API GROUP CORPORATION This Management's Discussion and Analysis of Financial Condition and Results of Operations 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 "APG Management's Discussion and Analysis of Financial Condition and Results of Operations" section and other disclosures contained in our Registration Statement on Form S-4 effectiveMay 1, 2020 (the "Form S-4"), including financial results for the year endedDecember 31, 2019 . 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 accounting principles generally accepted inthe United States of America ("U.S. GAAP"). To supplement our financial results presented in accordance withU.S. GAAP in this Management's Discussion and Analysis of Financial Condition and Results of Operations section, we present EBITDA, which is a non-U.S. GAAP financial measure, to assist readers 29
-------------------------------------------------------------------------------- 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 that are not reflected in the most directly comparable measure calculated and presented in accordance withU.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 withU.S. GAAP, a reconciliation to theU.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", "our", and "Successor" refer toAPi Group Corporation and its subsidiaries for all periods subsequent to the APi Acquisition (as defined below). All references in this quarterly report on Form 10-Q to our "Predecessor" refer toAPi Group Inc. , ("APi Group ") and its subsidiaries for all periods prior to the APi Acquisition.
Overview
We were incorporated with limited liability under the laws of theBritish Virgin Islands under the BVI Companies Act onSeptember 18, 2017 under the nameJ2 Acquisition Limited . We were originally formed for the purpose of acquiring a target company or business. OnOctober 10, 2017 , we raised gross proceeds of approximately$1.25 billion in connection with our initial public offering in theUnited Kingdom . OnOctober 1, 2019 , we completed our acquisition ofAPi Group (the "APi Acquisition") and changed our name toAPi Group Corporation in connection with the APi Acquisition. With over 90 years of history operating from over 200 locations,APi Group is a market leading business services provider of safety, specialty, and industrial services operating primarily inthe United States , as well as inCanada and theUnited Kingdom with consolidated net revenues of approximately$985 million for the Successor in 2019,$3.1 billion for the Predecessor in 2019, and approximately$3.7 billion for the Predecessor in 2018.APi Group provides a variety of specialty contracting services, including engineering and design, fabrication, installation, inspection, maintenance, service and repair, and retrofitting and upgrading. APi provides statutorily mandated and contracted services to a strong base of long-standing customers across industries. We also have an experienced management team and a strong leadership development culture.
We operate our business under three primary operating segments which are also our reportable segments:
• Safety Services - A leading provider of safety services in
focusing on end-to-end integrated occupancy systems (fire protection
solutions, HVAC and entry systems), including design, installation,
inspection and service of these integrated systems. This segment also
provides mission critical services, including life safety, emergency
communication systems and specialized mechanical services. The work
performed within this segment spans across industries and facilities and
includes commercial, industrial, residential, medical and special-hazard
settings.
• Specialty Services - A leading provider of diversified, single-source
infrastructure and specialty contractor solutions, focusing on
infrastructure services and specialized industrial plant solutions,
including maintenance and repair of water, sewer and telecom
infrastructure. The customers in this segment vary from public and
private utilities, communications, industrial plants and governmental
agencies throughout the United States .
• Industrial Services - A leading provider of a variety of specialtycontracting services to the energy industry focused on transmission and
distribution. This segment's services include oil and gas pipeline
infrastructure, access and road construction, supporting facilities, and
performing ongoing integrity management and maintenance.
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-------------------------------------------------------------------------------- We focus on recurring revenue and repeat business from our diversified long-standing customers across a variety of end markets, which provides us with stable cash flows and a platform for organic growth. Maintenance and service revenues are predictable through contractual arrangements with typical terms ranging from days to three years, with the majority having durations of less than six months, and are often recurring due to consistent renewal rates and long-standing customer relationships.
For financial information about our operating segments, see Note 16 - "Segment Information" to our condensed consolidated financial statements included herein.
Prior to the APi Acquisition, we had no revenue or other operations other than the active solicitation of a target business with which to complete a business combination. We generated small amounts of non-operating income in the form of unrealized and realized gains on marketable securities and interest income on cash and cash equivalents. We relied upon the proceeds from the initial public offering to fund our limited acquisition-related operations prior to the closing of the APi Acquisition. The historical financial information prior to the APi Acquisition has not been discussed below as these historical amounts are not considered meaningful.
Effect of Seasonality and Cyclical Nature of Business
Our revenue and results of operations can be subject to seasonal and other variations. These variations are influenced by weather, customer spending patterns, bidding seasons, project schedules, holidays and timing, in particular, for large, non-recurring projects. Typically, our revenue is lowest at the beginning of the year and during the winter months inNorth America during the first quarter because cold, snowy or wet conditions can cause project delays. Revenue is generally higher during the summer and fall months during the third and fourth quarters, due to increased demand for our services when favorable weather conditions exist in many of the regions in which we operate. Continued cold and wet weather can often affect second quarter productivity. In the fourth quarter, many projects tend to be completed by customers seeking to spend their capital budgets before the end of the year, which generally has a positive effect on our revenue. However, the holiday season and inclement weather can cause delays, which can reduce revenue and increase costs on affected projects. The effects of the COVID-19 pandemic could also result in greater seasonal and cyclical volatility than would otherwise exist under normal conditions. Additionally, the industries we serve can be cyclical. Fluctuations in end-user demand within those industries, 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 revenue.
Recent Developments
Impairment of
During the first quarter of 2020, we concluded that a triggering event had occurred for all of our reporting units as a result of the COVID-19 global pandemic and we recorded total non-cash charges of$208 million to reflect the impairment of our goodwill and intangible assets as preliminary carrying values exceeded fair value. Pursuant to the authoritative literature, we performed impairment tests and determined that, as a result of the impact of COVID-19, which has negatively impacted our operations, suppliers and other vendors, customer base, the demand for work within the oil and gas industry as a result of the volatility in oil prices and other factors outside of the control of management, certain of our goodwill and intangible assets were impaired. Specifically, we determined the goodwill associated with our Mechanical, Infrastructure/Utility, Fabrication,Specialty Contracting , Transmission and Civil reporting units were impaired by$34 million ,$80 million ,$17 million ,$23 million ,$45 million and$4 million , respectively. We also determined that intangible assets of a business classified as held for sale were impaired by$5 million . 31
-------------------------------------------------------------------------------- The circumstances and global disruption caused by COVID-19 has affected, and we believe it will continue to affect, our businesses, operating results, cash flows and financial condition, however the scope and duration of the impact is highly uncertain. In addition, some of the inherent estimates and assumptions used in determining the fair value of our reporting units are outside the control of management, including interest rates, cost of capital, tax rates, industry growth, credit ratings, foreign exchange rates, and labor inflation. Given the uncertainty of these factors, as well as the inherent difficulty in predicting the severity and duration of the COVID-19 global pandemic and associated recovery and the uncertainties regarding the potential financial impact on our business and the overall economy, there can be no assurance that our estimates and assumptions made for purposes of the goodwill impairment testing performed during the first quarter of 2020 will prove to be accurate predictions of the impact in future periods. While we believe we have made reasonable estimates and assumptions to calculate the fair values of our reporting units which were based on facts and circumstances known at such time, it is possible that existing or new events may result in forecasted cash flows, revenue and earnings that differ from those that formed the basis of our estimates and assumptions. For each of our reporting units, particularly if the global pandemic caused by COVID-19 continues to persist for an extended period of time, a reporting unit's actual results could be materially different from our estimates and assumptions used to calculate fair value. If so, we may be required to recognize material impairments to goodwill or other long-lived assets. We will continue to monitor our reporting units for any triggering events or other signs of impairment. We may be required to perform additional impairment testing based on further deterioration of the global economic environment, continued disruptions to our businesses, further declines in operating results of our reporting units and/or tradenames, sustained deterioration of our market capitalization, and other factors, which could result in additional impairment charges in the future. Although we cannot predict when improvements in macroeconomic conditions will occur, if consumer confidence and consumer spending decline significantly in the future or if economic activity experiences a sustained deterioration from current levels, it is reasonably likely we will be required to record additional impairment charges in the future. As ofMarch 31, 2020 , there was one reporting unit, Life Safety, with fair value exceeding its carrying value by less than 10%. Since the goodwill balances for each reporting unit are still preliminary, pending finalizing purchase price allocation from the APi Acquisition, it is possible the Life Safety reporting unit may experience an impairment charge even if there are no changes to the aforementioned discount rates. Based on a sensitivity analysis, a 10% increase in the carrying value of the Life Safety reporting unit would have resulted in an impairment charge of$27 million . See Note 2 - "Basis of Presentation and Significant Accounting Policies" and Note 7 - "Goodwill and Intangibles" of the Interim Statements for additional information. Credit Facilities In lateMarch 2020 , we drew down$200 million under our$300 million Revolving Credit Facility. As ofMarch 31, 2020 ,$33 million was available after giving effect to$67 million of outstanding letters of credit, which reduce availability. We were in compliance with all covenants contained in the Credit Agreement as ofMarch 31, 2020 . DuringApril 2020 , we repaid the$200 million of borrowings on the Revolving Credit Facility.
Income Taxes
The three months endedMarch 31, 2020 were also impacted by certain discrete or non-recurring tax items. The income tax benefit of$51 for the three months endedMarch 31, 2020 was primarily due to impairment of goodwill and intangible assets. The tax law changes in the CARES Act had an impact of$0 on the Company's income tax provision. 32
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COVID-19 Update
We continue to monitor the short- and long-term impacts of COVID-19, a global pandemic that has caused a significant slowdown in the global economy beginning inMarch 2020 . While we had some slowdown impact in March, the impacts of COVID-19 were not seen as significant at that time. During the three months endedMarch 31, 2020 , we continued to provide services to our customers and saw a relatively minor impact to our business. To date, the services we provide have been deemed to be essential in most instances. However, as the COVID-19 situation has evolved in April and May, we have seen various disruptions in our work due to the domino effects of the various local, state and national jurisdictional "shelter-in-place" orders, including but not limited to the impact on our efficiency to perform our work while adhering to physical distancing protocols demanded by COVID-19, customers deferring inspection and service projects, and temporary shutdowns of active projects as they work through COVID-19 related matters. Due to the statutory nature of much of our work and the long-term investments being made across the public and private utility sector, to date we have not experienced significant cancellations. However, we are experiencing delays in certain projects and disruptions to the flow of our work to meet COVID-19 working protocols. We are actively quoting new work for customers such as schools, universities, hotels, casinos and other customers that may be temporarily operating at less than capacity or closed. Should the macro economy continue to be negatively impacted by the COVID-19 pandemic, it is possible that some projects could be delayed indefinitely or cancelled, or that we are not successful in accelerating inspection and service projects. As we have monitored our activity in April andMay 2020 , revenue period over period has been impacted by the level of shelter-in-place orders and outbreaks of COVID-19, which for certain larger projects, caused customers to temporarily halt work to put in COVID-19 working protocols. Subsequent toMarch 31, 2020 , all of our segments have seen volume declines. Recently we are seeing indications of stabilizing and some volume improvements off previous lows as our teams and customers are adapting to working in the COVID-19 environment and with the easing of some shelter-in-place orders. There can be no assurance that this will continue in a positive manner. To date, we have been able to source the supply and materials needed for our business with minimal disruptions. However, the continued impact of COVID-19 on our vendors is evolving and could make it difficult to obtain needed materials. We have also implemented a preemptive cost reduction plan, which we expect will save both expense and cash in 2020 if market conditions require us to maintain them throughout the rest of the year. While we cannot estimate the duration or future negative financial impact of the COVID-19 pandemic on our business, we are currently experiencing some negative impact, which we expect to continue in the future.
Recent Accounting Pronouncements
A summary of recent accounting pronouncements is included in Note 3 - "Recent Accounting Pronouncements" to our Interim Statements included in this quarterly report.
Description of Key Line Items
Net Revenues
Revenue is generated from the sale of various types of contracted services, fabrication and distribution. We derive revenue primarily from construction services under contractual arrangements with
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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 materials pricing.
Revenue for fixed price agreements is 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.
Revenue from time and material contracts is recognized as the services are
provided. Revenue earned is based on total contract costs incurred plus an
agreed-upon markup. Revenue for these cost-plus contracts is recognized over
time on an input basis as labor hours are incurred, materials are utilized, and
services are performed. Revenue from wholesale or retail unit sales is
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
Selling, general and administrative expenses consist primarily of personnel, facility leases, advertising and marketing expenses, administrative expenses associated with accounting, finance, legal, information systems, leadership development, human resources and risk management and overhead associated with these functions. 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 expense consists primarily of compensation and associated costs for executive management, finance, legal, information systems, leadership development and other administrative personnel, facility leases, 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.
Impairment of
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.
Critical Accounting Policies and Estimates
For information regarding our Critical Accounting Policies, see the "Critical
Accounting Policies" section of the "APG Management's Discussion and Analysis of
Financial Condition and Results of
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Operations" in our Form S-4. Additionally, see the "Use of estimates and risks and uncertainty of COVID-19" section of Note 2 - "Basis of Presentation and Significant Accounting Policies" to the Interim Statements for a discussion about the impact of the COVID-19 pandemic on asset impairment.
Results of Operations
The following is a discussion of our financial condition and results of operations during the three months endedMarch 31, 2020 (the "Successor Period") and the three months endedMarch 31, 2019 (the "Predecessor Period"). We did not ownAPi Group for the Predecessor period. Consequently, these results may not be indicative of the results that we would expect to recognize for future periods. Three Months EndedMarch 31, 2020 (Successor) compared to Three Months EndedMarch 31, 2019 (Predecessor) Three Months Ended March 31, 2020 2019 Change ($ in millions) (Successor) (Predecessor) $ % Net revenues $ 858 $ 922$ (64 ) (6.9)% Cost of revenues 696 759 (63 ) (8.3)% Gross profit 162 163 (1 ) (0.6)% Selling, general, and administrative expenses 188 137 51 37.2% Impairment of goodwill, intangibles and long-lived assets 208 - 208 NM Operating income (loss) (234 ) 26 (260 ) NM Interest expense, net 14 6 8 133.3% Investment income and other, net (3 ) (2 ) (1 ) 50.0% Other expense, net 11 4 7 175.0% Income (loss) before income taxes (245 ) 22 (267 ) NM Income tax provision (benefit) (51 ) 1 (54 ) NM Net income (loss) $ (194 ) $ 21$ (215 ) NM NM = Not meaningful Net revenues Net revenues for the three months endedMarch 31, 2020 were$858 million compared to$922 million for the same period in 2019, a decrease of$64 million or 6.9%. The decrease in net revenues was primarily attributable to a decrease in volume of projects in the Industrial Services segment of$76 million due to more focused project selection during the current year. This was partially offset by the Specialty Services segment, which increased revenues by$14 million , and consistent performance in the Safety Services segment, despite the impact of COVID-19 during the first quarter of 2020.
Gross profit
The following table presents gross profit (net revenues less cost of revenues), and gross profit margin (gross profit as a percentage of net revenues) for APG for the three months endedMarch 31, 2020 (Successor) and 2019 (Predecessor), respectively: Three Months Ended March 31, 2020 2019 Change ($ in millions) (Successor) (Predecessor) $ % Gross profit $ 162 $ 163$ (1 ) (0.6)% Gross profit margin 18.9 % 17.7 % 35
-------------------------------------------------------------------------------- Our gross profit for the three months endedMarch 31, 2020 was$162 million , compared to$163 million for the same period in 2019, a decrease of$1 million , or 0.6%. The decrease in gross profit was primarily attributable to$22 million recognized in cost of revenues from the amortization of backlog assets related to purchase accounting, offset by a more favorable contract mix with a greater percentage of our revenues in 2020 coming from our higher margin segment, Safety Services, and improved gross profit in the Industrial Services segment of 715 basis points due to improved project selection, conditions and execution. This resulted in a higher gross profit margin of 18.9% in 2020 versus 17.7% in 2019. The gross profit margin was negatively impacted by 2.5% due to the$22 million backlog amortization. Operating expenses
The following table presents operating expenses and operating margin (operating
income (loss) as a percentage of net revenues) for APG for the three months
ended
Three Months Ended March 31,
2020 2019 Change
($ in millions) (Successor) (Predecessor) $ %
Selling, general, and administrative
expenses $ 188 $ 137 $ 51 37.2%
Impairment of goodwill, intangibles
and long-lived assets 208 - 208 NM
Total operating expenses $ 396 $ 137 $ 259 189.1%
Operating expenses as a percentage
of net revenues 46.2 % 14.9 %
Operating margin (27.3 %) 2.8 %
Our operating expenses for the three months ended March 31, 2020 were
$396 million , compared to $137 million for the same period in 2019, an increase
of $259 million . Operating expenses as a percentage of net revenues were 46.2%
for 2020 compared to 14.9% for 2019. The increase in operating expenses is
primarily attributable to impairment charges of $208 million , intangible asset
amortization expense, which increased $21 million over the same period in the
prior year, increases of $17 million due to business growth focused on
compensation and additional resources to drive our organic growth strategy,
unabsorbed overhead costs of $3 million , and non-cash share-based compensation
of $1 million . Additionally, we incurred $6 million of non-recurring business
process transformation and public company registration, listing and compliance
costs of $6 million , and corporate costs related to being a public company of $3
million .
Operating income and EBITDA
Three Months Ended March 31,
2020 2019 Change
($ in millions) (Successor) (Predecessor) $ %
Operating income (loss) $ (234 ) $ 26 $ (260 ) NM
EBITDA (161 ) 53 (214 ) (403.8)%
Our operating loss for the three months ended March 31, 2020 was $234 million ,
compared to income of $26 million for the same period in 2020, a decrease of
$260 million . Operating margin decreased to approximately (27.3)% in 2020 from
2.8% in 2019. The decrease was primarily attributable to impairment expense of
$208 million , increased expenses related to intangible asset amortization
expense, which increased $43 million over the prior year, and other increases in
operating expenses discussed above. EBITDA as a percentage of net revenues
decreased to (18.8)% in 2020 from 5.7% in 2019. The decrease was primarily
driven by the increased operating expenses discussed above.
Interest expense, net
Interest expense was$14 million for the three months endedMarch 31, 2020 compared to$6 million for the same period of the prior year. The$8 million increase in interest expense was primarily due to an increase in average outstanding borrowings and higher average borrowing costs reflecting the APi Acquisition in whichAPi Group's previous debt totaling$595 million as ofMarch 31, 2019 , was settled and replaced by our Credit Facilities that include the issuance of a$1.2 billion Term Loan. 36
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Income tax provision
The effective tax rate for the three months endedMarch 31, 2020 was 20.9%, after discrete and non-recurring tax items. The income tax benefit of$51 million for the three months endedMarch 31, 2020 related to the impairment of goodwill and intangible assets. The tax law changes in the CARES Act had an immaterial impact on the Company's income tax provision during the three months endedMarch 31, 2020 .
Non-GAAP Financial Measures (Unaudited)
We supplement our reporting of consolidated financial information determined in accordance withU.S. GAAP with earnings before interest, taxes, depreciation and amortization ("EBITDA"), which is a non-U.S. GAAP financial measure. Management believes this measure provides meaningful information and helps investors understand our financial results and assess our prospects for future performance. We use EBITDA to evaluate our performance, both internally and as compared with our peers, because it excludes certain items that may not be indicative of our core operating results. This non-U.S. GAAP financial measure, however, has limitations as an analytical tool 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 this non-U.S. GAAP financial measure is that it excludes 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, this measure is subject to inherent limitations as it reflects the exercise of judgment by management about which items are excluded or included in determining this non-U.S. GAAP financial measure. Investors are encouraged to review the reconciliation of this non-U.S. GAAP financial measure to its most comparableU.S. GAAP financial measure included in this quarterly report and not to rely on any single financial measure to evaluate our business. The following table presents a reconciliation of net income (loss) to EBITDA for the periods indicated: Three Months Ended March 31, 2020 2019 ($ in millions) (Successor) (Predecessor) Reported net income (loss) $ (194 ) $ 21 Adjustments to reconcile net income (loss) to EBITDA: Interest expense, net 14 6 Income tax provision (benefit) (51 ) 1 Depreciation 18 16 Amortization 52 9 EBITDA $ (161 ) $ 53 37
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Operating Segment Results for the Three Months Ended
Net Revenues
Three Months Ended March 31,
2020 2019 Change
($ in millions) (Successor) (Predecessor) $ %
Safety Services $ 424 $ 426 $ (2 ) (0.5)%
Specialty Services 300 286 14 4.9%
Industrial Services 137 213 (76 ) (35.7)%
Corporate and Eliminations (3 ) (3 ) - 0.0%
$ 858 $ 922 $ (64 ) (6.9)%
Operating Income (loss)
Three Months Ended March 31,
2020 2019 Change
($ in millions) (Successor) (Predecessor) $ %
Safety Services $ (10 ) $ 52 $ (62 ) (119.2)%
Specialty Services (136 ) - (136 ) NM
Industrial Services (58 ) (9 ) (49 ) NM
Corporate and Eliminations (30 ) (17 ) (13 ) 76.5%
$ (234 ) $ 26 $ (260 ) NM
EBITDA
Three Months Ended March 31,
2020 2019 Change
($ in millions) (Successor) (Predecessor) $ %
Safety Services $ 18 $ 55 $ (37 ) (67.3)%
Specialty Services (108 ) 14 (122 ) NM
Industrial Services (45 ) (3 ) (42 ) NM
Corporate and Eliminations (26 ) (13 ) (13 ) 100.0%
$ (161 ) $ 53 $ (214 ) NM
The following discussion breaks down the net revenues, operating income and
EBITDA by operating segment for the three months ended
Safety Services
Safety Services net revenues for the three months endedMarch 31, 2020 decreased by$2 million , or 0.5% compared to the same period in the prior year. This is due to timing of larger contract revenues during the year-over-year period, combined with some impact of COVID-19 and shelter-in-place orders during the last half of March. Safety Services operating margin for the three months endedMarch 31, 2020 and 2019 was approximately (2.4)% and 12.2%, respectively. The decrease was primarily driven by impairment charges of$34 million and intangible asset amortization expense, which was$22 million higher for the three months endedMarch 31, 2020 compared to the same period in the prior year as a result of the APi Acquisition and the step up in fair values for intangible assets. Safety Services EBITDA as a percentage of net revenues for the three months endedMarch 31, 2020 and 2019 was approximately 4.2% and 12.9%, respectively. The decrease was primarily driven by impairment charges. 38
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Specialty Services
Specialty Services net revenues for the three months ended
Specialty Services operating margin for the three months endedMarch 31, 2020 and 2019 was approximately (45.3)% and 0.0%, respectively. The decrease was primarily driven by impairment charges of$120 million , and intangible asset amortization expense, which was$13 million higher for the three months endedMarch 31, 2020 compared to the same period in the prior year as a result of the APi Acquisition and the step up in fair values for intangible assets and contract mix. Specialty Services EBITDA as a percentage of net revenues for the three months endedMarch 31, 2020 and 2019 was approximately (36.0)% and 4.9%, respectively. The decrease was primarily driven by impairment charges.
Industrial Services
Industrial Services net revenues for the three months ended
Industrial Services operating margin for the three months endedMarch 31, 2020 and 2019 was approximately (42.3)% and (4.2)%, respectively. The decline was primarily driven by impairment charges of$49 million , and intangible asset amortization expense, which was$7 million higher for the three months endedMarch 31, 2020 compared to the same period in the prior year as a result of the APi Acquisition and the step up in fair values for intangible assets. This was partially offset by productivity increases due to better project selection and jobsite conditions. Industrial Services EBITDA as a percentage of net revenues, was (32.8)% and (1.4)% for the three months endedMarch 31, 2020 and 2019, respectively. The decrease was primarily driven by impairment charges, partially offset by contract selection, productivity and favorable jobsite conditions.
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, and our access to our Revolving Credit Facility. We believe that these sources will be sufficient to fund our liquidity requirements for at least the next twelve months. As ofMarch 31, 2020 , we had$499 million of total liquidity, comprising$436 million in cash and cash equivalents and$33 million ($100 million less outstanding letters of credit of approximately$67 million ) of available borrowings under our Revolving Credit Facility. Given the uncertainties regarding the COVID-19 global pandemic and in preparation for its potential unforeseen impacts, in lateMarch 2020 , we drew down$200 million under our Revolving Credit Facility. As ofMarch 31, 2020 , we had$1.2 billion of indebtedness outstanding under the Term Loan, and$200 million outstanding under the$300 million Revolving Credit Facility. As ofMarch 31, 2020 ,$33 million was available after giving effect to$67 million of outstanding letters of credit, which reduce availability. Subsequently, inApril 2020 , we repaid the full amount borrowed on the Revolving Credit Facility. We also expect to continue to raise cash through equity and debt offerings when capital market conditions are favorable and other sources of liquidity are not sufficient. Our principal liquidity requirements have been, and we expect will be, any contingent consideration due to selling shareholders, including tax payments in connection therewith, for working capital and general corporate purposes, 39
-------------------------------------------------------------------------------- including capital expenditures and debt service, as well as to identify, execute and integrate strategic acquisitions and business transformation. Our capital expenditures were approximately$11 and$22 million in the three months endedMarch 31, 2020 and 2019, respectively. Including our current assessment of the potential effects of the COVID-19 pandemic on our results of operations, we anticipate that funds generated from operations, available borrowings under our Credit Facility and our cash balances will be sufficient to meet our working capital requirements, anticipated capital expenditures, debt service obligations, insurance and performance collateral requirements, letter of credit needs, earn-out obligations, required income tax payments, acquisition and other investment funding requirements, share repurchase activity and other liquidity needs for at least the next twelve months.
Credit Facilities
We have a credit agreement which provides for (1) a term loan facility, pursuant to which we incurred a$1.2 billion Term Loan, which we used to fund a part of the cash portion of the purchase price in the APi Acquisition and (2) a$300 million Revolving Credit Facility of which up to$150 million can be used for the issuance of letters of credit. 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, and prolonged impacts of COVID-19 and shelter-in-place governmental action, over which we have no control.
Effective
One ofAPi Group's Canadian subsidiaries had a$20 million unsecured line of credit agreement with a variable interest rate based upon the prime rate.APi Group had no amounts outstanding under the line of credit atMarch 31, 2020 .
We were in compliance with all covenants contained in the Credit Agreement as of
Cash Flows
Three Months Ended March 31,
2020 2019
($ in millions) (Successor) (Predecessor)
Net cash provided by operating activities $ 55 $ 25
Net cash used in investing activities (15 ) (22 )
Net cash provided by (used in) financing
activities 139 (16 )
Effect of foreign currency exchange rate
change on cash and cash equivalents 1 -
Net increase (decrease) in cash and cash
equivalents $ 180 $ (13 )
Cash and cash equivalents at the end of the
period $ 436 $ 41
Net Cash Provided by Operating Activities
Net cash provided by operating activities was$55 million for the three months endedMarch 31, 2020 compared to$25 million for the same period in 2019. Cash flow from operations is primarily influenced 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. The increase in cash flows provided by operating activities in 2020 compared to the same period in 2019 was primarily driven by changes in working capital levels. 40
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Net cash used in investing activities was$15 million for the three months endedMarch 31, 2020 compared to$22 million for the same period in 2019. The decrease in cash used in investing activities was attributed to reduction in purchases of property and equipment during the current year.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was$139 million for three months endedMarch 31, 2020 compared to net cash used in financing activities of$16 million for the same period in 2019. The increase in cash provided by financing activities was primarily due to our borrowing of$200 million on the Revolving Credit Facility duringMarch 2020 due to the uncertainty and unforeseen potential consequences associated with the COVID-19 pandemic, which we subsequently repaid inApril 2020 .
Off-Balance Sheet Financing Arrangements
We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.
We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or entered into any non-financial agreement involving assets.
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