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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/03/22 APi Group Corp. 10-Q 9/30/22 110:21M Donnelley … Solutions/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 5.55M
6: EX-95.1 Mine-Safety Disclosure HTML 275K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 36K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 36K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 33K
5: EX-32.2 Certification -- §906 - SOA'02 HTML 32K
12: R1 Document and Entity Information HTML 82K
13: R2 Condensed Consolidated Balance Sheets HTML 166K
14: R3 Condensed Consolidated Balance Sheets HTML 57K
(Parenthetical)
15: R4 Condensed Consolidated Statements of Operations HTML 116K
16: R5 Condensed Consolidated Statements of Comprehensive HTML 53K
Income (Loss)
17: R6 Condensed Consolidated Statements of Comprehensive HTML 33K
Income (Loss) (Parenthetical)
18: R7 Condensed Consolidated Statements of Shareholders' HTML 130K
Equity
19: R8 Condensed Consolidated Statements of Cash Flows HTML 139K
20: R9 Nature of Business HTML 34K
21: R10 Basis of Presentation and Significant Accounting HTML 45K
Policies
22: R11 Recent Accounting Pronouncements HTML 46K
23: R12 Business Combinations HTML 224K
24: R13 Restructuring HTML 56K
25: R14 Net Revenues HTML 477K
26: R15 Goodwill and Intangibles HTML 197K
27: R16 Fair Value of Financial Instruments HTML 297K
28: R17 Derivatives HTML 80K
29: R18 Property and Equipment, Net HTML 88K
30: R19 Leases HTML 147K
31: R20 Debt HTML 159K
32: R21 Income Taxes HTML 55K
33: R22 Employee Benefit Plans HTML 51K
34: R23 Pension HTML 246K
35: R24 Related-Party Transactions HTML 44K
36: R25 Commitments and Contingencies HTML 40K
37: R26 Shareholders' Equity and Redeemable Convertible HTML 55K
Preferred Stock
38: R27 Share-Based Compensation HTML 63K
39: R28 Earnings Per Share HTML 219K
40: R29 Segment Information HTML 399K
41: R30 Basis of Presentation and Significant Accounting HTML 57K
Policies (Policies)
42: R31 Business Combinations (Tables) HTML 182K
43: R32 Restructuring (Tables) HTML 50K
44: R33 Net Revenues (Tables) HTML 451K
45: R34 Goodwill and Intangibles (Tables) HTML 199K
46: R35 Fair Value of Financial Instruments (Tables) HTML 289K
47: R36 Property and Equipment, Net (Tables) HTML 83K
48: R37 Leases (Tables) HTML 143K
49: R38 Debt (Tables) HTML 120K
50: R39 Pension (Tables) HTML 239K
51: R40 Share-Based Compensation (Tables) HTML 39K
52: R41 Earnings Per Share (Tables) HTML 217K
53: R42 Segment Information (Tables) HTML 386K
54: R43 Nature of Business - Additional Information HTML 32K
(Detail)
55: R44 Basis of Presentation and Significant Accounting HTML 48K
Policies - Additional Information (Detail)
56: R45 Business Combinations - Additional Information HTML 92K
(Detail)
57: R46 Business Combinations - Summary of Preliminary HTML 102K
Fair Value of Consideration of Assets Acquired and
Liabilities Assumed (Detail)
58: R47 Business Combinations - Summary of Preliminary HTML 38K
Fair Value of Identifiable Intangible Assets
(Detail)
59: R48 Business Combinations - Summary of Company's HTML 35K
Operating Results of Acquisition and Related
Finance (Detail)
60: R49 Restructuring (Additional Information) (Details) HTML 41K
61: R50 Restructuring - Summary of Restructuring Program HTML 53K
(Details)
62: R51 Net Revenues - Summary of Disaggregated Net HTML 79K
Revenues (Detail)
63: R52 Net Revenues - Additional Information (Detail) HTML 44K
64: R53 Net Revenues - Additional Information (Details1) HTML 34K
65: R54 Net Revenues - Summary of Accounts Receivable, Net HTML 38K
of Allowances, Contract Assets and Contract
Liabilities from Contracts with Customer (Detail)
66: R55 Goodwill and Intangibles - Summary of Changes In HTML 44K
Carrying Amounts of Goodwill By Reportable
Segments (Detail)
67: R56 Goodwill and Intangibles - Additional Information HTML 38K
(Detail)
68: R57 Goodwill and Intangibles - Summary of Identifiable HTML 49K
Intangible Assets (Detail)
69: R58 Goodwill and Intangibles - Summary of Amortization HTML 38K
Expense Recognized on Intangible Assets (Detail)
70: R59 Fair Value of Financial Instruments - Summary of HTML 73K
Fair Value Measurement Assets and Liabilities
Measured on Recurring Basis (Detail)
71: R60 Fair Value of Financial Instruments - Summary of HTML 39K
Reconciliation of Fair Value of Contingent
Consideration Obligations (Detail)
72: R61 Fair Value of Financial Instruments - Additional HTML 46K
Information (Detail)
73: R62 Fair Value of Financial Instruments - Summary of HTML 45K
Carrying And Fair Value Of Non-Variable Interest
Rate Debt (Detail)
74: R63 Fair Value of Financial Instruments - Summary of HTML 42K
Carrying And Fair Value Of Non-Variable Interest
Rate Debt (Parenthetical) (Detail)
75: R64 Derivatives - Additional Information (Detail) HTML 119K
76: R65 Property and Equipment, Net - Summary of HTML 64K
Components of Property and Equipment (Detail)
77: R66 Property and Equipment, Net - Additional HTML 33K
Information (Detail)
78: R67 Leases - Additional Information (Detail) HTML 39K
79: R68 Leases - Schedule of Future Undiscounted Cash HTML 115K
Flows and Reconciliation to the Lease Liabilities
(Detail)
80: R69 Schedule of Supplemental Unaudited Condensed HTML 41K
Consolidated Balance Sheets Information Related to
Leases (Detail)
81: R70 Debt - Summary of Debt Obligations (Detail) HTML 61K
82: R71 Debt - Summary of Debt Obligations (Parenthetical) HTML 36K
(Detail)
83: R72 Debt - Additional Information (Detail) HTML 123K
84: R73 Debt - Schedule of Annual Maturities, Excluding HTML 52K
Amortization of Debt Issuance Costs (Detail)
85: R74 Income Taxes - Additional Information (Detail) HTML 71K
86: R75 Employee Benefit Plans - Additional Information HTML 80K
(Detail)
87: R76 Pension - Schedule of Preliminary Valuation of HTML 40K
Pension Plans in Purchase Price Allocation
(Detail)
88: R77 Pension - Summary of Supplemental Condensed HTML 37K
Consolidated Balance Sheets Information Related to
Pension (Detail)
89: R78 Pension - Additional Information (Detail) HTML 51K
90: R79 Pension - Information for Pension Plans with HTML 38K
Accumulated Benefit Obligations in Excess of Plan
Assets (Detail)
91: R80 Pension - Information for Pension Plans with HTML 37K
Projected Benefit Obligations in Excess of Plan
Assets (Detail)
92: R81 Pension - Components of Net Periodic Pension HTML 43K
Benefit (Detail)
93: R82 Pension - Major Assumptions Used to Determine HTML 46K
Benefit Obligation (Detail)
94: R83 Pension - Summary of Fair Value of Pension Plan HTML 68K
Assets by Asset Category (Detail)
95: R84 Other Noncurrent Liabilities - Summary of Other HTML 32K
Noncurrent Liabilities (Detail)
96: R85 Other Noncurrent Liabilities - Additional HTML 32K
Information (Detail)
97: R86 Related-Party Transactions - Additional HTML 70K
Information (Detail)
98: R87 Commitments and Contingencies (Additional HTML 36K
Information) (Detail)
99: R88 Shareholders' Equity and Redeemable Convertible HTML 81K
Preferred Stock - Additional Information (Detail)
100: R89 Share-Based Compensation - Additional Information HTML 73K
(Details)
101: R90 Share-Based Compensation - Summary of Valuation HTML 36K
Assumptions (Detail)
102: R91 Earnings Per Share - Summary of Computation HTML 101K
Earnings Per Common Share Using Two Class Method
(Detail)
103: R92 Earnings Per Share - Summary of Computation HTML 43K
Earnings Per Common Share Using Two Class Method
(Parenthetical) (Detail)
104: R93 Segment Information - Additional Information HTML 36K
(Detail)
105: R94 Segment Information - Summary of Reconciliation HTML 90K
Operating Income to EBITDA (Detail)
108: XML IDEA XML File -- Filing Summary XML 208K
106: XML XBRL Instance -- apg-20220930_htm XML 5.99M
107: EXCEL IDEA Workbook of Financial Reports XLSX 214K
8: EX-101.CAL XBRL Calculations -- apg-20220930_cal XML 294K
9: EX-101.DEF XBRL Definitions -- apg-20220930_def XML 1.14M
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11: EX-101.PRE XBRL Presentations -- apg-20220930_pre XML 1.68M
7: EX-101.SCH XBRL Schema -- apg-20220930 XSD 306K
109: JSON XBRL Instance as JSON Data -- MetaLinks 642± 1.06M
110: ZIP XBRL Zipped Folder -- 0000950170-22-021671-xbrl Zip 568K
| 10-Q |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM i 10-Q
(Mark One)
i ☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended i September 30, i 2022 /
or
i ☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number i 001-39275
i APi Group Corporation
(Exact Name of Registrant as Specified in its Charter)
i Delaware |
|
i 98-1510303 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification No.) |
|
|
|
i 1100 Old Highway 8 NW i New Brighton, i Minnesota |
|
i 55112 |
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code: ( i 651) i 636-4320
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
|
Trading Symbol(s) |
|
Name of each exchange on which registered |
i Common Stock, par value $0.0001 per share |
|
i APG |
|
i New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
i Large accelerated filer |
|
☒ |
|
Accelerated filer |
|
☐ |
|
|
|
|
|||
Non-accelerated filer |
|
☐ |
|
Smaller reporting company |
|
i ☐ |
|
|
|
|
|||
|
|
|
|
Emerging growth company |
|
i ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No i ☒
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: i 233,906,920 shares of common stock as of October 27, 2022.
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
APi Group Corporation
Condensed Consolidated Balance Sheets (Unaudited)
(In millions, except share and per share data)
|
|
|
|
|
||||
Assets |
|
|
|
|
|
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
i 395 |
|
|
$ |
i 1,188 |
|
Restricted cash |
|
|
i 3 |
|
|
|
i 302 |
|
Accounts receivable, net of allowances of $ i 2 and $ i 3 at
September 30, 2022 and |
|
|
i 1,249 |
|
|
|
i 767 |
|
Inventories |
|
|
i 150 |
|
|
|
i 69 |
|
Contract assets |
|
|
i 511 |
|
|
|
i 217 |
|
Prepaid expenses and other current assets |
|
|
i 164 |
|
|
|
i 83 |
|
Total current assets |
|
|
i 2,472 |
|
|
|
i 2,626 |
|
Property and equipment, net |
|
|
i 399 |
|
|
|
i 326 |
|
Operating lease right of use assets |
|
|
i 209 |
|
|
|
i 101 |
|
Goodwill |
|
|
i 2,327 |
|
|
|
i 1,106 |
|
Intangible assets, net |
|
|
i 1,683 |
|
|
|
i 882 |
|
Deferred tax assets |
|
|
i 61 |
|
|
|
i 73 |
|
Pension and post-retirement assets |
|
|
i 576 |
|
|
|
— |
|
Other assets |
|
|
i 214 |
|
|
|
i 45 |
|
Total assets |
|
$ |
i 7,941 |
|
|
$ |
i 5,159 |
|
|
|
|
|
|
|
|
||
Liabilities, Redeemable Convertible Preferred Stock, and Shareholders’ Equity |
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Short-term and current portion of long-term debt |
|
$ |
i 6 |
|
|
$ |
i 1 |
|
Accounts payable |
|
|
i 469 |
|
|
|
i 236 |
|
Contingent consideration and compensation liabilities |
|
|
i 18 |
|
|
|
i 22 |
|
Accrued salaries and wages |
|
|
i 294 |
|
|
|
i 209 |
|
Contract liabilities |
|
|
i 428 |
|
|
|
i 243 |
|
Operating and finance leases |
|
|
i 65 |
|
|
|
i 27 |
|
Other accrued liabilities |
|
|
i 243 |
|
|
|
i 129 |
|
Total current liabilities |
|
|
i 1,523 |
|
|
|
i 867 |
|
Long-term debt, less current portion |
|
|
i 2,781 |
|
|
|
i 1,766 |
|
Pension and post-retirement obligations |
|
|
i 65 |
|
|
|
— |
|
Contingent consideration and compensation liabilities |
|
|
i 14 |
|
|
|
i 10 |
|
Operating and finance leases |
|
|
i 158 |
|
|
|
i 79 |
|
Deferred tax liabilities |
|
|
i 342 |
|
|
|
i 43 |
|
Other noncurrent liabilities |
|
|
i 111 |
|
|
|
i 71 |
|
Total liabilities |
|
|
i 4,994 |
|
|
|
i 2,836 |
|
|
|
|
|
|
|
|
||
Commitments and contingencies (Note 17) |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
i 5.5% Series B Redeemable Convertible Preferred Stock, $ i i 0.0001 / par
value, i i 800,000 / authorized |
|
|
i 797 |
|
|
|
— |
|
|
|
|
|
|
|
|
||
Shareholders’ equity: |
|
|
|
|
|
|
||
Series A Preferred Stock, $ i i 0.0001 / par
value, i i 7,000,000 / authorized
shares, i i i i 4,000,000 / / / shares
|
|
|
— |
|
|
|
— |
|
Common Stock, $ i i 0.0001 / par
value, i i 500,000,000 / authorized shares, i 233,786,135 shares
and |
|
|
i — |
|
|
|
i — |
|
Additional paid-in capital |
|
|
i 2,565 |
|
|
|
i 2,560 |
|
Accumulated deficit |
|
|
( i 186 |
) |
|
|
( i 237 |
) |
Accumulated other comprehensive loss |
|
|
( i 229 |
) |
|
|
— |
|
Total shareholders’ equity |
|
|
i 2,150 |
|
|
|
i 2,323 |
|
Total liabilities, redeemable convertible preferred stock, and shareholders’ equity |
|
$ |
i 7,941 |
|
|
$ |
i 5,159 |
|
See notes to condensed consolidated financial statements.
3
APi Group Corporation
Condensed Consolidated Statements of Operations (Unaudited)
(In millions, except per share amounts)
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|||||
Net revenues |
|
$ |
i 1,735 |
|
|
$ |
i 1,047 |
|
|
$ |
i 4,855 |
|
|
$ |
i 2,828 |
|
Cost of revenues |
|
|
i 1,295 |
|
|
|
i 795 |
|
|
|
i 3,604 |
|
|
|
i 2,163 |
|
Gross profit |
|
|
i 440 |
|
|
|
i 252 |
|
|
|
i 1,251 |
|
|
|
i 665 |
|
Selling, general, and administrative expenses |
|
|
i 379 |
|
|
|
i 211 |
|
|
|
i 1,138 |
|
|
|
i 579 |
|
Operating income |
|
|
i 61 |
|
|
|
i 41 |
|
|
|
i 113 |
|
|
|
i 86 |
|
Interest expense, net |
|
|
i 33 |
|
|
|
i 14 |
|
|
|
i 88 |
|
|
|
i 43 |
|
(Gain) loss on extinguishment of debt, net |
|
|
( i 5 |
) |
|
|
— |
|
|
|
( i 5 |
) |
|
|
i 9 |
|
Non-service pension benefit |
|
|
( i 10 |
) |
|
|
— |
|
|
|
( i 32 |
) |
|
|
— |
|
Investment income and other, net |
|
|
( i 3 |
) |
|
|
( i 3 |
) |
|
|
( i 5 |
) |
|
|
( i 12 |
) |
Other expense, net |
|
|
i 15 |
|
|
|
i 11 |
|
|
|
i 46 |
|
|
|
i 40 |
|
Income before income taxes |
|
|
i 46 |
|
|
|
i 30 |
|
|
|
i 67 |
|
|
|
i 46 |
|
Income tax provision |
|
|
i 18 |
|
|
|
i 11 |
|
|
|
i 16 |
|
|
|
i 14 |
|
Net income |
|
$ |
i 28 |
|
|
$ |
i 19 |
|
|
$ |
i 51 |
|
|
$ |
i 32 |
|
Net income attributable to common shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Stock dividend on Series B Preferred Stock |
|
|
( i 11 |
) |
|
|
— |
|
|
|
( i 33 |
) |
|
|
— |
|
Net income attributable to common shareholders |
|
$ |
i 17 |
|
|
$ |
i 19 |
|
|
$ |
i 18 |
|
|
$ |
i 32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
i 0.06 |
|
|
$ |
i 0.08 |
|
|
$ |
i 0.06 |
|
|
$ |
i 0.14 |
|
Diluted |
|
|
i 0.06 |
|
|
|
i 0.08 |
|
|
|
i 0.06 |
|
|
|
i 0.14 |
|
Weighted average shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
i 234 |
|
|
|
i 205 |
|
|
|
i 233 |
|
|
|
i 199 |
|
Diluted |
|
|
i 266 |
|
|
|
i 209 |
|
|
|
i 266 |
|
|
|
i 205 |
|
See notes to condensed consolidated financial statements.
4
APi Group Corporation
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(In millions)
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
|
|
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|||||
Net income |
|
$ |
i 28 |
|
|
$ |
i 19 |
|
|
$ |
i 51 |
|
|
$ |
i 32 |
|
Other comprehensive (loss) income: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Fair value change - derivatives, net of tax benefit (expense) |
|
|
i 51 |
|
|
|
i 5 |
|
|
|
i 82 |
|
|
|
i 13 |
|
Foreign currency translation adjustment |
|
|
( i 86 |
) |
|
|
( i 9 |
) |
|
|
( i 311 |
) |
|
|
( i 9 |
) |
Comprehensive (loss) income |
|
$ |
( i 7 |
) |
|
$ |
i 15 |
|
|
$ |
( i 178 |
) |
|
$ |
i 36 |
|
See notes to condensed consolidated financial statements.
5
APi Group Corporation
(In millions, except share amounts)
|
|
Preferred Stock Issued |
|
|
Common Stock Issued |
|
|
Additional |
|
|
Accumulated |
|
|
Accumulated |
|
|
Total |
|
||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Equity |
|
||||||||
Balance, December 31, 2021 |
|
|
i 4,000,000 |
|
|
$ |
— |
|
|
|
i 224,625,193 |
|
|
$ |
— |
|
|
$ |
i 2,560 |
|
|
$ |
( i 237 |
) |
|
$ |
— |
|
|
$ |
i 2,323 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 7 |
) |
|
|
— |
|
|
|
( i 7 |
) |
Fair value change - derivatives |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 9 |
|
|
|
i 9 |
|
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 59 |
) |
|
|
( i 59 |
) |
Series A Preferred Stock dividend |
|
|
— |
|
|
|
— |
|
|
|
i 7,539,697 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Series B Preferred Stock dividend |
|
|
— |
|
|
|
— |
|
|
|
i 519,469 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Share repurchases |
|
|
— |
|
|
|
— |
|
|
|
( i 531,431 |
) |
|
|
— |
|
|
|
( i 11 |
) |
|
|
— |
|
|
|
— |
|
|
|
( i 11 |
) |
Profit sharing plan contributions |
|
|
— |
|
|
|
— |
|
|
|
i 622,655 |
|
|
|
— |
|
|
|
i 15 |
|
|
|
— |
|
|
|
— |
|
|
|
i 15 |
|
Share-based compensation and other, net |
|
|
— |
|
|
|
— |
|
|
|
i 413,029 |
|
|
|
— |
|
|
|
i 8 |
|
|
|
— |
|
|
|
— |
|
|
|
i 8 |
|
Balance, March 31, 2022 |
|
|
i 4,000,000 |
|
|
$ |
— |
|
|
|
i 233,188,612 |
|
|
$ |
— |
|
|
$ |
i 2,572 |
|
|
$ |
( i 244 |
) |
|
$ |
( i 50 |
) |
|
$ |
i 2,278 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 30 |
|
|
|
— |
|
|
|
i 30 |
|
Fair value change - derivatives |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 22 |
|
|
|
i 22 |
|
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 166 |
) |
|
|
( i 166 |
) |
Series B Preferred Stock dividend |
|
|
— |
|
|
|
— |
|
|
|
i 686,455 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Share repurchases |
|
|
— |
|
|
|
— |
|
|
|
( i 681,329 |
) |
|
|
— |
|
|
|
( i 11 |
) |
|
|
— |
|
|
|
— |
|
|
|
( i 11 |
) |
Share-based compensation and other, net |
|
|
— |
|
|
|
— |
|
|
|
i 24,584 |
|
|
|
— |
|
|
|
i 3 |
|
|
|
— |
|
|
|
— |
|
|
|
i 3 |
|
Balance, June 30, 2022 |
|
|
i 4,000,000 |
|
|
$ |
— |
|
|
|
i 233,218,322 |
|
|
$ |
— |
|
|
$ |
i 2,564 |
|
|
$ |
( i 214 |
) |
|
$ |
( i 194 |
) |
|
$ |
i 2,156 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 28 |
|
|
|
— |
|
|
|
i 28 |
|
Fair value change - derivatives |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 51 |
|
|
|
i 51 |
|
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 86 |
) |
|
|
( i 86 |
) |
Series B Preferred Stock dividend |
|
|
— |
|
|
|
— |
|
|
|
i 739,015 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Share repurchases |
|
|
— |
|
|
|
— |
|
|
|
( i 738,572 |
) |
|
|
— |
|
|
|
( i 11 |
) |
|
|
— |
|
|
|
— |
|
|
|
( i 11 |
) |
Share-based compensation and other, net |
|
|
— |
|
|
|
— |
|
|
|
i 567,370 |
|
|
|
— |
|
|
|
i 12 |
|
|
|
— |
|
|
|
— |
|
|
|
i 12 |
|
Balance, September 30, 2022 |
|
|
i 4,000,000 |
|
|
$ |
— |
|
|
|
i 233,786,135 |
|
|
$ |
— |
|
|
$ |
i 2,565 |
|
|
$ |
( i 186 |
) |
|
$ |
( i 229 |
) |
|
$ |
i 2,150 |
|
|
|
Preferred Stock Issued |
|
|
Common Stock Issued |
|
|
Additional |
|
|
Accumulated |
|
|
Accumulated |
|
|
Total |
|
||||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Deficit |
|
|
Income (Loss) |
|
|
Equity |
|
||||||||
Balance, December 31, 2020 |
|
|
i 4,000,000 |
|
|
$ |
— |
|
|
|
i 168,052,024 |
|
|
$ |
— |
|
|
$ |
i 1,856 |
|
|
$ |
( i 284 |
) |
|
$ |
( i 14 |
) |
|
$ |
i 1,558 |
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 8 |
) |
|
|
— |
|
|
|
( i 8 |
) |
Fair value change - derivatives |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 1 |
) |
|
|
( i 1 |
) |
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 4 |
) |
|
|
( i 4 |
) |
Series A Preferred Stock dividend |
|
|
|
|
|
|
|
|
i 12,447,912 |
|
|
|
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
— |
|
||||
Warrants exercised |
|
|
— |
|
|
|
— |
|
|
|
i 19,994,203 |
|
|
|
— |
|
|
|
i 230 |
|
|
|
— |
|
|
|
— |
|
|
|
i 230 |
|
Profit sharing plan contributions |
|
|
|
|
|
|
|
|
i 630,109 |
|
|
|
|
|
|
i 13 |
|
|
|
|
|
|
— |
|
|
|
i 13 |
|
||||
Share-based compensation and other, net |
|
|
— |
|
|
|
— |
|
|
|
i 157,979 |
|
|
|
— |
|
|
|
i 3 |
|
|
|
— |
|
|
|
— |
|
|
|
i 3 |
|
Balance, March 31, 2021 |
|
|
i 4,000,000 |
|
|
$ |
— |
|
|
|
i 201,282,227 |
|
|
$ |
— |
|
|
$ |
i 2,102 |
|
|
$ |
( i 292 |
) |
|
$ |
( i 19 |
) |
|
$ |
i 1,791 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 21 |
|
|
|
— |
|
|
|
i 21 |
|
Fair value change - derivatives |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 9 |
|
|
|
i 9 |
|
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 4 |
|
|
|
i 4 |
|
Share-based compensation and other, net |
|
|
— |
|
|
|
— |
|
|
|
( i 1,140 |
) |
|
|
— |
|
|
|
i 3 |
|
|
|
— |
|
|
|
— |
|
|
|
i 3 |
|
Balance, June 30, 2021 |
|
|
i 4,000,000 |
|
|
$ |
— |
|
|
|
i 201,281,087 |
|
|
$ |
— |
|
|
$ |
i 2,105 |
|
|
$ |
( i 271 |
) |
|
$ |
( i 6 |
) |
|
$ |
i 1,828 |
|
Net income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 19 |
|
|
|
— |
|
|
|
i 19 |
|
Fair value change - derivatives |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
i 5 |
|
|
|
i 5 |
|
Foreign currency translation adjustment |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( i 9 |
) |
|
|
( i 9 |
) |
Issuance of common shares |
|
|
— |
|
|
|
— |
|
|
|
i 22,716,049 |
|
|
|
— |
|
|
|
i 446 |
|
|
|
— |
|
|
|
— |
|
|
|
i 446 |
|
Share-based compensation and other, net |
|
|
— |
|
|
|
— |
|
|
|
i 452,840 |
|
|
|
— |
|
|
|
i 8 |
|
|
|
— |
|
|
|
— |
|
|
|
i 8 |
|
Balance, September 30, 2021 |
|
|
i 4,000,000 |
|
|
$ |
— |
|
|
|
i 224,449,976 |
|
|
$ |
— |
|
|
$ |
i 2,559 |
|
|
$ |
( i 252 |
) |
|
$ |
( i 10 |
) |
|
$ |
i 2,297 |
|
See notes to condensed consolidated financial statements.
6
APi Group Corporation
Condensed Consolidated Statements of Cash Flows (Unaudited)
(In millions)
|
|
Nine Months Ended September 30, |
|
|||||
|
|
|
|
2021 |
|
|||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net income |
|
$ |
i 51 |
|
|
$ |
i 32 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
||
Depreciation |
|
|
i 60 |
|
|
|
i 59 |
|
Amortization |
|
|
i 165 |
|
|
|
i 95 |
|
Restructuring charges, net of cash paid |
|
|
i 12 |
|
|
|
— |
|
Deferred taxes |
|
|
( i 9 |
) |
|
|
( i 1 |
) |
Share-based compensation expense |
|
|
i 14 |
|
|
|
i 8 |
|
Profit-sharing expense |
|
|
i 10 |
|
|
|
i 11 |
|
Non-cash lease expense |
|
|
i 49 |
|
|
|
i 24 |
|
Non-service pension benefit |
|
|
( i 32 |
) |
|
|
— |
|
(Gain) loss on extinguishment of debt, net |
|
|
( i 5 |
) |
|
|
i 9 |
|
Other, net |
|
|
i 13 |
|
|
|
i 5 |
|
Pension contributions |
|
|
( i 27 |
) |
|
|
— |
|
Changes in operating assets and liabilities, net of effects of acquisitions: |
|
|
|
|
|
|
||
Accounts receivable |
|
|
( i 104 |
) |
|
|
( i 76 |
) |
Contract assets |
|
|
( i 134 |
) |
|
|
( i 81 |
) |
Inventories |
|
|
( i 25 |
) |
|
|
( i 5 |
) |
Prepaid expenses and other current assets |
|
|
( i 25 |
) |
|
|
( i 11 |
) |
Accounts payable |
|
|
i 68 |
|
|
|
i 54 |
|
Accrued liabilities and income taxes payable |
|
|
( i 6 |
) |
|
|
( i 11 |
) |
Contract liabilities |
|
|
i 46 |
|
|
|
i 16 |
|
Other assets and liabilities |
|
|
( i 39 |
) |
|
|
( i 60 |
) |
Net cash provided by operating activities |
|
|
i 82 |
|
|
|
i 68 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
||
Acquisitions, net of cash acquired |
|
|
( i 2,881 |
) |
|
|
( i 51 |
) |
Purchases of property and equipment |
|
|
( i 60 |
) |
|
|
( i 43 |
) |
Proceeds from sales of property, equipment, held for sale assets, and businesses |
|
|
i 10 |
|
|
|
i 13 |
|
Net cash used in investing activities |
|
|
( i 2,931 |
) |
|
|
( i 81 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Proceeds from long-term borrowings |
|
|
i 1,104 |
|
|
|
i 350 |
|
Payments on long-term borrowings |
|
|
( i 33 |
) |
|
|
( i 320 |
) |
Repurchases of long-term borrowings |
|
|
( i 30 |
) |
|
|
— |
|
Payments of debt issuance costs |
|
|
( i 25 |
) |
|
|
( i 4 |
) |
Repurchases of common stock |
|
|
( i 33 |
) |
|
|
— |
|
Proceeds from equity issuances |
|
|
i 797 |
|
|
|
i 676 |
|
Payments of acquisition-related consideration |
|
|
( i 6 |
) |
|
|
( i 72 |
) |
Restricted shares tendered for taxes |
|
|
( i 1 |
) |
|
|
( i 1 |
) |
Net cash provided by financing activities |
|
|
i 1,773 |
|
|
|
i 629 |
|
Effect of foreign currency exchange rate change on cash, cash equivalents, and restricted cash |
|
|
( i 17 |
) |
|
|
( i 1 |
) |
Net (decrease) increase in cash, cash equivalents, and restricted cash |
|
|
( i 1,093 |
) |
|
|
i 615 |
|
Cash, cash equivalents, and restricted cash, beginning of period |
|
|
i 1,491 |
|
|
|
i 515 |
|
Cash, cash equivalents, and restricted cash, end of period |
|
$ |
i 398 |
|
|
$ |
i 1,130 |
|
Supplemental cash flow disclosures: |
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
i 81 |
|
|
$ |
i 32 |
|
Cash paid for income taxes, net of refunds |
|
|
i 24 |
|
|
|
i 55 |
|
Accrued consideration issued in business combinations |
|
|
i 1 |
|
|
|
i 13 |
|
Shares of common stock issued to profit sharing plan |
|
|
i 13 |
|
|
|
i 13 |
|
See notes to condensed consolidated financial statements.
7
APi Group Corporation
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Amounts in millions, except shares and where noted otherwise)
NOTE 1. NATURE OF BUSINESS
APi Group Corporation (the “Company” or “APG”) is a global, market-leading business services provider of safety and specialty services in over i 500 locations in approximately 20 countries.
/NOTE 2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation
The accompanying interim unaudited condensed consolidated financial statements (the “Interim Statements”) include the accounts of the Company and of its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. These Interim Statements have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) and do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America (“U.S. GAAP”) for complete financial statements. The condensed consolidated balance sheets as of December 31, 2021 were derived from audited financial statements for the year then ended but do not include all of the information and footnotes required by U.S. GAAP with respect to annual financial statements. In the opinion of management, the Interim Statements include all adjustments (including normal recurring accruals) necessary for a fair presentation of the Company’s consolidated financial position, results of operations and cash flows for the dates and periods presented. The Company revised its Condensed Consolidated Statements of Shareholders’ Equity for the three-month period ended March 31, 2022 to reclassify the Series B Preferred Stock dividend from Accumulated Deficit to Additional Paid-In Capital. It is recommended that these Interim Statements be read in conjunction with the Company’s audited annual consolidated financial statements and accompanying footnotes thereto for the year ended December 31, 2021. Results for interim periods are not necessarily indicative of the results to be expected for a full fiscal year or for any future period.
Resegmentation
The Company has combined the leadership responsibility and full accountability for the Industrial Services and Specialty Services operating segments. As a result, beginning in 2022, the information for the legacy Industrial Services segment was combined with the legacy Specialty Services segment to form a new operating and reportable segment called Specialty Services. Accordingly, the Company presents financial information for the Safety Services and Specialty Services segments, the two operating segments and also the reportable segments. The Company's chief operating decision maker regularly reviews financial information to allocate resources and assess performance utilizing these reorganized segments.
Certain prior year amounts have been recast to conform to the current year presentation. Throughout these Interim Statements, unless otherwise indicated, amounts and activity reflect reclassifications related to the Company's resegmentation, as described in Note 21 - "Segment Information."
Cash, cash equivalents, and restricted cash
The Company considers all highly liquid investments purchased with an original maturity date of three months or less to be cash equivalents. Restricted cash is reported as restricted cash and other assets in the condensed consolidated balance sheets. Restricted cash reflects collateral against certain bank guarantees and amounts held in escrow.
8
Investments
The Company holds investments in joint ventures which are accounted for under the equity method of accounting as the Company does not exercise control over the joint ventures. The Company’s share of earnings from the joint ventures was $ i 2 and $ i 1 during the three months ended September 30, 2022 and 2021, respectively, and $ i i 3 / during the nine months ended September 30, 2022 and 2021. The earnings are recorded within investment income and other, net in the condensed consolidated statements of operations. The investment balances were $ i i 4 / as of September 30, 2022 and December 31, 2021, and are recorded within other assets in the condensed consolidated balance sheets.
/Pension and post-retirement obligations
The Company's accounting policies related to pension and post-retirement obligations are disclosed in Note 15 - "Pension".
NOTE 3. RECENT ACCOUNTING PRONOUNCEMENTS
See the recent accounting pronouncements discussion below for information pertaining to the effects of recently adopted and other recent accounting pronouncements as updated from the discussion in the Company’s 2021 audited consolidated financial statements included in the Company’s Form 10-K filed on March 1, 2022.
Accounting standards issued and adopted
In March 2020, the Financial Accounting Standards Board ("FASB") issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which helps limit the accounting impact from contract modifications, including hedging relationships, due to the transition from the London Interbank Offered Rate ("LIBOR") to alternative reference rates, such as the Secured Overnight Financing Rate, that are completed by December 31, 2022. The Company adopted this standard on January 1, 2022, and it did not have an impact on the consolidated financial statements. The Company will continue to use the one-month LIBOR until it is phased out on June 30, 2023 and does not expect the transition from LIBOR to alternative reference interest rates to have a significant impact to operating results, financial position or cash flows, but will continue to monitor the impact of this transition until it is completed.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40), which simplifies the accounting for certain convertible instruments, amends guidance on derivative scope exceptions for contracts in an entity's own equity, and modifies the guidance on diluted earnings per share ("EPS") calculations as a result of these changes. The Company adopted this ASU on January 1, 2022 and it did not have a material impact on its consolidated financial statements.
NOTE 4. BUSINESS COMBINATIONS
The Company continually evaluates potential acquisitions that strategically fit with the Company’s existing portfolio or expand the Company’s portfolio into a new and attractive business area. Acquisitions are accounted for as business combinations using the acquisition method of accounting. As such, the Company makes a preliminary allocation of the purchase price to the tangible assets and identifiable intangible assets acquired and liabilities assumed. In the months after closing, as the Company obtains additional information about the acquired assets and liabilities and learns more about the newly acquired business, it is able to refine the estimates of fair value and more accurately allocate the purchase price. Purchase price is allocated to acquired assets and liabilities assumed based upon their estimated fair values, with limited exceptions as permitted pursuant to U.S. GAAP, as determined based on estimates and assumptions deemed reasonable by the Company. The Company engages third-party valuation specialists to assist with preparation of critical assumptions and calculations of the fair value of acquired tangible and intangible assets in connection with significant acquisitions. The excess of the purchase price over the tangible and intangible assets acquired and liabilities assumed is recorded as goodwill. Goodwill is attributable to the workforce of the acquired businesses, the complementary strategic fit and resulting synergies these businesses bring to existing operations, and the opportunities in new markets expected to be achieved from the expanded platform.
2022 Chubb Acquisition
9
On January 3, 2022, the Company completed its acquisition of the Chubb fire and security business (the "Chubb Acquisition"). The Chubb fire and security business (the "Chubb business") is a globally recognized fire safety and security services provider, offering customers complete and reliable services from design and installation to monitoring and on-going maintenance and recurring services. The Chubb business is headquartered in the United Kingdom, and has operations in i 17 countries, expanding the Company's geographic footprint to a total of approximately i 20 countries. The results of the Chubb business are reported within the Company's Safety Services segment.
The consideration paid by the Company for the stock purchase of the Chubb business was funded through a combination of cash on hand and net proceeds from the private placement of Series B Preferred Stock (as defined in Note 16 - "Related-Party Transactions"), the offering of the i 4.750% Senior Notes, and the 2021 Term Loan (both defined in Note 12 - "Debt").
During the three and nine months ended September 30, 2022, the Company incurred transaction costs of $ i 0 and $ i 24, respectively, which were expensed and included as a component of selling, general, and administrative expenses in the condensed consolidated statements of operations.
The Chubb Acquisition was accounted for as a business combination using the acquisition method of accounting in accordance with ASC 805, Business Combinations. The purchase price has been preliminarily allocated to the tangible assets and identifiable intangible assets acquired and liabilities assumed based upon their estimated fair values, with the exception of the following: (1) pre-acquisition contingencies which are recognized and measured in accordance with ASC 450, Contingencies, if fair value cannot be determined; (2) deferred income tax assets acquired and liabilities assumed are recognized and measured in accordance with ASC 740, Income Taxes; (3) pensions and other post-retirement benefits other than pensions are recognized and measured in accordance with ASC 715, Compensation – Retirement Benefits; (4) contract assets and liabilities are measured and recognized in accordance with ASC 606, Revenue from Contracts with Customers ("ASC 606"); and (5) certain lease related assets and liabilities which are measured and recognized in accordance with ASC 842, Leases ("ASC 842").
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the date of the Chubb Acquisition:
Cash paid at closing |
|
$ |
i 2,935 |
|
Working capital and net indebtedness adjustment |
|
|
( i 42 |
) |
Total net consideration |
|
$ |
i 2,893 |
|
|
|
|
|
|
Cash |
|
$ |
i 60 |
|
Accounts receivable |
|
|
i 438 |
|
Inventories |
|
|
i 67 |
|
Contract assets |
|
|
i 183 |
|
Other current assets |
|
|
i 20 |
|
Property and equipment |
|
|
i 77 |
|
Operating lease right of use assets |
|
|
i 154 |
|
Pension and post-retirement assets |
|
|
i 626 |
|
Other noncurrent assets |
|
|
i 9 |
|
Intangible assets |
|
|
i 1,099 |
|
Goodwill |
|
|
i 1,412 |
|
Accounts payable |
|
|
( i 191 |
) |
Contract liabilities |
|
|
( i 162 |
) |
Accrued expenses |
|
|
( i 221 |
) |
Finance and operating lease liabilities |
|
|
( i 155 |
) |
Pension and post-retirement obligations |
|
|
( i 71 |
) |
Deferred tax liabilities |
|
|
( i 363 |
) |
Other noncurrent liabilities |
|
|
( i 89 |
) |
Net assets acquired |
|
$ |
i 2,893 |
|
10
Since the Chubb Acquisition occurred on January 3, 2022, the Company has not finalized its accounting for any areas of purchase price allocation related to the Chubb Acquisition. The Company anticipates that it will finalize its accounting for the Chubb Acquisition during the fourth quarter of 2022. During the nine months ended September 30, 2022, the Company recorded measurement period adjustments, primarily related to working capital balances, property and equipment, and intangible assets. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required.
The excess of the purchase price over the tangible and intangible assets acquired and liabilities assumed has been recorded as goodwill. The Company has assigned the provisional goodwill of $ i 1,412 to its Safety Services reportable segment (see Note 7 - "Goodwill and Intangibles"). Based on U.S. income tax principles related to acquisitions of non-U.S. entities, the Company does not expect any of the provisional amount of goodwill to be deductible for U.S. income tax purposes.
The Company has identified the following significant intangible assets: customer relationships, trade names and trademarks, and contractual backlog. As of the effective date of the Chubb Acquisition, identifiable intangible assets are required to be measured at fair value, and these assets could include assets that are not intended to be used or sold or that are intended to be used in a manner other than their highest and best use. For purposes of these condensed consolidated financial statements, the fair value and weighted-average useful lives of these intangible assets have been estimated using variations of the income approach. Specifically, the excess earnings method was utilized to estimate the fair value of the customer relationships and the contractual backlog. The relief from royalty method was utilized to estimate the fair value of the trade names and trademarks. Significant inputs used to value these intangible assets include projections of future cash flows, long-term growth rates, customer attrition rates, discount rates, royalty rates, and applicable income tax rates.
The following table summarizes the preliminary fair value of the identifiable intangible assets:
Customer relationships |
|
$ |
i 584 |
|
Trade names and trademarks |
|
|
i 465 |
|
Contractual backlog |
|
|
i 50 |
|
Total intangibles |
|
$ |
i 1,099 |
|
The estimated useful lives over which the intangible assets will be amortized are as follows: customer relationships ( i fifteen years), trade names and trademarks ( i fifteen years), and contractual backlog ( i two years).
The results of operations for the Chubb business are included in the consolidated financial statements of the Company from the date of acquisition.
Pro forma consolidated financial information
The following pro forma consolidated financial information reflects the results of operations of the Company for the three and nine months ended September 30, 2021 as if the Chubb Acquisition and related financing had occurred as of January 1, 2021, after giving effect to certain purchase accounting and financing adjustments. These amounts are based on financial information of the Chubb business and are not necessarily indicative of what the Company’s operating results would have been had the Chubb Acquisition and related financing taken place on January 1, 2021.
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||
Net revenues |
|
$ |
i 1,567 |
|
|
$ |
i 4,450 |
|
Net income (loss) |
|
|
i 8 |
|
|
|
( i 45 |
) |
Pro forma financial information is presented as if the operations of the Chubb business had been included in the consolidated results of the Company since January 1, 2021, and gives effect to transactions that are directly attributable to the Chubb Acquisition and related financing. Adjustments, net of related tax impacts, include: additional depreciation and amortization expense related to the fair value of acquired property and equipment and intangible assets as if such assets were acquired on January 1, 2021; costs related to the fair value step-up of acquired inventory; interest expense under the Company’s 2021 Term Loan and i 4.750% Senior Notes (both defined in Note 12 - "Debt") as if the amounts borrowed to partially finance the purchase price were borrowed on January 1, 2021.
Total cumulative transaction-related costs of $ i 44 were expensed and have been included as a component of selling, general, and administrative expenses, were reflected as if the transaction occurred as of January 1, 2021.
11
2021 Acquisitions
The Company completed the acquisitions of Premier Fire & Security, Inc. ("Premier Fire") in July 2021, and Northern Air Corporation ("NAC") in November 2021, both included in the Safety Services segment, as well as several other individually immaterial acquisitions. Total purchase consideration for all of the completed acquisitions of $ i 113 consisted of cash paid at closing of $ i 93, gross cash acquired of $ i 7, and accrued consideration of $ i 20. The results of operations of these acquisitions are included in the Company’s condensed consolidated statements of operations from their respective dates of acquisition.
The Company has not finalized its accounting for the NAC acquisition. The area of the purchase price allocation that is not yet finalized for the NAC acquisition is the valuation of income tax related matters. During the nine months ended September 30, 2022, the Company recorded a measurement period adjustment, primarily related to a reclassification between intangible assets and goodwill for the NAC acquisition. The Company will make appropriate adjustments to the purchase price allocation prior to completion of the measurement period, as required. Based on preliminary estimates, the total amount of goodwill from the 2021 acquisitions expected to be deductible for tax purposes is $ i 48. See Note 7 – “Goodwill and Intangibles” for the provisional goodwill assigned to each segment.
The following table summarizes the preliminary estimated fair values of the assets acquired and liabilities assumed at the dates of acquisition:
|
|
Premier Fire |
|
|
NAC |
|
|
Other 2021 |
|
|||
Cash paid at closing |
|
$ |
i 32 |
|
|
$ |
i 36 |
|
|
$ |
i 25 |
|
Accrued consideration |
|
|
i 7 |
|
|
|
i 4 |
|
|
|
i 9 |
|
Total consideration |
|
$ |
i 39 |
|
|
$ |
i 40 |
|
|
$ |
i 34 |
|
|
|
|
|
|
|
|
|
|
|
|||
Cash |
|
$ |
i 3 |
|
|
$ |
i 2 |
|
|
$ |
i 2 |
|
Current assets |
|
|
i 10 |
|
|
|
i 22 |
|
|
|
i 6 |
|
Property and equipment |
|
|
i 1 |
|
|
|
i 2 |
|
|
|
i 2 |
|
Intangible assets, net |
|
|
i 14 |
|
|
|
i 14 |
|
|
|
i 10 |
|
Goodwill |
|
|
i 17 |
|
|
|
i 13 |
|
|
|
i 19 |
|
Current liabilities |
|
|
( i 6 |
) |
|
|
( i 13 |
) |
|
|
( i 5 |
) |
Net assets acquired |
|
$ |
i 39 |
|
|
$ |
i 40 |
|
|
$ |
i 34 |
|
For the three months ended September 30, 2022, net revenues and operating loss from the Company's material acquisitions that closed over the previous twelve months was $ i 526 and $ i 7, respectively. For the nine months ended September 30, 2022, net revenues and operating income from the material acquisitions that closed over the previous twelve months was $ i 1,603 and $ i 4, respectively.
Accrued consideration
The Company’s acquisition purchase agreements typically include deferred payment provisions, often to sellers who become employees of the Company or its subsidiaries. The provisions are made up of three general types of arrangements, contingent compensation and contingent consideration (both of which are contingent on the future performance of the acquired entity) and deferred payments related to indemnities. Contingent compensation arrangements are typically contingent on the former owner’s future employment with the Company, and the related amounts are recognized over the required employment period, which is typically three to i five years. Contingent consideration arrangements are not contingent on employment and are included as part of purchase consideration at the time of the initial acquisition and are paid over a three to i five year period. The liability for deferred payments is recognized at the date of acquisition based on the Company’s best estimate and is typically payable over a one to i two year period. Deferred payments are not contingent on any future performance or employment obligations and can be offset for working capital true-ups, and representations and warranty items.
The total contingent compensation arrangement liability was $ i 17 and $ i 12 at September 30, 2022 and December 31, 2021, respectively. The maximum payout of these arrangements upon completion of the future performance periods was $1 i 9 and $ i 57, inclusive of the $ i 17 and $ i 12, accrued as of September 30, 2022 and December 31, 2021, respectively. The contingent compensation liability is included in contingent consideration and compensation liabilities in the condensed consolidated balance sheets for all periods presented. The Company primarily determines the contingent compensation liability based on forecasted cumulative earnings compared to the cumulative earnings target set forth in the arrangement. Compensation expense associated with these arrangements is recognized ratably over the required employment period.
12
The contingent consideration obligations are measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings. For additional considerations regarding the fair value of the Company's contingent consideration liabilities, see Note 8 - "Fair Value of Financial Instruments."
The total liability for deferred payments was $ i 12 and $ i 15 at September 30, 2022 and December 31, 2021, respectively, and is included in contingent consideration and compensation liabilities in the condensed consolidated balance sheets for all periods presented.
/NOTE 5. Restructuring
During 2022, the Company initiated a multi-year restructuring program to drive efficiencies and synergies and optimize operating margin. The Company expects to incur expenses related to workforce reductions, lease termination costs, and other facility rationalization costs over the next three years. The Company recorded total restructuring costs within the Safety Services segment of $ i 7 and $ i 18, of which $ i 2 and $ i 4 was recorded in cost of revenues and $ i 5 and $ i 14 in selling, general, and administrative expenses on the condensed consolidated statements of operations for the three and nine months ended September 30, 2022, respectively. The amounts recognized in the nine months ended September 30, 2022 relate to costs associated with workforce reductions. As of September 30, 2022, the Company had $ i 11 in restructuring liabilities recorded in other accrued liabilities on the condensed consolidated balance sheets for this plan, which are expected to be paid within the next three to six months. The Company continues to evaluate operating efficiencies and anticipates incurring additional costs in the coming quarters in connection with these activities, but is unable to estimate those amounts at this time as such plans are not yet finalized.
The following table summarizes the Company's 2022 restructuring program for the nine month period ended September 30, 2022:
|
|
Nine Months Ended |
|
|
Balance as of December 31, 2021 |
|
$ |
— |
|
Charged to cost of revenues - employee related |
|
|
i 4 |
|
Charged to selling, general, and administrative expenses - employee related |
|
|
i 14 |
|
Payments |
|
|
( i 6 |
) |
Currency translation adjustment and other |
|
|
( i 1 |
) |
Balance as of September 30, 2022 |
|
$ |
i 11 |
|
NOTE 6. NET REVENUES
Under ASC 606, revenue is recognized when or as control of promised goods and services is transferred to customers and the amount of revenue recognized reflects the consideration to which an entity expects to be entitled in exchange for the goods and services transferred. Net revenues are primarily recognized by the Company over time utilizing the cost-to-cost measure of progress. Net revenues recognized at a point in time primarily relate to distribution contracts and short-term time and materials contracts.
Contracts with customers
The Company derives net revenues primarily from contracts with a duration of less than one week to three years (with the majority of contracts with durations of less than six months) which are subject to multiple pricing options including fixed price, unit price, time and material, or cost plus a markup. The Company also enters into fixed price service contracts related to monitoring, maintenance, and inspection of safety systems. The Company may utilize subcontractors in the fulfillment of its performance obligations. When doing so, the Company is considered the principal in these transactions and revenues are recognized on a gross basis.
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 relative to total expected cost in satisfying its performance obligation. The cost-to-cost method is used as it best depicts the continuous transfer of control of goods or services to the customer. Costs incurred include direct materials, labor and subcontract costs, and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. These contract costs are included in the results of operations under cost of revenues. Labor and subcontractor labor costs are considered to be incurred and recognized as the work is performed.
13
Net revenues from time and material contracts are generally recognized as the services are provided and is equal to the sum of the contract costs incurred plus an agreed upon markup. Net revenues earned from distribution contracts are recognized upon shipment or performance of the service.
The cost estimation process for recognizing net revenues over time under the cost-to-cost method is based on the professional knowledge and experience of the Company’s project managers, engineers, and finance professionals. Management reviews estimates of total contract transaction price and total project costs on an ongoing basis. Changes in job performance, job conditions, and management’s assessment of expected variable consideration are factors that influence estimates of the total contract transaction price, total costs to complete those contracts, and the Company’s profit recognition. Changes in these factors could result in cumulative revisions to net revenues in the period in which the revisions are determined, which could materially affect the Company’s consolidated results of operations for that period. Provisions for estimated losses on uncompleted contracts are recorded in the period in which such estimated losses are determined.
The Company disaggregates its net revenues primarily by segment, service type, and country from which revenues are invoiced, as the nature, timing and uncertainty of cash flows are relatively consistent within each of these categories. The following tables provide disclosure of disaggregated net revenues by segment for the three and nine months ended September 30, 2022 and 2021. Prior period balances in this table have been recast to reflect current period presentation, as described in Note 2 - "Basis of Presentation and Significant Accounting Policies." Disaggregated net revenues information is as follows:
|
|
Three Months Ended September 30, 2022 |
|
|||||||||||||
|
|
Safety |
|
|
Specialty |
|
|
Corporate and |
|
|
Consolidated |
|
||||
Life Safety |
|
$ |
i 1,008 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
i 1,008 |
|
Heating, Ventilation, and Air Conditioning ("HVAC") |
|
|
i 146 |
|
|
|
— |
|
|
|
— |
|
|
|
i 146 |
|
Infrastructure / Utility |
|
|
— |
|
|
|
i 341 |
|
|
|
— |
|
|
|
i 341 |
|
Fabrication |
|
|
— |
|
|
|
i 87 |
|
|
|
— |
|
|
|
i 87 |
|
Specialty Contracting |
|
|
— |
|
|
|
i 162 |
|
|
|
— |
|
|
|
i 162 |
|
Corporate and Eliminations |
|
|
— |
|
|
|
— |
|
|
|
( i 9 |
) |
|
|
( i 9 |
) |
Net revenues |
|
$ |
i 1,154 |
|
|
$ |
i 590 |
|
|
$ |
( i 9 |
) |
|
$ |
i 1,735 |
|
|
|
Three Months Ended September 30, 2021 |
|
|||||||||||||
|
|
Safety |
|
|
Specialty |
|
|
Corporate and |
|
|
Consolidated |
|
||||
Life Safety |
|
$ |
i 430 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
i 430 |
|
HVAC |
|
|
i 103 |
|
|
|
— |
|
|
|
— |
|
|
|
i 103 |
|
Infrastructure / Utility |
|
|
— |
|
|
|
i 317 |
|
|
|
— |
|
|
|
i 317 |
|
Fabrication |
|
|
— |
|
|
|
i 44 |
|
|
|
— |
|
|
|
i 44 |
|
Specialty Contracting |
|
|
— |
|
|
|
i 166 |
|
|
|
— |
|
|
|
i 166 |
|
Corporate and Eliminations |
|
|
— |
|
|
|
— |
|
|
|
( i 13 |
) |
|
|
( i 13 |
) |
Net revenues |
|
$ |
i 533 |
|
|
$ |
i 527 |
|
|
$ |
( i 13 |
) |
|
$ |
i 1,047 |
|
|
|
Nine Months Ended September 30, 2022 |
|
|||||||||||||
|
|
Safety |
|
|
Specialty |
|
|
Corporate and |
|
|
Consolidated |
|
||||
Life Safety |
|
$ |
i 2,966 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
i 2,966 |
|
HVAC |
|
|
i 408 |
|
|
|
— |
|
|
|
— |
|
|
|
i 408 |
|
Infrastructure / Utility |
|
|
— |
|
|
|
i 849 |
|
|
|
— |
|
|
|
i 849 |
|
Fabrication |
|
|
— |
|
|
|
i 194 |
|
|
|
— |
|
|
|
i 194 |
|
Specialty Contracting |
|
|
— |
|
|
|
i 477 |
|
|
|
— |
|
|
|
i 477 |
|
Corporate and Eliminations |
|
|
— |
|
|
|
— |
|
|
|
( i 39 |
) |
|
|
( i 39 |
) |
Net revenues |
|
$ |
i 3,374 |
|
|
$ |
i 1,520 |
|
|
$ |
( i 39 |
) |
|
$ |
i 4,855 |
|
14
|
|
Nine Months Ended September 30, 2021 |
|
|||||||||||||
|
|
Safety |
|
|
Specialty |
|
|
Corporate and |
|
|
Consolidated |
|
||||
Life Safety |
|
$ |
i 1,201 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
i 1,201 |
|
HVAC |
|
|
i 310 |
|
|
|
— |
|
|
|
— |
|
|
|
i 310 |
|
Infrastructure / Utility |
|
|
— |
|
|
|
i 747 |
|
|
|
— |
|
|
|
i 747 |
|
Fabrication |
|
|
— |
|
|
|
i 183 |
|
|
|
— |
|
|
|
i 183 |
|
Specialty Contracting |
|
|
— |
|
|
|
i 417 |
|
|
|
— |
|
|
|
i 417 |
|
Corporate and Eliminations |
|
|
— |
|
|
|
— |
|
|
|
( i 30 |
) |
|
|
( i 30 |
) |
Net revenues |
|
$ |
i 1,511 |
|
|
$ |
i 1,347 |
|
|
$ |
( i 30 |
) |
|
$ |
i 2,828 |
|
|
|
Three Months Ended September 30, 2022 |
|
|||||||||||||
|
|
Safety |
|
|
Specialty |
|
|
Corporate and |
|
|
Consolidated |
|
||||
United States |
|
$ |
i 568 |
|
|
$ |
i 565 |
|
|
$ |
( i 9 |
) |
|
$ |
i 1,124 |
|
France |
|
|
i 125 |
|
|
|
— |
|
|
|
— |
|
|
|
i 125 |
|
Other |
|
|
i 461 |
|
|
|
i 25 |
|
|
|
— |
|
|
|
i 486 |
|
Net revenues |
|
$ |
i 1,154 |
|
|
$ |
i 590 |
|
|
$ |
( i 9 |
) |
|
$ |
i 1,735 |
|
|
|
Three Months Ended September 30, 2021 |
|
|||||||||||||
|
|
Safety |
|
|
Specialty |
|
|
Corporate and |
|
|
Consolidated |
|
||||
United States |
|
$ |
i 442 |
|
|
$ |
i 516 |
|
|
$ |
( i 13 |
) |
|
$ |
i 945 |
|
France |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
i 91 |
|
|
|
i 11 |
|
|
|
— |
|
|
|
i 102 |
|
Net revenues |
|
$ |
i 533 |
|
|
$ |
i 527 |
|
|
$ |
( i 13 |
) |
|
$ |
i 1,047 |
|
|
|
Nine Months Ended September 30, 2022 |
|
|||||||||||||
|
|
Safety |
|
|
Specialty |
|
|
Corporate and |
|
|
Consolidated |
|
||||
United States |
|
$ |
i 1,576 |
|
|
$ |
i 1,481 |
|
|
$ |
( i 39 |
) |
|
$ |
i 3,018 |
|
France |
|
|
i 417 |
|
|
|
— |
|
|
|
— |
|
|
|
i 417 |
|
Other |
|
|
i 1,381 |
|
|
|
i 39 |
|
|
|
— |
|
|
|
i 1,420 |
|
Net revenues |
|
$ |
i 3,374 |
|
|
$ |
i 1,520 |
|
|
$ |
( i 39 |
) |
|
$ |
i 4,855 |
|
|
|
Nine Months Ended September 30, 2021 |
|
|||||||||||||
|
|
Safety |
|
|
Specialty |
|
|
Corporate and |
|
|
Consolidated |
|
||||
United States |
|
$ |
i 1,247 |
|
|
$ |
i 1,323 |
|
|
$ |
( i 30 |
) |
|
$ |
i 2,540 |
|
France |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
i 264 |
|
|
|
i 24 |
|
|
|
— |
|
|
|
i 288 |
|
Net revenues |
|
$ |
i 1,511 |
|
|
$ |
i 1,347 |
|
|
$ |
( i 30 |
) |
|
$ |
i 2,828 |
|
The Company’s contracts with its customers generally require significant services to integrate complex activities and equipment into a single deliverable and are, therefore, generally accounted for as a single performance obligation to provide a single contracted service for the duration of the project. For contracts with multiple performance obligations, the transaction price of a contract is allocated to each performance obligation and recognized as net revenues when or as the performance obligation is satisfied using the estimated stand-alone selling price of each distinct good or service. The stand-alone selling price is estimated using the expected cost plus a margin approach for each performance obligation. The Company utilizes the practical expedient under ASC 606 and does not disclose unsatisfied performance obligations for service contracts as these contracts generally have an original duration of less than one year. For those in-process contracts with an original duration exceeding one year, the aggregate amount of transaction price allocated to the performance obligations unsatisfied at September 30, 2022 was $ i 567. The Company expects to recognize revenue on approximately i 65% of the remaining performance obligations over the next i twelve months.
15
When more than one contract is entered into with a customer on or close to the same date, management evaluates whether those contracts should be combined and accounted for as a single contract as well as whether those contracts should be accounted for as one, or more than one, performance obligation. This evaluation requires significant judgment and is based on the facts and circumstances of the various contracts.
Contracts are often modified through change orders to account for changes in the scope and price of the goods or services being provided. Although the Company evaluates each change order to determine whether such modification creates a separate performance obligation, the majority of change orders are for goods or services not distinct within the context of the original contract and, therefore, not treated as a separate performance obligation but rather as a modification of the existing contract and performance obligation.
Variable consideration
Transaction prices for customer contracts may include variable consideration which comprises items such as early completion bonuses and liquidated damages provisions. Management estimates variable consideration for a performance obligation utilizing estimation methods believed to best predict the amount of consideration to which the Company will be entitled. Variable consideration is included in the transaction price only to the extent it is probable, in the Company’s judgment, that a significant future reversal in the amount of cumulative revenue recognized under the contract will not occur when the uncertainty associated with the variable consideration is subsequently resolved.
Changes in the estimates of transaction prices are recognized in net revenues on a cumulative catch-up basis in the period in which the revisions to the estimates are made. Such changes in estimates may also result in the reversal of previously recognized net revenues if the ultimate outcome differs from the Company’s previous estimate. For the three and nine months ended September 30, 2022 and 2021, there were no significant reversals of net revenues recognized associated with the revision of transaction prices. The Company typically does not incur any returns, refunds or similar obligations after the completion of the performance obligation since any deficiencies are corrected during the course of performance.
Contract assets and liabilities
The Company typically invoices customers with payment terms of net due in i 30 days. It is also common for contracts in the Company’s industries to specify a general contractor is not required to submit payments to a subcontractor until it has received those funds from the owner or funding source. In most instances, the Company receives payment of invoices between i 30 to i 90 days from the date of the invoice.
The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from the Company’s projects when revenues are recognized under the cost-to-cost measure of progress and exceed the amounts invoiced to the Company’s customers, as the amounts cannot be billed under the terms of the Company’s contracts. In addition, many of the Company’s time and material arrangements are billed in arrears pursuant to contract terms, resulting in contract assets being recorded as net revenues are recognized in advance of billings.
Contract liabilities from the Company’s contracts arise when amounts invoiced to the Company’s customers exceed net revenues recognized under the cost-to-cost measure of progress. Contract liabilities also include advance payments from the Company’s customers on certain contracts. Contract liabilities decrease as the Company recognizes net revenues from the satisfaction of the related performance obligation.
The Company utilizes the practical expedient under ASC 606 and does not adjust for a significant financing component if the time between payment and the transfer of the related good or service is expected to be one year or less. The Company’s revenue arrangements are typically accounted for under such expedient as payments are within one year of performance for the Company’s services. As of September 30, 2022, none of the Company’s contracts contained a significant financing component.
Contract assets and contract liabilities are classified as current in the condensed consolidated balance sheets as all amounts are expected to be relieved within one year. i The balances of accounts receivable, net of allowances, contract assets, and contract liabilities from contracts with customers as of September 30, 2022 and December 31, 2021 are as follows:
16
|
|
Accounts |
|
|
Contract |
|
|
Contract |
|
|||
Balance as of September 30, 2022 |
|
$ |
i 1,249 |
|
|
$ |
i 511 |
|
|
$ |
i 428 |
|
Balance as of December 31, 2021 |
|
|
i 767 |
|
|
|
i 217 |
|
|
|
i 243 |
|
The Company did not recognize significant revenues associated with the final settlement of contract value for any projects completed in prior periods. In accordance with industry practice, accounts receivable includes retentions receivable, a portion of which may not be received within one year. At September 30, 2022 and December 31, 2021, retentions receivable were $ i 134 and $ i 117, respectively, while the portions that may not be received within one year were $ i 20 and $ i 25, respectively. There were no other significant changes due to business acquisitions or significant changes in estimates of contract progress or transaction price. There were i no significant impairments of contract assets recognized during the period.
Costs to obtain or fulfill a contract
The Company generally does not incur significant incremental costs related to obtaining or fulfilling a contract prior to the start of a project. The Company may incur certain fulfilment costs such as initial design or mobilization costs which are capitalized if: (i) they relate directly to the contract; (ii) are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract; and (iii) are expected to be recovered through revenues generated under the contract. Such costs, which are amortized over the life of the respective project, were not material for any period presented.
/NOTE 7. GOODWILL AND INTANGIBLES
Goodwill
The following table provides disclosure of goodwill by segment as of September 30, 2022 and December 31, 2021. Prior period balances in this table have been recast to reflect current period presentation, as described in Note 2 - "Basis of Presentation and Significant Accounting Policies." The changes in the carrying amount of goodwill by reportable segment for the nine months ended September 30, 2022 are as follows:
|
|
Safety |
|
|
Specialty |
|
|
Total |
|
|||
Goodwill as of December 31, 2021 |
|
$ |
i 925 |
|
|
$ |
i 181 |
|
|
$ |
i 1,106 |
|
Acquisitions |
|
|
i 1,415 |
|
|
|
— |
|
|
|
i 1,415 |
|
Foreign currency translation and other, net (1) |
|
|
( i 194 |
) |
|
|
— |
|
|
|
( i 194 |
) |
Goodwill as of September 30, 2022 |
|
$ |
i 2,146 |
|
|
$ |
i 181 |
|
|
$ |
i 2,327 |
|
/
17
Intangibles
The Company’s identifiable intangible assets are comprised of the following as of September 30, 2022 and December 31, 2021:
|
|
|
||||||||||||||
|
|
Weighted Average |
|
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
||||
Amortized intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contractual backlog |
|
|
i 1.3 |
|
|
$ |
i 145 |
|
|
$ |
( i 117 |
) |
|
$ |
i 28 |
|
Customer relationships |
|
|
i 9.7 |
|
|
|
i 1,365 |
|
|
|
( i 322 |
) |
|
|
i 1,043 |
|
Trade names and trademarks |
|
|
i 13.4 |
|
|
|
i 687 |
|
|
|
( i 75 |
) |
|
|
i 612 |
|
Total |
|
|
|
|
$ |
i 2,197 |
|
|
$ |
( i 514 |
) |
|
$ |
i 1,683 |
|
|
|
|
|
||||||||||||||
|
|
Weighted Average |
|
|
Gross |
|
|
Accumulated |
|
|
Net Carrying |
|
||||
Amortized intangibles: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Contractual backlog |
|
|
i 0.8 |
|
|
$ |
i 101 |
|
|
$ |
( i 97 |
) |
|
$ |
i 4 |
|
Customer relationships |
|
|
i 6.4 |
|
|
|
i 859 |
|
|
|
( i 221 |
) |
|
|
i 638 |
|
Trade names and trademarks |
|
|
i 12.7 |
|
|
|
i 280 |
|
|
|
( i 40 |
) |
|
|
i 240 |
|
Total |
|
|
|
|
$ |
i 1,240 |
|
|
$ |
( i 358 |
) |
|
$ |
i 882 |
|
|
Amortization expense recognized on identifiable intangible assets is as follows:
|
|
Three Months Ended September 30, |
|
|
|
Nine Months Ended September 30, |
|
||||||||||||
|
|
|
|
|
2021 |
|
|
|
2022 |
|
|
|
2021 |
|
|||||
Cost of revenues |
|
$ |
i 15 |
|
|
|
$ |
i 2 |
|
|
|
$ |
i 22 |
|
|
|
$ |
i 5 |
|
Selling, general, and administrative expenses |
|
|
i 36 |
|
|
|
|
i 30 |
|
|
|
|
i 143 |
|
|
|
|
i 90 |
|
Total intangible asset amortization expense |
|
$ |
i 51 |
|
|
|
$ |
i 32 |
|
|
|
$ |
i 165 |
|
|
|
$ |
i 95 |
|
During the three months ended September 30, 2022, the Company recorded measurement period adjustments for the Chubb Acquisition. The measurement period adjustments resulted in a decrease in amortization expense that had been recorded earlier in the year. If the intangible assets fair values had been known at the date of the Chubb Acquisition, amortization expense would have decreased by $ i i 2 / to $ i i 55 / for the three months ended March 31, 2022 and June 30, 2022, respectively.
/18
NOTE 8. FAIR VALUE OF FINANCIAL INSTRUMENTS
U.S. GAAP defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). These valuation techniques are based upon observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. As the basis for evaluating such inputs, a three-tier value hierarchy prioritizes the inputs used in measuring fair value as follows:
Level 1: |
Observable inputs such as quoted prices for identical assets or liabilities in active markets. |
|
|
Level 2: |
Observable inputs other than quoted prices that are directly or indirectly observable for the asset or liability, including quoted prices for similar assets or liabilities in active markets; quoted prices for similar or identical assets or liabilities in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
|
|
Level 3: |
Unobservable inputs that reflect the Company's own assumptions. |
Recurring fair value measurements
The Company’s financial assets and liabilities (adjusted to fair value at least quarterly) are derivative instruments and contingent consideration obligations. In the condensed consolidated balance sheets, derivative instruments are primarily included in other noncurrent assets and other noncurrent liabilities and contingent consideration obligations are primarily included in contingent consideration and compensation liabilities.
The following tables summarize the fair values and levels within the fair value hierarchy in which the measurements fall for assets and liabilities measured on a recurring basis as of September 30, 2022 and December 31, 2021:
|
|
Fair Value Measurements at September 30, 2022 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives designated as hedge instruments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash flow hedges - interest rate swaps |
|
|
|
|
$ |
i 17 |
|
|
$ |
— |
|
|
$ |
i 17 |
|
|
Cash flow hedges - cross currency contracts |
|
|
— |
|
|
|
i 25 |
|
|
|
— |
|
|
|
i 25 |
|
Net investment hedges |
|
|
— |
|
|
|
i 45 |
|
|
|
— |
|
|
|
i 45 |
|
Fair value hedges |
|
|
— |
|
|
|
i 95 |
|
|
|
— |
|
|
|
i 95 |
|
Derivatives not designated as hedge instruments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency contracts |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
$ |
— |
|
|
$ |
i 182 |
|
|
$ |
— |
|
|
$ |
i 182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives not designated as hedge instruments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency contracts |
|
|
— |
|
|
|
( i 2 |
) |
|
|
— |
|
|
|
( i 2 |
) |
Contingent consideration obligations |
|
|
— |
|
|
|
— |
|
|
|
( i 4 |
) |
|
|
( i 4 |
) |
Total |
|
$ |
— |
|
|
$ |
( i 2 |
) |
|
$ |
( i 4 |
) |
|
$ |
( i 6 |
) |
19
|
|
Fair Value Measurements at December 31, 2021 |
|
|||||||||||||
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives designated as hedge instruments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash flow hedges - cross currency swaps |
|
$ |
— |
|
|
$ |
i 6 |
|
|
$ |
— |
|
|
$ |
i 6 |
|
Net investment hedges |
|
|
— |
|
|
|
i 12 |
|
|
|
— |
|
|
|
i 12 |
|
Total |
|
$ |
— |
|
|
$ |
i 18 |
|
|
$ |
— |
|
|
$ |
i 18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Derivatives designated as hedge instruments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Cash flow hedges - interest rate swaps |
|
$ |
— |
|
|
$ |
( i 11 |
) |
|
$ |
— |
|
|
$ |
( i 11 |
) |
Derivatives not designated as hedge instruments |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Foreign currency contracts |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Contingent consideration obligations |
|
|
— |
|
|
|
— |
|
|
|
( i 4 |
) |
|
|
( i 4 |
) |
Total |
|
$ |
— |
|
|
$ |
( i 11 |
) |
|
$ |
( i 4 |
) |
|
$ |
( i 15 |
) |
The Company determines the fair value of its derivative instruments designated as hedge instruments using standard pricing models and market-based assumptions for all inputs such as yield curves and quoted spot and forward exchange rates. Accordingly, the Company’s derivative instruments are classified as Level 2.
Contingent consideration obligations
The value of the contingent consideration obligations is determined using a probability-weighted discounted cash flow method. This fair value measurement is based on unobservable inputs in the market and thus represents a Level 3 measurement within the fair value hierarchy. This analysis reflects the contractual terms of the purchase agreements (e.g., potential payment amounts, length of measurement periods, manner of calculating any amounts due) and utilizes assumptions with regard to future cash flows, probabilities of achieving such future cash flows, and a discount rate. Depending on the contractual terms of the purchase agreement, the probabilities of achieving future cash flows or earnings generally represent the only significant unobservable inputs. The contingent consideration obligations are measured at fair value each reporting period and changes in estimates of fair value are recognized in earnings.
The table below presents a reconciliation of the fair value of the Company’s contingent consideration obligations that use unobservable inputs (Level 3), as well as other information about the contingent consideration obligations:
|
|
Nine Months Ended |
|
|
Balance as of December 31, 2021 |
|
$ |
i 4 |
|
Issuances |
|
|
i — |
|
Settlements |
|
|
— |
|
Adjustments to fair value |
|
|
— |
|
Balance as of September 30, 2022 |
|
$ |
i 4 |
|
Number of open contingent consideration arrangements at the end of period |
|
|
i 3 |
|
Maximum potential payout at end of period |
|
$ |
i 5 |
|
At September 30, 2022, the remaining open contingent consideration arrangements are set to expire at various dates through 2023. Level 3 unobservable inputs were used to calculate the fair value adjustments shown in the table above. The fair value adjustments and the related unobservable inputs were not considered significant for the three and nine months ended September 30, 2022.
20
Fair value estimates
The following table presents the carrying amount and fair value of the Company’s non-variable interest rate debt ( i 4.125% Senior Notes and i 4.750% Senior Notes, as defined in Note 12 – “Debt”), including current portions and excluding unamortized debt issuance costs, which are estimated by discounting future cash flows at currently available rates for borrowing arrangements with similar terms and conditions, which are considered to be Level 2 inputs under the fair value hierarchy. The carrying values of variable interest rate long-term debt, including current portions and excluding accrued interest, approximate their fair values because of the variable interest rates of these instruments, which are generally reset monthly. During the three months ended September 30, 2022, the Company repurchased $ i 13 and $ i 23 of the 4.125% Senior Notes and 4.750% Senior Notes, respectively.
|
|
|
|
|
||||||||||||
|
|
Carrying Value |
|
|
Fair Value |
|
|
Carrying Value |
|
|
Fair Value |
|
||||
i 4.125% Senior Notes |
|
$ |
i 337 |
|
|
$ |
i 267 |
|
|
$ |
i 350 |
|
|
$ |
i 348 |
|
i 4.750% Senior Notes |
|
|
i 277 |
|
|
|
i 230 |
|
|
|
i 300 |
|
|
|
i 305 |
|
NOTE 9. DERIVATIVES
The Company uses foreign currency forward contracts, cross-currency swaps, and interest rate swap agreements to manage risks associated with foreign currency exchange rates, net investments in foreign operations, and interest rates. The Company does not hold derivative financial instruments of a speculative nature or for trading purposes. The Company records derivatives as assets and liabilities on the condensed consolidated balance sheets at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. Cash flows from derivatives are classified in the condensed consolidated statements of cash flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationships. The Company evaluates hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued.
The Company is exposed to credit risk in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. The Company monitors its exposure to credit risk by using credit approvals and credit limits and by selecting major global banks and financial institutions as counterparties. The Company does not enter into derivative transactions for trading purposes, and is not party to any derivatives that require collateral to be posted prior to settlement.
Cash flow hedges
For derivative instruments that are designated and qualify as cash flow hedges, the gain or loss on the derivative is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized in current earnings.
Interest rate swaps
The Company manages its fixed and floating rate debt mix using interest rate swaps. The Company uses interest rate swap contracts to separate interest rate risk management from the debt funding decision. The cash paid and received from the settlement of interest rate swaps is included in interest expense in the condensed consolidated statements of operations. The Company elected a method that does not require continuous evaluation of hedge effectiveness.
During the three months ended September 30, 2022, the Company terminated the previously outstanding $ i 720 notional amount interest rate swap with a maturity date in October 2024 ("2024 Interest Rate Swap"). The present value as of the date of termination of the 2024 Interest Rate Swap is recorded in accumulated other comprehensive income (loss) ("AOCI") on the condensed consolidated balance sheets. The fair value previously recognized in AOCI related to interest rate movements of the 2024 Interest Rate Swap is being amortized to interest expense on a straight-line basis through October 2024. The amount amortized from AOCI into interest expense during the three and nine months ended September 30, 2022 was $ i i 1 / . As of September 30, 2022, approximately $ i 33 of unrealized pre-tax gains remained in AOCI.
During the three months ended September 30, 2022, the Company entered into an aggregate $ i 720 notional amount interest rate swap ("2026 Interest Rate Swap") that exchanges a variable rate of interest (LIBOR) for an average fixed rate of interest of approximately i 3.64% over the term of the agreement, which matures in October 2026.
21
During the three months ended June 30, 2022, the Company entered into an aggregate $ i 400 notional amount of interest rate swaps that exchange a variable rate of interest (LIBOR) for an average fixed rate of interest of approximately i 3.46% over the term of the agreements, which mature in January 2028. These swaps are forward-starting and are effective commencing January 2023.
As of September 30, 2022, the Company had $ i 1,120 notional amount outstanding in swap agreements, which includes the aggregate $ i 400 notional amount of forward-starting swaps, and the i four-year $ i 720 notional 2026 Interest Rate Swap. The Company has designated these swaps as cash flow hedges of the interest rate risk attributable to forecasted variable interest (LIBOR) payments. As of September 30, 2022, the weighted average fixed rate of interest on these swaps, excluding the forward-starting swap, was approximately i 3.64%. The effective portion of the after tax fair value gains or losses on these swaps is included as a component of AOCI.
Variations in the assets and liability balances are primarily driven by changes in the applicable forward yield curves related to LIBOR. The fair value of the effective interest rate swaps designated as hedging instruments was an asset of $ i 9 and a liability of $ i 11 as of September 30, 2022 and December 31, 2021, respectively. The fair value of the forward-starting interest rate swaps designated as hedging instruments was an asset of $ i 8 as of September 30, 2022.
The Company recorded interest expense (income) of ($ i 1) and $ i 3 during the three months ended September 30, 2022 and 2021, respectively, and $ i 3 and $ i 8 of interest expense during the nine months ended September 30, 2022 and 2021, respectively, related to interest rate swaps.
Cross-currency swaps
The Company enters into cross currency exchange contracts utilized to hedge against the effect of exchange rate fluctuations on cash flows denominated in foreign currencies. These transactions are designated as cash flow hedges. The settlement or extension of these derivatives will result in reclassifications (from AOCI) to earnings in the period during which the hedged transactions affect earnings. The Company periodically assesses whether its currency exchange contracts are effective, and when a contract is determined to be no longer effective as a hedge, the Company discontinues hedge accounting prospectively.
During 2021, the Company entered into two cross-currency swaps designated as cash flow hedges with gross notional U.S. dollar equivalent amounts of $ i 26 and $ i 94 with maturity dates of September 2027 and 2030, respectively. The total fair value of the cross-currency hedges was an asset of $ i 25 and $ i 6 as of September 30, 2022 and December 31, 2021, respectively. The Company recognized income of $ i 7 and $ i 17 in investment income and other, net, during the three and nine months ended September 30, 2022, respectively, and income of $ i i 3 / in investment income and other, net, during the three and nine months ended September 30, 2021, respectively.
Net investment hedges
The Company has net investments in foreign subsidiaries subject to changes in foreign currency exchange rates. During 2021, the Company entered into a $ i 230 notional foreign currency swap designated as a net investment hedge for a portion of the Company’s net investments in Euro-denominated subsidiaries. Gains and losses resulting from a change in fair value of the net investment hedge are offset by gains and losses on the underlying foreign currency exposure and are included in AOCI in the condensed consolidated balance sheets.
During 2021, the Company amended the critical terms of the foreign currency swap by extending the maturity date and modifying the U.S. dollar and Euro coupons. The amended swap was redesignated as a net investment hedge as a result of the amendment, recorded at fair value with changes recorded in AOCI, and the initial net investment hedge was dedesignated. The amended net investment hedge reduces the Company’s interest expense by approximately $ i 3 annually and reduces its overall effective interest rate by approximately i 24 basis points, and will mature in July 2029.
The fair value previously recognized in AOCI related to interest rate movements of the dedesignated swap is being amortized to interest expense on a straight-line basis through the third quarter 2029. The Company recorded interest income of $ i 1 and $ i 3 during the three and nine months ended September 30, 2022, respectively.
The fair value of the foreign currency swaps designated as net investment hedges was an asset of $ i 45 and $ i 12 as of September 30, 2022 and December 31, 2021, respectively.
22
Fair value hedges
The Company has certain intercompany loans subject to changes in foreign currency exchange rates. To hedge these exposures, during the first quarter of 2022, the Company entered into three cross currency swaps each with maturity dates of January 2027. These contracts are designated as fair value hedges with gross notional U.S. dollar equivalents of $ i 271, $ i 241, and $ i 209 in GBP, CAD, and EUR, respectively. The Company measures the effectiveness of fair value hedges of anticipated transactions on a spot-to-spot basis. Accordingly, the spot-to-spot change in the derivative fair values are recorded in the condensed consolidated statements of operations and perfectly offset the spot-to-spot change in the underlying intercompany loans, and as such, these hedges are deemed highly effective. The excluded component of the fair values of these derivatives is reported in AOCI within shareholders’ equity in the condensed consolidated balance sheets. Any cash flows associated with these instruments are included in operating activities in the condensed consolidated statements of cash flows.
The fair value of these hedges were an asset of $ i 95 as of September 30, 2022 and are included in other assets. The Company recognized income of $ i 51 and $ i 95 in investment income and other, net, during the three and nine months ended September 30, 2022, respectively.
Foreign currency contracts
The Company used foreign currency contracts, primarily forward foreign currency contracts, to mitigate the foreign currency exposure of certain foreign currency transactions. Fair market value gains or losses on foreign currency contracts not designated as hedging instruments were included in the results of operations and are classified in investment income and other, net in the condensed consolidated statements of operations.
Certain of the Company’s derivative transactions are subject to master netting arrangements that allow the Company to net settle contracts with the same counterparties. These arrangements generally do not call for collateral and no cash collateral had been received or pledged related to the underlying derivatives.
The Company recognized income of $ i 6 and $ i 9 in investment income and other, net, during the three and nine months ended September 30, 2022, respectively, and an immaterial amount during the three and nine months ended September 30, 2021.
As of September 30, 2022, foreign currency contracts carried balances of $ i 2 in other noncurrent liabilities and less than $ i 1 in other assets. As of December 31, 2021, foreign currency contracts carried immaterial balances.
/NOTE 10. PROPERTY AND EQUIPMENT, NET
The components of property and equipment as of September 30, 2022 and December 31, 2021 are as follows:
|
|
Estimated |
|
|
|
|
||||
Land |
|
N/A |
|
$ |
i 29 |
|
|
$ |
i 26 |
|
Building |
|
i 39 |
|
|
i 97 |
|
|
|
i 77 |
|
Machinery and equipment |
|
i 1- i 20 |
|
|
i 302 |
|
|
|
i 228 |
|
Autos and trucks |
|
i 4- i 10 |
|
|
i 115 |
|
|
|
i 106 |
|
Office equipment |
|
i 3- i 7 |
|
|
i 24 |
|
|
|
i 26 |
|
Leasehold improvements |
|
i 1- i 15 |
|
|
i 28 |
|
|
|
i 18 |
|
Total cost |
|
|
|
|
i 595 |
|
|
|
i 481 |
|
Accumulated depreciation |
|
|
|
|
( i 196 |
) |
|
|
( i 155 |
) |
Property and equipment, net |
|
|
|
$ |
i 399 |
|
|
$ |
i 326 |
|
Depreciation expense related to property and equipment, including finance leases, was $ i 22 and $ i 20 during the three months ended September 30, 2022 and 2021, respectively, and $ i 60 and $ i 59 during the nine months ended September 30, 2022 and 2021, respectively. Depreciation expense is included within cost of revenues and selling, general, and administrative expenses in the condensed consolidated statements of operations.
/23
NOTE 11. LEASES
The Company determines if an arrangement is or contains a lease at inception, which is the date on which the terms of the contract are agreed to and the agreement creates enforceable rights and obligations. Under ASC 842, a contract is or contains a lease when (i) explicitly or implicitly identified assets have been deployed in the contract and (ii) the customer obtains substantially all of the economic benefits from the use of that underlying asset and directs how and for what purpose the asset is used during the term of the contract. The Company also considers whether its service arrangements include the right to control the use of an asset.
The Company leases various facilities, equipment, and vehicles from unrelated parties, which are primarily classified and accounted for as operating leases. The facility leases are primarily for office space with initial terms i i extending / up to ten years. The equipment leases are primarily related to heavy equipment utilized in the completion of construction jobs and the terms of the agreements range from one to seven years. Vehicle leases have a minimum lease term ranging from one to seven years. i Some leases include one or more options to renew, generally at the Company’s sole discretion, with renewal terms that can extend the lease term by one to twelve years or more. i In addition, certain leases contain termination options, where the rights to terminate are held by either the Company, the lessor, or both parties. These options to extend or terminate a lease are included in the lease terms when it is reasonably certain that the Company will exercise that option. The Company’s leases generally do not contain any material restrictive covenants.
See the table below for information pertaining to the effects of recently acquired leases as updated from the discussion in the Company’s 2021 audited consolidated financial statements included in the Company’s Form 10-K filed on March 1, 2022. There were no other material impacts to the lease disclosures contained in the Company's Form 10-K.
The future undiscounted cash flows for each of the next five years and thereafter and reconciliation to the lease liabilities recognized on the condensed consolidated balance sheets as of September 30, 2022 is as follows:
|
|
Operating |
|
|
Finance |
|
|
Total |
|
|||
Remainder of 2022 |
|
$ |
i 17 |
|
|
$ |
i 2 |
|
|
$ |
i 19 |
|
2023 |
|
|
i 63 |
|
|
|
i 5 |
|
|
|
i 68 |
|
2024 |
|
|
i 46 |
|
|
|
i 5 |
|
|
|
i 51 |
|
2025 |
|
|
i 33 |
|
|
|
i 3 |
|
|
|
i 36 |
|
2026 |
|
|
i 21 |
|
|
|
i 1 |
|
|
|
i 22 |
|
2027 |
|
|
i 14 |
|
|
|
— |
|
|
|
i 14 |
|
Thereafter |
|
|
i 36 |
|
|
|
i — |
|
|
|
i 36 |
|
Total lease payments |
|
$ |
i 230 |
|
|
$ |
i 16 |
|
|
$ |
i 246 |
|
Less imputed interest |
|
|
( i 22 |
) |
|
|
( i 1 |
) |
|
|
( i 23 |
) |
Total present value of lease liabilities |
|
$ |
i 208 |
|
|
$ |
i 15 |
|
|
$ |
i 223 |
|
Operating and finance leases - current |
|
$ |
i 60 |
|
|
$ |
i 5 |
|
|
$ |
i 65 |
|
Operating and finance leases - non-current |
|
|
i 148 |
|
|
|
i 10 |
|
|
|
i 158 |
|
Total present value of lease liabilities |
|
$ |
i 208 |
|
|
$ |
i 15 |
|
|
$ |
i 223 |
|
Supplemental condensed consolidated balance sheets information related to leases is as follows:
|
|
|
|
|
||||
Weighted-average remaining lease term: |
|
|
|
|
|
|
||
Operating leases |
|
i 5.2 years |
|
|
i 6.0 years |
|
||
Finance leases |
|
i 3.0 years |
|
|
i 2.8 years |
|
||
|
|
|
|
|
|
|
||
Weighted-average discount rate: |
|
|
|
|
|
|
||
Operating leases |
|
|
i 3.6 |
% |
|
|
i 3.4 |
% |
Finance leases |
|
|
i 4.0 |
% |
|
|
i 2.3 |
% |
24
NOTE 12. DEBT
Debt obligations consist of the following:
|
|
Maturity Date |
|
|
|
|
||||
Term loan facility |
|
|
|
|
|
|
|
|
||
2019 Term Loan |
|
|
$ |
i 1,127 |
|
|
$ |
i 1,140 |
|
|
Revolving Credit Facility |
|
|
|
— |
|
|
|
— |
|
|
2021 Term Loan |
|
|
|
i 1,085 |
|
|
|
— |
|
|
Senior notes |
|
|
|
|
|
|
|
|
||
i 4.125% Senior Notes |
|
|
|
i 337 |
|
|
|
i 350 |
|
|
i 4.750% Senior Notes |
|
|
|
i 277 |
|
|
|
i 300 |
|
|
Other obligations |
|
|
|
|
i 7 |
|
|
|
i 1 |
|
Total debt obligations |
|
|
|
|
i 2,833 |
|
|
|
i 1,791 |
|
Less: unamortized deferred financing costs |
|
|
|
|
( i 46 |
) |
|
|
( i 24 |
) |
Total debt, net of deferred financing costs |
|
|
|
|
i 2,787 |
|
|
|
i 1,767 |
|
Less: short-term and current portion of long-term debt |
|
|
|
|
( i 6 |
) |
|
|
( i 1 |
) |
Long-term debt, less current portion |
|
|
|
$ |
i 2,781 |
|
|
$ |
i 1,766 |
|
Term loan facility
As of September 30, 2022, the Company had $ i 1,127 of principal outstanding under the 2019 Term Loan. During the nine months ended September 30, 2022, the Company made payments of $ i 13 on the 2019 Term Loan. As of September 30, 2022, the Company had a i four-year interest rate swap with respect to $ i 720 of notional value of the 2019 Term Loan, exchanging one-month LIBOR for a fixed rate of i 3.64% per annum. Accordingly, the Company's fixed interest rate per annum on the swapped $ i 720 notional value of the 2019 Term Loan is i 3.64% through its maturity. The remaining $ i 407 of the 2019 Term Loan balance will bear interest at i 6.25% per annum based on i one-month LIBOR plus 250 basis points, but the rate will fluctuate as LIBOR fluctuates. Refer to Note 9 - "Derivatives" for additional information.
The Company completed an amendment to its credit agreement during the first quarter of 2022 ("2022 Incremental Amendment") and entered into an incremental $ i 1,100 term loan ("2021 Term Loan"), with a maturity date of i January 3, 2029. The interest rate applicable to the 2021 Term Loan is, at the Company's option, either (1) a base rate plus an applicable margin equal to i 1.75% or (2) Stock Eurocurrency rate (adjusted for statutory reserves) plus an applicable margin equal to i 2.75%. The 2021 Term Loan balance will bear interest at i 6.50% per annum based on one-month LIBOR plus 275 basis points, but the rate will fluctuate as LIBOR fluctuates. During the nine months ended September 30, 2022, the Company made payments of $ i 15 on the 2021 Term Loan.
Under the 2022 Incremental Amendment, the Company increased the revolving credit facility capacity by an additional aggregate principal amount of $ i 200 to $ i 500 and extended the maturity date to i 2026. The interest rate applicable to borrowings under the $ i 500 i five-year senior secured revolving credit facility (the “Revolving Credit Facility”) is, at the Company’s option, either (1) a base rate plus an applicable margin equal to i 1.25%, or (2) a Eurocurrency rate (adjusted for statutory reserves) plus an applicable margin equal to i 2.25%.
At September 30, 2022 and December 31, 2021, the Company had i i no / amounts outstanding under the Revolving Credit Facility, and $ i 424 and $ i 227 was available at September 30, 2022 and December 31, 2021, respectively, after giving effect to $ i 76 and $ i 73 of outstanding letters of credit.
As of September 30, 2022 and December 31, 2021, the Company was in compliance with all applicable debt covenants.
Information related to 2021 issuances and extinguishments of long-term debt are described in Note 11 - "Debt" in the Company’s 2021 Annual Report on Form 10-K.
25
Senior notes
During the three months ended September 30, 2022, the Company repurchased on the open market $ i 13 and $ i 23 of the i 4.125% Senior Notes and i 4.750% Senior Notes, respectively (the "Repurchases"). In connection with the Repurchases, the Company recognized a net gain on debt extinguishment of $ i 5.
i 4.125% Senior Notes
During 2021, the Company completed a private offering of $ i 350 aggregate principal amount of i 4.125% Senior Notes (“ i 4.125% Senior Notes”) issued under an indenture dated June 22, 2021. The i 4.125% Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis by the Company and certain of the Company’s subsidiaries. The Company used the net proceeds from the sale of the i 4.125% Senior Notes to prepay a portion of the 2019 Term Loan, repay a previously outstanding term loan of $ i 250, and fund general corporate purposes.
i 4.750% Senior Notes
During 2021, the Company completed a private offering of $ i 300 aggregate principal amount of i 4.750% Senior Notes due 2029 (the " i 4.750% Senior Notes") issued under an indenture dated October 21, 2021, as supplemented by a supplemental indenture dated January 3, 2022. The gross proceeds from the offering were held in an escrow account as of December 31, 2021 and classified within restricted cash on the condensed consolidated balance sheets. Upon closing of the Chubb Acquisition, the funds were released from escrow and at that time the i 4.750% Senior Notes were fully and unconditionally guaranteed on a senior unsecured basis by the Company and certain of the Company's subsidiaries.
The Company was in compliance with all covenants contained in the indentures for the i 4.125% Senior Notes and i 4.750% Senior Notes as of September 30, 2022 and December 31, 2021.
Other obligations
As of September 30, 2022 and December 31, 2021, the Company had $ i 7 and $ i 1 in notes outstanding, respectively, for the acquisition of equipment and vehicles, and working capital purposes.
Approximate annual maturities, excluding amortization of debt issuance costs, of the Company's financing arrangements for the periods subsequent to September 30, 2022 are as follows:
Remainder of 2022 |
|
$ |
i 2 |
|
2023 |
|
|
i 12 |
|
2024 |
|
|
i 11 |
|
2025 |
|
|
i 11 |
|
2026 |
|
|
i 1,138 |
|
2027 |
|
|
i 11 |
|
Thereafter |
|
|
i 1,648 |
|
Total |
|
$ |
i 2,833 |
|
Note 13. Income Taxes
The Company’s quarterly income tax provision is measured using an estimate of its consolidated annual effective tax rate, adjusted in the current period for discrete income tax items, within the periods presented. The comparison of the Company’s income tax provision between periods may be impacted by the level and mix of earnings and losses by tax jurisdiction, foreign income tax rate differentials and discrete items. The Company’s effective tax rate was i 40.5% and i 38.5% for the three months ended September 30, 2022 and 2021, respectively, and i 24.2% and i 31.3% for the nine months ended September 30, 2022 and 2021, respectively. The difference between the effective tax rate and the statutory U.S. Federal income tax rate of i i 21.0 / % for the nine months ended September 30, 2022 and 2021 is due to nondeductible permanent items, state taxes, and the reversal of the Company’s indefinite reinvestment assertion.
26
As of September 30, 2022, the Company’s deferred tax assets included a valuation allowance of $ i 92 primarily related to certain deferred tax assets of the Company’s foreign subsidiaries and a capital loss carryforward in the U.S. The factors used to assess the likelihood of realization were the past performance of the related entities, forecasts of future taxable income, future reversals of existing taxable temporary differences, and available tax planning strategies that could be implemented to realize the deferred tax assets. The ability or failure to achieve the forecasted taxable income in these entities could affect the ultimate realization of deferred tax assets.
As of September 30, 2022, the Company had gross federal, state, and foreign net operating loss carryforwards of approximately $ i 0, $ i 32 and $ i 80, respectively. i The state net operating losses have carryforward periods of five to i twenty years and begin to expire in i 2027. / i The foreign net operating losses generally have carryback periods of i three years, carryforward periods of i twenty years, or are indefinite, and begin to expire in i 2036. /
The Company’s liability for unrecognized tax benefits is recorded within other non-current liabilities in the condensed consolidated balance sheets and recognizes interest and penalties accrued related to unrecognized tax benefits in the provision for income taxes in the condensed consolidated statements of operations. As of September 30, 2022 and December 31, 2021, the total gross unrecognized tax benefits were $ i 2 and $ i 2, respectively. The Company had accrued gross interest and penalties as of September 30, 2022 and December 31, 2021 of $ i 0 and $ i 1, respectively. During the three and nine months ended September 30, 2022 and 2021, the Company recognized net interest expense of less than $ i i i i 1 / / / for all periods.
If all of the Company’s unrecognized tax benefits as of September 30, 2022 were recognized, $ i 2 would impact the Company’s effective tax rate. The Company expects $ i 1 of unrecognized tax benefits to expire in the next twelve months due to lapses in the statute of limitations.
As of September 30, 2022, with few exceptions, neither the Company nor its subsidiaries are subject to examination prior to tax year 2014. There are various other audits in state and foreign jurisdictions. No adjustments have been proposed and the Company does not expect the results of the audits to have a material impact on the consolidated financial statements.
On December 27, 2020, the Consolidated Appropriations Act was signed into law, which included a temporary provision that allows for a i 100 percent deduction for business meals expenses purchased from a restaurant between December 31, 2020 and January 1, 2023. The tax law changes in the Consolidated Appropriations Act did not have a material impact on the Company’s quarterly income tax provision.
/Note 14. Employee Benefit Plans
Multiemployer pension plans
Certain Company subsidiaries, including certain subsidiaries in Canada, contribute amounts to multiemployer pension plans and other multiemployer benefit plans and trusts, which are recorded as a component of employee wages and salaries within costs of revenues. Contributions are generally based on fixed amounts per hour per employee for employees covered under these plans. Multiemployer plan contribution rates are determined annually and assessed on a pay-as-you-go basis based on union employee payrolls. Union payrolls cannot be determined for future periods because the number of union employees employed at a given time and the plans in which they participate vary depending upon the location, the number of ongoing projects, and the need for union resources in connection with those projects. Total consolidated contributions to multiemployer plans were $ i 26 and $ i 26 during the three months ended September 30, 2022 and 2021, respectively, and $ i 77 and $ i 69 during the nine months ended September 30, 2022 and 2021, respectively.
Defined benefit pension plans
The Company assumed both funded and unfunded foreign defined benefit pension plans that cover a portion of the Company's employees, and the largest plans are closed to new participants. Refer to Note 15 - "Pension" for more information on these plans.
27
Profit sharing plans
The Company has a trustee-administered profit sharing retirement plan covering substantially all of the Company's employees in the U.S. not covered by collective bargaining agreements and also adopted a profit sharing plan for employees in Canada (collectively, “Profit Sharing Plans”). The Profit Sharing Plans provide for annual discretionary contributions in amounts based on a performance grid as determined by the Company’s directors. In connection with these plans, the Company recognized $ i i 4 / in expense during the three months ended September 30, 2022 and 2021, and $ i 10 and $ i 11 in expense during the nine months ended September 30, 2022 and 2021, respectively.
Employee stock purchase plan
Most of the Company’s employees in the U.S. and Canada, including named executive officers, are eligible to participate in the Company’s Employee Stock Purchase Plan (the “ESPP”). Sales of shares of the Company’s common stock under the ESPP are generally made pursuant to offerings that are intended to satisfy the requirements of Section 423 of the Internal Revenue Code. The ESPP permits employees of the Company to purchase common stock at a price equal to i 85% of the lesser of (i) the market value of the common stock on the first day of the offering period, or (ii) the market value of the common stock on the purchase date, whichever is lower. Participants are subject to eligibility requirements and may not purchase more than i 500 shares in any offering period or more than i ten thousand dollars of common stock in a year under the ESPP. The Company recognized $ i i 1 / of expense during the three months ended September 30, 2022 and 2021, and $ i i 3 / of expense during the nine months ended September 30, 2022 and 2021.
Post-retirement benefit plans
As part of the Chubb Acquisition, the Company assumed an unfunded post-retirement benefit plan that provides life benefits to certain eligible retirees in Canada. As of September 30, 2022, the benefit obligation was $ i 4. The PBO discount rate was i 3.0% at September 30, 2022.
Benefit payments, including amounts to be paid from corporate assets and reflecting expected future service, as appropriate, are expected to be less than $ i i i i 1 / / / for 2023 through 2028 and thereafter.
/Note 15. PENSION
The Company sponsors both funded and unfunded foreign defined benefit pension plans that cover a portion the Company's employees, and the largest plans are closed to new participants. The Company assumed the pension plans as part of the Chubb Acquisition on January 3, 2022, therefore, the plans used a January 3, 2022 measurement date to determine the Company's preliminary valuation of the pension plans in the purchase price allocation.
Guidance under FASB ASC Topic 715, Compensation – Retirement Benefits, requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under this guidance, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in other comprehensive income (loss), net of tax effects, until they are amortized as a component of net periodic benefit cost. Pension and post-retirement obligation balances and related costs reflected within the condensed consolidated balance sheets include costs directly attributable to plans dedicated to the Company.
|
|
||
Plan assets |
$ |
i 2,615 |
|
|
|
|
|
|
|
||
Projected benefit obligation ("PBO") funded status |
|
|
|
Fair value of plan assets |
$ |
i 2,615 |
|
Benefit obligations |
|
( i 2,041 |
) |
Funded status of plans |
$ |
i 574 |
|
Supplemental condensed consolidated balance sheets information related to pension is as follows:
28
|
|
||
Pension and post-retirement benefits |
$ |
i 626 |
|
Other accrued liabilities |
|
— |
|
Other noncurrent liabilities |
|
( i 52 |
) |
Net amount recognized |
$ |
i 574 |
|
Information for pension plans with accumulated benefit obligations in excess of plan assets:
|
|
|
||
PBO |
|
$ |
i 78 |
|
Accumulated benefit obligation |
|
|
i 64 |
|
Fair value of plan assets |
|
|
i 26 |
|
Information for pension plans with projected benefit obligations in excess of plan assets:
|
|
|
||
PBO |
|
$ |
i 78 |
|
Accumulated benefit obligation |
|
|
i 64 |
|
Fair value of plan assets |
|
|
i 26 |
|
The components of the net periodic pension benefit for the defined benefit pension plans are as follows:
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||
Service cost |
|
$ |
i 3 |
|
|
$ |
i 9 |
|
Interest cost |
|
|
i 7 |
|
|
|
i 24 |
|
Expected return on plan assets |
|
|
( i 18 |
) |
|
|
( i 56 |
) |
Net periodic pension benefit |
|
$ |
( i 8 |
) |
|
$ |
( i 23 |
) |
Major assumptions used in determining the benefit obligation and net periodic benefit cost for pension plans are presented in the following table as weighted averages:
|
Three and Nine Months Ended September 30, 2022 |
|
|||||
|
Benefit Obligation |
|
|
Net Periodic |
|
||
Discount rates: |
|
|
|
|
|
||
PBO |
|
i 1.9 |
% |
|
|
i 1.9 |
% |
Interest cost |
|
— |
|
|
|
i 1.7 |
% |
Service cost |
|
— |
|
|
|
i 2.2 |
% |
Salary scale |
|
i 2.9 |
% |
|
|
i 2.9 |
% |
Expected return on plan assets |
|
— |
|
|
|
i 3.1 |
% |
Non-U.S. pension plan assets are typically managed by decentralized fiduciary committees. The disclosure below of asset categories is presented in aggregate for i 12 defined benefit plans in i 7 countries; however, there is variation in asset allocation policy from country to country. Local regulations, local funding rules, and local financial and tax considerations are part of the funding and investment allocation process in each country. Each plan has its own strategic asset allocation. The asset allocations are reviewed periodically and rebalanced when necessary.
The fair values of the pension plan assets by asset category are as follows:
29
|
Quoted Prices in |
|
Significant |
|
Significant |
|
|
|
|
|
|||||
|
Active Markets for |
|
Observable |
|
Unobservable |
|
Not |
|
|
|
|||||
|
Identical Assets |
|
Inputs |
|
Inputs |
|
Subject to |
|
|
|
|||||
Asset Category |
Level 1 |
|
Level 2 |
|
Level 3 |
|
Leveling |
|
Total |
|
|||||
Public equities: |
|
|
|
|
|
|
|
|
|
|
|||||
Global equity funds at net asset value 1 |
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
i 238 |
|
$ |
i 238 |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|||||
Governments |
|
— |
|
|
i 1,608 |
|
|
— |
|
|
i 69 |
|
|
i 1,677 |
|
Corporate bonds |
|
— |
|
|
i 638 |
|
|
— |
|
|
— |
|
|
i 638 |
|
Fixed income securities 1 |
|
— |
|
|
— |
|
|
— |
|
|
i 106 |
|
|
i 106 |
|
Real estate 1,2 |
|
— |
|
|
— |
|
|
— |
|
|
i 11 |
|
|
i 11 |
|
Other 1,3 |
|
— |
|
|
( i 212 |
) |
|
— |
|
|
i 59 |
|
|
( i 153 |
) |
Cash & cash equivalents 1,4 |
|
— |
|
|
i 33 |
|
|
— |
|
|
i 65 |
|
|
i 98 |
|
Subtotal |
$ |
— |
|
$ |
i 2,067 |
|
$ |
— |
|
$ |
i 548 |
|
$ |
i 2,615 |
|
Other assets & liabilities 5 |
|
|
|
|
|
|
|
|
|
— |
|
||||
Total at January 3, 2022 |
|
|
|
|
|
|
|
|
$ |
i 2,615 |
|
||||
Derivatives in the plan are primarily used to manage risk and gain asset class exposure while still maintaining liquidity. Derivative instruments mainly consist of equity futures, interest rate futures, interest rate swaps, and currency forward contracts.
The plans review assets at least quarterly to ensure they are within the targeted asset allocation ranges and, if necessary, asset balances are adjusted back within target allocations. The plans generally employ a broadly diversified investment manager structure that includes diversification by active and passive management, style, capitalization, country, sector, industry, and number of investment managers.
Quoted market prices are used to value investments when available. Investments in securities traded on exchanges, including listed futures and options, are valued at the last reported sale prices on the last business day of the year or, if not available, the last reported bid prices. Fixed income securities are primarily measured using a market approach pricing methodology, where observable prices are obtained by market transactions involving identical or comparable securities of issuers with similar credit ratings. Mortgages have been valued on the basis of their future principal and interest payments discounted at prevailing interest rates for similar investments. Investment contracts are valued at fair value by discounting the related cash flows based on current yields of similar instruments with comparable durations. Real estate investments are valued on a quarterly basis using discounted cash flow models which consider long-term lease estimates, future rental receipts, and estimated residual values. Valuation estimates are supplemented by third-party appraisals on an annual basis.
Over-the-counter securities and government obligations are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable, generally broker quotes. Temporary cash investments are stated at cost, which approximates fair value.
The Company expects to make total contributions of approximately $ i 33 to the global defined benefit pension plans in 2022, of which a one-time contribution of $ i 27 was made during the first quarter of 2022. Contributions do not reflect benefits to be paid directly from corporate assets.
Benefit payments, including amounts to be paid from the plans and corporate assets, and reflecting expected future service, as appropriate, are expected to be paid as follows: $ i 94 in 2022, $ i 94 in 2023, $ i 95 in 2024, $ i 96 in 2025, $ i 95 in 2026, and $ i 502 from 2027 through 2030.
/30
Note 16. Related-Party Transactions
Annual dividends for Series A Preferred Stock were declared as of December 31, 2021 and settled in shares during January 2022. The Company issued i 7,539,697 shares in January 2022 to Mariposa Acquisition IV, LLC, a related entity that is controlled by a co-chair of the Company’s Board of Directors. In addition, the Company incurred advisory fees of $ i i 1 / during the three months ended September 30, 2022 and 2021, and $ i i 3 / during the nine months ended September 30, 2022 and 2021, payable to Mariposa Capital, LLC, an entity owned by a co-chair of the Company’s Board of Directors.
On January 3, 2022, the Company issued and sold i 800,000 shares of the Company’s i 5.5% Series B Redeemable Convertible Preferred Stock, par value $ i 0.0001 per share (the “Series B Preferred Stock”) for an aggregate purchase price of $ i 800. Of the i 800,000 shares issued and sold, i 200,000 shares were sold to Viking Global Equities Master Ltd. and Viking Global Equities II LP ("Viking Purchasers"), which is the aggregate owner of more than i 5% of the Company's outstanding stock, for an aggregate purchase price of $ i 200.
The Company has entered into sales contracts with Royal Oak Enterprises, an entity controlled by a co-chair of the Company's Board of Directors, and recorded $ i 3 and $ i 8 in net revenues for the three and nine months ended September 30, 2022, respectively, and as of September 30, 2022 had $ i 3 in accounts receivable, net of allowances.
From time to time, the Company also enters into other immaterial related party transactions.
/NOTE 17. Commitments and contingencies
The Company is unable to predict the final outcome of the following matters based on the information currently available except otherwise noted. However, the Company does not believe that the resolution of any of these matters will have a material adverse effect upon the Company's results of operations, cash flows, or financial condition.
Environmental and asset retirement obligations
The Company's operations are subject to environmental regulation by various authorities. The Company has accrued for the costs of environmental remediation activities, including but not limited to, investigatory, remediation, operating and maintenance costs, and performance guarantees, and periodically reassess these amounts. Management believes that the likelihood of incurring losses materially in excess of the amounts accrued is remote. The Company has recorded the fair value associated with the retirement of these obligations. Over time, the liability is increased for changes in its present value and the capitalized cost is depreciated over the useful life of the related asset.
The outstanding liability for these obligations was $ i 19 and $ i 6, and was included in other noncurrent liabilities as of September 30, 2022 and December 31, 2021, respectively.
Legal proceedings
From time to time, the Company is subject to workmanship warranty, casualty, negligence, construction defect, breach of contract, product liability, wage and hour, and other claims and legal proceedings in the ordinary course of business relating to the products the Company installs that, if adversely determined, could adversely affect the Company's consolidated financial condition, results of operations, and cash flows. The Company does not believe that the ultimate resolution of these matters will have a material adverse effect on the Company's business, financial condition, results of operations, or liquidity.
/NOTE 18. SHAREHOLDERS’ EQUITY and REdeemable convertible preferred stock
Shareholders' equity
Series A Preferred Stock
The Company has i i 4,000,000 / shares of Series A Preferred Stock issued and outstanding as of September 30, 2022 ("Series A Preferred Stock"). i The Series A Preferred Stock will be automatically converted into shares of common stock on a i one for one basis upon the last day of 2026. / The holders of the Series A Preferred Stock are entitled to receive an annual dividend in the form of common stock or cash, at the Company’s sole option, based on the increase in the market price of the Company’s common stock.
31
Stock repurchases
The Company is authorized to purchase up to an aggregate of $ i 250 of shares of the Company’s common stock pursuant to the stock repurchase program ("SRP"), which will expire on i February 29, 2024 unless otherwise modified or terminated by the Company's Board of Directors. The SRP authorizes open market, private, and accelerated share repurchase transactions. During the three months ended September 30, 2022, the Company repurchased i 738,572 shares of common stock for approximately $ i 11. During the nine months ended September 30, 2022, the Company repurchased i 1,951,332 shares of common stock for approximately $ i 33. As of September 30, 2022, the Company had approximately $ i 217 of authorized repurchases remaining under the SRP.
Redeemable Convertible Preferred Stock
Series B Preferred Stock
During the first quarter of 2022, the Company authorized, issued, and sold, for an aggregate purchase price of $ i 800, i 800,000 shares of the Company’s i 5.5% Series B Preferred Stock, par value $ i 0.0001 per share. The holders of the Series B Preferred Stock are entitled to dividends at the rate of i 5.5% per annum, payable in cash or the Company’s common stock, at the Company's election. The Series B Preferred Stock ranks senior to the Company's common stock and Series A Preferred Stock with respect to dividend rights and rights upon the voluntary or involuntary liquidation, dissolution, or winding up of the affairs of the Company. The Series B Preferred Stock is classified as redeemable convertible preferred stock on the condensed consolidated balance sheets due to a provision that a change in control or de-listing of the Company could require the Company to redeem the Series B Preferred Stock for cash at the election of the holder.
The Series B Preferred Stock is convertible, at the holder’s option, into shares of the Company’s common stock at a conversion price equal to $ i 24.60 per share, subject to certain customary adjustments. The holders of Series B Preferred Stock have certain other rights including voting rights on an as converted basis, certain pre-emptive rights on private equity offerings by the Company, certain registration rights, and, in the case of certain holders, certain director designation rights, as provided in the certificate of designation governing the Series B Preferred Stock.
The Company may, at its option, effect conversion of the outstanding shares of Series B Preferred Stock to common stock, but only if the volume-weighted average price of the Company's common stock exceeds $ i 36.90 per share for 15 consecutive trading days.
Dividends
The holders of Series B Preferred Stock are entitled to receive cumulative dividends at a rate of i 5.5% as and when declared by the Board of Directors, prior and in preference to any declaration or payment of any dividend on the Company's common stock and Series A Preferred Stock. Series B Preferred Stock dividends are cumulative and accrued quarterly, in cash or in common stock, based on an annual i 5.5% dividend rate. The Company declared a Series B Preferred Stock dividend and issued $ i 11 or i 739,015 shares of common stock and $ i 33 or i 1,944,939 shares of common stock during the three and nine months ended September 30, 2022, respectively. If regular dividends are to be paid in shares of common stock, then each holder shall be entitled to receive such number of whole shares of common stock as is determined by dividing the pro rata amount of regular dividends to which a holder is entitled by the average price per share of common stock over the dividend determination period from dividend notice until the payment date.
/
Note 19. Share-based compensation
The Company maintains a 2019 Equity Incentive Plan (the “2019 Plan”), which allows for grants of share-based awards. The Company has issued Time-Based Restricted Stock Units ("RSUs"), Performance-Based Restricted Stock Units with EBITDA-based performance conditions (“PSUs”), and Performance-Based Restricted Stock Units with share-price targets ("MSUs"), which are all generally subject to forfeiture if employment terminates prior to vesting. Forfeitures are estimated and recorded using historical forfeiture rates. During the nine months ended September 30, 2022, the Company awarded new RSUs, PSUs, and MSUs, detailed below.
Time-Based Restricted Stock Units
32
The RSUs entitle recipients to shares of the Company’s common stock and primarily vest in equal installments over a i three-year service period from date of grant. The RSUs granted to the Company’s recipients vest ratably over the service period, generally on the anniversary date of their grant date. During the nine months ended September 30, 2022, the Company granted i 505,609 RSUs at a weighted average grant-date fair value of $ i 19.41 per share. A total of i 227,294 shares vested at a weighted average fair value of $ i 14.35 per share during the nine months ended September 30, 2022.
Performance-Based Restricted Stock Units
EBITDA-based
The PSUs entitle the recipient to shares of the Company's common stock if specified performance conditions are achieved. During the nine months ended September 30, 2022, the Company approved and granted PSUs with EBITDA-based financial performance conditions. PSUs vest, if at all, following a i three-year performance period. If the performance conditions are not met, no compensation cost is recognized and any recognized compensation cost is reversed. During the nine months ended September 30, 2022, the Company granted i 545,122 PSUs at a weighted-average grant date fair value of $ i 20.77.
Market-based
The MSUs entitle the recipient to shares of the Company's common stock if specified market conditions are achieved. During the nine months ended September 30, 2022, the Company approved and granted i 444,926 MSUs with certain share-price targets. Total MSUs granted during the nine months ended September 30, 2022 had a weighted-average grant date fair value of $ i 16.31. The MSUs will vest i 100%, if at all, on the later of March 9, 2025, the third anniversary of the grant date, and the date that such performance condition is satisfied (but no later than March 9, 2027). For awards subject to a market condition, the grant-date fair value is estimated using a Monte Carlo valuation model. The Company recognizes stock-based compensation expense for awards subject to market-based vesting conditions regardless of whether it becomes probable that these conditions will be achieved or not, and stock-based compensation expense for any such awards is not reversed if vesting does not actually occur. The Monte Carlo model is based on random projections of stock price paths and must be repeated numerous times to achieve a probabilistic assessment. Expected volatility is calculated based on the historical volatility and implied volatility of the Company's common stock, and the risk-free interest rate is based on U.S. Treasury yield curve rates with maturities consistent with the three-year vesting period. i The key assumptions used in valuing these market-based awards were as follows:
Risk-free interest rate |
|
i 1.85% |
Dividend yield |
|
— |
Expected volatility |
|
i 45% |
The Company recognized compensation expense of $ i 3 and $ i 2 during the three months ended September 30, 2022 and 2021, respectively, and $ i 10 and $ i 6 during the nine months ended September 30, 2022 and 2021, respectively, for the RSUs, PSUs, and MSUs in total. Total unrecognized compensation related to unvested RSUs, PSUs and MSUs as of September 30, 2022 was approximately $ i 29, which is expected to be recognized over a weighted average period of approximately i 0.9 years, i 1.7 years, and i 2.4 years, respectively. The Company's actual tax benefits realized from the tax deductions related to the vesting of RSUs for the three and nine months ended September 30, 2022 was less than $ i 1 and $ i 2, respectively. The Company's actual tax benefits realized from the tax deductions related to the vesting of RSUs was less than $ i 1 and $ i 1, for the three and nine months ended September 30, 2021 respectively.
/33
Note 20. Earnings Per Share
Net income is allocated between the Company’s common shares and other participating securities based on their participation rights. The Series A Preferred Stock and Series B Preferred Stock represent participating securities. Earnings attributable to Series A Preferred Stock and Series B Preferred Stock are not included in earnings attributable to common shares in calculating earnings per common share (the two-class method). For periods of net loss, there is no impact from the two-class method on earnings per share as net loss is allocated to common shares because Series A Preferred Stock and Series B Preferred Stock are not contractually obligated to share the loss.
The following table sets forth the computation of earnings per common share using the two-class method. The dilutive effect of outstanding Series A Preferred Stock, the Series B Preferred Stock, the Series A Preferred Stock dividend, and the Series B Preferred Stock Dividend is reflected in diluted EPS using the if-converted method, and options, restricted shares, and performance shares are reflected using the treasury stock method. For periods of net loss, basic and diluted EPS are the same, as the assumed exercise of Series A Preferred Stock, Series B Preferred Stock, restricted and performance shares, and stock options are anti-dilutive (amounts in millions, except share and per share amounts):
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
||||||||||
|
|
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|||||
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
i 28 |
|
|
$ |
i 19 |
|
|
$ |
i 51 |
|
|
$ |
i 32 |
|
Less income attributable to Series A Preferred Stock |
|
|
( i 2 |
) |
|
|
( i 2 |
) |
|
|
( i 2 |
) |
|
|
( i 4 |
) |
Less income attributable to Series B Preferred Stock |
|
|
( i 2 |
) |
|
|
— |
|
|
|
( i 2 |
) |
|
|
— |
|
Less stock dividend attributable to Series B Preferred Stock |
|
|
( i 11 |
) |
|
|
— |
|
|
|
( i 33 |
) |
|
|
— |
|
Net income attributable to common shareholders - basic |
|
$ |
i 13 |
|
|
$ |
i 17 |
|
|
$ |
i 14 |
|
|
$ |
i 28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding - basic (1) |
|
|
i 233,605,429 |
|
|
|
i 204,851,780 |
|
|
|
i 232,982,467 |
|
|
|
i 199,472,387 |
|
Income per common share - basic |
|
$ |
i 0.06 |
|
|
$ |
i 0.08 |
|
|
$ |
i 0.06 |
|
|
$ |
i 0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income |
|
$ |
i 28 |
|
|
$ |
i 19 |
|
|
$ |
i 51 |
|
|
$ |
i 32 |
|
Less income attributable to Series A Preferred Stock |
|
|
( i 2 |
) |
|
|
( i 2 |
) |
|
|
( i 2 |
) |
|
|
( i 4 |
) |
Less income attributable to Series B Preferred Stock |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Less stock dividend attributable to Series B Preferred Stock |
|
|
( i 11 |
) |
|
|
— |
|
|
|
( i 33 |
) |
|
|
— |
|
Net income attributable to common shareholders - diluted |
|
$ |
i 15 |
|
|
$ |
i 17 |
|
|
$ |
i 16 |
|
|
$ |
i 28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted average shares outstanding - basic |
|
|
i 233,605,429 |
|
|
|
i 204,851,780 |
|
|
|
i 232,982,467 |
|
|
|
i 199,472,387 |
|
Dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
RSUs, PSUs, and stock options (1) |
|
|
i 336,325 |
|
|
|
i 713,750 |
|
|
|
i 357,350 |
|
|
|
i 1,773,018 |
|
Shares issuable upon conversion of Series B Preferred Stock |
|
|
i 32,520,000 |
|
|
|
— |
|
|
|
i 32,520,000 |
|
|
|
— |
|
Shares issuable pursuant to the annual Series A Preferred Stock dividend (2) |
|
|
— |
|
|
|
i 3,821,671 |
|
|
|
— |
|
|
|
i 3,547,120 |
|
Weighted average shares outstanding - diluted |
|
|
i 266,461,754 |
|
|
|
i 209,387,201 |
|
|
|
i 265,859,817 |
|
|
|
i 204,792,525 |
|
Income per common share - diluted |
|
$ |
i 0.06 |
|
|
$ |
i 0.08 |
|
|
$ |
i 0.06 |
|
|
$ |
i 0.14 |
|
34
Note 21. SEgment information
The Company has combined the leadership responsibility and full accountability for two of its operating segments. As a result, beginning in 2022, the information for the legacy Industrial Services segment was combined with the legacy Specialty Services segment to form a new operating and reportable segment called Specialty Services. Accordingly, the Company presents financial information for the Safety Services and Specialty Services segments, the two operating segments and also the reportable segments. Refer to Note 2 - "Basis of Presentation and Significant Accounting Policies" for more information. The information in the tables below has been retroactively adjusted to reflect these changes in reporting segments.
The Company manages its operations under i two operating segments which represent the Company’s i two reportable segments: Safety Services and Specialty Services. This structure is generally focused on various businesses related to contracting services and maintenance of industrial and commercial facilities. Both reportable segments derive their revenues from installation, inspection, maintenance, service and repair, retrofitting and upgrading, engineering and design, distribution, fabrication, and various types of other services in approximately i 20 countries.
The Safety Services segment focuses on end-to-end integrated occupancy systems (fire protection solutions, HVAC, and entry systems), including design, installation, inspection and service of these integrated systems. The work performed within this segment spans across industries and facilities and includes commercial, education, healthcare, high tech, industrial and special-hazard settings.
The Specialty Services segment provides a variety of infrastructure services and specialized industrial plant services, which includes maintenance and repair of critical infrastructure such as underground electric, gas, water, sewer and telecommunications infrastructure. This segment’s 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.
The accounting policies of the reportable segments are the same as those described in Note 2 – “Basis of Presentation and Significant Accounting Policies.” All intercompany transactions and balances are eliminated in consolidation. Intercompany revenues and costs between entities within a reportable segment are eliminated to arrive at segment totals and eliminations between segments are separately presented. Corporate results include amounts related to corporate functions such as administrative costs, professional fees, acquisition-related transaction costs (exclusive of acquisition integration costs, which are included within the segment results of the acquired businesses), and other discrete items.
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. As appropriate, the Company supplements the reporting of consolidated financial information determined in accordance with U.S. GAAP with certain non-U.S. GAAP financial measures, including EBITDA. The Company believes these non-U.S. GAAP measures provide meaningful information and help investors understand the Company’s financial results and assess its prospects for future performance. The Company uses EBITDA to evaluate its performance, both internally and as compared with its peers, because it excludes certain items that may not be indicative of the Company’s core operating results for its reportable segments. Segment EBITDA is calculated in a manner consistent with consolidated EBITDA.
35
Summarized financial information for the Company’s reportable segments is presented and reconciled to consolidated financial information in the following tables, including a reconciliation of consolidated operating income (loss) to EBITDA:
|
|
Three Months Ended September 30, 2022 |
|
|||||||||||||
|
|
Safety |
|
|
Specialty |
|
|
Corporate and |
|
|
Consolidated |
|
||||
Net revenues |
|
$ |
i 1,154 |
|
|
$ |
i 590 |
|
|
$ |
( i 9 |
) |
|
$ |
i 1,735 |
|
EBITDA Reconciliation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income (loss) |
|
$ |
i 60 |
|
|
$ |
i 45 |
|
|
$ |
( i 44 |
) |
|
$ |
i 61 |
|
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investment income and other, net |
|
|
i 1 |
|
|
|
i 2 |
|
|
|
— |
|
|
|
i 3 |
|
Non-service pension benefit |
|
|
i 10 |
|
|
|
— |
|
|
|
— |
|
|
|
i 10 |
|
Gain on extinguishment of debt, net |
|
|
— |
|
|
|
— |
|
|
|
i 5 |
|
|
|
i 5 |
|
Depreciation |
|
|
i 8 |
|
|
|
i 12 |
|
|
|
i 2 |
|
|
|
i 22 |
|
Amortization |
|
|
i 37 |
|
|
|
i 14 |
|
|
|
— |
|
|
|
i 51 |
|
EBITDA |
|
$ |
i 116 |
|
|
$ |
i 73 |
|
|
$ |
( i 37 |
) |
|
$ |
i 152 |
|
Total assets |
|
$ |
i 5,879 |
|
|
$ |
i 1,357 |
|
|
$ |
i 705 |
|
|
$ |
i 7,941 |
|
Capital expenditures |
|
|
i 5 |
|
|
|
i 16 |
|
|
|
i 5 |
|
|
|
i 26 |
|
|
|
Three Months Ended September 30, 2021 |
|
|||||||||||||
|
|
Safety |
|
|
Specialty |
|
|
Corporate and |
|
|
Consolidated |
|
||||
Net revenues |
|
$ |
i 533 |
|
|
$ |
i 527 |
|
|
$ |
( i 13 |
) |
|
$ |
i 1,047 |
|
EBITDA Reconciliation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income (loss) |
|
$ |
i 56 |
|
|
$ |
i 31 |
|
|
$ |
( i 46 |
) |
|
$ |
i 41 |
|
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investment income and other, net |
|
|
— |
|
|
|
i 4 |
|
|
|
( i 1 |
) |
|
|
i 3 |
|
Depreciation |
|
|
i 3 |
|
|
|
i 16 |
|
|
|
i 1 |
|
|
|
i 20 |
|
Amortization |
|
|
i 16 |
|
|
|
i 14 |
|
|
|
i 2 |
|
|
|
i 32 |
|
EBITDA |
|
$ |
i 75 |
|
|
$ |
i 65 |
|
|
$ |
( i 44 |
) |
|
$ |
i 96 |
|
Total assets |
|
$ |
i 3,108 |
|
|
$ |
i 1,482 |
|
|
$ |
i 193 |
|
|
$ |
i 4,783 |
|
Capital expenditures |
|
|
i 3 |
|
|
|
i 6 |
|
|
|
— |
|
|
|
i 9 |
|
|
|
Nine Months Ended September 30, 2022 |
|
|||||||||||||
|
|
Safety |
|
|
Specialty |
|
|
Corporate and |
|
|
Consolidated |
|
||||
Net revenues |
|
$ |
i 3,374 |
|
|
$ |
i 1,520 |
|
|
$ |
( i 39 |
) |
|
$ |
i 4,855 |
|
EBITDA Reconciliation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income (loss) |
|
$ |
i 186 |
|
|
$ |
i 70 |
|
|
$ |
( i 143 |
) |
|
$ |
i 113 |
|
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investment income and other, net |
|
|
i 2 |
|
|
|
i 5 |
|
|
|
( i 2 |
) |
|
|
i 5 |
|
Non-service pension benefit |
|
|
i 32 |
|
|
|
— |
|
|
|
— |
|
|
|
i 32 |
|
Gain on extinguishment of debt, net |
|
|
— |
|
|
|
— |
|
|
|
i 5 |
|
|
|
i 5 |
|
Depreciation |
|
|
i 20 |
|
|
|
i 35 |
|
|
|
i 5 |
|
|
|
i 60 |
|
Amortization |
|
|
i 120 |
|
|
|
i 43 |
|
|
|
i 2 |
|
|
|
i 165 |
|
EBITDA |
|
$ |
i 360 |
|
|
$ |
i 153 |
|
|
$ |
( i 133 |
) |
|
$ |
i 380 |
|
Total assets |
|
$ |
i 5,879 |
|
|
$ |
i 1,357 |
|
|
$ |
i 705 |
|
|
$ |
i 7,941 |
|
Capital expenditures |
|
|
i 16 |
|
|
|
i 37 |
|
|
|
i 7 |
|
|
|
i 60 |
|
36
|
|
Nine Months Ended September 30, 2021 |
|
|||||||||||||
|
|
Safety |
|
|
Specialty |
|
|
Corporate and |
|
|
Consolidated |
|
||||
Net revenues |
|
$ |
i 1,511 |
|
|
$ |
i 1,347 |
|
|
$ |
( i 30 |
) |
|
$ |
i 2,828 |
|
EBITDA Reconciliation |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income (loss) |
|
$ |
i 153 |
|
|
$ |
i 37 |
|
|
$ |
( i 104 |
) |
|
$ |
i 86 |
|
Plus: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Investment income and other, net |
|
|
i 5 |
|
|
|
i 8 |
|
|
|
( i 1 |
) |
|
|
i 12 |
|
Loss on extinguishment of debt, net |
|
|
— |
|
|
|
— |
|
|
|
( i 9 |
) |
|
|
( i 9 |
) |
Depreciation |
|
|
i 6 |
|
|
|
i 49 |
|
|
|
i 4 |
|
|
|
i 59 |
|
Amortization |
|
|
i 49 |
|
|
|
i 43 |
|
|
|
i 3 |
|
|
|
i 95 |
|
EBITDA |
|
$ |
i 213 |
|
|
$ |
i 137 |
|
|
$ |
( i 107 |
) |
|
$ |
i 243 |
|
Total assets |
|
$ |
i 3,108 |
|
|
$ |
i 1,482 |
|
|
$ |
i 193 |
|
|
$ |
i 4,783 |
|
Capital expenditures |
|
|
i 5 |
|
|
|
i 38 |
|
|
|
— |
|
|
|
i 43 |
|
37
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report contains “forward-looking statements”. These forward-looking statements are based on beliefs and assumptions as of the date such statements are made and are subject to risks and uncertainties. These forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms including “expect”, “anticipate”, “project”, “will”, “should”, “believe”, “intend”, “plan”, “estimate”, “potential”, “target”, “would”, and similar expressions, although not all forward-looking statements contain these identifying terms.
These forward-looking statements are based on our current expectations and assumptions and on information currently available to management and include, among others, statements regarding, as of the date such statements are made:
38
These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including those described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this quarterly report and in our Annual Report on Form 10-K, filed on March 1, 2022, including those described under “Cautionary Note Regarding Forward Looking Statements” and “Risk Factors” in such Form 10-K, and other filings we make with the SEC. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this quarterly report may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Important factors that may materially affect the forward-looking statements include the following:
39
The factors identified above are believed to be important factors, but not necessarily all of the important factors, that could cause actual results to differ materially from those expressed in any forward-looking statement made by us. Other factors not discussed herein could also have a material adverse effect on us. You should not rely upon forward-looking statements as predictions of future events. Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. These forward-looking statements speak only as of the date of this quarterly report. We assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future, except as required by applicable law.
All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this quarterly report and hereafter in our other SEC filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.
40
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 Statements and related notes included in this quarterly report, and the Consolidated Financial Statements, related notes and the MD&A section and other disclosures contained in our Annual Report on Form 10-K, including financial results for the year ended December 31, 2021. 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
APG is 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:
We focus on growing our recurring revenues and repeat business from our diversified long-standing customers across a variety of end markets, which we believe provides us with stable cash flows and a platform for organic growth. We believe maintenance and service revenues are generally more predictable through contractual arrangements with typical terms ranging from days to three years, with the majority having short durations and are often recurring due to consistent renewal rates and long-standing customer relationships.
For financial information about our operating segments, see Note 21 – “Segment Information” to our condensed consolidated financial statements included herein.
41
Recent Developments and Certain Factors and Trends Affecting our Results of Operations
Restructuring
During 2022, we initiated a multi-year restructuring program to drive efficiencies and synergies and optimize operating margin. We recorded total restructuring costs within the Safety Services segment of $7 and $18, of which $2 and $4 million was recorded in cost of revenues and $5 and $14 million in selling, general, and administrative expenses on the condensed consolidated statements of operations for the three and nine months ended September 30, 2022, respectively. The amounts recognized in the period primarily relate to costs associated with workforce reductions. As of September 30, 2022, we had $11 million in restructuring liabilities recorded in other accrued liabilities on the condensed consolidated balance sheets for this plan, which we expect to pay within the next three to six months.
For additional information about our restructuring activity, see Note 5 – “Restructuring" to our condensed consolidated financial statements included herein.
Acquisitions
On January 3, 2022, we completed the acquisition of the Chubb fire and security business (the "Chubb Acquisition"). The total net consideration for the Chubb Acquisition was $2,893 million for the stock purchase of the Chubb fire and security business (the "Chubb business"). The Chubb business is a globally recognized fire safety and security services provider, offering customers complete and reliable services from design and installation to monitoring and on-going maintenance and recurring services. We expect the Chubb business will be a core asset within our Safety Services segment, and will provide meaningful opportunities for future value creation through providing complementary revenue growth by expanding our opportunities for cross-selling products and services across our key end markets.
For additional information about our acquisition activity, see Note 4 – “Business Combinations" to our condensed consolidated financial statements included herein.
Resegmentation
We have combined the leadership responsibility and full accountability for our Industrial Services and Specialty Services operating segments. As a result, beginning in 2022, the information for our legacy Industrial Services segment was combined with the legacy Specialty Services segment to form a new operating and reportable segment called Specialty Services. Accordingly, we present financial information for the Safety Services and Specialty Services segments, our two operating segments and also our reportable segments. Our chief operating decision maker regularly reviews financial information to allocate resources and assess performance utilizing these reorganized segments.
Certain prior year amounts have been recast to conform to the current year presentation and the information in the tables below has been retroactively adjusted to reflect these changes in reporting segments.
42
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. Additionally, the COVID-19 pandemic has impacted the availability of skilled labor resources, particularly in our international businesses, interrupting our ability to perform our services and execute our jobs. In addition, fluctuations in foreign currencies may have an impact on our financial position and results of operations. However, we believe that our exposure to transactional gains or losses resulting from changes in foreign currencies is limited because our foreign operations primarily invoice and collect receivables in their respective local or functional currencies, and the expenses associated with these transactions are generally contracted and paid for in the same local currencies. In cases where operational transactions represent a material currency risk, we generally enter into cross-currency swaps. Refer to Note 9 - "Derivatives" to our condensed consolidated financial statements included in this quarterly report for additional information on our hedging activities. While we actively monitor economic, industry and market factors that could affect our business, we cannot predict the effect that changes in such factors may have on our future consolidated results of operations, liquidity and cash flows, and we may be unable to fully mitigate, or benefit from, such changes.
Russia-Ukraine conflict
While we continue to monitor the conflict in Ukraine, there has not been any direct, material impact on our operations as we do not have any customers or operations in Russia or Ukraine. Should the conflict escalate beyond its current scope, the precise impacts on our business are difficult to predict but could include increased direct costs of materials and labor; increased credit or other capital costs; and impacts on demand for our services, which could include increased demand for our services related to energy production outside of the conflict area but that could also include a reduction in demand in other geographies or markets.
Effect of Seasonality and Cyclical Nature of Business
Our net revenues and results of operations can be subject to variability stemming from seasonality and industry cyclicality. Seasonal variations are primarily related to large, non-recurring projects that can be influenced by weather conditions impacting customer spending patterns, contract award seasons, and project schedules, as well as the timing of holidays. Consequently, net revenues for our businesses are typically lower during the first and second quarters due to the prevalence of unfavorable weather conditions, 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 3 – “Recent Accounting Pronouncements” to our condensed consolidated financial statements included herein.
43
Description of Key Line Items
Net revenues
Net revenues are generated from the sale of various types of contracted services, fabrication and distribution. We derive net revenues primarily from services under contractual arrangements with durations ranging from days to three years, with the majority having durations of less than six months, and which may provide the customer with pricing options that include a combination of fixed, unit, or time and material pricing. Net revenues for fixed price agreements are generally recognized over time using the cost-to-cost method of accounting which measures progress based on the cost incurred to total expected cost in satisfying our performance obligation.
Net revenues from time and material contracts are recognized as the services are provided. Net revenues earned are based on total contract costs incurred plus an agreed upon markup. Net revenues for these cost-plus contracts are recognized over time on an input basis as labor hours are incurred, materials are utilized, and services are performed. Net revenues from wholesale or retail unit sales are recognized at a point-in-time upon shipment.
Cost of revenues
Cost of revenues consists of direct labor, materials, subcontract costs and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Labor costs are considered to be incurred as the work is performed. Subcontractor labor is recognized as the work is performed.
Gross profit
Our gross profit is influenced by direct labor, materials, and subcontract costs. Our profit margins are also influenced by raw material costs, contract mix, weather, and proper coordination with contract providers. Labor intensive contracts usually drive higher margins than those contracts that include material, subcontract, and equipment costs.
Selling, general, and administrative expenses ("SG&A")
Selling expenses consist primarily of compensation and associated costs for sales and marketing personnel, costs of advertising, trade shows and corporate marketing. General and administrative expenses consist primarily of compensation and associated costs for executive management, personnel, facility leases, administrative expenses associated with accounting, finance, legal, information systems, leadership development, human resources, 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.
(Gain) loss on extinguishment of debt, net
(Gain) loss on extinguishment of debt, net reflects the difference between the repurchase price and carrying amount of debt at the time of extinguishment.
Non-service pension benefit
Non-service pension benefit reflects the sum of the components of pension expense not related to service cost, i.e. interest cost, expected return on assets, and amortizations of prior service costs and actuarial gains and losses.
44
Critical Accounting Policies and Estimates
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 Form 10-K for the fiscal year ended December 31, 2021.
Results of Operations
The following is a discussion of our financial condition and results of operations during the three and nine months ended September 30, 2022 and the three and nine months ended September 30, 2021.
Three months ended September 30, 2022 compared to the three months ended September 30, 2021
|
|
Three Months Ended September 30, |
|
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Net revenues |
|
$ |
1,735 |
|
|
$ |
1,047 |
|
|
$ |
688 |
|
|
|
65.7 |
% |
Cost of revenues |
|
|
1,295 |
|
|
|
795 |
|
|
|
500 |
|
|
|
62.9 |
% |
Gross profit |
|
|
440 |
|
|
|
252 |
|
|
|
188 |
|
|
|
74.6 |
% |
Selling, general, and administrative expenses |
|
|
379 |
|
|
|
211 |
|
|
|
168 |
|
|
|
79.6 |
% |
Operating income |
|
|
61 |
|
|
|
41 |
|
|
|
20 |
|
|
|
48.8 |
% |
Interest expense, net |
|
|
33 |
|
|
|
14 |
|
|
|
19 |
|
|
|
135.7 |
% |
Gain on extinguishment of debt, net |
|
|
(5 |
) |
|
|
— |
|
|
|
(5 |
) |
|
NM |
|
|
Non-service pension benefit |
|
|
(10 |
) |
|
|
— |
|
|
|
(10 |
) |
|
NM |
|
|
Investment income and other, net |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
— |
|
|
|
— |
|
Other expense, net |
|
|
15 |
|
|
|
11 |
|
|
|
4 |
|
|
|
36.4 |
% |
Income before income taxes |
|
|
46 |
|
|
|
30 |
|
|
|
16 |
|
|
|
53.3 |
% |
Income tax provision |
|
|
18 |
|
|
|
11 |
|
|
|
7 |
|
|
|
63.6 |
% |
Net income |
|
$ |
28 |
|
|
$ |
19 |
|
|
$ |
9 |
|
|
|
47.4 |
% |
NM = Not meaningful
Net revenues
Net revenues for the three months ended September 30, 2022 were $1,735 million compared to $1,047 million for the same period in 2021, an increase of $688 million or 65.7%. The increase in net revenues was primarily driven by acquisitions completed during the previous twelve months within the Safety Services segment. In addition, the increase in net revenues was due to growth in inspection, service, and monitoring revenue and our ability to pass through inflationary increases in costs through project pricing.
Gross profit
The following table presents our gross profit (net revenues less cost of revenues) and gross margin (gross profit as a percentage of net revenues) for the three months ended September 30, 2022 and 2021, respectively:
|
|
Three Months Ended September 30, |
|
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Gross profit |
|
$ |
440 |
|
|
$ |
252 |
|
|
$ |
188 |
|
|
|
74.6 |
% |
Gross margin |
|
|
25.4 |
% |
|
|
24.1 |
% |
|
|
|
|
|
|
||
Our gross profit for the three months ended September 30, 2022 was $440 million compared to $252 million for the same period in 2021, an increase of $188 million, or 74.6%. Gross margin was 25.4%, an increase of 130 basis points compared to prior year, primarily due to acquisitions completed during the previous twelve months within the Safety Services segment, an improved mix of inspection, service, and monitoring revenue, which generates higher margins, and growth within the Safety Services segment. These improvements were partially offset by supply chain disruptions and inflation causing downward pressure on margins.
45
Operating expenses
The following table presents operating expenses and operating margin (operating income (loss) as a percentage of net revenues) for the three months ended September 30, 2022 and 2021, respectively:
|
|
Three Months Ended September 30, |
|
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Selling, general, and administrative expenses |
|
$ |
379 |
|
|
$ |
211 |
|
|
$ |
168 |
|
|
|
79.6 |
% |
SG&A expenses as a % of net revenues |
|
|
21.8 |
% |
|
|
20.2 |
% |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
SG&A (excluding amortization) (Non-GAAP) |
|
$ |
343 |
|
|
$ |
181 |
|
|
$ |
162 |
|
|
|
89.5 |
% |
SG&A expenses (excluding amortization) as a % of net revenues |
|
|
19.8 |
% |
|
|
17.3 |
% |
|
|
|
|
|
|
||
Operating margin |
|
|
3.5 |
% |
|
|
3.9 |
% |
|
|
|
|
|
|
||
Selling, general, and administrative expenses
Our SG&A expenses for the three months ended September 30, 2022 were $379 million compared to $211 million for the same period in 2021, an increase of $168 million. SG&A expenses as a percentage of net revenues was 21.8% during the three months ended September 30, 2022 compared to 20.2% for the same period in 2021. The primary drivers for the increase in SG&A expenses include additional SG&A expenses contributed by acquisitions completed in the prior twelve months, as well as higher levels of spending associated with acquisitions, including integration, transformation, and reorganization expenses and an increase in amortization expense of $6 million compared to the same period in 2021. Our SG&A expenses excluding amortization for the three months ended September 30, 2022 were $343 million, or 19.8% of net revenues, compared to $181 million, or 17.3% of net revenues, for the same period of 2021 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 $33 million and $14 million for the three months ended September 30, 2022 and 2021, respectively. The increase in interest expense was primarily due to increased debt used for financing the Chubb Acquisition and higher interest rates due to a larger proportion of floating interest rate debt in the current year.
Gain on extinguishment of debt, net
During 2022, we repurchased $13 million and $23 million of the outstanding principal amount of the 4.125% Senior Notes and 4.750% Senior Notes, respectively. In connection with the repurchases, we recognized a net gain on debt extinguishment of $5 million.
Non-service pension benefit
The non-service pension benefit was $(10) million and $0 million for the three months ended September 30, 2022 and 2021, respectively. The higher year-on-year benefit in 2022 was solely due to the acquisition of pension plans as part of the Chubb Acquisition during 2022.
Investment income and other, net
Investment income and other, net remained consistent at $(3) million and $(3) million for the three months ended September 30, 2022 and 2021, respectively.
46
Income tax provision
The income tax expense for the three months ended September 30, 2022 was $18 million compared to $11 million in the same period of the prior year. This change was driven by higher income before taxes in the three months ended September 30, 2022 compared to the same period in 2021. The effective tax rate for the three months ended September 30, 2022 was 40.5%, compared to 38.5% in the same period of 2021. The difference in the effective tax rate was driven by discrete and nondeductible permanent items. The difference between the effective tax rate and the statutory U.S. federal income tax rate of 21.0% is due to the nondeductible permanent items, state taxes, and the reversal of our indefinite reinvestment assertion.
Net income and EBITDA
The following table presents net income and EBITDA for the three months ended September 30, 2022 and 2021, respectively:
|
|
Three Months Ended September 30, |
|
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Net income |
|
$ |
28 |
|
|
$ |
19 |
|
|
$ |
9 |
|
|
|
47.4 |
% |
EBITDA (non-GAAP) |
|
|
152 |
|
|
|
96 |
|
|
|
56 |
|
|
|
58.3 |
% |
Net income as a % of net revenues |
|
|
1.6 |
% |
|
|
1.8 |
% |
|
|
|
|
|
|
||
EBITDA as a % of net revenues |
|
|
8.8 |
% |
|
|
9.2 |
% |
|
|
|
|
|
|
||
Our net income for the three months ended September 30, 2022 was $28 million compared to $19 million for the same period in 2021, an increase of $9 million. The improvement resulted from additional revenue and profit contributed by acquisitions completed in the previous twelve months and an improved mix of inspection, service, and monitoring revenue. These increases were largely offset by higher levels of spending related to integration of recently acquired businesses, increased interest costs associated with newly issued term loan debt, and increased amortization expense of $19 million compared to the same period in the prior year. Net income as a percentage of net revenues for the three months ended September 30, 2022 and 2021 was 1.6% and 1.8%, respectively. EBITDA for the three months ended September 30, 2022 was $152 million compared to $96 million for the same period in 2021, an increase of $56 million. The increase in EBITDA was primarily driven by the factors previously discussed. See the discussion and reconciliation of our non-U.S. GAAP financial measures below.
Operating Segment Results for the three months ended September 30, 2022 compared to the three months ended September 30, 2021
|
|
Net Revenues |
|
||||||||||||
|
|
Three Months Ended September 30, |
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
$ |
|
|
% |
|
||||
Safety Services |
|
$ |
1,154 |
|
|
$ |
533 |
|
$ |
621 |
|
|
|
116.5 |
% |
Specialty Services |
|
|
590 |
|
|
|
527 |
|
|
63 |
|
|
|
12.0 |
% |
Corporate and Eliminations |
|
|
(9 |
) |
|
|
(13 |
) |
|
4 |
|
|
|
(30.8 |
)% |
|
|
$ |
1,735 |
|
|
$ |
1,047 |
|
$ |
688 |
|
|
|
65.7 |
% |
|
|
Operating Income (Loss) |
|
|||||||||||||
|
|
Three Months Ended September 30, |
|
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Safety Services |
|
$ |
60 |
|
|
$ |
56 |
|
|
$ |
4 |
|
|
|
7.1 |
% |
Safety Services operating margin |
|
|
5.2 |
% |
|
|
10.5 |
% |
|
|
|
|
|
|
||
Specialty Services |
|
$ |
45 |
|
|
$ |
31 |
|
|
$ |
14 |
|
|
|
45.2 |
% |
Specialty Services operating margin |
|
|
7.6 |
% |
|
|
5.9 |
% |
|
|
|
|
|
|
||
Corporate and Eliminations |
|
$ |
(44 |
) |
|
$ |
(46 |
) |
|
$ |
2 |
|
|
|
(4.3 |
)% |
|
|
$ |
61 |
|
|
$ |
41 |
|
|
$ |
20 |
|
|
|
48.8 |
% |
47
|
|
EBITDA |
|
|||||||||||||
|
|
Three Months Ended September 30, |
|
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Safety Services |
|
$ |
116 |
|
|
$ |
75 |
|
|
$ |
41 |
|
|
|
54.7 |
% |
Safety Services EBITDA as a % of net revenues |
|
|
10.1 |
% |
|
|
14.1 |
% |
|
|
|
|
|
|
||
Specialty Services |
|
$ |
73 |
|
|
$ |
65 |
|
|
$ |
8 |
|
|
|
12.3 |
% |
Specialty Services EBITDA as a % of net revenues |
|
|
12.4 |
% |
|
|
12.3 |
% |
|
|
|
|
|
|
||
Corporate and Eliminations |
|
$ |
(37 |
) |
|
$ |
(44 |
) |
|
$ |
7 |
|
|
|
(15.9 |
)% |
|
|
$ |
152 |
|
|
$ |
96 |
|
|
$ |
56 |
|
|
|
58.3 |
% |
The following discussion breaks down the net revenues, operating income (loss), and EBITDA by operating segment for the three months ended September 30, 2022 compared to the three months ended September 30, 2021.
Safety Services
Safety Services net revenues for the three months ended September 30, 2022 increased by $621 million or 116.5% compared to the same period in the prior year. The increase was primarily driven by acquisitions completed in the prior twelve months and increased inspection, service, and monitoring revenue within our Life Safety and HVAC services businesses.
Safety Services operating margin for the three months ended September 30, 2022 and 2021 was approximately 5.2% and 10.5%, respectively. The decline was primarily the result of increased spending related to the integration of recently acquired businesses, supply chain disruptions and inflation causing downward pressure on margins, and increased amortization expense of $21 million compared to the same period in the prior year, partially offset by an increase in inspection, service, and monitoring revenue. Safety Services EBITDA as a percentage of net revenues for the three months ended September 30, 2022 and 2021 was approximately 10.1% and 14.1%, respectively. This decline was primarily related to the factors discussed above.
Specialty Services
Specialty Services net revenues for the three months ended September 30, 2022 increased by $63 million or 12.0% compared to the same period in the prior year. The increase was primarily driven by increased activity in the infrastructure, fabrication, and utility markets during the three months ended September 30, 2022 compared to the same period in the prior year. Additionally, we have been able to offset some of the inflationary increases in cost of goods sold through strategic pricing improvements and contract negotiations, resulting in increased net revenues during the three months ended September 30, 2022 compared to the same period of the prior year.
Specialty Services operating margin for the three months ended September 30, 2022 and 2021 was approximately 7.6% and 5.9%, respectively. The improvement was primarily driven by higher levels of productivity in the execution of specialty contracting work during the three months ended September 30, 2022 compared to the same period during the prior year. The improvement was also due to decreased depreciation expense of $4 million in the three months ended September 30, 2022 compared to the same period in the prior year. Comparatively, during the three months ended September 30, 2022, margins increased due to the growth in sales volumes. These improvements were partially offset by supply chain disruptions and inflationary pressures on margins. Specialty Services EBITDA as a percentage of net revenues for the three months ended September 30, 2022 and 2021 was approximately 12.4% and 12.3%, respectively, due to the factors discussed above.
48
Nine months ended September 30, 2022 compared to the nine months ended September 30, 2021
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Net revenues |
|
$ |
4,855 |
|
|
$ |
2,828 |
|
|
$ |
2,027 |
|
|
|
71.7 |
% |
Cost of revenues |
|
|
3,604 |
|
|
|
2,163 |
|
|
|
1,441 |
|
|
|
66.6 |
% |
Gross profit |
|
|
1,251 |
|
|
|
665 |
|
|
|
586 |
|
|
|
88.1 |
% |
Selling, general, and administrative expenses |
|
|
1,138 |
|
|
|
579 |
|
|
|
559 |
|
|
|
96.5 |
% |
Operating income |
|
|
113 |
|
|
|
86 |
|
|
|
27 |
|
|
|
31.4 |
% |
Interest expense, net |
|
|
88 |
|
|
|
43 |
|
|
|
45 |
|
|
|
104.7 |
% |
(Gain) loss on extinguishment of debt, net |
|
|
(5 |
) |
|
|
9 |
|
|
|
(14 |
) |
|
|
(155.6 |
)% |
Non-service pension benefit |
|
|
(32 |
) |
|
|
— |
|
|
|
(32 |
) |
|
NM |
|
|
Investment income and other, net |
|
|
(5 |
) |
|
|
(12 |
) |
|
|
7 |
|
|
|
(58.3 |
)% |
Other expense, net |
|
|
46 |
|
|
|
40 |
|
|
|
6 |
|
|
|
15.0 |
% |
Income before income taxes |
|
|
67 |
|
|
|
46 |
|
|
|
21 |
|
|
|
45.7 |
% |
Income tax provision |
|
|
16 |
|
|
|
14 |
|
|
|
2 |
|
|
|
14.3 |
% |
Net income |
|
$ |
51 |
|
|
$ |
32 |
|
|
$ |
19 |
|
|
|
59.4 |
% |
NM = Not meaningful
Net revenues
Net revenues for the nine months ended September 30, 2022 were $4,855 million compared to $2,828 million for the same period in 2021, an increase of $2,027 million or 71.7%. The increase in net revenues was primarily attributable to revenues contributed by acquisitions completed within the Safety Services segment during the past twelve months. The increase in net revenues was also due to growth in inspection, service, and monitoring revenue, our ability to pass through inflationary increases in costs through project pricing, and continued market recoveries from the COVID-19 pandemic within our Safety Services and Specialty Services segments.
Gross profit
The following table presents our gross profit (net revenues less cost of revenues) and gross margin (gross profit as a percentage of net revenues) for the nine months ended September 30, 2022 and 2021, respectively:
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Gross profit |
|
$ |
1,251 |
|
|
$ |
665 |
|
|
$ |
586 |
|
|
|
88.1 |
% |
Gross margin |
|
|
25.8 |
% |
|
|
23.5 |
% |
|
|
|
|
|
|
||
Our gross profit for the nine months ended September 30, 2022 was $1,251 million compared to $665 million for the same period in 2021, an increase of $586 million, or 88.1%. Gross margin was 25.8%, an increase of 230 basis points compared to prior year, primarily due to acquisitions completed within the Safety Services segment during the past twelve months. Additionally, the increase was driven by an improved mix of inspection, service, and monitoring revenue, which generates higher margins, and growth within the Safety Services segment. These improvements were partially offset by supply chain disruptions and inflation causing downward pressure on margins.
49
Operating expenses
The following table presents operating expenses and operating margin (operating income (loss) as a percentage of net revenues) for the nine months ended September 30, 2022 and 2021, respectively:
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Selling, general, and administrative expenses |
|
$ |
1,138 |
|
|
$ |
579 |
|
|
$ |
559 |
|
|
|
96.5 |
% |
SG&A expenses as a % of net revenues |
|
|
23.4 |
% |
|
|
20.5 |
% |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
SG&A (excluding amortization) (Non-GAAP) |
|
$ |
995 |
|
|
$ |
489 |
|
|
$ |
506 |
|
|
|
103.5 |
% |
SG&A expenses (excluding amortization) as a % of net revenues |
|
|
20.5 |
% |
|
|
17.3 |
% |
|
|
|
|
|
|
||
Operating margin |
|
|
2.3 |
% |
|
|
3.0 |
% |
|
|
|
|
|
|
||
Selling, general, and administrative expenses
Our SG&A expenses for the nine months ended September 30, 2022 were $1,138 million compared to $579 million for the same period in 2021, an increase of $559 million. SG&A expenses as a percentage of net revenues were 23.4% during the nine months ended September 30, 2022 compared to 20.5% for the same period in 2021. The increase in SG&A expenses was primarily driven by additional SG&A expenses contributed by acquisitions completed in the prior twelve months. Also driving the increase was higher levels of spending associated with acquisitions, including integration, transition, and reorganization expenses and an increase in amortization expense of $53 million compared to the same period in 2021. Our SG&A expenses excluding amortization for the nine months ended September 30, 2022 were $995 million, or 20.5% of net revenues, compared to $489 million, or 17.3% of net revenues, for the same period of 2021 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 $88 million and $43 million for the nine months ended September 30, 2022 and 2021, respectively. The increase in interest expense was primarily due to increased debt related to the financing of the Chubb Acquisition and higher interest rates due to a larger proportion of floating interest rate debt in the current year.
(Gain) loss on extinguishment of debt, net
During 2022, we repurchased $13 million and $23 million of the outstanding principal amount of the 4.125% Senior Notes and 4.750% Senior Notes, respectively. In connection with the repurchases, we recognized a net gain on debt extinguishment of $5 million. During 2021, in connection with the repayment of the previously outstanding term loan and prepayment on a portion of the 2019 Term Loan using proceeds from the private offering of $350 million aggregate principal amount of senior notes (4.125% Senior Notes), we incurred a loss on extinguishment of debt of $9 million related to unamortized debt issuance costs.
Non-service pension benefit
The non-service pension benefit was $(32) million and $0 million for the nine months ended September 30, 2022 and 2021, respectively. The higher year-on-year benefit in 2022 was solely due to the acquisition of pension plans as part of the Chubb Acquisition during the nine months ended September 30, 2022.
Investment income and other, net
Investment income and other, net was $(5) million and $(12) million for the nine months ended September 30, 2022 and 2021, respectively. The decline in investment income and other, net was primarily due to COVID-19 relief at Canadian subsidiaries of $2 million in 2021 and the impact of changes in foreign currency rates.
50
Income tax provision
The income tax expense for the nine months ended September 30, 2022 was $16 million compared to $14 million in the same period of the prior year. This change was driven by unfavorable discrete items in the nine months ended September 30, 2022 compared to the same period in 2021. The effective tax rate for the nine months ended September 30, 2022 was 24.2%, compared to 31.3% in the same period of 2021. The difference in the effective tax rate was driven by discrete and nondeductible permanent items. The difference between the effective tax rate and the statutory U.S. federal income tax rate of 21.0% is due to the nondeductible permanent items, state taxes, and the reversal of our indefinite reinvestment assertion.
Net income and EBITDA
The following table presents net income and EBITDA for the nine months ended September 30, 2022 and 2021, respectively:
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Net income |
|
$ |
51 |
|
|
$ |
32 |
|
|
$ |
19 |
|
|
|
59.4 |
% |
EBITDA (non-GAAP) |
|
|
380 |
|
|
|
243 |
|
|
|
137 |
|
|
|
56.4 |
% |
Net income as a % of net revenues |
|
|
1.1 |
% |
|
|
1.1 |
% |
|
|
|
|
|
|
||
EBITDA as a % of net revenues |
|
|
7.8 |
% |
|
|
8.6 |
% |
|
|
|
|
|
|
||
Our net income for the nine months ended September 30, 2022 was $51 million compared to $32 million for the same period in 2021, an increase of $19 million. The improvement is primarily attributable to additional revenue and profit contributed by acquisitions completed in the previous twelve months. The increase was also driven by an improved mix of inspection, service, and monitoring revenue. These increases in revenues were partially offset by increased acquisition and integration related expenses, increased interest costs associated with newly issued term loan debt, and increased amortization expense of $70 million. Net income as a percentage of net revenues for the nine months ended September 30, 2022 and 2021 was 1.1% and 1.1%, respectively. EBITDA for the nine months ended September 30, 2022 was $380 million compared to $243 million for the same period in 2021, an increase of $137 million. The increase in EBITDA was primarily driven by the factors previously discussed. See the discussion and reconciliation of our non-U.S. GAAP financial measures below.
Operating Segment Results for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021
|
|
Net Revenues |
|
|||||||||||||
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Safety Services |
|
$ |
3,374 |
|
|
$ |
1,511 |
|
|
$ |
1,863 |
|
|
|
123.3 |
% |
Specialty Services |
|
|
1,520 |
|
|
|
1,347 |
|
|
|
173 |
|
|
|
12.8 |
% |
Corporate and Eliminations |
|
|
(39 |
) |
|
|
(30 |
) |
|
|
(9 |
) |
|
|
30.0 |
% |
|
|
$ |
4,855 |
|
|
$ |
2,828 |
|
|
$ |
2,027 |
|
|
|
71.7 |
% |
|
|
Operating Income (Loss) |
|
|||||||||||||
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Safety Services |
|
$ |
186 |
|
|
$ |
153 |
|
|
$ |
33 |
|
|
|
21.6 |
% |
Safety Services operating margin |
|
|
5.5 |
% |
|
|
10.1 |
% |
|
|
|
|
|
|
||
Specialty Services |
|
$ |
70 |
|
|
$ |
37 |
|
|
$ |
33 |
|
|
|
89.2 |
% |
Specialty Services operating margin |
|
|
4.6 |
% |
|
|
2.7 |
% |
|
|
|
|
|
|
||
Corporate and Eliminations |
|
$ |
(143 |
) |
|
$ |
(104 |
) |
|
$ |
(39 |
) |
|
|
37.5 |
% |
|
|
$ |
113 |
|
|
$ |
86 |
|
|
$ |
27 |
|
|
|
31.4 |
% |
51
|
|
EBITDA |
|
|||||||||||||
|
|
Nine Months Ended September 30, |
|
|
Change |
|
||||||||||
($ in millions) |
|
2022 |
|
|
2021 |
|
|
$ |
|
|
% |
|
||||
Safety Services |
|
$ |
360 |
|
|
$ |
213 |
|
|
$ |
147 |
|
|
|
69.0 |
% |
Safety Services EBITDA as a % of net revenues |
|
|
10.7 |
% |
|
|
14.1 |
% |
|
|
|
|
|
|
||
Specialty Services |
|
$ |
153 |
|
|
$ |
137 |
|
|
$ |
16 |
|
|
|
11.7 |
% |
Specialty Services EBITDA as a % of net revenues |
|
|
10.1 |
% |
|
|
10.2 |
% |
|
|
|
|
|
|
||
Corporate and Eliminations |
|
$ |
(133 |
) |
|
$ |
(107 |
) |
|
$ |
(26 |
) |
|
|
24.3 |
% |
|
|
$ |
380 |
|
|
$ |
243 |
|
|
$ |
137 |
|
|
|
56.4 |
% |
The following discussion breaks down the net revenues, operating income (loss), and EBITDA by operating segment for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
Safety Services
Safety Services net revenues for the nine months ended September 30, 2022 increased by $1,863 million or 123.3% compared to the same period in the prior year. The increase was primarily attributable to acquisitions completed in the past twelve months. The increase was also driven by general market recoveries in both our Life Safety and HVAC services businesses and increased inspection, service, and monitoring revenue within our Life Safety businesses.
Safety Services operating margin for the nine months ended September 30, 2022 and 2021 was approximately 5.5% and 10.1%, respectively. The decline was primarily the result of increased spending related to the integration of recently acquired businesses. Additionally, the decline was partially driven by supply chain disruptions and inflation causing downward pressure on margins, and increased amortization expense of $71 million compared to the same period in the prior year, partially offset by an increase in inspection, service, and monitoring revenue. Safety Services EBITDA as a percentage of net revenues for the nine months ended September 30, 2022 and 2021 was approximately 10.7% and 14.1%, respectively. This decline was primarily related to the factors discussed above.
Specialty Services
Specialty Services net revenues for the nine months ended September 30, 2022 increased by $173 million or 12.8% compared to the same period in the prior year. The increase was primarily attributable to increased activity in the specialty contracting, infrastructure, and utility markets during the nine months ended September 30, 2022 compared to the same period in the prior year. Additionally, the increase was driven by general market recoveries driving a resumption in the demand for our services when compared to the prior year, which was negatively impacted by the COVID-19 pandemic. We have also been able to offset some of the inflationary increases in cost of revenues through strategic pricing improvements and contract negotiations, resulting in increased net revenues during the nine months ended September 30, 2022 compared to the same period on the prior year.
Specialty Services operating margin for the nine months ended September 30, 2022 and 2021 was approximately 4.6% and 2.7%, respectively. The improvement was primarily attributable to higher levels of productivity in the execution of specialty contracting work during the nine months ended September 30, 2022 compared to the same period in 2021. During the nine months ended September 30, 2022, margins increased due to growth in sales volumes. Comparatively, during the nine months ended September 30, 2021, we experienced margin contractions as a result of lower sales volumes but consistent indirect costs. These margin improvements were partially offset by supply chain disruptions and inflationary pressures on margins. Specialty Services EBITDA as a percentage of net revenues for the nine months ended September 30, 2022 and 2021 was approximately 10.1% and 10.2%, 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 (excluding amortization) and EBITDA (defined below), which are non-U.S. GAAP financial measures. We use these non-U.S. GAAP financial measures to evaluate our performance, both internally and as compared with our peers, because they exclude certain items that may not be indicative of our core operating results. Management believes these measures are useful to investors since they (a) permit investors to view our performance using the same tools that management uses to evaluate our past performance, reportable business segments, and prospects for future performance, (b) permit investors to compare us with our peers, and (c) in the case of EBITDA, determines certain elements of management’s incentive compensation.
52
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 measure 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 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 (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 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) |
|
2022 |
|
|
2021 |
|
||
Reported SG&A expenses |
|
$ |
379 |
|
|
$ |
211 |
|
Adjustments to reconcile to SG&A expenses to SG&A expenses (excluding amortization) |
|
|
|
|
|
|
||
Amortization expense |
|
|
(36 |
) |
|
|
(30 |
) |
SG&A expenses (excluding amortization) |
|
$ |
343 |
|
|
$ |
181 |
|
|
|
Nine Months Ended September 30, |
|
|||||
($ in millions) |
|
2022 |
|
|
2021 |
|
||
Reported SG&A expenses |
|
$ |
1,138 |
|
|
$ |
579 |
|
Adjustments to reconcile to SG&A expenses to SG&A expenses (excluding amortization) |
|
|
|
|
|
|
||
Amortization expense |
|
|
(143 |
) |
|
|
(90 |
) |
SG&A expenses (excluding amortization) |
|
$ |
995 |
|
|
$ |
489 |
|
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 (loss) to EBITDA for the periods indicated:
|
|
Three Months Ended September 30, |
|
|||||
($ in millions) |
|
2022 |
|
|
2021 |
|
||
Reported net income |
|
$ |
28 |
|
|
$ |
19 |
|
Adjustments to reconcile net income to EBITDA: |
|
|
|
|
|
|
||
Interest expense, net |
|
|
33 |
|
|
|
14 |
|
Income tax provision |
|
|
18 |
|
|
|
11 |
|
Depreciation |
|
|
22 |
|
|
|
20 |
|
Amortization |
|
|
51 |
|
|
|
32 |
|
EBITDA |
|
$ |
152 |
|
|
$ |
96 |
|
53
|
|
Nine Months Ended September 30, |
|
|||||
($ in millions) |
|
2022 |
|
|
2021 |
|
||
Reported net income |
|
$ |
51 |
|
|
$ |
32 |
|
Adjustments to reconcile net income to EBITDA: |
|
|
|
|
|
|
||
Interest expense, net |
|
|
88 |
|
|
|
43 |
|
Income tax provision |
|
|
16 |
|
|
|
14 |
|
Depreciation |
|
|
60 |
|
|
|
59 |
|
Amortization |
|
|
165 |
|
|
|
95 |
|
EBITDA |
|
$ |
380 |
|
|
$ |
243 |
|
Liquidity and Capital Resources
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 Revolving Credit Facility and the proceeds from debt offerings. We believe these sources will be sufficient to fund our liquidity requirements for at least the next twelve months. Although we believe we have sufficient resources to fund our future cash requirements, there are many factors with the potential to influence our cash flow position including weather, seasonality, commodity prices, market conditions, and inflation, over which we have no control.
As of September 30, 2022, we had $819 million of total liquidity, comprising $395 million in cash and cash equivalents and $424 million ($500 million less outstanding letters of credit of approximately $76 million, which reduce availability) of available borrowings under our Revolving Credit Facility. On January 3, 2022, we issued and sold 800,000 shares of Series B Preferred Stock (defined below) for an aggregate purchase price of $800 million, and entered into an amendment to our credit agreement. As part of this amendment, we incurred a $1,100 million seven-year incremental term loan ("2021 Term Loan"), the Revolving Credit Facility was upsized by $200 million to $500 million, the maturity date of the Revolving Credit Facility was extended five years, and the letter of credit sublimit was increased by $100 million to $250 million.
During September 2021, we issued 22,716,049 shares of our common stock in a public underwritten offering. The proceeds from this offering totaled approximately $446 million, net of related expenses. We used the net proceeds from this offering for general corporate purposes, which includes items such as 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 be, any accrued consideration due to selling shareholders, including tax payments in connection therewith, for working capital and general corporate purposes, including capital expenditures and debt service, as well as to identify, execute and integrate strategic acquisitions and business transformation.
In March 2022, we announced that our Board of Directors authorized a stock repurchase program, authorizing the purchase of up to an aggregate of $250 million of shares of common stock through February 2024. During the three and nine months ended September 30, 2022, we repurchased 738,572 and 1,951,332 shares of common stock for approximately $11 million and $33 million, respectively, under this stock repurchase program, leaving approximately $217 million of authorized repurchases.
Cash Flows
The following table summarizes net cash flows with respect to our operating, investing and financing activities for the periods indicated:
|
|
Nine Months Ended September 30, |
|
|||||
($ in millions) |
|
2022 |
|
|
2021 |
|
||
Net cash provided by operating activities |
|
$ |
82 |
|
|
$ |
68 |
|
Net cash used in investing activities |
|
|
(2,931 |
) |
|
|
(81 |
) |
Net cash provided by financing activities |
|
|
1,773 |
|
|
|
629 |
|
Effect of foreign currency exchange rate change on cash and cash equivalents |
|
|
(17 |
) |
|
|
(1 |
) |
Net (decrease) increase in cash and cash equivalents |
|
$ |
(1,093 |
) |
|
$ |
615 |
|
Cash, cash equivalents, and restricted cash at the end of the period |
|
$ |
398 |
|
|
$ |
1,130 |
|
54
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $82 million for the nine months ended September 30, 2022 compared to $68 million for the same period in 2021. The increase in cash flows provided by operating activities is primarily due to an increase in net income in the period. This increase is partially offset by 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. During the nine months ended September 30, 2022, operating cash flows were impacted by inflationary pressures and supply chain disruptions leading to an increase in the required level of working capital investment needed to ensure we have materials available to meet our growth in sales volumes, as well as higher levels of spending related to acquisition and integration costs. Further, the increase in the cost of our debt driven by new debt issuances that occurred during the later half of 2021 and the first half of 2022, and a one-time contribution to assumed pension plans of $27 million were factors in our increased cash provided by operating activities during the nine months ended September 30, 2022 compared to the same period in the prior year.
Net Cash Used in Investing Activities
Net cash used in investing activities was $(2,931) million for the nine months ended September 30, 2022 compared to $(81) million for the same period in 2021. During the current year, we completed the Chubb Acquisition and other immaterial acquisition activity resulting in the use of $2,881 million for acquisitions during the nine months ended September 30, 2022 compared to $51 million for the same period in 2021.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $1,773 million for the nine months ended September 30, 2022 compared to $629 million for the same period in 2021. The increase in cash provided by financing activities was primarily due to $1,104 million of proceeds from the issuance of the 2021 Term Loan and other debt, and $797 million of proceeds from the issuance of Series B Preferred Stock. The increase was partially offset by $33 million of payments on long-term borrowings, $30 million of repurchases of long-term borrowings, and $33 million of repurchases of common stock. In the same period of the prior year, cash provided by financing activities was primarily driven by proceeds of $350 million from the completed offering of the 4.125% Senior Notes and $230 million from the issuance of common stock in connection with the warrant exercises. These cash inflows were partially offset by payments of $320 million on long term borrowings and $72 million for acquisition-related consideration.
Financing Activities
Credit Agreement
In anticipation of the Chubb Acquisition, on December 16, 2021, APi Group DE, as borrower, we, as guarantor and our subsidiary guarantors named therein entered into Amendment No. 2 to the Credit Agreement ("Amendment No. 2"). On January 3, 2022, the closing date of the Chubb Acquisition, we closed the transactions contemplated by Amendment No. 2, pursuant to which (1) we incurred a $1,100 million seven-year incremental term loan, (2) the Revolving Credit Facility was upsized by $200 million to $500 million, (3) the maturity date of the Revolving Credit Facility was extended five years, (4) the letter of credit sublimit was increased by $100 million to $250 million, (5) additional loan parties and collateral in additional jurisdictions became subject to the Credit Agreement, (6) changes were made to the guarantor coverage requirements under the Credit Agreement with respect to consolidated EBITDA, and (7) certain other changes were made to the Credit Agreement.
The interest rate applicable to the 2021 Term Loan is, at our option, either (a) a base rate plus an applicable margin equal to 1.75% or (b) a Eurocurrency rate (adjusted for statutory reserves) plus an applicable margin equal to 2.75%. Principal payments on the 2021 Term Loan will be made in quarterly installments on the last day of each fiscal quarter, for a total annual amount equal to 1.00% of the initial aggregate principal amount of the 2021 Term Loan. The 2021 Term Loan matures on January 3, 2029. The 2021 Term Loan is subject to the same mandatory prepayment provisions as the 2019 Term Loan.
55
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, 2022 was 2.72:1.00.
As of September 30, 2022, we had $1,127 million and $1,085 million of indebtedness outstanding on the 2019 Term Loan and 2021 Term Loan, respectively. We had no amounts outstanding under the Revolving Credit Facility, under which $424 million was available after giving effect to $76 million of outstanding letters of credit, which reduces availability.
Senior Notes
We 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 subsidiaries. The 4.125% Senior Notes will mature on July 15, 2029, unless redeemed earlier, and bear interest at a rate of 4.125% per year until maturity, payable semi-annually in arrears. We used the net proceeds from the sale of the 4.125% Senior Notes to repay the previously outstanding term loan, prepay a portion of the 2019 Term Loan and for general corporate purposes. During the three months ended September 30, 2022, we repurchased $13 million of outstanding principal amount of the 4.125% Senior Notes and recognized a net gain of $2 million on the debt extinguishment. As of September 30, 2022, we had $337 million aggregate principal amount of 4.125% Senior Notes outstanding.
We 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 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. During the three months ended September 30, 2022, we repurchased $23 million of outstanding principal amount of the 4.750% Senior Notes and recognized a net gain of $3 million on the debt extinguishment. As of September 30, 2022, 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, 2022 and December 31, 2021.
Issuance of Series B Preferred Stock
On January 3, 2022, concurrent with the closing of the Chubb Acquisition, we issued and sold 800,000 shares of our 5.5% Series B Redeemable Convertible Preferred Stock, par value $0.0001 per share (the "Series B Preferred Stock"), for an aggregate purchase price of $800 million, pursuant to securities purchase agreements entered into on July 26, 2021 with certain investors. The net proceeds from the Series B Preferred Stock issuance were used to fund a portion of the consideration for the Chubb Acquisition.
The holders of the Series B Preferred Stock are entitled to dividends at the rate of 5.5% per annum, payable in cash or common stock, at our election. The Series B Preferred Stock ranks senior to our common stock and Series A Preferred Stock with respect to dividend rights and rights upon the voluntary or involuntary liquidation, dissolution, or winding up of our affairs.
The Series B Preferred Stock is convertible, at the holder’s option, into shares of our common stock at a conversion price equal to $24.60 per share, subject to certain customary adjustments. The holders of Series B Preferred Stock have certain other rights including voting rights on an as-converted basis, certain pre-emptive rights on our private equity offerings, certain registration rights, and, in the case of certain holders, certain director designation rights, as provided in the certificate of designation governing the Series B Preferred Stock.
56
We may, at our option, effect conversion of the outstanding shares of Series B Preferred Stock to common stock, but only if the volume-weighted average price of our common stock exceeds $36.90 per share for 15 consecutive trading days.
Material Cash Requirements from Known Contractual and Other Obligations
Our material cash requirements from known contractual and other obligations primarily relate to the following, for which information on both a short-term and long-term basis is provided in the indicated notes to the condensed consolidated financial statements and expected to be satisfied using cash generated from operations:
We make investments in our properties and equipment to enable continued expansion and effective performance of our business. Our capital expenditures are expected to be approximately 1.5% of annual net revenues.
57
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest rate risk
As of September 30, 2022, our variable interest rate debt was primarily related to our 2019 Term Loan, our 2021 Term Loan, and our Revolving Credit Facility. As of September 30, 2022, excluding letters of credit outstanding of $76 million, we had no amounts of outstanding revolving loans, $1,127 million outstanding on the 2019 Term Loan, and $1,085 million outstanding on the 2021 Term Loan. As of September 30, 2022, we had a four-year interest rate swap with respect to $720 million of notional value of the 2019 Term Loan, exchanging one-month LIBOR for a rate of 3.64% per annum. This expense will be offset by the amortization through October 2024 of the remaining gain of $33 million recognized from the termination of the previously outstanding $720 million notional amount interest rate swap resulting in an effective rate on the $720 million of notional value of the 2019 Term Loan of 3.97%. The remaining floating $407 million of our 2019 Term Loan balance will bear interest at 6.25% per annum based on one-month LIBOR plus 250 basis points. The 2021 Term Loan balance will bear interest at 6.50% per annum based on one-month LIBOR plus 275 basis points, but the rate will fluctuate as LIBOR fluctuates.
Additionally, during 2021, we entered into a euro-denominated net investment hedge with a notional value of $230 million. The net investment hedge reduces our overall effective interest rate by approximately 24 basis points. A 100-basis point increase in the applicable interest rates under our credit facilities (including the unhedged portion of our 2019 Term Loan debt) would have increased our interest expense by approximately $11 million for the nine months ended September 30, 2022.
While we cannot predict our ability to refinance existing debt or the impact interest rate movements will have on our existing debt, we continue to evaluate our financial position on an ongoing basis. The ICE Benchmark Administration intends to cease the publication of U.S. dollar LIBOR for all tenors (excluding 1 week and 2 month) on June 30, 2023. The discontinuation of the 1 month LIBOR after 2023 and the replacement with an alternative reference rate, such as the Secured Overnight Financing Rate may adversely impact interest rates and our interest expense could increase.
Foreign currency risk
Our operations are in approximately 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, 2022, respectively. 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, 2022. Translation gains or losses, which are recorded in accumulated other comprehensive loss in the condensed consolidated balance sheets, result from translation of the assets and liabilities of our foreign subsidiaries into U.S. dollars. Foreign currency translation losses totaled approximately $86 million and $9 million for the three months ended September 30, 2022 and 2021, respectively, and $311 million and $9 million for the nine months ended September 30, 2022 and 2021, respectively.
Our exposure to fluctuations in foreign currency exchange rates has increased as a result of the Chubb Acquisition 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 Chubb business intercompany financing structure, we entered into cross-currency swaps to manage the foreign currency risk of certain intercompany loans. We also occasionally 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 the Critical Accounting Policies section of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
58
In addition, we are exposed to various supply chain risks, including 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 and 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 cancelled and in a low oil and gas price environment, certain of our businesses could become less profitable or incur losses.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating such controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.
As required by Rule 13a-15(b) of the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures are not effective at September 30, 2022 due to the material weaknesses in internal control over financial reporting described below, which were previously disclosed in Item 9A. “Controls and Procedures” of our Form 10-K for the year ended December 31, 2021.
Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives as specified above. However, our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent or detect all errors and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company have been detected.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a‑15(f) under the Exchange Act. Under the supervision of our Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2022 based on the guidelines established in Internal Control — Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of September 30, 2022 due to the material weaknesses described below.
Material Weaknesses in Internal Control
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility a material misstatement of annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
We continue to have previously identified control deficiencies that are not remediated as of September 30, 2022 related to an ineffective control environment, ineffective risk assessment, and ineffective information and communication resulting from an insufficient number of trained resources with expertise in implementation and operation of internal control over financial reporting and information technology systems. As a result, the Company had ineffective control activities related to the design and operation of process-level controls and general information technology controls across all financial reporting processes. These control deficiencies constitute material weaknesses in our internal control over financial reporting as of September 30, 2022.
59
Changes in Internal Control Over Financial Reporting
We are executing our remediation plans to remediate the material weaknesses relating to our internal control over financial reporting, as described below. These plans include a detailed risk and controls assessment, key process walkthroughs and flowchart documentation, training, and execution of determined key controls. There were no material changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Remediation Plans
Management has undertaken various steps to continue remediating such control deficiencies and has seen improved results versus December 31, 2021. Given an effort of this magnitude, management believes that full remediation will most likely continue to extend over the next couple of years. The material weaknesses will not be considered remediated until management designs and implements effective controls that operate for a sufficient period of time and management has concluded through testing that these controls are effective. We are monitoring the effectiveness of our remediation plans and will make the changes management determines to be appropriate. Steps taken by us during the three months ended September 30, 2022 include the following:
We plan to continue our efforts to improve, design and implement integrated processes to enhance our internal control over financial reporting, including:
60
PART II. OTHER INFORMATION
Item 1A. Risk factors
There have been no material changes to our risk factors contained in Part I, Item 1A. "Risk Factors" of our Form 10-K for the year ended December 31, 2021.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides information about the Company's purchase of equity securities during the three months ended September 30, 2022:
During the Three Months Ended September 30, 2022 |
|
Total Number of Shares Purchased (1) |
|
|
Average Price Paid Per Share |
|
|
Total Number of Shares |
|
|
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (in millions) |
|
||||
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
— |
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
738,572 |
|
|
|
14.89 |
|
|
|
738,572 |
|
|
|
217 |
|
|
Total |
|
|
738,572 |
|
|
$ |
14.89 |
|
|
|
738,572 |
|
|
$ |
217 |
|
Item 4. Mine Safety Disclosures
Information regarding mine safety violations and other regulatory matters required by Section 1503(a) of the Dodd-Frank Wall Street Reform and Consumer Protection Act and Item 104 of Regulation S-K is included in Exhibit 95.1 to this quarterly report.
61
Item 6. Exhibits
Exhibit No. |
|
Description of Exhibits |
|
|
|
|
|
|
|
|
|
31.1* |
|
|
|
|
|
31.2* |
|
|
|
|
|
32.1** |
|
|
|
|
|
32.2** |
|
|
|
|
|
95.1* |
|
|
|
|
|
101.INS* |
|
Inline XBRL Instance Document. |
|
|
|
101.SCH* |
|
Inline XBRL Taxonomy Extension Schema Document. |
|
|
|
101.DEF* |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
|
|
101.CAL* |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
|
101.LAB* |
|
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
|
|
101.PRE* |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
|
|
104* |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
** Furnished herewith
62
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this quarterly report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
APi GROUP CORPORATION |
|
||
|
||
|
|
|
|
|
Chief Executive Officer |
|
|
(Duly Authorized Officer) |
|
||
|
/s/ Kevin S. Krumm |
|
|
|
|
|
|
Chief Financial Officer |
|
|
(Principal Financial Officer) |
63
| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 10/15/29 | ||||
| 7/15/29 | ||||
| 1/3/29 | ||||
| 1/31/28 | ||||
| 3/9/27 | ||||
| 10/1/26 | ||||
| 3/9/25 | ||||
| 2/29/24 | ||||
| 6/30/23 | ||||
| 1/1/23 | ||||
| 12/31/22 | ||||
| Filed on: | 11/3/22 | 8-K | ||
| 10/27/22 | ||||
| For Period end: | 9/30/22 | |||
| 9/1/22 | 4 | |||
| 8/31/22 | ||||
| 8/1/22 | ||||
| 7/31/22 | ||||
| 7/1/22 | ||||
| 6/30/22 | 10-Q | |||
| 3/31/22 | 10-Q | |||
| 3/9/22 | 4 | |||
| 3/1/22 | 10-K, 3, 8-K | |||
| 1/3/22 | 3, 4, 8-K, S-3 | |||
| 1/1/22 | 4 | |||
| 12/31/21 | 10-K, 4, 5 | |||
| 12/16/21 | ||||
| 10/21/21 | 8-K | |||
| 9/30/21 | 10-Q | |||
| 7/26/21 | 8-K | |||
| 6/30/21 | 10-Q | |||
| 6/22/21 | 8-K | |||
| 3/31/21 | 10-Q | |||
| 1/1/21 | 4 | |||
| 12/31/20 | 10-K, 10-K/A, 4, 5, 8-K | |||
| 12/27/20 | ||||
| List all Filings | ||||