APi Group Corporation — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. APi Group provides safety and specialty services in more than 500 locations across approximately 20 countries. The quarter’s results include the Chubb fire and security business, acquired January 3, 2022.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $1,649 | $978 | $3,120 | $1,781 |
| Gross profit | $435 | $232 | $811 | $413 |
| Gross margin | 26.4% | 23.7% | 26.0% | 23.2% |
| Operating income | $59 | $47 | $52 | $45 |
| Operating margin | 3.6% | 4.8% | 1.7% | 2.5% |
| Net income | $30 | $21 | $23 | $13 |
| Diluted EPS | $0.06 | $0.09 | $0.01 | $0.06 |
| EBITDA (non-GAAP) | $148 | $96 | $228 | $147 |
- Q2 revenue increased 68.6%; six-month revenue increased 75.2%, primarily reflecting Chubb and other recent acquisitions, alongside service and inspection growth and market recovery.
- Q2 gross margin improved 270 basis points, while operating margin fell 120 basis points. Higher acquisition-related SG&A, integration costs, and amortization weighed on operating results.
- For the six months, operating cash flow was negative $64, versus positive $19 a year earlier. Working-capital investment, acquisition and integration spending, higher debt costs, and a $27 pension contribution contributed to cash use.
- Investing cash outflow was $2,903, including $2,875 for acquisitions. Financing cash inflow was $1,818, including term-loan proceeds and Series B preferred-stock proceeds. Cash, cash equivalents, and restricted cash ended at $333.
Balance sheet, debt, and liquidity
- At June 30, 2022, cash and cash equivalents were $330; total assets were $8,054.
- Total debt obligations were $2,865 before $48 of unamortized financing costs; reported net debt was $2,817. Debt increased substantially following Chubb financing.
- Total liquidity was $773: $330 cash plus $443 available under the $500 revolving facility after letters of credit. No revolver borrowings were outstanding. The company reported compliance with debt covenants; its first-lien net leverage ratio was 2.88:1.00.
- Series B preferred stock issued for $800 carries a 5.5% annual cumulative dividend, payable in cash or common shares at the company’s election, and is convertible at the holder’s option at $24.60 per share, subject to adjustments.
Material changes, outlook, and risks
- Chubb acquisition: The $2,899 net consideration acquisition expanded Safety Services and international operations. Purchase accounting remained preliminary, with finalization expected in Q4 2022. Management cited cross-selling and growth opportunities.
- Restructuring: A multiyear program began in Q2 to improve efficiencies and margins. The company recorded $11 of costs, had $8 accrued for payment within six to nine months, and expected additional costs but could not yet estimate them.
- Management outlook: No specific revenue or earnings guidance is provided in the supplied filing text. Management stated it believes liquidity is sufficient for at least the next 12 months and expects capital expenditures of approximately 1.5% of annual revenue.
- Operating pressures: Supply-chain disruption, inflation in materials and labor, labor availability, customer project delays or cancellations, seasonal and cyclical demand, and fixed-price contract cost overruns may pressure performance. Management noted some inflationary costs could be passed through, but recovery is not assured.
- Other risks: COVID-19 disruptions remain uncertain. The Russia-Ukraine conflict has raised energy and inflation concerns, though the company reported no material direct exposure in those countries. Variable-rate debt exposes the company to higher interest costs; a 100-basis-point rate increase would have added approximately $11 of interest expense for the six months ended June 30, 2022.
- Currency and unusual items: Foreign-currency translation losses were $225 for the six months and contributed to comprehensive loss of $171. A non-service pension benefit of $22 partly offset expenses. The six-month effective tax rate was negative 11.3%, reflecting favorable discrete items and other tax factors.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30 because previously identified material weaknesses remained. Remediation is underway and is expected to take multiple years.
- Environmental remediation and ordinary-course legal claims are disclosed; management did not expect their resolution to materially adversely affect results, cash flows, financial condition, or liquidity.
Important facts for investors to verify
- How much of reported growth and margin performance is attributable to Chubb and other acquisitions versus organic activity, and whether integration produces the anticipated benefits.
- Whether working-capital needs and operating cash flow improve after the six-month cash outflow, and the implications for debt reduction and capital allocation.
- Debt sensitivity to interest rates, refinancing conditions, covenant headroom, and the transition away from LIBOR.
- The final Chubb purchase-price allocation, pension assumptions and funding needs, and additional restructuring costs.
- Progress in remediating the disclosed material weaknesses and the timing of effective controls.