Business context and reporting period
APi Group Corporation filed this unaudited Form 10-Q for the three months ended March 31, 2023. APi provides safety and specialty services through more than 500 locations. Its reportable segments are Safety Services and Specialty Services. The company describes its work as including installation, inspection, maintenance, repair, infrastructure and related services; most customer contracts have durations under six months.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Net revenue | $1.614 billion | $1.471 billion |
| Gross profit / margin | $425 million / 26.3% | $376 million / 25.6% |
| Operating income (loss) / margin | $73 million / 4.5% | $(7) million / (0.5)% |
| Net income (loss) | $26 million | $(7) million |
| Diluted earnings (loss) per common share | $0.05 | $(0.08) |
| EBITDA (non-GAAP) | $149 million | $80 million |
| Cash from operating activities | $(1) million | $(118) million |
- Revenue increased 9.7% year over year. Safety Services revenue rose 10.9% to $1.191 billion; Specialty Services rose 4.4% to $430 million.
- Gross margin improved 70 basis points. EBITDA margin increased to 9.2% from 5.4%; EBITDA is a non-GAAP measure.
- Cash and cash equivalents were $363 million at March 31, versus $605 million at December 31, 2022. Total liquidity was $809 million, including $446 million available on the revolving facility.
- Total debt obligations were $2.632 billion ($2.594 billion net of financing costs), versus $2.832 billion at year-end. The company repaid $200 million of term loans during the quarter. Long-term debt, less current portion, was $2.588 billion.
- Net cash used in investing was $27 million, including $21 million of capital expenditures. Financing used $216 million, including $202 million of debt repayments and $12 million of share repurchases.
- Current assets were $2.364 billion and current liabilities $1.549 billion. The company reported $469 million of contract liabilities and $490 million of contract assets.
Material changes versus the prior comparable period
- Revenue grew by $143 million, with management citing segment growth, higher inspection, service and monitoring revenue, and strategic pricing; foreign exchange partly offset growth.
- Operating income improved by $80 million, from a $7 million loss to $73 million of income. SG&A fell 8.1% to $352 million, primarily due to lower acquisition and integration expenses.
- Net income improved by $33 million. Interest expense rose $10 million to $37 million, mainly due to higher rates on floating-rate debt.
- Operating cash use narrowed by $117 million, partly reflecting higher income, lower working-capital needs, and a $27 million pension contribution made in Q1 2022.
- Q1 2022 included the Chubb acquisition, with $2.875 billion of acquisition cash outflow and substantial related debt and preferred-stock proceeds; these were not repeated in Q1 2023.
Outlook, commentary and risks
- No quantified full-year revenue or earnings guidance is provided in the filing. Management says existing liquidity sources are expected to fund requirements for at least the next 12 months. Capital expenditures are expected to be approximately 1.5% of annual net revenue.
- The Chubb restructuring program is expected to run through fiscal 2024. APi had incurred $30 million of related costs since the acquisition, estimates approximately $105 million of total costs by the end of fiscal 2024, and reported $17 million in restructuring liabilities at quarter-end.
- Management cited disciplined project and customer selection and a better mix of higher-margin inspection, service and monitoring work. The company also noted Q1 seasonality, including weather-related project delays in North America.
- Key risks include customer demand and contract renewals, project cost estimation on fixed-price work, inflation and supply disruptions, competition for skilled labor, cyclical end markets, weather, foreign exchange, and substantial indebtedness. A 100-basis-point rate increase was estimated to add approximately $4 million to quarterly interest expense. LIBOR transition could also affect borrowing costs.
- APi reported that disclosure controls and internal control over financial reporting were not effective at March 31, 2023 due to unremediated material weaknesses involving IT user-access controls and revenue-recognition process controls. Management said remediation was ongoing and believed full remediation could be achieved by year-end, but cautioned it was not assured.
- The company was in compliance with debt covenants at quarter-end and reported a first-lien net leverage ratio of 2.26:1.00. It reported $18 million of environmental remediation liabilities; management said litigation outcomes were not expected to materially affect the company.
- Series B preferred stock has an 5.5% cumulative dividend, an $840 million aggregate liquidation preference, and holder conversion rights. Dividends may be paid in cash or common shares, at the company’s election.
Important facts for investors to verify
- Whether revenue growth and margin gains continue, particularly in recurring inspection, service and monitoring work, and whether Specialty Services sustains its improvement.
- Progress and effectiveness of the stated internal-control remediation, including whether the material weaknesses are fully remediated and tested.
- Chubb integration and restructuring costs against the approximately $105 million total estimate through fiscal 2024.
- Cash conversion, working-capital movements, debt repayment capacity, interest-rate exposure, and available revolver capacity.
- The effects of Series B preferred dividends, potential conversion or redemption rights, and any dilution to common shareholders.