ADT Inc.
ADT Inc.
24/10/2024 | Press release | Distributed by Public on 24/10/2024 21:09
Quarterly Report for Quarter Ending September 30, 2024 (Form 10-Q)
adt-20240930
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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.
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| (Mark One) | |
| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2024
OR
| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from __________ to __________
Commission File Number: 001-38352
ADT 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, Florida33431
(561) 988-3600
(Address of principal executive offices, zip code, registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
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| 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. YesxNo ¨
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). YesxNo ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ |
| Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No ☒
As of October 17, 2024, there were 852,268,869 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 | ||
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Part I
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Financial Information
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Item 1.
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Financial Statements
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1
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Condensed Consolidated Balance Sheets (Unaudited)
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1
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Condensed Consolidated Statements of Operations (Unaudited)
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2
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Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
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3
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Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
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4
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Condensed Consolidated Statements of Cash Flows (Unaudited)
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6
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Notes to Condensed Consolidated Financial Statements (Unaudited)
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1. Description of Business and Summary of Significant Accounting Policies
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7
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2. Revenue and Receivables
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11
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3. Divestitures
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12
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4. Goodwill and Other Intangible Assets
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15
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5. Debt
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17
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6. Derivative Financial Instruments
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19
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7. Income Taxes
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21
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8. Equity
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21
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9. Share-Based Compensation
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22
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10. Net Income (Loss) Per Share
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23
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11. Commitments and Contingencies
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25
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12. Leases
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27
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13. Related Party Transactions
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28
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Item 2.
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Management's Discussion and Analysis of Financial Condition and Results of Operations
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30
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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42
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Item 4.
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Controls and Procedures
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42
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Part II
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Other Information
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Item 1.
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Legal Proceedings
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44
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Item 1A.
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Risk Factors
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44
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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46
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Item 3.
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Defaults Upon Senior Securities
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47
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Item 4.
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Mine Safety Disclosures
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47
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Item 5.
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Other Information
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47
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Item 6.
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Exhibits
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47
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Signatures
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49
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share and per share data)
| September 30, 2024 | December 31, 2023 | |||
| Assets | ||||
| Current assets: | ||||
| Cash and cash equivalents | $ | 95,338 | $ | 14,621 |
| Restricted cash and restricted cash equivalents | 109,411 | 115,329 | ||
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Accounts receivable, net of allowance for credit losses of $63,995 and $46,850, respectively
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396,913 | 370,201 | ||
| Inventories, net | 203,007 | 201,394 | ||
| Prepaid expenses and other current assets | 194,902 | 242,192 | ||
| Current assets of discontinued operations | 3,322 | 60,957 | ||
| Total current assets | 1,002,893 | 1,004,694 | ||
| Property and equipment, net | 259,554 | 253,658 | ||
| Subscriber system assets, net | 3,003,196 | 3,005,936 | ||
| Intangible assets, net | 4,898,878 | 4,877,493 | ||
| Goodwill | 4,903,899 | 4,903,899 | ||
| Deferred subscriber acquisition costs, net | 1,288,840 | 1,175,904 | ||
| Other assets | 726,732 | 699,231 | ||
| Noncurrent assets of discontinued operations | 569 | 43,279 | ||
| Total assets | $ | 16,084,561 | $ | 15,964,094 |
| Liabilities and stockholders' equity | ||||
| Current liabilities: | ||||
| Current maturities of long-term debt | $ | 196,563 | $ | 312,061 |
| Accounts payable | 226,614 | 277,201 | ||
| Deferred revenue | 249,920 | 255,221 | ||
| Accrued expenses and other current liabilities | 533,959 | 556,114 | ||
| Current liabilities of discontinued operations | 38,301 | 79,611 | ||
| Total current liabilities | 1,245,357 | 1,480,208 | ||
| Long-term debt | 7,524,523 | 7,513,456 | ||
| Deferred subscriber acquisition revenue | 2,058,273 | 1,914,954 | ||
| Deferred tax liabilities | 1,116,665 | 1,027,189 | ||
| Other liabilities | 230,231 | 219,069 | ||
| Noncurrent liabilities of discontinued operations | 12,227 | 20,572 | ||
| Total liabilities | 12,187,276 | 12,175,448 | ||
| Commitments and contingencies (See Note 11) | ||||
| Stockholders' equity: | ||||
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Preferred stock-authorized 1,000,000 shares of $0.01 par value; zero issued and outstanding as of September 30, 2024 and December 31, 2023
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- | - | ||
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Common stock-authorized 3,999,000,000 shares of $0.01 par value; issued and outstanding shares of 857,250,221 and 867,432,337 as of September 30, 2024 and December 31, 2023, respectively
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8,573 | 8,674 | ||
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Class B common stock-authorized 100,000,000 shares of $0.01 par value; issued and outstanding shares of 54,744,525 as of September 30, 2024 and December 31, 2023
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547 | 547 | ||
| Additional paid-in capital | 7,358,241 | 7,413,305 | ||
| Accumulated deficit | (3,458,579) | (3,617,718) | ||
| Accumulated other comprehensive income (loss) | (11,497) | (16,162) | ||
| Total stockholders' equity | 3,897,285 | 3,788,646 | ||
| Total liabilities and stockholders' equity | $ | 16,084,561 | $ | 15,964,094 |
See Notes to Condensed Consolidated Financial Statements
1
ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Revenue: | ||||||||
| Monitoring and related services | $ | 1,077,550 | $ | 1,053,456 | $ | 3,208,267 | $ | 3,125,344 |
| Security installation, product, and other | 166,286 | 126,417 | 429,800 | 355,082 | ||||
| Total revenue | 1,243,836 | 1,179,873 | 3,638,067 | 3,480,426 | ||||
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Cost of revenue (exclusive of depreciation and amortization shown separately below):
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| Monitoring and related services | 154,744 | 148,533 | 460,649 | 452,809 | ||||
| Security installation, product, and other | 67,362 | 38,863 | 151,996 | 113,921 | ||||
| Total cost of revenue | 222,106 | 187,396 | 612,645 | 566,730 | ||||
| Selling, general, and administrative expenses | 358,520 | 346,444 | 1,105,523 | 1,000,861 | ||||
| Depreciation and intangible asset amortization | 335,270 | 329,653 | 1,002,131 | 1,008,773 | ||||
| Merger, restructuring, integration, and other | 1,590 | 9,817 | 15,094 | 32,441 | ||||
| Operating income (loss) | 326,350 | 306,563 | 902,674 | 871,621 | ||||
| Interest expense, net | (161,830) | (146,850) | (358,980) | (401,261) | ||||
| Other income (expense) | 17,735 | 661 | 44,907 | (10) | ||||
| Income (loss) from continuing operations before income taxes and equity in net earnings (losses) of equity method investee | 182,255 | 160,374 | 588,601 | 470,350 | ||||
| Income tax benefit (expense) | (50,235) | (34,427) | (166,505) | (119,987) | ||||
| Income (loss) from continuing operations before equity in net earnings (losses) of equity method investee | 132,020 | 125,947 | 422,096 | 350,363 | ||||
| Equity in net earnings (losses) of equity method investee | - | (2,688) | - | (7,103) | ||||
| Income (loss) from continuing operations | 132,020 | 123,259 | 422,096 | 343,260 | ||||
| Income (loss) from discontinued operations, net of tax | (4,869) | (209,496) | (111,000) | (456,123) | ||||
| Net income (loss) | $ | 127,151 | $ | (86,237) | $ | 311,096 | $ | (112,863) |
| Common Stock: | ||||||||
| Income (loss) from continuing operations per share - basic | $ | 0.15 | $ | 0.13 | $ | 0.46 | $ | 0.38 |
| Income (loss) from continuing operations per share - diluted | $ | 0.14 | $ | 0.13 | $ | 0.44 | $ | 0.36 |
| Net income (loss) per share - basic | $ | 0.14 | $ | (0.09) | $ | 0.34 | $ | (0.12) |
| Net income (loss) per share - diluted | $ | 0.13 | $ | (0.09) | $ | 0.32 | $ | (0.12) |
| Weighted-average shares outstanding - basic | 850,462 | 857,423 | 851,539 | 856,446 | ||||
| Weighted-average shares outstanding - diluted | 912,861 | 917,774 | 913,296 | 918,701 | ||||
| Class B Common Stock: | ||||||||
| Income (loss) from continuing operations per share - basic | $ | 0.15 | $ | 0.13 | $ | 0.46 | $ | 0.38 |
| Income (loss) from continuing operations per share - diluted | $ | 0.14 | $ | 0.13 | $ | 0.44 | $ | 0.36 |
| Net income (loss) per share - basic | $ | 0.14 | $ | (0.09) | $ | 0.34 | $ | (0.12) |
| Net income (loss) per share - diluted | $ | 0.13 | $ | (0.09) | $ | 0.32 | $ | (0.12) |
| Weighted-average shares outstanding - basic | 54,745 | 54,745 | 54,745 | 54,745 | ||||
| Weighted-average shares outstanding - diluted | 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 September 30, | Nine Months Ended September 30, | |||||||
| 2024 | 2023 | 2024 | 2023 | |||||
| Net income (loss) | $ | 127,151 | $ | (86,237) | $ | 311,096 | $ | (112,863) |
| Other comprehensive income (loss), net of tax: | ||||||||
| Cash flow hedges | 1,472 | 22,763 | 4,593 | 30,484 | ||||
| Other | (42) | (17) | 72 | (43) | ||||
| Total other comprehensive income (loss), net of tax | 1,430 | 22,746 | 4,665 | 30,441 | ||||
| Comprehensive income (loss) | $ | 128,581 | $ | (63,491) | $ | 315,761 | $ | (82,422) |
See Notes to Condensed Consolidated Financial Statements
3
ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)
| Three Months Ended September 30, 2024 | ||||||||||||||
| Number of Common Shares | Number of Class B Common Shares | Common Stock | Class B Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | |||||||
| Beginning balance | 857,053 | 54,745 | $ | 8,571 | $ | 547 | $ | 7,347,061 | $ | (3,535,042) | $ | (12,927) | $ | 3,808,210 |
| Net income (loss) | - | - | - | - | - | 127,151 | - | 127,151 | ||||||
| Other comprehensive income (loss), net of tax | - | - | - | - | - | - | 1,430 | 1,430 | ||||||
| Dividends | - | - | - | - | - | (50,157) | - | (50,157) | ||||||
| Share-based compensation expense | - | - | - | - | 9,942 | - | - | 9,942 | ||||||
| Transactions related to employee share-based compensation plans and other | 197 | - | 2 | - | 1,238 | (531) | - | 709 | ||||||
| Ending balance | 857,250 | 54,745 | $ | 8,573 | $ | 547 | $ | 7,358,241 | $ | (3,458,579) | $ | (11,497) | $ | 3,897,285 |
| Three Months Ended September 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 | 866,409 | 54,745 | $ | 8,664 | $ | 547 | $ | 7,390,269 | $ | (4,041,963) | $ | (39,505) | $ | 3,318,012 |
| Net income (loss) | - | - | - | - | - | (86,237) | - | (86,237) | ||||||
| Other comprehensive income (loss), net of tax | - | - | - | - | - | - | 22,746 | 22,746 | ||||||
| Dividends | - | - | - | - | - | (32,321) | - | (32,321) | ||||||
| Share-based compensation expense | - | - | - | - | 15,580 | - | - | 15,580 | ||||||
| Transactions related to employee share-based compensation plans and other | 385 | - | 4 | - | 1,315 | (434) | - | 885 | ||||||
| Ending balance | 866,794 | 54,745 | $ | 8,668 | $ | 547 | $ | 7,407,164 | $ | (4,160,955) | $ | (16,759) | $ | 3,238,665 |
See Notes to Condensed Consolidated Financial Statements
4
ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in thousands)
| Nine Months Ended September 30, 2024 | ||||||||||||||
| Number of Common Shares | Number of Class B Common Shares | Common Stock | Class B Common Stock | Additional Paid-In Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Stockholders' Equity | |||||||
| Beginning balance | 867,432 | 54,745 | $ | 8,674 | $ | 547 | $ | 7,413,305 | $ | (3,617,718) | $ | (16,162) | $ | 3,788,646 |
| Net income (loss) | - | - | - | - | - | 311,096 | - | 311,096 | ||||||
| Other comprehensive income (loss), net of tax | - | - | - | - | - | - | 4,665 | 4,665 | ||||||
| Dividends | - | - | - | - | - | (150,375) | - | (150,375) | ||||||
| Share-based compensation expense | - | - | - | - | 39,329 | - | - | 39,329 | ||||||
| Repurchases of common stock (including excise tax) | (15,000) | - | (150) | - | (93,969) | - | - | (94,119) | ||||||
|
Transactions related to employee share-based
compensation plans and other
|
4,818 | - | 49 | - | (424) | (1,582) | - | (1,957) | ||||||
| Ending balance | 857,250 | 54,745 | $ | 8,573 | $ | 547 | $ | 7,358,241 | $ | (3,458,579) | $ | (11,497) | $ | 3,897,285 |
| Nine Months Ended September 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) | - | - | - | - | - | (112,863) | - | (112,863) | ||||||
| Other comprehensive income (loss), net of tax | - | - | - | - | - | - | 30,441 | 30,441 | ||||||
| Dividends | - | - | - | - | - | (96,751) | - | (96,751) | ||||||
| Share-based compensation expense | - | - | - | - | 43,068 | - | - | 43,068 | ||||||
|
Transactions related to employee share-based
compensation plans and other
|
4,696 | - | 47 | - | (16,663) | (1,762) | - | (18,378) | ||||||
| Ending balance | 866,794 | 54,745 | $ | 8,668 | $ | 547 | $ | 7,407,164 | $ | (4,160,955) | $ | (16,759) | $ | 3,238,665 |
See Notes to Condensed Consolidated Financial Statements
5
ADT INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
| Nine Months Ended September 30, | ||||
| 2024 | 2023 | |||
| Cash flows from operating activities: | ||||
| Net income (loss) | $ | 311,096 | $ | (112,863) |
| Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||
| Depreciation and intangible asset amortization | 1,004,003 | 1,058,794 | ||
| Amortization of deferred subscriber acquisition costs | 165,454 | 145,688 | ||
| Amortization of deferred subscriber acquisition revenue | (257,538) | (227,651) | ||
| Share-based compensation expense | 39,329 | 43,068 | ||
| Deferred income taxes | 87,652 | 6,804 | ||
| Provision for losses on receivables and inventory | 146,204 | 104,469 | ||
| Goodwill, intangible, and other asset impairments | 21,296 | 521,663 | ||
| Unrealized (gain) loss on interest rate swap contracts | 61,128 | (38,477) | ||
| Other non-cash items, net | 53,934 | 102,843 | ||
| Changes in operating assets and liabilities, net of effects of acquisitions and dispositions: | ||||
| Deferred subscriber acquisition costs | (271,029) | (295,440) | ||
| Deferred subscriber acquisition revenue | 196,355 | 221,747 | ||
| Other, net | (132,661) | (284,951) | ||
| Net cash provided by (used in) operating activities | 1,425,223 | 1,245,694 | ||
| Cash flows from investing activities: | ||||
| Dealer generated customer accounts and bulk account purchases | (473,560) | (385,462) | ||
| Subscriber system asset expenditures | (406,521) | (480,947) | ||
| Purchases of property and equipment | (130,114) | (130,520) | ||
|
Proceeds (payments) from sale of business, net of cash sold
|
(21,000) | - | ||
|
Proceeds (payments) from interest rate swaps
|
(6,675) | - | ||
| Other investing, net | 3,506 | 8,848 | ||
| Net cash provided by (used in) investing activities | (1,034,364) | (988,081) | ||
| Cash flows from financing activities: | ||||
| Proceeds from long-term borrowings | 970,521 | 650,000 | ||
| Proceeds from receivables facility | 189,861 | 212,188 | ||
| Proceeds (payments) from interest rate swaps | 72,249 | 59,184 | ||
| Repurchases of common stock | (93,356) | - | ||
| Repayment of long-term borrowings, including call premiums | (1,087,658) | (888,716) | ||
| Repayment of receivables facility | (202,747) | (144,620) | ||
| Dividends on common stock | (132,214) | (96,400) | ||
| Payments on finance leases | (23,069) | (32,268) | ||
| Other financing, net | (9,647) | (34,497) | ||
| Net cash provided by (used in) financing activities | (316,060) | (275,129) | ||
| Cash and cash equivalents and restricted cash and restricted cash equivalents: | ||||
| Net increase (decrease) | 74,799 | (17,516) | ||
| Beginning balance | 129,950 | 373,580 | ||
| Ending balance | $ | 204,749 | $ | 356,064 |
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 and small business customers in the United States ("U.S.").
Prior to March 11, 2024, the Company was majority-owned by Prime Security Services TopCo (ML), L.P., which is majority-owned by Prime Security Services TopCo Parent, L.P. ("Ultimate Parent"). Ultimate Parent is majority-owned by Apollo Investment Fund VIII, L.P. and its related funds that are directly or indirectly managed by affiliates of Apollo Global Management, Inc. (together with its subsidiaries and affiliates, "Apollo" or the "Sponsor"). Following a registered secondary offering of the Company's common stock ("Common Stock") by certain Apollo affiliates (and the Company's concurrent repurchase from the underwriters of 15 million shares of Common Stock that were the subject of the offering), including the exercise of the underwriters' overallotment option which closed on March 19, 2024, Apollo beneficially owns less than 50% of the Company's outstanding common stock, which includes Common Stock and Class B common stock ("Class B Common Stock") combined, and less than 50% of the Company's outstanding Common Stock, and the Company ceased to be a "controlled company" under the New York Stock Exchange (the "NYSE") rules.
Basis of Presentation
The condensed consolidated financial statements included herein:
•have been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America ("GAAP");
•are comprised of the consolidated results of ADT Inc. and its wholly-owned subsidiaries for which all intercompany transactions have been eliminated;
•are unaudited, but in the opinion of management, 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; and
•should not be taken as indicative of results that may be expected for future interim periods or the full year.
The Condensed Consolidated Balance Sheet as of December 31, 2023 included herein was derived from the audited consolidated financial statements as of that date. Certain information and footnote disclosures required in the annual consolidated financial statements have been omitted as appropriate. For a more comprehensive understanding of the Company and its interim results, these condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2023 (the "2023 Annual Report").
In addition, the results of companies acquired, if applicable, are included from the effective dates of acquisition. Prior to the sale of its shares in SNTNL LLC ("Canopy") during the fourth quarter of 2023, the Company used the equity method of accounting to account for its investment in Canopy as it had the ability to exercise significant influence but did not control.
Certain prior period amounts have been reclassified to conform with the current period presentation.
Discontinued Operations
In January 2024, the Company's board of directors (the "Board of Directors" or the "Board") approved a plan to fully exit the residential solar business (the "Solar Business") (the "ADT Solar Exit"). The ADT Solar Exit represents a strategic shift that had a major effect on the Company's financial results. As of June 30, 2024, substantially all operations of the Solar Business had ceased, and beginning in the second quarter of 2024, the results of operations and financial position of the Solar Business are classified as discontinued operations in the Company's Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets, respectively, for all periods presented.
In addition, in August 2023, ADT entered into an agreement to divest its commercial business (the "Commercial Business"), which was completed in October 2023 (the "Commercial Divestiture"). As a result, the Commercial Business is presented as a discontinued operation in the Company's Condensed Consolidated Statements of Operations for all periods presented.
7
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The cash flows and comprehensive income (loss) of discontinued operations have not been segregated and are included in the Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Comprehensive Income (Loss), respectively, for all periods presented.
Refer to Note 3 "Divestitures" for additional information on discontinued operations.
Unless otherwise noted, amounts and disclosures throughout these Notes to Condensed Consolidated Financial Statements relate to the Company's continuing operations.
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.
Segment Update
Beginning in the second quarter of 2024, and as a result of the ADT Solar Exit, the Company currently reports its results in a single operating and reportable segment, which reflects the business operations of the Company's former Consumer and Small Business ("CSB") segment, 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.
Prior to the third quarter of 2023, the Commercial Business was reflected in the Commercial reportable segment, and prior to the second quarter of 2024, the Solar Business was reflected in the Solar reportable segment.
Accounting Pronouncements
Recently Adopted Accounting Pronouncements
Supplier Finance Program Obligations- Accounting Standards Update ("ASU") 2022-04,Liabilities - Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations,requires that a reporting entity who is a buyer in a supplier finance program disclose qualitative and quantitative information about its supplier finance programs, including a roll-forward of the obligations.
The Company adopted the roll-forward requirement effective January 1, 2024. The Company does not currently have any material supplier finance programs, and the guidance will be applied prospectively to any future arrangements.
Fair Value of Equity Investments- ASU 2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions, states that an entity should not consider the impact of contractual sale restrictions when measuring an equity security's fair value and introduces new disclosure requirements related to such equity securities.
The Company adopted this guidance effective January 1, 2024. This guidance did not impact the Company.
Recently Issued Accounting Pronouncements
Disclosure Improvements - ASU 2023-06, Disclosure Improvements: Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative, represents changes to clarify or improve disclosure and presentation requirements of a variety of topics.
The effective date for each amendment will be the date on which the SEC's removal of that related disclosure from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company is monitoring the potential impact of this guidance on its financial statements and disclosures.
8
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Segment Reporting- ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, improves reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. In addition, the guidance, among other requirements, enhances interim disclosures, clarifies circumstances in which an entity can disclose multiple segment measures of profit or loss, and provides new segment disclosure requirements for entities with a single reportable segment.
The amendments in this guidance are effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. This guidance should be applied retrospectively to all periods presented. The Company is currently evaluating the impact of this guidance on its disclosures.
Income Taxes- ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, focuses on improvements to income tax disclosures, primarily related to the rate reconciliation and income tax paid information. In addition, the update includes certain other amendments to improve the effectiveness of income tax disclosures.
The guidance is effective for annual periods beginning after December 15, 2024, and should be applied prospectively, with retrospective application also a permitted option. Early adoption is permitted. The Company is currently evaluating the impact of this guidance on its disclosures.
Significant Accounting Policies
Unless otherwise noted, the Company's accounting policies, including those discussed herein, do not materially differ from those disclosed in the 2023 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) | September 30, 2024 | December 31, 2023 | ||
| Cash and cash equivalents | $ | 95,338 | $ | 14,621 |
|
Restricted cash and restricted cash equivalents(1)
|
109,411 | 115,329 | ||
| Ending balance | $ | 204,749 | $ | 129,950 |
(1) Primarily includes funds received from State Farm Fire & Casualty Company ("State Farm"), net of payments and inclusive of interest earned, in connection with the State Farm Development Agreement (as defined and discussed in Note 13 "Related Party Transactions"). The remaining amount of restricted cash relates to the Company's uncommitted receivables securitization financing agreement (the "2020 Receivables Facility"). Refer to Note 5 "Debt."
Inventories, net
Inventories, net includes finished goods and work-in-progress. Work-in-progress is not material.
Subscriber System Assets, net and Deferred Subscriber Acquisition Costs, net
Subscriber system assets represent capitalized equipment and installation costs incurred in connection with transactions in which the Company retains ownership of the security system, and which the Company may retrieve upon termination of the contract with the customer. Deferred subscriber acquisition costs represent selling expenses (primarily commissions) that are incremental to acquiring customers.
Subscriber system assets and any related deferred subscriber acquisition costs are accounted for on a pooled basis based on the month and year of customer acquisition. The Company depreciates and amortizes these pooled costs using an accelerated method over the estimated life of the customer relationship, which is 15 years.
| (in thousands) | September 30, 2024 | December 31, 2023 | ||
| Gross carrying amount | $ | 6,777,008 | $ | 6,404,479 |
| Accumulated depreciation | (3,773,812) | (3,398,543) | ||
| Subscriber system assets, net | $ | 3,003,196 | $ | 3,005,936 |
9
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 September 30, | Nine Months Ended September 30, | |||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | ||||
| Depreciation of subscriber system assets | $ | 139,704 | $ | 135,414 | $ | 417,313 | $ | 407,739 |
|
Amortization of deferred subscriber acquisition costs
|
$ | 56,119 | $ | 47,945 | $ | 165,454 | $ | 138,145 |
Accrued Expenses and Other Current Liabilities
| (in thousands) | September 30, 2024 | December 31, 2023 | ||
| Accrued interest | $ | 57,648 | $ | 111,197 |
| Payroll-related accruals | 110,521 | 110,941 | ||
|
Opportunity Fund (see Note 13 "Related Party Transactions")
|
87,168 | 93,950 | ||
| Accrued dividends | 50,051 | 32,207 | ||
| Other accrued liabilities | 228,571 | 207,819 | ||
| Accrued expenses and other current liabilities | $ | 533,959 | $ | 556,114 |
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 September 30, 2024 and December 31, 2023, investments in money market mutual funds were $98 million and $55 million, respectively.
Long-Term Debt Instruments- The fair values of the Company's long-term debt instruments are determined using broker-quoted market prices, which represent quoted prices for similar assets or liabilities as well as other observable market data, and are classified as Level 2 fair value measurements. The carrying amounts of debt outstanding, if any, under the Company's first lien revolving credit facility (the "First Lien Revolving Credit Facility") and the 2020 Receivables Facility approximate their fair values as interest rates on these borrowings approximate current market rates.
| September 30, 2024 | December 31, 2023 | |||||||
| (in thousands) |
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||||
|
Long-term debt instruments subject to fair value disclosures(1)
|
$ | 7,647,462 | $ | 7,701,348 | $ | 7,756,049 | $ | 7,731,408 |
________________
(1) Excludes finance leases and certain vehicle loans reported as discontinued operations.
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 6 "Derivative Financial Instruments" for the fair values of the Company's derivative financial instruments.
10
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
| September 30, 2024 | December 31, 2023 | |||||||
| (in thousands) |
Carrying Amount |
Fair Value |
Carrying Amount |
Fair Value |
||||
| Retail installment contract receivables, net | $ | 676,922 | $ | 500,920 | $ | 673,635 | $ | 487,685 |
2. REVENUE AND RECEIVABLES
Revenue
The Company allocates the transaction price to each performance obligation based on the relative standalone selling price, which is determined using observable internal and external pricing, profitability, and operational metrics.
In addition to the details provided below, the Company's disaggregated revenue includes monitoring and related services and security installation, product, and other revenue, which are presented on the face of the Condensed Consolidated Statements of Operations.
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 September 30, | Nine Months Ended September 30, | |||||||
|
(in thousands)
|
2024 | 2023 | 2024 | 2023 | ||||
| Amortization of deferred subscriber acquisition revenue | $ | 87,980 | $ | 77,471 | $ | 257,538 | $ | 220,779 |
Customer-Owned - In transactions involving security systems sold outright to the customer (referred to as outright sales), the Company's performance obligations generally include the sale and installation of the system, which is primarily recognized at a point in time based upon the nature of the transaction and contractual terms, and any monitoring and related services, which are recognized when these services are provided to the customer.
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.
| Nine Months Ended September 30, | ||||
| (in thousands) | 2024 | 2023 | ||
| Beginning balance | $ | 46,850 | $ | 27,815 |
| Provision for credit losses | 106,697 | 81,368 | ||
|
Write-offs, net of recoveries(1)
|
(89,552) | (70,543) | ||
| Ending balance | $ | 63,995 | $ | 38,640 |
(1)Recoveries were not material for the periods presented. As such, the Company presented write-offs, net of recoveries.
11
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 is comprised of:
| (in thousands) | September 30, 2024 | December 31, 2023 | ||
| Retail installment contract receivables, gross | $ | 685,883 | $ | 674,827 |
| Allowance for credit losses | (8,961) | (1,192) | ||
| Retail installment contract receivables, net | $ | 676,922 | $ | 673,635 |
| Balance Sheet Classification: | ||||
| Accounts receivable, net | $ | 258,453 | $ | 238,961 |
| Other assets | 418,469 | 434,674 | ||
| Retail installment contract receivables, net | $ | 676,922 | $ | 673,635 |
The allowance for credit losses relates to retail installment contract receivables from outright sales transactions. As of September 30, 2024, the current and delinquent billed retail installment contract receivables, net were not material.
As of September 30, 2024 and December 31, 2023, retail installment contract receivables, net, used as collateral for borrowings under the 2020 Receivables Facility were $599 million and $610 million, respectively. Refer to Note 5 "Debt" for further discussion regarding the 2020 Receivables Facility.
Contract Assets
Contract assets represent the Company's right to consideration in exchange for goods or services transferred to the customer. The contract asset is reclassified to accounts receivable when the Company's right to the consideration becomes unconditional, which generally occurs over the course of a 24-, 36-, or 60-month period as additional services are performed and billed. There is no significant financing component.
During the nine months ended September 30, 2024 and 2023, contract assets recognized were not material.
The balance of contract assets for residential transactions is comprised of:
| (in thousands) | September 30, 2024 | December 31, 2023 | ||
| Contract assets, gross | $ | 42,147 | $ | 39,627 |
| Allowance for credit losses | (5,272) | (9,025) | ||
| Contract assets, net | $ | 36,875 | $ | 30,602 |
| Balance Sheet Classification: | ||||
| Prepaid expenses and other current assets | $ | 17,482 | $ | 15,365 |
| Other assets | 19,393 | 15,237 | ||
| Contract assets, net | $ | 36,875 | $ | 30,602 |
3. DIVESTITURES
The Company may decide to divest or exit a portion of its business for various reasons, including efforts to focus on its other businesses. The Company presents discontinued operations for components of the business that are either disposed of through sale (or qualify as held for sale), abandonment, or spin-off if these actions also represent a strategic shift that has or will have a major effect on the Company's financial results.
12
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Refer to Note 10 "Net Income (Loss) per Share" for basic and diluted earnings per share information for discontinued operations.
ADT Solar Exit
As discussed in Note 1 "Description of Business and Summary of Significant Accounting Policies," as a result of the ADT Solar Exit, the Solar Business is now presented as a discontinued operation in the Company's Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets for the periods presented as substantially all operations have ceased.
During the three months ended September 30, 2024, aggregate exit charges incurred were not material. During the nine months ended September 30, 2024, the Company incurred aggregate exit charges of $88 million, which have been recognized within income (loss) from discontinued operations, net of tax related to (i) $34 million, associated with the write-down and disposition of inventory and asset impairments, (ii) $29 million, associated with the disposition of the existing installation pipeline, (iii) $13 million, associated with employee separation costs, and (iv) $11 million, associated with contract termination and other charges.
During the nine months ended September 30, 2024, the Company paid approximately $21 million associated with the ADT Solar Exit primarily related to employee separation and other restructuring costs.
The following reconciliations represent the major classes of line items of the Solar Business presented within discontinued operations in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations and certain information in the Condensed Consolidated Statements of Cash Flows for the periods presented.
Balance Sheet Information
| (in thousands) | September 30, 2024 | December 31, 2023 | ||
| Assets | ||||
|
Accounts receivable, net
|
$ | 309 | $ | 20,270 |
| Inventories, net | - | 28,714 | ||
|
Prepaid expenses and other current assets
|
3,013 | 11,973 | ||
|
Total current assets of discontinued operations
|
3,322 | 60,957 | ||
| Property and equipment, net | 473 | 29,512 | ||
| Other assets | 96 | 13,767 | ||
|
Total assets of discontinued operations
|
$ | 3,891 | $ | 104,236 |
| Liabilities | ||||
| Current maturities of long-term debt | $ | 138 | $ | 8,551 |
| Accounts payable | 3,397 | 16,682 | ||
| Deferred revenue | 165 | 9,177 | ||
| Accrued expenses and other current liabilities | 34,601 | 45,201 | ||
|
Total current liabilities of discontinued operations
|
38,301 | 79,611 | ||
| Long-term debt | 365 | 9,893 | ||
| Other liabilities | 11,862 | 10,679 | ||
|
Total liabilities of discontinued operations
|
$ | 50,528 | $ | 100,183 |
13
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Statements of Operations Information
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | ||||
| Revenue | $ | 65 | $ | 57,611 | $ | 21,360 | $ | 279,978 |
|
Cost of revenue
|
1,091 | 49,424 | 62,450 | 212,666 | ||||
| Selling, general, and administrative expenses | 5,477 | 49,157 | 57,245 | 158,228 | ||||
| Depreciation and intangible asset amortization | 55 | 3,434 | 1,872 | 12,330 | ||||
| Merger, restructuring, integration, and other | (1,558) | 6,480 | 36,592 | 9,898 | ||||
|
Goodwill impairment
|
- | 88,367 | - | 511,176 | ||||
|
Other (income) and expense items
|
5 | 337 | 1,478 | 1,121 | ||||
| Income (loss) from discontinued operations before income taxes | (5,005) | (139,588) | (138,277) | (625,441) | ||||
| Income tax benefit (expense) | 475 | (4,336) | 35,851 | 132,427 | ||||
| Income (loss) from discontinued operations, net of tax | $ | (4,530) | $ | (143,924) | $ | (102,426) | $ | (493,014) |
Cash Flow Information
| Nine Months Ended September 30, | ||||
| (in thousands) | 2024 | 2023 | ||
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
||||
| Depreciation and intangible asset amortization | $ | 1,872 | $ | 12,330 |
| Goodwill, intangible, and other asset impairments | $ | 13,770 | $ | 515,730 |
|
Cash flows from investing activities:
|
||||
| Purchases of property and equipment | $ | (80) | $ | (3,233) |
Commercial Divestiture
As discussed in Note 1 "Description of Business and Summary of Significant Accounting Policies," on October 2, 2023, the Company completed the Commercial Divestiture. At the time of closing, the total purchase price was approximately $1,613 million, and the Company received net proceeds of approximately $1,585 million, subject to certain customary post-closing adjustments as set forth in the purchase agreement.
In July 2024, the Company paid the purchaser of the Commercial Business $21 million related to the settlement of post-closing adjustments.
In connection with the Commercial Divestiture, the Company entered into a Transition Services Agreement (the "Commercial TSA"). During the three and nine months ended September 30, 2024, the Company recognized $14 million and $36 million, respectively, of income from the Commercial TSA, which is reflected in other income (expense).
The following reconciliations represent the major classes of line items of the Commercial Business presented within discontinued operations in the Condensed Consolidated Statements of Operations and certain information in the Condensed Consolidated Statements of Cash Flows for any period presented prior to the Commercial Divestiture.
14
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Statements of Operations Information
During the nine months ended September 30, 2024, activity, net of tax, relating to the Commercial Divestiture was approximately $9 million primarily related to the settlement of post-closing adjustments.
| (in thousands) | Three Months Ended September 30, 2023 | Nine Months Ended September 30, 2023 | ||
| Revenue | $ | 351,400 | $ | 1,033,962 |
|
Cost of revenue
|
233,204 | 688,305 | ||
| Selling, general, and administrative expenses | 72,601 | 213,113 | ||
| Depreciation and intangible asset amortization | (3,186) | 37,691 | ||
|
Other (income) and expense items
|
8,814 | 19,222 | ||
| Income (loss) from discontinued operations before income taxes | 39,967 | 75,631 | ||
| Income tax benefit (expense) | (105,539) | (38,740) | ||
| Income (loss) from discontinued operations, net of tax | $ | (65,572) | $ | 36,891 |
Cash Flow Information
| (in thousands) | Nine Months Ended September 30, 2023 | |
|
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
|
||
| Depreciation and intangible asset amortization | $ | 37,691 |
| Share-based compensation expense | $ | 11,699 |
|
Cash flows from investing activities:
|
||
| Subscriber system asset expenditures | $ | (8,902) |
| Purchases of property and equipment | $ | (4,399) |
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
There were no changes in the carrying amounts of goodwill since December 31, 2023. All accumulated goodwill impairment losses were associated with the Solar reporting unit, which is now presented as a discontinued operation.
Other Intangible Assets
| September 30, 2024 | December 31, 2023 | |||||||||||
| (in thousands) |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
Gross Carrying Amount |
Accumulated Amortization |
Net Carrying Amount |
||||||
| Definite-lived intangible assets: | ||||||||||||
| Contracts and related customer relationships | $ | 6,046,100 | $ | (3,328,512) | $ | 2,717,588 | $ | 5,571,456 | $ | (2,937,245) | $ | 2,634,211 |
| Dealer relationships | 1,518,020 | (677,548) | 840,472 | 1,518,020 | (618,154) | 899,866 | ||||||
| Other | 209,773 | (201,955) | 7,818 | 209,773 | (199,357) | 10,416 | ||||||
| Total definite-lived intangible assets | 7,773,893 | (4,208,015) | 3,565,878 | 7,299,249 | (3,754,756) | 3,544,493 | ||||||
| Indefinite-lived intangible assets: | ||||||||||||
| Trade name | 1,333,000 | - | 1,333,000 | 1,333,000 | - | 1,333,000 | ||||||
| Intangible assets | $ | 9,106,893 | $ | (4,208,015) | $ | 4,898,878 | $ | 8,632,249 | $ | (3,754,756) | $ | 4,877,493 |
15
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The change in the net carrying amount of contracts and related customer relationships during the period was as follows:
| (in thousands) | ||
| Balance as of December 31, 2023 | $ | 2,634,211 |
|
Customer contract additions, net of dealer charge-backs(1)
|
474,744 | |
| Amortization | (391,367) | |
| Balance as of September 30, 2024 | $ | 2,717,588 |
(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.
During the third quarter of 2024, the Company purchased customer accounts from a third party for an aggregate contractual purchase price of approximately $98 million, subject to reduction based on customer retention. The Company paid initial cash at closing of approximately $81 million, which is included in dealer generated customer accounts and bulk account purchases on the Condensed Consolidated Statements of Cash Flows.
Definite-Lived Intangible Asset Amortization Expense
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
| (in thousands) | 2024 | 2023 | 2024 | 2023 | ||||
| Definite-lived intangible asset amortization expense | $ | 151,817 | $ | 143,243 | $ | 453,359 | $ | 466,886 |
16
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. DEBT
The Company's debt is comprised of the following (in thousands):
| Description | Issued | Maturity |
Interest Rate(1)
|
Interest Payable | September 30, 2024 | December 31, 2023 | ||
|
First Lien Term Loan B due 2030
|
10/13/2023 | 10/13/2030 |
Term SOFR +2.25%
|
Quarterly | $ | 1,984,090 | $ | 1,375,000 |
|
First Lien Revolving Credit Facility
|
3/16/2018 | 6/23/2026 |
Term SOFR +2.75%
|
Quarterly
|
- | - | ||
| Term Loan A Facility | 3/14/2023 | 3/14/2028 |
Term SOFR +2.25%
|
Quarterly | - | 625,625 | ||
| First Lien Notes due 2024 | 4/4/2019 | 4/15/2024 | 5.250% | 2/15 and 8/15 | - | 99,999 | ||
| First Lien Notes due 2026 | 4/4/2019 | 4/15/2026 | 5.750% | 3/15 and 9/15 | 1,350,000 | 1,350,000 | ||
| First Lien Notes due 2027 | 8/20/2020 | 8/31/2027 | 3.375% | 6/15 and 12/15 | 1,000,000 | 1,000,000 | ||
| First Lien Notes due 2029 | 7/29/2021 | 8/1/2029 | 4.125% | 2/1 and 8/1 | 1,000,000 | 1,000,000 | ||
| ADT Notes due 2032 | 5/2/2016 | 7/15/2032 | 4.875% | 1/15 and 7/15 | 728,016 | 728,016 | ||
| ADT Notes due 2042 | 7/5/2012 | 7/15/2042 | 4.875% | 1/15 and 7/15 | 21,896 | 21,896 | ||
| Second Lien Notes due 2028 | 1/28/2020 | 1/15/2028 | 6.250% | 1/15 and 7/15 | 1,300,000 | 1,300,000 | ||
|
2020 Receivables Facility(2)
|
3/5/2020 | 8/20/2029 | Various | Monthly | 423,118 | 436,004 | ||
| Total debt principal, excluding finance leases | 7,807,120 | 7,936,540 | ||||||
|
Plus: Finance lease liabilities(3)
|
73,624 | 69,468 | ||||||
| Less: Unamortized debt discount, net | (12,325) | (15,005) | ||||||
| Less: Unamortized deferred financing costs | (29,397) | (39,620) | ||||||
| Less: Unamortized purchase accounting fair value adjustment and other | (117,936) | (125,866) | ||||||
| Total debt | 7,721,086 | 7,825,517 | ||||||
| Less: Current maturities of long-term debt, net of unamortized debt discount | (196,563) | (312,061) | ||||||
| Long-term debt | $ | 7,524,523 | $ | 7,513,456 |
_________________
(1) Interest rate as of September 30, 2024. Interest on the 2020 Receivables Facility is primarily based on the Secured Overnight Financing Rate ("SOFR") +0.95% and Cost of Funds ("COF") +0.85%. Interest on the First Lien Revolving Credit Facility is based on Term SOFR +2.75% + Credit Spread Adjustment ("CSA").
(2) Maturity date for the 2020 Receivables Facility represents the final maturity date of current loans borrowed under the facility.
(3) Refer to Note 12 "Leases" for additional information regarding the Company's finance leases.
As of September 30, 2024, the Company was in compliance with all financial covenant and other maintenance tests for all of its debt obligations.
Significant changes in the Company's debt during the nine months ended September 30, 2024 were as follows:
First Lien Credit Agreement
The Company's first lien credit agreement, dated as of July 1, 2015 (together with subsequent amendments and restatements, the "First Lien Credit Agreement"), contains a term loan (the "First Lien Term Loan B due 2030") and the First Lien Revolving Credit Facility.
During the nine months ended September 30, 2024, the Company borrowed $325 million and repaid $325 million under the First Lien Revolving Credit Facility; and as of September 30, 2024, the available borrowing capacity was $575 million.
During the nine months ended September 30, 2023, there were no borrowings or repayments under the First Lien Revolving Credit Facility.
Significant amendments to the First Lien Credit Agreement since December 31, 2023 are as follows:
•April 2024 - The Company amended and restated the First Lien Credit Agreement, which reduced the interest rate on the First Lien Term Loan B due 2030 from Term SOFR +2.50% to Term SOFR +2.25%.
17
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
•May 2024 -The Company amended and restated the First Lien Credit Agreement, which included the exchange of $143 million principal amount of loans under the Company's Term Loan A Facility for its First Lien Term Loan B due 2030. In addition, later that month, the Company further amended and restated the First Lien Credit Agreement, pursuant to which the Company incurred an additional $474 million of outstanding principal under the First Lien Term Loan B due 2030 with the proceeds used to pay off the remaining outstanding balance of the Company's Term Loan A Facility.
•Subsequent event- In October 2024, the Company amended and restated the First Lien Credit Agreement to extend the maturity date of the First Lien Revolving Credit Facility to October 2029 (as extended, the "Extended First Lien Revolving Credit Facility"), subject to a springing maturity of 91 days prior to the maturity date of certain long-term indebtedness, and obtain an additional $225 million of Extended First Lien Revolving Credit Facility commitments. After giving effect to the amendment, the aggregate amount of commitments under the Extended First Lien Revolving Credit Facility is $800 million. Borrowings under the Extended First Lien Revolving Credit Facility bear interest at a rate equal to either (a) Term SOFR with a floor of zero or (b) a base rate ("Base Rate") determined by reference to the highest of (i) the federal funds rate plus 0.50% per annum, (ii) the rate of interest per annum last quoted by The Wall Street Journal as the "Prime Rate" in the United States and (iii) the one-month adjusted term SOFR plus 1.00% per annum, in each case, plus an applicable margin of 2.00% per annum for Term SOFR loans and 1.00% per annum for Base Rate loans, subject to two step-downs based on certain specified net first lien leverage ratios. In addition, the amendment reduced the commitment fee in respect of the Extended First Lien Revolving Credit Facility to 0.30% per annum in respect of the unutilized commitments thereunder, subject to two step-downs based on certain specified net first lien leverage ratios.
Proceeds and repayments of long-term borrowings include the impact of $646 million from the amendments described above. In addition, debt issuance costs, loss on extinguishment of debt, and financing and consent fees were not material as a result of these amendments.
Other than as described above, the loans under the amended and restated First Lien Credit Agreement continue to have the same terms as provided under the existing First Lien Credit Agreement, and the parties to the amended and restated First Lien Credit Agreement continue to have the same obligations set forth in the existing First Lien Credit Agreement.
Term Loan A Facility Redemption
Significant activity since December 31, 2023 is as follows:
•May 2024 -The Company exchanged $143 million of loans under its Term Loan A Facility for its First Lien Term Loan B due 2030, as discussed above. In addition, later that month, the Company redeemed the remaining outstanding principal balance of $474 million of its Term Loan A Facility, excluding accrued and unpaid interest, using proceeds under the First Lien Term Loan B due 2030, as discussed above. As a result, the Term Loan A Facility has been terminated.
First Lien Notes due 2024 Redemption
Significant activity since December 31, 2023 is as follows:
•April 2024 -The Company redeemed the remaining outstanding principal balance of $100 million of the First Lien Notes due 2024, excluding accrued and unpaid interest, using proceeds from the Company's First Lien Revolving Credit Facility.
2020 Receivables Facility
Under the 2020 Receivables Facility, the Company obtains financing by selling or contributing certain retail installment contract receivables to the Company's wholly-owned consolidated bankruptcy-remote special purpose entity (the "SPE"), which then grants a security interest in those retail installment contract receivables as collateral for cash borrowings.
Significant activity since December 31, 2023 is as follows:
•March 2024 -The Company amended the agreement governing the 2020 Receivables Facility, pursuant to which the uncommitted revolving period was extended from March 2024 to April 2024.
18
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
•April 2024 -The Company further amended the agreement governing the 2020 Receivables Facility, pursuant to which, among other things, the borrowing capacity was increased from $500 million to $550 million and the uncommitted revolving period was extended from April 2024 to April 2025. In addition, proceeds and repayments of long-term borrowings include the impact of $32 million from the amendments described above.
As of September 30, 2024, the Company had an uncommitted available borrowing capacity under the 2020 Receivables Facility of approximately $127 million.
Variable Interest Entity
The SPE meets the definition of a variable interest entity for which the Company is the primary beneficiary as it has the power to direct the SPE's activities and the obligation to absorb losses or the right to receive benefits of the SPE. As such, the Company consolidates the SPE's assets, liabilities, and financial results of operations.
The SPE's assets and liabilities primarily consist of a portion of the Company's unbilled retail installment contract receivables, net, as discussed in Note 2 "Revenue and Receivables," and borrowings under the 2020 Receivables Facility, as presented above.
The 2020 Receivables Facility did not have a material impact to the Condensed Consolidated Statements of Operations during the periods presented.
Solar Receivables Facility
On August 2, 2023, Compass Solar Group, LLC ("Compass") and ADT Solar Finance LLC ("ADT Solar Finance"), each an indirect wholly-owned subsidiary of ADT Inc. entered into a Receivables Financing Agreement with Mizuho Bank, Ltd. (the "Solar Receivables Financing Agreement") to finance receivables generated by the installation of residential solar systems. Prior to its expiration in August 2024, the Solar Receivables Financing Agreement, among other things, provided for an uncommitted revolving loan facility in the aggregate principal amount of up to $300 million which loans were to be secured by substantially all the assets of ADT Solar Finance (the "Solar Receivables Facility"). The Company did not borrow any amounts under the Solar Receivable Facility prior to its expiration.
6. 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, and other income (expense) depending on the nature of the underlying that the swaps are economically hedging.
•Designated as cash flow hedges:Unrealized gains and losses are recognized as a component of accumulated other comprehensive income (loss) ("AOCI") and are reclassified into interest expense, net, in the same period in which the related interest on debt affects earnings.
For interest rate swap contracts that have been de-designated as cash flow hedges and for which forecasted cash flows are:
•Probable or reasonably possible of occurring:Unrealized gains and losses previously recognized as a component of AOCI are reclassified into interest expense, net, in the same period in which the related interest on variable-rate debt affects earnings through the original maturity date of the related interest rate swap contracts.
•Probable of not occurring: Unrealized gains and losses previously recognized as a component of AOCI are immediately reclassified into interest expense, net.
The cash flows associated with interest rate swap contracts that were entered into with the intention of offsetting the economic overhedged position of a portion of the Company's existing interest rate swaps are reflected as cash flows from investing activities.
19
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
As of September 30, 2024 and December 31, 2023, the Company's interest rate swaps consisted of the following (in thousands):
| Execution | Maturity | Designation | Notional Amount | |
| October 2019 | September 2026 | Not designated | $ | 2,800,000 |
|
March 2023
|
March 2028 | Not designated | 100,000 | |
|
April 2023
|
March 2028 | Not designated | 200,000 | |
|
December 2023(1)
|
September 2026 | Not designated | 700,000 | |
| Total notional amount | $ | 3,800,000 |
_________________
(1) Interest rate swaps entered into to offset the excess notional interest rate swaps as a result of the partial redemption of the First Lien Term Loan B due 2026. The changes in fair value associated with these swaps and the over-hedged swaps are reflected in other income (expense).
Classification and Fair Value of Interest Rate Swaps
| (in thousands) | September 30, 2024 | December 31, 2023 | ||
| Prepaid expenses and other current assets | $ | 51,776 | $ | 74,974 |
| Other assets | $ | 43,683 | $ | 76,493 |
| Accrued expenses and other current liabilities | $ | 699 | $ | 5,312 |
| Other liabilities | $ | 2,135 | $ | 1,325 |
Unrealized Gain (Loss) on Interest Rate Swaps
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
|
Statement of Operations Classification (in thousands)
|
2024 | 2023 | 2024 | 2023 | ||||
|
Interest expense, net
|
$ | (58,051) | $ | 16,380 | $ | (46,429) | $ | 38,477 |
|
Other income (expense)
|
$ | (4,821) | $ | - | $ | (14,699) | $ | - |
Cash Flow Hedges Reclassifications out of AOCI
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
|
(in thousands)
|
2024 | 2023 | 2024 | 2023 | ||||
| Interest expense, net | $ | 1,943 | $ | 30,008 | $ | 6,057 | $ | 40,186 |
| Income tax (benefit) expense | $ | (471) | $ | (7,245) | $ | (1,464) | $ | (9,702) |
As of September 30, 2024 and December 31, 2023, AOCI, net of tax, related to previously designated cash flow hedges was $9 million and $13 million, respectively.
As of September 30, 2024, AOCI associated with previously designated cash flow hedges that is estimated to be reclassified to interest expense, net, within the next twelve months is not material.
20
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
7. 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 nine months ended September 30, 2024, the Company did not have a material change to its unrecognized tax benefits from those disclosed in the 2023 Annual Report. Based on the current status of its income tax audits, the Company expects approximately $29 million of its unrecognized tax benefits will be resolved in the next twelve months.
Effective Tax Rate
The effective tax rate can vary from period to period due to permanent tax adjustments, discrete items such as the settlement of income tax audits and changes in tax laws, as well as recurring factors such as changes in the overall state tax rate. The discussion below is based on the continuing operations of the Company.
The Company's income tax expense for the three months ended September 30, 2024 was $50 million, resulting in an effective tax rate for the period of 27.6%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state tax rate, net of federal benefits, of 6.2%, and an unfavorable impact from unrecognized tax benefits of 4.0%, partially offset by a favorable impact from a prior year tax return adjustment of 4.0%.
The Company's income tax expense for the three months ended September 30, 2023 was $34 million, resulting in an effective tax rate for the period of 21.5%. The effective tax rate primarily represents the federal statutory tax rate of 21.0%, and a state tax rate, net of federal benefits, of 5.1%, partially offset by favorable impacts from dispositions of 3.1%, and prior year tax return adjustments of 1.2%.
The Company's income tax expense for the nine months ended September 30, 2024 was $167 million, resulting in an effective tax rate for the period of 28.3%. The effective tax rate primarily represents the federal statutory rate of 21.0%, a state tax rate, net of federal benefits, of 5.8%, unfavorable impacts from dispositions of 1.6%, and unrecognized tax benefits of 0.8%, partially offset by a favorable impact from a prior year tax return adjustment of 1.2%.
The Company's income tax expense for the nine months ended September 30, 2023 was $120 million, resulting in an effective tax rate for the period of 25.5%. The effective tax rate primarily represents the federal statutory tax rate of 21.0%, a state tax rate, net of federal benefits, of 5.8%, and an unfavorable impact from permanent non-deductible items of 1.2%, partially offset by a favorable impact from dispositions of 1.0%.
8. EQUITY
Common Stock and Class B Common Stock
The Company has two classes of common stock, including Common Stock and Class B Common Stock.
During the nine months ended September 30, 2024, shares issued resulted from the vesting of restricted stock units ("RSUs") and stock option exercises related to share-based compensation awards.
Share Repurchase Plan
On January 24, 2024, the Company's Board of Directors announced a share repurchase plan (the "Share Repurchase Plan"), pursuant to which the Company is authorized to repurchase, through January 29, 2025, up to a maximum aggregate amount of $350 million of shares of the Company's Common Stock under this Share Repurchase Plan.
The Company may effect these repurchases pursuant to one or more open market or private transactions, including pursuant to a plan that qualifies for the affirmative defense provided by Rule 10b5‐1 under the Exchange Act, or pursuant to one or more accelerated share repurchase agreements.
The Company is not obligated to repurchase any of its shares of Common Stock, and the timing and amount of any repurchases will depend on legal requirements, market conditions, stock price, the availability of the safe harbor provided by Rule 10b-18 under the Exchange Act, alternative uses of capital, and other factors.
21
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
During the first quarter of 2024, the Company repurchased and retired 15 million shares of its Common Stock under the Share Repurchase Plan and paid approximately $93 million (or approximately $6.22 per share). Refer to Note 13 "Related Party Transactions" for further information.
There were no other share repurchases during the nine months ended September 30, 2024.
As of September 30, 2024, the Company had approximately $257 million remaining under the Share Repurchase Plan.
Subsequent event- In October 2024, the Company repurchased 5 million shares of Common Stock at a price per share of $6.40 for an aggregate purchase price of $32 million. As a result, the Company has approximately $225 million remaining under the Share Repurchase Plan.
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 | ||||
| Nine Months Ended September 30, 2024 | ||||||||||
| 1/24/2024 | 3/14/2024 | 4/4/2024 | $ | 0.055 | $ | 47,059 | $ | 0.055 | $ | 3,011 |
| 4/25/2024 | 6/13/2024 | 7/9/2024 | 0.055 | 47,137 | 0.055 | 3,011 | ||||
| 8/1/2024 | 9/13/2024 | 10/4/2024 | 0.055 | 47,146 | 0.055 | 3,011 | ||||
| Total | $ | 0.165 | $ | 141,342 | $ | 0.165 | $ | 9,033 | ||
| Nine Months Ended September 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 | ||||
| 8/8/2023 | 9/15/2023 | 10/4/2023 | 0.035 | 30,405 | 0.035 | 1,916 | ||||
| Total | $ | 0.105 | $ | 91,003 | $ | 0.105 | $ | 5,748 |
Subsequent Event - On October 24, 2024, the Company announced a dividend of $0.055 per share to holders of Common Stock and Class B Common Stock of record on December 12, 2024, which will be paid on January 9, 2025.
Accumulated Other Comprehensive Income (Loss)
During the three and nine months ended September 30, 2024, there were no material reclassifications out of AOCI. Refer to Note 6 "Derivative Financial Instruments" for AOCI reclassifications associated with previously designated cash flow hedges.
9. SHARE-BASED COMPENSATION
RSUs
During the first quarter of 2024, the Company completed its annual long-term incentive plan equity award to employees and granted approximately 3.9 million RSUs under its 2018 Omnibus Incentive Plan, as amended (the "2018 Plan"), with a grant date fair value of $6.51 equal to the closing price per share of the Company's Common Stock on the date of grant. These RSUs are service-based awards with a three-year graded vesting period from the date of grant.
Options
During the first quarter of 2024, the Company granted approximately 6.8 million options under the 2018 Plan. These options are service-based awards with a three-year graded vesting period from the date of grant and have an exercise price of $6.51, which is equal to the closing price per share of the Company's common stock on the date of grant, and a contractual term of ten years from the grant date. The weighted-average grant date fair value for the options granted was $2.56.
22
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Company used a binomial lattice model to determine the grant date fair value for options granted and included the following assumptions:
|
Expected exercise term (years)
|
7 |
|
Expected volatility(1)
|
49.9% |
|
Expected dividend yield(2)
|
3.4% |
|
Risk-free interest rate(3)
|
4.0% |
(1) Estimated using historical and implied stock price volatility of the Company.
(2) Calculated by taking the annual dividend run-rate and dividing by the stock price at date of grant.
(3) Based on the U.S. Treasury yield curve.
Other
During the second quarter of 2024, the Company modified certain share-based compensation awards and recorded additional share-based compensation expense of $11 million associated with the modifications.
10. NET INCOME (LOSS) PER SHARE
The Company applies the two-class method for computing and presenting net income (loss) per share for each class of common stock, which allocates current period net income (loss) to each class of common stock and participating securities based on dividends declared and participation rights in the remaining undistributed earnings or losses.
Basic net income (loss) per share is computed by dividing the net income (loss) allocated to each class of common stock by the related weighted-average number of shares outstanding during the period. Diluted net income (loss) per share gives effect to all securities representing potential common shares that were dilutive and outstanding during the period for each class of common stock and excludes potentially dilutive securities whose effect would have been anti-dilutive.
Common Stock
Potential shares of Common Stock include (i) incremental shares related to the vesting or exercise of share-based compensation awards, warrants, and other options to purchase additional shares of the Company's Common Stock calculated using the treasury stock method and (ii) incremental shares of Common Stock issuable upon the conversion of Class B Common Stock. Additionally, the basic and diluted earnings per share computations for Common Stock excludes approximately 7 million and 9 million unvested shares for the current and prior periods, respectively, as their vesting is contingent upon achievement of certain performance requirements.
23
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
|
in thousands, except per share amounts
|
2024 | 2023 | 2024 | 2023 | ||||
| Allocation of income (loss) from continuing operations - basic | $ | 124,078 | $ | 115,874 | $ | 396,740 | $ | 322,680 |
| Dilutive effect | 3,327 | 2,255 | 10,068 | 6,697 | ||||
| Allocation of income (loss) from continuing operations - diluted | $ | 127,405 | $ | 118,129 | $ | 406,808 | $ | 329,377 |
| Allocation of income (loss) from discontinued operations, net of tax - basic | $ | (4,576) | $ | (196,923) | $ | (104,340) | $ | (428,719) |
| Dilutive effect | - | - | - | - | ||||
| Allocation of income (loss) from discontinued operations, net of tax - diluted | $ | (4,576) | $ | (196,923) | $ | (104,340) | $ | (428,719) |
| Weighted-average shares outstanding - basic | 850,462 | 857,423 | 851,539 | 856,446 | ||||
|
Dilutive effect(1)
|
62,399 | 60,351 | 61,757 | 62,255 | ||||
| Weighted-average shares outstanding - diluted | 912,861 | 917,774 | 913,296 | 918,701 | ||||
| Income (loss) from continuing operations per share - basic | $ | 0.15 | $ | 0.13 | $ | 0.46 | $ | 0.38 |
| Income (loss) from continuing operations per share - diluted | $ | 0.14 | $ | 0.13 | $ | 0.44 | $ | 0.36 |
| Income (loss) per share from discontinued operations, net of tax - basic | $ | (0.01) | $ | (0.23) | $ | (0.12) | $ | (0.50) |
| Income (loss) per share from discontinued operations, net of tax - diluted | $ | (0.01) | $ | (0.21) | $ | (0.11) | $ | (0.47) |
_________________
(1) During the three and nine months ended September 30, 2024, 21 million and 20 million shares of Common Stock, respectively, 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 nine months ended September 30, 2023, 22 million and 18 million shares of Common Stock, respectively, that would be dilutive were excluded from the diluted earnings per share calculations because their effects would have been anti-dilutive.
24
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Class B Common Stock
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
|
in thousands, except per share amounts
|
2024 | 2023 | 2024 | 2023 | ||||
| Allocation of net income (loss) from continuing operations - basic | $ | 7,942 | $ | 7,385 | $ | 25,356 | $ | 20,580 |
| Dilutive effect | (316) | (339) | (1,035) | (949) | ||||
| Allocation of net income (loss) from continuing operations - diluted | $ | 7,626 | $ | 7,046 | $ | 24,321 | $ | 19,631 |
| Allocation of income (loss) from discontinued operations, net of tax - basic | $ | (293) | $ | (12,573) | $ | (6,660) | $ | (27,404) |
| Dilutive effect | - | - | - | - | ||||
| Allocation of income (loss) from discontinued operations, net of tax - diluted | $ | (293) | $ | (12,573) | $ | (6,660) | $ | (27,404) |
| 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) from continuing operations per share - basic | $ | 0.15 | $ | 0.13 | $ | 0.46 | $ | 0.38 |
| Net income (loss) from continuing operations per share - diluted | $ | 0.14 | $ | 0.13 | $ | 0.44 | $ | 0.36 |
| Income (loss) per share from discontinued operations, net of tax - basic | $ | (0.01) | $ | (0.23) | $ | (0.12) | $ | (0.50) |
| Income (loss) per share from discontinued operations, net of tax - diluted | $ | (0.01) | $ | (0.21) | $ | (0.11) | $ | (0.47) |
(1) There were no potential shares of Class B Common Stock during the periods presented.
11. COMMITMENTS AND CONTINGENCIES
Contractual Obligations
There have been no significant changes to the Company's contractual obligations as compared to December 31, 2023, except as discussed below:
Google Commercial Agreement
In July 2020, the Company and Google entered into a Master Supply, Distribution, and Marketing Agreement (the "Google Commercial Agreement"), as subsequently amended, pursuant to which Google has agreed to supply the Company with certain Google devices as well as certain Google video and analytics services ("Google Devices and Services"), for sale to the Company's customers.
The Google Commercial Agreement also specifies that each party shall contribute $150 million toward joint marketing, customer acquisition, training of the Company's employees, and product technology updates related to the Google Devices and Services. In August 2022, the Company and Google executed an amendment to the Google Commercial Agreement, pursuant to which Google has agreed to commit an additional $150 million to fund growth, data and insights, product innovation and technology advancements, customer acquisition, and marketing, as mutually agreed by the Company and Google, (together with the initial amounts, the "Google Success Funds").
During the three and nine months ended September 30, 2024, $7 million and $22 million, respectively, of the Google Success Funds were reimbursed to the Company primarily for certain joint marketing and customer acquisition expenses incurred by the Company, substantially all of which was recorded as a reduction to advertising expenses. During the three and nine months ended September 30, 2023, the Company was reimbursed $28 million and $40 million, respectively.
25
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Google Cloud Agreement Addendum
In December 2023, the Company and Google entered into an addendum to the Company's existing agreement with Google for using Google cloud services (the "Google Cloud Agreement Addendum"), pursuant to which Google has agreed to provide certain credits, discounts, and other incentives for use of the Google Cloud Platform to the Company, and the Company has committed to purchasing $200 million of Google Cloud Platform services over seven years (through December 2030), with $35 million in the first two years, $65 million in the next two years after that, and $100 million in the last three years of the commitment. The Company may elect to cancel the commitment in return for a cancellation fee of 30% of the total remaining commitment amount and loss of any discounts, remaining credits, or other incentives provided under the Google Cloud Agreement Addendum.
During the three and nine months ended September 30, 2024, the Company made purchases toward this commitment of $9 million and $19 million, respectively.
Other Commitments
During the fourth quarter of 2023, the Company entered into an agreement with one of its vendors to purchase at least $190 million of security system equipment and components through March 2025. During the second quarter of 2024, the Company increased its commitment by approximately $130 million. This commitment is also satisfied through purchases made by the Company's dealer network. During the three and nine months ended September 30, 2024, purchases toward this commitment were approximately $44 million and $144 million, respectively.
Guarantees
In the normal course of business, the Company is liable for contract completion and product performance. As of September 30, 2024 and December 31, 2023, the Company's guarantees primarily relate to standby letters of credit related to its insurance programs and totaled $74 million and $78 million, respectively. The Company does not believe such obligations will materially affect its financial position, results of operations, or cash flows.
Legal Proceedings
The Company is subject to various claims and lawsuits in the ordinary course of business, which include among other things commercial general liability claims, automobile liability claims, contractual disputes, worker's compensation claims, labor law and employment claims, claims that the Company infringed on the intellectual property of others, and consumer and employment class actions. The Company is also subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations, and threatened legal actions and proceedings. In connection with such formal and informal inquiries, the Company receives numerous requests, subpoenas, and orders for documents, testimony, and information in connection with various aspects of its activities. There have been no material changes to these matters from those disclosed in the 2023 Annual Report.
The Company records accruals for losses that are probable and reasonably estimable. These accruals are based on a variety of factors such as judgment, probability of loss, opinions of internal and external legal counsel, and actuarially determined estimates of claims incurred but not yet reported based upon historical claims experience. Legal costs in connection with claims and lawsuits in the ordinary course of business are expensed as incurred. Additionally, the Company records insurance recovery receivables or other indemnifications from third-parties when recovery has been determined to be probable. The Company has not accrued for any losses for which the likelihood of loss cannot be assessed, is less than probable, or the range of possible loss cannot be estimated.
As of September 30, 2024 and December 31, 2023, the Company's accrual for ongoing claims and lawsuits within the scope of an insurance program, including amounts related to the Solar Business, totaled $102 million and $110 million, respectively. The Company's accrual related to ongoing claims and lawsuits not within the scope of an insurance program is not material.
26
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. LEASES
Company as Lessee
As part of normal operations, the Company leases real estate, vehicles, and equipment primarily through its main operating entity, ADT LLC.
Right-of-Use Assets and Lease Liabilities
|
(in thousands)
|
September 30, 2024 | December 31, 2023 | ||||
| Presentation and Classification: | ||||||
| Operating | Current | Prepaid expenses and other current assets | $ | 67 | $ | 68 |
| Operating | Non-current | Other assets | 82,983 | 85,649 | ||
| Finance | Non-current |
Property and equipment, net(1)
|
67,832 | 65,368 | ||
| Total right-of-use assets | $ | 150,882 | $ | 151,085 | ||
| Operating | Current | Accrued expenses and other current liabilities | $ | 19,147 | $ | 13,035 |
| Finance | Current | Current maturities of long-term debt | 26,533 | 25,741 | ||
| Operating | Non-current | Other liabilities | 77,066 | 80,189 | ||
| Finance | Non-current | Long-term debt | 47,091 | 43,727 | ||
| Total lease liabilities | $ | 169,837 | $ | 162,692 |
_________________
(1)Finance lease right-of-use assets are recorded net of accumulated depreciation, which was approximately $61 million and $50 million as of September 30, 2024 and December 31, 2023, respectively.
Lease Cost
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||
|
(in thousands)
|
2024 | 2023 | 2024 | 2023 | ||||
| Operating lease cost | $ | 7,365 | $ | 8,832 | $ | 20,943 | $ | 24,822 |
| Finance lease cost: | ||||||||
| Amortization of right-of-use assets | 6,095 | 4,355 | 16,203 | 10,144 | ||||
| Interest on lease liabilities | 1,109 | 709 | 3,514 | 1,494 | ||||
| Variable lease costs | 8,701 | 7,692 | 24,428 | 27,512 | ||||
| Total lease cost | $ | 23,270 | $ | 21,588 | $ | 65,088 | $ | 63,972 |
Right-of-Use Assets Obtained in Exchange for Lease Obligations(1)
| Nine Months Ended September 30, | ||||
|
(in thousands)
|
2024 | 2023 | ||
| Operating leases | $ | 14,200 | $ | 28,786 |
| Finance leases | $ | 33,283 | $ | 62,203 |
_________________
(1)Includes both continuing and discontinued operations.
Company as Lessor
The Company is a lessor in certain Company-owned transactions as the Company has identified a lease component associated with the right-of-use of the security system and a non-lease component associated with the monitoring and related services.
27
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.
13. RELATED PARTY TRANSACTIONS
The Company's related party transactions primarily relate to products and services received from, or monitoring and related services provided to, other entities affiliated with Apollo, and, from time to time, management, consulting, and transaction advisory services provided by Apollo to the Company, as well as transactions between the Company and State Farm. There were no notable related party transactions during the periods presented other than as described below.
Apollo
Offering and Share Repurchase
On March 6, 2024, the Company and certain entities managed by affiliates of Apollo Global Management, Inc. (the "Selling Stockholders") entered into an underwriting agreement (the "Underwriting Agreement") with Morgan Stanley & Co. LLC and Barclays Capital Inc., as representatives of the underwriters named therein, including Apollo Global Securities, LLC, an affiliate of Apollo (collectively, the "Underwriters"), in connection with the offer and sale by the Selling Stockholders (the "Offering") of 65 million shares of the Company's Common Stock, and, at the option of the Underwriters, up to an additional 9.75 million shares of Common Stock (the "Underwriters' Option").
As part of the Offering, the Company purchased 15 million shares of Common Stock under its Share Repurchase Plan from the Underwriters (the "Share Repurchase"). The Company paid approximately $93 million (or approximately $6.22 per share) for the Share Repurchase, which was the same per share price paid by the Underwriters to the Selling Stockholders. The repurchase is reflected as a reduction to additional paid-in-capital and as a financing cash outflow.
The Offering and the Share Repurchase closed on March 11, 2024. On March 15, 2024, the Underwriters exercised the Underwriters' Option in full, which subsequently closed on March 19, 2024. The Company did not pay any underwriting fees in connection with the Share Repurchase, including on behalf of the Selling Stockholders or otherwise.
All the shares in the Offering were sold by the Selling Stockholders. The Company did not receive any of the proceeds from the sale of shares by the Selling Stockholders in the Offering.
Other
During the nine months ended September 30, 2024, other fees incurred to Apollo were not material.
During the nine months ended September 30, 2023, the Company incurred fees to Apollo of $1 million related to Apollo's performance of placement agent services related to the initial funding of the Term Loan A Facility.
State Farm
State Farm owns more than 10% of the Company's issued and outstanding common stock, and as a result, is a related party.
In October 2022, the Company, ADT LLC (an indirect wholly owned subsidiary of the Company), and State Farm entered into a development agreement (the "State Farm Development Agreement") in connection with State Farm's strategic investment in ADT. Pursuant to the State Farm Development Agreement, State Farm committed up to $300 million to fund certain initiatives as agreed to between the Company and State Farm related to the partnership (the "Opportunity Fund"), of which the Company has received $100 million. Amounts held by the Company in the Opportunity Fund are restricted until the Company uses the funds, as agreed upon with State Farm, in accordance with the State Farm Development Agreement.
As of September 30, 2024 and December 31, 2023, the balance in the portion of the Opportunity Fund held by the Company was $87 million and $94 million, respectively.
During the nine months ended September 30, 2024 and 2023, the Company made payments from the Opportunity Fund of $10 million and $6 million, respectively. Interest earned on the Opportunity Fund was not material.
28
ADT INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Sunlight Financial LLC
ADT Solar used Sunlight Financial LLC ("Sunlight"), an entity previously affiliated with Apollo, to access certain loan products for ADT Solar customers. As of December 2023, Sunlight was no longer affiliated with Apollo, and as a result, was no longer a related party.
During the three and nine months ended September 30, 2023, total loans funded by Sunlight were $9 million and $71 million, respectively, and the Company incurred financing fees of $2 million and $11 million, respectively.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Table of Contents
•Introduction
•Business and Basis of Presentation
•Factors Affecting Operating Results
•Key Performance Indicators
•Results of Operations
•Non-GAAP Measures
•Liquidity and Capital Resources
•Critical Accounting Estimates
•Cautionary Statements Regarding Forward-Looking Statements
INTRODUCTION
The following discussion and analysis contains forward-looking statements about our business, operations, and financial performance based on current plans and estimates that involve risks, uncertainties, and assumptions, which could differ materially from actual results. Factors that could cause such differences are discussed in the sections of this Quarterly Report on Form 10-Q titled "Cautionary Statements Regarding Forward-Looking Statements" and Item 1A "Risk Factors."
To obtain a more comprehensive understanding of our financial condition, changes in financial condition, and results of operations, the following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited consolidated financial statements and the related notes included in our 2023 Annual Report.
BUSINESS AND BASIS OF PRESENTATION
Our Business
ADT (or "we," "our," and "us"), provides security, interactive, and smart home solutions to consumer and small business customers in the U.S.
As of September 30, 2024, we served approximately 6.4 million security monitoring service subscribers.
Our mission is to empower people to protect and connect what matters most with safe, smart, and sustainable solutions, delivered through innovative offerings, unrivaled safety, and a premium experience because we believe that everyone deserves to feel safe.
Basis of Presentation
As a result of the Commercial Divestiture and ADT Solar Exit, we currently report our results as a single operating and reportable segment, which reflects the business operations of our former CSB segment. All financial information presented in this section has been prepared in U.S. dollars in accordance with GAAP, excluding any non-GAAP measures, and includes the accounts of ADT Inc. and its wholly-owned subsidiaries. All intercompany transactions have been eliminated. Results of our Solar and former Commercial businesses are presented within discontinued operations.
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Business Updates
ADT Solar Exit
As discussed in Note 1 "Description of Business and Summary of Significant Accounting Policies" and Note 3 "Divestitures," in January 2024, the Board approved a plan to fully exit the Solar Business. Beginning in the second quarter of 2024, the results of operations and financial position of the Solar Business are classified as discontinued operations in the Company's Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets, respectively, for all periods presented. Additionally, the cash flows and comprehensive income (loss) of the Solar Business have not been segregated and are included in the Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Comprehensive Income (Loss), respectively.
During the three months ended September 30, 2024, aggregate exit charges incurred were not material. During the nine months ended September 30, 2024, we incurred aggregate exit charges of $88 million, which have been recognized within income (loss) from discontinued operations, net of tax, related to (i) $34 million, associated with the write-down and disposition of inventory and asset impairments, (ii) $29 million, associated with the disposition of the existing installation pipeline, (iii) $13 million, associated with employee separation costs, and (iv) $11 million, associated with contract termination and other charges.
Additionally, during the nine months ended September 30, 2024, we paid approximately $21 million in connection with the ADT Solar Exit, primarily related to employee separation and other restructuring costs.
We do not expect the remaining charges and cash expenditures to be material. The estimated charges and cash expenditures resulting from the ADT Solar Exit could change materially due to various factors including unknown or unforeseen costs.
Our reported operating metrics, gross customer revenue attrition and recurring monthly revenue (as defined and discussed below), were not impacted by the ADT Solar Exit.
Commercial Divestiture
As discussed in Note 1 "Description of Business and Summary of Significant Accounting Policies" and Note 3 "Divestitures," we divested our Commercial Business during the fourth quarter of 2023. The Commercial Business is presented as a discontinued operation in the Company's Condensed Consolidated Statements of Operations for all periods presented. Additionally, the cash flows and comprehensive income (loss) of the Commercial Business have not been segregated and are included in the Condensed Consolidated Statements of Cash Flows and Condensed Consolidated Statements of Comprehensive Income (Loss), respectively, for all periods presented.
Our reported operating metrics, gross customer revenue attrition and recurring monthly revenue (as defined and discussed below), have been recast for any period prior to the sale to exclude the Commercial Business.
Income received in connection with the Commercial TSA is recognized in other income (expense), and the expenses incurred by us to support the transition are recorded based on the nature of the expense.
FACTORS AFFECTING OPERATING RESULTS
The factors described herein could have a material effect on our business, financial condition, results of operations, cash flows, and key performance indicators. Unless otherwise noted, our results of operations discussed below relate to continuing operations and may be impacted by the ADT Solar Exit and Commercial Divestiture.
Generally, a significant upfront investment is required to acquire new subscribers that in turn provide ongoing and predictable recurring revenue generated from our monitoring services and other subscriber-based offerings. Although the economics of an installation may vary depending on the customer type, acquisition channel, and product offering, we generally achieve revenue break-even in approximately two years.
New customer additions and customer attrition have a direct impact on our financial results, including revenue, operating income, and cash flows. A portion of our recurring customer base can be expected to cancel its service each year as customers may choose to terminate or not to renew their contracts for a variety of reasons, including relocation, cost, loss to competition, or service issues. Relocations are sensitive to changes in the residential housing market, and fewer relocations generally lead to improvements in gross customer revenue attrition, but fewer new customer additions. Additionally, non-payment disconnects generally increase in a weaker macroeconomic environment. We have been experiencing fewer relocation disconnects and higher non-pay disconnects largely related to housing market conditions and the weaker macroeconomic environment. We may
31
continue to experience fluctuations in these or other trends in the future as changes in the general macroeconomic environment or housing market develop.
Our results are also impacted by the mix of transactions under a Company-owned equipment model versus a customer-owned equipment model (referred to as outright sales), as there are different accounting treatments applicable to each model, as well as the mix, price, and type of offerings sold. Beginning in the second quarter of 2024, a growing number of our direct channel new customer adds are outright sales. As we continue to build our partnership with Google, introduce new or enhance our current offerings, and refine our go-to-market approach, we expect to continue to see a shift toward an increasing proportion of outright sales transactions, which will impact results in future periods when those changes occur. We believe ADT self set-up customers sold under an outright sales model, which typically have lower monthly recurring fees than our professional installations, will allow us to grow our subscriber base through access to the fast-growing do-it-yourself ("DIY") market.
We may experience an increase in costs associated with factors such as, but not limited to, (i) offering a wider variety of products and services; (ii) providing a greater mix of interactive and smart home solutions; (iii) replacing or upgrading certain system components or technology due to technological advancements, cybersecurity upgrades, or otherwise; (iv) supply chain disruptions; (v) inflationary pressures on costs such as materials, labor, and fuel; and (vi) other changes in prices, interest rates, or terms from our suppliers, vendors, or third-party lenders.
As part of our response to changes or pressures in the current macroeconomic environment, we have been evaluating, and continue to evaluate, cost-saving opportunities such as leveraging technology, reducing headcount or our physical facilities footprint when appropriate, and reducing non-essential spend. While we have experienced some increase in costs as a result of inflation, we have, for the most part, been able to offset the rising costs through price increases to our customers, as well as cost-saving opportunities.
Hurricanes and other natural disasters may impact certain areas in which we operate and may result in service, sales, and installation disruptions to certain of our customers. At the end of September 2024, Hurricane Helene made landfall in the southeastern part of the U.S. We determined there were no material financial or business impacts from Hurricane Helene for the quarter ended September 30, 2024. Subsequently, at the beginning of October 2024, Hurricane Milton made landfall in Florida. We are currently evaluating the financial and business impacts Hurricanes Helene and Milton may have on future periods.
KEY PERFORMANCE INDICATORS
We evaluate our results using certain key performance indicators, including operating metrics such as recurring monthly revenue and gross customer revenue attrition, as well as the non-GAAP measure Adjusted EBITDA. Computations of our key performance indicators may not be comparable to other similarly titled measures reported by other companies.
Certain operating metrics are approximated, as there may be variations to reported results due to certain adjustments we might make in connection with the integration over several periods of acquired companies that calculated these metrics differently or periodic reassessments and refinements in the ordinary course of business, including changes due to system conversions or historical methodology differences in legacy systems.
End-of-Period Recurring Monthly Revenue ("RMR")
RMR is generated by contractual recurring fees for monitoring and other recurring services provided to our customers, including contracts monitored but not owned.
We use RMR to evaluate our overall sales, installation, and retention performance. Additionally, we believe the presentation of RMR is useful to investors because it measures the volume of revenue under contract at a given point in time, which is useful for forecasting future revenue performance as the majority of our revenue comes from recurring sources.
Gross Customer Revenue Attrition
Gross customer revenue attrition is defined as RMR lost as a result of customer attrition, net of dealer charge-backs and reinstated customers, excluding contracts monitored but not owned and self set-up/DIY customers. Customer sites are considered canceled when all services are terminated. Dealer charge-backs represent customer cancellations charged back to the dealers because the customer canceled service during the charge-back period, which is generally thirteen months.
Gross customer revenue attrition is calculated on a trailing twelve-month basis, the numerator of which is the RMR lost during the period due to attrition, net of dealer charge-backs and reinstated customers, and the denominator of which is total annualized RMR based on an average of RMR under contract at the beginning of each month during the period, in each case, excluding contracts monitored but not owned and self set-up/DIY customers.
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We use gross customer revenue attrition to evaluate our retention and customer satisfaction performance, as well as evaluate subscriber trends by vintage year. Additionally, we believe the presentation of gross customer revenue attrition is useful to investors as it provides a means to evaluate drivers of customer attrition and the impact of retention initiatives.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP measure. Our definition of Adjusted EBITDA, a reconciliation of Adjusted EBITDA to income (loss) from continuing operations (the most comparable GAAP measure), and additional information, including a description of the limitations relating to the use of Adjusted EBITDA, are provided under "-Non-GAAP Measures."
RESULTS OF OPERATIONS
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
|
(in thousands, except as otherwise indicated)
|
2024 | 2023 | $ Change | 2024 | 2023 | $ Change | ||||||
| Revenue: | ||||||||||||
| Monitoring and related services | $ | 1,077,550 | $ | 1,053,456 | $ | 24,094 | $ | 3,208,267 | $ | 3,125,344 | $ | 82,923 |
| Security installation, product, and other | 166,286 | 126,417 | 39,869 | 429,800 | 355,082 | 74,718 | ||||||
| Total revenue | 1,243,836 | 1,179,873 | 63,963 | 3,638,067 | 3,480,426 | 157,641 | ||||||
|
Cost of revenue (exclusive of depreciation and amortization shown separately below):
|
||||||||||||
| Monitoring and related services | 154,744 | 148,533 | 6,211 | 460,649 | 452,809 | 7,840 | ||||||
| Security installation, product, and other | 67,362 | 38,863 | 28,499 | 151,996 | 113,921 | 38,075 | ||||||
| Total cost of revenue | 222,106 | 187,396 | 34,710 | 612,645 | 566,730 | 45,915 | ||||||
| Selling, general, and administrative expenses | 358,520 | 346,444 | 12,076 | 1,105,523 | 1,000,861 | 104,662 | ||||||
| Depreciation and intangible asset amortization | 335,270 | 329,653 | 5,617 | 1,002,131 | 1,008,773 | (6,642) | ||||||
| Merger, restructuring, integration, and other | 1,590 | 9,817 | (8,227) | 15,094 | 32,441 | (17,347) | ||||||
| Operating income (loss) | 326,350 | 306,563 | 19,787 | 902,674 | 871,621 | 31,053 | ||||||
| Interest expense, net | (161,830) | (146,850) | (14,980) | (358,980) | (401,261) | 42,281 | ||||||
| Other income (expense) | 17,735 | 661 | 17,074 | 44,907 | (10) | 44,917 | ||||||
| Income (loss) from continuing operations before income taxes and equity in net earnings (losses) of equity method investee | 182,255 | 160,374 | 21,881 | 588,601 | 470,350 | 118,251 | ||||||
| Income tax benefit (expense) | (50,235) | (34,427) | (15,808) | (166,505) | (119,987) | (46,518) | ||||||
| Income (loss) from continuing operations before equity in net earnings (losses) of equity method investee | 132,020 | 125,947 | 6,073 | 422,096 | 350,363 | 71,733 | ||||||
| Equity in net earnings (losses) of equity method investee | - | (2,688) | 2,688 | - | (7,103) | 7,103 | ||||||
| Income (loss) from continuing operations | 132,020 | 123,259 | 8,761 | 422,096 | 343,260 | 78,836 | ||||||
|
Income (loss) from discontinued operations, net of tax
|
(4,869) | (209,496) | 204,627 | (111,000) | (456,123) | 345,123 | ||||||
| Net income (loss) | $ | 127,151 | $ | (86,237) | $ | 213,388 | $ | 311,096 | $ | (112,863) | $ | 423,959 |
|
Key Performance Indicators:(1)
|
||||||||||||
|
RMR
|
$ | 358,881 | $ | 350,392 | $ | 8,489 | $ | 358,881 | $ | 350,392 | $ | 8,489 |
| Gross customer revenue attrition (percent) | 12.8% | 12.9% | N/A* | 12.8% | 12.9% | N/A* | ||||||
|
Adjusted EBITDA(2)
|
$ | 658,691 | $ | 623,445 | $ | 35,246 | $ | 1,925,669 | $ | 1,854,288 | $ | 71,381 |
(1)Refer to the "-Key Performance Indicators" section for the definitions of these key performance indicators.
(2)Adjusted EBITDA is a non-GAAP measure. Refer to the "-Non-GAAP Measures" section for the definition of this term and a reconciliation to the most comparable GAAP measure.
* Not applicable.
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Revenue
During the three and nine months ended September 30, 2024, revenue, as compared to the prior periods, primarily reflects:
•Monitoring and related services ("M&S Revenue"): higher recurring revenue of $21 million and $80 million, respectively, primarily driven by an increase in average prices.
•Security installation, product, and other: (i) an increase in installation revenue of $29 million and $38 million, respectively, primarily driven by a higher volume of sales transactions with new customers under the outright sales model, as well as (ii) an increase in the amortization of deferred subscriber acquisition revenue of $11 million and $37 million, respectively, associated with customers under the Company-owned model.
The increase in RMR, as compared to the prior period, was primarily driven by an increase in average prices on new and existing subscribers as well as the impact of customer accounts purchased from a third party.
Gross customer revenue attrition, as compared to the prior period, remained relatively flat and included a decrease in voluntary and other disconnects offset by higher non-payment disconnects.
Cost of Revenue
During the three and nine months ended September 30, 2024, cost of revenue, as compared to the prior period, reflects an increase in installation and product costs of $28 million and $38 million, respectively, primarily due to a higher volume of outright sales transactions, as well as an increase in monitoring and related service costs during the nine months ended September 30, 2024 of $8 million, primarily due to higher interactive fees and other customer service initiatives.
Selling, General, and Administrative Expenses
During the three months ended September 30, 2024, as compared to the prior period, SG&A remained relatively flat, and included increased investments in technology, partially offset by improved cost efficiencies.
The increase in SG&A during the nine months ended September 30, 2024, as compared to the prior period, was primarily driven by:
•an increase in general and administrative costs of $48 million, which includes a current year charge and prior year credit related to legal settlements in an aggregate amount of approximately $35 million,
•an increase in the allowance for credit losses of $37 million, as a result of an increase in customer delinquencies, and
•an increase in selling costs of $26 million, primarily related to the amortization of deferred subscriber acquisition costs.
Depreciation and Intangible Asset Amortization
During the three months ended September 30, 2024, as compared to the prior period, depreciation and intangible asset amortization remained relatively flat.
During the nine months ended September 30, 2024, as compared to the prior period, depreciation and intangible asset amortization reflects a decrease in the amortization of customer relationship intangible assets of $33 million, primarily related to certain assets acquired as part of the acquisition of The ADT Security Corporation in 2016, partially offset by an increase in the amortization of acquired customer contracts of $23 million.
Merger, Restructuring, Integration, and other
During the three and nine months ended September 30, 2024, merger, restructuring, integration, and other decreased $8 million and $17 million, respectively, primarily due to third-party strategic optimization costs incurred during the prior period.
Interest Expense, Net
During the three months ended September 30, 2024, the increase in interest expense, net, as compared to the prior year period, was primarily driven by:
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•a decrease in net unrealized gains of $74 million on our interest rate swaps, partially offset by
•lower interest expense of $38 million primarily related to lower principal amounts outstanding on our First Lien Term Loan B and the redemption of our Term Loan A Facility and First Lien Notes due 2024 and,
•a non-recurring expense of $25 million recorded during the third quarter of 2023 associated with the reclassification from AOCI of historical losses related to certain interest rate swaps for which cash flows were probable of not occurring as a result of the partial redemption of our First Lien Term Loan B.
During the nine months ended September 30, 2024, the decrease in interest expense, net, as compared to the prior year period, was primarily driven by:
•lower interest expense of $103 million primarily related to lower principal amounts outstanding on our First Lien Term Loan B and the redemption of our Term Loan A Facility and First Lien Notes due 2024, as well as
•a non-recurring expense of $25 million as discussed above, partially offset by
•a decrease in net unrealized gains of $85 million on our interest rate swaps.
Other Income (Expense)
During the three and nine months ended September 30, 2024, the increases in other income (expense), as compared to the prior periods, was primarily due to income received under the Commercial TSA of $14 million and $36 million, respectively.
Income Tax Benefit (Expense)
During the three months ended September 30, 2024, income tax expense was $50 million, resulting in an effective tax rate for the period of 27.6%. This primarily represents the federal statutory tax rate of 21.0%, a state tax rate, net of federal benefits, of 6.2%, and an unfavorable impact from unrecognized tax benefits of 4.0%, partially offset by a favorable impact from a prior year tax return adjustment of 4.0%.
During the three months ended September 30, 2023, income tax expense was $34 million, resulting in an effective tax rate for the period of 21.5%. The effective tax rate primarily represents the federal statutory tax rate of 21.0%, and a state tax rate, net of federal benefits, of 5.1%, partially offset by favorable impacts from dispositions of 3.1% and prior year tax return adjustments of 1.2%.
During the nine months ended September 30, 2024, income tax expense was $167 million, resulting in an effective tax rate for the period of 28.3%. This primarily represents the federal statutory tax rate of 21.0%, a state tax rate, net of federal benefits, of 5.8%, unfavorable impacts from dispositions of 1.6%, and unrecognized tax benefits of 0.8%, partially offset by a favorable impact from a prior year tax return adjustment of 1.2%.
During the nine months ended September 30, 2023, income tax expense was $120 million, resulting in an effective tax rate for the period of 25.5%. The effective tax rate primarily represents the federal statutory tax rate of 21.0%, a state tax rate, net of federal benefits, of 5.8%, and an unfavorable impact from permanent non-deductible items of 1.2%, partially offset by a favorable impact from dispositions of 1.0%.
Deferred Tax Assets
We have a significant amount of deferred tax assets, against which we take valuation allowances that relate to the uncertainty of our ability to utilize these deferred tax assets in future periods. We review periodically those matters that can influence our decision as to whether or not a valuation allowance is appropriate. Among those matters considered are pending and enacted legislation. We will consider each quarter whether any developments to such legislation, together with the other factors we consider, require a valuation allowance.
We believe that our deferred tax assets for disallowed interest under Internal Revenue Code ("IRC") Section 163(j) will continue to grow from their current level. There is currently significant uncertainty in the matters we consider when determining whether it is appropriate to take additional valuation allowances. While we have not reported any material changes to our valuation allowances since our 2023 Annual Report, we may determine to do so in subsequent periods. Any material change to our valuation allowance would materially and adversely affect our operating results and may result in a net loss position for any given period.
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Net Operating Losses
During 2023, we utilized a significant portion of our net operating losses ("NOLs") to offset the gain generated from the sale of the Commercial Business. As of December 31, 2023, we disclosed that we expect to utilize our remaining NOLs during 2024. We expect to become a federal cash taxpayer in 2025 depending on future losses generated by the business, specifically with regard to the ADT Solar Exit.
NON-GAAP MEASURES
To provide investors with additional information in connection with our results as determined in accordance with GAAP, we disclose Adjusted EBITDA as a non-GAAP measure. This measure is not a financial measure calculated in accordance with GAAP, and it should not be considered as a substitute for net income, income (loss) from continuing operations, operating income, or any other measure calculated in accordance with GAAP, and may not be comparable to similarly titled measures reported by other companies.
Adjusted EBITDA
We believe Adjusted EBITDA is useful to investors to measure the operational strength and performance of our business. We believe the presentation of Adjusted EBITDA is useful as it provides investors additional information about our operating profitability adjusted for certain non-cash items, non-routine items we do not expect to continue at the same level in the future, as well as other items not core to our operations. Further, we believe Adjusted EBITDA provides a meaningful measure of operating profitability because we use it for evaluating our business performance, making budgeting decisions, and comparing our performance against other peer companies using similar measures.
We define Adjusted EBITDA as income (loss) from continuing operations adjusted for (i) interest; (ii) taxes; (iii) depreciation and amortization, including depreciation of subscriber system assets and other fixed assets and amortization of dealer and other intangible assets; (iv) amortization of deferred costs and deferred revenue associated with subscriber acquisitions; (v) share-based compensation expense; (vi) merger, restructuring, integration, and other items; (vii) impairment charges; and (viii) non-cash, non-routine, or other adjustments or charges not necessary to operate our business.
There are material limitations to using Adjusted EBITDA as it does not include certain significant items, including interest, taxes, depreciation and amortization, and other adjustments which directly affect our income (loss) from continuing operations (the most comparable GAAP measure). These limitations are best addressed by considering the economic effects of the excluded items independently and by considering Adjusted EBITDA in conjunction with income (loss) from continuing operations as calculated in accordance with GAAP.
The table below reconciles Adjusted EBITDA to income (loss) from continuing operations:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||
| (in thousands) | 2024 | 2023 | $ Change | 2024 | 2023 | $ Change | ||||||
|
Income (loss) from continuing operations
|
$ | 132,020 | $ | 123,259 | $ | 8,761 | $ | 422,096 | $ | 343,260 | $ | 78,836 |
| Interest expense, net | 161,830 | 146,850 | 14,980 | 358,980 | 401,261 | (42,281) | ||||||
| Income tax expense (benefit) | 50,235 | 34,427 | 15,808 | 166,505 | 119,987 | 46,518 | ||||||
| Depreciation and intangible asset amortization | 335,270 | 329,653 | 5,617 | 1,002,131 | 1,008,773 | (6,642) | ||||||
| Amortization of deferred subscriber acquisition costs | 56,119 | 47,945 | 8,174 | 165,454 | 138,145 | 27,309 | ||||||
| Amortization of deferred subscriber acquisition revenue | (87,980) | (77,471) | (10,509) | (257,538) | (220,779) | (36,759) | ||||||
| Share-based compensation expense | 10,107 | 9,683 | 424 | 39,466 | 30,678 | 8,788 | ||||||
|
Merger, restructuring, integration, and other
|
1,590 | 9,817 | (8,227) | 15,094 | 32,441 | (17,347) | ||||||
|
Other, net(1)
|
(500) | (718) | 218 | 13,481 | 522 | 12,959 | ||||||
|
Adjusted EBITDA (from continuing operations)
|
$ | 658,691 | $ | 623,445 | $ | 35,246 | $ | 1,925,669 | $ | 1,854,288 | $ | 71,381 |
(1) During 2024, primarily includes unrealized (gains) / losses on interest rate swaps presented within other income (expense).
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During the three months ended September 30, 2024, the increase in Adjusted EBITDA, as compared to the prior period, was primarily due to:
•higher M&S Revenue, net of the associated costs, of approximately $20 million, and
•improved cost efficiencies, including the benefit of $14 million of TSA income, partially offset by increased investments in technology.
During the nine months ended September 30, 2024, the increase in Adjusted EBITDA, as compared to the prior period, was primarily due to:
•higher M&S Revenue, net of the associated costs, of approximately $81 million, and
•higher other income of $51 million, which primarily includes $36 million of TSA income, partially offset by
•higher selling, general, and administrative expenses, excluding commissions of $68 million, associated with negative impacts from legal settlements of $35 million, higher provision for credit losses of $37 million, and increased investments in technology, partially offset by improved cost efficiencies.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital resources primarily consisted of the following:
| (in thousands) | September 30, 2024 | |
| Cash and cash equivalents | $ | 95,338 |
| Restricted cash and restricted cash equivalents | $ | 109,411 |
| Availability under First Lien Revolving Credit Facility | $ | 575,000 |
|
Uncommitted available borrowing capacity under 2020 Receivables Facility
|
$ | 126,882 |
|
Carrying amount of total debt outstanding, including finance leases
|
$ | 7,721,086 |
Liquidity
We expect our ongoing sources of liquidity to include cash generated from operations, borrowings under our credit facilities, and the issuance of equity and/or debt securities as appropriate given market conditions. Our future cash needs are expected to include cash for operating activities including working capital, principal and interest payments on our debt, capital expenditures, potential dividend payments to our stockholders, potential share repurchases under our Share Repurchase Plan, and from time to time, strategic investments, bulk account purchases, or other initiatives that we may undertake.
We are a highly leveraged company with significant debt service requirements and have both fixed-rate and variable-rate debt. We may periodically seek to repay, redeem, repurchase, or refinance our indebtedness, or seek to retire or purchase our outstanding securities through cash purchases in the open market, privately negotiated transactions, a 10b5-1 repurchase plan, or otherwise, and any such transactions may involve material amounts. Cash outflows for interest payments are not consistent between quarters, with larger outflows occurring in the first and third quarters, and may vary as a result of our variable rate debt.
We believe our cash position, available borrowing capacity under our credit agreements, and cash provided by operating activities are, and will continue to be, adequate to meet our operational and business needs in the next twelve months, as well as our long-term liquidity needs.
Material Cash Requirements
There have been no significant changes to our material cash requirements, commitments and contingencies, or off-balance sheet arrangements from those disclosed in our 2023 Annual Report, except as discussed below.
Share Repurchase Plan
On January 24, 2024, our Board of Directors announced the Share Repurchase Plan (the "Share Repurchase Plan"), pursuant to which we are authorized to repurchase, through January 29, 2025, up to a maximum aggregate amount of $350 million of shares of our Common Stock under the Share Repurchase Plan. As of September 30, 2024, we have approximately $257 million remaining under the Share Repurchase Plan.
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Subsequent event- In October 2024, we repurchased 5 million shares of Common Stock at a price per share of $6.40 for an aggregate purchase price of $32 million. As a result, we have approximately $225 million remaining under the Share Repurchase Plan.
ADT Solar Exit
During the nine months ended September 30, 2024, we paid approximately $21 million associated with the ADT Solar Exit. We do not expect the remaining cash expenditures to be material.
Other Contractual Obligations
As discussed in Note 11 "Commitments and Contingencies," during the three and nine months ended September 30, 2024, we made purchases toward our $200 million commitment under the Google Cloud Agreement Addendum of $9 million and $19 million, respectively.
In addition, during the three and nine months ended September 30, 2024, purchases toward our commitment to one of our vendors to purchase at least $320 million of security system equipment and components were approximately $44 million and $144 million, respectively.
Long-Term Debt
Significant changes and activity related to our long-term debt since our 2023 Annual Report are discussed below. Refer to Note 5 "Debt" for further discussion on our debt agreements and activity.
First Lien Credit Agreement
In April 2024, we amended and restated the First Lien Credit Agreement, which reduced the interest rate on our First Lien Term Loan B due 2030 from Term SOFR +2.50% to Term SOFR +2.25%.
In May 2024, we amended and restated the First Lien Credit Agreement, which included the exchange of $143 million principal amount of loans under our Term Loan A Facility for its First Lien Term Loan B due 2030. In addition, later that month, we further amended and restated the First Lien Credit Agreement, pursuant to which we incurred an additional $474 million of outstanding principal under the First Lien Term B Loan due 2030 and used the proceeds used to pay off the remaining outstanding balance of the Term Loan A Facility.
Proceeds and repayments of long-term borrowings include the impact of $646 million from the amendments described above. In addition, loss on extinguishment of debt and financing and consent fees were not material as a result of these amendments.
During the nine months ended September 30, 2024, we borrowed $325 million and repaid $325 million under the First Lien Revolving Credit Facility.
Subsequent event- In October 2024, we amended and restated the First Lien Credit Agreement to extend the maturity date of the First Lien Revolving Credit Facility to October 2029 (as extended, the "Extended First Lien Revolving Credit Facility"), subject to a springing maturity of 91 days prior to the maturity date of certain long-term indebtedness, and obtain an additional $225 million of Extended First Lien Revolving Credit Facility commitments. After giving effect to the amendment, the aggregate amount of commitments under the Extended First Lien Revolving Credit Facility is $800 million. Borrowings under the Extended First Lien Revolving Credit Facility bear interest at a rate equal to either (a) Term SOFR with a floor of zero or (b) a base rate ("Base Rate") determined by reference to the highest of (i) the federal funds rate plus 0.50% per annum, (ii) the rate of interest per annum last quoted by The Wall Street Journal as the "Prime Rate" in the United States and (iii) the one-month adjusted term SOFR plus 1.00% per annum, in each case, plus an applicable margin of 2.00% per annum for Term SOFR loans and 1.00% per annum for Base Rate loans, subject to two step-downs based on certain specified net first lien leverage ratios. In addition, the amendment reduced the commitment fee in respect of the Extended First Lien Revolving Credit Facility to 0.30% per annum in respect of the unutilized commitments thereunder, subject to two step-downs based on certain specified net first lien leverage ratios.
Term Loan A Facility Redemption
In May 2024 we exchanged $143 million of loans under our Term Loan A Facility for our First Lien Term Loan B due 2030, as discussed above. In addition, later that month, we redeemed the remaining outstanding principal balance of $474 million of our Term Loan A Facility, excluding accrued and unpaid interest, using proceeds under the First Lien Term Loan B due 2030, as discussed above. As a result, the Term Loan A Facility has been terminated.
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First Lien Notes due 2024 Redemption
In April 2024, we redeemed the remaining outstanding principal balance of $100 million of our First Lien Notes due 2024, excluding accrued and unpaid interest, using proceeds from the First Lien Revolving Credit Facility.
2020 Receivables Facility
In March 2024, we amended the agreement governing the 2020 Receivables Facility, pursuant to which the uncommitted revolving period was extended from March 2024 to April 2024.
In April 2024, we further amended the agreement governing the 2020 Receivables Facility, pursuant to which, among other things, the borrowing capacity was increased from $500 million to $550 million and the uncommitted revolving period was extended from April 2024 to April 2025. In addition, proceeds and repayments of long-term borrowings include the impact of $32 million from the amendments described above.
As of September 30, 2024, the outstanding balance was $423 million.
Solar Receivables Facility
On August 2, 2023, we entered into the Solar Receivables Facility Financing Agreement to finance receivables generated by the installation of residential solar systems, which, among other things, provides for an uncommitted revolving loan facility in the aggregate principal amount of up to $300 million. During August 2024, the Solar Receivables Facility's uncommitted revolving period expired. We did not borrow any amounts under the Solar Receivables Facility prior to its expiration.
Debt Covenants
As of September 30, 2024, we were in compliance with all financial covenant and other maintenance tests for all our debt obligations. We do not believe there is a material risk of future noncompliance with our financial covenant and other maintenance tests.
Dividends
During the nine months ended September 30, 2024 and 2023, we declared aggregate dividends of $141 million ($0.055 per share per quarter) and $91 million ($0.035 per share per quarter) on our Common Stock, respectively, and $9 million ($0.055 per share per quarter) and $6 million ($0.035 per share per quarter) on our Class B Common Stock, respectively.
On October 24, 2024, we announced a dividend of $0.055 per share to holders of Common Stock and Class B Common Stock of record on December 12, 2024, which will be paid on January 9, 2025.
Cash Flow Analysis
The amounts and discussion below include cash flows from both continuing operations and discontinued operations, as appropriate, consistent with the presentation on the Statements of Cash Flows.
| Nine Months Ended September 30, | ||||||
| (in thousands) | 2024 | 2023 | $ Change | |||
| Net cash provided by (used in): | ||||||
| Operating activities | $ | 1,425,223 | $ | 1,245,694 | $ | 179,529 |
| Investing activities | $ | (1,034,364) | $ | (988,081) | $ | (46,283) |
| Financing activities | $ | (316,060) | $ | (275,129) | $ | (40,931) |
Cash Flows from Operating Activities
The increase in net cash provided by operating activities, as compared to the prior period, was primarily due to a decrease in cash interest of $130 million primarily related to reduced principal balances on our debt, the benefit of lower outflows in the current year related to our Solar business, improved operating performance, and lower employee-related payments. This
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increase was partially offset by the benefit received in the prior period associated with the results of the former Commercial Business as well as legal settlements during the current and prior period.
The remainder of the activity related to changes in assets and liabilities due to the volume and timing of other operating cash receipts and payments with respect to when the transactions are reflected in earnings. Refer to the discussions above under "-Results of Operations" for further details.
Cash Flows from Investing Activities
The increase in net cash used in investing activities, as compared to the prior period, was primarily due to:
•an increase in dealer generated customer accounts and bulk account purchases of $88 million primarily due to higher bulk account purchases from a third party, and
•a $21 million payment associated with the settlement of post-closing adjustments related to the sale of the former Commercial Business, partially offset by
•a decrease in subscriber system assets expenditures of $74 million primarily due to a higher volume of outright sales and fewer customer additions.
Cash Flows from Financing Activities
The increase in net cash used in financing activities, as compared to the prior period, was primarily due to:
•share repurchases during the current period of $93 million, and
•an increase in net repayments on our 2020 Receivables Facility of $80 million, partially offset by
•a decrease in net repayments on our long-term debt of $122 million primarily related to higher redemptions during the prior period.
CRITICAL ACCOUNTING ESTIMATES
We disclosed our critical accounting estimates in our 2023 Annual Report, which include estimates prepared in accordance with GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the financial condition or results of operations.
Critical accounting estimates are based on, among other things, estimates, assumptions, and judgments made by management that include inherent risks and uncertainties. Our estimates are based on relevant information available at the end of each period. Actual results could differ materially from these estimates under different assumptions or market conditions.
There were no material changes in our critical accounting estimates since our 2023 Annual Report.
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CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains certain information that may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and are made in reliance on the safe harbor protections provided thereunder. While we have specifically identified certain information as being forward-looking in the context of its presentation, we caution you that all statements contained in this Form 10-Q that are not clearly historical in nature, including statements regarding the ADT Solar Exit and the expected costs and benefits of such exit; the Commercial Divestiture; the expected timetable for realizing expected benefits and synergies of the Commercial Divestiture and ADT Solar Exit including that the costs of the ADT Solar Exit may exceed our best estimates; the integration of strategic bulk purchases of customer accounts; the strategic investment by and long term partnership with State Farm; repurchases of shares of the Company's common stock under the authorized share repurchase program, anticipated financial performance, including the Company's ability to achieve its stated guidance metrics and to reduce debt or improve leverage ratios, or to achieve or maintain its long-term leverage goals; management's plans and objectives for future operations; the successful development, commercialization, and timing of new or joint products; the expected timing of product commercialization with State Farm or any changes thereto, including the ADT home security program for State Farm; business prospects; outcomes of regulatory proceedings; market conditions; our ability to deploy our business continuity and disaster plans and procedures to successfully respond to catastrophic events; our strategic partnership and ongoing relationship with Google; the expected timing of product commercialization with Google or any changes thereto; the successful internal development, commercialization, and timing of our next generation platform and innovative offerings; the successful conversion of customers who continue to utilize outdated technology; the current and future market size for existing, new, or joint products; any stated or implied outcomes with regards to the foregoing; and other matters. Any stated or implied outcomes with regards to the foregoing are forward-looking.
Without limiting the generality of the preceding sentences, any time we use the words "ongoing," "expects," "intends," "will," "anticipates," "believes," "confident," "continue," "propose," "seeks," "could," "may," "should," "estimates," "forecasts," "might," "goals," "objectives," "targets," "planned," "projects," and, in each case, their negative or other various or comparable terminology, and similar expressions, we intend to clearly express that the information deals with possible future events and is forward-looking in nature. However, the absence of these words or similar expressions does not mean that a statement is not forward-looking.
For ADT, particular uncertainties that could cause our actual results to be materially different than those expressed in our forward- looking statements include, without limitation:
•our ability to effectively implement our strategic partnership with, commercialize products with, or utilize any of the amounts invested in us by State Farm or provided by State Farm for research and development or other purposes;
•our ability to keep pace with rapid technological changes, including the development of our next-generation platform, and industry changes;
•our ability to effectively implement our strategic partnership with or utilize any of the amounts invested in us by Google;
•the impact of supply chain disruptions;
•our ability to maintain and grow our existing customer base;
•our ability to sell our products and services or launch new products and services in highly competitive markets, including the home security and automation market, and to achieve market acceptance with acceptable margins;
•our ability to successfully upgrade obsolete equipment installed at our customers' premises in an efficient and cost-effective manner;
•changes in law, economic and financial conditions, including tax law changes, changes to privacy requirements, changes to telemarketing, email marketing and similar consumer protection laws, interest volatility, and trade tariffs and restrictions applicable to the products we sell;
•any material changes to the valuation allowances we take with respect to our deferred tax assets;
•the impact of information technology, cybersecurity, or data security breaches, including the incidents disclosed in the Current Reports on Form 8-K filed with the SEC on August 8, 2024 (the "August Incident") and October 7, 2024 (the "October Incident" and together with the August Incident, the "Cybersecurity Incidents");
•the Company's ongoing assessments of the impacts of the Cybersecurity Incidents; the Company's expectations regarding its ability to contain and remediate the Cybersecurity Incidents and to effectively implement counter measures intended to safeguard the Company's information technology assets and operations; the impact of the Cybersecurity Incidents on the Company's relationships with customers, employees and regulators; the Company's ability to coordinate effectively with its third party business partner to address the October Incident; legal, reputational and financial risks resulting from the Cybersecurity Incidents; and that any future, or still undetected, cybersecurity
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related incident, whether an attack, disruption, intrusion, denial of service, theft or other breach, including any such incident related to or arising from ADT's business partners or other third parties, could result in unauthorized access to, or disclosure of, data, resulting in claims, costs and reputational harm that could negatively affect our actual results of operations or financial condition;
•our dependence on third-party providers, suppliers, and dealers to enable us to produce and distribute our products and services in a cost-effective manner that protects our brand;
•our ability to successfully implement an equipment ownership model that best satisfies the needs of our customers and to successfully implement and maintain our receivables securitization financing agreement or similar arrangements;
•our ability to successfully pursue alternate business opportunities and strategies;
•our ability to integrate various companies we have acquired in an efficient and cost-effective manner;
•the amount and timing of our cash flows and earnings, which may be impacted by customer, competitive, supplier and other dynamics and conditions;
•our ability to maintain or improve margins through business efficiencies; and
•the other factors that are described under the heading "Risk Factors" in our last Annual Report on Form 10-K for the year ended December 31, 2023.
Forward-looking statements and information involve risks, uncertainties, and other factors that could cause actual results to differ materially from those expressed or implied in, or reasonably inferred from, such statements, including without limitation, the risks and uncertainties disclosed or referenced under the heading "Risk Factors" in Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A in our 2023 Annual Report. Therefore, caution should be taken not to place undue reliance on any such forward-looking statements. Much of the information in this report that looks toward future performance is based on various factors and important assumptions about future events that may or may not actually occur. As a result, our operations and financial results in the future could differ materially and substantially from those we have discussed in the forward-looking statements included in this Quarterly Report on Form 10-Q. Any forward-looking statement made in this Quarterly Report on Form 10-Q speaks only as of the date on which it is made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise unless required by law.
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 2023 Annual Report.
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. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of September 30, 2024, our disclosure controls and procedures were 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.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2024, there were no changes in our internal control over financial reporting ("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 ICFR.
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During 2023, ADT began a multi-year IT transformation project by which we are migrating much of ADT's infrastructure to the cloud. The initiative includes certain aspects of our customer relationship management and enterprise resource planning systems. In 2024, we nationally launched our customer relationship management system for our residential pro-install customers, which resulted in changes to our processes and procedures as well as to our ICFR; however, we concluded that this launch has not currently materially affected our ICFR. In addition, the transition to our new enterprise resource planning system has recently started and is not planned to be implemented until the second half of 2025.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
See Note 11 "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 2023 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 2023 Annual Report, except as discussed below:
While we are no longer a "controlled company," we may continue to rely on exemptions from certain NYSE corporate governance requirements during a one-year transition period.
Our Common Stock is listed on the New York Stock Exchange (the "NYSE"). Prior to March 19, 2024, Apollo controlled more than 50% of the combined voting power of the Company with respect to the election of directors, and we were considered a "controlled company" for the purposes of the NYSE rules and corporate governance standards. While we were a "controlled company" under the NYSE rules, we availed ourselves of applicable "controlled company" exemptions, which exempted us from certain requirements, including the requirements that we have a majority of independent directors on our Board of Directors and that the Compensation Committee of our Board of Directors (the "Compensation Committee") and Nominating and Corporate Governance Committee of our Board of Directors (the "Nominating and Corporate Governance Committee") be comprised entirely of independent directors.
On March 19, 2024, following a registered secondary offering of the Company's Common Stock by certain Apollo affiliates (and the Company's concurrent repurchase from the underwriters of 15 million shares of Common Stock that were the subject of the offering), including the exercise of the underwriters' overallotment option which closed on that date, Apollo's combined voting power with respect to the election of directors fell to 49.5%, and we ceased to be a controlled company as of that date. Under the NYSE rules, a company that ceases to be a controlled company must comply with the independent board committee requirements as they relate to the nominating and corporate governance and compensation committees on the following phase-in schedule: (i) at least one independent committee member at the time the company ceases to be a controlled company; (ii) at least a majority of independent committee members within 90 days of the date the company ceases to be a controlled company; and (iii) all independent committee members within one year of the date the company ceases to be a controlled company. Additionally, the NYSE rules provide a 12-month phase-in period from the date a company ceases to be a controlled company to comply with the majority independent board requirement.
As of the date of this report, we have two independent committee members on each of the Nominating and Corporate Governance and the Compensation Committees of the Board, our Audit Committee is comprised entirely of independent directors and we are in compliance with the phase-in requirements described above. Until we are fully subject to these requirements, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.
Apollo continues to exert significant influence over us, and its interests may conflict with our interests and the interests of other stockholders.
While we are no longer a "controlled company," Apollo continues to be able to exert significant influence over us and as of September 30, 2024 had the right to, among other things, nominate 50% of our directors pursuant to the Amended and Restated Stockholders Agreement, dated December 14, 2018, (the "Stockholders Agreement") between the Company and Ultimate Parent and the Co-Investors (as defined therein). The interests of Apollo and its affiliates, including funds affiliated with Apollo, could conflict with or differ from our interests or the interests of our other stockholders. For example, the concentration of ownership held by funds affiliated with Apollo could (i) delay, defer, or prevent a change in control of our Company, (ii) impede a merger, takeover, or other business combination which may otherwise be favorable for us or that another stockholder may otherwise view favorably or (iii) cause us to enter into transactions or agreements that are not in the best interests of all stockholders. Additionally, Apollo and its affiliates are in the business of making investments in companies and may, from time to time, acquire and hold interests in or provide advice to businesses that compete directly or indirectly with us, or are suppliers or customers of ours. Apollo and its affiliates may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us. Any such investment may increase the
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potential for the conflicts of interest discussed in this risk factor. So long as funds affiliated with Apollo continue to directly or indirectly own a significant amount of our equity, even if such amount is less than 50%, Apollo and its affiliates will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions.
In addition, we are party to the Stockholders Agreement with Ultimate Parent and the Co-Investors. The Stockholders Agreement specifies that we will not take certain significant actions without the prior consent of Ultimate Parent, including, among other things, hiring or terminating any Executive Officer of our company, designating any new Executive Officer of our company, entering into certain merger, consolidation or other "change of control" transactions or changing the size of our Board. The Stockholders Agreement also specifies that Ultimate Parent has the right to nominate individuals for election to our Board and that we are, to the fullest extent permitted by applicable law, required to nominate and recommend that each such individual be elected as a director, and the right to designate a member to each committee of our Board. Relatedly, our amended and restated Bylaws (the "Bylaws") provide that Ultimate Parent and the Co-Investors have the right, subject to certain conditions, to have their representatives appointed to serve on committees of our Board.
Cybersecurity attacks or threats or other unauthorized access or attempts to access our systems, or those of third parties, could compromise the security of our systems and otherwise disrupt our normal operations which could have a material adverse effect on our reputation, business, results of operations or financial condition.
We collect, process, transmit, and store sensitive and confidential information related to our customers, employees and business partners, as well as proprietary information related to our business, such as business plans and license agreements. This makes us vulnerable to cyber attacks and other attempts to gain unauthorized access to our information and technology networks and systems, including as a result of work from home environments and third-party systems that are interconnected with ours. Cyber attacks may come from phishing, malware, ransomware, or other methods. While we implement security measures within our products, services, operations, and, to a limited extent, within third parties' systems, cyber attacks continue to evolve in sophistication and increase in volume and frequency and we have not in the past been and may not in the future be able to timely detect or prevent cybersecurity breaches on our systems or within third-party systems that are interconnected with ours, including the unauthorized access, capture, or alteration of information; the exposure or exploitation of potential security vulnerabilities; distributed denial of service attacks; the installation of malware or ransomware; acts of vandalism; computer viruses; or misplaced data or data loss that could materially adversely impact our reputation, business, results of operations or financial condition. Despite our security measures, we and third parties whose systems are interconnected with ours have been the target of and/or subject to a number of these forms of cyber attacks, including the incidents disclosed in the Current Reports on Form 8-K filed with the SEC on August 8, 2024 and October 7, 2024, respectively, the latter of which (referred to herein as the "October Incident") we are still actively investigating, and we will likely continue to be the target of and/or subject to such attacks in the future. These cyber attacks have in the past resulted and may in the future result in certain impacts on our Company, including disrupted operations, system instability, theft of our confidential or proprietary or other information, increased cybersecurity protection, consulting and legal costs, litigation, and reputational damage. In addition, cyber attacks could result in misstated or misappropriated financial data or impair our ability to effectively manage our financial reporting process. We may be subject to regulatory scrutiny or exposed to additional litigation or other claims by affected persons including our customers, employees, and business partners. We are aware of one putative class action that was filed by a former ADT employee on October 18, 2024, alleging negligence and breach of implied contract arising out of the October Incident. Additionally, while our investigation is continuing, we have notified one state regulator about the October Incident and may additionally need to notify regulatory agencies in other states and individuals. While we maintain insurance coverage that is intended to address certain aspects of data security risks, such insurance coverage may not be sufficient to cover all losses or all types of claims that may arise.
In addition, following the Commercial Divestiture, certain of our information systems and our information security protocols remain interdependent on those of our divested Commercial Business, including dependence for a transitional period on its information systems for billing and alarm monitoring for a small portion of our clients' accounts. Moreover, certain employees of our former Commercial Business have had and will continue to have access to our financial and other internal systems for a period of time. For more information on the continuing services relationship between ADT and our former Commercial Business, see the risk factor included in our 2023 Annual Report entitled, "We may not achieve some or all of the strategic and financial benefits that we expect to achieve from the Commercial Divestiture or the Solar Exit which could have a material adverse effect on our financial condition and results of operations."
This interconnection with our former Commercial Business was exploited by an unauthorized actor in the October Incident and exposes us to increased risks related to cyber attacks. Cyber attacks and threats at our former Commercial Business have in the past led and may in the future lead to cyber attacks and threats to our systems and assets. Any measures we have taken or may take in the future to protect against theft and unauthorized system access may prove insufficient and cannot provide absolute protection against employees, including employees of our former Commercial Business, who may wrongfully or negligently use or access such technology, intellectual property, or information, or negligently or wrongfully disclose such technology and intellectual, confidential, proprietary, or any other information to third parties, including our competitors.
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Our business also requires us to share confidential information with suppliers and other third parties. Third parties, including our partners and vendors, could also be a source of cybersecurity risk to us, or cause disruptions to our normal operations, in the event of a failure of their own products, components, networks, cybersecurity systems, and infrastructure. For example, in 2021, one of our vendors, the Ultimate Kronos Group ("Kronos"), which is a workforce management and human capital management cloud provider, experienced a ransomware attack that resulted in Kronos temporarily decommissioning the functionality of certain of its cloud software, requiring us to find alternative methods to properly pay our employees and to monitor the status of the work in progress of certain of our projects in a timely manner. In addition, some of the products we sell and provide services for are categorized as Internet of Things and may become targets for cybercriminals and other actors attempting to gain unauthorized access. The significant increase in the number of our employees working from home further exposes us to security risks. Although we take steps to secure confidential, proprietary or other information that is provided to or accessible by third parties working on our behalf, we cannot be certain that advances in criminal capabilities, new discoveries in the field of cryptography, or other developments will not compromise or breach the technology protecting the networks that access our products and services.
A significant actual or perceived (whether or not valid) theft, loss, fraudulent use or misuse of customer, employee, or other personally identifiable data, whether by us, our partners and vendors, or other third parties, or as a result of employee error or malfeasance or otherwise, non-compliance with applicable industry standards or our contractual or other legal obligations regarding such data, or a violation of our privacy and information security policies with respect to such data, could result in significant remediation costs, administrative fines, litigation or other claims by third parties, or regulatory actions against us. Such an event could additionally result in unfavorable publicity and therefore materially and adversely affect the market's perception of the security and reliability of our products and services and our credibility and reputation with our customers, which may lead to customer dissatisfaction and could result in lost sales and increased customer revenue attrition.
In addition, we depend on our information technology infrastructure, and that of our third parties, for business-to-business and business-to-consumer electronic commerce. Cyber attacks to, or threats against, this infrastructure could create prolonged system disruptions and shutdowns that could negatively impact our operations. Increasingly, our products and services are accessed through the Internet, and a significant number of service calls happen virtually, and cyber attacks and/or threats in connection with the delivery of our services via the Internet may affect us and could be detrimental to our reputation, business, financial condition, results of operations, and cash flows. There can be no assurance that our continued investments in new and emerging technology and other solutions to protect our network and information systems will prevent any of the risks described herein. In addition, any delay in making such investments due to conflicting budget priorities or otherwise could have a material adverse effect on our business, financial condition, results of operations, and cash flows. There can be no assurance that our insurance will be sufficient to protect against all our losses from any future disruptions or cyber attacks on our systems or other events as described herein.
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 nine months ended September 30, 2024.
Use of Proceeds from Registered Equity Securities
We did not receive any proceeds from sales of registered equity securities during the nine months ended September 30, 2024.
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Issuer Purchases of Equity Securities
The following table presents repurchases of shares of the Company's Common Stock during the three months ended September 30, 2024:
|
Period
|
Total Number of Shares Purchased
|
Average Price Paid Per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
|
Maximum Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs
(in thousands)
|
||
|
July 1, 2024 - July 31, 2024
|
- | $ | - | - | $ | 256,644 |
|
August 1, 2024 - August 31, 2024
|
- | $ | - | - | $ | 256,644 |
|
September 1, 2024 - September 30, 2024
|
- | $ | - | - | $ | 256,644 |
|
Total
|
- | $ | - | - | $ | 256,644 |
_________________
(1) On January 24, 2024, the Company's Board of Directors announced the Share Repurchase Plan, pursuant to which the Company is authorized to repurchase, through January 29, 2025, up to a maximum aggregate amount of $350 million of shares of the Company's Common Stock. The Company may effect these repurchases pursuant to one or more open market or private transactions, including pursuant to a plan that qualifies for the affirmative defense provided by Rule 10b5‐1 under the Exchange Act, or pursuant to one or more accelerated share repurchase agreements. The Company is not obligated to repurchase any of its shares of Common Stock, and the timing and amount of any repurchases will depend on legal requirements, market conditions, stock price, the availability of the safe harbor provided by Rule 10b-18 under the Exchange Act, alternative uses of capital, and other factors.
Subsequent event- In October 2024, the Company repurchased 5 million shares of Common Stock at a price per share of $6.40 for an aggregate purchase price of $32 million. As a result, the Company has approximately $225 million remaining under the Share Repurchase Plan.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
None.
ITEM 5. OTHER INFORMATION.
During the three months ended September 30, 2024, 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.
MIRA Amendment
On August 1, 2024, the Amended and Restated Management Investor Rights Agreement among the Company, Ultimate Parent, and certain security holders (the "MIRA"), was amended to, among other things, limit the applicability of the MIRA to certain current and former members of the Company's executive leadership team (the "MIRA Amendment").
The foregoing description of the MIRA Amendment does not purport to be complete and is qualified in its entirety by reference to the full text of the MIRA Amendment, which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q.
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.
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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 | |
|
10-Q
|
3.1
|
8/1/2024
|
||
| 8-K | 3.1 | 9/18/2023 | ||
| 10-Q |
10.6
|
8/1/2024 | ||
| 8-K |
10.1
|
10/1/2024
|
||
|
10.3*
|
Form of Indemnification Agreement by and between the Company and each of its Directors and Executive Officers
|
|||
|
31.1*
|
Certification of CEO, pursuant to SEC Rule 13a-14(a) and 15d-14(a)
|
|||
|
31.2*
|
Certification of CFO, pursuant to SEC Rule 13a-14(a) and 15d-14(a)
|
|||
|
32.1**
|
Certification by the CEO, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|||
|
32.2**
|
Certification by the CFO, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
|
|||
| 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 |
^ Certain schedules and similar attachments have been omitted. The Company agrees to furnish supplementally a copy of any omitted schedule or attachment to the SEC upon its request.
* Filed herewith.
** Furnished herewith.
+ Management contract or compensatory plan or arrangement.
48
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: | October 24, 2024 | By: | /s/ Jeffrey Likosar |
| Name: | Jeffrey Likosar | ||
| Title: |
President, Corporate Development and Transformation, and Chief Financial Officer (Principal Financial Officer) |
||
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