API GROUP CORPORATION
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") section should be read in conjunction with the Interim
Statements and related notes included in this quarterly report, and the
Consolidated Financial Statements, related notes and the MD&A section and other
disclosures contained in our Annual Report on Form 10-K, including financial
results for the year ended December 31, 2021 . This discussion contains
forward-looking statements that involve risks and uncertainties. Actual results
may differ materially from those discussed in these forward-looking statements.
Factors that might cause a difference include, but are not limited to, those
discussed under the "Cautionary Note Regarding Forward Looking Statements"
section of this quarterly report.
We prepare our financial statements in accordance with generally accepted
accounting principles in the United States of America ("U.S. GAAP"). To
supplement our financial results presented in accordance with U.S. GAAP in this
MD&A section, we present EBITDA, which is a non-U.S. GAAP financial measure, to
assist readers in understanding our performance and provide an additional
perspective on trends and underlying operating results on a period-to-period
comparable basis. Non-U.S. GAAP financial measures either exclude or include
amounts not reflected in the most directly comparable measure calculated and
presented in accordance with U.S. GAAP. Where a non-U.S. GAAP financial measure
is used, we have provided the most directly comparable measure calculated and
presented in accordance with U.S. GAAP, a reconciliation to the U.S. GAAP
measure and a discussion of the reasons why management believes this information
is useful to it and may be useful to investors.
Unless the context otherwise requires, all references in this section to "APG",
the "Company", "we", "us", and "our" refer to
Overview
APG is a global, market-leading business services provider of safety and specialty services in over 500 locations worldwide. 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 that deliver innovative solutions to our customers.
We operate our business under two primary operating segments, which are also our reportable segments:
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Safety Services - A leading provider of safety services inNorth America ,Asia Pacific , andEurope , focusing on end-to-end integrated occupancy systems (fire protection solutions, Heating, Ventilation, and Air Conditioning ("HVAC") and entry systems), including design, installation, inspection and service of these integrated systems. The work performed within this segment spans across industries and facilities and includes commercial, education, healthcare, high tech, industrial and special-hazard settings.
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Specialty Services - A leading provider of a variety of infrastructure services and specialized industrial plant services, which include maintenance and repair of critical infrastructure such as underground electric, gas, water, sewer and telecommunications infrastructure. Our services include engineering and design, fabrication, installation, maintenance service and repair, retrofitting and upgrading, pipeline infrastructure, access and road construction, supporting facilities, and performing ongoing integrity management and maintenance to customers within the energy industry. Customers within this segment vary from private and public utilities, communications, healthcare, education, transportation, manufacturing, industrial plants and governmental agencies throughoutNorth America . 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 growth. We believe maintenance and service revenues are generally more predictable through contractual arrangements with typical terms ranging from days to three years, with the majority having short durations and are often recurring due to consistent renewal rates and long-standing customer relationships.
For financial information about our operating segments, see Note 21 - "Segment Information" to our condensed consolidated financial statements included herein.
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--------------------------------------------------------------------------------Recent Developments and Certain Factors and Trends Affecting our Results of Operations
Restructuring
During the three months endedJune 30, 2022 , we initiated a multi-year restructuring program to drive efficiencies and synergies and optimize operating margin. We recorded total restructuring costs of$11 million within the Safety Services segment, of which$2 million was recorded in cost of revenues and$9 million in selling, general, and administrative expenses on the condensed consolidated statements of operations for both the three and six months endedJune 30, 2022 . The amounts recognized in the period primarily relate to costs associated with workforce reductions. As ofJune 30, 2022 , we had$8 million in restructuring liabilities recorded in other accrued liabilities on the condensed consolidated balance sheets for this plan, which we expect to pay within the next six to nine months.
For additional information about our restructuring activity, see Note 5 - "Restructuring" to our condensed consolidated financial statements included herein.
Acquisitions
OnJanuary 3, 2022 , we completed the acquisition of the Chubb fire and security business (the "Chubb Acquisition"). We paid an aggregate cash consideration of$2,935 million for the stock purchase of the Chubb fire and security business (the "Chubb business"). The Chubb business is a globally recognized fire safety and security services provider, offering customers complete and reliable services from design and installation to monitoring and on-going maintenance and recurring services. We expect the Chubb business will be a core asset within our Safety Services segment, and will provide meaningful opportunities for future value creation through providing complementary revenue growth by expanding our opportunities for cross-selling products and services across our key end markets.
For additional information about our acquisition activity, see Note 4 - "Business Combinations" to our condensed consolidated financial statements included herein.
Resegmentation
We have combined the leadership responsibility and full accountability for our Industrial Services and Specialty Services operating segments. As a result, beginning in 2022, the information for our legacy Industrial Services segment was combined with the legacy Specialty Services segment to form a new operating and reportable segment called Specialty Services. Accordingly, we present financial information for the Safety Services and Specialty Services segments, our two operating segments and also our reportable segments. Our chief operating decision maker regularly reviews financial information to allocate resources and assess performance utilizing these reorganized segments.
Certain prior year amounts have been recast to conform to the current year presentation and the information in the tables below has been retroactively adjusted to reflect these changes in reporting segments.
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 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. In addition, fluctuations in
foreign currencies may have an impact on our financial position and results of
operations. However, we believe that our exposure to transactional gains or
losses resulting from changes in foreign currencies is limited because our
foreign operations primarily invoice and collect receivables in their respective
local or functional currencies, and the expenses associated with these
transactions are generally contracted and paid for in the same local currencies.
In cases where operational
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transactions represent a material currency risk, we enter into cross currency
swaps. Refer to Note 9 - "Derivatives" to our condensed consolidated financial
statements included herein for additional information on our hedging activities.
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, and as the situation has continued to evolve, the impacts on our work have also evolved. Throughout 2020 and into 2021, we encountered headwinds related to job site accessibility, project delays, workflow disruptions due to COVID-19 protocols, and diminished demand from our customers. With the progress in the administration of vaccines during 2021, we began, and continue to experience stabilization and volume improvements as our teams and customers adapted to working in the long-term COVID-19 environment and the markets in which we operate began to recover. In the second half of 2021 and into the first half of 2022, we experienced supply chain disruptions, which have negatively impacted the source and supply of materials needed to perform our work. Additionally, the outbreak of recent variants and their related containment and mitigation efforts that have been put in place around the world, has impacted the availability of skilled labor resources, particularly in our international businesses, interrupting our ability to perform our services and execute our jobs. Although the majority of our businesses have largely recovered from the impacts of the COVID-19 pandemic, there remains significant uncertainty about the resulting market disruption or volatility, including the potential effects on our operations. We continue to be cautiously optimistic about the markets in which we operate and the customers we serve; however, should there be a slowdown in economic activity due to surges in the number of cases, or an increase in variants of the virus that are more virulent, contagious, or against which current vaccines are less effective, it is possible that projects could be delayed or canceled or that we could experience restricted access to our customers' facilities, preventing us from performing maintenance and service projects. The extent to which our business and results of operations are impacted in future periods will also depend upon a number of other factors, including limitations on the ability of our employees to perform their work due to illness caused by the pandemic or local, state, or federal orders requiring vaccination, testing, or quarantine, our customers' demand for our services, and our ability to continue to safely and effectively operate in this environment.
The military conflict betweenRussia andUkraine has had political, social and economic impacts that have affected our business, and may have future business impacts that are difficult to predict or quantify. The most immediate impact has been on energy supply and pricing, increasing our direct costs. In addition, the conflict is exacerbating general global inflationary pressures as the longer term interruption in production of goods inUkraine emerges, which may continue into the future. The conflict is also reducing international political stability, which in turn may adversely impact markets in a variety of ways. For example, sanctions and other penalties imposed by countries across the globe againstRussia are creating substantial uncertainty in the global economy. While we do not have operations inRussia orUkraine and believe that we do not have a material direct exposure to customers, suppliers and vendors in those countries, we are unable to predict the impact that these actions will have on the global economy or on our financial condition, results of operations, and cash flows. Should the conflict escalate beyond its current scope, including, among other potential impacts, the geographic proximity of the conflict relative to the rest ofEurope , where a material portion of our business is carried out, further impacts on our business could emerge. The precise impacts on our business are difficult to predict but could include increased direct costs of materials and labor; increased credit or other capital costs; and impacts on demand for our services, which could include increased demand for our services related to energy production outside of the conflict area but that could also include a reduction in demand in other geographies or markets.
Effect of Seasonality and Cyclical Nature of Business
Our net revenues and results of operations can be subject to variability
stemming from seasonality and industry cyclicality. Seasonal variations are
primarily related to large, non-recurring projects that can be influenced by
weather conditions impacting customer spending patterns, contract award seasons,
and project schedules, as well as the timing of holidays. Consequently, net
revenues for our businesses are typically lower during the first and second
quarters due to the prevalence of unfavorable weather conditions, which can
cause project delays and affect productivity.
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Additionally, the industries we serve can be cyclical. Fluctuations in end-user
demand, or in the supply of services, within those industries, can affect demand
for our services. As a result, our business may be adversely affected by
industry declines or by delays in new projects. Variations or unanticipated
changes in project schedules in connection with large projects can create
fluctuations in net revenues.
Recent Accounting Pronouncements
A summary of recent accounting pronouncements is included in Note 3 - "Recent Accounting Pronouncements" to our condensed consolidated financial statements included herein.
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.
Selling, general, and administrative expenses ("SG&A")
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 condensed consolidated statements of operations.
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--------------------------------------------------------------------------------Non-service pension benefit
Non-service pension benefit reflects the sum of the components of pension expense not related to service cost, i.e. interest cost, expected return on assets, and amortizations of prior service costs and actuarial gains and losses.
Critical Accounting Policies and Estimates
For information regarding our Critical Accounting Policies, see the "Critical Accounting Policies" section of the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Form 10-K for the fiscal year endedDecember 31, 2021 .
Results of Operations
The following is a discussion of our financial condition and results of
operations during the three and six months ended
Three months endedJune 30, 2022 compared to the three months endedJune 30, 2021 Three Months Ended June 30, Change ($ in millions) 2022 2021 $ % Net revenues $ 1,649$ 978 $ 671 68.6 % Cost of revenues 1,214 746 468 62.7 % Gross profit 435 232 203 87.5 % Selling, general, and administrative expenses 376 185 191 103.2 % Operating income (loss) 59 47 12 25.5 % Interest expense, net 28 14 14 100.0 % Loss on extinguishment of debt - 9 (9 ) NM Non-service pension benefit (11 ) - (11 ) NM Investment income and other, net (2 ) (6 ) 4 (66.7 )% Other expense, net 15 17 (2 ) (11.8 )% Income (loss) before income taxes 44 30 14 46.7 % Income tax provision (benefit) 14 9 5 55.6 % Net income (loss) $ 30 $ 21$ 9 42.9 % NM = Not meaningful Net revenues Net revenues for the three months endedJune 30, 2022 were$1,649 million compared to$978 million for the same period in 2021, an increase of$671 million or 68.6%. The increase in net revenues was primarily driven by additional revenues contributed by acquisitions completed during the previous 12 months within the Safety Services segment. In addition, the increase in net revenues was due to growth in inspection and service revenue, our ability to pass through inflationary increases in costs through project pricing, as well as continued market recoveries from the COVID-19 pandemic within our Safety Services and Specialty Services segments.
Gross profit
The following table presents our gross profit (net revenues less cost of
revenues) and gross margin (gross profit as a percentage of net revenues) for
the three months ended
Three Months Ended June 30, Change
($ in millions) 2022 2021 $ %
Gross profit $ 435 $ 232 $ 203 87.5 %
Gross margin 26.4 % 23.7 %
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Our gross profit for the three months ended
Operating expenses
The following table presents operating expenses and operating margin (operating income (loss) as a percentage of net revenues) for the three months endedJune 30, 2022 and 2021, respectively: Three Months Ended June 30, Change ($ in millions) 2022 2021 $ % Selling, general, and administrative expenses $ 376 $ 185$ 191 103.2 % SG&A expenses as a % of net revenues 22.8 %
18.9 %
SG&A (excluding amortization) (Non-GAAP) $ 323 $ 155$ 168 108.4 % SG&A expenses (excluding amortization) as a % of net revenues 19.6 % 15.8 % Operating margin 3.6 % 4.8 %
Selling, general, and administrative expenses
Our SG&A expenses for the three months endedJune 30, 2022 were$376 million compared to$185 million for the same period in 2021, an increase of$191 million . SG&A expenses as a percentage of net revenues was 22.8% during the three months endedJune 30, 2022 compared to 18.9% for the same period in 2021. The primary drivers for the increase in SG&A expenses include additional SG&A expenses contributed by acquisitions completed in the prior 12 months, as well as higher levels of spending associated with acquisitions, including integration, transformation, and reorganization expenses and an increase in amortization expense of$23 million compared to the same period in 2021. Our SG&A expenses excluding amortization for the three months endedJune 30, 2022 were$323 million , or 19.6% of net revenues, compared to$155 million , or 15.8% of net revenues, for the same period of 2021 primarily due to the factors discussed above. See the discussion and reconciliation of our non-U.S. GAAP financial measures below.
Interest expense, net
Interest expense was$28 million and$14 million for the three months endedJune 30, 2022 and 2021, respectively. The increase in interest expense was primarily due to increased debt following the Chubb Acquisition related financing.
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 previously outstanding 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 a previously outstanding 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.
Non-service pension benefit
The non-service pension benefit was$11 million and$0 million for the three months endedJune 30, 2022 and 2021, respectively. The higher year-on-year benefit in 2022 was solely due to the acquisition of pension plans as part of the Chubb Acquisition during 2022. 45 --------------------------------------------------------------------------------
Investment income and other, net
Investment income and other, net was$2 million and$6 million for the three months endedJune 30, 2022 and 2021, respectively. The decrease in investment income and other, net was primarily due to the impact of changes in foreign currency rates and fluctuations in the fair value of our derivative instruments.
Income tax provision (benefit)
The income tax expense (benefit) for the three months endedJune 30, 2022 was an expense of$14 million compared to$9 million in the same period of the prior year. This change was driven by higher income before taxes in the three months endedJune 30, 2022 compared to the same period in 2021. The effective tax rate for the three months endedJune 30, 2022 was 31.8%, compared to 28.9% in the same period of 2021. The difference in the effective tax rate was driven by discrete and nondeductible permanent items. The difference between the effective tax rate and the statutoryU.S. federal income tax rate of 21.0% is due to the nondeductible permanent items, state taxes and the reversal of our indefinite reinvestment assertion.
Net income (loss) and EBITDA
The following table presents net income (loss) and EBITDA for the three months
ended
Three Months Ended June 30, Change
($ in millions) 2022 2021 $ %
Net income (loss) $ 30 $ 21 $ 9 42.9 %
EBITDA (non-GAAP) 148 96 52 54.2 %
Net income (loss) as a % of
net revenues 1.8 % 2.1 %
EBITDA as a % of net
revenues 9.0 % 9.8 %
Our net income (loss) for the three months ended June 30, 2022 was $30 million
compared to $21 million for the same period in 2021, an increase of $9 million .
The improvement resulted from additional revenue and profit contributed by
acquisitions completed in the previous 12 months and an improved mix of
inspection and service revenue. These increases were largely offset by higher
levels of spending related to integration of recently acquired businesses and
increased interest costs associated with newly issued term loan debt. Net income
as a percentage of net revenues for the three months ended June 30, 2022 and
June 30, 2021 was 1.8% and 2.1%, respectively. EBITDA for the three months ended
June 30, 2022 was $148 million compared to $96 million for the same period in
2021, an increase of $52 million . The increase in EBITDA was primarily driven by
the factors previously discussed. See the discussion and reconciliation of our
non-U.S. GAAP financial measures below.
Operating Segment Results for the three months ended
Net Revenues
Three Months Ended June 30, Change
($ in millions) 2022 2021 $ %
Safety Services $ 1,146 $ 512 $ 634 123.8 %
Specialty Services 518 476 42 8.8 %
Corporate and Eliminations (15 ) (10 ) (5 ) 50.0 %
$ 1,649 $ 978 $ 671 68.6 %
Operating Income (Loss)
Three Months Ended June 30, Change
($ in millions) 2022 2021 $ %
Safety Services $ 63 $ 52 $ 11 21.2 %
Safety Services operating margin 5.5 % 10.2 %
Specialty Services $ 32 $ 24 $ 8 33.3 %
Specialty Services operating margin 6.2 % 5.0 %
Corporate and Eliminations $ (36 ) $ (29 ) $ (7 ) 24.1 %
$ 59 $ 47 $ 12 25.5 %
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EBITDA
Three Months Ended June 30, Change
($ in millions) 2022 2021 $ %
Safety Services $ 121 $ 73 $ 48 65.8 %
Safety Services EBITDA as a % of net
revenues 10.6 % 14.3 %
Specialty Services $ 60 $ 58 $ 2 3.4 %
Specialty Services EBITDA as a % of
net revenues 11.6 % 12.2 %
Corporate and Eliminations $ (33 ) $ (35 ) $ 2 (5.7 )%
$ 148 $ 96 $ 52 54.2 %
The following discussion breaks down the net revenues, operating income (loss),
and EBITDA by operating segment for the three months ended
Safety Services
Safety Services net revenues for the three months endedJune 30, 2022 increased by$634 million or 123.8% compared to the same period in the prior year. The increase was primarily driven by additional net revenues contributed by acquisitions completed in the prior 12 months, general market recoveries in both our Life Safety and HVAC services businesses and increased inspection and service revenue within our Life Safety and HVAC service businesses. Safety Services operating margin for the three months endedJune 30, 2022 and 2021 was approximately 5.5% and 10.2%, respectively. The decline was primarily the result of increased spending related to the integration of recently acquired businesses, and supply chain disruptions and inflation causing downward pressure on margins, partially offset by an increase in service and inspection revenue. Safety Services EBITDA as a percentage of net revenues for the three months endedJune 30, 2022 and 2021 was approximately 10.6% and 14.3%, respectively. This decline was primarily related to the factors discussed above.
Specialty Services
Specialty Services net revenues for the three months endedJune 30, 2022 increased by$42 million or 8.8% compared to the same period in the prior year. The increase was primarily driven by increased activity in the infrastructure and utility markets during the three months endedJune 30, 2022 compared to the same period in the prior year and general market recoveries driving a rebound in the demand for our services when compared to the prior year, which was negatively impacted by the COVID-19 pandemic. Additionally, we have been able to offset some of the inflationary increases in cost of goods sold through strategic pricing improvements and contract negotiations, resulting in increased net revenues during the three months endedJune 30, 2022 compared to the same period on the prior year. Specialty Services operating margin for the three months endedJune 30, 2022 and 2021 was approximately 6.2% and 5.0%, respectively. The improvement was primarily driven by higher levels of productivity in the execution of specialty contracting work during the three months endedJune 30, 2022 compared to the same period during the prior year. During the three months endedJune 30, 2021 , we experienced margin contractions due to lower sales volumes but consistent indirect costs. Comparatively, during the three months endedJune 30, 2022 , margins increased due to the growth in sales volumes. These improvements were partially offset by supply chain disruptions and inflationary pressures on margins. Specialty Services EBITDA as a percentage of net revenues for the three months endedJune 30, 2022 and 2021 was approximately 11.6% and 12.2%, respectively, due to the factors discussed above. 47 -------------------------------------------------------------------------------- Six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 Six Months Ended June 30, Change ($ in millions) 2022 2021 $ % Net revenues$ 3,120 $ 1,781 $ 1,339 75.2 % Cost of revenues 2,309 1,368 941 68.8 % Gross profit 811 413 398 96.4 % Selling, general, and administrative expenses 759 368 391 106.3 % Operating income (loss) 52 45 7 15.6 % Interest expense, net 55 29 26 89.7 % Loss on extinguishment of debt - 9 (9 ) NM Non-service pension benefit (22 ) - (22 ) NM Investment income and other, net (2 ) (9 ) 7 (77.8 )% Other expense, net 31 29 2 6.9 % Income (loss) before income taxes 21 16 5 31.3 % Income tax provision (benefit) (2 ) 3 (5 ) (166.7 )% Net income (loss) $ 23 $ 13$ 10 76.9 % NM = Not meaningful Net revenues Net revenues for the six months endedJune 30, 2022 were$3,120 million compared to$1,781 million for the same period in 2021, an increase of$1,339 million or 75.2%. The increase in net revenues was primarily attributable to additional revenues contributed by acquisitions completed within the Safety Services segment during the past 12 months. The increase in net revenues was also due to growth in service and inspection revenue, our ability to pass through inflationary increases in costs through project pricing, and continued market recoveries from the COVID-19 pandemic within our Safety Services and Specialty Services segments. Gross profit
The following table presents our gross profit (net revenues less cost of
revenues) and gross margin (gross profit as a percentage of net revenues) for
the six months ended
Six Months Ended June 30, Change
($ in millions) 2022 2021 $ %
Gross profit $ 811 $ 413 $ 398 96.4 %
Gross margin 26.0 % 23.2 %
Our gross profit for the six months ended June 30, 2022 was $811 million
compared to $413 million for the same period in 2021, an increase of $398
million , or 96.4%. Gross margin was 26.0%, an increase of 280 basis points
compared to prior year, primarily due to acquisitions completed within the
Safety Services segment during the past 12 months. Additionally, the increase
was driven by an improved mix of service and inspection revenue, which generates
higher margins, and growth within the Safety Services segment. These
improvements were partially offset by supply chain disruptions and inflation
causing downward pressure on margins.
Operating expenses
The following table presents operating expenses and operating margin (operating income (loss) as a percentage of net revenues) for the six months endedJune 30, 2022 and 2021, respectively: Six Months Ended June 30, Change ($ in millions) 2022 2021 $ % Selling, general, and administrative expenses $ 759$ 368 $ 391 106.3 % SG&A expenses as a % of net revenues 24.3 %
20.7 %
SG&A (excluding amortization) (Non-GAAP) $ 652$ 308 $ 344 111.7 % SG&A expenses (excluding amortization) as a % of net revenues 20.9 % 17.3 % Operating margin 1.7 % 2.5 % 48
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Selling, general, and administrative expenses
Our SG&A expenses for the six months endedJune 30, 2022 were$759 million compared to$368 million for the same period in 2021, an increase of$391 million . SG&A expenses as a percentage of net revenues was 24.3% during the six months endedJune 30, 2022 compared to 20.7% for the same period in 2021. The increase in SG&A expenses was primarily driven by additional SG&A expenses contributed by acquisitions completed in the prior 12 months. Also driving the increase was higher levels of spending associated with acquisitions, including integration, transition, and reorganization expenses and an increase in amortization expense of$47 million compared to the same period in 2021. Our SG&A expenses excluding amortization for the six months endedJune 30, 2022 were$652 million , or 20.9% of net revenues, compared to$308 million , or 17.3% of net revenues, for the same period of 2021 primarily due to the factors discussed above. See the discussion and reconciliation of our non-U.S. GAAP financial measures below.
Interest expense, net
Interest expense was$55 million and$29 million for the six months endedJune 30, 2022 and 2021, respectively. The increase in interest expense was primarily due to increased debt related to the financing of the Chubb Acquisition.
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 previously outstanding 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 previously outstanding 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, that did not recur in the current period.
Non-service pension benefit
The non-service pension benefit was
Investment income and other, net
Investment income and other, net was$2 million and$9 million for the six months endedJune 30, 2022 and 2021, respectively. The decline in investment income and other, net was primarily due to a the impact of changes in foreign currency rates and fluctuations in the fair value of our derivative instruments.
Income tax provision (benefit)
The income tax expense (benefit) for the six months endedJune 30, 2022 was a benefit of$2 million compared to an expense of$3 million in the same period of the prior year. This change was driven by favorable discrete items in the six months endedJune 30, 2022 compared to the same period in 2021. The effective tax rate for the six months endedJune 30, 2022 was (11.3%), compared to 17.0% in the same period of 2021. The difference in the effective tax rate was driven by discrete and nondeductible permanent items. The difference between the effective tax rate and the statutoryU.S. federal income tax rate of 21.0% is due to the nondeductible permanent items, state taxes and the reversal of our indefinite reinvestment assertion. 49 --------------------------------------------------------------------------------
Net income (loss) and EBITDA
The following table presents net income (loss) and EBITDA for the six months
ended
Six Months Ended June 30, Change
($ in millions) 2022 2021 $ %
Net income (loss) $ 23 $ 13 $ 10 76.9 %
EBITDA (non-GAAP) 228 147 81 55.1 %
Net income (loss) as a % of net revenues 0.7 % 0.7 %
EBITDA as a % of net revenues 7.3 % 8.3 %
Our net income (loss) for the six months endedJune 30, 2022 was$23 million compared to$13 million for the same period in 2021, an increase of$10 million . The improvement is primarily attributable to additional revenue and profit contributed by acquisitions completed in the previous 12 months. The increase was also driven by an improved mix of service and inspection revenue. These increases in revenues were partially offset by increased acquisition and integration related expenses, including interest costs associated with newly issued term loan debt used to fund acquisition activity. Net income as a percentage of net revenues for both the six months endedJune 30, 2022 and 2021 was 0.7%. EBITDA for the six months endedJune 30, 2022 was$228 million compared to$147 million for the same period in 2021, an increase of$81 million . The increase in EBITDA was primarily driven by the factors previously discussed. See the discussion and reconciliation of our non-U.S. GAAP financial measures below.
Operating Segment Results for the six months ended
Net Revenues
Six Months Ended June 30, Change
($ in millions) 2022 2021 $ %
Safety Services $ 2,220 $ 978 $ 1,242 127.0 %
Specialty Services 930 820 110 13.4 %
Corporate and Eliminations (30 ) (17 ) (13 ) 76.5 %
$ 3,120 $ 1,781 $ 1,339 75.2 %
Operating Income (Loss)
Six Months Ended June 30, Change
($ in millions) 2022 2021 $ %
Safety Services $ 126 $ 97 $ 29 29.9 %
Safety Services operating margin 5.7 % 9.9 %
Specialty Services $ 25 $ 6 $ 19 316.7 %
Specialty Services operating margin 2.7 % 0.7 %
Corporate and Eliminations $ (99 ) $ (58 ) $ (41 ) 70.7 %
$ 52 $ 45 $ 7 15.6 %
EBITDA
Six Months Ended June 30, Change
($ in millions) 2022 2021 $ %
Safety Services $ 244 $ 138 $ 106 76.8 %
Safety Services EBITDA as a % of net
revenues 11.0 % 14.1 %
Specialty Services $ 80 $ 72 $ 8 11.1 %
Specialty Services EBITDA as a % of
net revenues 8.6 % 8.8 %
Corporate and Eliminations $ (96 ) $ (63 ) $ (33 ) 52.4 %
$ 228 $ 147 $ 81 55.1 %
50
-------------------------------------------------------------------------------- The following discussion breaks down the net revenues, operating income (loss), and EBITDA by operating segment for the six months endedJune 30, 2022 compared to the six months endedJune 30, 2021 .
Safety Services
Safety Services net revenues for the six months endedJune 30, 2022 increased by$1,242 million or 127.0% compared to the same period in the prior year. The increase was primarily attributable to additional revenues contributed by acquisitions completed in the past 12 months. The increase was also driven by general market recoveries in both our Life Safety and HVAC service businesses and increased service and inspection revenue within our Life Safety businesses. Safety Services operating margin for the six months endedJune 30, 2022 and 2021 was approximately 5.7% and 9.9%, respectively. The decline was primarily the result of increased spending related to the integration of recently acquired businesses. Additionally, the decline was driven by supply chain disruptions and inflation causing downward pressure on margins, partially offset by an increase in service and inspection revenue. Safety Services EBITDA as a percentage of net revenues for the six months endedJune 30, 2022 and 2021 was approximately 11.0% and 14.1%, respectively. This decline was primarily related to the factors discussed above.
Specialty Services
Specialty Services net revenues for the six months endedJune 30, 2022 increased by$110 million or 13.4% compared to the same period in the prior year. The increase was primarily attributable to increased activity in the specialty contracting markets during the six months endedJune 30, 2022 compared to the same period in the prior year. Additionally, the increase was driven by general market recoveries driving a resumption in the demand for our services when compared to the prior year, which was negatively impacted by the COVID-19 pandemic. We have also been able to offset some of the inflationary increases in cost of revenues through strategic pricing improvements and contract negotiations, resulting in increased net revenues during the six months endedJune 30, 2022 compared to the same period on the prior year. Specialty Services operating margin for the six months endedJune 30, 2022 and 2021 was approximately 2.7% and 0.7%, respectively. The improvement was primarily attributable to higher levels of productivity in the execution of specialty contracting work during the six months endedJune 30, 2022 compared to the same period in 2021. During the six months endedJune 30, 2022 , margins increased due to growth in sales volumes. Comparatively, during the six months endedJune 30, 2021 , we experienced margin contractions as a result of lower sales volumes but consistent indirect costs. These margin improvements were partially offset by supply chain disruptions and inflationary pressures on margins. Specialty Services EBITDA as a percentage of net revenues for the six months endedJune 30, 2022 and 2021 was approximately 8.6% and 8.8%, respectively, due to the factors discussed above.
Non-GAAP Financial Measures
We supplement our reporting of consolidated financial information determined in accordance withU.S. GAAP with SG&A (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) permit 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 we report in accordance withU.S. GAAP. The principal limitation of these non-U.S. GAAP financial measure is that they exclude significant expenses 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 they reflect 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. 51 --------------------------------------------------------------------------------
SG&A expenses (excluding amortization)
SG&A (excluding amortization) is a measure of operating costs used by management to manage the business and its segments. We believe this non-U.S. GAAP measure provides meaningful information and helps investors understand our core selling, general, and administrative expenses excluding acquisition-related amortization expense to better enable investors to understand our financial results and assess our prospects for future performance.
The following tables present reconciliations of SG&A expenses to SG&A expenses (excluding amortization) for the periods indicated:
Three Months Ended June 30,
($ in millions) 2022 2021
Reported SG&A expenses $ 376 $ 185
Adjustments to reconcile to SG&A expenses to
SG&A expenses (excluding amortization)
Amortization expense (53 ) (30 )
SG&A expenses (excluding amortization) $ 323 $ 155
Six Months Ended June 30,
($ in millions) 2022 2021
Reported SG&A expenses $ 759 $ 368
Adjustments to reconcile to SG&A expenses to
SG&A expenses (excluding amortization)
Amortization expense (107 ) (60 )
SG&A expenses (excluding amortization) $ 652 $ 308
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 our
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 our prospects for future performance. Consolidated
EBITDA is calculated in a manner consistent with segment EBITDA, which is a
measure of segment profitability.
The following table presents a reconciliation of net income (loss) to EBITDA for
the periods indicated:
Three Months Ended June 30,
($ in millions) 2022 2021
Reported net income (loss) $ 30 $ 21Adjustments to reconcile net income (loss) to EBITDA: Interest expense, net
28 14
Income tax provision (benefit) 14 9
Depreciation 19 20
Amortization 57 32
EBITDA $ 148 $ 96
Six Months Ended June 30,
($ in millions) 2022 2021
Reported net income (loss) $ 23 $ 13Adjustments to reconcile net income (loss) to EBITDA: Interest expense, net
55 29
Income tax provision (benefit) (2 ) 3
Depreciation 38 39
Amortization 114 63
EBITDA $ 228 $ 147
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Liquidity and Capital Resources
Overview
Our primary sources of liquidity are 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 debt 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 position including weather, seasonality, commodity prices, market conditions, inflation, and prolonged impacts of COVID-19, over which we have no control. As ofJune 30, 2022 , we had$773 million of total liquidity, comprising$330 million in cash and cash equivalents and$443 million ($500 million less outstanding letters of credit of approximately$57 million , which reduce availability) of available borrowings under our Revolving Credit Facility. OnJanuary 3, 2022 , we issued and sold 800,000 shares of Series B Preferred Stock (defined below) for an aggregate purchase price of$800 million , and entered into an amendment to our credit agreement. As part of this amendment, we incurred a$1,100 million seven-year incremental term loan ("2021 Term Loan"), the Revolving Credit Facility was upsized by$200 million to$500 million , the maturity date of the Revolving Credit Facility was extended five years, and the letter of credit sublimit was increased by$100 million to$250 million . DuringSeptember 2021 , we issued 22,716,049 shares of our common stock in a public underwritten offering. The proceeds from this offering totaled approximately$446 million , net of related expenses. We used the net proceeds from this offering for general corporate purposes, which includes items such as other business opportunities, capital expenditures and working capital. 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. InMarch 2022 , we announced that our Board of Directors authorized a stock repurchase program, authorizing the purchase of up to an aggregate of$250 million of shares of common stock throughFebruary 2024 . During the three and six months endedJune 30, 2022 , we repurchased 681,329 and 1,212,760 shares of common stock for approximately$11 million and$22 million , respectively, under this stock repurchase program, leaving approximately$228 million of authorized repurchases. Cash Flows
The following table summarizes net cash flows with respect to our operating, investing and financing activities for the periods indicated:
Six Months Ended June 30 ,
($ in millions) 2022 2021
Net cash provided by (used in) operating activities $ (64 ) $ 19 Net cash provided by (used in) investing activities (2,903 ) (35 ) Net cash provided by (used in) financing activities 1,818 187
Effect of foreign currency exchange rate change on cash and cash equivalents
(9 ) 3
Net increase (decrease) in cash and cash equivalents
$ 174
Cash, cash equivalents, and restricted cash at the
end of the period $ 333 $ 689
53
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Net Cash Provided by (Used in) Operating Activities
Net cash provided by (used in) operating activities was$(64) million for the six months endedJune 30, 2022 compared to$19 million for the same period in 2021. Cash flows 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 six months endedJune 30, 2022 , operating cash flows were impacted by inflationary pressures and supply chain disruptions leading to an increase in the required level of working capital investment needed to ensure we have materials available to meet our growth in sales volumes, as well as higher levels of spending related to acquisition and integration costs. Further, the increase in the cost of our debt driven by new debt issuances that occurred during the later half of 2021 and the first half of 2022 and a one-time contribution to assumed pension plans of$27 million were factors in our increased use of cash for operating activities during the six months endedJune 30, 2022 compared to the same period in the prior year.
Net Cash Provided by (Used in) Investing Activities
Net cash used in investing activities was$(2,903) million for the six months endedJune 30, 2022 compared to$(35) million for the same period in 2021. During the current year, we completed the Chubb Acquisition within our Safety Services segment resulting in the use of$2,875 million for acquisitions during the six months endedJune 30, 2022 compared to$12 million for the same period in 2021.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was$1,818 million for the six months endedJune 30, 2022 compared to$187 million for the same period in 2021. The increase in cash provided by financing activities was primarily due to$1,101 million of proceeds from the issuance of the 2021 Term Loan and other debt, and$797 million of proceeds from the issuance of Series B Preferred Stock, partially offset by payments of$31 million on long-term borrowings and$22 million of share repurchases. In the same period of the prior year, cash provided by financing activities was primarily driven by proceeds of$350 million from the completed offering of the 4.125% Senior Notes and$230 million from the issuance of common stock in connection with the warrant exercises. These cash inflows were partially offset by payments of$318 million on long term borrowings and$70 million for acquisition-related consideration.
Financing Activities
Credit Agreement
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, (2) the Revolving Credit Facility was upsized by$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, 2029 . The 2021 Term Loan is subject to the same mandatory prepayment provisions as the 2019 Term Loan. 54 -------------------------------------------------------------------------------- The Credit Agreement contains customary representations and warranties, and affirmative and negative covenants, including covenants that, 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 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 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. Our first lien net leverage ratio as ofJune 30, 2022 was 2.88:1.00. As ofJune 30, 2022 , we had$1,127 million and$1,085 million of indebtedness outstanding on the 2019 Term Loan and 2021 Term Loan, respectively. We had no amounts outstanding under the Revolving Credit Facility, under which$443 million was available after giving effect to$57 million of outstanding letters of credit, which reduces availability.
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 are fully and unconditionally guaranteed on a senior unsecured basis by us and certain subsidiaries. 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, payable semi-annually in arrears. We used the net proceeds from the sale of the 4.125% Senior Notes to repay the previously outstanding term loan, prepay a portion of the 2019 Term Loan and for general corporate purposes. As ofJune 30, 2022 , we had$350 million aggregate principal amount of 4.125% Senior Notes outstanding. We 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 datedJanuary 3, 2022 . The 4.750% Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by us and certain subsidiaries. The 4.750% Senior Notes will mature onOctober 15, 2029 , unless earlier redeemed, and bear interest at a rate of 4.750% per year until maturity, payable semi-annually in arrears. 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. As ofJune 30, 2022 , we had$300 million aggregate principal amount of 4.750% Senior Notes outstanding.
Debt Covenants
We were in compliance with all covenants contained in the indentures governing the 4.125% Senior Notes and 4.750% Senior Notes and Credit Agreement as ofJune 30, 2022 andDecember 31, 2021 .
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. 55 --------------------------------------------------------------------------------
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 condensed consolidated financial statements and expected to be satisfied using cash generated from operations:
•
Operating and Finance Leases - See Note 11 - "Leases."
•
Debt - See Note 12 - "Debt" for future principal payments and interest rates on our debt instruments.
•
Tax Obligations - See Note 13 - "Income Taxes."
•
Pension obligations - See Note 15 - "Pension."
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.
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