APi Group Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. APi Group provides safety, specialty and industrial services, primarily in North America and Europe. Unless otherwise stated, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $978 | $889 | $1,781 | $1,747 |
| Gross profit / margin | $232 / 23.7% | $174 / 19.6% | $413 / 23.2% | $336 / 19.2% |
| Operating income (loss) | $47 | $27 | $45 | $(207) |
| Net income (loss) | $21 | $36 | $13 | $(158) |
| Diluted EPS | $0.09 | $0.17 | $0.06 | $(0.93) |
| EBITDA (non-GAAP) | $96 | $112 | $147 | $(49) |
Q2 revenue increased 10.0%, with recovery and acquisitions lifting Safety Services and improved market conditions benefiting Specialty Services. Gross margin expanded 410 basis points, reflecting lower backlog amortization, favorable segment mix and divestiture of lower-margin businesses; inflation and supply disruptions partly offset gains. Q2 net income and EBITDA declined despite higher revenue and operating income, principally due to a $9 debt-extinguishment loss, higher transformation and compliance spending, nonrecurrence of Canadian COVID-relief payments, and margin pressure.
For the first half, revenue rose 1.9%. The swing to operating and net income from prior-year losses primarily reflects the absence of a $208 goodwill and intangible impairment charge recorded in 2020, as well as improved gross margin. The prior-period impairment makes the year-over-year profit comparison less representative of underlying operating trends.
Segments and material changes
- Safety Services: Q2 revenue rose 38% to $512; operating income was $52 versus $22. Recovery, inspection and service work, acquisitions and improved mix contributed.
- Specialty Services: Q2 revenue rose 18.9% to $415; operating income was $32 versus $22. Inflation and supply-chain disruption weighed on margins; segment EBITDA margin fell to 13.3% from 17.8%.
- Industrial Services: Q2 revenue fell 60.7% to $68 and operating income was a loss of $8. Declines reflected divestitures, weak energy-market demand, customer project delays and selective bidding. The segment reported a first-half operating loss of $23.
Lower backlog amortization boosted gross margin by $21 in Q2 and $42 in the first half compared with the respective 2020 periods. Two Industrial Services business sales reduced revenue by about $40 in Q2 and $78 in the first half, versus 2020.
Cash flow, liquidity and debt
- First-half operating cash flow was $19, down from $232 in 2020, as recovering business volumes increased working-capital requirements; prior-year volume declines had released working capital.
- First-half investing cash use was $35, including $34 of capital expenditures. Management expects annual capital expenditures to be less than 2% of revenue.
- Cash and cash equivalents were $686 at June 30, 2021, versus $515 at year-end 2020. Total liquidity was $913, including $227 available on the revolver after letters of credit.
- Total debt obligations were $1,492 ($1,470 net of deferred financing costs); long-term debt, net, was $1,457. The company had $1,140 outstanding on its 2019 term loan and no revolver borrowings.
- APi issued $350 of 4.125% senior notes due 2029, using proceeds to repay the $250 2020 term loan, prepay part of the 2019 term loan and fund corporate purposes. The transaction generated a $9 debt-extinguishment loss. The company reported compliance with applicable debt covenants.
- About $230 of warrant-exercise proceeds came with issuance of approximately 20 million common shares. Shares issued increased from about 168 million at December 2020 to about 201 million at June 2021.
Outlook, risks and unusual items
Management said available cash, operating cash flow and revolver access should fund liquidity needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance. Management described signs of stabilizing volumes through the first half of 2021, but cautioned that COVID-19 effects remain uncertain.
On July 27, 2021, APi announced an agreement to acquire Carrier’s Chubb fire and security business for $3.1 billion enterprise value, comprising $2.9 billion cash and about $200 of assumed liabilities and other adjustments. The company expects to fund the transaction with cash, perpetual preferred equity and debt, with closing anticipated around year-end 2021, subject to conditions and regulatory approvals. The filing highlights execution, financing, integration, approval and transaction-cost risks.
Other disclosed risks include supply-chain constraints and material-cost inflation, fixed-price contract exposure, project estimation risk, seasonality and weather, weak energy-sector demand, labor availability and safety, customer credit and project cancellations, COVID-19 disruption, and substantial indebtedness. The company also noted potential interest-rate exposure and uncertainty around the planned phaseout of LIBOR.
Controls: Management concluded disclosure controls and procedures were not effective at June 30, 2021 because of previously reported material weaknesses. Areas included IT general controls, financial-statement preparation and review, segregation of duties, estimating costs to complete contracts, and review of projected information used in valuation models. Remediation efforts were underway; the weaknesses were not yet considered remediated.
Key facts for investors to verify
- Whether operating cash flow improves as working-capital demands normalize, and whether receivables and contract assets are collected as expected.
- Whether inflation and supply constraints can be recovered through pricing, particularly on fixed-price work, and whether Industrial Services demand and profitability stabilize.
- Financing terms, regulatory approvals, closing conditions, integration costs and expected funding for the Chubb acquisition.
- Debt covenant headroom and interest-rate exposure, including the effects of LIBOR transition and the company’s hedges.
- Progress and testing of remediation for the disclosed material weaknesses in internal control.
- Underlying profit trends excluding prior-year impairment charges and the benefit from lower backlog amortization.