APi Group Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 accounting principles generally accepted 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 APi Group Corporation and its subsidiaries. Any references to “first quarter 2021” and “first quarter 2020”are referring to the three months ended March 31, 2021 and 2020, respectively. 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 operate our business under three primary operating segments which are also our reportable segments: • Safety Services – A leading provider of safety services in North America and Europe, focusing on end-to-end integrated occupancy systems (fire protection solutions, Heating, Ventilation, and Air Conditioning (“HVAC”) and entry systems), including design, installation, inspection and service of these integrated systems. The work performed within this segment spans across industries and facilities and includes commercial, education, healthcare, high tech, industrial and special-hazard settings. • 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 the energy 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. 23 Certain Factors and Trends Affecting our Results of Operations Effect of Seasonality and Cyclical Nature of Business Our revenue and results of operations can be subject to seasonal and other variations. These variations are influenced by weather and include impacts of customer spending patterns, bidding seasons, project schedules, holidays and timing, in particular, for large, non-recurring projects. Typically, our revenue is lowest in the first quarter during the winter months in North America because cold, snowy or wet conditions can cause project delays. Revenue is generally higher during the summer and fall months during the third and fourth quarters, due to increased demand for our services when favorable weather conditions exist in many of the regions in which we operate. Continued cold and wet weather can often affect second quarter productivity. In the fourth quarter, many projects tend to be completed by customers seeking to spend their capital budgets before the end of the year, which generally has a positive effect on our revenue. However, the holiday season and inclement weather can cause delays, which can reduce revenue and increase costs on affected projects. The effects of the COVID-19 pandemic have resulted and could continue to result in greater seasonal and cyclical volatility than would otherwise exist under normal conditions. Additionally, the industries we serve can be cyclical. Fluctuations in end-user demand within those industries, or in the supply of services within those industries, can affect demand for our services. As a result, our business may be adversely affected by industry declines or by delays in new projects. Variations or unanticipated changes in project schedules in connection with large projects can create fluctuations in revenue. 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 2021, we completed several immaterial acquisitions for consideration transferred of $7 million, primarily made up of cash paid at closing, and 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. 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 in March 2020. 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. 24 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 . This could negatively impact our revenue, have a material adverse impact on our operating results, and cause harm to our reputation. 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, causing certain customers to temporarily halt work to implement COVID-19 working protocols and other customers have delayed or cancelled projects. Generally, during the latter half of 2020 and continuing into first quarter 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. 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 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 Interim Statements included in this quarterly report. Description of Key Line Items Net Revenues Revenue is generated from the sale of various types of contracted services, fabrication and distribution. We derive revenue primarily from 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. 25 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 and Intangible Assets 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 months ended March 31, 2021 and the three months ended March 31, 2020. Three months ended March 31, 2021 compared to the three months ended March 31, 2020 Three Months Ended March 31, Change ($ in millions) 2021 2020 $ % Net revenues $ 803 $ 858 $ (55 ) (6.4 )% Cost of revenues 622 696 (74 ) (10.6 )% Gross profit 181 162 19 11.7 % Selling, general, and administrative expenses 183 188 (5 ) (2.7 )% Impairment of goodwill and intangible assets — 208 (208 ) NM Operating income (2 ) (234 ) 232 99.1 % Interest expense, net 15 14 1 7.1 % Investment income and other, net (3 ) (3 ) — — Other expense, net 12 11 1 9.1 % Income before income taxes (14 ) (245 ) 231 94.3 % Income tax provision (6 ) (51 ) 45 88.2 % Net loss $ (8 ) $ (194 ) $ 186 95.9 % NM = Not meaningful Net revenues Net revenues for the three months ended March 31, 2021 were $803 million compared to $858 million for the same period in 2020, a decrease of $55 million or (6.4)%. The decrease in net revenues was primarily driven by the Industrial Services segment, 26 which was impacted by the sale of two businesses that accounted for $38 million in revenue during first quarter 2020 , disciplined project selection resulting from our strategic focus on improving margins, suppression of demand for our services due to a general slowing in the energy industry, and the continuing negative imp acts from the COVID-19 pandemic. This change was partially offset by increased revenues in our Safety Services and Specialty Services segments due to acquisitions that occurred primarily during the fou rth quarter of 2020 and higher volumes due to project timing. Gross profit The following table presents our gross profit (net revenues less cost of revenues) and gross margin (gross profit as a percentage of net revenues) for the three months ended March 31, 2021 and 2020, respectively: Three Months Ended March 31, Change ($ in millions) 2021 2020 $ % Gross profit $ 181 $ 162 $ 19 11.7 % Gross margin 22.5 % 18.9 % Our gross profit for the three months ended March 31, 2021 was $181 million compared to $162 million for the same period in 2020, an increase of $19 million, or 11.7%. Gross margin was 22.5%, an increase of 360 basis points compared to prior year primarily due to a $21 million decrease in backlog amortization expense, which positively impacted the rate by 260 basis points. We also divested two lower margin businesses during 2020 in our Industrial Services segment, which contributed 90 basis points to the improvement. In addition, favorable mix from a higher content of service work, higher volumes in more profitable segments, and disciplined project and customer selection drove higher gross margin. These increases were partially offset by project delays, jobsite conditions and suppression of demand in the energy industry. Operating expenses The following table presents operating expenses for APG for the three months ended March 31, 2021 and 2020, respectively: Three Months Ended March 31, Change ($ in millions) 2021 2020 $ % Selling, general, and administrative expenses (excluding amortization expense) $ 153 $ 158 $ (5 ) (3.2 )% Amortization expense $ 30 $ 30 $ — — Impairment of goodwill and intangible assets $ — $ 208 $ (208 ) NM Total operating expenses $ 183 $ 396 $ (213 ) (53.8 )% Operating expenses as a percentage of net revenues 22.8 % 46.2 % Our operating expenses for the three months ended March 31, 2021 were $183 million compared to $396 million for the same period in 2020, a decrease of $213 million. Operating expenses as a percentage of net revenues were 22.8% for 2021 compared to 46.2% for 2020, improving primarily due to the $208 million impairment charge related to goodwill and intangible assets recorded in the first quarter 2020 that did not repeat during 2021. In addition, selling, general, and administrative expenses (excluding amortization) decreased $5 million, primarily due to a reduction in depreciation expense and the divestiture of two businesses in the Industrial Services segment. Interest expense, net Interest expense was $15 million for the three months ended March 31, 2021 relatively flat compared to $14 million for the same period of the prior year. Income tax provision The income tax benefit for the three months ended March 31, 2021 was $6 million compared to a benefit of $51 million in the first quarter of the prior year. The decrease in tax benefit was driven by a lower loss before income taxes. The effective tax rate for the three months ended March 31, 2021 was 42.3%, compared to 20.9% in the first quarter of 2020. The difference in the effective tax rate was driven by discrete and nondeductible permanent items, which have a greater impact on the effective tax rate when income or losses are smaller. The tax law changes in the CARES Act had an immaterial impact on the Company’s income tax provision during 27 the three months ended March 31, 2021. The difference between the effective tax rate and the statutory U.S. federal income tax rate of 21.0% is due to the nondeductible permanent items, state taxes and foreign earnings in jurisdictions that have higher tax rates. Net income (loss) and EBITDA Three Months Ended March 31, Change ($ in millions) 2021 2020 $ % Net loss $ (8 ) $ (194 ) $ 186 95.9 % EBITDA 51 (161 ) 212 131.7 % Net income as a % of Net Revenues (1.0 )% (22.6 )% EBITDA as % of Net Revenues 6.4 % (18.8 )% Our net loss for the three months ended March 31, 2021 of $8 million compared to $194 million for the same period in 2020, an improvement of $186 million. Net loss as a percentage of net revenues for the three months ended March 31, 2021 was (1.0)% compared to (22.6)% for the same period in 2020. The change was principally from an impairment charge that occurred in first quarter 2020 related to goodwill and intangible assets of $208 million that did not recur, and an improved gross margin rate and lower operating expenses (discussed above). EBITDA as a percentage of net revenues for the first quarter 2021 was 6.4% compared to (18.8)% for the same period in 2020. Improvements in EBITDA were primarily a result of the impairment charge of $208 million recorded in first quarter 2020 and an improved gross margin rate. See the discussion and reconciliation of our non-U.S. GAAP financial measures below. Operating Segment Results for the three months ended March 31, 2021 versus the three months ended March 31, 2020 Net Revenues Three Months Ended March 31, Change ($ in millions) 2021 2020 $ % Safety Services $ 466 $ 424 $ 42 9.9 % Specialty Services 321 300 21 7.0 % Industrial Services 25 137 (112 ) (81.8 )% Corporate and Eliminations (9 ) (3 ) (6 ) (200.0 )% $ 803 $ 858 $ (55 ) (6.4 )% Operating Income (Loss) Three Months Ended March 31, Change ($ in millions) 2021 2020 $ % Safety Services $ 45 $ (10 ) $ 55 550.0 % Safety Services operating margin 9.7 % (2.4 )% Specialty Services (3 ) (136 ) 133 97.8 % Specialty Services operating margin (0.9 )% (45.3 )% Industrial Services (15 ) (58 ) 43 74.1 % Industrial Services operating margin (60.0 )% (42.3 )% Corporate and Eliminations (29 ) (30 ) 1 3.3 % $ (2 ) $ (234 ) $ 232 99.1 % EBITDA Three Months Ended March 31, Change ($ in millions) 2021 2020 $ % Safety Services $ 65 $ 18 $ 47 261.1 % Safety Services EBITDA as a % of net revenues 13.9 % 4.2 % Specialty Services 20 (108 ) 128 118.5 % Specialty Services EBITDA as a % of net revenues 6.2 % (36.0 )% Industrial Services (6 ) (45 ) 39 86.7 % Industrial Services EBITDA as a % of net revenues (24.0 )% (32.8 )% Corporate and Eliminations (28 ) (26 ) (2 ) (7.7 )% $ 51 $ (161 ) $ 212 131.7 % 28 The following discussion breaks down the net revenues, operating income and EBITDA by operating segment for the three months ended March 31, 2021 compared to the three months ended March 31, 2020. Safety Services Safety Services net revenues for the three months ended March 31, 2021 increased by $42 million, or 9.9% compared to the same period in the prior year. This increase is primarily driven by the 2020 acquisitions, and higher volumes from increased demand for our HVAC services, partially offset by continued negative impacts of COVID-19. Safety Services operating margin for the three months ended March 31, 2021 and 2020 was approximately 9.7% and (2.4)%, respectively. The improvement was primarily driven by an impairment charge of $34 million recorded in the first quarter 2020 that did not recur. In addition, the improvement was impacted by favorable contract mix which shifted to more inspection and service related work, disciplined project and customer selection, and a decrease in amortization expense of $9 million. Safety Services EBITDA as a percentage of net revenues for the three months ended March 31, 2021 and 2020 was approximately 13.9% and 4.2%, respectively. This improvement is primarily related to the impairment charges recorded in first quarter 2020 that did not recur, and improved project mix. Specialty Services Specialty Services net revenues for the three months ended March 31, 2021 increased by $21 million, or 7.0% compared to the same period in the prior year. The increase in segment revenue was primarily driven by project timing and higher volumes of specialty fabrication projects during first quarter 2021. These increases were partially offset by adverse jobsite conditions and project delays for certain projects. Specialty Services operating margin for the three months ended March 31, 2021 and 2020 was approximately (0.9)% and (45.3)%, respectively. The improvement was the result of an impairment charge of $120 million recorded in first quarter 2020 that did not recur, and decreased amortization expense of $7 million. Our Specialty Services EBITDA as a percentage of net revenues for the three months ended March 31, 2021 and 2020 was approximately 6.2% and (36.0)%, respectively. This improvement is primarily related to the impairment charges recorded in first quarter 2020 that did not recur. Industrial Services Industrial Services net revenues for the three months ended March 31, 2021 decreased by $112 million, or (81.8)% compared to the same period in the prior year. The sale of two Industrial Services businesses accounted for $38 million of the decline. The revenue decline was also impacted by suppression of demand for our services due to COVID-19, 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 three months ended March 31, 2021 and 2020 was approximately (60.0)% and (42.3)%, respectively. The decline was primarily driven by a lower volume of projects while certain indirect costs for leases and equipment remained consistent with prior quarters, partially offset by an impairment charge of $49 million which was recorded in first quarter 2020 that did not recur. Industrial Services EBITDA as a percentage of net revenues was (24.0)% and (32.8)% for the three months ended March 31, 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 the impacts of lower volumes described above. Non-GAAP Financial Measures (Unaudited) 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 29 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 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 table presents a reconciliation of net loss to EBITDA for the periods indicated: Three Months Ended March 31, ($ in millions) 2021 2020 Reported net loss $ (8 ) $ (194 ) Adjustments to reconcile net loss to EBITDA: Interest expense, net 15 14 Income tax provision (6 ) (51 ) Depreciation 19 18 Amortization 31 52 EBITDA $ 51 $ (161 ) 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 of March 31, 2021, we had $972 million of total liquidity, comprising $745 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 first quarter 2021, we 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. 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 March 31, 2021, we had $1.2 billion of indebtedness outstanding under the term loan incurred on October 1, 2019 (the “2019 Term Loan”), $249 million outstanding under the incremental term loan incurred on October 22, 2020 (the “2020 Term Loan”), and no amounts outstanding under the $300 million Revolving Credit Facility. 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 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 $18 million and $11 million in the three months ended March 31, 2021 and 2020, respectively. 30 Our annual 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 annually . In December 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 first quarter 2021 under the share repurchase program, and approximately $70 million of repurchases remained authorized. Cash Flows The following table summarizes net cash flows with respect to our operating, investing and financing activities for the periods indicated: Three Months Ended March 31, ($ in millions) 2021 2020 Net cash provided by operating activities $ 32 $ 55 Net cash used in investing activities (23 ) (15 ) Net cash provided by financing activities 223 139 Effect of foreign currency exchange rate change on cash and cash equivalents 1 1 Net increase in cash and cash equivalents $ 233 $ 180 Cash, cash equivalents, and restricted cash at the end of the period $ 748 $ 436 Net Cash Provided by Operating Activities Net cash provided by operating activities was $32 million for the three months ended March 31, 2021 compared to $55 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. The decrease in net cash provided by operating activities was primarily driven by changes in working capital levels as the declines in net revenues during first quarter 2021 have resulted in less impactful reductions in our working capital balances. Net Cash Used in Investing Activities Net cash used in investing activities was $23 million for the three months ended March 31, 2021 compared to $15 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 management enacted adjustments to capital expenditures in response to COVID-19 during the prior year. Net Cash Provided by Financing Activities Net cash provided by financing activities was $223 million for the three months ended March 31, 2021 compared to $139 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 first quarter 2021 and acquisition-related consideration payments made in the prior year period that did not recur in first quarter 2021. During first quarter 2020, we borrowed $200 million on our Revolving Credit Facility due to uncertainties around the future impact of COVID-19, which was repaid early in the second quarter of 2020. Credit Facilities We have a credit agreement (the “Credit Agreement”) which provides for: (1) a term loan facility, pursuant to which we incurred the $1.2 billion 2019 Term Loan used to fund a part of the cash portion of the purchase price in the APi Acquisition; and the incremental $250 million 2020 Term Loan, 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. As of March 31, 2021, the Company had no amounts outstanding under the Revolving Credit Facility and $227 million was available after giving effect to $73 million of outstanding letters of credit, which reduce availability. 31 One of APi Group’s Canadian subsidiaries had a $20 million unsecured line of credit agreement with a variable interest rate based upon the prime rate. This line of credit was closed during January 2021. 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) 4.50 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 of March 31, 2021 was 1.75:1.00. We were in compliance with all covenants contained in the Credit Agreement as of March 31, 2021 and December 31, 2020.