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. After reviewing the businesses in our portfolio, we have made the decision to realign our segments beginning in 2025 by moving our HVAC business from Safety Services to Specialty Services. 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. 38 Table of Contents For financial information about our operating segments, see Note 17 – “Segment Information” to our condensed consolidated financial statements included herein. R ECENT D EVELOPMENTS A ND C ERTAIN F ACTORS A ND T RENDS A FFECTING O UR R ESULTS O F O PERATIONS Acquisitions On June 3, 2024, we completed the acquisition of Elevated Facility Services Group ("Elevated"). The total net consideration for the Elevated acquisition was $579 million. Elevated is a premier provider of contractually based services for all major brands of elevator and escalator equipment. On October 1, 2024, we completed an acquisition in the Safety Services Segment. The aggregate consideration paid was approximately $104 million. For additional information about our acquisition activity, see Note 3 – “Business Combinations" and Note 18 – "Subsequent Events" to our condensed consolidated financial statements included herein. 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 nine months ended September 30, 2024, we have incurred pre-tax restructuring costs within the Safety Services segment of $5 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 39 Table of Contents 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. 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. 40 Table of Contents 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. Investment expense (income) and other, net Investment expense (income) and other, net includes expense (income) from foreign currency forward contracts that we use to hedge the effect of foreign currency exchange rate fluctuations on forecasted foreign currency transactions, joint ventures, miscellaneous items, and non-service pension cost (benefit). Non-service pension cost (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, 2023. 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, 2024 and the three and nine months ended September 30, 2023. Three months ended September 30, 2024 compared to the three months ended September 30, 2023 Three Months Ended September 30, Change ($ in millions) 2024 2023 $ % Net revenues $ 1,826 $ 1,784 $ 42 2.4 % Cost of revenues 1,259 1,273 (14) (1.1) % Gross profit 567 511 56 11.0 % Selling, general, and administrative expenses 425 407 18 4.4 % Operating income 142 104 38 36.5 % Interest expense, net 41 37 4 10.8 % Investment expense (income) and other, net 1 (7) (8) (114.3) % Other expense, net 42 30 12 40.0 % Income before income taxes 100 74 26 35.1 % Income tax provision 31 20 11 55.0 % Net income $ 69 $ 54 $ 15 27.8 % Net revenues Net revenues for the three months ended September 30, 2024 were $1,826 million compared to $1,784 million for the same period in 2023, an increase of $42 million or 2.4%. The increase in net revenues was primarily driven by revenue from acquisitions completed and growth in inspection, service, and monitoring revenue in the Safety Services segment, partially offset by the divestiture of an Infrastructure/Utility operating company during 2023 and project delays in the Safety Services and Specialty Services segments. 41 Table of Contents Gross profit The following table presents our gross profit (net revenues less cost of revenues) and gross margin (gross profit as a percentage of net revenues) for the three months ended September 30, 2024 and 2023, respectively: Three Months Ended September 30, Change ($ in millions) 2024 2023 $ % Gross profit $ 567 $ 511 $ 56 11.0 % Gross margin 31.1 % 28.6 % Our gross profit for the three months ended September 30, 2024 was $567 million compared to $511 million for the same period in 2023, an increase of $56 million or 11.0%. Gross margin for the three months ended September 30, 2024 was 31.1%, an increase of 250 basis points compared to the prior year period, primarily due to disciplined project and customer selection and an improved mix of inspection, service, and monitoring revenue in the Safety Services segment, which generates higher margins. The increase in gross margin was also driven by savings in our Safety Services segment related to the Chubb restructuring program. Operating expenses The following table presents operating expenses and operating margin (operating income as a percentage of net revenues) for the three months ended September 30, 2024 and 2023, respectively: Three Months Ended September 30, Change ($ in millions) 2024 2023 $ % Selling, general, and administrative expenses $ 425 $ 407 $ 18 4.4 % SG&A expenses as a % of net revenues 23.3 % 22.8 % Operating margin 7.8 % 5.8 % SG&A expenses (excluding amortization) (non-GAAP) $ 368 $ 345 $ 23 6.7 % SG&A expenses (excluding amortization) as a % of net revenues (non-GAAP) 20.2 % 19.3 % Selling, general, and administrative expenses Our SG&A expenses for the three months ended September 30, 2024 were $425 million compared to $407 million for the same period in 2023, an increase of $18 million. SG&A expenses as a percentage of net revenues was 23.3% during the three months ended September 30, 2024 compared to 22.8% for the same period in 2023. The increase in SG&A expenses was primarily driven by SG&A expenses from acquisitions completed, acquisition costs that are non-recurring in nature, and investments to support our Safety Services segment in the three months ended September 30, 2024 compared to 2023. Our SG&A expenses excluding amortization for the three months ended September 30, 2024 were $368 million, or 20.2% of net revenues, compared to $345 million, or 19.3% 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 $41 million and $37 million for the three months ended September 30, 2024 and 2023, respectively. The increase in interest expense was primarily due to the increase in volume of debt offset by the rate decrease as a result of the repricing of the Term Loans completed in October 2023 and May 2024. 42 Table of Contents Investment expense (income) and other, net Investment expense (income) and other, net was expense of $1 million for the three months ended September 30, 2024 compared to income of $7 million for the same period of 2023. The increase in investment expense (income) and other was primarily due to an increase in non-service pension costs in the current year. Income tax provision The effective tax rate for the three months ended September 30, 2024 was 30.9% compared to 25.5% in the same period of 2023. The difference in the effective tax rate was driven by discrete and nondeductible permanent items. The difference between the effective tax rate and the statutory U.S. federal income tax rate of 21.0% is due to nondeductible permanent items, taxes on foreign earnings in jurisdictions that have higher tax rates, state taxes, and discrete items. The Organization for Economic Co-operation and Development has a framework to implement a global minimum corporate tax of 15% for companies with global revenues and profits above certain thresholds (referred to as Pillar 2), with certain aspects of Pillar 2 effective January 1, 2024 and other aspects effective January 1, 2025. While it is uncertain whether the U.S. will enact legislation to adopt Pillar 2, certain countries in which we operate have adopted the legislation, and other countries are in the process of introducing legislation to implement Pillar 2. We are continuing to evaluate and monitor but does not expect for Pillar 2 to have a material impact on the effective tax rate or the consolidated financial statements. Net income and EBITDA The following table presents net income and EBITDA for the three months ended September 30, 2024 and 2023, respectively: Three Months Ended September 30, Change ($ in millions) 2024 2023 $ % Net income $ 69 $ 54 $ 15 27.8 % EBITDA (non-GAAP) 218 188 30 16.0 % Net income as a % of net revenues 3.8 % 3.0 % EBITDA as a % of net revenues 11.9 % 10.5 % Our net income for the three months ended September 30, 2024 was $69 million compared to $54 million for the same period in 2023, an increase of $15 million. The improvement is attributable to acquisitions completed in our Safety Services segment, and growth in inspection, service, and monitoring revenue, in addition to improved operating margin due to disciplined project and customer selection in our Safety Services segment. The increase is also attributable to savings in our Safety Services segment related to the Chubb restructuring program. The increase in net income was partially offset by the increase in SG&A expenses from acquisitions completed. Net income as a percentage of net revenues for the three months ended September 30, 2024 and 2023 was 3.8% and 3.0%, respectively. EBITDA for the three months ended September 30, 2024 was $218 million compared to $188 million for the same period in 2023, an increase of $30 million. The increase in EBITDA was primarily driven by the factors previously discussed. See the discussion and reconciliation of our non-U.S. GAAP financial measures below. Operating Segment Results for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 Net Revenues Three Months Ended September 30, Change ($ in millions) 2024 2023 $ % Safety Services $ 1,335 $ 1,217 $ 118 9.7 % Specialty Services 493 569 (76) (13.4) % Corporate and Eliminations (2) (2) NM NM $ 1,826 $ 1,784 $ 42 2.4 % 43 Table of Contents Operating Income (Loss) Three Months Ended September 30, Change ($ in millions) 2024 2023 $ % Safety Services $ 148 $ 98 $ 50 51.0 % Safety Services operating margin 11.1 % 8.1 % Specialty Services $ 40 $ 43 $ (3) (7.0 %) Specialty Services operating margin 8.1 % 7.6 % Corporate and Eliminations $ (46) $ (37) NM NM $ 142 $ 104 $ 38 36.5 % EBITDA Three Months Ended September 30, Change ($ in millions) 2024 2023 $ % Safety Services $ 197 $ 153 $ 44 28.8 % Safety Services EBITDA as a % of net revenues 14.8 % 12.6 % Specialty Services $ 66 $ 70 $ (4) (5.7 %) Specialty Services EBITDA as a % of net revenues 13.4 % 12.3 % Corporate and Eliminations $ (45) $ (35) NM NM $ 218 $ 188 $ 30 16.0 % 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, 2024 compared to the three months ended September 30, 2023. Safety Services Safety Services net revenues for the three months ended September 30, 2024 increased by $118 million or 9.7% compared to the same period in 2023. The increase was primarily driven by revenue from acquisitions completed during the last year and increased inspection, service, and monitoring revenue. Safety Services operating margin for the three months ended September 30, 2024 and 2023 was approximately 11.1% 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 September 30, 2024 and 2023 was approximately 14.8% and 12.6%, respectively. This increase was primarily related to the factors discussed above. Specialty Services Specialty Services net revenues for the three months ended September 30, 2024 decreased by $76 or 13.4% compared to the same period in 2023. The decrease was primarily due to the divestiture of an Infrastructure/Utility operating company during 2023, project timing and delays, and the continued impact of the planned exit of a customer relationship in the Infrastructure/Utility reporting unit. Specialty Services operating margin was approximately 8.1% and 7.6% for the three months ended September 30, 2024 and 2023, respectively. The increase was primarily the result of disciplined project and customer selection and the divestiture of an Infrastructure/Utility operating company during 2023. Specialty Services EBITDA as a percentage of net revenues for the three months ended September 30, 2024 and 2023 was approximately 13.4% and 12.3%, respectively, due to the factors discussed above. 44 Table of Contents Nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 Nine Months Ended September 30, Change ($ in millions) 2024 2023 $ % Net revenues $ 5,157 $ 5,169 $ (12) (0.2) % Cost of revenues 3,554 3,737 (183) (4.9) % Gross profit 1,603 1,432 171 11.9 % Selling, general, and administrative expenses 1,235 1,148 87 7.6 % Operating income 368 284 84 29.6 % Interest expense, net 110 112 (2) (1.8) % Loss on extinguishment of debt, net — 3 (3) (100.0) % Investment expense (income) and other, net 6 (18) (24) (133.3) % Other expense, net 116 97 19 19.6 % Income before income taxes 252 187 65 34.8 % Income tax provision 69 59 10 16.9 % Net income $ 183 $ 128 $ 55 43.0 % Net revenues Net revenues for the nine months ended September 30, 2024 were $5,157 million compared to $5,169 million for the same period in 2023, a decrease of $12 or 0.2%. The decrease was primarily driven by the continued impact of the planned exit of a customer relationship in the Infrastructure/Utility reporting unit and project delays in the Specialty Services segment, partially offset by revenue from acquisitions completed within the Safety Services segment and growth in inspection, service, and monitoring revenue. Gross profit The following table presents our gross profit (net revenues less cost of revenues) and gross margin (gross profit as a percentage of net revenues) for the nine months ended September 30, 2024 and 2023, respectively: Nine Months Ended September 30, Change ($ in millions) 2024 2023 $ % Gross profit $ 1,603 $ 1,432 $ 171 11.9 % Gross margin 31.1 % 27.7 % Our gross profit for the nine months ended September 30, 2024 was $1,603 million compared to $1,432 million for the same period in 2023, an increase of $171 million, or 11.9%. Gross margin was 31.1%, an increase of 340 basis points compared to the prior year period, primarily due to disciplined project and customer selection in our Safety Services and Specialty Services segments, an improved mix of inspection, service, and monitoring revenue, which generates higher margins, and savings in our Safety Services segment related to the Chubb restructuring program. 45 Table of Contents Operating expenses The following table presents operating expenses and operating margin (operating income (loss) as a percentage of net revenues) for the nine months ended September 30, 2024 and 2023, respectively: Nine Months Ended September 30, Change ($ in millions) 2024 2023 $ % Selling, general, and administrative expenses $ 1,235 $ 1,148 $ 87 7.6 % SG&A expense as a % of net revenues 23.9 % 22.2 % Operating margin 7.1 % 5.5 % SG&A expenses (excluding amortization) (non-GAAP) $ 1,076 $ 988 $ 88 8.9 % SG&A expenses (excluding amortization) as a % of net revenues (non-GAAP) 20.9 % 19.1 % Selling, general, and administrative expenses Our SG&A expenses for the nine months ended September 30, 2024 were $1,235 million compared to $1,148 million for the same period in 2023, an increase of $87 million. SG&A expenses as a percentage of net revenues was 23.9% during the nine months ended September 30, 2024 compared to 22.2% for the same period in 2023. The increase in SG&A expenses was primarily driven by investments to support our Safety Services segment and SG&A expenses from acquisitions completed. The increase was also due to acquisition costs that are non-recurring in nature in the nine months ended September 30, 2024. The increase in SG&A expenses was partially offset by savings in our Safety Services segment related to the Chubb restructuring program. Our SG&A expenses excluding amortization and impairment for the nine months ended September 30, 2024 were $1,076 million or 20.9% of net revenues, compared to $988 million, or 19.1% of net revenues, for the same period of 2023 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 $110 million and $112 million for the nine months ended September 30, 2024 and 2023, respectively. The decrease in interest expense was a result of interest income generated by the investment of the equity and debt cash proceeds prior to the Elevated acquisition, and the rate decrease as a result of the repricing of the Term Loans completed in October 2023 and May 2024, offset by the increase in volume of debt. Loss on extinguishment of debt, net During the nine months ended September 30, 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 (income) and other, net was expense of $6 million during the nine months ended September 30, 2024 compared to income of $18 million for the same period in 2023 The increase in investment expense (income) and other was primarily due to an increase in non-service pension costs in the current year and a decrease in earnings from joint ventures. Income tax provision The income tax provision for the nine months ended September 30, 2024 was $69 million compared to $59 million in the same period of 2023. This change was driven by increased generated income before taxes in the nine months ended September 30, 2024 compared to the same period of the prior year. The effective tax rate for the nine months ended September 30, 2024 was 27.2%, compared to 31.3% in the same period of 2023. The difference in the effective tax rate was 46 Table of Contents driven by discrete and nondeductible permanent items. The difference between the effective tax rate and the statutory U.S. federal income tax rate of 21.0% is due to nondeductible permanent items, taxes on foreign earnings in jurisdictions that have higher tax rates, state taxes, and discrete items. Net income and EBITDA The following table presents net income and EBITDA for the nine months ended September 30, 2024 and 2023, respectively: Nine Months Ended September 30, Change ($ in millions) 2024 2023 $ % Net income $ 183 $ 128 $ 55 43.0 % EBITDA (non-GAAP) 583 525 58 11.0 % Net income as a % of net revenues 3.5 % 2.5 % EBITDA as a % of net revenues 11.3 % 10.2 % Our net income for the nine months ended September 30, 2024 was $183 million compared to $128 million for the same period in 2023, an increase of $55 million. The improvement is primarily attributable to growth in inspection, service, and monitoring revenue and disciplined project and customer selection in our Safety Services and Specialty Services segments. The increase in is also attributable to income from acquisitions completed and savings in our Safety Services segment related to the Chubb restructuring program. The net income increase was partially offset by SG&A expenses from acquisitions completed. Net income as a percentage of net revenues for the nine months ended September 30, 2024 and 2023 was 3.5% and 2.5%, respectively. EBITDA for the nine months ended September 30, 2024 was $583 million compared to $525 million for the same period in 2023, an increase of $58 million. The increase in EBITDA was primarily driven by the factors previously discussed. See the discussion and reconciliation of our non-U.S. GAAP financial measures below. Operating Segment Results for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 Net Revenues Nine Months Ended September 30, Change ($ in millions) 2024 2023 $ % Safety Services $ 3,828 $ 3,633 $ 195 5.4 % Specialty Services 1,335 1,554 (219) (14.1) % Corporate and Eliminations (6) (18) NM NM $ 5,157 $ 5,169 (12) (0.2) % Operating Income (Loss) Nine Months Ended September 30, Change ($ in millions) 2024 2023 $ % Safety Services $ 412 $ 292 $ 120 41.1 % Safety Services operating margin 10.8 % 8.0 % Specialty Services $ 82 $ 84 $ (2) (2.4 %) Specialty Services operating margin 6.1 % 5.4 % Corporate and Eliminations $ (126) $ (92) NM NM $ 368 $ 284 $ 84 29.6 % 47 Table of Contents EBITDA Nine Months Ended September 30, Change ($ in millions) 2024 2023 $ % Safety Services $ 544 $ 449 $ 95 21.2 % Safety Services EBITDA as a % of net revenues 14.2 % 12.4 % Specialty Services $ 161 $ 166 $ (5) (3.0 %) Specialty Services EBITDA as a % of net revenues 12.1 % 10.7 % Corporate and Eliminations $ (122) $ (90) NM NM $ 583 $ 525 $ 58 11.0 % 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, 2024 compared to the nine months ended September 30, 2023. Safety Services Safety Services net revenues for the nine months ended September 30, 2024 increased by $195 or 5.4% compared to the same period in 2023. The increase was driven by increased inspection, service, and monitoring revenue and revenue from acquisitions completed in the last year. Safety Services operating margin for the nine months ended September 30, 2024 and 2023 was approximately 10.8% and 8.0%, 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 nine months ended September 30, 2024 and 2023 was approximately 14.2% and 12.4%, respectively. This increase was primarily related to the factors discussed above. Specialty Services Specialty Services net revenues for the nine months ended September 30, 2024 decreased by $219 million or 14.1% compared to the same period in 2023. The decrease was primarily due to the continued impact of the planned exit of a customer relationship in the Infrastructure/Utility reporting unit and project delays. Specialty Services operating margin for the nine months ended September 30, 2024 and 2023 was approximately 6.1% and 5.4%, respectively. The increase was primarily the result of disciplined project and customer selection during the nine months ended September 30, 2024. Specialty Services EBITDA as a percentage of net revenues for the nine months ended September 30, 2024 and 2023 was approximately 12.1% and 10.7%, 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, (c) in the case of EBITDA, determine certain elements of management’s incentive compensation, and (d) provide consistent period-to-period comparisons of the results. 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 48 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 September 30, ($ in millions) 2024 2023 Reported SG&A expenses $ 425 $ 407 Adjustments to reconcile to SG&A expenses to SG&A expenses (excluding amortization) Amortization expense (57) (49) SG&A expenses (excluding amortization) $ 368 $ 358 Nine Months Ended September 30, ($ in millions) 2024 2023 Reported SG&A expenses $ 1,235 $ 1,148 Adjustments to reconcile to SG&A expenses to SG&A expenses (excluding amortization) Amortization expense (159) (147) SG&A expenses (excluding amortization) $ 1,076 $ 1,001 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) 2024 2023 Reported net income $ 69 $ 54 Adjustments to reconcile net income to EBITDA: Interest expense, net 41 37 Income tax provision 31 20 Depreciation 21 21 Amortization 56 56 EBITDA $ 218 $ 188 49 Table of Contents Nine Months Ended September 30, ($ in millions) 2024 2023 Reported net income $ 183 $ 128 Adjustments to reconcile net income to EBITDA: Interest expense, net 110 112 Income tax provision 69 59 Depreciation 60 59 Amortization 161 167 EBITDA $ 583 $ 525 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 and equity 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, 2024, we had $982 million of total liquidity, comprising $487 million in cash and cash equivalents and $495 million ($500 million less outstanding letters of credit of approximately $5 million, which reduce availability) of available borrowings under our Revolving Credit Facility. During 2022, we completed the Second 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 first quarter of 2024, we completed the Fifth Amendment to our credit agreement, upsizing our 2021 Term Loan by $300 million. The loan proceeds were directed as consideration for a portion of the purchase price for the Series B Preferred Stock Conversion. During the second quarter of 2024, we completed the Sixth Amendment to our credit agreement, repaying the 2019 Term Loan and refinancing the 2021 Term Loan through an upsizing and repricing. We incurred approximately $550 million of incremental principal on our 2021 Term Loan. The proceeds were used to repay the remaining $330 million of the 2019 Term Loan, repay $100 million of the Revolving Credit Facility outstanding, and for general corporate purposes, including to partially fund the Elevated acquisition. During the second quarter of 2024, we issued 12,650,000 shares of Company common stock in a public underwritten offering. The proceeds from this offering totaled approximately $458 million, net of related expenses. We expect to use the net proceeds from this offering for general corporate purposes, which may include future acquisitions and other business opportunities, capital expenditures and working capital. 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. 50 Table of Contents 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 nine months ended September 30, 2024, we repurchased 16,260,160 shares of common stock for approximately $600 million. As of September 30, 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 $250 million of common stock through February 2024. The 2022 SRP expired on February 29, 2024. Cash Flows The following table summarizes net cash flows with respect to our operating, investing and financing activities for the periods indicated: Nine Months Ended September 30, ($ in millions) 2024 2023 Net cash provided by operating activities 337 217 Net cash used in investing activities (680) (108) Net cash provided by (used in) financing activities 348 (253) Effect of foreign currency exchange rate change on cash, cash equivalents, and restricted cash 4 (1) Net increase (decrease) in cash, cash equivalents, and restricted cash $ 9 $ (145) Cash, cash equivalents, and restricted cash, end of period $ 489 $ 462 Net Cash Provided by Operating Activities Net cash provided by operating activities was $337 million for the nine months ended September 30, 2024 compared to $217 million 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 is also driven by lower working capital needs associated with the various services we provided in the nine months ended September 30, 2024 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. Net Cash Used in Investing Activities Net cash used in investing activities was $680 million for the nine months ended September 30, 2024 compared to $108 million for the same period in 2023. During the nine months ended September 30, 2024, we completed the Elevated acquisition and several other acquisitions, resulting in the use of $647 million for acquisitions during the nine months ended September 30, 2024 compared to $57 million for the same period in 2023. Net Cash Provided by (Used in) Financing Activities Net cash provided by financing activities was $348 million for the nine months ended September 30, 2024 compared to $253 million used in financing activities for the same period in 2023. The increase in cash provided by financing activities was primarily driven by equity and debt issuances in the nine months ended September 30, 2024. In the nine months ended September 30, 2024, cash provided by financing activities was higher due to $850 million of proceeds from the repricing transactions of the 2021 Term Loan and $458 million of proceeds from the issuance of common shares. The increase in cash used in financing activities in the nine months ended September 30, 2024 was partially offset by $335 million of payments on long-term borrowings and $600 million of payments for conversion of the Series B Preferred Stock. 51 Table of Contents 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 first quarter of 2024, we completed the Fifth Amendment to our credit agreement, upsizing our 2021 Term Loan by an aggregate principal amount equal to $300 million. The loan proceeds were directed as consideration for a portion of the purchase price for the Series B Preferred Stock Conversion. During the second quarter of 2024, we completed the Sixth Amendment to our credit agreement, refinancing the 2021 Term Loan through an upsizing and repricing and repaying the 2019 Term Loan. We incurred approximately $550 million of incremental principal our 2021 Term Loan. The proceeds were used to repay the remaining $330 million of the 2019 Term Loan, repay $100 million of the Revolving Credit Facility loan outstanding, and for general corporate purposes, including to partially fund the Elevated acquisition. 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 2021 Term Loan is, at our option, either (a) a base rate plus an applicable margin equal to 1.00% or (b) a Term SOFR rate (adjusted for statutory reserves) plus an applicable margin equal to 2.00%. 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. 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, 2024 was 1.8:1.0. As of September 30, 2024, the 2019 Term Loan and the 2021 Term Loan have no remaining principal amount outstanding and $2,257 million, respectively. We had no amounts outstanding under the Revolving Credit Facility, under which $495 million was available after giving effect to $5 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 52 Table of Contents 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, 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 September 30, 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 September 30, 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 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 million. The repurchase price was financed by (i) an incremental term facility of $300 million 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: • 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." • 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 nine months ended September 30, 2024. 53 Table of Contents 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 September 30, 2024, our outstanding variable interest rate debt was primarily related to our $2,257 million 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. During the three months ended September 30, 2024, we entered into a $720 notional amount forward starting interest rate swap that exchanges a variable rate of interest (SOFR) for an average fixed rate of interest of approximately 3.13% over the term of the agreement, commencing in October 2026 and maturing in January 2029. In addition, interest expense will be offset by the amortization through October 2024 of the remaining gain of $1 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 200 basis points. As of September 30, 2024, excluding letters of credit outstanding of $5 million, we had no amounts 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 35% and 38% of our consolidated net revenues for the three and nine months ended September 30, 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 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 nine months ended September 30, 2024. These foreign currency transaction gains and losses, including hedging impacts, are classified in investment income and other, net, in the condensed consolidated statements of operations and were a gain (loss) of $1 million and $0 million for the three months ended September 30, 2024 and 2023 respectively, and $(1) million and $0 million for the nine months ended September 30, 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 gains (losses) totaled approximately $69 million and $(63) million for the three months ended September 30, 2024 and 2023, respectively, and $26 million and $(22) million for the nine months ended September 30, 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 54 Table of Contents 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.