What changed in this filing

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Item 1A. Risk Factors

2024-04-25 compared with 2023-11-02 · 30 added, 30 removed, 2 unchanged (97% of the section changed)

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.

Our significant business risks are described in Part I, Item 1A “Risk Factors” in our 2023 Annual Report and in our other filings with the SEC.

The risk factors described in our filings with the SEC and other information may not describe every risk facing the Company.

There have been no material changes in our risk factors from those disclosed in our Amended 2022 Annual Report, except as discussed below:

Risks Related to the Commercial Divestiture

We 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.

Although we believe the Commercial Divestiture will place us in a better position to prioritize investments in CSB and make strategic decisions with respect to Solar that we intend to drive profitable, capital-efficient revenue growth for the long-term, there can be no assurance that we will achieve such benefits.

We are using the net after-tax cash proceeds of approximately $1.5 billion for significant debt reduction and have already used $1.3 billion of the net proceeds for debt reduction.

There may, however, be a delay in our ability to use the remaining 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 Commercial 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 Commercial 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 Commercial 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 Commercial Divestiture, which may adversely affect ADT’s results of operations and financial condition.

Prior to the Commercial Divestiture, ADT had three business segments, CSB, Commercial, and Solar.

The Commercial Divestiture resulted 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 Commercial Divestiture, particularly those affecting consumers and small businesses.

Additionally, ADT has announced it is taking a series of steps to rationalize its Solar business, including exiting underperforming branches and streamlining the cost structure.

A smaller Solar business increases ADT’s dependence on CSB, and any trends or uncertainties affecting the CSB segment will more directly affect ADT’s results of operations and financial condition in the future.

Macroeconomic headwinds or changes in consumer preferences could have a greater impact on our business following the Commercial Divestiture which could have a material adverse effect on our business, results of operations, and financial condition.

Risks Related to the Rationalization of the ADT Solar Business

ADT announced plans to rationalize the ADT Solar business, which includes exiting underperforming branches and streamlining ADT Solar’s cost structure, which are subject to uncertainties and risks that may materially adversely affect our financial condition and results of operations.

On November 2, 2023, we announced a series of steps to rationalize the ADT Solar business, significantly reducing the number of ADT Solar branches in light of continued operational challenges and underperformance of operating results relative to expectations.

In connection with the ADT Solar rationalization, we anticipate incurring severance and other costs, which are not expected to be material.

The ADT Solar rationalization activity may result in business disruptions and may not produce the full efficiency and cost reduction benefits anticipated.

Furthermore, the benefits may be realized later than expected and the cost of implementing these measures may be greater than anticipated.

If these measures are not successful, we may need to undertake additional cost reduction efforts with respect to ADT Solar, including, among other things, a further reduction of branches or ceasing operations, which could result in future charges.

Moreover, the ADT Solar rationalization plan may cause business disruptions with customers, which could make our brand less attractive to consumers, and ADT Solar may not be more efficient or effective than prior to the implementation of the rationalization plan.

The ADT Solar rationalization activities, including the related charges and the impact of the related workforce reduction, which may include potential legal claims by impacted employees, could have a material adverse effect on our business, operating results and financial condition.

The ADT Solar rationalization activities may also involve continued financial involvement in the discontinued branches, such as by causing us to continue to incur expenses to maintain services for completed installations and to complete those installations which have not yet been completed, or through continuing guarantees, indemnities or other financial obligations, such as a requirement by lenders that we repay outstanding loan amounts for jobs that have not achieved permission to operate in a timely manner, both within and outside of the markets impacted.

The incurrence of any such cost or action could have a material adverse effect on our business, financial condition, results of operations and cash flows.

There have been no material changes in our risk factors from those disclosed in our 2023 Annual Report, except as discussed below:

While we are no longer a “controlled company,” we may continue to rely on exemptions from certain NYSE corporate governance requirements during a one-year transition period.

Our Common Stock is listed on the New York Stock Exchange (the “NYSE”).

Prior to March 19, 2024, Apollo controlled more than 50% of the combined voting power of the Company with respect to the election of directors, and we were considered a “controlled company” for the purposes of NYSE rules and corporate governance standards.

While we were a “controlled company” under NYSE rules, we availed ourselves of applicable “controlled company” exemptions, which exempted us from certain requirements, including the requirements that we have a majority of independent directors on our Board of Directors and that the Compensation Committee of our Board of Directors (the “Compensation Committee”) and Nominating and Corporate Governance Committee of our Board of Directors (the “Nominating and Corporate Governance Committee”) be comprised entirely of independent directors.

On March 19, 2024, following a registered secondary offering of the Company’s Common Stock by certain Apollo affiliates (and the Company’s concurrent repurchase from the underwriters of 15 million shares of Common Stock that were the subject of the offering), including the exercise of the underwriters’ overallotment option which closed on that date, Apollo’s combined voting power with respect to the election of directors fell to 49.5%, and we ceased to be a controlled company as of that date.

Under NYSE rules, a company that ceases to be a controlled company must comply with the independent board committee requirements as they relate to the nominating and corporate governance and compensation committees on the following phase-in schedule:

(i) at least one independent committee member at the time the company ceases to be a controlled company; (ii) at least a majority of independent committee members within 90 days of the date the company ceases to be a controlled company; and (iii) all independent committee members within one year of the date the company ceases to be a controlled company.

Additionally, the NYSE rules provide a 12-month phase-in period from the date a company ceases to be a controlled company to comply with the majority independent board requirement.

As of the date of this report, we have one independent committee member on each of the Nominating and Corporate Governance and the Compensation Committees of the Board, our Audit Committee is comprised entirely of independent directors and we are in compliance with the phase-in requirements described above.

Until we are fully subject to these requirements, our stockholders will not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements of the NYSE.

Apollo continues to exert significant influence over us, and its interests may conflict with our interests and the interests of other stockholders.

While we are no longer a “controlled company,” Apollo continues to be able to exert significant influence over us and as of March 31, 2024 had the right to, among others, nominate 50% of our directors pursuant to the amended and restated Stockholders Agreement between ADT and Prime TopCo LP and one of our Co-Investors (as defined therein).

The interests of Apollo and its affiliates, including funds affiliated with Apollo, could conflict with or differ from our interests or the interests of our other stockholders.

For example, the concentration of ownership held by funds affiliated with Apollo could (i) delay, defer, or prevent a change in control of our company, (ii) impede a merger, takeover, or other business combination which may otherwise be favorable for us or that another stockholder may otherwise view favorably or (iii) cause us to enter into transactions or agreements that are not in the best interests of all stockholders.

Additionally, Apollo and its affiliates are in the business of making investments in companies and may, from time to time, acquire and hold interests in or provide advice to businesses that compete directly or indirectly with us, or are suppliers or customers of ours.

Apollo and its affiliates may also pursue acquisition opportunities that may be complementary to our business, and as a result, those acquisition opportunities may not be available to us.

Any such investment may increase the potential for the conflicts of interest discussed in this risk

So long as funds affiliated with Apollo continue to directly or indirectly own a significant amount of our equity, even if such amount is less than 50%, Apollo and its affiliates will continue to be able to substantially influence or effectively control our ability to enter into corporate transactions.

In addition, we are party to the Stockholders Agreement with Ultimate Parent and the Co-Investor.

The Stockholders Agreement specifies that we will not take certain significant actions without the prior consent of Ultimate Parent, including, among other things, hiring or terminating any Executive Officer of our company, designating any new Executive Officer of our company, entering into certain merger, consolidation or other “change of control” transactions or changing the size of our Board.

The Stockholders Agreement also specifies that Ultimate Parent has the right to nominate individuals for election to our Board and that we are, to the fullest extent permitted by applicable law, required to nominate and recommend that each such individual be elected as a director, and the right to designate a member to each committee of our Board.

Relatedly, our amended and restated Bylaws (the “Bylaws”) provide that Ultimate Parent and the Co-Investor have the right, subject to certain conditions, to have their representatives appointed to serve on committees of our Board.

Recently, stockholders agreements and bylaw provisions of this nature have been challenged on the basis that they conflict with the Delaware General Corporate Law (“DGCL”).

Following the recent decision from the Chancery Court of the State of Delaware in West Palm Beach Firefighters’ Pension Fund v.

Moelis & Company holding that certain of those types of provisions are invalid under the DGCL, the Board has received two demands (collectively, the “Demands”) from purported stockholders requesting that the Board take all action necessary to amend the Stockholders Agreement and the Bylaws to comply with the DGCL.

Absent such changes, the purported shareholder threatens to take further action, including possibly commencing litigation.

The Board is evaluating the Demands;

the outcome of this matter is uncertain.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1A. Risk Factors