APi Group Corporation (NYSE: APG) — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparison is with Q1 2023. Amounts are in millions of dollars unless otherwise stated. APi provides life-safety, security and specialty services through Safety Services and Specialty Services, with more than 500 locations worldwide.
Financial results and liquidity
| Metric | Q1 2024 | Q1 2023 / comparator |
|---|---|---|
| Revenue | $1,601 | $1,614; down 0.8% |
| Gross profit / margin | $492 / 30.7% | $425 / 26.3% |
| Operating income / margin | $100 / 6.2% | $73 / 4.5% |
| Net income | $45 | $26 |
| EBITDA (non-GAAP) | $166 / 10.4% of revenue | $149 / 9.2% |
| Operating cash flow | $7 | $(1) |
| Capital expenditures | $22 | $21 |
| Cash and cash equivalents at quarter-end | $247 | $479 at December 31, 2023 |
| Total debt obligations | $2,756 | $2,356 at December 31, 2023 |
Gross-margin expansion reflected disciplined project selection, Safety Services pricing gains and a richer mix of inspection, service and monitoring work. SG&A rose 11.4% to $392, increasing to 24.5% of revenue from 21.8%; the company cited investment in both segments and nonrecurring advisory costs associated with the Series B conversion. Interest expense was $34, down from $37. The effective tax rate was 28.0%, versus 30.6%.
Common-share result: Despite consolidated net income of $45, the company reported a net loss attributable to common shareholders of $334, or $(1.34) per basic and diluted share. This primarily reflects a $372 charge related to conversion of Series B preferred stock, plus a $7 preferred-stock dividend. Q1 2023 common-share income was $15, or $0.05 per share.
Liquidity and debt: Reported total liquidity was $643, comprising $247 cash and $396 available under the $500 revolving facility, net of letters of credit. Debt, net of financing costs, was $2,729. The company had $100 drawn on the revolver and was in compliance with debt covenants; its first-lien net leverage ratio was 2.09:1.00. Approximately $1,120 of term-loan principal was covered by interest-rate swaps, with the remaining term-loan balance exposed to floating rates.
Material changes and business performance
- Safety Services revenue increased 1.9% to $1,214; operating margin improved to 10.3% from 8.1%. Growth in inspection, service and monitoring, pricing, project selection and Chubb restructuring savings supported performance.
- Specialty Services revenue fell 9.5% to $389, reflecting disciplined selection of longer-term projects and a planned exit from a customer relationship. Operating income was $7, compared with break-even in Q1 2023; EBITDA margin increased to 8.5% from 6.3%.
- Revenue declined modestly overall, but gross profit increased 15.8%, operating income 37.0%, and EBITDA 11.4% year over year.
- Operating cash flow remained low despite improving from the prior-year use of cash. Cash fell by $232 during the quarter, largely in connection with financing the preferred-stock conversion and repurchase.
- Series B preferred stock was converted into approximately 32.8 million common shares; APi immediately repurchased half of the conversion shares for $600. The transaction was financed with a $300 term-loan increase and cash and available credit. The preferred shares are no longer outstanding.
Outlook, risks and unusual items
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management says liquidity sources should be sufficient for at least the next 12 months, while noting cash flow can be affected by weather, seasonality, commodity prices, market conditions and inflation.
- Remaining performance obligations were $2,894 at March 31; the company expects to recognize approximately 86% over the next 12 months. Management notes that first- and second-quarter revenue is typically seasonally lower.
- The Chubb restructuring program runs through fiscal 2025. The company estimates approximately $125 of total restructuring and related costs by then; $68 of restructuring costs had been incurred since the Chubb acquisition, and $30 of restructuring liabilities remained at quarter-end.
- After quarter-end, APi agreed to acquire Elevated Facility Services for approximately $570 cash, subject to customary adjustments and closing conditions; closing was expected in Q2 2024. It also completed an equity offering that generated $457 net proceeds. In April, it began a process to reprice and increase the 2021 Term Loan by approximately $550, with expected uses including refinancing the 2019 Term Loan, repaying the revolver and funding general purposes, including the Elevated acquisition. These transactions were not reflected in March 31 balances.
- Principal risks include project delays and cost-estimation exposure, short contract durations and renewal risk, skilled-labor competition, supply-chain and material-price pressures, seasonality, customer credit risk, international and foreign-exchange exposure, and substantial indebtedness. Litigation and environmental obligations are disclosed; management does not expect them to have a material adverse effect, and environmental liabilities were $16.
- Disclosure controls and internal control over financial reporting were reported ineffective at March 31, 2024 because of unremediated material weaknesses involving IT change-management access controls at the acquired Chubb business and completeness and accuracy of certain third-party-hosted timekeeping and service-order data. Remediation is ongoing, but the weaknesses had not been remediated as of filing.
Important facts for investors to verify
- How much of the gross-margin improvement is sustainable, particularly as Specialty Services revenue contracted and SG&A rose.
- Cash conversion and working-capital trends, given only $7 of operating cash flow and the quarter’s $232 cash decline.
- Post-quarter financing and acquisition execution: the Elevated purchase price and closing, equity-offering proceeds, and the actual terms and use of proceeds from the planned term-loan repricing and increase.
- Progress and independent testing of remediation for the two material weaknesses in internal control.
- Future restructuring costs and savings, and the conversion’s effects on share count, common-share earnings and capital allocation.