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, 2020 . 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 market-leading business services provider of safety, specialty and
industrial services in over 200 locations, primarily in
We operate our business under three primary operating segments which are also our reportable segments:
• Safety Services - A leading provider of safety services in
and
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.
• 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, and retrofitting and upgrading. Customers
within this segment vary from private and public utilities,
communications, healthcare, education, transportation, manufacturing,
industrial plants and governmental agencies throughout the United States .
• Industrial Services - A leading provider of a variety of services to theenergy industry focused on transmission and distribution. This segment's
services include pipeline infrastructure, access and road construction,
supporting facilities, and performing ongoing integrity management and
maintenance.
We focus on growing our recurring revenue 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.
Maintenance and service revenues are generally more 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 15 - "Segment Information" to our unaudited condensed consolidated financial statements included herein.
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--------------------------------------------------------------------------------Certain Factors and Trends Affecting our Results of Operations
Effect of Seasonality and Cyclical Nature of Business
Our net revenues and results of operations can be subject to seasonal and other variations. These variations are influenced by weather and include impacts of customer spending patterns, bidding seasons, project schedules, holidays and timing, in particular, for large, non-recurring projects. Typically, our net revenues are lowest in the first quarter during the winter months inNorth America because cold, snowy or wet conditions can cause project delays. Continued cold and wet weather can often affect second quarter productivity. Net revenues are generally higher during the summer and fall months during the third and early fourth quarter, due to increased demand for our services when favorable weather conditions exist in many of the regions in which we operate. 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 net revenues. However, the holiday season and inclement weather can cause delays, which can reduce net revenues and increase costs on affected projects. 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 net revenues.
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. 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. Recent Developments Acquisitions During the first six months of 2021 we completed several individually immaterial acquisitions for aggregate consideration of$13 million , made up of cash paid at closing of$12 million and accrued consideration of$1 million . The results of operations of these acquisitions are included in our unaudited condensed consolidated statement of operations from their respective dates of acquisition and were not material. See Note 4 - "Business Combinations" for further details. OnJuly 27, 2021 , we announced we have entered into a definitive agreement to acquire the Chubb Limited ("Chubb") fire and security business from Carrier Global Corporation for an enterprise value of$3,100 million , which is comprised of$2,900 million cash and approximately$200 million of assumed liabilities, and other adjustments. The transaction is expected to be funded through a combination of cash on hand, perpetual preferred equity financing, and debt and is expected to close around year-end 2021.
COVID-19 Update
We continue to monitor short and long-term impacts of COVID-19, a global pandemic that has caused a significant slowdown in the global economy beginning inMarch 2020 and continues to impact the global economy as countries experience surges of COVID-19. To date, the services we provide have been deemed to be essential in most instances under various governmental orders. However, as the COVID-19 situation has continued to evolve, we have seen impacts on our work due to the domino effects of various local, state and national governmental orders, including but not limited to, reduced efficiency in performing 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 customers work through COVID-19 related matters. As a result, we are experiencing delays in certain projects and disruptions to the flow of our work to meet COVID-19 working protocols. Although we are actively quoting new work for customers, should the macro economy continue to be negatively impacted by the COVID-19 pandemic or worsen due to surges in cases, it is possible additional projects could be delayed indefinitely or cancelled, or that we may not be allowed access to our customers' facilities to perform inspection and service projects. In addition, the effects of the COVID-19 pandemic have resulted and could continue to result in greater seasonal and cyclical volatility than would otherwise exist under normal conditions. 28 -------------------------------------------------------------------------------- New or renewed shelter-in-place orders, closures or other mitigation efforts, and outbreaks in jurisdictions in which we operate or at our project or work sites, could have a material negative impact on our net revenues and earnings. If a large number of our employees who are located in a particular jurisdiction or are working on a project or work site are exposed to or infected with COVID-19 and we are unable to hire qualified personnel due to labor shortages and other impacts of the COVID-19 outbreak, we may be required to delay projects or the provision of our services for a period of time. This could negatively impact our net revenues, have a material adverse impact on our operating results, and cause harm to our reputation. Generally, during the latter half of 2020 and continuing into first half of 2021, we saw indications of stabilizing and some volume improvements as our teams and customers adapted to working in the COVID-19 environment and with the easing of some shelter-in-place orders as vaccination rates improve. There can be no assurance that this trend, which would allow us to recover prior year volume levels, will continue in a positive manner. We have begun to experience supply chain disruptions, which are negatively impacting the source and supply of materials needed for our business. The continued impact of COVID-19 on our vendors is evolving and could continue to make it difficult to obtain needed materials and at reasonable prices. We also implemented a preemptive cost reduction plan, which saved both expense and cash in 2020. As COVID-19 restrictions were easing and volumes were increasing from earlier lows, the majority of these cost reductions were reinstated in the fourth quarter of 2020.The United States Department of Homeland Security's Cybersecurity and Infrastructure Security Agency has warned that cybercriminals will take advantage of the uncertainty created by COVID-19 and federal and state mandated quarantines to launch cybersecurity attacks. The risks could include more frequent malicious cybersecurity and fraudulent activities, as well as schemes which attempt to take advantage of employees' use of various technologies to enable remote work activities. We believe the COVID-19 outbreak has incrementally increased our cyber risk profile, but we are unable to predict the extent or impacts of those risks at this time. A significant disruption in our information technology systems, unauthorized access to or loss of confidential information, or legal claims resulting from violation of privacy laws could each have a material adverse effect on our business. 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. In prior economic downturns, the impact on our business has generally lagged against the impact of other industries. We have no way of knowing if the economic crisis caused by COVID-19 will impact us similarly to past economic downturns.
Recent Accounting Pronouncements
A summary of recent accounting pronouncements is included in Note 3 - "Recent Accounting Pronouncements" to our unaudited condensed consolidated financial statements included herein.
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 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. 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.
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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 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, 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. There is a portion of amortization expense related to the backlog of intangible assets reflected in cost of revenues in the unaudited condensed consolidated statement of operations.
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 Operations" in our Form 10-K.
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, 2021 compared to the three months endedJune 30, 2020 Three Months Ended June 30, Change ($ in millions) 2021 2020 $ % Net revenues$ 978 $ 889 $ 89 10.0 % Cost of revenues 746 715 31 4.3 % Gross profit 232 174 58 33.3 % Selling, general, and administrative expenses 185 147 38 25.9 % Operating income 47 27 20 74.1 % Interest expense, net 14 14 - - Loss on extinguishment of debt 9 - 9 NM Investment income and other, net (6 ) (11 ) 5 45.5 % Other expense, net 17 3 14 466.7 % Income before income taxes 30 24 6 25.0 % Income tax provision (benefit) 9 (12 ) 21 175.0 % Net income $ 21 $ 36$ (15 ) (41.7 )% NM = Not meaningful 30
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Net revenues
Net revenues for the three months endedJune 30, 2021 were$978 million compared to$889 million for the same period in 2020, an increase of$89 million or 10.0%. The increase in net revenues was primarily driven by significant increases in both the Safety and Specialty Services segments resulting from general market recoveries. In the second quarter of 2020, both segments experienced poor market conditions resulting from the negative impact of the COVID-19 pandemic. In addition, the Safety Services segment also benefited from additional revenues from acquisitions completed in the previous 12 months. These increases were partially offset by a decline in the Industrial Services segment, which was impacted by the sale of two businesses that accounted for$40 million in revenue during the second quarter of 2020 and difficult market conditions.
Gross profit
The following table presents our gross profit (net revenues less cost of
revenues) and gross margin (gross profit as a percentage of net revenues) for
the three months ended
Three Months Ended June 30, Change
($ in millions) 2021 2020 $ %
Gross profit $ 232 $ 174 $ 58 33.3 %
Gross margin 23.7 % 19.6 %
Our gross profit for the three months ended June 30, 2021 was $232 million
compared to $174 million for the same period in 2020, an increase of
$58 million , or 33.3%. Gross margin was 23.7%, an increase of 410 basis points
compared to prior year, primarily due to a $21 million decrease in backlog
amortization expense, which positively impacted the rate by 210 basis points.
Also driving the improvement was a favorable mix from higher volumes in more
profitable segments. Additionally, we divested two lower margin businesses
during 2020 in our Industrial Services segment which contributed 80 basis points
to the improvement. These increases were partially offset by project delays due
to supply chain disruptions and downward pressure on margins caused by the
impact of inflation, which we have not been able to fully recover in the short
term.
Operating expenses
The following table presents operating expenses and operating margin (operating
income as a percentage of net revenues) for the three months ended June 30, 2021
and 2020, respectively:
Three Months Ended June 30, Change
($ in millions) 2021 2020 $ %
Selling, general, and administrative
expenses (excluding amortization
expense) $ 155 $ 119 $ 36 30.3 %
Amortization expense 30 28 2 7.1 %
Total operating expenses $ 185 $ 147 $ 38 25.9 %
Operating expenses as a percentage of
net revenues 18.9 % 16.5 %
Operating margin 4.8 % 3.0 %
Our operating expenses for the three months ended June 30, 2021 were
$185 million compared to $147 million for the same period in 2020, an increase
of $38 million . Operating expenses as a percentage of net revenues were 18.9%
for 2021 compared to 16.5% for 2020. In the second quarter of 2020, we took
various actions in response to the COVID-19 pandemic which resulted in lowering
operating expenses as a percentage of net revenues. This included implementing a
preemptive cost reduction plan to lower expenses throughout 2020. However, as
COVID-19 restrictions began to ease and volumes increased, we restored many of
these costs in fourth quarter of 2020, resulting in an increase in operating
expenses as a percentage of net revenues. Also driving the increase was higher
levels of spending related to business process transformation projects,
including system and process development costs and expenses associated with the
implementation of compliance programs related to the Sarbanes-Oxley Act of 2002
during the second quarter of 2021.
Interest expense, net
Interest expense was
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--------------------------------------------------------------------------------Loss on Extinguishment of Debt
During the second quarter of 2021 we completed a private offering of$350 million aggregate principal amount of senior notes. The proceeds from the offering were used to repay all outstanding indebtedness under the 2020 Term Loan, prepay a portion of the 2019 Term Loan, pay for transaction fees and expenses, and fund general corporate purposes. In connection with the repayment of the 2020 Term Loan and prepayment on a portion of the 2019 Term Loan, the Company incurred a loss on extinguishment of debt of$9 million related to unamortized debt issuance costs.
Income tax provision (benefit)
The income tax expense (benefit) for the three months endedJune 30, 2021 was expense of$9 million compared to a benefit of$(12) million in the same period of the prior year. This change was driven by the fact that we had earned income for the first six months of 2021, compared to a loss position for the first six months of 2020 due to an impairment charge. The effective tax rate for the three months endedJune 30, 2021 was 28.9%, compared to (49.0)% in the same period of 2020. The difference in the effective tax rate was driven by discrete and nondeductible permanent items which have a greater impact on the effective tax rate when income or losses are smaller. 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 foreign earnings in jurisdictions that have higher tax rates.
Net income and EBITDA
The following table presents net income and EBITDA for the three months ended
Three Months Ended June 30, Change
($ in millions) 2021 2020 $ %
Net income $ 21 $ 36 $ (15 ) (41.7 )%
EBITDA 96 112 (16 ) (14.3 )%
Net income as a % of Net Revenues 2.1 % 4.0 %
EBITDA as % of Net Revenues 9.8 % 12.6 %
Our net income for the three months ended June 30, 2021 was $21 million compared
to $36 million for the same period in 2020, a reduction of $15 million . Net
income as a percentage of net revenues for the three months ended June 30, 2021
was 2.1% compared to 4.0% for the same period in 2020. The decline in net income
and in EBITDA resulted from a $9 million loss on extinguishment of debt
recognized in the second quarter of 2021, higher spending related to business
process transformation projects to enhance systems and implement compliance
programs related to Sarbanes-Oxley Act of 2002, and COVID-19 relief payments
that were received by our Canadian subsidiaries during the second quarter of
2020 that did not repeat in the second quarter of 2021. Also driving the decline
was the impact of supply chain disruptions and downward pressure on margins
caused by inflation. These items were partially offset by improved profitability
in the Safety Services segment.
Operating Segment Results for the three months ended
Net Revenues
Three Months Ended June 30, Change
($ in millions) 2021 2020 $ %
Safety Services $ 512 $ 371 $ 141 38.0 %
Specialty Services 415 349 66 18.9 %
Industrial Services 68 173 (105 ) (60.7 )%
Corporate and Eliminations (17 ) (4 ) (13 ) (325.0 )%
$ 978 $ 889 $ 89 10.0 %
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Operating Income (Loss)
Three Months Ended June 30, Change
($ in millions) 2021 2020 $ %
Safety Services $ 52 $ 22 $ 30 136.4 %
Safety Services operating margin 10.2 % 5.9 %
Specialty Services 32 22 10 45.5 %
Specialty Services operating margin 7.7 % 6.3 %
Industrial Services (8 ) 4 (12 ) (300.0 )%
Industrial Services operating margin (11.8 )% 2.3 %
Corporate and Eliminations (29 ) (21 ) (8 ) (38.1 )%
$ 47 $ 27 $ 20 74.1 %
EBITDA
Three Months Ended June 30, Change
($ in millions) 2021 2020 $ %
Safety Services $ 73 $ 49 $ 24 49.0 %
Safety Services EBITDA as a % of
net revenues 14.3 % 13.2 %
Specialty Services 55 62 (7 ) (11.3 )%
Specialty Services EBITDA as a % of
net revenues 13.3 % 17.8 %
Industrial Services 3 21 (18 ) (85.7 )%
Industrial Services EBITDA as a %
of net revenues 4.4 % 12.1 %
Corporate and Eliminations (35 ) (20 ) (15 ) (75.0 )%
$ 96 $ 112 $ (16 ) (14.3 )%
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, 2021 increased by$141 million or 38.0% compared to the same period in the prior year. This improvement was primarily driven by the general market recovery as compared to the poor market conditions in the second quarter of 2020, which was negatively impacted by the COVID-19 pandemic. We experienced continued growth in inspection and service revenues, driving specific improvements in both our Life Safety and HVAC service businesses. The segment also benefited from additional net revenues contributed by acquisitions completed in the prior 12 months. Safety Services operating margin for the three months endedJune 30, 2021 and 2020 was approximately 10.2% and 5.9%, respectively. The improvement was primarily driven by higher volumes and leveraging operating expenses to improve profitability, shift to more inspection and service work generating a favorable project mix, and a$6 million decrease in amortization expense. Safety Services EBITDA as a percentage of net revenues for the three months endedJune 30, 2021 and 2020 was approximately 14.3% and 13.2%, respectively. This improvement is primarily related to the higher volume and improved operating profitability described above.
Specialty Services
Specialty Services net revenues for the three months endedJune 30, 2021 increased by$66 million or 18.9% compared to the same period in the prior year. The increase was primarily driven by higher demand and timing for fabrication and specialty contracting services during the second quarter of 2021, resulting from general improvements in market conditions compared to the prior year, which was negatively impacted by the COVID-19 pandemic. These increases were partially offset by lower volumes in infrastructure and certain utility businesses. Specialty Services operating margin for the three months endedJune 30, 2021 and 2020 was approximately 7.7% and 6.3%, respectively. The improvement was the result of increased volume, improvements in general market conditions compared to the second quarter of 2020 and decreased amortization expense of$6 million . These increases were partially offset by the downward pressure on margins caused by the impact of inflation and supply chain disruptions, which we have not been able to fully recover in the short term. Our Specialty Services EBITDA as a percentage of net revenues for the three months endedJune 30, 2021 and 2020 was approximately 13.3% and 17.8%, respectively, due to the factors discussed above and decreased income from joint venture investments of$4 million . 33 --------------------------------------------------------------------------------
Industrial Services
Industrial Services net revenues for the three months endedJune 30, 2021 decreased by$105 million or (60.7)% compared to the same period in the prior year. The sale of two Industrial Services businesses accounted for$40 million of the decline. Also driving the decline was the suppression of demand for our services due to decisions by our customers to delay and suspend projects, strategic focus on improving margin resulting from disciplined project and customer selection, and difficult market conditions. Industrial Services operating margin for the three months endedJune 30, 2021 and 2020 was approximately (11.8)% and 2.3%, respectively. The decline was primarily driven by a lower volume of projects and was partially offset by a decline in amortization expense of$6 million . Industrial Services EBITDA as a percentage of net revenues was 4.4% and 12.1% for the three months endedJune 30, 2021 and 2020, respectively, driven by the impacts of lower volumes described above. Six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 Six Months Ended June 30, Change ($ in millions) 2021 2020 $ % Net revenues$ 1,781 $ 1,747 $ 34 1.9 % Cost of revenues 1,368 1,411 (43 ) (3.0 )% Gross profit 413 336 77 22.9 % Selling, general, and administrative expenses 368 335 33 9.9 % Impairment of goodwill and intangible assets - 208 (208 ) NM Operating income (loss) 45 (207 ) 252 121.7 % Interest expense, net 29 28 1 3.6 % Loss on debt extinguishment 9 - 9 NM Investment income and other, net (9 ) (14 ) 5 35.7 % Other expense, net 29 14 15 107.1 % Income (loss) before income taxes 16 (221 ) 237 107.2 % Income tax provision (benefit) 3 (63 ) 66 104.8 % Net income (loss) $ 13$ (158 ) $ 171 108.2 % NM = Not meaningful Net revenues Net revenues for the six months endedJune 30, 2021 and 2020 were$1,781 million compared to$1,747 million for the same period in 2020, an increase of$34 million or 1.9%. The increase in net revenues was primarily driven by significant increases in both the Safety and Specialty Services segments resulting from general market recoveries. During 2020, both segments were negatively impacted by poor market conditions resulting from the COVID-19 pandemic. Additionally, during 2021, the Safety Services segment benefited from additional revenues from acquisitions completed in the previous 12 months. These increases were partially offset by a decline in the Industrial Services segment, which was impacted by the sale of two businesses that accounted for$78 million in revenue during the six months endedJune 30, 2020 and continues to be negatively impacted by decisions by our customers to delay and suspend projects during the six months endedJune 30, 2021 .
Gross profit
The following table presents our gross profit (net revenues less cost of
revenues) and gross margin (gross profit as a percentage of net revenues) for
the six months ended
Six Months Ended June 30, Change
($ in millions) 2021 2020 $ %
Gross profit $ 413 $ 336 $ 77 22.9 %
Gross margin
23.2 % 19.2 %
Our gross profit for the six months ended June 30, 2021 was $413 million ,
compared to $336 million for the same period in 2020, an increase of $77 million
or 22.9%. Gross margin was 23.2%, an increase of 400 basis points compared to
prior year primarily due to a $42 million decrease in backlog amortization
expense, which positively impacted the rate by 240 basis points. We also
divested two lower margin businesses during 2020 in our Industrial Services
segment, which contributed 90 basis points to the improvement. In addition,
higher volumes in more profitable segments and disciplined project and customer
selection drove higher gross margins. These increases were partially offset by
project delays, jobsite conditions and suppression of demand in the energy
industry.
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Operating expenses
The following table presents operating expenses and operating margin (operating income as a percentage of net revenues) for the six months endedJune 30, 2021 and 2020, respectively: Six Months Ended June 30, Change ($ in millions) 2021 2020 $ % Selling, general, and administrative expenses (excluding amortization expense)$ 308 $ 277 $ 31 11.2 % Amortization expense 60 58 2 3.4 % Impairment of goodwill and intangible assets - 208 (208 ) NM Total operating expenses$ 368 $ 543 $ (175 ) (32.2 )% Operating expenses as a percentage of net revenues 20.7 % 31.1 % Operating margin 2.5 % (11.8 )% Our operating expenses for the six months endedJune 30, 2021 were$368 million , compared to$543 million for the same period in 2020, a decrease of$175 million . Operating expenses as a percentage of net revenues were 20.7% for 2021 compared to 31.1% for 2020, improving primarily due to the$208 million impairment charge related to goodwill and intangible assets recorded in the first quarter of 2020 that did not repeat during 2021. This decline was offset by an increase of 11.2% in selling, general, and administrative expenses (excluding amortization) due to higher spending related to business process transformation projects to enhance systems and implement compliance programs related to Sarbanes-Oxley Act of 2002 and the preemptive cost reduction plan we implemented in the second quarter of 2020 to reduce expenses in response to the COVID-19 pandemic. As COVID-19 restrictions began to ease, we restored many of these costs in the fourth quarter of 2020, resulting in an increase in selling, general, and administrative expenses.
Interest expense, net
Interest expense was
Income tax provision (benefit)
The income tax expense (benefit) for the six months endedJune 30, 2021 was expense of$3 million compared to a benefit of$(63) million in the same period of the prior year. This change was driven by the fact that we had earned income for the first six months of 2021, compared to being in a loss position in the first six months of 2020 due to an impairment charge. The effective tax rate for the six months endedJune 30, 2021 was 17.0% compared to (28.5)% in the same period of 2020. The difference in the effective tax rate was driven by discrete and nondeductible permanent items, which have a greater impact on the effective tax rate when income or losses are smaller. 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 foreign earnings in jurisdictions that have higher tax rates.
Net income (loss) and EBITDA
The following table presents net income and EBITDA for the six months ended
Six Months Ended June 30, Change
($ in millions) 2021 2020 $ %
Net income (loss) $ 13 $ (158 ) $ 171 108.2 %
EBITDA 147 (49 ) 196 400.0 %
Net income (loss) as a % of Net
Revenues 0.7 % (9.0 )%
EBITDA as % of Net Revenue 8.3 % (2.8 )%
Our net income (loss) for the six months ended June 30, 2020 was $13 million
compared to $(158) million for the same period in 2020, an improvement of
$171 million . Net income (loss) as a percentage of net revenues for the six
months ended June 30, 2020 was 0.7% compared to (9.0)% for the same period in
2020. The change was principally from an impairment charge that occurred in the
first quarter of 2020 related to goodwill and intangible assets of $208 million
that did not recur, an improved gross margin rate and lower operating expenses
(discussed above). EBITDA as a percentage of net revenues for the six months
ended June 30, 2020 was 8.3% compared to (2.8)% for the same period in 2020.
Improvements in EBITDA were primarily a result of the non-recurrence of the
impairment charge of $208 million recorded in the first quarter of 2020 and an
improved gross margin rate. See the discussion and reconciliation of our
non-U.S. GAAP financial measures below.
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Operating Segment Results for the six months ended June 30, 2021 versus the six
months ended June 30, 2020
Net Revenues
Six Months Ended June 30, Change
($ in millions) 2021 2020 $ %
Safety Services $ 978 $ 795 $ 183 23.0 %
Specialty Services 736 649 87 13.4 %
Industrial Services 93 310 (217 ) (70.0 )%
Corporate and Eliminations (26 ) (7 ) (19 ) (271.4 )%
$ 1,781 $ 1,747 $ 34 1.9 %
Operating Income (Loss)
Six Months Ended June 30, Change
($ in millions) 2021 2020 $ %
Safety Services $ 97 $ 12 $ 85 708.3 %
Safety Services operating margin 9.9 % 1.5 %
Specialty Services 29 (114 ) 143 125.4 %
Specialty Services operating margin 3.9 % (17.6 )%
Industrial Services (23 ) (54 ) 31 57.4 %
Industrial Services operating margin (24.7 )% (17.4 )%
Corporate and Eliminations (58 ) (51 ) (7 ) (13.7 )%
$ 45 $ (207 ) $ 252 121.5 %
EBITDA
Six Months Ended June 30, Change
($ in millions) 2021 2020 $ %
Safety Services $ 138 $ 67 $ 71 106.0 %
Safety Services EBITDA as a % of net
revenues 14.1 % 8.4 %
Specialty Services 75 (46 ) 121 263.0 %
Specialty Services EBITDA as a % of net
revenues 10.2 % (7.1 )%
Industrial Services (3 ) (24 ) 21 87.5 % Industrial Services EBITDA as a % of net revenues (3.2 )% (7.7
)%
Corporate and Eliminations (63 ) (46 ) (17 ) (37.0 )%
$ 147 $ (49 ) $ 196 399.5 %
The following discussion breaks down the net revenues, operating income and
EBITDA by operating segment for the six months ended
Safety Services
Safety Services net revenues for the six months endedJune 30, 2021 increased by$183 million or 23.0% compared to the same period in the prior year. This increase is primarily driven by 2020 acquisitions and higher volumes from increased demand for our HVAC andLife Safety Services . Safety Services operating margin for the six months endedJune 30, 2021 and 2020 was approximately 9.9% and 1.5%, respectively. The improvement was primarily driven by an impairment charge of$34 million recorded in the first quarter of 2020 that did not recur. In addition, the improvement was driven by favorable contract mix which shifted to more inspection and service work, disciplined project and customer selection, and a decrease in amortization expense of$15 million . Safety Services EBITDA as a percentage of net revenues for the six months endedJune 30, 2021 and 2020 was approximately 14.1% and 8.4%, respectively. This improvement is primarily related improved project mix and impairment charges recorded in the first quarter of 2020 that did not recur.
Specialty Services
Specialty Services net revenues for the six months endedJune 30, 2021 increased by$87 million or 13.4% compared to the same period in the prior year. The increase was primarily driven by demand and timing for our fabrication and specialty contracting services during the six months endedJune 30, 2021 . These increases were partially offset by project deferrals and jobsite disruptions driven by unfavorable weather conditions in the first quarter of 2021. 36 -------------------------------------------------------------------------------- Specialty Services operating margin for the six months endedJune 30, 2021 and 2020 was approximately 3.9% and (17.6)%, respectively. The improvement was the result of an impairment charge of$120 million recorded in the first quarter of 2020 that did not recur, and decreased amortization expense of$13 million . Our Specialty Services EBITDA as a percentage of net revenues for the six months endedJune 30, 2021 and 2020 was approximately 10.2% and (7.1)%, respectively. This improvement is primarily related to the impairment charge recorded in the first quarter of 2020 that did not recur, partially offset by a decrease in income from joint venture investments of$5 million .
Industrial Services
Industrial Services net revenues for the six months endedJune 30, 2021 decreased by$217 million or (70.0)% compared to the same period in the prior year. The sale of two Industrial Services businesses accounted for$78 million of the decline. The revenue decline was also impacted by a suppression of demand for our services due to general market weakness, our strategic focus on improving margin resulting from disciplined project and customer selection, and a general slowing in the energy industry. Industrial Services operating margin for the six months endedJune 30, 2021 and 2020 was approximately (24.7)% and (17.4)%, respectively. The decline was primarily driven by a lower volume of projects while certain indirect costs for leases and equipment remained consistent with prior periods, partially offset by an impairment charge of$49 million recorded in the first quarter of 2020 that did not recur and decreased amortization expense of$11 million . Industrial Services EBITDA as a percentage of net revenues was (3.2)% and (7.7)% for the six months endedJune 30, 2021 and 2020, respectively. This improvement is primarily related to the impairment charge of$49 million in 2020 that did not recur, partially offset by impacts of lower volumes described above.
Non-GAAP Financial Measures (Unaudited)
We supplement our reporting of consolidated financial information determined in accordance withU.S. GAAP with EBITDA (defined below), which is a non-U.S. GAAP financial measure. 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. Management believes this measure is useful to investors since it (a) permits investors to view the Company's performance using the same tools that management uses to evaluate the Company's past performance, reportable business segments and prospects for future performance, (b) permits investors to compare the Company with its peers and (c) determines certain elements of management's incentive compensation. Specifically, 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. The Company supplements the reporting of its consolidated financial information with EBITDA. The Company believes this non-U.S. GAAP measure provides meaningful information and help investors understand the Company's financial results and assess its prospects for future performance. Consolidated EBITDA is calculated in a manner consistent with segment EBITDA, which is a measure of segment profitability. 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 following reconciliation of this non-U.S. GAAP financial measure to its most comparableU.S. GAAP financial measure and not to rely on any single financial measure to evaluate our business. The following table presents a reconciliation of net income to EBITDA for the periods indicated: Three Months Ended June 30, ($ in millions) 2021 2020 Reported net income$ 21 $ 36 Adjustments to reconcile net income to EBITDA: Interest expense, net 14
14
Income tax provision (benefit) 9 (12 ) Depreciation 20 23 Amortization 32 51 EBITDA$ 96 $ 112 37
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Six Months Ended June 30,
($ in millions) 2021 2020
Reported net income (loss) $ 13 $ (158 ) Adjustments to reconcile net income (loss) to EBITDA: Interest expense, net
29 28
Income tax provision (benefit) 3 (63 )
Depreciation 39 41
Amortization 63 103
EBITDA $ 147 $ (49 )
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 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, and prolonged impacts of COVID-19 and shelter-in-place governmental action, over which we have no control. As ofJune 30, 2021 , we had$913 million of total liquidity, comprising$686 million in cash and cash equivalents and$227 million ($300 million less outstanding letters of credit of approximately$73 million , which reduce availability) of available borrowings under our Revolving Credit Facility. During the six months endedJune 30, 2021 , we received approximately$230 million of cash proceeds from the exercise of approximately 60 million outstanding warrants, resulting in the issuance of approximately 20 million shares of common stock. During the second quarter of 2021, we completed a private offering of$350 million aggregate principal amount of 4.125% Senior Notes due 2029 (the "Senior Notes"). The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by us and certain of our existing and future domestic subsidiaries. The proceeds from the sale of the Senior Notes were used to repay all outstanding indebtedness under the term loan incurred onOctober 22, 2020 (the "2020 Term Loan"), prepay a portion of the term loan incurred onOctober 1, 2019 (the "2019 Term Loan"), pay for transaction fees and expenses, and fund general corporate purposes. In connection with the repayment of the 2020 Term Loan and partial repayment on the 2019 Term Loan, we incurred a loss on debt extinguishment of$9 million related to unamortized debt issuance costs, which was recorded within loss on debt extinguishment in the unaudited condensed consolidated statements of operations. 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. We expect to fund the acquisition of the Chubb fire and security business, anticipated to close around year-end 2021, through a combination of cash on hand, perpetual preferred equity financing, and debt financing. Our capital expenditures were approximately$34 million and$17 million in the six months endedJune 30, 2021 and 2020, respectively. The increase in capital spending is due to the reduction in capital expenditures that occurred in 2020 as a result of COVID-19, and as we return to a more normalized level of spending, capital spending has increased in the current period, and is expected to be less than 2% of net revenues annually. InDecember 2020 , our Board of Directors authorized a share repurchase program, authorizing the purchase of up to an aggregate of$100 million of shares of common stock. There were no stock repurchases during the six months endedJune 30, 2021 under the share repurchase program and approximately$70 million of repurchases remained authorized. 38 --------------------------------------------------------------------------------
Cash Flows
The following table summarizes net cash flows with respect to our operating, investing and financing activities for the periods indicated:
Six Months Ended June 30 ,
($ in millions) 2021 2020
Net cash provided by operating activities $ 19 $ 232 Net cash used in investing activities (35 ) (16 ) Net cash provided by financing activities 187 (96 )
Effect of foreign currency exchange rate change on cash
and cash equivalents 3 1 Net increase in cash and cash equivalents $ 174
$ 121 Cash, cash equivalents, and restricted cash at the end of the period
$ 689 $ 377
Net Cash Provided by Operating Activities
Net cash provided by operating activities was$19 million for the six months endedJune 30, 2021 compared to$232 million for the same period in 2020. Cash flow from operations is primarily driven by changes in the mix and timing of demand for our services and working capital needs associated with the various services we provide. Working capital is primarily affected by changes in total accounts receivable, accounts payable, accrued expenses, and contract assets and contract liabilities, all of which tend to be related and are affected by changes in the timing and volume of work performed. During 2020, the decline in volume of business due to the COVID-19 pandemic drove a significant decrease in our working capital, which generated substantial operating cash flows. During the first six months of 2021, we have begun to recover from the impacts of COVID-19 and the volume of business has expanded, driving higher working capital requirements and leading to lower operating cash flows. This is in line with historical period increases in working capital during the first six months as we move through a typical business cycle.
Net cash used in investing activities was$35 million for the six months endedJune 30, 2021 compared to$16 million for the same period in 2020. The increase in cash used in investing activities was attributable to an increase in purchases of property and equipment during the current period as we return to more normalized levels of spending after management enacted reductions to capital expenditures in response to COVID-19 during the prior year.
Net Cash Provided by Financing Activities
Net cash provided by (used in) financing activities was$187 million for the six months endedJune 30, 2021 compared to a usage of$(96) million for the same period in 2020. The increase in cash provided by financing activities was primarily due to$230 million of proceeds from the issuance of common shares in connection with the warrant exercises which occurred during the first quarter of 2021 and net proceeds from long-term debt of$32 million , which were partially offset by payments made on acquisition-related consideration.
Credit Facilities
During the second quarter of 2021, we completed a private offering of$350 million aggregate principal amount of Senior Notes, issued under an indenture, datedJune 22, 2021 (the "Indenture"). The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by us and certain existing and future domestic subsidiaries. We used the net proceeds from the sale of the Senior Notes to repay the$250 million 2020 Term Loan, prepay a portion of the 2019 Term Loan and for general corporate purposes. As ofJune 30, 2021 , we had$350 million aggregate principal amount of Senior Notes outstanding. The Indenture contains customary terms and provisions (including representations, covenants, and conditions). Certain covenants, among other things, restrict our ability to incur indebtedness, grant liens, make investments and sell assets. The Indenture also contains customary events of default, covenants and representations and warranties. Financial covenants include: a senior secured leverage ratio no greater than 3.5 to 1.0, a total net leverage ratio of 3.0 to 1.0, and a fixed charge coverage ratio of 2.0 to 1.0. The Senior Notes will mature onJuly 15, 2029 , unless redeemed earlier, and bear interest at a rate of 4.125% per year until maturity. Interest will be payable in cash, semi-annually in arrears, onJanuary 15 andJuly 15 of each year, beginning onJanuary 15, 2022 . The Senior Notes are subject to redemption in whole or in part at any time on or afterJuly 15, 2024 at the redemption prices set forth in the Indenture. In addition, beforeJuly 15, 2024 , up to 35% of the aggregate principal amount of the Senior Notes may be redeemed with the net proceeds of certain equity offerings at the redemption price set forth in the Indenture, subject to certain conditions. Further, all or a portion of the Senior Notes may be redeemed at any time prior toJuly 15, 2024 at a price equal to 100% of the principal amount, plus a "make-whole" premium and accrued interest, if any, to the date of redemption. 39 -------------------------------------------------------------------------------- As ofJune 30, 2021 , we have a credit agreement (the "Credit Agreement") which provides for: (1) a term loan facility, pursuant to which we incurred the$1,200 million 2019 Term Loan used to fund a part of the cash portion of the purchase price in the APi Acquisition, and (2) a$300 million five-year senior secured revolving credit facility (the "Revolving Credit Facility") of which up to$150 million can be used for the issuance of letters of credit. As ofJune 30, 2021 , we had$1,140 million of indebtedness outstanding on the 2019 Term Loan and had no amounts outstanding under the Revolving Credit Facility, under which$227 million was available after giving effect to$73 million of outstanding letters of credit, which reduce availability.
One of our Canadian subsidiaries had a
The Credit Agreement contains customary affirmative and negative covenants, including limitations on additional indebtedness, dividends and other distributions, entry into new lines of business, use of loan proceeds, capital expenditures, restricted payments, restrictions on liens on assets, transactions with affiliates, and dispositions. To the extent total outstanding borrowings under the Revolving Credit Facility (excluding undrawn letters of credit up to$40 million ) is greater than 30% of the total commitment amount of the Revolving Credit Facility, our first lien net leverage ratio shall not exceed: (i) 4.50 to 1.00 for each fiscal quarter ending in 2020; (ii) 4.00 to 1.00 for each fiscal quarter ending in 2021; and (iii) 3.75 to 1.00 for each fiscal quarter ending thereafter. Our first lien net leverage ratio as ofJune 30, 2021 was 1.13:1.00. We were in compliance with all covenants contained in the Indenture and Credit Agreement as ofJune 30, 2021 and, in the case of the Credit Agreement, as ofDecember 31, 2020 . 40
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