NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Description of Business and Summary of Significant Accounting Policies
Organization and Business
ADT Inc. (formerly named Prime Security Services Parent Inc.), a company incorporated in the State of Delaware, and its wholly owned subsidiaries (collectively, the “Company”), is a leading provider of security, automation, and smart home solutions serving consumer and business customers in the United States (“U.S.”). The Company is majority-owned by Prime Security Services TopCo Parent, L.P. (“Ultimate Parent”). Ultimate Parent is owned by Apollo Investment Fund VIII, L.P. and related funds that are directly or indirectly managed by Apollo Global Management, Inc. (together with its subsidiaries and affiliates, “Apollo” or the “Sponsor”), and management investors.
On July 1, 2015, the Company acquired Protection One, Inc. and ASG Intermediate Holding Corp. (collectively, the “Formation Transactions”), which were instrumental in the formation of the Company. Prior to the Formation Transactions, the Company was a holding company with no assets or liabilities. On May 2, 2016, the Company acquired The ADT Security Corporation (formerly named The ADT Corporation) (“The ADT Corporation”) (“ADT Acquisition”). The Company primarily conducts business under the ADT brand name.
In January 2018, the Company completed an initial public offering (“IPO”) and its common stock began trading on the New York Stock Exchange under the symbol “ADT.”
Significant Accounting Policies
The condensed consolidated financial statements are prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”), which require 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.
Basis of Presentation and Consolidation
The condensed consolidated financial statements included herein are unaudited, but in the opinion of management, such financial statements include all adjustments, consisting of normal recurring adjustments, necessary to summarize fairly the Company’s financial position, results of operations, and cash flows for the interim periods presented. The interim results reported in these condensed consolidated financial statements should not be taken as indicative of results that may be expected for future interim periods or the full year. For a more comprehensive understanding of the Company and its interim results, these condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements included in its Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Annual Report”), which was filed with the U.S. Securities and Exchange Commission (“SEC”) on March 11, 2019. The Company’s accounting policies used in the preparation of these condensed consolidated financial statements do not differ from those used for the annual consolidated financial statements, unless otherwise noted.
The Condensed Consolidated Balance Sheet as of December 31, 2018 included herein was derived from the audited consolidated financial statements as of that date but does not include all the footnote disclosures from the annual consolidated financial statements.
The accompanying condensed consolidated financial statements include the accounts of ADT Inc. and its wholly owned subsidiaries. All intercompany transactions have been eliminated. Certain prior period amounts have been reclassified to conform with the current period presentation.
The Company has one operating and reportable segment, which is based on the manner in which the Chief Executive Officer, who is the chief operating decision maker, evaluates performance and makes decisions about how to allocate resources.
Cash and Cash Equivalents and Restricted Cash and Cash Equivalents
The following table provides a reconciliation of the amount of cash and cash equivalents and restricted cash and cash equivalents reported within the Condensed Consolidated Balance Sheets to the same of such amounts shown in the Condensed Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30,
2019
|
|
December 31,
2018
|
Cash and cash equivalents
|
$
|
155,774
|
|
|
$
|
363,177
|
|
Restricted cash and cash equivalents in prepaid expenses and other current assets
|
600
|
|
|
3,985
|
|
Cash and cash equivalents in assets held for sale
|
4,221
|
|
|
—
|
|
Cash and cash equivalents and restricted cash and cash equivalents at end of period
|
$
|
160,595
|
|
|
$
|
367,162
|
|
Subscriber System Assets, net and Deferred Subscriber Acquisition Costs, net
The Company capitalizes certain costs associated with transactions in which the Company retains ownership of the security system as well as incremental selling expenses related to acquiring customers. These costs include equipment, installation costs, and other incremental costs and are recorded in subscriber system assets, net and deferred subscriber acquisition costs, net in the Condensed Consolidated Balance Sheets. These assets embody a probable future economic benefit as they contribute to the generation of future monitoring and related services revenue for the Company.
Subscriber system assets, net represent capitalized equipment and installation costs incurred in connection with transactions in which the Company retains ownership of the security system. Upon customer termination, the Company may retrieve such assets. Depreciation expense relating to subscriber system assets is included in depreciation and intangible asset amortization in the Condensed Consolidated Statements of Operations and was $142 million and $137 million for the three months ended September 30, 2019 and 2018, respectively, and was $423 million and $410 million for the nine months ended September 30, 2019 and 2018, respectively.
The gross carrying amount, accumulated depreciation, and net carrying amount of the Company’s subscriber system assets as of September 30, 2019 and December 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30,
2019
|
|
December 31,
2018
|
Gross carrying amount
|
$
|
4,501,992
|
|
|
$
|
4,304,279
|
|
Accumulated depreciation
|
(1,726,716
|
)
|
|
(1,396,578
|
)
|
Subscriber system assets, net
|
$
|
2,775,276
|
|
|
$
|
2,907,701
|
|
Deferred subscriber acquisition costs, net represent incremental selling expenses (primarily commissions) related to acquiring customers. Amortization expense relating to deferred subscriber acquisition costs included in selling, general and administrative expenses in the Condensed Consolidated Statements of Operations was $21 million and $16 million for the three months ended September 30, 2019 and 2018, respectively, and $59 million and $43 million for the nine months ended September 30, 2019 and 2018, respectively.
Subscriber system assets and any related deferred subscriber acquisition costs resulting from customer acquisitions are accounted for on a pooled basis based on the month and year of acquisition. The Company amortizes its pooled subscriber system assets and related deferred subscriber acquisition costs using an accelerated method over the estimated life of the customer relationship, which is 15 years.
Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of September 30, 2019 and December 31, 2018 consisted of the following:
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30,
2019
|
|
December 31,
2018
|
Accrued interest
|
$
|
110,569
|
|
|
$
|
85,046
|
|
Payroll-related accruals
|
95,771
|
|
|
105,089
|
|
Other accrued liabilities
|
285,202
|
|
|
207,944
|
|
Accrued expenses and other current liabilities
|
$
|
491,542
|
|
|
$
|
398,079
|
|
Radio Conversion Costs
In February 2019, the Company received notice from AT&T, the Company’s largest wireless network provider, that it will be retiring its 3G network in 2022, which is also the year the Code-Division Multiple Access (“CDMA”) network used to provide services to some of the Company’s customers is being retired. The Company currently provides services to approximately 3.4 million customer sites that use 3G or CDMA cellular equipment, which number is decreasing on a monthly basis in the ordinary course of business due to attrition, upgrades, and repairs. The Company’s plans to address this transition are not yet finalized, and the impact involves numerous estimates and variables. Among other factors, the Company will look to reduce any applicable costs to the Company, such as hardware costs currently estimated to be less than $90 per site, by exploring cost-sharing opportunities and working with suppliers, carriers, and customers and to increase revenue by using the transition as an opportunity to sell new products and services in conjunction with replacing the radio and to more rapidly transition customers to the Company’s new Command and Control technology. The Company currently estimates that aggregate net expenditures could be between $200 million to $325 million through 2022. For 2019, the Company expects to incur net costs of approximately $25 million to $35 million associated with radio conversion costs.
Fair Value of Financial Instruments
The Company’s financial instruments primarily consist of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, 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 values.
Cash Equivalents - Included in cash and cash equivalents are investments in money market mutual funds, which were $124 million as of September 30, 2019 and $221 million as of December 31, 2018. These investments are classified as Level 1 fair value measurements.
Long-Term Debt Instruments - The fair values of the Company’s debt instruments are determined using broker-quoted market prices, which are classified as Level 2 fair value measurements.
The carrying value and fair value of the Company’s long-term debt instruments that are subject to fair value disclosures as of September 30, 2019 and December 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
(in thousands)
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
Debt instruments, excluding finance lease obligations
|
$
|
9,771,289
|
|
|
$
|
10,165,580
|
|
|
$
|
9,952,385
|
|
|
$
|
9,828,274
|
|
Derivative Financial Instruments - Derivative financial instruments are reported at fair value as either assets or liabilities in the Condensed Consolidated Balance Sheets. These fair values are primarily calculated using discounted cash flow valuation techniques that incorporate observable inputs, such as quoted forward interest rates, and incorporate credit risk adjustments to reflect the risk of default by the counterparty or the Company. The resulting fair values are classified as Level 2 fair value measurements. Refer to Note 8 “Derivative Financial Instruments” for further discussion.
Guarantees
In the normal course of business, the Company is liable for contract completion and product performance. The Company does not believe such obligations will significantly affect its financial position, results of operations, or cash flows. The Company had no material guarantees other than in standby letters of credit related to its insurance programs. The Company’s guarantees totaled $57 million and $54 million as of September 30, 2019 and December 31, 2018, respectively.
Recently Adopted Accounting Pronouncements
Financial Accounting Standards Board Accounting Standards Update (“ASU”) 2016-02, Leases, and related amendments, require lessees to recognize a right-of-use asset and a lease liability for substantially all leases and to disclose key information about leasing arrangements and aligns certain underlying principles of the lessor model with the revenue standard. The Company adopted this guidance in the first quarter of 2019 using the optional transition method, which allows entities to apply the guidance at the adoption date and recognize a cumulative effect adjustment to the opening balance of retained earnings, if any, in the period of adoption with no restatement of comparative periods. As part of the adoption, the Company elected to apply the package of transitional practical expedients under which the Company did not reassess prior conclusions about lease identification, lease classification,
and initial direct costs of existing leases as of the date of adoption. Additionally, the Company elected lessee and lessor practical expedients to not separate non-lease components from lease components. The Company did not elect to apply the hindsight transitional practical expedient to reassess the lease terms of existing lease arrangements as of the date of adoption or the short-term lease recognition exemption.
Upon transition to the guidance as of the date of adoption, the Company recognized operating lease liabilities in the Condensed Consolidated Balance Sheet, with a corresponding amount of right-of-use assets, net of amounts reclassified from other assets and liabilities that are required to be presented as a component of operating lease liabilities or right-of-use assets. Refer to Note 13 “Leases” for further discussion regarding the amount of operating lease liabilities and right-of-use assets recognized as of the date of adoption. Further, the adoption did not have a material effect on the Condensed Consolidated Statements of Operations or Cash Flows.
The net impact of the adoption to the line items in the Condensed Consolidated Balance Sheet was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
December 31, 2018
|
|
Lease Standard Adoption Adjustment
|
|
January 1, 2019
|
Assets
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
129,811
|
|
|
$
|
(885
|
)
|
|
$
|
128,926
|
|
Intangible assets, net
|
|
7,488,194
|
|
|
(658
|
)
|
|
7,487,536
|
|
Other assets
|
|
120,279
|
|
|
125,170
|
|
|
245,449
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
Accrued expenses and other current liabilities
|
|
398,079
|
|
|
29,460
|
|
|
427,539
|
|
Other liabilities
|
|
140,604
|
|
|
94,167
|
|
|
234,771
|
|
Recently Issued Accounting Pronouncements
There are no recently issued accounting pronouncements that the Company expects to have a material effect on the condensed consolidated financial statements, except as otherwise noted in our 2018 Annual Report.
2. Revenue
The Company generates revenue primarily through contractual monthly recurring fees received for monitoring and related services provided to customers. In transactions in which the Company provides monitoring and related services but retains ownership of the security systems, the Company’s performance obligations primarily include monitoring, related services (such as maintenance agreements), and a material right associated with the non-refundable fees received in connection with the initiation of a monitoring contract (referred to as deferred subscriber acquisition revenue) that the customer will not need to pay upon a renewal of the contract. The portion of the transaction price associated with monitoring and related services revenue is recognized when the services are provided to the customer and is reflected in monitoring and related services revenue in the Condensed Consolidated Statements of Operations.
Deferred subscriber acquisition revenue is deferred and recorded as deferred subscriber acquisition revenue in the Condensed Consolidated Balance Sheets upon initiation of a monitoring contract. Deferred subscriber acquisition revenue is amortized on a pooled basis into installation and other revenue in the Condensed Consolidated Statements of Operations over the estimated life of the customer relationship using an accelerated method consistent with the amortization of subscriber system assets and deferred subscriber acquisition costs associated with the transaction. Amortization of deferred subscriber acquisition revenue was $28 million and $21 million for the three months ended September 30, 2019 and 2018, respectively, and was $79 million and $56 million for the nine months ended September 30, 2019 and 2018, respectively.
In transactions involving security systems that are sold outright to the customer, the Company’s performance obligations generally include monitoring, related services, and the sale and installation of the security systems. For such arrangements, the Company allocates a portion of the transaction price to each performance obligation based on a relative standalone selling price. Revenue associated with the sale and installation of security systems is generally recognized once installation is complete and is reflected in installation and other revenue in the Condensed Consolidated Statements of Operations. Revenue associated with monitoring and related services is recognized as those services are provided and is reflected in monitoring and related services revenue in the Condensed Consolidated Statements of Operations.
Customer billings for services not yet rendered are deferred and recognized as revenue as services are provided. These fees are recorded as current deferred revenue in the Condensed Consolidated Balance Sheets as the Company expects to satisfy any
remaining performance obligations, as well as recognize the related revenue, within the next twelve months. Accordingly, the Company has applied the practical expedient regarding deferred revenue to exclude the value of remaining performance obligations if (i) the contract has an original expected term of one year or less or (ii) the Company recognizes revenue in proportion to the amount it has the right to invoice for services performed.
The following table sets forth the Company’s revenues disaggregated by source:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
(in thousands)
|
|
September 30,
2019
|
|
September 30,
2018
|
|
September 30,
2019
|
|
September 30,
2018
|
Monitoring and related services
|
|
$
|
1,093,564
|
|
|
$
|
1,029,399
|
|
|
$
|
3,249,401
|
|
|
$
|
3,069,817
|
|
Installation and other
|
|
207,006
|
|
|
118,917
|
|
|
577,973
|
|
|
326,406
|
|
Total revenue
|
|
$
|
1,300,570
|
|
|
$
|
1,148,316
|
|
|
$
|
3,827,374
|
|
|
$
|
3,396,223
|
|
3. Acquisitions and Dispositions
Acquisitions
During the nine months ended September 30, 2019, the Company paid $95 million, net of cash acquired, related to business acquisitions, which resulted in the recognition of $45 million of goodwill and $35 million of contracts and related customer relationships.
Disposition of Canadian Operations
On September 30, 2019, the Company entered into an agreement to sell all of the shares of ADT Security Services Canada, Inc. (“ADT Canada”) to TELUS Corporation (“TELUS”). On November 5, 2019, the Company completed the sale of ADT Canada for CAD $683 million (approximately $519 million as of the date of closing) in cash, which remains subject to certain post-closing purchase price adjustments. In connection with the sale of ADT Canada, the Company and TELUS also entered into a non-competition and non-solicitation agreement pursuant to which the Company will not have any operations in Canada, subject to limited exceptions for cross-border commercial customers and mobile safety applications, for a period of seven years. Additionally, the Company and TELUS entered into a patent and trademark license agreement granting the usage of the Company’s trademarks and patents in Canada to TELUS for a period of seven years. Finally, the Company and TELUS entered into a transition services agreement whereby the Company will provide certain post-closing services to TELUS related to the business of ADT Canada.
As of September 30, 2019, the ADT Canada disposal group was classified as held for sale and presented as a single asset amount and a single liability amount in the Condensed Consolidated Balance Sheet. The ADT Canada disposal group was measured at the lower of its carrying amount or fair value less costs to sell. Long-lived assets and definite-lived intangible assets are not depreciated or amortized while classified as held for sale. The sale of ADT Canada did not represent a strategic shift that will have a major effect on the Company’s operations and financial results, and therefore, did not meet the criteria to be reported as discontinued operations.
The Company recorded a loss on business held for sale of $55 million in order to measure the ADT Canada disposal group at the lower of its carrying value or fair value less costs to sell as of September 30, 2019, which resulted in a corresponding held for sale valuation allowance on its assets held for sale in the Condensed Consolidated Balance Sheet. The loss on business held for sale primarily relates to the foreign currency translation, net of tax, associated with the ADT Canada disposal group, which totaled $38 million as of September 30, 2019.
The major classes of assets and liabilities that were classified as held for sale as of September 30, 2019 were as follows:
|
|
|
|
|
(in thousands)
|
September 30,
2019
|
Assets held for sale:
|
|
Cash and cash equivalents
|
$
|
4,221
|
|
Accounts receivable trade, net of allowance for doubtful accounts
|
7,118
|
|
Inventories, net
|
3,481
|
|
Work-in-progress
|
2,445
|
|
Prepaid expenses and other current assets
|
2,053
|
|
Property and equipment, net
|
15,998
|
|
Subscriber system assets, net
|
144,603
|
|
Intangible assets, net
|
278,707
|
|
Goodwill
|
160,420
|
|
Deferred subscriber acquisition costs, net
|
21,183
|
|
Other assets
|
6,687
|
|
Held for sale valuation allowance
|
(55,489
|
)
|
Total assets held for sale
|
$
|
591,427
|
|
|
|
Liabilities held for sale:
|
|
Current maturities of long-term debt
|
$
|
195
|
|
Accounts payable
|
11,614
|
|
Deferred revenue
|
10,021
|
|
Accrued expenses and other current liabilities
|
12,318
|
|
Long-term debt
|
384
|
|
Deferred subscriber acquisition revenue
|
23,720
|
|
Deferred tax liabilities
|
60,222
|
|
Other liabilities
|
10,259
|
|
Total liabilities held for sale
|
$
|
128,733
|
|
The following represents ADT Canada’s (loss) income before income taxes for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
|
September 30, 2019
|
|
September 30, 2018
|
|
September 30, 2019
|
|
September 30, 2018
|
(Loss) income before income taxes
|
$
|
(38,661
|
)
|
|
$
|
135
|
|
|
$
|
(46,997
|
)
|
|
$
|
712
|
|
4. Goodwill and Other Intangible Assets
Goodwill
The changes in the carrying amount of goodwill during the nine months ended September 30, 2019 were as follows:
|
|
|
|
|
(in thousands)
|
|
Beginning balance
|
$
|
5,081,887
|
|
Acquisitions
|
44,570
|
|
Goodwill impairment
|
(45,482
|
)
|
Reclassification to held for sale
|
(160,420
|
)
|
Currency translation and other
|
36,362
|
|
Ending balance
|
$
|
4,956,917
|
|
The Company had accumulated goodwill impairment losses of $88 million as of December 31, 2018. There were no material measurement period adjustments to purchase price allocations.
Other Intangible Assets
The gross carrying amounts, accumulated amortization, and net carrying amounts of the Company’s other intangible assets as of September 30, 2019 and December 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2019
|
|
December 31, 2018
|
(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
|
$
|
7,734,227
|
|
|
$
|
(3,515,480
|
)
|
|
$
|
4,218,747
|
|
|
$
|
7,568,456
|
|
|
$
|
(2,816,079
|
)
|
|
$
|
4,752,377
|
|
Dealer relationships
|
1,518,020
|
|
|
(279,414
|
)
|
|
1,238,606
|
|
|
1,598,916
|
|
|
(230,511
|
)
|
|
1,368,405
|
|
Other
|
207,417
|
|
|
(182,183
|
)
|
|
25,234
|
|
|
210,802
|
|
|
(176,390
|
)
|
|
34,412
|
|
Total definite-lived intangible assets
|
9,459,664
|
|
|
(3,977,077
|
)
|
|
5,482,587
|
|
|
9,378,174
|
|
|
(3,222,980
|
)
|
|
6,155,194
|
|
Indefinite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
Trade name
|
1,333,000
|
|
|
—
|
|
|
1,333,000
|
|
|
1,333,000
|
|
|
—
|
|
|
1,333,000
|
|
Intangible assets
|
$
|
10,792,664
|
|
|
$
|
(3,977,077
|
)
|
|
$
|
6,815,587
|
|
|
$
|
10,711,174
|
|
|
$
|
(3,222,980
|
)
|
|
$
|
7,488,194
|
|
For the nine months ended September 30, 2019, the changes in the net carrying amount of contracts and related customer relationships were as follows:
|
|
|
|
|
(in thousands)
|
|
Beginning balance
|
$
|
4,752,377
|
|
Acquisition of customer relationships
|
34,792
|
|
Customer contract additions, net of dealer charge-backs
|
514,459
|
|
Amortization
|
(863,352
|
)
|
Reclassification to held for sale
|
(205,235
|
)
|
Currency translation and other
|
(14,294
|
)
|
Ending balance
|
$
|
4,218,747
|
|
The Company paid $514 million to purchase contracts with customers under the ADT Authorized Dealer Program and from other third parties during the nine months ended September 30, 2019. The weighted-average amortization period for contracts with customers purchased under the ADT Authorized Dealer Program and from other third parties was 15 years during the nine months ended September 30, 2019.
Amortization expense for definite-lived intangible assets for the periods presented was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
(in thousands)
|
|
September 30,
2019
|
|
September 30,
2018
|
|
September 30,
2019
|
|
September 30,
2018
|
Definite-lived intangible asset amortization expense
|
|
$
|
315,732
|
|
|
$
|
293,535
|
|
|
$
|
933,260
|
|
|
$
|
906,233
|
|
Goodwill and Indefinite-Lived Intangible Assets Impairment
Goodwill and indefinite-lived intangible assets are not amortized and are tested for impairment at least annually as of the first day of the fourth quarter of each year and more often if an event occurs or circumstances change which indicate it is more-likely-than-not that fair value is less than carrying value. In connection with the ADT Canada disposal group being classified as held for sale, the Company quantitatively tested the goodwill associated with the Canada reporting unit for impairment as of September 30, 2019.
Under the quantitative approach, the Company estimated the fair value of the reporting unit and compared it to its carrying amount. The fair value of the reporting unit was determined using the income approach, which discounts projected cash flows using market participant assumptions. The income approach included significant assumptions including, but not limited to, forecasted revenue, operating profit margins, operating expenses, cash flows, perpetual growth rates, and long-term discount rates. In developing these assumptions, the Company relied on various factors including operating results, business plans, economic projections, anticipated future cash flows, and other market data.
Based on the result of the test, the Company recorded a goodwill impairment loss of $45 million related to the Canada reporting unit.
5. Debt
Debt as of September 30, 2019 and December 31, 2018 was comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of
|
Debt Description
|
|
Issued
|
|
Maturity
|
|
Interest Rate
|
|
Interest Payable
|
|
September 30, 2019
|
|
December 31, 2018
|
First Lien Term B-1 Loan
|
|
5/2/2016
|
|
5/2/2022
|
|
LIBOR +2.75%
|
|
Quarterly
|
|
$
|
—
|
|
|
$
|
3,924,438
|
|
First Lien Term Loan due 2026
|
|
9/23/2019
|
|
9/23/2026
|
|
LIBOR +3.25%
|
|
Quarterly
|
|
3,110,000
|
|
|
—
|
|
Prime Notes
|
|
5/2/2016
|
|
5/15/2023
|
|
9.250%
|
|
5/15 and 11/15
|
|
1,246,000
|
|
|
2,546,000
|
|
First Lien Notes due 2024
|
|
4/4/2019
|
|
4/15/2024
|
|
5.250%
|
|
2/15 and 8/15
|
|
750,000
|
|
|
—
|
|
First Lien Notes due 2026
|
|
4/4/2019
|
|
4/15/2026
|
|
5.750%
|
|
3/15 and 9/15
|
|
1,350,000
|
|
|
—
|
|
ADT Notes due 2020
|
|
12/18/2014
|
|
3/15/2020
|
|
5.250%
|
|
3/15 and 9/15
|
|
152,748
|
|
|
300,000
|
|
ADT Notes due 2021
|
|
10/1/2013
|
|
10/15/2021
|
|
6.250%
|
|
4/15 and 10/15
|
|
1,000,000
|
|
|
1,000,000
|
|
ADT Notes due 2022
|
|
7/5/2012
|
|
7/15/2022
|
|
3.500%
|
|
1/15 and 7/15
|
|
1,000,000
|
|
|
1,000,000
|
|
ADT Notes due 2023
|
|
1/14/2013
|
|
6/15/2023
|
|
4.125%
|
|
6/15 and 12/15
|
|
700,000
|
|
|
700,000
|
|
ADT Notes due 2032
|
|
5/2/2016
|
|
7/15/2032
|
|
4.875%
|
|
1/15 and 7/15
|
|
728,016
|
|
|
728,016
|
|
ADT Notes due 2042
|
|
7/5/2012
|
|
7/15/2042
|
|
4.875%
|
|
1/15 and 7/15
|
|
21,896
|
|
|
21,896
|
|
Finance lease obligations
|
|
N/A
|
|
N/A
|
|
N/A
|
|
N/A
|
|
79,706
|
|
|
49,911
|
|
Less: Unamortized debt (discount)/premium, net
|
|
(27,739
|
)
|
|
(19,642
|
)
|
Less: Unamortized deferred financing costs
|
|
(61,144
|
)
|
|
(42,840
|
)
|
Less: Unamortized purchase accounting fair value adjustment and other
|
|
(198,488
|
)
|
|
(205,483
|
)
|
Total debt
|
|
|
|
|
|
|
|
|
|
9,850,995
|
|
|
10,002,296
|
|
Less: Current maturities of long-term debt
|
|
(212,877
|
)
|
|
(58,184
|
)
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
$
|
9,638,118
|
|
|
$
|
9,944,112
|
|
__________________
N/A—Not applicable
Significant changes in the Company’s debt during the nine months ended September 30, 2019 were as follows:
First Lien Credit Agreement
Amendment and Restatement dated as of March 15, 2019 (effective April 4, 2019)
In April 2019, and in connection with a $500 million repayment of the first lien term loan due in May 2022 (“First Lien Term B-1 Loan”), the Company amended and restated the first lien credit agreement (“First Lien Credit Agreement”) governing the First Lien Term B-1 Loan to, among other things, (a) authorize the redemption of the outstanding principal amount of Prime Notes (as defined below), (b) authorize the incurrence of the First Lien Notes due 2024 (as defined below) and First Lien Notes due 2026 (as defined below) by amending the Net First Lien Leverage Ratio for the incurrence of pari passu indebtedness to 3.20 to 1.00 (from 2.35 to 1.00), (c) provide for $300 million of additional incremental pari passu debt capacity, and (d) increase the borrowing capacity under a first lien revolving credit facility (“First Lien Revolving Credit Facility”) by an additional $50 million, which replaced the Mizuho Bank Revolving Credit Facility (as defined below). The Company incurred approximately $17 million in deferred financing costs in connection with this amendment and restatement.
Amendment and Restatement dated as of September 23, 2019
In September 2019, and in connection with an approximately $300 million repayment of the First Lien Term B-1 Loan, the Company amended and restated the First Lien Credit Agreement to refinance and replace the $3.4 billion aggregate principal amount of the First Lien Term B-1 Loan with $3.1 billion aggregate principal amount of a first lien term loan due 2026 (“First Lien Term Loan due 2026”), which was issued at a 1% discount, and make other changes to, among other things, provide the Company with additional flexibility to incur additional indebtedness and fund future distributions to stockholders. Deferred financing costs in connection with this amendment and restatement were not material.
The First Lien Term Loan due 2026 requires scheduled quarterly payments equal to 0.25% of the aggregate outstanding principal amount, or approximately $8 million per quarter, with the remaining balance payable at maturity. In addition, the Company is required to make annual prepayments on the outstanding First Lien Term Loan due 2026 with a percentage of the Company’s excess cash flow, as defined in the First Lien Credit Agreement, if the excess cash flow exceeds a certain specified threshold. The Company may make voluntary prepayments on the First Lien Term Loan due 2026 at any time prior to maturity at par, subject to a 1.00% prepayment premium in the event of certain specified events at any time during the first six months after the closing date of the amendment. The First Lien Term Loan due 2026 has an interest rate calculated as, at the Company’s option, either (a) LIBOR determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs (“Adjusted LIBOR”) with a floor of 1.00%, or (b) a base rate determined by reference to the highest of (i) the federal funds rate plus 0.50% per annum, (ii) the prime rate published by the Wall Street Journal, and (iii) one-month Adjusted LIBOR plus 1.00% per annum (“Base Rate”), in each case, plus the applicable margin of 3.25% for Adjusted LIBOR loans and 2.25% for Base Rate loans and is payable at least quarterly.
As of September 30, 2019, the Company had a $400 million First Lien Revolving Credit Facility, the incurrence of which was subject to compliance with certain terms and conditions under the Company’s debt agreements. The Company had no borrowings under the First Lien Revolving Credit Facility as of September 30, 2019.
Mizuho Bank Revolving Credit Facility
In February 2019, the Company entered into a first lien revolving credit agreement with an aggregate available commitment of up to $50 million maturing in March 2023 (“Mizuho Bank Revolving Credit Facility”). The Mizuho Bank Revolving Credit Facility was terminated and replaced in April 2019 as part of the amendment and restatement to the First Lien Credit Agreement in April 2019, which is discussed above.
Prime Notes
In February 2019, the Company redeemed $300 million aggregate principal amount of the outstanding Prime Notes for a total redemption price of approximately $319 million, which included the related call premium. In April 2019, the Company repurchased and cancelled an additional $1 billion aggregate principal amount of the outstanding Prime Notes for a total repurchase price of approximately $1.1 billion, which included the related call premium.
First Lien Notes due 2024 and First Lien Notes due 2026
In April 2019, the Company issued $750 million aggregate principal amount of 5.250% first-priority senior secured notes due 2024 (“First Lien Notes due 2024”) and $750 million aggregate principal amount of 5.750% first-priority senior secured notes
due 2026 (“First Lien Notes due 2026”). The proceeds from the First Lien Notes due 2024 and the First Lien Notes due 2026, along with cash on hand and borrowings under the First Lien Revolving Credit Facility, were used to (a) repurchase $1 billion aggregate principal amount of the Prime Notes, (b) repay $500 million aggregate principal amount of the First Lien Term B-1 Loan, and (c) pay fees and expenses associated with the foregoing, including call premiums on the Prime Notes as well as accrued and unpaid interest on the repurchased Prime Notes and repaid borrowings under the First Lien Term B-1 Loan. The Company incurred approximately $25 million in deferred financing costs in connection with the issuance of the First Lien Notes due 2024 and the First Lien Notes due 2026.
In September 2019, the Company issued an additional $600 million aggregate principal amount of the First Lien Notes due 2026 at a 2% premium pursuant to and with the same terms as the underlying indenture of the First Lien Notes due 2026. The proceeds from the additional First Lien Notes due 2026, along with cash on hand, were used to (a) repay approximately $300 million aggregate principal amount of the First Lien Term B-1 Loan, (b) repurchase or redeem the outstanding $300 million aggregate principal amount of the 5.250% notes due 2020 issued by The ADT Corporation (“ADT Notes due 2020”), and (c) pay fees and expenses associated with the foregoing, including call premiums on the ADT Notes due 2020 as well as accrued and unpaid interest on the First Lien Term B-1 Loan and the ADT Notes due 2020. The Company incurred approximately $8 million in deferred financing costs in connection with the additional borrowings.
The First Lien Notes due 2024 will mature on April 15, 2024 with semi-annual interest payment dates of February 15 and August 15, while the First Lien Notes due 2026 will mature on April 15, 2026 with semi-annual interest payment dates of March 15 and September 15. Both may be redeemed, in whole or in part, at any time at a make-whole premium plus accrued and unpaid interest to, but excluding, the redemption date.
The First Lien Notes due 2024 and the First Lien Notes due 2026 are guaranteed, jointly and severally, on a senior secured first-priority basis, by each of the Company’s existing and future direct or indirect wholly owned material domestic subsidiaries that guarantee the First Lien Credit Agreement. In addition, the indentures governing the First Lien Notes due 2024 and the First Lien Notes due 2026 contain covenants that limit the Company’s ability to, among other things: (a) incur certain liens; (b) enter into sale leaseback transactions; and (c) consolidate, merge, or sell all or substantially all of the Company’s assets. These covenants are subject to a number of important limitations and exceptions. Additionally, upon the occurrence of specified change of control events, the Company must offer to repurchase the notes at 101% of the principal amount, plus accrued and unpaid interest, if any, to, but not including, the purchase date. Each indenture governing the First Lien Notes due 2024 and the First Lien Notes due 2026 also provides for customary events of default.
ADT Notes
In September 2019, the Company repurchased and cancelled $147 million aggregate principal amount of the outstanding ADT Notes due 2020 for a total repurchase price of approximately $149 million, which included the related call premium. In October 2019, the Company redeemed the remaining $153 million principal amount of the outstanding ADT Notes due 2020 for a total redemption price of approximately $155 million included the related call premium.
Loss on Extinguishment of Debt
During the nine months ended September 30, 2019, loss on extinguishment of debt totaled $103 million, which related to $22 million associated with the call premium and partial write-off of unamortized deferred financing costs in connection with the $300 million partial redemption of the Prime Notes in February 2019, $61 million associated with the call premium and partial write-off of unamortized deferred financing costs in connection with the $1 billion partial repayment and cancellation of the Prime Notes in April 2019, $6 million associated with the partial write-off of unamortized deferred financing costs and discount in connection with the $500 million repayment of the First Lien Term B-1 Loan in April 2019, and $13 million associated with the partial write-off of unamortized deferred financing costs and discount in connection with the amendment and restatement to the First Lien Credit Agreement in September 2019.
During the nine months ended September 30, 2018, loss on extinguishment of debt totaled $275 million, which related to $213 million associated with the redemption premium and the write-off of unamortized discount and deferred financing costs in connection with the full redemption of the Company’s prior mandatorily redeemable preferred securities in July 2018 and $62 million associated with the call premium and the partial write-off of unamortized deferred financing costs in connection with the $594 million partial redemption of the Prime Notes in February 2018.
6. Income Taxes
Unrecognized Tax Benefits
During the nine months ended September 30, 2019, the Company did not have a significant change to its unrecognized tax benefits. The Company’s unrecognized tax benefits relate to tax years that remain subject to audit by the taxing authorities in the U.S. federal, state and local, and foreign jurisdictions. Based on the current status of its income tax audits, the Company does not believe that a significant portion of its unrecognized tax benefits will be resolved in the next twelve months.
Effective Tax Rate
The Company’s income tax benefit for the three months ended September 30, 2019 was $36 million, resulting in an effective tax rate for the period of 16.7%. The effective tax rate primarily represents the federal income tax rate of 21.0%, a 21.9% unfavorable impact from valuation allowances established on the net capital losses generated in the U.S. and Canada related to the ADT Canada disposal group, a 5.6% unfavorable impact from non-deductible goodwill impairment loss, offset by a 20.7% favorable impact from net capital losses generated in the U.S. and Canada related to the ADT Canada disposal group, and a 4.6% favorable impact from amendments to prior year tax returns.
Income tax benefit for the three months ended September 30, 2018 was $8 million, resulting in an effective tax rate for the period of 3.2%. The effective tax rate primarily represents the federal income tax rate of 21.0%, an 11.2% unfavorable impact of permanent non-deductible expenses primarily associated with the Company’s prior mandatorily redeemable preferred securities, a 5.6% unfavorable impact from an increase in the Company’s unrecognized tax benefits, and a 4.9% unfavorable impact associated with legislative changes.
The Company’s income tax benefit for the nine months ended September 30, 2019 was $82 million, resulting in an effective tax rate for the period of 18.8%. The effective tax rate primarily represents the federal income tax rate of 21.0%, an 11.0% unfavorable impact from valuation allowances established on the net capital losses generated in the U.S. and Canada related to the ADT Canada disposal group, a 2.8% unfavorable impact from non-deductible goodwill impairment loss, offset by a 10.4% favorable impact from net capital losses generated in the U.S. and Canada related to the ADT Canada disposal group, and a 2.3% favorable impact from amendments to prior year tax returns.
Income tax benefit for the nine months ended September 30, 2018 was $20 million, resulting in an effective tax rate for the period of 4.1%. The effective tax rate primarily represents the federal income tax rate of 21.0%, an 11.6% unfavorable impact of permanent non-deductible expenses primarily associated with the Company’s prior mandatorily redeemable preferred securities, a 7.3% unfavorable impact of future non-deductible share-based compensation, a 4.2% unfavorable impact associated with legislative changes, and offset by a 5.6% favorable impact associated with amendments to prior year tax returns.
7. Commitments and Contingencies
Purchase Obligations
During the nine months ended September 30, 2019, the Company amended an agreement with a wireless network provider, which resulted in a fixed purchase obligation totaling approximately $80 million through 2022. There have been no other material changes to the Company’s purchase obligations outside the ordinary course of business as compared to December 31, 2018.
Legal Proceedings
The Company is subject to various claims and lawsuits in the ordinary course of business, which include contractual disputes; worker’s compensation; employment matters; product, general, and auto liability claims; claims that the Company has infringed on the intellectual property rights of others; claims related to alleged security system failures; and consumer and employment class actions. The Company is also subject to regulatory and governmental examinations, information requests and subpoenas, inquiries, investigations, and threatened legal actions and proceedings. In connection with such formal and informal inquiries, the Company receives numerous requests, subpoenas, and orders for documents, testimony, and information in connection with various aspects of its activities.
The Company records accruals for losses that are probable and reasonably estimable. These accruals are based on a variety of factors such as judgment, probability of loss, opinions of internal and external legal counsel, and actuarially determined estimates of claims incurred but not yet reported based upon historical claims experience. Legal costs in connection with claims and lawsuits in the ordinary course of business are expensed as incurred. Additionally, the Company records insurance recovery receivables from third-party insurers when recovery has been determined to be probable.
The Company’s accrual for ongoing claims and lawsuits not within scope of an insurance program was not material and in most cases the Company has not accrued for any losses as the ultimate outcome or the range of possible loss cannot be estimated. The Company’s accrual for ongoing claims and lawsuits within scope of an insurance program totaled $109 million and $74 million as of September 30, 2019 and December 31, 2018, respectively.
Environmental Matters
In October 2013, the Company was notified by subpoena that the Office of the Attorney General of California, in conjunction with the Alameda County District Attorney, is investigating whether the Company’s electronic waste disposal policies, procedures, and practices are in violation of the California Business and Professions Code and the California Health and Safety Code. During 2016, Protection One, Inc. was also notified by the same parties that it was subject to a similar investigation. The investigations have been inactive since December 2016 other than a status conference conducted in May 2019. The Company is coordinating joint handling of both investigations and continues to fully cooperate with the respective authorities.
Wireless Encryption Litigation
The Company was subject to five class action claims regarding wireless encryption in certain ADT security systems. Jurisdictionally, three of the five cases were in Federal Court (in districts within Illinois, Arizona, and California), and both of the remaining two cases were in Florida State Court (both in Palm Beach County Circuit Court). Each of the five plaintiffs brought a claim under the respective state’s consumer fraud statute alleging that the Company made misrepresentations and material omissions in its advertising regarding the unencrypted wireless signal pathways in certain security systems monitored by the Company. The complaints in all five cases further alleged that certain security systems monitored by the Company were not secure because the wireless signal pathways were unencrypted and could be easily hacked. In January 2017, the parties agreed to settle all five class action lawsuits. In October 2017, the U.S. District Court for the Northern District of California entered an order granting preliminary approval of the settlement. Notice to class members was issued in November 2017, and the claim submittal process has been completed. A fairness hearing regarding the settlement was conducted in February 2018, after which trial court stayed the settlement proceedings pending an appellate ruling on a related legal issue. The appellate court issued a ruling in early June 2019, and in July 2019 the trial court entered an order granting final approval of the settlement. Settlement checks to the qualified class members were mailed the week of September 9, 2019 and all five pending lawsuits have been dismissed.
Shareholder Litigation
Five substantially similar shareholder class action lawsuits related to the January 2018 IPO of ADT Inc. common stock were filed in the Circuit Court of the Fifteenth Judicial Circuit in and for Palm Beach County, Florida in March, April, and May 2018 and have been consolidated for discovery and trial and entitled In re ADT Inc. Shareholder Litigation. The lead plaintiffs seek to represent a class of similarly situated shareholders and assert claims for alleged violations of the Securities Act of 1933, as amended (“Securities Act”). The plaintiffs allege that the Company defendants violated the Securities Act because the registration statement and prospectus used to effectuate the IPO were false and misleading in that they allegedly misled investors with respect to litigation involving the Company, the Company’s efforts to protect its intellectual property, and the competitive pressures faced by the Company. The defendants moved to dismiss the consolidated complaint in October 2018. In July 2019 the Florida state court denied the Company’s motions to dismiss the complaint, but reserved its ruling on the motion to dismiss by the Company’s outside directors and requested further briefing. A similar shareholder class action lawsuit entitled Perdomo v ADT Inc., also related to the January 2018 IPO, was filed in the U.S. District Court for the Southern District of Florida in May 2018, for which the plaintiff filed an Amended Complaint in January 2019 as directed by the Court. In September 2019, the parties reached an agreement in principle to settle the actions pending in both the state court and the federal court and the federal court action has been voluntarily dismissed.
California Independent Contractor Litigation
In August 2017, Jabra Shuheiber filed civil litigation in Marin County Superior Court on behalf of himself and two other individuals asserting wage and hour violations against the Company. The action is entitled Jabra Shuheiber v. ADT, LLC (Case Number CV 1702912, Superior Court, Marin County). Mr. Shuheiber was the owner/operator of a sub-contractor, Maximum Protection, Inc. (“MPI”), who employed the other two plaintiffs in the litigation. In August 2018, in response to the California Supreme Court’s decision in Dynamex Operations West, Inc. v. Superior Court of Los Angeles County, counsel for Mr. Shuheiber provided the Company with a proposed amended complaint that modified the wage and hour claims such that they were brought on a class basis. The proposed class is not clearly defined but appears to be composed of two groups of individuals: 1) individual owners of sub-contractors who performed services for the sub-contractor; and 2) individuals with no ownership interest in a sub-contractor who were employed by the sub-contractor and provided services pursuant to a contract between the sub-contractor and the Company. In October 2018, the Company answered Plaintiffs First Amended Complaint and filed a Cross-Complaint against Plaintiff’s sub-contracting company for indemnification pursuant to the term of ADT’s sub-contract.
Los Angeles Alarm Permit Class Action
In June 2013, the Company was served with a class action complaint in California State Court entitled Villegas v. ADT. In this complaint, the plaintiff asserted that the Company violated certain provisions of the California Alarm Act and the Los Angeles Municipal Alarm Ordinance for its alleged failures to obtain alarm permits for its Los Angeles customers and disclose the alarm permit fee in its customer contracts. The plaintiff seeks to recover damages for putative class members who were required to pay enhanced false alarm fines as a result of the Company not obtaining a valid alarm permit at the time of alarm system installation. The case was initially dismissed by the trial court and judgment was entered in the Company’s favor in October 2014, which the plaintiff appealed. In September 2016, the California Appellate Court reversed and remanded the case back to the trial court. In November 2018, the trial court granted the plaintiff’s motion for class certification and certified four subclasses of customers who received fines from the City of Los Angeles on or after May 31, 2010 for a false alarm and for not having an alarm system permit: a pre-March 2009 class of customers installed by the Company; a pre-March 2009 class of customers installed by ADT Authorized Dealers; a post-March 2009 class of customers installed by the Company; and a post-March 2009 class of customers installed by ADT Authorized Dealers. Discovery is ongoing and trial is currently scheduled in February 2020.
TCPA Telemarketing Class Actions
On May 13, 2019, the Company was served in a putative Telephone Consumer Protection Act (“TCPA”) class action lawsuit captioned, Mark Fitzhenry v. ADT LLC and Safe Streets USA LLC, filed in the U.S. District Court for the Southern District of Florida. Plaintiff sought to recover statutory damages allowed under the TCPA on behalf of himself and others similarly situated based on his receipt of a single telemarketing call allegedly made by or on behalf of a third-party ADT authorized dealer. In August 2019, the Company was dismissed from the lawsuit.
On November 7, 2019, the Company was served in a putative TCPA class action lawsuit captioned, Todd Brand v. ADT LLC, Safe Streets USA LLC and Resource Marketing Corp., filed in the U.S. District Court for the Northern District of Florida. Plaintiff seeks to recover statutory damages allowed under the TCPA on behalf of himself and others similarly situated based on his receipt of marketing text messages allegedly made by or on behalf of a third-party ADT authorized dealer. The Company is being defended and indemnified by this third-party ADT authorized dealer.
Tax Sharing Agreement
On September 28, 2012, Johnson Controls International plc (as successor to Tyco International Ltd., “Tyco”) distributed to its public stockholders The ADT Corporation’s common stock (“Separation from Tyco”), and The ADT Corporation became an independent public company. In connection with the Separation from Tyco, The ADT Corporation entered into a tax sharing agreement (“2012 Tax Sharing Agreement”) that governs the rights and obligations of The ADT Corporation, Tyco, and Pentair Ltd. (formerly Tyco Flow Control International, Ltd., “Pentair”) for certain pre-Separation from Tyco tax liabilities, including Tyco’s obligations under a 2007 tax sharing agreement (“2007 Tax Sharing Agreement”) among Tyco, Covidien (“Covidien”), now operating as a subsidiary of Medtronic, and TE Connectivity Ltd. (“TE Connectivity”).
As of September 30, 2019, there have been no material changes to the 2012 Tax Sharing Agreement as compared to December 31, 2018.
8. Derivative Financial Instruments
The Company's derivative financial instruments primarily consist of LIBOR-based interest rate swap contracts, which were entered into with the objective of managing exposure to variability in interest rates on the Company's debt. All interest rate swap contracts are reported in the Condensed Consolidated Balance Sheets at fair value. For the interest rate swap contracts that are not designated as hedges, the change in fair value is recognized in interest expense, net in the Condensed Consolidated Statements of Operations. For the interest rate swap contracts that are designated as cash flow hedges, the change in fair value is recognized as a component of AOCI in the Condensed Consolidated Statements of Comprehensive Loss and is reclassified into interest expense, net in the same period in which the related interest on debt affects earnings.
During the nine months ended September 30, 2019, the Company entered into LIBOR-based interest rate swap contracts with an aggregate notional amount of $725 million. Below is a summary of the Company’s interest rate swap contracts as of September 30, 2019 (in thousands):
|
|
|
|
|
|
|
|
|
|
Execution
|
|
Maturity
|
|
Designation
|
|
Notional Amount
|
April 2017
|
|
April 2020
|
|
Not designated
|
|
$
|
1,000,000
|
|
June 2018
|
|
April 2022
|
|
Cash flow hedge
|
|
1,500,000
|
|
August 2018
|
|
April 2022
|
|
Cash flow hedge
|
|
1,000,000
|
|
January 2019
|
|
April 2022
|
|
Not designated
|
|
125,000
|
|
January 2019
|
|
April 2022
|
|
Cash flow hedge
|
|
300,000
|
|
February 2019
|
|
April 2022
|
|
Not designated
|
|
100,000
|
|
February 2019
|
|
April 2022
|
|
Cash flow hedge
|
|
200,000
|
|
Total notional amount
|
|
|
|
|
|
$
|
4,225,000
|
|
All interest rate swap contracts designated as cash flow hedges were highly effective as of September 30, 2019.
The fair value of the Company’s derivatives and related classification in the Condensed Consolidated Balance Sheets for the periods presented were as follows:
|
|
|
|
|
|
|
|
|
(in thousands)
|
September 30,
2019
|
|
December 31,
2018
|
Assets
|
|
|
|
Prepaid expenses and other current assets
|
$
|
437
|
|
|
$
|
6,525
|
|
Other assets
|
—
|
|
|
1,236
|
|
|
|
|
|
Liabilities
|
|
|
|
Accrued expenses and other current liabilities
|
32,163
|
|
|
1,989
|
|
Other liabilities
|
71,331
|
|
|
26,040
|
|
Fair value of interest rate swaps
|
$
|
103,057
|
|
|
$
|
20,268
|
|
As of September 30, 2019 and December 31, 2018, AOCI, net of tax related to interest rate swap contracts designated as cash flow hedges was $77 million and $21 million, respectively.
Modifications to Cash Flow Hedges
In October 2019, the Company terminated interest rate swap contracts with an aggregate notional amount of $3.8 billion, of which $2.8 billion were designated as cash flow hedges, and concurrently entered into new LIBOR-based interest rate swap contracts, which were designated as cash flow hedges, with an aggregate notional amount of $2.8 billion and maturity of September 2026. The new interest rate swap terms represent a blend of the current interest rate environment and the unfavorable positions of the terminated interest rate swap contracts.
Forward Foreign Currency Exchange Derivatives
During the fourth quarter of 2019, the Company entered into forward foreign currency exchange contracts in order to manage exposure to variability in foreign exchange rates on the sale proceeds of ADT Canada.
9. Share-based Compensation
During the second quarter of 2019, the Company amended the 2018 Omnibus Incentive Plan (“2018 Plan”) to increase the number of authorized common shares to be issued under the 2018 Plan from approximately 38 million shares to approximately 88 million shares. Share-based compensation expense totaled $19 million and $18 million during the three months ended September 30, 2019 and 2018, respectively, and $65 million and $113 million during the nine months ended September 30, 2019 and 2018, respectively.
Restricted Stock Units
During the nine months ended September 30, 2019, the Company granted approximately 4 million restricted stock units (“RSUs”) under the 2018 Plan. These RSUs are primarily service-based awards with a three-year graded vesting period from the date of grant. The fair value of the RSUs is equal to the closing price per share of the Company’s common stock on the date of grant,
which resulted in a weighted-average grant date fair value of $6.23.
Options
During the nine months ended September 30, 2019, the Company granted approximately 9 million options under the 2018 Plan. These options are primarily service-based awards with a three-year graded vesting period from the date of grant, an exercise price equal to the closing price per share of the Company’s common stock on the date of grant, which resulted in a weight-average exercise price of $6.18, and a contractual term of ten years from the grant date. The 2018 Plan’s provisions allow for adjustments to the exercise price of options in the event of specified changes in capital or operating structure.
The Company used the following significant assumptions to estimate the grant date fair value for the options using the Black Scholes valuation approach:
|
|
|
|
For the Nine Months Ended September 30, 2019
|
Risk-free interest rate
|
1.58% - 2.51%
|
Expected exercise term (years)
|
6.0 - 6.5
|
Expected dividend yield
|
2.1% - 2.7%
|
Expected volatility
|
41%
|
The risk-free interest rate was based on a U.S. Treasury bond with a zero-coupon rate that is based on the expected exercise term. The stock price volatility was implied based upon an average of historical volatilities of publicly traded companies in industries similar to the Company, as the Company did not have sufficient history to use as a basis for actual stock price volatility, and the Company’s debt to equity ratio. The dividend yield was calculated by taking the annual dividend run-rate and dividing by the stock price at date of grant. The expected average exercise term was calculated using the simplified method, as the Company did not have sufficient historical exercise data to provide a reasonable basis to estimate future exercise patterns.
During the nine months ended September 30, 2019, the weighted-average grant date fair value for options granted was $2.11.
10. Equity
In January 2018, the Company completed an IPO in which the Company issued and sold 105,000,000 shares of common stock at an IPO price of $14.00 per share. The Company received net proceeds of $1.4 billion from the sale of its shares in the IPO after deducting underwriting discounts, commissions, and offering expenses.
Dividends
In February 2019, the Company approved a dividend reinvestment plan (“DRIP”), which allows stockholders to designate all or a portion of the cash dividends on their shares of common stock for reinvestment in additional shares of the Company’s common stock. The number of shares issued will be determined based on the volume weighted average closing price per share of the Company’s common stock for the five trading days preceding the dividend payment and adjusted for any discounts, as applicable. The DRIP will terminate upon the earlier of (a) February 27, 2021 and (b) the date upon which an aggregate of 18,750,000 shares of common stock have been issued pursuant to the DRIP. When dividends are declared, the Company records a liability for the full amount of the dividends. When dividends are settled, the Company reduces the liability and records an increase in common stock par value and additional paid-in capital for the portion of dividends settled in shares of common stock under the DRIP.
During the nine months ended September 30, 2019, the Company declared the following dividends on common stock:
|
|
|
|
|
|
|
|
Declared Date
|
|
Dividend per Share
|
|
Record Date
|
|
Payment Date
|
March 11, 2019
|
|
$0.035
|
|
April 2, 2019
|
|
April 12, 2019
|
May 7, 2019
|
|
$0.035
|
|
June 11, 2019
|
|
July 2, 2019
|
August 6, 2019
|
|
$0.035
|
|
September 11, 2019
|
|
October 2, 2019
|
During the three months ended September 30, 2019, the Company declared $26 million (or $0.035 per share) in dividends, of which $3 million represents the portion of the dividends settled in cash and $23 million represents the portion of the dividends settled in shares of common stock, which resulted in the issuance of approximately 4 million shares of common stock, on October 2, 2019.
During the nine months ended September 30, 2019, the Company declared $79 million (or $0.105 per share) in dividends. When including the October 2, 2019 payment date, approximately $11 million represents the portion of the dividends settled in cash and $68 million represents the portion of the dividends settled in shares of common stock, which resulted in the issuance of 11 million shares of common stock.
Apollo has informed the Company that it has elected to discontinue participation in the DRIP with respect to dividends of the Company subsequent to the October 2, 2019 dividend payment.
On November 12, 2019, the Company announced a dividend of $0.035 per share to common stockholders of record on December 13, 2019, which will be distributed on January 3, 2020.
On November 12, 2019, the Company announced a special dividend of $0.70 per share to common stockholders of record as of December 13, 2019, which will be distributed on December 23, 2019.
Share Repurchase Program
In February 2019, the Company approved a share repurchase program, which permitted the Company to repurchase up to $150 million of the Company’s shares of common stock through February 27, 2021. The Company effected these repurchases pursuant to one or more trading plans adopted in accordance with Securities Exchange Act Rule 10b5-1, in privately negotiated transactions, in open market transactions, or pursuant to an accelerated share repurchase program. The share repurchase program was conducted in accordance with Securities Exchange Act Rule 10b-18 and was substantially complete as of September 30, 2019.
During the nine months ended September 30, 2019, the Company repurchased 24 million shares of common stock for approximately $150 million. There were no share repurchases during the three months ended September 30, 2019. All of the shares repurchased were treated as retirements and reduced the number of shares issued and outstanding. In addition, the Company recorded the excess of the purchase price over the par value per share as a reduction to additional paid-in capital.
Accumulated Other Comprehensive Loss
There were no material reclassifications out of AOCI during the three months and nine months ended September 30, 2019 and 2018.
11. Net Loss per Share
Basic net loss per share is computed by dividing net loss available to common shares by the weighted-average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss available to common shares by the diluted weighted-average number of common shares outstanding during the period, which reflects the dilutive effect of potential common shares using the treasury stock method.
For purposes of the diluted net loss per share computation, all potential common shares that would be dilutive were excluded because their effect would be anti-dilutive due to the net loss available to common shares. As a result, basic net loss per share is equal to diluted net loss per share for each period presented.
The computations of basic and diluted net loss per share for the periods presented are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Nine Months Ended
|
(in thousands, except per share amounts)
|
September 30,
2019
|
|
September 30,
2018
|
|
September 30,
2019
|
|
September 30,
2018
|
Numerator:
|
|
|
|
|
|
|
|
Net loss
|
$
|
(181,630
|
)
|
|
$
|
(235,544
|
)
|
|
$
|
(352,157
|
)
|
|
$
|
(459,686
|
)
|
Denominator:
|
|
|
|
|
|
|
|
Weighted-average shares outstanding, basic and diluted
|
739,852
|
|
|
755,277
|
|
|
748,500
|
|
|
744,720
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted
|
$
|
(0.25
|
)
|
|
$
|
(0.31
|
)
|
|
$
|
(0.47
|
)
|
|
$
|
(0.62
|
)
|
12. Related Party Transactions
The Company’s related party transactions primarily relate to management, consulting, and transaction advisory services provided by Apollo, as well as monitoring and related services provided to other entities controlled by Apollo. There were no significant related party transactions for the three months or nine months ended September 30, 2019 and 2018.
13. Leases
Company as Lessor
The Company is a lessor in certain transactions in which the Company provides monitoring and related services but retains ownership of the security systems as the Company has identified a lease component associated with the right-of-use of the security systems and a non-lease component associated with monitoring and related services. For transactions in which the timing and pattern of transfer is the same for the lease and non-lease components, and the lease component would be classified as an operating lease if accounted for separately, the Company applies the practical expedient to aggregate the lease and non-lease components and accounts for the combined component based upon its predominant characteristic, which is the non-lease component. As a result, the Company accounts for the combined component as a single performance obligation under the applicable revenue guidance and the underlying assets are reflected within subscriber system assets, net in the Condensed Consolidated Balance Sheets.
Certain of the Company’s transactions do not qualify for the practical expedient as the lease component represents a sales-type lease, and as such, the Company separately accounts for the lease component and non-lease component. The Company’s sales-type leases are not material.
Company as Lessee
The Company leases real estate, vehicles, and equipment with various lease terms and maturities that extend out through 2030 from various counter parties as part of normal operations. The Company applies the practical expedient to not separate the lease and non-lease components and accounts for the combined component as a lease. Additionally, the Company’s right-of-use assets and lease liabilities include leases with an initial lease term of 12 months or less.
The Company’s right-of-use assets and lease liabilities primarily represent (a) lease payments that are fixed at the commencement of a lease and (b) variable lease payments that depend on an index or rate. Lease payments are recognized as lease cost on a straight-line basis over the lease term, which is determined as the non-cancelable period, periods in which termination options are reasonably certain of not being exercised, and periods in which renewal options are reasonably certain of being exercised. The discount rate for a lease is determined using the Company’s incremental borrowing rate that coincides with the lease term at the commencement of a lease. The incremental borrowing rate is estimated based on publicly available data for the Company’s debt instruments and other instruments with similar characteristics.
Lease payments that are not fixed or that are not dependent on an index or rate and vary because of changes in usage or other factors are included in variable lease costs. Variable lease costs, which primarily relate to fuel, repair, and maintenance payments that vary based on the usage of leased vehicles, are recorded in the period in which the obligation is incurred.
The Company’s leases do not contain material residual value guarantees or restrictive covenants. The Company’s subleases are not material.
The following table presents the amounts reported in the Company’s Condensed Consolidated Balance Sheets related to operating and finance leases as of the periods presented below:
|
|
|
|
|
|
|
|
|
|
|
|
Leases (in thousands)
|
|
Classification
|
|
September 30, 2019
|
|
January 1, 2019
|
Assets
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating
|
|
Prepaid expenses and other current assets
|
|
$
|
1,191
|
|
|
$
|
1,642
|
|
Non-current
|
|
|
|
|
|
|
Operating
|
|
Other assets
|
|
123,658
|
|
|
125,936
|
|
Finance
|
|
Property and equipment, net(a)
|
|
69,359
|
|
|
38,181
|
|
Total right-of-use assets
|
|
|
|
$
|
194,208
|
|
|
$
|
165,759
|
|
Liabilities
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
Operating
|
|
Accrued expenses and other current liabilities
|
|
$
|
30,851
|
|
|
$
|
30,357
|
|
Finance
|
|
Current maturities of long-term debt
|
|
28,140
|
|
|
18,343
|
|
Non-current
|
|
|
|
|
|
|
Operating
|
|
Other liabilities
|
|
98,785
|
|
|
99,168
|
|
Finance
|
|
Long-term debt
|
|
51,566
|
|
|
31,568
|
|
Total lease liabilities
|
|
|
|
$
|
209,342
|
|
|
$
|
179,436
|
|
_________________
|
|
(a)
|
Finance right-of-use assets are recorded net of accumulated amortization of approximately $39 million and $32 million as of September 30, 2019 and January 1, 2019, respectively.
|
The following is a summary of the Company’s lease cost for the presented periods:
|
|
|
|
|
|
|
|
|
|
Lease Cost (in thousands)
|
|
For the Three Months Ended September 30, 2019
|
|
For the Nine Months Ended September 30, 2019
|
Operating lease cost
|
|
$
|
14,618
|
|
|
$
|
44,691
|
|
Finance lease cost
|
|
|
|
|
Amortization of right-of-use assets
|
|
6,780
|
|
|
17,298
|
|
Interest on lease liabilities
|
|
1,017
|
|
|
2,674
|
|
Variable lease costs
|
|
11,096
|
|
|
35,955
|
|
Total lease cost
|
|
$
|
33,511
|
|
|
$
|
100,618
|
|
The following is a summary of the cash flows and supplemental information associated with the Company’s leases for the presented period:
|
|
|
|
|
|
Other information (in thousands)
|
|
For the Nine Months Ended September 30, 2019
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
Operating cash flows from operating leases
|
|
$
|
45,116
|
|
Operating cash flows from finance leases
|
|
2,674
|
|
Financing cash flows from finance leases
|
|
17,166
|
|
Right-of-use assets obtained in exchange for new finance lease liabilities
|
|
49,053
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
41,307
|
|
The following is a summary of the weighted-average lease term and discount rate for operating and finance leases as of the presented period:
|
|
|
|
|
Lease Term and Discount Rate
|
|
September 30, 2019
|
Weighted-average remaining lease term (years)
|
|
|
Operating leases
|
|
4.8
|
|
Finance leases
|
|
3.2
|
|
Weighted-average discount rate
|
|
|
Operating leases
|
|
6.50
|
%
|
Finance leases
|
|
5.00
|
%
|
The following is a maturity analysis related to the Company’s operating and finance leases as of September 30, 2019:
|
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities (in thousands)
|
|
Operating Leases
|
|
Finance Leases
|
2019
|
|
$
|
8,692
|
|
|
$
|
7,902
|
|
2020
|
|
36,883
|
|
|
29,075
|
|
2021
|
|
31,514
|
|
|
24,138
|
|
2022
|
|
28,363
|
|
|
18,707
|
|
2023
|
|
22,670
|
|
|
5,854
|
|
Thereafter
|
|
23,393
|
|
|
291
|
|
Total lease payments
|
|
$
|
151,515
|
|
|
$
|
85,967
|
|
Less interest
|
|
21,879
|
|
|
6,261
|
|
Total
|
|
$
|
129,636
|
|
|
$
|
79,706
|
|
The following is a maturity analysis related to the Company’s operating and finance leases as of December 31, 2018:
|
|
|
|
|
|
|
|
|
|
Maturity of Lease Liabilities (in thousands)
|
|
Operating Leases
|
|
Finance Leases
|
2019
|
|
$
|
40,192
|
|
|
$
|
20,604
|
|
2020
|
|
31,885
|
|
|
16,735
|
|
2021
|
|
26,336
|
|
|
10,728
|
|
2022
|
|
22,751
|
|
|
5,386
|
|
2023
|
|
16,731
|
|
|
696
|
|
Thereafter
|
|
17,727
|
|
|
—
|
|
Total lease payments
|
|
$
|
155,622
|
|
|
$
|
54,149
|
|
Less interest
|
|
—
|
|
|
4,238
|
|
Total
|
|
$
|
155,622
|
|
|
$
|
49,911
|
|