What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-08-11 compared with 2021-05-12 · 252 added, 112 removed, 197 unchanged (65% of the section changed)

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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.

We prepare our financial statements in accordance with generally accepted accounting principles in the United States of America (“U.S.

To supplement our financial results presented in accordance with U.S.

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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.

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 provide statutorily mandated and other contracted services to a strong base of long-standing customers across industries.

We have a winning leadership culture driven by entrepreneurial business leaders to deliver innovative solutions for our customers.

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Effect of Seasonality and Cyclical Nature of Business

Our revenue and results of operations can be subject to seasonal and other variations.

Our net revenues and results of operations can be subject to seasonal and other variations.

These variations are influenced by weather and include impacts of customer spending patterns, bidding seasons, project schedules, holidays and timing, in particular, for large, non-recurring projects.

Typically, our 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.

Typically, our net revenues are lowest in the first quarter during the winter months in North America because cold, snowy or wet conditions can cause project delays.

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.

Net revenues are generally higher during the summer and fall months during the third and early fourth quarter, due to increased demand for our services when favorable weather conditions exist in many of the regions in which we operate.

In the fourth quarter, many projects tend to be completed by customers seeking to spend their capital budgets before the end of the year, which generally has a positive effect on our net revenues.

However, the holiday season and inclement weather can cause delays, which can reduce net revenues and increase costs on affected projects.

Additionally, the industries we serve can be cyclical.

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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.

Variations or unanticipated changes in project schedules in connection with large projects can create fluctuations in net revenues.

Economic, Industry and Market Factors

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Recent Developments

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.

During the first six months of 2021 we completed several individually immaterial acquisitions for aggregate consideration of $13 million, made up of cash paid at closing of $12 million and accrued consideration of $1 million.

The results of operations of these acquisitions are included in our unaudited condensed consolidated statement of operations from their respective dates of acquisition and were not material.

See Note 4 – “Business Combinations” for further details.

On July 27, 2021, we announced we have entered into a definitive agreement to acquire the Chubb Limited (“Chubb”) fire and security business from Carrier Global Corporation for an enterprise value of $3,100 million, which is comprised of $2,900 million cash and approximately $200 million of assumed liabilities, and other adjustments.

The transaction is expected to be funded through a combination of cash on hand, perpetual preferred equity financing, and debt and is expected to close around year-end 2021.

COVID-19 Update

We continue to monitor short and long-term impacts of COVID-19, a global pandemic that has caused a significant slowdown in the global economy beginning in March 2020.

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 and continues to impact the global economy as countries experience surges of COVID-19.

To date, the services we provide have been deemed to be essential in most instances under various governmental orders.

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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.

New or renewed shelter-in-place orders , closures or other mitigation efforts, and outbreaks in jurisdictions in which we operate or at our project or work sites, could have a material negative impact on our net revenues and earnings.

If a large number of our employees who are located in a particular jurisdiction or are working on a project or work site are exposed to or infected with COVID-19 and we are unable to hire qualified personnel due to labor shortages and other impacts of the COVID-19 outbreak, we may be required to delay projects or the provision of our services for a period of time .

This could negatively impact our 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.

This could negatively impact our net revenue s , have a material adverse impact on our operating results, and cause harm to our reputation.

Generally, during the latter half of 2020 and continuing into first half of 2021, we saw indications of stabilizing and some volume improvements as our teams and customers adapted to working in the COVID-19 environment and with the easing of some shelter-in-place orders as vaccination rates improve.

There can be no assurance that this trend, which would allow us to recover prior year volume levels, will continue in a positive manner.

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 have begun to experience supply chain disruptions, which are negatively impacting the source and supply of materials needed for our business.

The continued impact of COVID-19 on our vendors is evolving and could continue to make it difficult to obtain needed materials and at reasonable prices.

We also implemented a preemptive cost reduction plan, which saved both expense and cash in 2020.

As COVID-19 restrictions were easing and volumes were increasing from earlier lows, these cost reductions have eased and costs were reinstated.

As COVID-19 restrictions were easing and volumes were increasing from earlier lows, the majority of these cost reductions were reinstated in the fourth quarter of 2020.

The United States Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency has warned that cybercriminals will take advantage of the uncertainty created by COVID-19 and federal and state mandated quarantines to launch cybersecurity attacks.

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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.

A summary of recent accounting pronouncements is included in Note 3 – “Recent Accounting Pronouncements” to our unaudited condensed consolidated financial statements included herein.

Description of Key Line Items

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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

The following is a discussion of our financial condition and results of operations during the three and six months ended June 30, 2021 and the three and six months ended June 30, 2020.

Three months ended June 30, 2021 compared to the three months ended June 30, 2020

Three Months Ended June 30,

($ in millions)

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Selling, general, and administrative expenses

Impairment of goodwill and intangible assets

Operating income

Interest expense, net

Loss on extinguishment of debt

Investment income and other, net

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Income before income taxes

Income tax provision

Income tax provision (benefit)

NM = Not meaningful

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,

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.

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

Net revenues for the three months ended June 30, 2021 were $978 million compared to $889 million for the same period in 2020, an increase of $89 million or 10.0%.

The increase in net revenues was primarily driven by significant increases in both the Safety and Specialty Services segments resulting from general market recoveries.

In the second quarter of 2020, both segments experienced poor market conditions resulting from the negative impact of the COVID-19 pandemic.

In addition, the Safety Services segment also benefited from additional revenues from acquisitions completed in the previous 12 months.

These increases were partially offset by a decline in the Industrial Services segment, which was impacted by the sale of two businesses that accounted for $40 million in revenue during the second quarter of 2020 and difficult market conditions.

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 June 30, 2021 and 2020, respectively:

Three Months Ended June 30,

($ in millions)

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%.

Our gross profit for the three months ended June 30, 2021 was $232 million compared to $174 million for the same period in 2020, an increase of $58 million, or 33.3%.

Gross margin was 23.7%, an increase of 410 basis points compared to prior year, primarily due to a $21 million decrease in backlog amortization expense, which positively impacted the rate by 210 basis points.

Also driving the improvement was a favorable mix from higher volumes in more profitable segments.

Additionally, we divested two lower margin businesses during 2020 in our Industrial Services segment which contributed 80 basis points to the improvement.

These increases were partially offset by project delays due to supply chain disruptions and downward pressure on margins caused by the impact of inflation, which we have not been able to fully recover in the short term.

Operating expenses

The following table presents operating expenses and operating margin (operating income as a percentage of net revenues) for the three months ended June 30, 2021 and 2020, respectively:

Three Months Ended June 30,

($ in millions)

Selling, general, and administrative expenses (excluding amortization expense)

Amortization expense

Total operating expenses

Operating expenses as a percentage of net revenues

Operating margin

Our operating expenses for the three months ended June 30, 2021 were $185 million compared to $147 million for the same period in 2020, an increase of $38 million.

Operating expenses as a percentage of net revenues were 18.9% for 2021 compared to 16.5% for 2020.

In the second quarter of 2020, we took various actions in response to the COVID-19 pandemic which resulted in lowering operating expenses as a percentage of net revenues.

This included implementing a preemptive cost reduction plan to lower expenses throughout 2020.

However, as COVID-19 restrictions began to ease and volumes increased, we restored many of these costs in fourth quarter of 2020, resulting in an increase in operating expenses as a percentage of net revenues.

Also driving the increase was higher levels of spending related to business process transformation projects, including system and process development costs and expenses associated with the implementation of compliance programs related to the Sarbanes-Oxley Act of 2002 during the second quarter of 2021.

Interest expense, net

Interest expense was $14 million for both the three months ended June 30, 2021 and 2020.

Loss on Extinguishment of Debt

During the second quarter of 2021 we completed a private offering of $350 million aggregate principal amount of senior notes.

The proceeds from the offering were used to repay all outstanding indebtedness under the 2020 Term Loan, prepay a portion of the 2019 Term Loan, pay for transaction fees and expenses, and fund general corporate purposes.

In connection with the repayment of the 2020 Term Loan and prepayment on a portion of the 2019 Term Loan, the Company incurred a loss on extinguishment of debt of $9 million related to unamortized debt issuance costs.

Income tax provision (benefit)

The income tax expense (benefit) for the three months ended June 30, 2021 was expense of $9 million compared to a benefit of $(12) million in the same period of the prior year.

This change was driven by the fact that we had earned income for the first six months of 2021, compared to a loss position for the first six months of 2020 due to an impairment charge.

The effective tax rate for the three months ended June 30, 2021 was 28.9%, compared to (49.0)% in the same period of 2020.

The difference in the effective tax rate was driven by discrete and nondeductible permanent items which have a greater impact on the effective tax rate when income or losses are smaller.

The difference between the effective tax rate and the 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 and EBITDA

The following table presents net income and EBITDA for the three months ended June 30, 2021 and 2020, respectively:

Three Months Ended June 30,

($ in millions)

Net income as a % of Net Revenues

EBITDA as % of Net Revenues

Our net income for the three months ended June 30, 2021 was $21 million compared to $36 million for the same period in 2020, a reduction of $15 million.

Net income as a percentage of net revenues for the three months ended June 30, 2021 was 2.1% compared to 4.0% for the same period in 2020.

The decline in net income and in EBITDA resulted from a $9 million loss on extinguishment of debt recognized in the second quarter of 2021, higher spending related to business process transformation projects to enhance systems and implement compliance programs related to Sarbanes-Oxley Act of 2002, and COVID-19 relief payments that were received by our Canadian subsidiaries during the second quarter of 2020 that did not repeat in the second quarter of 2021.

Also driving the decline was the impact of supply chain disruptions and downward pressure on margins caused by inflation.

These items were partially offset by improved profitability in the Safety Services segment.

Operating Segment Results for the three months ended June 30, 2021 versus the three months ended June 30, 2020

Three Months Ended June 30,

($ in millions)

Safety Services

Specialty Services

Industrial Services

Corporate and Eliminations

Operating Income (Loss)

Three Months Ended June 30,

($ in millions)

Safety Services

Safety Services operating margin

Specialty Services

Specialty Services operating margin

Industrial Services

Industrial Services operating margin

Corporate and Eliminations

Three Months Ended June 30,

($ in millions)

Safety Services

Safety Services EBITDA as a % of net revenues

Specialty Services

Specialty Services EBITDA as a % of net revenues

Industrial Services

Industrial Services EBITDA as a % of net revenues

Corporate and Eliminations

The following discussion breaks down the net revenues, operating income (loss) and EBITDA by operating segment for the three months ended June 30, 2021 compared to the three months ended June 30, 2020.

Safety Services

Safety Services net revenues for the three months ended June 30, 2021 increased by $141 million or 38.0% compared to the same period in the prior year.

This improvement was primarily driven by the general market recovery as compared to the poor market conditions in the second quarter of 2020, which was negatively impacted by the COVID-19 pandemic.

We experienced continued growth in inspection and service revenues, driving specific improvements in both our Life Safety and HVAC service businesses.

The segment also benefited from additional net revenues contributed by acquisitions completed in the prior 12 months.

Safety Services operating margin for the three months ended June 30, 2021 and 2020 was approximately 10.2% and 5.9%, respectively.

The improvement was primarily driven by higher volumes and leveraging operating expenses to improve profitability, shift to more inspection and service work generating a favorable project mix, and a $6 million decrease in amortization expense.

Safety Services EBITDA as a percentage of net revenues for the three months ended June 30, 2021 and 2020 was approximately 14.3% and 13.2%, respectively.

This improvement is primarily related to the higher volume and improved operating profitability described above.

Specialty Services

Specialty Services net revenues for the three months ended June 30, 2021 increased by $66 million or 18.9% compared to the same period in the prior year.

The increase was primarily driven by higher demand and timing for fabrication and specialty contracting services during the second quarter of 2021, resulting from general improvements in market conditions compared to the prior year, which was negatively impacted by the COVID-19 pandemic.

These increases were partially offset by lower volumes in infrastructure and certain utility businesses.

Specialty Services operating margin for the three months ended June 30, 2021 and 2020 was approximately 7.7% and 6.3%, respectively.

The improvement was the result of increased volume, improvements in general market conditions compared to the second quarter of 2020 and decreased amortization expense of $6 million.

These increases were partially offset by the downward pressure on margins caused by the impact of inflation and supply chain disruptions, which we have not been able to fully recover in the short term.

Our Specialty Services EBITDA as a percentage of net revenues for the three months ended June 30, 2021 and 2020 was approximately 13.3% and 17.8%, respectively, due to the factors discussed above and decreased income from joint venture investments of $4 million.

Industrial Services

Industrial Services net revenues for the three months ended June 30, 2021 decreased by $105 million or (60.7)% compared to the same period in the prior year.

The sale of two Industrial Services businesses accounted for $40 million of the decline.

Also driving the decline was the suppression of demand for our services due to decisions by our customers to delay and suspend projects, strategic focus on improving margin resulting from disciplined project and customer selection, and difficult market conditions.

Industrial Services operating margin for the three months ended June 30, 2021 and 2020 was approximately (11.8)% and 2.3%, respectively.

The decline was primarily driven by a lower volume of projects and was partially offset by a decline in amortization expense of $6 million.

Industrial Services EBITDA as a percentage of net revenues was 4.4% and 12.1% for the three months ended June 30, 2021 and 2020, respectively, driven by the impacts of lower volumes described above.

Six months ended June 30, 2021 compared to the six months ended June 30, 2020

Six Months Ended June 30,

($ in millions)

Cost of revenues

Selling, general, and administrative expenses

Impairment of goodwill and intangible assets

Operating income (loss)

Interest expense, net

Loss on debt extinguishment

Investment income and other, net

Other expense, net

Income (loss) before income taxes

Income tax provision (benefit)

Net income (loss)

NM = Not meaningful

Net revenues for the six months ended June 30, 2021 and 2020 were $1,781 million compared to $1,747 million for the same period in 2020, an increase of $34 million or 1.9%.

The increase in net revenues was primarily driven by significant increases in both the Safety and Specialty Services segments resulting from general market recoveries.

During 2020, both segments were negatively impacted by poor market conditions resulting from the COVID-19 pandemic.

Additionally, during 2021, the Safety Services segment benefited from additional revenues from acquisitions completed in the previous 12 months.

These increases were partially offset by a decline in the Industrial Services segment, which was impacted by the sale of two businesses that accounted for $78 million in revenue during the six months ended June 30, 2020 and continues to be negatively impacted by decisions by our customers to delay and suspend projects during the six months ended June 30, 2021.

The following table presents our gross profit (net revenues less cost of revenues) and gross margin (gross profit as a percentage of net revenues) for the six months ended June 30, 2021 and 2020, respectively:

Six Months Ended June 30,

($ in millions)

Our gross profit for the six months ended June 30, 2021 was $413 million, compared to $336 million for the same period in 2020, an increase of $77 million or 22.9%.

Gross margin was 23.2%, an increase of 400 basis points compared to prior year primarily due to a $42 million decrease in backlog amortization expense, which positively impacted the rate by 240 basis points.

We also divested two lower margin businesses during 2020 in our Industrial Services segment, which contributed 90 basis points to the improvement.

In addition, 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.

In addition, higher volumes in more profitable segments and disciplined project and customer selection drove higher gross margins.

These increases were partially offset by project delays, jobsite conditions and suppression of demand in the energy industry.

Operating expenses

The following table presents operating expenses for APG for the three months ended March 31, 2021 and 2020, respectively:

Three Months Ended

The following table presents operating expenses and operating margin (operating income as a percentage of net revenues) for the six months ended June 30, 2021 and 2020, respectively:

Six Months Ended June 30,

($ in millions)

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Operating expenses as a percentage of net revenues

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.

Operating margin

Our operating expenses for the six months ended June 30, 2021 were $368 million, compared to $543 million for the same period in 2020, a decrease of $175 million.

Operating expenses as a percentage of net revenues were 20.7% for 2021 compared to 31.1% for 2020, improving primarily due to the $208 million impairment charge related to goodwill and intangible assets recorded in the first quarter of 2020 that did not repeat during 2021.

This decline was offset by an increase of 11.2% in selling, general, and administrative expenses (excluding amortization) due to higher spending related to business process transformation projects to enhance systems and implement compliance programs related to Sarbanes-Oxley Act of 2002 and the preemptive cost reduction plan we implemented in the second quarter of 2020 to reduce expenses in response to the COVID-19 pandemic.

As COVID-19 restrictions began to ease, we restored many of these costs in the fourth quarter of 2020, resulting in an increase in selling, general, and administrative expenses.

Interest expense, net

Interest expense was $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.

Interest expense was $29 million for the six months ended June 30, 2021 which is slightly higher than $28 million for the same period of the prior year.

Income tax provision (benefit)

The income tax expense (benefit) for the six months ended June 30, 2021 was expense of $3 million compared to a benefit of $(63) million in the same period of the prior year.

This change was driven by the fact that we had earned income for the first six months of 2021, compared to being in a loss position in the first six months of 2020 due to an impairment charge.

The effective tax rate for the six months ended June 30, 2021 was 17.0% compared to (28.5)% in the same period of 2020.

The difference in the effective tax rate was driven by discrete and nondeductible permanent items, which have a greater impact on the effective tax rate when income or losses are smaller.

The tax law changes in the CARES Act had an immaterial impact on the Company’s income tax provision during

the three months ended March 31, 2021.

The difference between the effective tax rate and the statutory U.S.

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Net income (loss) and EBITDA

Three Months Ended

The following table presents net income and EBITDA for the six months ended June 30, 2021 and 2020, respectively:

Six Months Ended June 30,

($ in millions)

Net income as a % of Net Revenues

EBITDA as % of Net Revenues

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.

Net income (loss)

Net income (loss) as a % of Net Revenues

EBITDA as % of Net Revenue

Our net income (loss) for the six months ended June 30, 2020 was $13 million compared to $(158) million for the same period in 2020, an improvement of $171 million.

Net income (loss) as a percentage of net revenues for the six months ended June 30, 2020 was 0.7% compared to (9.0)% for the same period in 2020.

The change was principally from an impairment charge that occurred in the first quarter of 2020 related to goodwill and intangible assets of $208 million that did not recur, an improved gross margin rate and lower operating expenses (discussed above).

EBITDA as a percentage of net revenues for the six months ended June 30, 2020 was 8.3% compared to (2.8)% for the same period in 2020.

Improvements in EBITDA were primarily a result of the non-recurrence of the impairment charge of $208 million recorded in the first quarter of 2020 and an improved gross margin rate.

See the discussion and reconciliation of our non-U.S.

GAAP financial measures below.

Operating Segment Results for the three months ended March 31, 2021 versus the three months ended March 31, 2020

Three Months Ended

Operating Segment Results for the six months ended June 30, 2021 versus the six months ended June 30, 2020

Six Months Ended June 30,

($ in millions)

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Operating Income (Loss)

Three Months Ended

Six Months Ended June 30,

($ in millions)

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Corporate and Eliminations

Three Months Ended

Six Months Ended June 30,

($ in millions)

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Corporate and Eliminations

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.

The following discussion breaks down the net revenues, operating income and EBITDA by operating segment for the six months ended June 30, 2021 compared to the six months ended June 30, 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.

Safety Services net revenues for the six months ended June 30, 2021 increased by $183 million or 23.0% compared to the same period in the prior year.

This increase is primarily driven by 2020 acquisitions and higher volumes from increased demand for our HVAC and Life Safety Services.

Safety Services operating margin for the six months ended June 30, 2021 and 2020 was approximately 9.9% and 1.5%, respectively.

The improvement was primarily driven by an impairment charge of $34 million recorded in the first quarter of 2020 that did not recur.

In addition, the improvement was driven by favorable contract mix which shifted to more inspection and service work, disciplined project and customer selection, and a decrease in amortization expense of $15 million.

Safety Services EBITDA as a percentage of net revenues for the six months ended June 30, 2021 and 2020 was approximately 14.1% and 8.4%, respectively.

This improvement is primarily related improved project mix and impairment charges recorded in the first quarter of 2020 that did not recur.

Specialty Services

Specialty Services net revenues for the 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.

Specialty Services net revenues for the six months ended June 30, 2021 increased by $87 million or 13.4% compared to the same period in the prior year.

The increase was primarily driven by demand and timing for our fabrication and specialty contracting services during the six months ended June 30, 2021.

These increases were partially offset by project deferrals and jobsite disruptions driven by unfavorable weather conditions in the first quarter of 2021.

Specialty Services operating margin for the six months ended June 30, 2021 and 20 20 was approximately 3.9% and ( 17.6)% , respectively.

The improvement was the result of an impairment charge of $120 million recorded in the first quarter of 2020 that did not recur, and decreased amortization expense of $ 13 million.

O u r Specialty Services EBITDA as a percentage of net revenues for the six months ended June 30, 2021 and 20 20 was approximately 10.2% and ( 7.1)% , respectively.

This improvement is primarily related to the impairment charge recorded in the first quarter of 2020 that did not recur , partially offset by a decrease in income from joint venture investments of $5 million .

Industrial Services

Industrial Services net revenues for the three months ended March 31, 2021 decreased by $112 million, or (81.8)% compared to the same period in the prior year.

Industrial Services net revenues for the six months ended June 30, 2021 decreased by $217 million or (70.0)% compared to the same period in the prior year.

The sale of two Industrial Services businesses accounted for $78 million of the decline.

The revenue decline was also impacted by 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.

The revenue decline was also impacted by a suppression of demand for our services due to general market weakness, our strategic focus on improving margin resulting from disciplined project and customer selection, and a general slowing in the energy industry.

Industrial Services operating margin for the six months ended June 30, 2021 and 2020 was approximately (24.7)% and (17.4)%, respectively.

The decline was primarily driven by a lower volume of projects while certain indirect costs for leases and equipment remained consistent with prior periods, partially offset by an impairment charge of $49 million recorded in the first quarter of 2020 that did not recur and decreased amortization expense of $11 million.

Industrial Services EBITDA as a percentage of net revenues was (3.2)% and (7.7)% for the six months ended June 30, 2021 and 2020, respectively.

This improvement is primarily related to the impairment charge of $49 million in 2020 that did not recur, partially offset by impacts of lower volumes described above.

Non-GAAP Financial Measures (Unaudited)

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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.

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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

The following table presents a reconciliation of net income to EBITDA for the periods indicated:

Three Months Ended June 30,

($ in millions)

Reported net loss

Adjustments to reconcile net loss to EBITDA:

Reported net income

Adjustments to reconcile net income to EBITDA:

Interest expense, net

Income tax provision

Income tax provision (benefit)

Six Months Ended June 30,

($ in millions)

Reported net income (loss)

Adjustments to reconcile net income (loss) to EBITDA:

Interest expense, net

Income tax provision (benefit)

Liquidity and Capital Resources

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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.

As of June 30, 2021, we had $913 million of total liquidity, comprising $686 million in cash and cash equivalents and $227 million ($300 million less outstanding letters of credit of approximately $73 million, which reduce availability) of available borrowings under our Revolving Credit Facility.

During the six months ended June 30, 2021, we received approximately $230 million of cash proceeds from the exercise of approximately 60 million outstanding warrants, resulting in the issuance of approximately 20 million shares of common stock.

During the second quarter of 2021, we completed a private offering of $350 million aggregate principal amount of 4.125% Senior Notes due 2029 (the “Senior Notes”).

T he Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by us and certain of our existing and future domestic subsidiaries.

The proceeds from the sale of the Senior Notes were used to repay all outstanding indebtedness under the term loan incurred on October 22, 2020 (the “2020 Term Loan”), prepay a portion of the term loan incurred on October 1, 2019 (the “2019 Term Loan”), pay for transaction fees and expenses, and fund general corporate purposes.

In connection with the repayment of the 2020 Term Loan and partial repayment on the 2019 Term Loan, we incurred a loss on debt extinguishment of $9 million related to unamortized debt issuance costs, which was recorded within loss on debt extinguishment in the unaudited condensed consolidated statements of operations.

We expect to continue to be able to access the capital markets through equity and debt offerings for liquidity purposes as needed.

Our principal liquidity requirements have been, and we expect will be, any 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.

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 .

Our principal liquidity requirements have been, and we expect will be, any accrued consideration due to selling shareholders, including tax payments in connection therewith, for working capital and general corporate purposes, including capital expenditures and debt service, as well as to identify, execute and integrate strategic acquisitions and business transformation.

We expect to fund the acquisition of the Chubb fire and security business, anticipated to close around year-end 2021, through a combination of cash on hand, perpetual preferred equity financing, and debt financing.

Our capital expenditures were approximately $34 million and $17 million in the six months ended June 30, 2021 and 2020, respectively.

The increase in capital spending is due to the reduction in capital expenditures that occurred in 2020 as a result of COVID-19, and as we return to a more normalized level of spending, capital spending has increased in the current period, and is expected to be less than 2% of net revenues annually.

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.

There were no stock repurchases during the six months ended June 30, 2021 under the share repurchase program and approximately $70 million of repurchases remained authorized.

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,

Six Months Ended June 30,

($ in millions)

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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.

Net cash provided by operating activities was $19 million for the six months ended June 30, 2021 compared to $232 million for the same period in 2020.

Cash flow from operations is primarily driven by changes in the mix and timing of demand for our services and working capital needs associated with the various services we provide.

Working capital is primarily affected by changes in total accounts receivable, accounts payable, accrued expenses, and contract assets and contract liabilities, all of which tend to be related and are affected by changes in the timing and volume of work performed.

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.

During 2020, the decline in volume of business due to the COVID-19 pandemic drove a significant decrease in our working capital, which generated substantial operating cash flows.

During the first six months of 2021, we have begun to recover from the impacts of COVID-19 and the volume of business has expanded, driving higher working capital requirements and leading to lower operating cash flows.

This is in line with historical period increases in working capital during the first six months as we move through a typical business cycle.

Net Cash Used in Investing Activities

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 used in investing activities was $35 million for the six months ended June 30, 2021 compared to $16 million for the same period in 2020.

The increase in cash used in investing activities was attributable to an increase in purchases of property and equipment during the current period as we return to more normalized levels of spending after management enacted reductions to capital expenditures in response to COVID-19 during the prior year.

Net Cash Provided by Financing Activities

Net cash provided by 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.

Net cash provided by (used in) financing activities was $187 million for the six months ended June 30, 2021 compared to a usage of $(96) million for the same period in 2020.

The increase in cash provided by financing activities was primarily due to $230 million of proceeds from the issuance of common shares in connection with the warrant exercises which occurred during the first quarter of 2021 and net proceeds from long-term debt of $32 million, which were partially offset by payments made on acquisition-related consideration.

Credit Facilities

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.

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.

During the second quarter of 2021, we completed a private offering of $350 million aggregate principal amount of Senior Notes, issued under an indenture, dated June 22, 2021 (the “Indenture”).

The Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by us and certain existing and future domestic subsidiaries.

We used the net proceeds from the sale of the Senior Notes to repay the $250 million 2020 Term Loan, prepay a portion of the 2019 Term Loan and for general corporate purposes.

As of June 30, 2021, we had $350 million aggregate principal amount of Senior Notes outstanding.

The Indenture contains customary terms and provisions (including representations, covenants, and conditions).

Certain covenants, among other things, restrict our ability to incur indebtedness, grant liens, make investments and sell assets.

The Indenture also contains customary events of default, covenants and representations and warranties.

Financial covenants include:

a senior secured leverage ratio no greater than 3.5 to 1.0, a total net leverage ratio of 3.0 to 1.0, and a fixed charge coverage ratio of 2.0 to 1.0.

The Senior Notes will mature on July 15, 2029, unless redeemed earlier, and bear interest at a rate of 4.125% per year until maturity.

Interest will be payable in cash, semi-annually in arrears, on January 15 and July 15 of each year, beginning on January 15, 2022.

The Senior Notes are subject to redemption in whole or in part at any time on or after July 15, 2024 at the redemption prices set forth in the Indenture.

In addition, before July 15, 2024, up to 35% of the aggregate principal amount of the Senior Notes may be redeemed with the net proceeds of certain equity offerings at the redemption price set forth in the Indenture, subject to certain conditions.

Further, all or a portion of the Senior Notes may be redeemed at any time prior to July 15, 2024 at a price equal to 100% of the principal amount, plus a “make-whole” premium and accrued interest, if any, to the date of redemption.

As of June 30, 2021, we have a credit agreement (the “Credit Agreement”) which provides for:

(1) a term loan facility, pursuant to which we incurred the $1,200 million 2019 Term Loan used to fund a part of the cash portion of the purchase price in the APi Acquisition, and (2) a $300 million five-year senior secured revolving credit facility (the “Revolving Credit Facility”) of which up to $150 million can be used for the issuance of letters of credit.

As of June 30, 2021, we had $1,140 million of indebtedness outstanding on the 2019 Term Loan and had no amounts outstanding under the Revolving Credit Facility, under which $227 million was available after giving effect to $73 million of outstanding letters of credit, which reduce availability.

One of our Canadian subsidiaries had a $20 million unsecured line of credit agreement with a variable interest rate based upon the prime rate.

This line of credit was closed during the first quarter of 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:

To the extent total outstanding borrowings under the Revolving Credit Facility (excluding undrawn letters of credit up to $40 million) is greater than 30% of the total commitment amount of the Revolving Credit Facility, our first lien net leverage ratio shall not exceed:

(i) 4.50 to 1.00 for each fiscal quarter ending in 2020;

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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.

Our first lien net leverage ratio as of June 30, 2021 was 1.13:1.00.

We were in compliance with all covenants contained in the Indenture and Credit Agreement as of June 30, 2021 and, in the case of the Credit Agreement, as of December 31, 2020.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis