APi (APG) - 2024 Q1 - Quarterly Report

FORM 10-Q General Information This section details the Form 10-Q filing's administrative information, including registrant, incorporation, and stock listing Common Stock and Registrant Information This section provides key administrative details for the Form 10-Q, including registrant, incorporation, and stock exchange listing - Registrant: APi Group Corporation, incorporated in Delaware[2] - Common Stock (APG) registered on the New York Stock Exchange[2] - Registrant is a large accelerated filer and has filed all required reports[2] - Shares outstanding: 274,286,981 shares of common stock as of April 25, 2024[2] Table of Contents - Report Structure The table of contents outlines the Form 10-Q's structure, covering financial information and other disclosures - Part I: Financial Information (Items 1-4) covers financial statements, MD&A, market risk, and controls[3] - Part II: Other Information (Items 1A, 2, 4, 5, 6) includes risk factors, equity sales, mine safety, and exhibits[4] PART I. FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and related disclosures Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements and notes, highlighting key financial changes Condensed Consolidated Balance Sheets (Unaudited) - Key Metrics (In millions) | Metric | March 31, 2024 | December 31, 2023 | | :-------------------------------------- | :------------- | :---------------- | | Cash and cash equivalents | $247 | $479 | | Accounts receivable, net | $1,256 | $1,395 | | Total current assets | $2,232 | $2,582 | | Goodwill | $2,471 | $2,471 | | Intangible assets, net | $1,549 | $1,620 | | Total assets | $7,192 | $7,590 | | Short-term and current portion of debt | $105 | $5 | | Accounts payable | $382 | $472 | | Total current liabilities | $1,654 | $1,807 | | Long-term debt, less current portion | $2,624 | $2,322 | | Total liabilities | $4,891 | $4,722 | | Total shareholders' equity | $2,301 | $2,071 | Condensed Consolidated Statements of Operations (Unaudited) - Key Metrics (In millions, except per share amounts) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net revenues | $1,601 | $1,614 | | Gross profit | $492 | $425 | | Selling, general, and administrative expenses | $392 | $352 | | Operating income | $100 | $73 | | Net income | $45 | $26 |\n| Net (loss) income per common share: Basic | $(1.34) | $0.05 |\n| Net (loss) income per common share: Diluted | $(1.34) | $0.05 | Condensed Consolidated Statements of Cash Flows (Unaudited) - Key Metrics (In millions) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- |\n| Net cash provided by (used in) operating activities | $7 | $(1) |\n| Net cash used in investing activities | $(22) | $(27) |\n| Net cash used in financing activities | $(213) | $(216) |\n| Net decrease in cash, cash equivalents, and restricted cash | $(232) | $(242) |\n| Cash, cash equivalents, and restricted cash, end of period | $248 | $365 | Condensed Consolidated Balance Sheets (Unaudited) Condensed Consolidated Statements of Operations (Unaudited) Condensed Consolidated Statements of Comprehensive Income (Unaudited) Condensed Consolidated Statements of Shareholders' Equity (Unaudited) Condensed Consolidated Statements of Cash Flows (Unaudited) Notes to Condensed Consolidated Financial Statements (Unaudited) NOTE 1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES This note outlines the company's business, financial statement presentation, consolidation, and joint venture accounting policies - Company Description: Global, market-leading business services provider of life safety, security, and specialty services with over 500 locations worldwide[22] - Consolidation: Includes accounts of the Company and its wholly-owned subsidiaries; all significant intercompany accounts and transactions are eliminated[23] - Joint Ventures: Majority accounted for under the equity method; Company's share of earnings was $2 million for both Q1 2024 and Q1 2023[25] NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS This note discusses new SEC rules on climate-related disclosures, effective December 2025, and the company's ongoing evaluation - SEC Climate-Related Disclosures: New rules adopted in March 2024 require disclosure of material climate-related risks, Scope 1 and 2 GHG emissions, and financial statement footnotes on related expenses/capitalized costs[27] - Effective Date: Earliest for annual financial statements for the year ended December 31, 2025[28] - Company Evaluation: The company is currently evaluating the impact of these new rules on its consolidated financial statements[28] NOTE 3. BUSINESS COMBINATIONS This note details Q1 2024 acquisitions totaling $28 million, 2023 acquisitions, and related goodwill and contingent liabilities - 2024 Acquisitions: Three individually immaterial acquisitions completed for aggregate consideration of $28 million ($23 million cash, $5 million accrued consideration)[30] - 2023 Acquisitions: Completed two significant acquisitions (A23, B23) and five individually immaterial acquisitions, primarily within the Safety Services segment[31] - Goodwill from 2024 Acquisitions: $28 million ($21 million to Safety Services, $7 million to Specialty Services)[52] Contingent Consideration and Compensation Liabilities (In millions) | Liability Type | March 31, 2024 | December 31, 2023 | | :-------------------------------- | :------------- | :---------------- | | Contingent compensation arrangement | $11 | $9 | | Deferred payments | $21 | $17 | NOTE 4. RESTRUCTURING This note outlines the Chubb restructuring program, Q1 2024 costs, and estimated total costs through fiscal year 2025 - Chubb Restructuring Program: Multi-year program (through FY2025) designed to drive efficiencies, synergies, and optimize operating margin, including workforce reductions and facility rationalization[38] - Q1 2024 Costs: $1 million in pre-tax restructuring costs incurred within the Safety Services segment[39] - Estimated Total Costs: Approximately $125 million of restructuring costs and other costs expected by the end of fiscal year 2025[39] Restructuring Liabilities (In millions) | Category | December 31, 2023 | Charges (Q1 2024) | Payments (Q1 2024) | Currency Adjustment (Q1 2024) | March 31, 2024 | | :-------------------- | :---------------- | :------------------ | :----------------- | :---------------------------- | :------------- | | Employee termination benefits | $32 | $1 | $(8) | $(1) | $24 | | Program related costs | $0 | $4 | $(4) | $0 | $0 | | Asset write-downs | $6 | $0 | $0 | $0 | $6 | | Total | $38 | $5 | $(12) | $(1) | $30 | NOTE 5. NET REVENUES This note details Q1 2024 net revenues, segment performance, and remaining performance obligations Disaggregated Net Revenues by Segment (In millions) | Segment | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Safety Services | $1,214 | $1,191 | | Specialty Services | $389 | $430 | | Corporate and Eliminations | $(2) | $(7) | | Net revenues | $1,601 | $1,614 | Net Revenues by Service Type (In millions) | Service Type | Safety Services (Q1 2024) | Specialty Services (Q1 2024) | Consolidated (Q1 2024) | | :-------------------- | :------------------------ | :--------------------------- | :--------------------- | | Life Safety | $1,103 | — | $1,103 | | HVAC | $111 | — | $111 | | Infrastructure/Utility | — | $205 | $205 | | Fabrication | — | $50 | $50 | | Specialty Contracting | — | $134 | $134 | - Remaining Performance Obligations: $2,894 million as of March 31, 2024, with approximately 86% expected to be recognized over the next twelve months[48] Contract Assets and Liabilities (In millions) | Account | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Accounts receivable, net of allowances | $1,256 | $1,395 | | Contract assets | $458 | $436 | | Contract liabilities | $542 | $526 | NOTE 6. GOODWILL AND INTANGIBLES This note reports stable goodwill, decreased net intangible assets due to amortization, and Q1 2024 amortization expense Goodwill by Segment (In millions) | Segment | December 31, 2023 | Acquisitions | Foreign Currency Translation and Other, Net | March 31, 2024 | | :-------------------- | :---------------- | :----------- | :------------------------------------------ | :------------- | | Safety Services | $2,294 | $21 | $(28) | $2,287 | | Specialty Services | $177 | $7 | $0 | $184 | | Total Goodwill | $2,471 | $28 | $(28) | $2,471 | Identifiable Intangible Assets, Net (In millions) | Intangible Asset | March 31, 2024 Net Carrying Amount | December 31, 2023 Net Carrying Amount | | :-------------------- | :--------------------------------- | :------------------------------------ | | Contractual backlog | $0 | $1 | | Customer relationships | $983 | $1,034 | | Trade names and trademarks | $566 | $585 | | Total | $1,549 | $1,620 | Intangible Asset Amortization Expense (In millions) | Category | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Cost of revenues | $0 | $7 | | Selling, general, and administrative expenses | $50 | $48 | | Total | $50 | $55 | NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS This note details fair value measurements for derivatives and contingent obligations using a three-tier hierarchy - Fair Value Hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than quoted prices), Level 3 (unobservable inputs)[57][58] Fair Value Measurements at March 31, 2024 (In millions) | Financial Instrument | Level 1 | Level 2 | Level 3 | Total | | :-------------------------------- | :------ | :------ | :------ | :---- | | Derivatives designated as hedge instruments | $0 | $85 | $0 | $85 | | Contingent consideration obligations | $0 | $0 | $(6) | $(6) | | Total | $0 | $85 | $(6)| $79 | - Contingent Consideration Obligations: Valued using a probability-weighted discounted cash flow method (Level 3), with a balance of $6 million as of March 31, 2024[65][68] - Debt Fair Value: Estimated by discounting future cash flows at currently available rates (Level 2 inputs); the 2021 Term Loan was upsized by $300 million in Q1 2024[69] NOTE 8. DERIVATIVES This note describes the company's use of derivatives to manage currency and interest rate risks, including swaps - Derivative Use: Manage risks associated with foreign currency exchange rates, net investments in foreign operations, and interest rates; not for speculative trading[71] Fair Value of Derivative Instruments (In millions) | Derivative Type | Notional Outstanding (Mar 31, 2024) | Fair Value Asset (Mar 31, 2024) | Notional Outstanding (Dec 31, 2023) | Fair Value Asset (Dec 31, 2023) | | :-------------------------------- | :---------------------------------- | :------------------------------ | :---------------------------------- | :------------------------------ | | Designated as hedging instruments | $2,199 | $85 | $2,191 | $54 | | Not designated as hedging instruments | $121 | $0 | $73 | $0 | | Total Derivatives | $2,320 | $85 | $2,264 | $54 | - Interest Rate Swaps: $1,120 million notional amount outstanding designated as cash flow hedges for SOFR-based term loans, with a weighted average fixed rate of approximately 3.52% as of March 31, 2024[82] - Fair Value Hedges: Three cross-currency swaps totaling $721 million notional amount (GBP, CAD, EUR) designated as fair value hedges for intercompany loans[86] - Net Investment Hedges: A $230 million notional foreign currency swap designated as a net investment hedge for Euro-denominated subsidiaries[87] NOTE 9. PROPERTY AND EQUIPMENT, NET This note details the decrease in net property and equipment and consistent Q1 2024 depreciation expense Property and Equipment, Net (In millions) | Category | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------- | :---------------- | | Total cost | $626 | $632 | | Accumulated depreciation | $(251) | $(247) | | Property and equipment, net | $375 | $385 | - Depreciation Expense: $19 million for both the three months ended March 31, 2024, and 2023[90] NOTE 10. DEBT This note details increased debt, covenant compliance, and plans to reprice and upsize the 2021 Term Loan Debt Obligations (In millions) | Debt Instrument | Maturity Date | March 31, 2024 | December 31, 2023 | | :-------------------- | :------------ | :------------- | :---------------- | | 2019 Term Loan | Oct 1, 2026 | $330 | $330 | | 2021 Term Loan | Jan 3, 2029 | $1,707 | $1,407 | | Revolving Credit Facility | Oct 1, 2026 | $100 | $0 | | 4.125% Senior Notes | Jul 15, 2029 | $337 | $337 | | 4.750% Senior Notes | Oct 15, 2029 | $277 | $277 | | Other obligations | | $5 | $5 | | Total debt obligations | | $2,756 | $2,356 | - 2021 Term Loan: Upsized by $300 million in Q1 2024 to fund a portion of the Series B Preferred Stock Conversion[93] - Revolving Credit Facility: $100 million outstanding as of March 31, 2024, with $396 million available[94][96] - Debt Covenants: The Company was in compliance with all applicable debt covenants as of March 31, 2024[98][99] - Subsequent Event (April 30, 2024): Plan to reprice and increase the 2021 Term Loan by approximately $550 million to refinance the 2019 Term Loan ($330 million) and Revolving Credit Facility ($100 million), and provide funds for general corporate purposes, including the Elevated acquisition[138][216] NOTE 11. INCOME TAXES This note details the Q1 2024 effective tax rate, valuation allowance, and unrecognized tax benefits - Effective Tax Rate: 28.0% for Q1 2024, down from 30.6% for Q1 2023, primarily due to changes in forecasted geographical income mix[101] - Valuation Allowance: $110 million as of March 31, 2024, primarily related to certain net operating loss, capital loss, and tax credit carryforwards of foreign subsidiaries[102] - Unrecognized Tax Benefits: Total gross unrecognized tax benefits were $8 million as of March 31, 2024 (vs $7 million at Dec 31, 2023)[104] - Pillar 2: The Company is evaluating the impact of the global minimum corporate tax (Pillar 2) but does not expect it to have a material impact on the effective tax rate or consolidated financial statements[181] NOTE 12. EMPLOYEE BENEFIT PLANS This note outlines employee benefit plans, including pension costs, multiemployer contributions, and profit-sharing expense Net Periodic Pension Cost (Benefit) (In millions) | Component | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------- | :-------------------------------- | :-------------------------------- | | Service cost | $1 | $1 | | Interest cost | $15 | $15 | | Expected return on plan assets | $(10) | $(18) | | Net periodic pension cost (benefit) | $4 | $(2) | - Multiemployer Pension Plan Contributions: $19 million for Q1 2024, down from $23 million for Q1 2023[107] - Profit Sharing Plans Expense: $6 million for Q1 2024, up from $5 million for Q1 2023[108] - Employee Stock Purchase Plan (ESPP) Expense: $1 million for Q1 2024, down from $2 million for Q1 2023[109] NOTE 13. RELATED-PARTY TRANSACTIONS This note details advisory fees, Series A dividends, and Series B preferred stock conversion by related parties - Advisory Fees: $1 million incurred to Mariposa Capital, LLC (related party) in both Q1 2024 and Q1 2023[111] - Series A Preferred Stock Dividends: 7,944,104 common shares issued to Mariposa Acquisition IV, LLC (related entity) in January 2024[111] - Series B Preferred Stock Conversion: Viking Purchasers (aggregate owner of >5% of outstanding stock) converted all Series B Preferred Stock into common stock during Q1 2024[112][113] - Series B Preferred Stock Dividends to Viking Purchasers: 155,059 common shares in Q1 2024 vs 124,573 common shares in Q1 2023[112] NOTE 14. COMMITMENTS AND CONTINGENCIES This note addresses litigation and environmental remediation obligations, with no material adverse effect expected - Litigation: Involved in various litigation matters and claims; management believes outcomes will not have a material adverse effect on financial position, results of operations, or cash flows[114] - Environmental Obligations: Outstanding liability of $16 million as of March 31, 2024 (vs $17 million at Dec 31, 2023), included in other noncurrent liabilities[115] NOTE 15. SHAREHOLDERS' EQUITY AND REDEEMABLE CONVERTIBLE PREFERRED STOCK This note details Series A preferred stock, the SRP, and the Series B preferred stock conversion and repurchase - Series A Preferred Stock: 4,000,000 shares issued and outstanding, automatically convertible into common stock on a one-for-one basis on December 31, 2026[116] - Stock Repurchase Program (SRP): Board authorized up to $1,000 million in common stock repurchases; $600 million (16,260,160 shares) repurchased in Q1 2024 related to the Series B Preferred Stock Conversion[117][118] - Series B Preferred Stock Conversion: All 800,000 outstanding shares converted into approximately 32,803,519 common shares (including dividends) on February 28, 2024[120][121] - Repurchase of Conversion Shares: One-half of the Conversion Shares were immediately repurchased for an aggregate purchase price of $600 million, financed by an incremental term facility ($300 million) and cash/available credit[121] - Series B Preferred Stock Dividends: $7 million (283,196 common shares) declared in Q1 2024 for stock outstanding through February 28, 2024[122] NOTE 16. EARNINGS PER SHARE This note reports Q1 2024 basic and diluted EPS of $(1.34), driven by a net loss from Series B conversion Earnings Per Common Share (In millions, except per share amounts) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net (loss) income attributable to common shareholders | $(334) | $12 | | Weighted average shares outstanding - basic | 249,744,275 | 234,386,758 | | (Loss) income per common share - basic | $(1.34) | $0.05 | | (Loss) income per common share - diluted | $(1.34) | $0.05 | - Impact of Series B Preferred Stock Conversion: $(372) million on net (loss) income attributable to common shareholders in Q1 2024[126] - Dilutive Securities: Excluded from diluted EPS calculation in Q1 2024 as their inclusion would be anti-dilutive due to the net loss[126] NOTE 17. SEGMENT INFORMATION This note details Q1 2024 segment performance for Safety and Specialty Services, including revenues and margins - Reportable Segments: Safety Services (end-to-end integrated occupancy systems) and Specialty Services (infrastructure services and specialized industrial plant services)[127][128][129] Segment Net Revenues (In millions) | Segment | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change ($) | Change (%) | | :-------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Safety Services | $1,214 | $1,191 | $23 | 1.9% | | Specialty Services | $389 | $430 | $(41) | (9.5)% | | Corporate and Eliminations | $(2) | $(7) | NM | NM | | Consolidated | $1,601 | $1,614 | $(13) | (0.8)% | Segment Operating Income (Loss) and Margin (In millions) | Segment | Operating Income (Q1 2024) | Operating Margin (Q1 2024) | Operating Income (Q1 2023) | Operating Margin (Q1 2023) | Change ($) | Change (%) | | :-------------------- | :------------------------- | :------------------------- | :------------------------- | :------------------------- | :--------- | :--------- | | Safety Services | $125 | 10.3% | $96 | 8.1% | $29 | 30.2% | | Specialty Services | $7 | 1.8% | $0 | 0% | $7 | NM | | Corporate and Eliminations | $(32) | | $(23) | | NM | NM | | Consolidated | $100 | 6.2% | $73 | 4.5% | $27 | 37.0% | Segment EBITDA and Margin (In millions) | Segment | EBITDA (Q1 2024) | EBITDA Margin (Q1 2024) | EBITDA (Q1 2023) | EBITDA Margin (Q1 2023) | Change ($) | Change (%) | | :-------------------- | :--------------- | :---------------------- | :--------------- | :---------------------- | :--------- | :--------- | | Safety Services | $163 | 13.4% | $146 | 12.3% | $17 | 11.6% | | Specialty Services | $33 | 8.5% | $27 | 6.3% | $6 | 22.2% | | Corporate and Eliminations | $(30) | | $(24) | | NM | NM | | Consolidated | $166 | 10.4% | $149 | 9.2% | $17 | 11.4% | NOTE 18. SUBSEQUENT EVENTS This note covers the Elevated acquisition, a public offering, and plans to reprice and upsize the 2021 Term Loan - Elevated Acquisition: Definitive agreement signed April 15, 2024, to acquire Elevated Facility Services Group for approximately $570 million in cash, expected to close in Q2 2024[136] - Public Offering: Completed on April 19, 2024, offering 11,000,000 shares of common stock (plus 1,650,000 underwriter option) at $37.50 per share, generating $457 million in net proceeds[137] - 2021 Term Loan Repricing and Upsize: Process began April 30, 2024, to reprice and increase the 2021 Term Loan by approximately $550 million. Proceeds will refinance the 2019 Term Loan ($330 million) and Revolving Credit Facility ($100 million), and provide funds for general corporate purposes, including the Elevated acquisition[138] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of Q1 2024 financial condition, operations, liquidity, and capital resources Overview This overview describes APi Group as a global safety and specialty services provider focused on recurring revenue - Company Profile: Global, market-leading business services provider of safety and specialty services in over 500 locations worldwide[150] - Operating Segments: Safety Services (fire protection, HVAC, entry systems) and Specialty Services (infrastructure services, specialized industrial plant services)[151] - Business Strategy: Focus on growing recurring revenues and repeat business from diversified long-standing customers for stable cash flows and organic growth[151] Recent Developments and Certain Factors and Trends Affecting Our Results of Operations This section discusses Chubb restructuring, economic factors, foreign currency, seasonality, and cyclical business - Chubb Restructuring Program: Incurred $1 million in pre-tax restructuring costs in Q1 2024, with an estimated total of $125 million by the end of fiscal year 2025[154] - Economic Factors: General economic and market conditions, availability of transportation/transmission capacity, fluctuations in energy/fuel prices, increased competition for skilled labor, and supply chain disruptions can negatively affect demand and profitability[155] - Foreign Currency: Exposure to transactional gains or losses is limited as foreign operations primarily invoice and collect in local currencies; cross-currency swaps are used for material currency risks[155] - Seasonality: Net revenues are typically lower during the first and second quarters due to unfavorable weather conditions in North America[156] - Cyclical Nature: Business can be adversely affected by industry declines or delays in new projects due to fluctuations in end-user demand[157] Description of Key Line Items This section defines key financial statement line items, including revenues, costs, gross profit, SG&A, and amortization - Net Revenues: Generated from contracted services (fixed price, unit price, time and material), recognized over time (cost-to-cost or input basis) or at a point in time (wholesale/retail unit sales)[160][161] - Cost of Revenues: Comprises direct labor, materials, subcontract costs, and indirect costs related to contract performance[162] - Gross Profit: Influenced by direct labor, materials, subcontract costs, raw material costs, contract mix, and weather[163] - Selling, General, and Administrative Expenses (SG&A): Includes compensation, facility leases, administrative expenses, professional fees, and corporate overhead[164] - Amortization of Intangible Assets: Reflects charges to amortize finite-lived identifiable intangible assets, primarily customer relationships, with a portion in cost of revenues[165] - Loss on Extinguishment of Debt, Net: Represents the difference between the repurchase price and carrying amount of debt at the time of extinguishment[166] Critical Accounting Policies and Estimates This section refers to the Annual Report on Form 10-K for detailed information on critical accounting policies - Reference to 10-K: For information regarding Critical Accounting Policies, refer to the Annual Report on Form 10-K for the fiscal year ended December 31, 2023[167] Results of Operations This section details Q1 2024 financial results, including revenues, gross profit, operating income, and net income Consolidated Results of Operations (In millions) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | Change ($) | Change (%) | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | :--------- | :--------- | | Net revenues | $1,601 | $1,614 | $(13) | (0.8)% | | Gross profit | $492 | $425 | $67 | 15.8% | | Gross margin | 30.7% | 26.3% | 4.4% | | | Selling, general, and administrative expenses | $392 | $352 | $40 | 11.4% | | Operating income | $100 | $73 | $27 | 37.0% | | Interest expense, net | $34 | $37 | $(3) | (8.1)% | | Income before income taxes | $63 | $38 | $25 | 65.8% | | Income tax provision | $18 | $12 | $6 | 50.0% | | Net income | $45 | $26 | $19 | 73.1% | | EBITDA (non-GAAP) | $166 | $149 | $17 | 11.4% | - Gross margin improved by 440 basis points due to disciplined project and customer selection, pricing improvements in Safety Services, and an improved mix of higher-margin inspection, service, and monitoring revenue[172] - SG&A expenses increased primarily due to investments supporting Safety Services and Specialty Services segments, and non-recurring third-party advisor costs related to the Series B Preferred Stock Conversion[176] - Effective tax rate for Q1 2024 was 28.0%, down from 30.6% in Q1 2023, driven by changes to the forecasted geographical income mix[180] Non-GAAP Financial Measures This section explains the use of non-GAAP measures like SG&A (ex-amortization) and EBITDA for performance assessment - Non-GAAP Measures Used: SG&A expenses (excluding amortization) and Earnings before interest, taxes, depreciation, and amortization (EBITDA)[191] - Purpose: Evaluate performance, understand core operating results, compare with peers, and determine management's incentive compensation[191] SG&A Expenses (excluding amortization) Reconciliation (In millions) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Reported SG&A expenses | $392 | $352 | | Amortization expense | $(50) | $(48) | | SG&A expenses (excluding amortization) | $342 | $304 | EBITDA Reconciliation (In millions) | Metric | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Reported net income | $45 | $26 | | Interest expense, net | $34 | $37 | | Income tax provision | $18 | $12 | | Depreciation | $19 | $19 | | Amortization | $50 | $55 | | EBITDA | $166 | $149 | Liquidity and Capital Resources This section details liquidity sources, total liquidity, term loan upsizing, RCF draw, and stock repurchases - Primary Liquidity Sources: Cash flows from operating activities, available cash and cash equivalents, $500 million Revolving Credit Facility, and proceeds from debt offerings[198] - Total Liquidity (March 31, 2024): $643 million, comprising $247 million in cash and cash equivalents and $396 million of available borrowings under the Revolving Credit Facility[199] - 2021 Term Loan Upsize: $300 million incremental term facility completed in Q1 2024, with proceeds directed towards the Series B Preferred Stock Conversion[200] - Revolving Credit Facility Draw: $100 million drawn in Q1 2024 to fund a portion of the Series B Preferred Stock Conversion[200] - Stock Repurchase Program (SRP): Board authorized a $1,000 million program; $600 million (16,260,160 shares) repurchased in Q1 2024 related to the Series B Preferred Stock Conversion[202] Net Cash Flows (In millions) | Activity | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :-------------------------------------- | :-------------------------------- | :-------------------------------- | | Net cash provided by (used in) operating activities | $7 | $(1) | | Net cash used in investing activities | $(22) | $(27) | | Net cash used in financing activities | $(213) | $(216) | | Net decrease in cash, cash equivalents, and restricted cash | $(232) | $(242) | Material Cash Requirements from Known Contractual and Other Obligations This section outlines material cash requirements from leases, debt, taxes, and pensions, funded by operations - Material Cash Requirements: Primarily relate to operating and finance leases, debt (principal payments and interest rates), tax obligations, and pension obligations[223] - Capital Expenditures: Typically less than 1.5% of annual net revenues[223] - Funding Source: Expected to be satisfied using cash generated from operations[223] Item 3. Quantitative and Qualitative Disclosures about Market Risk This section details market risk exposures (interest rate, foreign currency) and mitigation strategies Interest rate risk This section describes interest rate risk from variable debt and mitigation through interest rate swaps - Variable Interest Rate Debt: Primarily from the 2019 Term Loan ($330 million outstanding) and 2021 Term Loan ($1,707 million outstanding) as of March 31, 2024[224] - Mitigation: Uses a $720 million interest rate swap (3.59% fixed) and a $400 million interest rate swap (3.41% fixed) to mitigate increases in variable interest rates[224] - Remaining Floating Rate: Bears interest based on one-month SOFR plus CSA plus 225 basis points (2019 Term Loan) or 250 basis points (2021 Term Loan)[224] Foreign currency risk This section details foreign currency risk from operations, transaction/translation losses, and hedging strategies - Foreign Operations Revenue: Approximately 40% of consolidated net revenues for the three months ended March 31, 2024[225] - Foreign Currency Transaction (Loss) Gain: $(1) million for Q1 2024 (vs $0 million for Q1 2023), including hedging impacts[226] - Foreign Currency Translation (Loss) Gain: $(42) million for Q1 2024 (vs $14 million for Q1 2023), recorded in accumulated other comprehensive loss[226] - Mitigation: Minimizing consolidated net assets and liability positions in non-functional currencies, using cross-currency swaps for intercompany loans, and foreign currency forward contracts[227] Other market risk This section covers other market risks, including customer credit, material price fluctuations, and energy costs - Customer Creditworthiness: Risk to accounts receivable and contract assets if customers' ability to pay is negatively impacted by economic conditions[228] - Supply Chain Risks: Exposure to price fluctuations or availability of materials (copper, steel, cable optic fiber) and increases in energy prices for its vehicle fleet[229] - Price Recovery: No assurance that all commodity price increases will be recoverable, particularly for fixed-price contracts, which could reduce profitability[229] - Oil and Gas Prices: Prolonged periods of low oil and gas prices may result in project delays or cancellations, potentially leading to reduced profitability or losses[229] Item 4. Controls and Procedures Management concluded disclosure controls and internal control were ineffective due to material weaknesses; remediation is active Evaluation of Disclosure Controls and Procedures Management concluded disclosure controls were ineffective due to material weaknesses in internal control - Effectiveness Conclusion: Disclosure controls and procedures were not effective as of March 31, 2024[231] - Reason for Ineffectiveness: Due to material weaknesses in internal control over financial reporting[231] - Assurance Level: Controls provide reasonable assurance, not absolute, of achieving desired objectives[232] Management's Report on Internal Control over Financial Reporting Management reported internal control was ineffective due to material weaknesses in IT and third-party controls - Effectiveness Conclusion: Internal control over financial reporting was not effective as of March 31, 2024[233] - Material Weaknesses Identified[235] - User access controls specific to segregation of duties in the Company's change management process in certain information technology systems of the Chubb business's fire and security business[235] - Inadequate controls to ensure the completeness and accuracy of timekeeping and service order information used in the financial reporting processes of certain businesses processed and hosted by a third-party service organization[235] Ongoing Remediation Plan Management is actively remediating control deficiencies, showing Q1 2024 progress with ongoing training planned - Remediation Progress: Management has undertaken various steps and seen improved results versus December 31, 2023[236] - Steps Taken (Q1 2024)[236] - Obtained a final attestation report for 2023 over the design effectiveness of controls operated by the third-party service organization, noting an unqualified opinion[236] - Continued to map conflicts within certain information technology systems of the Chubb business's fire and security business for further analysis[236] - Future Plans: Continue efforts to strengthen internal control over financial reporting, including ongoing training with control owners and reviewers focusing on sufficient documentation and evidence[237] - Remediation Completion: Material weaknesses will not be considered remediated until controls operate for a sufficient period and are tested for effectiveness[239] Changes in Internal Control over Financial Reporting No other material changes occurred in internal control over financial reporting during Q1 2024 - No Other Material Changes: No other material changes in internal control over financial reporting during Q1 2024, apart from the ongoing remediation plans[240] CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This section provides a cautionary note regarding forward-looking statements and associated risks Forward-Looking Statements Disclosure This section cautions that forward-looking statements are subject to risks, and readers should not rely on them - Forward-looking statements are based on current expectations and assumptions, subject to known and unknown risks and uncertainties[140][141] - Key factors that may materially affect results include adverse credit markets, global economic/political risks, customer investment willingness, demand for services, acquisition success, supply chain constraints, inflation, labor matters, and substantial indebtedness[141][143] - Readers should not rely on forward-looking statements as predictions of future events and the Company assumes no obligation to update or revise them[144][145] PART II. OTHER INFORMATION This part contains other required disclosures, including risk factors, equity sales, mine safety, and exhibits Item 1A. Risk Factors This section confirms no material changes to risk factors disclosed in the Company's Annual Report on Form 10-K - No material changes to risk factors contained in the Company's Form 10-K for the year ended December 31, 2023[242] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities This section details the repurchase of 16.26 million common shares for $600 million under the SRP Issuer Purchases of Equity Securities (Three Months Ended March 31, 2024) | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Value of Shares That May Yet Be Purchased Under the Plans or Programs (in millions) | | :-------------------------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------- | :------------------------------------------------------------------------------------------ | | February 1, 2024 - February 29, 2024 | 16,260,160 | $36.90 | 16,260,160 | $400 | | Total | 16,260,160 | $36.90 | 16,260,160 | $400 | - The repurchases were made under a Stock Repurchase Program (SRP) authorized by the Board of Directors to purchase up to an aggregate of $1,000 million of common stock[246] Item 4. Mine Safety Disclosures This section states mine safety disclosures are provided in Exhibit 95.1 of this quarterly report - Mine safety violations and other regulatory matters are disclosed in Exhibit 95.1 of this quarterly report[244] Item 5. Other Information This section reports a director's Rule 10b5-1 trading arrangement to sell 1.98 million common shares - Sir Martin E. Franklin, a director, adopted a Rule 10b5-1 trading arrangement on March 8, 2024, to sell up to 1,980,000 shares of common stock by December 13, 2024[245] - No other officers or directors adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the quarter ended March 31, 2024[245] Item 6. Exhibits This section lists all exhibits filed, including corporate governance, CEO/CFO certifications, and XBRL documents - Exhibits include Certificate of Elimination of Series B Preferred Stock, Conversion and Repurchase Agreement, Amendment No. 5 to Credit Agreement, CEO/CFO Certifications (31.1, 31.2, 32.1, 32.2), Mine Safety Disclosures (95.1), and Inline XBRL documents (101.INS, SCH, DEF, CAL, LAB, PRE, 104)[247] SIGNATURES This section contains the official signatures confirming the submission of the quarterly report Report Signatures This section confirms the quarterly report was signed on May 2, 2024, by the CEO and CFO - The quarterly report was signed on May 2, 2024[250] - Signatories: Russell A. Becker (Chief Executive Officer) and Kevin S. Krumm (Chief Financial Officer)[250]