Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following is a discussion and year-to-year comparisons of APG’s financial condition and results of operations for the years ended December 31, 2020 and 2019, which for 2019 includes the results of operations for APi Group, Inc. (“APi Group”) for the period following the APi Acquisition (October 1, 2019 through December 31, 2019)(“2019 Successor period”) and for APi Group for the nine months ended September 30, 2019 (“2019 Predecessor period”).
For a discussion of the results of operations and financial condition of APi Group for the year ended December 31, 2018 and year-to-year comparisons between 2019 and 2018, please refer to “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Form S-4, effective as of May 1, 2020, which item is incorporated herein by reference.
Some of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” and “Cautionary Note Regarding Forward Looking Statements” sections of this Annual Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
APG is a market-leading business services provider of safety, specialty and industrial services in over 200 locations, primarily in North America and with an expanding platform in Europe. APG provides statutorily mandated and other contracted services to a strong base of long-standing customers across industries. We have a winning leadership culture driven by entrepreneurial business leaders to deliver innovative solutions for our customers.
We focus on growing our recurring 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 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.
We were incorporated on September 18, 2017 with limited liability under the laws of the British Virgin Islands under the name J2 Acquisition Limited (“J2”). J2 was created for the purpose of acquiring a target company or business. On October 1, 2019, we completed our acquisition of APi Group (the “APi Acquisition”) and changed our name to APi Group Corporation in connection with the APi Acquisition.
Our financial statement presentation for the APi Group financial information as of and for the periods presented prior to the APi Acquisition date are labeled “Predecessor”. Our financial statements, including APi Group from the APi Acquisition date, are labeled “Successor”.
Certain Factors and Trends Affecting APG’s Results of Operations
Summary of Principal Acquisitions
During 2020 we completed multiple acquisitions for an aggregate cash purchase price of $319 million, net of cash acquired. These acquisitions were primarily in the Safety Services segment. The largest of these acquisitions was SKG, a European market-leading provider of commercial safety services, with operations primarily in the Netherlands, Belgium, France, Sweden, Norway, and the United Kingdom. See Note 4 – “Business Combinations” for further details.
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 oil, gas 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
33
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.
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 in March 2020. To date, the services we provide have been deemed to be essential in most instances. However, as the COVID-19 situation has continued to evolve, we have seen various disruptions in our work due to the domino effects of the various local, state and national jurisdictional 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. 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 are not successful in being 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.
New or extended shelter-in-place orders or closures, or 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 which could negatively impact our revenue, cause harm to our reputation and have a material adverse impact on our operating results.
As we have continued to monitor our activity, revenue period over period has been negatively impacted by the level of shelter in-place orders and outbreaks of COVID-19, which has caused certain customers to temporarily halt work to put in COVID-19 working protocols and other customers have delayed or cancelled projects. During the year ended December 31, 2020, all of our segments saw volume declines relative to the same period of 2019. Generally, during the latter half of 2020, 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. There can be no assurance that this trend, which would allow us to recover prior year volume levels, 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 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, these cost reductions have eased and costs were reinstated.
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 of our information technology systems, unauthorized access to or loss of confidential information, or legal claims resulting from our 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.
Description of Key Line Items
Net Revenues
Revenue is generated from the sale of various types of construction services, inspections, 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 materials pricing.
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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 construction 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 expenses consist primarily of compensation and associated costs for sales and marketing personnel, costs of advertising, trade shows and corporate marketing. General and administrative expenses consist primarily of compensation and associated costs for executive management, personnel, facility leases, administrative expenses associated with accounting, finance, legal, information systems, leadership development, human resources and risk management and overhead associated with these functions. General and administrative expenses also include outside professional fees and other corporate expenses.
Amortization of Intangible Assets
Amortization expense reflects the charges incurred to amortize our finite-lived identifiable intangible assets, such as customer relationships, and trade names which are amortized over their estimated useful lives.
Impairment of Goodwill, Intangibles and Long-Lived Assets
We do not amortize goodwill, rather, goodwill is tested for impairment annually, or more frequently as events and circumstances change. Expenses for impairment charges related to the write-down of goodwill balances and identifiable intangible assets balances are recorded to the extent their carrying values exceed their estimated fair values. Expenses for impairment charges related to the write-down of other long-lived assets (which includes amortizable intangibles) are recorded when triggering events indicate their carrying values may exceed their estimated fair values.
Results of Operations
The following is a discussion of APG’s financial condition and results of operations for the years ended December 31, 2020 and 2019.
35
The following financial information has been extracted from the audited consolidated financial statements of APG included in this Annual Report.
Years Ended December 31,
Period From
January 1, 2019
Through
September 30,
2020
2019
2019
($ in millions)
(Successor)
(Successor)
(Predecessor)
Net revenues
$
3,587
$
985
$
3,107
Cost of revenues
2,831
787
2,503
Gross profit
756
198
604
Selling, general, and administrative expenses
725
359
490
Impairment of goodwill, intangibles and long-lived assets
197
—
12
Operating income (loss)
(166
)
(161
)
102
Interest expense, net
52
15
20
Investment income and other, net
(34
)
(25
)
(11
)
Other expense (income), net
18
(10
)
9
Income (loss) before income taxes
(184
)
(151
)
93
Income tax provision (benefit)
(31
)
2
7
Net income (loss)
$
(153
)
$
(153
)
$
86
Year ended December 31, 2020 versus Year Ended December 31, 2019
APG’s results of operations for the year ended December 31, 2019 includes the results of operations of APi Group from October 1, 2019 (the date of the APi Acquisition) through December 31, 2019. As a result, for the year ended December 31, 2020, the changes in our results of operations, including consolidated and segment operating results, for the year ended December 31, 2020 compared to the year ended December 31, 2019 in all cases were a result of the APi Acquisition and the comparison of a full year of operations versus three months of operations. Activity prior to the APi Acquisition was the preparation for the acquisition of a target company. As a result, our activity prior to the APi Acquisition was limited to the evaluation of business combination candidates and we did not generate any operating revenues until the closing of the APi Acquisition. During the period from inception until the APi Acquisition, we generated investment income from investment of our cash on hand in treasury securities.
Net revenues
Net revenues for the year ended December 31, 2020 were $3,587 million compared to $985 million for the 2019 Successor period, and $3,107 million in the 2019 Predecessor period. Net revenues in 2020 were negatively impacted by the sale of two Industrial Services businesses that accounted for $91 million of revenue in 2020 compared to $60 million for the 2019 Successor period and $230 for the 2019 Predecessor period, the negative impacts of COVID-19 resulting from access restrictions to buildings and project sites, and the delay or cancellation of projects by our customers due to the uncertainty and impact of COVID-19 on their businesses. This was combined with focused project selection, which led to a decrease in the volume of projects.
Gross profit
Years Ended December 31,
Period From
January 1, 2019
Through
September 30,
2020
2019
2019
($ in millions)
(Successor)
(Successor)
(Predecessor)
Gross profit
$
756
$
198
$
604
Gross margin
21.1
%
20.1
%
19.4
%
Gross margin for the year ended December 31, 2020 was 21.1% compared to 20.1% for the 2019 Successor period, and 19.4% in the 2019 Predecessor period. Changes in 2020 were the result of continued focus on project selection, targeted price improvements, increased efficiencies on our projects, better project management, jobsite conditions, and the mix of services provided. We also divested two lower margin businesses during 2020 in our Industrial Services segment which contributed to the increase.
36
Operating expenses
Years Ended December 31,
Period From
January 1, 2019
Through
September 30,
2020
2019
2019
($ in millions)
(Successor)
(Successor)
(Predecessor)
Selling, general, and administrative expenses (excluding amortization expense)
$
612
$
330
$
464
Amortization expense
113
29
26
Impairment of goodwill, intangibles and long-lived assets
197
—
12
Total operating expenses
$
922
$
359
$
502
Operating expenses as a percentage of net revenues
25.7
%
36.4
%
16.2
%
Operating expenses of $922 million for the year ended December 31, 2020 represented 25.7% of net revenues for the year ended December 31, 2020 compared to 36.4% in the 2019 Successor period, and 16.2% in the 2019 Predecessor period. The changes in operating expenses are attributable to various factors including impairment expense of $197 million in 2020 as a result of negative impacts from COVID-19 on operations, including supplier, vendor, and customer base. Other factors included increases in amortization expense due to the purchase accounting adjustments recorded in connection with the APi Acquisition and other acquisitions, and increases related to contingent consideration and compensation. These were partially offset by a decrease in share-based compensation expense as a one-time charge of $155 million was recognized in the 2019 Successor period related to the fair value of the Preferred Stock Annual Dividend feature. In addition, the composition of selling, general, and administrative expenses has changed due to our transition to a public company. We have recognized increases in costs related to business process transformation, compensation, public company registration, listing and compliance, professional management fees, and insurance. These increases have been partially offset by elimination of prior ownership costs and reductions from our preemptive cost reduction plan enacted in response to COVID-19, which were largely temporary and designed to flex as our businesses are impacted by COVID-19.
I nterest expense, net
Interest expense was $52 million for the year ended December 31, 2020 compared to $15 million for the 2019 Successor period and $20 million in the 2019 Predecessor period . The increase in interest expense was primarily due to an increase in average outstanding borrowings and higher average borrowing costs reflecting the APi Acquisition in which APi Group’s previous debt was settled and replaced by borrowings under our Credit Agreement, and a full year of higher average outstanding borrowings.
Investment income and other, net
Investment income and other, net was $34 million for the year ended December 31, 2020 compared to $25 million for the 2019 Successor period and $11 million in the 2019 Predecessor period . When considering the periods presented, investment income and other remained consistent. We recognized higher income related to our joint venture arrangements and COVID-19 government relief funds at our Canadian subsidiaries during 2020; however this was partially offset by a reduction in investment income that had occurred in 2019 prior to the APi Acquisition.
Income tax provision (benefit)
The effective tax rate for the year ended December 31, 2020 was 16.8%, reflecting discrete and non-recurring tax items compared to an effective tax rate of (1.3)% for the 2019 Successor period which also included non-recurring items primarily related to the APi Acquisition. The income tax benefit of $31 million for the year ended December 31, 2020 was related to the impairment of goodwill and intangible assets. During 2020, APi Group elected to defer the payment of $39 million of payroll taxes under the Coronavirus Aid, Relief, and Economic Security Act (“ CA RES Act”). Under this election $19 million will be payable on December 31, 2021, with the remainder payable on December 31, 2022.
Prior to the APi Acquisition, APi Group had elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code for federal tax purposes. As a result, APi Group’s income was not subject to U.S. federal income taxes or state income taxes in those states where the S Corporation status is recognized. Accordingly, no provision or liability for federal or state income tax has been provided in predecessor consolidated financial statements except for those taxing jurisdictions where the S Corporation status is not recognized. The provision for income tax in APi Group’s historical periods consists of these taxes. However, in prior periods, APi Group made significant distributions to its shareholders based on its S Corporation earnings. These distributions will no longer be necessary.
In connection with the APi Acquisition, APi Group’s S Corporation status was terminated and APG is now treated as a C Corporation under Subchapter C of the Internal Revenue Code and will be part of the consolidated tax group of the Company. The
37
Company’s domestication and the revocation of APi Group’s S Corporation election had a material impact on our consolidated results of operations, financial condition and cash flows. Our effective income tax rate for 2020 and 2019 and future periods increased as compared to prior periods and our net income has decrease d in 2020 and 2019 and is expected to decrease in future periods due to the application of both federal and state taxes against pre-tax income .
Net Income and EBITDA
Years Ended December 31,
Period From
January 1, 2019
Through
September 30,
2020
2019
2019
($ in millions)
(Successor)
(Successor)
(Predecessor)
Net income (loss)
$
(153
)
$
(153
)
$
86
EBITDA
131
(67
)
191
Net income as % of Net Revenues
(4.3
)%
(15.5
)%
2.8
%
EBITDA as % of Net Revenues
3.7
%
(6.8
)%
6.1
%
Net income as a percentage of net revenues for the year ended December 31, 2020 was (4.3)% compared to (15.5)% for the 2019 Successor period, and 2.8% in the 2019 Predecessor period. The change in 2020 was primarily attributable to changes in gross profit, operating expenses, and income tax, discussed above. EBITDA as a percentage of net revenues for the year ended December 31, 2020 was 3.7% compared to (6.8)% for the 2019 Successor period, and 6.1% in the 2019 Predecessor period. During 2020, improvements in EBITDA were largely due to change in mix of work, increased efficiencies in the execution of our services, income from our joint venture investments, and improved project selection throughout our segments, which was most pronounced in our Industrial Services segment. See the discussion of our non-U.S. GAAP financial measures below.
Operating Segment Results
Net Revenues
Years Ended
December 31,
Period from January 1, 2019 Through September 30,
2020
2019
2019
($ in millions)
(Successor)
(Successor)
(Predecessor)
Safety Services
$
1,639
$
435
$
1,342
Specialty Services
1,401
386
1,107
Industrial Services
563
167
670
Corporate and Eliminations
(16
)
(3
)
(12
)
$
3,587
$
985
$
3,107
38
Operating Income (Loss)
Years Ended
December 31,
Period from January 1, 2019 Through September 30,
2020
2019
2019
($ in millions)
(Successor)
(Successor)
(Predecessor)
Safety Services
$
8
$
34
$
161
Safety Services operating margin
0.5
%
7.8
%
12.0
%
Specialty Services
(22
)
19
60
Specialty Services operating margin
(1.6
)%
4.9
%
5.4
%
Industrial Services
(34
)
(5
)
—
Industrial Services operating margin
(6.0
)%
(3.0
)%
0.0
%
Corporate and Eliminations
(118
)
(209
)
(119
)
$
(166
)
$
(161
)
$
102
EBITDA
Years Ended
December 31,
Period from January 1, 2019 Through September 30,
2020
2019
2019
($ in millions)
(Successor)
(Successor)
(Predecessor)
Safety Services
$
140
$
59
$
170
Safety Services EBITDA as a % of Net Revenues
8.5
%
13.6
%
12.7
%
Specialty Services
95
50
111
Specialty Services EBITDA as a % of Net Revenues
6.8
%
13.0
%
10.0
%
Industrial Services
2
9
21
Industrial Services EBITDA as a % of Net Revenues
0.4
%
5.4
%
3.1
%
Corporate and Eliminations
(106
)
(185
)
(111
)
$
131
$
(67
)
$
191
APG’s results of operations for the year ended December 31, 2020 include a full year of operations compared to the year ended December 31, 2019 which includes the results of operations of APi Group from October 1, 2019 (the date of the APi Acquisition) through December 31, 2019. As a result, for the year ended December 31, 2020, the changes in our segment operating results compared to prior year are primarily a result of the APi Acquisition and comparing three months of operations to a full year of operations.
The following discussion breaks down the net revenues, operating income and EBITDA by operating segment for the year ended December 31, 2020 (Successor) compared to the 2019 Successor period ended December 31, 2019 and the 2019 Predecessor period.
Safety Services
Safety Services net revenues for the year ended December 31, 2020 was $1,639 million compared to $435 million during the 2019 Successor period and $1,342 million for the 2019 Predecessor period. This change in net revenues is primarily due to the negative impacts of COVID-19 in addition to the timing of larger contract revenues during the prior year periods.
Safety Services operating margin for the year ended December 31, 2020 was 0.5% compared to 7.8% during the 2019 Successor period and 12.0% for the 2019 Predecessor period. The fluctuations were primarily driven by impairment charges of $83 million and intangible asset amortization expense of $113 million in the year ended December 31, 2020. Safety Services EBITDA as a percentage of net revenues for the year ended December 31, 2020 was 8.5% compared to 13.6% during the 2019 Successor period and 12.7% for the 2019 Predecessor period. The change was primarily driven by impairment charges.
39
Specialty Services
Specialty Services net revenues for the year ended December 31, 2020 was $1,401 million compared to $386 million during the 2019 Successor period and $1,107 million in the 2019 Predecessor period. The decline was primarily driven by negative impacts of COVID-19 and the timing of projects.
Specialty Services operating margin for the year ended December 31, 2020 was (1.6)% compared to 4.9% during the 2019 Successor period and 5.4% for the 2019 Predecessor period. The decrease was driven by impairment charges of $52 million, and intangible asset amortization expense of $55 million in the year ended December 31, 2020. Specialty Services EBITDA as a percentage of net revenues for the year ended December 31, 2020 was 6.8% compared to 13.0% during the 2019 Successor period and 10.0% for the 2019 Predecessor period. Specialty Services EBITDA was primarily influenced by impairment charges, partially offset by our focus on project selection, pricing improvements and stronger contribution from our joint venture investments.
Industrial Services
Industrial Services net revenues for the year ended December 31, 2020 was $563 million compared to $167 million during the 2019 Successor period and $670 million for the 2019 Predecessor period. This decrease was primarily due to the sale of two businesses in the first quarter of 2020 that accounted for $91 million, $60 million, and $230 million of revenue for the respective periods above. Additionally, the Industrial Services segment experienced decreased volume of projects as a result of our strategic focus on improving margins as opposed to growing net revenues. Net revenues were also negatively impacted by suppression of demand for our services due to COVID-19 and changes in oil prices.
Industrial Services operating margin for the year ended December 31, 2020 was (6.0)% compared to (3.0)% during the 2019 Successor period and 0% for the 2019 Predecessor period. The fluctuations were primarily driven by impairment charges of $62 million in the year ended December 31, 2020 and higher intangible asset amortization expense of $10 million. This was partially offset by productivity increases due to better project and customer selection, project management and favorable jobsite conditions. Industrial Services EBITDA as a percentage of net revenues for the year ended December 31, 2020 was 0.4% compared to 5.4% during the 2019 Successor period and 3.1% for the 2019 Predecessor period. Specialty services EBITDA was primarily influenced by impairment charges, partially offset by continued productivity increases due to improved project and customer selection, project management and favorable jobsite conditions.
Non-GAAP Financial Measures
We supplement our reporting of consolidated financial information determined in accordance with U.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. The Company uses EBITDA to evaluate its performance, both internally and as compared with its peers, because it excludes certain items that may not be indicative of the Company’s core operating results. 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 with U.S. GAAP. The principal limitation of this non-U.S. GAAP financial measure is that it excludes significant expenses that are required by U.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
40
encouraged to review the following reconciliation of this non-U.S. GAAP financial measure to its most comparable U.S. GAAP financial measure and not to rely on any single financial measure to evaluate our business.
The following tables present a reconciliation of net income (loss) to EBITDA for the periods indicated:
Years Ended
December 31,
Period from January 1, 2019 Through September 30,
2020
2019
2019
($ in millions)
(Successor)
(Successor)
(Predecessor)
Reported net income (loss)
$
(153
)
$
(153
)
$
86
Adjustments to reconcile net income (loss) to EBITDA:
Interest expense, net
52
15
20
Income tax provision (benefit)
(31
)
2
7
Depreciation
81
18
52
Amortization
182
51
26
EBITDA
$
131
$
(67
)
$
191
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. 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 of December 31, 2020, we had $745 million of total liquidity, comprising $515 million in cash and cash equivalents and $230 million ($300 million less outstanding letters of credit of approximately $70 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 late March 2020, we drew down $200 million under our Revolving Credit Facility. Subsequently, in April 2020, we repaid the full amount borrowed on the Revolving Credit Facility. As of December 31, 2020, we had $1.2 billion of indebtedness outstanding under the term loan on October 1, 2019 (the “2019 Term Loan”), and no amounts outstanding under the $300 million Revolving Credit Facility. As of December 31, 2020, $230 million was available after giving effect to $70 million of outstanding letters of credit, which reduce availability.
On October 22, 2020, we entered into an incremental $250 million term loan under the Credit Agreement (the "2020 Term Loan"), which we used to replenish balance sheet cash utilized for the acquisitions and general business purposes.
We also 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 deferred consideration due to selling shareholders, including tax payments in connection therewith, for working capital and general corporate purposes, including capital expenditures and debt service, as well as to identify, execute and integrate strategic acquisitions and business transformation. Our capital expenditures were approximately $38 million, $11 million, and $53 million in the years ended December 31, 2020, the 2019 Successor period and the 2019 Predecessor period, respectively.
Our capital expenditures were decreased in 2020 due to the impacts of COVID 19 and may return to pre-COVID levels in future periods which we expect to be less than 2% of net revenues.
Subsequent to year end, the Company has received approximately $230 million of cash proceeds resulting from the exercise of approximately 60 million outstanding warrants, resulting in the issuance of approximately 20 million shares of Common Stock. Refer to Note 21 – “Subsequent Events” for further information.
In December 2020, APi Group Corporation announced that the Company’s Board of Directors authorized the SRP, authorizing the purchase of up to an aggregate of $100 million of shares of the Company’s Common Stock. During the fourth quarter of 2020 we
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repurchased 1,742, 284 shares for approximately $30 million under the SRP, leaving approximately $70 million of authorized repurchases.
Cash Flows
The following table summarizes net cash flows with respect to APG’s operating, investing and financing activities for the periods indicated:
Years Ended December 31,
Period from January 1, 2019 Through September 30,
2020
2019
2019
($ in millions)
(Successor)
(Successor)
(Predecessor)
Net cash provided by operating activities
$
496
$
150
$
145
Net cash used in investing activities
(340
)
(1,728
)
(51
)
Net cash provided by (used in) financing activities
99
1,398
(10
)
Effect of foreign currency exchange rate change on cash
and cash equivalents
4
(1
)
—
Net increase (decrease) in cash and cash equivalents
$
259
$
(181
)
$
84
Cash and cash equivalents at the end of the period
$
515
$
256
$
138
Cash flow information for the year ended December 31, 2019 includes cash flows of APi Group from and after the closing of the APi Acquisition (October 1, 2019).
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $496 million in the year ended December 31, 2020 compared to $150 million in the 2019 Successor period and $145 million for the 2019 Predecessor period. 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. The increase in cash flow provided by operating activities in 2020 compared to 2019 was primarily driven by changes in working capital levels as the declines in net revenues have resulted in reductions in our accounts receivable and other fluctuations in our working capital balances, which include deferrals of payroll withholding taxes.
Net Cash Used in Investing Activities
Net cash used in investing activities was $340 million in the year ended December 31, 2020 compared to $1.7 billion in the 2019 Successor period and $51 million for the 2019 Predecessor period. The cash used in investing activities for the year ended December 31, 2020 was primarily attributed to payments of $319 million of cash consideration in connection with acquisitions, and $38 million of capital expenditures. The cash used in investing activities for the 2019 Successor period was primarily attributed to payments to acquire APi Group of $2.6 billion, partially offset by $816 million from the proceeds from the sale of marketable securities.
Net Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was $99 million in the year ended December 31, 2020 compared to $1.4 billion in the 2019 Successor period and net cash used in financing activities of $10 million for the 2019 Predecessor period. The cash provided by financing activities for the year ended December 31, 2020 was primarily driven by proceeds from the issuance of additional debt of $250 million, partially offset by cash payments of $93 million for acquisition-related consideration and $30 million for the repurchase
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of Common Stock . The cash provided by financing activities for the 2019 Successor period was primarily driv en by proceeds from the issuance of debt of $1.2 billion and proceeds from the issuance of shares and warrant exercises of $210 million.
Credit Facilities
In connection with the closing of the APi Acquisition, we entered into a Credit Agreement by and among APi Group DE, Inc., our wholly-owned subsidiary, as borrower (the “Borrower”), APG, as a guarantor, the subsidiary guarantors from time to time party thereto, the lenders from time to time party thereto, and Citibank, N.A., as administrative agent and as collateral agent (the “Credit Agreement”), which provides for (1) a term loan facility, pursuant to which we incurred (a) a $1.2 billion seven-year senior secured term loan (the “2019 Term Loan”) on October 1, 2019, which we used to fund a part of the cash portion of the purchase price in the APi Acquisition and (b) an incremental $250 million term loan (the “2020 Term Loan”) on October 22, 2020, which we used to replenish balance sheet cash utilized for acquisitions, including the SKG Acquisition, and to pay fees and expenses related to such acquisitions and the financing ; 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. At December 31, 2020 and 2019, the Company had no amounts outstanding under the Credit Facilities and $230 million was available after giving effect to $70 million of outstanding letters of credit.
The interest rate applicable to the 2019 Term Loan and 2020 Term Loan is, at our option, either (1) a base rate plus an applicable margin equal to 1.50% for the 2019 Term Loan and 1.75% for the 2020 Term Loan or (2) a Eurocurrency rate (adjusted for statutory reserves) plus an applicable margin equal to 2.50% for the 2019 Term Loan and 2.75% for the 2020 Term Loan. At the option of the Borrower, the interest period for a 2019 Term Loan or 2020 Term Loan that is a Eurocurrency rate loan may be one, two, three or six months (or twelve months or any other period agreed with the applicable lenders under the Term Loan). Interest on the 2019 Term Loan and 2020 Term Loan is payable (1) with respect to a Eurocurrency rate loan, at the end of each interest period except that, if the interest period exceeds three months, interest is payable every three months and (2) with respect to a base rate loan, on the last business day of each March, June, September and December. Principal payments on the 2019 Term Loan commenced the first quarter ending on March 31, 2020 and will be made in quarterly installments on the last day of each fiscal quarter, for a total annual amount equal to 1.00% of the initial aggregate principal amount of the 2019 Term Loan. Principal payments on the 2020 Term Loan will commence with the first quarter ending on March 31, 2021 and will be made in quarterly installments on the last day of each fiscal quarter, for a total annual amount equal to 1.00% of the initial aggregate principal amount of the 2020 Term Loan. The 2019 Term Loan matures on October 1, 2026 and the 2020 Term Loan matures on October 1, 2026.
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, APG’s first lien net leverage ratio shall not exceed (i) 4.00 to 1.00 for each fiscal quarter ending in 2021 and (ii) 3.75 to 1.00 for each fiscal quarter ending thereafter. Our first lien net leverage ratio as of December 31, 2020 was 2.38:1.00.
In addition, the Credit Agreement contains customary provisions relating to events of default that include, among others, non-payment of principal, interest or fees, breach of covenants, inaccuracy of representations and warranties, failure to make payment on, or defaults with respect to, certain other indebtedness having an aggregate principal amount in excess of $75 million, bankruptcy and insolvency events, judgments in excess of $75 million or that could reasonably be expected to have a material adverse effect, change of control and certain events relating to Employment Retirement Income Security Act (“ERISA”) plans. Upon the occurrence of an event of default, and after the expiration of any applicable grace period, payment of any outstanding loans under the Credit Agreement may be accelerated and the lenders could foreclose on their security interests in the assets of the Borrower and the Guarantors.
We were in compliance with all covenants contained in the Credit Agreement as of December 31, 2020 and 2019.
Effective October 31, 2019, we entered into a $720 million of notional value five-year interest rate swap, exchanging one-month LIBOR for a fixed rate of 1.62% per annum, plus 250 basis points. Accordingly, our fixed interest rate per annum on the swapped $720 million of the 2019 Term Loan debt is 4.12%. As of December 31, 2020, the remaining $468 million of the 2019 Term Loan debt was bearing interest of 2.65% per annum based on one-month LIBOR plus 250 basis points. As of December 31, 2020, the $250 million 2020 Term Loan was bearing interest of 2.90% per annum based on one-month LIBOR plus 275 basis points.
One of APG’s Canadian subsidiaries had a $20 million unsecured line of credit agreement with a variable interest rate based upon the prime rate. There were no amounts outstanding under the line of credit at December 31, 2020 and the line of credit was closed in January 2021.
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Recently Issued Accounting Pronouncements
We review new accounting standards to determine the expected impact, if any, of the adoption of such standards will have on our financial position and/or results of operations . See Note 3 – “Recent Accounting Pronouncements” for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations or liquidity.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:
Revenue Recognition from Contracts with Customers
We recognize revenue from contracts with customers under Accounting Standards Codification (“ASC”) Topic 606 (“Topic 606”) . ASC 606 aligns revenue recognition with the timing of when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This core principle is achieved through the application of the following five step model: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to performance obligations in the contract, and (5) recognize revenue as performance obligations are satisfied.
We recognize revenue at the time the related performance obligation is satisfied by transferring a promised good or service to our customers. A good or service is considered to be transferred when the customer obtains control. We can transfer control of a good or service and satisfy our performance obligations either over time or at a point in time. We transfer control of a good or service over time and, therefore, satisfy a performance obligation and recognize revenue over time, if one of the following three criteria are met: (a) the customer simultaneously receives and consumes the benefits provided as we perform, (b) our performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (c) our performance does not create an asset with an alternative use, and we have an enforceable right to payment for performance completed to date.
For our performance obligations satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of that performance obligation. The selection of the method to measure progress towards completion can be either an input or output method and requires judgment based on the nature of the goods or services to be provided.
For our construction contracts, revenue is generally recognized over time as our performance creates or enhances an asset that the customer controls as it is created or enhanced. Our fixed price construction projects generally use a cost-to-cost input method to measure progress towards completion of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Costs incurred include direct materials, labor and subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. These contract costs are included in the results of operations under cost of sales. Labor costs are considered to be incurred as the work is performed. Subcontractor labor is recognized as work is performed.
Revenue from time and material construction contracts is recognized as the services are provided and is equal to the sum of the contract costs incurred plus an agreed upon markup. Revenue earned from distribution contracts is recognized upon shipment or performance of the service.
We have a right to payment for performance completed to date at any time throughout our performance of a contract, including in the event of a cancellation, and as such, revenue is recognized over time. These performance obligations use the cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on the contracts.
Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised from time to time on an on-going basis. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident.
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The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our long-term construction projects when revenues recognized under the cost-to-cost measure of progress exceed amounts invoiced to our customers. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. In addition, many of our time and materials arrangements, as well as our contracts to perform turnaround services within the Specialty Services segment, are billed in arrears pursuant to contract terms that are standard within the industry, and resulting in contract assets and/or unbilled receivables being recorded, as revenue is recognized in advance of billings. Contract assets are generally classified as current assets within the consolidated balanc e sheets.
Contract liabilities from our long-term construction contracts arise when amounts invoiced to our customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from our customers on certain contracts. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when we expect to recognize such revenue. The long-term portion of contract liabilities is included in other non-current liabilities in the consolidated balance sheets.
Business Combinations
The determination of the fair value of net assets acquired in a business combination and estimates of acquisition-related contingent consideration requires estimates and judgments of future cash flow expectations for the acquired business and the related identifiable tangible and intangible assets. Fair values of net assets acquired are calculated using standard valuation techniques. Fair values of contingent consideration liabilities are estimated using an income approach such as discounted cash flows or option pricing models. We allocate purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions consistent with those of a market participant, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, future expected cash flows from backlog, customer relationships, and trade names; and discount rates. In estimating the future cash flows, management considers demand, competition and other economic factors. Management’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates, which could result in impairment charges in the future.
Due to the time required to obtain the necessary data for each acquisition, U.S. GAAP provides a “measurement period” of up to one year from the date of acquisition in which to finalize these fair value determinations. During the measurement period, preliminary fair value estimates may be revised if new information is obtained about the facts and circumstances existing as of the date of acquisition, or based on the final net assets and working capital of the acquired business, as prescribed in the applicable purchase agreement. Such adjustments may result in the recognition, or adjust the fair values, of acquisition-related assets and liabilities and/or consideration paid, and the related depreciation and amortization expense, which are referred to as “measurement period adjustments.”
Significant changes in the assumptions or estimates used in the underlying valuations, including the expected profitability or cash flows of an acquired business, could materially affect our operating results in the period such changes are recognized.
Insurance Liabilities
We use high retention insurance programs to manage our risk for health, workers’ compensation, general liability and auto insurance. Accrued liabilities and other non-current liabilities include our best estimates of amounts expected to be incurred for these losses. The estimates are based on claim reports provided by the insurance carrier and actuarial analyses provided by third-party actuarial specialists, and management’s best estimates including the maximum premium for a policy period. The amounts the Company will ultimately incur could differ in the near term from the estimated amounts accrued.
The Periodic Assessment of Potential Impairment of Goodwill
Goodwill represents the excess of cost over the fair market value of net tangible and identifiable intangible assets of acquired businesses. Goodwill is not amortized but instead is annually tested for impairment, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. We have recorded goodwill in connection with our historical acquisitions of businesses. Upon acquisition, these businesses were either combined into one of the existing components or managed on a stand-alone basis as an individual component.
The components are aligned to one of our three reportable segments, Safety Services, Specialty Services, or Industrial Services. Goodwill is required to be evaluated for impairment at the reporting unit level, which represents the operating segment level or one level below the operating segment level for which discrete financial information is available.
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We identify reporting units by assessing whether components have discrete financial information available, engage in business activities, and have a segment manager regularly review the component’s operating results. If two or more components are deemed economically similar, those components are aggregated into one reporting unit when performing the annual goodwill impairment test.
We perform our annual goodwill impairment assessment on October 1 each fiscal year, or more frequently if events or circumstances arise which indicate that goodwill may be impaired. Qualitative indicators that may trigger the need for annual or interim quantitative impairment testing include, among other things, deterioration in macroeconomic conditions, declining financial performance, deterioration in the operational environment, or an expectation of selling or disposing of a portion of a reporting unit. Additionally, a significant change in business climate, a loss of a significant customer, increased competition, a sustained decrease in share price, or a decrease in estimated fair value below book value may trigger the need for interim impairment testing of goodwill associated with one or more reporting units.
While our services have largely been deemed essential, we did experience negative impacts from COVID-19 on our operations including impacts from our suppliers, other vendors, and customer base. In addition to the impacts of COVID-19, we were also impacted by a significant decline in demand and volatility in oil prices as some of our services involve work within the oil and gas industry. As a result of these factors and the significant decline in our market capitalization during the first quarter of 2020, we concluded that an impairment triggering event had occurred for all of our reporting units and performed impairment tests for our goodwill and recoverability tests for our long-lived assets, which primarily include finite-lived intangible assets, property and equipment and right of use lease assets. During 2020, we recorded an impairment charge of $197 (comprised of $193 at businesses with ongoing operations and $4 at a business that was divested during 2020). See Note 7 – “Goodwill and Intangibles” for further information.
For the year ended December 31, 2020, we performed our annual goodwill impairment assessment as of October 1, 2020. We performed a qualitative assessment for our goodwill by examining relevant events and circumstances that could have an effect on their fair values, such as: macroeconomic conditions, industry and market conditions, entity-specific events, financial performance and other relevant factors or events that could affect earnings and cash flows. Based on the results of the qualitative assessments for the year ended December 31, 2020, we performed quantitative testing for all of our reporting units. For the reporting units for which quantitative testing was performed, we estimated their fair values using a combination of market and income approaches. Under the market approach, fair values were estimated using published market multiples for comparable companies and applying them to revenue and EBITDA. Under the income approach, a discounted cash flow methodology was used, considering: (i) management estimates, such as projections of revenue, operating costs and cash flows, taking into consideration historical and anticipated financial results; (ii) general economic and market conditions; and (iii) the impact of planned business and operational strategies. Estimated discount rates were determined using the weighted average cost of capital for each reporting unit at the time of the analysis, taking into consideration the risks inherent within each reporting unit individually. Significant assumptions used in testing the reporting units included terminal values based on a terminal growth rate of 3%, ten years of discounted cash flows prior to the terminal value, and discount rates ranging from 15% to 18%. We believe the assumptions used in our quantitative goodwill impairment tests are reflective of the risks inherent in the business models of our reporting units and within our industry.
As part of the SKG Acquisition which occurred in October 2020, we used discounted cash flow projections and related assumptions for sales growth, operating margins and discount rate in determining the fair value of SKG. Goodwill was calculated as the excess of cost over the fair value of net identifiable assets at the SKG Acquisition date. As the SKG Acquisition aligns with our annual goodwill testing date, we determined that the preliminary fair values identified in purchase accounting approximate carrying value of this reporting unit.
Based on the results of the quantitative assessment, fair value was more than 10% in excess of carrying value for all reporting units, with the exception of our Infrastructure/Utility reporting unit which exceeded carrying value by approximately 9%. A 100 basis point increase in the discount rate used to test goodwill for impairment would have resulted in no additional impairment. Goodwill balances at each of our reporting units subject to impairment testing are shown in the table below:
($ in millions)
Goodwill Balance as of December 31, 2020
Life Safety
$
647
Mechanical
48
Infrastructure/Utility
119
Fabrication
5
Specialty Contracting
48
Transmission
4
While we believe we have made reasonable estimates and assumptions to calculate the fair values of the reporting units, it is possible changes could occur. If in future years, the reporting unit’s actual results are not consistent with the estimates and assumptions used to
46
calculate fair value, we may be required to recognize material impairments to goodwill. We will continue to monitor the impact of the COVID-19 pandemic and any changes to our reporting units for other signs of impairment. We may be required to perform additional impairment testing based on changes in the economic environment, disruptions to our business, significant declines in operating results of our reporting units, sustained deterioration of our market capitalization, and other factors, which could result in impairment charges in the future. Although management cannot predict when changes in macroeconomic conditions will occur, if there is significant deterioration from levels at year end in the construction industry, market prices for oil and gas and other fuel sources, or our market capitalization, it is reasonably likely we will be required to record material impairment charges in the future.
Income Taxes
Our provision for income taxes uses an effective tax rate based on annual pre-tax income, statutory tax rates, permanent tax differences and tax planning opportunities in the various jurisdictions in which we operate. Significant factors that can affect our annual effective tax rate include our assessment of certain tax matters, the location and amount of taxable earnings, changes in certain non-deductible expenses and expected credits. Although we believe our provision for income taxes is correct and the related assumptions are reasonable, the final outcome of tax matters could be materially different from what we currently anticipate, which could result in significant costs or benefits to us. See Note 13 – “Income Taxes” for additional discussion.
In the ordinary course of business, there is inherent uncertainty in quantifying income tax positions. We assess our income tax positions and record tax benefits for all years subject to examination based on our evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recognized the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in our financial statements.
We file income tax returns in numerous tax jurisdictions, including U.S. federal, most U.S. states and certain foreign jurisdictions. Although we believe our calculations for tax returns are correct and the positions taken thereon are reasonable, the final outcome of income tax examinations could be materially different from our expectations and the estimates that are reflected in our consolidated financial statements, which could have a material effect on our results of operations, cash flows and liquidity.
Item 7A. Qualitative and Quantitative Disclosures about Market Risk
Interest Rate Risk
As of December 31, 2020, we had $1.4 billion senior secured term loans outstanding, of which $718 million had a variable interest rate. As of December 31, 2019, we had $1.2 billion senior secured term loans outstanding, of which $480 million had a variable interest rate. In addition, as of December 31, 2020 and 2019, we had a $300 million senior secured revolving credit facility, and, excluding letters of credit outstanding of $70 million and $65 million, respectively. We had no amounts of outstanding revolving loans in either period. The term loan balances outstanding had a weighted-average interest rate of 3.18%, and 4.40% for the years ended December 31, 2020 and 2019, respectively. A 100-basis point increase in the applicable interest rates under our credit facilities would have increased our interest expense by approximately $13 million and $3 million for the years ended December 31, 2020 and 2019, respectively.
Foreign Currency Risk
Our foreign operations are primarily in Europe and Canada. Revenue generated from foreign operations represented approximately 7% of our consolidated net revenues for the years ended December 31, 2020 and 2019. Revenue and expense related to our foreign operations are, for the most part, denominated in the functional currency of the foreign operation, which minimizes the impact that fluctuations in exchange rates would have on net income or loss. We are subject to fluctuations in foreign currency exchange rates when transactions are denominated in currencies other than the functional currencies. These foreign currency transaction gains and losses are classified in other (income) expense, net, in the consolidated statements of operations and were a $12 million gain for the year ended December 31, 2020 and were immaterial for the 2019 Successor period, 2019 Predecessor period, and the year ended December 31, 2018, respectively. Translation gains or losses, which are recorded in accumulated other comprehensive income (loss) on the consolidated balance sheet, result from translation of the assets and liabilities of APi Group’s foreign subsidiaries into U.S. dollars. Foreign currency translation losses (gains) totaled approximately ($9) million, ($3) million, ($3) million, and $11
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million for the year ended December 31, 2020 , the 2019 Successor period, 2019 Predecessor period, and the year ended December 31, 2018 , respectively.
Our exposure to fluctuations in foreign currency exchange rates has increased from the SKG Acquisition and will continue to increase in the future if we continue to expand our operations outside of the United States. We seek to manage foreign currency exposure by minimizing our consolidated net asset and liability positions in currencies other than the functional currency.
Foreign Currency Contracts
We use foreign currency contracts, primarily forward foreign currency contracts, to mitigate the foreign currency exposure of certain intercompany foreign currency transactions. At December 31, 2020, the Company had approximately $525 million notional amount outstanding of these foreign currency contracts that are not designated as effective hedges for accounting purposes and have maturity dates through January 2021. Fair market value gains or losses are included in the results of operations and are classified in other (income) expense, net and offset gain and losses on the underlying intercompany transactions. The fair value of derivative financial instruments as of December 31, 2020 was a liability of $9 million.
Other Market Risk
We are also exposed to construction market risk and its potential related impact on accounts receivable or contract assets on uncompleted contracts. The amounts recorded may be at risk if our customers’ ability to pay these obligations is negatively impacted by economic conditions. We continually monitor the creditworthiness of our customers and maintain ongoing discussions with customers regarding contract status with respect to change orders and billing terms. Therefore, management believes it takes appropriate action to manage market and other risks, but there is no assurance that management will be able to reasonably identify all risks with respect to the collectability of these assets. See also “Revenue Recognition from Contracts with Customers” under Critical Accounting Policies within Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.
In addition, we are exposed to market risk of fluctuations in certain commodity prices of materials, such as copper and steel, which are used as components of supplies or materials utilized in our operations. We are also exposed to increases in energy prices, particularly as they relate to gasoline prices for our vehicle fleet. While we believe we can increase our contract prices to adjust for some price increases in commodities, there can be no assurance that such price increases, if they were to occur, would be recoverable. Additionally, our fixed price contracts do not allow us to adjust prices and, as a result, increases in material costs could reduce profitability with respect to projects in progress.
Significant declines in market prices for oil and gas and other fuel sources may also impact our operations. Prolonged periods of low oil and gas prices may result in projects being delayed or cancelled and in a low oil and gas price environment, certain of our businesses could become less profitable or incur losses.
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