APi Group Corporation — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Amounts are in millions of dollars except per-share data. APi acquired its operating business on October 1, 2019; 2020 “Successor” results use a new acquisition-accounting basis and are not directly comparable with 2019 “Predecessor” results.
Business context and financial performance
APi provides safety, specialty infrastructure, and industrial services, primarily in North America. The company reported that COVID-19 disruptions, customer project delays or cancellations, access restrictions, and lower oil-and-gas demand affected activity. Management also cited deliberate project selection as a factor in lower volumes.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $889 | $1,067 | $1,747 | $1,989 |
| Gross profit / margin | $174 / 19.6% | $208 / 19.5% | $336 / 19.2% | $371 / 18.7% |
| Operating income (loss) | $27 | $63 | $(207) | $89 |
| Net income (loss) | $36 | $53 | $(158) | $74 |
| EBITDA, non-GAAP | $112 | $90 | $(49) | $143 |
Q2 revenue fell 16.7% year over year; all three segments declined: Safety Services 16.4%, Specialty Services 15.7%, and Industrial Services 18.4%. Gross margin was broadly stable in Q2, though operating margin fell to 3.0% from 5.9%. Q2 EBITDA margin increased to 12.6% from 8.4%, which management attributed to work mix, execution efficiencies, project selection, and joint-venture income. Comparisons are affected by acquisition accounting, including higher amortization and the different reporting basis.
For the first half, revenue declined 12.2%. A non-cash impairment charge of $208 ($203 goodwill and $5 intangible assets) drove the reported operating and net losses. The charge was allocated across reporting units, with Specialty Services recording $120 and Industrial Services $49 of goodwill impairment. EBITDA is a non-GAAP measure; first-half EBITDA was $(49), versus $143 in the prior-year period.
Cash flow, liquidity, debt, and other metrics
- Operating cash flow was $232 for the first half, versus $53 in 2019. Management said the increase was primarily driven by working-capital changes, including lower receivables amid reduced revenue.
- Investing cash outflow was $16, including $17 of capital expenditures; financing cash outflow was $96, largely reflecting $86 of acquisition-related consideration payments.
- Cash and cash equivalents were $377 at June 30, compared with $256 at December 31, 2019. Total liquidity was $607: cash plus $230 available on the revolving facility after letters of credit.
- Total debt obligations were $1,203, including a $1,194 term loan; debt net of financing costs was $1,181. No revolving borrowings were outstanding. The company reported covenant compliance and a net leverage ratio of 2.19:1.
- The term loan carried a 2.68% rate at quarter-end. A $720 notional interest-rate swap fixes LIBOR at 1.62% through October 2024; the filing says the resulting rate on the swapped debt is 4.12%.
- Current assets were $1,394 and current liabilities $821. Accounts receivable were $646; contract assets were $245 and contract liabilities $235. Remaining transaction price on unsatisfied performance obligations was $1,505.
Outlook, commentary, risks, and unusual items
- Management said it could not predict the cumulative severity or duration of COVID-19’s effects. It reported early signs of volume stabilization and improvement from prior lows, but cautioned that recovery to prior-year levels was not assured. It gave no specific earnings or revenue guidance.
- Management believed cash, operating cash generation, and available borrowing capacity would meet liquidity needs for at least the next 12 months. It had drawn and repaid $200 of revolver borrowings in March and April, respectively.
- Further impairments remain possible. Fair values and purchase accounting were preliminary; the company expected to finalize the APi acquisition accounting in Q3 2020. The Life Safety reporting unit had less than 10% fair-value headroom; a 10% increase in its carrying value would have resulted in a $41 impairment, based on the company’s sensitivity analysis.
- Other risks include project delays or cancellations, workforce and supply availability, customer credit and construction-market conditions, oil-and-gas price volatility, seasonality, fixed-price cost overruns, interest-rate exposure and possible LIBOR replacement, and the company’s substantial debt and covenant requirements.
- Disclosure controls and procedures were deemed ineffective due to material weaknesses involving IT general controls, financial-statement preparation and review, segregation of duties, estimates of contract costs to complete, and review of projected financial information used in fair-value models. Management was developing a remediation plan.
- One Industrial Services subsidiary classified as held for sale was sold on July 1, 2020 for $5, approximately its carrying value; no significant gain or loss was expected.
Important facts for investors to verify
- Whether customer volumes and project activity continue to stabilize, and whether COVID-19 or oil-and-gas conditions cause further disruption.
- Final acquisition purchase-price allocation and any resulting changes to goodwill, intangible assets, amortization, or impairment charges.
- Progress remediating the disclosed material weaknesses and whether controls are tested and deemed effective.
- Cash conversion and working-capital trends, given that first-half operating cash flow benefited from working-capital changes during falling revenue.
- Debt service, available revolver capacity, covenant headroom, and exposure to interest rates and LIBOR transition.
- Segment-level operating performance and the distinction between GAAP results and management’s non-GAAP EBITDA measure.