APi Group Corporation — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. APi provides safety, specialty and industrial services across more than 200 locations, primarily in North America and Europe. Amounts below are in millions of dollars unless stated otherwise.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1,047 | $958 | $2,828 | $2,705 |
| Gross profit / margin | $252 / 24.1% | $222 / 23.2% | $665 / 23.5% | $558 / 20.6% |
| Operating income (loss) | $41 | $62 | $86 | $(145) |
| Net income (loss) | $19 | $27 | $32 | $(131) |
| EBITDA (non-GAAP) | $96 | $120 | $243 | $71 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $68 | $329 |
- Q3 revenue rose 9.3% year over year, while operating income fell 33.9% and net income fell 29.6%. SG&A, acquisition and transformation costs, and the prior-year impairment-related benefit contributed to lower earnings; gross margin improved.
- Nine-month revenue increased 4.5%. Net income and EBITDA recovered from 2020, when a $197 million goodwill and intangible impairment charge contributed to the loss. Nine-month EBITDA margin was 8.6%, versus 2.6% in 2020; EBITDA is a non-GAAP measure.
- Q3 segment revenue: Safety Services $533 (up 31.9%); Specialty Services $436 (up 9.0%); Industrial Services $103 (down 34.8%). Safety benefited from acquisitions and recovering service markets; Industrial remained weak. Specialty operating income fell sharply against a prior-year impairment-related benefit.
- Cash and cash equivalents were $1.128 billion at September 30, versus $515 million at year-end 2020. Total liquidity was $1.354 billion, including $226 million available on the revolver. Gross debt was $1.491 billion; the revolver had no borrowings, and the company reported compliance with debt covenants.
- Nine-month operating cash flow declined to $68 million from $329 million, chiefly because business recovery increased working-capital needs, including receivables and contract assets. Investing cash use was $81 million; financing provided $629 million, including substantial equity proceeds. Capital expenditures were $43 million.
Material changes, outlook and risks
- In Q2, APi issued $350 million of 4.125% senior notes, using proceeds in part to repay the $250 million 2020 term loan and prepay part of the 2019 term loan. A $9 million debt-extinguishment loss was recorded.
- In September, APi issued 22.7 million common shares, generating approximately $446 million net proceeds. Shares outstanding were 224.6 million as of November 3, 2021.
- APi agreed to acquire Carrier’s Chubb fire and security business for $3.1 billion enterprise value, comprising $2.9 billion cash and approximately $200 million assumed liabilities, subject to closing adjustments and regulatory approvals. The company anticipated closing around year-end 2021. In October it issued $300 million of 4.750% notes into escrow for part of the purchase price; the notes must be redeemed if closing conditions are not met by October 27, 2022. The filing also describes an $800 million Series B preferred-stock sale agreement intended to fund part of the acquisition.
- Management said 2021 activity had stabilized and improved as customers adapted to COVID-19, but offered no quantitative earnings or revenue guidance. It warned that COVID-related restrictions and vaccine requirements could affect labor availability, customer access and project timing. Supply-chain disruption and inflation were pressuring margins, while Industrial Services faced weak energy-market demand.
- Other key risks include weather and seasonality, project-cost estimation and fixed-price contract exposure, skilled-labor availability, customer credit and collection risk, substantial indebtedness, interest-rate/LIBOR transition risk, and acquisition execution and integration.
- Disclosure controls and procedures were deemed ineffective at September 30, 2021 because of previously identified material weaknesses involving IT controls, financial-reporting review and segregation of duties, contract cost-to-complete estimates, and purchase-accounting valuation models. Management described remediation efforts, but the weaknesses were not yet considered remediated.
Investor verification priorities
- Confirm the Chubb transaction’s closing status, final consideration, regulatory conditions and funding mix, including the Series B preferred issuance and escrowed notes.
- Track operating cash conversion and working capital, particularly receivables and contract assets, alongside the recovery in revenue.
- Assess whether supply-chain inflation, project delays and weak Industrial Services demand continue to pressure margins.
- Monitor progress testing and remediation of the disclosed material weaknesses in internal controls.
- Reconcile earnings trends with prior-period impairment and impairment-reversal effects, and review the company’s non-GAAP EBITDA reconciliation.