APi Group Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. Amounts are in millions of dollars unless noted. The filing reports annual results, not a standalone fourth quarter.
Business context
APi Group provides safety, specialty infrastructure and industrial services, including fire protection, HVAC, inspections, maintenance, utility infrastructure and energy-related services. At year-end, it reported three segments: Safety Services, Specialty Services and Industrial Services. Revenue is diversified; no customer represented more than 5% of 2021 net revenue.
On January 3, 2022, APi completed the $3.1 billion enterprise-value acquisition of Chubb’s fire and security business. Chubb was not included in FY2021 results. Beginning in 2022, APi planned to report two segments, combining Industrial Services with Specialty Services.
Financial performance
| Metric | 2021 | 2020 |
|---|---|---|
| Net revenue | $3,940 | $3,587 |
| Gross profit / margin | $939 / 23.8% | $756 / 21.1% |
| Operating income (loss) / margin | $136 / 3.5% | $(166) / (4.6)% |
| Net income (loss) | $47 | $(153) |
| EBITDA (non-GAAP) | $341 | $131 |
| Cash from operating activities | $182 | $496 |
| Capital expenditures | $55 | $38 |
Revenue grew 9.8%, reflecting market recovery, inspection and service growth, acquisitions and stronger specialty contracting and fabrication. Industrial Services revenue declined amid energy-market weakness and the 2020 sale of two businesses. Gross margin increased 270 basis points; management attributed much of the improvement to lower backlog amortization, alongside stronger Safety Services and service revenue. Supply disruption and inflation weighed on margins.
FY2021 GAAP net income was $47, but the filing reports a $137 net loss attributable to common shareholders and basic and diluted loss per share of $0.67. This reflects the $184 accrued Series A Preferred Stock dividend deducted in determining income attributable to common shareholders. The comparable 2020 common-shareholder loss was $375, or $2.21 per share.
Operating cash flow fell by $314 to $182, chiefly because recovering sales required more working capital, including higher receivables and contract assets. The 2020 comparison benefited from working-capital reductions during the pandemic. Investing cash outflow was $121, versus $340 in 2020; financing provided $917, including equity and debt proceeds.
Liquidity, debt and capital structure
At December 31, 2021, cash and cash equivalents were $1,188; restricted cash was $302, primarily related to escrowed Chubb financing proceeds. APi reported total liquidity of $1,415, comprising cash and $227 of availability under its revolving facility after letters of credit. Management said existing sources were expected to fund liquidity requirements for at least 12 months.
Year-end debt obligations totaled $1,791 before $24 of unamortized financing costs: $1,140 under the 2019 term loan and $650 of senior notes, plus other obligations. The term loan matures in 2026; the 4.125% and 4.750% notes mature in 2029. APi was in compliance with debt covenants at year-end. A $720 portion of the 2019 term loan was swapped to a fixed LIBOR component; the remaining $420 was floating-rate.
After year-end, APi funded the Chubb transaction with approximately $2,900 cash plus assumed liabilities and adjustments, including an $800 issuance of 5.5% Series B convertible preferred stock and a new $1,100 seven-year term loan. The revolving facility was increased to $500. These post-year-end changes materially increased the company’s scale and debt and preferred obligations.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided. Management cited organic growth, service and inspection revenue, cross-selling, acquisitions and infrastructure investment as opportunities; planned annual capital spending was approximately 1.5% of revenue.
- COVID-19 recovery supported 2021 demand, but the company continued to report supply-chain disruption and inflationary pressure. Risks include labor availability and cost, project delays, weather, energy-market weakness and customers’ ability to pay.
- Revenue on many fixed-price projects is recognized over time using estimated costs to complete. Changes to those estimates can reduce or reverse previously recorded revenue or profit; this was also the auditor’s critical audit matter.
- The company recorded no goodwill impairment in 2021, compared with a $197 impairment charge in 2020. Year-end goodwill was $1,106; management identified the SKG reporting unit as having a 10% fair-value cushion over carrying value.
- APi disclosed material weaknesses in internal control over financial reporting, including weaknesses in the control environment, risk assessment, information and communication, process controls and IT controls. Management said remediation would likely extend over the next couple of years. The auditor issued an adverse opinion on internal control effectiveness, while giving an unqualified opinion on the financial statements.
- APi is substantially self-insured for many claims and assumed certain pending and incurred-but-not-reported claims with Chubb. It also disclosed asbestos-related litigation and potential environmental exposure, including PFAS-related matters. Management did not expect ordinary-course litigation to materially affect the company, but outcomes are uncertain.
- APi does not anticipate cash dividends on common stock; debt agreements may also restrict distributions. Preferred-stock dividends and potential share conversion create dilution and cash-flow considerations.
Important facts for investors to verify
- How Chubb integration, financing costs and the enlarged debt burden affect earnings, cash generation, leverage and covenant headroom.
- Whether operating cash flow recovers as receivables and contract assets are collected, and how working capital performs as revenue grows.
- Progress and testing evidence for remediation of the material weaknesses, and any subsequent auditor assessment of internal controls.
- Whether margin gains persist after lower backlog amortization, and the continuing effect of inflation and supply constraints on fixed-price work.
- Developments in the SKG goodwill cushion, self-insurance and Chubb claims reserves, asbestos litigation, and environmental contingencies.
- The terms, dividend burden and potential dilution associated with Series A and Series B preferred stock.