APi Group Corporation (NYSE: APG) — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. APi Group provides safety and specialty services through more than 500 locations worldwide, operating in Safety Services and Specialty Services.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1.771B | $1.649B | $3.385B | $3.120B |
| Gross profit / margin | $496M / 28.0% | $435M / 26.4% | $921M / 27.2% | $811M / 26.0% |
| Operating income / margin | $107M / 6.0% | $59M / 3.6% | $180M / 5.3% | $52M / 1.7% |
| Net income | $48M | $30M | $74M | $23M |
| Diluted EPS, as reported | $0.12 | $0.06 | $0.17 | $0.01 |
| EBITDA, non-GAAP | $188M | $148M | $337M | $228M |
Q2 revenue grew 7.4%; six-month revenue increased 8.5%. Management attributed growth to both segments, particularly inspection, service and monitoring work. Q2 gross margin improved 160 basis points; six-month gross margin improved 120 basis points. Management cited disciplined project and customer selection, pricing improvements, and a higher mix of service revenue. Lower acquisition and integration costs also supported operating profit. EBITDA is a non-GAAP measure and should be considered alongside GAAP results.
In Q2, Safety Services revenue was $1.225B, up 6.9%, with an 8.0% operating margin versus 5.5% a year earlier. Specialty Services revenue was $555M, up 7.1%, with a 7.4% operating margin versus 6.2%. For the first half, Safety Services revenue rose 8.8% to $2.416B and Specialty Services revenue rose 5.9% to $985M.
Cash flow, debt and liquidity
- Cash flow: First-half operating cash flow was $73M, compared with cash used of $64M in the prior-year period. Investing used $82M, including $45M for acquisitions and $46M of capital expenditures. Financing used $232M, including $204M of debt repayments and $23M of share repurchases. Cash, cash equivalents and restricted cash ended at $370M.
- Debt: June 30 total debt obligations were $2.632B ($2.596B net of deferred financing costs), primarily term loans and 2029 senior notes. The company repaid $200M of term-loan principal during the half. Cash and cash equivalents were $368M.
- Liquidity: Management reported $851M of total liquidity: $368M cash plus $483M available under its $500M revolving credit facility, after letters of credit. No revolver borrowings were outstanding. The company reported compliance with applicable debt covenants; its first-lien net leverage ratio was 2.14:1.00.
- Interest exposure: Interest expense rose to $38M in Q2 from $28M and to $75M for the half from $55M, primarily due to higher rates on floating-rate debt. Interest-rate swaps cover portions of the term loans.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the supplied filing text. Management said current liquidity should fund requirements for at least the next twelve months. Capital expenditures are expected to be approximately 1.5% of annual revenue.
- The Chubb integration and restructuring program is expected to continue through fiscal 2024. The company estimates approximately $105M of total program costs by the end of 2024; $34M had been incurred since the acquisition through June 30, 2023, with $15M of restructuring liabilities recorded.
- Management cited risks from economic and end-market weakness, project delays or cancellations, short contract durations and renewal uncertainty, fixed-price cost overruns, inflation and supply constraints, labor availability and costs, weather and seasonality, foreign exchange, customer credit, and substantial indebtedness.
- Internal controls: Disclosure controls and internal control over financial reporting were reported as not effective at June 30, 2023, due to unremediated material weaknesses involving IT user-access controls and revenue-recognition process controls. Management described remediation work and said it believes full remediation may be achieved by year-end, but noted the weaknesses were not remediated as of the filing date and effectiveness is not assured.
- Other notable items include a UK pension-plan annuity buy-in, after which the company does not expect future contributions to those plans, and a May 2023 credit-agreement amendment replacing LIBOR with Term SOFR.
Most important facts to verify
- Common-share earnings discrepancy: The statements of operations report net income attributable to common shareholders of $37M for Q2 and $52M for the half, while the detailed EPS note reports $28M and $40M, respectively. Reported EPS is $0.12 and $0.17 in both presentations. Review the filing’s detailed EPS calculation and any subsequent clarification.
- Confirm the drivers and sustainability of improved margins, particularly service-revenue growth, pricing, and disciplined project selection, and distinguish organic growth from acquisition and currency effects.
- Track operating cash conversion and working-capital movements, especially contract assets, receivables and accrued liabilities, alongside the $200M term-loan repayment.
- Monitor execution and cost of the Chubb restructuring, the expected benefits of integration, and progress in remediating the material weaknesses in financial controls.
- Review preferred-stock terms and dilution: Series B has a 5.5% cumulative dividend and a $840M liquidation preference; the filing reports 235.8M common shares outstanding on July 27, 2023.