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 unaudited condensed consolidated financial statements (the "Interim Statements") and related notes included in this quarterly report, and the Company's 2023 audited annual consolidated financial statements, the related notes thereto and under the heading "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and other disclosures contained in our Annual Report on Form 10-K, including financial results for the year ended December 31, 2022. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those discussed in these forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under the “Cautionary Note Regarding Forward Looking Statements” section of this quarterly report. We prepare our financial statements in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). To supplement our financial results presented in accordance with U.S. GAAP in this MD&A section, we present EBITDA, which is a non-U.S. GAAP financial measure, to assist readers in understanding our performance and provide an additional perspective on trends and underlying operating results on a period-to-period comparable basis. Non-U.S. GAAP financial measures either exclude or include amounts not reflected in the most directly comparable measure calculated and presented in accordance with U.S. GAAP. Where a non-U.S. GAAP financial measure is used, we have provided the most directly comparable measure calculated and presented in accordance with U.S. GAAP, a reconciliation to the U.S. GAAP measure and a discussion of the reasons why management believes this information is useful to it and may be useful to investors. Unless the context otherwise requires, all references in this section to “APG”, the “Company”, “we”, “us”, and “our” refer to APi Group Corporation and its subsidiaries. Overview We are a global, market-leading business services provider of safety and specialty services in over 500 locations worldwide. 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 that deliver innovative solutions to our customers. We operate our business under two primary operating segments, which are also our reportable segments: • Safety Services – A leading provider of safety services in North America, Asia Pacific, 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, retrofitting and upgrading, pipeline infrastructure, access and road construction, supporting facilities, and performing ongoing integrity management and maintenance to customers within the energy industry. Customers within this segment vary from private and public utilities, communications, healthcare, education, transportation, manufacturing, industrial plants, and governmental agencies throughout North America. We focus on growing our recurring revenues 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. We believe maintenance and service revenues are generally more predictable through contractual arrangements with typical terms ranging from days to three years, with the majority having short durations and are often recurring due to consistent renewal rates and long-standing customer relationships. For financial information about our operating segments, see Note 18 – “Segment Information” to our condensed consolidated financial statements included herein. 38 Table of Contents R ECENT D EVELOPMENTS A ND C ERTAIN F ACTORS A ND T RENDS A FFECTING O UR R ESULTS O F O PERATIONS Restructuring During 2022, we announced our multi-year Chubb restructuring program designed to drive efficiencies and synergies and optimize operating margin. The Chubb restructuring program includes expenses related to workforce reductions, lease termination costs, and other facility rationalization costs through fiscal year 2024. During the nine months ended September 30, 2023, we have incurred pre-tax restructuring costs within the Safety Services segment of $21 million in connection with the Chubb restructuring program. In total, we estimate that we will recognize approximately $105 million of restructuring costs related to the Chubb restructuring program by the end of fiscal year 2024. For additional information about our restructuring activity, see Note 5 – “Restructuring" to our condensed consolidated financial statements included herein. Assets held for sale During the three months ended September 30, 2023, we determined our intent to sell an infrastructure/utility operating company in our Specialty Services segment (the "Operating Company"). We classified the net book value of the Operating Company as held for sale in the condensed consolidated balance sheets with the assets recorded in prepaid expenses and other current assets and liabilities recorded in other accrued liabilities. As of September 30, 2023, the Operating Company remains classified as held for sale. Pursuant to the authoritative literature, we evaluated the recoverability of the carrying value of the assets and liabilities held for sale. During the three months ended September 30, 2023, we recorded an impairment charge of $ 13 million. 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. 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, have resulted and may continue to result, 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. Increased competition for skilled labor resources and higher labor costs can reduce our profitability and impact our ability to deliver timely service to our customers. We have experienced supply chain disruptions, which have negatively impacted the source and supply of materials needed to perform our work. In addition, fluctuations in foreign currencies may have an impact on our financial position and the results of operations. However, we believe that our exposure to transactional gains or losses resulting from changes in foreign currencies is limited because our foreign operations primarily invoice and collect receivables in their respective local or functional currencies, and the expenses associated with these transactions are generally contracted and paid for in the same local currencies. In cases where operational transactions represent a material currency risk, we generally enter into cross-currency swaps. Refer to Note 9 – "Derivatives" to our condensed consolidated financial statements included in this quarterly report for additional information on our hedging activities. 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 results of operations, liquidity, and cash flows, and we may be unable to fully mitigate, or benefit from such changes. Effect of Seasonality and Cyclical Nature of Business Our net revenues and results of operations can be subject to variability stemming from seasonal and other variations. Seasonal variations can be influenced by weather conditions impacting customer spending patterns, contract award seasons, and project schedules, as well as the timing of holidays. Consequently, net revenues for our businesses are typically lower during the first quarter due to the prevalence of unfavorable weather conditions within our North American operations, which can cause project delays and affect productivity. Additionally, the industries we serve can be cyclical. Fluctuations in end-user demand, or in the supply of services within those industries, can affect demand for our services. As a result, our business may be adversely affected by industry declines or by delays in new projects. Variations or unanticipated changes in project schedules in connection with large projects can create fluctuations in net revenues. 39 Table of Contents Recent Accounting Pronouncements A summary of recent accounting pronouncements is included in Note 2 – “Recent Accounting Pronouncements” to our condensed consolidated financial statements included herein. D ESCRIPTION O F K EY L INE I TEMS Net revenues Net revenues are generated from the sale of various types of contracted services, fabrication and distribution. We derive net revenues 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. Net revenues for fixed price agreements are 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. Net revenues from time and material contracts are recognized as the services are provided. Net revenues earned are based on total contract costs incurred plus an agreed upon markup. Net revenues for these cost-plus contracts are recognized over time on an input basis as labor hours are incurred, materials are utilized, and services are performed. Net revenues from wholesale or retail unit sales are recognized at a point-in-time upon shipment. Cost of revenues Cost of revenues consists of direct labor, materials, subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Labor costs are considered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed. Gross profit Our gross profit is influenced by direct labor, materials, and subcontract costs. Our profit margins are also influenced by raw material costs, contract mix, weather, and proper coordination with contract providers. Labor-intensive contracts usually drive higher margins than those contracts that include material, subcontract, and equipment costs. Selling, general, and administrative expenses ("SG&A") Selling expenses consist primarily of compensation and associated costs for sales and marketing personnel, costs of advertising, trade shows, and corporate marketing. General and administrative expenses consist primarily of compensation and associated costs for executive management, personnel, facility leases, administrative expenses associated with accounting, finance, legal, information systems, leadership development, human resources, risk management, and overhead associated with these functions. General and administrative expenses also include outside professional fees and other corporate expenses. Amortization of intangible assets Amortization expense reflects the charges incurred to amortize our finite-lived identifiable intangible assets, such as customer relationships, which are amortized over their estimated useful lives. There is a portion of amortization expense related to the backlog intangible assets reflected in cost of revenues in the condensed consolidated statements of operations. Loss on extinguishment of debt, net Loss on extinguishment of debt, net reflects the difference between the repurchase price and carrying amount of debt at the time of extinguishment. 40 Table of Contents Non-service pension benefit Non-service pension benefit reflects the sum of the components of pension expense not related to service cost, i.e. interest cost, expected return on assets, and amortizations of prior service costs and actuarial gains and losses. C RITICAL A CCOUNTING P OLICIES A ND E STIMATES For information regarding our Critical Accounting Policies, see the “Critical Accounting Policies” section of the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022. R ESULTS O F O PERATIONS The following is a discussion of our financial condition and results of operations during the three and nine months ended September 30, 2023 and the three and nine months ended September 30, 2022. Three months ended September 30, 2023 compared to the three months ended September 30, 2022 Three Months Ended September 30, Change ($ in millions) 2023 2022 $ % Net revenues $ 1,784 $ 1,735 $ 49 2.8 % Cost of revenues 1,273 1,295 (22) (1.7) % Gross profit 511 440 71 16.1 % Selling, general, and administrative expenses 407 379 28 7.4 % Operating income 104 61 43 70.5 % Interest expense, net 37 33 4 12.1 % Gain on extinguishment of debt, net — (5) 5 (100.0) % Non-service pension benefit (3) (10) 7 (70.0) % Investment income and other, net (4) (3) (1) 33.3 % Other expense, net 30 15 15 100.0 % Income before income taxes 74 46 28 60.9 % Income tax provision 20 18 2 11.1 % Net income $ 54 $ 28 $ 26 92.9 % Net revenues Net revenues for the three months ended September 30, 2023 were $1,784 million compared to $1,735 million for the same period in 2022, an increase of $49 million or 2.8%. The increase in net revenues occurred in the Safety Services segment, driven by growth in inspection, service, and monitoring revenue. Gross profit The following table presents our gross profit (net revenues less cost of revenues) and gross margin (gross profit as a percentage of net revenues) for the three months ended September 30, 2023 and 2022, respectively: Three Months Ended September 30, Change ($ in millions) 2023 2022 $ % Gross profit $ 511 $ 440 $ 71 16.1 % Gross margin 28.6 % 25.4 % Our gross profit for the three months ended September 30, 2023 was $511 million compared to $440 million for the same period in 2022, an increase of $71 million, or 16.1%. Gross margin was 28.6%, an increase of 320 basis points compared to the prior year period, primarily due to disciplined project and customer selection, and pricing improvements in 41 Table of Contents our Safety Services and Specialty Services segments, as well as an improved mix of inspection, service, and monitoring revenue, which generates higher margins. Operating expenses The following table presents operating expenses and operating margin (operating income as a percentage of net revenues) for the three months ended September 30, 2023 and 2022, respectively: Three Months Ended September 30, Change ($ in millions) 2023 2022 $ % Selling, general, and administrative expenses $ 407 $ 379 $ 28 7.4 % SG&A expenses as a % of net revenues 22.8 % 21.8 % Operating margin 5.8 % 3.5 % SG&A expenses (excluding amortization and impairment) (Non-GAAP) $ 345 $ 343 $ 2 0.6 % SG&A expenses (excluding amortization and impairment) as a % of net revenues (Non-GAAP) 19.3 % 19.8 % Selling, general, and administrative expenses Our SG&A expenses for the three months ended September 30, 2023 were $407 million compared to $379 million for the same period in 2022, an increase of $28 million. SG&A expenses as a percentage of net revenues was 22.8% during the three months ended September 30, 2023 compared to 21.8% for the same period in 2022. The increase in SG&A expenses was primarily attributable to an impairment charge of $13 million related to assets held for sale and increased amortization expense in the three months ended September 30, 2023 compared to 2022. Our SG&A expenses excluding amortization and impairment for the three months ended September 30, 2023 were $345 million, or 19.3% of net revenues, compared to $343 million, or 19.8% of net revenues, for the same period of 2022. The decrease in SG&A expenses excluding amortization and impairment as a percentage of net revenues was driven by lower acquisition and integration related expenses incurred in three months ended September 30, 2023 compared to the same period in 2022 and better leverage of SG&A expenses across a growing revenue base, partially offset by investments to support growth in our Safety Services segment. See the discussion and reconciliation of our non-U.S. GAAP financial measures below. Interest expense, net Interest expense was $37 million and $33 million for the three months ended September 30, 2023 and 2022, respectively. The increase in interest expense was primarily due to higher interest rates on our floating interest rate debt in the current year, partially offset by a decrease in the outstanding principal amounts of our floating rate debt. Gain on extinguishment of debt, net During 2022, we repurchased $13 million and $23 million of the outstanding principal amount of the 4.125% Senior Notes and 4.750% Senior Notes, respectively. In connection with the repurchases, we recognized a net gain on debt extinguishment of $5 million. Non-service pension benefit The non-service pension benefit was $3 million and $10 million for the three months ended September 30, 2023 and 2022, respectively. The change was due to higher interest costs due to higher discount rates and lower expected return on asset benefit compared to the same period of the prior year. Investment income and other, net Investment income and other, net was $4 million and $3 million for the three months ended September 30, 2023 and 2022, respectively. The increase in investment income was primarily due to an increase in other miscellaneous income. 42 Table of Contents Income tax provision The income tax provision for the three months ended September 30, 2023 was $20 million compared to $18 million for the three months ended September 30, 2022. This change was driven by increased generated income before taxes in the three months ended September 30, 2023 compared to the same period in 2022. The effective tax rate for the three months ended September 30, 2023 was 25.5%, compared to 40.5% in the same period of 2022. The difference in the effective tax rate was driven by discrete and nondeductible permanent items. The difference between the effective tax rate and the statutory U.S. federal income tax rate of 21.0% is due to the nondeductible permanent items, taxes on foreign earnings in jurisdictions that have higher tax rates, and state taxes. Net income and EBITDA The following table presents net income and EBITDA for the three months ended September 30, 2023 and 2022, respectively: Three Months Ended September 30, Change ($ in millions) 2023 2022 $ % Net income $ 54 $ 28 $ 26 92.9 % EBITDA (non-GAAP) 188 152 36 23.7 % Net income as a % of net revenues 3.0 % 1.6 % EBITDA as a % of net revenues 10.5 % 8.8 % Our net income for the three months ended September 30, 2023 was $54 million compared to $28 million for the same period in 2022, an increase of $26 million. The improvement primarily resulted from disciplined project and customer selection, pricing improvements within our Safety Services and Specialty Services segments, and an increase in inspection, service, and monitoring revenue. The net income increase was partially offset by an impairment charge of $13 million related to assets held for sale. Net income as a percentage of net revenues for the three months ended September 30, 2023 and 2022 was 3.0% and 1.6%, respectively. EBITDA for the three months ended September 30, 2023 was $188 million compared to $152 million for the same period in 2022, an increase of $36 million. The increase in EBITDA was primarily driven by the factors previously discussed. See the discussion and reconciliation of our non-U.S. GAAP financial measures below. Operating Segment Results for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 Net Revenues Three Months Ended September 30, Change ($ in millions) 2023 2022 $ % Safety Services $ 1,217 $ 1,154 $ 63 5.5 % Specialty Services 569 590 (21) (3.6) % Corporate and Eliminations (2) (9) NM NM $ 1,784 $ 1,735 $ 49 2.8 % Operating Income (Loss) Three Months Ended September 30, Change ($ in millions) 2023 2022 $ % Safety Services $ 98 $ 60 $ 38 63.3 % Safety Services operating margin 8.1 % 5.2 % Specialty Services $ 43 $ 45 $ (2) (4.4 %) Specialty Services operating margin 7.6 % 7.6 % Corporate and Eliminations $ (37) $ (44) NM NM $ 104 $ 61 $ 43 70.5 % 43 Table of Contents EBITDA Three Months Ended September 30, Change ($ in millions) 2023 2022 $ % Safety Services $ 153 $ 116 $ 37 31.9 % Safety Services EBITDA as a % of net revenues 12.6 % 10.1 % Specialty Services $ 70 $ 73 $ (3) (4.1 %) Specialty Services EBITDA as a % of net revenues 12.3 % 12.4 % Corporate and Eliminations $ (35) $ (37) NM NM $ 188 $ 152 $ 36 23.7 % NM = Not meaningful The following discussion breaks down the net revenues, operating income (loss), and EBITDA by operating segment for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. Safety Services Safety Services net revenues for the three months ended September 30, 2023 increased by $63 million or 5.5% compared to the same period in 2022. The increase was primarily driven by increased inspection, service, and monitoring revenue. This increase was also due to continued strength in our end markets and strategic pricing improvements. Safety Services operating margin for the three months ended September 30, 2023 and 2022 was approximately 8.1% and 5.2%, respectively. The increase was primarily the result of growth in inspection, service, and monitoring revenue, disciplined project and customer selection, and pricing improvements across the segment. The increase was also driven by lower acquisition and integration related expenses incurred in the three months ended September 30, 2023 compared to the same period in 2022. Safety Services EBITDA as a percentage of net revenues for the three months ended September 30, 2023 and 2022 was approximately 12.6% and 10.1%, respectively. This increase was primarily related to the factors discussed above. Specialty Services Specialty Services net revenues for the three months ended September 30, 2023 decreased by $21 million or 3.6% compared to the same period in 2022. The decrease was primarily due to continued disciplined customer and project selection and customer project delays in the fabrication business, partially offset by strong growth in the service business during the three months ended September 30, 2023 compared to the same period in 2022. Specialty Services operating margin was approximately 7.6% for each of the three months ended September 30, 2023 and 2022. The consistency in operating margin despite lower revenues was primarily the result of disciplined project and customer selection offsetting lower volume leverage during the three months ended September 30, 2023. Specialty Services EBITDA as a percentage of net revenues for the three months ended September 30, 2023 and 2022 was approximately 12.3% and 12.4%, respectively, due to the factors discussed above. 44 Table of Contents Nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 Nine Months Ended September 30, Change ($ in millions) 2023 2022 $ % Net revenues $ 5,169 $ 4,855 $ 314 6.5 % Cost of revenues 3,737 3,604 133 3.7 % Gross profit 1,432 1,251 181 14.5 % Selling, general, and administrative expenses 1,148 1,138 10 0.9 % Operating income 284 113 171 151.3 % Interest expense, net 112 88 24 27.3 % Loss (gain) on extinguishment of debt, net 3 (5) 8 (160.0) % Non-service pension benefit (9) (32) 23 (71.9) % Investment income and other, net (9) (5) (4) 80.0 % Other expense, net 97 46 51 110.9 % Income before income taxes 187 67 120 179.1 % Income tax provision 59 16 43 268.8 % Net income $ 128 $ 51 $ 77 151.0 % Net revenues Net revenues for the nine months ended September 30, 2023 were $5,169 million compared to $4,855 million for the same period in 2022, an increase of $314 million or 6.5%. The increase in net revenues occurred in both the Safety Services and Specialty Services segments and was driven by growth in inspection, service, and monitoring revenue. Gross profit The following table presents our gross profit (net revenues less cost of revenues) and gross margin (gross profit as a percentage of net revenues) for the nine months ended September 30, 2023 and 2022, respectively: Nine Months Ended September 30, Change ($ in millions) 2023 2022 $ % Gross profit $ 1,432 $ 1,251 $ 181 14.5 % Gross margin 27.7 % 25.8 % Our gross profit for the nine months ended September 30, 2023 was $1,432 million compared to $1,251 million for the same period in 2022, an increase of $181 million, or 14.5%. Gross margin was 27.7%, an increase of 190 basis points compared to the prior year period, primarily due to disciplined project and customer selection within our Safety Services and Specialty Services segments and pricing improvements, as well as an improved mix of inspection, service, and monitoring revenue, which generates higher margins. 45 Table of Contents Operating expenses The following table presents operating expenses and operating margin (operating income (loss) as a percentage of net revenues) for the nine months ended September 30, 2023 and 2022, respectively: Nine Months Ended September 30, Change ($ in millions) 2023 2022 $ % Selling, general, and administrative expenses $ 1,148 $ 1,138 $ 10 0.9 % SG&A expense as a % of net revenues 22.2 % 23.4 % Operating margin 5.5 % 2.3 % SG&A expenses (excluding amortization and impairment) (Non-GAAP) $ 988 $ 995 $ (7) (0.7 %) SG&A expenses (excluding amortization and impairment) as a % of net revenues 19.1 % 20.5 % Selling, general, and administrative expenses Our SG&A expenses for the nine months ended September 30, 2023 were $1,148 million compared to $1,138 million for the same period in 2022, an increase of $10 million. SG&A expenses as a percentage of net revenues was 22.2% during the nine months ended September 30, 2023 compared to 23.4% for the same period in 2022. The decrease in expenses as a percentage of net revenues was driven by lower acquisition and integration related expenses incurred, better leverage of SG&A expenses across a growing revenue base, and changes in estimates to acquired liabilities in the nine months ended September 30, 2023 compared to the same period in the prior year, partially offset by an impairment charge of $13 million related to assets held for sale and investments to support growth in our Safety Services segment. Our SG&A expenses excluding amortization and impairment for the nine months ended September 30, 2023 were $988 million, or 19.1% of net revenues, compared to $995 million, or 20.5% of net revenues, for the same period of 2022 primarily due to the factors discussed above. See the discussion and reconciliation of our non-U.S. GAAP financial measures below. Interest expense, net Interest expense was $112 million and $88 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in interest expense was primarily due to higher interest rates on our floating interest rate debt in the current year, partially offset by a decrease in the outstanding principal amounts of our floating rate debt. Loss on extinguishment of debt, net During the nine months ended September 30, 2023, we made payments of $100 million and $100 million of the outstanding principal amount of the 2019 Term Loan and 2021 Term Loan, respectively. In connection with the payments, we recognized a net loss on debt extinguishment of $3 million. Non-service pension benefit The non-service pension benefit was $9 million and $32 million for the nine months ended September 30, 2023 and 2022, respectively. The change was due to higher interest costs due to higher discount rates and lower expected return on asset benefit compared to the same period of the prior year. Investment income and other, net Investment income and other, net was $9 million and $5 million for the nine months ended September 30, 2023 and 2022, respectively. The increase in investment income was primarily due to an increase in earnings from joint ventures. 46 Table of Contents Income tax provision The income tax provision for the nine months ended September 30, 2023 was an expense of $59 million compared to $16 million in the same period of 2022. This change was driven by increased generated income before taxes in the nine months ended September 30, 2023 compared to the same period of the prior year, and the reversal of the permanent reinvestment assertion, which was $9 million of benefit in 2022. The effective tax rate for the nine months ended September 30, 2023 was 31.3%, compared to 24.2% in the same period of 2022. The difference in the effective tax rate was driven by discrete and nondeductible permanent items, primarily the reversal of our indefinite reinvestment assertion in 2022. The difference between the effective tax rate and the statutory U.S. federal income tax rate of 21.0% is due to the nondeductible permanent items, taxes on foreign earnings in jurisdictions that have higher tax rates, state taxes, and discrete items. Net income and EBITDA The following table presents net income and EBITDA for the nine months ended September 30, 2023 and 2022, respectively: Nine Months Ended September 30, Change ($ in millions) 2023 2022 $ % Net income $ 128 $ 51 $ 77 151.0 % EBITDA (non-GAAP) 525 380 145 38.2 % Net income as a % of net revenues 2.5 % 1.1 % EBITDA as a % of net revenues 10.2 % 7.8 % Our net income for the nine months ended September 30, 2023 was $128 million compared to $51 million for the same period in 2022, an increase of $77 million. The improvement primarily resulted from disciplined project and customer selection, pricing improvements within our Safety Services and Specialty Services segments, and growth in inspection, service, and monitoring revenue. The increase was also due to a decrease in operating expenses driven by lower acquisition and integration related expenses. The increase in net income was partially offset by an impairment charge of $13 million related to assets held for sale. Net income as a percentage of net revenues for the nine months ended September 30, 2023 and 2022 was 2.5% and 1.1%, respectively. EBITDA for the nine months ended September 30, 2023 was $525 million compared to $380 million for the same period in 2022, an increase of $145 million. The increase in EBITDA was primarily driven by the factors previously discussed. See the discussion and reconciliation of our non-U.S. GAAP financial measures below. Operating Segment Results for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 Net Revenues Nine Months Ended September 30, Change ($ in millions) 2023 2022 $ % Safety Services $ 3,633 $ 3,374 $ 259 7.7 % Specialty Services 1,554 1,520 34 2.2 % Corporate and Eliminations (18) (39) NM NM $ 5,169 $ 4,855 $ 314 6.5 % Operating Income (Loss) Nine Months Ended September 30, Change ($ in millions) 2023 2022 $ % Safety Services $ 292 $ 186 $ 106 57.0 % Safety Services operating margin 8.0 % 5.5 % Specialty Services $ 84 $ 70 $ 14 20.0 % Specialty Services operating margin 5.4 % 4.6 % Corporate and Eliminations $ (92) $ (143) NM NM $ 284 $ 113 $ 171 151.3 % 47 Table of Contents EBITDA Nine Months Ended September 30, Change ($ in millions) 2023 2022 $ % Safety Services $ 449 $ 360 $ 89 24.7 % Safety Services EBITDA as a % of net revenues 12.4 % 10.7 % Specialty Services $ 166 $ 153 $ 13 8.5 % Specialty Services EBITDA as a % of net revenues 10.7 % 10.1 % Corporate and Eliminations $ (90) $ (133) NM NM $ 525 $ 380 $ 145 38.2 % NM = Not meaningful The following discussion breaks down the net revenues, operating income (loss), and EBITDA by operating segment for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. Safety Services Safety Services net revenues for the nine months ended September 30, 2023 increased by $259 million or 7.7% compared to the same period in 2022. The increase was driven by increased inspection, service, and monitoring revenue. This increase was also due to continued strength in our end markets and strategic pricing improvements. Safety Services operating margin for the nine months ended September 30, 2023 and 2022 was approximately 8.0% and 5.5%, respectively. The increase was primarily the result of disciplined project and customer selection, pricing improvements, and improved mix of inspection, service, and monitoring revenue, which generates higher margins. The increase was also driven by lower acquisition and integration related expenses incurred in the nine months ended September 30, 2023 compared to the same period in 2022. Safety Services EBITDA as a percentage of net revenues for the nine months ended September 30, 2023 and 2022 was approximately 12.4% and 10.7%, respectively. This increase was primarily related to the factors discussed above. Specialty Services Specialty Services net revenues for the nine months ended September 30, 2023 increased by $34 million or 2.2% compared to the same period in 2022. The increase was primarily driven by an increase in service revenue in the infrastructure, utility, and specialty contracting markets during the nine months ended September 30, 2023 compared to the same period in 2022. Specialty Services operating margin for the nine months ended September 30, 2023 and 2022 was approximately 5.4% and 4.6%, respectively. The increase was primarily the result of disciplined project and customer selection during the nine months ended September 30, 2023. Specialty Services EBITDA as a percentage of net revenues for the nine months ended September 30, 2023 and 2022 was approximately 10.7% and 10.1%, respectively, due to the factors discussed above. Non-GAAP Financial Measures We supplement our reporting of consolidated financial information determined in accordance with U.S. GAAP with SG&A expenses (excluding amortization and impairment) and EBITDA (defined below), which are non-U.S. GAAP financial measures. We use these non-U.S. GAAP financial measures to evaluate our performance, both internally and as compared with our peers because they exclude certain items that may not be indicative of our core operating results. Management believes these measures are useful to investors since they (a) permit investors to view our performance using the same tools that management uses to evaluate our past performance, reportable business segments, and prospects for future performance, (b) permit investors to compare us with our peers, and (c) in the case of EBITDA, determines certain elements of management’s incentive compensation. These non-U.S. GAAP financial measures, however, have limitations as analytical tools and should not be considered in isolation from, a substitute for, or superior to, the related financial information we report in accordance with U.S. GAAP. The principal limitation of these non-U.S. GAAP financial measures is that they exclude significant expenses 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, these measures are subject to inherent 48 Table of Contents limitations as they reflect the exercise of judgment by management about which items are excluded or included in determining these non-U.S. GAAP financial measures. Investors are encouraged to review the following reconciliations of these non-U.S. GAAP financial measures to the most comparable U.S. GAAP financial measures and not to rely on any single financial measure to evaluate our business. SG&A expenses (excluding amortization and impairment) SG&A expenses (excluding amortization and impairment) is a measure of operating costs used by management to manage the business and its segments. We believe this non-U.S. GAAP measure provides meaningful information and helps investors understand our core selling, general, and administrative expenses excluding acquisition-related amortization expense and impairment charges to better enable investors to understand our financial results and assess our prospects for future performance. The following tables present reconciliations of SG&A expenses to SG&A expenses (excluding amortization and impairment) for the periods indicated: Three Months Ended September 30, ($ in millions) 2023 2022 Reported SG&A expenses $ 407 $ 379 Adjustments to reconcile to SG&A expenses to SG&A expenses (excluding amortization and impairment) Amortization expense (49) (36) Impairment of goodwill, intangibles, and other assets (13) — SG&A expenses (excluding amortization and impairment) $ 345 $ 343 Nine Months Ended September 30, ($ in millions) 2023 2022 Reported SG&A expenses $ 1,148 $ 1,138 Adjustments to reconcile to SG&A expenses to SG&A expenses (excluding amortization and impairment) Amortization expense (147) (143) Impairment of goodwill, intangibles, and other assets (13) — SG&A expenses (excluding amortization and impairment) $ 988 $ 995 EBITDA 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. We supplement the reporting of our consolidated financial information with EBITDA. We believe this non-U.S. GAAP measure provides meaningful information and helps investors understand our financial results and assess our prospects for future performance. Consolidated EBITDA is calculated in a manner consistent with segment EBITDA, which is a measure of segment profitability. The following table presents a reconciliation of net income to EBITDA for the periods indicated: Three Months Ended September 30, ($ in millions) 2023 2022 Reported net income $ 54 $ 28 Adjustments to reconcile net income to EBITDA: Interest expense, net 37 33 Income tax provision 20 18 Depreciation 21 22 Amortization 56 51 EBITDA $ 188 $ 152 49 Table of Contents Nine Months Ended September 30, ($ in millions) 2023 2022 Reported net income $ 128 $ 51 Adjustments to reconcile net income to EBITDA: Interest expense, net 112 88 Income tax provision 59 16 Depreciation 59 60 Amortization 167 165 EBITDA $ 525 $ 380 L IQUIDITY A ND C APITAL R ESOURCES Overview Our primary sources of liquidity are cash flows from the operating activities of our consolidated subsidiaries, available cash and cash equivalents, access to our $500 million five-year senior secured revolving credit facility (the "Revolving Credit Facility") and the proceeds from debt offerings. 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 inflation, over which we have no control. As of September 30, 2023, we had $945 million of total liquidity, comprising $461 million in cash and cash equivalents and $484 million ($500 million less outstanding letters of credit of approximately $16 million, which reduce availability) of available borrowings under our Revolving Credit Facility. During 2022, we issued and sold 800,000 shares of Series B Preferred Stock (defined below) for an aggregate purchase price of $800 million, and entered into an amendment to our credit agreement. As part of this amendment, we entered into a $1,100 million seven-year incremental term loan ("2021 Term Loan"), the Revolving Credit Facility was upsized by $200 million to $500 million, the maturity date of the Revolving Credit Facility was extended five years, and the letter of credit sublimit was increased by $100 million to $250 million. 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 continue to be, for working capital and general corporate purposes, including capital expenditures and debt service, any accrued consideration and compensation due to selling shareholders, including tax payments in connection therewith, as well as to identify, execute, and integrate strategic acquisitions and business transformation transactions or initiatives. In 2022, our Board of Directors authorized a stock repurchase program, authorizing the purchase of up to an aggregate of $250 million of common stock through February 2024. During the three and nine months ended September 30, 2023, we repurchased 656,489 and 1,626,493 shares of common stock for aggregate payments of approximately $18 million and $41 million under this stock repurchase program, respectively, leaving approximately $166 million of authorized repurchases. 50 Table of Contents Cash Flows The following table summarizes net cash flows with respect to our operating, investing and financing activities for the periods indicated: Nine Months Ended September 30, ($ in millions) 2023 2022 Net cash provided by operating activities $ 217 $ 82 Net cash used in investing activities (108) (2,931) Net cash (used in) provided by financing activities (253) 1,773 Effect of foreign currency exchange rate change on cash, cash equivalents, and restricted cash (1) (17) Net decrease in cash, cash equivalents, and restricted cash $ (145) $ (1,093) Cash, cash equivalents, and restricted cash, end of period $ 462 $ 398 Net Cash Provided by Operating Activities Net cash provided by operating activities was $217 million for the nine months ended September 30, 2023 compared to $82 million of cash used for the same period in 2022. The increase in cash provided by operating activities is primarily due to an increase in net income in the period. This increase in cash provided is also driven by lower working capital needs associated with the various services we provided in the nine months ended September 30, 2023 compared to the same period of the prior year. Cash flow from operations is primarily driven by changes in the mix and timing of demand for our services and working capital needs associated with the various services we provide. Working capital is primarily affected by changes in total accounts receivable, accounts payable, accrued expenses, and contract assets and contract liabilities, all of which tend to be related and are affected by changes in the timing and volume of work performed. The increase in cash provided by operating activities in the current year is also due to a one-time contribution to an assumed pension plan of $27 million during the nine months ended September 30, 2022. Net Cash Used in Investing Activities Net cash used in investing activities was $108 million for the nine months ended September 30, 2023 compared to $2,931 million for the same period in 2022. During 2022, we completed the Chubb Acquisition resulting in the use of $2,881 million for acquisitions during the nine months ended September 30, 2022 compared to $57 million for the same period in 2023. Net Cash (Used in) Provided by Financing Activities Net cash used in financing activities was $(253) million for the nine months ended September 30, 2023 compared to $1,773 million provided by financing activities for the same period in 2022. The decrease in cash provided by financing activities was primarily driven by equity and debt issuances in the nine months ended September 30, 2022 related to the Chubb Acquisition. In the nine months ended September 30, 2022, cash provided by financing activities was higher due to $1,104 million of proceeds from the issuance of the 2021 Term Loan and other debt, and $797 million of proceeds from the issuance of Series B Preferred Stock. The increase in cash used in financing activities in the nine months ended September 30, 2023 was also driven by $206 million of payments on long-term borrowings. Financing Activities Credit Agreement We have entered into a Credit Agreement by and among APi Group DE, Inc., our wholly-owned subsidiary, as borrower ("APi Group DE"), APG as a guarantor, the subsidiary guarantors from time to time party thereto, the lenders from time to time party thereto, and Citibank N.A., as administrative agent and as collateral agent (the “Credit Agreement”) which provides for: (1) a term loan facility, pursuant to which we incurred 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 a $1,100 million seven-year incremental term loan ("2021 Term Loan") used to fund a portion of the purchase price in the Chubb acquisition, and (2) a $500 million Revolving Credit Facility of which up to $250 million can be used for the issuance of letters of credit. 51 Table of Contents On October 11, 2023, we completed repricing of our 2019 Term Loan and 2021 Term Loan. The repricing reduces the applicable margin on all outstanding amounts by 25 basis points. Additionally, $422 million of the 2019 Term Loan was extended to the 2021 Term Loan and assumed all the same terms as the repriced 2021 Term Loan. We made a repayment of $100 million on the 2019 Term Loan concurrent with the close of this transaction. Following the repricing transaction, we have $505 million outstanding on 2019 Term Loan and $1,407 million outstanding on the 2021 Term Loan. Following the debt repricing transaction, the amended interest rate applicable to the 2019 Term Loan is, at our option, either (a) a base rate plus an applicable margin equal to 1.25% or (b) a Term SOFR rate (adjusted for statutory reserves) plus an applicable margin equal to 2.25% plus a credit spread adjustment ("CSA"). Principal payments on the 2019 Term Loan are due in quarterly installments on the last day of each fiscal quarter, unless prepayments are made, for a total annual amount equal to 1.00% of the initial aggregate principal amount of the 2019 Term Loan. The 2019 Term Loan matures on October 1, 2026. Following the debt repricing transaction, the amended interest rate applicable to the 2021 Term Loan is, at our option, either (a) a base rate plus an applicable margin equal to 1.50% or (b) a Term SOFR rate (adjusted for statutory reserves) plus an applicable margin equal to 2.50% plus a CSA. Principal payments on the 2021 Term Loan will be made in quarterly installments on the last day of each fiscal quarter, for a total annual amount equal to 1.00% of the initial aggregate principal amount of the 2021 Term Loan. The 2021 Term Loan matures on January 3, 2029. The 2021 Term Loan is subject to the same mandatory prepayment provisions as the 2019 Term Loan. The interest rate applicable to borrowings under the Revolving Credit Facility is, at our option, either (a) a base rate plus an applicable margin equal to 1.25% or (2) a Term SOFR rate (adjusted for statutory reserves) plus an applicable margin equal to 2.25% plus a CSA. The Credit Agreement contains customary representations and warranties, and affirmative and negative covenants, including covenants that, among other things, restrict our, and our restricted subsidiaries’, ability to (i) incur additional indebtedness; (ii) pay dividends or make other distributions or repurchase or redeem capital stock; (iii) prepay, redeem or repurchase certain debt; (iv) make loans and investments; (v) sell, transfer and otherwise dispose of assets; (vi) incur or permit to exist certain liens; (vii) enter into transactions with affiliates; (viii) enter into agreements restricting subsidiaries’ ability to pay dividends; and (ix) consolidate, amalgamate, merge or sell all or substantially all assets. The Credit Agreement also contains customary events of default. Furthermore, with respect to the revolving credit facility, we must maintain a first lien net leverage ratio that does not exceed (i) 4.00 to 1.00 for each fiscal quarter ending in 2021, and (ii) 3.75 to 1.00 for each fiscal quarter ending thereafter, if on the last day of any fiscal quarter the outstanding amount of all revolving loans and letter of credit obligations (excluding undrawn letters of credit up to $40 million) under the Credit Agreement is greater than 30% of the total revolving credit commitments thereunder subject to a right of cure. Our first lien net leverage ratio as of September 30, 2023 was 1.92:1.00. During the nine months ended September 30, 2023, we repaid an aggregate amount of $200 million, $100 million to each of the 2019 Term Loan and 2021 Term Loan. As a result, as of September 30, 2023, the 2019 Term Loan and the 2021 Term Loan had remaining principal amounts of $1,027 million and $985 million, respectively. On October 11, 2023, we made a repayment of $100 million on the 2019 Term Loan concurrent with the close of the repricing transaction. Following the repricing transaction, we have $505 million outstanding on 2019 Term Loan and $1,407 million outstanding on the 2021 Term Loan. We had no amounts outstanding under the Revolving Credit Facility, under which $484 million was available after giving effect to $16 million of outstanding letters of credit, which reduces availability. Senior Notes On June 22, 2021, APi Group DE completed a private offering of $350 million aggregate principal amount of 4.125% Senior Notes due 2029 (the “4.125% Senior Notes”), issued under an indenture, dated June 22, 2021. The 4.125% Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by us and certain of our subsidiaries. The 4.125% Senior Notes will mature on July 15, 2029, unless redeemed earlier, and bear interest at a rate of 4.125% per year until maturity, payable semi-annually in arrears. We used the net proceeds from the sale of the 4.125% Senior Notes to repay a previously outstanding term loan, prepay a portion of the 2019 Term Loan and for general corporate purposes. As of September 30, 2023, we had $337 million aggregate principal amount of 4.125% Senior Notes outstanding. On October 21, 2021, APi Escrow Corp, a wholly-owned subsidiary of the Company, completed a private offering of $300 million aggregate principal amount of 4.750% Senior Notes due 2029 (the “4.750% Senior Notes”) issued under an indenture dated October 21, 2021, as supplemented by a supplemental indenture dated January 3, 2022. The 4.750% Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by us and certain of our subsidiaries. The 4.750% Senior Notes will mature on October 15, 2029, unless earlier redeemed, and bear interest at a rate of 4.750% per year until 52 Table of Contents maturity, payable semi-annually in arrears. We used the net proceeds from the sale of the 4.750% Senior Notes to finance a portion of the consideration for the Chubb Acquisition. As of September 30, 2023, we had $277 million aggregate principal amount of 4.750% Senior Notes outstanding. Debt Covenants We were in compliance with all covenants contained in the indentures governing the 4.125% Senior Notes and 4.750% Senior Notes and Credit Agreement as of September 30, 2023 and December 31, 2022. Issuance of Series B Preferred Stock During 2022, we issued and sold 800,000 shares of our 5.5% Series B Redeemable Convertible Preferred Stock, par value $0.0001 per share (the "Series B Preferred Stock"), for an aggregate purchase price of $800 million, pursuant to securities purchase agreements entered into on July 26, 2021 with certain investors. The net proceeds from the Series B Preferred Stock issuance were used to fund a portion of the consideration for the Chubb Acquisition. The holders of the Series B Preferred Stock are entitled to dividends at the rate of 5.5% per annum, payable in cash or common stock, at our election. The Series B Preferred Stock ranks senior to our common stock and Series A Preferred Stock with respect to dividend rights and rights upon the voluntary or involuntary liquidation, dissolution, or winding up of our affairs. The Series B Preferred Stock is convertible, at the holder’s option, into shares of our common stock at a conversion price equal to $24.60 per share, subject to certain customary adjustments. The holders of Series B Preferred Stock have certain other rights including voting rights on an as-converted basis, certain pre-emptive rights on our private equity offerings, certain registration rights, and, in the case of certain holders, certain director designation rights, as provided in the certificate of designation governing the Series B Preferred Stock. We may, at our option, effect conversion of the outstanding shares of Series B Preferred Stock to common stock, but only if the volume-weighted average price of our common stock exceeds $36.90 per share for 15 consecutive trading days. Material Cash Requirements from Known Contractual and Other Obligations Our material cash requirements from known contractual and other obligations primarily relate to the following, for which information on both a short-term and long-term basis is provided in the indicated notes to the Interim Statements and expected to be satisfied using cash generated from operations: • Operating and Finance Leases – See Note 11 – "Leases" in the Annual Report on Form 10-K filed on March 1, 2023. We have not had material changes to our lease obligations during the nine months ended September 30, 2023. • Debt – See Note 11 – "Debt" for future principal payments and interest rates on our debt instruments. • Tax Obligations – See Note 12 – "Income Taxes." • Pension obligations – See Note 13 – "Employee Benefit Plans." We make investments in our properties and equipment to enable continued expansion and effective performance of our business. Our capital expenditures are expected to be approximately 1.5% of annual net revenues.