APi Group Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Amounts are in millions of dollars unless stated otherwise. APi provides safety and specialty services through two segments and operates in more than 500 locations worldwide.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $1,784 | $1,735 | $5,169 | $4,855 |
| Gross profit | $511 | $440 | $1,432 | $1,251 |
| Gross margin | 28.6% | 25.4% | 27.7% | 25.8% |
| Operating income | $104 | $61 | $284 | $113 |
| Net income | $54 | $28 | $128 | $51 |
| Diluted EPS | $0.15 | $0.06 | $0.32 | $0.06 |
| EBITDA (non-GAAP) | $188 | $152 | $525 | $380 |
Q3 revenue grew 2.8%, while gross profit rose 16.1%; nine-month revenue grew 6.5% and gross profit rose 14.5%. Management attributed margin improvement to pricing, disciplined project and customer selection, and a greater mix of inspection, service, and monitoring work. Q3 operating margin was 5.8% versus 3.5%; nine-month margin was 5.5% versus 2.3%.
- Segment trends: Q3 Safety Services revenue increased 5.5% to $1,217; Specialty Services decreased 3.6% to $569, with fabrication project delays and selective project choices partly offset by service growth. For nine months, Safety Services revenue increased 7.7% to $3,633 and Specialty Services increased 2.2% to $1,554.
- Interest and taxes: Net interest expense was $37 in Q3 and $112 for nine months, up from $33 and $88, respectively, primarily reflecting higher rates on floating-rate debt. Effective tax rates were 25.5% in Q3 and 31.3% year to date.
Cash flow, debt and liquidity
- Operating cash flow was $217 for the first nine months, versus $82 in 2022. Management cited higher net income, lower working-capital needs, and a prior-year $27 pension contribution.
- Investing cash outflow was $108, compared with $2,931 in 2022, which included $2,881 for the Chubb acquisition. Financing cash outflow was $253, versus $1,773 of inflow in 2022, when debt and preferred-stock proceeds funded the acquisition.
- Cash and cash equivalents were $461 at September 30, compared with $605 at year-end 2022. Total liquidity was $945, including $484 available under the revolving facility after letters of credit.
- Total debt obligations were $2,632 ($2,598 net of deferred financing costs); current debt was $256 and long-term debt, net of current portion, was $2,342. The company reported compliance with debt covenants and a first-lien net leverage ratio of 1.92:1.00.
- Interest-rate swaps fixed rates on $1,120 of term-loan principal at weighted-average rates of approximately 3.52%. The remaining debt was exposed to floating rates.
Material developments, outlook and risks
- Restructuring: The Chubb integration program incurred $21 of costs in the first nine months; cumulative costs since the acquisition were $51. APi estimates approximately $105 of total costs through fiscal 2024. Restructuring liabilities were $23 for employee termination benefits and $28 in total including program costs and asset write-downs.
- Held-for-sale business: APi recorded a $13 impairment charge in Q3 on a Specialty Services infrastructure/utility company classified as held for sale. On October 3, 2023, it agreed to sell the business for $37, with closing expected before year-end.
- Debt actions after quarter-end: On October 11, APi repriced its term loans, reducing applicable margins by 25 basis points, extended $422 of the 2019 loan into the 2021 loan, and repaid $100 of the 2019 loan. Following the transaction, reported principal balances were $505 and $1,407, respectively.
- Outlook: Management said available liquidity should meet requirements for at least the next 12 months. Capital expenditures are expected to be approximately 1.5% of annual revenue. Of $2,732 in remaining performance obligations, APi expects to recognize approximately 87% as revenue over the next 12 months. The filing does not provide specific revenue or earnings guidance.
- Risks and contingencies: Risks include economic and project-demand volatility, short contract durations, customer delays, weather and seasonality, labor availability and cost, supply-chain and commodity pressures, fixed-price project cost overruns, foreign-currency exposure, and substantial indebtedness. Management did not expect litigation or environmental matters to have a material adverse effect; environmental liabilities were $17.
- Financial reporting controls: Management concluded disclosure controls and internal control over financial reporting were not effective at September 30 because previously identified material weaknesses remained in IT user-access controls and revenue-recognition process controls. Remediation continued; management believed remediation could be achieved by year-end, but the weaknesses were not remediated as of the filing date.
Most important facts for investors to verify
- Whether operating cash flow and working-capital performance remain strong as the business grows.
- Progress on Chubb restructuring, its remaining expected costs, and delivery of anticipated margin benefits.
- Completion and proceeds of the planned $37 business sale, and whether the impairment fully reflects the disposal economics.
- Impact of floating rates and the October loan repricing on interest expense, debt balances, and future cash available for repayment or investment.
- Whether the control weaknesses are remediated and validated through sustained testing.
- Performance of Specialty Services, including fabrication demand and project timing, and the durability of Safety Services’ service-revenue growth.