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, 2023. 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 – Our Safety Services segment is a leading provider of safety services in North America, Europe, and Asia Pacific focusing on end-to-end integrated occupancy systems (fire protection, Heating, Ventilation, and Air Conditioning (“HVAC”) and entry), including service, monitoring, inspection, design and installation 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 – Our Specialty Services segment is 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 17 – “Segment Information” to our condensed consolidated financial statements included herein. 32 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 2025. During the three months ended March 31, 2024, we have incurred pre-tax restructuring costs within the Safety Services segment of $1 million in connection with the Chubb restructuring program. In total, we estimate that we will recognize approximately $125 million of restructuring and other costs related to the Chubb restructuring program by the end of fiscal year 2025. For additional information about our restructuring activity, see Note 4 – “Restructuring" to our condensed consolidated financial statements included herein. 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 8 – "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 consolidated 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 and second quarters due to the prevalence of unfavorable weather conditions within our North America companies, 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. 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. 33 Table of Contents 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 advertising, trade shows, and corporate marketing. General and administrative expenses consist primarily of compensation and associated costs for executive management, personnel, facility leases, administrative expenses associated with accounting, finance, legal, information systems, leadership development, human resources, and risk management, and overhead associated with these functions. General and administrative expenses also include outside professional fees and other corporate expenses. Amortization of intangible assets Amortization expense reflects the charges incurred to amortize our finite-lived identifiable intangible assets, such as customer relationships, 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. 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, 2023. 34 Table of Contents R ESULTS O F O PERATIONS The following is a discussion of our financial condition and results of operations during the three months ended March 31, 2024 and the three months ended March 31, 2023. Three months ended March 31, 2024 compared to the three months ended March 31, 2023 Three Months Ended March 31, Change ($ in millions) 2024 2023 $ % Net revenues $ 1,601 $ 1,614 $ (13) (0.8) % Cost of revenues 1,109 1,189 (80) (6.7) % Gross profit 492 425 67 15.8 % Selling, general, and administrative expenses 392 352 40 11.4 % Operating income 100 73 27 37.0 % Interest expense, net 34 37 (3) (8.1) % Loss on extinguishment of debt, net — 3 (3) (100.0) % Investment expense (income) and other, net 3 (5) 8 (160.0) % Other expense, net 37 35 2 5.7 % Income before income taxes 63 38 25 65.8 % Income tax provision 18 12 6 50.0 % Net income $ 45 $ 26 $ 19 73.1 % Net revenues Net revenues for the three months ended March 31, 2024 were $1,601 million compared to $1,614 million for the same period in 2023, a decrease of $13 million or 0.8%. The decrease in net revenues was primarily driven by disciplined project and customer selection on our longer term projects in the Specialty Services segment, partially offset by growth in inspection, service, and monitoring revenue in the Safety Services segment. Gross profit The following table presents our gross profit (net revenues less cost of revenues) and gross margin (gross profit as a percentage of net revenues) for the three months ended March 31, 2024 and 2023, respectively: Three Months Ended March 31, Change ($ in millions) 2024 2023 $ % Gross profit $ 492 $ 425 $ 67 15.8 % Gross margin 30.7 % 26.3 % Our gross profit for the three months ended March 31, 2024 was $492 million compared to $425 million for the same period in 2023, an increase of $67 million, or 15.8%. Gross margin for the three months ended March 31, 2024 was 30.7%, an increase of 440 basis points compared to the prior year period, primarily due to disciplined project and customer selection, pricing improvements in our Safety Services segment, and an improved mix of inspection, service, and monitoring revenue, which generates higher margins. 35 Table of Contents Operating expenses The following table presents operating expenses and operating margin (operating income as a percentage of net revenues) for the three months ended March 31, 2024 and 2023, respectively: Three Months Ended March 31, Change ($ in millions) 2024 2023 $ % Selling, general, and administrative expenses $ 392 $ 352 $ 40 11.4 % SG&A expenses as a % of net revenues 24.5 % 21.8 % Operating margin 6.2 % 4.5 % SG&A expenses (excluding amortization) (Non-GAAP) $ 342 $ 304 $ 38 12.5 % SG&A expenses (excluding amortization) as a % of net revenues (Non-GAAP) 21.4 % 18.8 % Selling, general, and administrative expenses Our SG&A expenses for the three months ended March 31, 2024 were $392 million compared to $352 million for the same period in 2023, an increase of $40 million. SG&A expenses as a percentage of net revenues was 24.5% during the three months ended March 31, 2024 compared to 21.8% for the same period in 2023. The increase in SG&A expenses as a percentage of net revenues was primarily driven by investments to support our Safety Services and Specialty Services segments in the three months ended March 31, 2024 compared to 2023. The increase was also due to third party advisor costs related to the Series B Preferred Stock Conversion that are non-recurring in nature. Our SG&A expenses excluding amortization for the three months ended March 31, 2024 were $342 million, or 21.4% of net revenues, compared to $304 million, or 18.8% of net revenues, for the same period of 2023. The increase in SG&A expenses excluding amortization as a percentage of net revenues is 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 $34 million and $37 million for the three months ended March 31, 2024 and 2023, respectively. The decrease in interest expense was primarily due to the decrease in the average outstanding principal amounts of our floating rate debt, partially offset by an increase in interest rates on our floating interest rate debt. Loss on extinguishment of debt, net During 2023, we made aggregate payments of $200 million to pay down outstanding principal amounts of the 2019 Term Loan and 2021 Term Loan. In connection with the payments, we recognized a net loss on debt extinguishment of $3 million. Investment expense (income) and other, net Investment expense and other, net was $3 million for the three months ended March 31, 2024 compared to income of $5 million the prior year. The increase in investment expense and other was primarily due to an increase in non-service pension costs in the current year. Income tax provision The effective tax rate for the three months ended March 31, 2024 was 28.0%, compared to 30.6% in the same period of 2023 . The difference in the effective tax rate was driven by changes to the forecasted geographical income mix offset by discrete items. The difference between the effective tax rate and the statutory U.S. federal income tax rate of 21.0% is due to the nondeductible permanent items, taxes on foreign earnings in jurisdictions that have higher tax rates, and state taxes. The Organization for Economic Co-operation and Development has a framework to implement a global minimum corporate tax of 15% for companies with global revenues and profits above certain thresholds (referred to as Pillar 2), with 36 Table of Contents certain aspects of Pillar 2 effective January 1, 2024 and other aspects effective January 1, 2025. While it is uncertain whether the U.S. will enact legislation to adopt Pillar 2, certain countries in which the Company operates have adopted the legislation, and other countries are in the process of introducing legislation to implement Pillar 2. The Company is continuing to evaluate and monitor but does not expect for Pillar 2 to have a material impact on the effective tax rate or the consolidated financial statements. Net income and EBITDA The following table presents net income and EBITDA for the three months ended March 31, 2024 and 2023, respectively: Three Months Ended March 31, Change ($ in millions) 2024 2023 $ % Net income $ 45 $ 26 $ 19 73.1 % EBITDA (non-GAAP) 166 149 $ 17 11.4 % Net income as a % of net revenues 2.8 % 1.6 % EBITDA as a % of net revenues 10.4 % 9.2 % Our net income for the three months ended March 31, 2024 was $45 million compared to $26 million for the same period in 2023, an increase of $19 million. Net income as a percentage of net revenues for the three months ended March 31, 2024 and 2023 was 2.8% and 1.6%, respectively. The improvement is primarily attributable to growth in inspection, service, and monitoring revenue and pricing improvements in our Safety Services segment, in addition to improved operating margin due to disciplined project and customer selection in our Specialty Services segment. The net income increase was partially offset by an increase in non-service pension costs of approximately $7 million. EBITDA for the three months ended March 31, 2024 was $166 million compared to $149 million for the same period in 2023, an increase of $17 million. The increase in EBITDA was primarily driven by the factors previously discussed. See the discussion and reconciliation of our non-U.S. GAAP financial measures below. Operating Segment Results for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 Net Revenues Three Months Ended March 31, Change ($ in millions) 2024 2023 $ % Safety Services $ 1,214 $ 1,191 $ 23 1.9 % Specialty Services 389 430 $ (41) (9.5) % Corporate and Eliminations (2) (7) NM NM $ 1,601 $ 1,614 $ (13) (0.8) % Operating Income (Loss) Three Months Ended March 31, Change ($ in millions) 2024 2023 $ % Safety Services $ 125 $ 96 $ 29 30.2 % Safety Services operating margin 10.3 % 8.1 % Specialty Services $ 7 $ — $ 7 NM Specialty Services operating margin 1.8 % — % Corporate and Eliminations $ (32) $ (23) NM NM $ 100 $ 73 $ 27 37.0 % 37 Table of Contents EBITDA Three Months Ended March 31, Change ($ in millions) 2024 2023 $ % Safety Services $ 163 $ 146 $ 17 11.6 % Safety Services EBITDA as a % of net revenues 13.4 % 12.3 % Specialty Services $ 33 $ 27 $ 6 22.2 % Specialty Services EBITDA as a % of net revenues 8.5 % 6.3 % Corporate and Eliminations $ (30) $ (24) NM NM $ 166 $ 149 $ 17 11.4 % NM = Not meaningful The following discussion breaks down the net revenues, operating income (loss), and EBITDA by operating segment for the three months ended March 31, 2024 compared to the three months ended March 31, 2023. Safety Services Safety Services net revenues for the three months ended March 31, 2024 increased by $23 million or 1.9% compared to the same period in 2023. The increase was primarily driven by increased inspection, service, and monitoring revenue. This increase was also due to continued strength in our new and existing end markets and strategic pricing improvements. Safety Services operating margin for the three months ended March 31, 2024 and 2023 was approximately 10.3% and 8.1%, respectively. The increase was primarily the result of disciplined project and customer selection, pricing improvements, improved mix of inspection, service and monitoring revenue, which generates higher margins, and savings in our Safety Services segment related to the Chubb restructuring program. Safety Services EBITDA as a percentage of net revenues for the three months ended March 31, 2024 and 2023 was approximately 13.4% and 12.3%, respectively. This increase was primarily related to the factors discussed above. Specialty Services Specialty Services net revenues for the three months ended March 31, 2024 decreased by $41 million or 9.5% compared to the same period in 2023. The decrease was primarily due to continued disciplined project and customer selection on longer term projects and the planned exit of a customer relationship in the Infrastructure/Utility reporting unit. Specialty Services operating margin was approximately 1.8% and 0% for the three months ended March 31, 2024 and 2023, respectively. The increase was primarily the result of disciplined project and customer selection. Specialty Services EBITDA as a percentage of net revenues for the three months ended March 31, 2024 and 2023 was approximately 8.5% and 6.3%, 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 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 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 38 Table of Contents 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) SG&A expenses (excluding amortization) 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 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) for the periods indicated: Three Months Ended March 31, ($ in millions) 2024 2023 Reported SG&A expenses $ 392 $ 352 Adjustments to reconcile to SG&A expenses to SG&A expenses (excluding amortization) Amortization expense (50) (48) SG&A expenses (excluding amortization) $ 342 $ 304 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 March 31, ($ in millions) 2024 2023 Reported net income $ 45 $ 26 Adjustments to reconcile net income to EBITDA: Interest expense, net 34 37 Income tax provision 18 12 Depreciation 19 19 Amortization 50 55 EBITDA $ 166 $ 149 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, our 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. 39 Table of Contents As of March 31, 2024, we had $643 million of total liquidity, comprising $247 million in cash and cash equivalents and $396 million ($400 million less outstanding letters of credit of approximately $4 million, which reduce availability) of available borrowings under our Revolving Credit Facility. During 2022, we 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 limit was increased by $100 million to $250 million. During 2023, we completed the Fourth Amendment to our credit agreement, repricing our 2019 Term Loan and 2021 Term Loan. The repricing reduced 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. During the three months ended March 31, 2024, we upsized our 2021 Term Loan by $300 million with a Fifth Amendment to our credit agreement. The loan proceeds were directed as consideration for a portion of the purchase price for the Series B Preferred Stock Conversion. During the three months ended March 31, 2024, we drew $100 million under the Revolving Credit Facility to fund a portion of the purchase price for the Series B Preferred Stock Conversion. 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. On February 26, 2024, our Board of Directors authorized a stock repurchase program ("SRP") to purchase up to an aggregate of $1,000 million of shares of our common stock. This stock repurchase program is indefinite, unless otherwise modified or terminated by our Board of Directors at any time in its sole discretion. During the three months ended March 31, 2024, we repurchased 16,260,160 shares of common stock for approximately $600 million. As of March 31, 2024, we had approximately $400 million of authorized repurchases remaining under the SRP. In 2022, our Board of Directors authorized a stock repurchase program ("2022 SRP"), authorizing the purchase of up to an aggregate of $250 million of common stock through February 2024. The 2022 SRP expired on February 29, 2024. Cash Flows The following table summarizes net cash flows with respect to our operating, investing and financing activities for the periods indicated: Three Months Ended March 31, ($ in millions) 2024 2023 Net cash provided by (used in) operating activities $ 7 $ (1) Net cash used in investing activities (22) (27) Net cash used in financing activities (213) (216) Effect of foreign currency exchange rate change on cash, cash equivalents, and restricted cash (4) 2 Net decrease in cash, cash equivalents, and restricted cash $ (232) $ (242) Cash, cash equivalents, and restricted cash, end of period $ 248 $ 365 Net Cash Provided by (Used in) Operating Activities Net cash provided by operating activities was $7 million for the three months ended March 31, 2024 compared to $1 million of cash used for the same period in 2023. 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 by operating activities is also driven by lower working capital needs associated with the various services we provided in the three months ended March 31, 2024 compared to the 40 Table of Contents 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. Net Cash Used in Investing Activities Net cash used in investing activities was $22 million for the three months ended March 31, 2024 compared to $27 million for the same period in 2023. We had proceeds on the sale of property and equipment of $23 million during the three months ended March 31, 2024 compared to $4 million for the same period in 2023, partially offset by cash used in acquisitions of $23 million and $10 million in the three months ended March 31, 2024 and 2023, respectively. Net Cash Used in Financing Activities Net cash used in financing activities was $213 million for the three months ended March 31, 2024 compared to $216 million used in financing activities for the same period in 2023. The consistent use of cash in financing activities was primarily driven by equity and stock repurchases in the three months ended March 31, 2024 related to the Series B Preferred Stock Conversion. In the three months ended March 31, 2024, $400 million of proceeds from the 2021 Term Loan and Revolving Credit Facility were used for share repurchases of $600 million during the Series B Preferred Stock Conversion. The cash used in financing activities in the three months ended March 31, 2023 was driven by $202 million of aggregate payments on the 2019 Term Loan and 2021 Term Loan. 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 term loan ("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. During the three months ended March 31, 2024, we completed the Fifth Amendment to our credit agreement, upsizing our 2021 Term Loan by an aggregate principal amount equal to $300. The loan proceeds were directed as consideration for a portion of the purchase price for the Series B Preferred Stock Conversion. In 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. 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 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. Based on the early prepayments we have made, we do not owe any quarterly principal amounts for the remainder of the 2019 Term Loan. 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 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. Based on the early prepayments we have made, we do not owe any quarterly principal amounts for the remainder of the 2021 Term Loan. 41 Table of Contents 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 March 31, 2024 was 2.09:1.00. As of March 31, 2024, the 2019 Term Loan and the 2021 Term Loan have remaining principal amounts of $330 million and $1,707 million, respectively. We had $100 million outstanding under the Revolving Credit Facility, under which $396 million was available after giving effect to $4 million of outstanding letters of credit, which reduces availability. On April 30, 2024, we began a process to reprice our 2021 Term Loan with a remaining principal balance of $1,707 million. We expect that the repricing will reduce the applicable margin on all outstanding amounts. Additionally, we expect to increase the existing 2021 Term Loan by approximately $550 million on the same terms as the current 2021 Term Loan. We expect to use the proceeds of approximately $550 million to refinance the 2019 Term Loan with a remaining principal of $330 million and repay the $100 million Revolving Credit Facility borrowing as well as to provide funds for general corporate purposes, including the acquisition of Elevated Facility Services Group. We expect the transaction to close in early May 2024. 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 March 31, 2024, we had $337 million aggregate principal amount of 4.125% Senior Notes outstanding. On October 21, 2021, 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 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 March 31, 2024, 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 March 31, 2024 and December 31, 2023. Issuance and Conversion 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 42 Table of Contents 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. On February 28, 2024, we entered into a Conversion and Repurchase Agreement with Juno Lower Holdings L.P. ("Juno Lower Holdings"), FD Juno Holdings L.P. ("FD Juno Holdings", and together with Juno Lower Holdings, "Blackstone"), Viking Global Equities Master Ltd. ("VGEM") and Viking Global Equities II L.P. (VGE II, and collectively with VGEM, "Viking" and collectively with the Blackstone, the "Series B Holders") pursuant to which Blackstone and Viking agreed to convert all of the outstanding shares of the Series B Preferred Stock that they hold, which represents all of the Series B Preferred Stock outstanding. The transactions contemplated by the agreement (the "Series B Preferred Stock Conversion") were also consummated on February 28, 2024. Under the terms of the agreement, (i) the Series B Holders each agreed to exercise their respective right to convert all of their Series B Preferred Stock into common stock, resulting in a total of 800,000 shares of Series B Preferred Stock being converted into approximately 32,803,519 shares of common stock (inclusive of approximately 283,196 shares attributable to accrued and unpaid dividends thereon (the "Conversion Shares") and (ii) upon issuance of the Conversion Shares, we agreed to immediately repurchase one-half of the Conversion Shares, on a pro rata basis, from the Series B Holders for an aggregate purchase price of $600. The repurchase price was financed by (i) an incremental term facility of $300 funded exclusively by Blackstone in the amount of $225 and Viking in the amount of $75 and (ii) cash and available credit from the balance sheet. 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 12 – "Leases" in the Annual Report on Form 10-K filed on February 28, 2024. We have not had material changes to our lease obligations during the three months ended March 31, 2024. • Debt – See Note 10 – "Debt" for future principal payments and interest rates on our debt instruments. • Tax Obligations – See Note 11 – "Income Taxes." • Pension obligations – See Note 12 – "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 typically less than 1.5% of annual net revenues. ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK Interest rate risk As of March 31, 2024, our outstanding variable interest rate debt was primarily related to our 2019 Term Loan and our 2021 Term Loan. As of March 31, 2024, we had $330 million outstanding on the 2019 Term Loan and $1,707 million outstanding on the 2021 Term Loan. To mitigate increases in variable interest rates, we have a $720 million interest rate swap, exchanging one-month SOFR for a rate of 3.59% per annum and a $400 million interest rate swap exchanging one-month SOFR for a rate of 3.41% per annum. In addition, interest expense will be offset by the amortization through October 2024 of the remaining gain of $10 million recognized from the termination of the previously outstanding $720 million notional amount interest rate swap. The remaining floating rate portfolio will bear interest based on one-month SOFR plus CSA plus 225 basis points (for the 2019 Term Loan) or one-month SOFR plus CSA plus 250 basis points (for the 2021 Term Loan). As of March 31, 2024, excluding letters of credit outstanding of $4 million, we had $100 million of outstanding revolving loans under our Credit Agreement. Foreign currency risk We have operations in over 20 countries globally. Revenues generated from foreign operations represented approximately 40% of our consolidated net revenues for three months ended March 31, 2024. Net revenues and expenses related to our foreign operations are, for the most part, denominated in the functional currency of the foreign operation, which 43 Table of Contents minimizes the impact fluctuations in exchange rates would have on net income or loss. We are subject to fluctuations in foreign currency exchange rates when transactions are denominated in currencies other than the functional currencies. Such transactions were not material to our operations during the three months ended March 31, 2024. These foreign currency transaction gains and losses, including hedging impacts, are classified in investment expense (income) and other, net, in the condensed consolidated statements of operations and were a (loss) gain of $(1) million and $— million for three months ended March 31, 2024 and 2023, respectively. These net foreign currency transaction gains and losses include derivative instruments designed to reduce foreign currency exchange rate risks. Translation gains or losses, which are recorded in accumulated other comprehensive loss in the condensed consolidated balance sheets, result from translation of the assets and liabilities of our foreign subsidiaries into U.S. dollars. Foreign currency translation (losses) gains totaled approximately $(42) million and $14 million for the three months ended March 31, 2024 and 2023, respectively. Our exposure to fluctuations in foreign currency exchange rates has increased as a result of our international presence and may continue to increase in the future if we continue to expand our operations outside of the U.S. We seek to manage foreign currency exposure by minimizing our consolidated net assets and liability positions in currencies other than the functional currency of our foreign subsidiaries. However, we believe that our exposure to transactional gains or losses resulting from fluctuations 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 order to manage foreign currency risk related to transactions in foreign currencies and the intercompany financing structure, we entered into cross-currency swaps to manage the foreign currency risk of certain intercompany loans. We also use foreign currency contracts as a way to mitigate foreign currency exposure. Other market risk We are also exposed to market risks impacting our customer base due to the potential related impact on accounts receivable or contract assets on uncompleted contracts. The amounts recorded may be at risk if our customers’ ability to pay these obligations is negatively impacted by economic conditions. We continually monitor the creditworthiness of our customers and maintain ongoing discussions with customers regarding contract status with respect to change orders and billing terms. Therefore, management believes it takes appropriate action to manage market and other risks, but there is no assurance management will be able to reasonably identify all risks with respect to the collectability of these assets. See also “Revenue Recognition from Contracts with Customers” under Critical Accounting Estimates within Item 7, "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, 2023. In addition, we are exposed to various supply chain risks, including the market risk of price fluctuations or availability of copper, steel, cable optic fiber, and other materials used as components of supplies or materials utilized in our operations. We are also exposed to increases in energy prices, particularly as they relate to gasoline prices for our vehicle fleet. Disruptions in our supply chain can occur due to market inefficiencies but can also be driven by other events, like cybersecurity breaches, pandemics, or similar disruptive events. While we believe we can increase our contract prices to adjust for some price increases in commodities, there can be no assurance that such price increases, if they were to occur, would be recoverable. Additionally, some of our fixed price contracts do not allow us to adjust prices and, as a result, increases in material costs could reduce profitability with respect to projects in progress. Significant declines in market prices for oil, gas, and other fuel sources may also impact our operations. Prolonged periods of low oil and gas prices may result in projects being delayed or canceled, and in a low oil and gas price environment, certain of our businesses could become less profitable or incur losses.