Business context and reporting period
APi Group Corporation (NYSE: APG) filed this Form 10-K for the fiscal year ended December 31, 2020. It provides safety, specialty infrastructure and industrial services through more than 200 locations, primarily in North America, with an expanding European business. Its three reportable segments are Safety Services, Specialty Services and Industrial Services.
Comparability requires care: 2020 includes a full year of acquired APi Group operations, while 2019 is split between the post-acquisition Successor period (October–December) and the Predecessor period (January–September), with different accounting bases. The filing does not provide a standalone fourth-quarter income statement or cash-flow summary.
Financial performance and position
Unless otherwise stated, amounts are in millions of dollars. 2020 consolidated results and year-end balances:
| Metric | 2020 |
|---|---|
| Net revenue | $3,587 |
| Gross profit / gross margin | $756 / 21.1% |
| Operating loss | $(166) |
| Net loss | $(153) |
| Net loss attributable to common shareholders / diluted loss per share | $(375) / $(2.21) |
| EBITDA, as defined by the company / EBITDA margin | $131 / 3.7% |
| Cash provided by operating activities | $496 |
| Cash used in investing activities | $(340) |
| Cash provided by financing activities | $99 |
| Cash and cash equivalents at year-end | $515 |
| Debt, net of financing costs | $1,415 |
| Total liquidity, including available revolver borrowings | $745 |
Year-end liquidity comprised $515 cash and $230 available under the $300 revolving facility, net of approximately $70 of letters of credit. The company reported $1,443 of debt principal before unamortized financing costs, including $1,188 on the 2019 Term Loan and $250 on the 2020 Term Loan. It reported a first-lien net leverage ratio of 2.38:1.00 and compliance with debt covenants at year-end. Capital expenditures were $38.
Management separately cited 2020 adjusted net revenue of $3.5 billion and adjusted EBITDA of $381 million in its executive-compensation discussion; these are not the GAAP results or the company-defined EBITDA shown above. The supplied filing text does not provide a reconciliation of those adjusted figures in that discussion.
Segments
| Segment | 2020 revenue | Operating income (loss) / margin | EBITDA / EBITDA margin |
|---|---|---|---|
| Safety Services | $1,639 | $8 / 0.5% | $140 / 8.5% |
| Specialty Services | $1,401 | $(22) / (1.6)% | $95 / 6.8% |
| Industrial Services | $563 | $(34) / (6.0)% | $2 / 0.4% |
Material changes versus the prior comparable period
- Revenue was affected by COVID-19 access restrictions, customer project delays or cancellations, focused project selection and the sale of two Industrial Services businesses. The divested businesses contributed $91 of 2020 revenue, compared with $230 in the 2019 Predecessor period and $60 in the 2019 Successor period.
- Gross margin increased to 21.1% from 19.4% in the 2019 Predecessor period and 20.1% in the 2019 Successor period. Management attributed the improvement to project selection, pricing, execution efficiencies, project management, business mix and divestiture of lower-margin businesses.
- The company recorded $197 of non-cash impairment charges in 2020, primarily related to goodwill and intangible assets amid pandemic impacts, oil-market weakness and a decline in market capitalization.
- Interest expense was $52. The company attributed its increase versus the 2019 periods to higher average borrowings and borrowing costs following the acquisition financing.
- Operating cash flow was $496. Management said the increase reflected working-capital movements, including lower receivables associated with reduced revenue and deferred payroll taxes; it should not be viewed as solely an improvement in underlying earnings.
- 2020 net loss was $(153), the same as the reported 2019 Successor-period net loss, but the periods are not comparable in duration or operating scope. In 2019’s nine-month Predecessor period, net income was $86.
Outlook, management commentary, risks and unusual items
- Management said it believed available cash, operating cash flow and revolver access would fund liquidity needs for at least the next 12 months. It did not provide a formal 2021 revenue or earnings forecast in the supplied filing text.
- COVID-19 continued to disrupt customer access, project schedules, service work and workforce productivity. Management reported stabilizing activity and some volume improvement in the latter half of 2020, but cautioned that recovery was uncertain. All segments experienced volume declines relative to the corresponding 2019 periods.
- In October 2020, APG acquired SK FireSafety, establishing a broader European platform. The company reported $319 of cash consideration, net of cash acquired, for 2020 acquisitions, primarily in Safety Services.
- APG deferred $39 of payroll taxes under the CARES Act: $19 was payable in December 2021 and the balance in December 2022. Subsequent to year-end, warrant exercises generated approximately $230 in cash proceeds and about 20 million common shares; remaining warrants were mandatorily redeemed in February 2021.
- The company authorized a $100 share-repurchase program and repurchased 1,742,284 shares for approximately $30 in the fourth quarter, leaving approximately $70 authorized. It did not anticipate cash dividends on common stock. The Series A Preferred Stock dividend was settled in January 2021 with approximately 12.4 million common shares.
- Key risks include substantial debt and floating-rate exposure, project-cost estimates under cost-to-cost revenue recognition, fixed-price contract execution, customer payment and project cancellation risk, dependence on skilled labor, union and multiemployer pension obligations, commodity costs, seasonal and construction-market cyclicality, and potential further asset impairment. A 100-basis-point rate increase was estimated to increase 2020 interest expense by approximately $13.
- Management concluded disclosure controls and procedures were ineffective at December 31, 2020 because of material weaknesses in IT controls, financial-statement preparation and review, segregation of duties, contract cost estimates, and valuation-model review. Remediation was ongoing; the weaknesses were not yet considered remediated. The independent auditor issued an unqualified opinion on the financial statements, not an opinion on internal-control effectiveness.
- The filing describes ordinary-course litigation and asbestos-related claims; management did not expect the disclosed matters to have a material adverse effect, while noting outcomes are uncertain. The company also reported significant self-insurance exposure and possible multiemployer pension contribution or withdrawal-liability risk.
Most important facts for investors to verify
- Reconcile the $381 million adjusted EBITDA cited in compensation disclosures with the company-defined EBITDA of $131 million, and assess the adjustments and their recurrence.
- Track organic revenue, volumes and margins separately from acquisitions, divestitures and the uneven 2019 Successor/Predecessor comparison.
- Assess cash-flow quality, especially the contribution of working-capital changes and deferred payroll taxes to 2020 operating cash flow.
- Monitor debt, variable-rate exposure, covenant headroom and use of the revolver, including the effects of future acquisitions and share repurchases.
- Follow remediation and independent testing of the disclosed material weaknesses, particularly controls over contract estimates and financial reporting.
- Review the final purchase accounting for SK FireSafety, subsequent warrant-related dilution, preferred-share dividends, pension exposure and any additional impairment charges.