ADT Inc. - Quarter Report: 2023 June (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 June 30, 2023
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
![adtinclogoa08.jpg](https://www.sec.gov/Archives/edgar/data/0001703056/000170305623000157/adt-20230630_g1.jpg)
ADT Inc.
(Exact name of registrant as specified in its charter)
Delaware | 47-4116383 | |||||||
(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, zip code, registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
Common Stock, par value $0.01 per share | ADT | New 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 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 July 31, 2023, there were 866,480,530 shares outstanding 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)
June 30, 2023 | December 31, 2022 | ||||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 146,435 | $ | 257,223 | |||||||
Restricted cash and restricted cash equivalents | 114,365 | 116,357 | |||||||||
Accounts receivable, net of allowance for credit losses of $70,566 and $65,655, respectively | 621,871 | 597,313 | |||||||||
Inventories, net | 307,728 | 329,490 | |||||||||
Work-in-progress | 62,745 | 80,765 | |||||||||
Prepaid expenses and other current assets | 301,823 | 340,848 | |||||||||
Total current assets | 1,554,967 | 1,721,996 | |||||||||
Property and equipment, net | 340,898 | 375,968 | |||||||||
Subscriber system assets, net | 3,102,531 | 3,061,303 | |||||||||
Intangible assets, net | 5,004,029 | 5,091,747 | |||||||||
Goodwill | 5,344,329 | 5,767,016 | |||||||||
Deferred subscriber acquisition costs, net | 1,169,187 | 1,079,638 | |||||||||
Other assets | 818,438 | 723,568 | |||||||||
Total assets | $ | 17,334,379 | $ | 17,821,236 | |||||||
Liabilities and stockholders' equity | |||||||||||
Current liabilities: | |||||||||||
Current maturities of long-term debt | $ | 836,075 | $ | 871,917 | |||||||
Accounts payable | 375,312 | 486,715 | |||||||||
Deferred revenue | 385,639 | 402,691 | |||||||||
Accrued expenses and other current liabilities | 721,880 | 899,780 | |||||||||
Total current liabilities | 2,318,906 | 2,661,103 | |||||||||
Long-term debt | 8,834,725 | 8,956,671 | |||||||||
Deferred subscriber acquisition revenue | 1,826,454 | 1,645,478 | |||||||||
Deferred tax liabilities | 763,550 | 892,994 | |||||||||
Other liabilities | 272,732 | 271,842 | |||||||||
Total liabilities | 14,016,367 | 14,428,088 | |||||||||
Commitments and contingencies (See Note 13) | |||||||||||
Stockholders' equity: | |||||||||||
Preferred stock—authorized 1,000,000 shares of $0.01 par value; zero issued and outstanding as of June 30, 2023 and December 31, 2022 | — | — | |||||||||
Common stock—authorized 3,999,000,000 shares of $0.01 par value; issued and outstanding shares of 866,408,740 and 862,098,041 as of June 30, 2023 and December 31, 2022, respectively | 8,664 | 8,621 | |||||||||
Class B common stock—authorized 100,000,000 shares of $0.01 par value; issued and outstanding shares of 54,744,525 as of June 30, 2023 and December 31, 2022 | 547 | 547 | |||||||||
Additional paid-in capital | 7,390,269 | 7,380,759 | |||||||||
Accumulated deficit | (4,041,963) | (3,949,579) | |||||||||
Accumulated other comprehensive income (loss) | (39,505) | (47,200) | |||||||||
Total stockholders' equity | 3,318,012 | 3,393,148 | |||||||||
Total liabilities and stockholders' equity | $ | 17,334,379 | $ | 17,821,236 |
See Notes to Condensed Consolidated Financial Statements
1
ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Revenue: | |||||||||||||||||||||||
Monitoring and related services | $ | 1,187,063 | $ | 1,145,792 | $ | 2,360,381 | $ | 2,267,088 | |||||||||||||||
Security installation, product, and other | 328,533 | 240,183 | 622,734 | 471,653 | |||||||||||||||||||
Solar installation, product, and other | 77,532 | 215,055 | 222,367 | 407,036 | |||||||||||||||||||
Total revenue | 1,593,128 | 1,601,030 | 3,205,482 | 3,145,777 | |||||||||||||||||||
Cost of revenue (exclusive of depreciation and amortization shown separately below): | |||||||||||||||||||||||
Monitoring and related services | 224,758 | 232,506 | 471,161 | 468,120 | |||||||||||||||||||
Security installation, product, and other | 194,020 | 142,402 | 363,274 | 281,152 | |||||||||||||||||||
Solar installation, product, and other | 64,898 | 132,905 | 163,242 | 268,309 | |||||||||||||||||||
Total cost of revenue | 483,676 | 507,813 | 997,677 | 1,017,581 | |||||||||||||||||||
Selling, general, and administrative expenses | 441,771 | 487,069 | 904,000 | 969,417 | |||||||||||||||||||
Depreciation and intangible asset amortization | 345,838 | 399,416 | 728,893 | 875,539 | |||||||||||||||||||
Merger, restructuring, integration, and other | 18,090 | (3,845) | 35,737 | (3,317) | |||||||||||||||||||
Goodwill impairment | 181,179 | — | 422,809 | — | |||||||||||||||||||
Operating income (loss) | 122,574 | 210,577 | 116,366 | 286,557 | |||||||||||||||||||
Interest expense, net | (84,282) | (81,651) | (255,908) | (87,958) | |||||||||||||||||||
Other income (expense) | 519 | 1,463 | (671) | 2,959 | |||||||||||||||||||
Income (loss) before income taxes and equity in net earnings (losses) of equity method investee | 38,811 | 130,389 | (140,213) | 201,558 | |||||||||||||||||||
Income tax benefit (expense) | 55,138 | (37,924) | 118,002 | (57,448) | |||||||||||||||||||
Income (loss) before equity in net earnings (losses) of equity method investee | 93,949 | 92,465 | (22,211) | 144,110 | |||||||||||||||||||
Equity in net earnings (losses) of equity method investee | (1,738) | (948) | (4,415) | (948) | |||||||||||||||||||
Net income (loss) | $ | 92,211 | $ | 91,517 | $ | (26,626) | $ | 143,162 | |||||||||||||||
Net income (loss) per share - basic: | |||||||||||||||||||||||
Common Stock | $ | 0.10 | $ | 0.10 | $ | (0.03) | $ | 0.16 | |||||||||||||||
Class B Common Stock | $ | 0.10 | $ | 0.10 | $ | (0.03) | $ | 0.16 | |||||||||||||||
Weighted-average shares outstanding - basic: | |||||||||||||||||||||||
Common Stock | 857,581 | 848,242 | 855,949 | 846,048 | |||||||||||||||||||
Class B Common Stock | 54,745 | 54,745 | 54,745 | 54,745 | |||||||||||||||||||
Net income (loss) per share - diluted: | |||||||||||||||||||||||
Common Stock | $ | 0.10 | $ | 0.10 | $ | (0.03) | $ | 0.15 | |||||||||||||||
Class B Common Stock | $ | 0.10 | $ | 0.10 | $ | (0.03) | $ | 0.15 | |||||||||||||||
Weighted-average shares outstanding - diluted: | |||||||||||||||||||||||
Common Stock | 916,859 | 910,809 | 855,949 | 911,005 | |||||||||||||||||||
Class B Common Stock | 54,745 | 54,745 | 54,745 | 54,745 | |||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements
2
ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(in thousands)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Net income (loss) | $ | 92,211 | $ | 91,517 | $ | (26,626) | $ | 143,162 | |||||||||||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
Cash flow hedges | 3,586 | 6,561 | 7,721 | 17,653 | |||||||||||||||||||
Other | 2 | (5) | (26) | (14) | |||||||||||||||||||
Total other comprehensive income (loss), net of tax | 3,588 | 6,556 | 7,695 | 17,639 | |||||||||||||||||||
Comprehensive income (loss) | $ | 95,799 | $ | 98,073 | $ | (18,931) | $ | 160,801 |
See Notes to Condensed Consolidated Financial Statements
3
ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands)
Three Months Ended June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
Number of Common Shares | Number of Class B Common Shares | Common Stock | Class B Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||
Beginning balance | 866,917 | 54,745 | $ | 8,668 | $ | 547 | $ | 7,380,867 | $ | (4,101,557) | $ | (43,093) | $ | 3,245,432 | |||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | 92,211 | — | 92,211 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | — | — | — | 3,588 | 3,588 | |||||||||||||||||||||||||||||||||||||||
Dividends | — | — | — | — | — | (32,172) | — | (32,172) | |||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | 11,506 | — | — | 11,506 | |||||||||||||||||||||||||||||||||||||||
Transactions related to employee share-based compensation plans and other | (508) | — | (4) | — | (2,104) | (445) | (2,553) | ||||||||||||||||||||||||||||||||||||||||
Ending balance | 866,409 | 54,745 | $ | 8,664 | $ | 547 | $ | 7,390,269 | $ | (4,041,963) | $ | (39,505) | $ | 3,318,012 |
Three Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
Number of Common Shares | Number of Class B Common Shares | Common Stock | Class B Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||
Beginning balance | 851,324 | 54,745 | $ | 8,513 | $ | 547 | $ | 7,262,237 | $ | (3,933,140) | $ | (57,890) | $ | 3,280,267 | |||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | 91,517 | — | 91,517 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | — | — | — | 6,556 | 6,556 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock, net of expenses | 4,704 | — | 47 | — | 15,321 | — | — | 15,368 | |||||||||||||||||||||||||||||||||||||||
Dividends | — | — | — | — | — | (31,944) | — | (31,944) | |||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | 16,932 | — | — | 16,932 | |||||||||||||||||||||||||||||||||||||||
Transactions related to employee share-based compensation plans and other | 614 | — | 6 | — | 1,175 | (478) | — | 703 | |||||||||||||||||||||||||||||||||||||||
Ending balance | 856,642 | 54,745 | $ | 8,566 | $ | 547 | $ | 7,295,665 | $ | (3,874,045) | $ | (51,334) | $ | 3,379,399 |
See Notes to Condensed Consolidated Financial Statements
4
ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands)
Six Months Ended June 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||
Number of Common Shares | Number of Class B Common Shares | Common Stock | Class B Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||
Beginning balance | 862,098 | 54,745 | $ | 8,621 | $ | 547 | $ | 7,380,759 | $ | (3,949,579) | $ | (47,200) | $ | 3,393,148 | |||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | (26,626) | — | (26,626) | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | — | — | — | 7,695 | 7,695 | |||||||||||||||||||||||||||||||||||||||
Dividends | — | — | — | — | — | (64,430) | — | (64,430) | |||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | 27,488 | — | — | 27,488 | |||||||||||||||||||||||||||||||||||||||
Transactions related to employee share-based compensation plans and other | 4,311 | — | 43 | — | (17,978) | (1,328) | (19,263) | ||||||||||||||||||||||||||||||||||||||||
Ending balance | 866,409 | 54,745 | $ | 8,664 | $ | 547 | $ | 7,390,269 | $ | (4,041,963) | $ | (39,505) | $ | 3,318,012 |
Six Months Ended June 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
Number of Common Shares | Number of Class B Common Shares | Common Stock | Class B Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | ||||||||||||||||||||||||||||||||||||||||
Beginning balance | 846,826 | 54,745 | $ | 8,468 | $ | 547 | $ | 7,261,267 | $ | (3,952,590) | $ | (68,973) | $ | 3,248,719 | |||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | — | — | 143,162 | — | 143,162 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of tax | — | — | — | — | — | — | 17,639 | 17,639 | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock, net of expenses | 4,704 | — | 47 | — | 15,321 | — | — | 15,368 | |||||||||||||||||||||||||||||||||||||||
Dividends | — | — | — | — | — | (63,702) | — | (63,702) | |||||||||||||||||||||||||||||||||||||||
Share-based compensation expense | — | — | — | — | 32,952 | — | — | 32,952 | |||||||||||||||||||||||||||||||||||||||
Transactions related to employee share-based compensation plans and other | 5,112 | — | 51 | — | (13,875) | (915) | — | (14,739) | |||||||||||||||||||||||||||||||||||||||
Ending balance | 856,642 | 54,745 | $ | 8,566 | $ | 547 | $ | 7,295,665 | $ | (3,874,045) | $ | (51,334) | $ | 3,379,399 |
See Notes to Condensed Consolidated Financial Statements
5
ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Six Months Ended June 30, | |||||||||||
2023 | 2022 | ||||||||||
Cash flows from operating activities: | |||||||||||
Net income (loss) | $ | (26,626) | $ | 143,162 | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
Depreciation and intangible asset amortization | 728,893 | 875,539 | |||||||||
Amortization of deferred subscriber acquisition costs | 95,163 | 75,989 | |||||||||
Amortization of deferred subscriber acquisition revenue | (147,932) | (111,884) | |||||||||
Share-based compensation expense | 27,488 | 32,952 | |||||||||
Deferred income taxes | (131,226) | 50,251 | |||||||||
Provision for losses on receivables and inventory | 67,093 | 45,835 | |||||||||
Goodwill, intangible, and other asset impairments | 427,832 | 195 | |||||||||
Unrealized (gain) loss on interest rate swap contracts | (22,097) | (204,562) | |||||||||
Other non-cash items, net | 52,652 | 78,409 | |||||||||
Changes in operating assets and liabilities, net of effects of acquisitions: | |||||||||||
Deferred subscriber acquisition costs | (185,128) | (195,746) | |||||||||
Deferred subscriber acquisition revenue | 148,473 | 166,452 | |||||||||
Other, net | (235,150) | (133,956) | |||||||||
Net cash provided by (used in) operating activities | 799,435 | 822,636 | |||||||||
Cash flows from investing activities: | |||||||||||
Dealer generated customer accounts and bulk account purchases | (252,151) | (341,586) | |||||||||
Subscriber system asset expenditures | (320,328) | (378,571) | |||||||||
Purchases of property and equipment | (89,347) | (87,621) | |||||||||
Acquisition of businesses, net of cash acquired | — | (13,154) | |||||||||
Proceeds from sale of business, net of cash sold | — | 26,681 | |||||||||
Other investing, net | 7,126 | (13,189) | |||||||||
Net cash provided by (used in) investing activities | (654,700) | (807,440) | |||||||||
Cash flows from financing activities: | |||||||||||
Proceeds from long-term borrowings | 650,000 | 380,000 | |||||||||
Proceeds from receivables facility | 140,194 | 139,642 | |||||||||
Proceeds (payments) from interest rate swaps | 36,280 | (24,903) | |||||||||
Repayment of long-term borrowings, including call premiums | (873,301) | (340,099) | |||||||||
Repayment of receivables facility | (92,382) | (46,980) | |||||||||
Dividends on common stock | (64,229) | (63,288) | |||||||||
Payments on finance leases | (21,271) | (22,165) | |||||||||
Other financing, net | (32,806) | (15,134) | |||||||||
Net cash provided by (used in) financing activities | (257,515) | 7,073 | |||||||||
Cash and cash equivalents and restricted cash and restricted cash equivalents: | |||||||||||
Net increase (decrease) | (112,780) | 22,269 | |||||||||
Beginning balance | 373,580 | 33,277 | |||||||||
Ending balance | $ | 260,800 | $ | 55,546 | |||||||
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
Business and Organization
ADT Inc., together with its wholly-owned subsidiaries (collectively, “ADT” or the “Company”), provides security, interactive, and smart home solutions to consumer, small business, and commercial customers, as well as residential solar and energy storage solutions, in the United States (“U.S.”). The Company primarily conducts business under the ADT brand name.
The Company is majority-owned by Prime Security Services TopCo (ML), L.P., which is majority-owned by Prime Security Services TopCo Parent, L.P. (“Ultimate Parent”). Ultimate Parent is majority-owned by Apollo Investment Fund VIII, L.P. and its related funds that are directly or indirectly managed by affiliates of Apollo Global Management, Inc. (together with its subsidiaries and affiliates, “Apollo” or the “Sponsor”).
Basis of Presentation
The condensed consolidated financial statements included herein have been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”). Certain prior period amounts have been reclassified to conform with the current period presentation.
The financial statements included herein comprise the consolidated results of ADT Inc. and its wholly-owned subsidiaries. The results of companies acquired are included from the effective dates of acquisition; and all intercompany transactions have been eliminated. The Company uses the equity method of accounting to account for an investment in which it has the ability to exercise significant influence but does not control.
The condensed consolidated financial statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the Company’s financial position, results of operations, and cash flows for the interim periods presented. The interim results reported herein should not be taken as indicative of results that may be expected for future interim periods or the full year.
As disclosed in the Company’s Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on July 10, 2023, in connection with the preparation of the Company’s second quarter 2023 condensed consolidated financial statements, the Company identified errors in the non-cash goodwill impairment losses associated with its Solar reporting unit and related tax impacts recognized during the third quarter of 2022 and the first quarter of 2023 as a result of the Company not applying the simultaneous equation method prescribed by Accounting Standards Update 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). As a result, on July 27, 2023, the Company filed an Amendment No. 1 to its Annual Report on Form 10-K for the year ended December 31, 2022 (the “Amended 2022 Annual Report”), which was originally filed with the SEC on February 28, 2023 (the “Original 2022 Annual Report”). The Company also restated its Quarterly Reports on Form 10-Q for the quarters ended September 30, 2022, and March 31, 2023, by filing amendments to the respective original Quarterly Reports on Form 10-Q with the SEC on July 27, 2023.
The Condensed Consolidated Balance Sheet as of December 31, 2022 included herein was derived from the audited consolidated financial statements as of that date. Certain information and footnote disclosures required in the annual consolidated financial statements have been omitted as appropriate. For a more comprehensive understanding of the Company and its interim results, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Amended 2022 Annual Report.
Use of Estimates
The preparation of these condensed consolidated financial statements in accordance with GAAP requires the Company to select accounting policies and make estimates that affect amounts reported in the condensed consolidated financial statements and the accompanying notes. The Company’s estimates are based on the relevant information available at the end of each period. Actual results could differ materially from these estimates under different assumptions or market conditions.
The Company considered recent impacts from macroeconomic conditions such as inflationary pressures, rising interest rates, the uncertainty and volatility in the financial markets, and supply chain disruptions, as well as any on-going impacts from the COVID-19 Pandemic (as defined below), in the assessment of its financial position, results of operations, and cash flows, as well as certain accounting estimates, as of and for the periods presented.
7
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
COVID-19 Pandemic - During March 2020, the World Health Organization declared the outbreak of a novel coronavirus as a pandemic (the “COVID-19 Pandemic”). As of June 30, 2023, the impact to the Company, as well as its response plan, has not materially changed from that described in the Amended 2022 Annual Report.
Segments
The Company has three operating and reportable segments organized based on customer type: Consumer and Small Business (“CSB”), Commercial, and Solar. The accounting policies of the Company’s reportable segments are the same as those of the Company. Refer to Note 3 “Segment Information” for additional information.
Commercial Divestiture
On August 7, 2023, ADT, Iris Buyer LLC, a Delaware limited liability company and affiliate of GTCR LLC (“GTCR”), and, solely for certain purposes set forth in the Commercial Purchase Agreement (as defined below), Fire & Security Holdings, LLC (“F&S Holdings”), a Delaware limited liability company and an indirect, wholly owned subsidiary of ADT, entered into an Equity Purchase Agreement (the “Commercial Purchase Agreement”). Pursuant to the terms and subject to the conditions set forth in the Commercial Purchase Agreement, GTCR has agreed to acquire all of the issued and outstanding equity interests of F&S Holdings (the “Commercial Transaction” or “Divestiture”), which directly or indirectly holds all of the issued and outstanding equity interests in the subsidiaries of ADT that operate ADT’s Commercial business (the “Commercial Business”).
The purchase price to be paid to ADT in connection with the Commercial Transaction is $1,613 million in cash, subject to certain customary adjustments as set forth in the Commercial Purchase Agreement.
The Company evaluated and concluded that it did not meet the held for sale criteria for the disposal group as of June 30, 2023. Subsequent to June 30, 2023, in connection with the Commercial Transaction, the Company evaluated and concluded that it met all of the held for sale criteria for the disposal group and will classify and report results of the Commercial Business as discontinued operations for the current and historical periods in the Company’s consolidated financial statements beginning in its Quarterly Report on Form 10-Q for the period ended September 30, 2023.
Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Vintage Disclosures for Financing Receivables - ASU 2022-02, Financial Instruments — Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures, requires reporting entities to disclose current-period gross write-offs by year of origination for financing receivables, among other requirements.
This disclosure-only guidance became effective January 1, 2023. The impact to the Company’s condensed consolidated financial statements was not material.
Supplier Finance Program Obligations - ASU 2022-04, Liabilities — Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations, requires that a reporting entity who is a buyer in a supplier finance program disclose qualitative and quantitative information about its supplier finance programs, including a roll-forward of the obligations.
The Company adopted this guidance effective January 1, 2023, except the roll-forward requirement, which becomes effective January 1, 2024 (early adoption is permitted), and should be applied prospectively.
The Company does not currently have any material supplier finance programs.
Recently Issued Accounting Pronouncements
Fair Value of Equity Investments - ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, states an entity should not consider the contractual sale restriction when measuring the equity security’s fair value and introduces new disclosure requirements related to such equity securities.
This guidance becomes effective January 1, 2024, and should be applied prospectively with any adjustments recognized in earnings and disclosed on the date of adoption. Early adoption is permitted. The Company is currently evaluating this guidance.
8
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Significant Accounting Policies
Unless otherwise noted, the Company’s accounting policies discussed below, or included within the respective footnotes herein, do not materially differ from those disclosed in the Amended 2022 Annual Report.
Cash and Cash Equivalents and Restricted Cash and Restricted Cash Equivalents
The following table reconciles the amounts below reported in the Condensed Consolidated Balance Sheets to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows:
(in thousands) | June 30, 2023 | December 31, 2022 | |||||||||
Cash and cash equivalents | $ | 146,435 | $ | 257,223 | |||||||
Restricted cash and restricted cash equivalents(1) | 114,365 | 116,357 | |||||||||
Ending balance | $ | 260,800 | $ | 373,580 |
(1) Primarily includes amounts received from State Farm Fire & Casualty Company (“State Farm”), inclusive of accrued interest, in connection with the State Farm Development Agreement (as defined and discussed in Note 15 “Related Party Transactions”).
Subscriber System Assets, net and Deferred Subscriber Acquisition Costs, net
Subscriber system assets represent capitalized equipment and installation costs incurred in connection with transactions in which the Company retains ownership of the security system, which the Company may retrieve upon termination of the contract with the customer. Deferred subscriber acquisition costs represent selling expenses (primarily commissions) that are incremental to acquiring customers.
Subscriber system assets and any related deferred subscriber acquisition costs are accounted for on a pooled basis based on the month and year of customer acquisition. The Company depreciates and amortizes these pooled costs using an accelerated method over the estimated life of the customer relationship, which is 15 years.
(in thousands) | June 30, 2023 | December 31, 2022 | |||||||||
Gross carrying amount | $ | 6,342,824 | $ | 6,205,762 | |||||||
Accumulated depreciation | (3,240,293) | (3,144,459) | |||||||||
Subscriber system assets, net | $ | 3,102,531 | $ | 3,061,303 |
Depreciation of subscriber system assets and amortization of deferred subscriber acquisition costs are reflected in depreciation and intangible asset amortization and selling, general, and administrative expenses (“SG&A”), respectively, as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Depreciation of subscriber system assets | $ | 139,645 | $ | 137,486 | $ | 283,448 | $ | 270,608 | ||||||||||||||||||
Amortization of deferred subscriber acquisition costs | $ | 48,479 | $ | 39,050 | $ | 95,163 | $ | 75,989 |
Accrued Expenses and Other Current Liabilities
(in thousands) | June 30, 2023 | December 31, 2022 | |||||||||
Accrued interest | $ | 133,093 | $ | 156,495 | |||||||
Payroll-related accruals | 143,223 | 208,111 | |||||||||
Opportunity Fund (see Note 15 “Related Party Transactions”) | 96,988 | 100,802 | |||||||||
Operating lease liabilities (see Note 14 “Leases”) | 25,779 | 28,696 | |||||||||
Other accrued liabilities | 322,797 | 405,676 | |||||||||
Accrued expenses and other current liabilities | $ | 721,880 | $ | 899,780 |
9
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Fair Value of Financial Instruments
The Company’s financial instruments primarily consist of cash and cash equivalents, restricted cash and restricted cash equivalents, accounts receivable, retail installment contract receivables, accounts payable, debt, and derivative financial instruments. Due to their short-term and/or liquid nature, the fair values of cash, restricted cash, accounts receivable, and accounts payable approximate their respective carrying amounts.
Cash Equivalents - Included in cash and cash equivalents and restricted cash and restricted cash equivalents, as applicable from time to time, are investments in money market mutual funds. These investments are generally classified as Level 1 fair value measurements, which represent unadjusted quoted prices in active markets for identical assets or liabilities.
As of June 30, 2023 and December 31, 2022, investments in money market mutual funds were $170 million and $145 million, respectively.
Long-Term Debt Instruments - The fair values of the Company’s long-term debt instruments are determined using broker-quoted market prices, which represent quoted prices for similar assets or liabilities as well as other observable market data, and are classified as Level 2 fair value measurements. The carrying amounts of debt outstanding, if any, under the Company’s first lien revolving credit facility (the “First Lien Revolving Credit Facility”) and its uncommitted receivables securitization financing agreement (the “Receivables Facility”) approximate their fair values as interest rates on these borrowings approximate current market rates.
June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
(in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
Long-term debt instruments subject to fair value disclosures(1) | $ | 9,568,276 | $ | 9,264,903 | $ | 9,733,700 | $ | 9,312,932 |
________________
(1) Excludes finance leases.
Derivative Financial Instruments - Derivative financial instruments are reported at fair value as either assets or liabilities that are primarily calculated using discounted cash flow models utilizing observable inputs, such as quoted forward interest rates, and incorporate credit risk adjustments to reflect the risk of default by the counterparty or the Company. The resulting fair values are classified as Level 2 fair value measurements.
Refer to Note 8 “Derivative Financial Instruments” for the fair values of the Company’s derivative financial instruments.
Retail Installment Contract Receivables - The fair values of the Company’s retail installment contract receivables are determined using a discounted cash flow model and are classified as Level 3 fair value measurements.
June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||
(in thousands) | Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||
Retail installment contract receivables, net | $ | 626,212 | $ | 437,827 | $ | 531,516 | $ | 385,114 |
10
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. REVENUE AND RECEIVABLES
Revenue
Disaggregated Revenue
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
CSB: | ||||||||||||||||||||||||||
Monitoring and related services | $ | 1,043,254 | $ | 1,011,442 | $ | 2,071,888 | $ | 2,004,470 | ||||||||||||||||||
Security installation, product, and other | 124,822 | 77,047 | 228,664 | 146,608 | ||||||||||||||||||||||
Total CSB | 1,168,076 | 1,088,489 | 2,300,552 | 2,151,078 | ||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||
Monitoring and related services | 143,809 | 134,350 | 288,493 | 262,618 | ||||||||||||||||||||||
Security installation, product, and other | 203,711 | 163,136 | 394,070 | 325,045 | ||||||||||||||||||||||
Total Commercial | 347,520 | 297,486 | 682,563 | 587,663 | ||||||||||||||||||||||
Solar: | ||||||||||||||||||||||||||
Solar installation, product, and other | 77,532 | 215,055 | 222,367 | 407,036 | ||||||||||||||||||||||
Total Solar | 77,532 | 215,055 | 222,367 | 407,036 | ||||||||||||||||||||||
Total revenue | $ | 1,593,128 | $ | 1,601,030 | $ | 3,205,482 | $ | 3,145,777 |
The Company allocates the transaction price to each performance obligation based on relative standalone selling price, which is determined using observable internal and external pricing, profitability, and operational metrics.
Company-Owned - In transactions in which the Company provides monitoring and related services but retains ownership of the security system (referred to as Company-owned transactions), the Company’s performance obligations primarily include (i) monitoring and related services, which are recognized when these services are provided to the customer, and (ii) a material right associated with the one-time non-refundable fees in connection with the initiation of a monitoring contract which the customer will not be required to pay again upon a renewal of the contract (referred to as deferred subscriber acquisition revenue). Deferred subscriber acquisition revenue is amortized on a pooled basis over the estimated life of the customer relationship using an accelerated method consistent with the treatment of subscriber system assets and deferred subscriber acquisition costs and is reflected in security installation, product, and other revenue.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Amortization of deferred subscriber acquisition revenue | $ | 75,910 | $ | 58,461 | $ | 147,932 | $ | 111,884 |
Customer-Owned - In transactions involving security systems sold outright to the customer (referred to as outright sales), the Company’s performance obligations generally include the sale and installation of the system and any monitoring and related services. The portion of the transaction price associated with the sale and installation of a system is recognized either at a point in time or over time based upon the nature of the transaction and contractual terms. Approximately half of security installation, product, and other revenue generated by the Commercial segment is recognized over time primarily using a cost-to-cost measure of progress method.
Solar - The Company enters into agreements with third-party lenders in order to access loan products for the Company’s Solar customers. Fees incurred under these agreements are recorded as a reduction of solar installation, product, and other revenue.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Third-party lender fees | $ | 9,057 | $ | 39,862 | $ | 28,470 | $ | 78,072 |
11
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Revenue and cost of revenue from the sale of solar equipment are reflected in the statements of operations as follows:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Solar installation, product, and other revenue | $ | 33,421 | $ | 120,505 | $ | 108,511 | $ | 246,373 | ||||||||||||||||||
Solar installation, product, and other cost of revenue | $ | 29,145 | $ | 78,327 | $ | 80,843 | $ | 160,142 |
Allowance for Credit Losses
The Company evaluates its allowance for credit losses on accounts receivable in pools based on customer type. For each customer pool, the allowance for credit losses is estimated based on the delinquency status of the underlying receivables and the related historical loss experience, as adjusted for current and expected future conditions, if applicable. The allowance for credit losses is not material for the individual pools of customers.
Six Months Ended June 30, | |||||||||||
(in thousands) | 2023 | 2022 | |||||||||
Beginning balance | $ | 65,655 | $ | 54,032 | |||||||
Provision for credit losses | 61,068 | 47,582 | |||||||||
Write-offs, net of recoveries(1) | (56,157) | (40,017) | |||||||||
Ending balance | $ | 70,566 | $ | 61,597 |
(1)Recoveries were not material for the periods presented. As such, the Company presented write-offs, net of recoveries.
Retail Installment Contract Receivables, net
For security system transactions occurring under both Company-owned and customer-owned equipment models, the Company’s retail installment contract option allows qualifying residential customers to pay the fees due at installation over a 24-, 36-, or 60-month interest-free period, and there is no significant financing component.
Upon origination of a retail installment contract, the Company utilizes external credit scores to assess customer credit quality and determine eligibility. Subsequent to origination, the Company monitors the delinquency status of retail installment contract receivables as the key credit quality indicator.
The balance of unbilled retail installment contract receivables comprises:
(in thousands) | June 30, 2023 | December 31, 2022 | ||||||||||||
Retail installment contract receivables, gross | $ | 627,369 | $ | 532,406 | ||||||||||
Allowance for credit losses | (1,157) | (890) | ||||||||||||
Retail installment contract receivables, net | $ | 626,212 | $ | 531,516 | ||||||||||
Balance Sheet Classification: | ||||||||||||||
Accounts receivable, net | $ | 210,758 | $ | 169,242 | ||||||||||
Other assets | 415,454 | 362,274 | ||||||||||||
Retail installment contract receivables, net | $ | 626,212 | $ | 531,516 |
The allowance for credit losses relates to retail installment contract receivables from outright sales transactions. As of June 30, 2023, the current and delinquent billed retail installment contract receivables were not material.
As of June 30, 2023 and December 31, 2022, retail installment contract receivables, net, used as collateral for borrowings under the Receivables Facility were $563 million and $506 million, respectively. Refer to Note 7 “Debt” for further discussion regarding the Receivables Facility.
12
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Contract Assets
Contract assets represent the Company’s right to consideration in exchange for goods or services transferred to the customer. The contract asset is reclassified to accounts receivable when the Company’s right to the consideration becomes unconditional, which generally occurs over the course of a 24-, 36-, or 60-month period as additional services are performed and billed. The financing component of contract assets is not significant.
During the six months ended June 30, 2023 and 2022, contract assets recognized were not material.
The balance of contract assets for residential transactions comprises:
(in thousands) | June 30, 2023 | December 31, 2022 | ||||||||||||
Contract assets, gross | $ | 42,392 | $ | 54,305 | ||||||||||
Allowance for credit losses | (5,000) | (5,453) | ||||||||||||
Contract assets, net | $ | 37,392 | $ | 48,852 | ||||||||||
Balance Sheet Classification: | ||||||||||||||
Prepaid expenses and other current assets | $ | 21,487 | $ | 33,632 | ||||||||||
Other assets | 15,905 | 15,220 | ||||||||||||
Contract assets, net | $ | 37,392 | $ | 48,852 |
3. SEGMENT INFORMATION
As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies,” the Company reports results in three operating and reportable segments: CSB, Commercial, and Solar. The Company’s segments are based on the manner in which the Company’s Chief Executive Officer, who is the chief operating decision maker (the “CODM”) evaluates performance and makes decisions about how to allocate resources. There have been no changes to the Company’s segments from that disclosed in the Amended 2022 Annual Report.
The Company organizes its segments based on customer type as follows:
•CSB - Customers in the CSB segment are comprised of owners and renters of residential properties, small business operators, and other individual consumers. The CSB segment includes the sale, installation, servicing, and monitoring of integrated security and automation systems and other related offerings.
•Commercial - Customers in the Commercial segment are comprised of larger businesses with more expansive facilities (typically larger than 10,000 square feet) and multi-site operations, which often require more sophisticated integrated solutions. The Commercial segment includes the sale, installation, servicing, and monitoring of integrated security and automation systems, fire detection and suppression systems, and other related offerings.
•Solar - Customers in the Solar segment are comprised of residential homeowners. The Solar segment includes the sale and installation of solar systems, energy storage solutions, roofing services, and other related offerings.
Each of the Company’s segments includes revenue and operating costs related to the activities noted above, other operating costs associated with support functions related to these operations, and certain dedicated corporate costs and other income and expense items. The CSB segment includes general corporate costs and other income and expense items not included in the Commercial and Solar segments.
The CODM uses Adjusted EBITDA, which is the Company’s segment profit measure, to evaluate segment performance. Adjusted EBITDA is defined 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 items; (vii) losses on extinguishment of debt; (viii) radio conversion costs, net; (ix) adjustments related to acquisitions, such as contingent consideration and purchase accounting adjustments, or dispositions; (x) impairment charges; and (xi) other income/gain or expense/loss items such as changes in fair value of certain financial instruments or financing and consent fees.
The CODM does not review the Company's assets by segment; therefore, such information is not presented.
13
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Reconciliations
The following table presents total revenue by segment and a reconciliation to consolidated total revenue:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
CSB | $ | 1,168,076 | $ | 1,088,489 | $ | 2,300,552 | $ | 2,151,078 | ||||||||||||||||||
Commercial | 347,520 | 297,486 | 682,563 | 587,663 | ||||||||||||||||||||||
Solar | 77,532 | 215,055 | 222,367 | 407,036 | ||||||||||||||||||||||
Total Revenue | $ | 1,593,128 | $ | 1,601,030 | $ | 3,205,482 | $ | 3,145,777 |
The following table presents Adjusted EBITDA by segment and a reconciliation to consolidated income (loss) before income taxes and equity in net earnings (losses) of equity method investee:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Adjusted EBITDA by segment: | ||||||||||||||||||||||||||
CSB | $ | 643,725 | $ | 580,701 | $ | 1,238,398 | $ | 1,141,246 | ||||||||||||||||||
Commercial | 44,970 | 31,363 | 85,758 | 54,993 | ||||||||||||||||||||||
Solar | (37,440) | (14,815) | (47,985) | 2,007 | ||||||||||||||||||||||
Total | $ | 651,255 | $ | 597,249 | $ | 1,276,171 | $ | 1,198,246 | ||||||||||||||||||
Reconciliation: | ||||||||||||||||||||||||||
Total segment Adjusted EBITDA | $ | 651,255 | $ | 597,249 | $ | 1,276,171 | $ | 1,198,246 | ||||||||||||||||||
Less: | ||||||||||||||||||||||||||
Interest expense, net | 84,282 | 81,651 | 255,908 | 87,958 | ||||||||||||||||||||||
Depreciation and intangible asset amortization | 345,838 | 399,416 | 728,893 | 875,539 | ||||||||||||||||||||||
Amortization of deferred subscriber acquisition costs | 48,479 | 39,050 | 95,163 | 75,989 | ||||||||||||||||||||||
Amortization of deferred subscriber acquisition revenue | (75,910) | (58,461) | (147,932) | (111,884) | ||||||||||||||||||||||
Share-based compensation expense | 11,506 | 16,932 | 27,488 | 32,952 | ||||||||||||||||||||||
Merger, restructuring, integration, and other(1) | 18,090 | (3,845) | 35,737 | (3,317) | ||||||||||||||||||||||
Goodwill impairment(2) | 181,179 | — | 422,809 | — | ||||||||||||||||||||||
Acquisition-related adjustments(3) | 1,028 | 1,328 | 2,658 | 37,623 | ||||||||||||||||||||||
Equity in net earnings (losses) of equity method investee | (1,738) | (948) | (4,415) | (948) | ||||||||||||||||||||||
Other, net(4) | (310) | (8,263) | 75 | 2,776 | ||||||||||||||||||||||
Income (loss) before income taxes and equity in net earnings (losses) of equity method investee | $ | 38,811 | $ | 130,389 | $ | (140,213) | $ | 201,558 |
________________
(1) During 2023, includes integration and third-party costs related to the strategic optimization of the Solar business operations following the ADT Solar acquisition, restructuring costs, as well as acquisition costs.
(2) During 2023, represents impairment charges associated with the Company’s Solar reporting unit. Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” and Note 6 “Goodwill and Other Intangible Assets.”
(3) During 2022, primarily represents the amortization of the customer backlog intangible asset acquired in the ADT Solar Acquisition, which was fully amortized as of March 2022.
(4) During 2022, primarily includes a gain on sale of a business of $10 million and net radio conversion costs.
4. ACQUISITIONS AND DISPOSITIONS
During the six months ended June 30, 2022, total consideration related to acquisitions was approximately $31 million, including approximately $15 million in shares of the Company’s common stock. This resulted in the recognition of approximately $24 million of goodwill.
During the six months ended June 30, 2022, proceeds related to disposal activities totaled approximately $27 million, resulting in a gain of approximately $10 million recognized in SG&A.
14
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. EQUITY METHOD INVESTMENTS
Canopy Investment
In April 2022, the Company and Ford Motor Company (“Ford”) formed the entity, SNTNL LLC (“Canopy”). Canopy meets the definition of a variable interest entity (“VIE”) because the Company holds a variable interest through its 40% investment in Canopy’s preferred class of equity (the “Canopy Investment”) and fees received under various commercial agreements between the Company and Canopy. The Company is not the primary beneficiary, and therefore, does not consolidate Canopy’s assets, liabilities, and financial results of operations. As a result, the Company accounts for its investment in Canopy under the equity method of accounting.
The impact to the Company’s condensed consolidated financial statements as a result of the Canopy Investment or the commercial agreements was not material during the periods presented.
As of June 30, 2023 and December 31, 2022, the Canopy Investment’s carrying amount was approximately $8 million and $7 million, respectively, and is presented in other assets. The balance primarily reflects the initial contribution, plus an additional investment of approximately $5 million during the first quarter of 2023, as well as the Company’s proportionate share of Canopy’s cumulative net earnings or losses.
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
Changes in the carrying amounts of goodwill by reportable segment were as follows:
(in thousands) | CSB | Commercial | Solar | Total | |||||||||||||||||||
Balance as of December 31, 2022 | $ | 4,919,251 | $ | 336,589 | $ | 511,176 | $ | 5,767,016 | |||||||||||||||
Acquisitions(1) | 122 | — | — | 122 | |||||||||||||||||||
Impairment | — | — | (422,809) | (422,809) | |||||||||||||||||||
Balance as of June 30, 2023 | $ | 4,919,373 | $ | 336,589 | $ | 88,367 | $ | 5,344,329 |
(1) Includes the impact of measurement period adjustments which were not material during the six months ended June 30, 2023.
As of June 30, 2023 and December 31, 2022, the Company had accumulated goodwill impairment losses of $624 million and $201 million, respectively, associated with the Company’s Solar reporting unit.
Solar Goodwill Impairment
As previously disclosed, the Company performed an interim impairment quantitative assessment on the Solar reporting unit as a result of a triggering event as of March 31, 2023 and recorded a goodwill impairment charge of $242 million during the first quarter of 2023. Also as previously disclosed, the Solar reporting unit was considered at risk of future impairment following the impairment in the first quarter 2023.
During the second quarter of 2023, the Company concluded there was an additional triggering event related to its Solar reporting unit as a result of the then-current macroeconomic conditions, including the impact of rising interest rates, as well as ADT Solar’s continued underperformance of operating results in the second quarter of 2023 relative to expectations. As a result, the Company performed an interim impairment quantitative assessment on the Solar reporting unit as of June 30, 2023. Based on the results of the Company’s interim goodwill impairment quantitative analysis, the Company recorded a goodwill impairment charge of $181 million during the second quarter of 2023.
15
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company estimated the fair value of the Solar reporting unit using the income approach, which included significant assumptions such as forecasted revenue, Adjusted EBITDA margins, and discount rates, as well as other assumptions including operating expenses and cash flows. In developing these assumptions, the Company relied on various factors including operating results, business plans, economic projections, anticipated future cash flows, and other market data. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying judgments and factors may include such items as a prolonged downturn in the business environment, changes in economic conditions that significantly differ from the Company’s assumptions in timing or degree, volatility in equity and debt markets resulting in higher discount rates, and unexpected regulatory changes. There are inherent uncertainties related to these judgments and factors that may ultimately impact the estimated fair value determinations.
As the carrying value of the Solar reporting unit approximates its fair value following the impairment charge, the Solar reporting unit continues to be considered at risk of future impairment. If the Company’s assumptions are not realized, or if there are future changes in any of the assumptions due to a change in economic conditions or otherwise, it is possible that a further impairment charge may need to be recorded in the future.
The Company did not identify any triggering events associated with its other reporting units.
Other Intangible Assets
June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||||
(in thousands) | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | |||||||||||||||||||||||||||||
Definite-lived intangible assets: | |||||||||||||||||||||||||||||||||||
Contracts and related customer relationships | $ | 5,537,454 | $ | (2,821,065) | $ | 2,716,389 | $ | 7,021,305 | $ | (4,262,383) | $ | 2,758,922 | |||||||||||||||||||||||
Dealer relationships | 1,518,020 | (578,501) | 939,519 | 1,518,020 | (538,801) | 979,219 | |||||||||||||||||||||||||||||
Other | 223,848 | (208,727) | 15,121 | 224,783 | (204,177) | 20,606 | |||||||||||||||||||||||||||||
Total definite-lived intangible assets | 7,279,322 | (3,608,293) | 3,671,029 | 8,764,108 | (5,005,361) | 3,758,747 | |||||||||||||||||||||||||||||
Indefinite-lived intangible assets: | |||||||||||||||||||||||||||||||||||
Trade name | 1,333,000 | — | 1,333,000 | 1,333,000 | — | 1,333,000 | |||||||||||||||||||||||||||||
Intangible assets | $ | 8,612,322 | $ | (3,608,293) | $ | 5,004,029 | $ | 10,097,108 | $ | (5,005,361) | $ | 5,091,747 |
The change in the net carrying amount of contracts and related customer relationships during the period was as follows:
(in thousands) | |||||
Balance as of December 31, 2022 | $ | 2,758,922 | |||
Customer contract additions, net of dealer charge-backs(1) | 248,050 | ||||
Amortization | (290,583) | ||||
Balance as of June 30, 2023 | $ | 2,716,389 |
(1) The weighted-average amortization period for customer contract additions was approximately 15 years.
Payments for customer contract additions under the Company’s authorized dealer program and from other third parties are reflected as dealer generated customer accounts and bulk account purchases on the Condensed Consolidated Statements of Cash Flows.
Additionally, during the first quarter of 2023, the Company retired approximately $1.7 billion of customer relationship intangible assets that became fully amortized. These assets were originally acquired as part of the 2016 acquisition of The ADT Security Corporation (formerly named The ADT Corporation) (“The ADT Corporation”) (the “ADT Acquisition”).
16
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Definite-Lived Intangible Asset Amortization Expense
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Definite-lived intangible asset amortization expense | $ | 151,795 | $ | 210,738 | $ | 334,944 | $ | 502,685 |
7. DEBT
The Company’s debt is comprised of the following (in thousands):
Description | Issued | Maturity | Interest Rate(1) | Interest Payable | June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||||||
First Lien Term Loan due 2026 | 9/23/2019 | 9/23/2026 | Term SOFR +2.75% | Quarterly | $ | 2,716,375 | $ | 2,730,269 | ||||||||||||||||||||||||||||||
Term Loan A Facility | 3/14/2023 | 3/14/2028 | Term SOFR +2.25% | Quarterly | 641,875 | — | ||||||||||||||||||||||||||||||||
First Lien Notes due 2024 | 4/4/2019 | 4/15/2024 | 5.250% | 2/15 and 8/15 | 600,000 | 750,000 | ||||||||||||||||||||||||||||||||
First Lien Notes due 2026 | 4/4/2019 | 4/15/2026 | 5.750% | 3/15 and 9/15 | 1,350,000 | 1,350,000 | ||||||||||||||||||||||||||||||||
First Lien Notes due 2027 | 8/20/2020 | 8/31/2027 | 3.375% | 6/15 and 12/15 | 1,000,000 | 1,000,000 | ||||||||||||||||||||||||||||||||
First Lien Notes due 2029 | 7/29/2021 | 8/1/2029 | 4.125% | 2/1 and 8/1 | 1,000,000 | 1,000,000 | ||||||||||||||||||||||||||||||||
ADT Notes due 2023 | 1/14/2013 | 6/15/2023 | 4.125% | 6/15 and 12/15 | — | 700,000 | ||||||||||||||||||||||||||||||||
ADT Notes due 2032 | 5/2/2016 | 7/15/2032 | 4.875% | 1/15 and 7/15 | 728,016 | 728,016 | ||||||||||||||||||||||||||||||||
ADT Notes due 2042 | 7/5/2012 | 7/15/2042 | 4.875% | 1/15 and 7/15 | 21,896 | 21,896 | ||||||||||||||||||||||||||||||||
Second Lien Notes due 2028 | 1/28/2020 | 1/15/2028 | 6.250% | 1/15 and 7/15 | 1,300,000 | 1,300,000 | ||||||||||||||||||||||||||||||||
Receivables Facility | 3/5/2020 | 5/20/2028 | Various | Monthly | 402,553 | 354,741 | ||||||||||||||||||||||||||||||||
Other debt(2) | 1,181 | 2,446 | ||||||||||||||||||||||||||||||||||||
Total debt principal, excluding finance leases | 9,761,896 | 9,937,368 | ||||||||||||||||||||||||||||||||||||
Plus: Finance lease liabilities(3) | 102,524 | 94,888 | ||||||||||||||||||||||||||||||||||||
Less: Unamortized debt discount, net | (11,792) | (13,415) | ||||||||||||||||||||||||||||||||||||
Less: Unamortized deferred financing costs | (49,418) | (50,896) | ||||||||||||||||||||||||||||||||||||
Less: Unamortized purchase accounting fair value adjustment and other | (132,410) | (139,357) | ||||||||||||||||||||||||||||||||||||
Total debt | 9,670,800 | 9,828,588 | ||||||||||||||||||||||||||||||||||||
Less: Current maturities of long-term debt, net of unamortized debt discount | (836,075) | (871,917) | ||||||||||||||||||||||||||||||||||||
Long-term debt | $ | 8,834,725 | $ | 8,956,671 |
_________________
(1) Interest rate as of June 30, 2023. During June 2023, the Secured Overnight Financing Rate (“SOFR”) replaced the forward London Interbank Offered Rate (“LIBOR”) as the applicable benchmark rate for all remaining existing and future issuances of the Company’s debt instruments with a variable rate component. Interest on the Receivables Facility is primarily based on SOFR +0.95% and Cost of Funds (“COF”) +0.85%.
(2) Other debt primarily consists of vehicle loans at various interest rates and maturities.
(3) Refer to Note 14 “Leases” for additional information regarding the Company’s finance leases.
Significant changes in the Company’s debt during the six months ended June 30, 2023 were as follows:
First Lien Credit Agreement
The Company’s first lien credit agreement, dated as of July 1, 2015 (together with subsequent amendments and restatements, the “First Lien Credit Agreement”), contains a first lien term loan facility (the “First Lien Term Loan due 2026”) and the First Lien Revolving Credit Facility.
During the six months ended June 30, 2023, there were no borrowings under the First Lien Revolving Credit Facility; and as of June 30, 2023, the Company had $575 million in available borrowing capacity.
During the six months ended June 30, 2022, the Company borrowed $380 million and repaid $325 million under its First Lien Revolving Credit Facility.
17
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Term Loan A Facility
On March 14, 2023, Prime Security Services Holdings, LLC (“Holdings”), a Delaware limited liability company and a wholly owned direct subsidiary of the Company, Prime Security Services Borrower, LLC (“Prime Borrower”), a Delaware limited liability company and a wholly owned direct subsidiary of Holdings, and The ADT Corporation, a Delaware corporation and a wholly owned direct subsidiary of Prime Borrower (together with Prime Borrower, the “Term Loan A Borrowers”), entered into a term loan credit agreement (the “Term Loan A Credit Agreement”) with Barclays Bank PLC, as administrative agent, and the lenders party thereto, pursuant to which such lenders provided the Term Loan A Borrowers with an aggregate principal amount of $600 million of term loans (the “Closing Date Term Loan A Loans”) under a senior secured term loan A facility (the “Term Loan A Facility”).
Also on March 14, 2023, Holdings, the Term Loan A Borrowers, the subsidiary loan parties thereto, Barclays Bank PLC, and the lender party thereto entered into an amendment to the Term Loan A Credit Agreement, pursuant to which the lender party thereto agreed, at the option of the Term Loan A Borrowers and subject to the satisfaction or waiver of customary conditions, to provide the Term Loan A Borrowers with an aggregate principal amount of $50 million of incremental term loans (the “Incremental Term Loan A Loans”) under the Term Loan A Facility on or before the scheduled maturity date of the Company’s 4.125% senior notes due June 15, 2023 (the “ADT Notes due 2023”). On June 15, 2023, the Company borrowed the Incremental Term Loan A Loans and used the proceeds to complete the redemption of approximately $50 million of the ADT Notes due 2023. The Incremental Term Loan A Loans have the same terms as, and constitutes one class with, the Closing Date Term Loan A Loans.
The Term Loan A Facility has a maturity date of March 14, 2028, subject to a springing maturity of 91 days prior to the maturity date of certain long-term indebtedness of Prime Borrower and its subsidiaries if, on such date, the aggregate principal amount of such indebtedness equals or exceeds $100 million.
The Term Loan A Facility requires scheduled amortization payments in annual amounts equal to 5.00% of the original principal amount of the Term Loan A Facility, payable quarterly, with the balance payable at maturity. The Term Loan A Borrowers may make voluntary prepayments under the Term Loan A Facility at any time prior to maturity at par.
Borrowings under the Term Loan A Facility bear interest at a rate equal to, at Prime Borrower’s option, either (a) a term SOFR rate plus an adjustment of 0.10% (“Term SOFR”) or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50% per annum, (ii) the rate of interest per annum last quoted by The Wall Street Journal as the “Prime Rate” in the U.S., and (iii) the one-month adjusted term SOFR plus 1.00% per annum, in each case, plus an applicable margin of 2.50% per annum for SOFR loans and 1.50% per annum for base rate loans, subject to adjustments based on certain specified net first lien leverage ratios. Prime Borrower has elected the Term SOFR alternative to apply to borrowings under the Term Loan A Facility.
Indebtedness incurred under the Term Loan A Facility is guaranteed, jointly and severally, on a senior secured first-priority basis, by Holdings, on a limited recourse basis, and by substantially all of Prime Borrower’s wholly owned material domestic subsidiaries, and is secured by a pledge of Prime Borrower’s capital stock directly held by Holdings and by first-priority security interests in substantially all of the assets of Prime Borrower and the subsidiary guarantors, in each case subject to certain permitted liens and exceptions. The Term Loan A Facility is subject to customary mandatory prepayment provisions, covenants, and restrictions, including a financial maintenance covenant requiring the Term Loan A Facility Borrowers to comply as of the last day of each fiscal quarter with a specified maximum consolidated net first lien leverage ratio.
Fees associated with the Term Loan A Facility were not material during the periods presented.
ADT Notes due 2023 Redemption
On March 15, 2023, the Company used the proceeds from the Closing Date Term Loan A Loans to redeem approximately $600 million of the ADT Notes due 2023 (the “2023 Notes Partial Redemption”) for a total redemption price of approximately $600 million, excluding any accrued and unpaid interest. Loss on extinguishment of debt was not material.
On June 15, 2023, the Company redeemed the remaining outstanding balance of approximately $100 million of the ADT Notes due 2023 using $50 million of proceeds from the Incremental Term Loan A Loans and cash on hand.
18
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
First Lien Notes due 2024 Partial Redemption
On March 17, 2023, Prime Borrower and Prime Finance Inc., a Delaware corporation and an indirect wholly-owned subsidiary of the Company (together with Prime Borrower, the “Issuers”), delivered a Notice of Partial Redemption (the “First Lien Notes due 2024 Partial Redemption Notice”) to holders of the outstanding 5.250% First-Priority Senior Secured Notes due 2024 (the “First Lien Notes due 2024”). The First Lien Notes due 2024 Partial Redemption Notice was issued pursuant to the terms of the Indenture, dated as of April 4, 2019, as amended and supplemented through the date hereof, among the Issuers, the guarantors party thereto from time to time and Wells Fargo Bank, National Association, as trustee.
On May 2, 2023, in accordance with the First Lien Notes due 2024 Partial Redemption Notice, the Company redeemed $150 million principal amount of the $750 million outstanding First Lien Notes due 2024 for a redemption price of $150 million, excluding accrued and unpaid interest, using cash on hand.
Receivables Facility
Under the Receivables Facility, the Company obtains financing by selling or contributing certain retail installment contract receivables to the Company’s wholly-owned consolidated bankruptcy-remote special purpose entity (“SPE”), which then grants a security interest in those retail installment contract receivables as collateral for cash borrowings.
In March 2023, the Company amended the agreement governing the Receivables Facility, pursuant to which, among other things, the borrowing capacity was increased from $400 million to $500 million and the uncommitted revolving period was extended from May 2023 to March 2024.
As of June 30, 2023, the Company had an uncommitted available borrowing capacity under the Receivables Facility of approximately $97 million.
The Receivables Facility did not have a material impact to the Condensed Consolidated Statements of Operations during the periods presented.
Variable Interest Entity
The SPE meets the definition of a VIE for which the Company is the primary beneficiary as it has the power to direct the SPE’s activities and the obligation to absorb losses or the right to receive benefits of the SPE. As such, the Company consolidates the SPE’s assets, liabilities, and financial results of operations.
The SPE’s assets and liabilities primarily consist of a portion of the Company’s unbilled retail installment contract receivables, net, as discussed in Note 2 “Revenue and Receivables,” and borrowings under the Receivables Facility, as presented above.
Solar Receivables Facility
On August 2, 2023, Compass Solar Group, LLC (“Compass”) and ADT Solar Finance LLC (“ADT Solar Finance”), each an indirect wholly-owned subsidiary of ADT Inc. entered into a Receivables Financing Agreement with Mizuho Bank, Ltd. (the “Solar Receivables Financing Agreement”) to finance receivables generated by the installation of residential solar systems. The Solar Receivables Financing Agreement, among other things, provides for an uncommitted revolving loan facility in the aggregate principal amount of up to $300 million, which loans are secured by substantially all the assets of ADT Solar Finance (the “Solar Receivables Facility”). The Solar Receivables Financing Agreement has an initial revolving period of one year (which may be extended by agreement of the parties) followed by an amortization period of 300 months to maturity where all collections on the receivables during such period will be applied to prepay the loan until reduced to zero, which will occur only if the Solar Receivables Financing Agreement is not mutually extended on a revolving basis. The interest rate under the Solar Receivables Financing Agreement is the sum of (x) term SOFR (plus a credit adjustment spread of 0.1%) plus (y) 1.0% (increased to 3.5% after the termination date) or, with respect to loans funded by a Conduit Lender (as defined in the Solar Receivables Financing Agreement), the sum of (x) the applicable rate set forth in the Receivables Financing Agreement plus (y) 1.0% (increased to 3.5% after the termination date).
In connection with such Solar Receivables Financing Agreement, certain other agreements relating to the transaction were entered into, including ADT Solar Finance’s limited liability company agreement, a Receivables Sale Agreement between Compass and ADT Solar Finance, pursuant to which Compass sells such receivables from time to time to ADT Solar Finance, a Performance Support Agreement entered into by ADT Inc., pursuant to which ADT Inc. guaranteed certain obligations under the Solar Receivables Financing Agreement and related transaction documents and certain account control agreements and security agreements, were also entered into.
19
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. DERIVATIVE FINANCIAL INSTRUMENTS
The Company's derivative financial instruments primarily consist of interest rate swap contracts, which were entered into with the objective of managing exposure to variability in interest rates on the Company's debt. As of July 2023, SOFR is the applicable benchmark for all of the Company's interest rate swap contracts. All interest rate swap contracts are reported in the Condensed Consolidated Balance Sheets at fair value.
For interest rate swap contracts that are:
•Not designated as cash flow hedges: Unrealized gains and losses are recognized in interest expense, net.
•Designated as cash flow hedges: Unrealized gains and losses are recognized as a component of accumulated other comprehensive income (loss) (“AOCI”) and are reclassified into interest expense, net, in the same period in which the related interest on debt affects earnings.
For interest rate swap contracts that have been de-designated as cash flow hedges and for which forecasted cash flows are:
•Probable or reasonably possible of occurring: Unrealized gains and losses previously recognized as a component of AOCI are reclassified into interest expense, net, in the same period in which the related interest on variable-rate debt affects earnings through the original maturity date of the related interest rate swap contracts.
•Probable of not occurring: Unrealized gains and losses previously recognized as a component of AOCI are immediately reclassified into interest expense, net.
The cash flows associated with interest rate swap contracts that included an other-than-insignificant financing element at inception are reflected as cash flows from financing activities.
Interest Rate Swaps:
During the six months ended June 30, 2023, the Company entered into floating-to-fixed interest rate swaps with an aggregate notional amount of $300 million to partially hedge the Term Loan A Facility.
As of June 30, 2023, the Company’s interest rate swaps consisted of the following (in thousands):
Execution | Maturity | Designation | Notional Amount | |||||||||||||||||
October 2019 | September 2026 | Not designated | $ | 2,800,000 | ||||||||||||||||
March 2023 | March 2028 | Not designated | $ | 100,000 | ||||||||||||||||
April 2023 | March 2028 | Not designated | $ | 200,000 | ||||||||||||||||
Classification and Fair Value of Interest Rate Swaps:
(in thousands) | June 30, 2023 | December 31, 2022 | ||||||||||||
Prepaid expenses and other current assets | $ | 90,113 | $ | 78,110 | ||||||||||
Other assets | 115,499 | 105,405 | ||||||||||||
Fair value of interest rate swaps - net asset (liability) | $ | 205,612 | $ | 183,515 | ||||||||||
Unrealized Gain (Loss) on Interest Rate Swaps:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Gain (loss) included in interest expense, net | $ | 54,613 | $ | 59,273 | $ | 22,097 | $ | 204,562 |
20
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cash Flow Hedges Reclassifications out of AOCI:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Interest expense, net | $ | 4,729 | $ | 8,647 | $ | 10,178 | $ | 23,267 | ||||||||||||||||||
Income tax (benefit) expense | $ | (1,143) | $ | (2,086) | $ | (2,457) | $ | (5,614) |
As of June 30, 2023 and December 31, 2022, AOCI, net of tax, related to previously designated cash flow hedges was $38 million and $46 million, respectively.
As of June 30, 2023, approximately $18 million of AOCI associated with previously designated cash flow hedges is estimated to be reclassified to interest expense, net, within the next twelve months.
9. INCOME TAXES
Unrecognized Tax Benefits
The Company’s unrecognized tax benefits relate to tax years that remain subject to audit by the taxing authorities in the U.S. federal, state and local, and foreign jurisdictions. During the six months ended June 30, 2023, the Company did not have a material change to its unrecognized tax benefits. Based on the current status of its income tax audits, the Company does not believe a significant portion of its unrecognized tax benefits will be resolved in the next twelve months.
Effective Tax Rate
The effective tax rate can vary from period to period due to permanent tax adjustments, discrete items such as the settlement of income tax audits and changes in tax laws, as well as recurring factors such as changes in the overall state tax rate.
The Company’s income tax benefit (expense) for the three months ended June 30, 2023 was $55 million, resulting in an effective tax rate for the period of (142.1)%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of (43.9)%, and unfavorable impacts related to the Solar goodwill impairment, non-deductible executive compensation, non-U.S. earnings, and other items, partially offset by favorable impacts from federal tax credits, losses from equity method investee, and other items.
The Company’s income tax benefit (expense) for the three months ended June 30, 2022 was $(38) million, resulting in an effective tax rate for the period of 29.1%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 5.5%, and a 3.0% unfavorable impact of prior year return adjustments related to executive compensation, partially offset by a 1.6% favorable impact from the release of a capital loss valuation allowance related to disposal activities.
The Company’s income tax benefit (expense) for the six months ended June 30, 2023 was $118 million, resulting in an effective tax rate for the period of 84.2%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state statutory tax rate, net of federal benefits, of 23.5%, and unfavorable impacts related to the Solar goodwill impairment, non-deductible executive compensation and other items, partially offset by favorable impacts from federal tax credits and other items.
The Company’s income tax benefit (expense) for the six months ended June 30, 2022 was $(57) million, resulting in an effective tax rate for the period of 28.5%. The effective tax rate primarily represents the federal statutory tax rate of 21.0%, a state statutory tax rate, net of federal benefits, of 5.9%, a 2.0% unfavorable impact of prior year return adjustments related to executive compensation, and a 1.4% unfavorable impact of permanent items, partially offset by a 1.0% favorable impact from the release of a capital loss valuation allowance related to disposal activities.
21
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
10. EQUITY
Common Stock and Class B Common Stock
The Company has two classes of common stock, including common stock (“Common Stock”) and Class B common stock (“Class B Common Stock”).
During the six months ended June 30, 2023, shares issued resulted from the vesting of restricted stock units (“RSUs”) and stock option exercises related to share-based compensation awards.
Dividends
(in thousands, except per share data) | Common Stock | Class B Common Stock | ||||||||||||||||||||||||||||||||||||
Declaration Date | Record Date | Payment Date | Per Share | Aggregate | Per Share | Aggregate | ||||||||||||||||||||||||||||||||
Six Months Ended June 30, 2023 | ||||||||||||||||||||||||||||||||||||||
2/28/2023 | 3/16/2023 | 4/4/2023 | $ | 0.035 | $ | 30,342 | $ | 0.035 | $ | 1,916 | ||||||||||||||||||||||||||||
5/2/2023 | 6/15/2023 | 7/6/2023 | 0.035 | 30,256 | 0.035 | 1,916 | ||||||||||||||||||||||||||||||||
Total | $ | 0.070 | $ | 60,598 | $ | 0.070 | $ | 3,832 | ||||||||||||||||||||||||||||||
Six Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||||||||
3/1/2022 | 3/17/2022 | 4/4/2022 | $ | 0.035 | $ | 29,842 | $ | 0.035 | $ | 1,916 | ||||||||||||||||||||||||||||
5/5/2022 | 6/16/2022 | 7/5/2022 | 0.035 | 30,028 | 0.035 | 1,916 | ||||||||||||||||||||||||||||||||
Total | $ | 0.070 | $ | 59,870 | $ | 0.070 | $ | 3,832 |
Subsequent Event - On August 8, 2023, the Company announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on September 15, 2023, which will be paid on October 4, 2023.
Accumulated Other Comprehensive Income (Loss)
Refer to Note 8 “Derivative Financial Instruments” for AOCI reclassifications associated with cash flow hedges. There were no other material reclassifications out of AOCI.
11. SHARE-BASED COMPENSATION
During the first quarter of 2023, the Company completed its annual long-term incentive plan equity award to employees and granted approximately 6.6 million RSUs under its 2018 Omnibus Incentive Plan, as amended (the “2018 Plan”) with a weighted-average grant date fair value of $7.60 equal to the closing price per share of the Company’s Common Stock on the date of grant. These RSUs are service-based awards with a three-year graded vesting period from the date of grant.
12. NET INCOME (LOSS) PER SHARE
The Company applies the two-class method for computing and presenting net income (loss) per share for each class of common stock, which allocates current period net income (loss) to each class of common stock and participating securities based on dividends declared and participation rights in the remaining undistributed earnings or losses.
Basic net income (loss) per share is computed by dividing the net income (loss) allocated to each class of common stock by the related weighted-average number of shares outstanding during the period. Diluted net income (loss) per share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period for each class of common stock and excludes potentially dilutive securities whose effect would have been anti-dilutive.
22
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Common Stock:
Potential shares of Common Stock include (i) incremental shares related to the vesting or exercise of share-based compensation awards, warrants, and other options to purchase additional shares of the Company’s Common Stock calculated using the treasury stock method and (ii) incremental shares of Common Stock issuable upon the conversion of Class B Common Stock. Additionally, the basic and diluted earnings per share computations for Common Stock exclude approximately 9 million unvested shares as their vesting is contingent upon achievement of certain performance requirements.
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
in thousands, except per share amounts | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Allocation of net income (loss) - basic | $ | 86,712 | $ | 85,994 | $ | (25,030) | $ | 134,499 | ||||||||||||||||||
Dilutive effect (including conversion of Class B Common Stock) | 2,133 | 2,149 | — | 4,156 | ||||||||||||||||||||||
Allocation of net income (loss) - diluted | $ | 88,845 | $ | 88,143 | $ | (25,030) | $ | 138,655 | ||||||||||||||||||
Weighted-average shares outstanding - basic | 857,581 | 848,242 | 855,949 | 846,048 | ||||||||||||||||||||||
Dilutive effect (including conversion of Class B Common Stock)(1) | 59,278 | 62,567 | — | 64,957 | ||||||||||||||||||||||
Weighted-average shares outstanding - diluted | 916,859 | 910,809 | 855,949 | 911,005 | ||||||||||||||||||||||
Net income (loss) per share - basic | $ | 0.10 | $ | 0.10 | $ | (0.03) | $ | 0.16 | ||||||||||||||||||
Net income (loss) per share - diluted | $ | 0.10 | $ | 0.10 | $ | (0.03) | $ | 0.15 |
_________________
(1) During the three months ended June 30, 2023, the diluted earnings per share calculations excluded approximately 25 million weighted average shares as their effects would have been anti-dilutive. During the six months ended June 30, 2023, all potential shares of Common Stock that would be dilutive were excluded from the diluted earnings per share calculations because their effects would have been anti-dilutive. During the three and six months ended June 30, 2022, the diluted earnings per share calculations excluded approximately 20 million and 19 million weighted average shares, respectively, as their effects would have been anti-dilutive.
Class B Common Stock:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
in thousands, except per share amounts | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Allocation of net income (loss) - basic | $ | 5,499 | $ | 5,523 | $ | (1,596) | $ | 8,663 | ||||||||||||||||||
Dilutive effect(1) | (217) | (233) | — | (323) | ||||||||||||||||||||||
Allocation of net income (loss) - diluted | $ | 5,282 | $ | 5,290 | $ | (1,596) | $ | 8,340 | ||||||||||||||||||
Weighted-average shares outstanding - basic | 54,745 | 54,745 | 54,745 | 54,745 | ||||||||||||||||||||||
Dilutive effect(1) | — | — | — | — | ||||||||||||||||||||||
Weighted-average shares outstanding - diluted | 54,745 | 54,745 | 54,745 | 54,745 | ||||||||||||||||||||||
Net income (loss) per share - basic | $ | 0.10 | $ | 0.10 | $ | (0.03) | $ | 0.16 | ||||||||||||||||||
Net income (loss) per share - diluted | $ | 0.10 | $ | 0.10 | $ | (0.03) | $ | 0.15 |
(1) There were no potential shares of Class B Common Stock during the periods presented.
23
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
13. COMMITMENTS AND CONTINGENCIES
Contractual Obligations
There have been no significant changes to the Company’s contractual obligations as compared to December 31, 2022, except as discussed below:
Repurchase of Solar Loans
As of June 30, 2023, the liability related to certain loans provided to customers within the Company’s Solar business that the Company may be required to repurchase from third party lenders was approximately $33 million. This liability is partially offset by a net receivable of $23 million related to the amount the Company ultimately expects to recover from any loans required to be repurchased, either through ongoing loan payments from the customer or proceeds from subsequent resale of the loans.
Google Commercial Agreement
In July 2020, the Company and Google entered into a Master Supply, Distribution, and Marketing Agreement (the “Google Commercial Agreement”), pursuant to which Google has agreed to supply the Company with certain Google devices as well as certain Google video and analytics services (“Google Devices and Services”), for sale to the Company’s customers.
The Google Commercial Agreement also specifies that each party shall contribute $150 million towards joint marketing, customer acquisition, training of the Company’s employees, and product technology updates related to the Google Devices and Services. In August 2022, the Company and Google executed an amendment to the Google Commercial Agreement, pursuant to which Google has agreed to commit an additional $150 million to fund growth, data and insights, product innovation and technology advancements, customer acquisition, and marketing, as mutually agreed by the Company and Google, (together with the initial amounts, the “Google Success Funds”).
During the six months ended June 30, 2023, $25 million of the Google Success Funds were approved for reimbursement to the Company for certain joint marketing expenses incurred by the Company and recorded as a reduction to advertising expenses, of which the Company received $12.5 million during the second quarter of 2023. In July, the Company was reimbursed for the remaining $12.5 million.
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 $79 million and $93 million as of June 30, 2023 and December 31, 2022, respectively. The Company does not believe such obligations will materially affect its financial position, results of operations, or cash flows.
Legal Proceedings
The Company is subject to various claims and lawsuits in the ordinary course of business, which include among other things commercial general liability claims, automobile liability claims, contractual disputes, worker’s compensation claims, labor law and employment claims, claims that the Company infringed on the intellectual property of others, and consumer and employment class actions. The Company is also subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations, and threatened legal actions and proceedings. In connection with such formal and informal inquiries, the Company receives numerous requests, subpoenas, and orders for documents, testimony, and information in connection with various aspects of its activities. There have been no material changes to these matters from those disclosed in the Amended 2022 Annual Report.
The Company records accruals for losses that are probable and reasonably estimable. These accruals are based on a variety of factors such as judgment, probability of loss, opinions of internal and external legal counsel, and actuarially determined estimates of claims incurred but not yet reported based upon historical claims experience. Legal costs in connection with claims and lawsuits in the ordinary course of business are expensed as incurred. Additionally, the Company records insurance recovery receivables from third-party insurers when recovery has been determined to be probable. The Company has not accrued for any losses for which the likelihood of loss cannot be assessed, is less than probable, or the range of possible loss cannot be estimated.
24
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
As of June 30, 2023 and December 31, 2022, the Company’s accrual for ongoing claims and lawsuits within the scope of an insurance program totaled $107 million and $90 million, respectively. The Company’s accrual related to ongoing claims and lawsuits not within the scope of an insurance program is not material.
14. LEASES
Company as Lessee
As part of normal operations, the Company leases real estate, vehicles, and equipment.
Right-of-Use Assets and Lease Liabilities:
(in thousands) | June 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||
Presentation and Classification: | ||||||||||||||||||||||||||
Operating | Current | $ | 97 | $ | 210 | |||||||||||||||||||||
Operating | Non-current | Other assets | 128,008 | 128,455 | ||||||||||||||||||||||
Finance | Non-current | 100,625 | 93,013 | |||||||||||||||||||||||
Total right-of-use assets | $ | 228,730 | $ | 221,678 | ||||||||||||||||||||||
Operating | Current | $ | 25,779 | $ | 28,696 | |||||||||||||||||||||
Finance | Current | 54,721 | 48,512 | |||||||||||||||||||||||
Operating | Non-current | 115,656 | 116,823 | |||||||||||||||||||||||
Finance | Non-current | 47,803 | 46,376 | |||||||||||||||||||||||
Total lease liabilities | $ | 243,959 | $ | 240,407 |
_________________
(1)Finance right-of-use assets are recorded net of accumulated depreciation, which was approximately $117 million and $106 million as of June 30, 2023 and December 31, 2022, respectively.
Lease Cost:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||||
Operating lease cost | $ | 10,472 | $ | 12,032 | $ | 20,694 | $ | 24,517 | ||||||||||||||||||
Finance lease cost: | ||||||||||||||||||||||||||
Amortization of right-of-use assets | 9,939 | 10,791 | 21,324 | 20,643 | ||||||||||||||||||||||
Interest on lease liabilities | 1,182 | 869 | 2,231 | 1,700 | ||||||||||||||||||||||
Variable lease costs | 17,594 | 25,864 | 37,826 | 48,998 | ||||||||||||||||||||||
Total lease cost | $ | 39,187 | $ | 49,556 | $ | 82,075 | $ | 95,858 |
Right-of-Use Assets Obtained in Exchange for Lease Obligations:
Six Months Ended June 30, | ||||||||||||||
(in thousands) | 2023 | 2022 | ||||||||||||
Operating leases | $ | 17,563 | $ | 16,322 | ||||||||||
Finance leases | $ | 33,116 | $ | 23,670 |
Company as Lessor
The Company is a lessor in certain Company-owned transactions as the Company has identified a lease component associated with the right-of-use of the security system and a non-lease component associated with the monitoring and related services.
25
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
For transactions in which (i) the timing and pattern of transfer is the same for the lease and non-lease components and (ii) the lease component would be classified as an operating lease if accounted for separately, the Company applies the practical expedient to aggregate the lease and non-lease components and accounts for the combined transaction based upon its predominant characteristic, which is the non-lease component. The Company accounts for the combined component as a single performance obligation under the applicable revenue guidance and recognizes the underlying assets within subscriber system assets, net.
For transactions that do not qualify for the practical expedient as the lease component represents a sales-type lease, the Company accounts for the lease and non-lease components separately. The Company’s sales-type leases are not material.
15. RELATED PARTY TRANSACTIONS
The Company’s related party transactions primarily relate to products and services received from, or monitoring and related services provided to, other entities affiliated with Apollo, and, from time to time, management, consulting, and transaction advisory services provided by Apollo to the Company, as well as transactions between the Company and State Farm. There were no notable related party transactions during the periods presented other than as described below.
Apollo
Upon initial funding of the Term Loan A Facility in March 2023, the Company incurred fees to Apollo of $1 million related to Apollo’s performance of placement agent services related to such debt.
State Farm
On October 13, 2022 (the “Closing”), the Company issued and sold in a private placement to State Farm 133,333,333 shares of the Company’s Common Stock at a per share price of $9.00 for an aggregate purchase price of $1.2 billion (the “State Farm Strategic Investment”) pursuant to a securities purchase agreement dated September 5, 2022. State Farm owns approximately 15% of the Company’s issued and outstanding Common Stock (assuming conversion of Class B Common Stock), and as a result, is a related party.
At the Closing, the Company, ADT LLC (an indirect wholly owned subsidiary of the Company), and State Farm entered into a Development Agreement (the “State Farm Development Agreement”) pursuant to which State Farm committed up to $300 million to fund certain initiatives as agreed to between the Company and State Farm related to the partnership (the “Opportunity Fund”).
Additionally at the Closing, the Company received $100 million of the Opportunity Fund, which will be restricted until such time as the Company uses the funds in accordance with the State Farm Development Agreement. The Company’s use of the funds is also subject to approval by State Farm.
As of June 30, 2023 and December 31, 2022, the balance in the Opportunity Fund was approximately $97 million and $101 million, respectively, and includes payments of $5 million partially offset by interest earned of $2 million during 2023.
Sunlight Financial LLC
ADT Solar uses Sunlight Financial LLC (“Sunlight”), an entity affiliated with Apollo, to access certain loan products for ADT Solar customers, as discussed in Note 2 “Revenue and Receivables.”
During the three and six months ended June 30, 2023, total loans funded by Sunlight were approximately $16 million and $61 million, respectively, and the Company incurred financing fees of approximately $3 million and $9 million, respectively.
During the three and six months ended June 30, 2022, total loans funded by Sunlight were approximately $131 million and $243 million, respectively, and the Company incurred third-party lender fees of approximately $15 million and $30 million, respectively, which is recognized as a reduction of Solar installation, product, and other revenue.
As of June 30, 2023, the Company may be required to repurchase loans previously funded by Sunlight in the amount of approximately $22 million.
26
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Rackspace
During October 2020, the Company entered into a master services agreement with Rackspace US, Inc. (“Rackspace”), an entity affiliated with Apollo, 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 included a minimum purchase commitment of $50 million over a seven year term, which the Company has met through spend with Rackspace as well as other parties. During the six months ended June 30, 2023 and 2022, fees incurred to Rackspace were not material.
Canopy
Canopy is considered a related party under GAAP as the Company accounts for its investment in Canopy under the equity method of accounting. During the first quarter of 2023, the Company made an additional equity investment of approximately $5 million in Canopy.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
INTRODUCTION
To obtain a more comprehensive understanding of our financial condition, changes in financial condition, and results of operations, the following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and the related notes included in our Amended 2022 Annual Report, which was filed with the SEC on July 27, 2023.
The following discussion and analysis contains forward-looking statements about our business, operations, and financial performance based on current plans and estimates that involve risks, uncertainties, and assumptions, which could differ materially from actual results. Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled “Cautionary Statements Regarding Forward-Looking Statements” and Item 1A “Risk Factors.”
Table of Contents
BUSINESS AND BASIS OF PRESENTATION
Our Business
ADT Inc., together with its wholly-owned subsidiaries (collectively, the “Company,” “we,” “our,” “us,” and “ADT”), provides security, interactive, and smart home solutions to residential, small business, and commercial customers, as well as residential solar and energy storage solutions, in the U.S. As of June 30, 2023, we served approximately 6.7 million security monitoring service subscribers.
Our mission is to empower people to protect and connect what matters most with safe, smart, and sustainable solutions, delivered through innovative offerings, unrivaled safety, and a premium experience because we believe that everyone deserves to feel safe.
Basis of Presentation
We report financial and operating information for our three segments: CSB, Commercial, and Solar. All financial information presented in this section has been prepared in U.S. dollars in accordance with GAAP, excluding our non-GAAP measures, and includes the accounts of ADT Inc. and its wholly-owned subsidiaries. All intercompany transactions have been eliminated.
We considered recent impacts from macroeconomic conditions such as inflationary pressures, rising interest rates, the uncertainty and volatility in the financial markets, and supply chain disruptions, as well as any on-going impacts from the COVID-19 Pandemic, in the assessment of our financial position, results of operations, and cash flows, as well as certain accounting estimates, as of and for the periods presented. As of June 30, 2023, the impact to the Company of the factors referenced above, as well as our response plan, has not materially changed from that described in our Amended 2022 Annual Report.
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Business Updates
Google
During the first quarter of 2023, we introduced our new ADT+ app for our self-setup line of do-it-yourself (“DIY”) smart home security products, including Google Nest offerings. We expect to introduce our ADT+ app for professional installations by the end of 2023 along with a new interactive platform and hardware lineup.
During the six months ended June 30, 2023, $25 million of the first tranche of the Google Success Funds was approved for reimbursement to the Company for Google’s portion of certain joint marketing expenses incurred by the Company. We received $12.5 million during the second quarter of 2023 and the remaining $12.5 million in July 2023.
Refer to Note 13 “Commitments and Contingencies” for further information on the Google Commercial Agreement.
State Farm
In connection with the State Farm Development Agreement, State Farm committed up to $300 million to an Opportunity Fund, of which we received $100 million upon Closing.
Refer to Note 15 “Related Party Transactions” for further information on the State Farm Strategic Investment.
Commercial Divestiture
As discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies,” we entered into the Commercial Purchase Agreement, pursuant to which GTCR agreed to acquire all of the issued and outstanding equity interests of F&S Holdings, which directly or indirectly holds all of the issued and outstanding equity interests in the subsidiaries of ADT that operate our Commercial Business. The purchase price to be paid to ADT in connection with the Commercial Transaction is $1,613 million in cash, subject to certain customary adjustments as set forth in the Commercial Purchase Agreement. We will report the results of the Commercial Business as discontinued operations beginning in the third quarter of 2023.
We expect to use the net proceeds from the Commercial Transaction to redeem approximately $1.5 billion of our debt, which will reduce future cash interest payments accordingly.
In addition, we expect to utilize a significant portion of our existing net operating losses (“NOLs”) to offset an expected gain in connection with the sale of the Commercial Business. We believe that we will utilize our remaining NOLs during 2024. Thereafter, without additional NOLs, we expect to begin paying federal cash taxes as such taxes are incurred.
FACTORS AFFECTING OPERATING RESULTS
The factors described herein could have a material adverse effect on our business, financial condition, results of operations, cash flows, and key performance indicators.
Generally, a significant upfront investment is required to acquire new subscribers that in turn provide ongoing and predictable recurring revenue generated from our monitoring services and other subscriber-based offerings. Although the economics of an installation may vary depending on the customer type, acquisition channel, and product offering, we generally achieve revenue break-even in less than two and a half years.
Our CSB and Commercial results are impacted by the mix of transactions under a Company-owned equipment model versus a customer-owned equipment model (referred to as outright sales), as there are different accounting treatments applicable to each model, as well as the mix, price, and type of offerings sold. As we continue to build our partnership with Google, introduce new or enhance our current offerings, and refine our go-to-market approach, we expect to see a shift toward an increasing proportion of outright sales transactions, which will impact results in future periods when those changes occur. We also expect an increase in the proportion of ADT self-set up customers, which typically have lower monthly recurring fees than our professional installations but will allow us to grow our subscriber base through access to the fast-growing do-it-yourself (“DIY”) market.
In addition, in our Solar business, we are exploring options for our customers seeking greater flexibility and accessibility in their rooftop solar financing. For example, in August 2023, we entered into an agreement in principle with SunPower Financial to offer lease and power purchase agreement (“PPA”) financing options to new Solar customers. We expect to have a final agreement in place which will enable us to offer a PPA financing option to our Solar customers beginning in the fourth quarter of 2023.
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Advances in technology are also helping us to improve our products and services and reduce our costs. For example, our innovative virtual service support program (the “Virtual Assistance Program”), which we launched for our residential customers in July 2021, provides our customers the ability to troubleshoot and resolve certain service issues through a live video stream with our skilled technicians. This provides customers with more options for receiving certain services that best fit their lifestyles while reducing the cost for us to provide these services and lowering our carbon footprint by eliminating thousands of vehicle trips each day.
We may experience an increase in costs associated with factors such as (i) offering a wider variety of products and services; (ii) providing a greater mix of interactive and smart home solutions; (iii) replacing or upgrading certain system components or technology due to technological advancements, cybersecurity upgrades, or otherwise; (iv) supply chain disruptions; (v) inflationary pressures on costs such as materials, labor, and fuel; and (vi) other changes in prices, interest rates, or terms from our suppliers, vendors, or third-party lenders. Changes in interest rates or terms from third-party lenders that provide loan products to our Solar customers are impacted by factors such as the Federal Reserve increasing the risk-free interest rate or other developments in the financial markets, and we expect these third-party costs to continue to increase in future periods. Refer to Note 6 “Goodwill and Other Intangible Assets” and Critical Accounting Estimates below for further discussion.
New customer additions and customer attrition have a direct impact on our financial results, including revenue, operating income, and cash flows. A portion of our recurring customer base can be expected to cancel its service each year as customers may choose to terminate or not to renew their contracts for a variety of reasons, including relocation, cost, loss to competition, or service issues. Relocations are sensitive to changes in the residential housing market, and fewer relocations generally lead to improvements in gross customer revenue attrition, but fewer new customer additions. Additionally, non-payment disconnects generally increase in a weaker macroeconomic environment. During 2022 and through the second quarter of 2023, we experienced fewer relocation disconnects and higher non-pay disconnects largely related to housing market conditions and the weaker macroeconomic environment. Further, in connection with the divestiture of our Commercial Business, our gross customer revenue attrition may increase as residential customers typically have slightly higher attrition rates than our commercial customers. We may continue to experience fluctuations in these or other trends in the future as changes in the general macroeconomic environment or housing market develop.
As part of our response to changes or pressures in the macroeconomic environment, we have been evaluating, and continue to evaluate, cost saving opportunities such as reducing headcount or our physical facilities footprint when appropriate, and reducing non-essential spend. While we have experienced some increase in costs as a result of inflation, we have, for the most part, been able to offset the rising costs through price increases to our customers, as well as cost saving opportunities.
KEY PERFORMANCE INDICATORS
We evaluate our results using certain key performance indicators, including operating metrics such as recurring monthly revenue (“RMR”) and gross customer revenue attrition, as well as the non-GAAP measure Adjusted EBITDA. Computations of our key performance indicators may not be comparable to other similarly titled measures reported by other companies.
Certain operating metrics are approximated, as there may be variations to reported results due to certain adjustments we might make in connection with the integration over several periods of acquired companies that calculated these metrics differently or periodic reassessments and refinements in the ordinary course of business, including changes due to system conversions or historical methodology differences in legacy systems.
RMR
RMR is generated by contractual recurring fees for monitoring and other recurring services provided to our customers and includes customers within both the CSB and Commercial segments.
We use RMR to evaluate our overall sales, installation, and retention performance. Additionally, we believe the presentation of RMR is useful to investors because it measures the volume of revenue under contract at a given point in time, which is useful for forecasting future revenue performance as the majority of our revenue comes from recurring sources.
Gross Customer Revenue Attrition
Gross customer revenue attrition is defined as RMR lost as a result of customer attrition, net of dealer charge-backs and reinstated customers, excluding contracts monitored but not owned and self-setup/DIY customers. Customer sites are considered canceled when all services are terminated. Dealer charge-backs represent customer cancellations charged back to the dealers because the customer canceled service during the charge-back period, which is generally thirteen months.
Gross customer revenue attrition is calculated on a trailing twelve-month basis, the numerator of which is the RMR lost during the period due to attrition, net of dealer charge-backs and reinstated customers, and the denominator of which is total annualized
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RMR based on an average of RMR under contract at the beginning of each month during the period, in each case, excluding contracts monitored but not owned and self-setup/DIY customers.
We use gross customer revenue attrition to evaluate our retention and customer satisfaction performance, as well as evaluate subscriber trends by vintage year. Additionally, we believe the presentation of gross customer revenue attrition is useful to investors as it provides a means to evaluate drivers of customer attrition and the impact of retention initiatives.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measure. Our definition of Adjusted EBITDA, a reconciliation of Adjusted EBITDA to 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.”
RESULTS OF OPERATIONS
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
(in thousands, except as otherwise indicated) | 2023 | 2022 | $ Change | 2023 | 2022 | $ Change | ||||||||||||||||||||||||||||||||
Revenue: | ||||||||||||||||||||||||||||||||||||||
Monitoring and related services | $ | 1,187,063 | $ | 1,145,792 | $ | 41,271 | $ | 2,360,381 | $ | 2,267,088 | $ | 93,293 | ||||||||||||||||||||||||||
Security installation, product, and other | 328,533 | 240,183 | 88,350 | 622,734 | 471,653 | 151,081 | ||||||||||||||||||||||||||||||||
Solar installation, product, and other | 77,532 | 215,055 | (137,523) | 222,367 | 407,036 | (184,669) | ||||||||||||||||||||||||||||||||
Total revenue | 1,593,128 | 1,601,030 | (7,902) | 3,205,482 | 3,145,777 | 59,705 | ||||||||||||||||||||||||||||||||
Cost of revenue (exclusive of depreciation and amortization shown separately below): | ||||||||||||||||||||||||||||||||||||||
Monitoring and related services | 224,758 | 232,506 | (7,748) | 471,161 | 468,120 | 3,041 | ||||||||||||||||||||||||||||||||
Security installation, product, and other | 194,020 | 142,402 | 51,618 | 363,274 | 281,152 | 82,122 | ||||||||||||||||||||||||||||||||
Solar installation, product, and other | 64,898 | 132,905 | (68,007) | 163,242 | 268,309 | (105,067) | ||||||||||||||||||||||||||||||||
Total cost of revenue | 483,676 | 507,813 | (24,137) | 997,677 | 1,017,581 | (19,904) | ||||||||||||||||||||||||||||||||
Selling, general, and administrative expenses | 441,771 | 487,069 | (45,298) | 904,000 | 969,417 | (65,417) | ||||||||||||||||||||||||||||||||
Depreciation and intangible asset amortization | 345,838 | 399,416 | (53,578) | 728,893 | 875,539 | (146,646) | ||||||||||||||||||||||||||||||||
Merger, restructuring, integration, and other | 18,090 | (3,845) | 21,935 | 35,737 | (3,317) | 39,054 | ||||||||||||||||||||||||||||||||
Goodwill impairment | 181,179 | — | 181,179 | 422,809 | — | 422,809 | ||||||||||||||||||||||||||||||||
Operating income (loss) | 122,574 | 210,577 | (88,003) | 116,366 | 286,557 | (170,191) | ||||||||||||||||||||||||||||||||
Interest expense, net | (84,282) | (81,651) | (2,631) | (255,908) | (87,958) | (167,950) | ||||||||||||||||||||||||||||||||
Other income (expense) | 519 | 1,463 | (944) | (671) | 2,959 | (3,630) | ||||||||||||||||||||||||||||||||
Income (loss) before income taxes and equity in net earnings (losses) of equity method investee | 38,811 | 130,389 | (91,578) | (140,213) | 201,558 | (341,771) | ||||||||||||||||||||||||||||||||
Income tax benefit (expense) | 55,138 | (37,924) | 93,062 | 118,002 | (57,448) | 175,450 | ||||||||||||||||||||||||||||||||
Income (loss) before equity in net earnings (losses) of equity method investee | 93,949 | 92,465 | 1,484 | (22,211) | 144,110 | (166,321) | ||||||||||||||||||||||||||||||||
Equity in net earnings (losses) of equity method investee | (1,738) | (948) | (790) | (4,415) | (948) | (3,467) | ||||||||||||||||||||||||||||||||
Net income (loss) | $ | 92,211 | $ | 91,517 | $ | 694 | $ | (26,626) | $ | 143,162 | $ | (169,788) | ||||||||||||||||||||||||||
Key Performance Indicators:(1) | ||||||||||||||||||||||||||||||||||||||
RMR | $ | 382,222 | $ | 368,768 | $ | 13,454 | $ | 382,222 | $ | 368,768 | $ | 13,454 | ||||||||||||||||||||||||||
Gross customer revenue attrition (percent) | 12.5% | 12.7% | N/A* | 12.5% | 12.7% | N/A* | ||||||||||||||||||||||||||||||||
Adjusted EBITDA(2) | $ | 651,255 | $ | 597,249 | $ | 54,006 | $ | 1,276,171 | $ | 1,198,246 | $ | 77,925 |
(1)Refer to the “—Key Performance Indicators” section for the definitions of these key performance indicators.
(2)Adjusted EBITDA is a non-GAAP measure. Refer to the “—Non-GAAP Measures” section for the definition of this term and a reconciliation to the most comparable GAAP measure.
*N/A — Not applicable.
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Revenue
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | $ Change | 2023 | 2022 | $ Change | ||||||||||||||||||||||||||||||||
CSB: | ||||||||||||||||||||||||||||||||||||||
Monitoring and related services | $ | 1,043,254 | $ | 1,011,442 | $ | 31,812 | $ | 2,071,888 | $ | 2,004,470 | $ | 67,418 | ||||||||||||||||||||||||||
Security installation, product, and other | 124,822 | 77,047 | 47,775 | 228,664 | 146,608 | 82,056 | ||||||||||||||||||||||||||||||||
Total CSB | 1,168,076 | 1,088,489 | 79,587 | 2,300,552 | 2,151,078 | 149,474 | ||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||
Monitoring and related services | 143,809 | 134,350 | 9,459 | 288,493 | 262,618 | 25,875 | ||||||||||||||||||||||||||||||||
Security installation, product, and other | 203,711 | 163,136 | 40,575 | 394,070 | 325,045 | 69,025 | ||||||||||||||||||||||||||||||||
Total Commercial | 347,520 | 297,486 | 50,034 | 682,563 | 587,663 | 94,900 | ||||||||||||||||||||||||||||||||
Solar: | ||||||||||||||||||||||||||||||||||||||
Solar installation, product, and other | 77,532 | 215,055 | (137,523) | 222,367 | 407,036 | (184,669) | ||||||||||||||||||||||||||||||||
Total Solar | 77,532 | 215,055 | (137,523) | 222,367 | 407,036 | (184,669) | ||||||||||||||||||||||||||||||||
Total revenue | $ | 1,593,128 | $ | 1,601,030 | $ | (7,902) | $ | 3,205,482 | $ | 3,145,777 | $ | 59,705 |
CSB:
During the three months ended June 30, 2023, the increases in revenue, as compared to the prior period, included:
•Monitoring and related services revenue (“M&S Revenue”): higher recurring revenue of $32 million primarily driven by an increase in average prices.
•Security installation, product, and other: (i) an increase in installation revenue of $30 million primarily driven by a higher volume of outright sales transactions and higher installation revenue per unit, as well as (ii) an increase in the amortization of deferred subscriber acquisition revenue of $17 million as a result of a higher population of existing customers under a Company-owned model.
During the six months ended June 30, 2023, the increases in revenue, as compared to the prior period, included:
•M&S Revenue: higher recurring revenue of $67 million primarily driven by an increase in average prices.
•Security installation, product, and other: (i) an increase in installation revenue of $46 million primarily driven by a higher volume of outright sales transactions and higher installation revenue per unit, as well as (ii) an increase in the amortization of deferred subscriber acquisition revenue of $36 million as a result of a higher population of existing customers under a Company-owned model.
Commercial:
During the three months ended June 30, 2023, the increases in revenue, as compared to the prior period, included:
•M&S Revenue: (i) higher recurring revenue of $5 million driven by improvements in average revenue per subscriber, as well as (ii) higher revenue from time and materials billings of $4 million driven by higher revenue per service call.
•Security installation, product, and other: higher installation revenue of $41 million primarily related to strong sales performance and improvements in supply chain delays.
During the six months ended June 30, 2023, the increases in revenue, as compared to the prior period, included:
•M&S Revenue: (i) higher revenue from time and materials billings of $16 million driven by higher revenue per service call, as well as (ii) higher recurring revenue of $10 million driven by improvements in average revenue per subscriber.
•Security installation, product, and other: higher installation revenue of $69 million primarily related to strong sales performance and improvements in supply chain delays.
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Solar:
During the three and six months ended June 30, 2023, the decrease in revenue, as compared to the prior period, was primarily due to fewer sales and installations as a result of prior cost reduction efforts, delays in certain operational initiatives, and impacts from macroeconomic conditions, including higher interest rates.
In addition, the decrease in revenue for the six months ended June 30, 2023 as compared to the prior period was impacted by the amortization of purchase accounting adjustments of $30 million related to a customer backlog intangible asset, which was recorded as a reduction to revenue during the first quarter of 2022.
RMR and Gross Customer Revenue Attrition:
As of June 30, 2023, our ending RMR balance was $382 million, up $13 million or 4% compared to the prior period, primarily driven by an increase in average prices on new and existing subscribers.
Gross customer revenue attrition was 12.5% as of June 30, 2023, compared to 12.7% as of June 30, 2022. The improvement in gross customer revenue attrition was driven by a decrease in relocations, partially offset by higher non-payment disconnects.
Cost of Revenue
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | $ Change | 2023 | 2022 | $ Change | ||||||||||||||||||||||||||||||||
CSB: | ||||||||||||||||||||||||||||||||||||||
Monitoring and related services | $ | 142,302 | $ | 150,564 | $ | (8,262) | $ | 303,903 | $ | 305,083 | $ | (1,180) | ||||||||||||||||||||||||||
Security installation, product, and other | 44,250 | 20,640 | 23,610 | 72,928 | 37,301 | 35,627 | ||||||||||||||||||||||||||||||||
Total CSB | 186,552 | 171,204 | 15,348 | 376,831 | 342,384 | 34,447 | ||||||||||||||||||||||||||||||||
Commercial: | ||||||||||||||||||||||||||||||||||||||
Monitoring and related services | 82,456 | 81,942 | 514 | 167,258 | 163,037 | 4,221 | ||||||||||||||||||||||||||||||||
Security installation, product, and other | 149,770 | 121,762 | 28,008 | 290,346 | 243,851 | 46,495 | ||||||||||||||||||||||||||||||||
Total Commercial | 232,226 | 203,704 | 28,522 | 457,604 | 406,888 | 50,716 | ||||||||||||||||||||||||||||||||
Solar: | ||||||||||||||||||||||||||||||||||||||
Solar installation, product, and other | 64,898 | 132,905 | (68,007) | 163,242 | 268,309 | (105,067) | ||||||||||||||||||||||||||||||||
Total Solar | 64,898 | 132,905 | (68,007) | 163,242 | 268,309 | (105,067) | ||||||||||||||||||||||||||||||||
Total cost of revenue | $ | 483,676 | $ | 507,813 | $ | (24,137) | $ | 997,677 | $ | 1,017,581 | $ | (19,904) |
CSB:
During the three and six months ended June 30, 2023, cost of revenue, as compared to the prior period, included an increase in installation costs due to a higher volume of outright sales transactions, partially offset by cost reduction initiatives primarily in monitoring and related services.
Commercial:
During the three and six months ended June 30, 2023, the increase in cost of revenue, as compared to the prior period, was primarily attributable to an increase in installations and services performed in connection with strong sales performance as discussed above.
Solar:
During the three and six months ended June 30, 2023, the decrease in cost of revenue, as compared to the prior period, was primarily due to fewer sales and installations as discussed above.
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Selling, General, and Administrative Expenses
During the three months ended June 30, 2023, the decrease in SG&A, as compared to the prior period, was primarily driven by:
•a decrease of $46 million in Solar SG&A, primarily due to recent cost reduction initiatives, including lower selling and advertising costs,
•a decrease of $19 million in general and administrative expenses in CSB primarily related to a legal settlement, and
•a decrease of $12 million in advertising costs, primarily due to utilization of a portion of the Google Success Funds, partially offset by
•an increase of $19 million in selling costs, primarily related to the amortization of deferred subscriber acquisition costs, and
•an increase of $13 million in the allowance for credit losses primarily related to residential retail installment contract receivables.
During the six months ended June 30, 2023, the decrease in SG&A, as compared to the prior period, was primarily driven by:
•a decrease of $64 million in Solar SG&A, primarily due to recent cost reduction initiatives, including lower selling and advertising costs,
•a decrease of $25 million in radio conversion costs due to the wind down of the replacement program,
•a decrease of $27 million in advertising costs, primarily due to utilization of a portion of the Google Success Funds, and
•a decrease of $14 million in general and administrative expenses in CSB primarily related to a legal settlement, partially offset by
•an increase of $35 million in selling costs, primarily related to the amortization of deferred subscriber acquisition costs, and
•an increase of $20 million in the allowance for credit losses primarily related to residential retail installment contract receivables.
Depreciation and Intangible Asset Amortization
During the three and six months ended June 30, 2023, the decrease in depreciation and intangible asset amortization, as compared to the prior period, was primarily driven by a decrease in the amortization of customer relationship intangible assets of $65 million and $181 million, respectively, primarily related to certain assets acquired as part of the ADT Acquisition, partially offset by increases in the amortization of subscriber system assets and contracts and related customer relationship intangible assets.
During the first quarter of 2023, the remaining customer relationship intangible assets acquired as part of the ADT Acquisition became fully amortized.
Merger, restructuring, integration, and other
During the three and six months ended June 30, 2023, the increase in merger, restructuring, integration, and other, as compared to the prior period, was primarily due to increases of approximately (i) $6 million and $14 million, respectively, in integration and third-party costs related to the strategic optimization of our Solar business operations following the acquisition of ADT Solar and (ii) $5 million and $13 million, respectively, of restructuring costs.
Goodwill Impairment
During the first and second quarters of 2023, we recorded goodwill impairment charges of $242 million and $181 million, respectively, which were the result of interim impairment quantitative analyses associated with our Solar reporting unit. Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” and Note 6 “Goodwill and Other Intangible Assets” and the section “—Critical Accounting Estimates” below for further discussion.
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Interest Expense, net
During the six months ended June 30, 2023, the increase in interest expense, net, as compared to the prior year period, was driven by a decrease in unrealized gains of $182 million on our interest rate swaps not designated as cash flow hedges, partially offset by higher interest expense primarily related to our First Lien Term Loan due 2026.
Income Tax Benefit (Expense)
During the three and six months ended June 30, 2023, the increase in income tax benefit was due to increases in our annual effective tax rate primarily as a result of the Solar goodwill impairment charges.
Refer to Note 9 “Income Taxes” for details on our effective tax rate.
Deferred Tax Assets
We have a significant amount of deferred tax assets, against which we take valuation allowances that relate to the uncertainty of our ability to utilize these deferred tax assets in future periods. We review periodically those matters that can influence our decision as to whether or not a valuation allowance is appropriate. Among those matters considered are pending and enacted legislation. We will consider each quarter whether any developments to such legislation, together with the other factors we consider, require a valuation allowance.
We believe that our deferred tax assets for disallowed interest under Internal Revenue Code (“IRC”) Section 163(j) will continue to grow from their current level. There is currently significant uncertainty in the matters we consider when determining whether it is appropriate to take additional valuation allowances. While we have not reported any material changes to our valuation allowances since our Amended 2022 Annual Report, we may determine to do so in subsequent periods. Any material change to our valuation allowance would materially and adversely affect our operating results and may result in a net loss position for any given period.
NON-GAAP MEASURES
To provide investors with additional information in connection with our results as determined in accordance with GAAP, we disclose Adjusted EBITDA as a non-GAAP measure. This measure is not a financial measure calculated in accordance with GAAP, and it should not be considered as a substitute for net income, operating income, or any other measure calculated in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies.
Adjusted EBITDA
We believe Adjusted EBITDA is useful to investors to measure the operational strength and performance of our business. We believe the presentation of Adjusted EBITDA is useful as it provides investors additional information about our operating profitability adjusted for certain non-cash items, non-routine items we do not expect to continue at the same level in the future, as well as other items not core to our operations. Further, we believe Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against other peer companies using similar measures.
We define Adjusted EBITDA as 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 items; (vii) losses on extinguishment of debt; (viii) radio conversion costs, net; (ix) adjustments related to acquisitions, such as contingent consideration and purchase accounting adjustments, or dispositions; (x) impairment charges; and (xi) other income/gain or expense/loss items such as changes in fair value of certain financial instruments or financing and consent fees.
There are material limitations to using Adjusted EBITDA. Adjusted EBITDA does not take into account certain significant items, including depreciation and amortization, interest, taxes, and other adjustments which directly affect our net income (loss). These limitations are best addressed by considering the economic effects of the excluded items independently and by considering Adjusted EBITDA in conjunction with net income or loss as calculated in accordance with GAAP.
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The table below reconciles Adjusted EBITDA to net income (loss):
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | $ Change | 2023 | 2022 | $ Change | ||||||||||||||||||||||||||||||||
Net income (loss) | $ | 92,211 | $ | 91,517 | $ | 694 | $ | (26,626) | $ | 143,162 | $ | (169,788) | ||||||||||||||||||||||||||
Interest expense, net | 84,282 | 81,651 | 2,631 | 255,908 | 87,958 | 167,950 | ||||||||||||||||||||||||||||||||
Income tax expense (benefit) | (55,138) | 37,924 | (93,062) | (118,002) | 57,448 | (175,450) | ||||||||||||||||||||||||||||||||
Depreciation and intangible asset amortization | 345,838 | 399,416 | (53,578) | 728,893 | 875,539 | (146,646) | ||||||||||||||||||||||||||||||||
Amortization of deferred subscriber acquisition costs | 48,479 | 39,050 | 9,429 | 95,163 | 75,989 | 19,174 | ||||||||||||||||||||||||||||||||
Amortization of deferred subscriber acquisition revenue | (75,910) | (58,461) | (17,449) | (147,932) | (111,884) | (36,048) | ||||||||||||||||||||||||||||||||
Share-based compensation expense | 11,506 | 16,932 | (5,426) | 27,488 | 32,952 | (5,464) | ||||||||||||||||||||||||||||||||
Merger, restructuring, integration, and other | 18,090 | (3,845) | 21,935 | 35,737 | (3,317) | 39,054 | ||||||||||||||||||||||||||||||||
Goodwill impairment(1) | 181,179 | — | 181,179 | 422,809 | — | 422,809 | ||||||||||||||||||||||||||||||||
Acquisition-related adjustments(2) | 1,028 | 1,328 | (300) | 2,658 | 37,623 | (34,965) | ||||||||||||||||||||||||||||||||
Other, net(3) | (310) | (8,263) | 7,953 | 75 | 2,776 | (2,701) | ||||||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 651,255 | $ | 597,249 | $ | 54,006 | $ | 1,276,171 | $ | 1,198,246 | $ | 77,925 |
________________
(1) Represents impairment charges associated with our Solar reporting unit. Refer to Note 1 “Description of Business and Summary of Significant Accounting Policies” and Note 6 “Goodwill and Other Intangible Assets.”
(2) During 2022, primarily represents the amortization of the customer backlog intangible asset related to the ADT Solar Acquisition, which was fully amortized as of March 2022.
(3) During 2022, primarily includes the gain on sale of a business of $10 million and net radio conversion costs.
Adjusted EBITDA in total and by segment are set forth below. As noted above, Adjusted EBITDA is our segment profit measure pursuant to GAAP and is therefore not a non-GAAP financial measure with respect to our segments.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||
(in thousands) | 2023 | 2022 | $ Change | 2023 | 2022 | $ Change | |||||||||||||||||||||||||||||
CSB | $ | 643,725 | $ | 580,701 | $ | 63,024 | $ | 1,238,398 | $ | 1,141,246 | $ | 97,152 | |||||||||||||||||||||||
Commercial | 44,970 | 31,363 | 13,607 | 85,758 | 54,993 | 30,765 | |||||||||||||||||||||||||||||
Solar | (37,440) | (14,815) | (22,625) | (47,985) | 2,007 | (49,992) | |||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 651,255 | $ | 597,249 | $ | 54,006 | $ | 1,276,171 | $ | 1,198,246 | $ | 77,925 |
The factors listed below exclude amounts that are outside of our definition of Adjusted EBITDA. Refer to the discussions above under “—Results of Operations” for further details.
CSB:
During the three and six months ended June 30, 2023, respectively, the increases, as compared to the prior periods, were primarily due to:
•higher M&S Revenue, net of the associated costs, of $46 million and $80 million,
•lower advertising costs of $11 million and $25 million, and
•lower general and administrative expenses of $19 million and $14 million, partially offset by
•higher provision for credit losses of $13 million and $18 million.
Commercial:
During the three and six months ended June 30, 2023, respectively, the increases, as compared to the prior periods, were primarily due to:
•higher M&S Revenue, net of associated costs, of $9 million and $22 million, and
•higher installation revenue, net of the associated costs and commissions, of $10 million and $15 million, partially offset by
•higher general and administrative expenses of $5 million and $7 million.
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Solar:
During the three and six months ended June 30, 2023, respectively, the decreases, as compared to the prior periods, were primarily due to:
•lower installation revenue, net of the associated costs and commissions, of $59 million and $104 million, partially offset by
•lower SG&A expenses, including the non-recurrence of an $11 million charge during 2022 associated with the estimated amount of receivables and rebates not expected to be collected from a former third-party lender.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital resources primarily consisted of the following:
(in thousands) | June 30, 2023 | ||||
Cash and cash equivalents | $ | 146,435 | |||
Restricted cash and restricted cash equivalents | $ | 114,365 | |||
Availability under First Lien Revolving Credit Facility | $ | 575,000 | |||
Uncommitted available borrowing capacity under Receivables Facility | $ | 97,447 | |||
Carrying amount of total debt outstanding | $ | 9,670,800 |
Liquidity
We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our First Lien 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 including working capital, principal and interest payments on our debt, capital expenditures, potential dividend payments to our stockholders, and from time to time, strategic investments or other initiatives that we may undertake.
We are a highly leveraged company with significant debt service requirements and have both fixed-rate and variable-rate debt. All of our remaining variable rate debt instruments previously based on LIBOR are now based on SOFR, and we do not anticipate any material impacts from the SOFR transition. We may periodically seek to repay, redeem, repurchase, or refinance our indebtedness, or seek to retire or purchase our outstanding securities through cash purchases in the open market, privately negotiated transactions, a 10b5-1 repurchase plan, or otherwise, and any such transactions may involve material amounts. Cash outflows for interest payments are not consistent between quarters, with larger outflows occurring in the first and third quarters, and may vary as a result of our variable rate debt.
As of June 30, 2023, our next debt maturity will occur in April 2024 with respect to the remaining outstanding balance of $600 million of our First Lien Notes due 2024. We are closely monitoring the impact of recent developments in the financial markets and banking industry, inflationary pressures, and changes in interest rates on our cash position. However, we believe our cash position, available borrowing capacity under our credit agreements, and cash provided by operating activities are, and will continue to be, adequate to meet our operational and business needs in the next twelve months, as well as our long-term liquidity needs.
Material Cash Requirements
There have been no significant changes to our material cash requirements, commitments and contingencies, or off-balance sheet arrangements from those disclosed in our Amended 2022 Annual Report.
Repurchase of Solar Loans
As of June 30, 2023, the liability related to certain loans provided to customers within our Solar business that we may be required to repurchase from third party lenders was approximately $33 million. This liability is partially offset by a net receivable of $23 million related to the amount we ultimately expect to recover from any loans required to be repurchased, either through ongoing loan payments from the customer or proceeds from subsequent resale of the loans.
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Long-Term Debt
Significant changes and activity related to our long-term debt since our Amended 2022 Annual Report are discussed below. Refer to Note 7 “Debt” for further discussion on our debt agreements.
Term Loan A Facility
In March 2023, we borrowed an aggregate principal amount of $600 million of term loans under the Term Loan A Facility, and in June 2023, we borrowed an additional aggregate principal amount of $50 million of Incremental Term Loan A Loans.
ADT Notes due 2023 Redemption
In March 2023, we used the proceeds from the Term Loan A Facility to redeem approximately $600 million of the ADT Notes due 2023 for a total redemption price of approximately $600 million, excluding accrued and unpaid interest. On June 15, 2023, we redeemed the remaining outstanding balance of approximately $100 million of the ADT Notes due 2023 using $50 million of proceeds from the Incremental Term Loan A Loans and cash on hand.
First Lien Notes due 2024 Partial Redemption
On May 2, 2023, we redeemed $150 million principal amount of the $750 million outstanding First Lien Notes due 2024 for a redemption price of $150 million, excluding accrued and unpaid interest, using cash on hand.
Receivables Facility
In March 2023, we amended the agreement governing the Receivables Facility, pursuant to which, among other things, the borrowing capacity was increased from $400 million to $500 million and the uncommitted revolving period was extended from May 2023 to March 2024.
During the six months ended June 30, 2023, we received proceeds from the Receivables Facility of $140 million and repaid $92 million, and as of June 30, 2023, the Receivables Facility had an outstanding balance of $403 million.
Solar Receivables Facility
On August 2, 2023, we entered into the Solar Receivables Facility Financing Agreement to finance receivables generated by the installation of residential solar systems, which, among other things, provides for an uncommitted revolving loan facility in the aggregate principal amount of up to $300 million.
Debt Covenants
As of June 30, 2023, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations. We do not believe there is a material risk of future noncompliance with our financial covenant and other maintenance tests.
Dividends
During the six months ended June 30, 2023 and 2022, we declared aggregate dividends of $61 million ($0.035 per share) and $60 million ($0.035 per share) on our Common Stock, respectively, and $4 million ($0.035 per share) on our Class B Common Stock during each period.
On August 8, 2023, we announced a dividend of $0.035 per share to holders of Common Stock and Class B Common Stock of record on September 15, 2023, which will be paid on October 4, 2023.
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Cash Flow Analysis
Six Months Ended June 30, | |||||||||||||||||
(in thousands) | 2023 | 2022 | $ Change | ||||||||||||||
Net cash provided by (used in): | |||||||||||||||||
Operating activities | $ | 799,435 | $ | 822,636 | $ | (23,201) | |||||||||||
Investing activities | $ | (654,700) | $ | (807,440) | $ | 152,740 | |||||||||||
Financing activities | $ | (257,515) | $ | 7,073 | $ | (264,588) |
Cash Flows from Operating Activities
The decrease in net cash provided by operating activities, as compared to the prior period, was primarily due to:
•an increase in cash interest of $97 million primarily related to our First Lien Term Loan due 2026, and
•an increase in payroll tax payments of $26 million primarily related to deferrals of such payments in 2020 under the CARES Act, partially offset by
•the timing of payments to vendors primarily related to inventory.
During 2023, we also received approximately $19 million related to a legal settlement and approximately $13 million of the Google Success Funds.
The remainder of the activity related to changes in assets and liabilities due to the volume and timing of other operating cash receipts and payments with respect to when the transactions are reflected in earnings. Refer to the discussions above under “—Results of Operations” for further details.
Cash Flows from Investing Activities
The decrease in net cash used in investing activities, as compared to the prior period, was primarily due to:
•a decrease in cash paid for dealer generated customer account and bulk account purchases of $89 million primarily related to fewer bulk purchases,
•a decrease in subscriber system assets expenditures of $58 million due to fewer adds,
•a decrease in net cash paid of $20 million primarily related to other investments, and
•a decrease in cash paid for the acquisition of businesses, net of cash acquired, of $13 million as a result of activity during the prior year, partially offset by
•a decrease in proceeds from the sale of a business of $27 million due to activity during the prior year.
Cash Flows from Financing Activities
The change in cash flows from financing activities, as compared to the prior period, was primarily due to:
•a decrease in net proceeds of long-term borrowings of approximately $263 million primarily as a result of the ADT Notes due 2023 Redemption and ADT Notes due 2024 Partial Redemption in 2023, as well as a reduction of net borrowings under the First Lien Revolving Credit Facility compared to the prior year, partially offset by borrowings under the Term Loan A Facility in 2023, and
•a decrease in net proceeds under the Receivables Facility of $45 million, partially offset by
•proceeds from interest rate swap contracts that included an other-than-insignificant financing element at inception of $36 million during 2023 compared to payments of $25 million during 2022.
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CRITICAL ACCOUNTING ESTIMATES
We disclosed our critical accounting estimates in our Amended 2022 Annual Report, which include estimates prepared in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations.
Critical accounting estimates are based on, among other things, estimates, assumptions, and judgments made by management that include inherent risks and uncertainties. Our estimates are based on relevant information available at the end of each period. Actual results could differ materially from these estimates under different assumptions or market conditions.
There were no material changes in our critical accounting estimates since our Amended 2022 Annual Report, except as discussed below:
Goodwill Impairment
We perform our annual goodwill impairment test on October 1 of each year or more often if events occur or circumstances change which indicate it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. Under a quantitative approach, we estimate the fair value of a reporting unit and compare it to the reporting unit’s carrying amount. If the carrying amount of a reporting unit exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
As previously disclosed, we performed an interim impairment quantitative assessment on the Solar reporting unit as a result of a triggering event as of March 31, 2023 and recorded a goodwill impairment charge of $242 million during the first quarter of 2023. Also as previously disclosed, the Solar reporting unit was considered at risk for future impairment following the impairment in the first quarter 2023.
During the second quarter of 2023, we concluded there was an additional triggering event related to the Solar reporting unit as a result of the then-current macroeconomic conditions, including the impact of rising interest rates, as well as ADT Solar’s continued underperformance of operating results in the second quarter of 2023 relative to expectations. As a result, we performed an interim impairment quantitative assessment on the Solar reporting unit as of June 30, 2023.
We estimated the fair value of the Solar reporting unit using the income approach, which included significant assumptions such as forecasted revenue, Adjusted EBITDA margins, and discount rates, as well as other assumptions including operating expenses and cash flows. In developing these assumptions, we relied on various factors including operating results, business plans, economic projections, anticipated future cash flows, and other market data. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying judgments and factors may include such items as a prolonged downturn in the business environment, changes in economic conditions that significantly differ from our assumptions in timing or degree, volatility in equity and debt markets resulting in higher discount rates, and unexpected regulatory changes. There are inherent uncertainties related to these judgments and factors that may ultimately impact the estimated fair value determinations.
Based on the results of our interim impairment analysis, we recorded a non-cash impairment charge of $181 million during the second quarter of 2023. Following the impairment loss, the remaining balance of goodwill attributable to our Solar reporting unit is approximately $88 million.
As the carrying value of the Solar reporting unit approximates its fair value following the impairment charge, the Solar reporting unit is considered at risk of future impairment. If our assumptions are not realized, or if there are future changes in any of the assumptions due to a change in economic conditions or otherwise, it is possible that a further impairment charge may need to be recorded in the future. For example, a decrease of approximately 16.7% in 2024 projected revenues, a decrease in the Adjusted EBITDA margin across all periods of 0.7%, or an increase in the weighted average cost of capital by 1.1%, holding other assumptions constant, would result in approximately $40 million of additional impairment before applying the simultaneous equation method which would have the effect of increasing the amount of any additional impairment.
Refer to Note 6 “Goodwill and Other Intangible Assets” to the condensed consolidated financial statements for further discussion.
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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain information and disclosures that are forward-looking and therefore subject to risks and uncertainties, including those described below. All statements, other than statements of historical fact, included in this document are, or could be, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and the applicable rules and regulations of the SEC and are made in reliance on the safe harbor protections provided thereunder. These forward-looking statements relate to, among other things, the Commercial Transaction between ADT and GTCR, the expected timetable for completing the Commercial Transaction and the benefits and synergies of the Commercial Transaction; the strategic investment by and long term partnership with State Farm; anticipated financial performance, including the Company’s ability to achieve its stated guidance metrics and its progress toward its medium-term targets; management’s plans and objectives for future operations; the successful development, commercialization, and timing of new or joint products; the expected timing of product commercialization with State Farm or any changes thereto; our acquisition of ADT Solar and its anticipated impact on our business and financial condition; business prospects; outcomes of regulatory proceedings; market conditions; our ability to successfully respond to the challenges posed by the COVID-19 Pandemic; our strategic partnership and ongoing relationship with Google; the expected timing of product commercialization with Google or any changes thereto; the successful internal development, commercialization, and timing of our next generation platform and innovative offerings; the successful commercialization of our joint venture with Ford; the successful conversion of customers who continue to utilize outdated technology; the current and future market size for existing, new, or joint products; any stated or implied outcomes with regards to the foregoing; and other matters. Forward-looking statements are contained principally in the sections of this report titled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Without limiting the generality of the preceding sentences, any time the Company uses the words “expects,” “intends,” “will,” “anticipates,” “believes,” “confident,” “continue,” “propose,” “seeks,” “could,” “may,” “should,” “estimates,” “forecasts,” “might,” “goals,” “objectives,” “targets,” “planned,” “projects,” and, in each case, their negative or other various or comparable terminology, and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking. These forward-looking statements are based on management’s current beliefs and assumptions and on information currently available to management. We caution that these statements are subject to risks and uncertainties, many of which are outside of our control, and could cause future events or results to be materially different from those stated or implied in this document, including among others, factors relating to:
•uncertainties as to the timing of the sale of the Commercial Business and the risk that the Divestiture may not be completed in a timely manner or at all;
•the possibility that any or all of the conditions to the consummation of the sale of the Commercial Business may not be satisfied or waived;
•the effect of the announcement or dependency of the Commercial Transaction on our ability to retain and hire key personnel and to maintain relationships with customers, suppliers and other business partners;
•risks related to diverting management’s attention from ADT’s ongoing business operations;
•uncertainties as to our ability and the amount of time necessary to realize the expected benefits of the Commercial Transaction;
•the achievement of potential benefits of the equity investment by and long-term partnership with State Farm, including as a result of restrictions on or required prior regulatory approval of, various actions by regulated insurers;
•our ability to effectively implement our strategic partnership with, commercialize products with, or utilize the incremental funding committed by State Farm or Google;
•our ability to keep pace with rapid technological changes, including the development of our next-generation platform, and industry changes;
•our ability to effectively implement our strategic partnership with or utilize any of the amounts invested in us by Google;
•risks and uncertainties related to the Company’s ability to successfully integrate and operate the ADT Solar business, including the possibility of future impairments to the value of goodwill at ADT Solar;
•risks related to the various financing arrangements that the Company facilitates for some ADT Solar customers;
•our ability to commercialize our joint venture with Ford;
•our ability to continuously and successfully commercialize innovative offerings;
•our ability to successfully implement an Environmental, Social, and Governance program across the Company;
•the impact of supply chain disruptions;
•our ability to maintain and grow our existing customer base;
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•our ability to sell our products and services or launch new products and services in highly competitive markets, including the home security and automation market, the commercial fire and security markets, and the solar market, and to achieve market acceptance with acceptable margins;
•our ability to successfully upgrade obsolete equipment installed at our customers’ premises in an efficient and cost-effective manner;
•changes in law, economic and financial conditions, including tax law changes, changes to privacy requirements, changes to telemarketing, email marketing and similar consumer protection laws, interest volatility, and trade tariffs and restrictions applicable to the products we sell;
•any material changes to the valuation allowances we take with respect to our deferred tax assets;
•the impact of potential information technology, cybersecurity, or data security breaches;
•our dependence on third-party providers, suppliers, and dealers to enable us to produce and distribute our products and services in a cost-effective manner that protects our brand;
•our ability to successfully implement an equipment ownership model that best satisfies the needs of our customers and to successfully implement and maintain our receivables securitization financing agreement or similar arrangements;
•our ability to successfully pursue alternate business opportunities and strategies;
•our ability to integrate various companies we have acquired in an efficient and cost-effective manner;
•the amount and timing of our cash flows and earnings, which may be impacted by customer, competitive, supplier and other dynamics and conditions;
•our ability to maintain or improve margins through business efficiencies;
•risks related to the restatement of our consolidated financial statements included in our Amended 2022 Annual Report and in our Reports on Form 10-Q/A for the quarters ended September 30, 2022, and March 31, 2023, each as filed with the SEC on July 27, 2023;
•any litigation or investigation related to such restatements; and
•the Company’s ability to maintain effective ICFR and disclosure controls and procedures (“DCPs”), including its ability to remediate any existing material weakness in its ICFR and the timing of any such remediation, as well as the ability to reestablish effective DCPs at a reasonable assurance level.
Forward-looking statements and information involve risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements, including without limitation, the risks and uncertainties disclosed or referenced under the heading “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A in our Amended 2022 Annual Report. Therefore, caution should be taken not to place undue reliance on any such forward-looking statements. Much of the information in this report that looks toward future performance is based on various factors and important assumptions about future events that may or may not actually occur. As a result, our operations and financial results in the future could differ materially and substantially from those we have discussed in the forward-looking statements included in this Quarterly Report on Form 10-Q. Any forward-looking statement made in this Quarterly Report on Form 10-Q speaks only as of the date on which it is made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise unless required by law.
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 as we have both fixed-rate and variable-rate debt. 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.
There were no material changes in our interest rate risk exposure to that disclosed in our Amended 2022 Annual Report, except as discussed below.
During the six months ended June 30, 2023, we borrowed $650 million under our variable-rate Term Loan A Facility, and we used the proceeds to redeem approximately $650 million of our fixed-rate ADT Notes due 2023. Additionally, during March 2023 and April 2023, we entered into floating-to-fixed interest rate swaps with an aggregate notional amount of $300 million to partially hedge the Term Loan A Facility.
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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 on Form 10-Q.
As a result of the material weakness in ICFR as previously disclosed in the Company’s Amended 2022 Annual Report, and given that the related conclusion to restate our financial statements for the affected periods (as discussed in Note 1 “Description of Business and Summary of Significant Accounting Policies”) occurred subsequent to June 30, 2023, and that any related remediation actions were not implemented as of June 30, 2023, our Chief Executive Officer and Chief Financial Officer have concluded that as of June 30, 2023, our disclosure controls and procedures were not effective at a reasonable assurance level in ensuring information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Remediation Plan
Upon identification of the material weakness, management developed and implemented a remediation plan, which includes updating our procedures regarding the recognition of the tax impacts related to goodwill impairments to specifically review the considerations of all tax impacts caused by the recognition of such goodwill impairments in accordance with relevant accounting guidance.
Our management believes the measures described above and others that may be implemented will remediate the material weakness that we have identified. However, the material weakness will not be considered remediated until there has been appropriate time for us to conclude through testing that the controls are operating effectively.
As management continues to evaluate and improve the Company’s ICFR, we may decide to take additional measures to address control deficiencies or determine to modify certain of the remediation measures identified.
Changes in Internal Control over Financial Reporting
During the three months ended June 30, 2023, there were no changes in our ICFR identified in our management’s evaluation pursuant to Rules 13a-15(d) and 15d-15(d) of the Exchange Act 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 13 “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 “Risk Factors” in our Amended 2022 Annual Report and in our other filings with the SEC. The risk factors described in our filings with the SEC and other information may not describe every risk facing the Company. There have been no material changes in our risk factors from those disclosed in our Amended 2022 Annual Report, except as discussed below:
Risks Related to the Pending Divestiture of our Commercial Business
The pending Divestiture of our Commercial Business is subject to various risks, uncertainties and conditions and may not be completed on the terms or timeline currently contemplated, if at all, which could have a material adverse effect on our financial condition and results of operations.
On August 8, 2023, we announced the entry into a definitive agreement to sell our Commercial Business to an affiliate of GTCR for a purchase price of approximately $1.6 billion, subject to customary purchase price adjustments (the “Divestiture”). The Divestiture has been approved by our Board and is expected to close in the fourth quarter of 2023, subject to customary closing conditions, including regulatory approvals. There can be no assurance regarding the ultimate timing of the Divestiture or that the Divestiture will be completed as expected. Unanticipated developments could delay, prevent or otherwise adversely affect the Divestiture, including but not limited to potential problems or delays in obtaining regulatory approvals.
During the period leading to closing the Divestiture, whether or not the Divestiture is completed, our ongoing businesses may be materially adversely affected, including as a result of one or more of the following:
•the diversion of management’s attention from operating and growing the remaining businesses as a result of the time and effort required to execute the Divestiture;
•expenses incurred in connection with the Divestiture, including the legal, professional, advisory and consulting fees related to its completion;
•challenges in separating the Commercial Business, including separating the operations, shared services, products, infrastructure and personnel, as well as the assets and liabilities, potentially resulting in delays or additional costs in completing the Divestiture;
•disruptions to and potential adverse impacts on relationships with third-party providers, suppliers, dealers, customers and others with whom we do business that may conclude that our product and service offerings are insufficient to satisfy their requirements from doing or continuing to do business with us;
•loss of synergies between CSB and Commercial;
•uncertainty among key employees concerning their future with ADT, leading to potential distraction or attrition, as well as potential difficulty in attracting and retaining prospective employees in the future; and
•exposure to unanticipated ongoing obligations and liabilities, including as a result of any indemnification obligations.
Failure to complete the Divestiture could adversely affect our results of operations and financial condition.
There is no assurance that the Divestiture will close as expected or at all. Consummation of the Divestiture is subject to various customary closing conditions, including regulatory approvals. We cannot predict with certainty whether and when any of these conditions will be satisfied. If we are unable to complete the Divestiture as expected, we could face significant negative consequences, including negative reactions from the financial markets as well as challenges in achieving our debt reduction goals, which could adversely affect our credit ratings, and cause difficulty executing on our strategic priorities, objectives, goals, and medium-term target framework. We have also incurred significant costs, including the diversion of management resources, for which we will have received little or no benefit if the Divestiture does not close.
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Even if we complete the Divestiture, we may be unable to do so on the timeline we currently expect and may not achieve some or all of the strategic and financial benefits that we expect to achieve from the Divestiture which could have a material adverse effect on our financial condition and results of operations.
We believe the Divestiture will place us in a better position to prioritize investments in CSB and Solar that we intend to drive profitable, capital-efficient revenue growth for the long-term. Upon completion of the Divestiture, we plan to use the net after-tax cash proceeds of approximately $1.5 billion for significant debt reduction. There may, however, be a delay in our ability to use some or all of the proceeds to repay a portion of our indebtedness which could have a material adverse effect on our financial condition and may adversely affect our credit ratings and cost of capital, as well as our ability to execute on our strategic priorities, objectives, goals, and medium-term target framework. Moreover, we may not be able to achieve the other anticipated benefits of the Divestiture, which could have a material adverse impact on our business, financial condition, results of operations, and cash flows. The anticipated benefits are based on a number of assumptions, some of which may prove incorrect, and could be affected by factors beyond our control, including, without limitation, general economic conditions, increased operating costs, regulatory developments and other risks described in these risk factors and within Item IA of Part I of our Amended 2022 Annual Report.
The Divestiture increases the risk of damage to our brand and reputation which may materially adversely affect our financial condition and results of operations.
In connection with the Divestiture, we have agreed to provide transitional services to GTCR for a period of up to 24 months and to license our ADT Commercial brand for 12 months. These arrangements allow for the use of our trademarks, certain intellectual property and limited use of the ADT Commercial brand, which may cause us to incur unanticipated costs and liabilities and which could have a material adverse effect on our business, financial condition and results of operations. Additionally, GTCR’s ability to use the ADT Commercial brand may increase the risk of damage to the brand for our remaining businesses, which could negatively impact our reputation, results of operations and financial condition.
ADT will be a less diversified business following the Divestiture, which may adversely affect ADT’s results of operations and financial condition.
ADT currently has three business segments, CSB, Commercial, and Solar. The Divestiture will result in ADT being a smaller, less diversified company more focused on consumers, potentially making ADT more vulnerable to changing market, regulatory and economic conditions following the Divestiture, particularly those affecting consumers and small businesses. Macroeconomic headwinds or changes in consumer preferences could have a greater impact on our business following the Divestiture which could have a material adverse effect on our business, results of operations and financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Recent Sales of Unregistered Equity Securities
There were no sales of unregistered equity securities during the six months ended June 30, 2023.
Use of Proceeds from Registered Equity Securities
We did not receive any proceeds from sales of registered equity securities during the six months ended June 30, 2023.
Issuer Purchases of Equity Securities
There were no repurchases of any shares of our common stock during the three months ended June 30, 2023.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
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ITEM 5. OTHER INFORMATION.
During the fiscal quarter ended June 30, 2023, none of the Company’s directors or executive officers adopted or terminated any contract, instruction or written plan for the purchase or sale of Company securities intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
ITEM 6. EXHIBITS.
The exhibits listed on the accompanying Index to Exhibits are filed/furnished or incorporated by reference as part of this Quarterly Report on Form 10-Q.
INDEX TO EXHIBITS
The information required by this Item is set forth on the exhibit index below.
Exhibit Number | Incorporated by Reference | |||||||||||||||||||||||||
Exhibit Description | Form | Exhibit | Filing Date | |||||||||||||||||||||||
8-K | 3.1 | 9/17/2020 | ||||||||||||||||||||||||
8-K | 3.1 | 7/23/2020 | ||||||||||||||||||||||||
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. | |||||||||||||||||||||||||
104 | Cover Page Interactive Data File - the cover page XBRL tags are embedded within the Inline XBRL document |
_________________________
* Filed herewith.
** Furnished herewith.
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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: | August 8, 2023 | By: | /s/ Kenneth J. Porpora | ||||||||
Name: | Kenneth J. Porpora | ||||||||||
Title: | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||||||
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