Api Group Corp quarterly report, Q3 FY2020

APi Group Corporation (NYSE: APG) — Q3 2020 Form 10-Q

Reporting period: Three and nine months ended September 30, 2020. The company provides safety, specialty and industrial services, primarily in North America. APi Group was acquired on October 1, 2019; 2020 “Successor” results use acquisition-date fair-value accounting and are not directly comparable with 2019 “Predecessor” results. Comparisons below are reported by the company and should be interpreted with this limitation in mind.

Financial performance and position

Metric	Q3 2020	Q3 2019	Nine months 2020	Nine months 2019
Revenue	$958 million	$1,118 million	$2,705 million	$3,107 million
Gross profit / margin	$222 million / 23.2%	$233 million / 20.8%	$558 million / 20.6%	$604 million / 19.4%
Operating income (loss)	$62 million	$13 million	($145 million)	$102 million
Net income (loss)	$27 million	$12 million	($131 million)	$86 million
EBITDA (non-GAAP)	$120 million	$48 million	$71 million	$191 million
Operating cash flow	Not presented separately	Not presented separately	$329 million	$145 million

• Q3 revenue declined 14.3% year over year. Safety Services revenue fell 14.4%, Specialty Services 1.7%, and Industrial Services 35.5%. The Industrial decline included divestitures and reduced project volume.
• Q3 operating income and EBITDA improved substantially, but results reflect, among other factors, an $11 million impairment reversal, lower SG&A, acquisition-related amortization, and differences in acquisition accounting. EBITDA is a non-GAAP measure; it is not a substitute for GAAP results.
• Nine-month results included a $197 million goodwill impairment charge. The reported nine-month net loss also reflects higher amortization following the acquisition and increased interest expense.
• Operating cash flow rose to $329 million for the nine months, supported by working-capital movements, including lower receivables and payroll-tax deferrals. Investing cash outflow was $17 million; capital expenditures were $24 million. Financing cash outflow was $101 million, primarily reflecting acquisition-related payments.
• At September 30, cash was $467 million and total debt obligations were $1.197 billion ($1.176 billion net of financing costs). The company reported $232 million available under its revolving facility after letters of credit, or total liquidity of $699 million. It was in compliance with debt covenants; first-lien net leverage was 1.81:1.00.

Material changes and significant items

• Revenue reductions were attributed to COVID-19 disruptions, customer project delays or cancellations, access restrictions, project selection, and the sale of two Industrial Services subsidiaries. Lower oil-and-gas demand and oil-price volatility also affected Industrial Services.
• The company finalized the APi acquisition purchase-price allocation in Q3. The revised goodwill impairment was $197 million, including $193 million at continuing businesses and $4 million at a divested business; a prior $5 million impairment of held-for-sale intangible assets was reversed.
• Goodwill impairment testing was sensitive to valuation assumptions: management reported that a 100-basis-point increase in the discount rate would have resulted in an additional $122 million impairment.
• Q3 effective tax rate was 50.1%; the nine-month rate was 21.2%, with a $35 million income-tax benefit for the nine-month period. The company noted effects from its transition from S-corporation to C-corporation status and discrete tax items.
• In October 2020, APi acquired SK FireSafety and another U.S. life-safety business for approximately $302 million. On October 22, it entered into an additional $250 million term loan to replenish cash used for the acquisitions and cover related fees and expenses. The new loan matures October 1, 2026.

Outlook, risks and controls

• Management gave no quantified earnings or revenue guidance. It said operating cash generation, cash balances and available credit were expected to meet liquidity needs for at least the next 12 months, while emphasizing substantial uncertainty about COVID-19 and its effects.
• Management reported that Q3 activity showed stabilization and some volume improvement from earlier lows, but said there was no assurance the trend would continue. Cost reductions had supported expense and cash performance; some were being reversed as activity recovered.
• Key risks include further COVID-related project delays or cancellations, workforce and supply-chain disruptions, customer credit and project funding, short-duration contracts, oil-and-gas market weakness, fixed-price project cost overruns, seasonality, interest-rate exposure, and possible additional impairment charges.
• Disclosure controls and procedures were deemed ineffective at September 30, 2020 because of material weaknesses in IT general controls, financial-statement preparation and review, segregation of accounting duties, contract-cost estimates, and management review of valuation projections. Management was developing and executing a remediation plan.
• The cover page checks “No” for having filed all reports required during the preceding 12 months; investors should verify the filing-status explanation and any subsequent compliance updates.

Important facts for investors to verify

1. How much of Q3 profitability and EBITDA reflects sustainable operating improvement versus impairment reversals, acquisition accounting, and temporary cost actions.
2. Whether working-capital benefits, including payroll-tax deferrals, are repeatable and how cash conversion performs as revenue and costs change.
3. The impact of the October acquisitions and $250 million incremental borrowing on pro forma debt, interest expense, leverage, and liquidity.
4. Whether COVID-19, oil-and-gas exposure, or valuation assumptions lead to further impairments; the filing indicates a 100-basis-point discount-rate sensitivity of $122 million.
5. Progress in remediating the disclosed material weaknesses and clarification of the cover-page “No” response on prior-period filing compliance.