporary pricing and retention initiatives for existing customers, may help counterbalance any increase in gross customer revenue attrition that we may experience as a result of reduced consumer or business spending caused by the COVID-19 Pandemic. Finally, we may see opportunities for additional acquisitions, continued investment in potential new revenue streams or capabilities, and low cost bulk account purchases.
We considered the emergence and pervasive economic impact of the COVID-19 Pandemic in our assessment of our financial position, results of operations, cash flows, and certain accounting estimates as of and for the three and nine months ended September 30, 2020. Due to the evolving and uncertain nature of the COVID-19 Pandemic, it is possible that the effects of the COVID-19 Pandemic could materially impact our estimates and condensed consolidated financial statements in future reporting periods.
Radio Conversion Costs
The providers of 3G and Code-Division Multiple Access (“CDMA”) cellular networks have notified us that they will be retiring their 3G and CDMA networks during 2022. Accordingly, during 2019 we commenced a program to replace the 3G and CDMA cellular equipment used in many of our security systems. We continue to estimate the range of net costs for this replacement program at $200 million to $325 million through 2022, of which we have incurred $49 million through September 30, 2020. We expect to incur $50 million to $75 million of net costs during 2020, of which we have incurred $24 million for the nine months ended September 30, 2020. These amounts and ranges are net of any revenue we collect from customers associated with these radio replacements and cellular network conversions. We seek to minimize these costs by converting customers during routine service visits whenever possible. The replacement program and pace of replacement are subject to change and may be influenced by our ability to access customer sites due to the COVID-19 Pandemic, cost-sharing opportunities with suppliers, carriers, and customers, as well as new and innovative technologies.
Commercial Agreement
Concurrently with the issuance and sale of common stock to Google LLC (“Google”), we entered into a Master Supply, Distribution, and Marketing Agreement with Google (the “Commercial Agreement”), pursuant to which Google has agreed to supply us with certain Google devices as well as certain Google video and analytics services (“Google Services”), for sale to our customers. Subject to customary termination rights related to breach and change of control, the Commercial Agreement has an initial term of seven years from the date that the Google Service is successfully integrated into our end-user security and automation platform, which is targeted for no later than June 30, 2022. If the integrated service is not launched by June 30, 2022 then we will be required to offer Google Services without integration for professional installations except for existing customers who already have ADT Pulse or ADT Control interactive services until such integration has been made. Further, subject to certain carveouts, we have agreed to exclusively sell Google end‐user video and sensing analytics services and smart-home, security and safety devices to our customers; the exclusivity does not apply to, among others, Blue by ADT DIY products and services, certain of our legacy platforms, sales large commercial customers, and certain devices that Google does not supply to us.
The Commercial Agreement also contains customary termination rights for both parties. In addition, Google has rights to terminate the Commercial Agreement if (i) we divest any part of our direct to consumer business and the acquiring entity does not agree to assume all obligations under the Commercial Agreement, or (ii) we breach certain provisions of the Commercial Agreement and do not cure such breaches. In the event that we breach the Commercial Agreement in a manner reasonably likely to result in a material adverse effect on Google’s business or brand, or we breach certain data security and privacy obligations under the Commercial Agreement, we must suspend the sale of Google Services and certain devices during the applicable cure period. Upon termination of the Commercial Agreement, we will no longer have rights to sell the Google
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Service or devices to new customers, subject to an applicable transition period. In addition, the Google Services may not be accessible by our customers through our integrated end-user application during any cure period for our breach of certain data security and privacy provisions of the Commercial Agreement or upon termination of the agreement for a breach of such provisions.
The Commercial Agreement specifies that each party will contribute $150 million towards the joint marketing of devices and services, customer acquisition, training of our employees for the sales, installation, customer service, and maintenance for the product and service offerings, and technology updates for products included in such offerings. Each party will contribute such funds in three equal tranches, subject to the attainment of certain milestones.
Next Generation Platform
On November 5, 2020, we announced our ongoing development work in connection with the internal build of a next generation professional security and home automation technology platform in coordination with Google. The differentiated platform will leverage artificial intelligence and machine learning, including intelligent alarm and video verification, to improve ADT’s security offering and create a more connected, helpful home.
SIGNIFICANT EVENTS
The comparability of our results of operations has been impacted by the following:
Disposition of Canadian Operations
During November 2019, we sold ADT Security Services Canada, Inc. (“ADT Canada”) to TELUS Corporation (“TELUS”) for a selling price of $514 million (CAD $676 million). In connection with the sale of ADT Canada, we entered into a transition services agreement with TELUS whereby we will provide certain post-closing services to TELUS related to the business of ADT Canada. Additionally, we entered into a non-competition and non-solicitation agreement with TELUS pursuant to which we will not have any operations in Canada, subject to limited exceptions for cross-border commercial customers and mobile safety applications, for a period of seven years. Finally, we entered into a patent and trademark license agreement with TELUS granting the usage of our trademarks and patents in Canada to TELUS for a period of seven years.
The sale of ADT Canada did not represent a strategic shift that will have a major effect on our operations and financial results, and therefore, did not meet the criteria to be reported as discontinued operations.
Defenders Acquisition
During January 2020, we acquired Defender Holdings, Inc. (“Defenders”) (the “Defenders Acquisition”), which represented the acquisition of our largest independent dealer, for total consideration of approximately $290 million, which consisted of cash paid of $173 million, net of cash acquired, and the issuance of approximately 16 million shares of our common stock, par value of $0.01 per share, (“Common Stock”) with a fair value of $114 million. In connection with the Defenders Acquisition, we settled a pre-existing relationship with Defenders in the amount of $81 million.
Equipment Ownership Model Change
During February 2020, we launched a new revenue model initiative for certain residential customers which revised the amount and nature of fees due at installation, introduced a 60 month monitoring contract option, and introduced a new retail installment contract which allows qualifying residential customers to repay the fees due at installation over the course of a 24, 36, or 60 month interest-free period. Due to the requirements of our initial third-party consumer financing program, we also transitioned our security system ownership model from a predominately Company-owned model to a predominately customer-owned model (the “Equipment Ownership Model Change”).
During March 2020, we entered into an uncommitted receivables securitization financing agreement (the “Receivables Facility”). Under the terms of the Receivables Facility, we may receive up to $200 million of financing secured by retail installment contract receivables from transactions involving security systems that were sold under a customer-owned model. During April 2020, we amended the Receivables Facility to also permit financing secured by retail installment contract receivables from transactions occurring under the Company-owned model. During May 2020, we started to transition our security system ownership model back to a predominately Company-owned model as a result of this amendment.
In connection with the above, and with respect to transactions arising through Defenders, which has historically used a customer-owned ownership model, subsequent to the Defenders Acquisition, our residential transactions during the three and nine months ended September 30, 2020 included an increase in transactions based on a customer-owned model. In connection
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with our transition back to a Company-owned model, we do not expect to experience the same level of revenue growth subsequent to September 30, 2020 as reported in our results of operations for the three and nine months ended September 30, 2020. We are in the early stages of our new revenue model initiative and we cannot be certain that this initiative or our transition back to a predominately Company-owned model, which is anticipated to include transactions arising through Defenders beginning in 2021, will achieve the desired outcomes. Accordingly, the results of the new revenue model initiative and impact of our transition back to a predominately Company-owned model could have a material adverse effect on our business, financial condition, results of operations, cash flows, and key performance indicators.
KEY PERFORMANCE INDICATORS
In evaluating our results, we utilize key performance indicators, which include non-GAAP measures as well as certain other operating metrics such as recurring monthly revenue and gross customer revenue attrition. Our computations of key performance indicators may not be comparable to other similarly titled measures reported by other companies. Additionally, our operating metric key performance indicators are approximated as there may be variations to reported results in each period due to certain adjustments we might make in connection with the integration over several periods of acquired companies that calculated these metrics differently, or otherwise, including periodic reassessments and refinements in the ordinary course of business. These refinements, for example, may include changes due to systems conversion or historical methodology differences in legacy systems.
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 believe the presentation of RMR is useful because it measures the volume of revenue under contract at a given point in time.
Gross Customer Revenue Attrition
A portion of our customer base can be expected to cancel its service every year. Customers may choose not to renew or may terminate their contracts for a variety of reasons, including, but not limited to, relocation, cost, loss to competition, or service issues. Gross customer revenue attrition has a direct impact on our financial results, including revenue, operating income, and cash flows.
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 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 twelve to fifteen 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, excluding contracts monitored but not owned and DIY 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.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measure that we believe is useful to investors to measure the operational strength and performance of our business. Our definition of Adjusted EBITDA, a reconciliation of Adjusted EBITDA to net income (loss) (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.”
Free Cash Flow
Free Cash Flow is a non-GAAP measure that our management employs to measure cash that is available to repay debt, make other investments, and pay dividends. Our definition of Free Cash Flow, a reconciliation of Free Cash Flow to cash flows from operating activities (the most comparable GAAP measure), and additional information, including a description of the limitations relating to the use of Free Cash Flow, are provided under “—Non-GAAP Measures.”
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Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
The following table sets forth our condensed consolidated results of operations, and key performance indicators for the periods presented.
(in thousands, except as otherwise indicated)
For the Three Months Ended
Results of Operations:
September 30, 2020September 30, 2019$
Change
Monitoring and related services$1,045,677 $1,093,564 $(47,887)
Installation and other253,247 207,006 46,241 
Total revenue1,298,924 1,300,570 (1,646)
Cost of revenue (exclusive of depreciation and amortization shown separately below)
357,895 356,556 1,339 
Selling, general and administrative expenses410,933 378,645 32,288 
Depreciation and intangible asset amortization473,346 505,832 (32,486)
Merger, restructuring, integration, and other(6,117)9,800 (15,917)
Goodwill impairment— 45,482 (45,482)
Loss on sale of business(19)55,489 (55,508)
Operating income (loss)62,886 (51,234)114,120 
Interest expense, net(156,759)(152,431)(4,328)
Loss on extinguishment of debt(48,916)(14,532)(34,384)
Other income1,992 200 1,792 
Loss before income taxes(140,797)(217,997)77,200 
Income tax benefit27,699 36,367 (8,668)
Net loss$(113,098)$(181,630)$68,532 
Key Performance Indicators: (1)
RMR$341,367 $351,381 $(10,014)
Gross customer revenue attrition (percent)12.9 %13.5 %(60) bps
Adjusted EBITDA (2)
$563,809 $624,476 $(60,667)
_______________________
(1)Refer to the “—Key Performance Indicators” section for the definitions of these key performance indicator.
(2)Adjusted EBITDA is a non-GAAP measure. Refer to the “—Non-GAAP Measures” section for the definition of this term and reconciliation to the most comparable GAAP measure.
Monitoring and Related Services Revenue
The decrease in monitoring and related services revenue was driven by a decrease in recurring revenue due to the sale of ADT Canada. This decrease was partially offset by an increase in recurring revenue in the U.S. largely due to improvements in average pricing as new and existing residential customers selected higher priced interactive services. Average customer count remained relatively flat due to recent improvements in attrition and customer additions.
The decrease in RMR to $341 million as of September 30, 2020 from $351 million as of September 30, 2019 was primarily due to the sale of ADT Canada, which decreased RMR by approximately $16 million. The decrease in RMR was partially offset by improvements in average pricing in the U.S. As of September 30, 2020 and September 30, 2019, gross customer revenue attrition was 12.9% and 13.5%, respectively. The improvement in attrition was primarily due to fewer customer relocations and the benefit of customer retention initiatives.
Installation and Other Revenue
The increase in installation and other revenue was primarily due to higher volume of revenue from equipment sold outright to residential customers as a result of the Defenders Acquisition. This increase was partially offset by (i) a decrease in the volume of revenue from equipment sold outright to commercial customers as a result of the COVID-19 Pandemic and (ii) the sale of ADT Canada.
In connection with the anticipated transition of residential transactions arising through Defenders to a predominately Company-owned model in 2021, we do not expect to experience the same level of revenue growth in future periods as compared to our results of operations for the three months ended September 30, 2020.
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Cost of Revenue
Cost of revenue was relatively flat and included an increase in installation costs associated with a higher volume of transactions in which equipment was sold outright to residential customers as a result of the Defenders Acquisition. This increase was partially offset by (i) a decrease in installation costs associated with a lower volume of transactions in which equipment was sold outright to commercial customers as a result of the COVID-19 Pandemic and (ii) the sale of ADT Canada.
In connection with the anticipated transition of residential transactions arising through Defenders to a predominately Company-owned model in 2021, we do not expect to experience the same level of increase in cost of revenue in future periods as compared to our results of operations for the three months ended September 30, 2020.
Selling, General and Administrative Expenses
The increase in selling, general and administrative expenses was primarily due to $78 million of incremental expenses associated with the Defenders Acquisition and an increase in radio conversion costs of $9 million. These increases were partially offset by (i) a reduction in financing and consent fees of $22 million associated with financing transactions in 2019, (ii) a $16 million decrease in advertising expenses (exclusive of incremental advertising expenses from recent acquisitions), (iii) $6 million from an estimated legal settlement, net of insurance, in 2019, and (iv) a reduction of expenses of $6 million due to the sale of ADT Canada.
Depreciation and Intangible Asset Amortization
The decrease in depreciation and intangible asset amortization expense was primarily due to a decrease of $24 million associated with the sale of ADT Canada as well as a decrease in the depreciation of subscriber system assets.
Merger, Restructuring, Integration, and Other
The decrease in merger, restructuring, integration, and other was primarily due to gains and losses recognized on a strategic investment, which had a gain of $11 million during the three months ended September 30, 2020 compared to a loss of $5 million during the three months ended September 30, 2019.
Interest Expense, net
The increase in interest expense, net, was primarily due to (i) $19 million related to our variable-rate first lien term loans, net of the impact of our interest rate swaps, and (ii) $3 million related to our fixed-rate first lien notes due to our refinancing transactions during September 2020 and September 2019. These increases were partially offset by (i) a decrease in interest expense of $9 million related to the changes in fair value of interest rate swap contracts as a result of cash flow hedges no longer being highly effective, and (ii) $9 million related to our second lien notes as a result of a reduction in interest rate due to our refinancing during January 2020.
Loss on Extinguishment of Debt
During the three months ended September 30, 2020, loss on extinguishment of debt totaled $49 million and related to the call premium and write-off of unamortized fair value adjustments in connection with the $1 billion redemption of our 6.250% notes due 2021 (the “ADT Notes due 2021”) in September 2020.
During the three months ended September 30, 2019, loss on extinguishment of debt totaled $15 million, which primarily related to the partial write-off of unamortized deferred financing costs and discount in connection with the amendment and restatement to our first lien credit agreement in September 2019.
Income Tax Benefit
Income tax benefit for the three months ended September 30, 2020 was $28 million, resulting in an effective tax rate for the period of 19.7%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.5%, and a 3.9% unfavorable impact from non-deductible charges primarily due to the Defenders Acquisition.
Income tax benefit for the three months ended September 30, 2019 was $36 million, resulting in an effective tax rate for the period of 16.7%. The effective tax rate primarily represents the federal income tax rate of 21.0%, a 21.9% unfavorable impact from valuation allowances established on the net capital losses generated in the U.S. and Canada related to the sale of ADT Canada, a 5.6% unfavorable impact from non-deductible goodwill impairment loss, offset by a 20.7% favorable impact from
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net capital losses generated in the U.S. and Canada related to the sale of ADT Canada, and a 4.6% favorable impact from amendments to prior year tax returns.
The effective tax rate can vary from period to period due to permanent tax adjustments, discrete items such as the settlement of income tax audits and changes in tax laws, as well as recurring factors such as changes in the overall state tax rate.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
The following table sets forth our condensed consolidated results of operations, summary cash flow data, and key performance indicators for the periods presented.
(in thousands, except as otherwise indicated)
For the Nine Months Ended
Results of Operations:
September 30, 2020September 30, 2019$
Change
Monitoring and related services$3,133,013 $3,249,401 $(116,388)
Installation and other867,050 577,973 289,077 
Total revenue4,000,063 3,827,374 172,689 
Cost of revenue (exclusive of depreciation and amortization shown separately below)1,142,228 1,020,603 121,625 
Selling, general and administrative expenses1,278,191 1,047,818 230,373 
Depreciation and intangible asset amortization1,440,239 1,502,574 (62,335)
Merger, restructuring, integration, and other114,715 23,069 91,646 
Goodwill impairment— 45,482 (45,482)
Loss on sale of business738 55,489 (54,751)
Operating income23,952 132,339 (108,387)
Interest expense, net(569,391)(465,977)(103,414)
Loss on extinguishment of debt(114,759)(103,004)(11,755)
Other income6,572 2,909 3,663 
Loss before income taxes(653,626)(433,733)(219,893)
Income tax benefit133,494 81,576 51,918 
Net loss$(520,132)$(352,157)$(167,975)
Summary Cash Flow Data:
Net cash provided by operating activities$993,269 $1,459,249 $(465,980)
Net cash used in investing activities$(800,275)$(1,156,921)$356,646 
Net cash provided by (used in) financing activities$249,156 $(509,716)$758,872 
Key Performance Indicators: (1)
RMR$341,367 $351,381 $(10,014)
Gross customer revenue attrition (percent)12.9 %13.5 %(60) bps
Adjusted EBITDA (2)
$1,666,408 $1,876,050 $(209,642)
Free Cash Flow (2)
$343,309 $394,036 $(50,727)
_______________________
(1)Refer to the “—Key Performance Indicators” section for the definitions of these key performance indicators.
(2)Adjusted EBITDA and Free Cash Flow are non-GAAP measures. Refer to the “—Non-GAAP Measures” section for the definitions of these terms and reconciliations to the most comparable GAAP measures.
Monitoring and Related Services Revenue
The decrease in monitoring and related services revenue was driven by a decrease in recurring revenue due to the sale of ADT Canada. This decrease was partially offset by an increase in recurring revenue in the U.S. largely due to improvements in average pricing as new and existing residential customers selected higher priced interactive services. Average customer count remained relatively flat due to recent improvements in attrition and customer additions.
The decrease in RMR to $341 million as of September 30, 2020 from $351 million as of September 30, 2019 was primarily due to the sale of ADT Canada, which decreased RMR by approximately $16 million. The decrease in RMR was partially offset by improvements in average pricing in the U.S. As of September 30, 2020 and September 30, 2019, gross customer revenue
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attrition was 12.9% and 13.5%, respectively. The improvement in attrition was primarily due to fewer customer relocations and the benefit of customer retention initiatives.
Installation and Other Revenue
The increase in installation and other revenue was primarily due to higher volume of revenue from equipment sold outright to residential customers as a result of the Defenders Acquisition and the Equipment Ownership Model Change. These increases were partially offset by (i) a decrease in the volume of revenue from equipment sold outright to commercial customers as a result of the COVID-19 Pandemic and (ii) the sale of ADT Canada.
In connection with our transition back to a predominately Company-owned model for our residential transactions, we do not expect to experience the same level of revenue growth subsequent to September 30, 2020 as reported in our results of operations for the nine months ended September 30, 2020.
Cost of Revenue
The increase in cost of revenue was primarily due to an increase in installation costs associated with a higher volume of transactions in which equipment was sold outright to residential customers as a result of the Defenders Acquisition and the Equipment Ownership Model Change. These increases were partially offset by (i) a decrease in installation costs associated with a lower volume of transactions in which equipment was sold outright to commercial customers as a result of the COVID-19 Pandemic and (ii) the sale of ADT Canada.
In connection with our transition back to a predominately Company-owned model for our residential transactions, we do not expect to experience the same level of increase in cost of revenue subsequent to September 30, 2020 as reported in our results of operations for the nine months ended September 30, 2020.
Selling, General and Administrative Expenses
The increase in selling, general and administrative expenses was primarily due to $226 million of incremental expenses associated with the Defenders Acquisition, an increase of $38 million in the provision for credit losses (exclusive of incremental provision from recent acquisitions) due to the estimated impact of the COVID-19 Pandemic and an increase in the volume of longer duration receivables, an increase in radio conversion costs of $36 million, as well as increases in selling costs, which includes amortization of deferred subscriber acquisition costs. These increases were partially offset by (i) a reduction in expenses of $38 million due to the sale of ADT Canada, (ii) a reduction in financing and consent fees of $18 million associated with financing transactions, (iii) recoveries of $7 million in 2020 compared to write-offs of $5 million in 2019 associated with notes receivable from a former strategic investment, (iv) $6 million from an estimated legal settlement, net of insurance, in 2019, and (v) a decrease in advertising expenses (exclusive of incremental advertising expenses from recent acquisitions).
Depreciation and Intangible Asset Amortization
The decrease in depreciation and intangible asset amortization expense was primarily due to a decrease of $70 million associated with the sale of ADT Canada as well as a decrease in the depreciation of subscriber system assets. These decreases were partially offset by an increase of the amortization of customer contracts acquired under the ADT Authorized Dealer Program.
Merger, Restructuring, Integration, and Other
The increase in merger, restructuring, integration, and other was primarily due to a charge of $81 million associated with the settlement of a pre-existing relationship. This increase was partially offset by a $9 million decrease in loss recognized on a strategic investment, which had a loss of $1 million during the nine months ended September 30, 2020 compared to a loss of $9 million during the nine months ended September 30, 2019.
Interest Expense, net
The increase in interest expense, net, was primarily due to (i) $80 million related to the changes in fair value of interest rate swap contracts as a result of cash flow hedges no longer being highly effective, (ii) $34 million related to our fixed-rate first lien notes due to our refinancing transactions during 2020 and 2019, and (iii) $30 million related to our variable-rate first lien term loans, net of the impact of our interest rate swaps. These increases were partially offset by a decrease in interest expense of $44 million related to our second lien notes due to the timing of partial redemptions during 2019 as well as a reduction in interest rate due to our refinancing during January 2020.
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Loss on Extinguishment of Debt
During the nine months ended September 30, 2020, loss on extinguishment of debt totaled $115 million and included $66 million associated with the call premium and write-off of unamortized deferred financing costs in connection with the $1.2 billion redemption of second lien notes in February 2020 and $49 million associated with the call premium and write-off of unamortized fair value adjustments in connection with the $1 billion redemption of the ADT Notes due 2021 in September 2020.
During the nine months ended September 30, 2019, loss on extinguishment of debt totaled $103 million and included (i) $22 million associated with the call premium and the partial write-off of unamortized deferred financing costs in connection with the $300 million partial redemption of second lien notes in February 2019, (ii) $61 million associated with the call premium and partial write-off of unamortized deferred financing costs in connection with the $1 billion partial redemption of second lien notes in April 2019, (iii) $6 million associated with the partial write-off of unamortized deferred financing costs and discount in connection with the $500 million repayment of a first lien term loan in April 2019, and (iv) $13 million associated with the partial write-off of unamortized deferred financing costs and discount in connection with the amendment and restatement to our first lien credit agreement in September 2019.
Income Tax Benefit
Income tax benefit for the nine months ended September 30, 2020 was $133 million, resulting in an effective tax rate for the period of 20.4%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 2.9%, a 3.0% unfavorable impact from non-deductible charges primarily due to the Defenders Acquisition, and a 1.2% unfavorable impact from an increase in valuation allowances primarily due to tax credits not expected to be utilized prior to expiration.
Income tax benefit for the nine months ended September 30, 2019 was $82 million, resulting in an effective tax rate for the period of 18.8%. The effective tax rate primarily represents the federal income tax rate of 21.0%, an 11.0% unfavorable impact from valuation allowances established on the net capital losses generated in the U.S. and Canada related to the sale of ADT Canada, a 2.8% unfavorable impact from non-deductible goodwill impairment loss, offset by a 10.4% favorable impact from net capital losses generated in the U.S. and Canada related to the sale of ADT Canada, and a 2.3% favorable impact from amendments to prior year tax returns.
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.
NON-GAAP MEASURES
To provide investors with additional information in connection with our results as determined in accordance with GAAP, we disclose Adjusted EBITDA and Free Cash Flow as non-GAAP measures. These measures are not financial measures calculated in accordance with GAAP and should not be considered as a substitute for net income, operating income, cash flows, 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 that the presentation of Adjusted EBITDA is appropriate to provide additional information to investors about our operating profitability adjusted for certain non-cash items, non-routine items that we do not expect to continue at the same level in the future, as well as other items that are 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 that of other peer companies using similar measures.
We define Adjusted EBITDA as net income or loss 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, (vii) losses on extinguishment of debt, (viii) radio conversion costs, (ix) financing and consent fees, (x) foreign currency gains/losses, (xi) acquisition related adjustments, and (xii) other charges and non-cash items.
There are material limitations to using Adjusted EBITDA. Adjusted EBITDA does not take into account certain significant items, including depreciation and amortization, interest, taxes, and other adjustments which directly affect our net income or loss. These limitations are best addressed by considering the economic effects of the excluded items independently, and by considering Adjusted EBITDA in conjunction with net income or loss as calculated in accordance with GAAP.
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Free Cash Flow
We believe that the presentation of Free Cash Flow is appropriate to provide additional information to investors about our ability to repay debt, make other investments, and pay dividends.
We define Free Cash Flow as cash flows from operating activities less cash outlays related to capital expenditures. We define capital expenditures to include accounts purchased through our network of authorized dealers or third parties outside of our authorized dealer network; subscriber system asset expenditures; and purchases of property and equipment. These items are subtracted from cash flows from operating activities because they represent long-term investments that are required for normal business activities.
Free Cash Flow adjusts for cash items that are ultimately within management’s discretion to direct, and therefore, may imply that there is less or more cash that is available than the most comparable GAAP measure. Free Cash Flow is not intended to represent residual cash flow for discretionary expenditures since debt repayment requirements and other non-discretionary expenditures are not deducted. These limitations are best addressed by using Free Cash Flow in combination with the cash flows as calculated in accordance with GAAP.
Adjusted EBITDA
The table below reconciles Adjusted EBITDA to net loss for the periods presented.
For the Three Months EndedFor the Nine Months Ended
(in thousands)September 30, 2020September 30, 2019$
Change		September 30, 2020September 30, 2019$
Change
Net loss$(113,098)$(181,630)$68,532 $(520,132)$(352,157)$(167,975)
Interest expense, net156,759 152,431 4,328 569,391 465,977 103,414 
Income tax benefit(27,699)(36,367)8,668 (133,494)(81,576)(51,918)
Depreciation and intangible asset amortization473,346 505,832 (32,486)1,440,239 1,502,574 (62,335)
Amortization of deferred subscriber acquisition costs24,810 20,784 4,026 70,226 58,544 11,682 
Amortization of deferred subscriber acquisition revenue(31,329)(28,034)(3,295)(90,346)(78,506)(11,840)
Share-based compensation expense26,431 18,876 7,555 74,758 65,126 9,632 
Merger, restructuring, integration, and other(6,117)9,800 (15,917)114,715 23,069 91,646 
Goodwill impairment— 45,482 (45,482)— 45,482 (45,482)
Loss on sale of business(19)55,489 (55,508)738 55,489 (54,751)
Loss on extinguishment of debt48,916 14,532 34,384 114,759 103,004 11,755 
Radio conversion costs, net(1)
12,641 11,718 923 24,311 12,637 11,674 
Financing and consent fees(2)
3 21,892 (21,889)5,263 23,279 (18,016)
Foreign currency losses (gains) (3)
— 207 (207)— (531)531 
Acquisition related adjustments(4)
(155)4,026 (4,181)1,289 16,725 (15,436)
Other(5)
(680)9,438 (10,118)(5,309)16,914 (22,223)
Adjusted EBITDA$563,809 $624,476 $(60,667)$1,666,408 $1,876,050 $(209,642)
___________________
(1)Represents costs, net of any incremental revenue earned, associated with replacing cellular technology used in many of our security systems pursuant to a replacement program.
(2)Represents fees expensed associated with financing transactions.
(3)Represents the conversion of intercompany loans that are denominated in Canadian dollars to U.S. dollars.
(4)Represents amortization of purchase accounting adjustments and compensation arrangements related to acquisitions.
(5)Represents other charges and non-cash items. The three and nine months ended September 30, 2020 include recoveries of $3 million and $7 million, respectively, of notes receivable from a former strategic investment that were previously written-off, $5 million of which is included in the nine months ended September 30, 2019. The three and nine months ended September 30, 2019 include an estimated legal settlement, net of insurance, of $6 million.
Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019
The decrease in Adjusted EBITDA was primarily related to (i) an increase in selling, general and administrative expenses, excluding items outside of our definition of Adjusted EBITDA, largely due to the Defenders Acquisition and (ii) the sale of
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ADT Canada. The decrease was partially offset by an increase from transactions in which equipment is sold outright to customers, net of the associated costs.
In connection with the anticipated transition of residential transactions arising through Defenders to a predominately Company-owned model in 2021, we could experience an adverse impact to Adjusted EBITDA related to a decrease in volume of transactions in which equipment is sold outright to residential customers in future periods as compared to our results of operations for the three months ended September 30, 2020.
Refer to the discussions above under “—Results of Operations” for further details.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019
The decrease in Adjusted EBITDA was primarily related to (i) an increase in selling, general and administrative expenses, excluding items outside of our definition of Adjusted EBITDA, largely due to the Defenders Acquisition and the provision for credit losses and (ii) the sale of ADT Canada. The decrease was partially offset by an increase from transactions in which equipment is sold outright to customers, net of the associated costs.
In connection with our transition back to a predominately Company-owned model for our residential transactions, we could experience an adverse impact to Adjusted EBITDA related to a decrease in volume of transactions in which equipment is sold outright to residential customers subsequent to September 30, 2020 as reported in our results of operations for the nine months ended September 30, 2020.
Refer to the discussions above under “—Results of Operations” for further details.
Free Cash Flow
The table below reconciles Free Cash Flow to cash flows from operating activities for the periods presented.
For the Nine Months Ended
(in thousands)September 30, 2020September 30, 2019$
Change
Net cash provided by operating activities$993,269 $1,459,249 $(465,980)
Dealer generated customer accounts and bulk account purchases(265,131)(514,487)249,356 
Subscriber system asset expenditures(272,512)(430,586)158,074 
Purchases of property and equipment(112,317)(120,140)7,823 
Free Cash Flow$343,309 $394,036 $(50,727)
Cash Flows from Operating Activities
Refer to the discussion below under “—Liquidity and Capital Resources” for further details regarding cash flows from operating activities.
Cash Outlays Related to Capital Expenditures
Dealer generated customer accounts and bulk account purchases, subscriber system asset expenditures, and purchases of property and equipment are included in cash flows from investing activities. Refer to the discussions below under “—Liquidity and Capital Resources” for further details regarding cash flows from investing activities.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity
We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our revolving credit facility and Receivables Facility, 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, working capital, capital expenditures, strategic investments, periodic principal and interest payments on our debt, and potential dividend payments to our stockholders. We may, from time to time, 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 or through privately negotiated transactions or through a 10b5-1 repurchase plan or otherwise, and any such transactions may involve material amounts. We believe our cash position, borrowing capacity available under our revolving credit facility and Receivables Facility, and cash provided by operating
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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.
We are a highly leveraged company with significant debt service requirements. As of September 30, 2020, we had $489 million in cash and cash equivalents and $400 million available under our revolving credit facility. In addition, we had an uncommitted available borrowing capacity of $159 million under our Receivables Facility, which is dependent on the volume of eligible retail installment contract receivables that can be sold under our Receivables Facility. The carrying amount of total debt outstanding was approximately $9.7 billion as of September 30, 2020.
Long-Term Debt
Significant changes in our debt during the nine months ended September 30, 2020 were as follows:
First Lien Credit Agreement
As of September 30, 2020, we had an available borrowing capacity of $400 million under our first lien revolving credit facility (the “First Lien Revolving Credit Facility”), with no borrowings outstanding.
Second Lien Notes due 2028
During January 2020, we issued $1.3 billion aggregate principal amount of 6.250% second-priority senior secured notes due 2028 (the “Second Lien Notes due 2028”). The proceeds from the Second Lien Notes due 2028, along with cash on hand and borrowings under the First Lien Revolving Credit Facility, were used to redeem the outstanding $1.2 billion aggregate principal amount of our 9.250% second-priority senior secured notes due 2023 (the “Prime Notes”) and pay any related fees and expenses, including the call premium on the outstanding Prime Notes. The deferred financing costs incurred in connection with the issuance of the Second Lien Notes due 2028 were not material.
The Second Lien Notes due 2028 will mature on January 15, 2028 with semi-annual interest payment dates of January 15 and July 15, and may be redeemed at our option as follows:
•Prior to January 15, 2023, in whole at any time or in part from time to time, (a) at a redemption price equal to 100% of the principal amount of the Second Lien Notes due 2028 redeemed, plus a make-whole premium and accrued and unpaid interest as of, but excluding, the redemption date or (b) for up to 40% of the original aggregate principal amount of the Second Lien Notes due 2028 and in an aggregate amount equal to the net cash proceeds of any equity offerings, at a redemption price equal to 106.250%, plus accrued and unpaid interest, so long as at least 50% of the original aggregate principal amount of the Second Lien Notes due 2028 shall remain outstanding after each such redemption.
•On or after January 15, 2023, in whole at any time or in part from time to time, at a redemption price equal to 103.125% of the principal amount of the Second Lien Notes due 2028 redeemed and accrued and unpaid interest as of, but excluding, the redemption date. The redemption price decreases to 101.563% on or after January 15, 2024 and decreases to 100% on or after January 15, 2025.
Additionally, upon the occurrence of specified change of control events, we must offer to repurchase the Second Lien Notes due 2028 at 101% of the principal amount, plus accrued and unpaid interest, if any, to, but not including, the purchase date. The indenture governing the Second Lien Notes due 2028 also provides for customary events of default.
Prime Notes
The indenture underlying the outstanding $1.2 billion aggregate principal amount of the Prime Notes was discharged during January 2020 and the Prime Notes were redeemed during February 2020 for a total redemption price of approximately $1.3 billion, which included the related call premium.
Receivables Facility
During March 2020, we entered into the Receivables Facility. Under the terms of the Receivables Facility, we may receive up to $200 million of financing secured by retail installment contract receivables from transactions involving security systems that were sold under a customer-owned model. During April 2020, we amended the Receivables Facility to also permit financing secured by retail installment contract receivables from transactions occurring under our Company-owned model. The Receivables Facility has a one year revolving period until March 5, 2021, which may be extended, and bears interest at a variable rate. If the revolving period is not extended, we are required to repay the Receivables Facility in a manner consistent with the contractual collections of the underlying retail installment contract receivables. We may make voluntary prepayments on the Receivables Facility at any time prior to maturity at par.
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We obtain financing by selling or contributing certain retail installment contract receivables to our wholly-owned consolidated bankruptcy-remote special purpose entity (the “SPE”), which, pursuant to the Receivables Facility, borrows funds secured by the transferred retail installment contract receivables. The SPE is a separate legal entity with its own creditors who will be entitled, prior to and upon the liquidation of the SPE, to be satisfied out of the SPE’s assets prior to any assets in the SPE becoming available to us (other than the SPE). Accordingly, the assets of the SPE are not available to pay our creditors (other than the SPE), although collections from the transferred retail installment contract receivables in excess of amounts required to repay the SPE’s creditors may be remitted to us during and after the term of the Receivables Facility. The SPE’s creditors have legal recourse to the transferred retail installment contract receivables owned by the SPE, but do not have any recourse to us (other than the SPE) for the payment of principal and interest on the SPE’s financing.
We service the transferred retail installment contract receivables and are responsible for ensuring that amounts collected from the transferred retail installment contract receivables are remitted to the SPE. We are required to deposit payments received from the transferred retail installment contract receivables into a segregated account maintained by a third party. On a monthly basis, the segregated account is utilized to make required principal, interest, and other payments due under the Receivables Facility.
During the nine months ended September 30, 2020, we received proceeds of $44 million under the Receivables Facility and repaid $2 million. As of September 30, 2020, we had an outstanding balance of $41 million and an uncommitted available borrowing capacity of $159 million under the Receivables Facility.
First Lien Notes due 2027
During August 2020, we issued $1 billion aggregate principal amount of 3.375% first-priority senior secured notes due 2027 (the “First Lien Notes due 2027”). The proceeds from the First Lien Notes due 2027, along with cash on hand, were used to redeem the outstanding $1 billion aggregate principal amount of the ADT Notes due 2021, pay accrued and unpaid interest on the ADT Notes due 2021, and pay any related fees and expenses, including the call premium on the ADT Notes due 2021. The deferred financing costs incurred in connection with the issuance of the First Lien Notes due 2027 were not material.
The First Lien Notes due 2027 will mature on August 31, 2027 with semi-annual interest payment dates of June 15 and December 15, and may be redeemed at our option as follows:
•Prior to August 31, 2026, in whole at any time or in part from time to time, at a make-whole premium plus accrued and unpaid interest, if any, thereon to the redemption date.
•On or after August 31, 2026, in whole at any time or in part from time to time, at a redemption price equal to 100% of the principal amount of the First Lien Notes due 2027 redeemed plus accrued and unpaid interest, if any, thereon to the redemption date.
Additionally, upon the occurrence of specified change of control events, we must offer to repurchase the First Lien Notes due 2027 at 101% of the principal amount, plus accrued and unpaid interest, if any, to, but not including, the purchase date. The indenture governing the First Lien Notes due 2027 also provides for customary events of default.
ADT Notes
In September 2020, we redeemed $1 billion aggregate principal amount of the ADT Notes due 2021 for a total repurchase price of approximately $1.1 billion, which included the related call premium.
Debt Covenants
As of September 30, 2020, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations and we do not believe there is a material risk of future noncompliance with our financial covenant and other maintenance tests as a result of the COVID-19 Pandemic.
Issuance of Class B Common Stock
During September 2020, we amended our articles of incorporation to authorize the issuance of 100,000,000 shares of Class B common stock, par value of $0.01 per share, (“Class B Common Stock”) as well as to increase the number of authorized shares of preferred stock, par value of $0.01 per share, to 1,000,000.
The Class B Common Stock represents a new class of common stock of ADT. Each share of Class B Common Stock has equal status and rights to dividends with a share of Common Stock. The holders of Class B Common Stock have one vote for each share of Class B Common Stock held of record by such holder on all matters on which stockholders are entitled to vote
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generally; provided, however, that holders of Class B Common Stock, as such, are not entitled to vote on the election, appointment, or removal of directors of ADT. Additionally, each share of Class B Common Stock will immediately become convertible into one share of Common Stock, at the option of the holder thereof, at any time following the earlier of (i) the expiration or early termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Clearance”), required prior to such holder’s conversion of all such shares of Class B Common Stock, and (ii) to the extent HSR Clearance is not required prior to such holder’s conversion of such shares of Class B Common Stock, the date that such holder owns such shares of Class B Common Stock.
During September 2020, we issued and sold 54,744,525 shares of Class B Common Stock for an aggregate purchase price of $450 million to Google in a private placement pursuant to a securities purchase agreement dated July 31, 2020 (the “Securities Purchase Agreement”). As of the date of closing, Google held approximately 6.6% of the issued and outstanding Common Stock of ADT on an as-converted basis. Prior to closing, the Securities Purchase Agreement provided Google with the option to purchase additional shares of Class B Common Stock, for the same price per share, up to 9.9% of the issued and outstanding Common Stock of ADT on an as-converted basis. Google did not exercise this option. The proceeds received will be used to reduce debt and fund growth over time.
In connection with the issuance of the Class B Common Stock, Google entered into an Investor Rights Agreement (the “Investor Rights Agreement”) with us, pursuant to which Google agreed to be bound by customary transfer restrictions and drag-along rights, and be afforded customary registration rights with respect to shares of Class B Common Stock held directly by Google. Under the terms of the Investor Rights Agreement, Google is prohibited, subject to certain exceptions, from transferring any shares of Class B Common Stock or any shares of Common Stock issuable upon conversion of the Class B Common Stock beneficially owned by Google until the earlier of (i) the three-year anniversary of issuance, (ii) the date on which the Commercial Agreement has been terminated under certain specified circumstances, and (iii) June 30, 2022 if we breach certain of our obligations under the Commercial Agreement.
Dividends
During the nine months ended September 30, 2020, we declared the following dividends on common stock:
Declaration DateRecord DatePayment DateCommon Stock Dividend per ShareClass B Common Stock Dividend per Share
March 5, 2020March 19, 2020April 2, 2020$0.035$—
May 7, 2020June 18, 2020July 2, 2020$0.035$—
August 5, 2020September 18, 2020October 2, 2020$0.035$0.035
During the three months ended September 30, 2020, we declared dividends of $0.035 per share on Common Stock ($27 million) and $0.035 per share on Class B Common Stock ($2 million). The amount of dividends settled in shares of Common Stock during the period was not material.
During the nine months ended September 30, 2020, we declared aggregate dividends of $0.105 per share on Common Stock ($81 million) and $0.035 per share on Class B Common Stock ($2 million). The amount of dividends settled in shares of Common Stock during the period was not material.
On November 5, 2020, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on December 21, 2020, which will be distributed on January 4, 2021.
Share Repurchase Program
On February 27, 2019, we approved a share repurchase program (the “Share Repurchase Program”), which permits us to repurchase up to $150 million of our shares of Common Stock through February 27, 2021. We announced the Share Repurchase Program on March 11, 2019. On March 23, 2020, we approved an increase of $75 million, inclusive of the amount then remaining under the Share Repurchase Program, in the authorized repurchase amount and an extension of the Share Repurchase Program through March 23, 2021.
We may effect these repurchases pursuant to one or more trading plans to be adopted in accordance with Rule 10b5-1 (each, a “10b5-1 plan”) under the Securities Exchange Act of 1934 (the “Exchange Act”), in privately negotiated transactions, in open market transactions, or pursuant to an accelerated share repurchase program. We intend to conduct the Share Repurchase Program in accordance with Rule 10b-18 under the Exchange Act. We are not obligated to repurchase any of our shares of Common Stock and the timing and amount of any repurchases will depend on legal requirements, market conditions, stock price, alternative uses of capital, and other factors.
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During the three and nine months ended September 30, 2020, there were no material repurchases of shares of our Common Stock under the Share Repurchase Program. As of September 30, 2020, we had approximately $75 million remaining in the Share Repurchase Program.
Cash Flow Analysis
The following table is a summary of our cash flow activity for the periods presented:
For the Nine Months Ended
(in thousands)September 30, 2020September 30, 2019$
Change
Net cash provided by operating activities$993,269 $1,459,249 $(465,980)
Net cash used in investing activities$(800,275)$(1,156,921)$356,646 
Net cash provided by (used in) financing activities$249,156 $(509,716)$758,872 
Cash Flows from Operating Activities
The decrease in cash flows provided by operating activities was primarily due to (i) an increase in selling, general and administrative expenses largely due to the Defenders Acquisition, (ii) an increase in the volume of transactions in which equipment was sold outright to residential customers, (iii) the sale of ADT Canada, (iv) $81 million related to the settlement of a pre-existing relationship in connection with the Defenders Acquisition, and (v) an increase in interest payments of $40 million due to changes to the timing and amount of interest payments as a result of our recent financing transactions. The remainder of the activity in cash flows provided by operating activities 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.
In connection with our transition back to a predominately Company-owned model for our residential transactions, we expect to experience an increase in cash flows from operating activities related to a decrease in the volume of transactions in which equipment is sold outright to residential customers subsequent to September 30, 2020 as reported in our results of operations for the nine months ended September 30, 2020.
Refer to the discussions above under “—Results of Operations” for further details.
Cash Flows from Investing Activities
The decrease in cash flows used in investing activities was primarily due to (i) a decrease in the volume of dealer and bulk account purchases and an advance payment received for dealer charge-backs in connection with the Defenders Acquisition, (ii) a decrease in the volume of subscriber system asset expenditures as a result of the Equipment Ownership Model Change and the sale of ADT Canada, and (iii) proceeds received associated with the sale of a strategic investment. These decreases were partially offset by an increase in cash used for business acquisitions, net of cash acquired, of $87 million primarily due to the Defenders Acquisition.
In connection with our transition back to a predominately Company-owned model for our residential transactions, we expect to experience an increase in cash flows used in investing activities related to an increase in the volume of subscriber system asset expenditures subsequent to September 30, 2020 as compared to the volume of subscriber system asset expenditures for the nine months ended September 30, 2020.
Cash Flows from Financing Activities
During the nine months ended September 30, 2020, net cash provided by financing activities primarily consisted of (i) $450 million of proceeds associated with the issuance of Class B Common Stock and (ii) $41 million of net proceeds under the Receivables Facility. These cash inflows were partially offset by (i) $108 million related to the net repayments of long-term borrowings, (ii) $80 million related to dividend payments on common stock, and (iii) $28 million related to the payment of deferred financing fees.
During the nine months ended September 30, 2019, net cash used in financing activities primarily consisted of (i) $272 million related to the net repayments of long-term borrowings, (ii) $150 million related to repurchases of common stock, (iii) $53 million related to the payment of deferred financing fees, and (iv) $34 million related to dividend payments on common stock.
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COMMITMENTS AND CONTRACTUAL OBLIGATIONS
In our 2019 Annual Report, we disclosed our commitments and contractual obligations. There have been no material changes to these commitments and contractual obligations except for certain commitments pursuant to the Commercial Agreement and the changes to our long-term debt during the nine months ended September 30, 2020, as described above. Refer to the discussion above under “—Liquidity and Capital Resources” for further details regarding significant changes to our long-term debt.
During October 2020, we entered into a master services agreement with Rackspace US, Inc., a related party, for the provision of cloud storage, equipment, and services to facilitate the implementation of our cloud migration strategy for certain applications. The master services agreement includes a minimum purchase commitment of $50 million over a 7 year term.
OFF-BALANCE SHEET ARRANGEMENTS
There have been no material changes to our off-balance sheet arrangements as disclosed in our 2019 Annual Report during the nine months ended September 30, 2020.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying condensed consolidated financial statements are prepared in accordance with GAAP, which requires us to select accounting policies and make estimates that affect amounts reported in the condensed consolidated financial statements and the accompanying notes. Management’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. In our 2019 Annual Report, we identified our accounting policies that are based on, among other things, estimates and judgments made by management that include inherent risks and uncertainties.
Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” to the condensed consolidated financial statements for further information about recent accounting adoptions and pronouncements.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains certain information that may constitute “forward-looking statements” within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. 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 report that are not clearly historical in nature, including statements regarding anticipated financial performance, management’s plans and objectives for future operations, business prospects, outcome of regulatory proceedings, market conditions, our ability to successfully respond to the challenges posed by the COVID-19 Pandemic, our strategic partnership and ongoing relationship with Google, the expected timing of product commercialization with Google or any changes thereto, the successful internal development, commercialization and timing of our next generation platform and other matters are forward-looking. Forward-looking statements are contained principally in the sections of this report entitled “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Without limiting the generality of the preceding sentence, 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 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.
Forward-looking information involves 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 in Part II Item 1A. of this report under the heading “Risk Factors.” 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 of the Company 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 the Quarterly Report. We assume no obligation (and specifically disclaim any such obligation) to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, except as required by law.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Our operations expose us to a variety of market risks, including the effects of changes in interest rates. We monitor and manage these financial exposures as an integral part of our overall risk management program. Our policies allow for the use of specified financial instruments for hedging purposes only. Use of derivatives for speculation purposes is prohibited.
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Interest Rate Risk
We have both fixed-rate and variable-rate debt, and, as a result, we are exposed to fluctuations in interest rates on our debt. We have interest rate swap contracts to hedge our interest rate exposure on our variable-rate debt. However, certain of our variable-rate debt instruments are subject to a one-percent floor on interest payments while our interest rate swap contracts do not include a floor. If current LIBOR increases above one percent, the increase in our debt service obligations on most of our variable-rate indebtedness will be neutralized as we have entered into interest rate swaps that hedge any increase in current LIBOR above one percent. If current LIBOR is below one percent, even though the amount borrowed remains the same, our net income and cash flows, including cash available for servicing our indebtedness, will decrease by the impact of the difference between one percent and current LIBOR because certain of our variable-rate debt has an interest floor of one percent while the corresponding interest rate swap contracts do not have a LIBOR floor.
As a result of changes in the interest rate environment in response to macroeconomic decline, our interest rate swap contracts designated as cash flow hedges with an aggregate notional amount of $3 billion were no longer highly effective beginning in March 2020. Accordingly, we de-designated the cash flow hedges and the changes in fair value for the period in which these cash flow hedges were no longer highly effective were recognized in interest expense. Amounts recognized as a component of AOCI prior to de-designation will be reclassified into interest expense in the same period in which the related interest on variable-rate debt affects earnings through the maturity dates of the interest rate swap contracts as the forecasted cash flows are probable of occurring.
The changes in fair value of interest rate swap contracts recognized in interest expense, net, in the Condensed Consolidated Statements of Operations were a gain of $8 million and a loss of $1 million during the three months ended September 30, 2020 and 2019, respectively, and losses of $90 million and $9 million during the nine months ended September 30, 2020 and 2019, respectively.
As of September 30, 2020, the carrying amount of our debt, excluding finance leases, was $9.7 billion with a fair value of $10.1 billion. In addition, we had interest rate swap contracts with aggregate notional amounts of $3.2 billion with a fair value of $305 million as a net liability. As of September 30, 2020, a hypothetical 10% change in interest rates would change the fair value of our debt by approximately $224 million based on the implied yield from broker-quoted market prices on our debt, while a similar change in interest rates would change the fair value of our interest rate swap contracts by approximately $3 million based on a discounted cash flow analysis. Additionally, any 0.125% decrease in LIBOR below 1.0% would result in an increase of approximately $4 million in annualized interest expense on our variable-rate debt, including the impact of our interest rate swaps.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2020, our disclosure controls and procedures were effective in recording, processing, summarizing, and reporting, within the time periods specified in the SEC’s rules and forms, information required to be disclosed in the reports that we file or submit under the Exchange Act, and that such information was accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting identified in our management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) of the Exchange Act during the three months ended September 30, 2020 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 12 “Commitments and Contingencies” to the condensed consolidated financial statements under the heading “Legal Proceedings” included in this Quarterly Report on Form 10-Q for legal proceedings and related matters.
ITEM 1A. RISK FACTORS.
Our significant business risks are described in Part I, Item 1A. in our 2019 Annual Report, as filed with the SEC on March 10, 2020 and in our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K filed with the SEC since such date. You should be aware that these risk factors and other information may not describe every risk facing the Company.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Equity Securities
As previously disclosed in our Current Report on Form 8-K filed with the SEC on January 7, 2020, we issued shares of Common Stock as consideration in the Defenders Acquisition in reliance on the exemption provided by Section 4(a)(2) of the Securities Act.
In addition, as previously disclosed in our Current Report on Form 8-K filed with the SEC on September 17, 2020, we issued and sold 54,744,525 shares of Class B Common Stock for an aggregate purchase price of $450 million to Google in a private placement in reliance on the exemption provided by Section 4(a)(2) of the Securities Act. The proceeds received will be used to reduce debt and fund growth over time.
Use of Proceeds from Registered Equity Securities
We did not receive any proceeds from sales of registered equity securities during the nine months ended September 30, 2020.
Issuer Purchases of Equity Securities
On February 27, 2019, we approved the Share Repurchase Program, which permits us to repurchase up to $150 million of our shares of Common Stock through February 27, 2021. We announced the Share Repurchase Program on March 11, 2019. On March 23, 2020, we approved an increase of $75 million, inclusive of the amount then remaining under the Share Repurchase Program, in the authorized repurchase amount and an extension of the Share Repurchase Program through March 23, 2021.
We may effect these repurchases pursuant to one or more trading plans to be adopted in accordance with Rule 10b5-1 (each, a “10b5-1 plan”) under the Exchange Act, in privately negotiated transactions, in open market transactions, or pursuant to an accelerated share repurchase program. We intend to conduct the Share Repurchase Program in accordance with Rule 10b-18 under the Exchange Act. We are not obligated to repurchase any of our shares of Common Stock and the timing and amount of any repurchases will depend on legal requirements, market conditions, stock price, alternative uses of capital, and other factors.
During the three months ended September 30, 2020, there were no repurchases of any shares of our Common Stock under the Repurchase Program and as of September 30, 2020, we had approximately $75 million remaining in the Repurchase Program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
ITEM 5. OTHER INFORMATION.
None.
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ITEM 6. EXHIBITS.
The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this report.
Exhibits Index
The information required by this Item is set forth on the exhibit index.
Exhibit NumberExhibit Description
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48

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101
XBRL Instant Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
104Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document
_________________________
^ Confidential treatment requested. Confidential portions of this Exhibit 2.1 have been omitted.
* Filed herewith.
+ Management contract or compensatory plan or arrangement.


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ADT Inc.
Date:November 5, 2020By:/s/ Jeffrey Likosar
 Name:Jeffrey Likosar
 Title:Executive Vice President, Chief Financial Officer and Treasurer
(Principal Financial Officer)
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