ADT 2014 Annual Report

ADT 2014 Annual Report
January 23, 2015
Dear ADT Stockholder,
We closed the 2014 fiscal year making significant progress on each of our key performance measures, and delivered a strong second half
performance after some challenges at the outset of the year. Our steady progress in delivering against our strategic initiatives was evidenced by
a strong fourth fiscal quarter financial performance, driven by an increase in gross customer additions, a reduction in attrition, improvement in
cost efficiencies, and strong margin performance. We enter the new fiscal year with a clear focus on execution and maintaining the positive
momentum in our operating and financial performance to position ADT for continued growth.
Reflecting on our progress against our strategic initiatives, there were several significant achievements that put us on the path to continued
growth as we seek to create long-term shareholder value—
• Installed our 1 Millionth ADT Pulse® customer. To put this milestone in context, if ADT Pulse® were an independent company, it
would be the fourth largest security company in North America. Today, just four years after its initial launch, Pulse take rates are exceeding
50% across all channels, and approximately 70% of all direct new Residential ADT sales are interactive security systems – representing
successful transformations of our technology expertise, product portfolio, and customer engagement.
• Improved the customer experience and drove significant improvements in revenue and unit attrition. We ended the fiscal year
with fourth quarter attrition favorable to both our guidance and prior year. Enhanced customer experience initiatives across the service
value chain, along with non-pay initiatives, enhanced resale efforts and tighter credit screening all contributed to lower attrition in 2014.
Our plan is to drive attrition even lower in 2015.
• Expanded our addressable market with the launch of ADT Business. Upon the expiration of the non-competition agreement with
our former parent company in late September 2014, we expanded our product and service offerings to the mid-size commercial market,
tripling the addressable market for our business services. The newly rebranded “ADT Business” team will continue to serve small business
owners while we begin to build the expertise and product capability to capture growth opportunities in this expanded market, where the
strength of ADT’s trusted brand continues to be a competitive advantage.
• Completed strategic acquisition and forged new partnerships. In July, we successfully closed the acquisition of the second-largest
security company in Canada, Reliance Protectron, that when combined with ADT Canada, creates a strong platform for future growth in
that country. Over the course of 2014, we formed new relationships with technology companies such as Life360, McAfee and IFTTT,
providing opportunities to expand our services and improve the customer experience.
• Continued to optimize our cost structure. In fiscal year 2014, we continued to make progress in driving down customer acquisition
costs and lowering our overall net creation multiple despite higher Pulse take rates, which require a larger upfront investment. In 2015, we
remain focused on driving creation costs even lower, through our cost efficiency programs and a solid pipeline of productivity initiatives
including the launch of electronic contracts, the roll out of our new wireless Pulse panel, and other planned hardware cost efficiencies.
• Added tremendous new talent to the management team. Four executives joined our Executive Leadership Team in the last year:
Chief Financial Officer Michael Geltzeiler; Chief Marketing Officer Jerri DeVard; Chief Human Resources Officer Laura Miller; and President
of ADT Canada Andrea Martin. Each of these leaders brings deep expertise in their field, having led large functions at leading public
companies such as the New York Stock Exchange, Verizon, and Coca-Cola. We also strengthened our sales leadership teams in
Residential and Business.
• Completed all post-separation transition activities with our former parent company. After a three-year change effort that began
pre-separation and touched all 200 of our facilities across North America and nearly every single IT platform, we completed all separation
activities and freed up significant resources to focus on executing against ADT’s strategic and operational priorities.
ADT continues to lead in a market that is creating new opportunities for future growth. Those opportunities are being fueled by innovation, new
services, and the potential demand for monitored security as an integral part of connected homes and businesses. Today only about 20% of
homes in North America have a professionally monitored security system, and home automation services are only in their infancy, leaving 80% of
the market without monitored security or automation. This represents a significant potential growth opportunity for ADT.
This is an exciting time for our industry, and we believe that ADT is in the right place, at the right time, with the right capabilities to capitalize on
these opportunities and deliver meaningful value to our investors. We intend to strengthen our position as the #1 security company in North
America, trusted by millions to meet their needs and provide peace of mind.
Thank you for your continued support and partnership as we forge ahead.
Regards,
Naren Gursahaney
President & Chief Executive Officer
The ADT Corporation
The ADT Corporation
1501 Yamato Road
Boca Raton, Florida 33431
January 23, 2015
Dear ADT Stockholder:
You are cordially invited to attend The ADT Corporation 2015 Annual Meeting of Stockholders (the “Annual Meeting”), which will be held
at 8:30 a.m. Eastern Time, on Tuesday, March 17, 2015 at the Embassy Suites Boca Raton, 661 NW 53rd Street, Boca Raton, Florida.
Details of the business to be conducted at the Annual Meeting are given in the accompanying Notice of Annual Meeting and Proxy
Statement, which provides information required by applicable laws and regulations.
In accordance with U.S. Securities and Exchange Commission rules, we are sending stockholders a Notice of Internet Availability of
Proxy Materials (the “Notice”) with instructions for accessing the proxy materials and voting via the Internet. This Notice also provides
information on how stockholders may obtain paper copies of our proxy materials if they so choose. We believe use of the Internet makes
the proxy distribution process more efficient, less costly and helps in conserving natural resources.
Your vote is important and we encourage you to vote whether you are a registered owner or a beneficial owner (because your shares are
held in a stock brokerage account or by a bank or other nominee), and whether or not you plan to attend the Annual Meeting. If you are
a registered owner of ADT common stock and do not plan to vote in person at the Annual Meeting, you may vote via the Internet, by
telephone or, if you receive a paper proxy card in the mail, by mailing the completed proxy card. Voting by any of these methods will
ensure your representation at the Annual Meeting. If you are a beneficial owner, the registered owner will communicate with you about
how to vote your shares.
Thank you for your continued interest in ADT.
Bruce Gordon
Chairman of the Board of Directors
PROXY STATEMENT
Yours sincerely,
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The ADT Corporation
Notice of 2015 Annual Meeting of Stockholders
When:
Tuesday, March 17, 2015 at 8:30 a.m. Eastern Time
Where:
Embassy Suites Boca Raton, 661 NW 53rd Street, Boca Raton, Florida 33487
Who Can Vote:
Stockholders of ADT common stock at the close of business on January 20, 2015.
Date of Mailing or Beginning on or about January 23, 2015, this Notice of Annual Meeting and the 2015 Proxy
Availability Date: Statement are being mailed or made available, as the case may be, to stockholders of record on
January 20, 2015.
Items of Business: • To elect the members of our Board of Directors, each as named in the 2015 Proxy Statement.
• To ratify the appointment of Deloitte & Touche LLP as our Independent Registered Public
Accounting Firm for fiscal year 2015.
• To approve, in a non-binding vote, the compensation of the Company’s named executive officers.
Proxy Voting:
Your vote is important. Proxy voting permits stockholders unable to attend the Annual Meeting to
vote their shares through a proxy. By appointing a proxy, your shares will be represented and voted
in accordance with your instructions. Stockholders who do not receive paper copies of our proxy
materials can vote their shares by following the voting instructions provided on the Notice of
Internet Availability of Proxy Materials. If you are a registered owner and requested a paper copy of
the proxy materials, you can vote your shares by proxy by completing and returning your proxy card
or by following the Internet or telephone voting instructions provided on the proxy card. If you sign
the proxy card and do not provide instructions on how to vote, the proxies will vote as
recommended by the Board of Directors. Beneficial owners who received or requested a paper copy
of the proxy materials may submit voting instructions by completing and returning their voting
instruction form or by following the Internet or telephone voting instructions provided on the voting
instruction form. You can change your voting instructions or revoke your proxy at any time prior to
the Annual Meeting by following the instructions on page 2 of the 2015 Proxy Statement and on the
proxy card.
Important Notice Regarding the Availability of Proxy Materials for the Stockholder Meeting to be held on
March 17, 2015. The Company’s 2015 Proxy Statement and 2014 Annual Report are available online at
www.proxyvote.com.
By Order of the Board of Directors,
N. David Bleisch
Senior Vice President, Chief Legal Officer and Corporate Secretary
January 23, 2015
PROXY STATEMENT
• To transact such other business as may properly come before the annual meeting or any
adjournment or postponement thereof.
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TABLE OF CONTENTS
The ADT Corporation
Table of Contents
Questions and Answers about Voting Your Shares
Costs of Solicitation
Returning Your Proxy or Voting Instruction Form
CORPORATE GOVERNANCE OF THE COMPANY
Overview
Board of Directors
Director Independence
Experiences, Qualifications, Attributes and Skills of Director Nominees
Certain Relationships and Related Party Transactions
Director Service
Code of Conduct
Director Nomination Process
PROPOSAL NUMBER ONE—ELECTION OF DIRECTORS
Current Directors Nominated for Re-Election
1
1
4
4
5
5
5
7
11
12
13
13
13
15
15
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
18
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
19
EXECUTIVE OFFICERS
20
COMPENSATION OF EXECUTIVE OFFICERS
23
COMPENSATION DISCUSSION AND ANALYSIS
23
Executive Summary
Fiscal Year 2014 Business Highlights
Overview of Compensation Programs
Fiscal Year 2014 Compensation Decisions
Pay for Performance
Process for Determining Executive Officer Compensation (including NEOs)
Components of Compensation Programs
Fiscal Year 2015 Compensation Decisions
23
23
23
25
25
26
28
31
PROXY STATEMENT
INFORMATION ABOUT THIS PROXY STATEMENT AND THE ANNUAL MEETING
TABLE OF CONTENTS
Executive Benefits and Perquisites
Policies and Practices
Risk Mitigation in Compensation Program Design
32
32
33
REPORT OF THE COMPENSATION COMMITTEE
34
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
34
FISCAL YEAR 2014 NEO COMPENSATION
35
Summary Compensation Table
Summary Compensation Table – All Other Compensation
Grants of Plan Based Awards Table
Outstanding Equity Awards at Fiscal Year-End Table
Option Exercises and Stock Vested Table
Non-Qualified Deferred Compensation Table
Potential Payments Upon Termination or Change in Control
35
36
37
39
42
42
42
COMPENSATION OF NON-MANAGEMENT DIRECTORS
45
AUDIT COMMITTEE REPORT
46
PROPOSAL NUMBER TWO—RATIFICATION OF THE APPOINTMENT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
47
PROXY STATEMENT
Audit and Non-Audit Fees
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of Independent
Auditors
47
47
PROPOSAL NUMBER THREE—NON-BINDING ADVISORY VOTE ON COMPENSATION
OF THE NAMED EXECUTIVE OFFICERS
48
OTHER MATTERS
49
Registered and Principal Executive Offices
Householding of Proxy Materials
49
49
RECONCILIATION OF NON-GAAP MEASURES TO GAAP MEASURES AND SELECTED
DEFINITIONS
49
INCORPORATION BY REFERENCE
53
WEBSITE ACCESS TO REPORTS AND OTHER INFORMATION
53
INFORMATION ABOUT THIS PROXY STATEMENT AND THE ANNUAL MEETING
INFORMATION ABOUT THIS PROXY STATEMENT
AND THE ANNUAL MEETING
Questions and Answers about Voting Your Shares
The ADT Corporation (“ADT” or the “Company”) has sent a Notice of
Internet Availability of Proxy Materials and/or Notice of Annual Meeting
and Proxy Statement, together with a proxy card, because ADT’s
Board of Directors is soliciting your proxy to vote at the Annual
Meeting of Stockholders scheduled to be held on March 17, 2015
(the “Annual Meeting”). This Proxy Statement contains information
about the items being voted on at the Annual Meeting and important
information about ADT. ADT’s 2014 Annual Report on Form 10-K,
which includes ADT’s consolidated and combined financial
statements for the fiscal year ended September 26, 2014 (the
“Annual Report”), is enclosed with these materials. ADT has made
these materials available to each person who is registered as a holder
of its shares in its register of stockholders (such owners are often
referred to as “holders of record” or “registered stockholders”) as of
the close of business on January 20, 2015, the record date for the
Annual Meeting. Any ADT stockholder as of the record date who
does not receive a paper copy of the Notice of the Annual Meeting
and Proxy Statement, together with the enclosed proxy card or voting
instruction form and the Annual Report, may obtain a copy at the
Annual Meeting or by contacting ADT at (561) 322-4958 or
[email protected]
ADT has requested those banks, brokerage firms and other
nominees who hold ADT shares on behalf of the owners of the
shares (such owners are often referred to as “beneficial owners,”
“beneficial stockholders” or “street name holders”) as of the close of
business on January 20, 2015 forward these materials, together with
a voting instruction form, to those beneficial stockholders. ADT has
agreed to pay the reasonable expenses of the banks, brokerage firms
and other nominees for forwarding these materials.
Why did I receive a one-page notice in the
mail regarding the Internet availability of
proxy materials?
Pursuant to rules adopted by the U.S. Securities and Exchange
Commission (the “SEC”), we have elected to provide stockholders
access to our proxy materials over the Internet. We believe that this
e-proxy process will expedite our stockholders’ receipt of proxy
materials, lower our costs in connection with our Annual Meeting and
reduce the environmental impact of our Annual Meeting. Accordingly,
we sent a Notice of Internet Availability of Proxy Materials (the
“Notice”) on or about January 23, 2015 to stockholders of record
entitled to vote at the Annual Meeting. If you receive the Notice by
mail, you will not receive a printed copy of the proxy materials unless
you specifically request a printed copy.
All stockholders will have the ability to access the proxy materials on a
website referred to in the Notice, to download printable versions of
the proxy materials from our website or to request and receive a
paper or email copy of the proxy materials from us. Instructions on
how to access the proxy materials over the Internet or to request a
printed copy from us may be found on the Notice. If you receive
paper copies of the proxy materials, a proxy card will also be
enclosed.
Who is entitled to vote?
January 20, 2015 is the record date for the Annual Meeting. On
January 20, 2015, there were 171,152,219 shares outstanding and
entitled to vote at the Annual Meeting. Stockholders registered in our
share register at the close of business on January 20, 2015 are
entitled to vote at the Annual Meeting.
How many votes do I have?
Every holder of a share of common stock on the record date will be
entitled to one vote per share for each director to be elected at the
Annual Meeting and to one vote per share on each other matter
presented at the Annual Meeting.
What is the difference between holding
shares as a stockholder of record and as a
beneficial owner?
Most of our stockholders hold their shares through a stockbroker,
bank or other nominee rather than directly in their own name. As
summarized below, there are some differences between shares held
of record and those owned beneficially.
Stockholder of Record
If your shares are registered directly in your name, as registered
shares entitled to voting rights in our share register operated by our
transfer agent, Wells Fargo Shareowner Services, you are
considered, with respect to those shares, the stockholder of record
and the Notice or, if requested, paper or emails copies of these proxy
materials are being sent to you directly by us. As the stockholder of
record, you have the right to grant your voting proxy directly to the
Company officers named in the proxy card, or to grant a written proxy
to any person (who does not need to be a stockholder), or to vote in
person at the Annual Meeting. If you have received paper copies of
the proxy materials, we have enclosed a proxy card for you to use in
which you can elect to appoint Company officers as proxies.
Beneficial Owner
If your shares are held in a stock brokerage account or by a bank or
other nominee, you are considered the beneficial owner of shares
held in street name, and the Notice or, if requested, paper copies of
these proxy materials are being forwarded to you by your broker,
bank or other nominee who is considered, with respect to those
shares, the stockholder of record. As the beneficial owner, you have
The ADT Corporation
2015 Proxy Statement
1
PROXY STATEMENT
Why did I receive these proxy materials?
INFORMATION ABOUT THIS PROXY STATEMENT AND THE ANNUAL MEETING—CONTINUED
the right to direct your broker, bank or other nominee on how to vote
your shares and are also invited to attend the Annual Meeting.
However, since you are not the stockholder of record, you may only
vote these shares in person at the Annual Meeting if you follow the
instructions described below under the headings “How do I attend
the Annual Meeting?” and “How do I vote?” If you have received
paper copies of the proxy materials, your broker, bank or other
nominee has enclosed a voting instruction form for you to use in
directing your broker, bank or other nominee as to how to vote your
shares, which may contain instructions for voting by telephone or
electronically.
How do I vote?
You can vote in the following ways:
• By Mail: If you are a holder of record and elect to receive a paper
copy of your proxy materials, you can vote by marking, dating and
signing the proxy card and returning it by mail in the enclosed
postage-paid envelope. If you beneficially own your shares and
receive a voting instruction form, you can vote by following the
instructions on your voting instruction form. Please refer to
information from your bank, broker or other nominee on how to
submit voting instructions.
• By Internet or Telephone: You can vote over the Internet at
www.proxyvote.com by following the instructions on the proxy
card, voting instruction form or in the Notice previously sent to
you. You can vote using a touchtone telephone by calling 1-800690-6903.
• At the Annual Meeting: If you are a holder of record planning to
attend the Annual Meeting and wish to vote your shares in person,
we will give you a ballot at the meeting. Stockholders who own
their shares in street name are not able to vote at the Annual
Meeting unless they have a proxy, executed in their favor, from
their broker, bank or other nominee, the holder of record of their
shares.
PROXY STATEMENT
Even if you plan to be present at the Annual Meeting, we encourage
you to complete and mail the enclosed card to vote your shares by
proxy or vote by phone or the Internet. Telephone and Internet voting
facilities for stockholders will be available 24 hours a day and will
close at 11:59 p.m. Eastern Time on March 16, 2015. Proxy cards
mailed by holders of record must be received no later than March 16,
2015 in order to be counted in the vote.
How do I vote by proxy given to a Company
officer if I am a holder of record?
If you properly fill in your proxy card appointing an officer of the
Company as your proxy and submit it to us in time to vote, your
proxy, meaning one of the individuals named on your proxy card, will
vote your shares as you have directed.
If other matters are properly presented at the Annual Meeting and any
adjournment or postponement thereof for consideration and you are a
holder of record and have submitted a proxy, the persons named as
proxies will have the discretion to vote on those matters for you.
At the time we began printing this Proxy Statement, we knew of no
matters intended to be raised at the Annual Meeting other than those
described in this Proxy Statement.
2 The ADT Corporation
2015 Proxy Statement
Whether or not you plan to attend the Annual Meeting, we urge you to
submit your proxy. Returning the proxy card or submitting your vote
electronically will not affect your right to attend the Annual Meeting.
How do I attend the Annual Meeting?
All stockholders as of January 20, 2015 are invited to attend and vote
at the Annual Meeting. For admission to the Annual Meeting, if you
are a stockholder of record, you should bring the admission ticket
which is part of the proxy card and a form of photo identification to
the Registered Stockholders check-in area, where your ownership will
be verified. Those who beneficially own shares should come to the
Beneficial Owners check-in area. To be admitted, if you are a
beneficial owner, you must bring an account statement or letter from
your bank, broker or nominee showing that you own ADT shares as
of January 20, 2015 along with a form of photo identification.
Registration will begin at 8:00 a.m., and the Annual Meeting will begin
at 8:30 a.m.
What if I return my proxy card but do not
mark it to show how I am voting?
Your shares will be voted according to the instructions you have
indicated. If you sign and return your proxy card but do not indicate
instructions for voting, your shares will be voted: “FOR” the election of
all nominees to the Board of Directors named on the proxy card;
“FOR” the ratification of Deloitte & Touche LLP as our Independent
Registered Public Accounting Firm for fiscal year 2015 and “FOR” the
approval, in a non-binding vote, of the compensation of ADT’s named
executive officers.
If other matters are properly presented at the Annual Meeting and any
adjournment or postponement thereof for consideration and you are a
holder of record and have submitted a proxy, the persons named as
proxies will have the discretion to vote on those matters for you.
May I change or revoke my vote after I
submit my vote via telephone or the
Internet, or return my proxy or voting
instruction form?
You may change your vote by:
• If you are a holder of record, by notifying our Corporate Secretary
in writing before the Annual Meeting that you are revoking your
proxy or, if you beneficially own your shares, following the
instructions on the voting instruction form, each provided that
such notice is received no later than March 16, 2015;
• Submitting another proxy card (or voting instruction form if you
beneficially own your shares) with a later date that is received not
later than March 16, 2015;
• If you are a holder of record, or a beneficial owner with a proxy
from the holder of record, voting in person at the Annual Meeting;
or
• If you voted by telephone or the Internet, submitting subsequent
voting instructions through the telephone or Internet before the
closing of those voting facilities at 11:59 p.m., Eastern Time on
March 16, 2015.
INFORMATION ABOUT THIS PROXY STATEMENT AND THE ANNUAL MEETING—CONTINUED
It means you have multiple accounts at the transfer agent and/or with
banks and stockbrokers. Please vote all of your shares. Beneficial
owners sharing an address who are receiving multiple copies of the
Proxy Statement and Annual Report will need to contact their broker,
bank or other nominee to request that only a single copy of each
document be mailed to all stockholders at the shared address in the
future. In addition, if you are the beneficial owner, but not the record
holder, of ADT’s shares, your broker, bank or other nominee may
deliver only one copy of the Proxy Statement and Annual Report to
multiple stockholders who share an address unless that nominee has
received contrary instructions from one or more of the stockholders.
ADT will deliver promptly, upon written or oral request, a separate
copy of the Proxy Statement and Annual Report to a stockholder at a
shared address to which a single copy of the documents was
delivered. Stockholders who wish to receive a separate printed copy
of the Proxy Statement and Annual Report, now or in the future,
should submit their request to ADT by telephone at (561) 322-4958,
by email to [email protected] or by submitting a written
request to our Corporate Secretary at The ADT Corporation, 1501
Yamato Road, Boca Raton, Florida 33431.
What proposals are being presented at the
Annual Meeting?
ADT intends to present proposals numbered 1 through 3 for
stockholder consideration and voting at the Annual Meeting. These
proposals are for:
1. Election of the nominees to the Board of Directors, each as
named in this Proxy Statement.
2. Ratification of the appointment of Deloitte & Touche LLP as ADT’s
Independent Registered Public Accounting Firm for fiscal year
2015.
3. Approval, in a non-binding vote, of the compensation of the
Company’s named executive officers.
Other than matters incident to the conduct of the Annual Meeting and
those set forth in this Proxy Statement, ADT does not know of any
other business or proposals to be raised at the Annual Meeting. If any
other business is proposed and properly presented at the Annual
Meeting, the proxies received from our stockholders give the named
proxies the authority to vote on the matter in their discretion, and such
named proxies will vote in accordance with the recommendations of
the Board of Directors.
How does a stockholder submit a proposal
for the 2016 Annual Meeting?
Rule 14a-8 of the Securities Exchange Act of 1934, or the “Exchange
Act,” establishes the eligibility requirements and the procedures that
must be followed for a stockholder proposal to be included in a
public company’s proxy materials. Under the rule, if a stockholder
wants to include a proposal in ADT’s proxy materials for its 2016
Annual Meeting, the proposal must be received by ADT at its principal
executive offices on or before September 25, 2015 (120 calendar
days before the date of this Proxy Statement’s release to
stockholders) and comply with specified eligibility requirements and
procedures in Exchange Act Rule 14a-8. An ADT stockholder who
wants to present a matter for action at the 2016 Annual Meeting, but
chooses not to do so under Exchange Act Rule 14a-8 (i.e., is not
requesting that the proposal be included in ADT’s proxy materials),
must deliver to the Corporate Secretary of ADT, at its principal
executive offices, on or after November 18, 2015 and no later than
December 18, 2015 (not less than 90 nor more than 120 days prior
to the one-year anniversary of the Annual Meeting), a written notice to
that effect; provided, however, in the event that the date of the 2016
Annual Meeting is convened more than 30 days prior to or delayed
by more than 70 days after the anniversary date of the 2015 Annual
Meeting, such notice must be received no earlier than 120 calendar
days prior to the 2016 Annual Meeting and not later than the later of
the 90th day before the 2016 Annual Meeting or the 10th day
following the date on which public announcement of the date of the
2016 Annual Meeting is first made.
In either case, as well as for stockholder nominations for directors, the
stockholder must also comply with the requirements in the
Company’s By-laws with respect to a stockholder properly bringing
business before the Annual Meeting. (You can request a copy of the
By-laws from our Corporate Secretary.)
Can a stockholder nominate director
candidates?
The Company’s By-laws permit stockholders to nominate directors at
the Annual Meeting. To make a director nomination at the 2016
Annual Meeting, you must submit a notice with the name of the
candidate on or after November 18, 2015 and no later than
December 18, 2015 (not less than 90 nor more than 120 days prior
to the one-year anniversary of the Annual Meeting) to the Corporate
Secretary of ADT, at its principal executive offices. The nomination
and notice must meet all other qualifications and requirements of the
Company’s Board Governance Principles, By-laws and Regulation
14A of the Exchange Act. The Nominating and Governance
Committee of the Board of Directors evaluates all director nominee
candidates in the same manner, regardless of the source of the
recommendation. These standards are discussed in further detail
below at page 13 under “Corporate Governance of the CompanyDirector Nomination Process.” (You can request a copy of the
nomination requirements from our Corporate Secretary.)
What constitutes a quorum?
In order to conduct business at the Annual Meeting, it is necessary to
have a quorum. The holders of record of a majority of the voting
power of the issued and outstanding shares of common stock of the
Company entitled to vote thereat, present in person or represented
by proxy, shall constitute a quorum for the transaction of business at
the Annual Meeting.
How many votes are required to approve
each item?
Election of each director nominee requires the affirmative vote of a
majority of the votes cast with respect to the director at the Annual
Meeting for the election of directors, provided that in a “contested
election” of directors (that is, the number of shares voted “for” that
nominee exceeds the number of votes cast “against” that nominee),
directors shall be elected by the vote of a plurality of the votes cast.
Proposals No. 2 and 3 require the affirmative vote of the holders of a
majority of the voting power of the shares of stock present in person
or represented by proxy and entitled to vote on the subject matter.
Proposals No. 2 and 3 are advisory in nature and are non-binding.
The ADT Corporation
2015 Proxy Statement
3
PROXY STATEMENT
What does it mean if I receive more than
one proxy or voting instruction form?
INFORMATION ABOUT THIS PROXY STATEMENT AND THE ANNUAL MEETING—CONTINUED
What is the effect of broker non-votes and
abstentions?
What happens if a nominee for director
declines or is unable to accept election?
A broker non-vote occurs when a broker holding shares for a
beneficial owner does not vote on a particular agenda proposal
because the broker does not have discretionary voting power for that
particular proposal and has not received voting instructions from the
beneficial owner. Under the current New York Stock Exchange
(“NYSE”) rules, although brokers have discretionary power to vote
your shares with respect to “routine” matters, they do not have
discretionary power to vote your uninstructed shares on “non-routine”
matters. We believe the following proposals will be considered “nonroutine” under the NYSE rules and therefore your broker will not be
able to vote your shares with respect to these proposals unless the
broker receives appropriate voting instructions from you: Proposal
No. 1 (Election of Directors) and Proposal No. 3 (Non-Binding
Advisory Vote on Compensation of the Named Executive Officers).
Broker non-votes will have no effect on the outcomes of Proposal
No. 1 or Proposal No. 3.
As of the mailing of this Proxy Statement, our Board of Directors does
not know of any reason why any director nominee would be unable to
serve as a director.
Shares owned by stockholders electing to abstain from voting and
broker non-votes will be regarded as present at the meeting for
purposes of determining whether a quorum is present. Votes cast
shall exclude abstentions and therefore abstentions will have no
effect on Proposal No. 1, but abstentions will have the effect of an
“AGAINST” vote on Proposal No. 2 (Ratification of the appointment of
Deloitte & Touche LLP as ADT’s Independent Registered Public
Accounting Firm for fiscal year 2015) and Proposal No. 3 (NonBinding Advisory Vote on Compensation of the Named Executive
Officers).
If any nominee is unable to serve, the Board can either nominate a
different individual or reduce the size of the Board. If it nominates a
different individual, the shares represented by all valid proxies will be
voted for that nominee.
How will voting on any other business be
conducted?
Other than matters incidental to the conduct of the Annual Meeting
and those set forth in this Proxy Statement, we do not know of any
other business or proposals to be considered at the Annual Meeting.
If any other business is proposed and properly presented at the
Annual Meeting, the proxies received from our stockholders give the
proxy holders the authority to vote on the matter at their discretion
and such proxy holders will vote in accordance with the
recommendations of the Board of Directors.
Who will count the votes?
Broadridge Financial Solutions, Inc. (“Broadridge”) will act as the
inspector of elections and will tabulate the votes.
Costs of Solicitation
PROXY STATEMENT
The costs of solicitation of proxies will be paid by ADT. ADT has engaged MacKenzie Partners, Inc. as the proxy solicitor for the Annual Meeting
for an approximate fee of $10,000, plus reasonable out-of-pocket expenses. In addition to the use of the mails, certain directors, officers or
employees of ADT may solicit proxies by telephone, electronic communication or personal contact. Upon request, ADT will reimburse brokers,
dealers, banks and trustees or their nominees for reasonable expenses incurred by them in forwarding proxy materials to beneficial owners of our
common stock.
Returning Your Proxy or Voting Instruction Form
ADT stockholders of record who have received paper copies of the proxy materials should complete and return the proxy card as soon as
possible. In order to assure that your proxy is received in time to be voted at the Annual Meeting, the proxy card must be completed in
accordance with the instructions on it and received at the address set forth below by the times (being local times) and dates specified therein:
Vote Processing c/o Broadridge
51 Mercedes Way
Edgewood, NY 11717
If your shares are held in street name and you have received paper copies of the proxy materials, you should return your voting instruction form in
accordance with the instructions on that form or as provided by the bank, brokerage firm or other nominee who holds shares of ADT common
stock on your behalf.
4 The ADT Corporation
2015 Proxy Statement
CORPORATE GOVERNANCE OF THE COMPANY
CORPORATE GOVERNANCE OF THE COMPANY
Overview
ADT’s Board of Directors is responsible for directing, and providing oversight of, the management of ADT’s business in the best interests of the
stockholders and consistent with good corporate citizenship. In carrying out its responsibilities, the Board of Directors selects and monitors top
management, provides oversight for financial reporting and legal compliance, determines ADT’s governance principles and implements its
governance policies. The Board of Directors, together with management, is responsible for establishing the firm’s operating values and code of
conduct and for setting strategic direction and priorities.
ADT believes that good governance requires not only an effective set of specific practices but also a culture of responsibility throughout the
Company, and governance at ADT is intended to optimize both. ADT also believes that good governance ultimately depends on the quality of its
leadership, and it is committed to recruiting and retaining directors and officers of proven leadership and personal integrity. To further these goals,
the Board of Directors has adopted the ADT Board Governance Principles. The Board of Directors intends that these principles serve as a flexible
framework within which the Board of Directors may conduct its business, and not as a set of binding legal obligations. The ADT Board Governance
Principles are posted on our website at http://investors.adt.com. We will also provide a copy of the ADT Board Governance Principles to
stockholders upon written request to our Corporate Secretary at The ADT Corporation, 1501 Yamato Road, Boca Raton, Florida 33431.
Board of Directors
The business of the Company is managed under the direction of its Board of Directors. The Board of Directors delegates its authority to
management for managing the everyday affairs of the Company. The Board of Directors requires that senior management review major actions
and initiatives with the Board prior to implementation.
Mission of the Board of Directors: What the Board Intends to Accomplish
The mission of the Board of Directors is to promote the long-term value and health of the Company in the interests of the stockholders, its
employees and its other stakeholders and set an ethical “tone at the top.” To this end, the Board of Directors provides management with
strategic guidance, and also ensures that management adopts and implements procedures designed to promote both legal compliance and the
highest standards of honesty, integrity and ethics throughout the organization.
Governance Principles: How the Board Oversees the Company
2. Company Leadership: The directors, together with management, set ADT’s strategic direction, review financial objectives, and establish a
high ethical tone for the management and leadership of the Company.
3. Compliance with Laws and Ethics: The directors ensure that procedures and practices are in place and designed to prevent and identify
illegal or unethical conduct and to permit appropriate and timely redress should such conduct occur.
4. Inform and Listen to Investors and Regulators: The directors take steps to see that management discloses appropriate information fairly,
fully, timely, and accurately to investors and regulators, and that the Company maintains a two-way communication channel with its investors
and regulators.
5. Continuous Improvement: The directors remain abreast of new developments in corporate governance, and they implement new
procedures and practices as they deem appropriate.
Board Responsibilities
The Board of Directors is responsible for:
• Reviewing and approving management’s strategic and business plans.
• Reviewing and approving financial plans, objectives, and actions including significant capital allocations and expenditures.
• Monitoring management execution of corporate plans and objectives.
• Advising management on significant decisions and reviewing and approving major transactions.
• Recommending director candidates for election by stockholders.
• Appraising the Company’s major risks and overseeing that appropriate risk management and control procedures are in place.
The ADT Corporation
2015 Proxy Statement
5
PROXY STATEMENT
1. Active Board: The directors are well informed about the Company and vigorous in their oversight of management.
CORPORATE GOVERNANCE OF THE COMPANY—CONTINUED
• Selecting, monitoring, evaluating, compensating, and if necessary replacing the Chief Executive Officer and other senior executives, and
seeing that management development and succession plans are maintained for these executive positions.
• Determining the Chief Executive Officer’s compensation, and approving senior executives’ compensation, based on performance in meeting
pre-determined standards and objectives.
• Determining that procedures are in place and designed to promote compliance with laws and regulations and setting an ethical “tone at the top.”
• Determining that procedures are in place designed to promote integrity and candor in the audit of the Company’s financial statements and
operations, and in all financial reporting and disclosure.
• Designing and assessing the effectiveness of its own governance practices and procedures.
• Periodically monitoring and reviewing stockholder communications sent to the Company.
Board Leadership Structure
The Board of Directors does not have a formal policy regarding the separation of the roles of Chairman and Chief Executive Officer, as it believes
it is in the best interests of the Company to make that determination based on the direction of the Company and the membership of the Board at
a given time. The Company has had an independent Chairman since its separation from Tyco International Ltd. (“Tyco”), the Company’s former
parent company, in September 2012, and the Board of Directors believes that having separate Chairman and Chief Executive Officer positions,
and having an independent director serve as Chairman, continues to be the appropriate leadership structure for the Company at this time. The
Board of Directors believes that the current leadership structure enables the Chief Executive Officer to focus on the operations of the Company’s
business, while the independent Chairman focuses on leading the Board in its responsibilities and helping the Board ensure that management is
acting in the best interests of the Company and its stockholders.
Board Risk Management
Risk is an inherent part of ADT’s business activities and risk management is critical to the Company’s innovation and success. The Company’s
compensation programs are designed to motivate employees to take appropriate levels of risks that are aligned with the Company’s strategic
goals, without encouraging or rewarding excessive risk. The Board of Directors is responsible for evaluating the Company’s major risks and for
determining that appropriate risk management and control procedures are in place and that senior executives take the appropriate steps to
manage all major risks.
PROXY STATEMENT
As part of its enterprise risk management (“ERM”) program, the Company conducts an annual risk assessment survey covering risks, among
others, in finance, operations, strategy, compliance, information technology, human resources, environment, health, safety and welfare, brand
reputation, innovation, litigation, risk management, public affairs and competition. The Board of Directors has delegated responsibility for the
oversight of the ERM program to its Nominating and Governance Committee. The Company formed the Enterprise Risk Management Council
(the “ERMC”), which is chaired by the Chief Legal Officer, and consists of other senior executives from Risk Management, Internal Audit, IT,
Corporate Development, Operations, Finance, Innovation and Technology, EH&S and Marketing. The ERMC meets periodically to (i) review the
results of the annual risk assessment survey and to identify the top enterprise risks, (ii) determine specified risk owners, (iii) monitor the
implementation of mitigation plans, and (iv) update and obtain direction from the Nominating and Governance Committee on a regular basis.
Throughout the year, the Board of Directors dedicates a portion of their meetings to review and discuss specific risks and mitigation processes in
greater detail. Oversight of certain specific risks is delegated to the following committees of the Board of Directors:
Audit Committee—oversees risks relating to the Company’s major financial risk exposures including financial statements and financial reporting
and controls, internal controls, cybersecurity risk oversight and legal, regulatory and compliance risks, and steps taken by management to
monitor and control such exposures.
Compensation Committee—oversees risks arising from the Company’s compensation policies and programs for all employees and the nonmanagement directors.
Nominating and Governance Committee—oversees risks related to the Company’s governance structure and process as well as oversee the
ERMC as described above.
Board Capacities
The Board of Directors as a whole is constituted to be strong in its collective knowledge and diversity of accounting and finance, management
and leadership, vision and strategy, business operations, business judgment, crisis management, risk assessment, industry knowledge,
corporate governance, and global markets.
The culture of the Board of Directors is such that the Board can operate swiftly and effectively in making key decisions when facing major
challenges. Board meetings are conducted in an environment of trust, open dialogue, mutual respect, and constructive commentary that are akin
to those of a high-performance team.
The Board of Directors is informed, proactive, and vigilant in its oversight of the Company and protection of stockholder assets.
6 The ADT Corporation
2015 Proxy Statement
CORPORATE GOVERNANCE OF THE COMPANY—CONTINUED
Director Independence
To maintain its objective oversight of management, the Board of Directors consists currently of all independent directors, with the exception of
Mr. Gursahaney, the current Chief Executive Officer. The Board of Directors has adopted categorical standards designed to assist it in assessing
director independence (the “Independence Standards”). The Independence Standards are included in our Board Governance Principles which
can be found on our website at http://investors.adt.com. The Independence Standards have been designed to comply with the standards
required by the NYSE. In addition, committee members are subject to any additional independence requirements that may be required by law,
regulation or NYSE listing standards.
Based on an annual evaluation performed by, and recommendations made by, the Nominating and Governance Committee, our Board of
Directors annually determines the independence of each director. Under our Board Governance Principles and NYSE listing standards, a director
is not independent unless the Board of Directors makes an affirmative determination that such director has no material relationships with the
Company (either directly or indirectly as a partner, stockholder or officer of an organization that has a relationship with the Company).
Material relationships can include commercial, industrial, banking, consulting, legal, accounting, charitable, and familial relationships, among others.
Our Board of Directors has affirmatively determined that each of Mr. Colligan, Mr. Daly, Mr. Donahue, Mr. Dutkowsky, Mr. Gordon, Ms. Heller,
Ms. Hyle and Mr. Hylen has satisfied the Independence Standards as well as the independence requirements of the NYSE. Mr. Gursahaney, the
current Chief Executive Officer, is not independent, because of his role as an executive officer of the Company.
In making its independence determinations, the Board of Directors considered and reviewed the various commercial and employment
transactions and relationships known to the Board of Directors (including those identified through annual directors’ questionnaires) that exist
between us and our subsidiaries and the entities with which certain of our directors are, or have been, affiliated. Specifically, the Board’s
independence determinations included reviewing the following transactions:
On January 9, 2014, in connection with its recommendation to the Board of Directors to appoint Richard Daly to the Board of Directors, the
Nominating and Governance Committee considered Mr. Daly’s current position with Broadridge and the amounts paid by the Company or Tyco
during each of the last three fiscal years for proxy processing and mailing services, including conduit payments to banks and brokers
(collectively, the “ADT Proxy Payments”), provided by Broadridge to the Company. As stated in his biography on page 15, Mr. Daly is the Chief
Executive Officer and President of Broadridge and a member of the board of directors of Broadridge. The ADT Proxy Payments totaled $300,085
in 2014 and since the ADT Proxy Payments were less than the greater of $1 million or 2% of Broadridge’s consolidated gross revenues in any of
the last three fiscal years, and were below the thresholds set forth under our Independence Standards, the Nominating and Governance
Committee determined that Mr. Daly satisfied the Independence Standards, including the independence requirements of the NYSE.
On January 8, 2015, in connection with its recommendation to the Board of Directors to appoint Christopher Hylen to the Board of Directors, the
Nominating and Governance Committee considered Mr. Hylen’s current position with the Citrix SaaS Division (“Citrix”) and the amounts paid by
the Company during each of the last three fiscal years for telecom and IT support services and web collaboration, (collectively, the “Citrix
Payments”), provided by Citrix to the Company. Mr. Hylen’s biography is on page 17 of this Proxy Statement. During 2012, 2013 and 2014,
ADT paid $40,877 to Citrix Online for pre- and post-Spin-off (as defined below on page 12 in “Certain Relationships and Related Party
Transactions”) telecom services and $521,941 to Citrix Systems, Inc. for server subscriptions and renewals. Since the Citrix Payments were less
than the greater of $1 million or 2% of Citrix’s consolidated gross revenues in any of the last three fiscal years, and were below the thresholds set
forth under our Independence Standards, the Nominating and Governance Committee determined that Mr. Hylen satisfied the Independence
Standards, including the independence requirements of the NYSE.
The Board of Directors determined that the transactions identified were not material and did not affect the independence of such director under
our Independence Standards, including the independence requirements of the NYSE.
The ADT Corporation
2015 Proxy Statement
7
PROXY STATEMENT
On August 5, 2013, ADT Security Services Canada, Inc., a subsidiary of the Company (“ADTSS Canada”) entered into a service contract for
equipment, materials and services for approximately $16 million per year (the “Contract”) with Tech Data Canada Corporation, a subsidiary of
Tech Data Corporation (“Tech Data Canada”). As stated in his biography on page 16, Mr. Dutkowsky is the Chief Executive Officer and a
member of the board of directors of Tech Data Corporation. During fiscal year 2014, ADT paid $9,487,913 to Tech Data Canada for purchases
and warehousing of security equipment. Since these payments were less than the greater of $1 million or 2% of Tech Data Canada’s
consolidated gross revenues in any of the last three fiscal years, and were below the thresholds set forth under our Independence Standards,
the Nominating and Governance Committee determined that Mr. Dutkowsky satisfied the Independence Standards, including the independence
requirements of the NYSE.
CORPORATE GOVERNANCE OF THE COMPANY—CONTINUED
Board Committees
To conduct its business the Board of Directors maintains three standing committees: Audit, Compensation, and Nominating and Governance,
and each of these committees is entirely composed of independent directors, as described below. The members of the Board of Directors
serving on these committees are set forth in the following table and the functions of those committees are set forth below:
Audit Committee
Compensation
Committee
Bruce Gordon, Chairman
Thomas Colligan
Nominating and
Governance
Committee
Chairman
Chairman
Richard Daly
Timothy Donahue
Chairman
Robert Dutkowsky
Naren Gursahaney
Bridgette Heller
Kathleen Hyle
Christopher Hylen (1)
Number of Meetings Held in
Fiscal Year 2014
(1)
10
9
6
PROXY STATEMENT
Upon the recommendation of the Nominating and Governance Committee, on January 8, 2015, the Board of Directors appointed Mr. Hylen to the Company’s Board of Directors for a term
expiring at the 2015 Annual Meeting, or until his earlier resignation or removal, and to the Board’s Audit Committee.
• Assignments to, and chairs of, the Audit and Compensation Committees are recommended by the Nominating and Governance Committee
and selected by the Board of Directors. The independent directors as a group elect the members and the chair of the Nominating and
Governance Committee. All committees report on their activities to the Board of Directors.
• The Chairman may convene a “special committee” to review certain material matters being considered by the Board of Directors. The special
committee will report their activities to the Board of Directors.
• To ensure effective discussion and decision making while at the same time having a sufficient number of independent directors for its three
standing committees, the Board of Directors is normally constituted of between seven and nine directors but may consist of as many as
twelve directors as determined by the Board of Directors from time to time. Subject to ADT’s certificate of incorporation, the number of
directors shall be fixed by resolution by the Board of Directors, and vacancies occurring in the Board of Directors may be filled only by a
majority of the vote of the remaining directors then in office.
• The Nominating and Governance Committee annually reviews the organization of the Board of Directors and recommends appropriate
changes to the full Board of Directors.
Each of the committees operates under a written charter that is posted to our website at http://investors.adt.com. We will also provide a printed
copy of the committee charters to stockholders upon written request to our Corporate Secretary at The ADT Corporation, 1501 Yamato Road,
Boca Raton, Florida 33431.
8 The ADT Corporation
2015 Proxy Statement
CORPORATE GOVERNANCE OF THE COMPANY—CONTINUED
Audit Committee
The Audit Committee was established in accordance with Section 3(a)(58)(A) and Rule 10A-3 under the Exchange Act. The Audit Committee
met ten times during fiscal year 2014 and is responsible, among other things, for:
• overseeing the quality and integrity of our annual audited and quarterly unaudited financial statements, accounting practices and financial
information that we provide to the SEC or the public;
• selecting our independent registered public accounting firm, such selection to be presented by our Board of Directors to our stockholders for
their ratification at the annual meeting of stockholders;
• pre-approving all services to be provided to us by our independent registered public accounting firm;
• conferring with our independent registered public accounting firm to review the plan and scope of its proposed financial audits and quarterly
reviews, as well as its findings and recommendations upon the completion of the audits and such quarterly reviews;
• reviewing the independence of the independent registered public accounting firm;
• overseeing our internal audit function;
• meeting with the independent registered public accounting firm, our appropriate financial personnel and internal auditor regarding our internal
controls, critical accounting policies and other matters; and
• overseeing all of our compliance, internal controls, cybersecurity risk and risk management policies.
The Board of Directors has determined that all of the members of the Audit Committee meet the independence requirements set forth in the
listing standards of the NYSE, our Board Governance Principles and in accordance with the Audit Committee charter, are “financially literate” as
defined by the NYSE rules and have accounting or related financial management expertise as such terms are interpreted by the Board of
Directors in its business judgment, and that the committee chairman, Mr. Colligan, and Ms. Hyle each qualify as an “audit committee financial
expert” as defined by the rules of the SEC. None of our Audit Committee members simultaneously serves on more than two other public
company audit committees.
Compensation Committee
The Compensation Committee oversees the Company’s overall compensation structure, policies and programs, including strategic
compensation programs for our executive officers that align the interests of our executive officers with those of our stockholders, and assesses
whether the Company’s compensation structure establishes appropriate incentives for management and employees. The Compensation
Committee met nine times during fiscal year 2014 and is responsible, among other things, for:
• proposing to our Board of Directors incentive compensation plans and equity-based plans, including performance objectives and metrics
associated with these plans, on an annual basis for the Chief Executive Officer;
• reviewing annually the Chief Executive Officer’s performance and proposing to our independent directors Chief Executive Officer
compensation (including salary, bonus, equity-based grants and any other long-term cash compensation);
• reviewing annual performance of the other executive officers and approving their compensation (including salary, bonus, equity-based grants
and any other long-term cash compensation);
• reviewing and approving the comparator group(s) for benchmarking compensation levels and pay practices, as well as performance, for the
Chief Executive Officer and executive officers;
• reviewing annually talent development and succession plans for executive officers other than the Chief Executive Officer and making
recommendations to our Board of Directors;
• reviewing and approving benefit and perquisite programs for executive officers;
• administering the Company’s equity incentive plans, including the review and grant of stock option and other equity incentive grants to
executive officers;
• overseeing the design, participation, adequacy, competitiveness, internal equity and cost effectiveness for the Company’s broadly-applicable
benefit programs;
• establishing, in collaboration with the Nominating and Governance Committee, compensation for non-management directors;
• monitoring compliance by officers and directors with the Company’s stock ownership guidelines;
• conducting an annual risk assessment of the Company’s compensation programs;
• administering the Company’s pay recoupment policy;
The ADT Corporation
2015 Proxy Statement
9
PROXY STATEMENT
• setting and reviewing our executive compensation philosophy and principles;
CORPORATE GOVERNANCE OF THE COMPANY—CONTINUED
• reviewing the Company’s human resources strategy and controls, including Sarbanes-Oxley Section 404 compliance;
• assessing annually the performance of the Compensation Committee and its members and the adequacy of the Committee charter and
recommending results and/or changes to our Board of Directors;
• recommending to our Board of Directors the Company’s approach with respect to the stockholder advisory vote on executive compensation
or “say-on-pay” and how frequently the Company should permit stockholders to have a vote on say-on-pay, taking into account the results of
stockholder votes on the frequency of say-on-pay resolutions at the Company;
• overseeing our disclosure regarding executive compensation, including approving the report to be included in our annual proxy statement on
Schedule 14A, which disclosure is included or incorporated by reference in our annual report on Form 10-K; and
• reviewing and approving employment, retirement, severance and change-in-control agreements/arrangements for our executive officers.
The Board of Directors has determined that all of the members of the Compensation Committee meet the independence requirements, including
the heightened independence criteria set forth in the listing standards of the NYSE, our Board Governance Principles and in accordance with the
Compensation Committee charter, are “non-employee directors” (within the meaning of Rule 16b-3 of the Exchange Act) and “outside directors”
(within the meaning of Section 162(m) of the Internal Revenue Code (the “Code”)). For more information on the Compensation Committee,
please see the Compensation Discussion and Analysis in this Proxy Statement.
Nominating and Governance Committee
The Nominating and Governance Committee met six times during fiscal year 2014 and is responsible, among other things, for:
• developing and recommending to our Board of Directors our corporate governance principles and otherwise taking a leadership role in
shaping our corporate governance;
• reviewing and evaluating the adequacy of and recommending to our Board of Directors amendments to our by-laws, certificate of
incorporation, committee charters and other governance policies;
• reviewing and making recommendations to our Board of Directors regarding the purpose, structure and operations of our various board
committees;
• identifying, reviewing and recommending to our Board of Directors individuals for election or re-election to the Board of Directors, consistent
with criteria approved by the Board of Directors;
• overseeing the Chief Executive Officer succession planning process, including an emergency succession plan, and making
recommendations to our Board of Directors;
• establishing, in collaboration with the Compensation Committee, compensation for non-management directors;
• establishing criteria and qualifications for board membership, including standards for assessing independence;
PROXY STATEMENT
• overseeing the Company’s Environmental, Health & Safety management program;
• ensuring the appropriate process is in place to perform and review the Company’s enterprise-wide risk assessments;
• overseeing the Board of Directors’ annual self-evaluation; and
• overseeing and monitoring general governance matters including communications with stockholders, regulatory developments relating to
corporate governance and our corporate social responsibility activities.
The Board of Directors has determined that all members of the Nominating and Governance Committee meet the independence requirements
set forth in the listing standards of the NYSE, our Board Governance Principles and in accordance with the Nominating and Governance
Committee charter.
10 The ADT Corporation
2015 Proxy Statement
CORPORATE GOVERNANCE OF THE COMPANY—CONTINUED
Experiences, Qualifications, Attributes and Skills of Director Nominees
C. Hylen
K. Hyle
B. Heller
N. Gursahaney
B. Gordon
R. Dutkowsky
T. Donahue
R. Daly
T. Colligan
When evaluating potential director nominees, the Nominating and Governance Committee utilizes a diverse group of experiences, qualifications,
attributes and skills, including diversity in gender, ethnicity and race that the Nominating and Governance Committee believes enables a director
nominee to make significant contributions to the Board of Directors, ADT and our stockholders. The Nominating and Governance Committee
works with the Board of Directors to determine the appropriate mix of backgrounds and experiences in order to establish and maintain a Board
that is strong in its collective knowledge and that can fulfill its responsibilities, perpetuate our long term success, and represent the interests of
our stockholders. These experiences, qualifications, attributes and skills are more fully described in the following table:
Management Experience
Experience as a CEO, COO, President or Senior Vice President of a company
or a significant subsidiary, operating division or business unit.
Independence
Satisfy the independence requirements of the New York Stock Exchange and
Board Governance Principles.
Financial Expertise
Possess the knowledge and experience to be qualified as an “audit committee
financial expert.”
Technical; Research and Development; Information Technology
Experience in, or experience in a senior management position responsible for,
managing a significant technical, information technology or research and
development function.
Marketing; Sales
Experience in, or experience in a senior management position responsible for,
managing a marketing and/or sales function.
Substantial experience with building brand and product awareness and with
business-to-consumer brand marketing.
Current CEO
Currently a sitting CEO of a publicity traded company.
Minority; Diversity
Add perspective through diversity in gender, ethnic background, race, etc.
Attendance at Meetings
The Board of Directors met twelve times during fiscal year 2014. ADT policy dictates that the Board of Directors meets at least five times a year,
and additional meetings may be called in accordance with our By-laws. One of these meetings is scheduled in conjunction with the Company’s
annual meeting of stockholders, and Board members are required to be in attendance at the annual meeting of stockholders in person or, via
exception, by telephone. No current director attended fewer than 75 percent of the meetings held, including meetings held by all committees of
the Board of Directors on which such director served. All of the current directors attended the 2014 Annual Meeting of Stockholders, except for
Mr. Hylen, who was not a director at that time.
Executive Sessions
The non-management directors of the Company meet in executive sessions without management on a regular basis. The Chairman presides at
such executive sessions (the “Presiding Director”). In the absence of the Presiding Director, the non-management directors will designate another
director to preside over such executive sessions.
The ADT Corporation
2015 Proxy Statement
11
PROXY STATEMENT
Consumer Brand Experience
CORPORATE GOVERNANCE OF THE COMPANY—CONTINUED
Board Communication
Management speaks on behalf of the Company, and the Board of Directors normally communicates through management with outside parties,
including stockholders, business journalists, equity analysts, rating agencies, and government regulators. Stockholders and all other interested
parties can directly raise issues with the Board of Directors, including the non-employee directors as a group, via email at [email protected]
The Board of Directors periodically reviews all pertinent communications from stockholders and other interested parties.
Certain Relationships and Related Party Transactions
The Board of Directors has adopted certain Guidelines for Related Party Transactions. These Guidelines provide a process for compliance with
the related party provisions of the Board Governance Principles, the Company’s Code of Conduct, and the Company’s Amended and Restated
By-laws, as well as the disclosure obligations under the SEC rules. The Nominating and Governance Committee monitors, reviews and
approves, if necessary, any material related party transactions between ADT and its subsidiaries (collectively, the “Company”) and its senior
officers and directors. ADT’s Guidelines for Related Party Transactions state that on an annual basis, the Nominating and Governance
Committee will receive a list of related parties (the “Related Party List”) for each senior officer and director and such list will include any entity that
employs a director, any entity (including charitable organizations) for which the director or executive officer serves on the board of directors, and
any entity in which the senior officer or director owns more than a 10% interest. There are three types of material related party transactions
covered by the Guidelines for Related Party Transactions with specific review procedures:
• Type 1—transactions involving the purchase by or from the Company of products or services in the ordinary course of business in armslength transactions.
• Type 2—transactions involving the provision of consulting, legal, accounting or financial advisory services to the Company that could
compromise a director’s independence.
• Type 3—transactions in which a director or officer has a direct or indirect personal interest or that create a conflict of interest for the director
or officer.
Ordinary course of business, arms-length transactions with entities on the Related Party List are deemed pre-approved by the Nominating and
Governance Committee, in amounts in the aggregate for each such entity of less than 1% of the revenue of such entity or the Company. For Type 1,
the Guidelines for Related Party Transactions provide that the Nominating and Governance Committee, prior to filing the Company’s proxy statement,
annually reviews the Related Party List, including the amount of payments to or from each related party, in comparison to the 1% threshold to ensure
that the directors meet the director independence requirement. Any proposed related party transaction involving a member of the Board of Directors
must be reviewed and approved by a majority of the disinterested members of the Board. All related party transactions involving potential conflicts of
interest must be reported to the Nominating and Governance Committee and approved or ratified by such Committee.
On September 28, 2012, ADT became an independent, publicly traded company as a result of Tyco’s distribution, on a pro rata basis, of all of
the shares of ADT to Tyco stockholders (the “Spin-off”).
PROXY STATEMENT
In order to govern certain ongoing relationships between the Company, Pentair Ltd. (“Pentair”) and Tyco after the Spin-off and to provide
mechanisms for an orderly transition, the Company, Pentair and Tyco have entered into the Pentair Separation and Distribution Agreement, the
Company and Tyco have entered into the ADT Separation and Distribution Agreement and the Company, Tyco or Pentair, as applicable, have
entered into other agreements pursuant to which certain services and rights are provided for following the Spin-off, and the Company, Pentair
and Tyco have agreed to indemnify each other against certain liabilities arising from their respective businesses.
The following is a summary list of the material agreements we have entered into with Tyco and Pentair:
• a tax sharing agreement with Tyco and Pentair that governs the rights and obligations of the Company, Tyco and Pentair for certain preseparation tax liabilities, including Tyco’s obligations under the tax sharing agreement among Tyco, Covidien Ltd., and TE Connectivity Ltd.
entered into in 2007;
• a non-income tax sharing agreement with Tyco that governs the respective rights, responsibilities and obligations of Tyco and the Company
after the distributions with respect to tax returns, tax liabilities, tax contests and other tax matters regarding non-income taxes related to
specified legal entities;
• a trademark agreement with Tyco in connection with the Spin-off that governs each party’s use of certain trademarks;
• a patent agreement with Tyco in connection with the Spin-off under which Tyco agreed to provide to the Company and its affiliates with a
release and covenant not to sue under Tyco and Affiliates’ pre-Spin-off patent portfolio (excluding certain patents from Tyco’s businesses) for
the continued manufacture, use and sale of pre-Spin-off products (and certain modifications thereof), whether manufactured internally or by
the same pre-Spin-off suppliers;
The foregoing is not a complete description of the terms of these agreements we have entered into with Tyco and Pentair. For further information
about the terms of these agreements, please see our Form 10-K for the fiscal year ended September 26, 2014 filed with the SEC on
November 12, 2014 and other periodic reports and registration statements that have been filed by the Company with the SEC.
During fiscal year 2014, there were no related party transactions that exceeded the 1% threshold under the Company’s Guidelines for Related
Party Transactions, nor were there any related party transactions required to be disclosed pursuant to Item 404(a) of Regulation S-K.
12 The ADT Corporation
2015 Proxy Statement
CORPORATE GOVERNANCE OF THE COMPANY—CONTINUED
Director Service
ADT’s Board Governance Principles provide the following:
• Directors are elected by an affirmative vote of a majority of the votes cast by stockholders at the annual meeting and they serve for one-year
terms. Any nominee for director who does not receive a majority of votes cast from the stockholders is not elected to the Board of Directors,
however, such nominee will remain in office until a new director is elected, which shall take place in a timely manner.
• Directors are not eligible to stand for re-election to the Board of Directors at the annual meeting following their 72nd birthday. However, the
Board of Directors may ask the director to continue his or her service on the Board when it is deemed to be in the best interests of the
Company.
• The Nominating and Governance Committee is responsible for the review of all directors, and where necessary will take action to remove a
director for performance, which requires the unanimous approval of the Board of Directors. This unanimous approval does not include the
approval of the director whose removal is sought.
• Directors inform the Nominating and Governance Committee of any significant change in their employment or professional responsibilities and
will offer their resignation to the Board of Directors. This allows for discussion with the Nominating and Governance Committee to determine if
it is in the mutual interest of both parties for the director to continue on the Board of the Directors.
• Committee chairs will serve in their respective roles for five years, and rotate at the time of the annual meeting of stockholders following the
completion of their fifth year of service.
• When the Chairman of the Board of Directors steps down, he or she simultaneously resigns from the Board of Directors, unless the remaining
members of the Board of Directors decides that his or her services are in the best interests of the Company. It is only in unusual
circumstances that the Board of Directors decides that the retired Chairman continues to serve.
Code of Conduct
ADT’s corporate culture is built on the premise that the Company seeks to draw the best from its employees, and that every employee, without
exception, is responsible for the conduct and success of the enterprise. This includes full, accurate, candid, and timely disclosure of information
and compliance with all laws and regulatory standards. The Board of Directors is responsible for setting the ethical tenor for management and
the Company, and that ethical tenor works on the expectation that employees understand where the lines are that they should not cross and
stay widely clear of these lines.
• honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional
relationships;
• full, fair, accurate, timely and understandable disclosure in reports and documents that we file with the SEC and other regulators and in our
other public communications;
• compliance with applicable laws, rules and regulations, including insider trading compliance; and
• accountability for adherence to the Code of Conduct and prompt internal reporting of violations of the Code, including illegal or unethical
behavior regarding accounting or auditing practices.
The Code of Conduct is reviewed periodically by all directors, executive officers, managers and employees, and they affirm in writing on an
annual basis that they understand it and are fully in compliance with it. A copy of our Code of Conduct is posted on our website at http://
investors.adt.com. We will also provide a copy of our Code of Conduct to stockholders upon written request to our Corporate Secretary at The
ADT Corporation, 1501 Yamato Road, Boca Raton, Florida 33431.
Director Nomination Process
In accordance with our governance principles, the Nominating and Governance Committee seeks to create a Board of Directors that as a whole
is strong in its collective knowledge and has a diversity of skills and experience with respect to vision and strategy, management and leadership,
business operations, business judgment, crisis management, risk assessment, industry knowledge, accounting and finance, corporate
governance and global markets. Our Board of Directors does not have a specific policy regarding diversity. Instead, the Nominating and
Governance Committee considers the Board of Directors’ overall composition when considering a potential new candidate, including whether
the Board of Directors has an appropriate combination of professional experience, skills, knowledge and variety of viewpoints and backgrounds
in light of our current and expected future needs. We believe that it is desirable for new candidates to contribute to a variety of viewpoints on the
Board of Directors, which may be enhanced by a mix of different professional and personal backgrounds and experiences.
The ADT Corporation
2015 Proxy Statement
13
PROXY STATEMENT
The Board of Directors has adopted a written Code of Conduct for directors, executive officers, managers and all other employees that is
designed to deter wrongdoing and to promote, among other things:
CORPORATE GOVERNANCE OF THE COMPANY—CONTINUED
General criteria specified in our governance principles for the nomination of director candidates include:
• the highest ethical standards and integrity;
• a willingness to act on and be accountable for board decisions;
• an ability to provide wise, informed and thoughtful counsel to top management on a range of issues;
• a history of achievement that reflects superior standards for themselves and others;
• loyalty and commitment to driving the success of ADT;
• an ability to take tough positions while at the same time working as a team player; and
• individual backgrounds that provide a portfolio of experience and knowledge commensurate with our needs.
Invitations to director nominees to become a member of the Board of Directors will be extended by the Chair of the Nominating and Governance
Committee after discussion with the Chairman of the Board of Directors and the Chief Executive Officer and agreement by the other members of
the Board of Directors. The Board of Directors will consider nominations submitted by stockholders.
PROXY STATEMENT
14 The ADT Corporation
2015 Proxy Statement
PROPOSAL NUMBER ONE—ELECTION OF DIRECTORS
PROPOSAL NUMBER ONE—ELECTION OF
DIRECTORS
Upon the recommendation of the Nominating and Governance
Committee, the Board of Directors has nominated for election at the
2015 Annual Meeting a slate of nine nominees, all of whom are
currently serving on the Board. The nominees are Mses. Heller and
Hyle and Messrs. Colligan, Daly, Donahue, Dutkowsky, Gordon,
Gursahaney and Hylen.
Biographical information regarding each of the nominees is set forth
below. Director nominees shall hold office until the next annual
meeting of stockholders and until his or her successor is elected and
qualified, subject, however, to prior death, resignation, retirement,
disqualification or removal from office.
Our By-laws require that a director nominee will be elected only if he
or she receives a majority of the votes cast with respect to his or her
election in an uncontested election (that is, the number of shares
voted “for” that nominee exceeds the number of votes cast “against”
that nominee). Each of our director nominees currently serves on the
Board of Directors. If a nominee who currently serves as a director is
not re-elected, Delaware law provides that the director would
continue to serve on the Board as a “holdover director.” Under our
By-laws, if a nominee for director who is an incumbent director is not
elected and no successor has been elected at such meeting, the
director is required to promptly tender his or her resignation to the
Board of Directors. In that situation, our Nominating and Governance
Committee would make a recommendation to the Board of Directors
about whether to accept or reject the resignation, or whether to take
other action. Within 90 days from the date that the election results
were certified, the Board of Directors would act on the Nominating
and Governance Committee’s recommendation and publicly disclose
its decision and the rationale behind it. If such incumbent director’s
resignation is not accepted by the Board of Directors, the director will
continue to serve until the next annual meeting and until his or her
successor is duly elected, or his or her earlier resignation or removal.
If a director’s resignation is accepted by the Board of Directors, then
the Board of Directors, in its sole discretion, may fill any resulting
vacancy.
Current Directors Nominated for Re-Election
Director Qualifications: Mr. Colligan’s qualifications include his 38
years as a Certified Public Accountant, his PwC experience, his
extensive experience with audit and financial issues and his past
service on public company audit committees.
Richard Daly (age 61)—Mr. Daly has been a member of our Board
of Directors since January 2014. Mr. Daly currently serves as Chief
Executive Officer and President of Broadridge and as a member of
the Broadridge board of directors. Prior to his current role, he served
as Group President of the Brokerage Services Group of Automatic
Data Processing (“ADP”). Prior to joining ADP in 1989, Mr. Daly
served as Senior Vice President of Operations at Thomson McKinnon
Securities and was a member of its board of directors. He is a
member of the Advisory Board for the National Association of
Corporate Directors and a founding member of the board of directors
of the Make-A-Wish Foundation of Suffolk County, Inc. Mr. Daly is
also a director of Fountain House, a New York City based charity.
Mr. Daly has a Bachelor of Science in Accounting from New York
Institute of Technology and was a Certified Public Accountant. He
also attended the Harvard Business School’s Young President’s
Program from 1996-2004, and completed its President’s Program in
Leadership.
Director Qualifications: Mr. Daly’s qualifications include his
experience as the chief executive officer of the largest independent
processor of corporate governance related activities, his significant
leadership experience and his extensive experience in the financial
services industry.
Timothy Donahue (age 66)—Mr. Donahue has been a member of
our Board of Directors since September 2012. Prior to his retirement,
Mr. Donahue was Executive Chairman of Sprint Nextel Corporation
from August 2005 to December 2006. He served as President and
Chief Executive Officer of Nextel Communications, Inc. from 1999.
He began his career with Nextel in January 1996 as President and
Chief Operating Officer. Before joining Nextel, Mr. Donahue served as
Northeast Regional President for AT&T Wireless Services operations
from 1991 to 1996. Prior to that, he served as President for McCaw
Cellular’s paging division in 1986 and was named McCaw’s
President for the U.S. central region in 1989. Mr. Donahue is a
director of NVR Inc., the non-executive chairman of UCT Coatings,
Inc., a private company, and a director of Radius Networks, Inc. He
previously served as a director of Tyco from 2008 to 2012; Covidien
Ltd. from 2009 to 2012; and Eastman Kodak Company from 2003 to
2013. Mr. Donahue has a Bachelor of Arts in English Literature from
John Carroll University.
Director Qualifications: Mr. Donahue’s qualifications include his
extensive experience and demonstrated leadership in the wireless
The ADT Corporation
2015 Proxy Statement
15
PROXY STATEMENT
Thomas Colligan (age 70)—Mr. Colligan has been a member of
our Board of Directors since September 2012. Mr. Colligan served as
Vice Dean of the Wharton School’s Aresty Institute of Executive
Education at the University of Pennsylvania, where he was
responsible for the non- degree executive education programs from
July 2007 until his retirement in June 2010. Prior to that he was a
managing director at Duke Corporate Education for two years. From
2001 to 2004, Mr. Colligan was Vice Chairman of
PricewaterhouseCoopers LLP (“PwC”) and he served PwC in other
capacities, including Partner, from 1969 to 2004. Mr. Colligan has
been a director of Targus, a private company, since 2010. He
previously served on the boards of Schering Plough Corporation from
2005 to 2009; Educational Management Corporation from 2006 to
2007; Anesiva, Inc. from 2004 to 2008; CNH Global from 2010 to
2013; and Office Depot from 2010 to 2013. Mr. Colligan has a
Bachelor of Science in Accounting from Fairleigh Dickinson University.
Mr. Colligan is a Certified Public Accountant and a member of the
American Institute of Certified Public Accountants.
PROPOSAL NUMBER ONE—ELECTION OF DIRECTORS—CONTINUED
communications industry, his experience in service-oriented
industries and as an executive and board member of several publicly
traded companies.
Robert Dutkowsky (age 60)—Mr. Dutkowsky has been a member
of our Board of Directors since September 2012. Mr. Dutkowsky has
been the Chief Executive Officer and a member of the board of
directors of Tech Data Corporation since October 2006. Prior to
joining Tech Data Corporation, Mr. Dutkowsky served as President,
CEO, and Chairman of the Board of Egenera, Inc. from 2004 until
2006, and served as President, CEO, and Chairman of the Board of
J.D. Edwards & Co., Inc. from 2002 until 2004. He was President,
CEO, and Chairman of the Board of GenRad, Inc. from 2000 until
2002. Beginning in 1997, Mr. Dutkowsky was Executive Vice
President, Markets and Channels, at EMC Corporation before being
promoted to President, Data General, in 1999. He began his career
at IBM where he served in several senior management positions.
Mr. Dutkowsky has a Bachelor of Science in Industrial and Labor
Relations from Cornell University.
Director Qualifications: Mr. Dutkowsky’s qualifications include his
experience as a chief executive officer and extensive executive
experience with technology companies and solutions providers.
PROXY STATEMENT
Bruce Gordon (age 68)—Mr. Gordon has been the Chairman of
our Board of Directors since September 2012. From August 2005
through April 2007, Mr. Gordon served as President and Chief
Executive Officer of the NAACP. Until his retirement in December
2003, Mr. Gordon was the President of Retail Markets at Verizon
Communications, Inc., a provider of wireline and wireless
communications. Prior to the merger of Bell Atlantic Corporation and
GTE, which formed Verizon in July 2000, Mr. Gordon filled a variety of
positions at Bell Atlantic Corporation, including Group President, Vice
President, Marketing and Sales, and Vice President, Sales.
Mr. Gordon also serves as a director of CBS Corporation and
Northrop Grumman Corporation. Previously, Mr. Gordon served as a
director of Southern Company, an electricity generating company,
from 1994 to 2006, and as a director of Tyco from 2003 to 2012.
Mr. Gordon graduated from Gettysburg College and has a Master of
Science from the Massachusetts Institute of Technology.
Director Qualifications: Mr. Gordon’s qualifications include his
significant leadership experience as the head of a large non-profit, his
in-depth experience as an executive in the service-oriented
communications industry and his corporate governance experience
as a director of several publicly traded companies.
Naren Gursahaney (age 53)—Mr. Gursahaney is the Company’s
President and Chief Executive Officer. He also serves as a member of
the Company’s Board of Directors. Prior to the separation from Tyco
in September 2012, Mr. Gursahaney served as President of Tyco’s
ADT North American Residential business segment. Prior to the
restructuring of the segment in fiscal year 2012, he was the President
of Tyco Security Solutions, the world’s largest electronic security
provider to residential, commercial, industrial and governmental
customers and the largest operating segment of Tyco.
Mr. Gursahaney joined Tyco in 2003 as Senior Vice President of
Operational Excellence. He then served as President of Tyco
Engineered Products and Services and President of Tyco Flow
Control. Prior to joining Tyco, Mr. Gursahaney was President and
Chief Executive Officer of GE Medical Systems Asia, where he was
responsible for the company’s $1.6 billion sales and services
business in the Asia-Pacific region. During his 10-year career with
16 The ADT Corporation
2015 Proxy Statement
GE, Mr. Gursahaney held senior leadership roles in services,
marketing and information management. His career also includes
positions with Booz Allen & Hamilton and Westinghouse Electric
Corporation. Mr. Gursahaney has a Bachelor of Science in
Mechanical Engineering from The Pennsylvania State University and a
Master of Business Administration from the University of Virginia.
Mr. Gursahaney is on the board of directors of NextEra Energy, Inc.
and is a member of its Audit Committee.
Director Qualifications: Mr. Gursahaney’s qualifications include his
experience as a chief executive officer and extensive executive
experience with Tyco and ADT in the security services industry and
his leadership roles in services, marketing, operations and information
management.
Bridgette Heller (age 53)—Ms. Heller has been a member of our
Board of Directors since September 2012. Ms. Heller was Executive
Vice President of Merck & Co, Inc. and President of Merck Consumer
Care from February 2010 to October 2014. Prior to joining Merck,
Ms. Heller was President, Johnson & Johnson, Global Baby Business
Unit from 2007 to 2010 and President, Johnson & Johnson, Global
Baby Kids and Wound Care from 2005 to 2007. Prior to joining
Johnson & Johnson, she was the Founder and Managing Partner at
Heller Associates from 2004 to 2005. She served as the Chief
Executive Officer of Chung’s Foods Inc. Ms. Heller spent 17 years
with Kraft Foods, from September 1985 to September 2002,
including as Executive Vice President and General Manager for the
North American Coffee portfolio. She served as a Director of PCA
International, Inc. from March 1998 until October 2005. Ms. Heller
has a Bachelor of Arts from Northwestern University and a Master of
Business Administration from Northwestern University’s Kellogg
School of Management.
Director Qualifications: Ms. Heller’s qualifications include her
significant experience in leadership positions at consumer products
companies.
Kathleen Hyle (age 56)—Ms. Hyle has been a member of our
Board of Directors since September 2012. From 2008 until its 2012
merger with Exelon, Ms. Hyle was Senior Vice President of
Constellation Energy and Chief Operating Officer of Constellation
Energy Resources. From June 2007 to November 2008, Ms. Hyle
served as Chief Financial Officer for Constellation Energy Nuclear
Group and for UniStar Nuclear Energy, LLC, a strategic joint venture
between Constellation Energy and Électricité de France. Ms. Hyle
held the position of Senior Vice President of Finance for Constellation
Energy from 2005 to 2007 and Senior Vice President of Finance,
Information Technology, Risk and Operations for Constellation New
Energy from January to October 2005. Prior to joining Constellation
Energy, Ms. Hyle served as the Chief Financial Officer of ANC Rental
Corp., the parent company of Alamo Rent-A-Car and National RentA-Car; Vice President and Treasurer of AutoNation, Inc.; and Vice
President and Treasurer of Black and Decker Corporation. Ms. Hyle
has been a director of AmerisourceBergen, a pharmaceutical services
provider, since 2010, where she chairs the Audit and Corporate
Responsibility Committee and serves on the Finance and Executive
Committees. Since 2012, Ms. Hyle has been a director for Bunge
Limited, a leading international agribusiness and food company,
where she chairs the Audit Committee and serves on the Risk
Committee. Ms. Hyle currently serves on the Executive and Finance
Committee of the Board of Trustees of Center Stage in Baltimore,
Maryland and on the Board of Sponsors for the Loyola University
PROPOSAL NUMBER ONE—ELECTION OF DIRECTORS—CONTINUED
Director Qualifications: Ms. Hyle’s qualifications include her
extensive experience as a leader in developing the business and
financial strategy of retail divisions in various companies, as a Certified
Public Accountant and service as chief financial officer in public
companies.
Christopher Hylen (age 54) —Mr. Hylen has been a member of our
Board of Directors since January 2015. Mr. Hylen is Senior Vice
President and General Manager of the Citrix SaaS Division, a leader in
mobile workspaces, providing virtualization, mobility management,
networking and cloud services to enable ways to work better. Prior to
joining Citrix in 2013, Mr. Hylen held various leadership positions at
Intuit from September 2006 to July 2013, including Senior Vice
President and General Manager of Payment Solutions at Intuit, Vice
President of Small Business Marketing and Vice President of Growth.
Before Intuit, he held executive roles at ADP from December 2001 to
September 2005, Business.com from March 1999 to September
2002, and American Express. Mr. Hylen has a Bachelor of Science in
Engineering from Widener University and a Master of Business
Administration from Harvard Business School.
Director Qualifications: Mr. Hylen’s qualifications include his more
than 20 years of senior general management experience in leadership
positions at technology companies.
The Board of Directors unanimously recommends that
stockholders vote FOR the election of all of the above listed
director nominees to serve until the 2016 Annual Meeting.
PROXY STATEMENT
Maryland Sellinger School of Business and Management. Ms. Hyle
has a Bachelor of Arts in Accounting from Loyola College.
The ADT Corporation
2015 Proxy Statement
17
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table provides information regarding the beneficial ownership of our common stock as of December 31, 2014 by (i) all directors
and nominees, (ii) each of our named executive officers, and (iii) our directors and executive officers as a group.
Except as otherwise noted, each person identified in the table below has sole voting and investment power with respect to the shares listed. To
the extent indicated in the table below, shares beneficially owned by a person include shares of which the person has the right to acquire
beneficial ownership within 60 days after December 31, 2014. As of December 31, 2014, there were 171,754,119 shares of our common
stock issued and outstanding.
Shares of Common Stock Beneficially Owned
Common
Stock
Beneficially
Owned
Directly or
Indirectly
Common
Stock
Acquirable
within 60Days
Total
Common
Stock
Beneficially
Owned
David Bleisch
33,142
117,835
150,977
*
Thomas Colligan
12,301
0
12,301
*
3,000
522
3,522
*
Name of Beneficial Owner
Richard Daly
Jerri DeVard
% of Shares
of Common
Stock
Outstanding
0
0
0
*
Timothy Donahue
10,263
0
10,263
*
Robert Dutkowsky
3,801
0
3,801
*
Alan Ferber
7,120
14,725
21,845
*
Michael Geltzeiler
11,970
23,000
34,970
*
Bruce Gordon
17,905
0
17,905
*
Naren Gursahaney
PROXY STATEMENT
199,414
1,090,873
1,290,287
*
Bridgette Heller
3,801
0
3,801
*
Kathleen Hyle
3,801
0
3,801
*
0
0
0
*
365,189
1,401,660
1,766,849
Christopher Hylen
Directors and Executive Officers as a Group (20 persons)
*
1.03%
Less than 1.0%
The following table sets forth the information indicated for persons or groups known to us to be beneficial owners of more than 5% of our
outstanding common stock.
Name and Address of Beneficial Owner
Amount and Nature of
Beneficial Ownership
Percentage of Class
BlackRock, Inc.
40 East 52nd Street
New York, NY 10022
11,067,707(1)
6.44%
Dodge & Cox
555 California Street, 40th Floor
San Francisco, CA 94104
28,008,568(2)
16.31%
The Vanguard Group
100 Vanguard Boulevard
Malvern, PA 19355
13,444,636(3)
7.83%
1)
2)
3)
Information shown is based on information reported on Schedule 13G filed with the SEC on February 10, 2014 in which BlackRock, Inc. reported that it has sole voting power over 9,156,992
shares of our common stock and sole dispositive power of 11,067,707 shares of our common stock.
Information shown is based on information reported on Schedule 13G filed with the SEC on February 14, 2014, in which Dodge and Cox reported that it has sole voting power over
26,861,356 shares of our common stock and sole dispositive power of 28,008,568 shares of our common stock.
Information shown is based on information reported on Schedule 13G filed with the SEC on February 10, 2014, in which The Vanguard Group reported that it has sole voting power over
326,251 shares of our common stock, sole dispositive power of 13,135,724 shares of our common stock and shared dispositive power over 308,912 shares of our common stock.
18 The ADT Corporation
2015 Proxy Statement
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
SECTION 16(a) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
PROXY STATEMENT
Section 16(a) of the Exchange Act requires that the Company’s directors, certain of its officers and any persons beneficially owning more than
10% of a registered class of the Company’s equity securities, to file reports of their ownership of ADT common stock and of changes in such
ownership with the SEC and the NYSE within specified time periods. Regulations also require ADT to identify in this Proxy Statement any person
subject to this requirement who failed to file any such report on a timely basis. To the Company’s knowledge, based solely on a review of the
copies of such reports furnished to the Company and written representations from reporting persons that no other reports were required, we
believe that all of our directors, officers, and greater than 10% stockholders complied with all Section 16(a) filing requirements applicable to them
during the fiscal year ended September 26, 2014.
The ADT Corporation
2015 Proxy Statement
19
EXECUTIVE OFFICERS
EXECUTIVE OFFICERS
Naren Gursahaney
Jerri DeVard
Age 53
Age 56
Mr. Gursahaney, a member of the Board of Directors, is the President
and Chief Executive Officer of the Company, and his biographical
information is set forth above under “Proposal Number One – Election
of Directors – Current Directors Nominated for Re-Election.”
Ms. DeVard was appointed the Company’s Senior Vice President and
Chief Marketing Officer in March 2014. She is responsible for all
strategic, operational and financial aspects of the Company’s
integrated marketing programs including brand advertising, digital
marketing, communications, lead generation, sponsorships, media,
and other initiatives. Prior to joining ADT in March 2014, Ms. DeVard
served as Nokia’s first Chief Marketing Officer. As a member of
Nokia’s executive committee, she oversaw all global and local
marketing, advertising, brand management, insights, retail,
partnership, and sponsorship activities for consumer and small
business. Before joining Nokia she held various marketing leadership
positions in Fortune 100 organizations including Senior Vice
President, Marketing and Brand Management for Verizon
Communications, Inc. and Chief Marketing Officer, e-consumer for
Citigroup. Ms. DeVard is a Director of Belk Stores and holds a
Bachelor of Arts in Economics from Spelman College and a Master of
Business Administration in Marketing from Atlanta University Graduate
School of Business.
The following information is provided
regarding the other executive officers of ADT:
N. David Bleisch
Age 55
Mr. Bleisch is the Company’s Senior Vice President, Chief Legal
Officer and Corporate Secretary. Prior to the separation from Tyco in
September 2012, he served as Vice President and General Counsel
of Tyco’s ADT North American Residential business segment. Prior to
the restructuring of the segment in fiscal year 2012, Mr. Bleisch was
the Vice President and General Counsel of Tyco Security Solutions,
the largest segment of Tyco. He also managed the intellectual
property legal group for all of Tyco’s operating segments worldwide.
Mr. Bleisch joined Tyco in 2005 as Vice President and General
Counsel of ADT North America and Deputy General Counsel of Tyco
Fire & Security. Prior to joining Tyco, he was Senior Vice President,
General Counsel and Corporate Secretary of The LTV Corporation in
Cleveland, Ohio. Prior to joining LTV, Mr. Bleisch was a partner in the
law firm of Jackson Walker LLP, where he served as a corporate
transactional attorney before transitioning to commercial trial work. He
holds a Bachelor of Arts from Carleton College and a Juris Doctor
from Boston College Law School. He is a member of the State Bar of
Texas.
PROXY STATEMENT
Donald Boerema
Age 57
Mr. Boerema is the Company’s Senior Vice President and Chief
Corporate Development Officer. He leads the Health Business and is
responsible for driving growth and enhancing customer experience
for ADT’s health services. He also directs ADT’s corporate strategy
and market and business development. Prior to the separation from
Tyco in September 2012, Mr. Boerema served as Chief Marketing
Officer for Tyco’s ADT North American Residential and Commercial
business segments, overseeing all strategic marketing and
communications and leading all advertising and online interactive
marketing initiatives across ADT North America. Prior to joining ADT in
November 2007, he served as President and Chief Operating Officer
for FDN Communications, a privately held telecommunications
company, where he was responsible for all aspects of sales,
marketing, network operations engineering and customer care.
Mr. Boerema also served as Senior Vice President of Business
Solutions for AT&T Wireless and led sales and marketing for a division
of McCaw Cellular Communications. Before joining McCaw, he held
management positions with PepsiCo, Inc. and began his career at
The Procter & Gamble Company. Mr. Boerema holds a Bachelor of
Science in Marketing and Finance and a Master of Business
Administration from Eastern Illinois University.
20 The ADT Corporation
2015 Proxy Statement
Mark Edoff
Age 56
Mr. Edoff is the Company’s Senior Vice President of Business
Operations Optimization. He is responsible for increasing efficiency
and driving overall business process improvements in the Company.
Prior to the separation from Tyco in September 2012, Mr. Edoff
served as Vice President and Chief Financial Officer of Tyco Security
Solutions from October 2010 until the restructuring of the segment in
fiscal year 2012. He joined Tyco in 2003 as Vice President and
Corporate Controller for the former Tyco Fire & Security business. In
2004, Mr. Edoff assumed the role of Chief Financial Officer for ADT
North America, which included responsibility for the combined
residential and commercial security business. Previously, he served
as the Director of Finance and Principal Accounting Officer for The
Gillette Company. Before joining Gillette, he had a 15-year career with
KPMG, where he was a Partner in the Assurance practice. Mr. Edoff
holds a Bachelor of Science in Business Administration from
Northeastern University and is a Certified Public Accountant.
Alan Ferber
Age 47
Mr. Ferber was appointed the Company’s President of the Residential
Business in October 2013. He is responsible for driving growth in the
residential market through marketing, sales and exceptional customer
service. He joined ADT in April 2013 as Senior Vice President and
Chief Customer Officer, responsible for developing strategies and
executing programs designed to create and sustain a superior
experience for ADT customers. Previously, Mr. Ferber served as Chief
Strategy and Brand Officer at U.S. Cellular. During his 11-year career
with U.S. Cellular, he held various senior leadership roles in sales,
marketing and operations, including Executive Vice President of
Operations, Chief Marketing Officer and Vice President of Marketing
and Sales Operations. He joined U.S. Cellular from Traq Wireless, a
start-up management software and service provider he co-founded
EXECUTIVE OFFICERS—CONTINUED
Michael Geltzeiler
Age 56
Mr. Geltzeiler was appointed the Company’s Senior Vice President
and Chief Financial Officer in October 2013. He is responsible for all
aspects of finance, treasury and investor relations and ADT’s financial
strategy to help grow its business operations and create stockholder
value. Before joining ADT, Mr. Geltzeiler served as Chief Financial
Officer and Group Executive Vice President at NYSE Euronext from
2008 to November 2013. From 2001 to 2008, he was an executive
at The Reader’s Digest Association, Inc., as Chief Financial Officer for
six years, then as President of School and Educational Services.
Previously, he served in financial leadership roles at ACNielsen
Corporation, including Chief Financial Officer of Marketing Services
and Corporate Controller and Chief Financial Officer, EMEA Region;
and in a variety of senior finance positions both in the U.S. and
abroad for Dun & Bradstreet. Mr. Geltzeiler holds a Bachelor of
Science in Accounting from the University of Delaware, a Master of
Business Administration in Finance from New York University’s Stern
School of Business, and a CPA certification in the State of New York.
Andrea Martin
Age 55
Ms. Martin was appointed the Company’s President, Canada in
January 2015. She is responsible for developing and executing the
Company’s strategy to grow the security and automation segment
throughout Canada and lead the integration of ADT Canada and
Reliance Protectron. Prior to joining ADT, Ms. Martin was Managing
Director of Data Services for Royal Mail plc in London, United
Kingdom from 2013 to 2014. Ms. Martin previously served on the
Board of Directors of Biocean Canada, Inc., a private Canadian life
sciences company, from October 2010 to October 2012, and as its
President and CEO from April 2011 to October 2012. Ms. Martin also
served as President and CEO of Reader’s Digest Canada, a business
unit of The Reader’s Digest Association, Inc. from 2001 to 2010.
Ms. Martin has extensive experience managing large subscriptionbased businesses, as well as successfully growing and transforming
global business units. Ms. Martin holds a Bachelor in Commerce from
Concordia University, as well as Advanced Executive Degrees from
Queen’s University and the University of Oxford Said Business
School.
Kathleen McLean
Age 55
Ms. McLean was appointed the Company’s Senior Vice President
and Chief Information Officer in May 2013. She is responsible for
developing and executing ADT’s information technology strategy in
support of its product development and business operations.
Ms. McLean also serves as Chief Customer Officer of the Company
and is responsible for defining and delivering a superior customer
experience for monitoring and response, ordering, provisioning, billing
and service. Ms. McLean has more than 30 years of business and
strategic technology leadership experience, including service with
world-leading consulting and telecommunications corporations.
Before joining ADT, she served as Executive Vice President, Chief
Revenue Officer and Chief Information Officer at FairPoint
Communications, Inc. where, as a member of the executive
committee, she was responsible for systems stability, operational
excellence and revenue growth. Prior to FairPoint Communications,
Inc., she spent nearly 12 years in several leadership positions at
Verizon Communications, Inc., implementing people, process and
systems strategies to improve operating performance and customer
service across all sectors of the company. Earlier in her career,
Ms. McLean worked for American Management Systems, Inc. (now
part of CGI Group, Inc.) in leadership positions culminating as Vice
President in the Telecom Industry Group. She holds a Bachelor of
Science in International Economics from Georgetown University and
did graduate work in information systems management at George
Washington University.
Laura Miller
Age 49
Ms. Miller was appointed the Company’s Senior Vice President and
Chief Human Resources Officer in May 2014. She oversees all
strategic human resources operations including human resources
business partners, shared services, compensation and benefits,
talent acquisition and management, and labor and employee
relations. She also develops and directs ADT’s change management
strategy and implementation, including merger and acquisition
activities. Prior to joining ADT, Ms. Miller served in various senior
leadership roles within the Coca-Cola Company in Atlanta, most
recently as Chief Human Resources Officer for Coca-Cola
Refreshments. As a member of Coca-Cola’s executive leadership
team, she oversaw all areas of human resources, including HR
business partners, shared services, and centers of expertise to
include compensation and benefits, talent acquisition, talent
management, labor and employee relations, and diversity and
inclusion. Prior to Coca-Cola, Ms. Miller held various human
resources leadership positions for Raytheon Company, a leading
defense contractor and industrial corporation based in Waltham, MA.
Ms. Miller holds a Bachelor of Science in Industrial and Labor
Relations from Cornell University.
Luis Orbegoso
Age 44
Mr. Orbegoso was appointed the Company’s President of Business
in September 2014. He is responsible for developing and executing
ADT’s strategy to grow its share of security and automation
customers in the small and mid-sized business market. He joined
ADT in May 2013 as Senior Vice President of Small Business, and in
October 2013 he was appointed as President of Small Business.
Previously Mr. Orbegoso served as President of the Global Fire
Detection and Alarm segment for United Technologies Corporation
(“UTC”) Climate, Controls and Security. He previously served as
President of Lenel Systems International, a division of UTC’s Fire and
Security segment. Prior to joining UTC in 2008, Mr. Orbegoso spent
13 years with General Electric in a variety of sales, marketing and
general management roles, culminating as Chief Marketing Officer of
GE Equipment Services. He holds a Bachelor of Science in
Mechanical Engineering from the University of Cincinnati and a Master
of Business Administration from Northwestern University’s Kellogg
School of Management.
The ADT Corporation
2015 Proxy Statement
21
PROXY STATEMENT
and built into a 100-employee, venture capital-backed company.
Earlier in his career, Mr. Ferber held positions with Ameritech
Corporation and First Chicago Corporation (now part of JPMorgan
Chase & Co.). He holds a Bachelor of Arts from the University of
Michigan and a Master of Business Administration from Northwestern
University’s Kellogg School of Management.
EXECUTIVE OFFICERS—CONTINUED
Arthur Orduña
Age 49
Mr. Orduña is the Company’s Senior Vice President and Chief
Innovation Officer, leading the Company’s vision for innovation and
product development. He is responsible for building the strategic
roadmap for new and existing solutions, defining product architecture
and positioning ADT as a partner of choice for key technology
companies. Prior to joining ADT in October 2012, he worked for
Canoe Ventures, LLC, a joint venture founded by the top six U.S.
cable companies, first serving as Chief Technology Officer then Chief
Product Officer. He was responsible for building a national data and
interactive services platform, developing product and technology
strategies, and launching new applications and services with key
partners including Comcast Cable, NBC-Universal, Time Warner
Cable and Cox Communications. Prior to joining Canoe Ventures,
Mr. Orduña was Senior Vice President of Policy & Product for
Advance/Newhouse—Bright House Networks. Earlier in his career, he
served as Vice President of Product & Marketing for Canal+
Technology U.S./Vivendi-Universal, and also Vice President of
Product & Marketing for Integrated Systems Inc./Diab-SDS before its
acquisition by Wind River Systems/Intel. He holds a Bachelor of Arts
from Cornell University.
Certain Legal Proceedings
On August 24, 2009, The Reader’s Digest Association, Inc. and its U.S. subsidiaries filed voluntary petitions for relief under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York. As such, Mr. Geltzeiler, our CFO, and Ms. Martin, our
President, Canada, previously served as executive officers of a company that filed a petition under the federal bankruptcy laws at or within two
years prior to the time of such filing.
PROXY STATEMENT
22 The ADT Corporation
2015 Proxy Statement
COMPENSATION OF EXECUTIVE OFFICERS
COMPENSATION OF EXECUTIVE OFFICERS
Compensation Discussion and Analysis
This section of the Proxy Statement describes in detail the Company’s compensation philosophy and its compensation programs, and reviews
compensation decisions for fiscal year 2014 for our Named Executive Officers (the “NEOs”). Our NEOs for fiscal year 2014 are listed below.
Name
Title
Naren Gursahaney
President and Chief Executive Officer (“CEO”)
Michael Geltzeiler
Senior Vice President and Chief Financial Officer (“CFO”)
Alan Ferber
President, Residential Business
N. David Bleisch
Senior Vice President, Chief Legal Officer and Corporate Secretary
Jerri DeVard
Senior Vice President and Chief Marketing Officer
The Compensation Discussion and Analysis also describes
compensation programs that apply to executives, other than the
NEOs, that report directly to the CEO (collectively, with the NEOs, the
“Executive Officers” of the Company).
• Added approximately 370,000 high quality residential and
commercial customers (excluding approximately 30,000
wholesale contract monitoring accounts) via the acquisition of
Reliance Protectron, Inc., nearly doubling our presence in Canada
and positioning us for greater growth opportunities;
Executive Summary
• Surpassed 1 million Pulse customers; Pulse now accounts for
16% of our existing customer base and for approximately 70% of
new direct residential customer accounts; and
• Repurchased 35 million of our outstanding shares and returned
$132 million to our stockholders in the form of dividends.
We made several key executive hires during fiscal year 2014 in order
to better position the Company for future success, among them
Michael Geltzeiler, our CFO, and Jerri DeVard, our Chief Marketing
Officer (“CMO”), both of whom are NEOs. We also hired Laura Miller
as our new Chief Human Resources Officer (“CHRO”) during fiscal
year 2014 and Andrea Martin as President for our Canadian
operations during the first part of fiscal year 2015. We believe that all
of these key hires have significantly strengthened our executive
leadership team.
*
For a definition of these non-GAAP financial measures and a reconciliation to GAAP
measures, see “Reconciliation of Non-GAAP Measures to GAAP Measures and Selected
Definitions” on page 49 of this Proxy Statement.
Fiscal Year 2014 Business Highlights
Overview of Compensation Programs
Following the first fiscal quarter of 2014, the Company delivered solid
sequential improvements in our operational performance, resulting in
strong financial results for fiscal year 2014, and made significant
progress on a number of strategic initiatives – positioning the
Company to drive further improvements in the coming year. Highlights
of ADT’s significant achievements for fiscal year 2014 include:
The Company’s compensation programs are designed with the
primary purpose of promoting long-term value creation for
stockholders. Our compensation programs accomplish this objective
by:
• Grew recurring revenue by 4% to $3.2 billion;
• Earned net income of $304 million compared with $421 million for
fiscal year 2013;
• Increased EBITDA before special items* by 5% to $1.8 billion
while improving EBITDA margins* by 70 basis points;
• Reduced revenue-based attrition from 13.9% to 13.5%;
• promoting a pay-for-performance culture by linking total
compensation to defined annual and long-term performance goals
which are aligned with the interests of stockholders;
• attracting and retaining the executive talent necessary to execute
the Company’s business strategy and deliver sustained
performance through market-competitive total compensation
opportunities; and
• motivating appropriate risk taking without encouraging or
rewarding excessive risk.
The ADT Corporation
2015 Proxy Statement
23
PROXY STATEMENT
The Company is a leading provider of monitored security, interactive
home and business automation and related monitoring services in the
United States and Canada, serving approximately 6.7 million
residential, small business and commercial customers. ADT has one
of the most trusted and well-known brands in the monitored security
industry today. We deliver an integrated customer experience by
maintaining the industry’s largest sales, installation and service field
force as well as a robust monitoring network, all backed by
approximately 17,500 employees. Our broad and pioneering set of
products and services, including ADT Pulse ® interactive home and
business solutions and home health services, meet a range of
customer needs for today’s active and increasingly mobile lifestyles.
We believe we are well positioned to continue to lead the large and
growing residential and expanded business security market, and that
our demonstrated expertise and established footprint will help us to
become a leader in the evolving market for home health monitoring,
lifestyle and business productivity solutions.
COMPENSATION OF EXECUTIVE OFFICERS—CONTINUED
The table below summarizes the components of our executive compensation program and how each component aligns with the objective of
creating long-term value for our stockholders:
Component
PROXY STATEMENT
What it Rewards
How it Aligns with Our Objectives
Base Salary
• Sustained high level of performance
• Demonstrated success in meeting or
exceeding key objectives
• Experience, skills and abilities key to the
long-term success of the business
• Competitive base salaries allow us to
attract and retain top talent
• Merit-based salary increases are aligned
to our pay-for-performance philosophy
Annual Incentive Compensation
• Company performance against key
financial goals and objectives which are
aligned to the interests of stockholders
• Performance against individual goals and
objectives which are aligned to the
delivery of key operational and financial
priorities
• Competitive annual incentive targets
allow us to attract and retain top talent
• Plan design, with annual awards ranging
from 0% to 200% of target based upon
performance against financial metrics
and individual objectives, aligns to the
interests of stockholders by linking
payouts to those measures with the
most significant impact on the long-term
success of the business
Long-Term Incentive Compensation
• Performance Share Units
• Stock Options
• Restricted Stock Units
• Increase in stock price
• Meeting or exceeding performance
targets
• Relative Total Shareholder Return (TSR)
• Continued service
• Competitive annual LTI targets allow us
to attract and retain top talent
• Most
significant
component
of
compensation aligns the interests of our
executives
with
those
of
our
stockholders by linking substantial
portion of executives’ total pay
opportunity to stock price performance,
both in the absolute and relative to the
broader market
• Variety of LTI vehicles balances focus on
sustainable
long-term
stockholder
interests, appropriate risk-taking and
retention objectives
• Vesting parameters support long-term
focus and retention
• Equity-based LTI assists executives in
meeting ownership guidelines
Benefits
• Executives’
contributions
retirement savings
• Behaviors consistent with a
lifestyle
• Promotes the health, wellness and
financial well-being of our executives
We believe that executives with higher levels of responsibility and a
greater ability to influence the results of the Company should have a
greater percentage of their total compensation in the form of variable
compensation, which is dependent upon performance. As a result,
24 The ADT Corporation
2015 Proxy Statement
toward
healthy
compensation for our NEOs is more heavily weighted toward variable
compensation (both annual and long-term incentives), where actual
amounts earned are based upon both Company and individual
performance.
COMPENSATION OF EXECUTIVE OFFICERS—CONTINUED
The chart below shows the distribution of targeted total direct pay for
our CEO and the other NEOs (on average) for fiscal year 2014. This
chart illustrates that 84% of CEO target annual compensation and, on
CEO
16%
average, 74% of target annual compensation for our other NEOs, is at
risk based on Company and individual performance:
Other NEOs
26%
16%
21%
68%
Annual Incentive
Long-Term Incentives
Note that the percentages shown in the chart above reflect target
compensation, and are not reflective of actual compensation values
presented in the Summary Compensation Table on page 35 of this
Proxy Statement.
NEO compensation is reviewed annually by the Compensation
Committee (and, in the case of the CEO, by the independent
members of the Board of Directors) to ensure alignment with the
Company’s compensation objectives and market practice.
Fiscal Year 2014 Compensation Decisions
In fiscal year 2014, we made some changes to our incentive
compensation programs which were designed to further align our
incentive plans with the interests of our stockholders, including:
• Replaced the Adjusted Free Cash Flow metrics in our Officer
Short-Term Bonus Plan (“Officer Bonus Plan”), Annual Incentive
Plan (“AIP”) and Long-Term Incentive Plan (“LTIP”) with Steady
State Free Cash Flow (“SSFCF”) metrics. We believed that SSFCF
more accurately captures the impact of the key value drivers of
our business, and moves closer to an ongoing earnings measure.
• Modified the metrics utilized in the Performance Share Unit (“PSU”)
component of our LTIP. The PSUs granted in fiscal year 2014 will
vest based upon our performance against Relative Total
Shareholder Return (“TSR”) and SSFCF metrics, which were
weighted equally at 50%. We believed that replacing the Recurring
Revenue metric previously in use in the LTIP with the TSR metric
more appropriately captures the overall performance of the
Company in comparison to the broader market, as reflected in
stock price movement and adjusted for dividends. For purposes
of the TSR metric, our stock performance is compared to the
median performance of companies in the Standard & Poor’s
(“S&P”) 500 Index.
• Adjusted the weighting of the equity mix for our Executive Officers
to increase the weighting of PSUs and reduce the weighting of
Stock Options. The equity mix for Executive Officers for awards
granted in conjunction with the annual grant process was as
follows: 50% PSUs, 25% Stock Options and 25% Restricted
Stock Units (“RSUs”). The decision to increase the weighting of
Base Salary
Annual Incentive
Long-Term Incentives
PSUs was made to further align the interests of our Executive
Officers with those of our stockholders.
Pay for Performance
We strongly believe that a significant portion of our executives’
compensation opportunity should be correlated with our
performance. Annual incentive compensation and 50% of long-term
equity incentive compensation (in the form of PSUs) is earned only
when the NEOs attain specified goals (including, for our NEOs other
than the CEO, certain individual objectives included as part of our
annual incentive program), thereby placing a substantial portion of
executive compensation at risk. The remaining 50% of our executives’
long-term equity incentive compensation is awarded in Stock Options
and time-vested RSUs, the value of each of which is dependent on
our performance over an extended vesting period as exhibited in the
performance of our stock price. We believe the design of our
incentive compensation plans creates additional incentive for our
executives to focus on sustainable, long-term growth.
Short-Term Incentives. The Compensation Committee set aggressive
targets in our annual incentive plans for fiscal year 2014 to focus our
executives on taking appropriate actions to ensure the Company is
well-positioned for long-term success. In fiscal year 2014, the
Company did not fully meet the aggressive targets set in our AIP (see
the performance targets and actual performance in “Fiscal Year 2014
Annual Incentive Compensation Design Summary”, as well as the
discussion regarding our fiscal year 2014 performance, below). As a
result, our CEO was awarded an annual incentive equal to 70% of his
targeted annual payout. Our other NEOs received an average payout
of 70.5% of their targeted awards, including the impact of their
performance against individual objectives. The Compensation
Committee believes these results reflect the proper alignment of pay
and performance. The Compensation Committee continued to set
aggressive targets for fiscal year 2015 to ensure the relationship with
performance continues.
Long-Term Incentives. The fiscal year 2014 long-term incentive
program was designed to reward management for performance
directly related to increasing stockholder value. Our CEO and the
other Executive Officers received 50% of their long-term incentive
The ADT Corporation
2015 Proxy Statement
25
PROXY STATEMENT
Base Salary
53%
COMPENSATION OF EXECUTIVE OFFICERS—CONTINUED
value in the form of PSUs, whose vesting is contingent upon
achieving TSR and SSFCF goals over a three-year performance
period. An additional 25% of long-term incentive value for our CEO
and other Executive Officers was delivered in the form of Stock
Options, which deliver value only when long-term stock price
appreciation is achieved. The remaining 25% of long-term incentive
value delivered to our CEO and other Executive Officers was awarded
in the form of RSUs, which deliver higher value when there is longterm stock price appreciation.
The following graph provides a comparison of the cumulative TSR on
the Company’s common stock to the returns of the S&P 500 Index
and the S&P 500 Industrial Index from October 1, 2012 (the first day
of fiscal year 2013 and the inception of trading of ADT common stock
as an independent, publicly traded company) through September 26,
2014 (the end of fiscal year 2014). From inception through the end of
fiscal year 2014, our TSR is 2.2%. As an indicator of the solid
sequential improvements in our operational performance during the
last three quarters of fiscal year 2014, however, our TSR between
January 30, 2014 (the date of release of the 10-Q for first fiscal
quarter) and September 26, 2014 is approximately 15%. The graph is
not, and is not intended to be, indicative of future performance of our
common stock.
160%
150%
140%
130%
ADT
120%
S&P500
S&P 500 Industrials (S5INDU)
110%
100%
90%
80%
70%
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
The above graph assumes the following:
PROXY STATEMENT
(1) $100 invested at the close of business on October 1, 2012, in
ADT common stock, S&P 500 Index, and the S&P 500 Industrial
Index.
(2) The cumulative total return assumes reinvestment of dividends.
The Compensation Committee believes that the annual incentive
awards earned by the NEOs, in comparison to the performance of
the Company’s stock relative to the S&P 500 Index and the S&P 500
Industrial Index, reflect a proper alignment of pay and performance.
Process for Determining Executive Officer
Compensation (including NEOs)
Role of the Compensation Committee
The Compensation Committee consists exclusively of independent
directors, the requirements of which are set forth in the NYSE listing
rules, who are also considered “outside directors” as defined in
Section 162(m) of the Code. The Compensation Committee is
responsible for, among other things, reviewing the performance of
and approving the compensation awarded to our Executive Officers,
other “senior officers” subject to the filing requirements of Section 16
of the Securities Exchange Act of 1934, as amended, and “senior
executives” (those executives who are not senior officers, but who
have a base salary of $350,000 or greater). The Compensation
26 The ADT Corporation
2015 Proxy Statement
Mar-14
Jun-14
Sep-14
Committee also reviews CEO performance and makes
recommendations regarding his compensation to the independent
members of the Board of Directors.
Role of Independent Compensation Consultant
The Compensation Committee regularly works with an independent
compensation consultant in carrying out its duties. The
Compensation Committee has the sole authority to retain,
compensate and terminate the independent compensation consultant
and any other advisors necessary to assist it in its evaluation of nonmanagement director, CEO or other senior executive compensation.
The Compensation Committee has engaged Farient Advisors LLC
(“Farient”) to provide advice regarding compensation practices for our
executives. In fulfilling its duties to the Compensation Committee,
Farient often works directly with management of the Company to
prepare materials for the Committee’s review. Farient regularly attends
Compensation Committee meetings and in fiscal year 2014 advised
the Committee on matters including, among others:
• an evaluation of our executives’ base salaries and short- and longterm target incentive compensation relative to the Company’s peer
group and the broader market;
• insight and advice in connection with the design of our incentive
plans, including the measures, goals, and leverage inherent in the
performance plans;
COMPENSATION OF EXECUTIVE OFFICERS—CONTINUED
• the composition of the Company’s peer group;
Peer Group Development
• feedback regarding the total targeted compensation for our CEO;
The Compensation Committee, with the assistance of our external
advisor, Farient, has developed a peer group for compensation
purposes that aligns with the Company’s business model and size
characteristics. Public companies were screened on whether they
have a similar range of revenues and are generally focused on
generating subscription-based recurring revenue, primarily in the
business-to-consumer (B2C) arena, with a focus on operations and
revenues primarily in the United States and Canada. The
Compensation Committee reviews the peer group periodically to
determine whether any significant changes to the business condition
of the Company or any of its peers would warrant any changes to the
peer group.
• an evaluation of whether the pay programs encourage our
executives to take undue risks.
Farient provides no services to the Company other than consulting
services provided to the Compensation Committee.
Role of Management
In making determinations with respect to executive compensation, the
Compensation Committee considers input from a number of sources,
including management. Specifically, the CEO and CHRO provide
insight to the Compensation Committee on specific decisions and
recommendations related to the compensation of our NEOs. The
Compensation Committee believes that the input of the CEO and
CHRO with respect to the assessment of individual performance,
succession planning and retention is a key component of the
process. The CHRO also supervises the development of materials for
each Compensation Committee meeting, including individual and
Company performance metrics, competitive market data and, in
conjunction with the CEO, individual compensation recommendations
for the Company’s executives. No member of management, including
the CEO, has a role in determining his or her own compensation.
Benchmarking
The Compensation Committee considers a number of factors in
determining target total compensation for each of the Company’s
Executive Officers. These factors include, but are not limited to,
position specific market data, the executive’s experience and
performance, and internal pay equity. While the Compensation
Committee strives to generally target executive compensation at the
median of the Company’s competitive market (including both
selected peer companies and the broader competitive market) in the
aggregate, they also apply discretion based upon their review of the
factors noted above to make individual compensation decisions for
the Company’s Executive Officers. In addition, the Compensation
Committee may target above-median market compensation for
specific individuals for a variety of reasons, including:
• specific organizational considerations, for example, because the
role is considered critical to delivering on our overall business
strategy;
• the need for specific expertise in building new or improving upon
existing business functions, particularly in the process of hiring
candidates from external sources; and
• the retention of key executives we believe are critical to our
success.
In its review of the peer group for use in reviewing the Company’s
fiscal year 2014 compensation programs and its determination of
individual executive compensation decisions, the Compensation
Committee approved a number of changes from the peer group
utilized in fiscal year 2013. Those changes included:
• the removal of Equinix, Inc. and STARZ from the peer group;
• the addition of Allegion plc, Cincinnati Bell, Inc. and EarthLink
Holdings Corp. to the peer group; and
• the addition of T-Mobile US, Inc. as a reference peer. Reference
peers are utilized only for purposes of assessing compensation
design and practices. While the companies in our reference peer
group meet a number of our screening criteria, particularly the
subscription-based recurring revenue business model and B2C
focus, their annual revenues are outside of the range employed in
the screening process for assessing CEO and CFO
compensation levels. As a result, inclusion of specific
compensation data would have the potential to skew comparative
statistics.
Equinix and STARZ, which were both included in the original peer
group developed prior to the Company’s separation from Tyco, were
removed from the peer group as neither primarily operates in the B2C
space. Additionally, Equinix is focused primarily on enterprise
solutions, while STARZ has a focus on selling programming to
distributors, neither of which is a business model comparable to the
Company’s.
The three additions to the peer group all provide services to
residential consumers: Allegion provides security and safety-related
products and services, Cincinnati Bell offers voice and data services,
as well as home security, and EarthLink provides network,
communication and IT services. T-Mobile US was included as a
reference peer due to its acquisition of a former member of the
Company’s peer group (MetroPCS), as well as its subscriber-based
recurring revenue business model. Its revenue size, however, is
outside the range of the screening criteria used to identify peer
companies.
Peer company data were utilized to benchmark pay levels for the
CEO and CFO positions and to provide insights on pay practices at
the executive level. General industry data from third party providers
were used as secondary data sources for the CEO and CFO
positions and as a primary source for the other executive positions.
Neither the Compensation Committee nor management has any input
into the companies included in these general industry surveys.
The ADT Corporation
2015 Proxy Statement
27
PROXY STATEMENT
• newly hired Executive Officer compensation packages; and
COMPENSATION OF EXECUTIVE OFFICERS—CONTINUED
The table below represents the peer group utilized by the
Compensation Committee for its use in reviewing fiscal year
2014 compensation programs and individual executive
compensation decisions. All data in the table was provided by
S&P Capital IQ.
Company Name (1)
Revenues (2)
Operating
Income (2)
Total
Assets (2)
Market
Cap (2)(3)
Allegion plc
$ 2,094
$ 385
$ 1,980
$ 5,028
Cablevision Systems Corp.
$ 6,232
$ 771
$ 6,591
$ 4,950
CenturyLink, Inc.
$18,095
$2,833
$51,787
$22,811
Charter Communications, Inc.
$ 8,155
$ 956
$17,295
$16,027
Cincinnati Bell
$ 1,257
$ 189
$ 2,107
$
718
EarthLink Holdings Corp.
$ 1,241
$
$ 1,007
$
448
31
Frontier Communications Corp.
$ 4,762
$1,031
$16,635
$ 6,514
Netflix, Inc.
$ 4,375
$ 228
$ 5,413
$23,047
Rollins, Inc.
$ 1,337
$ 191
$
739
$ 4,727
SIRIUS XM Radio, Inc.
$ 3,799
$1,047
$ 8,845
$19,258
Stanley Black & Decker, Inc.
$11,001
$1,089
$16,535
$15,012
Telephone & Data Systems, Inc.
$ 4,901
-$ 111
$ 8,904
$ 2,789
The Brink’s Co.
$ 3,942
$ 183
$ 2,498
$ 1,039
Tyco International Ltd.
$10,340
$ 745
$11,809
$19,244
Windstream Corp.
$ 5,988
$1,048
$13,445
$ 5,732
25TH PERCENTILE
$ 2,947
$ 190
$ 2,303
$ 3,758
MEDIAN
$ 4,762
$ 745
$ 8,845
$ 5,732
75TH PERCENTILE
$ 7,194
$1,039
$14,990
$17,636
The ADT Corporation
$ 3,408
$ 720
$10,549
$ 6,203
PERCENTILE RANK
27%
50%
61%
54%
(1)
(2)
(3)
Three additional companies, DIRECTV, T-Mobile US and Ascent Capital Group, are utilized as “reference peers” for purposes of assessing compensation design and practices only. While
these companies meet the subscription-based recurring revenue and primary B2C screening criteria, their annual revenues are outside the range used in the screening process.
Data presented is as of each company’s most recently reported fiscal year end. Figures presented are in millions of dollars.
Data presented is as of November 11, 2014.
PROXY STATEMENT
FY15 Peer Group Changes
In its recommendation to the Compensation Committee for fiscal year
2015, Farient included an additional criterion in its screening process.
While companies with a significant B2B focus were previously given
less consideration for inclusion in the peer group, Farient included
companies with a significant B2B focus in its screening process for
fiscal year 2015 due to the Company’s expansion into the
commercial security space.
Based on a review of recommendations made by Farient at the
December 2014 Compensation Committee meeting, the
Compensation Committee elected to make no changes to the peer
group for fiscal year 2015. The Compensation Committee did,
however, elect to add Diebold Inc., US Cellular Corporation and
ServiceMaster as reference peers for fiscal year 2015. These
companies will continue to be monitored for possible future inclusion
in the Company’s peer group.
Both the select peer group and the reference peers will be used to
assist the Compensation Committee in reviewing compensation
programs during fiscal year 2015. Only the select peer group will be
28 The ADT Corporation
2015 Proxy Statement
utilized by the Compensation Committee in making individual pay
decisions during fiscal year 2015.
Components of Compensation Programs
The target total compensation opportunity for each of our Executive
Officers is comprised of both fixed (base salary) and variable (both
annual and long-term incentives) compensation elements. In addition,
each of our NEOs is eligible to participate in the Company’s benefit
plans that are generally available to all employees.
Base Salary
Base salaries are reviewed annually by the Compensation
Committee. Base salaries may also be reviewed periodically in
situations of promotion or other change in job responsibilities. These
reviews and the associated compensation decisions are based upon
market data, the criticality of the role, internal pay equity and the
individual executive’s performance, level of experience and level of
responsibility.
COMPENSATION OF EXECUTIVE OFFICERS—CONTINUED
Annual Incentive Compensation
Executive Officers of the Company are eligible to earn annual incentives under the Officer Bonus Plan. Under the Officer Bonus Plan, which is
intended to comply with Section 162(m) of the Code, annual incentives are based upon achievement against an Operating Income target, which
is determined annually by the Compensation Committee. For fiscal year 2014, each of the Company’s Executive Officers was eligible for a
maximum bonus under the Officer Bonus Plan equal to 0.5% of the Company’s Operating Income.
After determining the Company’s performance against the Operating Income criterion, the Compensation Committee applies negative discretion
to the calculated maximum incentive amount. The Compensation Committee generally utilizes a guideline formula in applying its negative
discretion. This guideline formula is based upon the Company’s AIP, which is the plan upon which a majority of incentive-eligible employees’
annual incentives are based.
The guideline formula for purposes of the Officer Bonus Plan in effect for fiscal year 2014 reflects the Company’s focus as a subscriber-based
business with significant recurring monthly revenues, and the metrics utilized in the AIP were selected to drive results in those categories which
have the most significant impact on the success of our business. Officer Bonus Plan payouts are based upon the Company’s performance
against a variety of predetermined financial goals, as well as specific individual objectives (other than for the CEO).
The following table provides a basis for the rationale behind the selection of the AIP metrics:
Measure
Rationale for Inclusion in AIP
Recurring Revenue Growth
Supports our strategy of increasing recurring revenue through customer additions,
retention of existing customers and increased Average Revenue Per User (“ARPU”)
Steady State Free Cash Flow
Key measure in assessing the economic potential of the Company’s existing
subscriber base; also aligns to metrics reported by key industry competitors
Net Attrition
Focuses efforts on reducing customer attrition, which is a key value driver and
significantly impacts our operations
Individual Objectives (excluding CEO)
Provide individual line-of-sight to employees in supporting the strategic goals of the
Company
Fiscal 2014 Annual Incentive Compensation Design Summary
Performance Measure
Weighting
Performance
Target
Actual
Performance
% of
Target
Attained
37.5%
5.1%
2.7%
52.9%
Mr. Gursahaney
Recurring Revenue Growth*
Steady State Free Cash Flow
(1)*
Net Attrition
37.5%
948M
90.3%
25%
$
1,050M
13.9%
$
13.5%
102.9%
30%
see above
see above
see above
30%
see above
see above
see above
20%
see above
see above
see above
20%
various
various
various
Messrs. Geltzeiler, Ferber and Bleisch and Ms. DeVard
Recurring Revenue Growth*
Steady State Free Cash Flow
Net Attrition
Individual Objectives
(1)
(2)
*
(2)
(1)*
For compensation purposes, SSFCF is adjusted to exclude the effects of events that the Compensation Committee deems would not reflect the performance of the NEOs. The categories of
special items were identified at the time the performance measure was approved at the beginning of the fiscal year, although the Compensation Committee may in its discretion make
adjustments during the fiscal year. For fiscal year 2014, the approved categories of adjustments included adjustments related to (i) business acquisitions and divestitures; (ii) debt
refinancing; (iii) legacy legal and tax matters; (iv) goodwill and intangible asset impairments for business acquired prior to 2002; (v) certain unbudgeted capital expenditures and pension
contributions; (vi) significant unbudgeted restructuring or other one-time charges; (vii) charges related to the separation into a stand-alone public company; and (viii) realignments of
segment and corporate costs.
Individual objectives typically vary by NEO, but in general are related to performance against key strategic goals and value drivers for the Company, including, but not limited to, growing the
core business, improving customer attrition through the implementation of customer non-pay initiatives and improved credit screening, and strengthening of business platforms to support
efficiencies and process improvements.
For further definition of non-GAAP financial measures and a reconciliation to GAAP measures, see “Reconciliation of Non-GAAP Measures to GAAP Measures and Selected Definitions” on
page 49 of this Proxy Statement.
The ADT Corporation
2015 Proxy Statement
29
PROXY STATEMENT
The financial performance measures and targets utilized in the fiscal year 2014 AIP and in the Officer Bonus Plan guideline formula, as well as the
actual performance against the targets, are summarized in the table below. Actual Performance figures below exclude the impact of the
acquisition of Reliance Protectron, Inc.
COMPENSATION OF EXECUTIVE OFFICERS—CONTINUED
Description of Performance Measures: “Recurring Revenue
Growth” is defined as the growth in revenue generated by monthly
recurring fees related to electronic security, interactive home and
business automation and related monitoring services. Revenues
associated with the installation of our security and automation
systems, along with other one-time revenues, are excluded from this
calculation. From time to time, discretionary adjustments may be
applied for AIP and Officer Bonus Plan purposes. “Steady State Free
Cash Flow” is defined as a measure of pre-levered cash generated
by the Company after the cost of replacing recurring revenue lost to
attrition, but before the cost of new subscribers that drive recurring
revenue growth. Steady State Free Cash Flow is calculated by
subtracting both the Subscriber Acquisition Cost (“SAC”) required to
maintain recurring revenue and maintenance capex from EBITDA
(pre-SAC). From time to time, discretionary adjustments may be
applied for AIP and Officer Bonus Plan purposes. “Net Attrition” is the
customer revenue attrition rate which is defined as recurring revenue
lost resulting from customer attrition, net of dealer charge-backs and
re-sales. The customer revenue attrition rate is a 52-week trailing
ratio, the numerator of which is the recurring revenue lost during the
period due to attrition, net of dealer charge-backs and re-sales, and
the denominator of which is total annualized recurring revenue based
on an average of recurring revenue under contract at the beginning of
each month during the period.
In approving payouts for each of our NEOs in November 2014, the
Compensation Committee (and, in the case of the CEO, the
Named Executive Officer
independent members of the Board of Directors) first determined the
amount of the maximum bonus award each NEO was eligible to
receive under the Officer Bonus Plan, based upon the Company’s
Operating Income performance. The Compensation Committee then
determined the final awards for each of the NEOs through the
exercise of negative discretion based upon both the achievement of
the quantitative performance measures shown in the Fiscal 2014
Annual Incentive Compensation Design Summary table above and a
Strategic Modifier.
The Strategic Modifier provides the Compensation Committee the
ability to adjust the awards as calculated based upon the quantitative
performance measures plus or minus twenty percent (+/- 20%). The
Compensation Committee evaluated the overall strategic
performance of the Company, which included Small Business
Recurring Revenue Growth and Recurring Revenue Margin as well as
other strategic factors and, based upon that overall assessment,
made the determination that the overall pool of funds available to
allocate for awards for the Executive Officers of the Company,
including the NEOs, would be reduced by five (5) percentage points.
The table below shows the maximum and target annual incentive
compensation opportunities, as well as the actual incentive payouts
earned for fiscal year 2014, for each of our NEOs. These incentive
payments earned are reported in the “Non-Equity Incentive Plan
Compensation” column of the Summary Compensation Table on
page 35 of this Proxy Statement.
Maximum
Target
Actual
Naren Gursahaney
$1,800,000
$900,000
$630,000
Michael Geltzeiler
$1,500,000
$750,000
$538,125
Alan Ferber
$ 700,000
$350,000
$235,200
N. David Bleisch
$ 595,000
$297,500
$211,374
Jerri DeVard (1)
$ 700,000
$350,000
$126,594
(1)
Maximum and target amounts for Ms. DeVard represent annual amounts. Actual amount was pro-rated for the period from Ms. DeVard’s hire date (March 31, 2014) through the end of the
fiscal year.
PROXY STATEMENT
Long-Term Incentive Program
The Company’s LTIP is designed to provide a significant portion of
executives’ compensation opportunity in equity-based instruments. In
so doing, the LTIP is a key component in aligning the long-term
interests of executives with those of stockholders, thus promoting
value creation for both our executives and stockholders. A majority of
total equity granted under the LTIP is awarded during our annual grant
process. This process occurs in conjunction with our annual
Grant Type
assessment of individual performance and potential, and also takes
into account a review of the competitive compensation landscape.
Awards of equity under the annual LTIP process are delivered to
employees utilizing a mix of Stock Options, RSUs and PSUs. The
weighting of the different components of the awards varies by
employee level. In fiscal year 2014 we increased the weighting of
PSUs while reducing the weighting of Stock Options. The value of
awards granted to our CEO and the other NEOs during the annual
LTIP process are based upon the following mix of equity:
Weighting
PSUs
50%
Stock Options
25%
RSUs
25%
30 The ADT Corporation
2015 Proxy Statement
COMPENSATION OF EXECUTIVE OFFICERS—CONTINUED
The following table describes the general terms and conditions applicable to each of the equity-based grant type:
Vesting
Other Terms & Conditions
PSUs
100% on the 3rd anniversary of the grant date, subject to
satisfaction of performance conditions
• Vesting subject to performance against Relative Total
Shareholder Return (50% weighting) and Steady State
Free Cash Flow Growth (50% weighting).
• Accumulate dividend equivalent units with respect to
dividends, which vest only to the extent of vesting of the
underlying PSU award.
Stock Options
25% per year
• Granted with an exercise price equal to the closing
price of the Company’s common stock on the date of
grant.
• Expire on the 10th anniversary of the grant date unless
forfeited earlier.
RSUs
25% per year
• Accumulate dividend equivalent units with respect to
dividends, which vest in accordance with the vesting of
the underlying RSU award.
We modified the PSU metrics for fiscal year 2014 in order to
strengthen the alignment of our executives’ interests and efforts with
the interests of our stockholders. We implemented a TSR metric in
order to capture our performance relative to the broader market.
Additionally, we chose to focus on the importance of generating
increased cash flows by utilizing a SSFCF metric.
In certain unusual circumstances, we make equity grants in addition
to our normal annual grants and awards for new hires in order to
recognize an individual’s extraordinary contributions to the Company.
In December 2013, we made a one-time RSU grant to Mr. Bleisch to
recognize his extraordinary efforts in supporting our special
governance needs in fiscal years 2013 and 2014. These RSUs vest
in equal amounts on each of the first two anniversaries of the date of
grant.
Fiscal Year 2015 Compensation Decisions
Base Salary
At the end of fiscal year 2014 we made the decision to postpone
base salary increases for our Executive Officers for fiscal year 2015.
Executive Officer compensation is generally reviewed on an annual
basis near the end of the fiscal year, with recommendations for
increases taking effect at the beginning of the next fiscal year. Based
upon our overall performance in fiscal year 2014, the CEO elected
not to recommend compensation increases for the Executive Officers
(other than himself) effective at the beginning of fiscal year 2015. The
Compensation Committee agreed with this recommendation and, in
the case of the CEO, the independent members of the Board of
Directors agreed not to increase the CEO’s base salary. The
Compensation Committee will review Executive Officer compensation
during fiscal year 2015 and will determine whether to make any
changes at such time.
Incentive Plan Design Changes
For fiscal year 2015, the Compensation Committee approved
changes to the design of our AIP program. These changes were
implemented in order to continue strengthening the alignment
between our stockholders’ interests and those of our executives and
to further improve the line-of-sight for our employees. Among the plan
design changes for fiscal year 2015:
• Replaced the SSFCF metric with an EBITDA metric for the AIP.
We believe that EBITDA, as a measure of earnings, captures a
greater level of impact of the value drivers of our business than
SSFCF. Additionally, EBITDA is also a more commonly utilized
metric in incentive plans in our peer group and the broader
market, and is more easily understood by both investors and plan
participants.
• Renamed the Net Attrition metric utilized in the AIP as Customer
Retention. Customer Retention, which is the inverse of Net
Attrition, provides our employees with a stronger positive focus of
increasing the number of customers we retain, as opposed to the
Net Attrition metric, which is focused on reducing the number of
customers we lose.
• For those employees who support one of our Business Units
(including certain of our Executive Officers), we introduced AIP
metrics at the Business Unit level. Employees supporting the
Business Units will have 50% of their incentive award funded by
the performance of the Business Unit, with the other 50% of the
award funded by the performance of the Company as a whole.
This change will provide greater focus for those employees
supporting Business Units toward driving the results which they
are better able to impact, while still maintaining the focus on the
results of the Company as a whole.
• Recurring Revenue and Customer Retention will be utilized as
metrics for each of the Company’s Business Units, as well as at
the corporate level.
• A third Business Unit-specific metric will be utilized to focus the
efforts of the employees supporting those Business Units on the
specific priorities of those businesses.
The ADT Corporation
2015 Proxy Statement
31
PROXY STATEMENT
Grant Type
COMPENSATION OF EXECUTIVE OFFICERS—CONTINUED
The table below shows the metrics to be utilized and the weighting of those metrics in fiscal year 2015 for purposes of determining our
performance for the AIP:
Metric
Weighting (Corporate Participants)
Weighting (Business Unit Participants)
Corporate Recurring Revenue
33 1/3%
16 2/3%
Corporate Customer Retention
33 1/3%
16 2/3%
Corporate EBITDA
33 1/3%
16 2/3%
Business Unit Recurring Revenue
16 2/3%
Business Unit Customer Retention
16 2/3%
Business Unit-specific metrics
16 2/3%
For fiscal year 2015, the Compensation Committee approved the
following change to the design of the LTIP:
• Similar to the change made in the AIP, the SSFCF metric for
determining our PSU performance has been replaced with an
EBITDA metric. We believe that the EBITDA measure will provide a
more accurate indication of the overall performance of the
business and is better aligned with shareholder interests over the
long-term. As a result, 75% of the PSU awards granted in fiscal
year 2015 will be measured against our performance relative to
the EBITDA metric. The remaining 25% weighting for the PSUs will
remain Relative TSR.
• receive any Company contributions that were reduced under the
RSIP due to Internal Revenue Service compensation limits.
Executive Physical Program
The Company strongly believes in investing in the health and wellbeing of its executives as an important component in providing
continued effective leadership for the Company. As such, we
maintain an annual executive physical program, for which all of our
Executive Officers are eligible. The program allows for expenses for
an annual physical to be paid for by the Company, up to a total of
$3,000 per year.
Executive Benefits and Perquisites
Policies and Practices
Our Executive Officers, including the CEO and other NEOs, are
eligible to participate in the benefit plans that are available to
substantially all of our employees, including our defined contribution
savings plans, which includes the 401(k) Retirement Savings and
Investment Plan (“RSIP”), our medical, dental and life insurance plans
and long-term disability plans. Additionally, the Company provides
relocation benefits when a move is required. None of our NEOs
participate in a defined benefit pension plan.
The Company maintains certain policies and practices to ensure that
its compensation programs appropriately align the interests of its
executives with the interests of stockholders. We believe that these
policies and practices are aligned with best practices.
PROXY STATEMENT
Supplemental Savings and Retirement Plan
Executive Officers (US-based) are eligible to participate in the
Company’s Supplemental Savings and Retirement Plan (the “SSRP”),
a deferred compensation plan that permits the elective deferral of
base salary and annual performance-based bonus for executives in
certain career bands. The SSRP provides eligible employees the
opportunity to:
• contribute retirement savings in addition to amounts permitted
under the Company’s RSIP;
• defer compensation on a tax-deferred basis and receive taxdeferred market-based growth; and
Change in Control and Severance Benefits
Our Executive Officers, including the CEO and other NEOs, may be
eligible for certain benefits under either The ADT Corporation
Severance Plan for U.S. Officers and Executives (the “Severance
Plan”) or The ADT Corporation Change in Control Severance Plan (the
“CIC Severance Plan”), depending upon the circumstances leading to
their termination of service of employment with the Company. In the
case of the CIC Severance Plan, a “double trigger” is required before
benefits become available to the executives covered by that plan. We
believe that the benefits available to the NEOs under this plan are
moderate in comparison to the broader market. Details with respect
to the key provisions of the severance plans currently in effect and the
payments and benefits that would be payable under the plans are set
forth in the section titled “Potential Payments Upon Termination or
Change in Control” below.
Stock Ownership and Retention Guidelines
The Compensation Committee believes that requiring executives to own and hold a significant amount of Company stock aligns the executives’
interests with those of our stockholders. The Compensation Committee has established the following ownership guidelines:
Level
Ownership Guideline (as a multiple of base salary)
Chief Executive Officer
6x
Other Executive Officers
3x
32 The ADT Corporation
2015 Proxy Statement
COMPENSATION OF EXECUTIVE OFFICERS—CONTINUED
Equity Grant Practices
The Company’s practice is to grant annual equity awards to eligible
employees on or after the second trading day after financial and other
information about the Company has been widely released through a
press release, news wire or report filed with the SEC. This timing
ensures that annual equity grants are made at a time when the
market has the greatest amount of information concerning the
Company’s performance, including its financial condition and results
of operations, as is reasonably possible. All other equity grants during
the year, which are generally comprised of new hire awards or other
one-time grants, are made in conjunction with the timing of
Compensation Committee meetings.
Insider Trading Policy
The Company maintains an insider trading policy, applicable to all
employees and directors, which prohibits the Company’s personnel
from: (1) buying, selling or engaging in transactions in the Company’s
securities at any time while aware of material non-public information
about the Company; (2) buying or selling securities of other
companies while aware of material non-public information about
those companies that they become aware of as a result of business
dealings between the Company and those companies; (3) disclosing
material non-public information to any unauthorized persons outside
the Company; or (4) engaging in transactions in puts, calls, cashless
collars, options or similar rights and obligations involving the
Company’s securities, other than the exercise of any Companyissued stock options. The policy also restricts trading for a limited
number of Company employees (including the Executive Officers) and
the members of the Company’s Board of Directors to defined window
periods that follow the timing of the filing of the Company’s periodic
reports with the SEC.
Pay Recoupment Policy
The Company’s pay recoupment policy provides that, in addition to
any other remedies available to it and subject to applicable law, the
Company may recover any incentive compensation (whether in the
form of cash or equity) paid by the Company to any Executive Officer
that resulted from any financial result or operating metric that was
impacted by the Executive Officer’s fraudulent or illegal conduct. Our
Board of Directors has the sole discretion to make any and all
determinations under this policy. The Compensation Committee
periodically reviews this policy to determine whether any changes are
warranted.
Risk Mitigation in Compensation Program
Design
The Company’s compensation programs are designed to motivate
employees to take appropriate levels of risk that are aligned with the
Company’s strategic goals, without encouraging or rewarding
excessive risk. Among the program features which balance and
guard against excessive risk-taking include:
• A mix of compensation components (fixed and variable pay,
annual and long-term incentives, cash and equity) that encourage
a focus on both the short and long-term interests of the Company
and its stockholders;
• Incentive awards with payouts based upon a variety of financial
and operational objectives, which minimizes the risk associated
with any single performance measure;
• Incentive plans that cap maximum awards and which are not
overly leveraged;
• Stock ownership guidelines that align executive and stockholder
interests;
• A pay recoupment policy designed to deter excessive risk-taking;
and
• An annual risk assessment of the Company’s compensation
programs by the Compensation Committee.
The Company has concluded that its compensation programs and
policies are not reasonably likely to have a materially adverse effect on
the Company. This conclusion is based on a risk assessment that
was performed by management in conjunction with Farient and
presented to and reviewed with the Compensation Committee at its
September 2014 meeting.
The ADT Corporation
2015 Proxy Statement
33
PROXY STATEMENT
The Compensation Committee reviews ownership levels annually.
Executive Officers are generally expected to meet the ownership
guidelines within a number of years equal to the base salary multiple
(i.e., six years for the CEO and three years for other Executive
Officers). In addition to the ownership guidelines, the Compensation
Committee maintains a requirement that, until the ownership
guidelines are met, all Executive Officers must retain a minimum of
75% of net (after-tax) shares acquired through the exercise of Stock
Options or the vesting of RSUs. We believe that our stock ownership
and retention guidelines are comparable to those found in the
broader market.
REPORT OF THE COMPENSATION COMMITTEE
REPORT OF THE COMPENSATION COMMITTEE
The Compensation Committee has reviewed and discussed with management the Company’s Compensation Discussion and Analysis for the
year ended September 26, 2014 as required by Item 407(e)(5) of Regulation S-K promulgated by the SEC. Based on such review and
discussions, the Compensation Committee recommended to the Board of Directors, and the Board of Directors approved, the inclusion of the
Compensation Discussion and Analysis for the year ended September 26, 2014 in the Company’s 2015 Proxy Statement and its incorporation
by reference into the Company’s Annual Report on Form 10-K for the year ended September 26, 2014.
Submitted by the Compensation Committee of the Board of Directors:
Timothy Donahue, Chair
Richard Daly
Robert Dutkowsky
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
Messrs. Donahue (Chairman), Daly and Dutkowsky served as members of the Compensation Committee in fiscal year 2014, as did Mr. Dinesh
Paliwal, who formerly served on the Board of Directors and was the former Chair of the Compensation Committee until March 12, 2014. None of
such committee members or former committee members (i) was, during fiscal year 2014, an officer or employee of the Company or any of its
subsidiaries; (ii) was formerly an officer of the Company or any of its subsidiaries; or (iii) had any relationship requiring disclosure by the Company
pursuant to any paragraph of Item 404 of Regulation S-K promulgated by the SEC. No executive officer of the Company served as an executive
officer, director or member of a compensation committee of any other entity of which an executive officer or director of such entity is a member
of the Compensation Committee of the Company or the Company’s Board of Directors.
PROXY STATEMENT
34 The ADT Corporation
2015 Proxy Statement
FISCAL YEAR 2014 NEO COMPENSATION
FISCAL YEAR 2014 NEO COMPENSATION
Summary Compensation Table
The information set forth in the following table reflects compensation paid or earned by the NEOs for the fiscal years 2014, 2013 and 2012. The
compensation shown for fiscal year 2012 was earned by each NEO, as applicable, under the compensation programs of Tyco which, prior to
September 28, 2012, was the parent corporation of ADT. The table reflects total compensation earned beginning in the later of fiscal year 2012
or the year an individual first became an NEO.
Year
(b)
2014
900,026
—
2,716,602 1,148,360
630,000
—
70,400 5,465,388
2013
900,000
—
2,708,100 2,602,377
693,000
—
267,286 7,170,763
2012
610,000 290,000
1,747,016 1,698,545
451,300
—
152,957 4,949,818
Michael Geltzeiler
SVP, Chief Financial
Officer (1)
2014
661,953
1,853,414 1,186,135
538,125
—
102,057 4,341,684
Alan Ferber
President, Residential
Business Unit
2014
500,002
75,000
718,401
305,222
235,200
—
22,975 1,856,800
2013
204,545 115,000
498,064
498,456
90,383
—
47,843 1,454,291
N. David Bleisch
SVP, Chief Legal
Officer & Corporate
Secretary
2014
425,012
—
580,489
182,831
211,374
—
337,531 1,737,237
2013
391,667
—
417,690
320,529
191,221
—
126,404 1,447,511
2012
323,820
65,135
350,588
228,789
137,624
—
34,916 1,140,872
Jerri DeVard
SVP, Chief Marketing
Officer (2)
2014
251,924
—
520,078
665,952
126,594
—
90,552 1,655,100
(1)
(2)
(3)
(4)
(5)
(6)
Stock/Unit
Awards ($) (4)
(e)
All Other
Compensation
($) (6)
(i)
Salary
($)
(c)
Naren Gursahaney
Chief Executive Officer
Bonus
($) (3)
(d)
Non-Equity
Incentive Plan
Compensation
($) (5)
(g)
Total ($)
(j)
Michael Geltzeiler was appointed by the Company’s Board of Directors on October 14, 2013, with an effective start date of November 14, 2013.
Jerri DeVard was appointed by the Company’s Board of Directors on March 24, 2014, with an effective start date of March 31, 2014.
Bonus: The amount shown in column (d) in fiscal years 2014 and 2013 for Mr. Ferber represent a portion of a sign-on bonus paid when he joined the Company in April 2013, and on the
first anniversary of his hire. The amounts in fiscal year 2012 for Messrs. Gursahaney and Bleisch represent one-time lump sum payments in connection with their promotions into their new
roles with ADT. The amount represents the difference between their fiscal year 2012 salary and target bonus and their post-separation salary and target bonus for the period from April 1,
2012 to September 28, 2012.
Stock/Unit Awards and Option Awards: The amounts in columns (e) and (f) reflect the fair value of equity awards granted in fiscal years 2014, 2013 and 2012, which consisted
of stock options, RSUs and PSUs. These amounts represent the fair value of the entire amount of the award calculated in accordance with Financial Accounting Standards Board ASC Topic
718 (ASC Topic 718), excluding the effect of estimated forfeitures. Amounts for fiscal years 2014 and 2013 were calculated based upon the price of the Company’s common stock (including
the impact on the value of options under the Black-Scholes option pricing model). Values for fiscal year 2012 were calculated based upon the price of Tyco common stock, as awards granted
in fiscal year 2012 were made prior to the Company’s separation from Tyco. For stock options, amounts are computed by multiplying the fair value of the award (as determined under the
Black-Scholes option pricing model) by the total number of options granted. For RSUs, fair value is computed by multiplying the total number of shares subject to the award by the closing
market price of the Company’s common stock on the date of grant. For PSUs, fair value is based on a model that considers the closing market price of the Company’s common stock on the
date of grant, the range of shares subject to such stock award and the estimated probabilities of vesting outcomes. The value of PSUs included in the table assumes target performance. The
following amounts represent the maximum potential performance share value by individual for fiscal year 2014, determined at the time of grant (200% of the target award): Mr. Gursahaney—
$3,558,378; Mr. Geltzeiler—$1,779,190; Mr. Ferber—$943,890; and Mr. Bleisch—$568,004. Ms. DeVard did not receive PSUs in fiscal year 2014.
Amounts in columns (e) and (f) for fiscal year 2014 for Mr. Geltzeiler include, in addition to the value of awards granted with respect to our annual long-term incentive plan, the value of
awards representing grants of RSUs and stock options with respect to a sign-on equity award. The value of these sign-on grants included in columns (e) and (f) are $497,313 and $611,955,
respectively.
Amounts in column (e) for fiscal year 2012 include the incremental fair value associated with the shortening of the performance period for outstanding PSUs. The shortening of the
performance period was associated with ADT’s separation from Tyco. Amounts in column (f) for fiscal year 2012 include the incremental fair value associated with the conversion of
outstanding Tyco stock options into stock options of ADT. On July 12, 2012, in connection with the separation, the Tyco Board of Directors approved the conversion of all outstanding Tyco
PSUs into RSUs based on performance achieved through June 29, 2012. On August 2, 2012, the Tyco Compensation Committee approved the conversion ratio based on its review and
certification of performance results. On October 12, 2011 the Tyco Compensation Committee approved the methodology that would apply to convert outstanding Tyco equity awards upon
completion of the separation into post-separation equity awards of ADT, or split into equity awards of Tyco, ADT and Pentair Ltd., in order to preserve intrinsic value.
Non-Equity Incentive Plan Compensation: The amounts reported in column (g) for each NEO reflect annual cash incentive compensation for the applicable fiscal year. Annual
incentive compensation for fiscal year 2014 is discussed in further detail above under the heading “Annual Incentive Compensation.” Amounts for fiscal year 2012 were earned pursuant to
incentive plans designed and administered by Tyco.
All Other Compensation: The amounts reported in column (i) for fiscal years 2014 and 2013 represent the Company’s contributions to the 401(k) Retirement Savings and Investment
Plan and Supplemental Savings and Retirement Plan, taxable relocation benefits and associated tax gross-ups, and the value of the executive physical, as applicable. The amounts reported
for fiscal year 2012 were paid and/or earned with respect to similar programs administered by Tyco, as well as to cash perquisites and to insurance premiums paid by Tyco for the benefit of
the officer (and, in some cases, the officer’s spouse). Details with respect to the amounts in this column are set forth below, in the All Other Compensation table.
The ADT Corporation
2015 Proxy Statement
35
PROXY STATEMENT
Name and
Principal Position
(a)
Option
Awards
($) (4)
(f)
Change in
Pension Value
and
Nonqualified
Deferred
Compensation
Earnings ($)
(h)
FISCAL YEAR 2014 NEO COMPENSATION—CONTINUED
Summary Compensation Table – All Other Compensation
The components of the “All Other Compensation” column in the Summary Compensation Table for each NEO are shown in the following table.
Named Executive
Fiscal
Year
Naren Gursahaney
2014
Cash
Perquisite
(a)
2013
2012
—
—
15,250
Supplemental Executive Insurance Benefits
Variable
Tax
Retirement
Universal Supplemental Long-Term GrossPlan
Life
Disability
Care
Ups
Contributions
(b)
(b)
(b)
(c)
(d)
—
—
—
10,109
—
15,008
—
—
19,274
—
52,165
—
Total All Other
Compensation
68,400
2,000
70,400
53,607
161,514
267,286
70,225
23,091
152,957
17,972
63,694
102,057
20,873
2,102
22,975
Michael Geltzeiler
2014
—
—
—
—
Alan Ferber
2014
—
—
—
—
2013
—
—
—
—
5,699
7,500
34,644
47,843
N. David Bleisch
2014
—
—
—
—
75,140
29,415
232,976
337,531
2013
—
—
—
—
4,993
24,868
96,543
126,404
2012
—
—
—
—
2,602
24,327
7,987
34,916
2014
—
—
—
—
18,189
6,458
65,905
90,552
Jerri DeVard
(a)
(b)
(c)
(d)
(e)
20,391
Miscellaneous
(e)
—
Cash Perquisites under Tyco programs reflect an annual cash perquisite payment equal to the lesser of 10% of the executive’s base salary and $70,000. Payments were made quarterly and
were adjusted to reflect changes in salary. This benefit was discontinued by Tyco as of January 1, 2012.
Supplemental Executive Insurance Benefits reflect premiums paid by Tyco for insurance benefits for the executive and, in the case of long-term care, for the executive’s spouse as well. These
benefits were provided to certain executives of Tyco upon the approval of the Tyco Compensation Committee. Mr. Gursahaney was the only one of our NEOs who received these benefits in
his role as an executive of Tyco. ADT discontinued this benefit for Mr. Gursahaney as of November 30, 2012.
The amounts shown in this column as tax gross-up payments for Messrs. Gursahaney, Geltzeiler, Ferber and Bleisch and Ms. DeVard represent tax gross-up payments made with respect to
taxable relocation expenses.
For fiscal years 2014 and 2013, amounts represent matching contributions made by the Company on behalf of each executive to its tax-qualified 401(k) Retirement Savings and Investment
Plan and to its non-qualified Supplemental Savings and Retirement Plan. Amounts for fiscal year 2012 represent contributions made by Tyco to similar plans it administered.
Miscellaneous compensation in fiscal year 2014 includes the value of taxable relocation benefits for Messrs. Geltzeiler, Ferber and Bleisch and Ms. DeVard (totaling $63,244; $2,102;
$232,976; and $65,905, respectively), as well as the value of an executive physical for Messrs. Gursahaney and Geltzeiler. In fiscal year 2013, miscellaneous compensation for Messrs.
Gursahaney, Ferber and Bleisch includes the value of taxable relocation benefits, as well as the value of an executive physical for Mr. Bleisch. Amounts for fiscal year 2012 include matching
charitable contributions Tyco made on behalf of Mr. Gursahaney, as well as the value of taxable relocation benefits for Messrs. Gursahaney and Bleisch.
PROXY STATEMENT
36 The ADT Corporation
2015 Proxy Statement
FISCAL YEAR 2014 NEO COMPENSATION—CONTINUED
Grants of Plan Based Awards Table
The following table summarizes the number of RSUs and Stock Options granted to our NEOs in fiscal year 2014 pursuant to The ADT 2012
Stock and Incentive Plan (the “SIP”), as well as the grant date fair value of these awards. The table also summarizes the range of potential
payouts for the NEOs under the Officer Short-Term Bonus Plan and the Performance Share Unit Awards granted under the SIP. Actual bonus
awards under the Officer Short-Term Bonus Plan are reported in the Summary Compensation Table under the heading “Non-Equity Incentive
Plan Awards.” All numbers have been rounded to the nearest whole dollar, share or unit, with the exception of the exercise price of Stock Option
awards.
Naren
Gursahaney
Michael
Geltzeiler
Alan Ferber
N David.
Bleisch
Jerri DeVard
Award Type
Performance Bonus 12/09/2013 12/09/2013
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
(k)
Grant
Exercise Date Fair
or Base Value of
Price of Stock and
Option
Option
Awards Awards (3)
($/Sh)
($)
(l)
(m)
450,000 900,000 1,800,000
Performance Share
11/22/2013 11/22/2013
Unit (4)(5)
10,650 21,300
42,600
$ 845,397
Performance Share
11/22/2013 11/22/2013
Unit (4)(6)
8,520 21,300
42,600
$ 933,792
Restricted Stock
Unit (4)
11/22/2013 11/22/2013
Stock Option (4)
11/22/2013 11/22/2013
Performance Bonus 12/09/2013 12/09/2013
21,300
$ 937,413
76,000
$44.01 $1,148,360
375,000 750,000 1,500,000
Performance Share
11/22/2013 11/22/2013
Unit (4)(5)
5,325 10,650
21,300
$ 422,699
Performance Share
11/22/2013 11/22/2013
Unit (4)(6)
4,260 10,650
21,300
$ 466,896
Restricted Stock
Unit (4)
11/22/2013 11/22/2013
10,600
Restricted Stock
Unit (7)
11/22/2013 11/22/2013
11,300
Stock Option (4)
11/22/2013 11/22/2013
Stock Option (7)
11/22/2013 11/22/2013
Performance Bonus 12/09/2013 12/09/2013
175,000 350,000
$ 466,506
$ 497,313
38,000
44.01 $ 574,180
40,500
44.01 $ 611,955
700,000
Performance Share
11/22/2013 11/22/2013
Unit (4)(5)
2,825 5,650
11,300
$ 224,249
Performance Share
11/22/2013 11/22/2013
Unit (4)(6)
2,260 5,650
11,300
$ 247,696
Restricted Stock
Unit (4)
11/22/2013 11/22/2013
Stock Option (4)
11/22/2013 11/22/2013
Performance Bonus 12/09/2013 12/09/2013
5,600
$ 246,456
20,200
148,750 297,500
44.01 $ 305,222
595,000
Performance Share
Unit (4)(5)
11/22/2013 11/22/2013
1,700 3,400
6,800
$ 134,946
Performance Share
11/22/2013 11/22/2013
Unit (4)(6)
1,360 3,400
6,800
$ 149,056
Restricted Stock
Unit (4)
11/22/2013 11/22/2013
3,400
Restricted Stock
Unit (8)
12/09/2013 12/09/2013
3,700
Stock Option (4)
11/22/2013 11/22/2013
Performance Bonus 03/31/2014 03/31/2014
$ 149,634
$ 146,853
12,100
175,000 350,000
44.01 $ 182,831
700,000
Restricted Stock
Unit (7)
05/07/2014 05/07/2014
5,500
Restricted Stock
Unit (7)
05/07/2014 05/07/2014
11,100
Stock Option (7)
05/07/2014 05/07/2014
49,800
$31.33 $ 493,518
Stock Option (7)
05/07/2014 05/07/2014
17,400
$31.33 $ 172,434
The ADT Corporation
$ 172,315
$ 347,763
2015 Proxy Statement
37
PROXY STATEMENT
Name
(a)
All
Other
Stock
Awards:
Number
of
Estimated Possible Payouts Estimated Possible Payouts
under Non-Equity Incentive Under Equity Plan Awards Shares
Board or
of
(2)
Plan Awards (1)
Committee
Stock
Approval Threshold Target Maximum Threshold Target Maximum or Units
Grant Date
Date
($)
($)
($)
(#)
(#)
(#)
(#)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
FISCAL YEAR 2014 NEO COMPENSATION—CONTINUED
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
Amounts reported in columns (d) through (f) represent potential annual performance bonuses that the named executive officers could have earned under the Company’s Officer Short-Term
Bonus Plan for fiscal year 2014. The range of potential payouts is based upon the Guideline Formula the Compensation Committee uses to exercise its available “negative discretion” under
the plan. The Compensation Committee established a maximum payout of 200% of target. Threshold amounts assume minimum performance levels are achieved with respect to each
performance measure. For Ms. DeVard, amounts represent the annualized threshold, target and maximum, although her actual bonus opportunity was pro-rated based upon her hire date as
discussed above.
Amounts in (g) through (i) represent potential share payouts with respect to PSU awards that were made in connection with the fiscal year 2014 long-term incentive grant. PSU awards will
vest at the end of the three-year performance period, based upon the Company’s performance against its Steady State Free Cash Flow Growth and Relative Total Shareholder Return targets.
The threshold amounts shown above reflect the number of shares which would be delivered assuming that threshold attainment was met for the performance metrics. The maximum amounts
shown assume maximum attainment against performance metrics. PSUs accrue dividend equivalent units, but these equivalents are ultimately delivered to the recipient only to the extent that
the underlying awards vest based upon performance.
Amounts in column (m) show the grant date fair value of the Stock Option, RSU and PSU awards granted to the NEOs. These amounts represent the fair value of the entire amount of the
award calculated in accordance with ASC Topic 718, excluding the effect of estimated forfeitures. For grants of Stock Options, amounts are computed by multiplying the fair value of the
award (as determined under the Black-Scholes option pricing model) by the total number of options granted. For grants of RSUs, fair value is computed by multiplying the total number of
shares subject to the award by the closing price of the Company’s common stock on the date of grant. For grants of PSUs, fair value is based on a model that considers the closing price of
the Company’s common stock on the date of grant, the range of shares subject to such stock award, and the estimated probabilities of vesting outcomes. The value of PSUs included in the
table assumes target performance. However, the actual number of shares that will be delivered with respect to the PSUs will be determined based on performance through the end of the threeyear performance period.
Amounts represent grants of PSUs, RSUs and/or Stock Options with respect to our annual long-term incentive plan.
PSUs which vest subject to the Company’s SSFCF performance relative to target.
PSUs which vest subject to the Company’s TSR performance relative to target.
Amounts represent grants of RSUs and Stock Options with respect to sign-on equity awards for Mr. Geltzeiler and Ms. DeVard.
Amount represents one-time grant of RSUs for Mr. Bleisch to recognize his extraordinary efforts in supporting our special governance needs in fiscal years 2013 and 2014.
The Company made its annual grant of equity for fiscal year 2014 in November 2013. The annual award for each of our NEOs (excluding
Ms. DeVard, whose grant of equity was not made as part of the annual grant process) consisted of a mix of PSUs, RSUs and Stock Options.
For Stock Options (including those granted to Ms. DeVard), the exercise price equals the closing price of the Company’s common stock on the
date of grant. Stock Options granted as part of the annual award process generally vest in equal installments over a period of four years. Each
option holder has 10 years to exercise his or her Stock Option from the date of grant, unless forfeited earlier. PSUs generally vest at the end of a
three-year performance cycle, with the number of shares delivered dependent on the achievement of applicable performance criteria. Anywhere
between zero and 200% of the target number shares may be delivered based on performance. PSUs generally accrue dividend equivalent units,
which are subject to the same performance conditions applicable to the underlying award, but do not carry voting rights. RSUs granted as part
of the annual award process generally vest in equal installments over four years, accrue dividend equivalent units subject to the same vesting
restrictions as the underlying award, and do not carry voting rights.
PROXY STATEMENT
38 The ADT Corporation
2015 Proxy Statement
FISCAL YEAR 2014 NEO COMPENSATION—CONTINUED
Outstanding Equity Awards at Fiscal Year-End Table
The following table shows outstanding Stock Option awards classified as exercisable and unexercisable and the number and value of any
unvested or unearned equity awards outstanding as of September 26, 2014 for each of the NEOs. The value of any unvested or unearned
equity awards outstanding is calculated based on a market value of $35.61, which was the NYSE closing price per share of the Company’s
common stock on September 26, 2014.
Option Awards (1)
Naren
Gursahaney
Michael
Geltzeiler
Alan Ferber
N David.
Bleisch
Jerri DeVard
(1)
(2)
(3)
(4)
Market Value of
Number of Shares or Units
Shares or Units
of Stock That
Option
of Stock That
Have Not
Expiration Have Not Vested
Vested
Date
(#)(2)
($)(3)
Equity
Equity
Incentive Plan Incentive Plan
Awards: Awards: Market
Number of or Payout Value
Unearned
of Unearned
Shares, Units Shares, Units or
or Other Rights
Other Rights
That Have Not That Have Not
Vested
Vested
(#)(4)
($)(3)
13,138
39,309
14,741
137,587
110,850
54,644
201,873
148,633
92,973
52,146
32,850
21,900
—
—
—
—
—
—
—
—
—
—
—
30,992
52,147
98,550
43,800
76,000
38,000
40,500
$36.4222
$29.5082
$31.1718
$30.8309
$34.1771
$28.4959
$18.5745
$21.6169
$23.8843
$28.3870
$45.9000
$45.9000
$44.0100
$44.0100
$44.0100
3/9/2015
11/21/2015
1/11/2016
11/20/2016
7/2/2017
8/17/2018
10/6/2018
9/30/2019
10/11/2020
10/11/2021
11/29/2022
11/29/2022
11/21/2023
11/21/2023
11/21/2023
51,115
$1,820,205
82,706
$2,945,161
22,293
$ 793,854
21,682
$ 772,096
9,675
—
11,792
8,352
10,515
11,491
14,410
10,523
15,350
9,039
3,100
3,750
—
—
—
29,025
20,200
—
—
—
—
—
—
5,118
9,040
6,200
11,250
12,100
49,800
17,400
$44.4700
$44.0100
$31.3397
$29.5082
$30.8309
$34.1771
$18.5745
$21.6169
$23.8843
$28.3870
$45.9000
$45.9000
$44.0100
$31.3300
$31.3300
5/7/2023
11/21/2023
6/19/2015
11/21/2015
11/20/2016
7/2/2017
10/6/2018
9/30/2019
10/11/2020
10/11/2021
11/29/2022
11/29/2022
11/21/2023
5/6/2024
5/6/2024
14,318
$ 509,864
11,502
$ 409,586
14,678
$ 522,684
11,362
$ 404,601
16,688
$ 594,260
—
—
Stock Options granted to the NEOs generally vest and become exercisable one-fourth per year on each anniversary of the grant date, with the exception of certain one-time or sign-on grants.
Stock Options granted to the NEOs expire on the day prior to the tenth anniversary of the grant date.
The amounts shown in this column represent unvested awards of RSUs. Amounts include outstanding dividend equivalent units associated with the underlying RSU awards.
The amounts in these columns represent the market value of the unvested RSU and PSU awards calculated using a price of $35.61, which was the closing price of the Company’s Common
Stock on the NYSE on September 26, 2014.
The amounts shown in this column represent outstanding and unvested awards of PSUs. The number of PSUs is based on the number granted (target amount) and includes outstanding
dividend equivalent units associated with the underlying award. Dividend equivalent units will vest only to the extent the underlying awards vest based upon the Company’s performance
against its performance targets. The three-year performance period for the fiscal year 2014 grant ends on the last day of fiscal year 2016. The three-year performance period for the fiscal year
2013 grant ends on the last day of fiscal year 2015.
The ADT Corporation
2015 Proxy Statement
39
PROXY STATEMENT
Name
Number of
Number of
Securities
Securities
Underlying
Underlying
Option
Unexercised
Unexercised Exercise
Options: (#)
Options: (#)
Price
Exercisable UnExercisable
($)
Stock Awards
FISCAL YEAR 2014 NEO COMPENSATION—CONTINUED
Vesting dates for each outstanding stock option award, as of September 26, 2014, for the NEOs are as follows:
Year
Exercise Price
Naren Gursahaney
10/12/2014
$23.8843
30,992
10/12/2014
$28.3870
26,073
11/22/2014
$44.0100
19,000
11/30/2014
$45.9000
54,750
Number of Shares Underlying Vesting Awards
Michael Geltzeiler Alan Ferber N. David Bleisch
Jerri DeVard
2014
—
—
23,000
—
—
5,118
—
—
4,520
—
5,050
3,025
—
—
6,850
—
2015
5/7/2015
$31.3300
—
—
—
—
5/8/2015
$44.4700
—
—
9,675
—
—
10/12/2015
$28.3870
26,074
11/22/2015
$44.0100
19,000
11/30/2015
$45.9000
54,750
—
23,000
—
20,950
—
4,520
—
5,050
3,025
—
—
6,850
—
2016
5/7/2016
$31.3300
—
—
—
—
5/8/2016
$44.4700
—
—
9,675
—
11/22/2016
$44.0100
19,000
11/30/2016
$45.9000
32,850
23,000
20,950
—
5,050
3,025
—
—
—
3,750
—
—
—
—
2017
5/7/2017
$31.3300
5/8/2017
$44.4700
11/22/2017
$44.0100
—
—
19,000
20,950
—
9,675
—
—
9,500
5,050
3,025
—
—
—
—
4,350
2018
5/7/2018
$31.3300
PROXY STATEMENT
40 The ADT Corporation
2015 Proxy Statement
—
FISCAL YEAR 2014 NEO COMPENSATION—CONTINUED
Vesting dates for each outstanding RSU award, including outstanding dividend equivalent units, as of September 26, 2014, for the NEOs are as
follows:
Year
Naren Gursahaney
Number of Shares Underlying Vesting Awards
Michael Geltzeiler Alan Ferber N. David Bleisch
Jerri DeVard
2014
10/12/2014
5,137
—
—
1,757
—
11/22/2014
5,421
2,698
1,425
866
—
11/30/2014
980
—
—
542
—
12/9/2014
—
—
—
1,883
—
5/7/2015
—
—
—
—
1,383
5/8/2015
—
—
2,873
—
—
1,281
—
865
—
2015
10/12/2015
3,697
—
—
11/22/2015
5,421
2,697
1,425
11/30/2015
19,618
12/9/2015
—
—
3,330
—
—
—
—
1,883
—
—
—
—
—
1,382
2016
5/7/2016
5/8/2016
—
—
14,201
2,873
—
—
1,425
865
—
—
541
—
11/22/2016
5,421
11/30/2016
—
—
5/7/2017
—
—
—
—
5/8/2017
—
—
2,872
—
—
5,420
2,697
1,425
865
—
—
—
—
—
1,382
2017
11/22/2017
12,541
5/7/2018
Vesting dates for each outstanding PSU award, including outstanding dividend equivalent units, as of September 26, 2014, for the NEOs are as
follows:
Year
Naren Gursahaney
Number of Shares Underlying Vesting Awards
Michael Geltzeiler Alan Ferber N. David Bleisch
Jerri DeVard
2015
11/30/2015
39,340
—
—
4,440
—
6,922
—
2016
11/22/2016
43,366
21,682
11,502
The ADT Corporation
2015 Proxy Statement
41
PROXY STATEMENT
2018
FISCAL YEAR 2014 NEO COMPENSATION—CONTINUED
Option Exercises and Stock Vested Table
The following table sets forth information regarding option awards exercised and stock awards vested during fiscal year 2014 for the NEOs.
Values have been rounded to the nearest dollar, where applicable.
Option Awards
Number of Shares
Acquired on Value Realized on
Exercise (#)
Exercise ($) (1)
Name
Naren Gursahaney
18,000
Michael Geltzeiler
Stock Awards
Number of Shares
Acquired on Vesting (#)
Value Realized on
Vesting ($) (2)
67,282
$2,429,890
$787,500
—
—
—
Alan Ferber
—
—
2,835
N. David Bleisch
—
—
13,084
Jerri DeVard
—
—
(1)
(2)
—
—
$
89,614
$ 476,206
—
The amounts in this column reflect the value realized upon the exercise of vested stock options. The value realized is the difference between the sale price of the shares acquired via the
exercise of the options and the exercise price of the options.
The amounts shown in this column reflect the value of stock awards that vested based on the NYSE closing price per share of the Company’s Common Stock on the date of vesting.
Non-Qualified Deferred Compensation Table
The following table presents information related to the non-qualified deferred compensation accounts of each of our NEOs as of September 26,
2014.
Name
(a)
Executive
Contributions in Last
Fiscal Year ($) (1)
(b)
Registrant
Contributions in Last
Fiscal Year ($) (1)
(c)
Aggregate Earnings in
Last Fiscal Year ($) (2)
(d)
36,002
59,025
517,893
Naren Gursahaney
Michael Geltzeiler
Alan Ferber
N. David Bleisch
Jerri DeVard
(1)
PROXY STATEMENT
(2)
—
Aggregate
Withdrawals/
Distributions ($)
(e)
—
—
—
—
17,917
8,246
503
—
3,063
16,895
14,847
—
—
—
(9,891)
—
Aggregate Balance
at Last Fiscal Year
End ($)
(f)
5,779,880
—
26,666
166,275
—
The amounts in columns (b) and (c) reflect employee and Company contributions, respectively, under the SSRP, the Company’s non-qualified retirement savings plan. All of the amounts in
column (c) are included in the Summary Compensation Table under the column heading “All Other Compensation.” Under the terms of the SSRP, an eligible executive may elect to defer up
to 50% of his or her base salary and up to 100% of his or her performance bonus.
The amounts in this column include earnings (or losses) on the NEO’s notional account in the SSRP.
Potential Payments Upon Termination or Change in Control
Our NEOs are eligible for certain payments and benefits upon a
termination of employment under either the Severance Plan or the
CIC Severance Plan, depending on the circumstances of their
termination.
Severance Plan. Our NEOs would receive benefits under the
Severance Plan upon an involuntary termination of employment other
than for Cause, permanent disability, or death. Upon such
termination, an NEO would be entitled to the following:
• A payment equal to one and a half times his or her base salary
and one and a half times his or her target annual bonus (two times
base salary and two times target annual bonus for
Mr. Gursahaney).
• Continued participation in the Company’s medical, dental and
health care reimbursement account coverage for 12 months
following termination of employment (or until the NEO commences
employment by another company and becomes eligible for
42 The ADT Corporation
2015 Proxy Statement
coverage under the new employer’s plans), subject to the NEO’s
payment of the employee portion of such coverage.
• To the extent the NEO has not become eligible for medical, dental
and health care reimbursement account coverage by a new
employer after the 12-month period following termination of
employment, a cash payment equal to the projected value of the
employer portion of the premiums for such coverage for an
additional period up to 12 months.
• At the Company’s discretion and subject to the Officer Bonus
Plan, a pro-rata bonus for the year of termination based on the
actual performance of the Company and paid when bonuses are
paid to other participants in the plan.
• At the Company’s discretion, outplacement services for a period
not to exceed 12 months.
Each NEO must execute a general release of claims in favor of the
Company in order to receive these benefits. Following termination,
FISCAL YEAR 2014 NEO COMPENSATION—CONTINUED
CIC Severance Plan. In connection with a Change in Control, our
NEOs would receive benefits under the CIC Severance Plan only if
they had a qualifying termination of employment (an involuntary
termination of employment other than for Cause, permanent disability
or death, or a Good Reason Resignation, within the period beginning
60 days prior to, and ending 24 months following, a Change in
Control). Upon such termination, an NEO would be entitled to the
following:
• A payment equal to two times his or her base salary and two
times his or her target annual bonus.
• Continued participation in the Company’s medical, dental and
health care reimbursement account coverage for 12 months
following termination of employment (or until the NEO commences
employment by another company and becomes eligible for
coverage under the new employer’s plans), subject to the NEO’s
payment of the employee portion of such coverage.
• To the extent the NEO has not become eligible for medical, dental
and health care reimbursement account coverage by a new
employer after the 12-month period following termination of
employment, a cash payment equal to the projected value of the
employer portion of the premiums for such coverage for an
additional period of 12 months.
• A pro-rata bonus for the year of termination based on the target
bonus for the year of termination.
• Payment of the cost of outplacement services for 12 months
following the termination of employment.
Each NEO must execute a general release of claims in favor of the
Company in order to receive these benefits. The Company will not
reimburse an NEO with respect to any excise tax triggered by
Section 280G or 4999 of the Code, but any Change in Control
payments will be capped at three times the NEO’s “base amount”
under Section 280G of the Code if the cap results in a greater aftertax payment to the NEO than if the payments were not capped.
Equity Awards. In addition, the individual award agreements for the
outstanding equity awards provide for special treatment upon
termination of employment, including termination of employment
during the two-year period following a Change in Control.
• Awards Granted Prior to October 12, 2011. Other than in the
case of a Change in Control, if an NEO is terminated without
Cause, the NEO will continue to vest in unvested Stock Options
for a period of one year from the date of termination. All other
unvested Stock Options and all unvested RSUs and PSUs will be
forfeited unless the NEO is retirement eligible, in which case all or
a portion of the RSUs or Stock Options will vest and all or a
portion of the PSUs will remain subject to the performance criteria
and may vest upon the achievement of such performance criteria.
With respect to Stock Options, the NEO will have 12 months
following termination to exercise (or, for NEOs that are retirement
eligible, 36 months), subject to the original term of the stock
option.
• Awards Granted On and After October 12, 2011. Other than in
the case of a Change in Control, if an NEO is terminated without
Cause, the portion of Stock Options which would have vested
within one year from the date of termination will immediately vest
upon termination. All other unvested Stock Options and all
unvested RSUs and PSUs will be forfeited unless the NEO is
retirement eligible, in which case the RSUs or Stock Options will
vest pro rata based on the number of full months of service
completed from the date of grant through the termination date,
and all or a portion of the PSUs will remain subject to the
performance criteria and may vest upon the achievement of such
performance criteria. With respect to Stock Options, the NEO will
have 12 months following termination to exercise (or, for NEOs
that are retirement eligible, 36 months), subject to the original term
of the stock option.
• Change in Control. During the two year period following a Change
in Control, if the NEO is terminated without Cause or has a Good
Reason Resignation, all outstanding Stock Options and RSUs
vest in full and all outstanding PSUs vest at the target level. Stock
Options remain exercisable until the earlier of (i) the expiration of
the remainder of their term and (ii) up to three years following the
termination date.
The ADT Corporation
2015 Proxy Statement
43
PROXY STATEMENT
each NEO is prohibited from soliciting customers and employees for
a period of two years, and is prohibited from competing with the
Company for a period of one year.
FISCAL YEAR 2014 NEO COMPENSATION—CONTINUED
PROXY STATEMENT
The following table summarizes the severance benefits that would have been payable to each of our NEOs upon termination of employment or
upon a qualifying termination in connection with a change in control, assuming that the triggering event or events occurred on September 26,
2014. Equity award amounts are calculated using a price of $35.61, which was the closing price of the Company’s common stock on the NYSE
on September 26, 2014.
Change in Control
Without
With
Qualified
Qualified
Termination Termination
($)
($)
Name/Form of Compensation
Other Termination
With Cause
($)
Without
Cause ($)
Resignation/
Retirement
($)
Death or
Disability
($)
Naren Gursahaney
Cash Severance
—
3,600,000
—
Benefit Continuation & Outplacement
Accelerated Vesting of Equity Awards
—
21,199
—
5,505,426
—
9,126,625
Cash Severance
—
Benefit Continuation & Outplacement
—
Total
3,600,000
—
—
—
21,199
—
—
551,728
—
5,505,426
—
4,172,927
—
5,505,426
3,000,000
—
2,250,000
—
—
16,619
—
16,619
—
—
—
Michael Geltzeiler
Accelerated Vesting of Equity Awards
—
1,565,950
—
—
1,565,950
—
4,582,569
—
2,266,619
—
1,565,950
Cash Severance
—
1,700,000
—
1,275,000
—
Benefit Continuation & Outplacement
—
29,085
—
29,085
—
Accelerated Vesting of Equity Awards
—
919,450
—
—
2,648,536
—
1,304,085
Cash Severance
—
1,445,000
—
1,083,750
—
—
Benefit Continuation & Outplacement
—
21,199
—
21,199
—
—
Total
—
Alan Ferber
Total
—
—
—
—
919,450
—
919,450
N. David Bleisch
Accelerated Vesting of Equity Awards
—
1,052,592
—
92,660
—
1,052,592
—
2,518,791
—
1,197,609
—
1,052,592
Cash Severance
—
1,700,000
—
1,275,000
—
Benefit Continuation & Outplacement
—
29,085
—
29,085
—
Accelerated Vesting of Equity Awards
—
881,876
—
89,666
—
881,876
—
2,610,961
—
1,393,751
—
881,876
Total
Jerri DeVard
PROXY STATEMENT
Total
44 The ADT Corporation
2015 Proxy Statement
—
—
COMPENSATION OF NON-MANAGEMENT DIRECTORS
COMPENSATION OF NON-MANAGEMENT
DIRECTORS
Compensation for our non-management directors consists of an annual cash retainer in the amount of $80,000 per year, paid on a quarterly
basis, and an annual equity award of RSUs with a grant date fair value of approximately $120,000 and a one-year vesting term. In addition, the
non-executive chairman of our Board of Directors receives an additional cash retainer in the amount of $150,000 per year, paid quarterly. The
chair of the Audit Committee, beginning effective the third quarter of fiscal 2014, receives an additional cash retainer in the amount of $25,000
per year, paid quarterly. Prior to the third quarter of fiscal year 2014, the additional annual cash retainer for the chair of the Audit Committee was
$20,000. The chair of the Compensation Committee receives an additional cash retainer in the amount of $20,000 per year and the chair of the
Nominating and Governance Committee receives an additional cash retainer in the amount of $15,000 per year, each of which is paid on a
quarterly basis.
The following table sets forth information concerning the fiscal year 2014 compensation paid to our non-management directors.
All Other
Compensation
($) (2)
Fees Earned or
Paid in Cash ($)
Stock Awards
($) (1)
Thomas Colligan
102,500
120,006
—
Timothy Donahue
90,879
120,006
697
211,582
Richard Daly (3)
64,863
140,008
—
204,871
Robert Dutkowsky
Total
($)
222,506
80,000
120,006
536
200,542
Bruce Gordon
245,000
120,006
—
365,006
Bridgette Heller
80,000
120,006
33
200,039
Kathleen Hyle
87,500
120,006
360
207,866
Keith Meister
(4)
Dinesh Paliwal (5)
(1)
(2)
(3)
(4)
(5)
12,967
—
—
12,967
45,604
—
626
46,230
This column reflects the fair value of the awards granted to our non-management directors calculated in accordance with ASC Topic 718, excluding estimated forfeitures. The fair value of
RSUs is computed by multiplying the total number of shares subject to the award by the closing price of the Company’s common stock on the date of grant. RSUs granted to board members
generally vest and the underlying units are converted to shares and delivered to board members on the first anniversary of the grant date. The value of dividend equivalent units granted in
connection with dividends paid on the Company’s common stock during fiscal year 2014 are excluded.
This column reflects the value of the discount on security monitoring services provided by the Company, as well as the value of system installation, where applicable.
The value of stock awards includes, in addition to the annual grant awarded to all directors in conjunction with the Company’s Annual Meeting on March 13, 2014, the value of a “stub grant”
made to Mr. Daly. This stub grant represented a pro-rated grant covering the period from the date of his appointment to the Board of Directors (January 9, 2014) until the 2014 Annual
Meeting.
Mr. Meister resigned from the Board of Directors on November 24, 2013.
Mr. Paliwal elected not to stand for reelection at the Company’s March 13, 2014 Annual Meeting, resigning from the Board of Directors on that date.
The ADT Corporation
2015 Proxy Statement
45
PROXY STATEMENT
Name
AUDIT COMMITTEE REPORT
AUDIT COMMITTEE REPORT
The Audit Committee of the Board of Directors oversees ADT’s financial reporting process on behalf of the Board of Directors. Management has
the primary responsibility for the financial statements and the reporting process, including the systems of internal controls. The Audit Committee
meets separately with management, the senior internal auditor, the independent auditors and the Chief Legal Officer. The Audit Committee
operates under a written charter approved by the Board of Directors, a copy of which is available on our website at www.adt.com. The charter,
among other things, provides that the Audit Committee has direct responsibility to appoint, compensate, oversee, evaluate, and recommend
termination when appropriate, the independent auditor. In this context, the Audit Committee:
• reviewed and discussed the audited financial statements in ADT’s annual report on Form 10-K with management;
• reviewed with Deloitte & Touche LLP, ADT’s independent auditors, who are responsible for expressing an opinion on the conformity of those
audited financial statements with generally accepted accounting principles, their judgments as to the quality and acceptability of ADT’s
accounting principles and such other matters as are required to be discussed with the Audit Committee under generally accepted auditing
standards;
• received the written disclosures and the letter from Deloitte & Touche LLP required by applicable requirements of the Public Company
Accounting Oversight Board regarding Deloitte & Touche LLP’s communications with the Audit Committee concerning independence;
• discussed with Deloitte & Touche LLP its independence from management and ADT and considered whether Deloitte & Touche LLP could
also provide non-audit services without compromising the firm’s independence;
• discussed with Deloitte & Touche LLP the matters required to be discussed by statement on Auditing Standards No. 16, as amended
(AICPA, Professional Standards, Vol. 1, AU section 380), as adopted by the Public Company Accounting Oversight Board in Rule 3200T;
and
• discussed with ADT’s internal auditors and Deloitte & Touche LLP the overall scope and plans for their respective audits, and then met with
the internal auditors and Deloitte & Touche LLP, with and without management present, to discuss the results of their examinations, their
evaluations of ADT’s internal controls and the overall quality of ADT’s financial reporting.
Based on the foregoing reviews and discussions, the Audit Committee recommended to the Board of Directors that the Company’s audited
financial statements be included in the Annual Report on Form 10-K for the fiscal year ended September 26, 2014 filed with the SEC.
Submitted by the Audit Committee of the Board of Directors:
Thomas Colligan, Chair
Bridgette Heller
Kathleen Hyle
PROXY STATEMENT
46 The ADT Corporation
2015 Proxy Statement
PROPOSAL NUMBER TWO
PROPOSAL NUMBER TWO—RATIFICATION OF
THE APPOINTMENT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee is directly responsible for the appointment, compensation, oversight and evaluation of performance of the work of our
independent registered public accounting firm. On January 8, 2015, the Audit Committee appointed the firm of Deloitte & Touche LLP (“D&T”),
as the Company’s independent registered public accounting firm to audit ADT’s financial statements for the fiscal year ending September 25,
2015. The Audit Committee and the Board of Directors recommend that stockholders ratify the appointment of D&T as the Company’s
independent registered public accounting firm to audit the Company’s financial statements for the fiscal year ending September 25, 2015.
Stockholder approval of the appointment of D&T is not required, but the Audit Committee and the Board of Directors are submitting the selection
of D&T for ratification to obtain our stockholders’ views. In the event the stockholders do not ratify the appointment of D&T as the independent
auditors to audit our financial statements for fiscal year 2015, the Audit Committee and the Board of Directors will consider the voting results and
evaluate whether to select a different independent auditor.
Representatives of D&T will attend the Annual Meeting and will be available to respond to appropriate questions. Although D&T has indicated that
no statement will be made, an opportunity for a statement will be provided.
Set forth below are the aggregate audit and non-audit fees billed to the Company by D&T for fiscal years 2013 and 2014:
Audit and Non-Audit Fees
Audit Fees
2013
2014
$2,837,000
$2,687,850
Audit-Related Fees
121,778
40,800
Tax Fees
499,545
128,945
2,200
2,000
3,460,523
2,859,595
All Other Fees
Total:
Audit-Related Fees: Audit-related fees consist of fees billed for services performed by D&T that are reasonably related to the performance of
the audit or review of the Company’s financial statements, including the audits of employee benefit plans.
Tax Fees: Tax fees consist of fees billed for professional services performed by D&T with respect to tax compliance and tax planning and
advice for US and Canadian operations.
All Other Fees: All Other Fees consist of permitted services other than those that meet the criteria above and relate to accounting research
subscriptions.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors
The Audit Committee adopted a pre-approval policy that provides guidelines for the audit, audit-related, tax and other permissible non-audit
services that may be provided by the independent auditors. The policy identifies the guiding principles that must be considered by the Audit
Committee in approving services to ensure that the auditors’ independence is not impaired.
Under the policy, the Audit Committee annually pre-approves the audit engagement fees and terms of all audit and permitted non-audit services
to be provided by the independent auditor.
The Audit Committee considered whether providing the non-audit services shown in the table above was compatible with maintaining D&T’s
independence and concluded that it was.
The Audit Committee and the Board of Directors unanimously recommend that stockholders vote FOR the ratification of
Deloitte & Touche LLP as our Independent Registered Public Accounting Firm for fiscal year 2015.
The ADT Corporation
2015 Proxy Statement
47
PROXY STATEMENT
Audit Fees: These amounts represent fees of D&T for the audit of our annual consolidated financial statements, the review of financial
statements included in our quarterly Form 10-Q reports, the audit of internal control over financial reporting, and the services that an independent
auditor would customarily provide in connection with regulatory filings and similar engagements for the fiscal year.
PROPOSAL NUMBER THREE
PROPOSAL NUMBER THREE—NON-BINDING
ADVISORY VOTE ON COMPENSATION OF THE
NAMED EXECUTIVE OFFICERS
We request our stockholders’ non-binding advisory vote on the compensation of our named executive officers as disclosed in accordance with
the SEC’s rules in the section of this Proxy Statement under “Compensation of Executive Officers” on pages 23 to 44.
The Company currently intends to hold such votes annually. The next such vote will be held at the Company’s 2016 Annual Meeting of
Stockholders.
In considering their vote, stockholders should review with care that our compensation objectives, policies, practices and programs are designed
to attract and retain the talent needed to align with the strategic mission of ADT and to drive financial performance and incentivize execution of
our business strategy. Our compensation programs and practices are intended to reward our named executive officers for their performance in
implementing our strategy to grow our business and create long-term stockholder value. We believe our programs effectively link executive pay
to the financial performance of the Company while also aligning our named executive officers’ interests with the interests of our stockholders.
We are seeking our stockholders’ support for our executive officer compensation as detailed in this Proxy Statement. This proposal conforms to
SEC requirements and seeks our stockholders’ views on our executive compensation, compensation philosophy, pay principles and pay
practices as described in this Proxy Statement. The advisory vote is non-binding and it will not be binding on the Board of Directors or obligate it
to take any compensation actions, or to adjust our executive compensation programs or policies, as a result of the vote. However, the Board of
Directors will take into account the outcome of the vote when considering future executive compensation decisions for executive officers.
The Board of Directors unanimously recommends that stockholders support this proposal and vote FOR the following resolution:
“RESOLVED, that the compensation paid to The ADT Corporation’s named executive officers, as disclosed pursuant to Item 402
of Regulation S-K, including the Compensation Discussion and Analysis, compensation tables and narrative discussion is hereby
APPROVED.”
PROXY STATEMENT
48 The ADT Corporation
2015 Proxy Statement
OTHER MATTERS
OTHER MATTERS
Registered and Principal Executive Offices
The registered and principal executive offices of The ADT Corporation are located at 1501 Yamato Road, Boca Raton, Florida 33431 and its
telephone number is (561) 988-3600.
Householding of Proxy Materials
SEC rules permit companies and intermediaries such as brokers to satisfy delivery requirements for proxy statements and notices with respect to
two or more stockholders sharing the same address by delivering a single proxy statement or a single notice addressed to those stockholders.
This process, which is commonly referred to as “householding,” provides cost savings for companies. Some brokers household proxy materials,
delivering a single proxy statement or notice to multiple stockholders sharing an address unless contrary instructions have been received from
the affected stockholders. Once you have received notice from your broker that they will be householding materials to your address,
householding will continue until you are notified otherwise or until you revoke your consent. If, at any time, you no longer wish to participate in
householding and would prefer to receive a separate proxy statement or notice, or if your household is receiving multiple copies of these
documents and you wish to request that future deliveries be limited to a single copy, please notify your broker. You can request prompt delivery
of a copy of the proxy materials by writing to: Broadridge, Attention Householding Dept., 51 Mercedes Way, Edgewood, NY 11711 or by calling
1-800-542-1061.
RECONCILIATION OF NON-GAAP MEASURES TO
GAAP MEASURES AND SELECTED DEFINITIONS
Earnings before interest, taxes, depreciation and amortization (EBITDA), EBITDA Margin, EBITDA (pre-SAC), and steady-state free cash flow
(SSFCF), in each case before special items, are non-GAAP measures that may be used from time to time and should not be considered
replacements for GAAP results.
EBITDA (pre-SAC) is a useful measure of the Company’s success in retaining and servicing our customer base while providing a high level of
customer service in a cost-effective manner. The difference between Net Income (the most comparable GAAP measure) and EBITDA (pre-SAC)
(the non-GAAP measure) is the exclusion of interest expense, the provision for income taxes, depreciation expense, amortization expense, and
subscriber acquisition related revenue and expenses. Excluding these items eliminates the impact of expenses associated with our capitalization
and tax structure, the impact of non-cash charges related to capital investments and the impact of growing our subscriber base.
In addition, from time to time, the Company may present EBITDA and EBITDA (pre-SAC) before special items and, when appropriate, excluding
the results of recent acquisitions, which are the respective measures adjusted to exclude the impact of the items highlighted below. These
numbers provide information to investors regarding the impact of certain items management believes are useful to identify, as described below.
There are material limitations to using EBITDA and EBITDA (pre-SAC). EBITDA and EBITDA (pre-SAC) may not be comparable to similarly titled
measures reported by other companies. Furthermore, EBITDA and EBITDA (pre-SAC) do not take into account certain significant items, including
depreciation and amortization, interest expense and tax expense, which directly affect our net income. Additionally, EBITDA (pre-SAC) does not
take into account expenses related to acquiring new customers. These limitations are best addressed by considering the economic effects of
the excluded items independently, and by considering EBITDA and EBITDA (pre-SAC) in conjunction with net income as calculated in
accordance with GAAP. The EBITDA and EBITDA (pre-SAC) discussion above is also applicable to the respective margin measures.
SSFCF is a useful measure of pre-levered cash that is generated by the Company after the cost of replacing recurring revenue lost to attrition, but
before the cost of new subscribers that drive recurring revenue growth. The difference between Net Income (the most comparable GAAP measure)
and SSFCF (the non-GAAP measure) consists of the factors discussed above regarding EBITDA (pre-SAC), on a quarter-to-date basis. EBITDA
(pre-SAC) is then annualized and adjusted for additional factors, described in the reconciliation below, required to maintain the steady-state.
Certain components of these inputs are determined using trailing twelve month information or information from the most recent quarter.
In addition, from time to time, the Company may present SSFCF before special items, and when appropriate, excluding the results of recent
acquisitions, which is SSFCF adjusted to exclude the impact of the items highlighted below. These numbers provide information to investors
regarding the impact of certain items management believes are useful to identify, as described below.
The ADT Corporation
2015 Proxy Statement
49
PROXY STATEMENT
EBITDA is a useful measure of the Company’s success in acquiring, retaining and servicing our customer base and ability to generate and grow
recurring revenue while providing a high level of customer service in a cost-effective manner. The difference between Net Income (the most
comparable GAAP measure) and EBITDA (the non-GAAP measure) is the exclusion of interest expense, the provision for income taxes,
depreciation and amortization expense. Excluding these items eliminates the impact of expenses associated with our capitalization and tax
structure as well as the impact of non-cash charges related to capital investments.
RECONCILIATION OF NON-GAAP MEASURES TO GAAP MEASURES AND SELECTED DEFINITIONS—CONTINUED
The limitation associated with using SSFCF is that it adjusts for certain items that are ultimately within management’s and the Board of Directors’
discretion to direct and therefore may imply that there is less or more cash available than the most comparable GAAP measure. This limitation is
best addressed by using SSFCF in combination with other GAAP financial measures.
SSFCF as presented herein may not be comparable to similarly titled measures reported by other companies. This measure should be used in
conjunction with other GAAP financial measures. Investors are urged to read the Company’s financial statements as filed with the SEC, as well
as the accompanying reconciliations below that show the elements of the measure.
The Company has presented its EBITDA, EBITDA Margin, EBITDA (pre-SAC), SSFCF and other measures (such as recurring revenue) before
special items and, when appropriate, excluding the results of recent acquisitions. Special items include charges and gains related to
acquisitions, restructurings, impairments, and other income or charges that may mask the underlying operating results and/or business trends of
the Company. The Company utilizes these measures to assess overall operating performance, as well as to provide insight to management in
evaluating overall operating plan execution and underlying market conditions. These measures may be used as components in the Company’s
incentive compensation plans. These measures are useful for investors because they may permit more meaningful comparisons of the
Company’s underlying operating results and business trends between periods. The difference between the measures before and after special
items and/or the results of recent acquisitions is the impact of those items. The limitation of these measures is that they exclude the impact
(which may be material) of items that increase or decrease the Company’s reported operating income, operating margin, net income and EPS.
This limitation is best addressed by using the non-GAAP measures in combination with the most comparable GAAP measures in order to better
understand the amounts, character and impact of any increase or decrease on reported results.
PROXY STATEMENT
50 The ADT Corporation
2015 Proxy Statement
GAAP TO NON-GAAP RECONCILIATIONS
THE ADT CORPORATION
GAAP to Non-GAAP Reconciliations
(Unaudited)
EBITDA Before Special Items and EBITDA (pre-SAC) Before Special Items
($ in millions)
Net Income (GAAP)
For the
Quarter Ended
September 26,
2014
For the
Twelve
Months Ended
September 26,
2014
For the
Twelve
Months Ended
September 27,
2013
$
$
$
82
304
421
Interest expense, net
50
192
117
Income tax expense
27
128
221
273
1,040
942
Depreciation and intangible asset amortization
33
131
123
(40)
(151)
(135)
425
$ 1,644
$ 1,689
Restructuring and other, net
2
17
(1)
Acquisition and integration costs
4
7
2
17
44
7
17
23
3
38
(23)
458
$ 1,767
$ 1,690
51.9%
51.8%
51.1%
Amortization of deferred subscriber acquisition revenue
EBITDA
$
Radio conversion costs
Non-recurring separation costs
Separation related other expense
(income)(1)
EBITDA before special items
$
EBITDA margin before special items
Subscriber acquisition cost expenses net of related revenue
108
EBITDA before special items (pre-SAC)
566
Impact of Reliance Protection on EBITDA before special items (pre-SAC)
(15)
EBITDA before special items (pre-SAC), excluding Reliance Protection
(1)
$
—
PROXY STATEMENT
Amortization of deferred subscriber acquisition costs
551
Relates to the 2012 Tax Sharing Agreement between Tyco, ADT and Pentair.
The ADT Corporation
2015 Proxy Statement
51
GAAP TO NON-GAAP RECONCILIATIONS—CONTINUED
(Unaudited)
SSFCF Before Special Items, excluding Reliance Protectron and Discretionary
Adjustments
For the
Quarter Ended
September 26,
2014
($ in millions)
Last quarter, annualized EBITDA before special items (pre-SAC), excluding Reliance Protectron
SAC required to maintain recurring
$ 2,204
(1,238)
revenue(1)
Maintenance capital expenditures
(10)
SSFCF before special items, excluding Reliance Protectron
956
Discretionary adjustments
(8)
SSFCF before special items, excluding Reliance Protectron and discretionary adjustments
(1)
$
SAC required to maintain recurring revenue excludes Reliance Protectron and is calculated as follows:
For the
Quarter Ended
September 26,
2014
($ in millions)
Last quarter average recurring revenue under contract for the period
Trailing twelve month disconnects net of price
$
31.9
SAC required to maintain recurring revenue
(3)
264
14.7%
escalation(2)
Last quarter gross recurring revenue creation multiple(3)
(2)
948
$ 1,238
Average trailing twelve month recurring revenue disconnected net of price escalations. Disconnects account for dealer chargebacks.
Gross creation cost includes amount held back from dealers for chargebacks.
Recurring Revenue, excluding Reliance Protectron
PROXY STATEMENT
($ in millions)
Recurring revenue, excluding Reliance Protectron
Reliance Protectron recurring revenue
Other revenue
Total revenue
52 The ADT Corporation
2015 Proxy Statement
For the
Twelve
Months Ended
September 26,
2014
For the
Twelve
Months Ended
September 27,
2013
Change
$3,124
$3,041
2.7%
28
—
256
268
(4.5)%
N/A
$3,408
$3,309
3.0%
INCORPORATION BY REFERENCE
INCORPORATION BY REFERENCE
The Report of the Compensation Committee and the Audit Committee Report are not deemed filed with the SEC and shall not be deemed
incorporated by reference into any prior or future filings made by ADT under the Securities Act of 1933, as amended or the Exchange Act,
except to the extent that ADT specifically incorporates such information by reference. In addition, the website addresses contained in this Proxy
Statement are intended to provide inactive, textual references only. The information on these websites is not part of this Proxy Statement.
WEBSITE ACCESS TO REPORTS AND OTHER
INFORMATION
We file our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and other documents
electronically with the SEC under the Exchange Act. You may read and copy any materials that we file with the SEC at the SEC’s Public
Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by
calling the SEC at 1-800 SEC-0330. You may also obtain such reports from the SEC’s website at www.sec.gov.
Our website is www.adt.com. We make available free of charge through the Investor Relations tab of our website our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Sections
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our
Board Governance Principles, Board committee charters, and the ADT Code of Conduct are also available on our website. We will provide, free
of charge, a copy of any of our corporate documents listed above upon written request to our Corporate Secretary at The ADT Corporation,
1501 Yamato Road, Boca Raton, Florida 33431.
By order of the Board of Directors,
N. David Bleisch
Senior Vice President, Chief Legal
Officer and Corporate Secretary
PROXY STATEMENT
Boca Raton, Florida
January 23, 2015
The ADT Corporation
2015 Proxy Statement
53
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
È Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended September 26, 2014
OR
‘ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from
to
Commission File Number: 001-35502
The
ADT Corporation
(Exact Name of Registrant as Specified in its Charter)
Delaware
45-4517261
(State or Other Jurisdiction
of Incorporation or Organization)
(IRS Employer
Identification Number)
1501 Yamato Road
Boca Raton, Florida 33431
(Address of Principal Executive Offices, including Zip Code)
(561) 988-3600
(Registrant’s Telephone Number, including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes È No ‘
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ‘ No È
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90 days. Yes È No ‘
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every
Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes È No ‘
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. È
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller
reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2
of the Exchange Act. (Check one):
Large accelerated filer È
Accelerated filer
‘
Non-accelerated filer ‘ (Do not check if a smaller reporting company)
Smaller reporting company ‘
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ‘ No È
The aggregate market value of common equity held by non-affiliates of the registrant as of March 28, 2014 was approximately
$5,238,565,262 (determined by subtracting from the number of shares outstanding on that date the number of shares held by
affiliates of the registrant).
The number of outstanding shares of the registrant’s common stock, $0.01 par value, was 174,527,463 as of November 5, 2014.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive proxy statement to be filed within 120 days after the end of the registrant’s fiscal year covered
by this Form 10-K in connection with the registrant’s 2015 annual meeting of stockholders are incorporated by reference into Part III
of this Form 10-K.
FORM 10-K
Common Stock, par value $0.01 per share
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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TABLE OF CONTENTS
Page
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Part III
Item 10.
Item 11.
Item 12.
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
12
32
32
32
33
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34
37
38
56
57
57
57
58
Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . .
Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13.
Item 14.
Part IV
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Index to Consolidated and Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
59
59
59
59
59
60
61
62
FORM 10-K
Part I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Part II
Item 5.
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PART I
Item 1.
Business.
Overview
The ADT Corporation (hereinafter referred to as “we”, the “Company” or “ADT”) is a leading provider of
monitored security, interactive home and business automation and related monitoring services in the United
States and Canada. ADT has one of the most trusted and well-known brands in the monitored security industry
today. We currently serve approximately 6.7 million residential and small business customers, making us the
largest company of our kind in both the United States and Canada. We deliver an integrated customer experience
by maintaining the industry’s largest sales, installation and service field force as well as a robust monitoring
network, all backed by the support of approximately 17,500 employees. Our broad and pioneering set of products
and services, including interactive home and business solutions and home health services, meet a range of
customer needs for today’s active and increasingly mobile lifestyles. We believe we are well positioned to
continue to lead the large and growing residential and expanded business security market, and that our
demonstrated expertise and established footprint will help us to become a leader in the evolving market for home
automation, home health monitoring, lifestyle and business productivity solutions.
On September 19, 2011, Tyco announced that its board of directors had approved a plan to separate Tyco
into three separate, publicly traded companies, identifying the ADT North American Residential Security
Business of Tyco as one of those three companies. In conjunction with this plan, prior to September 28, 2012,
Tyco transferred the equity interests of the entities that held all of the assets and liabilities of its residential and
small business security business in the United States and Canada to ADT. Effective on September 28, 2012 (the
“Distribution Date”), Tyco distributed all of its shares of ADT to Tyco’s stockholders of record as of the close of
business on September 17, 2012 (the “Separation”). On the Distribution Date, each of the stockholders of Tyco
received one share of ADT common stock for every two shares of common stock of Tyco held on September 17,
2012.
We conduct business through our operating entities and report financial and operating information in one
operating segment. For the year ended September 26, 2014, our revenue was $3.4 billion and our operating
income was $659 million, and as of September 26, 2014, our total assets were $10.5 billion. Information about
revenues and long-lived assets by geographic area is presented in Note 12 to the Consolidated and Combined
Financial Statements. Unless otherwise indicated, references in this Annual Report on Form 10-K to 2014, 2013
and 2012 are to our fiscal years ended September 26, 2014, September 27, 2013 and September 28, 2012,
respectively.
In order to optimize the financial performance of our business, we focus on several key business drivers,
including customer additions, costs to add a new customer, average revenue per customer, costs incurred to
provide services to customers and customer tenure. We believe we have a proven track record of successfully
balancing these key business drivers to optimize our returns. We use a structured customer acquisition process
designed to generate new customers with attractive characteristics including, high adoption of automatic payment
methods and strong credit scores, and interactive service contracts, which we believe results in long average
customer tenure. We have made customer retention a top priority, and have partnered with J.D. Power and
Associates, a global market research company, to collect and analyze feedback from new and existing customers,
enabling us to focus our efforts on the aspects of customer experience that most strongly correlate to customer
satisfaction and tenure.
1
FORM 10-K
We originated in 1874 as the American District Telegraph Company, a consortium of 57 telegraph
operators. During the early part of the 20th century, we began offering fire and burglar alarm solutions. Over the
years, we engaged in a variety of communications related activities and by 1987 had become one of the leading
electronic security services providers. In 1997, we were acquired by Tyco International Ltd. (“Tyco” or
“Parent”). In 2010, we acquired our largest competitor, Broadview Security. The Company was incorporated in
Delaware in 2012 as a wholly-owned subsidiary of Tyco.
The majority of the monitoring and home/business automation services and a large portion of the
maintenance services we provide to our customers are governed by multi-year contracts with automatic renewal
provisions. This provides us with significant recurring revenue, which for the year ended September 26, 2014,
was approximately 92% of our revenue. We believe that the recurring nature of the majority of our revenue,
combined with our large customer base and increasing average revenue per customer enables us to invest
continuously in growing and optimizing our business. This includes investments in technologies to further
enhance the attractiveness of our solutions to current and potential customers, to continue development and
training to enable our direct sales, installation, customer service and field service personnel to more effectively
deliver exceptional service to our customers, to expand our dealer and partner network and to make continued
enhancements to operations efficiency.
Our business plan contemplates the achievement of sustained, profitable growth in the markets we serve
today, as well as in adjacent markets, by executing against strategies that leverage our key assets and core
competencies. Where appropriate, we plan to supplement our organic growth efforts with complementary
acquisitions, leveraging our experience in effectively integrating acquired businesses.
We will continue to manage our business by optimizing the key business drivers noted above to maximize
the value from and to our residential customers. We also believe there is significant opportunity to increase our
share of monitored security and premises automation for an expanded business market, including small and midsized businesses. Therefore, we plan to grow our share of business customers by continuing to expand our
business field sales force, supplemented with dedicated commercial sales professionals, and strengthen our
business marketing support. We believe these actions will contribute to building a larger, more robust partner
network and to assist in marketing additional value-added services, including ADT Pulse®, our remote
monitoring and home/business automation system.
Additionally, we believe monitored security and home/business automation services remain underpenetrated
in North America. The number of U.S. households with monitored security systems continues to be significantly
lower than those with other home services such as video and Internet. We plan to increase penetration of security
and automation services through the development of new solutions and enhanced offerings and marketing that
attract new customers to enter the market. In addition, through our efficient operating model and potentially
lower technology costs over time, we believe we can significantly reduce the cost of basic installation and
services, opening up the potential for a much larger portion of households and businesses to purchase monitored
security and home automation services.
FORM 10-K
Brands and Services
Our key brands are ADT® and ADT Pulse®. We believe our brands are among the most respected, trusted
and well-known brands in the monitored security industry. The strength of our brands is built upon our longstanding record of providing quality, reliable monitored security services. Due to the importance that customers
place on reputation and trust when purchasing home and business security and automation services, we believe
the strength of our brands is a key contributor to our success.
Our monitored security and home/business automation offerings involve the installation and monitoring of
residential and business security and premises automation systems designed to detect intrusion, control access
and react to movement, smoke, carbon monoxide, flooding, temperature and other environmental conditions and
hazards, as well as to address personal emergencies, such as injuries, medical emergencies or incapacitation. We
believe the breadth of our solutions allows us to meet a wide variety of customer needs. Our monitored security
systems connect, upon the occurrence of a triggering event, to one of our state-of-the-art monitoring centers.
Depending upon the type of service contract and the response specified by the customer, our monitoring center
personnel respond to alarms by relaying appropriate information to local fire or police departments and notifying
the customer or others on the customer’s emergency contact list. Additional action may be taken by call center
associates as needed, depending on the specific situation and recorded customer preferences.
2
Through the introduction of ADT Pulse® in 2010, we pioneered interactive technologies that allow our
customers to remotely monitor and manage their home and business environments by adding automation
capabilities to our monitored security systems. This is done in a way that maintains the separate network integrity
and redundancy of a customer’s life safety and security signals. Depending on the service plan that customers
purchase and the type and level of product installation, they can remotely access information regarding the
security of their home or business, arm and disarm their security system, adjust lighting or thermostat levels or
view real-time video from cameras covering different areas of their premises, all via secure access from webenabled devices (such as smart phones, laptops and tablet computers) and a customized web portal. ADT Pulse®
also allows customers to create customized schedules and automation for managing lights, thermostats and
appliances, and can be programmed to perform certain functions, such as recording and viewing live video and
sending text messages, based on triggering events. Additionally, in 2014 we introduced the industry’s first voice
authentication and control application for ADT Pulse®, which we believe improves the user experience and
engagement for our customers.
Many of our customers are driven to purchase monitored security as a result of a perceived or actual
increase in crime or other life safety concerns in their neighborhood, such as a break-in or fire nearby. Other
triggers that drive the purchase of monitored security systems include moving to a new home, getting a new job,
becoming a pet owner, getting married or divorced, having a baby and traveling. These life events tend to
heighten interest in solutions which can enhance safety and security and provide customers with greater peace of
mind. We believe many of our customers purchase security systems and monitoring services as a result of
encouragement by their insurance carriers, who offer lower insurance premium rates if a security system is
installed or may require that a system be installed as a condition of coverage.
In our health business, we provide monitoring center supported personal emergency response system
(“PERS”) products and services which leverage our safety monitoring infrastructure to provide customers with
solutions that help sustain independent living, encourage better self-care activities and improve communication
of critical health information. Our core PERS offering consists of a console unit and a wireless transmitter
generally worn as a necklace or wristband by the customer. In the event of an emergency, the transmitter allows
the customer to summon assistance via a two-way voice system that connects to our emergency response center
that is staffed with dedicated PERS monitoring specialists. The monitoring team relays information to the
appropriate local emergency responders, including Emergency Medical Services (EMS), police and fire
departments as well as family members. We offer PERS units for customers with and without traditional
telephone service. The majority of PERS units are shipped directly to the customer for easy set-up, however, if
required trained field support is available upon request.
In addition to monitoring services, we provide customer service for routine maintenance and the installation
of upgraded or additional equipment. Approximately 75% of our customer base is enrolled in a service plan
which provides additional value to the customer and generates incremental recurring monthly revenue for ADT.
Purchasers of our monitored security and home/business automation systems typically contract for ongoing
system monitoring and maintenance at the time of initial equipment installation.
Most of the monitoring services and a large portion of the maintenance services that we provide to our
customers are governed by multi-year contracts with automatic renewal provisions that provide us with recurring
monthly revenue. Under our typical service agreement, the customer pays an upfront fee and is then obligated to
3
FORM 10-K
The majority of our customers use traditional land-line telephone service as the primary communication
method for alarm signals from their sites. However, as the use of land-line telephone service has decreased, the
ability to provide alternative communication methods from a customer’s control panel to our central monitoring
centers has become increasingly important. We currently offer, and recommend, a variety of alternate and backup alarm transmission methods including cellular and broadband Internet. See Risk Factors “Shifts in our
customers’ choice of, or telecommunications providers’ support for, telecommunications services and equipment
could adversely impact our business and require significant capital expenditures.”
make monthly payments for the remainder of the initial contract term. The standard agreement term is three years
(two years in California), with automatic renewals for successive 30-day periods unless canceled by either party.
If a customer cancels or is otherwise in default under the contract prior to the end of the initial contract term, we
have the right under the contract to receive a termination charge from the customer in an amount equal to a
percentage of all remaining monthly payments. Monitoring services are generally billed monthly or quarterly in
advance. More than half of our customers pay us through automated payment methods, with a significantly
higher percentage of new customers opting for these payment methods. We periodically adjust the standard
monthly monitoring rate charged to new and existing customers.
Customers and Marketing
We serve approximately 6.7 million residential and small business customers throughout the United States
and Canada. Our residential customers are typically owners of single-family homes, while our small business
customers include, among others, retail businesses, food and beverage service providers, medical offices and
clinics, mechanical and auto-body shops, professional service providers and small-scale commercial facilities.
We manage our existing customer base to maximize customer lifetime value, which includes continually
evaluating our product offerings, pricing and service strategies, managing our costs to provide service to
customers, upgrading existing customers to ADT Pulse® and achieving long customer tenure. Our ability to
increase average revenue per customer is derived from, and largely dependent on, our continued introduction of
additional features and services that increase the value of our offerings to customers. Additionally, on
September 29, 2014 the non-competition and non-solicitation provisions associated with the Separation expired
and, as a result, we are no longer prohibited from competing in the commercial security market and therefore
intend to expand into the mid-sized commercial market.
To support the growth of our customer base and to improve awareness of our brands, we market our
monitored security and home/business automation systems and services through national television
advertisements, Internet advertising, including national search engine marketing, email, online video, local
search, direct mail and social media. We continually work to optimize our marketing spend through a lead
modeling process whereby we flex and shift our spending based on lead flow and measured marketing channel
effectiveness. We utilize a variety of third-party referral providers who generate leads and sales referrals for both
our direct sales team and our authorized dealers. Our partner lead generation methods include agreements with
affinity organizations such as United Services Automobile Association (USAA), AARP and third-party referral
companies.
FORM 10-K
We are constantly trialing new customer lead methods and channels in an effort to increase our customer
base and drive greater penetration within homes and businesses without sacrificing customer quality. We
continually explore opportunities to provide ADT-branded solutions through additional third parties, including
telecommunications companies, broadband and cable companies, retailers, public and private utilities and
software service providers.
Sales and Distribution Channels
We utilize a network of complementary distribution channels that includes a mix of direct and indirect. In
fiscal year 2014, we generated approximately 60% of our new customers through our internal sales force,
including our phone and field teams, supported by our direct response marketing efforts. We generated our
remaining new customers in fiscal year 2014 through our authorized dealer program, acquisitions and, to a small
extent, through agreements with leading homebuilders and related partners. As opportunities arise, we may also
engage in selective bulk account purchases, which typically involve the purchase of a set of customer accounts
from other security service providers, sometimes including competitors.
Our national sales call centers (inbound and outbound) close sales from prospective customers generated
through national marketing efforts and lead generation channel partners. Our telephone sales associates work to
understand customer needs and then direct customers to the most suitable sales approach. We close a sale over
4
the phone if appropriate, while balancing the opportunity for up-sales and customer education that occurs when a
sales representative works with the customer in their home or business to fully understand their individual needs.
When the sale is best handled in the customer’s home or business, the sales center associate can schedule a field
sales consultant appointment in real-time.
Our field sales force of approximately 3,800 sales consultants generates sales from residential and business
customers through company generated leads and leads generated by our field sales force as well as customer
referrals and other lead “self-generation” methods. Our field sales consultants undergo an in-depth screening
process prior to hire. Each sales consultant completes comprehensive centralized training prior to conducting
customer sales presentations and participates in ongoing training in support of new offerings and the use of our
structured model sales call. We utilize a highly structured sales approach, which includes, in addition to the
structured model sales call, daily monitoring of sales activity and effectiveness metrics and regular coaching by
our sales management teams.
Our extensive dealer network, which consists of approximately 415 authorized dealers, including one
authorized premier provider, operating across the United States and Canada, extends our reach by aligning us
with select independent security sales and installation companies. These authorized dealers generally agree to
exclusivity with us for security related services. We train and monitor each dealer to help ensure the dealer’s
financial stability, use of sound and ethical business practices and delivery of reliable and consistent high-quality
sales and installation methods. Authorized dealers are required to adhere to the same high quality standards for
sales and installation as company-owned field offices. We provide dealers with a full range of services designed
to assist them in all aspects of their business.
Additions to our customer base typically require an upfront investment, consisting primarily of direct
materials and labor to install the security and home/business automation systems, direct and indirect sales costs,
marketing costs and administrative costs related to installation activities. The economics of our installation
business varies slightly depending on the customer acquisition channel. We operate our business with the goal of
retaining customers for long periods of time in order to recoup our initial investment in new customers, generally
achieving cash flow break-even in approximately three years.
Field Operations
We serve our customer base from approximately 200 sales and service offices located throughout the United
States and Canada. From these locations our staff of approximately 4,400 installation and service technicians
provides monitored security and home/business automation system installations and field service and repair. We
staff our field offices to efficiently and effectively make sales calls, install systems and provide service support
based on customer needs and our evaluation of growth opportunities in each market and utilize third party
subcontract labor when appropriate. We maintain the relevant and necessary licenses related to the provision of
installation and security and related services in the jurisdictions in which we operate.
Monitoring Facilities and Support Services
We operate ten redundant monitoring facilities located across the United States and Canada. We employ
approximately 4,100 monitoring center customer care professionals, who are required to complete extensive
5
FORM 10-K
Typically, our authorized dealers are contractually obligated to offer exclusively to us all qualified security
services accounts they generate, but we are not obligated to accept these accounts. We pay our authorized dealers
for the services they provide in generating qualified monitored accounts. In those instances when we reject an
account, we generally still provide monitoring services for that account by means of a monitoring services
agreement with the authorized dealer. Like our direct sales contracts, dealer generated customer contracts
typically have an initial term of three years (two years in California) with automatic renewals for successive 30day periods unless canceled by either party. If an accepted security services account is canceled during the
charge-back period, generally thirteen months, the dealer is required to provide an account with equivalent
economic characteristics or to refund our payment for their services for generating the account.
initial training and receive ongoing training and coaching. Most of our monitoring facilities are listed by
Underwriters Laboratories, Inc. (“U.L.”) as protective signaling services stations. To obtain and maintain a U.L.
listing, a security system monitoring center must be located in a building meeting U.L.’s structural requirements,
have back-up computer and power systems and meet U.L. specifications for staffing and standard operating
procedures. Many jurisdictions have laws requiring that security systems for certain buildings be monitored by
U.L. listed facilities. In addition, a U.L. listing is required by insurers of certain customers as a condition of
insurance coverage. In the event of an emergency at one of our monitoring facilities (e.g., fire, tornado, major
interruption in telephone or computer service or any other event affecting the functionality of the facility), all
monitoring operations can be automatically transferred to another monitoring facility. All of our monitoring
facilities operate 24 hours a day on a year-round basis.
Customer Care
We maintain a service culture aimed at “Creating Customers for Life” because developing customer loyalty
and continually increasing customer tenure is an important value driver for our business. To maintain our high
standard of customer service, we provide ongoing high quality training to call center and field employees and to
dealer personnel. We also continually measure and monitor key operating and financial metrics, including
customer satisfaction oriented metrics across each customer touch point.
Customer care specialists answer non-emergency inquiries regarding service, billing, alarm testing and
support. Our monitoring centers provide customers with telephone and Internet coverage 24 hours a day on a
year-round basis. To ensure that technical service requests are handled promptly and professionally, all requests
are routed through our customer contact centers. Customer care specialists help customers resolve minor service
and operating issues related to monitored security and home/business automation systems and in many cases are
able to remotely resolve customer concerns. We continue to implement new customer self-service tools via
interactive voice response systems and the Internet, which will provide customers additional choices in managing
their services.
Suppliers
FORM 10-K
We purchase equipment and components of our products from a limited number of suppliers and
distributors. Inventory is held in our regional distribution center at levels we believe sufficient to meet current
and anticipated customer needs. We also maintain inventory of equipment and components at each field office
and in technicians’ vehicles. Generally our third-party distributors maintain safety stock of certain key items to
cover any minor supply chain disruptions. We also utilize dual sourcing methods to minimize the risk of a
disruption from a single supplier. We do not anticipate any major interruptions in our supply chain.
Industry and Competition
We believe that technology trends are creating significant change in our industry. Innovation has lowered
the barriers to entry in home automation, and new business models and competitors have emerged. We believe
that a combination of increasing customer interest in lifestyle and business productivity and technology
advancements will support the increasing penetration of interactive services and home/business automation. We
are focused on extending our leadership position in the monitored security industry while also growing our share
of the fast-growing home/business automation industry. The security systems market in the United States and
Canada remains highly competitive and fragmented, with a number of major firms and thousands of smaller
regional and local companies. The high fragmentation of the industry is primarily the result of relatively low
barriers to entering the business in local geographies and the availability of wholesale monitoring (whereby
smaller companies outsource their monitoring to operations that provide monitoring services but do not maintain
the customer relationship). We believe that our principal competitors within the security systems market are
Protection One, Inc., Monitronics International, Inc., Vivint, Inc., Comcast Corporation and AT&T, Inc.
6
Success in acquiring new customers in the residential and business security and home/business automation
markets is dependent on a variety of factors, including company brand and reputation, market visibility, service
and product capabilities, quality, price and the ability to identify and sell to prospective customers. Competition
is often based primarily on price in relation to value of the solutions and service. Rather than compete purely on
price, we emphasize the quality of our monitored security and home/business automation services, the reputation
of our industry leading brands and our knowledge of customer needs, which together allow us to deliver an
outstanding customer experience. In addition, we are increasingly offering added features and functionality, such
as those in our ADT Pulse® interactive services offering, which provide new services and capabilities that serve
to further differentiate our offering and support a pricing premium.
We believe our robust field sales force, including our nationwide team of in-home sales consultants, our
solid reputation for and expertise in providing reliable security and monitoring services through our in-house
network of fully redundant monitoring centers, our reliable product solutions and our highly skilled installation
and service organization position us well to compete with traditional and new competitors.
Seasonality
Our business experiences a certain level of seasonality. Because more household moves take place during
the second and third calendar quarters of each year, our disconnect rate is typically higher in those quarters than
in the first and fourth calendar quarters. There is also a slight seasonal effect on our new customer installation
volume and related cash expenses incurred in investment in new subscribers; however, other factors, such as the
level of marketing expense and relevant promotional offers, can mitigate any seasonality effects. In addition, due
to weather related incidences, we may see increased servicing costs related to higher alarm signals and customer
service requests as a result of customer power outages and related issues.
Patents, trademarks, copyrights and other proprietary rights are important to our business, and we
continuously refine our intellectual property strategy to maintain and improve our competitive position. We
register new intellectual property to protect our ongoing technological innovations and strengthen our brand, and
we take appropriate action against infringements or misappropriations of our intellectual property rights by
others. We review third-party intellectual property rights to help avoid infringement and to identify strategic
opportunities. We typically enter into confidentiality agreements to further protect our intellectual property.
We own a portfolio of patents that relate to a variety of security and home/business automation technologies
utilized in our business, including security panels and sensors and video and information management solutions.
We also own a portfolio of trademarks, including ADT®, ADT Pulse®, ADT Always There®, Companion
Service® and Creating Customers for Life®, and are a licensee of various patents and trademarks, including from
our third-party suppliers and technology partners. Due to the importance that customers place on reputation and
trust when making a decision on a security provider, our brand is critical to our business. Patents for individual
products extend for varying periods according to the date of patent filing or grant and the legal term of patents in
the various countries where patent protection is obtained. Trademark rights may potentially extend for longer
periods of time and are dependent upon national laws and use of the marks.
Government Regulation and Other Regulatory Matters
Our operations are subject to numerous federal, state, provincial and local laws and regulations in the United
States and Canada in areas such as consumer protection, occupational licensing, environmental protection, labor
and employment, tax, licensing and other laws and regulations. Most states and provinces in which we operate
have licensing laws directed specifically toward the monitored security industry. In certain jurisdictions, we must
obtain licenses or permits in order to comply with standards governing employee selection, training and business
conduct.
7
FORM 10-K
Intellectual Property
We also currently rely extensively upon the use of both wireline and wireless telecommunications to
communicate signals, and wireline and wireless telephone companies in the United States are regulated by
federal, state and local governments. The U.S. Federal Communications Commission (“FCC”) and state public
utilities commissions regulate the operation and use of wireless telephone and radio frequencies. Although the
use of wireline phone service has been decreasing, we believe we are well positioned to respond to these trends
with alternate transmission methods that we already employ, including cellular and broadband Internet
technologies. Our advertising and sales practices are regulated by the U.S. Federal Trade Commission (“FTC”)
and state consumer protection laws. In addition, we are subject to certain administrative requirements and laws of
the jurisdictions in which we operate. These laws and regulations may include restrictions on the manner in
which we promote the sale of our security services and require us to provide most purchasers of our services with
three-day or longer rescission rights.
Some local government authorities have adopted or are considering various measures aimed at reducing
false alarms. Such measures include requiring permits for individual alarm systems, revoking such permits
following a specified number of false alarms, imposing fines on customers or alarm monitoring companies for
false alarms, limiting the number of times police will respond to alarms at a particular location after a specified
number of false alarms, requiring additional verification of an alarm signal before the police respond or
providing no response to residential system alarms. See risk factors “We could be assessed penalties for false
alarms” and “Police departments could refuse to respond to calls from monitored security service companies.”
The monitored security industry is also subject to requirements, codes and standards imposed by various
insurance, approval and listing and standards organizations. Depending upon the type of customer, security
service provided and requirements of the applicable local governmental jurisdiction, adherence to the
requirements, codes and standards of such organizations is mandatory in some instances and voluntary in others.
Changes in laws and regulations can affect our operations, both positively and negatively, and impact the
manner in which we conduct our business.
Employees
As of September 26, 2014, we employed approximately 17,500 people. Approximately 12% of our
employees are covered by collective bargaining agreements. We believe that our relations with our employees
and labor unions have generally been good.
FORM 10-K
Available Information
ADT is required to file annual, quarterly and current reports, proxy statements and other information with
the U.S. Securities and Exchange Commission (“SEC”). Investors may read and copy any document that ADT
files, including this Annual Report on Form 10-K, at the SEC’s Public Reference Room at 100 F Street, N.E.,
Room 1580, Washington, DC 20549. Investors may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at www.sec.gov
that contains reports, proxy and information statements and other information regarding issuers that file
electronically with the SEC, from which investors can electronically access ADT’s SEC filings.
We maintain a web site at www.adt.com. We make available free of charge on or through our web site our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, reports filed
pursuant to Section 16 and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d)
of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as soon as reasonably practicable
after we electronically file or furnish such materials to the SEC. In addition, we have posted the charters for our
Audit Committee, Compensation Committee, and Nominating and Governance Committee, as well as our Board
Governance Principles and Code of Conduct, on our web site under the heading “Corporate Governance.”
8
Executive Officers of the Registrant
The following information is provided regarding the executive officers of ADT. Information with respect to
our directors is incorporated by reference to information included in the Proxy Statement for our 2015 Annual
Meeting of Stockholders.
David Bleisch—55
Mr. Bleisch is the Company’s Senior Vice President, Chief Legal Officer and Corporate Secretary. Prior to
the separation from Tyco in September 2012, he served as Vice President and General Counsel of Tyco’s ADT
North American Residential business segment. Prior to the restructuring of the segment in fiscal year 2012,
Mr. Bleisch was the Vice President and General Counsel of Tyco Security Solutions, the largest segment of
Tyco. He also managed the intellectual property legal group for all of Tyco’s operating segments worldwide.
Mr. Bleisch joined Tyco in 2005 as Vice President and General Counsel of ADT North America and Deputy
General Counsel of Tyco Fire & Security. Prior to joining Tyco, he was Senior Vice President, General Counsel
and Corporate Secretary of The LTV Corporation in Cleveland, Ohio. Prior to joining LTV, Mr. Bleisch was a
partner in the law firm of Jackson Walker LLP, where he served as a corporate transactional attorney before
transitioning to commercial trial work. He holds a Bachelor of Arts from Carleton College and a Juris Doctor
from Boston College Law School. He is a member of the State Bar of Texas.
Mr. Boerema is the Company’s Senior Vice President and Chief Corporate Development Officer. He leads
the Health Business and is responsible for driving growth and enhancing customer experience for ADT’s health
services. He also directs ADT’s corporate strategy and market and business development. Prior to the separation
from Tyco in September 2012, Mr. Boerema served as Chief Marketing Officer for Tyco’s ADT North American
Residential and Commercial business segments, overseeing all strategic marketing and communications and
leading all advertising and online interactive marketing initiatives across ADT North America. Prior to joining
ADT in November 2007, he served as President and Chief Operating Officer for FDN Communications, a
privately held telecommunications company, where he was responsible for all aspects of sales, marketing,
network operations engineering and customer care. Mr. Boerema also served as Senior Vice President of
Business Solutions for AT&T Wireless and led sales and marketing for a division of McCaw Cellular
Communications. Before joining McCaw, he held management positions with PepsiCo, Inc. and began his career
at The Procter & Gamble Company. Mr. Boerema holds a Bachelor of Science in Marketing and Finance and a
Master of Business Administration from Eastern Illinois University.
Jerri DeVard—56
Ms. DeVard was appointed the Company’s Senior Vice President and Chief Marketing Officer in March
2014. She is responsible for all strategic, operational and financial aspects of the Company’s integrated
marketing programs including brand advertising, digital marketing, communications, lead generation,
sponsorships, media, and other initiatives. Prior to joining ADT in March 2014, Ms. DeVard served as Nokia’s
first chief marketing officer. As a member of Nokia’s executive committee, she oversaw all global and local
marketing, advertising, brand management, insights, retail, partnership, and sponsorship activities for consumer
and small business. Before joining Nokia she held various marketing leadership positions in Fortune 100
organizations including senior vice president, marketing and brand management for Verizon Communications
and chief marketing officer, e-consumer for Citigroup. Ms. DeVard is a Director of Belk Stores and holds a
Master of Business Administration in Marketing from Atlanta University Graduate School of Business and a
Bachelor of Arts in Economics from Spelman College.
Mark Edoff—56
Mr. Edoff is the Company’s Senior Vice President of Business Operations Optimization. He is responsible
for increasing efficiency and driving overall business process improvements in the Company. Prior to the
separation from Tyco in September 2012, Mr. Edoff served as Vice President and Chief Financial Officer of
9
FORM 10-K
Don Boerema—57
Tyco Security Solutions from October 2010 until the restructuring of the segment in fiscal year 2012. He joined
Tyco in 2003 as Vice President and Corporate Controller for the former Tyco Fire & Security business. In 2004,
Mr. Edoff assumed the role of Chief Financial Officer for ADT North America, which included responsibility for
the combined residential and commercial security business. Previously, he served as the Director of Finance and
Principal Accounting Officer for The Gillette Company. Before joining Gillette, he had a 15-year career with
KPMG, where he was a Partner in the Assurance practice. Mr. Edoff holds a Bachelor of Science in Business
Administration from Northeastern University and is a Certified Public Accountant.
Alan Ferber—47
Mr. Ferber was appointed the Company’s President of the Residential Business in October 2013. He is
responsible for driving growth in the residential market through marketing, sales and exceptional customer
service. He joined ADT in April 2013 as Senior Vice President and Chief Customer Officer, responsible for
developing strategies and executing programs designed to create and sustain a superior experience for ADT
customers. Previously, Mr. Ferber served as Chief Strategy and Brand Officer at U.S. Cellular. During his 11year career with U.S. Cellular, he held various senior leadership roles in sales, marketing and operations,
including Executive Vice President of Operations, Chief Marketing Officer and Vice President of Marketing and
Sales Operations. He joined U.S. Cellular from Traq Wireless, a start-up management software and service
provider he co-founded and built into a 100-employee, venture capital-backed company. Earlier in his career,
Mr. Ferber held positions with Ameritech Corporation and First Chicago Corporation (now part of JPMorgan
Chase & Co.). He holds a Bachelor of Arts from the University of Michigan and a Master of Business
Administration from Northwestern University’s Kellogg School of Management.
Michael Geltzeiler—56
FORM 10-K
Mr. Geltzeiler was appointed the Company’s Senior Vice President and Chief Financial Officer in
November 2013. He is responsible for all aspects of finance, treasury and investor relations and ADT’s financial
strategy to help grow its business operations and create stockholder value. Before joining ADT, Mr. Geltzeiler
served as Chief Financial Officer and Group Executive Vice President at NYSE Euronext from 2008 to
November 2013. From 2001 to 2008, he was an executive at the Reader’s Digest Association, as Chief Financial
Officer for six years, then as President of School and Educational Services. Previously, he served in financial
leadership roles at ACNielsen Corporation, including Chief Financial Officer of Marketing Services and
Corporate Controller and Chief Financial Officer, EMEA Region; and in a variety of senior finance positions
both in the U.S. and abroad for Dun & Bradstreet. Mr. Geltzeiler holds a Bachelor of Science in Accounting from
the University of Delaware, a Master of Business Administration in Finance from New York University’s Stern
School of Business, and a CPA certification in the State of New York.
Naren Gursahaney—52
Mr. Gursahaney is the Company’s President and Chief Executive Officer. He also serves as a member of the
Company’s Board of Directors. Prior to the separation from Tyco in September 2012, Mr. Gursahaney served as
President of Tyco’s ADT North American Residential business segment. Prior to the restructuring of the segment
in fiscal year 2012, he was the President of Tyco Security Solutions, the world’s largest electronic security
provider to residential, commercial, industrial and governmental customers and the largest operating segment of
Tyco. Mr. Gursahaney joined Tyco in 2003 as Senior Vice President of Operational Excellence. He then served
as President of Tyco Engineered Products and Services and President of Tyco Flow Control. Prior to joining
Tyco, Mr. Gursahaney was President and Chief Executive Officer of GE Medical Systems Asia, where he was
responsible for the company’s $1.6 billion sales and services business in the Asia-Pacific region. During his 10year career with GE, Mr. Gursahaney held senior leadership roles in services, marketing and information
management. His career also includes positions with Booz Allen & Hamilton and Westinghouse Electric
Corporation. Mr. Gursahaney holds a Bachelor of Science in Mechanical Engineering from The Pennsylvania
State University and a Master of Business Administration from the University of Virginia. Mr. Gursahaney is on
the board of directors of NextEra Energy, Inc., where he serves on the Audit Committee.
10
Kathleen McLean—54
Ms. McLean was appointed the Company’s Senior Vice President and Chief Information Officer in May
2013. She is responsible for developing and executing ADT’s information technology strategy in support of its
product development and business operations. Ms. McLean also serves as Chief Customer Officer of the
Company and is responsible for defining and delivering a superior customer experience for monitoring and
response, ordering, provisioning, billing and service. Ms. McLean has more than 30 years of business and
strategic technology leadership experience, including service with world-leading consulting and
telecommunications corporations. Before joining ADT, she served as Executive Vice President, Chief Revenue
Officer and Chief Information Officer at FairPoint Communications, Inc. where, as a member of the executive
committee, she was responsible for systems stability, operational excellence and revenue growth. Prior to
FairPoint Communications, Inc., she spent nearly 12 years in several leadership positions at Verizon
Communications, Inc., implementing people, process and systems strategies to improve operating performance
and customer service across all sectors of the company. Earlier in her career, Ms. McLean worked for American
Management Systems, Inc. (now part of CGI Group, Inc.) in leadership positions culminating as Vice President
in the Telecom Industry Group. She holds a Bachelor of Science in International Economics from Georgetown
University and did graduate work in information systems management at George Washington University.
Laura Miller—49
Luis Orbegoso—44
Mr. Orbegoso was appointed the Company’s President of Business in September 2014. He is responsible for
developing and executing ADT’s strategy to grow its share of security and automation customers in the small and
mid-sized business market. He joined ADT in May 2013 as Senior Vice President of Small Business, and in
October 2013 he was appointed as President of Small Business. Previously Mr. Orbegoso served as President of
the Global Fire Detection and Alarm segment for United Technologies Corporation (“UTC”) Climate, Controls
and Security. He previously served as President of Lenel Systems International, a division of UTC’s Fire and
Security segment. Prior to joining UTC in 2008, Mr. Orbegoso spent 13 years with General Electric in a variety
of sales, marketing and general management roles, culminating as Chief Marketing Officer of GE Equipment
Services. He holds a Bachelor of Science in Mechanical Engineering from the University of Cincinnati and a
Master of Business Administration from Northwestern University’s Kellogg School of Management.
Arthur Orduña—49
Mr. Orduña is the Company’s Senior Vice President and Chief Innovation Officer, leading the Company’s
vision for innovation and product development. He is responsible for building the strategic roadmap for new and
existing solutions, defining product architecture and positioning ADT as a partner of choice for key technology
companies. Prior to joining ADT in October 2012, he worked for Canoe Ventures, LLC, a joint venture founded
by the top six U.S. cable companies, first serving as Chief Technology Officer then Chief Product Officer. He
was responsible for building a national data and interactive services platform, developing product and technology
11
FORM 10-K
Ms. Miller was appointed the Company’s Senior Vice President and Chief Human Resources Officer in
May 2014. She oversees all strategic human resources operations including human resources business partners,
shared services, compensation and benefits, talent acquisition and management, and labor and employee
relations. She also develops and directs ADT’s change management strategy and implementation, including
merger and acquisition activities. Prior to joining ADT, Ms. Miller served in various senior leadership roles
within the Coca-Cola Company in Atlanta, most recently as Chief Human Resources Officer for Coca-Cola
Refreshments. As a member of Coca-Cola’s executive leadership team, she oversaw all areas of human
resources, including HR business partners, shared services, and centers of expertise to include compensation and
benefits, talent acquisition, talent management, labor and employee relations, and diversity and inclusion. Prior
to Coca-Cola, Ms. Miller held various human resources leadership positions for Raytheon Company, a leading
defense contractor and industrial corporation based in Waltham, MA. Ms. Miller holds a Bachelor of Science in
Industrial and Labor Relations from Cornell University.
strategies, and launching new applications and services with key partners including Comcast Cable, NBCUniversal, Time Warner Cable and Cox Communications. Prior to joining Canoe Ventures, Mr. Orduña was
Senior Vice President of Policy & Product for Advance/Newhouse—Bright House Networks. Earlier in his
career, he served as Vice President of Product & Marketing for Canal+ Technology U.S./Vivendi-Universal, and
also Vice President of Product & Marketing for Integrated Systems Inc./Diab-SDS before its acquisition by Wind
River Systems/Intel. He holds a Bachelor of Arts from Cornell University.
Item 1A. Risk Factors.
In addition to risks and uncertainties in the ordinary course of business that are common to all businesses,
important factors that are specific to our industry and our Company could have a material and adverse impact
on our business, financial condition, results of operations and cash flows. You should carefully consider the risks
described below and in our subsequent periodic filings with the SEC. The following risk factors should be read in
conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
and the consolidated and combined financial statements and related notes in this report.
Risks Relating to Our Business
We sell our products and services in highly competitive markets, including the home automation market,
which may result in pressure on our profit margins and limit our ability to maintain or increase the
market share of our products and services. We may not be able to continue to develop and execute a
competitive yet profitable pricing structure.
FORM 10-K
The monitored security industry is highly fragmented and subject to significant competition and pricing
pressures. We experience significant competitive pricing pressures on installation, monitoring and service fees.
Several significant competitors offer installation fees that match or are lower than ours. Other competitors charge
significantly more for installation but, in many cases, less for monitoring. In addition, cable and
telecommunications companies are expanding into the monitored security industry and are bundling their
existing offerings with monitored security services. In some instances, it appears that the monitored security
services component of such bundled offerings is significantly underpriced and, in effect, subsidized by the rates
charged for the other services offered by these companies. These pricing alternatives may influence customers’
desire to subscribe to our services at rates and fees we consider appropriate. In many cases, we face competition
for direct sales from our authorized dealers, who may offer installation for considerably less than we do in
particular markets. We believe that the monitoring and service fees we offer are generally competitive with rates
offered by other security service providers. We face competition from other providers such as cable and
telecommunications companies that may have greater capital and resources than us, and may benefit from
superior advertising, marketing and promotional resources which could have a material adverse effect on our
ability to drive awareness and demand for our products and services. We also face potential competition from
improvements in Do-It-Yourself (DIY) or self-monitoring systems which enable customers to monitor and
control their environments without third-party involvement through the Internet, text messages, emails or similar
communications, but with the disadvantage that alarm events may go unnoticed. It is possible that one or more of
our competitors could develop a significant technological advantage over us that allows them to provide
additional service or better quality service or to lower their price, which could put us at a competitive
disadvantage. Continued pricing pressure or improvements in technology and shifts in customer preferences
towards self-monitoring or DIY could adversely impact our customer base and/or pricing structure and have a
material adverse effect on our business, financial condition, results of operations and cash flows.
We resist competing on price alone because we believe we have competitive advantage such as brand name
recognition and a reputation for a high level of service and security. However, with cable and
telecommunications companies actively targeting the home automation market and expanding into the monitored
security space, and with large technology companies expanding into the connected home market through the
development of their own solutions or the acquisition of other companies with home automation solution
offerings, this increased competition could result in pricing pressure, a shift in customer preferences towards the
12
services of these companies and reduce our market share. Continued pricing pressure from these competitors or
failure to achieve pricing based on the competitive advantages previously identified above could prevent us from
maintaining competitive price points for our products and services resulting in lost customers or in our inability
to attract new customers and have an adverse effect on our business, financial condition, results of operations and
cash flows.
Our business operates in markets that are characterized by rapidly changing technologies, evolving industry
standards and potential new entrants. For example, a number of cable and other telecommunications companies
and large technology companies with home automation solutions are offering interactive security services that
are competitive with our products and services. If these services gain market acceptance and traction, our ability
to grow our business, in particular our ADT Pulse® offering, could be materially and adversely affected.
Accordingly, our future success depends in part on our ability to accomplish the following: identify emerging
technological trends in our target end-markets; develop, acquire and maintain competitive products and services;
enhance our products and services by adding innovative features that differentiate us from our competitors; and
develop or acquire and bring products and services to market quickly and cost-effectively. Our ability to develop
or acquire new products and services that are technologically innovative requires the investment of significant
resources and can affect our competitive position. These acquisitions and development efforts divert resources
from other potential investments in our businesses, and they may not lead to the development of new
commercially successful technologies, products or services on a timely basis. Moreover, as we introduce new
products and services, we may be unable to detect and correct defects in the product or in its installation, which
could result in loss of sales or delays in market acceptance. New or enhanced products and services may not
satisfy consumer preferences and potential product failures may cause consumers to reject our products. As a
result, these products and services may not achieve market acceptance and our brand image could suffer. In
addition, our competitors may introduce superior designs or business strategies, impairing our brand, our ability
to charge a monthly service fee for our products or services and the desirability of our products and services,
which may cause consumers to defer or forego purchases of our products and services. In addition, the markets
for our products and services may not develop or grow as we anticipate. The failure of our technology, products
or services to gain market acceptance, the potential for product defects or the obsolescence of our products and
services could significantly reduce our revenue, increase our operating costs or otherwise adversely affect our
business, financial condition, results of operations or cash flows.
In addition to developing and acquiring new technologies and introducing new offerings, we may need,
from time to time, to phase out outdated and unsuitable technologies and services. If we are unable to do so on a
cost-effective basis, we could experience reduced profits.
Expiration of non-competition agreements, including non-solicit restrictions, could allow the entry of
potential competitors with deep knowledge of our business.
In connection with our Separation from Tyco in 2012, we entered into a Separation and Distribution
Agreement with Tyco, which included (i) non-compete provisions pursuant to which Tyco was prohibited from
competing with us in the residential and small business security markets in the United States and Canada, and
(ii) non-solicitation provisions which prevented Tyco from soliciting our residential and small business
customers in the United States and Canada. These provisions expired on September 29, 2014. Following the
expiration of these restrictions, Tyco is free to compete with us in the residential and small business security
markets in these jurisdictions.
13
FORM 10-K
Our future growth is dependent upon our ability to successfully compete with new and existing
competitors by developing or acquiring new technologies that achieve market acceptance with acceptable
margins.
We rely on a significant number of our customers remaining with us as customers for long periods of
time.
We operate our business with the goal of retaining customers for long periods of time in order to recoup our
initial investment in new customers, and we generally achieve cash flow break-even in approximately three
years. Accordingly, our long-term profitability is dependent on long customer tenure. This requires that we
minimize our rate of customer disconnects, or attrition. The primary reason for disconnects is when customers
relocate and do not reconnect. Customer relocations are impacted by changes in the housing market. See risk
factor “We are susceptible to downturns in the housing market and consumer discretionary income, which may
inhibit our ability to sustain customer base growth rates.” Some other factors that can increase disconnects
include problems experienced with our product or service quality, unfavorable general economic conditions, and
the preference for lower pricing of competitors’ products and services over ours. If we fail to keep our customers
for a sufficiently long period of time, our profitability, business, financial condition, results of operations and
cash flows could be materially and adversely affected.
If we experience significantly higher rates of customer attrition, we may be required to change the
estimated useful lives of assets related to our security monitoring customers, increasing our depreciation
and amortization expense or impairing such assets.
We amortize the costs of our acquired and dealer-generated contracts and related customer relationships
based on the estimated life of the customer relationships. We similarly depreciate the cost of our internally
generated residential and business monitoring system assets. If attrition rates were to rise significantly, we may
be required to accelerate the amortization of expenses related to such contracts and the depreciation of our
subscriber system assets or to impair such assets, which could cause a material adverse effect on our financial
condition and results of operations.
We are susceptible to changes in the housing market and consumer discretionary income, which may
inhibit our ability to sustain customer base growth rates.
FORM 10-K
Demand for alarm monitoring services is affected by the turnover in the housing market. Downturns in the
rate of the sale of new and existing homes, which we believe drives a substantial portion of our new customer
volume in any given year, would reduce opportunities to make sales of new security and home automation
systems and services and reduce opportunities to take over existing security and home automation systems.
Recoveries in the housing market increase the occurrence of relocations which may lead to customers
disconnecting service and not contracting with us in their new homes. In addition, because of personal economic
circumstances, current security alarm and home automation customers may decide to disconnect our services in
an effort to reduce their monthly spending and may default on their remaining contractual obligations to us. Our
long-term revenue growth rate depends on installations exceeding disconnects. If customer disconnects and
defaults increase, our business, financial condition, results of operations and cash flows could be materially and
adversely affected. See risk factor “We rely on a significant number of our customers remaining with us as
customers for long periods of time.”
Shifts in our customers’ choice of, or telecommunications providers’ support for, telecommunications
services and equipment could adversely impact our business and require significant capital expenditures.
Certain elements of our operating model have historically relied on our customers’ continued selection and
use of traditional land-line telecommunications to transmit alarm signals to our monitoring centers. There is a
growing trend for customers to switch to the exclusive use of cellular, satellite or Internet communication
technology in their homes and businesses, and telecommunication providers may discontinue their land-line
services in the future. In addition, many of our customers who use cellular communication technology for their
security and home/business automation systems use our products that rely on 2G cellular technology, and certain
telecommunication providers have advised us that they will discontinue their 2G services in the future. Some
older installed security systems use technology that is not compatible with the newer cellular, satellite or Internet
14
communication technology, such as 3G and 4G networks, and will not be able to transmit alarm signals on these
networks. The discontinuation of land-line, 2G cellular and any other services by telecommunications providers,
and the switch by customers to the exclusive use of cellular, satellite or Internet communication technology may
require system upgrades to alternative, and potentially more expensive, technologies to transmit alarm signals
and for systems to function properly. This could increase our customer attrition rates and slow new customer
generation. In order to maintain our customer base that uses security and home/business automation system
components that are or could become obsolete, we implemented a three-year conversion program in fiscal 2013
to replace 2G cellular technology used in many of our security systems at no additional cost to our customers,
and began incurring costs under this program in fiscal 2014. We may be required to upgrade or implement other
new technologies, including offering to subsidize the replacement of customers’ outdated systems, at our
expense. Any technology upgrades or implementations could require significant capital expenditures and also
divert management’s attention and other important resources away from our customer service and sales efforts.
In the future, we may not be able to successfully implement new technologies or adapt existing technologies to
changing market demands. If we are unable to adapt timely to changing technologies, market conditions or
customer preferences, our business, financial condition, results of operations and cash flows could be materially
and adversely affected.
In addition, we use broadband Internet access service, including video streaming services, to support our
product offerings, and we may choose to implement broadband Internet access in our intrusion panels as a
communications option for our services. Video streaming services use significantly more bandwidth than nonvideo Internet activity. As utilization rates and availability of these services increases, our high-speed customers
may use more bandwidth than in the past. If this occurs, we could be required to make significant capital
expenditures to increase network capacity in order to avoid service disruptions or reduced capacity for customers.
See risk factor “Our future growth is largely dependent upon our ability to successfully compete with new and
existing competitors by developing or acquiring new technologies that achieve market acceptance with
acceptable margins.”
We are dependent on information technology networks and systems, including Internet and Internet-based
or “cloud” computing services, to process, transmit and store electronic information. In the normal course of our
business, we or our partners collect and retain significant volumes of certain types of personally identifiable and
other information pertaining to our customers and employees, including video images of customer sites.
The legal, regulatory and contractual environment surrounding information security and privacy is
constantly evolving and companies that collect and retain sensitive and confidential information are under
increasing attack by cyber-criminals around the world. While we take security measures relating to our
operations and systems, those measures may not prevent security breaches (including cyber security breaches),
acts of vandalism, computer viruses, misplaced data or data loss that could be detrimental to our reputation,
business, financial condition and results of operations. Third parties, including our partners and vendors, could
also be a source of security risk to us in the event of a failure of their own security systems and infrastructure. In
addition, we cannot be certain that advances in criminal capabilities, new discoveries in the field of cryptography
or other developments will not compromise or breach the technology protecting the networks that access our
products and services. A significant actual or perceived (whether or not valid) theft, loss, fraudulent use or
misuse of customer, employee or other personally identifiable data, whether by us, our partners and vendors, or
other third parties or as a result of employee error or malfeasance or otherwise, non-compliance with our
contractual or other legal obligations regarding such data or a violation of our privacy and security policies with
respect to such data could result in significant costs, fines, litigation or regulatory actions against us. Such an
event could additionally result in unfavorable publicity and therefore adversely affect the market’s perception of
the security and reliability of our services, and our credibility and reputation with our customers, which may lead
to customer dissatisfaction and could result in lost sales and increased customer attrition. In addition, we depend
15
FORM 10-K
Failure to maintain the security of our information and technology networks, including personally
identifiable and other information could adversely affect us.
on our information technology infrastructure for business-to-business and business-to-consumer electronic
commerce. Security breaches of, or sustained attacks against, this infrastructure could create system disruptions
and shutdowns that could result in disruptions to our operations. Increasingly, our security and home/business
automation products and services are accessed through the Internet, and security breaches in connection with the
delivery of our services via the Internet may affect us and could be detrimental to our reputation, business,
operating results and financial condition. We continue to invest in technology and other solutions to protect our
network and information systems, however, there can be no assurance that these investments and solutions will
prevent any of the risks described above. If any one of the foregoing risks materializes, our business, financial
condition, results of operations and cash flows could be materially and adversely affected.
While we maintain cyber liability insurance that provides both third party liability and first party insurance
coverages, our insurance may not be sufficient to protect against all of our losses from any future breaches of our
systems.
An event causing a disruption in the ability of our monitoring facilities to operate could adversely affect
our business.
A disruption in our ability to provide security monitoring services and serve our customers could have a
material adverse effect on our business. A disruption could occur for many reasons, including fire, natural
disasters, weather, disease, transportation interruption, extended power outages, human or other error, terrorism
or sabotage or as a result of disruptions to third-party transmission lines. Monitoring could also be disrupted by
information systems and network-related events or cyber security attacks, such as computer hacking, computer
viruses, worms or other malicious software, denial of service attacks, malicious social engineering or other
destructive or disruptive activities that could also cause damage to our properties, equipment and data. While our
monitoring systems are fully redundant, a failure of our back-up procedures or a disruption affecting multiple
monitoring facilities could disrupt our ability to provide monitoring services. If we experience such disruptions,
we may experience customer dissatisfaction and potential loss of confidence, and liabilities to customers or other
third parties, each of which could harm our reputation and impact future revenues from these customers.
The market price of our stock has been and may continue to be volatile, and the value of an investment in
our common stock may decline.
The market price at which our common stock has traded has fluctuated significantly. The market price may
continue to be volatile due to a number of factors including the following, some of which are beyond our control:
FORM 10-K
•
our operating results or forecasts;
•
variations between our actual operating results and the expectations of securities analysts, investors and
the financial community;
•
competition, including the introduction of new competitors, their pricing strategies and services;
•
recent securities class actions and other litigation against us;
•
market volatility in general;
•
changes in regulatory policy or interpretation;
•
changes in the ratings of our debt or stock by rating agencies or securities analysts; or
•
announcements of developments affecting our business.
As a result of these and other factors, investors in our common stock may not be able to resell their shares at
or above their original purchase price.
We are subject to securities class actions which may harm our business and results of operations.
We are subject to securities class actions. Following certain periods of volatility in the market price of our
securities, we became the subject of securities litigation as described in Item 3 “Legal Proceedings.” We may
16
experience more such litigation following future periods of volatility. This type of litigation may be lengthy, and
may result in substantial costs and a diversion of management’s attention and resources. Results cannot be
predicted with certainty and an adverse outcome in such litigation could result in monetary damages or injunctive
relief that could harm our business, results of operations, financial condition or cash flows.
Our business strategy includes making acquisitions and investments that complement our existing
business. These acquisitions and investments could be unsuccessful or consume significant resources,
which could adversely affect our operating results.
We will continue to analyze and evaluate the acquisition of, or investment in strategic businesses or product
lines with the potential to strengthen our industry position or enhance our existing set of products and service
offerings. We cannot assure you that we will identify or successfully complete transactions with suitable
acquisition candidates in the future. Nor can we assure you that completed acquisitions will be successful.
•
diversion of management time and attention from daily operations;
•
difficulties integrating acquired businesses, technologies and personnel into our business or achieving
anticipated operations efficiencies or cost savings;
•
possibility of litigation or other claims in connection with, or as a result of, an acquisition, including
claims from terminated employees, customers, former stockholders or other third parties;
•
inability to obtain required regulatory approvals and/or required financing on favorable terms;
•
potential loss of key employees, key contractual relationships or key customers of acquired companies
or of us;
•
assumption of the liabilities and exposure to unforeseen liabilities of acquired companies; and
•
dilution of interests of holders of shares of our common stock through the issuance of equity securities
or equity-linked securities.
It may be difficult for us to complete transactions quickly and to integrate acquired operations efficiently
into our current business operations. Any acquisitions or investments may ultimately harm our business or
financial condition, as such acquisitions or investments may not be successful and may ultimately result in
impairment charges.
We may pursue business opportunities that diverge from our current business model, which may
adversely affect our business results.
We may pursue business opportunities that diverge from our current business model, including expanding
our products or service offerings, investing in new and unproven technologies, adding customer acquisition
channels and forming new alliances with companies to market our services. We can offer no assurance that any
such business opportunities will prove to be successful. Among other negative effects, our pursuit of such
business opportunities could cause our cost of investment in new customers to grow at a faster rate than our
recurring revenue and fees collected at the time of installation. Additionally, any new alliances or customer
acquisition channels could require developmental investments or have higher cost structures than our current
arrangements, which could reduce operating margins and require more working capital. In the event that working
capital requirements exceed operating cash flow, we might be required to draw on our revolving credit facility or
pursue other external financing, which may not be readily available. Any of these factors could materially and
adversely affect our business, financial condition, results of operations and cash flows.
17
FORM 10-K
Acquisitions and investments may involve significant cash expenditures, debt incurrence, operating losses
and expenses that could have a material adverse effect on our business, financial condition, results of operations
and cash flows. Acquisitions involve numerous other risks, including:
Our customer generation strategies through our authorized dealer and affinity marketing programs and
the competitive market for customer accounts may affect our future profitability.
A principal element of our business strategy is the generation of new customer accounts through our
authorized dealer program, which accounted for approximately 40% of our new customer accounts for our 2014
fiscal year. Our future operating results will depend in large part on our ability to continue to manage this
business generation strategy effectively. Although we currently generate accounts through hundreds of
authorized dealers, a significant portion of our accounts originate from a smaller number of authorized dealers. In
particular, during fiscal year 2014, one of our authorized dealers signed a 5-year renewal agreement with us and
accounted for approximately 18% of all our new accounts. We experience loss of authorized dealers from our
authorized dealer program due to various factors, such as authorized dealers becoming inactive or discontinuing
their electronic security business, non-renewal of our dealer contracts and competition from other alarm
monitoring companies. If we experience a loss of authorized dealers representing a significant portion of our
customer account generation from our authorized dealer program or if we are unable to replace or recruit
authorized dealers or alternate distribution channel partners in accordance with our business strategy, our
business, financial condition, results of operations and cash flows may be materially and adversely affected.
In addition, successful promotion of our brand depends on the effectiveness of our marketing efforts and on
our ability to offer member discounts and special offers for our products and services. We have actively pursued
affinity marketing programs, which provide members of participating organizations with discounts on our
products and services. The organizations with which we have affinity marketing programs closely monitor their
relationships with us, as well as their members’ satisfaction with our products and services. These organizations
may require us to pay higher fees to them, decrease our pricing for their members, introduce additional
competitive options or otherwise alter the terms of our participation in their marketing programs in ways that are
unfavorable to us. These organizations may also terminate their relationships with us if we fail to meet member
satisfaction standards. If any of our important affinity or marketing relationships, such as our relationships with
USAA or AARP, were terminated or altered in an unfavorable manner, we would lose a significant source of
sales leads and our business, financial condition, results of operations and cash flows could be materially and
adversely affected.
We face risks in acquiring and integrating customer accounts.
FORM 10-K
An element of our business strategy may involve the bulk acquisition of customer accounts. Acquisitions of
customer accounts involve a number of special risks, including the possibility of unexpectedly high rates of
attrition and unanticipated deficiencies in the accounts and systems acquired despite our investigations prior to
acquisition. We face competition from other alarm monitoring companies, including companies that may offer
higher prices and more favorable terms for customer accounts purchased, lower minimum financial qualifications
requirements for purchased accounts or lower prices for monitoring services provided. This competition could
reduce the acquisition opportunities available to us, slowing our rate of growth and/or increase the price we pay
for such account acquisitions, thus reducing our return on investment and negatively impacting our revenue and
results of operations. We cannot assure you that we will be able to purchase customer accounts on favorable
terms in the future.
The purchase price we pay for customer accounts is affected by the recurring revenue historically generated
by such accounts, as well as several other factors, including the level of competition, our prior experience with
accounts purchased in bulk from specific sellers, the geographic location of accounts, the number of accounts
purchased, the customers’ credit scores and the type of security or home/business automation equipment or
platform used by the customers. In purchasing accounts, we have relied on management’s knowledge of the
industry, due diligence procedures and representations and warranties of bulk account sellers. We cannot assure
you that in all instances the representations and warranties made by bulk account sellers are true and complete or,
if the representations and warranties are inaccurate, that we will be able to recover damages from bulk account
sellers in an amount sufficient to fully compensate us for any resulting losses. If any of these risks materializes,
our business, financial condition, results of operations and cash flows could be materially and adversely affected.
18
Our authorized dealers may not be able to mitigate certain risks such as information technology
breaches, data security breaches, product liability, errors and omissions and marketing compliance.
We generate a portion of our new customers through our authorized dealer network. We rely on our
authorized dealers to implement mitigation plans for certain risks they may experience such as, including but not
limited to, information technology breaches, data security breaches, product liability, errors and omissions and
marketing compliance. If our authorized dealers experiences any of these risks, or fail to implement mitigation
plans for their risks, or if such implemented mitigation plans fail, we may be susceptible to risks associated with
our authorized dealers on which we rely to generate customers. Any interruption in the generation of customer
accounts or services provided by our authorized dealers could adversely affect our cash flows, results of
operations and financial condition.
We rely on telemarketing and email marketing conducted internally and through third parties to generate a
substantial number of leads for our business. The telemarketing and email marketing services industries are
subject to an increasing amount of regulation in the United States and Canada. In the United States, the FTC and
FCC have issued regulations that place restrictions on unsolicited automated telephone calls to residential and
wireless telephone subscribers by means of automatic telephone dialing systems, prerecorded or artificial voice
messages and telephone fax machines, and require us to maintain a “do not call” list and to train our personnel to
comply with these restrictions. The FTC regulates both general sales practices and telemarketing specifically and
has broad authority to prohibit a variety of advertising or marketing practices that may constitute “unfair or
deceptive acts or practices.” Most of the statutes and regulations in the United States allow a private right of
action for the recovery of damages or provide for enforcement by the FTC and FCC, state attorneys general or
state agencies permitting the recovery of significant civil or criminal penalties, costs and attorneys’ fees in the
event that regulations are violated. The Canadian Radio-Television and Telecommunications Commission
(“CRTC”) enforces rules regarding unsolicited communications using automatic dialing and announcing devices,
live voice and fax. On July 1, 2014, the Canadian Anti-Spam Law (“CASL”) regulations went into effect in
Canada. The CRTC has enforcement authority under CASL. CASL prohibits the sending of commercial emails
without prior consent of the consumer or an existing business relationship and sets forth rules governing the
sending of commercial emails. CASL allows for a private right of action for the recovery of damages or provides
for enforcement by CRTC permitting the recovery of significant civil penalties, costs and attorneys’ fees in the
event that regulations are violated. We are diligent in our efforts to comply with all such applicable regulations,
but cannot assure you that we or third parties that we rely on for telemarketing, email marketing and other lead
generation activities will be in compliance with all applicable regulations at all times. Although our contractual
arrangements with such third parties expressly require them to comply with all such regulations and to indemnify
us for their failure to do so, we cannot assure you that the FTC, FCC, private litigants or others will not attempt
to hold us responsible for any unlawful acts conducted by such third parties or that we could successfully enforce
or collect upon such indemnities. Additionally, changes in such regulations or the interpretation thereof that
further restrict such activities could result in a material reduction in the number of leads for our business and
could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Unauthorized use of our brand name by third parties, and the expenses incurred in developing and
preserving the value of our brand name, may adversely affect our business.
Our brand name is critical to our success. Unauthorized use of our brand name by third parties may
adversely affect our business and reputation, including the perceived quality and reliability of our products and
services. We rely on trademark law, company brand name protection policies and agreements with our
employees, customers, business partners and others to protect the value of our brand name. Despite our
precautions, we cannot provide assurance that those procedures are sufficiently effective to protect against
unauthorized third-party use of our brand name. In particular, in recent years various third parties have used the
19
FORM 10-K
Increasing government regulation of telemarketing, email marketing and other marketing methods may
increase our costs and restrict the operation and growth of our business.
ADT® brand name to engage in fraudulent activities, including inducing customers to switch to competing
monitoring service providers, generating leads for competitors and obtaining personal financial information.
Third parties sometimes use ADT’s name and trademarks, or other confusingly similar variance thereof, in other
contexts that may impact our brand. We may not be successful in investigating, preventing or prosecuting all
unauthorized third-party use of our brand name. Future litigation with respect to such unauthorized use could
also result in substantial costs and diversion of our resources. These factors could adversely affect our reputation,
business, financial condition, results of operations and cash flows.
We do not own the right to use certain of our trademarks, including the ADT® brand name, outside of the
United States and Canada.
Following the Separation, Tyco owns the ADT® brand name outside of the United States and Canada and
has licensed it to a third party in South Korea. Therefore, in order to expand our business outside the United
States and Canada, we would need to either acquire or otherwise license the ADT® brand name from Tyco (to the
extent not already used by Tyco in the applicable jurisdictions) or use an alternative brand name. This would put
us at a distinct competitive disadvantage. Development of a new brand outside the United States and Canada
could be costly and would also require us to market other brands as superior alternatives to the ADT® brand,
which could undermine its value among customers within the United States and Canadian residential and
business security markets. These factors may make it difficult for us to develop a business outside of the United
States and Canada. These factors also expose us to the risk that the ADT® brand name could suffer reputational
damage or devaluation for reasons outside of our control, including Tyco’s business conduct outside of the
United States and Canada. Any of these factors may materially and adversely affect our business, financial
condition, results of operations and cash flows.
Infringement of our intellectual property rights could negatively affect us.
FORM 10-K
We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality provisions and
licensing arrangements to establish and protect our proprietary rights. We cannot guarantee, however, that the
steps we have taken to protect our intellectual property will be adequate to prevent infringement of our rights or
misappropriation of our technology. Adverse events affecting the use of our trademarks could affect our use of
those trademarks and negatively impact our brands. In addition, if we expand our business outside of the United
States and Canada in the future, effective patent, trademark, copyright and trade secret protection may be
unavailable or limited in some jurisdictions. Furthermore, while we enter into confidentiality agreements with
certain of our employees and third parties to protect our intellectual property, such confidentiality agreements
could be breached or otherwise may not provide meaningful protection for our trade secrets and know-how
related to the design, manufacture or operation of our products. If it becomes necessary for us to resort to
litigation to protect our intellectual property rights, any proceedings could be burdensome and costly, and we
may not prevail. Further, adequate remedies may not be available in the event of an unauthorized use or
disclosure of our trade secrets. If we fail to successfully enforce our intellectual property rights, our competitive
position could suffer, which could adversely affect our business, financial condition, results of operations and
cash flows.
Allegations that we have infringed the intellectual property rights of third parties could negatively affect
us.
We may be subject to claims of intellectual property infringement rights by third parties. In particular, as
our services have expanded into areas more heavily populated by intellectual property, we have become subject
to claims alleging infringement of intellectual property, including litigation brought by special purpose or socalled “non-practicing” entities that focus solely on extracting royalties and settlements by enforcing patent
rights. These companies typically have little or no business or operations and there are few effective deterrents
available to prevent such companies from filing patent infringement lawsuits against us. In addition, we rely on
20
licenses and other arrangements with third parties covering intellectual property related to the products and
services that we market, including a patent agreement with Tyco covering the manufacture, use and sale of preSeparation products. Notwithstanding these arrangements, we could be at risk for infringement claims from third
parties, including Tyco. Although the patent agreement generally includes a covenant by Tyco not to sue us for
products and services in existence as of the distribution date that may infringe Tyco patents, it does not protect us
from infringement claims for future product or service expansions, or if we change third-party product suppliers
or if an alleged infringement involves certain patents. In general, if a court determines that one or more of our
services infringes on intellectual property owned by others, we may be required to cease marketing those
services, to obtain licenses from the holders of the intellectual property at a material cost or to take other actions
to avoid infringing the intellectual property. The litigation process is costly and subject to inherent uncertainties,
and we may not prevail in litigation matters regardless of the merits of our position. Intellectual property lawsuits
or claims may become extremely disruptive if the plaintiffs succeed in blocking the trade of our products and
services and may have a material adverse effect on our business, financial condition, results of operations and
cash flows.
Our business operates in a regulated industry.
Our operations and employees are subject to various federal, state, provincial and local laws and regulations
in the United States and Canada in such areas as consumer protection, occupational licensing, environmental
protection, labor and employment, tax and other laws and regulations. Most states and provinces in which we
operate have licensing laws directed specifically toward the security services industry. Our business relies
heavily upon the use of both wireline and wireless telecommunications to communicate signals, and
telecommunications companies are regulated by federal, state and local governments.
Changes in laws or regulations could require us to change the way we operate or to utilize resources to
maintain compliance, which could increase costs or otherwise disrupt operations. In addition, failure to comply
with any applicable laws or regulations could result in substantial fines or revocation of our operating permits
and licenses. If laws and regulations were to change or if we or our products failed to comply with them, our
business, financial condition, results of operations and cash flows could be materially and adversely affected.
We could be assessed penalties for false alarms.
Some local governments impose assessments, fines, penalties and limitations on either customers or the
alarm companies for false alarms. A few municipalities have adopted ordinances under which both permit and
alarm dispatch fees are charged directly to the alarm companies. Our alarm service contracts generally allow us
to pass these charges on to customers, but we may not be able to collect these charges if customers are unwilling
or unable to pay them and such outcome may materially and adversely affect our operating results. Furthermore,
our customers may elect to terminate or not renew our services if assessments, fines or penalties for false alarms
become significant. If more local governments were to impose assessments, fines or penalties, our customer base,
financial condition, results of operations and cash flows could be materially and adversely affected.
Police departments could refuse to respond to calls from monitored security service companies.
Police departments in a limited number of U.S. and Canadian jurisdictions do not respond to calls from
monitored security service companies, either as a matter of policy or by local ordinance. In certain cases, in the
U.S., we are seeing requirements for video verification or eyewitness accounts of suspicious activities and this
21
FORM 10-K
In certain jurisdictions, we are required to obtain licenses or permits in order to comply with standards
governing employee selection and training and to meet certain standards in the conduct of our business. The loss
of such licenses or permits or the imposition of conditions to the granting or retention of such licenses or permits
could have a material adverse effect on us. Furthermore, in certain jurisdictions, certain security systems must
meet fire and building codes in order to be installed, and it is possible that our current or future products and
service offerings will fail to meet such codes, which could require us to make costly modifications to our
products and services or to forgo marketing in certain jurisdictions.
will increase costs of some security systems which may increase costs to customers. As an alternative to video
cameras, we have offered affected customers the option of receiving response from private guard companies, in
most cases through contracts with us, which increases the overall cost to customers. If more police departments
were to refuse to respond or be prohibited from responding to calls from monitored security service companies,
our ability to attract and retain customers could be negatively impacted and our business, financial condition,
results of operations and cash flows could be adversely affected.
Adoption of statutes and governmental policies purporting to characterize certain of our charges as
unlawful may adversely affect our business.
If a customer cancels their contract with us prior to the end of the initial contract term, other than in
accordance with the contract, we may charge the customer an early cancellation fee. Consumer protection
policies or legal precedents could be proposed or adopted to restrict the charges we can impose upon contract
cancellation. Such initiatives could compel us to increase our prices during the initial term of our contracts and
consequently lead to less demand for our services and increased attrition. Adverse judicial determinations
regarding these matters could cause us to incur legal exposure to customers against whom such charges have
been imposed and expose us to the risk that certain of our customers may seek to recover such charges through
litigation. In addition, the costs of defending such litigation and enforcement actions could have a material
adverse effect on our business, financial condition, results of operations and cash flows.
We depend on third party providers and suppliers for components of our security and home/business
automation systems, and third-party software licenses for our products and services, and any failure or
interruption in products or services provided by these third parties could harm our ability to operate our
business.
FORM 10-K
The components for the security and home/business automation systems that we install are manufactured by
third parties. We are therefore susceptible to interruptions in supply and to the receipt of components that do not
meet our high standards. Any financial or other difficulties our providers face may have negative effects on our
business. We exercise little control over our suppliers, which increases our vulnerability to problems with the
products and services they provide. While we strive to utilize dual-sourcing methods to allow similar hardware
components for our security systems to be interchangeable in order to minimize the risk of a disruption from a
single supplier, any interruption in supply could cause delays in installations and repairs and the loss of current
and potential customers. Also, if a previously installed component were found to be defective, we might not be
able to recover the costs associated with its repair or replacement across our installed customer base, and the
diversion of technical personnel to address the defect could materially and adversely affect our business,
financial condition, results of operations and cash flows.
We rely on third party software for key home automation features in our ADT Pulse® offering. We could
experience service disruptions if customer usage patterns for our ADT Pulse® offering exceed, or are otherwise
outside of, design parameters for the system and the ability for ADT or our third party provider to make
corrections. Such interruptions in the provision of services could result in our inability to meet customer demand,
damage our reputation and customer relationships and adversely affect our business. We also rely on certain
software technology that we license from third parties and use in our products and services to perform key
functions and provide critical functionality. For example, we license the software platform for our monitoring
operations from third parties. Because a number of our products and services incorporate technology developed
and maintained by third parties, we are, to a certain extent, dependent upon such third parties’ ability to maintain
or enhance their current products and services, to ensure that their products are free of defects or security
vulnerabilities, to develop new products and services on a timely and cost-effective basis and to respond to
emerging industry standards and other technological changes. Further, these third-party technology licenses may
not always be available to us on commercially reasonable terms or at all. If our agreements with third-party
vendors are not renewed or the third-party software becomes obsolete, is incompatible with future versions of our
products or services or otherwise fails to address our needs, we cannot provide assurance that we would be able
22
to replace the functionality provided by the third-party software with technology from alternative providers.
Furthermore, even if we obtain licenses to alternative software products or services that provide the functionality
we need, we may be required to replace hardware installed at our monitoring centers and at our customers’ sites,
including security system control panels and peripherals, in order to affect our integration of or migration to
alternative software products. Any of these factors could materially and adversely affect our business, financial
condition, results of operations and cash flows.
We are exposed to greater risks of liability for employee acts or omissions or system failure, than may be
inherent in other businesses.
If a customer or third party believes that he or she has suffered harm to person or property due to an actual
or alleged act or omission of one of our employees or security system failure, he or she (or their insurers) may
pursue legal action against us, and the cost of defending the legal action and of any judgment against us could be
substantial. In particular, because our products and services are intended to help protect lives and real and
personal property, we may have greater exposure to litigation risks than businesses that provide other consumer
and small business products and services. Substantially all of our customer contracts contain a series of riskmitigation provisions that serve to limit our liability and/or limit a claimant’s ability to pursue legal action;
however, in the event of litigation with respect to such matters, it is possible that these risk-mitigation provisions
may be deemed not applicable or unenforceable and, regardless of the ultimate outcome, we may incur
significant costs of defense that could materially and adversely affect our business, financial condition, results of
operations and cash flows.
Our interactive and home automation services are accessed through the Internet and our security monitoring
services, including those utilizing video streaming, are increasingly delivered using Internet technologies. Users
who access our services through mobile devices, such as smart phones, laptops and tablet computers, must have a
high-speed Internet connection, such as Wi-Fi, 3G or 4G, to use our services. Currently, this access is provided
by companies that have significant and increasing market power in the broadband and Internet access
marketplace, including telephone companies, cable companies and wireless companies. These providers could
take measures that affect their customers’ ability to use our products and services, such as degrading the quality
of the data packets we transmit over their lines, giving those packets low priority, giving other packets higher
priority than ours, blocking our packets entirely or attempting to charge their customers more for using our
products and services. To the extent that Internet service providers implement usage based pricing, including
meaningful bandwidth caps, or otherwise try to monetize access to their networks, we could incur greater
operating expenses and customer acquisition and retention could be negatively impacted. Furthermore, to the
extent network operators were to create tiers of Internet access service and either charge us for or prohibit us
from being available through these tiers, our business could be negatively impacted. Some of these providers also
offer products and services that directly compete with our own offerings, which could potentially give them a
competitive advantage.
The adoption or modification of laws or regulations relating to Internet access could result in changes in
how Internet service providers handle and charge for access to their networks. In January 2014, the U.S. Court of
Appeals for the District of Columbia in Verizon v. FCC struck down major portions of the “net neutrality” rules
adopted by the FCC in December 2010 that were intended, in part, to prevent broadband internet service
providers from discriminating against legal Internet traffic. In May 2014, the FCC sought public comment on
how it should ensure that the Internet remains open, and proposed new rules and enhancements to current rules.
Many have interpreted the new proposal, however, as not banning the creation of fast lanes, in which a content
provider might pay an Internet service provider a fee to give its content top priority for delivery to customers
(“paid prioritization”). The FCC has received comments, held “Open Internet” roundtable discussions and is
23
FORM 10-K
Certain providers of Internet access may block our services or charge their customers more for using our
services, or government regulations relating to the Internet could change, which could adversely affect
our revenue and growth.
considering next steps. Within such an uncertain regulatory environment, we could experience interference or
other discriminatory practices, such as those described above, that could cause us to lose customers and impede
our growth, cause us to incur additional expense or otherwise negatively affect our business.
We have significant deferred tax assets, and any impairments of or valuation allowances against these
deferred tax assets in the future could adversely affect our results of operations, financial condition and
cash flows.
We are subject to income taxes in the United States and Canada and in various state, territorial, provincial
and local jurisdictions. The amount of income taxes we pay is subject to our interpretation and application of tax
laws in jurisdictions in which we file. Changes in current or future laws or regulations, the imposition of new or
changed tax laws or regulations or new related interpretations by taxing authorities in the jurisdictions in which
we file could materially and adversely affect our financial condition, results of operations and cash flows.
Our future consolidated federal and state income tax liability may be significantly reduced by tax credits and
tax net operating loss (“NOL”) carryforwards available to us under the applicable tax codes. Our ability to fully
utilize these deferred tax assets, however, may be limited for various reasons, such as if projected future taxable
income becomes insufficient to recognize the full benefit of our NOL carryforwards prior to their expirations. As
part of the Separation of the ADT residential business from Tyco in July 2012, a separate return limitation year
(“SRLY”) event occurred as defined under relevant U.S. Income Tax Regulations (the “Regulations”). A SRLY
event can limit a corporation’s ability to utilize carryforward attributes should income attributable to specific
subgroup members relative to total U.S. consolidated income be insufficient to allow for full utilization. In
addition, if a corporation experiences an “ownership change,” Internal Revenue Code (the “Code”) Sections 382
and 383 provide annual limitations with respect to the ability of a corporation to utilize its net operating loss (as
well as certain built-in losses) and tax credit carryforwards against future U.S. taxable income. In general an
ownership change may result from transactions increasing the ownership of certain stockholders in the stock of
the corporation by more than 50 percentage points over a three-year testing period. During fiscal year 2013, we
determined that the SRLY limitation was no longer applicable as an ownership change is deemed to have
occurred upon Separation from Tyco on September 28, 2012 in accordance with Code Section 382. Therefore,
pursuant to the Code Section 382 “overlap rule,” the tax attributes as of the end of September 2012 are only
subject to the limitations provided by Code Sections 382 and 383. We do not, however, expect that this limitation
will impact our ability to utilize the tax attributes carried forward from pre-Separation periods.
FORM 10-K
In addition to the pre-Separation tax attributes, we generated a significant NOL in fiscal year 2013 along
with tax credit carryforwards. Our ability to fully utilize these tax assets may also be affected if in the future we
experience another “ownership change” within the meaning of Section 382 of the Code. Future changes in our
stock ownership, depending on the magnitude, including the purchase or sale of our common stock by five
percent stockholders, and issuances or redemptions of common stock by us could result in an ownership change
that would trigger the imposition of limitations under Section 382 of the Code for these post-Separation tax
attributes.
In addition, as a significant taxpayer, we are subject to regular audits by the U.S. Internal Revenue Service
(“IRS”) as well as state, territorial, provincial and local tax authorities. These audits, whether for periods before
Separation or post-Separation, could subject us to tax liabilities if tax authorities make adverse determinations
with respect to our NOLs or tax credits. Further, any future disallowance of some or all of our tax credits or NOL
carryforwards as a result of legislative change could materially affect our tax obligations. Accordingly, there can
be no assurance that in the future we will not be subject to increased taxation or experience limitations with
respect to recognizing the benefits of our NOL carryforwards and other tax attributes. Any such increase in
taxation or limitation of benefits could have a material adverse effect on our financial condition, results of
operations or cash flows.
24
If we are unable to hire and retain key personnel, including an effective sales force, our ability to manage
our business could be adversely affected.
Our success will depend in part upon the continued services of our management team and sales
representatives. Our ability to retain and hire new key personnel for management positions and effective sales
representatives could be impacted adversely by the competitive environment for management and sales talent.
The loss, incapacity or unavailability for any reason of key members of our management team and the inability
or delay in hiring new key employees including sales force personnel could adversely affect our ability to
manage our business and our future operational and financial results.
Adverse developments in our relationship with our employees could adversely affect our business, results
of operations and financial condition.
As of September 26, 2014, approximately 2,100 of our employees at various sites, or approximately 12% of
our total workforce, were represented by unions and covered by collective bargaining agreements. Our
relationships with these unions have generally been good. We are currently party to approximately 32 collective
bargaining agreements in the United States and Canada. Almost one-third of these agreements are up for renewal
in any given year. We cannot predict the outcome of negotiations of the collective bargaining agreements
covering our employees. If we are unable to reach new agreements or renew existing agreements, employees
subject to collective bargaining agreements may engage in strikes, work slowdowns or other labor actions, which
could materially disrupt our ability to provide services. New labor agreements or the renewal of existing
agreements may impose significant new costs on us, which could adversely affect our financial condition and
results of operations in the future.
On May 14, 2010, we acquired Broadview Security, a business formerly owned by The Brink’s Company.
Under the Coal Industry Retiree Health Benefit Act of 1992, as amended (the “Coal Act”), The Brink’s Company
and its majority-owned subsidiaries as of July 20, 1992 (including certain legal entities acquired in the
Broadview Security acquisition) are jointly and severally liable with certain of The Brink’s Company’s other
current and former subsidiaries for health care coverage obligations provided for by the Coal Act. A Voluntary
Employees’ Beneficiary Associate (“VEBA”) trust has been established by The Brink’s Company to pay for
these liabilities, although the trust may have insufficient funds to satisfy all future obligations. At the time of the
Broadview Spin-Off, Broadview Security entered into an agreement pursuant to which The Brink’s Company
agreed to indemnify it for any and all liabilities and expenses related to The Brink’s Company’s former coal
operations, including any health care coverage obligations. The Brink’s Company has agreed that this
indemnification survives our acquisition of Broadview Security. We have evaluated our potential liability under
the Coal Act as a contingency in light of all known facts, including the funding of the VEBA and indemnification
provided by The Brink’s Company. We have concluded that no accrual is necessary due to the existence of the
indemnification and our belief that The Brink’s Company and VEBA will be able to satisfy all future obligations
under the Coal Act. However, if The Brink’s Company and the VEBA are unable to satisfy all such obligations,
we could be held liable, which could have a material adverse effect on our financial condition, results of
operations or cash flows.
Risks Relating to Our Liquidity
Disruptions in the financial markets or changes in our credit ratings could adversely affect us by
reducing availability of credit or access to financing on favorable terms or at all and could adversely
affect our suppliers by increasing funding costs or reducing availability of credit.
In the normal course of our business, we may access the capital markets for general corporate purposes,
which may include repayment of indebtedness, acquisitions, additions to working capital, repurchase of common
stock, capital expenditures and investments in our business. We rely on the capital markets, particularly for
offerings of debt securities to meet our financial commitments and liquidity needs. Although we expect to have
25
FORM 10-K
We may be subject to liability for obligations of The Brink’s Company under the Coal Act.
sufficient liquidity to meet our foreseeable needs, our access to and the cost of capital could be negatively
impacted by disruptions in the financial markets or changes in our credit ratings. In recent years, the credit
markets experienced significant dislocations and liquidity disruptions, and similar disruptions in the credit
markets in the future could make financing terms for borrowers unattractive or unavailable. These factors may
make it more difficult or expensive for us to access the capital markets if the need arises. In addition, these
factors may make it more difficult for our suppliers to meet demand for their products or for potential strategic
partners to commence new projects, as they may experience increased costs of debt financing or difficulties in
obtaining debt financing. Disruptions in the financial markets have had adverse effects on other areas of the
economy and have led to a slowdown in general economic activity that may continue to adversely affect our
businesses. These disruptions may have other unknown adverse effects. One or more of these factors could
adversely affect our business, financial condition, results of operations or cash flows.
In fiscal 2013, Standard and Poor’s Rating Services, Moody’s Investors Service, Inc. and Fitch Ratings
downgraded the Company from BBB to BB-, from Baa2 to Ba2 and from BBB+ to BBB-, respectively. Our
credit ratings are based upon information furnished by us or obtained by a rating agency from its own sources
and are subject to revision, suspension or withdrawal by one or more rating agencies at any time. Rating agencies
may review the ratings assigned to us due to developments that are beyond our control, including as a result of
new standards requiring the agencies to reassess rating practices and methodologies. If further downgrades in our
credit ratings were to occur, it could result in higher interest costs under our revolving credit facility. It could also
cause our future borrowing costs to increase and reduce our access to capital.
Covenants in our debt instruments may adversely affect us.
Our revolving credit facility contains customary covenants, including a limit on the ratio of debt to earnings
before interest, taxes, depreciation, and amortization (“EBITDA”), a minimum required ratio of EBITDA to
interest expense and limits on incurrence of liens and subsidiary debt. In addition, the indenture governing our
senior unsecured notes contains customary covenants including limits on liens and sale/leaseback transactions.
FORM 10-K
Our ability to meet our financial covenants can be affected by events beyond our control, and we cannot
provide assurance that we will meet those tests. A breach of any of these covenants could result in a default under
our revolving credit facility or our indenture. Upon the occurrence of an event of default under our revolving
credit facility or our indenture, the lenders or trustees could elect to declare all amounts outstanding thereunder to
be immediately due and payable and, in the case of credit facility lenders, terminate all commitments to extend
further credit. If the lenders or trustees accelerate the repayment of borrowings, we cannot provide assurance that
we will have sufficient assets to repay our revolving credit facility and our other indebtedness. Furthermore,
acceleration of any obligation under any of our material debt instruments will permit the holders of our other
material debt to accelerate their obligations, which could have a material adverse effect on our financial
condition. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
We may continue to increase our debt or raise additional capital in the future, which could affect our
financial health and may decrease our profitability.
We may continue to increase our debt or raise additional capital in the future, subject to restrictions in our
revolving credit facility and indenture and any debt agreements covering debt incurred subsequent to the date of
this report. If our cash flow from operations is less than we anticipate, or if our cash requirements are more than
we expect, we may require more financing. However, debt or equity financing may not be available to us on
terms acceptable to us, if at all. If we incur additional debt or raise equity through the issuance of additional
capital stock, the terms of the debt or our capital stock issued may give the holders rights, preferences and
privileges senior to those of holders of our common stock, particularly in the event of liquidation. The terms of
the debt may also impose additional and more stringent restrictions on our operations than we currently have. If
we raise funds through the issuance of additional equity, your percentage ownership in us would decline. If we
are unable to raise additional capital when needed, it could affect our financial health.
26
Material adverse legal judgments, fines, penalties or settlements could adversely affect our financial
health and prevent us from fulfilling our obligations under our outstanding indebtedness.
We estimate that our available cash, our cash flow from operations and amounts available to us under our
revolving credit facility will be adequate to fund our operations and service our debt over both the short term and
the long term. However, material adverse legal judgments, fines, penalties or settlements arising from litigation
and similar contingencies could require additional funding. If such developments require us to obtain additional
funding, we cannot provide assurance that we will be able to obtain the additional funding that we need on
commercially reasonable terms or at all, which could have a material adverse effect on our financial condition,
results of operations and cash flows. Such an outcome could have important consequences to holders of shares of
our common stock. For example, it could:
•
require us to dedicate a substantial portion of our cash flow from operations to payments on our
indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital
expenditures, research and development efforts and other corporate purposes, including dividend
payments;
•
increase our vulnerability to adverse economic and industry conditions;
•
limit our flexibility in planning for, or reacting to, changes in our business and the markets in which we
operate;
•
restrict our ability to introduce new technologies or exploit business opportunities;
•
make it more difficult for us to satisfy our payment obligations with respect to our outstanding
indebtedness; and
•
increase the difficulty and/or cost to us of refinancing our indebtedness.
See risk factor “We are subject to securities class actions which may harm our business and results of
operations,” and Part I, Item 3 Legal Proceedings.
From time to time, we enter into arrangements with financial institutions to hedge exposure to fluctuations
in currency and interest rates, including forward contracts, options and swap agreements. The failure of one or
more counterparties to our hedging arrangements to fulfill their obligations could adversely affect our results of
operations.
Risks Relating to Our Common Stock
Provisions in our certificate of incorporation and by-laws and of Delaware law may prevent or delay an
acquisition of our company, which could decrease the trading price of our common stock.
Our certificate of incorporation and by-laws and Delaware law contain provisions that are intended to deter
coercive takeover practices and inadequate takeover bids by making such practices or bids more expensive to the
acquiror and to encourage prospective acquirors to negotiate with our board of directors rather than to attempt a
hostile takeover. These provisions include rules regarding how stockholders may present proposals or nominate
directors for election at stockholder meetings and the right of our board of directors to issue preferred stock
without stockholder approval.
Delaware law also imposes some restrictions on mergers and other business combinations between any
holder of 15% or more of our outstanding common stock and us. We believe these provisions protect our
stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirors to negotiate with
our board of directors and by providing our board of directors with more time to assess any acquisition proposal.
27
FORM 10-K
We are exposed to counterparty risk in our hedging arrangements.
These provisions are not intended to make us immune from takeovers. However, these provisions apply even if
the offer may be considered beneficial by some stockholders and could delay or prevent an acquisition that our
board of directors determines is not in the best interests of our company and our stockholders. Accordingly, in
the event that our board of directors determines that a potential business combination transaction is not in the best
interests of our company and our stockholders but certain stockholders believe that such a transaction would be
beneficial to our company and our stockholders, such stockholders may elect to sell their shares in our company
and the trading price of our common stock could decrease.
In addition, a merger or acquisition may trigger change in control and severance benefits to certain
executive employees under the terms of either our Severance Plan for U.S. Officers and Executives or Change in
Control Severance Plan, thereby increasing the cost of such a transaction.
Risks Relating to our Separation from Tyco
We share responsibility for certain income tax liabilities of ADT, Tyco and Pentair Ltd., formerly Tyco
Flow Control International Ltd. (“Pentair”) for tax periods prior to and including September 28, 2012,
and such liabilities may include a portion of Tyco’s obligations under its tax sharing agreement with
Covidien Ltd. (“Covidien”) and TE Connectivity Ltd. (“TE Connectivity”) for tax liabilities for tax
periods prior to and including June 29, 2007.
FORM 10-K
In connection with the 2007 distributions of Covidien and TE Connectivity by Tyco (the “2007
Separation”), Tyco entered into a tax sharing agreement (the “2007 Tax Sharing Agreement”) that governs the
rights and obligations of each party with respect to certain pre-2007 Separation tax liabilities and certain tax
liabilities arising in connection with the 2007 Separation. More specifically, Tyco, Covidien and TE Connectivity
share 27%, 42% and 31%, respectively, of income tax liabilities that arise from adjustments made by tax
authorities to Tyco’s, Covidien’s and TE Connectivity’s U.S. and certain non-U.S. income tax returns and certain
taxes attributable to internal transactions undertaken in anticipation of the 2007 Separation. In addition, in the
event the 2007 Separation or certain related transactions is determined to be taxable as a result of actions taken
after the 2007 Separation by Tyco, Covidien or TE Connectivity, the party responsible for such failure would be
responsible for all taxes imposed on Tyco, Covidien or TE Connectivity as a result thereof. If none of the
companies is responsible for such failure, then Tyco, Covidien and TE Connectivity would be responsible for
such taxes, in the same manner and in the same proportions as other shared tax liabilities under the 2007 Tax
Sharing Agreement. Costs and expenses associated with the management of these shared tax liabilities are
generally shared equally among the parties.
In connection with the Separation from Tyco, we entered into a tax sharing agreement (the “2012 Tax
Sharing Agreement”) with Tyco and Pentair that governs the rights and obligations of ADT, Tyco and Pentair for
certain pre-Separation tax liabilities, including Tyco’s obligations under the 2007 Tax Sharing Agreement. The
2012 Tax Sharing Agreement provides that ADT, Tyco and Pentair will share (i) certain pre-Separation income
tax liabilities that arise from adjustments made by tax authorities to ADT’s, Tyco’s, and Pentair’s U.S. and
certain non-U.S. income tax returns, and (ii) payments required to be made by Tyco in respect to the 2007 Tax
Sharing Agreement (collectively, “Shared Tax Liabilities”). Tyco will be responsible for the first $500 million of
Shared Tax Liabilities. ADT and Pentair will share 58% and 42%, respectively, of the next $225 million of
Shared Tax Liabilities. ADT, Tyco and Pentair will share 27.5%, 52.5% and 20.0%, respectively, of Shared Tax
Liabilities above $725 million.
With respect to years prior to and including the 2007 Separation, tax authorities have raised issues and
proposed tax adjustments that are generally subject to the sharing provisions of the 2007 Tax Sharing Agreement
and which may require Tyco to make a payment to a taxing authority, Covidien or TE Connectivity. Although
Tyco has advised us that it has resolved a substantial number of these adjustments, a few significant items raised
by the IRS remain open with respect to the audits of the 1997 through 2007 tax years. On July 1, 2013, Tyco
announced that the IRS issued Notices of Deficiency to Tyco primarily related to the treatment of certain
intercompany debt transactions (the “Tyco IRS Notices”). These notices assert that additional taxes of $883
28
million plus penalties of $154 million are owed based on audits of the 1997 through 2000 tax years of Tyco and
its subsidiaries, as they existed at that time. Further, Tyco reported receiving Final Partnership Administrative
Adjustments (the “Partnership Notices”) for certain U.S. partnerships owned by its former U.S. subsidiaries, for
which Tyco has informed that it estimates an additional tax deficiency of approximately $30 million will be
asserted. The additional tax assessments related to the Tyco IRS Notices and the Partnership Notices exclude
interest and do not reflect the impact on subsequent periods if the IRS challenge to Tyco’s tax filings is proved
correct. Tyco has filed petitions with the U.S. Tax Court to contest the IRS assessments. Consistent with its
petitions filed with the U.S. Tax Court, Tyco has advised us that it strongly disagrees with the IRS position and
believes (i) it has meritorious defenses for the respective tax filings, (ii) the IRS positions with regard to these
matters are inconsistent with applicable tax laws and Treasury regulations, and (iii) the previously reported taxes
for the years in question are appropriate. If the IRS should successfully assert its position, our share of the
collective liability, if any, would be determined pursuant to the 2012 Tax Sharing Agreement. In accordance with
the 2012 Tax Sharing Agreement, the amount ultimately assessed under the Tyco IRS Notices and the
Partnership Notices would have to be in excess of $1.85 billion, including other assessments for unrelated
historical tax matters Tyco has, or may settle in the future, before we would be required to pay any of the
amounts assessed. We believe that our income tax reserves and the liabilities recorded in the Consolidated
Balance Sheet for the 2012 Tax Sharing Agreement continue to be appropriate. No payments with respect to
these matters would be required until the dispute is resolved in the U.S. Tax Court. A trial date has been set for
February 2016. However, the ultimate resolution of these matters is uncertain, and if the IRS were to prevail, it
could have a material adverse impact on our financial condition, results of operations and cash flows, potentially
including a reduction in our available net operating loss carryforwards.
All the tax liabilities that are associated with our businesses, including liabilities that arose prior to the
Separation, have become our tax liabilities. Although we have agreed to share certain of these tax liabilities with
Tyco and Pentair pursuant to the 2012 Tax Sharing Agreement, we remain primarily liable for all of these
liabilities. If Tyco and Pentair default on their obligations to us under the 2012 Tax Sharing Agreement, we
would be liable for the entire amount of these liabilities. In addition, if another party to the 2012 Tax Sharing
Agreement that is responsible for all or a portion of an income tax liability were to default in its payment of such
liability to a taxing authority, we could be legally liable under applicable tax law for such liabilities and required
to make additional tax payments. Accordingly, under certain circumstances, we may be obligated to pay amounts
in excess of our agreed-upon share of our, Tyco’s and Pentair’s tax liabilities.
We recognize potential liabilities and record tax liabilities for anticipated tax audit issues in the United
States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional income
taxes will be due. These tax liabilities are reflected net of related tax loss carryforwards. We adjust these
liabilities in light of changing facts and circumstances; however, due to the complexity of some of these
uncertainties, the ultimate resolution may result in a payment that is materially different from our current
estimate of tax liabilities. Under the 2012 Tax Sharing Agreement, Tyco has the right to administer, control and
settle all U.S. income tax audits for periods prior to and including September 28, 2012. The timing, nature and
amount of any settlement agreed to by Tyco may not be in our best interests. All other tax audits will be
administered, controlled and settled by the party that would be responsible for paying the tax.
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FORM 10-K
We are responsible for all of our own taxes that are not shared pursuant to the 2012 Tax Sharing
Agreement’s sharing formulae, and Tyco and Pentair are responsible for their tax liabilities that are not subject to
the 2012 Tax Sharing Agreement’s sharing formulae. We also have sole responsibility for any income tax
liability arising as a result of our acquisition of Broadview Security in May 2010, including any liability of
Broadview Security under the tax sharing agreement between Broadview Security and The Brink’s Company
dated October 31, 2008 (collectively, the “Broadview Tax Liabilities”). Costs and expenses associated with the
management of Shared Tax Liabilities and Broadview Tax Liabilities are generally shared 20% by Pentair,
27.5% by ADT, and 52.5% by Tyco.
To the extent we are responsible for any liability under the 2012 Tax Sharing Agreement and if our estimate
of tax liabilities proves to be less than the amount for which we are ultimately liable, we would incur additional
income tax expense, which could have a material adverse impact on our financial condition, results of operations,
cash flows or our effective tax rate in future reporting periods.
If the distribution of ADT or Pentair common shares by Tyco to its shareholders or certain internal
transactions undertaken in anticipation of such distributions are determined to be taxable for U.S.
federal income tax purposes, we, our stockholders that are subject to U.S. federal income tax and/or Tyco
could incur significant U.S. federal income tax liabilities.
FORM 10-K
Tyco has received a private letter ruling from the IRS regarding the U.S. federal income tax consequences of
the Separation and the distribution of Pentair common shares by Tyco to its shareholders (the “Pentair
Distribution” and, together with the Separation, the “Distributions”) to the effect that, for U.S. federal income tax
purposes, the Separation will qualify as tax-free under Section 355 of the Code and the Pentair Distribution will
qualify as tax-free under Sections 355 and 361 of the Code, except for cash received in lieu of a fractional share
of our common stock and the Pentair common shares. The private letter ruling also provides that certain internal
transactions undertaken in anticipation of the Distributions will qualify for favorable treatment under the Code.
In addition to obtaining the private letter ruling, Tyco obtained an opinion from the law firm of McDermott
Will & Emery LLP confirming the tax-free status of the Distributions for U.S. federal income tax purposes. The
private letter ruling and the opinion rely on certain facts and assumptions and certain representations and
undertakings from us, Pentair and Tyco regarding the past and future conduct of our respective businesses and
other matters. Notwithstanding the private letter ruling and the opinion, the IRS could determine on audit that the
Separation, the Pentair Distribution or the internal transactions should be treated as taxable transactions if it
determines that any of these facts, assumptions, representations or undertakings is not correct or has been
violated, or that the Separation, the Pentair Distribution or the internal transactions should be taxable for other
reasons, including as a result of significant changes in stock or asset ownership after the Distributions. An
opinion of counsel represents counsel’s best legal judgment, is not binding on the IRS or the courts, and the IRS
or the courts may not agree with the opinion. In addition, the opinion was based on current law, and cannot be
relied upon if current law changes with retroactive effect. If the Separation ultimately is determined to be taxable,
the Separation could be treated as a taxable dividend or capital gain to our stockholders as of the date of the
Separation for U.S. federal income tax purposes, and those stockholders could incur significant U.S. federal
income tax liabilities. In addition, Tyco would recognize gain in an amount equal to the excess of the fair market
value of shares of our common stock and the Pentair common shares distributed to Tyco shareholders on the
distribution date over Tyco’s tax basis in such shares, but such gain, if recognized, generally would not be subject
to U.S. federal income tax. However, we or Tyco could incur significant U.S. federal income tax liabilities if it
ultimately is determined that certain internal transactions undertaken in anticipation of the Distributions are
taxable.
In addition, under the terms of the 2012 Tax Sharing Agreement, in the event the Separation, the Pentair
Distribution or the internal transactions were determined to be taxable as a result of actions taken after the
Distributions by us, Pentair or Tyco, the party responsible for such failure would be responsible for all taxes
imposed on us, Pentair or Tyco as a result thereof. Taxes resulting from the determination that the Separation, the
Pentair Distribution, or any internal transaction that was intended to be tax-free is taxable are referred to herein
as “Distribution Taxes.” If such failure is not the result of actions taken after the Distributions by us, Pentair or
Tyco, then we, Pentair and Tyco generally would be responsible for 27.5%, 20% and 52.5%, respectively, of any
taxes imposed on us, Pentair or Tyco as a result of such determination. Such tax amounts could be significant. In
the event that any party to the 2012 Tax Sharing Agreement defaults in its obligation to pay Distribution Taxes to
another party that arise as a result of no party’s fault, each non-defaulting party would be responsible for an equal
amount of the defaulting party’s obligation to make a payment to another party in respect of such other party’s
taxes. To the extent we are responsible for any liability under the 2012 Tax Sharing Agreement, there could be a
material adverse impact on our financial condition, results of operations, cash flows or our effective tax rate in
future reporting periods.
30
If the Separation is determined to be taxable for Swiss withholding tax purposes, we or Tyco could incur
significant Swiss withholding tax liabilities.
Generally, Swiss withholding tax of 35% is due on dividends and similar distributions to our and Tyco’s
shareholders, regardless of the place of residency of the shareholder. As of January 1, 2011, distributions to
shareholders out of qualifying contributed surplus (Kapitaleinlage) accumulated on or after January 1, 1997 are
exempt from Swiss withholding tax, if certain conditions are met (Kapitaleinlageprinzip). Tyco obtained a tax
ruling from the Swiss Federal Tax Administration confirming that the Separation qualifies as payment out of
such qualifying contributed surplus and, therefore, no amount was withheld by Tyco when making the
Separation.
This tax ruling relies on certain facts and assumptions and certain representations and undertakings from
Tyco regarding the past conduct of its businesses and other matters. Notwithstanding this tax ruling, the Swiss
Federal Tax Administration could determine on audit that the Separation should be treated as a taxable
transaction for withholding tax purposes if it determines that any of these facts, assumptions, representations or
undertakings is not correct or has been violated. If the Separation ultimately is determined to be taxable for
withholding tax purposes, we and Tyco could incur material Swiss withholding tax liabilities that could
significantly detract from or eliminate the benefits of the Separation. In addition, we could become liable to
indemnify Tyco for part of any Swiss withholding tax liabilities to the extent provided under the 2012 Tax
Sharing Agreement.
Our combined financial information for periods prior to September 28, 2012, is not necessarily
representative of the results we could achieve as an independent, publicly-traded company and may not
be a reliable indicator of our future results.
•
Prior to the Separation, our business was operated by Tyco as part of its broader corporate
organization, rather than as an independent, publicly-traded company. In addition, prior to the
Separation, Tyco, or one of its affiliates, performed significant corporate functions for us, including tax
and treasury administration and certain governance functions, including internal audit and external
reporting. Our combined financial statements for periods prior to September 28, 2012 reflect
allocations of corporate expenses from Tyco for these and similar functions.
•
For periods prior to September 28, 2012, our working capital requirements and capital for our general
corporate purposes, including acquisitions and capital expenditures, were satisfied as part of Tyco’s
company-wide cash management practices. As an independent, publicly-traded company, we no longer
obtain funds from Tyco to finance our working capital or other cash requirements. Rather, we obtain
financing from banks, through public offerings or private placements of debt or equity securities or
other arrangements.
•
Other significant changes may occur in our cost structure, management, financing and business
operations as a result of our operating as a company separate from Tyco.
For additional information about our past financial performance and the basis of presentation of our
financial statements, see “Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and our Consolidated and Combined Financial Statements.
The ownership by some of our executive officers and directors of common shares, options or other equity
awards of Tyco or Pentair may create, or may create the appearance of, conflicts of interest.
Because of their former positions with Tyco, some of our executive officers, including our chief executive
officer and some of our non-employee directors, own common shares of Tyco and Pentair, options to purchase
31
FORM 10-K
The combined financial information included in this report for periods prior to September 28, 2012 does not
necessarily reflect the results of operations, financial condition and cash flows that we could achieve as an
independent, publicly-traded company or those that we will achieve in the future. This is primarily because:
common shares of Tyco and Pentair or other equity awards in Tyco and Pentair. The individual holdings of
common shares, options to purchase common shares or other equity awards of Tyco and Pentair may be
significant for some of these persons compared to their total assets. These equity interests may create, or appear
to create, conflicts of interest when these directors and officers are faced with decisions that could benefit or
affect the equity holders of Tyco or Pentair in ways that do not benefit or affect us in the same manner.
Item 1B. Unresolved Staff Comments.
None.
Item 2.
Properties.
We currently operate through a network of approximately 200 sales and service offices, ten monitoring
facilities, four customer and field support locations, two national sales call centers and one regional distribution
center, located throughout the United States, Puerto Rico and Canada, the majority of which are leased. Our
corporate headquarters is located in Boca Raton, Florida and we lease this property under a long-term operating
lease with a third party. We believe our properties are adequate and suitable for our business as presently
conducted and are adequately maintained.
Item 3.
Legal Proceedings.
On October 25, 2013, we were notified by subpoena that the Office of the Attorney General of California, in
conjunction with the Alameda County District Attorney, is investigating whether certain of our waste disposal
policies, procedures and practices are in violation of the California Business and Professions Code and the
California Health and Safety Code. We are cooperating fully with the respective authorities. We are currently
unable to predict the outcome of this investigation or reasonably estimate a range of possible loss.
FORM 10-K
On April 28, 2014, we and certain of our current and former officers and directors were named as
defendants in a lawsuit filed in the United States District Court for the Southern District of Florida. The plaintiff
alleges violations of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and seeks monetary damages,
including interest, and class action status on behalf of all plaintiffs who purchased our common stock during the
period between November 27, 2012 and January 29, 2014, inclusive. The claims focus primarily on our
statements concerning our financial condition and future business prospects for fiscal 2013 and the first quarter
of fiscal 2014, our stock repurchase program in 2012 and 2013 and the buyback of stock from Corvex
Management LP (“Corvex”) in November 2013. On June 27, 2014, another plaintiff filed a similar action in the
same court. On July 14, 2014, the Court entered an order consolidating the two actions under the caption
Henningsen v. The ADT Corporation, Case No. 14-80566-CIV-DIMITROULEAS, and appointing IBEW Local
595 Pension and Money Purchase Pension Plans, Macomb County Employees’ Retirement System and KBC
Asset Management NV as Lead Plaintiffs in the consolidated action. In addition to ADT, the defendants named
in the action are Naren Gursahaney, Kathryn A. Mikells, Michael S. Geltzeiler, Keith A. Meister, and Corvex.
We intend to vigorously defend against the allegations in this action and are currently unable to predict the
outcome or if legal damages will be awarded.
In May and June 2014, four derivative actions were filed against a number of our past and present officers
and directors. Like the securities actions described above, the derivative actions focus primarily on our stock
repurchase program in 2012 and 2013, the buyback of stock from Corvex in November 2013 and our statements
concerning our financial condition and future business prospects for fiscal 2013 and the first quarter of fiscal
2014. Three of the derivative actions were filed in the United States District Court for the Southern District of
Florida. On July 16, 2014, the Court consolidated those three actions under the caption In re The ADT
Corporation Derivative Litigation, Lead Case No. 14-80570-CIV-DIMITROULEAS/SNOW. The fourth
derivative action, entitled Seidl v. Colligan, Case No. 2014CA007529, was filed in the Circuit Court of the 15th
32
Judicial Circuit, Palm Beach County, Florida. On July 14, 2014, the parties agreed to stay that action pending
resolution of motions to dismiss that are expected to be filed in the securities actions described above. The Court
approved the stay on July 23, 2014. A fifth derivative action asserting similar claims was filed in the Delaware
Court of Chancery on August 1, 2014. Defendants have moved to dismiss that action, which is entitled Ryan v.
Gursahaney, C.A. No. 9992-VCP.
In March 2014, we also received a demand from a shareholder to initiate litigation against our officers and
directors in connection with our stock repurchase program in 2012 and 2013 and the buyback of stock from
Corvex in November 2013. Our Board of Directors investigated the matters with the assistance of an outside law
firm and, on July 18, 2014, decided to reject the demand. In September 2014, we received a demand from
another shareholder to initiate litigation with regard to the same matters raised in the March 2014 demand. On
September 19, 2014, our Board of Directors decided to reject the demand.
See Note 7 to the Consolidated and Combined Financial Statements for a description of income tax matters.
In addition, we are subject to various claims and lawsuits in the ordinary course of our business, including
from time to time contractual disputes, employment matters, product and general liability claims, claims that we
have infringed the intellectual property rights of others, claims related to alleged security system failures and
consumer and employment class actions. We have recorded accruals for losses that we believe are probable to
occur and are reasonably estimable. See Note 7 to the Consolidated and Combined Financial Statements for
further information. While the ultimate outcome of these matters cannot be predicted with certainty, we believe
that the resolution of any such proceedings will not have a material adverse effect on our financial condition,
results of operations or cash flows.
Item 4.
Mine Safety Disclosures.
FORM 10-K
Not Applicable.
33
PART II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
As of the close of business on November 5, 2014, there were 18,426 holders of record of our common stock.
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the symbol “ADT.” The
following table sets forth the high and low sales prices of shares of ADT common stock as reported by the NYSE
and the dividends declared on ADT common stock for the quarterly periods presented below.
Quarter
Year Ended September 26, 2014
Dividends
Dividends
Declared Per
Paid Per
Market Price Range
Common
Common
High
Low
Share
Share
First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$44.01
40.58
34.81
37.36
Quarter
Year Ended September 27, 2013
Dividends
Dividends
Declared Per
Paid Per
Market Price Range
Common
Common
High
Low
Share
Share
First . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$47.00
50.37
48.86
44.56
$38.80
28.08
29.08
33.00
$35.38
44.60
38.09
38.91
—
0.400
—
0.400
0.125
0.250
—
0.250
0.125
0.200
0.200
0.200
0.125
0.125
0.125
0.125
The timing, declaration and payment of future dividends to holders of our common stock fall within the
discretion of our board of directors and will depend on our financial condition and results of operations, the
capital requirements of our business, covenants associated with debt obligations, legal requirements, regulatory
constraints, industry practice and other factors deemed relevant by our board of directors.
FORM 10-K
34
Performance Graph
The following graph provides a comparison of the cumulative total shareholder return on the Company’s
common stock to the returns of Standard & Poor’s (S&P) 500 and the S&P 500 Industrial Index from October 1,
2012 (the first day of fiscal year 2013) through September 26, 2014. The graph is not, and is not intended to be,
indicative of future performance of our common stock. This graph is not being filed with the SEC as part of this
Annual Report on Form 10-K and is not to be incorporated by reference into any filing of the Company under the
Securities Act of 1933 or the Securities Exchange Act of 1934 (whether made before or after the date of this
Annual Report on Form 10-K, irrespective of any general incorporation language contained in such filing).
$160
$140
$120
$100
ADT
$80
S&P500
S&P 500 Industrials
$60
$40
$20
Jan-13
Apr-13
Jul-13
Oct-13
Jan-14
Apr-14
Sep - 14
Jul-14
The above graph assumes the following:
(1) $100 invested at the close of business on October 1, 2012, in ADT common stock, S&P 500 Index, and
the S&P 500 Industrial Index.
(2) The cumulative total return assumes reinvestment of dividends.
Issuer Purchases of Equity Securities
Period
Total Number of
Shares
Purchased
Average Price
Paid Per Share
Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
Maximum
Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Plans or
Programs
06/28/14 – 07/25/14 . . . . . . . . . . . .
07/26/14 – 08/29/14 . . . . . . . . . . . .
08/30/14 – 09/26/14 . . . . . . . . . . . .
—
—
—
$—
$—
$—
—
—
—
$380,805,210
$380,805,210
$380,805,210
Total . . . . . . . . . . . . . . . . . . . . . . . .
—
$—
—
$380,805,210
35
FORM 10-K
$0
Oct-12
On November 18, 2013, our board of directors authorized a $1 billion increase to the $2 billion, three-year
share repurchase program that was previously approved on November 26, 2012 and expires on November 26,
2015.
During the quarter, the Company did not repurchase any shares as a part of the share repurchase program
noted above.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table provides information as of September 26, 2014 with respect to shares of ADT common
stock issuable under its equity compensation plans:
Equity Compensation Plan
Plan category
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
(a)
Weighted-average
exercise price of
outstanding
options, warrants
and rights
(b)
Number of
securities remaining
available for future
issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
5,933,656
$25.81
6,581,067
Equity compensation plans
approved by security
holders:
2012 Stock and
Incentive Plan(1) . . . .
Equity compensation plans
not approved by security
holders . . . . . . . . . . . . . . .
Total . . . . . . . . . . .
(1)
—
—
5,933,656
6,581,067
FORM 10-K
The ADT Corporation 2012 Stock and Incentive Plan (the “Plan”) provides for the award of stock options, restricted
stock units, performance share units and other equity and equity-based awards to officers and non-officer employees as
well as members of our board of directors. Amounts shown in column (a) include 4,820,964 shares that may be issued
upon the exercise of stock options, 37,617 deferred stock units (“DSU”), 733,573 shares that may be issued upon the
vesting of restricted stock units and 341,502 shares that may be issued upon vesting of performance share units (“PSU”).
The weighted-average exercise price in column (b) is inclusive of the outstanding DSUs, PSUs and restricted stock units,
all of which can be exercised for no consideration. Excluding the DSUs, PSUs and restricted stock units, the weightedaverage exercise price is equal to $31.77.
36
Item 6.
Selected Financial Data.
The following table sets forth selected consolidated and combined financial data for fiscal years 2014, 2013,
2012, 2011 and 2010. The statement of operations data set forth below for fiscal years 2014, 2013 and 2012 and
the balance sheet data as of September 26, 2014 and September 27, 2013 are derived from our audited financial
statements included elsewhere in this Annual Report on Form 10-K. The statement of operations data for fiscal
years 2011 and 2010 and the balance sheet data as of September 28, 2012, September 30, 2011 and
September 24, 2010 are derived from our audited financial statements which are not included in this Annual
Report on Form 10-K.
ADT has a 52- or 53-week fiscal year that ends on the last Friday in September. Fiscal year 2011 was a 53week year. Fiscal years 2014, 2013, 2012 and 2010 were 52-week years.
(in millions, except per share data)
Consolidated and Combined Statements of Operations Data:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income(1)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share(3):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average number of shares(3):
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per common share . . . . . . . . . . . . . . . . .
Consolidated and Combined Balance Sheet Data (End of Fiscal
Year):
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity(5) . . . . . . . . . . . . . . . . . . . . . .
(1)
(2)
(3)
(4)
(5)
2014
2013
2012
2011
2010
$ 3,408
659
304
$3,309
735
421
$3,228
722
394
$3,110
693
376
$2,591
504
239
$
$
1.67
1.66
$ 1.90
$ 1.88
$ 1.70
$ 1.67
$ 1.62
$ 1.59
$ 1.03
$ 1.01
$
182
183
0.80
222
224
$0.625
232
236
$ —
232
236
$ —
232
236
$ —
$10,549
5,096
7,421
3,128
$9,913
3,373
5,591
4,322
$9,260
2,525
4,103
5,157
$8,739
1,506
3,508
5,231
$8,692
1,326
3,526
5,166
Operating income and net income include $52 million, $67 million and $69 million of corporate expense
allocated from Tyco for fiscal years 2012, 2011 and 2010, respectively.
Net income includes allocated interest expense related to Tyco’s external debt of $64 million, $87 million
and $102 million for fiscal years 2012, 2011 and 2010, respectively.
The Separation was completed on September 28, 2012, and we issued 231 million shares of common stock.
This initial share amount has been used to calculate earnings per share for fiscal years 2012, 2011 and 2010.
See Note 11 to the Consolidated and Combined Financial Statements for additional information on earnings
per share.
Long-term debt and total liabilities include $1,482 million and $1,301 million of allocated debt from Tyco
as of September 30, 2011 and September 24, 2010, respectively. See Note 5 for discussion of fiscal 2014,
2013 and 2012 debt issuances.
In fiscal year 2014 and 2013, we repurchased common shares under our share repurchase program for a total
of $1.4 billion and $1.3 billion, respectively.
37
FORM 10-K
This selected financial data should be read in conjunction with Item 8 “Consolidated and Combined
Financial Statements and related Notes” and Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of this Annual Report on Form 10-K.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
The following discussion should be read in conjunction with our Consolidated and Combined Financial
Statements and the notes thereto. This discussion and analysis contains forward-looking statements that involve
risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forwardlooking statements as a result of many factors, including but not limited to those provided in Item 1A. Risk
Factors and under the heading “Cautionary Statement Regarding Forward-Looking Statements” below.
The Consolidated and Combined Financial Statements have been prepared in accordance with generally
accepted accounting principles in the United States of America (“GAAP”). Unless otherwise indicated,
references to 2014, 2013 and 2012 are to our fiscal years ended September 26, 2014, September 27, 2013 and
September 28, 2012, respectively.
As part of a plan to separate into three independent companies, on or prior to September 28, 2012, Tyco
transferred the equity interests of the entities that held all of the assets and liabilities of its residential and small
business security business in the United States and Canada to ADT. Effective on September 28, 2012 (the
“Distribution Date”), Tyco distributed all of its shares of ADT to Tyco’s stockholders of record as of the close of
business on September 17, 2012 (the “Separation”). On the Distribution Date, each of the stockholders of Tyco
received one share of ADT common stock for every two shares of common stock of Tyco held on September 17,
2012. Our Consolidated Balance Sheets as of September 26, 2014 and September 27, 2013 reflect the
consolidated financial position of ADT and its subsidiaries as an independent publicly-traded company.
Additionally, our Consolidated Statements of Operations, Comprehensive Income and Cash Flows for fiscal
years 2014 and 2013 reflect ADT’s operations and cash flows as a standalone company. Prior to September 28,
2012, our financial position, results of operations and cash flows consisted of Tyco’s residential and small
business security business in the United States, Canada and certain U.S. territories and were derived from Tyco’s
historical accounting records and presented on a carve-out basis. As such, our Statements of Operations,
Comprehensive Income and Cash Flows for fiscal year 2012 consist of the combined results of operations and
cash flows of the ADT North American Residential Security Business of Tyco.
We conduct business through our operating entities and report financial and operating information in one
reportable operating segment. We have a 52- or 53-week fiscal year that ends on the last Friday in September.
Fiscal years 2014, 2013 and 2012 are 52-week years. Our next 53-week year will occur in fiscal year 2016.
FORM 10-K
Business Overview
ADT is a leading provider of monitored security, interactive home and business automation and related
monitoring services. We currently serve approximately 6.7 million customers, making us the largest company of
our kind in both the United States and Canada. With a 140-year history, the ADT® brand is one of the most
respected, trusted and well-known brands in the monitored security industry today. Our broad and pioneering set
of products and services, including interactive home and business solutions and our home health services, meet a
range of customer needs for today’s active and increasingly mobile lifestyles. Our partner network is the broadest
in the industry, and includes independent authorized dealers, affinity organizations like USAA and AARP and
third-party referral companies. ADT delivers an integrated customer experience by maintaining the industry’s
largest sales, installation and service field force as well as a robust monitoring network, all backed by the support
of approximately 17,500 employees and about 200 sales and service offices.
For fiscal year 2014, our revenue was $3.4 billion and our operating income was $659 million. The majority
of the monitoring services and a large portion of the maintenance services we provide to our customers are
governed by multi-year contracts with automatic renewal provisions. This provides us with significant recurring
revenue, which for fiscal year 2014 was approximately 92% of our revenue. We believe that the recurring nature
of the majority of our revenue enables us to continuously invest in growing our business. This includes
38
investments in technologies to further enhance the attractiveness of our solutions to current and potential
customers, to continue development and training to enable our direct sales, installation, customer service and
field service personnel to more effectively deliver exceptional service to our customers, to expand our dealer and
partner network and to make continued enhancements to operations efficiency.
Factors Affecting Operating Results
Our subscriber-based business requires significant upfront investment to generate new customers, which in
turn provide predictable recurring revenue generated from monthly monitoring fees. In any period, our business
results will be impacted by a number of factors including: customer additions, costs associated with adding new
customers, average revenue per customer, costs related to providing services to customers and customer tenure.
We manage our business to optimize these factors. We focus on investing in each of our customer acquisition
channels in order to grow our account base in a cost effective manner and generate positive future cash flows and
attractive margins. We also focus on maintaining consistently high levels of customer satisfaction to increase
customer tenure and improve profitability.
Our ability to add new accounts depends on the overall demand for our solutions, which is driven by a
number of external factors. Growth in our customer base can be influenced by the overall state of the housing
market in the geographies we serve. A significant factor is the rate of household moves, whether involving newly
constructed housing or existing homes. Household moves may drive a majority of new customer volume in any
given period, but as household moves increase, our attrition rate also tends to increase. The overall performance
of the economies in geographies in which we operate may also affect our ability to attract new customers and
grow our business. Another external factor that affects customer additions is the perceived level of crime in the
communities we serve.
The monthly fees that we generate from any individual customer depend primarily on the customer’s level
of service. We offer a wide range of services at various price points, from basic burglar alarm monitoring to our
full suite of ADT Pulse® interactive services. Our ability to increase monthly average revenue per customer
depends on a number of factors, including our ability to effectively introduce and market additional features and
services that increase the value of our offerings to customers, which we believe drives customers to purchase
higher levels of service and supports our ability to make periodic adjustments to pricing.
We focus on keeping customer service and monitoring costs as low as possible without detracting from the
high-quality service levels for which we are known and that our customers have come to expect. We believe that
our ability to retain customers for longer periods of time is driven in part by our disciplined customer selection
practices and our delivery of a superior customer experience.
Key Performance Measures
We operate our business with the goal of retaining customers for long periods of time in order to recoup our
initial investment in new customers, achieving cash flow break-even in approximately three years. We generate
substantial recurring net operating cash flow from our customer base. In evaluating our financial results, we
review the following key performance indicators:
Customer Growth. Growth of our customer base is crucial to drive our recurring customer revenue as well as to
leverage costs of operations. To grow our customer base and improve awareness of our brands, we market our
monitored security and home/business automation systems and services through national television
39
FORM 10-K
Our marketing efforts are designed to direct potential customers into one of our customer acquisition
channels, where we work with the potential customers to identify the most appropriate set of solutions to meet
their needs. We closely monitor and manage our costs associated with on-boarding new customers. We utilize a
structured customer acquisition process that is designed to produce customers with attractive characteristics,
including strong credit scores and high usage of automated payment methods, and interactive service contracts,
which we believe results in longer average customer tenure.
advertisements, Internet advertising and through a direct sales force and an authorized dealer network. The key
customer metrics that we use to track customer growth are gross customer additions and ending customers. Gross
customer additions are new monitored customers installed or acquired during the period.
Customer Unit Attrition Rate. Our economic model is highly dependent on customer retention. Success in
retaining customers is driven in part by our discipline in accepting new customers with favorable characteristics
and by providing high quality equipment, installation, monitoring and customer service. Beginning with the
second quarter of fiscal 2014, we began to provide customer unit attrition rate as a key performance measure as
we believe that this metric supplements customer revenue attrition by providing additional information on the
economic impact of the security investments we make in residential and small business sites and is also used
internally, along with customer revenue attrition, to manage attrition.
Customer unit attrition measures residential and small business customer sites canceled, excluding health
services and contracts monitored but not owned, net of dealer charge-backs and re-sales. Customer sites are
considered canceled when all services are terminated. Dealer charge-backs represent customer cancellations
charged back to the dealers because the customer canceled service during the charge-back period, generally 13
months. Re-sales are inactive customer sites that are returned to active service during the period. The customer
unit attrition rate is a 52-week trailing ratio, the numerator of which is the trailing twelve month customer sites
canceled during the period due to attrition, net of charge-backs and re-sales, and the denominator of which is the
average of the customer base at the beginning of each month during the trailing twelve month period.
Customer Revenue Attrition Rate. We also evaluate our customer retention based upon the recurring revenue lost
resulting from customer attrition, net of dealer charge-backs and re-sales, which we refer to as customer revenue
attrition. The customer revenue attrition rate is a 52-week trailing ratio, the numerator of which is the annualized
recurring revenue lost during the period due to attrition, net of dealer charge-backs and re-sales, and the
denominator of which is total annualized recurring revenue based on an average of recurring revenue under
contract at the beginning of each month during the period.
Recurring Customer Revenue. Recurring customer revenue is generated by contractual monthly recurring fees for
monitoring and other recurring services provided to our customers. Our other revenue consists of revenue
associated with the sale of equipment, amortization of deferred revenue related to upfront fees, non-routine repair
and maintenance services and customer termination charges.
FORM 10-K
Average Revenue per Customer. Average revenue per customer measures the average amount of recurring
revenue per customer per month and is calculated based on the recurring revenue under contract at the end of the
period, divided by the total number of customers under contract at the end of the period.
Cost to Serve Expenses. Cost to serve expenses represent the cost of providing services to our customers reflected
in our Consolidated and Combined Statements of Operations. These expenses include costs associated with
service calls for customers who have maintenance contracts, costs of monitoring, call center customer service
and guard response, partnership commissions and continuing equity programs, bad debt expense and general and
administrative expenses. Recurring customer revenue less cost to serve expenses represents our recurring revenue
margin.
Gross Subscriber Acquisition Cost Expenses. Gross subscriber acquisition cost expenses represent certain costs
related to the acquisition of new customers reflected in our Consolidated and Combined Statements of
Operations such as advertising, marketing, and both direct and indirect selling costs for all new customer
accounts as well as sales commissions and installation equipment and labor costs associated with transactions
where title to the security system is contractually transferred to the customer.
Earnings before interest, taxes, depreciation and amortization (“EBITDA”). EBITDA is a non-GAAP measure
reflecting net income adjusted for interest, taxes and certain non-cash items which include depreciation of
subscriber system assets and other fixed assets, amortization of deferred costs and deferred revenue associated
with customer acquisitions, and amortization of dealer and other intangible assets. We believe EBITDA is useful
40
to provide investors with information about operating profits, adjusted for significant non-cash items, generated
from the existing customer base. A reconciliation of EBITDA to net income (the most comparable GAAP
measure) is provided under “Results of Operations—Non-GAAP Measures.”
Free Cash Flow (“FCF”). FCF is a non-GAAP measure that our management employs to measure cash that is
available to repay debt, make other investments and return capital to stockholders through dividends and share
repurchases. The difference between net cash provided by operating activities (the most comparable GAAP
measure) and FCF is the deduction of cash outlays for capital expenditures, subscriber system assets, dealer
generated customer accounts and bulk account purchases. A reconciliation of FCF to net cash provided by
operating activities is provided under “Results of Operations—Non-GAAP Measures.”
As reported in the first quarter of fiscal year 2014, we determined that a small number of customer upgrades
in Canada were incorrectly reflected as customer additions in prior periods. As a result, historical ending number
of customers, gross customer additions and average revenue per customer have been adjusted. These adjustments
had no impact on our financial statements for any prior periods. The following table reflects the revisions for the
fiscal years ended September 27, 2013 and September 28, 2012:
Ending number of
customers
(thousands)(1)
2013
2012
Previously reported metric . . . . . . . . . . . . . . . .
Effect of Canadian revision . . . . . . . . . . . . . . . .
Revised metric . . . . . . . . . . . . . . . . . . . . . . . . . .
(2)
6,422
(26)
6,396
1,107
(10)
1,097
Average revenue per
customer (dollars)(1)
2013
2012
1,161
(9)
1,152
$40.31
$ 0.16
$40.47
$38.87
$ 0.16
$39.03
The ending number of customers and average revenue per customer are as of the respective years ended.
Gross customer additions are for the respective years ended.
Historically, we have included contracts monitored but not owned in our ending number of customers. In the
fourth quarter of fiscal year 2014, we acquired Reliance Protectron Inc. (“Protectron”), whose business practice
is to exclude contracts monitored but not owned from its customer count. In order to harmonize our business
practices, we elected to exclude contracts monitored but not owned from our ending number of customers
starting in the fourth quarter of fiscal year 2014. Therefore, for comparative purposes, we are providing the
impact of contracts monitored but not owned on the relevant metrics for historical quarters of fiscal year 2014
and for fiscal years ended September 27, 2013 and September 28, 2012:
June 27,
2014
Previously reported/revised metric(2) . . . . . . . . . .
Effect of contracts monitored but not owned . . . .
Metric excluding contracts monitored but not
owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6,377
(64)
6,416
(64)
6,448
(66)
6,494
(64)
6,396
(81)
6,313
6,352
6,382
6,430
6,315
June 27,
2014
Previously reported/revised metric(2) . . . . . . . . . .
Effect of contracts monitored but not owned . . . .
Metric excluding contracts monitored but not
owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
(2)
Ending number of customers (thousands)(1)
March 28, December 27, September 27, September 28,
2014
2013
2013
2012
Average revenue per customer (dollars)(1)
March 28, December 27, September 27, September 28,
2014
2013
2013
2012
$41.85
0.35
$41.05
0.35
$40.63
0.35
$40.47
0.33
$39.03
0.41
$42.20
$41.40
$40.98
$40.80
$39.44
The ending number of customers and average revenue per customer are as of the respective quarters ended.
Includes Canadian revision described above for fiscal years ended 2013 and 2012.
41
FORM 10-K
(1)
6,521
(27)
6,494
Gross customer additions
(thousands)(2)
2013
2012
Results of Operations
(in millions, except as otherwise indicated)
2014
2013
2012
Recurring customer revenue . . . . . . . . . . . . . . . . . . . . . . . .
Other revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,152
256
$ 3,041
268
$ 2,903
325
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,408
3,309
3,228
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (expense) income . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Summary Cash Flow Data:
Net cash provided by operating activities . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . .
Key Performance Indicators:
Ending number of customers (thousands)(1)(2) . . . . . . .
Gross customer additions (thousands)(1)(2) . . . . . . . . . .
Customer revenue attrition rate (percent) . . . . . . . . . .
Customer unit attrition rate (percent) . . . . . . . . . . . . . .
Average revenue per customer (dollars)(2) . . . . . . . . . .
Cost to serve expenses . . . . . . . . . . . . . . . . . . . . . . . . .
Gross subscriber acquisition cost expenses . . . . . . . . .
EBITDA(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FCF(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1)
FORM 10-K
(2)
(3)
659
(192)
(35)
(128)
$
304
$ 1,519
(1,792)
202
$
$
$
$
$
6,663
995
13.5%
13.2%
41.54
1,102
442
1,644
251
735
(117)
24
(221)
$
421
$ 1,666
(1,394)
(366)
$
$
$
$
$
6,430
1,097
13.9%
13.3%
40.80
1,001
448
1,689
460
722
(92)
—
(236)
$
394
$ 1,493
(1,096)
(231)
$
$
$
$
$
6,315
1,152
13.5%
12.9%
39.44
961
523
1,584
406
Gross customer additions for fiscal year 2013 exclude approximately 117,000 customer accounts acquired in
connection with the acquisition of Devcon Security Holdings, Inc. in August 2013. These accounts are
included in the 6.4 million ending number of customers as of September 27, 2013. Gross customer additions
for fiscal year 2014 exclude approximately 373,000 customer accounts acquired in connection with the
acquisition of Protectron in July 2014. These accounts are included in the 6.7 million ending number of
customers as of September 26, 2014.
The ending number of customers, gross customer additions and average revenue per customer for fiscal
years 2012 and 2013 have been revised. See discussion under “Key Performance Measures” above for
further information.
EBITDA and FCF are non-GAAP measures. Refer to the “Non-GAAP Measures” section for the definitions
thereof and a reconciliation to the most comparable GAAP measures.
42
As mentioned above, we manage our business to optimize a number of factors including: customer
additions, costs associated with adding new customers, average revenue per customer, costs related to providing
services to customers and customer tenure. In order to understand how these key factors impact our Consolidated
and Combined Statements of Operations, we consider the following components of our expenses: cost to serve
expenses, gross subscriber acquisition cost expenses and depreciation and amortization. The following tables
reflect the location of these costs in our Consolidated and Combined Statements of Operations for fiscal years
2014, 2013 and 2012:
2014
(in millions)
Cost of
revenue
Selling, general
and
administrative
expenses
Cost to serve expenses . . . . . . . . . . . . . . . . . . . .
Gross subscriber acquisition cost expenses . . . .
Depreciation and amortization . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 411
61
968
17
$ 647
381
203
—
$ 44
—
—
—
$1,102
442
1,171
17
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,457
$1,231
$ 44
$2,732
(in millions)
Cost of
revenue
Selling, general
and
administrative
expenses
Radio
conversion costs
Total
Cost to serve expenses . . . . . . . . . . . . . . . . . . . .
Gross subscriber acquisition cost expenses . . . .
Depreciation and amortization . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 391
59
891
37
$ 610
389
174
—
$—
—
—
—
$1,001
448
1,065
37
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,378
$1,173
$—
$2,551
(in millions)
Cost of
revenue
Selling, general
and
administrative
expenses
Cost to serve expenses . . . . . . . . . . . . . . . . . . . .
Gross subscriber acquisition cost expenses . . . .
Depreciation and amortization . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 364
146
831
33
$ 597
377
151
—
$—
—
—
—
$ 961
523
982
33
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,374
$1,125
$—
$2,499
Radio
conversion costs
Total
2013
Radio
conversion costs
Total
Year Ended September 26, 2014 Compared with Year Ended September 27, 2013
Revenue
Revenue increased by $99 million, or 3.0%, to $3.4 billion for fiscal year 2014 as compared with fiscal year
2013, primarily as a result of growth in recurring customer revenue, which increased by $111 million, or 3.7%.
This increase was primarily the result of higher average revenue per customer and $28 million of recurring
revenue associated with Protectron.
Average revenue per customer increased by $0.74, or 1.8%, as of September 26, 2014 compared with
September 27, 2013 primarily due to price escalations on our existing customer base and the addition of new
43
FORM 10-K
2012
customers at higher rates largely driven by an increase in ADT Pulse® customers compared to total customer
additions, partially offset by lower average revenue per customer associated with customers acquired in the
acquisition of Protectron.
Gross customer additions were approximately 1.0 million during fiscal year 2014, reflecting direct and
dealer channel additions of 612,000 and 383,000, respectively. Additionally, we added approximately 373,000
customer accounts in conjunction with our acquisition of Protectron in July 2014 compared to approximately
117,000 customer accounts added in conjunction with our acquisition of Devcon Security Holdings, Inc.
(“Devcon Security”) in August 2013. Excluding these accounts, gross customer additions fell by 102,000, or
9.3%, during fiscal year 2014 as compared to fiscal year 2013, primarily due to lower dealer channel production,
29,000 fewer bulk account purchases and, to a lesser extent, lower levels of customer accounts generated through
our direct channel. The decline in our dealer channel production was primarily due to a lower number of dealers
for the majority of the year, in addition to dealers facing lead generation challenges as a result of the competitive
environment and tighter enforcement of telemarketing regulations. We continue to add new dealers and to work
closely with our existing dealers to help them strengthen their capabilities and better leverage ADT’s marketing
assets to grow their businesses, as evidenced by a 16% increase in dealer channel production from the quarter
ended June 27, 2014 compared to the quarter ended September 26, 2014, excluding bulk purchases. The decline
in customer accounts generated through our direct channel resulted from lead generation challenges partially due
to the impact of the competitive environment, the implementation of more stringent credit policies for new
subscribers and increased focus on ADT Pulse® upgrades for existing customers.
Our ending number of customers, net of attrition, increased by 233,000, or 3.6%, during fiscal year 2014
primarily due to the acquisition of Protectron during the fiscal fourth quarter. Our annualized customer unit
attrition and annualized customer revenue attrition as of September 26, 2014 were 13.2% and 13.5%,
respectively, compared with 13.3% and 13.9%, respectively, as of September 27, 2013. Attrition was impacted
favorably by several new programs implemented to address voluntary, non-pay and relocation disconnects, offset
by the impact of the competitive environment.
Operating Income
Operating income decreased by $76 million, or 10.3%, to $659 million for fiscal year 2014 as compared
with fiscal year 2013. Operating margin was 19.3% for fiscal year 2014 compared with 22.2% for fiscal year
2013.
FORM 10-K
Operating expenses for fiscal year 2014 totaled $2.7 billion, up 6.8% or $175 million as compared to fiscal
year 2013. Operating expenses included $17 million and $23 million of costs related to the Separation during
fiscal years 2014 and 2013, respectively. The increase in operating expenses is partially a result of $106 million
higher depreciation and amortization expense primarily related to increased depreciation of our subscriber system
assets, which included higher costs associated with ADT Pulse® additions and upgrades, and greater amortization
of dealer generated accounts and customer relationships. Additionally, there was a $101 million increase in cost
to serve expenses which was largely a result of $44 million of costs associated with our three-year conversion
program to replace 2G radios used in many of our security systems, an $18 million increase in restructuring and
other expenses primarily related to severance and a loss on the sublease portion of our office space, $15 million
of incremental costs associated with the operations of Protectron, and a $5 million increase in acquisition and
integration costs. After considering these items, cost to serve expenses increased by $19 million which was
primarily related to increased customer service and maintenance expenses from programs to improve customer
retention, incremental investments to strengthen our business platforms and capabilities to support our business
simplification, innovation and M&A opportunities and higher costs associated with being a stand-alone public
company.
As discussed above, we implemented a three-year conversion program for the replacement of 2G radios
used in many of our security systems which will continue to drive future incremental costs. We anticipate that we
will incur approximately $60 million to $70 million in fiscal year 2015 in conjunction with this program.
44
Interest Expense, net
Interest expense, net is comprised primarily of interest on our long-term debt. Net interest expense was $192
million for fiscal year 2014 compared with $117 million for fiscal year 2013. Interest expense for fiscal year
2014 reflects an increase in borrowings related to the issuances of $1 billion in notes during October 2013 and
$500 million in notes during March 2014.
Other (Expense) Income
Other expense was $35 million for fiscal year 2014 compared with other income of $24 million for fiscal
year 2013. Other expense for fiscal year 2014 was primarily the result of a $38 million reduction in amounts
owed to ADT by Tyco pursuant to the 2012 Tax Sharing Agreement largely due to the resolution of certain
unrecognized tax benefits. Other income for fiscal year 2013 was primarily the result of $23 million in nontaxable income recorded pursuant to the 2012 Tax Sharing Agreement for amounts owed by Tyco and Pentair in
connection with the exercise of ADT share based awards held by certain Tyco and Pentair employees. See Note 6
to the Consolidated and Combined Financial Statements for more information.
Income Tax Expense
Income tax expense was $128 million for fiscal year 2014 compared with $221 million for fiscal year 2013,
and the effective tax rate fell to 29.6% from 34.4%. The effective tax rate for fiscal year 2014 reflects the net
impact of a $42 million favorable adjustment resulting from the resolution of certain unrecognized tax benefits
partially offset by the unfavorable deferred tax impact of $17 million from IRS audit adjustments. The effective
tax rate for fiscal year 2014 also reflects the unfavorable impact resulting from $38 million in non-taxable other
expense discussed in “Other (Expense) Income” above.
The effective tax rate can vary from period to period due to permanent tax adjustments, discrete items such
as the settlement of income tax audits and changes in tax laws, as well as recurring factors such as changes in the
overall effective state tax rate. See Note 6 to the Consolidated and Combined Financial Statements for more
information on income taxes.
Revenue
Revenue increased by $81 million, or 2.5%, to $3.3 billion for fiscal year 2013 as compared with fiscal year
2012, primarily due to the growth in recurring customer revenue, which increased by $138 million, or 4.8%. This
increase was primarily the result of higher average revenue per customer as well as growth in customer accounts,
net of attrition. The growth in recurring customer revenue was partially offset by a decrease in other revenue,
which went down by $57 million, or 17.5%, to $268 million for fiscal year 2013 as compared with fiscal year
2012. The reduction in other revenue was due to the mix shift toward more ADT-owned systems rather than
outright system sales, resulting in higher deferred revenue and lower current period installation revenue.
Average revenue per customer increased by $1.36, or 3.4%, as of September 27, 2013 compared with
September 28, 2012 primarily due to price escalations on our existing customer base and the addition of new
customers at higher rates, including increased ADT Pulse® customers compared to total customer additions.
Gross customer additions were approximately 1.1 million during fiscal year 2013, reflecting customer
account growth of 644,000 in the direct channel and 453,000 in the dealer channel. Additionally, we acquired
approximately 117,000 customer accounts in conjunction with our acquisition of Devcon Security, which was
completed in August 2013. Excluding these accounts, gross customer additions fell by 55,000, or 4.8%, during
fiscal year 2013 as compared to fiscal year 2012, as increases in additions from our direct channel were not
sufficient to offset lower dealer channel production.
45
FORM 10-K
Year Ended September 27, 2013 Compared with Year Ended September 28, 2012
Our ending number of customers, net of attrition, grew by 115,000, or 1.8%, during fiscal year 2013. Our
annualized customer unit attrition and annualized customer revenue attrition as of September 27, 2013 were
13.3% and 13.9%, respectively, compared with 12.9% and 13.5%, respectively, as of September 28, 2012. The
increase in customer unit and revenue attrition from September 28, 2012 was due primarily to relocation
disconnects as a result of the continued recovery of the housing market. We continue to focus on high quality
service and our disciplined customer selection process in order to limit customer attrition.
Operating Income
Operating income increased by $13 million, or 1.8%, to $735 million for fiscal year 2013 as compared with
fiscal year 2012. Operating margin was 22.2% for fiscal year 2013 compared with 22.4% for fiscal year 2012.
Operating expenses for fiscal year 2013, which included $23 million of costs related to the Separation,
totaled $2.6 billion, up 2.7% or $68 million as compared to fiscal year 2012. The increase in operating expenses
includes $83 million in higher depreciation and amortization expense primarily related to our subscriber system
assets and dealer generated accounts. Cost to serve expenses totaled $1.0 billion for fiscal year 2013 as compared
to $961 million for fiscal year 2012. Cost to serve expenses for fiscal year 2012 include integration costs related
to the acquisition of Broadview Security of $14 million and restructuring related expenses of approximately $4
million. After considering these items, cost to serve expenses increased by $58 million which was primarily a
result of higher corporate costs and dis-synergies associated with the separation of our business from the
commercial security business of Tyco and increased customer service and maintenance expenses driven by
investments to improve customer retention. The increase was partially offset by a reduction in legal-related
charges as certain costs incurred in fiscal year 2012 did not recur in fiscal year 2013. The increases in
depreciation and amortization and cost to serve expenses were partially offset by a $75 million reduction in gross
subscriber acquisition cost expenses, which resulted from the deferral of a higher proportion of upfront
installation costs associated with the mix shift toward more ADT-owned systems.
Interest Expense, net
FORM 10-K
Interest expense, net was $117 million for fiscal year 2013 compared with $92 million for fiscal year 2012.
Interest expense for fiscal year 2013 is comprised primarily of interest on our long-term debt, which reflects an
increase in borrowings related to the issuance of $700 million in notes during January 2013. Interest expense for
fiscal year 2012 includes $64 million of allocated interest expense related to Tyco’s external debt, approximately
$22 million of interest on our unsecured notes and $3 million of financing costs incurred in connection with a
bridge facility.
Other (Expense) Income
During fiscal year 2013, we recorded $24 million of other income, which is comprised primarily of $23
million of non-taxable income recorded pursuant to the 2012 Tax Sharing Agreement. See Note 6 to the
Consolidated and Combined Financial Statements for more information.
Income Tax Expense
Income tax expense was $221 million for fiscal year 2013 compared with $236 million for fiscal year 2012,
and the effective tax rate fell slightly to 34.4% from 37.5%. The effective tax rate for fiscal year 2013 reflects the
favorable impact of an adjustment to the state tax rate at which we expect to settle our net deferred tax liabilities.
This adjustment resulted in a tax benefit of $7 million during the period. The effective tax rate for fiscal year
2013 also reflects the favorable impact resulting from $23 million in non-taxable other income. These favorable
items were partially offset by the impact of discrete charges of approximately $7 million due to legislative
changes in certain states.
46
The effective tax rate can vary from period to period due to permanent tax adjustments, discrete items such
as the settlement of income tax audits and changes in tax laws, as well as recurring factors such as changes in the
overall effective state tax rate.
Non-GAAP Measures
To provide investors with additional information in connection with our results as determined by GAAP, we
also disclose non-GAAP measures which management believes provide useful information to investors. These
measures consist of EBITDA and FCF. These measures are not financial measures calculated in accordance with
GAAP and should not be considered as substitutes for net income, operating profit, cash from operating activities
or any other operating performance measure calculated in accordance with GAAP, and they may not be
comparable to similarly titled measures reported by other companies. We use EBITDA to measure the
operational strength and performance of our business. We use FCF as an additional measure of our ability to
service debt, make other investments and return capital to stockholders through dividends and share repurchases.
These measures, or measures that are based on them, may also be used as components in our incentive
compensation plans.
There are material limitations to using EBITDA. EBITDA does not take into account certain significant
items, including depreciation and amortization, interest expense and tax expense, which directly affect our net
income. These limitations are best addressed by considering the economic effects of the excluded items
independently, and by considering EBITDA in conjunction with net income as calculated in accordance with
GAAP.
FCF is defined as cash from operations less cash outlays related to capital expenditures, subscriber system
assets, dealer generated customer accounts and bulk account purchases. Dealer generated customer accounts are
accounts that are generated through our network of authorized dealers. Bulk account purchases represent
accounts that we acquire from third parties outside of our authorized dealer network, such as other security
service providers, on a selective basis. These items are subtracted from cash from operating activities because
they represent long-term investments that are required for normal business activities. As a result, subject to the
limitations described below, FCF is a useful measure of our cash available to repay debt, make other investments
and return capital to stockholders through dividends and share repurchases.
FCF adjusts for cash items that are ultimately within management’s and the board of directors’ discretion to
direct and therefore may imply that there is less or more cash that is available than the most comparable GAAP
measure. FCF is not intended to represent residual cash flow for discretionary expenditures since debt repayment
requirements and other non-discretionary expenditures are not deducted. This limitation is best addressed by
using FCF in combination with the GAAP cash flow numbers.
47
FORM 10-K
We believe EBITDA is useful because it measures our success in acquiring, retaining and servicing our
customer base and our ability to generate and grow our recurring revenue while providing a high level of
customer service in a cost-effective manner. EBITDA excludes interest expense and the provision for income
taxes. Excluding these items eliminates the expenses associated with our capitalization and tax structure. Because
EBITDA excludes interest expense, it does not give effect to cash used for debt service requirements and thus
does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA also excludes
depreciation and amortization, which eliminates the impact of non-cash charges related to capital investments.
Depreciation and amortization includes depreciation of subscriber system assets and other fixed assets,
amortization of deferred costs and deferred revenue associated with subscriber acquisitions and amortization of
dealer and other intangible assets.
The tables below reconcile EBITDA to net income and FCF to cash flows from operating activities.
EBITDA
(in millions)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and intangible asset amortization . . . . . . . . . . . .
Amortization of deferred subscriber acquisition costs . . . . . . .
Amortization of deferred subscriber acquisition revenue . . . .
EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
2012
$ 304
192
128
1,040
131
(151)
$ 421
117
221
942
123
(135)
$ 394
92
236
871
111
(120)
$1,644
$1,689
$1,584
For fiscal year 2014, EBITDA decreased $45 million, or 2.7%, as compared with the prior year, despite a
$111 million increase in recurring revenue, due to increased cost to serve expenses, and a $59 million increase in
other expense. The increase in cost to serve expenses includes $44 million of costs associated with our three-year
conversion program to replace 2G radios used in many of our security systems, an $18 million increase in
restructuring and other expenses, $15 million of incremental costs associated with the operations of Protectron
and a $5 million increase in acquisition and integration costs. For further details, refer to the discussion above
under “Results of Operations.” The increase in other expense of $59 million was primarily driven by amounts
recorded pursuant to the 2012 Tax Sharing Agreement.
For fiscal year 2013, EBITDA increased $105 million, or 6.6%, as compared with fiscal year 2012. This
increase was primarily due to the impact of higher recurring customer revenue, partially offset by the impact of
increased cost to serve expenses as discussed above. Additionally other income primarily related to the 2012 Tax
Sharing Agreement increased EBITDA for fiscal year 2013 by $24 million. For further details, refer to the
discussion above under “Results of Operations.”
FCF
(in millions)
FORM 10-K
2014
2013
2012
Net cash provided by operating activities . . . . . . . . . . . . . . . .
Dealer generated customer accounts and bulk account
purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subscriber system assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,519
$1,666
$1,493
FCF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 251
(526)
(658)
(84)
(555)
(580)
(71)
$ 460
(648)
(378)
(61)
$ 406
For fiscal year 2014, FCF decreased $209 million compared with fiscal year 2013. This decrease was
primarily due to a $147 million decrease in net cash provided by operating activities, as well as a $78 million
increase in cash outlays for subscriber system assets, partially offset by a $29 million decrease in cash paid for
dealer generated accounts and bulk account purchases. The decrease in net cash provided by operating activities
was driven primarily by a $64 million increase in cash paid for interest, a $63 million increase in taxes paid and
the timing of other operating cash payments. The $78 million increase in cash paid for subscriber system assets
resulted primarily from an increase in the average cost of installed systems, partially driven by an increase in new
ADT Pulse® customers, higher volume of ADT Pulse® upgrades to existing customers and increased promotional
activities. The $29 million decrease in cash paid for dealer generated accounts resulted from the lower levels of
dealer account production and lower levels of bulk account purchases discussed above under “Results of
Operations—Revenue.”
48
For fiscal year 2013, FCF increased $54 million compared with fiscal year 2012. This increase was
primarily due to an increase of $173 million in net cash provided by operating activities, which primarily resulted
from higher EBITDA and improvements in working capital, and a decrease of $93 million in cash paid for dealer
generated customer accounts and bulk account purchases. These factors were partially offset by an increase of
$202 million in internally generated subscriber systems and an increase of $10 million in capital expenditures.
Approximately $80 million of the increase in internally generated subscriber systems resulted from the mix shift
toward more ADT-owned systems and is substantially offset by higher cash flows from operating activities
related to increases in deferred subscriber acquisition revenue.
Liquidity and Capital Resources
Liquidity and Cash Flow Analysis
Significant factors driving our liquidity position include cash flows generated from operating activities and
investments in internally generated subscriber systems and dealer generated customer accounts. Our cash flows
from operations include cash received from monthly recurring revenue and upfront fees received from customers,
less cash costs to provide services to our customers, including general and administrative costs and certain costs
associated with acquiring new customers. Historically, we have generated and expect to continue to generate
positive cash flow from operations. Prior to the Separation, our cash was regularly “swept” by Tyco at its
discretion in conjunction with its centralized approach to cash management and financing of operations. For
fiscal year 2012 transfers of cash both to and from Tyco’s cash management system are reflected as changes in
parent company investment in the Consolidated and Combined Statements of Cash Flows.
Liquidity
Revolving Credit Facility—At September 26, 2014, we had $375 million outstanding under our revolving
credit facility at an interest rate of 1.606%. During fiscal year 2014, we borrowed $600 million under the
revolving credit facility and repaid $375 million funded primarily with a portion of the cash proceeds from the
debt issuances described below.
Long Term Debt—In addition to the indebtedness outstanding at September 27, 2013, we issued $1.5 billion
aggregate principal amount of senior unsecured notes during fiscal 2014.
On October 1, 2013, we issued $1.0 billion aggregate principal amount of 6.250% senior unsecured notes
due October 2021 to certain institutional investors pursuant to certain exemptions from registration under the
Securities Act of 1933, as amended (the “October 2013 Debt Offering”). Net cash proceeds from the issuance of
this term indebtedness totaled $987 million, of which $150 million was used to repay the outstanding borrowings
under our revolving credit facility as of September 27, 2013. The remaining net proceeds were used primarily for
repurchases of outstanding shares of our common stock. Interest is payable on April 15 and October 15 of each
year, and commenced on April 15, 2014. We may redeem the notes, in whole or in part, at any time prior to the
maturity date at a redemption price equal to the greater of the principal amount of the notes to be redeemed, or a
make-whole premium, plus in each case, accrued and unpaid interest to, but excluding, the redemption date.
In connection with our October 2013 Debt Offering, we entered into an exchange and registration rights
agreement with the initial purchasers of the notes. Under this agreement, we were obligated to file a registration
49
FORM 10-K
At September 26, 2014, we had $66 million in cash and cash equivalents and another $375 million available
under our $750 million revolving credit facility. Our primary future cash needs are centered on operating
activities, working capital, capital expenditures, strategic investments and dividends. In addition, we may use
cash to repurchase shares of our common stock under our $3 billion share repurchase program. We believe our
cash position, amounts available under our revolving credit facility and cash provided by operating activities will
be adequate to meet our operational and business needs in the next twelve months.
statement for an offer to exchange the notes for a new issue of substantially identical notes registered under the
Securities Act of 1933, as amended. Alternatively, we were required to file a shelf registration statement to cover
resales of such notes if the exchange offer was not completed within 365 days after closing of the initial notes
issuance and the offer to exchange the notes had not been completed within 30 business days of the effective time
and date of the registration statement. On April 4, 2014, we commenced an offer to exchange the $1 billion notes
issued in October 2013. This exchange offer was completed on May 9, 2014.
On March 19, 2014, we completed a public offering of $500 million of our 4.125% senior unsecured notes
due April 2019 (the “March 2014 Debt Offering”). Net cash proceeds from the issuance of this term indebtedness
totaled $493 million, of which $200 million was used to repay the majority of the outstanding borrowings under
our revolving credit facility as of December 27, 2013. The remaining net proceeds were used primarily for
general corporate purposes and for repurchases of outstanding shares of our common stock. Interest is payable on
April 15 and October 15 of each year, and commenced on October 15, 2014. We may redeem the notes, in whole
or in part, at any time prior to the maturity date at a redemption price equal to the greater of the principal amount
of the notes to be redeemed, or a make-whole premium, plus in each case, accrued and unpaid interest to, but
excluding, the redemption date.
As of September 26, 2014, we were in compliance with all financial covenants related to our debt issuances.
Share Repurchases
On November 18, 2013, our board of directors authorized a $1 billion increase to the $2 billion, three-year
share repurchase program that was previously approved on November 26, 2012. This repurchase program expires
November 26, 2015. Pursuant to this approval, we may enter into accelerated share repurchase plans as well as
repurchase shares on the open market. During fiscal year 2014, we made open market repurchases of 14.0 million
shares of our common stock at an average price of $35.72 per share. The total cost of open market repurchases
for fiscal year 2014 was approximately $500 million, all of which was paid during the period.
On November 19, 2013, we entered into an accelerated share repurchase agreement under which we paid
$400 million for an initial delivery of approximately 8 million shares of our common stock. This accelerated
share repurchase program was completed on February 25, 2014. In total, we repurchased 10.9 million shares of
our common stock at an average price of $36.86 per share under this accelerated share repurchase agreement.
FORM 10-K
On November 24, 2013, we entered into a Share Repurchase Agreement (“Share Repurchase Agreement”)
with Corvex. Pursuant to the Share Repurchase Agreement, we repurchased 10.2 million shares from Corvex for
a price per share equal to $44.01, resulting in $451 million of cash paid during the quarter ended December 27,
2013.
As of September 26, 2014 we had $381 million remaining under the previously approved $3 billion share
repurchase program.
Dividends
During fiscal year 2014 our board of directors declared the following four dividends on our common stock
of $0.20 per share:
Dividend Declared Date
Dividend Paid Date
To Stockholders on
Record as of
January 9, 2014
March 13, 2014
July 18, 2014
September 19, 2014
February 19, 2014
May 21, 2014
August 20, 2014
November 19, 2014
January 29, 2014
April 30, 2014
July 30, 2014
October 29, 2014
50
Whether our board of directors exercises its discretion to approve any dividends in the future will depend on
many factors, including our financial condition, capital requirements of our business, covenants associated with
debt obligations, legal requirements, regulatory constraints, industry practice and other factors that our board of
directors deems relevant. Therefore, we can make no assurance that we will pay a dividend in the future.
Cash Flows from Operating Activities
For fiscal years 2014, 2013 and 2012, we reported net cash provided by operating activities of $1.5 billion,
$1.7 billion and $1.5 billion, respectively. See discussion of changes in net cash provided by operating activities
included in FCF under “Results of Operations—Non-GAAP Measures.”
Cash Flows from Investing Activities
(in millions)
Net cash used in investing activities . . . . . . . . . . . . . . . . . .
2014
2013
2012
$(1,792)
$(1,394)
$(1,096)
In order to maintain and grow our customer base and to expand our infrastructure, we typically reinvest the
cash provided by our operating activities into our business. These investments are intended to enhance the overall
customer experience, improve productivity of our field workforce and support greater efficiency of our back
office systems and our customer care centers. For fiscal years 2014, 2013 and 2012, our investing activities
consisted of subscriber system asset additions and capital expenditures totaling $742 million, $651 million and
$439 million, respectively. Additionally, during fiscal years 2014, 2013 and 2012, we paid $526 million, $555
million and $648 million, respectively, for customer contracts for electronic security services generated under the
ADT dealer program and bulk account purchases. See discussion included in FCF under “Results of
Operations—Non-GAAP Measures” for further information. During fiscal year 2014, we completed the
acquisition of Protectron, resulting in cash paid, net of cash acquired, of $517 million. Additionally, during fiscal
year 2013, we completed the acquisitions of Absolute Security and Devcon Security, resulting in cash paid, net
of cash acquired, of $16 million and $146 million, respectively.
(in millions)
2014
2013
2012
Net cash provided by (used in) financing activities . . . . . . . . . . . .
$202
$(366)
$(231)
For fiscal year 2014, the net cash provided by financing activities was largely the result of the net proceeds
from our $1 billion October 2013 Debt Offering and our $500 million March 2014 Debt Offering. This was
partially offset by $1.4 billion in repurchases of our common stock under our approved share repurchase
program, which were primarily funded with a portion of the net proceeds from our October 2013 Debt Offering
and cash provided by operations. Other sources and uses of cash included net borrowings of $225 million on our
revolving credit facility, $17 million in proceeds received from the exercise of stock options and $132 million in
dividend payments on our common stock.
For fiscal year 2013, the net cash used in financing activities was primarily the result of $1.2 billion in
repurchases of our common stock under our approved share repurchase program, which were partially funded
with the net proceeds from our $700 million January 2013 Debt Offering. Also, during the fourth quarter of fiscal
year 2013, we borrowed $150 million on our revolving credit facility. During fiscal year 2013, we paid $112
million in dividends on our common stock and $6 million for share repurchases related to shares purchased from
employees to cover tax withholdings. We also received $85 million in proceeds from the exercise of stock
options and $61 million in funds from Tyco and Pentair, which related to the allocation of funds between the
companies as outlined in the Separation and Distribution Agreement between Tyco and ADT.
51
FORM 10-K
Cash Flows from Financing Activities
For fiscal year 2012, the net cash used in financing activities was primarily the result of changes in parent
company investment of $1.1 billion and changes in balances due to (from) Tyco and affiliates of $63 million,
which were substantially offset by the net proceeds received on our issuance of $2.5 billion in long-term debt and
the removal of $1.5 billion in allocated debt from Tyco.
Commitments and Contractual Obligations
The following table provides a summary of our contractual obligations and commitments for debt, minimum
lease payment obligations under non-cancelable leases and other obligations as of September 26, 2014.
(in millions)
2015
2016
Long-term debt(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest payments(2) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations(3) . . . . . . . . . . . . . . . . . . . . . . . .
$
Total contractual cash obligations(4) . . . . . . . . . . . . . .
$325
(1)
(2)
(3)
(4)
1
205
65
6
48
2017
2018
2019
Thereafter
Total
$
1
203
52
6
9
$1,126
202
39
6
4
$—
184
33
6
—
$500
184
21
6
—
$3,450
1,216
45
14
—
$5,078
2,194
255
44
61
$271
$1,377
$223
$711
$4,725
$7,632
Long-term debt obligations consist primarily of our senior unsecured notes and revolving credit facility and
exclude debt discount and interest.
Interest payments consist primarily of interest on our fixed-rate debt.
Purchase obligations consist of commitments for purchases of goods and services.
Total contractual cash obligations in the table above exclude income taxes as we are unable to make a
reasonably reliable estimate of the timing for the remaining payments in future years. As of September 26,
2014, we recorded gross unrecognized tax benefits of $49 million and gross interest and penalties of $2
million. See Note 6 to the Consolidated and Combined Financial Statements for further information.
As of September 26, 2014, standby letters of credit related to our insurance programs were immaterial.
Off-Balance Sheet Arrangements
As of September 26, 2014, we had no material off-balance sheet arrangements.
FORM 10-K
Critical Accounting Policies and Estimates
The preparation of the Consolidated and Combined Financial Statements in conformity with U.S. GAAP
requires management to use judgment in making estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenue and
expenses. The following accounting policies are based on, among other things, judgments and assumptions made
by management that include inherent risks and uncertainties. Management’s estimates are based on the relevant
information available at the end of each period.
Revenue Recognition
Substantially all of our revenue is generated by contractual monthly recurring fees received for monitoring
services provided to customers. Revenue from monitoring services is recognized as those services are provided to
customers. Customer billings for services not yet rendered are deferred and recognized as revenue as the services
are rendered. The balance of deferred revenue is included in current liabilities or long-term liabilities, as
appropriate.
For transactions in which we retain ownership of the security system, non-refundable fees (referred to as
deferred subscriber acquisition revenue) received in connection with the initiation of a monitoring contract are
52
deferred and amortized over the estimated life of the customer relationship. Transactions in which we transfer
ownership of the security system to the customer occur only in certain limited circumstances.
Early termination of the contract by the customer results in a termination charge in accordance with the
customer contract, which is recognized when collectability is reasonably assured.
Subscriber System Assets, Deferred Subscriber Customer Acquisition Costs and Dealer Intangibles
We record certain assets in connection with the acquisition of new customers depending on how the
accounts are generated: subscriber system assets and related deferred subscriber acquisition costs for customer
accounts generated internally, and dealer intangibles for customer accounts that are generated through the ADT
dealer program. Subscriber system assets represent capitalized equipment and installation costs incurred in
connection with transactions in which we retain ownership of the security system. Deferred subscriber
acquisition costs represent direct and incremental selling expenses (i.e. commissions) related to acquiring the
customer and do not exceed deferred subscriber acquisition revenue. Dealer intangibles represent contracts and
related customer relationships generated through the ADT dealer program which are recorded upon acquisition at
their contractually determined purchase price.
Dealer intangibles, subscriber system assets and related deferred subscriber acquisition costs and revenue
are accounted for using pools based on the month and year of customer acquisition. We amortize these pooled
assets using an accelerated method over the expected life of the customer relationship, which is 15 years. We
periodically perform lifing studies to estimate the expected life of the customer relationship and the attrition
pattern of our customers. The lifing studies are based on historical customer terminations and are used to
establish the amortization rates of our customer account pools in order to reflect the pattern of future benefit. The
results of the lifing studies indicate that we can expect attrition to be greatest in the initial years of asset life;
therefore, an accelerated method best matches the future amortization cost with the estimated revenue stream
from these customer pools.
We record accruals for various contingencies including legal proceedings and other claims that arise in the
normal course of business. The accruals are based on judgment, the probability of losses and, where applicable,
the consideration of opinions of internal and/or external legal counsel and actuarially determined estimates. We
record an accrual when a loss is deemed probable to occur and is reasonably estimable. Additionally, we record
insurance recovery receivables from third-party insurers when recovery has been determined to be probable.
Acquisitions
We account for acquired businesses using the purchase method of accounting. Under the purchase method,
our Consolidated and Combined Financial Statements reflect the operations of an acquired business starting from
the completion of the acquisition. In addition, the assets acquired and liabilities assumed are recorded at the date
of acquisition at their estimated fair values, with any excess of the purchase price over the estimated fair values
of the net assets acquired recorded as goodwill.
Significant judgment is required in estimating the fair value of intangible assets and in assigning their
respective useful lives. Accordingly, we typically obtain the assistance of third-party valuation specialists for
significant items. The fair value estimates are based on available historical information and on future
expectations and assumptions deemed reasonable by management, but are inherently uncertain.
Goodwill
We assess goodwill for impairment annually and more frequently if events or changes in business
circumstances indicate that it is more likely than not that the carrying value of a reporting unit exceeds its fair
53
FORM 10-K
Loss Contingencies
value. In performing these assessments, management relies on various factors, including operating results,
business plans, economic projections, anticipated future cash flows and other market data.
We recorded no goodwill impairments in conjunction with our annual goodwill impairment assessment,
performed as of the first day of the fourth quarter of fiscal year 2014. While historical performance and current
expectations have resulted in fair values of goodwill in excess of carrying values, if our assumptions are not
realized, it is possible that in the future an impairment charge may need to be recorded. However, it is not
possible at this time to determine whether an impairment charge would result or if such a charge would be
material. We will continue to monitor the recoverability of our goodwill.
Fair value determinations require considerable judgment and are sensitive to changes in underlying
assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for
purposes of the annual goodwill impairment test will prove to be accurate predictions of the future. Examples of
events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions
and ultimately impact the estimated fair value of the business may include such items as: a prolonged downturn
in the business environment (i.e. sales volumes and prices), changes in economic conditions that significantly
differ from our assumptions in timing or degree, volatility in equity and debt markets resulting in higher discount
rates and unexpected regulatory changes.
Long-Lived Assets
We review long lived assets held and used by us, including property and equipment and amortizable
intangible assets, for impairment whenever events or changes in business circumstances indicate that the carrying
amount of the asset group may not be fully recoverable. If an impairment is determined to exist, we calculate any
related impairment loss based on fair value.
Impairments on long-lived assets to be disposed of are determined based upon the fair value less cost to sell
of the applicable assets. The calculation of the fair value of long-lived assets is based on assumptions concerning
the amount and timing of estimated future cash flows and assumed discount rates, reflecting varying degrees of
perceived risk.
Income Taxes
FORM 10-K
For purposes of our Consolidated and Combined Financial Statements for periods prior to the Separation,
income tax expense, deferred tax balances and tax carryforwards were recorded as if ADT filed tax returns on a
standalone basis separate from Tyco (“Separate Return Method”). The Separate Return Method applies the
accounting guidance for income taxes to the standalone financial statements as if we were a separate taxpayer
and a standalone enterprise for the periods prior to the Separation. The deferred tax balances reflected in our
Consolidated Balance Sheets as of September 26, 2014 and September 27, 2013 have been recorded on a
consolidated return basis. The calculation of income taxes for the Company requires a considerable amount of
judgment and use of both estimates and allocations. Prior to the Separation, we primarily operated within a Tyco
U.S. consolidated group and within a standalone Canadian entity. In certain instances, tax losses or credits
generated by Tyco’s other businesses continue to be available to us in periods after the Separation.
In determining taxable income for our Consolidated and Combined Financial Statements, we must make
certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities
and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary
differences between the tax and financial statement recognition of revenue and expense.
In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative
evidence including our past operating results, the existence of cumulative losses in the most recent years and our
forecast of future taxable income. In estimating future taxable income, we develop assumptions including the
amount of future pre-tax operating income, the reversal of temporary differences and the implementation of
54
feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts
of future taxable income and are consistent with the plans and estimates we are using to manage our underlying
businesses.
We do not have any significant valuation allowances against our net deferred tax assets.
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future.
Management records the effect of a tax rate or law change on our deferred tax assets and liabilities in the period
of enactment. Future tax rate or law changes could have a material effect on our results of operations, financial
condition or cash flows.
In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of
complex tax regulations in the United States and Canada. We recognize potential liabilities and record tax
liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on our estimate of whether,
and the extent to which, additional taxes will be due. These tax liabilities are reflected net of related tax loss
carryforwards. We adjust these reserves in light of changing facts and circumstances; however, due to the
complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially
different from our current estimate of the tax liabilities. If our estimate of tax liabilities proves to be less than the
ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves
to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in
the period when we determine the liabilities are no longer necessary.
Accounting Pronouncements
See Note 1 to the Consolidated and Combined Financial Statements for information about recent accounting
pronouncements.
This report contains certain information that may constitute “forward-looking statements” within the
meaning of the U.S. Private Securities Litigation Reform Act of 1995. While we have specifically identified
certain information as being forward-looking in the context of its presentation, we caution you that all statements
contained in this report that are not clearly historical in nature, including statements regarding business strategies,
market potential, future financial performance, the effects of the separation of ADT from Tyco and other matters,
are forward-looking. Without limiting the generality of the preceding sentence, any time we use the words
“anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” and similar expressions, we intend to
clearly express that the information deals with possible future events and is forward-looking in nature. However,
the absence of these words or similar expressions does not mean that a statement is not forward-looking.
Forward-looking information involves risks, uncertainties and other factors that could cause actual results to
differ materially from those expressed or implied in, or reasonably inferred from, such statements. Therefore,
caution should be taken not to place undue reliance on any such forward-looking statements. Much of the
information in this report that looks towards future performance of the Company is based on various factors and
important assumptions about future events that may or may not actually occur. As a result, our operations and
financial results in the future could differ materially and substantially from those we have discussed in the
forward-looking statements included in this report. We assume no obligation (and specifically disclaim any such
obligation) to publicly update or revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except as required by law.
55
FORM 10-K
Cautionary Statement Regarding Forward-Looking Statements
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Our operations include activities in the United States and Canada. These operations expose us to a variety of
market risks, including the effects of changes in interest rates and foreign currency exchange rates. We monitor
and manage these financial exposures as an integral part of our overall risk management program. Our policies
allow for the use of specified financial instruments for hedging purposes only. Use of derivatives for speculation
purposes is prohibited.
Interest Rate Risk
We have long term debt which includes fixed rate debt and a revolving credit facility that bears interest
based on floating London Interbank Offered Rate (“LIBOR”). As a result, we are exposed to fluctuations in
interest rates on our long term debt. Long term debt excluding capital lease and other long term obligations was
$5.1 billion and $3.3 billion as of September 26, 2014 and September 27, 2013, respectively. See “Item 7.
Liquidity and Capital Resources” for more information on our debt offerings and any outstanding debt. As of
September 26, 2014, a hypothetical 10% increase or decrease in interest rates would change the fair value of our
fixed rate debt by approximately $151 million and would not materially impact earnings or cash flows. As of
September 26, 2014, the exposure associated with our variable rate borrowings to a hypothetical 10% increase or
decrease in interest rates was not material to earnings, fair values or cash flows.
To help manage borrowing costs, we may from time to time enter into interest rate swap transactions with
financial institutions acting as principal counterparties. During the year ended September 26, 2014, we entered
into interest rate swap transactions to hedge $1 billion of our fixed rate debt. The interest rate swap transactions
are designated as fair value hedges, with the objective of managing the exposure to interest rate risk by
converting the interest rates on the fixed-rate notes to floating rates. As of September 26, 2014, our exposure to a
hypothetical 10% increase or decrease in interest rates was not material to earnings, fair values or cash flows
associated with the swap contracts.
Foreign Currency Risk
We have exposure to the effects of foreign currency exchange rate fluctuations on the results of our
Canadian operations. Our Canadian operations use the Canadian dollar to conduct business, but our results are
reported in U.S. dollars.
FORM 10-K
We are periodically exposed to the foreign currency rate fluctuations that affect transactions not
denominated in the functional currency of our U.S. and Canadian operations. We may from time to time use
financial derivatives, which may include forward foreign currency exchange contracts and foreign currency
options, to hedge this risk. We generally do not hedge investments in foreign subsidiaries since such investments
are long-term in nature. We hedge our exposure to fluctuations in foreign currency exchange rates through the
use of forward foreign currency exchange contracts.
During fiscal year 2014, our largest exposure to foreign exchange rates existed with the Canadian dollar
against the U.S. dollar. As of September 26, 2014, our exposure to a hypothetical 10% increase or decrease in the
value of the U.S. dollar relative to the Canadian dollar exchange rate was not material to earnings, fair values or
cash flows.
56
Item 8.
Financial Statements and Supplementary Data.
The following consolidated and combined financial statements and schedule specified by this Item, together
with the report thereon of Deloitte & Touche LLP, are presented following Item 15 of this report:
•
Report of Independent Registered Public Accounting Firm
•
Consolidated Balance Sheets as of September 26, 2014 and September 27, 2013
•
Consolidated and Combined Statements of Operations for the years ended September 26, 2014,
September 27, 2013 and September 28, 2012
•
Consolidated and Combined Statements of Comprehensive Income for the years ended September 26,
2014, September 27, 2013 and September 28, 2012
•
Consolidated and Combined Statements of Stockholders’ Equity for the years ended September 26,
2014, September 27, 2013 and September 28, 2012
•
Consolidated and Combined Statements of Cash Flows for the years ended September 26, 2014,
September 27, 2013 and September 28, 2012
•
Notes to Consolidated and Combined Financial Statements
•
Financial Statement Schedule:
Schedule II—Valuation and Qualifying Accounts
All other financial statements and schedules have been omitted since the information required to be
submitted has been included in the Consolidated and Combined Financial Statements and related Notes or
because they are either not applicable or not required under the rules of Regulation S-X.
Information on quarterly results of operations is set forth in Note 13 to the Consolidated and Combined
Financial Statements.
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that information required to be disclosed
in our reports is accumulated and communicated to our management, including our principal executive officer
and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. Our
management recognizes that any controls and procedures, no matter how well designed and operated, can only
provide reasonable assurance of achieving the desired control objectives and management necessarily applies its
judgment in evaluating the possible controls and procedures. Each reporting period, we carry out an evaluation,
with the participation of our principal executive officer and principal financial officer, or persons performing
similar functions, of the effectiveness of the design and operation of our disclosure controls and procedures as
defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act.
Based on management’s evaluation, our principal executive officer and principal financial officer have
concluded that, as of September 26, 2014, our disclosure controls and procedures were effective to provide
reasonable assurance that information required to be disclosed in the reports that we file or submit under the
57
FORM 10-K
None.
Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC
rules and forms and that such information is accumulated and communicated to management, including the
principal executive officer and principal financial officer, or persons performing similar functions, as appropriate
to allow timely decisions regarding required disclosure. In accordance with the SEC’s published guidance, the
internal control over financial reporting of Protectron, which was acquired on July 8, 2014, was excluded from
our evaluation of the effectiveness of our disclosure controls and procedures as of September 26, 2014. As of
September 26, 2014, Protectron’s assets and equity represent approximately 5.8% and 6.7% of our assets and
equity, respectively. For fiscal year 2014, Protectron’s revenue and net income each represent approximately
1.0% of our revenue and net income.
Changes in Internal Controls
There have been no changes in our internal control over financial reporting that occurred during the fiscal
quarter ended September 26, 2014 that have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting for the registrant, as defined under Exchange Act Rules 13a-15(f) and 15d-15(f). Our internal control
over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation and fair presentation of published financial statements.
Because of inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
FORM 10-K
Management assessed the effectiveness of our internal control over financial reporting as of September 26,
2014. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework (1992). In
accordance with the SEC’s published guidance, the internal control over financial reporting of Protectron, which
was acquired on July 8, 2014, was excluded from our evaluation of the effectiveness of our internal control over
financial reporting as of September 26, 2014. As of September 26, 2014, Protectron’s assets and equity represent
approximately 5.8% and 6.7% of our assets and equity, respectively. For fiscal year 2014, Protectron’s revenue
and net income each represent approximately 1.0% of our revenue and net income. Based on our assessment,
management has concluded that the Company’s internal control over financial reporting was effective as of
September 26, 2014.
Our internal control over financial reporting as of September 26, 2014, has been audited by Deloitte &
Touche LLP, our independent registered public accounting firm, as stated in their report provided following the
Index to Consolidated and Combined Financial Statements, which is presented following Item 15 of this report.
Item 9B. Other Information.
None.
58
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Incorporated herein by reference is the text to be included under the captions “Corporate Governance of the
Company—Board of Directors” (including all sub-captions thereunder), “Proposal Number One—Election of
Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” and “Corporate Governance of the
Company—Director Nomination Process” to be included in our definitive proxy statement (“2015 Proxy
Statement”) for our 2015 Annual Meeting of Stockholders, which will be filed with the SEC within 120 days
after the end of our fiscal year covered by this report. Also incorporated herein by reference is information
concerning our executive officers which is found in Item 1 of this Annual Report on Form 10-K under the
caption “Executive Officers of the Registrant.”
ADT’s Code of Conduct, which applies to our Chief Executive Officer, Chief Financial Officer and Chief
Accounting Officer, as well as all other employees and directors of ADT, meets the requirements of a “code of
ethics” as defined by Item 406 of Regulation S-K. Our Code of Conduct also meets the requirements of a code of
business conduct and ethics under the listing standards of the New York Stock Exchange, Inc. Our Code of
Conduct is posted on the “Investor Relations” section of our website at www.adt.com under the heading
“Corporate Governance.” We will also provide a copy of our Code of Conduct to stockholders upon request. We
disclose, if required, any amendments to our Code of Conduct, as well as any waivers for executive officers or
directors, on our website.
Item 11. Executive Compensation.
Incorporated herein by reference is the text to be included under the captions “Compensation of Executive
Officers,” “Compensation Discussion and Analysis” (and all sub-captions thereunder), “Report of the
Compensation Committee,” “Compensation Committee Interlocks and Insider Participation,” “Fiscal Year 2014
NEO Compensation” (and all sub-captions thereunder) and “Compensation of Non-Management Directors” in
our 2015 Proxy Statement.
Incorporated herein by reference is the text to be included under the caption “Security Ownership of Certain
Beneficial Owners and Management” in our 2015 Proxy Statement. Also incorporated herein by reference is
information concerning compensation plans under which our equity securities are authorized for issuance which
is found in Item 5 of this Annual Report on Form 10-K under the caption “Securities Authorized for Issuance
Under Equity Compensation Plans.”
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Incorporated herein by reference is the text to be included under the captions “Corporate Governance of the
Company—Board of Directors” (including all sub-captions thereunder), “Corporate Governance of the
Company—Director Independence,” “Corporate Governance of the Company—Guidelines for Related Party
Transactions” and “Other Matters—Certain Relationships and Related Party Transactions” in our 2015 Proxy
Statement.
Item 14. Principal Accountant Fees and Services.
Incorporated herein by reference is the text to be included under the caption “Proposal Number Two—
Ratification of the Appointment of Independent Registered Public Accounting Firm” (including all sub-captions
thereunder) in our 2015 Proxy Statement.
59
FORM 10-K
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) The following documents are filed as part of this report:
1.
The financial statements listed in the “Index to Consolidated and Combined Financial Statements”
2.
The financial statement schedules listed in the “Index to Consolidated and Combined Financial
Statements”
3.
The exhibits listed in the “Index to Exhibits”
(b) See Item 15(a)(3)
(c) See Item 15(a)(2)
FORM 10-K
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE ADT CORPORATION
Date: November 12, 2014
By: /s/ Michael Geltzeiler
Michael Geltzeiler
Senior Vice President and Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Capacity
/s/
Naren Gursahaney
Naren Gursahaney
Chief Executive Officer and
Director (Principal Executive
Officer)
November 12, 2014
Date
/s/
Michael Geltzeiler
Michael Geltzeiler
Senior Vice President and Chief
Financial Officer (Principal
Financial Officer)
November 12, 2014
Date
Michele Kirse
Michele Kirse
Senior Vice President, Controller
and Chief Accounting Officer
(Principal Accounting Officer)
November 12, 2014
Date
*
Thomas Colligan
Director
November 12, 2014
Date
*
Richard J. Daly
Director
November 12, 2014
Date
*
Timothy Donahue
Director
November 12, 2014
Date
*
Robert Dutkowsky
Director
November 12, 2014
Date
*
Bruce Gordon
Director
November 12, 2014
Date
*
Bridgette Heller
Director
November 12, 2014
Date
*
Director
November 12, 2014
Date
/s/
Kathleen Hyle
* /s/
November 12, 2014
Date
Michael Geltzeiler
Michael Geltzeiler
Attorney-in-fact
61
FORM 10-K
Name
THE ADT CORPORATION
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated and Combined Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated and Combined Statements of Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated and Combined Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated and Combined Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated and Combined Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule II – Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FORM 10-K
62
63
65
66
67
68
69
70
98
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The ADT Corporation
Boca Raton, Florida
We have audited the accompanying consolidated balance sheets of The ADT Corporation and subsidiaries
(previously the North American Residential Security Business of Tyco International Ltd.) (the “Company”) as of
September 26, 2014 and September 27, 2013, and the related consolidated and combined statements of
operations, comprehensive income, stockholders’ equity, and cash flows for each of the three fiscal years in the
period ended September 26, 2014. Our audits also included the financial statement schedule listed in the Index at
Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the consolidated and combined financial statements, prior to the separation of the
Company from Tyco International Ltd. (“Tyco”), the Company was comprised of the assets and liabilities used in
managing and operating the North American Residential Security Business of Tyco. For periods prior to the
separation of the Company from Tyco, the consolidated and combined financial statements also include
allocations from Tyco. These allocations may not be reflective of the actual level of assets, liabilities, or costs
which would have been incurred had the Company operated as a separate entity apart from Tyco.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of September 26, 2014, based on the
criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated November 12, 2014 expressed an unqualified
opinion on the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Boca Raton, Florida
November 12, 2014
63
FORM 10-K
In our opinion, such consolidated and combined financial statements present fairly, in all material respects, the
financial position of The ADT Corporation and subsidiaries as of September 26, 2014 and September 27, 2013,
and the results of their operations and their cash flows for each of the three fiscal years in the period ended
September 26, 2014, in conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic
consolidated and combined financial statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of The ADT Corporation
Boca Raton, Florida
We have audited the internal control over financial reporting of The ADT Corporation and subsidiaries (the
“Company”) as of September 26, 2014, based on criteria established in Internal Control—Integrated Framework
(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in
Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the
internal control over financial reporting at Reliance Protectron, Inc. (“Protectron”), which was acquired on July 8,
2014 and whose financial statements constitute approximately 5.8% of total assets, 6.7% of net assets, 1.0% of total
revenues, and 1.0% of net income of the consolidated financial statement amounts as of and for the fiscal year
ended September 26, 2014. Accordingly, our audit did not include the internal control over financial reporting at
Protectron. The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express
an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit
included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the
assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
FORM 10-K
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and
effected by the company’s board of directors, management, and other personnel to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of
collusion or improper management override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal
control over financial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial
reporting as of September 26, 2014, based on the criteria established in Internal Control—Integrated Framework
(1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated and combined financial statements and financial statement schedule as of and
for the fiscal year ended September 26, 2014 of the Company and our report dated November 12, 2014 expressed
an unqualified opinion on those financial statements and financial statement schedule.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Boca Raton, Florida
November 12, 2014
64
THE ADT CORPORATION
CONSOLIDATED BALANCE SHEETS
As of September 26, 2014 and September 27, 2013
(in millions, except share and per share data)
2014
66
$ 138
101
76
55
111
86
66
85
205
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subscriber system assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred subscriber acquisition costs, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
409
265
2,260
3,738
3,120
571
186
580
235
2,002
3,476
2,922
520
178
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10,549
$9,913
$
$
Liabilities and Stockholders’ Equity
Current Liabilities:
Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued and other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
4
208
253
7
236
3
203
264
43
245
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred subscriber acquisition revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
708
5,096
838
651
128
758
3,373
769
551
140
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
7,421
5,591
Stockholders’ Equity:
Common stock – authorized 1,000,000,000 shares of $0.01 par value; issued and
outstanding shares – 174,109,318 as of September 26, 2014 and 208,980,690 as of
September 27, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2
2,643
445
38
2
3,957
283
80
Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,128
4,322
Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . .
$10,549
$9,913
Commitments and contingencies (See Note 7)
See Notes to Consolidated and Combined Financial Statements
65
FORM 10-K
Assets
Current Assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable trade, less allowance for doubtful accounts of $24 and $27,
respectively . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013
THE ADT CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
Fiscal Years Ended September 26, 2014, September 27, 2013 and September 28, 2012
(in millions, except per share data)
2014
2013
2012
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,408 $3,309 $3,228
Cost of revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,457
1,378
1,374
Selling, general and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,231
1,173
1,125
Radio conversion costs (See Note 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
44
—
—
Separation costs (See Note 1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
23
7
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (expense) income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
659
(192)
(35)
735
(117)
24
722
(92)
—
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
432
(128)
642
(221)
630
(236)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 304
$ 421
$ 394
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.67 $ 1.90 $ 1.70
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.66 $ 1.88 $ 1.67
Weighted-average number of shares:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See Notes to Consolidated and Combined Financial Statements
FORM 10-K
66
182
183
222
224
232
236
THE ADT CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF COMPREHENSIVE INCOME
Fiscal Years Ended September 26, 2014, September 27, 2013 and September 28, 2012
(in millions)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive (loss) income:
Foreign currency translation and other, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other comprehensive (loss) income, net of tax . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
2012
$304
$421
$394
(42)
(13)
14
(42)
(13)
14
$262
$408
$408
FORM 10-K
See Notes to Consolidated and Combined Financial Statements
67
THE ADT CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS’ EQUITY
Fiscal Years Ended September 26, 2014, September 27, 2013 and September 28, 2012
(in millions)
Number of
Common
Shares
Balance as of September 30, 2011 . .
Comprehensive income:
Other comprehensive income . . .
Net income . . . . . . . . . . . . . . . . .
Conversion of parent company
investment . . . . . . . . . . . . . . . . . . . .
—
Balance as of September 28, 2012 . .
231
Additional
Common
Paid-In
Stock
Capital
$—
$
—
Parent
Company
Investment
Accumulated
Other
Comprehensive
Income
Total
Stockholders’
Equity
$ 5,152
$ 79
$ 5,231
14
14
394
394
231
Number of
Common
Shares
FORM 10-K
Balance as of September 28, 2012 . .
Comprehensive income (loss):
Other comprehensive loss . . . . . .
Net income . . . . . . . . . . . . . . . . .
Dividends declared ($0.625 per
share) . . . . . . . . . . . . . . . . . . . . . . . .
Common stock repurchases . . . . . . . .
Exercise of stock options and vesting
of restricted stock units . . . . . . . . . .
Stock-based compensation expense . .
Separation-related adjustments to
additional paid-in capital . . . . . . . . .
231
Balance as of September 27, 2013 . .
Comprehensive income (loss):
Other comprehensive loss . . . . . .
Net income . . . . . . . . . . . . . . . . .
Dividends declared ($0.80 per
share) . . . . . . . . . . . . . . . . . . . . . . . .
Common stock repurchases . . . . . . . .
Exercise of stock options and vesting
of restricted stock units . . . . . . . . . .
Stock-based compensation expense . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . .
209
Balance as of September 26, 2014 . .
174
$
2
5,062
2
$ 5,062
Additional
Common
Paid-In
Stock
Capital
$
2
$ 5,062
(5,546)
$
—
Retained
Earnings
$
(482)
$ 93
$ 5,157
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
$ 93
$ 5,157
—
(13)
421
(138)
(27)
(138)
(1,274)
(1,274)
5
2
85
19
85
19
65
65
3,957
283
80
(42)
304
(142)
(36)
17
20
2
$
2
$ 2,643
(42)
304
17
20
2
$
445
See Notes to Consolidated and Combined Financial Statements
68
4,322
(142)
(1,353)
(1,353)
1
(13)
421
$ 38
$ 3,128
THE ADT CORPORATION
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
Fiscal Years Ended September 26, 2014, September 27, 2013 and September 28, 2012
(in millions)
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and intangible asset amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred subscriber acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of deferred subscriber acquisition revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for losses on accounts receivable and inventory . . . . . . . . . . . . . . . . . . . . . . . . . .
Other non-cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities, net of the effects of acquisitions:
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred subscriber acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred subscriber acquisition revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . .
304
2013
$
421
2012
$
394
1,040
131
(151)
20
123
41
3
942
123
(135)
19
207
51
7
871
111
(120)
7
22
53
12
(52)
(5)
(18)
(7)
(30)
(184)
226
78
(55)
(25)
58
35
16
(181)
232
(49)
(33)
(30)
(9)
19
184
(147)
161
(2)
1,519
1,666
1,493
Cash Flows from Investing Activities:
Dealer generated customer accounts and bulk account purchases . . . . . . . . . . . . . . . . . . . . . . . .
Subscriber system assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of businesses, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other investing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(526)
(658)
(84)
(517)
(7)
(555)
(580)
(71)
(162)
(26)
(648)
(378)
(61)
—
(9)
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,792)
(1,394)
(1,096)
Cash Flows from Financing Activities:
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repurchases of common stock under approved program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds received for allocation of funds related to the Separation . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from long-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allocated debt activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in parent company investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in due to from Tyco and affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
17
(1,384)
(132)
—
2,100
(378)
—
—
—
(21)
85
(1,235)
(112)
61
850
(3)
—
—
—
(12)
—
—
—
—
2,489
(1)
(1,482)
(1,148)
(63)
(26)
202
(366)
(231)
(1)
(72)
138
(2)
(96)
234
3
169
65
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . .
Effect of currency translation on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (decrease) increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
66
$
138
$
234
Supplementary Cash Flow Information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income taxes paid, net of refunds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
171
61
$
107 $
(2)
83
30
See Notes to Consolidated and Combined Financial Statements
69
FORM 10-K
2014
THE ADT CORPORATION
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
1.
Basis of Presentation and Summary of Significant Accounting Policies
Nature of Business—The ADT Corporation (“ADT” or the “Company”), a company incorporated in the
state of Delaware, is a leading provider of monitored security, interactive home and business automation and
related monitoring services in the United States and Canada.
Separation from Tyco International Ltd.—On September 19, 2011, Tyco International Ltd. (“Tyco” or
“Parent”) announced that its board of directors had approved a plan to separate Tyco into three separate, publicly
traded companies, identifying the ADT North American Residential Security Business of Tyco as one of those
three companies. In conjunction with this plan, prior to September 28, 2012, Tyco transferred the equity interests
of the entities that held all of the assets and liabilities of its residential and small business security business in the
United States and Canada to ADT. Effective on September 28, 2012 (the “Distribution Date”), Tyco distributed
all of its shares of ADT to Tyco’s stockholders of record as of the close of business on September 17, 2012 (the
“Separation”). On the Distribution Date, each of the stockholders of Tyco received one share of ADT common
stock for every two shares of common stock of Tyco held on September 17, 2012.
The Separation was completed pursuant to the Separation and Distribution Agreement, dated as of
September 26, 2012, between Tyco and ADT (the “2012 Separation and Distribution Agreement”). This
agreement provided for the allocation to ADT of certain of Tyco’s assets, liabilities and obligations attributable
to periods prior to the Separation, which is reflected in the Company’s Consolidated Balance Sheet as of
September 28, 2012.
Basis of Presentation—The Consolidated and Combined Financial Statements have been prepared in United
States dollars (“USD”) and in accordance with generally accepted accounting principles in the United States of
America (“GAAP”). Unless otherwise indicated, references to 2014, 2013 and 2012 are to the Company’s fiscal
years ended September 26, 2014, September 27, 2013 and September 28, 2012, respectively.
FORM 10-K
The Consolidated and Combined Financial Statements reflect the Company’s financial position, results of
operations and cash flows in conformity with GAAP. The Consolidated Balance Sheets as of September 26, 2014
and September 27, 2013 reflect the consolidated financial position of ADT and its subsidiaries as an independent
publicly-traded company. Additionally, the Company’s Statements of Operations, Comprehensive Income and
Cash Flows for the years ended September 26, 2014 and September 27, 2013 reflect ADT’s consolidated
operations and cash flows as a standalone company. Prior to the Separation, the Company’s financial position,
results of operations and cash flows consisted of Tyco’s residential and small business security business in the
United States, Canada and certain U.S. territories and were derived from Tyco’s historical accounting records
and presented on a carve-out basis. As such, the Company’s Statements of Operations, Comprehensive Income
and Cash Flows for fiscal year 2012 consist of the combined results of operations and cash flows of the ADT
North American Residential Security Business of Tyco.
For periods prior to the Separation, the Company’s financial statements included allocations of certain
working capital, property and equipment, and operating expense balances. In addition, debt and related interest
expense as well as certain general corporate overhead expenses were allocated by Tyco to the Company for the
financial statements presented on a carve-out basis. The allocation of corporate overhead expenses from Tyco
was based on the relative proportion of either the Company’s headcount or revenue to Tyco’s consolidated
headcount or revenue. Such allocations are believed to be reasonable; however, they may not be indicative of the
actual results of the Company had the Company been operating as an independent, publicly traded company for
the periods presented or the amounts that will be incurred by the Company in the future. Corporate overhead
expenses primarily related to centralized corporate functions, including finance, treasury, tax, legal, information
technology, internal audit, human resources and risk management functions. During fiscal year 2012, the
Company was allocated $52 million of general corporate expenses incurred by Tyco which are included within
70
selling, general and administrative expenses in the Consolidated and Combined Statements of Operations. The
allocation of interest expense from Tyco was based on an assessment of the Company’s share of Tyco’s external
debt using historical data. During fiscal year 2012, the Company was allocated $64 million of interest expense
incurred by Tyco. See Note 5 for information on interest expense.
The Company has a 52- or 53-week fiscal year that ends on the last Friday in September. Fiscal years 2014,
2013 and 2012 were 52-week years.
The Company conducts business in one operating segment, which is identified by the Company based on
how resources are allocated and operating decisions are made. Management evaluates performance and allocates
resources based on the Company as a whole.
The Company conducts business through its operating entities. All intercompany transactions have been
eliminated. The results of companies acquired during the year are included in the Consolidated and Combined
Financial Statements from the effective date of acquisition.
Use of Estimates—The preparation of the Consolidated and Combined 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 in these Consolidated and Combined 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 allocation. Actual results could differ materially from these estimates.
For transactions in which the Company retains ownership of the security system, non-refundable fees
(referred to as deferred subscriber acquisition revenue) received in connection with the initiation of a monitoring
contract are deferred and amortized over the estimated life of the customer relationship. Transactions in which
the Company transfers ownership of the security system to the customer occur only in certain limited
circumstances.
Early termination of the contract by the customer results in a termination charge in accordance with the
customer contract, which is recognized when collectability is reasonably assured. The amounts of contract
termination charges recognized in revenue during fiscal years 2014, 2013 and 2012 were not material.
Advertising—Advertising costs which amounted to $168 million, $163 million and $155 million for fiscal
years 2014, 2013 and 2012, respectively, are expensed when incurred and are included in selling, general and
administrative expenses.
Radio Conversion Costs—During fiscal year 2013, the Company implemented a three-year conversion
program to replace 2G cellular technology used in many of its security systems. During fiscal year 2014, the
Company incurred charges related to the conversion program of $44 million. There were no charges incurred for
fiscal year 2013. These costs are reflected in radio conversion costs in the Consolidated and Combined
Statements of Operations.
Separation Costs—Charges incurred directly related to the Separation are reflected in Separation costs in
the Company’s Consolidated and Combined Statements of Operations.
71
FORM 10-K
Revenue Recognition—Substantially all of the Company’s revenue is generated by contractual monthly
recurring fees received for monitoring services provided to customers. Revenue from monitoring services is
recognized as those services are provided to customers. Customer billings for services not yet rendered are
deferred and recognized as revenue as the services are rendered. The balance of deferred revenue is included in
current liabilities or long-term liabilities, as appropriate.
Other (Expense) Income—During fiscal year 2014, the Company recorded $35 million of other expense,
which is comprised primarily of $38 million of non-taxable expense representing a reduction in the receivable
from Tyco pursuant to the tax sharing agreement entered into in conjunction with the Separation largely due to
the resolution of certain components of the Company’s unrecognized tax benefits. During fiscal year 2013, the
Company recorded $24 million of other income, which is comprised primarily of $23 million of non-taxable
income recorded pursuant to the tax sharing agreement for amounts owed by Tyco and Pentair Ltd. in connection
with the exercise of ADT share based awards held by certain Tyco and Pentair Ltd. employees. See Note 6 for
further information.
Translation of Foreign Currency—The Company’s Consolidated and Combined Financial Statements are
reported in U.S. dollars. A portion of the Company’s business is transacted in Canadian dollars. The Company’s
Canadian entity maintains its records in Canadian dollars. The assets and liabilities are translated into U.S.
dollars using rates of exchange at the balance sheet date and translation adjustments are recorded in accumulated
other comprehensive income. Revenue and expenses are translated at average rates of exchange in effect during
the year.
Cash and Cash Equivalents—All highly liquid investments with original maturities of three months or less
from the time of purchase are considered to be cash equivalents.
Allowance for Doubtful Accounts—The allowance for doubtful accounts receivable reflects the best estimate
of probable losses inherent in the Company’s receivable portfolio determined on the basis of historical
experience and other currently available evidence.
Inventories—Inventories are recorded at the lower of cost or market value. Cost is computed using standard
cost, which approximates average cost. Inventories consisted of the following ($ in millions):
September 26,
2014
September 27,
2013
Work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 2
74
$ 3
63
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$76
$66
FORM 10-K
Property and Equipment, Net—Property and equipment, net is recorded at cost less accumulated
depreciation. Depreciation expense on property and equipment for fiscal years 2014, 2013 and 2012 was $70
million, $48 million and $38 million, respectively. Maintenance and repair expenditures are charged to expense
when incurred. Depreciation is calculated using the straight-line method over the estimated useful lives of the
related assets as follows:
Buildings and related improvements
Up to 40 years
Leasehold improvements
Lesser of remaining term of the lease or economic
useful life
Other machinery, equipment and furniture and fixtures
3 to 14 years
Subscriber System Assets and Deferred Subscriber Acquisition Costs—The Company records certain assets
in connection with the acquisition of new customers depending on how the accounts are generated: subscriber
system assets and deferred subscriber acquisition costs for customer accounts that are generated internally, and
dealer intangibles for customer accounts that are generated through the ADT dealer program.
Subscriber system assets represent capitalized equipment and installation costs incurred in connection with
transactions in which the Company retains ownership of the security system. These assets embody a probable
future economic benefit as they generate future monitoring revenue for the Company. The Company pays
72
property taxes on the subscriber system assets and upon customer termination, may retrieve such assets.
Accumulated depreciation of subscriber system assets was $2.4 billion and $2.2 billion as of September 26, 2014
and September 27, 2013, respectively. Depreciation expense relating to subscriber system assets for fiscal years
2014, 2013 and 2012 was $381 million, $325 million and $287 million, respectively.
Deferred subscriber acquisition costs represent direct and incremental selling expenses (i.e. commissions)
related to acquiring the customer. Commissions paid in connection with the establishment of the monitoring
contract are determined based on a percentage of the contractual fees and do not exceed deferred subscriber
acquisition revenue. Amortization expense relating to deferred subscriber acquisition costs for fiscal years 2014,
2013 and 2012 was $131 million, $123 million and $111 million, respectively.
Subscriber system assets and any related deferred subscriber acquisition costs and deferred subscriber
acquisition revenue resulting from the customer acquisition are accounted for using pools based on the month
and year of acquisition. The Company amortizes its pooled subscriber system assets and related deferred costs
and deferred revenue using an accelerated method over the expected life of the customer relationship, which is 15
years. In order to align the amortization of subscriber system assets and related deferred costs and deferred
revenue to the pattern in which their economic benefits are consumed, the accelerated method utilizes an average
declining balance rate of 245% and converts to straight-line methodology when the resulting amortization charge
is greater than that from the accelerated method, resulting in an average amortization of 59% of the pool within
the first five years, 24% within the second five years and 17% within the final five years.
Intangible assets arising from the ADT dealer program described above are accounted for using pools based
on the month and year of acquisition. The Company amortizes its pooled dealer intangible assets using an
accelerated method over the expected life of the customer relationship, which is 15 years. The accelerated
method for amortizing these intangible assets utilizes an average declining balance rate of 300% and converts to
straight-line methodology when the resulting amortization charge is greater than that from the accelerated
method, resulting in an average amortization of 67% of the pool within the first five years, 22% within the
second five years and 11% within the final five years.
Other amortizable intangible assets are amortized on a straight-line basis over 5 to 40 years. The Company
evaluates the amortization methods and remaining useful lives of intangible assets on a periodic basis to
determine whether events and circumstances warrant a revision to the amortization method or remaining useful
lives.
Long-Lived Asset Impairments—The Company reviews long-lived assets, including property and equipment
and amortizable intangible assets, for impairment whenever events or changes in business circumstances indicate
that the carrying amount of the asset may not be fully recoverable. The Company performs undiscounted
operating cash flow analyses to determine if impairment exists. For purposes of recognition and measurement of
an impairment for assets held for use, the Company groups assets and liabilities at the lowest level for which cash
flows are separately identified. If an impairment is determined to exist, any related impairment loss is calculated
based on fair value. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to
be received, less costs of disposal.
Goodwill—Goodwill is assessed for impairment annually and more frequently if events or changes in
business circumstances indicate that it is more likely than not that the carrying value of a reporting unit exceeds
73
FORM 10-K
Dealer and Other Amortizable Intangible Assets, Net—Intangible assets primarily include contracts and
related customer relationships. Certain contracts and related customer relationships are generated from an
external network of independent dealers who operate under the ADT dealer program. These contracts and related
customer relationships are recorded at their contractually determined purchase price. During the charge-back
period, generally thirteen months, any cancellation of monitoring service, including those that result from
customer payment delinquencies, results in a charge-back by the Company to the dealer for the full amount of the
contract purchase price. The Company records the amount charged back to the dealer as a reduction of the
intangible assets.
its fair value. In performing these assessments, management relies on various factors, including operating results,
business plans, economic projections, anticipated future cash flows and other market data. There are inherent
uncertainties related to these factors which require judgment in applying them to the testing of goodwill for
impairment. The Company performs its annual impairment tests for goodwill as of the first day of the Company’s
fourth fiscal quarter of each year. See Note 4 for further information.
In testing goodwill for impairment, the Company has the option to first assess qualitative factors to
determine whether the existence of events or circumstances leads to a determination that it is more likely than not
that the estimated fair value of the reporting unit is less than its carrying amount. If the Company elects to
perform a qualitative assessment and determines that an impairment is more likely than not, a two-step,
quantitative impairment test is then required, otherwise no further analysis is required. The Company also may
elect not to perform the qualitative assessment and, instead, proceed directly to the quantitative impairment test.
Under the qualitative goodwill assessment, events and circumstances that would affect the estimated fair
value of a reporting unit are identified and evaluated. Factors such as the inputs to and results of the most recent
two-step quantitative impairment test, current and long-term forecasted financial results, changes in strategic
outlook or organizational structure, industry and market changes, and macroeconomic indicators are also
considered in the assessment.
FORM 10-K
As discussed above, the two-step, quantitative goodwill impairment test is performed either at the
Company’s election or when the results of the qualitative goodwill assessment indicate that it is more likely than
not that the estimated fair value of the reporting unit is less than its carrying amount. Under the two-step,
quantitative goodwill impairment test, the Company first compares the fair value of its reporting unit with its
carrying amount. The estimated fair value of the reporting unit used in the goodwill impairment test is
determined utilizing a discounted cash flow analysis based on the Company’s forecasts discounted using market
participants’ weighted average cost of capital and market indicators of terminal year cash flows. If the carrying
amount of the Company’s reporting unit exceeds its fair value, goodwill is considered potentially impaired and
step two of the goodwill impairment test is performed to measure the amount of impairment loss. In the second
step of the goodwill impairment test, the Company compares the implied fair value of the reporting unit’s
goodwill with the carrying amount of the reporting unit’s goodwill. If the carrying amount of the reporting unit’s
goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to
the excess of the carrying amount of goodwill over its implied fair value. The implied fair value of goodwill is
determined in the same manner that the amount of goodwill recognized in a business combination is determined.
The Company allocates the fair value of its reporting unit to all of the assets and liabilities of that unit, including
intangible assets, as if the reporting unit had been acquired in a business combination. Any excess of the fair
value of its reporting unit over the amounts assigned to its assets and liabilities represents the implied fair value
of goodwill.
Accrued Expenses and Other Current Liabilities—Included in accrued and other current liabilities in the
Company’s Consolidated Balance Sheets are amounts for payroll-related accruals of $45 million and $48 million
as of September 26, 2014 and September 27, 2013, respectively. Also included in accrued and other current
liabilities are customer advances, which totaled $35 million and $38 million as of September 26, 2014 and
September 27, 2013, respectively.
Parent Company Investment—Prior to the Separation, Tyco’s historical investment in the Company, the
Company’s accumulated net earnings after taxes, and the net effect of transactions with and allocations from
Tyco is shown as Parent company investment in the Consolidated and Combined Statements of Stockholders’
Equity. See discussion under “Basis of Presentation” for additional information on the allocation of expenses to
the Company by Tyco for periods prior to the Separation.
Income Taxes—For purposes of the Company’s Consolidated and Combined Financial Statements for
periods prior to the Separation, income tax expense, deferred tax balances and tax carryforwards have been
recorded as if ADT filed tax returns on a standalone basis separate from Tyco (“Separate Return Method”). The
74
Separate Return Method applies the accounting guidance for income taxes to the standalone financial statements
as if the Company was a separate taxpayer and a standalone enterprise for the periods prior to the Separation. The
deferred tax balances reflected in the Company’s Consolidated Balance Sheets as of September 26, 2014 and
September 27, 2013 have been recorded on a consolidated return basis. The calculation of income taxes for the
Company requires a considerable amount of judgment and use of both estimates and allocations. Prior to the
Separation, the Company primarily operated within a Tyco U.S. consolidated group and within a standalone
Canadian entity. In certain instances, tax losses or credits generated by Tyco’s other businesses continue to be
available to the Company in periods after the Separation.
In determining taxable income for the Company’s Consolidated and Combined Financial Statements, the
Company must make certain estimates and judgments. These estimates and judgments affect the calculation of
certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise
from temporary differences between the tax and financial statement recognition of revenue and expense.
In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available
positive and negative evidence including its past operating results, the existence of cumulative losses in the most
recent years and its forecast of future taxable income. In estimating future taxable income, the Company
develops assumptions including the amount of future pre-tax operating income, the reversal of temporary
differences and the implementation of feasible and prudent tax planning strategies. These assumptions require
significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates
the Company is using to manage its underlying businesses.
The Company does not have any significant valuation allowances against its net deferred tax assets.
In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the
application of complex tax regulations in the United States and Canada. The Company recognizes potential
liabilities and records tax liabilities for anticipated tax audit issues in the U.S. and other tax jurisdictions based on
its estimate of whether, and the extent to which, additional taxes will be due. These tax liabilities are reflected net
of related tax loss carryforwards. The Company adjusts these reserves in light of changing facts and
circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result
in a payment that is materially different from the Company’s current estimate of the tax liabilities. If the
Company’s estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to
expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the
reversal of the liabilities would result in tax benefits being recognized in the period when the Company
determines the liabilities are no longer necessary.
Concentration of Credit Risks—Financial instruments which potentially subject the Company to
concentrations of credit risks are principally accounts receivables. The Company’s concentration of credit risk
with respect to accounts receivable is limited due to the significant size of its customer base.
Financial Instruments—The Company’s financial instruments consist primarily of cash and cash
equivalents, accounts receivable, accounts payable, debt and derivative financial instruments. Due to their shortterm nature, the fair value of cash and cash equivalents, including the money market mutual funds, accounts
receivable and accounts payable approximated book value as of September 26, 2014 and September 27, 2013.
Cash Equivalents—Included in cash and cash equivalents are available-for-sale securities, representing cash
invested in money market mutual funds of nil and $124 million, as of September 26, 2014 and September 27,
75
FORM 10-K
Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future.
Management records the effect of a tax rate or law change on the Company’s deferred tax assets and liabilities in
the period of enactment. Future tax rate or law changes could have a material effect on the Company’s results of
operations, financial condition or cash flows.
2013 respectively. These investments are classified as Level 1 for purposes of fair value measurement, which is
performed each reporting period. Any unrealized holding gains or losses are excluded from earnings and reported
in other comprehensive income until realized.
Long-Term Debt Instruments—The fair value of the Company’s unsecured notes as of September 27, 2013
was determined using prices for ADT’s securities obtained from external pricing services, which is considered a
Level 2 input. Subsequently, the Company completed exchange offers for the $2.5 billion notes issued in July
2012, the $700 million notes issued in January 2013 and the $1.0 billion notes issued in October 2013. See Note
5 for further information on the Company’s exchange offers. The completion of these exchange offers enables
the Company to use broker-quoted market prices to determine the fair value of its debt. Therefore the fair value
of the Company’s unsecured notes as of September 26, 2014 was determined using these quoted market prices,
which is considered a Level 2 input. The carrying amount of debt outstanding under the Company’s revolving
credit facility approximates fair value as interest rates on these borrowings approximate current market rates,
which are considered Level 2.
The carrying value and fair value of the Company’s debt that is subject to fair value disclosures as of
September 26, 2014 and September 27, 2013 is as follows ($ in millions):
September 26, 2014
Carrying Value
Fair Value
Long-term debt instruments, excluding
capital lease obligations . . . . . . . . . . . . .
$5,065
$4,759
September 27, 2013
Carrying Value
Fair Value
$3,340
$2,892
Derivative Instruments—All derivative financial instruments are reported on the Consolidated Balance
Sheets at fair value. For derivative financial instruments designated as fair value hedges, the changes in fair value
of both the derivatives and the hedged items are recognized currently in the Consolidated and Combined
Statements of Operations. The fair values of the Company’s derivative financial instruments are not material.
FORM 10-K
During the year ended September 26, 2014, the Company entered into interest rate swap transactions to
hedge $500 million of its $1 billion, 6.250% fixed-rate notes due October 2021, and all $500 million of its
4.125% fixed-rate notes due April 2019. These transactions are designated as fair value hedges with the objective
of managing the exposure to interest rate risk by converting the interest rates on the fixed-rate notes to floating
rates. These transactions did not have a material impact on the Company’s Consolidated and Combined Financial
Statements as of and for the year ended September 26, 2014.
Restructuring and Other Charges—During the year ended September 26, 2014, the Company recognized $8
million in severance charges related to the separation of employees in conjunction with actions taken to reduce
general and administrative expenses, $5 million of which was paid as of September 26, 2014. In addition, during
the year ended September 26, 2014, the Company recognized $6 million in charges, primarily related to a loss on
the sublease of a portion of its office space and $3 million of other costs associated with consulting services
focused on identifying actions to reduce its cost structure and streamline operations.
The Company also recognized other charges of $8 million related to accelerated depreciation on certain
assets abandoned in connection with the rationalization of its business processes and system landscape.
Restructuring and other charges during fiscal years 2013 and 2012 were immaterial.
Guarantees—In the normal course of business, the Company is liable for contract completion and product
performance. In the opinion of management, such obligations will not significantly affect the Company’s
financial position, results of operations or cash flows. As of September 26, 2014 and September 27, 2013, the
Company did not have material guarantees.
Recent Accounting Pronouncements—In June 2011, the Financial Accounting Standards Board (“FASB”)
issued authoritative guidance for the presentation of comprehensive income. The guidance amended the reporting
76
of Other Comprehensive Income (“OCI”) by eliminating the option to present OCI as part of the statement of
stockholders’ equity. The amendment does not impact the accounting for OCI, but does impact its presentation in
the Company’s Consolidated and Combined Financial Statements. The guidance requires that items of net
income and OCI be presented either in a single continuous statement of comprehensive income or in two separate
but consecutive statements which include total net income and its components, consecutively followed by total
OCI and its components to arrive at total comprehensive income. In December 2011, the FASB issued
authoritative guidance to defer the effective date for those aspects of the guidance relating to the presentation of
reclassification adjustments out of accumulated other comprehensive income by component. The guidance
became effective for the Company in the first quarter of fiscal year 2013 and has been retrospectively applied for
the fiscal year ended September 28, 2012. The adoption of this guidance did not have a material impact on the
Company’s financial position, results of operations or cash flows.
In July 2012, the FASB issued authoritative guidance which amends the process of testing indefinite-lived
intangible assets for impairment. This guidance permits an entity to first assess qualitative factors to determine
whether the existence of events or circumstances leads to a determination that it is more likely than not (defined
as having a likelihood of more than fifty percent) that the indefinite-lived intangible asset is impaired. If an entity
determines it is not more likely than not that the indefinite-lived intangible asset is impaired, the entity will have
an option not to calculate the fair value of an indefinite-lived asset annually. The guidance became effective for
the Company in the first quarter of fiscal year 2013. The adoption of this guidance did not have a material impact
on the Company’s financial position, results of operations or cash flows.
In February 2013, the FASB issued authoritative guidance which expands the disclosure requirements for
amounts reclassified out of accumulated other comprehensive income (“AOCI”). The guidance requires an entity
to provide information about the amounts reclassified out of AOCI by component and present, either on the face
of the income statement or in the notes to financial statements, significant amounts reclassified out of AOCI by
the respective line items of net income but only if the amount reclassified is required under GAAP to be
reclassified to net income in its entirety in the same reporting period. For other amounts, an entity is required to
cross-reference to other disclosures required under GAAP that provide additional detail about those amounts.
This guidance does not change the current requirements for reporting net income or other comprehensive income
in the financial statements. The guidance became effective for the Company in the first quarter of fiscal year
2014. The adoption of this guidance did not have a significant impact on the Company’s Consolidated and
Combined Financial Statements, as any reclassifications out of AOCI were immaterial.
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 guidance is effective for
annual reporting periods (including interim reporting periods within those periods) beginning after December 15,
2016 and early adoption is not permitted. Companies may use either a full retrospective or a modified
retrospective approach to adopt this guidance. The Company is currently evaluating the impact of this guidance.
77
FORM 10-K
In September 2011, the FASB issued authoritative guidance which amends the process of testing goodwill
for impairment. The guidance permits an entity to first assess qualitative factors to determine whether the
existence of events or circumstances leads to a determination that it is more likely than not (defined as having a
likelihood of more than fifty percent) that the fair value of a reporting unit is less than its carrying amount. If an
entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying
amount, performing the traditional two-step goodwill impairment test is unnecessary. If an entity concludes
otherwise, it would be required to perform the first step of the two-step goodwill impairment test. If the carrying
amount of the reporting unit exceeds its fair value, then the entity is required to perform the second step of the
goodwill impairment test. However, an entity has the option to bypass the qualitative assessment in any period
and proceed directly to step one of the impairment test. The guidance became effective for the Company in the
first quarter of fiscal year 2013. The adoption of this guidance did not have a material impact on the Company’s
financial position, results of operations or cash flows.
2.
Acquisitions
Dealer Generated Customer Accounts and Bulk Account Purchases
During fiscal years 2014, 2013 and 2012, the Company paid $526 million, $555 million and $648 million,
respectively, for customer contracts for electronic security services generated under the ADT dealer program and
bulk account purchases.
Acquisitions
On July 8, 2014, the Company acquired all of the issued and outstanding capital stock of Reliance
Protectron Inc. (“Protectron”), a leading electronic security services company in Canada. The primary purpose of
the acquisition was to expand the Company’s market share in Canada and create a stronger organization that is
better positioned to serve Canadian customers. The consideration transferred in Canadian dollars (“CAD”) was
CAD $560 million ($525 million), and cash paid during fiscal year 2014 was $517 million, net of cash acquired.
The transaction was financed with borrowings of $375 million under the Company’s revolving credit facility and
cash on hand.
Under the acquisition method of accounting, the purchase price has been allocated to Protectron’s tangible
and identifiable intangible assets acquired and liabilities assumed based on estimates of fair value using available
information and making assumptions management believes are reasonable. The excess of the purchase price over
those fair values was recorded as goodwill. The following table summarizes the allocation of the purchase price
of this acquisition and the estimated fair value of the assets acquired and liabilities assumed at the date of
acquisition for fiscal year 2014:
Estimated fair value of assets acquired and liabilities assumed
(in millions):
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trade name and other intangibles . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consideration transferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
5
253
43
296
(65)
(7)
$525
FORM 10-K
The purchase price allocation for the Protectron acquisition as of September 26, 2014 is preliminary and
remains subject to post-closing adjustments. The amortization period for intangible assets acquired ranges from 7
to 20 years. The Company recorded approximately $296 million of goodwill, reflecting the strategic fit and the
value of Protectron’s recurring revenue and earnings growth potential to the Company. The goodwill amount is
not deductible for tax purposes. Protectron’s impact on the Company’s Consolidated Results of Operations for
fiscal year 2014 and pro-forma results for fiscal years 2014 and 2013 is immaterial.
On August 2, 2013, the Company acquired all of the issued and outstanding capital stock of Devcon
Security Holdings, Inc. (“Devcon Security”) for cash consideration of $146 million, net of cash acquired. Devcon
Security provides alarm monitoring services and related equipment to residential homes, businesses and
homeowners associations in the United States. As part of this acquisition, the Company recognized intangible
assets of $84 million in customer relationships and $60 million of goodwill as well as insignificant amounts of
net working capital and tangible assets. On October 1, 2012, the Company completed its acquisition of Absolute
Security, which had been an ADT authorized dealer, with $16 million of cash paid during fiscal year 2013. As
part of this acquisition, the Company recognized $20 million of goodwill.
These acquisitions were not material to the Company’s financial statements. There was no acquisition made
by the Company during fiscal year 2012.
78
3.
Property and Equipment
Property and equipment consisted of the following ($ in millions):
September 26,
2014
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings and leasehold improvements . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property under capital leases . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . .
4.
9
101
392
45
15
(297)
September 27,
2013
$
$
9
80
389
41
29
(313)
$ 265
$ 235
Goodwill and Other Intangible Assets
Goodwill
On the first day of the fiscal fourth quarter of 2014, the Company performed a qualitative impairment
assessment for goodwill and concluded that it is not more likely than not that the fair value of the reporting unit
is less than its carrying amount and therefore goodwill was not impaired. Additionally, there were no goodwill
impairments as a result of performing the Company’s annual impairment tests for fiscal years 2013 and 2012.
Balance as of September 27, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,476
296
(34)
Balance as of September 26, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,738
Balance as of September 28, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,400
80
(4)
Balance as of September 27, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,476
Other Intangible Assets
The following table sets forth the gross carrying amounts and accumulated amortization of the Company’s
other intangible assets as of September 26, 2014 and September 27, 2013 ($ in millions):
September 26, 2014
Gross Carrying
Accumulated
Amount
Amortization
September 27, 2013
Gross Carrying
Accumulated
Amount
Amortization
Amortizable:
Contracts and related customer
relationships . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . .
$8,098
51
$(5,022)
(7)
$7,697
13
$(4,780)
(8)
Total . . . . . . . . . . . . . . . . . . .
$8,149
$(5,029)
$7,710
$(4,788)
79
FORM 10-K
The changes in the carrying amount of goodwill for the years ended September 26, 2014 and September 27,
2013 are as follows ($ in millions):
Changes in the net carrying amount of contracts and related customer relationships for the years ended
September 26, 2014 and September 27, 2013 are as follows ($ in millions):
Balance as of September 27, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of customer relationships (Protectron) . . . . . . . . . . . . . . . . . .
Customer contract additions, net of dealer charge-backs . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,917
253
523
(587)
(30)
Balance as of September 26, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,076
Balance as of September 28, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition of customer relationships (Devcon Security) . . . . . . . . . . . . .
Customer contract additions, net of dealer charge-backs . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Currency translation and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,855
84
552
(566)
(8)
Balance as of September 27, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$2,917
Other than goodwill, the Company does not have any other indefinite-lived intangible assets as of
September 26, 2014 and September 27, 2013. Intangible asset amortization expense for fiscal years 2014, 2013
and 2012 was $589 million, $569 million and $546 million, respectively. The weighted-average amortization
periods for contracts and related customer relationships acquired during fiscal years 2014 and 2013 were 14 years
and 15 years, respectively.
The estimated aggregate amortization expense for intangible assets is expected to be as follows ($ in
millions):
Fiscal 2015
Fiscal 2016
Fiscal 2017
Fiscal 2018
Fiscal 2019
5.
..........................................
..........................................
..........................................
..........................................
..........................................
$577
486
408
346
297
Debt
FORM 10-K
Debt as of September 26, 2014 and September 27, 2013 is as follows ($ in millions):
September 26,
2014
Current maturities of long-term debt:
Capital lease obligations and other . . . . . . . . . . . . .
$
4
September 27,
2013
$
3
Current maturities of long-term debt . . . . . . . . . . . .
4
3
Long-term debt:
2.250% notes due July 2017 . . . . . . . . . . . . . . . . . . .
4.125% notes due April 2019 . . . . . . . . . . . . . . . . . .
6.250% notes due October 2021 . . . . . . . . . . . . . . .
3.500% notes due July 2022 . . . . . . . . . . . . . . . . . . .
4.125% notes due June 2023 . . . . . . . . . . . . . . . . . .
4.875% notes due July 2042 . . . . . . . . . . . . . . . . . . .
Revolving credit facility . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations and other . . . . . . . . . . . . .
750
498
1,001
998
700
743
375
31
750
—
—
998
700
742
150
33
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . .
$5,096
$3,373
Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,100
$3,376
80
Senior Unsecured Notes
Fiscal Year 2014
On October 1, 2013, the Company issued $1 billion aggregate principal amount of 6.250% senior unsecured
notes due October 2021 to certain institutional investors pursuant to certain exemptions from registration under
the Securities Act of 1933, as amended (the “October 2013 Debt Offering”). Net cash proceeds from the issuance
of this term indebtedness totaled $987 million, of which $150 million was used to repay the outstanding
borrowings under the Company’s revolving credit facility as of September 27, 2013. The remaining net proceeds
were used primarily for repurchases of outstanding shares of ADT’s common stock. Interest is payable on
April 15 and October 15 of each year and commenced on April 15, 2014. The Company may redeem the notes, in
whole or in part, at any time prior to the maturity date at a redemption price equal to the greater of the principal
amount of the notes to be redeemed, or a make-whole premium, plus in each case, accrued and unpaid interest to,
but excluding, the redemption date.
In connection with the October 2013 Debt Offering, the Company entered into an exchange and registration
rights agreement with the initial purchasers of the notes. Under this agreement, the Company was obligated to
file a registration statement for an offer to exchange the notes for a new issue of substantially identical notes
registered under the Securities Act of 1933, as amended. Alternatively, the Company was required to file a shelf
registration statement to cover resales of such notes if the exchange offer was not completed within 365 days
after closing of the initial notes issuance and the offer to exchange the notes had not been completed within 30
business days of the effective time and date of the registration statement. On April 4, 2014, the Company
commenced an offer to exchange the notes issued in the October 2013 Debt Offering, pursuant to the exchange
and registration rights agreement. This exchange offer was completed on May 9, 2014.
Fiscal Year 2013
On January 14, 2013, the Company issued $700 million aggregate principal amount of 4.125% unsecured
notes due June 2023 to certain institutional investors pursuant to certain exemptions from registration under the
Securities Act of 1933, as amended (the “January 2013 Debt Offering”). Net cash proceeds from the issuance of
this term indebtedness totaled $694 million and were primarily used for the repurchase of outstanding shares of
ADT’s common stock. Interest is payable on June 15 and December 15 of each year, and commenced on June 15,
2013. The Company may redeem the notes, in whole or in part, at any time prior to the maturity date at a
redemption price equal to the greater of the principal amount of the notes to be redeemed, or a make-whole
premium, plus in each case, accrued and unpaid interest to, but excluding, the redemption date.
Fiscal Year 2012
On July 5, 2012, the Company issued $2.5 billion aggregate principal amount of unsecured notes, of which
$750 million aggregate principal amount of 2.250% notes will mature on July 15, 2017, $1.0 billion aggregate
principal amount of 3.500% notes will mature on July 15, 2022, and $750 million aggregate principal amount of
4.875% notes will mature on July 15, 2042. Cash proceeds from the issuance of this term indebtedness, net of
debt issuance costs, totaled approximately $2.47 billion and were used primarily to repay intercompany debt and
to make other cash payments to Tyco in conjunction with the Separation. Interest is payable on January 15 and
81
FORM 10-K
On March 19, 2014, the Company completed a public offering of $500 million of its 4.125% senior
unsecured notes due April 2019. Net cash proceeds from the issuance of this term indebtedness totaled $493
million, of which $200 million was used to repay outstanding borrowings under the Company’s revolving credit
facility. The remaining net proceeds were used primarily for general corporate purposes and repurchases of
outstanding shares of ADT’s common stock. Interest is payable on April 15 and October 15 of each year, and
commenced on October 15, 2014. The Company may redeem the notes, in whole or in part, at any time prior to
the maturity date at a redemption price equal to the greater of the principal amount of the notes to be redeemed,
or a make-whole premium, plus in each case, accrued and unpaid interest to, but excluding, the redemption date.
July 15 of each year. The Company may redeem each series of the notes, in whole or in part, at any time at a
redemption price equal to the principal amount of the notes to be redeemed, plus a make-whole premium, plus in
each case, accrued and unpaid interest to, but excluding, the redemption date.
As part of the Company’s issuances of long-term notes in July 2012 and January 2013, the Company
entered into exchange and registration rights agreements with the initial purchasers of the notes. Under each of
these agreements, the Company was obligated to file a registration statement for an offer to exchange the notes
for a new issue of substantially identical notes registered under the Securities Act of 1933, as amended, or
provide a shelf registration statement to cover resales of such notes if the exchange offer was not complete within
365 days after closing of the respective notes issuance. On April 1, 2013, the Company commenced an offer to
exchange the $2.5 billion notes issued in July 2012, and on April 18, 2013, the Company commenced an offer to
exchange the $700 million notes issued in January 2013. These exchange offers were completed during the third
quarter of fiscal year 2013.
Revolving Credit Facility
On June 22, 2012, the Company entered into an unsecured senior revolving credit facility with a maturity
date of June 22, 2017 and an aggregate commitment of $750 million, which is available to be used for working
capital, capital expenditures and other corporate purposes. The interest rate for borrowings under the revolving
credit facility is based on the London Interbank Offered Rate (“LIBOR”) or an alternative base rate, plus a
spread, based upon the Company’s credit rating. As of September 26, 2014 and September 27, 2013, the
Company had outstanding borrowings under the facility of $375 million and $150 million, respectively, at an
interest rate of 1.606% and 1.630%, respectively.
On September 12, 2012 the Company established a $750 million commercial paper program, supported by
its revolving credit facility of the same amount. The Company discontinued this commercial paper program on
July 31, 2013.
The Company’s revolving credit facility contains customary covenants, including a limit on the ratio of debt
to earnings before interest, taxes, depreciation, and amortization (“EBITDA”), a minimum required ratio of
EBITDA to interest expense and limits on incurrence of liens and subsidiary debt. In addition, the indenture
governing the Company’s senior unsecured notes contains customary covenants including limits on liens and
sale/leaseback transactions. Furthermore, acceleration of any obligation under any of the Company’s material
debt instruments will permit the holders of its other material debt to accelerate their obligations.
FORM 10-K
As of September 26, 2014, the Company was in compliance with all financial covenants on its debt
instruments.
Aggregate annual maturities of long-term debt and capital lease obligations are as follows ($ in millions):
Fiscal 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
7
7
1,132
6
506
3,464
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less amount representing discount on notes . . . . . . . . . . .
Less amount representing interest on capital leases . . . . . .
Less hedge accounting fair value adjustment . . . . . . . . . . .
5,122
9
12
1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less current maturities of long-term debt . . . . . . . . . . . . .
5,100
4
Total long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,096
82
Prior to the issuance of its indenture in July 2012, the Company’s working capital requirements and capital
for general corporate purposes, including acquisitions and capital expenditures, were satisfied as part of Tyco’s
company-wide cash management practices. Accordingly, Tyco’s consolidated debt and related interest expense,
exclusive of amounts incurred directly by the Company, were allocated to the Company for periods prior to
July 5, 2012.
Interest expense totaled $193 million, $118 million and $93 million for the years ended September 26, 2014,
September 27, 2013 and September 28, 2012, respectively. Interest expense for the first nine months of fiscal
year 2012 includes allocated interest expense of $64 million. Interest expense for this period was allocated in the
same proportion as debt and included the impact of Tyco’s interest rate swap agreements designated as fair value
hedges. Interest expense for fiscal years 2014, 2013 and the remaining amount of interest expense for fiscal year
2012 primarily represents interest incurred on the Company’s unsecured notes. Accrued interest totaled $44
million and $27 million as of September 26, 2014 and September 27, 2013, respectively.
See Note 1 for information on the fair value of the Company’s debt.
6.
Income Taxes
Significant components of income before income taxes for fiscal years 2014, 2013 and 2012 are as follows
($ in millions):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2013
2012
$408
24
$610
32
$581
49
$432
$642
$630
Current:
United States:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred:
United States:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-U.S. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax provision . . . . . . . . . . . . . . . . . . . . . . . . .
83
2014
2013
2012
$ (17)
7
15
$
7
1
6
$170
36
8
$
$ 14
$214
$110
20
(7)
$172
33
2
$ 21
(6)
7
123
207
22
$128
$221
$236
5
FORM 10-K
Significant components of the income tax provision for fiscal years 2014, 2013 and 2012 are as follows ($ in
millions):
The reconciliation between the actual effective tax rate on continuing operations and the statutory U.S.
federal income tax rate for fiscal years 2014, 2013 and 2012 is as follows:
2014
2013
2012
Federal statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increases (reductions) in taxes due to:
U.S. state income tax provision, net . . . . . . . . . . . . . . . . . . . . .
Non-U.S. net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademark amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Nondeductible charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Resolution of unrecognized tax benefits . . . . . . . . . . . . . . . . . .
2005-2009 IRS adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
35.0 % 35.0 % 35.0 %
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29.6 % 34.4 % 37.5 %
4.2 % 3.5 % 3.4 %
(0.5)% (0.5)% (0.6)%
(5.3)% (3.6)% — %
— % (1.0)% — %
(6.5)% — % — %
3.7 % — % — %
(1.0)% 1.0 % (0.3)%
Deferred income taxes result from temporary differences between the amount of assets and liabilities
recognized for financial reporting and tax purposes.
The components of the Company’s net deferred income tax liability as of September 26, 2014 and
September 27, 2013 are as follows ($ in millions):
September 26,
2014
Deferred tax assets:
Accrued liabilities and reserves . . . . . . . . . . . . . . . .
Tax loss and credit carryforwards . . . . . . . . . . . . . .
Postretirement benefits . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
35
1,023
14
167
13
$ 1,252
FORM 10-K
Deferred tax liabilities:
Property and equipment . . . . . . . . . . . . . . . . . . . . . .
Subscriber system assets . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 27,
2013
$
37
1,114
15
161
10
$ 1,337
(34)
(633)
(1,111)
(10)
(16)
(600)
(1,052)
(12)
$(1,788)
$(1,680)
Net deferred tax liability before valuation
allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . .
(536)
(2)
(343)
(2)
Net deferred tax liability . . . . . . . . . . . . . . . . . . . . .
$ (538)
$ (345)
The net deferred tax liability increased primarily due to accelerated depreciation and amortization and
current year net operating loss (“NOL”) utilization.
The valuation allowance for deferred tax assets of $2 million as of September 26, 2014 and September 27,
2013, relates to the uncertainty of the utilization of certain state and U.S. deferred tax assets. The Company
believes that it is more likely than not that it will generate sufficient future taxable income to realize the tax
benefits related to its remaining deferred tax assets, including credit and NOL carryforwards, on the Company’s
Consolidated Balance Sheet.
84
As of September 26, 2014, the Company had approximately $2.6 billion of U.S. Federal NOL
carryforwards, $1.4 billion of state NOL carryforwards and immaterial foreign NOL carryforwards. The U.S.
Federal NOL carryforwards will expire between 2016 and 2033, and the state NOL carryforwards will expire
between 2015 and 2033. Although future utilization will depend on the Company’s actual profitability and the
result of income tax audits, the Company anticipates that its U.S. Federal NOL carryforwards will be fully
utilized prior to expiration. Of the $2.6 billion U.S. Federal NOL carryforwards, $0.8 billion was generated by a
prior consolidated group. As of September 28, 2012, this amount was subject to Separate Return Limitation Year
(“SRLY”) rules which placed limits on the amount of SRLY loss that could offset consolidated taxable income in
the future. However, during fiscal year 2013, the Company determined that the SRLY limitation was no longer
applicable as an “ownership change” is deemed to have occurred upon Separation from Tyco on September 28,
2012 pursuant to Internal Revenue Code (the “Code”) Section 382. Therefore, the tax attributes as of the end of
September 2012 are only subject to the limitations provided by Code Sections 382 and 383. The Company does
not, however, expect that this limitation will impact its ability to utilize the tax attributes carried forward from
pre-Separation periods.
Unrecognized Tax Benefits
As of September 26, 2014 and September 27, 2013, the Company had unrecognized tax benefits of $49
million and $87 million, respectively, of which $49 million and $69 million, if recognized, would affect the
effective tax rate. The Company recognizes interest and penalties related to unrecognized tax benefits in income
tax expense. Accrued interest and penalties related to the unrecognized tax benefits as of September 26, 2014 and
September 27, 2013 were not material. All unrecognized tax benefits and related interest were presented as noncurrent in the Company’s Condensed Balance Sheet as of September 26, 2014. As of September 27, 2013, the
current portion of the unrecognized tax benefits and the related accrued interest, which totaled $28 million and $8
million, respectively, are reflected in income taxes payable on the Company’s Consolidated Balance Sheet.
The impact to the income tax provision for interest and penalties related to unrecognized tax benefits was
immaterial for fiscal years 2014, 2013 and 2012.
2014
2013
2012
Balance as of beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions contributed in conjunction with
the Separation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions related to lapse of statute of limitations . . . . . . . . . . . . .
Reductions based on tax positions related to prior years . . . . . . . . .
Increase related to acquisitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease due to reductions in the AMT payable . . . . . . . . . . . . . . .
Other changes not impacting the income statement . . . . . . . . . . . . .
$ 87
$ 88
$
—
—
(38)
15
(18)
3
—
(1)
—
—
—
—
85
—
—
—
—
—
Balance as of end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 49
$ 87
$ 88
3
Based on the current status of its income tax audits, the Company believes that it is reasonably possible that
no unrecognized tax benefits may be resolved in the next twelve months.
85
FORM 10-K
A rollforward of unrecognized tax benefits for the years ended September 26, 2014, September 27, 2013 and
September 28, 2012 is as follows ($ in millions):
Many of the Company’s uncertain tax positions relate to tax years that remain subject to audit by the taxing
authorities in the U.S. federal, state and local or foreign jurisdictions. Open tax years in significant jurisdictions
are as follows:
Jurisdiction
Years
Open To Audit
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2007 – 2013
1997 – 2013
Undistributed Earnings of Subsidiaries
The Company’s primary non-U.S. operations are located in Canada. The Company has not provided U.S.
income taxes and foreign withholding taxes on the undistributed earnings of its Canadian subsidiaries as of
September 26, 2014, as earnings are expected to be permanently reinvested outside the U.S. If these foreign
earnings were to be repatriated in the future, the related U.S. tax liability may be reduced by any foreign income
taxes previously paid on these earnings. As of September 26, 2014, the cumulative amount of earnings upon
which U.S. income taxes have not been provided is approximately $220 million. The determination of the
amount of unrecognized deferred tax liability related to these earnings is not practicable.
Tax Sharing Agreement and Other Income Tax Matters
In connection with the Separation from Tyco, the Company entered into a tax sharing agreement (the “2012
Tax Sharing Agreement”) with Tyco and Pentair Ltd., formerly Tyco Flow Control International, Ltd. (“Pentair”)
that governs the rights and obligations of ADT, Tyco and Pentair for certain pre-Separation tax liabilities,
including Tyco’s obligations under the tax sharing agreement among Tyco, Covidien Ltd. (“Covidien”), and TE
Connectivity Ltd. (“TE Connectivity”) entered into in 2007 (the “2007 Tax Sharing Agreement”). The 2012 Tax
Sharing Agreement provides that ADT, Tyco and Pentair will share (i) certain pre-Separation income tax
liabilities that arise from adjustments made by tax authorities to ADT’s, Tyco’s, and Pentair’s U.S. and certain
non-U.S. income tax returns, and (ii) payments required to be made by Tyco in respect to the 2007 Tax Sharing
Agreement (collectively, “Shared Tax Liabilities”). Tyco will be responsible for the first $500 million of Shared
Tax Liabilities. ADT and Pentair will share 58% and 42%, respectively, of the next $225 million of Shared Tax
Liabilities. ADT, Tyco and Pentair will share 27.5%, 52.5% and 20.0%, respectively, of Shared Tax Liabilities
above $725 million.
FORM 10-K
In addition, under the terms of the 2012 Tax Sharing Agreement, in the event the distribution of ADT’s
common shares to the Tyco shareholders (the “Distribution”), the distribution of Pentair common shares to the
Tyco shareholders (the “Pentair Distribution” and, together with the Distribution, the “Distributions”), or certain
internal transactions undertaken in connection therewith were determined to be taxable as a result of actions
taken by ADT, Pentair or Tyco after the Distributions, the party responsible for such failure would be responsible
for all taxes imposed on ADT, Pentair or Tyco as a result thereof. Taxes resulting from the determination that the
Distribution, the Pentair Distribution, or any internal transaction that were intended to be tax-free is taxable are
referred to herein as “Distribution Taxes.” If such failure is not the result of actions taken after the Distributions
by ADT, Pentair or Tyco, then ADT, Pentair and Tyco would be responsible for any Distribution Taxes imposed
on ADT, Pentair or Tyco as a result of such determination in the same manner and in the same proportions as the
Shared Tax Liabilities. ADT has sole responsibility of any income tax liability arising as a result of Tyco’s
acquisition of Broadview Security in May 2010, including any liability of Broadview Security under the tax
sharing agreement between Broadview Security and The Brink’s Company dated October 31, 2008 (collectively,
“Broadview Tax Liabilities”). Costs and expenses associated with the management of Shared Tax Liabilities,
Distribution Taxes, and Broadview Tax Liabilities will generally be shared 20.0% by Pentair, 27.5% by ADT,
and 52.5% by Tyco. ADT is responsible for all of its own taxes that are not shared pursuant to the 2012 Tax
Sharing Agreement’s sharing formulae. In addition, Tyco and Pentair are responsible for their tax liabilities that
are not subject to the 2012 Tax Sharing Agreement’s sharing formulae.
86
The 2012 Tax Sharing Agreement also provides that, if any party defaults in its obligation to another party
to pay its share of the distribution taxes that arise as a result of no party’s fault, each non-defaulting party is
required to pay, equally with any other non-defaulting party, the amounts in default. In addition, if another party
to the 2012 Tax Sharing Agreement that is responsible for all or a portion of an income tax liability defaults in its
payment of such liability to a taxing authority, ADT could be legally liable under applicable tax law for such
liabilities and required to make additional tax payments. Accordingly, under certain circumstances, ADT may be
obligated to pay amounts in excess of its agreed-upon share of its, Tyco’s and Pentair’s tax liabilities.
The Company recorded a receivable from Tyco for certain tax liabilities incurred by ADT but indemnified
by Tyco under the 2012 Tax Sharing Agreement. This receivable totaled $41 million as of September 27, 2013,
substantially all of which was released into other expense during fiscal year 2014. The actual amount that the
Company may be entitled to receive could vary depending upon the outcome of certain unresolved tax matters,
which may not be resolved for several years.
In conjunction with the Separation, substantially all of Tyco’s outstanding equity awards were converted
into like-kind awards of ADT, Tyco and Pentair. Pursuant to the terms of the 2012 Separation and Distribution
Agreement, each of the three companies is responsible for issuing its own shares upon employee exercises of
stock option awards or vesting of restricted stock units. However, the 2012 Tax Sharing Agreement provides that
any allowable compensation tax deduction for such awards is to be claimed by the employee’s current employer.
The 2012 Tax Sharing Agreement requires the employer claiming a tax deduction for shares issued by the other
companies to pay a percentage of the allowable tax deduction to the company issuing the equity. During the year
ended September 26, 2014, amounts recorded in connection with this arrangement were immaterial.
7.
Commitments and Contingencies
Lease Obligations
The following table provides a schedule of minimum lease payments for non-cancelable operating leases as
of September 26, 2014 ($ in millions):
Fiscal 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 65
52
39
33
21
45
Less sublease income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
255
18
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$237
87
FORM 10-K
The Company has facility, vehicle and equipment leases that expire at various dates through 2024. Rental
expense under these leases was $58 million, $50 million and $44 million for fiscal years 2014, 2013 and 2012,
respectively. Sublease income was immaterial for all years presented. In addition to operating leases, the
Company has commitments under capital leases for certain facilities, which are immaterial.
Purchase Obligations
The following table provides a schedule of obligations related to commitments to purchase certain goods
and services as of September 26, 2014 ($ in millions):
Fiscal 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fiscal 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 28
9
4
—
—
—
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 41
Legal Proceedings
The Company is subject to various claims and lawsuits in the ordinary course of business, including from
time to time, contractual disputes, employment matters, product and general liability claims, claims that the
Company has infringed the intellectual property rights of others, claims related to alleged security system
failures, and consumer and employment class actions. The Company has recorded accruals for losses that it
believes are probable to occur and are reasonably estimable. While the ultimate outcome of these matters cannot
be predicted with certainty, the Company believes that the resolution of any such proceedings (other than matters
specifically identified below), will not have a material effect on its financial condition, results of operations or
cash flows.
Environmental Matter
FORM 10-K
On October 25, 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 certain of the
Company’s waste disposal policies, procedures and practices are in violation of the California Business and
Professions Code and the California Health and Safety Code. The Company is cooperating fully with the
respective authorities. The Company is currently unable to predict the outcome of this investigation or reasonably
estimate a range of possible loss.
Securities Litigation
On April 28, 2014, the Company and certain of its current and former officers and directors were named as
defendants in a lawsuit filed in the United States District Court for the Southern District of Florida. The plaintiff
alleges violations of the Securities Exchange Act of 1934 and SEC Rule 10b-5, and seeks monetary damages,
including interest, and class action status on behalf of all plaintiffs who purchased the Company’s common stock
during the period between November 27, 2012 and January 29, 2014, inclusive. The claims focus primarily on
the Company’s statements concerning its financial condition and future business prospects for fiscal 2013 and the
first quarter of fiscal 2014, its stock repurchase program in 2012 and 2013 and the buyback of stock from Corvex
Management LP (“Corvex”) in November 2013. On June 27, 2014, another plaintiff filed a similar action in the
same court. On July 14, 2014, the Court entered an order consolidating the two actions under the caption
Henningsen v. The ADT Corporation, Case No. 14-80566-CIV-DIMITROULEAS, and appointing IBEW Local
595 Pension and Money Purchase Pension Plans, Macomb County Employees’ Retirement System and KBC
Asset Management NV as Lead Plaintiffs in the consolidated action. In addition to the Company, the defendants
named in the action are Naren Gursahaney, Kathryn A. Mikells, Michael S. Geltzeiler, Keith A. Meister, and
Corvex. The Company intends to vigorously defend itself against the allegations in this action and is currently
unable to predict the outcome or if legal damages will be awarded.
88
Derivative Litigation
In May and June 2014, four derivative actions were filed against a number of past and present officers and
directors of the Company. Like the securities actions described above, the derivative actions focus primarily on
the Company’s stock repurchase program in 2012 and 2013, the buyback of stock from Corvex in November
2013 and the Company’s statements concerning its financial condition and future business prospects for fiscal
2013 and the first quarter of fiscal 2014. Three of the derivative actions were filed in the United States District
Court for the Southern District of Florida. On July 16, 2014, the Court consolidated those three actions under the
caption In re The ADT Corporation Derivative Litigation, Lead Case No. 14-80570-CIV-DIMITROULEAS/
SNOW. The fourth derivative action, entitled Seidl v. Colligan, Case No. 2014CA007529, was filed in the
Circuit Court of the 15th Judicial Circuit, Palm Beach County, Florida. On July 14, 2014, the parties agreed to
stay that action pending resolution of motions to dismiss that are expected to be filed in the securities actions
described above. The Court approved the stay on July 23, 2014. A fifth derivative action asserting similar claims
was filed in the Delaware Court of Chancery on August 1, 2014. Defendants have moved to dismiss that action,
which is entitled Ryan v. Gursahaney, C.A. No. 9992-VCP.
In March 2014, the Company also received a demand from a shareholder to initiate litigation against the
officers and directors of the Company in connection with the Company’s stock repurchase program in 2012 and
2013 and the buyback of stock from Corvex in November 2013. The Company’s Board of Directors investigated
the matters with the assistance of an outside law firm and, on July 18, 2014, decided to reject the demand. In
September 2014, the Company received a demand from another shareholder to initiate litigation with regard to
the same matters raised in the March 2014 demand. On September 19, 2014, the Company’s Board of Directors
decided to reject the demand.
Income Tax Matters
With respect to years prior to and including the 2007 separation of Covidien and TE Connectivity by Tyco,
tax authorities have raised issues and proposed tax adjustments that are generally subject to the sharing
provisions of the 2007 Tax Sharing Agreement and which may require Tyco to make a payment to a taxing
authority, Covidien or TE Connectivity. Although Tyco has advised ADT that it has resolved a substantial
number of these adjustments, a few significant items raised by the IRS remain open with respect to the audits of
the 1997 through 2007 tax years. On July 1, 2013, Tyco announced that the IRS issued Notices of Deficiency to
Tyco primarily related to the treatment of certain intercompany debt transactions (the “Tyco IRS
Notices”). These notices assert that additional taxes of $883 million plus penalties of $154 million are owed
based on audits of the 1997 through 2000 tax years of Tyco and its subsidiaries, as they existed at that time.
Further, Tyco reported receiving Final Partnership Administrative Adjustments (the “Partnership Notices”) for
certain U.S. partnerships owned by its former U.S. subsidiaries, for which Tyco has informed that it estimates an
additional tax deficiency of approximately $30 million will be asserted. The additional tax assessments related to
the Tyco IRS Notices and the Partnership Notices exclude interest and do not reflect the impact on subsequent
periods if the IRS challenge to Tyco’s tax filings is proved correct. Tyco has filed petitions with the U.S. Tax
Court to contest the IRS assessments. Consistent with its petitions filed with the U.S. Tax Court, Tyco has
advised the Company that it strongly disagrees with the IRS position and believes (i) it has meritorious defenses
for the respective tax filings, (ii) the IRS positions with regard to these matters are inconsistent with applicable
tax laws and Treasury regulations, and (iii) the previously reported taxes for the years in question are appropriate.
If the IRS should successfully assert its position, the Company’s share of the collective liability, if any, would be
89
FORM 10-K
As discussed above in Note 6, in connection with the Separation from Tyco, the Company entered into the
2012 Tax Sharing Agreement with Tyco and Pentair Ltd. that governs the rights and obligations of the Company,
Tyco and Pentair for certain pre-Separation tax liabilities, including Tyco’s obligations under the tax sharing
agreement among Tyco, Covidien, and TE Connectivity entered into the 2007 Tax Sharing Agreement”. The
Company is responsible for all of its own taxes that are not shared pursuant to the 2012 Tax Sharing Agreement’s
sharing formulae. Tyco and Pentair are responsible for their tax liabilities that are not subject to the 2012 Tax
Sharing Agreement’s sharing formulae.
determined pursuant to the 2012 Tax Sharing Agreement. In accordance with the 2012 Tax Sharing Agreement,
Tyco is responsible for the first $500 million of tax, interest and penalty assessed against pre-2013 tax years
including its 27% share of the tax, interest and penalty assessed for periods prior to Tyco’s 2007 spin transaction
(“Pre-2007 Spin Periods”). In accordance with the 2012 Tax Sharing Agreement, the amount ultimately assessed
against Pre-2007 Spin Periods with respect to the Tyco IRS Notices and the Partnership Notices would have to be
in excess of $1.85 billion, including other assessments for unrelated historical tax matters Tyco has, or may settle
in the future, before the Company would be required to pay any of the amounts assessed. In addition to the
Company’s share of cash taxes pursuant to the 2012 Tax Sharing Agreement, the Company’s NOL carryforward
may be reduced by audit adjustments to pre-2013 tax periods. The Company believes that its income tax reserves
and the liabilities recorded in the Consolidated Balance Sheet for the 2012 Tax Sharing Agreement continue to be
appropriate. No payments with respect to the Tyco IRS Notices would be required until the dispute is resolved in
the U.S. Tax Court. A trial date has been set for February 2016. However, the ultimate resolution of these matters
is uncertain, and if the IRS were to prevail, it could have a material adverse impact on the Company’s financial
condition, results of operations and cash flows, potentially including a reduction in the Company’s available
NOL carryforwards. Further, to the extent ADT is responsible for any liability under the 2012 Tax Sharing
Agreement, there could be a material impact on its financial position, results of operations, cash flows or its
effective tax rate in future reporting periods.
During the year ended September 26, 2014, Tyco advised the Company of pending IRS settlements related
to certain intercompany corporate expenses deducted on the U.S. income tax returns for the 2005 through 2009
tax years. The settlements reduced the Company’s NOL carryforwards, resulting in a decrease to the Company’s
net deferred tax asset of approximately $17 million.
Other liabilities in the Company’s Consolidated Balance Sheets as of both September 26, 2014 and
September 27, 2013 include $19 million for the fair value of ADT’s obligations under certain tax related
agreements entered into in conjunction with the Separation. The maximum amount of potential future payments
is not determinable as they relate to unknown conditions and future events that cannot be predicted.
8.
Retirement Plans
The Company measures its retirement plans as of its fiscal year end.
FORM 10-K
Defined Benefit Plans—The Company provides a defined benefit pension plan and certain other
postretirement benefits to certain employees. These plans were frozen prior to Separation and are not material to
the Company’s financial statements. As of September 26, 2014 and September 27, 2013, the fair value of pension
plan assets was $62 million and $56 million, respectively, and the fair value of projected benefit obligations in
aggregate was $84 million and $78 million, respectively. As a result, the plans were underfunded by
approximately $22 million at September 26, 2014 and September 27, 2013, respectively, and were recorded as a
net liability in the Consolidated Balance Sheets. Net periodic benefit cost was not material for fiscal years 2014,
2013 and 2012.
Defined Contribution Retirement Plans—Prior to the Separation, the Company maintained through Tyco
several defined contribution retirement plans, including 401(k) matching programs, as well as qualified and
nonqualified profit sharing and share bonus retirement plans. Following the Separation, the Company maintains
its own standalone 401(k) matching programs. Expense for the defined contribution plans is computed as a
percentage of participants’ compensation and was $20 million, $20 million and $22 million for fiscal years 2014,
2013 and 2012, respectively.
Deferred Compensation Plan—Prior to the Separation, the Company maintained through Tyco, a
nonqualified Supplemental Savings and Retirement Plan (“SSRP”), which permits eligible employees to defer a
portion of their compensation. A record keeping account is set up for each participant and the participant chooses
from a variety of measurement funds for the deemed investment of their accounts. The measurement funds
90
correspond to a number of funds in the Company’s 401(k) plans and the account balance fluctuates with the
investment returns on those funds. Following the Separation, the Company maintains its own standalone SSRP
for eligible employees. Deferred compensation liabilities were $17 million and $16 million as of September 26,
2014 and September 27, 2013, respectively. Deferred compensation expense was not material for fiscal years
2014, 2013 and 2012.
9.
Share Plans
Incentive Equity Awards Converted from Tyco Awards
Prior to the Separation, all employee incentive equity awards were granted by Tyco. On September 28,
2012, substantially all of Tyco’s outstanding awards were converted into like-kind awards of ADT, Tyco and
Pentair. The conversion of existing Tyco equity awards into ADT equity awards was considered a modification
of an award (“2012 Award Modification”) in accordance with the authoritative guidance for share-based
payments and affected all holders of Tyco incentive equity awards. As a result, the Company compared the fair
value of the awards immediately prior to the Separation to the fair value immediately after the Separation to
measure incremental compensation cost. Fair value immediately before the modification was measured based on
the assumptions of Tyco whereas the fair value of ADT options immediately after the modification, and from
there on, was representative of ADT as a standalone company. The conversion resulted in an increase in the fair
value of the awards and, accordingly, the Company recorded non-cash compensation expense, the amount of
which was immaterial. The following table provides details on the ADT incentive equity awards issued in
conjunction with the 2012 Award Modification:
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock units . . . . . . . . . . . . . . . . . . . . . . .
Shares
Weighted-Average
Grant-Date
Fair Value
7,837,941
3,169,241
$ 7.78
20.86
The assumptions used in the Black-Scholes pricing model to calculate the fair value of the options converted
on September 28, 2012 were as follows:
2012
1.01 –1.21%
5.50 – 6.50
1.42%
33%
FORM 10-K
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life of options (years) . . . . . . . . . . . . . . . . . . . .
Expected annual dividend yield . . . . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . . . . .
Stock Compensation Plans
Prior to the Separation, the Company adopted The ADT Corporation 2012 Stock Incentive Plan (the
“Plan”). The Plan provides for the award of stock options, stock appreciation rights, annual performance bonuses,
long-term performance awards, restricted units, restricted stock, deferred stock units, promissory stock and other
stock-based awards (collectively, “Awards”). In addition to the incentive equity awards converted from Tyco
awards, the Plan provides for a maximum of 8 million common shares to be issued as Awards, subject to
adjustment as provided under the terms of the Plan.
Stock-based compensation expense is included in selling, general and administrative expenses in the
Consolidated and Combined Statements of Operations. The stock-based compensation expense recognized and
the associated tax benefit for fiscal years 2014, 2013 and 2012 are as follows:
Stock-based compensation expense recognized . . . . . . . . . . . . . . . . . .
Tax benefit associated with stock-based compensation . . . . . . . . . . . . .
91
2014
2013
2012
$20
8
$19
7
$7
3
Stock Options—Options are granted to purchase common shares at prices that are equal to the fair market
value of the common shares on the date the option is granted. Conditions of vesting are determined at the time of
grant under the Plan. Options granted under the Plan generally vest in equal annual installments over a period of
four years and generally expire 10 years after the date of grant. The grant-date fair value of each option grant is
estimated using the Black-Scholes option pricing model and amortized on a straight-line basis over the requisite
service period of the awards, which is generally the vesting period. The compensation expense recognized is net
of estimated forfeitures. Forfeitures are estimated based on expected termination behavior, as well as an analysis
of actual option forfeitures.
Use of a valuation model requires management to make certain assumptions with respect to selected model
inputs. Expected volatility is calculated based on an analysis of historic and implied volatility measures for a set
of peer companies. The average expected life is based on the contractual term of the option and expected
employee exercise and post-vesting employment termination behavior. The risk-free interest rate is based on U.S.
Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The
assumptions used in the Black-Scholes option pricing model for fiscal years 2014 and 2013 are as follows:
2014
Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . .
Expected life of options (years) . . . . . . . . . . . . . . . . .
Expected annual dividend yield . . . . . . . . . . . . . . . . .
Expected stock price volatility . . . . . . . . . . . . . . . . . .
2013
1.73 – 2.10% 0.81 – 1.62%
6
5.75 – 6.00
1.95%
1.09%
41%
33%
The weighted-average grant-date fair value of options granted during fiscal years 2014 and 2013 was $14.20
and $13.06, respectively, and the intrinsic value of options exercised during fiscal years 2014 and 2013 was $8
million and $59 million, respectively.
The following table summarizes the stock option activity for fiscal year 2014:
WeightedAverage
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic
Value
($ in millions)
FORM 10-K
Shares
WeightedAverage
Exercise Price
Outstanding as of September 27, 2013 . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,296,060
627,540
798,354
304,282
$30.34
41.76
27.36
39.11
Outstanding as of September 26, 2014 . . . . .
Options vested and expected to vest as of
September 26, 2014 . . . . . . . . . . . . . . . . .
Exercisable as of September 26, 2014 . . . . .
4,820,964
31.77
5.44
$32
4,568,630
3,169,681
31.49
28.22
5.37
4.06
31
27
As of September 26, 2014, there was approximately $12 million of total unrecognized compensation
expense related to non-vested stock options granted under the Company’s share option plan. This expense, net of
forfeitures, is expected to be recognized over a weighted-average period of approximately 2 years.
Restricted Stock Units—Restricted stock units are granted subject to certain restrictions. Conditions of
vesting are determined at the time of grant under the Plan. Restrictions on the award generally lapse upon normal
retirement, if more than twelve months from the grant date, and death or disability of the employee. Recipients of
restricted stock units have no voting rights and receive dividend equivalent units. Dividend equivalent units are
subject to forfeiture if the underlying awards do not vest.
92
The fair market value of restricted stock units, both time vesting and those subject to specific performance
criteria, are expensed over the period of vesting. Restricted stock units that vest based upon passage of time
generally vest over a period of four years. Restricted stock units that vest dependent upon attainment of various
levels of performance (“performance share awards”) generally vest in their entirety three years from the grant
date. The fair value of restricted stock units is determined based on the closing market price of the underlying
stock on the grant date. The number of performance share awards included in the total restricted stock units
granted during fiscal year 2014 is immaterial. No performance share awards vested during fiscal year 2014.
The following table summarizes the restricted stock unit activity, including performance share awards, for
fiscal year 2014:
Shares
WeightedAverage
GrantDate Fair
Value
Non-vested as of September 27, 2013 . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,241,066
599,346
552,020
175,700
$33.75
40.57
28.37
38.36
Non-vested as of September 26, 2014 . . . . . . . . . . . . . . .
1,112,692
39.39
The weighted-average grant-date fair value of restricted stock units granted during fiscal year 2014 and
2013 was $40.57 and $45.91, respectively. The total fair value of restricted stock units vested during 2014 and
2013 was $15 million and $32 million, respectively.
As of September 26, 2014, there was $22 million of total unrecognized compensation cost related to nonvested restricted stock units. This expense, net of forfeitures, is expected to be recognized over a weightedaverage period of approximately 2 years.
10. Equity
Shares Authorized and Outstanding—As of September 26, 2014, the Company had 1,000,000,000 shares of
$0.01 par value common stock authorized, of which 174,109,318 shares were outstanding.
Dividends—Holders of shares of the Company’s common stock are entitled to receive dividends when, as
and if declared by its board of directors out of funds legally available for that purpose. Future dividends are
dependent on the Company’s financial condition and results of operations, the capital requirements of its
business, covenants associated with debt obligations, legal requirements, regulatory constraints, industry practice
and other factors deemed relevant by its board of directors.
During fiscal years 2014 and 2013, the Company’s board of directors declared the following dividends on
ADT’s common stock:
2014
Dividend
Amount
Dividend
Declared Date
Dividend
Paid Date
To Stockholders on
Record as of
$0.20
$0.20
$0.20
$0.20
January 9, 2014
March 13, 2014
July 18, 2014
September 19, 2014
February 19, 2014
May 21, 2014
August 20, 2014
November 19, 2014
January 29, 2014
April 30, 2014
July 30, 2014
October 29, 2014
93
FORM 10-K
Common Stock
2013
Dividend
Amount
Dividend
Declared Date
Dividend
Paid Date
To Stockholders on
Record as of
$0.125
$0.125
$0.125
$0.125
$0.125
November 26, 2012
January 10, 2013
March 14, 2013
July 19, 2013
September 20, 2013
December 18, 2012
February 20, 2013
May 15, 2013
August 21, 2013
November 20, 2013
December 10, 2012
January 30, 2013
April 24, 2013
July 31, 2013
October 30, 2013
Voting Rights—The holders of the Company’s common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders.
Other Rights—Subject to any preferential liquidation rights of holders of preferred stock that may be
outstanding, upon the Company’s liquidation, dissolution or winding-up, the holders of ADT common stock are
entitled to share ratably in the Company’s assets legally available for distribution to its stockholders.
Fully Paid—The issued and outstanding shares of the Company’s common stock are fully paid and nonassessable. Any additional shares of common stock that the Company may issue in the future will also be fully
paid and non-assessable.
The holders of the Company’s common stock do not have preemptive rights or preferential rights to
subscribe for shares of its capital stock.
Preferred Stock
The Company’s certificate of incorporation authorizes its board of directors to designate and issue from
time to time one or more series of preferred stock without stockholder approval. The board of directors may fix
and determine the preferences, limitations and relative rights of each series of preferred stock. As of
September 26, 2014, there were 50,000,000 shares of $0.01 par value preferred stock authorized of which none
were outstanding. The Company does not currently plan to issue any shares of preferred stock.
Share Repurchase Program
FORM 10-K
On November 26, 2012, the Company’s board of directors approved $2 billion of share repurchases over a
period of three years. Pursuant to this approval, the Company may enter into accelerated share repurchase plans
as well as repurchase shares on the open market. During fiscal year 2013, the Company made open market
repurchases of 15.5 million shares of ADT common stock at an average price of $43.01 per share. The total cost
of open market repurchases for fiscal year 2013 was approximately $668 million, of which $635 million was paid
during the period.
On January 29, 2013, the Company entered into an accelerated share repurchase agreement under which it
repurchased 12.6 million shares of ADT’s common stock for $600 million at an average price of $47.60 per
share. This accelerated share repurchase program, which was funded with proceeds from the January 2013 Debt
Offering, was completed on April 2, 2013.
On November 18, 2013, the Company’s board of directors authorized a $1 billion increase to the $2 billion,
three-year share repurchase program that was previously approved on November 26, 2012. This repurchase
program expires November 26, 2015. During fiscal year 2014, the Company made open market repurchases of
14 million shares of ADT’s common stock at an average price of $35.72 per share. The total cost of open market
repurchases for fiscal year 2014 was $500 million, all of which was paid during the period.
94
On November 19, 2013, the Company entered into an accelerated share repurchase agreement under which
it paid $400 million for an initial delivery of approximately 8 million shares of ADT’s common stock. This
accelerated share repurchase program was completed on February 25, 2014. In total, the Company repurchased
10.9 million shares of its common stock at an average price of $36.86 per share under this accelerated share
repurchase agreement.
On November 24, 2013, the Company entered into a Share Repurchase Agreement (“Share Repurchase
Agreement”) with Corvex. Pursuant to the Share Repurchase Agreement, the Company repurchased 10.2 million
shares from Corvex for a price per share equal to $44.01, resulting in $451 million of cash paid during fiscal year
2014. This repurchase was completed on November 29, 2013.
The above repurchases were made in accordance with the board approved repurchase program. All of the
Company’s repurchases were treated as effective retirements of the purchased shares and therefore reduced
reported shares issued and outstanding by the number of shares repurchased. In addition, the Company recorded
the excess of the purchase price over the par value of the common stock as a reduction to additional paid-in
capital.
Accumulated Other Comprehensive Income
Balance as of September 30, 2011
Pre-tax current period change . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . .
Deferred
Pension
Losses(1)
Accumulated
Other
Comprehensive
Income
$100
17
—
$ (21)
(5)
2
$ 79
12
2
Balance as of September 28, 2012
Pre-tax current period change . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . .
117
(19)
—
(24)
10
(4)
93
(9)
(4)
Balance as of September 27, 2013
Pre-tax current period change . . . . . . . . . . . .
Income tax benefit . . . . . . . . . . . . . . . . . . . . .
98
(41)
—
(18)
(1)
—
80
(42)
—
Balance as of September 26, 2014
(1)
Currency
Translation
Adjustments
$ 57
$ (19)
$ 38
The balances of deferred pension losses as of September 26, 2014, September 27, 2013 and September 28,
2012 are reflected net of tax benefit of $12 million, $11 million and $15 million, respectively.
Other
During fiscal year 2013, the Company made adjustments to additional paid-in capital, which primarily
resulted from the receipt of $61 million in cash from Tyco and Pentair related to the allocation of funds in
accordance with the 2012 Separation and Distribution Agreement.
11. Earnings Per Share
Basic earnings per share is computed by dividing net income attributable to common shares by the weighted
average number of common shares outstanding for the period. Diluted earnings per share reflects the potential
dilution of securities that could participate in earnings, but not securities that are anti-dilutive. Following the
95
FORM 10-K
The components of accumulated other comprehensive income reflected on the Consolidated Balance Sheets
are as follows ($ in millions):
Separation, the Company had 231,094,332 common shares outstanding. This amount was used as the starting
point for calculating weighted-average shares outstanding for fiscal year 2012. Additionally, diluted weightedaverage shares outstanding for fiscal year 2012 was determined assuming that the Separation occurred on the first
day of fiscal year 2012. The computation of basic and diluted earnings per share for fiscal years 2014, 2013 and
2012 is as follows:
(in millions, except per share amounts)
2014
2013
2012
$ 304
$ 421
$ 394
182
—
222
—
231
1
Basic weighted-average shares outstanding . . . . . . . . . . . . . .
182
222
232
Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.67
$1.90
$1.70
$ 304
$ 421
$ 394
182
222
232
1
1
1
2
2
Basic Earnings Per Share
Numerator:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denominator:
Weighted-average shares outstanding . . . . . . . . . . . . . . . . . .
Effect of vested deferred stock units . . . . . . . . . . . . . . .
Diluted Earnings Per Share
Numerator:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Denominator:
Basic weighted-average shares outstanding . . . . . . . . . . . . . .
Effect of dilutive securities:
Stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Diluted weighted-average shares outstanding . . . . . . . . . . . .
183
224
236
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1.66
$1.88
$1.67
The computation of diluted earnings per share excludes the effect of the potential exercise of options to
purchase approximately 1.7 million shares of stock for fiscal year 2014 and 0.8 million shares of stock for fiscal
years 2013 and 2012, as the effect would have been anti-dilutive.
FORM 10-K
12. Geographic Data
Revenues are attributed to individual countries based upon the operating entity that records the transaction.
Revenue by geographic area for fiscal years 2014, 2013 and 2012 are as follows ($ in millions):
Revenue
2014
2013
2012
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,206
202
$3,123
186
$3,034
194
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$3,408
$3,309
$3,228
Long-lived assets, which are comprised of subscriber system assets, net and property and equipment, net,
located in the United States approximate 94% and 93% of total long-lived assets as of September 26, 2014
and September 27, 2013, respectively, with the remainder residing in Canada.
96
13. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data for fiscal years 2014 and 2013 is as follows ($ in millions, except per
share data):
December 27,
2013
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 26,
2014
$ 839
165
77
$ 837
164
63
$ 849
169
82
$ 883
161
82
$0.39
$0.39
$0.35
$0.34
$0.47
$0.47
$0.47
$0.47
December 28,
2012
2013
March 29,
June 28,
2013
2013
September 27,
2013
$ 809
186
105
$ 821
174
107
$ 833
192
113
$ 846
183
96
$0.45
$0.44
$0.47
$0.47
$0.52
$0.52
$0.45
$0.45
FORM 10-K
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating income . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share:
Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
March 28,
June 27,
2014
2014
97
THE ADT CORPORATION
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
($ in millions)
Description
Allowance for Doubtful Accounts:
Year Ended September 28, 2012 . . . . . . . . . . . . . . . . . . . .
Year Ended September 27, 2013 . . . . . . . . . . . . . . . . . . . .
Year Ended September 26, 2014 . . . . . . . . . . . . . . . . . . . .
FORM 10-K
98
Balance at
Beginning of
Year
Additions
Charged to
Income
Deductions
Balance at
End of Year
$23
25
27
$50
49
43
$(48)
(47)
(46)
$25
27
24
INDEX TO EXHIBITS
Exhibits
2.1
Separation and Distribution Agreement, dated September 26, 2012 among Tyco International
Ltd., Tyco International Finance S.A., The ADT Corporation and ADT LLC
(6)
2.2
Separation and Distribution Agreement with respect to Tyco Flow Control Distribution, dated
as of March 27, 2012, among Tyco International Ltd., Tyco Flow Control International Ltd.
and The ADT Corporation
(1)
2.3
Amendment No. 1 to the Separation and Distribution Agreement, dated as of July 25, 2012,
among Tyco International Ltd., Tyco Flow Control International Ltd. and The ADT
Corporation
(3)
3.1
Amended and Restated Certificate of Incorporation of The ADT Corporation
(4)
3.2
Certificate of Amendment of the Amended and Restated Certificate of Incorporation of The
ADT Corporation, dated September 26, 2012
(5)
3.3
Amended and Restated Bylaws of The ADT Corporation, dated December 6, 2012
(7)
4.1
Indenture, dated as of July 5, 2012, by and between The ADT Corporation and Wells Fargo
Bank, National Association
(2)
4.2
First Supplemental Indenture, dated as of July 5, 2012, by and among The ADT Corporation,
Tyco International Ltd. and Wells Fargo Bank, National Association
(2)
4.3
Second Supplemental Indenture, dated as of July 5, 2012, by and among The ADT Corporation,
Tyco International Ltd. and Wells Fargo Bank, National Association
(2)
4.4
Third Supplemental Indenture, dated as of July 5, 2012, by and among The ADT Corporation,
Tyco International Ltd. and Wells Fargo Bank, National Association
(2)
4.5
Fourth Supplemental Indenture, dated as of January 14, 2013, by and between The ADT
Corporation and Wells Fargo Bank, National Association
(9)
4.6
Fifth Supplemental Indenture, dated as of October 1, 2013, by and between The ADT
Corporation and Wells Fargo Bank, National Association
(10)
4.7
Indenture, dated as of March 19, 2014, by and between The ADT Corporation and Wells Fargo
Bank, National Association
(11)
4.8
Officer’s Certificate, dated as of March 19, 2014, of The ADT Corporation, establishing the
terms of its 4.125% Senior Notes due 2019 (including form Note)
(11)
10.1
Tax Sharing Agreement, dated September 28, 2012, by and among Pentair Ltd., Tyco
International Ltd., Tyco International Finance S.A., and The ADT Corporation
(6)
10.2
Non-Income Tax Sharing Agreement dated September 28, 2012, by and among Tyco
International Ltd., Tyco International Finance S.A., and The ADT Corporation
(6)
10.3
Trademark Agreement, dated as of September 25, 2012, by and among ADT Services GmbH,
ADT US Holdings, Inc., Tyco International Ltd. and The ADT Corporation
(6)
10.4
Patent Agreement, dated as of September 26, 2012, by and between Tyco International Ltd. and
The ADT Corporation
(6)
10.5
Five Year Senior Unsecured Revolving Credit Agreement, dated as of June 22, 2012, by and
among The ADT Corporation, Tyco International Ltd., the lender parties thereto and Citigroup
Global Markets Inc. and J.P. Morgan Securities LLC, as bookrunners and lead arrangers
(2)
10.6*
The ADT Corporation 2012 Stock and Incentive Plan
(5)
99
FORM 10-K
Exhibit
Number
FORM 10-K
10.7*
The ADT Corporation Severance Plan for U.S. Officers and Executives
(6)
10.8*
The ADT Corporation Change in Control Severance Plan
(6)
10.9*
ADT LLC Supplemental Savings and Retirement Plan
(6)
10.10
Agreement, dated December 17, 2012, by and among The ADT Corporation, Keith A. Meister,
Corvex Management LP and Soros Fund Management LLC
(8)
10.11*
Form of ADT Indemnification Agreement, by and between The ADT Corporation and
Directors and Officers
(12)
10.12
Master Confirmation and form of Supplemental Confirmation, by and between, The ADT
Corporation and JPMorgan Chase Bank dated November 19, 2013
(14)
10.13
Share Repurchase Agreement, dated as of November 24, 2013, by and between The ADT
Corporation and Corvex Management LP
(13)
10.14
Amendment to Agreement, dated as of November 24, 2013, by and among The ADT
Corporation, Keith Meister and Corvex Management LP
(13)
12.1
Ratio of Earnings to Fixed Charges
21
List of subsidiaries of The ADT Corporation
23
Consent of Deloitte & Touche LLP
24
Powers of Attorney
31.1
Certification of CEO required by Securities and Exchange Commission Rule 13a-14(a) or
15d-14(a)
31.2
Certification of CFO required by Securities and Exchange Commission Rule 13a-14(a) or
15d-14(a)
32
Certification by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
Financial statements from the annual report on Form 10-K of The ADT Corporation for the
year ended September 26, 2014 formatted in XBRL: (i) the Consolidated Balance Sheets, (ii)
the Consolidated and Combined Statements of Operations, (iii) the Consolidated and Combined
Statements of Comprehensive Income (iv) the Consolidated and Combined Statements of
Stockholders’ Equity, (v) the Consolidated and Combined Statements of Cash Flows, and (vi)
the Notes to Consolidated and Combined Financial Statements
*
Management contract or compensatory plan or arrangement.
(1) Incorporated by reference from the respective exhibit to The ADT Corporation’s Registration
Statement on Form 10 filed on April 10, 2012 (File No. 001-35502)
(2) Incorporated by reference from the respective exhibit to Amendment No. 2 to The ADT Corporation’s
Registration Statement on Form 10 filed on July 9, 2012 (File No. 001-35502)
(3) Incorporated by reference from the respective exhibit to Amendment No. 3 to The ADT Corporation’s
Registration Statement on Form 10 filed on July 27, 2012 (File No. 001-35502)
(4) Incorporated by reference from the respective exhibit to The ADT Corporation’s Current Report on
Form 8-K filed on September 20, 2012
(5) Incorporated by reference from the respective exhibit to The ADT Corporation’s Form S-8 Registration
Statement, as filed on September 27, 2012 (File No. 333-184144)
(6) Incorporated by reference from the respective exhibit to The ADT Corporation’s Current Report on
Form 8-K filed on October 1, 2012
100
FORM 10-K
(7) Incorporated by reference from the respective exhibit to The ADT Corporation’s Current Report on
Form 8-K filed on December 6, 2012
(8) Incorporated by reference from the respective exhibit to The ADT Corporation’s Current Report on
Form 8-K filed on December 18, 2012
(9) Incorporated by reference from the respective exhibit to The ADT Corporation’s Current Report on
Form 8-K filed on January 14, 2013
(10) Incorporated by reference from the respective exhibit to The ADT Corporation’s Current Report on
Form 8-K filed on October 1, 2013
(11) Incorporated by reference from the respective exhibit to The ADT Corporation’s Current Report on
Form 8-K filed on March 19, 2014
(12) Incorporated by reference from the respective exhibit to The ADT Corporation’s Current Report on
Form 10-K filed on November 20, 2013
(13) Incorporated by reference from the respective exhibit to The ADT Corporation’s Current Report on
Form 8-K filed on November 29, 2013
(14) Incorporated by reference from the respective exhibit to The ADT Corporation’s Current Report on
Form 8-K filed on November 25, 2013
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