ADT Inc. 10-Q

ITEM 1A. RISK FACTORS. Our significant business risks are described in Part I, Item 1A “Risk Factors” in our Amended 2022 Annual Report and in our other filings with the SEC. The risk factors described in our filings with the SEC and other information may not describe every risk facing the Company. There have been no material changes in our risk factors from those disclosed in our Amended 2022 Annual Report, except as discussed below: Risks Related to the Pending Divestiture of our Commercial Business The pending Divestiture of our Commercial Business is subject to various risks, uncertainties and conditions and may not be completed on the terms or timeline currently contemplated, if at all, which could have a material adverse effect on our financial condition and results of operations. On August 8, 2023, we announced the entry into a definitive agreement to sell our Commercial Business to an affiliate of GTCR for a purchase price of approximately $1.6 billion, subject to customary purchase price adjustments (the “Divestiture”). The Divestiture has been approved by our Board and is expected to close in the fourth quarter of 2023, subject to customary closing conditions, including regulatory approvals. There can be no assurance regarding the ultimate timing of the Divestiture or that the Divestiture will be completed as expected. Unanticipated developments could delay, prevent or otherwise adversely affect the Divestiture, including but not limited to potential problems or delays in obtaining regulatory approvals. During the period leading to closing the Divestiture, whether or not the Divestiture is completed, our ongoing businesses may be materially adversely affected, including as a result of one or more of the following: • the diversion of management’s attention from operating and growing the remaining businesses as a result of the time and effort required to execute the Divestiture; • expenses incurred in connection with the Divestiture, including the legal, professional, advisory and consulting fees related to its completion; • challenges in separating the Commercial Business, including separating the operations, shared services, products, infrastructure and personnel, as well as the assets and liabilities, potentially resulting in delays or additional costs in completing the Divestiture; • disruptions to and potential adverse impacts on relationships with third-party providers, suppliers, dealers, customers and others with whom we do business that may conclude that our product and service offerings are insufficient to satisfy their requirements from doing or continuing to do business with us; • loss of synergies between CSB and Commercial; • uncertainty among key employees concerning their future with ADT, leading to potential distraction or attrition, as well as potential difficulty in attracting and retaining prospective employees in the future; and • exposure to unanticipated ongoing obligations and liabilities, including as a result of any indemnification obligations. Failure to complete the Divestiture could adversely affect our results of operations and financial condition. There is no assurance that the Divestiture will close as expected or at all. Consummation of the Divestiture is subject to various customary closing conditions, including regulatory approvals. We cannot predict with certainty whether and when any of these conditions will be satisfied. If we are unable to complete the Divestiture as expected, we could face significant negative consequences, including negative reactions from the financial markets as well as challenges in achieving our debt reduction goals, which could adversely affect our credit ratings, and cause difficulty executing on our strategic priorities, objectives, goals, and medium-term target framework. We have also incurred significant costs, including the diversion of management resources, for which we will have received little or no benefit if the Divestiture does not close. 44 Even if we complete the Divestiture, we may be unable to do so on the timeline we currently expect and may not achieve some or all of the strategic and financial benefits that we expect to achieve from the Divestiture which could have a material adverse effect on our financial condition and results of operations. We believe the Divestiture will place us in a better position to prioritize investments in CSB and Solar that we intend to drive profitable, capital-efficient revenue growth for the long-term. Upon completion of the Divestiture, we plan to use the net after-tax cash proceeds of approximately $1.5 billion for significant debt reduction. There may, however, be a delay in our ability to use some or all of the proceeds to repay a portion of our indebtedness which could have a material adverse effect on our financial condition and may adversely affect our credit ratings and cost of capital, as well as our ability to execute on our strategic priorities, objectives, goals, and medium-term target framework. Moreover, we may not be able to achieve the other anticipated benefits of the Divestiture, which could have a material adverse impact on our business, financial condition, results of operations, and cash flows. The anticipated benefits are based on a number of assumptions, some of which may prove incorrect, and could be affected by factors beyond our control, including, without limitation, general economic conditions, increased operating costs, regulatory developments and other risks described in these risk factors and within Item IA of Part I of our Amended 2022 Annual Report. The Divestiture increases the risk of damage to our brand and reputation which may materially adversely affect our financial condition and results of operations. In connection with the Divestiture, we have agreed to provide transitional services to GTCR for a period of up to 24 months and to license our ADT Commercial brand for 12 months. These arrangements allow for the use of our trademarks, certain intellectual property and limited use of the ADT Commercial brand, which may cause us to incur unanticipated costs and liabilities and which could have a material adverse effect on our business, financial condition and results of operations. Additionally, GTCR’s ability to use the ADT Commercial brand may increase the risk of damage to the brand for our remaining businesses, which could negatively impact our reputation, results of operations and financial condition. ADT will be a less diversified business following the Divestiture, which may adversely affect ADT’s results of operations and financial condition. ADT currently has three business segments, CSB, Commercial, and Solar. The Divestiture will result in ADT being a smaller, less diversified company more focused on consumers, potentially making ADT more vulnerable to changing market, regulatory and economic conditions following the Divestiture, particularly those affecting consumers and small businesses. Macroeconomic headwinds or changes in consumer preferences could have a greater impact on our business following the Divestiture which could have a material adverse effect on our business, results of operations and financial condition.