APi Group Corporation (APG) — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; filed May 12, 2021. APi provides safety, specialty and industrial services across more than 200 locations, primarily in North America and Europe. Amounts below are in millions of dollars, except per-share data and percentages.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $803 | $858 |
| Gross profit / margin | $181 / 22.5% | $162 / 18.9% |
| Operating loss | $(2) | $(234) |
| Net loss / diluted loss per share | $(8) / $(0.04) | $(194) / $(1.14) |
| EBITDA (non-GAAP) | $51 | $(161) |
| Cash provided by operations | $32 | $55 |
| Capital expenditures | $18 | $11 |
- Gross margin improved 360 basis points. Management attributed the increase to $21 less backlog amortization expense (about 260 basis points), divestiture of two lower-margin Industrial Services businesses (about 90 basis points), and better service mix and project selection; project delays and weaker energy demand partly offset gains.
- Operating loss and EBITDA improved substantially, but comparisons are affected by a $208 impairment charge recorded in Q1 2020 that did not recur. The company reported a 42.3% effective tax rate in Q1 2021 versus 20.9% a year earlier; the tax benefit was $6 versus $51, respectively.
- Cash and cash equivalents were $745 at March 31, 2021, up from $515 at year-end 2020. Cash, cash equivalents and restricted cash totaled $748 at quarter-end. Operating cash flow declined year over year, primarily due to working-capital changes.
- Total debt, net of deferred financing costs, was $1,412, including $1,394 long-term and $18 current. The company had no revolver borrowings and $227 of revolver availability after $73 of letters of credit. Total liquidity was reported as $972; the company said it expected available resources to cover requirements for at least 12 months.
- The first-lien net leverage ratio was 1.75:1.00, and the company reported compliance with debt covenants. Cash interest paid was $12.
Material changes versus Q1 2020
- Revenue decreased $55, or 6.4%. Safety Services revenue rose 9.9% to $466 and Specialty Services rose 7.0% to $321, while Industrial Services fell 81.8% to $25. The Industrial decline reflected divestitures (which accounted for $38 of prior-year revenue), weak energy-sector demand, COVID-related effects, and disciplined project selection.
- Safety Services generated $65 EBITDA (13.9% of revenue); Specialty Services generated $20 (6.2%). Industrial Services remained loss-making, with EBITDA of $(6) (negative 24.0% of revenue). These comparisons also reflect the prior-year impairment and other unusual charges.
- Financing cash flow included $230 of proceeds from warrant exercises, resulting in approximately 20 million common shares issued. Weighted-average basic shares increased to 192 million from 170 million.
- Q1 2021 acquisitions were described as immaterial and totaled $7 of consideration. The 2020 SK FireSafety acquisition established a European platform; purchase accounting remained subject to measurement-period adjustments.
Outlook, risks and unusual items
- The filing provides no specific numerical revenue or earnings guidance. Management cited stabilizing activity and some volume improvement in the latter half of 2020 and Q1 2021 as customers adapted to COVID-19, but cautioned there was no assurance the trend would continue.
- COVID-19 could continue to delay or cancel projects, restrict customer-site access, disrupt workforce availability and supply, and increase operating volatility. The company said its services were generally deemed essential and supply disruption had been minimal to date.
- Business is seasonal, with revenue typically lowest in Q1; weather, project timing, customer budgets and industry cycles can cause results to vary. Industrial Services remains exposed to energy-sector demand and low oil and gas prices.
- Interest-rate exposure remains on floating-rate debt. A 100-basis-point rate increase was estimated to add about $2 of interest expense for the quarter. The company also noted uncertainty around LIBOR discontinuation and replacement rates.
- Management identified substantial risks from fixed-price project cost estimates, material and labor costs, customer credit, acquisitions and integration, litigation, safety and environmental obligations, and substantial indebtedness. The filing describes contingent compensation arrangements with a $39 accrued liability and maximum potential payout of $62.
- Unusual governance and control item: Disclosure controls were not effective at March 31, 2021 because of previously disclosed material weaknesses involving IT general controls, financial statement review and documentation, segregation of duties, contract cost-to-complete estimates, and review of fair-value models. Remediation was underway; the weaknesses were not yet considered remediated.
- A related entity controlled by the board co-chair received 12.4 million shares in January 2021 to settle a preferred-share dividend. The company also reported $1 of advisory fees payable to an entity owned by the co-chair.
Investor verification priorities
- Assess the durability of gross-margin gains, particularly the impact of lower backlog amortization and divestitures, and whether core operating performance improved independently of the Q1 2020 impairment comparison.
- Track Industrial Services demand, segment losses, project volumes and the effect of energy-market conditions.
- Reconcile operating cash generation with working-capital movements, capital expenditures, debt service and the company’s stated liquidity.
- Monitor leverage, covenant headroom, floating-rate exposure and the LIBOR transition; verify the ongoing availability of the revolver.
- Follow progress and testing of material-weakness remediation, especially controls over project estimates, financial reporting and IT systems.
- Review COVID-19 effects, acquisition purchase-accounting changes, contingent obligations and the share dilution resulting from warrant exercises and preferred-share dividends.