API GROUP CORPORATION The following is a discussion and year-to-year comparisons of APG's financial condition and results of operations for the years endedDecember 31, 2021 and 2020. For a discussion of the results of operations and financial condition of APG for the year endedDecember 31, 2019 , and year-to-year comparisons between 2020 and 2019, which for 2019 includes the results of operations forAPi Group, Inc. for the period fromOctober 1, 2019 throughDecember 31, 2019 and forAPi Group, Inc. for the nine months endedSeptember 30, 2019 , please refer to "Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K, filed as ofMarch 24, 2021 (as amended onNovember 19, 2021 ), which item is incorporated herein by reference. Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the "Risk Factors" and "Cautionary Note Regarding Forward Looking Statements" sections of this Annual Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
We are a global, market-leading business services provider of safety and specialty services in over 500 locations in approximately 20 countries. We provide statutorily mandated and other contracted services to a strong base of long-standing customers across industries. We have a winning leadership culture driven by entrepreneurial business leaders to deliver innovative solutions for our customers. We focus on growing our recurring revenues and repeat business from our diversified long-standing customers across a variety of end markets, which we believe provides us with stable cash flows and a platform for organic and accretive growth. Maintenance, monitoring, and service revenues are generally more predictable through contractual arrangements with typical terms ranging from days to three years, with the majority of contracts having durations of less than six months and are often recurring due to consistent renewal rates and long-standing customer relationships.
Certain Factors and Trends Affecting our Results of Operations
Acquisitions
During 2021, we completed the acquisitions ofPremier Fire andNorthern Air Corporation within the Safety Services segment, along with several individually immaterial acquisitions. Total purchase consideration for all completed acquisitions was$111 million , which includes total paid at closing of$93 million , gross of cash acquired of$7 million , and accrued consideration of$18 million . The results of operations of these acquisitions are included in the consolidated statements of operations from their respective dates of acquisition. Net revenues and operating income from material acquisitions were$37 million and$1 million , respectively, for the year endedDecember 31, 2021 . See Note 4 - "Business Combinations" for further details. OnJanuary 3, 2022 , we completed the acquisition of the Chubb Business from Carrier Global Corporation for an enterprise value of$3,100 million . The aggregate consideration paid by us consists of (1) approximately$2,900 million cash, which was funded through a combination of cash on hand and net proceeds from the private placement of Series B Preferred Stock, the offering of the 4.750% Senior Notes and the 2021 Term Loan, each as defined and described below, and (2) approximately$200 million of assumed liabilities, and other adjustments. The Chubb Business will be reported within the Safety Services segment beginning with the first quarter of 2022.
Economic, Industry and Market Factors
We closely monitor the effects of general changes in economic and market
conditions on our customers. General economic and market conditions can
negatively affect demand for our customers' products and services, which can
affect their planned capital and maintenance budgets in certain end markets.
Market, regulatory and industry factors could affect demand for our services,
including: (i) changes to customers' capital spending plans; (ii) mergers and
acquisitions among the customers we serve; (iii) new or changing regulatory
requirements or other governmental policy changes or uncertainty; (iv) economic,
market or political developments; (v) changes in technology, tax and other
incentives; and (vi) access to capital for customers in the industries we serve.
Availability of
36
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transportation and transmission capacity and fluctuations in market prices for
energy and other fuel sources can also affect demand for our services for
pipeline and power generation construction services. These fluctuations, as well
as the highly competitive nature of our industries, can result, and has
resulted, in lower proposals and lower profit on the services we provide. In the
face of increased pricing pressure on key materials, such as steel, or other
market developments, we strive to maintain our profit margins through
productivity improvements, cost reduction programs, pricing adjustments, and
business streamlining efforts. Increased competition for skilled labor resources
and higher labor costs can reduce our profitability and impact our ability to
deliver timely service to our customers. While we actively monitor economic,
industry and market factors that could affect our business, we cannot predict
the effect that changes in such factors may have on our future consolidated
results of operations, liquidity and cash flows, and we may be unable to fully
mitigate, or benefit from, such changes.
COVID-19 Update
We continue to monitor short- and long-term impacts of the COVID-19 pandemic. As the situation has continued to evolve, the impacts on our work have also evolved due to the domino effects of various local, state, national and international governmental orders, including but not limited to, reduced efficiency in performing our work while adhering to physical distancing protocols demanded by COVID-19. Beginning in the fourth quarter of 2021, theU.S. government began implementing a COVID-19 vaccine mandate for certain federal contractors and subcontractors, subject to exception upon an approved reasonable accommodation based on disability or religion. The federal contractor mandate is currently the subject of litigation and is stayed under a nationwide injunction pending resolution on the merits, and could impact the availability of labor resources. We have not experienced significant labor shortages or loss of work as a result of current and anticipated COVID-19-vaccine-related mandates. Generally, in 2021, with the end of shelter-in-place orders and increases in vaccination rates, we continued to experience stabilization and volume improvements as our teams and customers have adapted to working in the long-term COVID-19 environment. We have experienced supply chain disruptions within certain segments of our business, which have negatively impacted the source and supply of materials needed to perform our work. During 2020, we implemented a preemptive cost reduction plan to save expense and cash and the majority of these costs were restored in 2021.
Description of Key Line Items
Net Revenues
Net revenues are generated from the sale of various types of contracted services, fabrication and distribution. We derive net revenues primarily from services under contractual arrangements with durations ranging from days to three years, with the majority having durations of less than six months, and which may provide the customer with pricing options that include a combination of fixed, unit, or time and material pricing. Net revenues for fixed price agreements are generally recognized over time using the cost-to-cost method of accounting which measures progress based on the cost incurred to total expected cost in satisfying our performance obligation. Net revenues from time and material contracts are recognized as the services are provided. Net revenues earned are based on total contract costs incurred plus an agreed upon markup. Net revenues for these cost-plus contracts are recognized over time on an input basis as labor hours are incurred, materials are utilized, and services are performed. Net revenues from wholesale or retail unit sales are recognized at a point-in-time upon shipment.
Cost of Revenues
Cost of revenues consists of direct labor, materials, subcontract costs, and
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Labor costs are considered to
be incurred as the work is performed. Subcontractor labor is recognized as the
work is performed.
Gross Profit
Our gross profit is influenced by direct labor, materials, and subcontract
costs. Our profit margins are also influenced by raw material costs, contract
mix, weather, and proper coordination with contract providers. Labor intensive
contracts usually drive higher margins than those contracts that include
material, subcontract, and equipment costs.
37
--------------------------------------------------------------------------------Selling, General and Administrative Expenses
Selling expenses consist primarily of compensation and associated costs for sales and marketing personnel, costs of advertising, trade shows, and corporate marketing. General and administrative expenses consist primarily of compensation and associated costs for executive management, personnel, facility leases, administrative expenses associated with accounting, finance, legal, information systems, leadership development, human resources, and risk management and overhead associated with these functions. General and administrative expenses also include outside professional fees and other corporate expenses.
Amortization of Intangible Assets
Amortization expense reflects the charges incurred to amortize our finite-lived identifiable intangible assets, such as customer relationships, which are amortized over their estimated useful lives. There is a portion of amortization expense related to the backlog intangible assets reflected in cost of revenues in the consolidated statements of operations.
Impairment of
We do not amortize goodwill, rather, goodwill is tested for impairment annually, or more frequently as events and circumstances change. Expenses for impairment charges related to the write-down of goodwill balances and identifiable intangible assets balances are recorded to the extent their carrying values exceed their estimated fair values. Expenses for impairment charges related to the write-down of other long-lived assets (which includes amortizable intangibles) are recorded when triggering events indicate their carrying values may exceed their estimated fair values.
Results of Operations
The following is a discussion of our financial condition and results of
operations for the years ended
The following financial information has been extracted from our audited consolidated financial statements included in this Annual Report.
Years Ended December 31, Change
($ in millions) 2021 2020 $ %
Net revenues $ 3,940 $ 3,587 $ 353 9.8 %
Cost of revenues 3,001 2,831 170 6.0 %
Gross profit 939 756 183 24.2 %
Selling, general, and administrative
expenses 803 725 78 10.8 %
Impairment of goodwill - 197 (197 ) NM
Operating income (loss) 136 (166 ) 302 181.9 %
Interest expense, net 60 52 8 15.4 %
Loss on extinguishment of debt 9 - 9 NM
Investment income and other, net (12 ) (34 ) 22 64.7 %
Other expense, net 57 18 39 216.7 %
Income (loss) before income taxes 79 (184 ) 263 142.9 %
Income tax provision (benefit) 32 (31 ) 63 203.2 %
Net income (loss) $ 47 $ (153 ) $ 200 130.7 %
Year ended
Net revenues
Net revenues for the year endedDecember 31, 2021 were$3,940 million compared to$3,587 million for the year endedDecember 31, 2020 , an increase of$353 million or 9.8%. The increase in net revenues is primarily attributable to general market recoveries from the COVID-19 pandemic in both our Safety Services and Specialty Services segments, incremental revenue contributed by acquisitions primarily within our Safety Services segment, and growth in inspection and service revenue in our Safety Services and Specialty Services segments. Additionally, greater demand for specialty contracting and fabrication services within our Specialty Services segment also drove the increase in net revenues. These improvements were partially offset by a decline in net 38 -------------------------------------------------------------------------------- revenues within our Industrial Services segment due to the suppressed demand for our services and general market weakness in the energy industry. Also impacting our Industrial Services segment was the sale during 2020 of two Industrial Services businesses that accounted for$91 million of net revenues in 2020.
Gross profit
Years Ended December 31, Change
($ in millions) 2021 2020 $ %
Gross profit
23.8 % 21.1 %
Our gross profit for the year ended December 31, 2021 was $939 million compared
to $756 million in the year ended December 31, 2020 , an increase of $183
million , or 24.2%. Gross margin for the year ended December 31, 2021 was 23.8%,
an increase of 270 basis points compared to the prior year primarily due to a
$64 million decrease in amortization expense for backlog intangible assets,
which were recorded in relation to the 2019 acquisition of APi, and positively
impacted the rate by 160 basis points. Also contributing to the improvement was
outsized growth in the Safety Services segment and an increase in inspection and
service revenue, which was partially offset by supply chain disruptions and
inflation causing downward pressure on margins and suppression of demand in the
energy industry.
Operating expenses
Years Ended December 31, Change
($ in millions) 2021 2020 $ %
Selling, general, and administrative
expenses $ 803 $ 725 $ 78 10.8 %
Selling, general, and administrative
expenses (excluding amortization)
(Non-GAAP) 681 612 69 11.3 %
Selling, general, and administrative
expenses (excluding amortization) as
a % of net revenues 17.3 % 17.1 %
Total operating expenses (Non-GAAP) 803 922 (119 ) (12.9 )%
Operating margin 3.5 % (4.6 )%
Operating expenses as a % of net
revenues 20.4 % 25.7 %
Selling, general, and administrative expenses were $803 million for the year
ended December 31, 2021 compared to $725 million for the year ended December 31,
2020 , an increase of $78 million . The increase was primarily driven by higher
spending related to acquisition expenses, business process transformation
projects to enhance systems and implement compliance programs related to the
Sarbanes-Oxley Act of 2002, and the restoration of costs that had been reduced
during the prior year as part of our COVID-19 response. Selling, general, and
administrative expenses (excluding amortization) as a percent of net revenues
were 17.3%, an increase of 20 basis points primarily driven by the factors
discussed above. Operating expenses were $803 million for the year ended
December 31, 2021 compared to $922 million for the year ended December 31, 2020 ,
a decrease of $119 million . Operating expenses as a percentage of net revenues
were 20.4% for 2021 compared to 25.7% for 2020, improving primarily due to the
$197 million impairment charge related to goodwill recorded in 2020 that did not
recur in 2021, partially offset by higher selling, general, and administrative
expenses. See the discussion of our non-U.S. GAAP financial measures below.
Interest expense, net
Interest expense was$60 million and$52 million for the years endedDecember 31, 2021 and 2020, respectively. The increase in interest expense was primarily due to the issuance of$650 million of fixed rate senior notes (4.125% Senior Notes and 4.750% Senior Notes) during 2021.
Investment income and other, net
Investment income and other, net was$12 million and$34 million for the years endedDecember 31, 2021 and 2020, respectively. The decline in investment income and other, net was primarily due to a decrease in income from joint venture investments of$11 million and a$6 million decline in income from COVID-19 relief programs. 39 --------------------------------------------------------------------------------
Loss on extinguishment of debt
During 2021, we completed a private offering of$350 million aggregate principal amount of senior notes (4.125% Senior Notes). The proceeds from the offering were used to repay all outstanding indebtedness under the 2020 Term Loan, prepay a portion of the 2019 Term Loan, pay transaction fees and expenses, and fund general corporate purposes. In connection with the repayment of the 2020 Term Loan and prepayment on a portion of the 2019 Term Loan, we incurred a loss on extinguishment of debt of$9 million related to unamortized debt issuance costs.
Income tax provision (benefit)
The effective tax rate for the year endedDecember 31, 2021 was 40.0% compared to an effective tax rate of 17.4% for the year endedDecember 31, 2020 . The income tax provision of$32 million for the year endedDecember 31, 2021 was related to statutory tax, nondeductible transaction costs, and limited executive compensation. In comparison, during 2020,APi Group had tax benefit of$31 million on a loss before income taxes of$184 million . The variation in tax expense from 2020 to 2021 was due to a swing from a loss before income taxes of$184 million in 2020 to income before income taxes in 2021 of$79 million . During 2020,APi Group elected to defer the payment of$39 million of payroll taxes under the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). Under this election,$19 million was paid onDecember 31, 2021 and the remainder is payable onDecember 31, 2022 . Prior to the APi Acquisition,APi Group had elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code for federal tax purposes. As a result,APi Group's income was not subject toU.S. federal income taxes or state income taxes in those states where theS Corporation status is recognized. Accordingly, no provision or liability for federal or state income tax has been provided in predecessor consolidated financial statements except for those taxing jurisdictions where theS Corporation status is not recognized. The provision for income tax inAPi Group's historical periods consists of these taxes. However, in prior periods,APi Group made significant distributions to its shareholders based on itsS Corporation earnings. These distributions will no longer be necessary. In connection with the APi Acquisition,APi Group's S Corporation status was terminated and APG is now treated as aC Corporation under Subchapter C of the Internal Revenue Code and will be part of our consolidated tax group. Our domestication and the revocation ofAPi Group's S Corporation election had a material impact on our consolidated results of operations, financial condition and cash flows. Our effective income tax rate for 2021, 2020, and 2019 and future periods increased as compared to prior periods and our net income has decreased in 2021, 2020, and 2019 and is expected to decrease in future periods due to the application of both federal and state taxes against pre-tax income. Net Income and EBITDA Years Ended December 31, Change ($ in millions) 2021 2020 $ % Net income (loss)$ 47 $ (153 ) $ 200 130.7 % EBITDA (non-GAAP) 341 131 210 160.3 % Net income (loss) as a % of net revenues 1.2 % (4.3 )% EBITDA as a % of net revenues 8.7 %
3.7 %
Net income (loss) for the year endedDecember 31, 2021 was$47 million of income compared to a net loss of$(153) million for the year endedDecember 31, 2020 , an improvement of$200 million . Net income (loss) as a percentage of net revenues for the year endedDecember 31, 2021 was 1.2% compared to (4.3)% for the year endedDecember 31, 2020 . The change was principally from an impairment charge that occurred in 2020 related to goodwill of$197 million that did not recur in 2021, an increase in inspection and service revenue, and an improved gross margin. These improvements were partially offset by lower investment income and other, net due to a$11 million decrease in income from joint ventures and a decline in income from COVID-19 relief programs of$6 million . EBITDA as a percentage of net revenues was 8.7% and 3.7% for the years endedDecember 31, 2021 and 2020, respectively. Improvements in EBITDA were primarily driven by the factors discussed above. See the discussion of our non-U.S. GAAP financial measures below. 40 --------------------------------------------------------------------------------
Operating Segment Results
Net Revenues
Years Ended December 31, Change
($ in millions) 2021 2020 $ %
Safety Services $ 2,080 $ 1,639 $ 441 26.9 %
Specialty Services 1,653 1,401 252 18.0 %
Industrial Services 277 563 (286 ) (50.8 )%
Corporate and Eliminations (70 ) (16 ) (54 ) (337.5 )%
$ 3,940 $ 3,587 $ 353 9.8 %
Operating Income (Loss)
Years Ended December 31, Change
($ in millions) 2021 2020 $ %
Safety Services $ 207 $ 8 $ 199 2487.5 %
Safety Services operating
margin 10.0 % 0.5 %
Specialty Services 102 (22 ) 124 563.6 %
Specialty Services operating
margin 6.2 % (1.6 )%
Industrial Services (24 ) (34 ) 10 29.4 %
Industrial Services
operating margin (8.7 )% (6.0 )%
Corporate and Eliminations (149 ) (118 ) (31 ) (26.3 )%
$ 136 $ (166 ) $ 302 181.9 %
EBITDA
Years Ended December 31, Change
($ in millions) 2021 2020 $ %
Safety Services $ 287 $ 140 $ 147 105.0 %
Safety Services EBITDA as a % of
net revenues 13.8 % 8.5 %
Specialty Services 193 95 98 103.2 %
Specialty Services EBITDA as a %
of net revenues 11.7 % 6.8 %
Industrial Services 12 2 10 500.0 %
Industrial Services EBITDA as a %
of net revenues 4.3 % 0.4 %
Corporate and Eliminations (151 ) (106 ) (45 ) (42.5 )%
$ 341 $ 131 $ 210 160.3 %
The following discussion breaks down the net revenues, operating income (loss),
and EBITDA by operating segment for the years ended
Safety Services
Safety Services net revenues for the year endedDecember 31, 2021 were$2,080 million compared to$1,639 million during the same period in the prior year. This increase is primarily attributable to market recoveries in both Life Safety and HVAC services as compared to the poor market conditions during most of the prior year, principally due to the negative impacts of COVID-19. Also driving the increase in net revenues was additional revenue contributed by acquisitions and an increase in inspection and service revenue. Safety Services operating margin for the years endedDecember 31, 2021 and 2020 was 10.0% and 0.5%, respectively. The improvement was primarily driven by an impairment charge of$83 million recorded in 2020 that did not recur in 2021 and a decrease in amortization expense of$47 million . The increase was partially offset by an unfavorable shift in the composition of work, a decline in productivity driven by certain supply chain disruptions, and an increase in operating expenses due to the restoration of costs that had been reduced during the prior year as part of our COVID-19 response. Safety Services EBITDA as a percentage of net revenues was 13.8% and 8.5% for the years endedDecember 31, 2021 and 2020, respectively. The change was primarily driven by the factors discussed above. 41 --------------------------------------------------------------------------------
Specialty Services
Specialty Services net revenues for the years endedDecember 31, 2021 and 2020 were$1,653 million and$1,401 million respectively. The increase was primarily due to increased demand resulting from general market recoveries from the COVID-19 downturn experienced during 2020 and favorable project timing for our specialty contracting and fabrication services partially offset by lower volumes for our infrastructure and utility services. Specialty Services operating margin for the years endedDecember 31, 2021 and 2020 was 6.2% and (1.6)% respectively. The improvement was driven by the non-recurrence of the$52 million impairment charge recorded in the prior year and lower expenses associated with contingent consideration related to acquisitions. Further driving the improvement was our ability to manage operating expenses with higher volumes, as well as a decrease in amortization expense of$10 million . These factors were partially offset by supply chain disruptions and inflation causing downward pressure on margins. Specialty Services EBITDA as a percentage of net revenues for the years endedDecember 31, 2021 and 2020 was 11.7% and 6.8%, respectively, with the improvement driven by the factors discussed above, partially offset by an$11 million decrease in income from joint venture investments.
Industrial Services
Industrial Services net revenues for the years endedDecember 31, 2021 and 2020 were$277 million and$563 million respectively. The decline was primarily the result of a suppression of demand for our services resulting from the general market weakness within the energy industry, and our strategic focus on improving margins through disciplined project and customer selection has led to a decline in project volumes. Further, the two Industrial Services businesses that were sold during 2020 accounted for$91 million of net revenues during the year endedDecember 31, 2020 and did not recur in 2021. Industrial Services operating margin for the years endedDecember 31, 2021 and 2020 was approximately (8.7)% and (6.0)%, respectively. The decline in operating margin was primarily attributable to a lower volume of projects while certain indirect costs for leases and equipment remained consistent with prior periods, and increased amortization expense of$2 million . The decrease was partially offset by lower operating expenses from cost reduction actions and an impairment charge of$62 million recorded in the year endedDecember 31, 2020 that did not recur. Industrial Services EBITDA as a percentage of net revenues was 4.3% and 0.4% for the years endedDecember 31, 2021 and 2020, respectively. This improvement was primarily driven by the factors discussed above.
Year ended
For a discussion of our 2020 results of operations, including a discussion of our financial results for the fiscal year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , refer to Part I, Item 7, of our annual report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onMarch 24, 2021 (as amended onNovember 19, 2021 ).
Non-GAAP Financial Measures
We supplement our reporting of consolidated financial information determined in accordance withU.S. GAAP with Operating Expenses, Selling, General, and Administrative Expenses, excluding amortization, and EBITDA (defined below), which are non-U.S. GAAP financial measures. We use these non-U.S. GAAP financial measures to evaluate our performance, both internally and as compared with our peers, because they exclude certain items that may not be indicative of our core operating results. Management believes these measures are useful to investors since they (a) permit investors to view our performance using the same tools that management uses to evaluate our past performance, reportable business segments and prospects for future performance, (b) permits investors to compare us with our peers and (c) in the case of EBITDA, determines certain elements of management's incentive compensation. These non-U.S. GAAP financial measures, however, have limitations as analytical tools and should not be considered in isolation from, a substitute for, or superior to, the related financial information that we report in accordance withU.S. GAAP. The principal limitation of these non-U.S. GAAP financial measures is that they exclude significant expenses that are required byU.S. GAAP to be recorded in our financial statements and may not be comparable to similarly titled measures of other companies due to potential differences in calculation methods. In addition, these measures are subject to inherent limitations as it reflects the exercise of judgment by management about which items are excluded or included in determining these non-U.S. GAAP financial measures. Investors are encouraged to review the following reconciliations of these non-U.S. GAAP financial measures to the most comparableU.S. GAAP financial measures and not to rely on any single financial measure to evaluate our business. 42 --------------------------------------------------------------------------------
Selling, General, and Administrative Expenses (Excluding Amortization) and Operating Expenses
Selling, general, and administrative expenses (excluding amortization) and operating expenses are measures of operating costs used by management to manage the business and its segments. We believe these non-U.S. GAAP measures provide meaningful information and helps investors understand our core selling, general, and administrative expenses excluding acquisition-related amortization expense and impairment charges to better enable investors to understand our financial results and assess our prospects for future performance.
The following tables present reconciliations of selling, general, and administrative expenses to selling, general, and administrative expenses (excluding amortization) and operating expenses for the periods indicated:
Years Ended December 31,
($ in millions) 2021 2020
Reported selling, general, and administrative
expenses $ 803 $ 725
Adjustments to reconcile to selling, general, and administrative expenses to selling, general, and administrative expenses (excluding amortization)
Amortization expense (122 )
(113 )
Selling, general, and administrative expenses
(excluding amortization) $ 681 $ 612
Years Ended December 31,
($ in millions) 2021 2020
Reported selling, general, and administrative
expenses $ 803 $ 725
Adjustments to reconcile to selling, general, and administrative expenses to operating expenses
Impairment of goodwill - 197
Total operating expenses $ 803 $ 922
EBITDA
Earnings before interest, taxes, depreciation and amortization ("EBITDA") is the
measure of profitability used by management to manage its segments and,
accordingly, in its segment reporting. We supplement the reporting of its
consolidated financial information with EBITDA. We believe this non-U.S. GAAP
measure provides meaningful information and helps investors understand our
financial results and assess its prospects for future performance. Consolidated
EBITDA is calculated in a manner consistent with segment EBITDA, which is a
measure of segment profitability.
The following tables present a reconciliation of net income (loss) to EBITDA for
the periods indicated:
Years Ended December 31,
($ in millions) 2021 2020
Reported net income (loss) $ 47 $ (153 )
Adjustments to reconcile net income (loss) to
EBITDA:
Interest expense, net 60 52
Income tax provision (benefit) 32 (31 )
Depreciation 75 81
Amortization 127 182
EBITDA $ 341 $ 131
Liquidity and Capital Resources
Overview
During 2021, our primary sources of liquidity were cash flows from the operating
activities of our consolidated subsidiaries, available cash and cash
equivalents, our access to our Revolving Credit Facility, and the proceeds from
the senior notes offerings. We believe these sources will be sufficient to fund
our liquidity requirements for at least the next twelve months. Although we
believe we have sufficient resources to fund our future cash requirements, there
are many factors with the potential to influence our cash flow
43
--------------------------------------------------------------------------------position including weather, seasonality, commodity prices, market conditions, and prolonged impacts of COVID-19, over which we have no control.
As ofDecember 31, 2021 , we had$1,415 million of total liquidity, comprising$1,188 million in cash and cash equivalents and$227 million ($300 million less outstanding letters of credit of approximately$73 million , which reduce availability) of available borrowings under our Revolving Credit Facility. During the year endedDecember 31, 2021 , we received approximately$230 million of cash proceeds from the exercise of 59,982,620 outstanding warrants, resulting in the issuance of 19,994,203 shares of common stock, and$446 million in cash proceeds from the issuance of 22,716,049 shares of common stock. In addition, during 2021, we completed two private offerings of senior notes with an aggregate principal amount of$350 million and$300 million , respectively. The proceeds from the sale of$350 million of 4.125% Senior Notes were used to repay all outstanding indebtedness under the$250 million incremental term loan incurred onOctober 22, 2020 (the "2020 Term Loan"), prepay a portion of the$1,200 million term loan incurred onOctober 1, 2019 (the "2019 Term Loan"), pay for transaction fees and expenses, and fund general corporate purposes. The proceeds from the sale of the$300 million or 4.750% Senior Notes were used to finance a portion of the consideration for the Chubb Acquisition and pay related fees and expenses. We expect to continue to be able to access the capital markets through equity and debt offerings for liquidity purposes as needed. Our principal liquidity requirements have been, and we expect will be, any accrued consideration due to selling shareholders, including tax payments in connection therewith, for working capital and general corporate purposes, including capital expenditures and debt service, as well as to identify, execute and integrate strategic acquisitions and business transformation. Our capital expenditures were approximately$55 million and$38 million in the years endedDecember 31, 2021 and 2020, respectively. InDecember 2020 , our Board of Directors authorized a share repurchase program, authorizing the purchase of up to an aggregate of$100 million of shares of common stock. There were no stock repurchases during the year endedDecember 31, 2021 under the share repurchase program and the program expired onDecember 31, 2021 . Cash Flows
The following table summarizes net cash flows with respect to our operating, investing and financing activities for the periods indicated:
Years Ended December 31,
($ in millions) 2021 2020
Net cash provided by operating activities $ 182 $ 496
Net cash used in investing activities (121 ) (340 ) Net cash provided by (used in) financing activities 917
99
Effect of foreign currency exchange rate change on cash
and cash equivalents (2 )
4
Net increase (decrease) in cash and cash equivalents $ 976 $
259
Cash, cash equivalents, and restricted cash at the end of the period
$ 1,491 $
515
Net Cash Provided by Operating Activities
Net cash provided by operating activities was$182 million in the year endedDecember 31, 2021 compared to$496 million for the same period in 2020. Cash flow from operations is primarily driven by changes in the mix and timing of demand for our services and working capital needs associated with the various services we provide. Working capital is primarily affected by changes in total accounts receivable, accounts payable, accrued expenses, and contract assets and contract liabilities, all of which tend to be related and are affected by changes in the timing and volume of work performed. During the year endedDecember 31, 2021 , we experienced an increase in the volume of business driven by our recovery from the impacts of COVID-19. During 2020, the decline in volume of business due to the COVID-19 pandemic drove a significant decrease in our working capital, which resulted in substantial net operating cash flows. The expansion of net revenues during 2021 required greater use of working capital, specifically the growth in accounts receivable and contract assets, which led to lower net operating cash flows. Also contributing to lower net operating cash flows was the$19 million payment for payroll taxes that we elected to defer in 2020 under the CARES Act and an increase in cash outflows related to costs associated with our business process transformation initiatives. 44 --------------------------------------------------------------------------------
Net cash used in investing activities was$121 million and$340 million in the years endedDecember 31, 2021 and 2020, respectively. The decline in net cash used for investing activities is primarily attributable to payments of$86 million in connection with acquisitions made during the year endedDecember 31 2021 , compared to$319 million in the prior year. Our capital expenditures were approximately$55 million and$38 million in the years endedDecember 31, 2021 and 2020, respectively. The increase in capital spending is primarily due to the reduction in capital expenditures that occurred in 2020 as a result of COVID-19, and as we return to a more normalized level of spending, capital spending has increased in the current period. Capital spending is expected to be approximately 1.5% of total net revenues annually.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was$917 million and$99 million in the years endedDecember 31, 2021 and 2020, respectively. The net cash provided by financing activities for the year endedDecember 31, 2021 was primarily due to$446 million of net proceeds from the issuance of common stock,$329 million of net proceeds from the issuance of long-term debt, and$230 million of net proceeds from the issuance of common shares in connection with the warrant exercises, which were partially offset by$74 million of payments made on acquisition-related consideration. The net cash provided by financing activities for the year endedDecember 31, 2020 was primarily from$229 million net proceeds from the issuance of long-term debt partially offset by$93 million of payments made on acquisition-related consideration and$30 million used to repurchase common stock.
Year ended
For a discussion of our Liquidity and Capital Resources for the fiscal year endedDecember 31, 2020 compared to the fiscal year endedDecember 31, 2019 , refer to Part I, Item 7 of our annual report on Form 10-K for the year endedDecember 31, 2020 , filed with theSEC onMarch 24, 2021 (as amended onNovember 19, 2021 ). Financing Activities Credit Agreement As ofDecember 31, 2021 , we had a Credit Agreement by and amongAPi Group DE, Inc. , our wholly-owned subsidiary, as borrower ("APi Group DE"), APG as a guarantor, the subsidiary guarantors from time to time party thereto, the lenders from time to time party thereto, andCitibank N.A ., as administrative agent and as collateral agent (the "Credit Agreement") which provides for: (1) a term loan facility, pursuant to which we incurred the$1,200 million 2019 Term Loan used to fund a part of the cash portion of the purchase price in the APi Acquisition, and (2) a$300 million five-year senior secured revolving credit facility (the "Revolving Credit Facility") of which up to$150 million can be used for the issuance of letters of credit. As ofDecember 31, 2021 , we had$1,140 million of indebtedness outstanding on the 2019 Term Loan and had no amounts outstanding under the Revolving Credit Facility, under which$227 million was available after giving effect to$73 million of outstanding letters of credit, which reduce availability. The interest rate applicable to the 2019 Term Loan is, at our option, either (1) a base rate plus an applicable margin equal to 1.50% or (2) a Eurocurrency rate (adjusted for statutory reserves) plus an applicable margin equal to 2.50%. At the option of the Borrower, the interest period for a 2019 Term Loan that is a Eurocurrency rate loan may be one, two, three, or six months (or twelve months or any other period agreed with the applicable lenders under the 2019 Term Loan). Interest on the 2019 Term Loan is payable (1) with respect to a Eurocurrency rate loan, at the end of each interest period except that, if the interest period exceeds three months, interest is payable every three months and (2) with respect to a base rate loan, on the last business day of each March, June, September, and December. Principal payments on the 2019 Term Loan commenced the first quarter endingMarch 31, 2020 and will be made in quarterly installments on the last day of each fiscal quarter, for a total annual amount equal to 1.00% of the initial aggregate principal amount of the 2019 Term Loan. The 2019 Term Loan matures onOctober 1, 2026 . The Credit Agreement contains customary representations and warranties, and affirmative and negative covenants, including covenants that, among other things, restrict our restricted subsidiaries', ability to (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain debt; (iv) make loans and investments; (v) sell, transfer and otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into transactions with affiliates; (viii) enter into agreements restricting subsidiaries' ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all assets. The Credit Agreement also contains customary events of default. Furthermore, with respect to the Revolving Credit Facility, we must maintain a first lien net leverage ratio that does not exceed (i) 4.00 to 1.00 for each fiscal quarter ending in 2021, and (ii) 3.75 to 1.00 for each fiscal quarter ending thereafter, if on the last day of any fiscal quarter the outstanding 45 -------------------------------------------------------------------------------- amount of all revolving loans and letter of credit obligations (excluding undrawn letters of credit up to$40 million ) under the Credit Agreement is greater than 30% of the total revolving credit commitments thereunder subject to a right of cure. As ofDecember 31, 2021 , our cash balance exceeded our secured debt and therefore our first lien net leverage ratio was (0.09):1.00.
One of our Canadian subsidiaries had a
Issuance of 4.125% Senior Notes
We completed a private offering of$350 million aggregate principal amount of 4.125% Senior Notes due 2029 (the "4.125% Senior Notes"), issued under an indenture, datedJune 22, 2021 (the "4.125% Senior Notes Indenture"). The 4.125% Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by us and certain existing and future domestic subsidiaries. We used the net proceeds from the sale of the 4.125% Senior Notes to repay the$250 million 2020 Term Loan, prepay a portion of the 2019 Term Loan and for general corporate purposes. As ofDecember 31, 2021 , we had$350 million aggregate principal amount of 4.125% Senior Notes outstanding. The 4.125% Senior Notes Indenture contains customary terms and provisions (including representations, covenants, and conditions). Certain covenants, among other things, restrict our, and our restricted subsidiaries', ability to (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain debt; (iv) make loans and investments; (v) sell, transfer and otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into transactions with affiliates; (viii) enter into agreements restricting subsidiaries' ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all assets. The 4.125% Senior Notes Indenture also contains customary events of default. The 4.125% Senior Notes will mature onJuly 15, 2029 , unless redeemed earlier, and bear interest at a rate of 4.125% per year until maturity. Interest will be payable in cash, semi-annually in arrears, onJanuary 15 andJuly 15 of each year, beginning onJanuary 15, 2022 . The 4.125% Senior Notes are subject to redemption in whole or in part at any time on or afterJuly 15, 2024 at the redemption prices set forth in the 4.125% Senior Notes Indenture. In addition, beforeJuly 15, 2024 , up to 35% of the aggregate principal amount of the 4.125% Senior Notes may be redeemed with the net proceeds of certain equity offerings at the redemption price set forth in the Indenture, subject to certain conditions. Further, all or a portion of the 4.125% Senior Notes may be redeemed at any time prior toJuly 15, 2024 at a price equal to 100% of the principal amount, plus a "make-whole" premium and accrued interest, if any, to the date of redemption.
Issuance of 4.750% Senior Notes
InOctober 2021 ,APi Escrow Corp. (the "Escrow Issuer"), one of our wholly-owned subsidiaries, completed a private offering of$300 million aggregate principal amount of 4.750% Senior Notes due 2029 (the "4.750% Senior Notes"), issued under an indenture, datedOctober 21, 2021 (as supplemented by a supplemental indenture, dated as ofJanuary 3, 2022 , the "4.750% Senior Notes Indenture"), maturing onOctober 15, 2029 , unless earlier redeemed, and bearing interest at a rate of 4.750% per year until maturity. Interest will be payable in cash, semi-annually in arrears, onApril 15 andOctober 15 of each year, beginning onApril 15, 2022 . We used the net proceeds from the sale of the 4.750% Senior Notes to finance a portion of the consideration for the Chubb Acquisition. The 4.750% Senior Notes Indenture contains customary terms and provisions (including representations, covenants, and conditions). Certain covenants, among other things, restrict our, and our restricted subsidiaries', ability to (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain debt; (iv) make loans and investments; (v) sell, transfer and otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into transactions with affiliates; (viii) enter into agreements restricting subsidiaries' ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all assets. The 4.750% Senior Notes Indenture also contains customary events of default. The gross proceeds from the 4.750% Senior Notes (plus an additional amount in cash sufficient to fund a special mandatory redemption on the last day of the third full calendar month following the closing of the offering) were deposited into an escrow account. On the closing date of the Chubb Acquisition, the special mandatory redemption provisions terminated and the Escrow Issuer merged with and intoAPi Group DE , with APi DE continuing as the surviving entity and assuming the obligations of the Escrow Issuer under the 4.750% Senior Notes and Indenture. The funds were released from escrow and at that time the 4.750% Senior Notes were fully and unconditionally guaranteed on a senior unsecured basis by us and certain existing and future subsidiaries. 46 --------------------------------------------------------------------------------
Debt Covenants
We were in compliance with all covenants contained in the 4.125% Senior Notes
Indenture, the 4.750% Senior Notes Indenture, and Credit Agreement as of
Equity Offering
OnMay 12, 2021 , we filed a universal shelf registration statement on Form S-3 (the "Form S-3") which enabled us to issue from time to time up to$500 million in shares of our common stock, preferred stock or debt securities, and onMay 21, 2021 , the Form S-3 was declared effective. DuringSeptember 2021 , we completed an underwritten offering of 22,716,049 shares of our common stock at a public offering price of$20.25 per share. This number of shares includes 2,962,962 shares sold to the underwriters upon exercise in full of their option to purchase additional shares. The offering resulted in gross proceeds of approximately$460 million , before underwriting discounts and commissions and offering expenses of approximately$14 million .
Recent Developments
2021 Term Loan
In anticipation of the Chubb Acquisition, onDecember 16, 2021 ,APi Group DE , as borrower, we, as guarantor and our subsidiary guarantors named therein entered into Amendment No. 2 to the Credit Agreement ("Amendment No. 2"). OnJanuary 3, 2022 , the closing date of the Chubb Acquisition, we closed the transactions contemplated by Amendment No. 2, pursuant to which (1) we incurred a$1,100 million seven-year incremental term loan ("2021 Term Loan"), (2) the Revolving Credit Facility was upsized from$200 million to$500 million , (3) the maturity date of the Revolving Credit Facility was extended five years, (4) the letter of credit sublimit was increased by$100 million to$250 million , (5) additional loan parties and collateral in additional jurisdictions became subject to the Credit Agreement, (6) changes were made to the guarantor coverage requirements under the Credit Agreement with respect to consolidated EBITDA, and (7) certain other changes were made to the Credit Agreement. The interest rate applicable to the 2021 Term Loan is, at our option, either (a) a base rate plus an applicable margin equal to 1.75% or (b) a Eurocurrency rate (adjusted for statutory reserves) plus an applicable margin equal to 2.75%. Principal payments on the 2021 Term Loan will be made in quarterly installments on the last day of each fiscal quarter, for a total annual amount equal to 1.00% of the initial aggregate principal amount of the 2021 Term Loan. The 2021 Term Loan matures onJanuary 3, 2028 . The 2021 Term Loan is subject to the same mandatory prepayment provisions as the 2019 Term Loan.
Issuance of Series B Preferred Stock
OnJanuary 3, 2022 , concurrent with the closing of the Chubb Acquisition, we issued and sold 800,000 shares of our 5.5% Series B Perpetual Convertible Preferred Stock, par value$0.0001 per share (the "Series B Preferred Stock"), for an aggregate purchase price of$800 million , pursuant to securities purchase agreements entered into onJuly 26, 2021 with certain investors. The net proceeds from the Series B Preferred Stock issuance were used to fund a portion of the consideration for the Chubb Acquisition. The holders of the Series B Preferred Stock are entitled to dividends at the rate of 5.5% per annum, payable in cash or common stock, at our election. The Series B Preferred Stock ranks senior to our common stock and Series A Preferred Stock with respect to dividend rights and rights upon the voluntary or involuntary liquidation, dissolution, or winding up of our affairs. The Series B Preferred Stock is convertible, at the holder's option, into shares of our common stock at a conversion price equal to$24.60 per share, subject to certain customary adjustments. The holders of Series B Preferred Stock have certain other rights including voting rights on an as-converted basis, certain pre-emptive rights on our private equity offerings, certain registration rights, and, in the case of certain holders, certain director designation rights, as provided in the certificate of designation governing the Series B Preferred Stock. We may, at our option, effect conversion of the outstanding shares of Series B Preferred Stock to common stock, but only if the volume-weighted average price of our common stock exceeds$36.90 per share for 15 consecutive trading days. 47 --------------------------------------------------------------------------------
Material Cash Requirements from Known Contractual and Other Obligations
Our material cash requirements from known contractual and other obligations primarily relate to the following, for which information on both a short-term and long-term basis is provided in the indicated notes to the consolidated financial statements and expected to be satisfied using cash generated from operations:
•
Operating and Finance Leases - See Note 10 - "Leases."
•
Debt - See Note 11 - "Debt" for future principal payments and interest rates on our debt instruments.
•
Tax Obligations - See Note 12 - "Income Taxes."
We make investments in our properties and equipment to enable continued expansion and effective performance of our business. Our capital expenditures are expected to be approximately 1.5% of annual net revenues.
The acquisition of the Chubb Business results in our assumption of additional liabilities related to pension and environmental matters. Future cash requirements related to the settlement of these liabilities are expected to be funded by cash generated from operations.
Recently Issued Accounting Pronouncements
We review new accounting standards to determine the expected impact, if any, of the adoption of such standards will have on our financial position and/or results of operations. See Note 3 - "Recent Accounting Pronouncements" for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations or liquidity.
Critical Accounting Estimates
The preparation of financial statements and related disclosures in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting estimates:
Revenue Recognition from Contracts with Customers
We recognize net revenues from contracts with customers under Accounting
Standards Codification ("ASC") Topic 606. ASC 606 aligns revenue recognition
with the timing of when promised goods or services are transferred to customers
in an amount that reflects the consideration to which we expect to be entitled
in exchange for those goods or services. This core principle is achieved through
the application of the following five step model: (1) identify the contract with
a customer, (2) identify the performance obligations in the contract, (3)
determine the transaction price, (4) allocate the transaction price to
performance obligations in the contract, and (5) recognize revenue as
performance obligations are satisfied.
We recognize net revenues at the time the related performance obligations are
satisfied by transferring a promised good or service to our customers. A good or
service is considered to be transferred when the customer obtains control. We
can transfer control of a good or service and satisfy our performance
obligations either over time or at a point in time. We transfer control of a
good or service over time and, therefore, satisfy a performance obligation and
recognize revenue over time, if one of the following three criteria are met: (a)
the customer simultaneously receives and consumes the benefits provided as we
perform, (b) our performance creates or enhances an asset that the customer
controls as the asset is created or enhanced, or (c) our performance does not
create an asset with an alternative use, and we have an enforceable right to
payment for performance completed to date.
For our performance obligations satisfied over time, we recognize revenue by
measuring the progress toward complete satisfaction of that performance
obligation. The selection of the method to measure progress towards completion
can be either an input or output method and requires judgment based on the
nature of the goods or services to be provided.
For our construction contracts, net revenues are generally recognized over time
as our performance creates or enhances an asset that the customer controls as it
is created or enhanced. Our fixed price construction projects generally use a
cost-to-cost input method to measure progress towards completion of the
performance obligation as we believe it best depicts the transfer of control to
the customer, which occurs as we incur costs on our contracts. Under the
cost-to-cost measure of progress, the extent of progress towards
48
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completion is measured based on the ratio of costs incurred to date to the total
estimated costs at completion of the performance obligation. Costs incurred
include direct materials, labor and subcontract costs and indirect costs related
to contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. These contract costs are included in the results of
operations under cost of revenues. Labor costs are considered to be incurred as
the work is performed. Subcontractor labor is recognized as work is performed.
Net revenues from time and material construction contracts are recognized as the
services are provided and is equal to the sum of the contract costs incurred
plus an agreed upon markup. Net revenues earned from distribution contracts are
recognized upon shipment or performance of the service.
We have a right to payment for performance completed to date at any time
throughout our performance of a contract, including in the event of a
cancellation, and as such, revenue is recognized over time. These performance
obligations use the cost-to-cost input method to measure our progress towards
complete satisfaction of the performance obligation as we believe it best
depicts the transfer of control to the customer which occurs as we incur costs
on the contracts.
Due to uncertainties inherent in the estimation process, it is possible that
estimates of costs to complete a performance obligation will be revised from
time to time on an on-going basis. For those performance obligations for which
net revenues are recognized using a cost-to-cost input method, changes in total
estimated costs, and related progress towards complete satisfaction of the
performance obligation, are recognized on a cumulative catch-up basis in the
period in which the revisions to the estimates are made. When the current
estimate of total costs for a performance obligation indicates a loss, a
provision for the entire estimated loss on the unsatisfied performance
obligation is made in the period in which the loss becomes evident.
The timing of revenue recognition may differ from the timing of invoicing to
customers. Contract assets include unbilled amounts from our long-term
construction projects when net revenues recognized under the cost-to-cost
measure of progress exceed amounts invoiced to our customers. Such amounts are
recoverable from our customers based upon various measures of performance,
including achievement of certain milestones, completion of specified units or
completion of a contract. In addition, many of our time and materials
arrangements, as well as our contracts to perform turnaround services within the
Specialty Services segment, are billed in arrears pursuant to contract terms
that are standard within the industry, and resulting in contract assets and/or
unbilled receivables being recorded, as revenue is recognized in advance of
billings. Contract assets are generally classified as current assets within the
consolidated balance sheets.
Contract liabilities from our long-term construction contracts arise when
amounts invoiced to our customers exceed net revenues recognized under the
cost-to-cost measure of progress. Contract liabilities additionally include
advanced payments from our customers on certain contracts. Contract liabilities
decrease as we recognize revenue from the satisfaction of the related
performance obligation and are recorded as either current or long-term,
depending upon when we expect to recognize such revenue. The long-term portion
of contract liabilities is included in other non-current liabilities in the
consolidated balance sheets.
Business Combinations
The determination of the fair value of net assets acquired in a business combination and estimates of acquisition-related contingent consideration requires estimates and judgments of future cash flow expectations for the acquired business and the related identifiable tangible and intangible assets. Fair values of net assets acquired are calculated using standard valuation techniques. Fair values of contingent consideration liabilities are estimated using an income approach such as discounted cash flows or option pricing models. We allocate purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions consistent with those of a market participant, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, future expected cash flows from backlog, customer relationships, and trade names; and discount rates. In estimating the future cash flows, management considers demand, competition and other economic factors. Management's estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates, which could result in impairment charges in the future. Due to the time required to obtain the necessary data for each acquisition,U.S. GAAP provides a "measurement period" of up to one year from the date of acquisition in which to finalize these fair value determinations. During the measurement period, preliminary fair value estimates may be revised if new information is obtained about the facts and circumstances existing as of the date of acquisition, or based on the final net assets and working capital of the acquired business, as prescribed in the applicable purchase agreement. Such revisions may result in the recording of "measurement period adjustments," which may result in the recognition of, 49 -------------------------------------------------------------------------------- or adjustment to, the fair values of acquisition-related assets or liabilities and/or consideration paid, as well as the related depreciation and amortization expense.
Significant changes in the assumptions or estimates used in the underlying valuations, including the expected profitability or cash flows of an acquired business, could materially affect our operating results in the period such changes are recognized.
The Periodic Assessment of Potential Impairment of
Goodwill represents the excess of cost over the fair market value of net tangible and identifiable intangible assets of acquired businesses.Goodwill is not amortized but instead is annually tested for impairment, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. We have recorded goodwill in connection with our historical acquisitions of businesses. Upon acquisition, these businesses were either combined into one of the existing components or managed on a stand-alone basis as an individual component. As ofDecember 31, 2021 , the components are aligned to one of our three reportable segments, Safety Services, Specialty Services, or Industrial Services.Goodwill is required to be evaluated for impairment at the reporting unit level, which represents the operating segment level or one level below the operating segment level for which discrete financial information is available. We identify reporting units by assessing whether components have discrete financial information available, engage in business activities, and have a segment manager regularly review the component's operating results. If two or more components are deemed economically similar, those components are aggregated into one reporting unit when performing the annual goodwill impairment test. We perform our annual goodwill impairment assessment onOctober 1 each fiscal year, or more frequently if events or circumstances arise which indicate that goodwill may be impaired. Qualitative indicators that may trigger the need for annual or interim quantitative impairment testing include, among other things, deterioration in macroeconomic conditions, declining financial performance, deterioration in the operational environment, or an expectation of selling or disposing of a portion of a reporting unit. Additionally, a significant change in business climate, a loss of a significant customer, increased competition, a sustained decrease in share price, or a decrease in estimated fair value below book value may trigger the need for interim impairment testing of goodwill associated with one or more reporting units. For the year endedDecember 31, 2021 , we performed our annual goodwill impairment assessment as ofOctober 1, 2021 . We performed quantitative testing for all of our reporting units based on their estimated fair values using a combination of market and income approaches. Under the market approach, fair values were estimated using published market multiples for comparable companies and applying them to revenue and EBITDA. Under the income approach, a discounted cash flow methodology was used, considering: (i) management estimates, such as projections of revenue, operating costs and cash flows, taking into consideration historical and anticipated financial results; (ii) general economic and market conditions; and (iii) the impact of planned business and operational strategies. Estimated discount rates were determined using the weighted average cost of capital for each reporting unit at the time of the analysis, taking into consideration the risks inherent within each reporting unit individually. Significant assumptions used in testing the reporting units included terminal values based on a terminal growth rate of 3%, ten years of discounted cash flows prior to the terminal value, and discount rates ranging from 10% to 15%. We believe the assumptions used in our quantitative goodwill impairment tests are reflective of the risks inherent in the business models of our reporting units and within our industry. Our goodwill impairment assessment for 2021 indicated each of our reporting units with material goodwill balances had an estimated fair value that significantly exceeded carrying value, except for the SKG reporting unit, which exceeded carrying value by 10%. A 100 basis point increase in the discount rate used to test goodwill for impairment would not have resulted in an impairment for the SKG reporting unit. Subsequent to our 2021 impairment testing, we aggregated the$196 million of goodwill in the SKG reporting unit with the Life Safety reporting unit.Goodwill balances subjected to impairment testing at each of our reporting units as ofDecember 31, 2021 are shown in the table below: Goodwill Balance as of December ($ in millions) 31, 2021 Life Safety $ 870 Heating, Ventilation and Air Conditioning (HVAC) 49 Infrastructure/Utility 119 Fabrication 4 Specialty Contracting 53 Transmission 4 50
-------------------------------------------------------------------------------- While we believe we have made reasonable estimates and assumptions to calculate the fair values of the reporting units, it is possible changes could occur. If in future years the reporting unit's actual results are not consistent with the estimates and assumptions used to calculate fair value, we may be required to recognize material impairments to goodwill. We may be required to perform additional impairment testing based on changes in the economic environment, disruptions to our business, significant declines in operating results of our reporting units, sustained deterioration of our market capitalization, and other factors, which could result in impairment charges in the future. Although management cannot predict when changes in macroeconomic conditions will occur, if there is significant deterioration from levels at year end in the construction industry, market prices for oil and gas and other fuel sources, or our market capitalization, it is reasonably likely we will be required to record material impairment charges in the future.
Insurance Liabilities
We use high retention insurance programs to manage our risk for health, workers' compensation, general liability and auto insurance. Accrued liabilities and other non-current liabilities include our best estimates of amounts expected to be incurred for these losses. The estimates are based on claim reports provided by the insurance carrier and actuarial analyses provided by third-party actuarial specialists, and management's best estimates including the maximum premium for a policy period. The amounts we will ultimately incur could differ in the near term from the estimated amounts accrued.
Income Taxes
Our provision for income taxes uses an effective tax rate based on annual pre-tax income, statutory tax rates, permanent tax differences and tax planning opportunities in the various jurisdictions in which we operate. Significant factors that can affect our annual effective tax rate include our assessment of certain tax matters, the location and amount of taxable earnings, changes in certain non-deductible expenses and expected credits. Although we believe our provision for income taxes is correct and the related assumptions are reasonable, the final outcome of tax matters could be materially different from what we currently anticipate, which could result in significant costs or benefits to us. See Note 12 - "Income Taxes" for additional discussion. In the ordinary course of business, there is inherent uncertainty in quantifying income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based on our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recognized the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in our financial statements. We file income tax returns in numerous tax jurisdictions, includingU.S. federal, mostU.S. states and certain foreign jurisdictions. Although we believe our calculations for tax returns are correct and the positions taken thereon are reasonable, the final outcome of income tax examinations could be materially different from our expectations and the estimates that are reflected in our consolidated financial statements, which could have a material effect on our results of operations, cash flows and liquidity.
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