APi Group Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unless noted otherwise, amounts are in millions of dollars. The quarter is reported on a “Successor” basis following the October 1, 2019 acquisition; the prior-year quarter is “Predecessor” and uses a different accounting basis, so comparisons are not fully comparable.
Business context and results
APi Group provides safety, specialty infrastructure and industrial services, primarily in North America, through Safety Services, Specialty Services and Industrial Services. Management describes much of its work as recurring or repeat business, but most contracts have durations under six months.
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $858 | $922 | Down $64, or 6.9% |
| Gross profit | $162 | $163 | Down $1 |
| Gross margin | 18.9% | 17.7% | Improved despite lower revenue |
| SG&A | $188 | $137 | Up $51 |
| Goodwill and intangible impairment | $208 | — | Non-cash; includes $203 goodwill and $5 held-for-sale intangible impairment |
| Operating income (loss) | $(234) | $26 | Operating margin was (27.3)% versus 2.8% |
| Net income (loss) | $(194) | $21 | 2020 loss per share was $(1.14); 2019 EPS is not presented as comparable |
| EBITDA | $(161) | $53 | Non-GAAP; EBITDA margin was (18.8)% versus 5.7% |
| Interest expense, net | $14 | $6 | Higher following acquisition financing |
| Operating cash flow | $55 | $25 | Increase primarily reflected working-capital changes |
| Capital expenditures | $11 | $22 | Lower year over year |
Material changes and financial position
- Revenue declined primarily because Industrial Services revenue fell $76 (35.7%), reflecting more selective project bidding and reduced demand in Canadian operations. Specialty Services rose $14 (4.9%); Safety Services was down $2 (0.5%).
- Gross margin improved partly due to a more favorable contract mix and better Industrial Services project selection and execution. Purchase-accounting amortization of acquired backlog added $22 to cost of revenue and reduced gross margin by approximately 2.5 percentage points.
- Q1 operating results included the $208 impairment charge, higher acquired-intangible amortization, and increased costs associated with growth and public-company operations. Management attributes the impairment trigger to COVID-19 disruption, oil-price volatility and related demand impacts.
- At March 31, cash was $436, versus $256 at December 31, 2019. Current assets were $1,450 and current liabilities were $919.
- Total debt obligations were $1,407, including a $1,197 term loan and $200 drawn on the revolver; debt net of deferred financing costs was $1,384. The term loan matures in 2026. The company reported compliance with debt covenants at quarter-end.
- Quarter-end liquidity was reported as $499: $436 cash plus $33 available under the revolver after $67 of letters of credit. The company drew $200 on the revolver in March and repaid it in April 2020.
- Cash increased by $180 during the quarter, including $139 net cash from financing, principally the revolver draw. Investing activities used $15; operating activities provided $55.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said cash, operating cash generation and available credit were expected to meet liquidity requirements for at least the next 12 months, while emphasizing uncertainty from COVID-19.
- Management reported that services were generally considered essential and Q1 COVID-19 effects were relatively limited, but April and May brought project delays, temporary shutdowns, inspection deferrals and volume declines across all segments. It reported early signs of stabilization and improvement from lows, without assurance this would continue.
- The company implemented a preemptive cost-reduction plan expected to save expense and cash if maintained; the filing does not provide a quantified savings target. Supply availability had been minimally disrupted to date, but future vendor and supply-chain impacts remained uncertain.
- Further impairment charges remain possible. The acquisition purchase-price allocation and reporting-unit goodwill balances were preliminary, with finalization expected in Q3 2020. Life Safety had less than 10% headroom; a 10% increase in its carrying value would have implied a $27 impairment charge under the stated sensitivity analysis.
- The $51 income tax benefit chiefly related to impairment. APi Group’s conversion from S-corporation to C-corporation status increased its tax exposure; the reported Q1 effective tax rate was 20.9%. CARES Act changes had no material tax-provision impact.
- Material weakness disclosures: management concluded disclosure controls were ineffective at March 31, 2020. Identified weaknesses covered IT general controls, financial-statement preparation and review, segregation of duties, contract cost estimates, and review of valuation models. A remediation plan was being developed.
- Other risks cited include short contract durations and customer cancellations, project cost-estimation risk, labor availability and collective bargaining, multiemployer pension exposure, weather and seasonality, substantial indebtedness and covenant compliance. The filing reports $1,433 of transaction price allocated to unsatisfied performance obligations at quarter-end.
- A previously identified wage-and-hour class-action settlement of approximately $20 was funded by former shareholders during the quarter. One Industrial Services divestiture was completed for $10 with no gain or loss; another business remained held for sale.
Most important facts for investors to verify
- Subsequent COVID-19 revenue, project delays, cancellations, margins and cash generation, particularly in Industrial Services and the Canadian operations.
- Final acquisition accounting and any changes to the $208 impairment, including further goodwill or intangible impairments and the Life Safety reporting unit’s valuation headroom.
- Revolver repayment status, available liquidity, debt-service needs and continued compliance with credit covenants.
- Progress and testing of remediation for the disclosed material weaknesses in internal control.
- Realization and timing of the $1,433 in unsatisfied performance obligations, given contract duration, customer deferrals and variable project execution.