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Basis of Presentation and Summary of Significant Accounting Policies | 3 Months Ended
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Mar. 31, 2018
Organization, Consolidation and Presentation of Financial Statements [Abstract] |
Basis of Presentation and Summary of Significant Accounting Policies | Basis of Presentation and Summary of Significant Accounting Policies Nature of Business—ADT Inc. (“ADT Inc.”), a company incorporated in the state of Delaware, and its wholly owned subsidiaries (collectively, the “Company”), are principally engaged in the sale, installation, servicing, and monitoring of electronic home and business security and automation systems in the United States (or “U.S.”) and Canada. Prior to September 2017, ADT Inc. was named Prime Security Services Parent Inc. ADT Inc. 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, LLC, its subsidiaries and its affiliates (“Apollo” or the “Sponsor”), and management investors. Basis of Presentation—The condensed consolidated financial statements include the accounts of ADT Inc. and its wholly owned subsidiaries, and have been prepared in U.S. dollars in accordance with generally accepted accounting principles in the United States of America (“GAAP”). 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 condensed consolidated financial statements, these interim 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, 2017, which was filed with the U.S. Securities and Exchange Commission (the “SEC”) on March 15, 2018. The Condensed Consolidated Balance Sheet as of December 31, 2017 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 financial statements. The Company conducts business through its operating entities and reports financial and operating information in one segment. All intercompany transactions have been eliminated. The results of companies acquired are included in the condensed consolidated financial statements from the effective dates of the acquisitions. Reclassifications—Certain prior period amounts have been reclassified to conform with the current period presentation. Use of Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of revenue and expenses. Significant estimates and judgments inherent in the preparation of the condensed consolidated financial statements include, but are not limited to, estimates of future cash flows and valuation related assumptions associated with asset impairment testing, useful lives and methods for depreciation and amortization, loss contingencies, income taxes and tax valuation allowances, and purchase price allocations. Actual results could differ materially from these estimates. Stock Split—On January 4, 2018, the board of directors of the Company declared a 1.681-for-1 stock split (the “Stock Split”) of the Company’s common stock issued and outstanding as of January 4, 2018. The number of shares subject to, and the exercise price of, the Company’s outstanding options were adjusted to reflect the Stock Split. Unless otherwise noted, all share and per-share data included in these condensed consolidated financial statements have been adjusted to give effect to the Stock Split. Initial Public Offering—In January 2018, the Company completed its initial public offering (“IPO”) in which the Company issued and sold 105,000,000 shares of common stock at an initial public offering price of $14.00 per share. The Company’s common stock began trading on the New York Stock Exchange under the symbol “ADT.” The Company received net proceeds of $1,415 million, after deducting underwriting discounts and commissions from the sale of its shares in the IPO. In addition, the Company incurred $10 million of offering expenses in connection with the IPO, of which $5 million had not been paid as of March 31, 2018. In connection with the IPO, the Company deposited $750 million of the net proceeds into a segregated account (“Segregated Account”) for the purpose of redeeming the 750,000 shares of Series A $0.01 par value preferred securities (“Koch Preferred Securities”) at a future date. Funds held in the Segregated Account are reported as noncurrent restricted cash and cash equivalents in the Company’s Condensed Consolidated Balance Sheet as of March 31, 2018. Refer to Note 13 “Subsequent Events” for further discussion. On February 21, 2018, the Company used approximately $649 million of the net proceeds from the IPO to voluntarily redeem $594 million aggregate principal amount of 9.250% Second-Priority Senior Secured Notes due 2023 (“Prime Notes”) and pay the related call premium. The aggregate principal amount of Prime Notes outstanding after the repayment was $2,546 million. Refer to Note 5 “Debt” for further discussion. Merger, Restructuring, Integration, and Other Costs—Included in merger, restructuring, integration, and other costs in the Condensed Consolidated Statements of Operations are certain direct and incremental costs resulting from acquisitions made by the Company, certain related integration efforts as a result of those acquisitions, costs related to the Company’s restructuring efforts, as well as impairment charges related to the Company’s strategic investments. Other (Expense) Income—Included in other (expense) income for the three months ended March 31, 2017, are foreign currency losses/(gains) related to the translation of monetary assets and liabilities that are denominated in Canadian dollars, primarily due to intercompany loans. In the first quarter of 2018, the Company designated certain of these loans to be of a long-term-investment nature, and are reflecting foreign currency losses/gains on these loans in accumulated other comprehensive loss in the condensed consolidated balance sheet. Income Taxes—In providing guidance on accounting for the impacts of tax on ‘global intangible low taxed income’ (“GILTI”), the Financial Accounting Standards Board (“FASB”) concluded that an accounting policy should be elected to either treat GILTI inclusions as a period cost in each year incurred, or to recognize deferred taxes for basis differences that are expected to reverse as GILTI in the future. The Company’s accounting policy election is to treat the impact of GILTI as a period cost in each year incurred. Subscriber System Assets, 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. The following table sets forth the gross carrying amount and accumulated depreciation of the Company’s subscriber system assets as of March 31, 2018 and December 31, 2017.
(in thousands) | March 31, 2018 |  | December 31, 2017
Gross carrying amount | $ | 3,891,719 |  |  | $ | 3,762,905 |
Accumulated depreciation | (1,001,074 | ) |  | (870,222 | )
Subscriber system assets, net | $ | 2,890,645 |  |  | $ | 2,892,683 |
Depreciation expense relating to subscriber system assets was $136 million and $133 million for the three months ended March 31, 2018 and 2017, respectively, and is included in depreciation and intangible asset amortization in the Condensed Consolidated Statements of Operations. Accrued Expenses and Other Current Liabilities—Accrued expenses and other current liabilities as of March 31, 2018 and December 31, 2017 consisted of the following:
(in thousands) | March 31, 2018 |  | December 31, 2017
Accrued interest | $ | 144,905 |  |  | $ | 91,592 |
Payroll-related accruals | 63,972 |  |  | 94,501 |
Other accrued liabilities | 201,769 |  |  | 165,247 |
Total accrued expenses and other current liabilities | $ | 410,646 |  |  | $ | 351,340 |
Financial Instruments—The Company’s financial instruments consist primarily of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, accounts payable, debt, preferred securities, and derivative financial instruments. Due to their short-term and/or liquid nature, the fair values of cash and cash equivalents, restricted cash and cash equivalents, accounts receivable, and accounts payable approximated their respective carrying values as of March 31, 2018 and December 31, 2017. Cash Equivalents—Included in cash and cash equivalents are investments in money market mutual funds, which were $145 million and $51 million as of March 31, 2018 and December 31, 2017, respectively. These investments are classified as Level 1 for purposes of fair value measurement. Restricted Cash and Cash Equivalents—Restricted cash and cash equivalents are restricted for a specific purpose and cannot be included in the general cash account. The Company’s current portion of restricted cash and cash equivalents is held by a third-party trustee and primarily relates to amounts placed in escrow to cover potential adjustments to the purchase price associated with certain acquisitions. The Company’s noncurrent portion of restricted cash and cash equivalents represents funds held in the Segregated Account for the purpose of redeeming the Koch Preferred Securities at a future date, as described above. Restricted cash and cash equivalents consist of highly liquid investments with remaining maturities when purchased of three months or less. The fair value of restricted cash and cash equivalents is determined using quoted prices available in active markets for identical investments, which is a Level 1 input. Long-Term Debt Instruments and Preferred Securities—The fair values of the Company’s debt instruments were determined using broker-quoted market prices, which are considered Level 2 inputs. The carrying amount of debt outstanding, if any, under the Company’s revolving credit facilities approximates fair value as interest rates on these borrowings approximate current market rates, and are considered Level 2 inputs. The fair value of the Koch Preferred Securities was estimated using a discounted cash-flow approach in conjunction with a binomial lattice interest rate model to incorporate the contractual dividends and the Company’s ability to redeem the Koch Preferred Securities. Key input assumptions to the valuation analysis are the credit spread, yield volatility, and expected time to redemption, which are considered Level 3 inputs. The credit spread was estimated using the credit spread at issuance of the Koch Preferred Securities and adjusted for the change in observed publicly traded debt of the Company between the issuance date and the measurement date. The yield volatility estimate was based on the historical yield volatility observed from comparable public high yield debt, and the expected time to redemption was based on the Company’s expectations. The carrying values and fair values of the Company’s debt and Koch Preferred Securities that are subject to fair value disclosures as of March 31, 2018 and December 31, 2017 were as follows:
| March 31, 2018 |  | December 31, 2017
(in thousands) | Carrying Value |  | Fair Value |  | Carrying Value |  | Fair Value
Debt instruments, excluding capital lease obligations | $ | 9,537,663 |  |  | $ | 9,914,144 |  |  | $ | 10,128,020 |  |  | $ | 10,868,626 |
Koch Preferred Securities | $ | 708,111 |  |  | $ | 942,500 |  |  | $ | 682,449 |  |  | $ | 924,700 |
Derivative Financial Instruments—All derivative financial instruments are reported on the Condensed Consolidated Balance Sheets at fair value. The Company has not designated any of its derivative financial instruments as hedges, and therefore, all changes in fair value are recognized in the Condensed Consolidated Statements of Operations. During the three months ended March 31, 2018 and 2017, the changes in fair value were not material to the condensed consolidated financial statements. 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. As of March 31, 2018 and December 31, 2017, the Company had no material guarantees other than $55 million and $54 million, respectively, primarily in standby letters of credit related to its insurance programs. Hurricanes—In the second half of 2017, there were three hurricanes impacting certain areas in which the Company operates that resulted in power outages and service disruptions to certain customers of the Company. The financial impact from these hurricanes to the three months ended March 31, 2018 was not material. The Company will continue to evaluate any potential financial and business impacts these hurricanes may have on future periods. Settlements—In January 2018, the Company received $10 million in connection with a litigation settlement which is reflected as a benefit to selling, general and administrative expenses in the Condensed Consolidated Statement of Operations. In February 2018, the Company entered into a settlement agreement, the terms of which entitled the Company to receive $7.5 million of non-cash compensation which was received in the first quarter of 2018 and reflected as a benefit to selling, general and administrative expenses in the Condensed Consolidated Statement of Operations. Additionally, the Company is entitled to receive $24 million in licensing fees over a forty-eight-month period. As of March 31, 2018, collection of amounts due under the license arrangement was not deemed probable. In April 2018, the counterparty to the license agreement was acquired by a third-party. As a result of this acquisition, the Company will determine the effect on its probability assessment and the corresponding impact to the second quarter of 2018 consolidated financial results. Recently Adopted Accounting Pronouncements—In May 2014, the FASB issued authoritative guidance, which sets forth a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The Company adopted this new authoritative guidance and its related amendments effective on January 1, 2018 using the modified retrospective transition method, whereby the cumulative effect of initially applying the new standard is recognized as an adjustment to the opening balance of stockholders’ equity. Results for reporting periods beginning on or after January 1, 2018 are presented under this new standard, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. The largest impact from the new standard relates to the timing of recognition of certain incremental selling costs associated with acquiring new customers. Under the new standard, these costs will primarily be amortized using an accelerated method over the expected life of the customer relationship, which is 15 years, rather than the initial contract term (generally 3-5 years). To a lesser extent, the adoption of the new standard impacted the identification of performance obligations and the allocation of transaction price to those performance obligations for certain sales of security systems sold outright to customers. As of January 1, 2018, due to the cumulative impact of adopting this new standard, the Company recorded a net increase to opening balance of stockholders’ equity of $34 million, which is net of tax of $12 million. The impact to the lines items in the Condensed Consolidated Balance Sheet were as follows:
|  | Balance at |  | Revenue Standard Adoption Adjustment |  | Balance at
(in thousands) |  | December 31, 2017 |  |  | January 1, 2018
Assets |  |  |  |  |  |
Prepaid expenses and other current assets |  | $ | 73,358 |  |  | $ | 6,615 |  |  | $ | 79,973 |
Deferred subscriber acquisition costs, net |  | 282,478 |  |  | 33,380 |  |  | 315,858 |
Other assets |  | 123,967 |  |  | 6,321 |  |  | 130,288 |
Liabilities |  |  |  |  |  |
Deferred tax liabilities |  | 1,376,708 |  |  | 11,886 |  |  | 1,388,594 |
Stockholders' Equity |  |  |  |  |  |
Accumulated deficit |  | (998,212 | ) |  | 34,430 |  |  | (963,782 | )
Refer to Note 2 “Revenue” for further discussion related to the impact of adopting this standard. In January 2016, the FASB issued authoritative guidance related to the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, this update clarifies the guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from the unrealized losses on available-for-sale debt securities. The Company adopted this new authoritative guidance effective on January 1, 2018. There was no material impact to the condensed consolidated financial statements as a result of the adoption. In May 2017, the FASB issued authoritative guidance that addresses changes to the terms or conditions of a share-based payment award, specifically regarding which changes to the terms or conditions of a share-based payment award would require modification accounting. This guidance does not change the accounting for modifications, but clarifies that an entity should apply modification accounting except when the fair value, vesting conditions, and classification of the modified award are the same as the original award immediately before the original award is modified. The Company adopted this new authoritative guidance effective on January 1, 2018, and applied the guidance prospectively for the shared-based payment award modifications subsequent to the date of adoption. Refer to Note 9 “Share-based Compensation” for further discussion. In November 2016, the FASB issued authoritative guidance amending the presentation of restricted cash within the statement of cash flows. The new guidance requires companies to include amounts generally described as restricted cash and restricted cash equivalents in cash and cash equivalents when reconciling beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this guidance in the first quarter of 2018 using the retrospective transition approach for all periods presented in the Condensed Consolidated Statement of Cash Flows. The following table provides a reconciliation of the amount of cash, cash equivalents, and restricted cash reported within the Condensed Consolidated Balance Sheets to the total of the same such amounts shown in the Condensed Consolidated Statements of Cash Flows:
(in thousands) | March 31, 2018 |  | December 31, 2017
Cash and cash equivalents | $ | 258,195 |  |  | $ | 122,899 |
Current portion of restricted cash and cash equivalents | 3,883 |  |  | 3,883 |
Noncurrent restricted cash and cash equivalents | 750,000 |  |  | — |
Total cash, cash equivalents, and restricted cash at the end of period | $ | 1,012,078 |  |  | $ | 126,782 |
Recently Issued Accounting Pronouncements—In February 2016, the FASB issued authoritative guidance on accounting for leases. This new guidance requires lessees to recognize a right-to-use asset and a lease liability for substantially all leases and to disclose key information about leasing arrangements. The recognition, measurement, and presentation of expenses and cash flows for lessees will remain significantly unchanged from current guidance. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. This guidance will be effective for the Company in the first quarter of 2019. Early adoption is permitted. The guidance is to be adopted using a modified retrospective approach as of the earliest period presented. The Company is currently evaluating the impact of this guidance. In January 2017, the FASB issued authoritative guidance to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. This guidance will be effective for the Company for annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests.

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