APi Group Corp

Previous wording

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.

Current wording

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 theyear 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.

Previous wording

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.

Current wording

During the six months ended June 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.

Previous wording

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.

Current wording

The following is a discussion of our financial condition and results of operations during the three and six months ended June 30, 2024 and the three and six months ended June 30, 2023.

Previous wording

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.

Current wording

Net revenues for the three months ended June 30, 2024 were $1,730 million compared to $1,771 million for the same period in 2023, a decrease of $41 million or 2.3%. The decrease in net revenues was primarily driven by disciplined project and customer selection and project delays in the Specialty Services segment and the divestiture of an Infrastructure/Utility operating company in the Specialty Services segment during 2023, partially offset by growth in inspection, service, and monitoring revenue and acquisitions completed within the Safety Services segment.

Previous wording

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.

Current wording

Our gross profit for the three months ended June 30, 2024 was $544 million compared to $496 million for the same period in 2023, an increase of $48 million or 9.7%. Gross margin for the three months ended June 30, 2024 was 31.4%, an increase of 340 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.

Previous wording

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.

Current wording

Our SG&A expenses for the three months ended June 30, 2024 were $418 million compared to $389 million for the same period in 2023, an increase of $29 million. SG&A expenses as a percentage of net revenues was 24.2% during the three months ended June 30, 2024 compared to 22.0% for the same period in 2023. The increase in SG&A expenses was primarily driven by investments to support our Safety Services segment and acquisition costs that are non-recurring in nature in the three months ended June 30, 2024 compared to 2023. 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 for the three months ended June 30, 2024 were $366 million, or 21.2% of net revenues, compared to $339 million, or 19.1% 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.

Previous wording

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.

Current wording

Interest expense was $35 million and $38 million for the three months ended June 30, 2024 and 2023, respectively. The decrease in interest expense was primarily due to the investment of the equity and debt cash proceeds prior to the Elevated acquisition.

Previous wording

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.

Current wording

Investment expense (income) and other, net was expense of $2 million for the three months ended June 30, 2024 compared to income of $6 million for the same period of 2023. The increase in investment expense and other was primarily due to an increase in non-service pension costs in the current year.

Previous wording

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.

Current wording

The effective tax rate for the three months ended June 30, 2024 was 22.4% compared to 37.2% 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.

Previous wording

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.

Current wording

Our net income for the three months ended June 30, 2024 was $69 million compared to $48 million for the same period in 2023, an increase of $21 million. The improvement is 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 Safety Services and Specialty Services segments. The increase is also attributable to savings in our Safety Services segment related to the Chubb restructuring program. The net income increase was partially offset by an increase in non-service pension costs of approximately $7 million. Net income as a percentage of net revenues for the three months ended June 30, 2024 and 2023 was 4.0% and 2.7%, respectively. EBITDA for the three months ended June 30, 2024 was $199 million compared to $188 million for the same period in 2023, an increase of $11 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.

Previous wording

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.

Current wording

Safety Services net revenues for the three months ended June 30, 2024 increased by $54 million or 4.4% compared to the same period in 2023. The increase was primarily driven by increased inspection, service, and monitoring revenue and revenue from acquisitions completed during the last year. This increase was also due to continued strength in our end markets and strategic pricing improvements.

Previous wording

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.

Current wording

Safety Services operating margin for the three months ended June 30, 2024 and 2023 was approximately 10.9% 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 three months ended June 30, 2024 and 2023 was approximately 14.4% and 12.2%, respectively. This increase was primarily related to the factors discussed above.

Previous wording

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.

Current wording

Specialty Services net revenues for the three months ended June 30, 2024 decreased by $102 or 18.4% compared to the same period in 2023. The decrease was primarily due to continued disciplined project and customer selection, project delays, and the planned exit of a customer relationship in the Infrastructure/Utility reporting unit. The decrease is also due to the divestiture of an Infrastructure/Utility operating company during 2023.

Previous wording

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.

Current wording

Specialty Services operating margin was approximately 7.7% and 7.4% for the three months ended June 30, 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 June 30, 2024 and 2023 was approximately 13.7% and 12.4%, respectively, due to the factors discussed above.

Previous wording

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.

Current wording

During the six months ended June 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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

As of June 30, 2024, we had $820 million of total liquidity, comprising $324 million in cash and cash equivalents and $496 million ($500 million less outstanding letters of credit of approximately $4 million, which reduce availability) of available borrowings under our Revolving Credit Facility.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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 six months ended June 30, 2024, we repurchased 16,260,160 shares of common stock for approximately $600 million. As of June 30, 2024, we had approximately $400 million of authorized repurchases remaining under the SRP.

Previous wording

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 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.

Current wording

Net cash provided by operating activities was $117 million for the six months ended June 30, 2024 compared to $73 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 six months ended June 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.

Previous wording

Net Cash Provided by (Used in) Operating Activities

Current wording

Net Cash Provided by (Used in) Financing Activities

Previous wording

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.

Current wording

Net cash provided by financing activities was $357 million for the six months ended June 30, 2024 compared to $232 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 six months ended June 30, 2024 . In the six months ended June 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 six months ended June 30, 2024 was partially offset by $334 million of payments on long-term borrowings and $600 million of payments for conversion of the Series B Preferred Stock.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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.

Previous wording

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.

Current wording

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 June 30, 2024 was 2.0:1.0.

Previous wording

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.

Current wording

As of June 30, 2024, the 2019 Term Loan and the 2021 Term Loan have remaining principal amounts of $0 million and $2,257 million, respectively. We had no amounts outstanding under the Revolving Credit Facility, under which $496 million was available after giving effect to $4 million of outstanding letters of credit, which reduces availability.

Previous wording

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.

Current wording

The repurchase price was financed by (i) an incremental term facility of $300 and (ii) cash and available credit from the balance sheet.

Previous wording

•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.

Current wording

•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 six months ended June 30, 2024.