APi Group Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unless noted otherwise, dollar amounts are in millions. APi provides safety and specialty services in more than 500 locations across approximately 20 countries.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $1,471 | $803 |
| Gross profit / margin | $376 / 25.6% | $181 / 22.5% |
| Operating income (loss) / margin | $(7) / (0.5)% | $(2) / (0.2)% |
| Net income (loss) | $(7) | $(8) |
| Net loss attributable to common shareholders | $(18) | $(8) |
| Basic and diluted EPS | $(0.08) | $(0.04) |
| EBITDA (non-GAAP) / margin | $80 / 5.4% | $51 / 6.4% |
| Operating cash flow | $(118) | $32 |
- Revenue increased 83.2%, principally reflecting the Chubb acquisition and other acquisitions, higher inspection and service activity, market recovery, and pricing that passed through some cost inflation.
- Gross margin expanded 310 basis points, driven largely by acquisitions and a more favorable inspection and service mix; supply constraints and inflation partially offset the improvement. Operating margin remained negative, while EBITDA grew but its margin declined.
- SG&A was $383, up $200 year over year, including higher acquisition-related costs and amortization. Q1 included $24 of Chubb transaction costs; amortization expense increased to $57 from $31.
- Interest expense rose to $27 from $15, primarily due to acquisition financing. A $11 non-service pension benefit was recorded following the assumption of Chubb pension plans. The income tax benefit was $16; the reported effective tax rate was 71.3%, affected by a discrete reversal of the indefinite reinvestment assertion.
- Cash used in operating activities was $118, versus $32 provided a year earlier, reflecting working-capital needs, acquisition-related spending, higher debt costs, and a $27 one-time pension contribution. Investing cash outflow was $2,884, including $2,875 for acquisitions; financing provided $1,831, including term-loan proceeds and preferred-stock issuance.
- At March 31, cash and cash equivalents were $315, restricted cash was $3, and available revolver capacity was $398, for reported total liquidity of $713. Cash, cash equivalents, and restricted cash totaled $318.
- Debt obligations totaled $2,864 before $50 of unamortized financing costs; long-term debt, net of financing costs and current portion, was $2,812. The company had $1,127 outstanding on the 2019 term loan, $1,085 on the 2021 term loan, and $650 of senior notes. No revolver borrowings were outstanding; $102 of letters of credit reduced availability. The company reported covenant compliance and a first-lien net leverage ratio of 2.93:1.00.
Business changes and material developments
- APi completed its acquisition of Chubb’s fire and security business on January 3, 2022, for total estimated consideration of $2,899, funded with cash, debt, and $800 of Series B preferred stock. Chubb’s results are included in Safety Services from the acquisition date; purchase accounting remained preliminary, with finalization anticipated in Q4 2022.
- Safety Services revenue rose 130.5% to $1,074; operating income was $63 and operating margin fell to 5.9% from 9.7%. Specialty Services revenue increased 19.8% to $412; operating loss narrowed to $7 from $18.
- APi reorganized reporting by combining Industrial Services with Specialty Services; prior-period segment data was recast. The company now reports Safety Services and Specialty Services.
- The 5.5% Series B preferred stock has an $840 aggregate liquidation preference at quarter-end and accrued an $11 dividend, issued as common shares. It is convertible at the holder’s option at $24.60 per common share and carries specified voting and other rights.
- The board authorized a $250 share-repurchase program through February 2024. APi repurchased 531,431 shares for approximately $11 during the quarter, leaving about $239 authorized.
Outlook, risks, contingencies, and unusual items
- Management stated that cash, operating cash flows, and access to the revolver and capital markets are expected to fund liquidity needs for at least the next 12 months. No specific revenue or earnings guidance was provided. Capital expenditures are expected to be approximately 1.5% of annual revenue.
- Management described market recovery and improving activity, while noting ongoing supply-chain disruptions, inflation, and skilled-labor availability constraints. APi said it seeks to recover cost increases through pricing, but fixed-price contracts may limit recovery.
- Other cited uncertainties include COVID-19 effects, seasonality and weather, customer demand and project cancellations, acquisition integration, labor and safety matters, foreign exchange, and the Russia-Ukraine conflict’s potential effects on energy costs and markets. The company reported no material direct operations or exposure in Russia or Ukraine.
- Interest-rate exposure remains relevant: a 100-basis-point increase in applicable credit-facility rates was estimated to increase quarterly interest expense by approximately $5. APi also noted the planned LIBOR transition and does not expect it to have a significant impact, while continuing to monitor it.
- Management said it did not expect the resolution of disclosed legal matters or environmental obligations to have a material adverse effect. Environmental liabilities were $22 at March 31, 2022, compared with $6 at year-end.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective due to material weaknesses involving the control environment, risk assessment, information and communication, trained staffing, process-level controls, and IT general controls. Remediation efforts were underway; management said full remediation would likely take the next couple of years.
Important facts for investors to verify
- How Chubb performs after acquisition, including integration costs, realized synergies, and the final purchase-price allocation.
- Whether operating cash flow and working-capital demands improve, and whether APi sustains margins amid inflation and supply constraints.
- Debt levels, interest-rate sensitivity, covenant headroom, and the cash or share impact of Series B dividends and potential conversion.
- Progress and independent validation of remediation of the disclosed material weaknesses in financial reporting controls.
- Whether the company can execute its liquidity, acquisition, and repurchase plans while managing seasonality, labor availability, and customer/project risks.