APi Group Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. APi Group provides safety and specialty services across more than 500 locations in approximately 20 countries. Results include the Chubb fire and security business from its January 3, 2022 acquisition. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,735 | $1,047 | $4,855 | $2,828 |
| Gross profit | $440 | $252 | $1,251 | $665 |
| Operating income | $61 | $41 | $113 | $86 |
| Net income | $28 | $19 | $51 | $32 |
| EBITDA (non-GAAP) | $152 | $96 | $380 | $243 |
| Diluted EPS | $0.06 | $0.08 | $0.06 | $0.14 |
- Revenue rose 65.7% in Q3 and 71.7% year to date, principally due to the Chubb acquisition and other acquisitions, with additional contributions from service and monitoring growth, pricing, and market recovery.
- Gross margin improved to 25.4% from 24.1% in Q3 and to 25.8% from 23.5% year to date. Operating margin fell to 3.5% from 3.9% in Q3 and to 2.3% from 3.0% year to date. EBITDA margin was 8.8% versus 9.2% in Q3 and 7.8% versus 8.6% year to date.
- Management attributed margin pressure primarily to acquisition integration costs, higher amortization, supply-chain disruption, and inflation. A higher mix of inspection, service, and monitoring revenue supported gross margin. Specialty Services operating margin improved; Safety Services margin declined.
- Interest expense rose to $33 in Q3 from $14 and to $88 year to date from $43, mainly reflecting Chubb-related borrowing and higher rates on floating-rate debt.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $82, versus $68 in 2021. Capital expenditures were $60; acquisitions used $2,881. Financing provided $1,773, including $1,104 of borrowing proceeds and $797 from Series B preferred stock issuance.
- Cash and cash equivalents were $395 at September 30, 2022, compared with $1,188 at year-end 2021; restricted cash was $3 versus $302. Cash, cash equivalents, and restricted cash totaled $398 at period-end.
- Total debt obligations were $2,833, including $2,212 in term loans and $614 in senior notes; net debt after deferred financing costs was $2,787. No revolving-credit borrowings were outstanding. The $500 revolving facility had $424 available after letters of credit.
- Total liquidity was $819, comprising $395 cash and $424 available revolver capacity. The company reported compliance with debt covenants and a first-lien net leverage ratio of 2.72:1.00. Management believes available liquidity sources will meet requirements for at least the next 12 months.
- Cash flow was affected by working-capital investment, including increased receivables and contract assets, as well as a $27 pension contribution. The filing reports $81 of cash interest paid year to date.
Material changes, outlook, and risks
- The January Chubb acquisition had net consideration of $2,893 and was financed in part with new term debt, senior notes, and $800 of Series B preferred stock. Purchase accounting remained preliminary; management expected to finalize it in Q4 2022.
- The Series B preferred stock carries a 5.5% cumulative dividend, is convertible at the holder’s option at $24.60 per common share, and has change-of-control or delisting redemption provisions. Dividends were paid in common shares; $33 was recorded for the first nine months.
- The company began a multi-year restructuring program. It recorded $18 in costs year to date and had $11 accrued at September 30, expected to be paid within three to six months. Additional costs are possible but not yet estimable.
- No quantified full-year revenue or earnings guidance is provided in the filing. Management expects capital expenditures of approximately 1.5% of annual revenue and cites acquisition integration, cross-selling, recurring service growth, and operational efficiencies as opportunities.
- Risks cited include inflation and supply-chain constraints, skilled-labor availability and costs, project-cost estimation, customer demand and contract renewal, seasonality, acquisition integration, substantial indebtedness and floating rates, foreign-exchange movements, and potential collection risk on receivables and contract assets. Management said the Russia-Ukraine conflict had no direct material operating impact to date.
- Foreign-currency translation losses were $86 in Q3 and $311 year to date, contributing to comprehensive losses of $7 and $178, respectively. The company also reported a $32 year-to-date non-service pension benefit related to plans assumed with Chubb.
- Management concluded disclosure controls and internal control over financial reporting were not effective at September 30, 2022 because previously identified material weaknesses remained. Remediation is underway and management expects it may take a couple of years to complete.
- Environmental, warranty, construction-defect, contract, product-liability, wage-and-hour, and other legal matters are disclosed. Management did not expect their resolution to materially adversely affect the company, while noting outcomes could not be predicted.
Important facts for investors to verify
- Whether Chubb integration delivers expected growth and synergies, and whether preliminary purchase accounting or restructuring generates further expenses.
- Whether Safety Services margins recover and working-capital investment converts into operating cash flow.
- Exposure to floating interest rates, debt repayment requirements, and continued compliance with credit-facility covenants.
- Progress in remediating material weaknesses in internal controls and the timing of effective remediation.
- The cumulative preferred dividend, potential conversion dilution, and the preferred stock’s redemption and governance terms.
- Whether inflation, supply disruptions, labor constraints, and foreign-exchange movements continue to pressure margins and reported equity.