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As filed with the Securities and Exchange Commission on April 2, 2020

Registration No. 333-

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

APi Group Corporation

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

The British Virgin Islands*   1700   98-1510303

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

c/o APi Group, Inc.

1100 Old Highway 8 NW

New Brighton, MN 55112

(651) 636-4320

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Thomas Lydon

APi Group, Inc.

1100 Old Highway 8 NW

New Brighton, MN 55112

(651) 636-4320

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copy to:

Donn A. Beloff, Esq.

Flora R. Perez, Esq.

Greenberg Traurig, P.A.

401 East Las Olas Boulevard, Suite 2000

Fort Lauderdale, FL 33301

Phone: (954) 765-0500 / Fax: (954) 765-1477

 

 

Approximate date of commencement of proposed sale to the public: The domestication described herein will be effective on, or as soon as practicable after, the date that this registration statement is declared effective.

If the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box  ☐

If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

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.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

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 7(a)(2)(B) of the Securities Act.  ☐

If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:

Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer)  ☐

Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer)  ☐

 

*

This registration statement is being filed to effect a domestication under Section 388 of the General Corporation Law of the State of Delaware and a discontinuance under Section 184 of the BVI Business Companies Act, 2004 (as amended), pursuant to which the Registrant’s jurisdiction of incorporation will be changed from the British Virgin Islands to the State of Delaware, United States of America.

 

 

Calculation of Registration Fee

 

 

 

 

Title of each class of

securities to be registered

 

Amount

to be

registered(1)

 

Proposed

maximum

offering price

per unit

 

Proposed

maximum

aggregate

    offering price    

 

Amount of

    registration fee    

Common Stock, par value $0.0001 per share

  174,898,290(2)   $6.455(3)   $1,128,968,462(3)   $146,540.11

Warrants to purchase Common Stock

  64,546,077      

Common Stock underlying Warrants

  21,515,359           $11.775(4)           $253,343,353(5)   $32,883.97

Series A Preferred Stock

          4,000,000           —  (6)     —  

Total

          $1,382,311,815   $179,424.07

 

 

(1)

Shortly after the effectiveness of this registration statement, APi Group Corporation (formerly known as J2 Acquisition Limited) (the “Registrant”) intends to effect a discontinuance under Section 184 of the BVI Business Companies Act, 2004 (as amended) and a domestication under Section 388 of the General Corporation Law of the State of Delaware, pursuant to which the Registrant’s jurisdiction of incorporation will be changed from the British Virgin Islands to the State of Delaware, United States of America. All securities being registered will be issued by the Registrant after such domestication, as the continuing entity following the domestication.

(2)

The shares to be registered include (1) 169,294,244 shares of common stock issuable upon the domestication in exchange for the Registrant’s outstanding ordinary shares, (2) 4,000,000 shares of common stock issuable upon conversion of the Registrant’s outstanding Series A Preferred Stock subsequent to the domestication, and (3) 1,604,046 shares of common stock issuable upon exercise or settlement of the Registrant’s outstanding options and restricted stock units subsequent to the domestication. In addition, pursuant to Rule 416, this registration statement also covers any additional shares of common stock that may be offered or issued in connection with any stock split, stock dividend or similar transaction paid on the common stock or Series A Preferred Stock.

(3)

Estimated solely for the purpose of calculating the registration fee, based on the average of the high and low prices for ordinary shares of the Registrant as reported on the OTC Market Group’s Pink marketplace on April 1, 2020 ($6.455 per share), in accordance with Rule 457(f)(1).

(4)

Estimated solely for purposes of calculating the registration fee and in accordance with Rule 457(g), the combined maximum offering price per warrant is equal to the sum obtained by adding (a) $0.275, which represents the closing price of the warrants on the London Stock Exchange (the “LSE”) on September 3, 2019, which is the date such warrants were suspended from trading on the LSE, and (b) $11.50, the exercise price of the warrants, resulting in a combined maximum offering price per warrant of $11.775.

(5)

The maximum number of the Registrant’s warrants and shares of common stock issuable upon exercise of the warrants subsequent to the domestication are being simultaneously registered hereunder. Consistent with the response to Question 240.06 of the Securities Act Rules Compliance and Disclosure Interpretations, the registration fee with respect to the warrants has been allocated to the shares of underlying common stock issuable upon the domestication and those shares of common stock are included in the registration fee. Pursuant to Rule 457(g)(3) under the Securities Act and solely for the purpose of calculating the registration fee, the proposed maximum aggregate offering price is equal to the product obtained by multiplying (a) $11.775, the proposed maximum offering price per warrant by (b) 21,515,359, the maximum number of shares issuable upon exercise of the outstanding warrants.

(6)

No additional fee due pursuant to Rule 457(i).

 

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the United States Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED APRIL 2, 2020

PROSPECTUS

APi GROUP CORPORATION

 

 

196,413,649 Shares of Common Stock

64,546,077 Warrants

4,000,000 Series A Preferred Stock

DOMESTICATION IN DELAWARE

 

 

Our board of directors has unanimously approved a proposal to change our jurisdiction of incorporation by discontinuing from the British Virgin Islands and continuing and domesticating as a corporation incorporated under the laws of the State of Delaware (the “Domestication”). This prospectus relates to the shares of our common stock, warrants and Series A Preferred Stock into which our outstanding ordinary shares, warrants and Founder Preferred Shares will be converted in connection with the Domestication. APi Group Corporation is incorporated with limited liability under the laws of the British Virgin Islands under the BVI Business Companies Act, 2004, as amended (the “BVI Companies Act”). To effect the Domestication, we will, upon the final approval of our Board of Directors, file a notice of continuation out of the British Virgin Islands with the British Virgin Islands Registrar of Corporate Affairs (we refer to the British Virgin Islands entity prior to the domestication as “APG BVI”) and file a certificate of incorporation and a certificate of corporate domestication with the Secretary of State of the State of Delaware, under which we will be domesticated and continue as a Delaware corporation (we refer to the domesticated Delaware entity as “APG Delaware”). APG Delaware will be deemed to be the same legal entity as APG BVI. On the effective date of the Domestication, each of our currently issued and outstanding (i) ordinary shares will automatically convert, on a one-for-one basis, into shares of APG Delaware common stock, par value $0.0001 per share (“APG Delaware common stock”), (ii) warrants will automatically convert, on a one-for-one basis, into warrants exercisable for shares of APG Delaware common stock and (iii) Founder Preferred Shares will automatically convert, on a one-for-one basis, into shares of Series A Preferred Stock. Under British Virgin Islands law and our current governing documents, we do not need shareholder approval of the Domestication, and our shareholders do not have statutory dissenters’ rights of appraisal as a result of the Domestication.

We are not asking you for a proxy and you are requested not to send us a proxy. No shareholder action is required to effect the Domestication. See “The Domestication—No Vote or Dissenters’ Rights of Appraisal in the Domestication.”

In connection with the Domestication, we intend to list our common stock on the New York Stock Exchange (the “NYSE”) under the ticker symbol “APG”.

 

 

Investing in our common stock involves risks. See “Risk Factors” beginning on page 8 of this prospectus.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

This prospectus will not be filed with the British Virgin Islands Registrar of Corporate Affairs. Neither the British Virgin Islands Financial Services Commission nor the British Virgin Islands Registrar of Corporate Affairs accepts any responsibility for APG Delaware’s financial soundness or the correctness of any of the statements made or opinions expressed in this prospectus.

Prospectus dated             , 2020

 


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TABLE OF CONTENTS

 

ABOUT THIS PROSPECTUS

     i  

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

     iii  

SUMMARY

     1  

RISK FACTORS

     8  

CAPITALIZATION

     33  

MARKET AND DIVIDEND INFORMATION

     34  

THE DOMESTICATION

     35  

SELECTED CONSOLIDATED FINANCIAL INFORMATION

     40  

APG MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     43  

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

     69  

BUSINESS

     75  

MANAGEMENT AND CORPORATE GOVERNANCE

     84  

COMPENSATION DISCUSSION AND ANALYSIS

     94  

EXECUTIVE COMPENSATION

     102  

RELATED PARTY TRANSACTIONS

     106  

SECURITY OWNERSHIP

     108  

DESCRIPTION OF CAPITAL STOCK; COMPARISON OF RIGHTS

     110  

MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES

     129  

SECURITIES ACT RESTRICTIONS ON RESALE OF APG DELAWARE COMMON STOCK

     139  

ACCOUNTING TREATMENT OF THE DOMESTICATION

     139  

VALIDITY OF THE CAPITAL STOCK

     139  

TAX MATTERS

     139  

CHANGE IN APG CERTIFYING ACCOUNTANT

     139  

EXPERTS

     140  

WHERE YOU CAN FIND MORE INFORMATION

     141  

INDEX TO FINANCIAL STATEMENTS

     F-1  

APPENDIX A—APG BVI AMENDED AND RESTATED MEMORANDUM AND ARTICLES OF ASSOCIATION

     A-1  

APPENDIX B—FORM OF NEW CERTIFICATE OF INCORPORATION OF APG DELAWARE

     B-1  

APPENDIX C—FORM OF NEW BYLAWS OF APG DELAWARE

     C-1  

PART II INFORMATION NOT REQUIRED IN PROSPECTUS

     II-1  


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ABOUT THIS PROSPECTUS

No person has been authorized to give any information or make any representation concerning us or the Domestication (other than as contained in this prospectus) and, if any such other information or representation is given or made, you should not rely on it as having been authorized by us. You should not assume that the information contained in this prospectus is accurate as of any date other than the date on the front cover of this prospectus.

Terms Used in This Prospectus

Unless the context otherwise requires, in this prospectus, the term(s) (1) “the Company,” “APG,” “we,” “us” and “our” refer to APi Group Corporation (formerly known as J2 Acquisition Limited) and its consolidated subsidiaries as it currently exists under British Virgin Islands law and will continue under Delaware law after the Domestication, (2) “APG BVI” and “APG Delaware” refer to the Company prior to and after the Domestication, respectively, and (3) “APi Group” refers to APi Group, Inc. and its consolidated subsidiaries prior to its acquisition by the Company. All references in this prospectus to the “Predecessor” refer to APi Group for all periods prior to its acquisition by the Company on October 1, 2019 (the “APi Acquisition”) and all references to “Successor” refer to the Company for all periods. With regard to financial information included in this prospectus, all “Successor” information includes APi Group as a consolidated subsidiary from the date of the APi Acquisition. The term “Predecessor 2019 Period” refers to the Predecessor period from January 1, 2019 through September 30, 2019, and the term “Successor 2019 Partial Period” refers to the Successor period from October 1, 2019 through December 31, 2019.

Presentation of Financial and Other Information

In this prospectus, references to “$”, “US$” and “U.S. Dollars” are to the lawful currency of the United States of America.

Unaudited Pro Forma Financial Information

Following the APi Acquisition, which was consummated on October 1, 2019, APi Group is considered to be our Predecessor under applicable SEC rules and regulations. As a result, we have included in this prospectus unaudited pro forma financial information based on the historical financial statements of APG and APi Group, combined and adjusted to give effect to the APi Acquisition as if it had occurred as of January 1, 2019. The unaudited pro forma combined consolidated financial information has been prepared in accordance with the basis of preparation described in “Unaudited Pro Forma Financial Information—Notes to Unaudited Pro Forma Condensed Combined Financial Information.”

Trademarks and Trade Names

This prospectus contains some of our trademarks and trade names. All other trademarks or trade names of any other company appearing in this prospectus belong to their respective owners. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the ® and symbols, but such references should not be construed as any indicator that their respective owners will not assert, to the fullest extent under applicable law, their rights thereto.

Industry and Market Data

This prospectus includes industry data and forecasts that we obtained from industry publications and surveys, public filings and internal company sources. Statements as to our ranking, market position and market estimates are based on independent industry publications, third-party forecasts, management’s estimates and assumptions about our markets and our internal research. Our internal estimates are based upon our understanding of industry and market conditions, and such information has not been verified by any independent sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable. However, while we believe that such information and estimates are reasonable and reliable, neither we nor the underwriters have independently verified market and industry data from third-parties. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those

 

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discussed under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” in this prospectus. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This prospectus 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:

 

   

our beliefs and expectations regarding our business strategies and competitive strengths, and our ability to maintain and advance our market share and position, grow our business organically and through acquisitions, and capitalize on customer demand;

 

   

our beliefs regarding competition, our relative market positioning and the competitive factors in the industries we serve;

 

   

our beliefs regarding our regional, decentralized operating model and differentiated leadership culture;

 

   

our beliefs regarding our acquisition platform and ability to execute on and successfully integrate strategic acquisitions;

 

   

our beliefs regarding the recurring and repeat nature of our business;

 

   

our expectations regarding industry trends and their impact on our business, and our ability to capitalize on the opportunities presented in the markets we serve;

 

   

our intent to continue to grow our business, both organically and through acquisitions, and our beliefs regarding the impact of our business strategies on our growth;

 

   

our plans and beliefs with respect to our leadership development platform;

 

   

our beliefs regarding our customer relationships and plans to grow existing business and expand service offerings;

 

   

our beliefs regarding the sufficiency of our properties and facilities;

 

   

our expectations regarding labor matters;

 

   

our beliefs regarding the adequacy of our insurance coverage;

 

   

our expectations regarding the increased costs and burdens of being a public company;

 

   

our expectations regarding the cost of compliance with laws and regulations;

 

   

our expectations and beliefs regarding accounting and tax matters;

 

   

our beliefs regarding the sufficiency of our current sources of liquidity to fund our future liquidity requirements, our expectations regarding the types of future liquidity requirements and our expectations regarding the availability of future sources of liquidity;

 

   

our beliefs regarding the benefits of the Domestication; and

 

   

our intent to settle future dividends on Founder Preferred Shares in shares.

These forward-looking statements are subject to a number of known and unknown risks, uncertainties and assumptions, including those described in “Risk Factors.” In light of these risks, uncertainties and assumptions, the

 

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forward-looking events and circumstances discussed in this prospectus 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:

 

   

the impact of the COVID-19 pandemic on our business, markets, supply chain, customers and workforce, on the credit and financial markets, and on the global economy generally;

 

   

economic conditions affecting the industries we serve, including the construction industry and the energy sector, as well as general economic conditions;

 

   

adverse developments in the credit markets that could adversely affect funding of construction projects;

 

   

the ability and willingness of customers to invest in infrastructure projects;

 

   

a decline in demand for our services or for the products and services of our customers;

 

   

the fact that our revenues are derived primarily from contracts with durations of less than six months and the risk that customers will not renew or enter into new contracts;

 

   

our ability to successfully acquire other businesses, successfully integrate acquired businesses into our operations and manage the risks and potential liabilities associated with those acquisitions;

 

   

the impact of our regional, decentralized business model on our ability to execute on our business strategies and operate our business successfully;

 

   

our ability to compete successfully in the industries and markets we serve;

 

   

our ability to properly manage and accurately estimate costs associated with specific customer projects, in particular for arrangements with fixed price terms;

 

   

increases in the cost, or reductions in the supply, of the materials we use in our business and for which we bear the risk of such increases;

 

   

our relationship with our employees, a large portion of which are covered by collective bargaining arrangements, and our ability to effectively manage and utilize our workforce;

 

   

the inherently dangerous nature of the services we provide and the risks of potential liability;

 

   

the impact of customer consolidation;

 

   

the loss of the services of key senior management personnel and the availability of skilled personnel;

 

   

the seasonality of our business and the impact of weather conditions;

 

   

the variability of our operating results between periods and the resulting difficulty in forecasting future operating results;

 

   

litigation that results from our business, including costs related to any damages we may be required to pay as a result of product liability claims brought against our customers;

 

   

the impact of health, safety and environmental laws and regulations, and the costs associated with compliance with such laws and regulations;

 

   

our substantial level of indebtedness and the effect of restrictions on our operations set forth in the documents that govern such indebtedness; and

 

   

our compliance with certain financial maintenance covenants in our Credit Facilities and the effect on our liquidity of any failure to comply with such covenants.

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 that 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 prospectus. 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.

 

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All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in this prospectus 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.

 

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SUMMARY

This summary provides an overview of selected information regarding our business and operations on a consolidated basis, including the operations of APi Group that we acquired on October 1, 2019. Because this is only a summary, it may not contain all of the information that may be important to you in understanding the Domestication. You should carefully read this entire prospectus, including the section entitled “Risk Factors.”

Overview

We were incorporated on September 18, 2017 with limited liability under the laws of the British Virgin Islands under the BVI Companies Act under the name J2 Acquisition Limited (“J2”). J2 was created for the purpose of acquiring a target company or business. On October 10, 2017, J2 raised gross proceeds of approximately $1.25 billion in connection with its initial public offering in the United Kingdom and its ordinary shares and warrants were listed on the London Stock Exchange (the “LSE”).

On October 1, 2019, we completed our acquisition of APi Group, a market leading provider of commercial safety services, specialty services and industrial services, and we changed our name to APi Group Corporation.

The consideration paid at closing for the APi Acquisition was approximately $2.9 billion, consisting of approximately $2.6 billion in cash and the issuance of 28,373,000 ordinary shares with a value of approximately $291 million to the sellers of APi Group (the “Sellers”). We funded the cash portion of the purchase price and related transaction expenses with a combination of cash on hand, a $1.2 billion term loan under a new term loan facility and approximately $207 million of proceeds from an early warrant exercise financing (the “Warrant Financing”). In addition, we accrued deferred consideration of approximately $147 million primarily related to the step-up in the basis of the assets acquired for tax purposes which is expected to be paid between April 2020 and April 2021.

Our ordinary shares are listed for trading on the LSE under the symbol “JTWO” and our warrants are listed for trading on the LSE under the symbol “JTOW.” Our shares and warrants began trading on the LSE on October 10, 2017 and were suspended from trading on September 3, 2019 due to the announcement of the then-pending APi Acquisition. Our ordinary shares are currently quoted on the OTC Market Group’s Pink marketplace under the symbol “JJAQF.” In connection with the Domestication, we intend to list our common stock on the NYSE under the ticker symbol “APG”.

Our principal executive offices are located at 1100 Old Highway 8 NW, New Brighton, MN 55112 and our telephone number is (651) 636-4320.

Our Business

With over 90 years of history and more than 40 businesses operating from over 200 locations, we are a market leading provider of commercial safety services, specialty services and industrial services operating primarily in the United States, as well as in Canada and the United Kingdom with approximately $4.1 billion in total combined net revenue in 2019, including $3.1 billion of net revenue of the Predecessor for the Predecessor 2019 Period and $985 million of net revenue of the Successor for the Successor 2019 Partial Period. We provide a variety of specialty contracting services, including engineering and design, fabrication, installation, inspection, maintenance, service and repair, and retrofitting and upgrading. We offer comprehensive and diverse solutions on a broad geographic scale. We have a strong base of diverse, long-standing customer relationships in each of the industries we serve. We also have an experienced management team and a strong leadership development culture.

We believe that our core strategies of driving organic growth and growth through accretive acquisitions, promoting sharing of best practices across all of our businesses and leveraging our scale and services offerings, place us in the position to capitalize on opportunities and trends in the industries we serve, grow our businesses and advance our position in each of our markets. We believe that our diverse customer base, regional approach to operating our businesses, specialty operations in niche markets, strong commitment to leadership development, long-standing customer relationships with a robust reputation in the industries we serve, and strong safety track record differentiates us from our competitors.



 

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We have a disciplined acquisition platform which has historically provided strategic acquisitions that are integrated into our operations. Since 2005, we have completed more than 60 acquisitions. We target companies that align with our strategic priorities and demonstrate key value drivers such as culture, geography, end markets and client base, capabilities and leadership. Each of our businesses maintains its identity, reputation, customer relationships and culture following acquisition, and we invest heavily into cultivating leadership at each business. Our acquired businesses benefit from the resources of direct access to the APG network, which facilitates organizational sharing of knowledge and best practices, increases collaboration across our businesses and develops cross-brand solutions which foster enhanced experience, quality and efficiency.

We employ a regional operating model designed to improve speed and responsiveness to our customers across our businesses, empower leadership of our businesses to drive business performance and execute key decisions, and foster cross-functional sharing of best practices. This structure promotes a business-owner mindset among our individual business leaders and combines the personal attention of a small-to-medium sized company with the strength and support of an industry leader. It also allows each of our businesses to remain highly focused on best positioning itself within the categories in which it competes and reinforces strong accountability for operational and financial performance.

We operate our business under three primary operating segments which are also our reportable segments:

 

   

Safety Services – A leading provider of safety solutions in North America, focusing on end-to-end integrated occupancy systems (fire protection solutions, HVAC and entry systems), including design, installation, inspection and service of these integrated systems. This segment also provides mission critical services, including life safety, emergency communication systems and specialized mechanical services. The work performed within this segment spans across industries and facilities and includes commercial, industrial, residential, medical and special-hazard settings. For the year ended December 31, 2019, the Safety Services segment generated combined net revenue of $1.8 billion, including $1.3 billion of net revenue of the Predecessor for the Predecessor 2019 Period and $435 million of net revenue of the Successor for the Successor 2019 Partial Period. In addition, for the year ended December 31, 2019, the Safety Services segment generated combined segment EBITDA of $229 million, including $170 million of segment EBITDA of the Predecessor during the Predecessor 2019 Period and $59 million of segment EBITDA of the Successor during the Successor 2019 Partial Period.

 

   

Specialty Services – A leading provider of diversified, single-source infrastructure and specialty contractor solutions, focusing on infrastructure services and specialized industrial plant solutions, including maintenance and repair of water, sewer and telecom infrastructure. The customers in this segment vary from public and private utility, communications, industrial plants and governmental agencies throughout the United States. For the year ended December 31, 2019, the Specialty Services segment generated combined net revenue of $1.5 billion, including $1.1 billion of net revenue of the Predecessor for the Predecessor 2019 Period and $386 million of net revenue of the Successor for the Successor 2019 Partial Period. In addition, for the year ended December 31, 2019, the Specialty Services segment generated combined segment EBITDA of $161 million, including $111 million of segment EBITDA of the Predecessor during the Predecessor 2019 Period and $50 million of segment EBITDA of the Successor during the Successor 2019 Partial Period.

 

   

Industrial Services – A leading provider of a variety of specialty contracting services and solutions to the energy industry focused on transmission and distribution. This segment’s services include oil and gas pipeline infrastructure, access and road construction, supporting facilities, and performing ongoing integrity management and maintenance. For the year ended December 31, 2019, the Industrial Services segment generated combined net revenue of $837 million, including $670 million of net revenue of the Predecessor for the Predecessor 2019 Period and $167 million of net revenue of the Successor for the Successor 2019 Period. In addition, for the year ended December 31, 2019, the Industrial Services segment generated combined segment EBITDA of $30 million, including $21 million of segment EBITDA of the Predecessor during the Predecessor 2019 Period and $9 million of segment EBITDA of the Successor during the Successor 2019 Period.

The combined financial information is considered non-GAAP financial information as it combines the results of the Predecessor for the Predecessor 2019 Period and the Successor for the Successor 2019 Period and the companies were not combined, for GAAP purposes, until the closing of the APi Acquisition on October 1, 2019. For a discussion regarding these non-GAAP results and a reconciliation of those results to the GAAP results, see “APG Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The Domestication

We intend to change our jurisdiction of incorporation from the British Virgin Islands to the State of Delaware. We will affect the Domestication by filing with the Secretary of State of the State of Delaware a certificate of corporate domestication and a certificate of incorporation of APG Delaware, and by filing with the British Virgin Islands Registrar of Corporate Affairs a notice of continuation out of the British Virgin Islands and certified copies of the certificates filed in Delaware. APG Delaware will be deemed to be the same legal entity as APG BVI. The Domestication and the certificate of incorporation of APG Delaware were approved by our Board of Directors. No action of our shareholders is required to effect the Domestication. We anticipate that the Domestication will become effective shortly after the effectiveness of the registration statement of which this prospectus forms a part (we refer to this date as the “Effective Time”). See “Description of Capital Stock; Comparison of Rights—Effective Time.” APG BVI has not received, and is not required by British Virgin Islands law to receive, approval of a plan of arrangement in the British Virgin Islands, and no plan of arrangement is contemplated.



 

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Comparison of Shareholder Rights

The Domestication will change our jurisdiction of incorporation from the British Virgin Islands to the State of Delaware. While we are currently governed by the BVI Companies Act, upon Domestication, we will be governed by the General Corporation Law of the State of Delaware (the “DGCL”). There are differences between British Virgin Islands corporate law and Delaware corporate law. In addition, in connection with the Domestication, we will be governed by a newly adopted certificate of incorporation and bylaws, which are different from our current organizational documents. For a more detailed description of how the new organizational documents and Delaware law may differ from our current organizational documents and British Virgin Islands law, please see “Description of Capital Stock; Comparison of Rights—Comparison of Rights” below. Our business, assets and liabilities on a consolidated basis, as well as our executive officers, principal business locations and fiscal year, will not change as a result of the Domestication.

The most significant differences between our current organizational documents and British Virgin Islands law and the new organizational documents and Delaware law are as follows:

 

   

Delaware law requires that all amendments to the certificate of incorporation of APG Delaware (other than a certificate of designation setting forth a copy of the resolution of the APG Delaware Board of Directors fixing the designations and the powers, preferences and rights, if any, and the qualifications, limitations and restrictions, if any, of the shares of one or more new series of preferred stock of APG Delaware or a change in APG Delaware’s name) must be approved by the Board of Directors and by the stockholders, while amendments to the Amended and Restated Memorandum and Articles of Association of APG BVI may be made solely by resolutions of the directors (in limited circumstances) or by the holders of ordinary shares;

 

   

Delaware law prohibits the repurchase of shares of APG Delaware when it is or would be rendered insolvent by such repurchase, while there are no such limitations in the BVI Companies Act;

 

   

The APG Delaware certificate of incorporation will prohibit the common stockholders of APG Delaware from acting by written consent, while the APG BVI Amended and Restated Memorandum and Articles of Association permit shareholder action by written consent;

 

   

The APG Delaware bylaws will not permit the stockholders of APG Delaware to call meetings of stockholders under any circumstances, while the shareholders holding 30% of the voting rights in respect of the matter for which the meeting is called may require the directors to call a meeting of shareholders of APG BVI;

 

   

Under Delaware law, only the stockholders may remove directors, while under British Virgin Islands law and the APG BVI Amended and Restated Memorandum and Articles of Association, a majority of the directors may remove a fellow director;

 

   

Under the APG Delaware certificate of incorporation and bylaws, subject to the rights of any series of preferred stock, vacancies and unfilled directorships will be filled solely by the remaining directors, while under the APG BVI Amended and Restated Memorandum and Articles of Association vacancies may be filled by either the directors or the shareholders;

 

   

Under Delaware law, directors may not act by proxy, while under British Virgin Islands law, directors may appoint another director or person to vote in his or her place, exercise his or her other rights as director, and perform his or her duties as director;

 

   

Under Delaware law, a sale of all or substantially all of the assets of APG Delaware requires stockholder approval, while the APG BVI Amended and Restated Memorandum and Articles of Association eliminate the shareholder vote otherwise required by the British Virgin Islands laws for a sale of more than 50% of the assets of APG BVI; and



 

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Under Delaware law, “business combinations” with “interested stockholders” are prohibited for a certain period of time absent certain requirements, while British Virgin Islands law provides no similar prohibition.

Share Conversion

APG BVI is currently authorized to issue an unlimited number of no par value shares which may be either ordinary shares or preferred shares. As of March 31, 2020, there were 169,294,244 ordinary shares of APG BVI issued and outstanding, and 4,000,000 Founder Preferred Shares issued and outstanding, which are convertible into ordinary shares on a one-for-one basis. In addition, as of March 31, 2020, there were issued and outstanding (i) 64,546,077 warrants exercisable to purchase 21,515,359 APG ordinary shares (with each three warrants entitling the holder to subscribe for one ordinary share) at an exercise price of $11.50 per whole ordinary share, (ii) 162,500 options to purchase APG ordinary shares at an exercise price of $11.50 on a one-for-one basis, all of which are fully vested and (iii) 1,441,546 unvested restricted stock units which vest and settle into APG ordinary shares, on a one-for-one basis, based on the vesting schedule applicable to the restricted stock unit awards. See “Description of Capital Stock; Comparison of Rights—Shares Reserved for Future Issuances.”

In connection with the Domestication, each ordinary share of APG BVI that is issued and outstanding immediately prior to the Effective Time will automatically convert into one share of common stock of APG Delaware. Similarly, outstanding options, warrants, restricted stock units and other rights to acquire APG ordinary shares will become options, warrants, restricted stock units or rights to acquire shares of common stock of APG Delaware. It will not be necessary for shareholders of APG BVI who currently hold share certificates to exchange their existing share certificates for certificates of shares of common stock of APG Delaware in connection with the Domestication. See “The Domestication—Domestication Share Conversion” below.

In connection with the Domestication, each Founder Preferred Share that is issued and outstanding immediately prior to the Effective Time will be converted into one share of Series A Preferred Stock of APG Delaware. The Series A Preferred Stock will be convertible into shares of APG Delaware common stock on a one-for-one basis at any time at the option of the holder and will be automatically converted into shares of APG Delaware common stock on the last day of the seventh full financial year of APG Delaware following October 1, 2019 (or if such date is not a trading day, the first trading day immediately following such date). The Annual Dividend Amount required to be paid on the Series A Preferred Stock may be paid in cash or in shares of common stock of APG Delaware, at the option of APG Delaware. Accordingly, APG Delaware may issue additional shares of APG Delaware common stock as a dividend on the Series A Preferred Stock. See “Description of Capital Stock; Comparison of Rights—Series A Preferred Stock.”

Reasons for the Domestication

Our Board of Directors believes that there are significant advantages to us that will arise as a result of a change of our domicile to Delaware and that any direct benefit that the DGCL provides to a corporation also indirectly benefits its stockholders, who are the owners of the corporation. Our Board of Directors further believes that there are several reasons why the Domestication is in the best interests of Company and its shareholders, including (1) the prominence, predictability and flexibility afforded by Delaware law, (2) the well-established principles of corporate governance in Delaware judicial precedent and (3) our increased ability to attract and retain qualified directors. See “The Domestication— Background and Reasons for the Domestication” below for further detail.

Risk Factors

An investment in our common stock will involve risks and uncertainties. Please review the section entitled “Risk Factors” beginning on page 8 of this prospectus.



 

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Material U.S. Federal Income Tax Consequences

See “Material U.S. Federal Income Tax Consequences” for important information regarding U.S. federal income tax consequences relating to (1) the APi Acquisition and the Domestication and (2) the ownership and disposition of APG Delaware common stock.

No Vote or Dissenters Rights of Appraisal in the Domestication

Under British Virgin Islands law and the Amended and Restated Memorandum and Articles of Association of APG BVI, we do not need shareholder approval of the Domestication, and our shareholders do not have statutory dissenters’ rights of appraisal or any other appraisal rights as a result of the Domestication. See “The Domestication—No Vote or Dissenters’ Rights of Appraisal in the Domestication.”



 

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Summary Consolidated Financial Information

The following tables present summary historical consolidated financial data as of the dates and for each of the periods indicated.

The summary historical consolidated financial data for the Successor as of and for the year ended December 31, 2019 and for the Predecessor for the period from January 1, 2019 to September 30, 2019 was derived from the audited consolidated financial statements of the Company included in this prospectus.

The summary historical consolidated financial data included below is not necessarily indicative of future results and should be read in conjunction with “APG Management’s Discussion and Analysis of Financial Condition and Results of Operation”, as well as our and APi Group’s consolidated financial statements and notes thereto contained in this prospectus.

 

     Successor             Predecessor  

($ in millions except per share data)

   As of and for the
Year Ended  December 31,
2019
            Period from
January 1, 2019
to
September 30,
2019
 

Statement of operations data:

        

Net revenues

   $ 985         $ 3,107  

Cost of revenues

     787           2,503  
  

 

 

       

 

 

 

Gross profit

     198           604  
  

 

 

       

 

 

 

Selling, general and administrative expenses

     359           490  

Impairment of goodwill, intangibles, and long-lived assets

     —             12  
  

 

 

       

 

 

 

Operating income (loss)

     (161         102  

Interest expense, net

     15           20  

Investment income and other, net

     (25         (11

Income tax provision

     2           7  
  

 

 

       

 

 

 

Net income (loss)

   $ (153       $ 86  
  

 

 

       

 

 

 

Weighted average shares outstanding used in computing basic and diluted loss per share

     133           N/A  

Net loss per share applicable to ordinary shareholders—basic and diluted

   $ (1.15         N/A  
 

Balance Sheet Data:

        

Total assets

   $ 4,011           N/A  

Total long-term debt

     1,190           N/A  

Total equity

     1,757           N/A  
 

Cash Flow Data:

        

Net cash provided by/(used in) operating activities

   $ 150         $ 145  

Net cash used in investing activities

     (1,728         (51

Net cash (used in)/provided by financing activities

     1,398           (10


 

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     Successor            Predecessor  

($ in millions except per share data)

   As of and for the Year
Ended
December 31,
2019
           Period from
January 1, 2019
to
September 30, 2019
 

Cash and cash equivalents at end of the period

     256          138  
 

Other Operational and Financial Data:

       

Gross profit margin (1)

     20.1        19.4

Net working capital

   $ 519          N/A  

Capital expenditures

     11          53  

 

(1)

Gross profit margin represents gross profit as a percentage of net revenues.



 

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RISK FACTORS

Any investment in our securities involves a number of risks and uncertainties, including the risks described below. If any of the following risks actually occur, our business, financial condition and results of operations could be materially affected. As a result, the trading price of our shares could decline, perhaps significantly, and you could lose all or part of your investment. The risks discussed below are not the only ones we face. Additional risks that are currently unknown to us or that we currently consider to be immaterial may also impair our business or adversely affect our financial condition or results of operations. The risks discussed below also include forward-looking statements and our actual results may differ substantially from those discussed in these forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to Our Business and Industry

Our businesses are dependent on levels of construction activity and an economic downturn in that industry could materially and adversely affect our business.

The demand for our services is substantially dependent upon the existence of construction projects across multiple markets including energy and infrastructure, commercial and industrial, and safety systems. Any period of economic recession affecting the volume or size of those projects is likely to adversely impact our business. Many of the construction projects that require our services involve long timelines from conception to completion, and many of the services that we offer are required later in the project’s lifecycle. Consequently, some of our businesses experience the results of economic trends later in an economic cycle.

The construction industry and individual markets within that industry have historically been vulnerable to macroeconomic downturns and we expect that will continue to be the case. The industry is traditionally cyclical in nature and economic downturns can adversely affect the willingness and ability of our customers to commit to capital expenditures. Such a decline would likely reduce the demand for certain of our services.

For example, the market for hydrocarbons has historically experienced significant volatility and has not fully recovered from the latest downturn, which began in 2015. To the extent that energy producers reduce exploration, development or refining activities in response to changes in their respective markets, the demand for our services would be adversely affected. In the past, reductions in new housing starts have also negatively affected the construction industry, including electrical utility transmission buildouts, and grid connections, and pipeline construction. Generally, when demand for our services is reduced, it leads to greater price competition and decreased revenue and profit, any of which could materially and adversely affect our results of operations and liquidity.

Adverse developments in the credit markets could adversely affect the funding of significant construction projects and therefore reduce demand for our services.

Adverse developments in the credit markets, including reduced liquidity or rising interest rates, could reduce the availability of funding for large capital projects, including construction projects that require our services. Volatility in the credit and equity markets could reduce the availability of debt or equity financing for significant construction projects, causing a reduction in capital spending, which, in the past has resulted, and in the future could result, in project pipeline constraints, project deferrals and project cancellations, any of which could materially and adversely affect our results of operations and liquidity.

Our long-term success depends, in part, on the quality and safety of the services we provide and systems we install. A deterioration in the quality or reputation of our businesses could have an adverse impact on our reputation, business, consolidated financial condition or results of operations.

The success of each of our businesses and our ability to attract and retain customers typically depends in large part on reputation. Such dependence makes our businesses susceptible to reputational damage and heightened competition from other companies. Changes in management practices, or acts or omissions that adversely affect our business, including any crime, scandal, litigation, negative publicity, catastrophic fires or similar events or accidents

 

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and injuries can have a substantial negative impact on the operations of our businesses, and can cause a loss of customer and prospective customer confidence. We or any of our businesses could also face legal claims and adverse publicity from a variety of events or conditions, many of which are beyond our control. If the reputation or perceived quality of our businesses decline, then our business, consolidated financial condition or results of operations could be adversely affected.

Our business strategy includes acquiring companies and making investments that complement our existing businesses. These acquisitions and investments could be unsuccessful or consume significant resources, which could adversely affect our operating results.

We expect to continue to analyze and evaluate the acquisition of strategic businesses, product lines or technologies with the potential to strengthen our industry position or enhance our existing offerings. We cannot assure you that we will identify or successfully complete transactions with suitable acquisition candidates in the future. Nor can we assure you that completed acquisitions will be successful.

Acquisitions and investments may involve significant cash expenditures, debt incurrence, operating losses and expenses that could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. Acquisitions involve numerous other risks, including:

 

   

diversion of management’s time and attention from daily operations;

 

   

difficulties integrating acquired businesses, technologies and personnel into our business;

 

   

inability to obtain required regulatory approvals and/or required financing on favorable terms;

 

   

potential loss of key employees, key contractual relationships, or key customers of acquired companies or from our existing businesses; and

 

   

assumption of the liabilities and exposure to unforeseen liabilities of acquired companies.

Under certain circumstances, it may be difficult for us to complete transactions quickly and to integrate acquired operations efficiently into our current business operations. Moreover, we may be unable to obtain strategic or operational benefits that are expected from our acquisitions. Any acquisitions or investments may ultimately harm our business or consolidated financial condition, as such acquisitions may not be successful and may ultimately result in impairment charges.

We are a decentralized company and place significant decision-making authority with our subsidiaries’ management, which presents certain risks.

We believe our practice of conferring significant authority upon the management of our subsidiaries has been important to our successful growth and has allowed us to be responsive to opportunities and to our customers’ needs. However, this practice presents certain risks, including the risk we would be slower to identify a misalignment between a subsidiary’s and our overall business strategy. Our decentralized organization also creates the possibility that our operating subsidiaries assume excessive risk without appropriate guidance from our centralized accounting, tax, treasury and insurance functions, or external legal counsel, as to the potential overall impact. If an operating subsidiary fails to follow our company policies, including those relating to compliance with applicable laws, we could be subjected to risks of noncompliance with applicable regulations, or made party to a contract, arrangement or situation that requires the assumption of disproportionate liabilities or contain other less desirable terms.

The construction industry is highly competitive and our failure to effectively compete could reduce our market share and harm our financial performance.

The construction industry is highly fragmented, and we compete with other companies in each of the markets in which we operate, ranging from small independent firms servicing local markets to larger firms servicing regional and national markets. We also compete with existing and prospective customers who perform some of the services we offer, which could reduce the amount of services we perform for our customers. There are relatively few barriers to entry for certain of the services we provide and, as a result, any organization that has adequate financial

 

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resources and access to technical expertise and skilled personnel may become a competitor. Further, smaller competitors are more susceptible to consolidation. Consolidation of smaller entities could create larger national competitors which could adversely affect our business or profitability.

Most of our customers’ work is awarded through bid processes. Consequently, price is often a significant factor that determines whether we are awarded the project, especially on smaller, less complex projects. Smaller competitors may have an advantage against us based on price alone due to their lower costs and financial return requirements. Additionally, our bids for certain projects may depend on customer perception, including our perceived relative ability to perform the work as compared to our competitors or a customer’s perception of technological advantages held by our competitors as well as other factors. Our results of operations could be materially and adversely affected if we are unsuccessful in bidding for projects or renewing our master service agreements, or if our ability to be awarded such projects or agreements requires that we accept less desirable terms, including lower margins.

We may not accurately estimate the costs associated with services provided under fixed price contracts, which could impair our financial performance.

A portion of our agreements with customers contain fixed price terms. Under these contracts, we typically set the price of our services on a per unit or aggregate basis and assume the risk that costs associated with our performance may be greater than what we estimated. We also enter into contracts for specific projects or jobs that require the installation or construction of an entire infrastructure system or specified units within an infrastructure system, many of which are priced on a fixed price or per unit basis. Profitability for these contracts will be reduced if actual costs to complete a project exceed our original estimates. If estimated costs to complete the remaining work for a project exceed the expected revenue to be earned, the full amount of any expected loss is recognized in the period the loss is determined. Our profitability is therefore dependent upon our ability to accurately estimate the costs associated with our services and our ability to execute in accordance with our plans. A variety of factors could negatively affect these estimates, including changes in expected productivity levels, conditions at work sites differing materially from those anticipated at the time we bid on the contract and higher than expected costs of labor and/or materials. These variations, along with other risks inherent in performing fixed price contracts, could cause actual project results to differ materially from our original estimates, which could result in lower margins than anticipated, or losses, which could reduce our profitability, cash flows and liquidity.

Improperly managed projects or project delays may result in additional costs or claims against us, which could have a material adverse effect on our operating results, cash flows and liquidity.

The quality of our performance on any given project depends in large part upon the ability of the project manager(s) to manage relationships and the project itself and to timely deploy appropriate resources, including both third-party contractors and our own personnel. Our results of operations, cash flows and liquidity could be adversely affected if a project manager or our personnel miscalculate the resources or time needed to complete a project with capped or fixed fees, or the resources or time needed to meet contractual milestones. Additionally, delays on a particular project, including delays in designs, engineering information or materials provided to us by the customer or a third party, delays or difficulties in equipment and material delivery, schedule changes, delays from failure to timely obtain permits or rights-of-way or to meet other regulatory requirements, weather-related delays, governmental, industry, political and other factors, some of which are beyond our control, could result in cancellations or deferrals of project work, which could lead to a decline in revenue, or, for project deferrals, could cause us to incur costs for standby pay, and could lead to personnel shortages on other projects scheduled to commence at a later date.

We could also encounter project delays due to local opposition, including political and social activism, which could include injunctive actions or public protests related to the siting of oil, natural gas, or electric power transmission lines or for power generation or other facilities, and such delays could adversely affect our project margins. In addition, some of our agreements require that we share in cost overages or pay liquidated damages if we do not meet project deadlines; therefore, any failure to properly estimate or manage cost, or delays in the completion of projects, could subject us to penalties, which could adversely affect our results of operations, cash flows and liquidity. Further, any defects or errors, or failures to meet our customers’ expectations, could result in reputational harm and large damage claims against us. Due to the substantial cost of, and potentially long lead-times necessary to acquire certain of the materials and equipment used in our complex projects, damage claims could substantially exceed the amount we can charge for our associated services.

 

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We maintain a workforce based upon current and anticipated workloads. We could incur significant costs and reduced profitability from underutilization of our workforce if we do not receive future contract awards, if contract awards are delayed, or if there is a significant reduction in the level of services we provide.

Our estimates of future performance and results of operations depend, among other factors, on whether and when we receive new contract awards, which affect the extent to which we are able to utilize our workforce. The rate at which we utilize our workforce is affected by a variety of factors, including our ability to forecast the need for our services, which allows us to maintain an appropriately sized workforce, our ability to transition employees from completed projects to new projects or between internal business groups, our ability to manage attrition, and our need to devote resources to non-chargeable activities such as training or business development. While our estimates are based upon our good faith judgment, professional knowledge and experience, these estimates may not be accurate and may frequently change based on newly available information. In the case of large-scale projects where timing is often uncertain, it is particularly difficult to predict whether and when we will receive a contract award. The uncertainty of contract award timing can present difficulties in matching our workforce size to our project needs. If an expected contract award is delayed or not received, we could incur costs resulting from underutilization of our workforce, redundancy of facilities, or from efforts to right-size our workforce and/or operations, which could reduce our profitability and cash flows.

To the extent our contracts require customers to pay at specific milestones or at the end of a project, our ability to collect accounts receivables will be dependent on our financial health at such time.

Slowing conditions in the industries we serve, customer difficulties in obtaining project financing, economic downturns or bankruptcies could also impair the financial condition of one or more of our customers and hinder their ability to pay us on a timely basis. To the extent that any of our contracts require customers to pay at specific milestones or at the end of a project, our ability to timely identify these difficulties and pare back our expenses and resources could be further impaired. In the past, we incurred significant losses after customers filed for bankruptcy or experienced financial difficulties following a general economic downturn, in which certain industry factors worsened the effect of the overall economic downturn on those customers. In difficult economic times, some of our clients may find it difficult to pay for our services on a timely basis, increasing the risk that our accounts receivable could become uncollectible and ultimately be written off. In certain cases, our clients are project-specific entities that do not have significant assets other than their interests in the project. From time to time, it may be difficult for us to collect payments owed to us by these clients. Delays in client payments may require us to make a working capital investment, which could negatively affect our cash flows and liquidity. If a client fails to pay us on a timely basis or defaults in making payments on a project for which we have devoted significant resources, it could materially and adversely affect our consolidated results of operations, cash flows and liquidity.

Our inability to recover on contract modifications against project owners or subcontractors for payment or performance could negatively affect our business.

We routinely present contract modifications to our clients and subcontractors for changes in contract specifications or requirements. We consider unapproved change orders to be contract modifications for which customers have not agreed to both scope and price. We consider claims to be contract modifications for which we seek, or will seek, to collect from customers, or others, for customer-caused changes in contract specifications or design, or other customer-related causes of unanticipated additional contract costs on which there is no agreement with customers. Claims can also be caused by non-customer-caused changes, such as rain or other weather delays. In some cases, settlement of contract modifications may not occur until after completion of work under the contract. A failure to promptly document and negotiate a recovery for multiple contract modifications could rise to the level of negatively impacting our cash flows, and reductions in our ability to recover contract modifications could have a negative impact on our consolidated financial condition, results of operations and cash flows.

 

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The nature of our business exposes us to potential liability for workmanship, design and other claims, which could materially and adversely affect our business and results of operations.

Under our contracts with customers, we may guarantee the work performed against, among other things, defects in workmanship, and we may agree to indemnify our customers for losses related to our services and materials. As much of the work we perform is inspected by our customers for any defects in construction prior to acceptance of the project, the claims that we have historically received have not been substantial. Additionally, materials used in construction are often provided by the customer or are warranted against defects by the supplier. If customer claims occur, we generally would be obligated to re-perform the services and/or repair or replace the item and any other facilities impacted thereby, at our sole expense, and we could also be responsible for other damages if we are not able to adequately satisfy customer claims. In addition, we may be required under contractual arrangements with our customers to honor any defects or failures in materials we provide. While we generally require the materials suppliers to provide us warranties or indemnification that are consistent with those we provide to our customers, if any of these suppliers default on their obligations to us, we may incur costs to repair or replace the defective materials. Costs incurred as a result of claims could adversely affect our business, consolidated financial condition, results of operations and cash flows.

Furthermore, our business involves professional judgments regarding the planning, design, development, construction, operations and management of electric power transmission, communications and pipeline infrastructure. Because our projects are often technically complex, our failure to make judgments and recommendations in accordance with applicable professional standards, including engineering standards, could result in damages. A significantly adverse or catastrophic event at a project site or completed project resulting from the services we performed could result in significant professional or product liability, personal injury (including claims for loss of life) or property damage claims or other claims against us, as well as reputational harm. These liabilities could exceed our insurance limits or could impact our ability to obtain third-party insurance in the future. In addition, customers, subcontractors or suppliers who have agreed to indemnify us against any such liabilities or losses might refuse or be unable to pay us. An uninsured claim, either in part or in whole, if successful and of a material magnitude, could have a substantial impact on our business, consolidated financial condition, results of operations and cash flows.

Many of our services are exposed to significant risks of liability for employee acts or omissions, or system failure.

Many of our businesses perform services at large projects and industrial facilities where accidents or system failures can be disastrous and costly. If a customer or third party believes that he or she has suffered harm to person or property due to an actual or alleged act or omission of one or more of our employees, faulty construction, or a failure of a system we installed, then they may pursue legal action against us. Any claim, regardless of its merit or eventual outcome, could result in substantial costs, divert management’s attention and create negative publicity, particularly for claims relating to environmental matters where the amount of the claim could be extremely large.

Because many of our services are intended to protect lives and real and personal property, we may have greater exposure to litigation risks than businesses that provide other services. For example, with respect to our safety services, we could face liability for failure to respond adequately to alarm activations, failure of our safety systems to operate as expected or losses caused by erroneous alarm activations. The nature of the services we provide exposes us to the risks that we may be held liable for employee acts or omissions, faulty construction or system failures. We work to include contractual provisions limiting our liability for our installation and monitoring services, and we typically maintain liability insurance to cover losses if our services fail to satisfy applicable requirements and standards. However, in the event of litigation, it is possible that contract limitations may be deemed inapplicable or unenforceable, that our insurance coverage is insufficient, or that insurance carriers deny coverage of our claims. As a result, such employee acts or omissions, faulty construction or system failures could have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows.

Our businesses may be affected by difficult work sites and environments, which could cause delays, increase our costs and reduce profitability.

Our businesses perform services under a variety of conditions, including, but not limited to, challenging and hard to reach terrain and difficult site conditions. Performing services under such conditions can result in project

 

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delays or cancellations, potentially causing us to incur unanticipated costs, reductions in revenue or the payment of liquidated damages. In addition, some of our contracts require that we assume the risk should actual site conditions vary from those expected. Some of our projects involve challenging engineering, procurement and construction phases, which may occur over extended time periods. We may encounter difficulties or delays in designs or materials provided by the customer or a third party, equipment and material delivery delays, schedule changes, delays from customer failure to timely obtain rights-of-way, weather-related delays, delays by subcontractors in completing their portion of the project and other factors, some of which are beyond our control, but that affect our ability to complete a project as originally scheduled. In some cases, delays and additional costs may be substantial, and we may be required to cancel a project and/or compensate the customer for the delay. We may not be able to recover any of such costs. Any such delays, cancellations, errors or other failures to meet customer expectations could result in damage claims substantially in excess of the revenue associated with a project. Delays or cancellations could also negatively affect our reputation or relationships with our customers, which could adversely affect our ability to secure new contracts.

Our unionized workforce and related obligations could adversely affect our operations.

As of December 31, 2019, approximately 44% of our employees were covered by collective bargaining agreements. Certain of our unionized employees have participated in strikes and work stoppages in the past, and we cannot be certain that strikes or work stoppages will not occur in the future. Strikes or work stoppages could adversely impact relationships with our customers and could cause us to lose business and experience a decline in revenues. Our ability to complete future acquisitions also could be adversely affected because of our union status for a variety of reasons. For instance, our union agreements may be incompatible with the union agreements of a business we want to acquire, and some businesses may not want to become affiliated with a union-based company. Additionally, we may be required to increase our exposure to withdrawal liabilities for underfunded multiemployer pension plans to which an acquired company historically contributed or presently contributes. Further, certain of our customers require or prefer a non-union workforce, and they may reduce the amount of work assigned to us if our non-union labor crews become unionized, which could negatively affect our business, consolidated financial condition, results of operations and cash flows.

We are and may become subject to periodic regulatory proceedings, including Fair Labor Standards Act (“FLSA”) and state wage and hour class action lawsuits, which may adversely affect our business and financial performance.

Pending and future wage and hour litigation, including claims relating to the Fair Labor Standards Act, analogous state laws, or other state wage and hour laws could result in significant attorney fees and settlement costs. Resolution of non-litigated alleged wage and hour violations could also negatively impact our performance. The potential settlement of, or awards of damages for, such claims also could materially impact our financial performance as could operational adjustments implemented in response to a settlement, court order or in an effort to mitigate future exposure. Additionally, an increased volume of alleged statutory violations or matters referred to an agency for potential resolution could result in significant attorney fees and settlement costs that could, in the aggregate, materially impact our financial performance.

We are and may become subject to periodic litigation which may adversely affect our business and financial performance.

We are subject to various lawsuits, administrative proceedings and claims that arise in the ordinary course of business. We could be party to class and collective actions, along with other complex legal disputes, that could materially impact our business by requiring, among other things, unanticipated management attention, significant attorney fees and settlement spend, or operational adjustments implemented in response to a settlement, court order or to mitigate future exposure.

We may have litigation in a variety of matters, some matters may be unpredictable or unanticipated, and the frequency and severity of litigation could increase. Because lawsuits are inherently unpredictable, assessing contingencies is highly subjective and requires judgements about future events. A judgement that is not covered by insurance or that is significantly in excess of our insurance coverage could materially adversely affect our consolidated financial condition or results of operations.

 

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We serve customers who are involved in energy exploration, production and transportation, and adverse developments affecting activities in these industries, including sustained low or further reduced oil or natural gas prices, reduced demand for oil and natural gas products, or increased regulation of exploration and production, could have a material adverse effect on our results of operations.

Our energy and infrastructure businesses depend on energy industry participants’ willingness to make operating and capital expenditures to build pipelines to transport oil and natural gas and the development and production of oil and natural gas in the United States. A reduction in these activities generally results in decreased demand for our support services in that industry. Therefore, if these expenditures decline, our business is likely to be adversely affected.

The level of activity in the new construction of oil and natural gas pipelines, oil and natural gas exploration and production in the U.S. has been volatile. The prices of crude oil and related products dropped substantially in the fourth quarter of 2014 and have been negatively affected by a combination of factors, including weakening demand, increased worldwide production, the decision by the Organization of Petroleum Exporting Countries to keep production levels unchanged and a strengthening in the U.S. dollar relative to most other currencies. If crude oil prices do not rise, or take longer to recover than anticipated, energy and production companies, pipeline owners and operators and public utility or local distribution companies in the regions we conduct our business may reduce or delay capital spending to expand or maintain their pipelines or oil and natural gas production. Decreases in production related field activities could have an adverse effect on our consolidated financial position, results of operations, demand for services, and cash flows.

Our customers may further consolidate, which could materially adversely affect our revenues and margins.

Our customers may consolidate, especially in periods of significant industry downturns. We expect any customers that consolidate will take actions to harmonize pricing from their suppliers and rationalize their supply chain, which could adversely affect our business and results of operations. There can be no assurance that, following consolidation, our large customers will continue to buy from us across different service offerings or geographic regions, or at the same levels as prior to consolidation, which could adversely affect our business, consolidated financial condition, results of operations and cash flows.

Demand for our businesses can be materially affected by new or changed governmental regulation.

Our customers operate in regulated industries and are subject to regulations that can change frequently and without notice. The adoption of new laws or regulations, or changes to the enforcement or interpretation of existing laws or regulations, could cause our customers to reduce spending on the services we provide, which could adversely affect our revenues, results of operations, and liquidity. Delays in implementing anticipated regulations or reversals of previously adopted regulations could adversely affect demand for our services. For example, the anticipation by utilities that coal-fueled power plants may become uneconomical to operate because of potential environmental regulations has increased demand for gas pipeline construction for utility customers. If these environmental regulations are not implemented, this could reduce demand for our services.

A portion of our future growth is based on the ability and willingness of public and private entities to invest in infrastructure.

A portion of our current business and a portion of our future growth is expected to result from public and private investments in infrastructure. As a result, reduced or delayed spending, including the impact of government sequestration programs or other changes in budget priorities could result in the deferral, delay or disruption of our projects. These potential events could impact our ability to be timely paid for our current services, which could adversely affect our cash flows and margins.

The impact of the coronavirus (COVID-19) pandemic, or similar global health concerns, could adversely affect our ability to timely complete projects and source the supplies we need, and may impact labor availability and productivity, which could adversely impact our business, financial condition and results of operations.

The coronavirus outbreak in China in December 2019 and the subsequent spread of the virus throughout the world has resulted in widespread infections and fatalities. Governments in affected countries, including the United States, have launched measures to combat the spread of COVID-19, including travel bans, quarantines and lock-downs of affected areas that include closures of non-essential businesses. We rely on the availability of our skilled workforce and third-party contractors to meet contractual milestones and timely complete projects. If the COVID-19 pandemic or similar outbreak were to require us to discontinue operations, or to cause shortages of our workforce or third-party contractors, it could result in cancellations or deferrals of project work, which could lead to a decline in revenue and an increase in costs. In addition, such outbreak may impact the availability of the commodities, supplies and materials needed for projects, and we may experience difficulties obtaining such commodities, supplies and materials from suppliers or vendors whose supply chains are impacted by the outbreak. If we are unable to source the essential commodities, supplies and materials in adequate quantities, at acceptable prices and in a timely manner, our business, financial condition and results of operations could be adversely affected. Similarly, our customers may be impacted by the COVID-19 pandemic, which could cause them to cancel or defer project work, which could have a negative impact on our business.

In addition, our results of operations are materially affected by conditions in the credit and financial markets and the economy generally. Global credit and financial markets have experienced extreme volatility and disruptions as a result of the COVID-19 pandemic including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that deterioration in credit and financial markets and confidence in economic conditions will not occur or be sustained as a result of the COVID-19 pandemic. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure by us or our customers to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon current or expected projects.

The full extent to which the COVID-19 pandemic impacts our business, markets, supply chain, customers and workforce will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions to treat or contain it or to otherwise limit its impact, among others.

 

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The industries we serve, including the construction industry, can be seasonal, cyclical and affected by weather conditions at project sites and other variations, the combined effects of which can potentially delay cash flows and adversely impact our results of operations.

Our revenue and results of operations can be subject to seasonal and other variations. These variations are influenced by various factors, including weather, customer spending patterns, bidding seasons, project schedules, holidays and timing, in particular, for large, non-recurring projects. In particular, many of the construction projects that demand our services include significant portions of outdoor work. As a result, seasonal changes and adverse weather conditions can adversely affect our business operations through declines in demand for our services and alterations and delays in applicable schedules. Adverse weather conditions such as extended rainy and cold weather in the spring and fall can reduce demand for our products and reduce sales or render our contracting operations less efficient resulting in under-utilization of crews and equipment and lower contract profitability. Although our businesses serve customers across the United States, Canada and the United Kingdom, major weather events such as hurricanes, tornadoes, tropical storms and heavy snows could also adversely impact a substantial number of projects and affect our revenues and profitability. Warmer and drier weather during the third and fourth quarters of our fiscal year typically results in higher activity and revenues during those quarters. Our first and second fiscal quarters typically have lower levels of activity due to weather conditions. A cool, wet spring increases drying time on projects, which can delay sales in our third fiscal quarter, while a warm dry spring may enable earlier project startup.

Furthermore, the industries we serve can be cyclical in nature. Fluctuations in end-user demand within those industries, 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 construction and installation projects can create fluctuations in revenue and could adversely affect our business, consolidated financial position, results of operations and cash flows.

A portion of our contracts allocate the risk of price increases in supplies to us.

For certain contracts, including where we have assumed responsibility for procuring materials for a project, we are exposed to market risk of increases in certain commodity prices of materials, such as copper and steel, which are used as components of supplies or materials utilized in all of our operations. In addition, our customers’ capital budgets may be impacted by the prices of certain materials. These prices could be materially impacted by general market conditions and other factors, including U.S. trade relationships with other countries or the imposition of tariffs. We are also exposed to increases in energy prices, including as they relate to gasoline prices for our rolling-stock fleet of approximately 8,000 units. Additionally, the price of fuel required to run our vehicles and equipment is unpredictable and fluctuates based on events outside our control. Any increase in fuel costs could materially reduce our profitability and liquidity to the extent we are not able to adjust our pricing for such expenses. While we believe we can increase our prices to adjust for some price increases in commodities, there can be no assurance that price increases of commodities, if they were to occur, would be recoverable. Additionally, some of our fixed price contracts do not allow us to adjust our prices and, as a result, increases in material or fuel costs could reduce our profitability with respect to such projects.

Our participation in joint ventures exposes us to liability and/or harm to our reputation for failures of our partners.

As part of our business, we have entered into joint venture arrangements and likely will continue to do so. The purpose of these joint ventures is typically to combine skills and resources to allow for the bidding and performance of particular projects. Success of these jointly performed projects can be adversely affected by the performance of our joint venture partners, over whom we may have little or no control. Differences in opinions or views between us and our joint venture partners could result in delayed decision-making or failure to agree on material issues that could adversely affect the business and operations of our joint ventures. Additionally, the failure by a joint venture partner to comply with applicable laws, regulations or client requirements could negatively impact our business.

We and our joint venture partners are generally jointly and severally liable for all liabilities and obligations of our joint ventures. If a joint venture partner fails to perform or is financially unable to bear its portion of required

 

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capital contributions or other obligations, including liabilities stemming from claims or lawsuits, we could be required to make additional investments, provide additional services or pay more than our proportionate share of a liability to make up for our partner’s shortfall. Further, if our partners experience cost overruns or project performance issues that we are unable to adequately address, the customer may terminate the project, which could result in legal liability to us, harm our reputation and reduce our profit or increase our loss on a project.

Our contracts contain provisions that may require us to pay damages or incur costs if we fail to meet our contractual obligations.

If we do not meet our contractual obligations, our customers may look to us to pay damages or pursue other remedies, including, in some instances, the payment of liquidated damages. Additionally, if we fail to meet our contractual obligations, or if our customer anticipates that we cannot meet our contractual obligations, our customers may, in certain circumstances, seek reimbursement from us to cover the incremental cost of having a third party complete or remediate our work. Our results of operations could be adversely affected if we are required to pay damages or incur costs as a result of a failure to meet our contractual obligations.

The loss of key senior management personnel or the failure to hire and retain highly skilled personnel could negatively affect our business.

We depend on our senior management and other key personnel to operate our businesses. We also rely on other highly skilled personnel. Competition for qualified personnel in the construction industry, especially with respect to specialized projects or unique skills sets in applicable trades, is intense. The loss of any of our executive officers or other key employees or the inability to identify, hire, train, retain, and manage skilled personnel, could harm our business.

Risks associated with our operations in Canada and the United Kingdom could harm our business and prospects.

Our overall business, consolidated financial condition, results of operations and cash flows could be negatively impacted by our activities and operations outside the United States. Our international operations are presently conducted primarily in Canada, but we also perform certain services in the United Kingdom and to a much lesser extent, Mexico, Asia and the Caribbean. Although approximately 7% of our revenue was derived from areas outside the United States as of December 31, 2019, it is possible the number of countries in which we operate and the amount of work we perform in foreign countries could increase in the future. We are paid for work outside the United States in currencies other than the U.S. dollar. Such payments may exceed our local currency needs, and, in certain instances, those amounts may be subject to temporary blocking or taxes or tariffs, and we may experience difficulties if we attempt to convert such amounts to U.S. dollars.

We could be adversely affected by our failure to comply with the laws applicable to our foreign activities, including the U.S. Foreign Corrupt Practices Act and other similar worldwide anti-bribery laws.

Applicable U.S. and non-U.S. anti-corruption laws, including but not limited to the U.S. Foreign Corrupt Practices Act (“FCPA”), prohibit us from, among other things, corruptly making payments to non-U.S. officials for the purpose of obtaining or retaining business. We pursue opportunities in certain parts of the world that experience government corruption, and in certain circumstances, compliance with these laws may conflict with longstanding local customs and practices. Our policies mandate compliance with all applicable anti-corruption laws. We have policies and procedures designed to ensure that our employees and intermediaries who work for us outside the United States comply with these laws, and we otherwise require such employees and intermediaries to comply with these laws. However, there can be no assurance that such policies, procedures and other requirements will protect us from liability under the FCPA or other similar laws for actions or inadvertences taken by our employees or intermediaries. Liability for such actions or inadvertences could result in severe criminal or civil fines, penalties, forfeitures, disgorgements or other sanctions. This in turn could have a material adverse effect on our reputation, business, consolidated financial condition, results of operations, and cash flows. In addition, detecting, investigating and resolving actual or alleged violations of such laws is expensive and could consume significant time and attention of our senior management, in-country management, and other personnel.

 

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Our failure to comply with the regulations of OSHA, the U.S. DOT and other state and local agencies that oversee safety and transportation compliance could reduce our revenue, profitability and liquidity.

The Occupational Safety and Health Act of 1970, as amended, establishes certain employer responsibilities, including maintenance of a workplace free of recognized hazards likely to cause death or serious injury, compliance with standards promulgated by OSHA and various recordkeeping, disclosure and procedural requirements. Various standards, including standards for notices of hazards and safety, may apply to our operations. We incur capital and operating expenditures and other costs in the ordinary course of business in complying with OSHA and other state and local laws and regulations, and could incur penalties and fines in the future, including, in extreme cases, criminal sanctions.

While we invest substantial resources in occupational health and safety programs, the construction industry involves a high degree of operational risk, and there can be no assurance that we will avoid significant liability. Although we have taken what we believe to be appropriate precautions, we have had employee injuries and fatalities in the past and may suffer additional injuries or fatalities in the future. Serious accidents of this nature may subject us to substantial penalties, civil litigation or criminal prosecution. Personal injury claims for damages, including for bodily injury or loss of life, could result in substantial costs and liabilities, which could materially and adversely affect our consolidated financial condition, results of operations or cash flows. In addition, if our safety record were to deteriorate, or if we suffered substantial penalties or criminal prosecution for violation of health and safety regulations, customers could cancel existing contracts and not award future business to us, which could materially adversely affect our liquidity, cash flows and results of operations. If we were not able to successfully resolve such issues, our ability to service our customers could be damaged, which could lead to a material adverse effect on our consolidated results of operations, cash flows and liquidity.

Unsatisfactory safety performance may subject us to liabilities, affect customer relationships, result in higher operating costs, negatively impact employee morale and result in higher employee turnover.

Our business is subject to operational hazards due to the nature of services we provide and the conditions in which we operate, including electricity, fires, explosions, mechanical failures and weather-related incidents. Construction projects undertaken by us expose our employees to electrical lines, pipelines carrying potentially explosive or toxic materials, heavy equipment, transportation accidents, adverse weather conditions and the risk of damage to equipment and property. These hazards, among others, can cause personal injuries and loss of life, severe damage to or destruction of property and equipment and other consequential damages and could lead to suspension of operations and large damage claims which could, in some cases, substantially exceed the amount we charge for the associated services. In addition, if serious accidents or fatalities occur, or if our safety records were to deteriorate, we may be restricted from bidding on certain work or obtaining new contracts, and certain existing contracts could be terminated. Our safety processes and procedures are monitored by various agencies and ratings bureaus. The occurrence of accidents in the course of our business could result in significant liabilities, employee turnover, increase the costs of our projects or harm our ability to perform under our contracts or enter into new customer contracts, all of which could materially adversely affect our profitability and our consolidated financial condition.

We are exposed to product liability, workmanship warranty, casualty, negligence, construction defect, breach of contract and other claims and legal proceedings.

From time to time, we are subject to product liability, workmanship warranty, casualty, negligence, construction defect, breach of contract and other claims and legal proceedings relating to the products we install that, if adversely determined, could adversely affect our consolidated financial condition, results of operations and cash flows. We rely on manufacturers and other suppliers to provide us with most of the products we install. Because we do not have direct control over the quality of such products manufactured or supplied by such third-party suppliers, we are exposed to risks relating to the quality of such products. In addition, we are exposed to potential claims arising from the conduct of our employees, and other subcontractors, for which we may be contractually liable.

We have in the past been, and may in the future be, subject to liabilities in connection with injury or damage incurred in conjunction with the installation of our products. Although we currently maintain what we believe to be suitable and adequate insurance, we may be unable to maintain such insurance on acceptable terms or such insurance may not provide adequate protection against potential liabilities.

 

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Such claims and legal proceedings can be expensive to defend and can divert the attention of management and other personnel for significant periods of time, regardless of the ultimate outcome. In addition, lawsuits relating to construction defects typically have statutes of limitations that can run as long as ten years. Claims of this nature could also have a negative impact on customer confidence in our businesses and services. Current or future claims could have a material adverse effect on our reputation, business, consolidated financial condition and results of operations.

We are subject to many laws and regulations in the jurisdictions in which we operate, and changes to such laws and regulations may result in additional costs and impact our operations.

We are committed to upholding the highest standards of corporate governance and legal compliance. We are subject to many laws and regulations in the jurisdictions in which we operate. We expect to be subject to various laws and regulations that apply specifically to U.S. public companies. These include the rules and regulations of the New York Stock Exchange, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as the various regulations, standards and guidance put forth by the SEC and other governmental agencies to implement those laws. New laws, rules and regulations, or changes to existing laws or their interpretations, could create added legal and financial costs and uncertainty for us. In addition, our United Kingdom operations are subject to laws and regulations that are in some cases different from those of the United States, including labor laws such as the U.K. Modern Slavery Act and laws and regulations governing information collected from employees, customers and others, specifically the European Union’s General Data Protection Regulation, which went into effect in May 2018. These laws and regulations, and the economic, financial, political and regulatory impact of the United Kingdom’s decision to leave the European Union, could increase the cost and complexity of doing business in the U.K. and negatively impact our financial position and results of operations. Our efforts to comply with evolving laws, regulations and reporting standards may increase our general and administrative expenses, divert management time and attention or limit our operational flexibility, all of which could have a material adverse effect on our consolidated financial position and results of operations.

Our failure to comply with environmental laws could result in significant liabilities and increased environmental regulations could result in increased costs.

Our operations are subject to various environmental laws and regulations, including those dealing with the handling and disposal of waste products, PCBs, fuel storage, water quality and air quality. We perform work in many different types of underground environments. If the field location maps supplied to us are not accurate, or if objects are present in the soil that are not indicated on the field location maps, our underground work could strike objects in the soil, some of which may contain pollutants. These objects may also rupture, resulting in the discharge of pollutants. In such circumstances, we may be liable for fines and damages, and we may be unable to obtain reimbursement from the parties providing the incorrect information. We perform work in and around environmentally sensitive areas such as rivers, lakes and wetlands. In addition, we perform directional drilling operations below certain environmentally sensitive terrains and water bodies. Due to the inconsistent nature of the terrain and water bodies, it is possible that such directional drilling may cause a surface fracture, resulting in the release of subsurface materials. These subsurface materials may contain contaminants in excess of amounts permitted by law, potentially exposing us to remediation costs and fines. We also own and lease several facilities at which we store our equipment. Some of these facilities contain fuel storage tanks that are above or below ground. If these tanks were to leak, we could be responsible for the cost of remediation as well as potential fines.

Moreover, new laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination or leaks, or the imposition of new clean-up requirements could require us to incur significant costs or become the basis for new or increased liabilities that could negatively impact our business, consolidated financial condition, results of operations and cash flows. In certain instances, we have obtained indemnification or covenants from third parties (including predecessors or lessors) for such clean-up and other obligations and liabilities. However, such third-party indemnities or covenants may not cover all of our costs and the indemnitors may not pay amounts owed to us, and such unanticipated obligations or liabilities, or future obligations and liabilities, may have a material adverse effect on our business, consolidated financial condition, results of operations and cash flows. Further, we cannot be certain that we will be able to identify or be indemnified for all potential environmental liabilities relating to any acquired business.

 

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Misconduct by our employees, subcontractors or partners or our overall failure to comply with laws or regulations could harm our reputation, damage our relationships with customers, reduce our revenue and profits, and subject us to criminal and civil enforcement actions.

Misconduct, fraud, non-compliance with applicable laws and regulations, or other improper activities by one or more of our employees, subcontractors or partners could have a significant negative impact on our business and reputation. Examples of such misconduct include employee or subcontractor theft, the failure to comply with safety standards, laws and regulations, customer requirements, environmental laws and any other applicable laws or regulations. While we maintain policies and procedures to prevent and detect these activities, such precautions may not be effective and are subject to inherent limitations, including human error and fraud. The failure of any of our employees to comply with applicable laws or regulations or other acts of misconduct could subject us to fines and penalties, harm our reputation, damage our relationships with customers, reduce our revenue and profits and subject us to criminal and civil enforcement actions.

As government contractors, our subsidiaries are subject to a number of rules and regulations, and their contracts with government entities are subject to audit. Violations of the applicable rules and regulations could result in a subsidiary being barred from future government contracts.

Government contractors must comply with many regulations and other requirements that relate to the award, administration and performance of government contracts. A violation of these laws and regulations could result in imposition of fines and penalties, the termination of a government contract or debarment from bidding on government contracts in the future. Further, despite our decentralized nature, a violation at one of our locations could impact other locations’ ability to bid on and perform government contracts. Additionally, because of our decentralized nature, we face risks in maintaining compliance with all local, state and federal government contracting requirements. Prohibition against bidding on future government contracts could have an adverse effect on our consolidated financial condition and results of operations.

In the event of a cybersecurity incident, we could experience operational interruptions, incur substantial additional costs, become subject to legal or regulatory proceedings or suffer damage to our reputation.

In addition to the disruptions that may occur from interruptions in our information technology systems, cybersecurity threats and sophisticated and targeted cyberattacks pose a risk to our information technology systems and the systems that we design and install. We have established security policies, processes and defenses designed to help identify and protect against intentional and unintentional misappropriation or corruption of our information technology systems, disruption of our operations or the secure operation of the systems we install. Despite these efforts, our information technology systems may be damaged, disrupted or shut down due to attacks by unauthorized access, malicious software, computer viruses, undetected intrusion, hardware failures or other events, and in these circumstances our disaster recovery plans may be ineffective or inadequate. These breaches or intrusions could lead to business interruption, exposure of proprietary or confidential information, data corruption, damage to our reputation, exposure to legal and regulatory proceedings and other costs. Such events could have a material adverse impact on our consolidated financial condition, results of operations and cash flows. In addition, we could be adversely affected if any of our significant customers or suppliers experiences any similar events that disrupt their business operations or damage their reputation. We maintain monitoring practices and protections of our information technology to reduce these risks and test our systems on an ongoing basis for potential threats. There can be no assurance, however, that our efforts will prevent the risk of a security breach of our databases or systems that could adversely affect our business.

Certain of our businesses are party to asbestos-related litigation that could adversely affect our consolidated financial condition, results of operations and cash flows.

Certain of our businesses, along with numerous other third parties, are named as defendants in personal injury lawsuits based on alleged exposure to asbestos containing materials. These cases typically involve product liability claims based primarily on allegations of sale, distribution, installation or use of industrial products that

 

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either contained asbestos or were used with asbestos containing components. We cannot predict with certainty the extent to which we will be successful in litigating or otherwise resolving lawsuits in the future and we continue to evaluate different strategies related to asbestos claims filed against us including entity restructuring and judicial relief. Unfavorable rulings, judgments or settlement terms could have a material adverse impact on our business and consolidated financial condition, results of operations and cash flows.

The amounts we have recorded for asbestos-related liabilities in the consolidated statements of financial position are based on our current strategy for resolving asbestos claims, currently available information, and a number of variables, estimates and assumptions. Key variables and assumptions include the number and type of new claims that are filed each year, the average cost of resolution of claims, the identity of defendants and the resolution of coverage issues with insurance carriers, amount of insurance, and the solvency risk with respect to our insurance carriers. Many of these factors are closely linked, such that a change in one variable or assumption will impact one or more of the others, and no single variable or assumption predominately influences the determination of our asbestos-related liabilities and insurance-related assets. Furthermore, predictions with respect to these variables are subject to greater uncertainty in the later portion of the projection period. Other factors that may affect our liability and cash payments for asbestos-related matters include uncertainties surrounding the litigation process from jurisdiction to jurisdiction and from case to case, reforms of state or federal tort legislation and the applicability of insurance policies among subsidiaries. As a result, actual liabilities or insurance recoveries could be significantly higher or lower than those recorded if assumptions used in our calculations vary significantly from actual results. If actual liabilities are significantly higher than those recorded, the cost of resolving such liabilities could have a material adverse effect on our consolidated financial position, results of operations and cash flows.

The due diligence undertaken in connection with the APi Acquisition may not have revealed all relevant considerations or liabilities of APi Group, which could have a material adverse effect on our consolidated financial condition or results of operations.

There can be no assurance that the due diligence undertaken by us in connection with our acquisition of APi Group has revealed all relevant facts that may be necessary to evaluate such acquisition, including the determination of the price, or to formulate a business strategy, particularly with respect to recent acquisitions completed by APi Group. Furthermore, the information provided during due diligence may have been incomplete, inadequate or inaccurate. As part of the due diligence process, we have also made subjective judgments regarding the results of operations, consolidated financial condition and prospects of APi Group. If the due diligence investigation has failed to correctly identify material issues and liabilities that may be present in APi Group, or if we consider any identified material risks to be commercially acceptable relative to the opportunity, we may incur substantial impairment charges or other losses. In addition, we may be subject to significant, previously undisclosed liabilities relating to the acquired businesses that were not identified during due diligence and which could contribute to poor operational performance, undermine any attempt to restructure the acquired companies or businesses in line with our business plan and have a material adverse effect on our business, consolidated results of operations, consolidated financial condition, cash flows, liquidity and/or prospects.

We may have limited recourse for indemnity claims under the business combination agreement governing the APi Acquisition.

Under the terms of the business combination agreement governing the APi Acquisition (the “BCA”), we will have limited recourse against the Sellers for losses and liabilities arising or discovered after the closing of the APi Acquisition. Except in the event of fraud or for certain specific indemnification matters, we cannot make a claim for indemnification against the Sellers for a breach of the representations and warranties or covenants in the BCA. In connection with the APi Acquisition, we obtained a representation and warranty insurance policy to provide indemnification for breaches of certain representations and warranties which policy is subject to certain specified limitations and exclusions. There can be no assurance that, in the event of a claim, the insurance policy will cover the relevant losses, or that proceeds that are recoverable under the insurance policy (if any) will be sufficient to compensate us for any losses incurred. Therefore, we may have limited recourse against the Sellers and/or the representations and warranties insurance provider in respect of claims for breach of the warranties, covenants and other provisions in the BCA, which could have a material adverse effect on our business, financial condition and results of operations.

 

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Financial Risks

Our substantial indebtedness may adversely affect our cash flow and our ability to operate our business and fulfill our obligations under our indebtedness.

As of December 31, 2019, on a consolidated basis, we had $1.2 billion in principal amount of debt outstanding under our Credit Facilities (as later defined), capital lease obligations totaling approximately $18 million and other indebtedness totaling approximately $14 million.

Our substantial indebtedness could have significant effects on our operations. For example, it may:

 

   

require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, dividends, research and development efforts and other general corporate purposes;

 

   

increase the amount of our interest expense, because our borrowings are at variable rates of interest, which, if interest rates increase, would result in higher interest expense;

 

   

cause credit rating agencies to view our debt level negatively;

 

   

increase our vulnerability to general adverse economic and industry conditions;

 

   

limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

   

limit our ability to make strategic acquisitions, introduce new technologies or exploit business opportunities; and

 

   

place us at a competitive disadvantage compared to our competitors that have less indebtedness.

In addition, the credit agreement governing the Credit Facilities contains covenants that restrict our operations. These covenants restrict, among other things, our ability to incur additional debt, grant liens, pay cash dividends, enter new lines of business, redeem our ordinary shares, make certain investments and engage in certain merger, consolidation or asset sale transactions. These restrictions could limit our ability to plan for or react to market conditions, meet extraordinary capital needs or otherwise take actions that we believe are in the best interest of the Company. Further, a failure by us to comply with any of these covenants and restrictions could result in an event of default that, if not waived or cured, could result in the acceleration of all or a substantial portion of the outstanding indebtedness thereunder.

The terms of our indebtedness may limit our ability to borrow additional funds or capitalize on business opportunities, and our future debt level may limit our future financial and operating flexibility.

The credit agreement governing the Credit Facilities prohibits distributions on, or purchases or redemptions of, securities if any default or event of default is continuing. In addition, it contains various covenants limiting our ability to, among other things, incur indebtedness if certain financial ratios are not maintained, grant liens, engage in transactions with affiliates, enter into sale-leaseback transactions, and sell substantially all of our assets or enter into a merger or consolidation. The credit agreement governing the Credit Facilities also treats a change of control as an event of default and also requires us to maintain certain leverage ratios.

Our ability to access capital markets to raise capital on favorable terms will be affected by our debt level, our operating and financial performance, the amount of our current maturities and debt maturing in the next several years, and by prevailing credit market conditions. Moreover, if lenders or any future credit rating agency downgrade our credit rating, then we could experience increases in our borrowing costs, face difficulty accessing capital markets or incurring additional indebtedness, be unable to receive open credit from our suppliers and trade counterparties, be unable to benefit from swings in market prices and shifts in market structure during periods of volatility in the crude oil and natural gas markets or suffer a reduction in the market price of our common stock. If we are unable to access the capital markets on favorable terms at the time a debt obligation becomes due in the future. The price and terms upon which we might receive such extensions or additional bank credit, if at all, could be more onerous than those contained in existing debt agreements. Any such arrangements could, in turn, increase the risk that our leverage may adversely affect our future financial and operating flexibility and thereby impact our ability to pay cash distributions at expected rates.

 

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We may need additional capital in the future for working capital, capital expenditures or acquisitions, and we may not be able to access capital on favorable terms, or at all, which would impair our ability to operate our business or achieve our growth objectives.

Our ability to generate cash is essential for the funding of our operations and the servicing of our debt. If existing cash balances together with the borrowing capacity under our Credit Facilities were not sufficient to make future investments, make acquisitions or provide needed working capital, we may require financing from other sources. Our ability to obtain such additional financing in the future will depend on a number of factors including prevailing capital market conditions, conditions in our industry, and our operating results. These factors may affect our ability to arrange additional financing on terms that are acceptable to us. If additional funds were not available on acceptable terms, we may not be able to make future investments, take advantage of acquisitions or pursue other opportunities.

A portion of our business depends on our ability to provide surety bonds. Any difficulties in the financial and surety markets or in our ability to obtain surety bonds may cause a material adverse effect on our bonding capacity and, therefore, our capacity to compete for or work on projects.

As of December 31, 2019, there was approximately $318,000 in outstanding construction surety bonds (bid, payment, and performance bonds) related to our projects that required an underlying surety bond. Historically, surety market conditions have experienced times of difficulty as a result of significant losses incurred by surety companies and the results of macroeconomic trends outside of our control. Consequently, during times when less overall bonding capacity is available in the market, surety terms have become more expensive and more restrictive. We cannot guarantee our ability to maintain a sufficient level of bonding capacity in the future, which could preclude our ability to bid for certain contracts or successfully contract with some customers.

Additionally, even if we continue to access bonding capacity to sufficiently bond future projects, we may be required to post collateral to secure bonds, which would decrease the liquidity we would have available for other purposes. Our surety providers are under no commitment to guarantee us access to new bonds in the future; thus, our ability to access or increase bonding capacity is at the sole discretion of our surety providers. If our surety companies were to limit or eliminate our access to bonds, the alternatives would include seeking bonding capacity from other surety companies, increasing business with clients that do not require bonds and posting other forms of collateral for project performance, such as letters of credit or cash. We may be unable to secure these alternatives in a timely manner, on acceptable terms, or at all. If we were to experience an interruption or reduction in the availability of bonding capacity as a result of these or any other reasons, we may be unable to compete for or work on the portion of projects available to us that require bonding.

We could incur additional costs to cover certain guarantees.

In some instances, we guarantee completion of a project by a specific date or price, cost savings, achievement of certain performance standards or performance of our services at a certain standard of quality. If we subsequently fail to meet such guarantees, we may be held responsible for costs resulting from such failures. Such a failure could result in our payment of liquidated or other damages. To the extent that any of these events occur, the total costs of a project could exceed the original estimated costs, and we would experience reduced profits or, in some cases, a loss.

We are effectively self-insured against many potential liabilities.

Although we maintain insurance policies with respect to a broad range of risks, including automobile liability, general liability, workers’ compensation and employee group health, these policies do not cover all possible claims and certain of the policies are subject to large deductibles. Accordingly, we are effectively self-insured for a substantial number of actual and potential claims. In addition, if any of our insurance carriers defaulted on their obligations to provide insurance coverage by reason of its insolvency or for other reasons, our exposure to

 

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claims would increase and our profits would be adversely affected. Our estimates for unpaid claims and expenses are based on known facts, historical trends and industry averages, utilizing the assistance of an actuary. The determination of such estimated liabilities and their appropriateness are reviewed and updated at least quarterly. However, these liabilities are difficult to assess and estimate due to many relevant factors, the effects of which are often unknown, including the severity of an injury or damage, the determination of liability in proportion to other parties, the timeliness of reported claims, the effectiveness of our risk management and safety programs and the terms and conditions of our insurance policies. Our accruals are based upon known facts, historical trends and our reasonable estimate of future expenses, and we believe such accruals are adequate. However, unknown or changing trends, risks or circumstances, such as increases in claims, a weakening economy, increases in medical costs, changes in case law or legislation, or changes in the nature of the work we perform, could render our current estimates and accruals inadequate. In such case, adjustments to our balance sheet may be required and these increased liabilities would be recorded in the period that the experience becomes known. Insurance carriers may be unwilling, in the future, to provide our current levels of coverage without a significant increase in insurance premiums and/or collateral requirements to cover our obligations to them. Increased collateral requirements may be in the form of additional letters of credit and/or cash, and an increase in collateral requirements could significantly reduce our liquidity. If insurance premiums increase, and/or if insurance claims are higher than our estimates, our profitability could be adversely affected.

We may be required to contribute cash to meet our underfunded obligations in certain multiemployer pension plans.

Our collective bargaining agreements generally require us to participate with other companies in multiemployer pension plans. To the extent those plans are underfunded, the Employee Retirement Income Security Act of 1974, as amended by the Multiemployer Pension Plan Amendments Act of 1980, may subject us to substantial liabilities under those plans if we withdraw from them or they are terminated or experience a mass withdrawal.

In addition, the Pension Protection Act of 2006 added special funding and operational rules generally applicable to plan years beginning after 2007 for multiemployer plans that are classified as “endangered,” “seriously endangered” or “critical” status based on multiple factors (including, for example, the plan’s funded percentage, cash flow position and whether it is projected to experience a minimum funding deficiency). Plans in these classifications must adopt measures to improve their funded status through a funding improvement or rehabilitation plan, as applicable, which may require additional contributions from employers (which may take the form of a surcharge on benefit contributions) and/or modifications to retiree benefits. Certain plans to which we contribute or may contribute in the future are in “endangered,” “seriously endangered” or “critical” status. The amount of additional funds, if any, that we may be obligated to contribute to these plans in the future cannot be estimated due to uncertainty of the future levels of work that require the specific use of union employees covered by these plans, as well as the future contribution levels and possible surcharges on contributions applicable to these plans.

Increases in healthcare costs could adversely affect our financial results.

The costs of providing employee medical benefits have steadily increased over a number of years due to, among other things, rising healthcare costs and legislative requirements. Because of the complex nature of healthcare laws, as well as periodic healthcare reform legislation adopted by Congress, state legislatures, and municipalities, we cannot predict with certainty the future effect of these laws on our healthcare costs. Continued increases in healthcare costs or additional costs created by future health care reform laws adopted by Congress, state legislatures, or municipalities could adversely affect our consolidated results of operations and financial position.

Our backlog is subject to reduction or cancellation, and revenues may be realized in different periods than initially reflected in our backlog.

Our backlog includes the estimated unsatisfied performance obligations associated with the services to be performed under customer contracts. These estimates are based on contract terms and evaluations regarding the timing of the services to be provided. In many instances, our customers are not contractually committed to procure specific volumes of services under a contract. Revenue estimates reflected in our backlog can be subject to change due to a number of factors, including contract cancellations and contract changes made by our customers to the

 

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amount or nature of the work actually performed under a contract. In addition, revenue reflected in our backlog may be realized in periods different from those previously reported due to the factors above as well as project accelerations, or delays due to various reasons, including, but not limited to, customer scheduling changes, commercial issues such as permitting, engineering revisions, difficult job site conditions, and adverse weather. The amount or timing of our backlog can also be impacted by the merger or acquisition activity of its customers. As a result, our backlog as of any particular date is an uncertain indicator of the amount of or timing of future revenues and earnings.

Our financial results are based, in part, upon estimates and assumptions that may differ from actual results. In addition, changes in accounting principles may cause unexpected fluctuations in our reported financial information.

In preparing our consolidated financial statements in conformity with GAAP, our management made a number of estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. These estimates and assumptions must be made because certain information used in the preparation of our consolidated financial statements is either dependent on future events or cannot be calculated with a high degree of precision from data available. In some cases, these estimates are particularly uncertain, and we must exercise significant judgment. Key estimates include: the recognition of revenue and project profit or loss, which we define as project revenue, less project costs of revenue, including project-related depreciation, in particular, on construction contracts accounted for under the cost-to-cost method, for which the recorded amounts require estimates of costs to complete and the amount of variable consideration included in the contract transaction price; allowances for doubtful accounts; fair value estimates, including those related to acquisitions, valuations of goodwill and intangible assets, acquisition-related contingent consideration and equity investments; asset lives used in computing depreciation and amortization; fair values of financial instruments; self-insurance liabilities; other accruals and allowances; income taxes; and the estimated effects of litigation and other contingencies. Actual results could differ materially from the estimates and assumptions that we use, which could have a material adverse effect on our consolidated results of operations, cash flows and liquidity.

In addition, accounting rules and regulations are subject to review and interpretation by the Financial Accounting Standards Board (the “FASB”), the SEC and various other governing bodies. A change in GAAP could have a significant effect on our reported financial results. Additionally, the adoption of new or revised accounting principles could require that we make significant changes to our systems, processes and controls. We cannot predict the effect of future changes to accounting principles, which could have a significant effect on our reported financial results and/or our consolidated results of operations, cash flows and liquidity.

We will face new challenges, increased costs and administrative responsibilities as a U.S. public company, and management will devote substantial time to related compliance initiatives.

As a U.S. publicly traded company with listed equity securities, we will need to comply with certain laws, regulations and requirements, including certain provisions of Sarbanes-Oxley, certain regulations of the SEC and certain of the NYSE requirements applicable to public companies. Complying with these statutes, regulations and requirements will occupy a significant amount of the time of our Board and management and will significantly increase our costs and expenses.

We will need to:

 

   

institute a more comprehensive compliance framework;

 

   

update, evaluate and maintain a system of internal controls over financial reporting in compliance with the requirements of Section 404 of Sarbanes-Oxley and the related rules and regulations of the SEC;

 

   

prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws;

 

   

revise our existing internal policies, such as those relating to disclosure controls and procedures and insider trading;

 

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comply with SEC rules and guidelines requiring registrants to provide their financial statements in interactive data format using eXtensible Business Reporting Language (“XBRL”);

 

   

involve and retain to a greater degree outside counsel and accountants in the above activities; and

 

   

enhance our investor relations function.

In addition, we also expect that being a public company subject to these rules and regulations will make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified executive officers and members of our Board, particularly to serve on our audit committee.

If we fail to establish and maintain an effective system of internal controls, we may not be able to report our financial results accurately and timely, which could harm our business and adversely affect our share price.

As a U.S. publicly traded company, we will be subject to the reporting requirements of the Exchange Act, Sarbanes-Oxley, and the rules and regulations and the listing standards of the NYSE. Accordingly, we will be required to establish and maintain internal controls over financial reporting and disclosure controls and procedures and to comply with those requirements. Even when such controls are implemented, management will not be able to guarantee that our internal controls and disclosure controls and procedures will prevent all possible errors. Because of the inherent limitations in all control systems, no system of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our business have been detected. These inherent limitations include the possibility that judgments in decision-making can be faulty and subject to simple error or mistake. Furthermore, controls can be circumvented by individual acts of some persons, by collusion of two or more persons, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any system of controls may not succeed in achieving its stated goals under all potential future conditions. Over time, measures of control may become inadequate because of changes in conditions or the degree of compliance with policies or procedures may deteriorate. Because of inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and may not be detected.

In connection with our preparation of our consolidated financial statements for the years ended December 31, 2019, 2018 and 2017, we and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting. Any failure to maintain effective internal control over financial reporting or remediate material weaknesses could adversely affect us.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with GAAP. Prior to the APi Acquisition, APi Group was not subject to public company internal control framework requirements and therefore did not design and document its control environment to be in compliance with required public company standards. Additionally, we and our independent registered public accounting firm were not required to and did not perform an evaluation of our internal control over financial reporting as of December 31, 2019, 2018 and 2017 in accordance with the provisions of the Sarbanes-Oxley Act. In connection with our preparation of our consolidated financial statements in this registration statement for the years ended December 31, 2019, 2018 and 2017, we and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting, and we cannot assure you that we have identified all, or that we will not in the future have additional, material weaknesses. If we fail to remediate any material weaknesses or if we otherwise fail to establish and maintain effective control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.

As indicated above, control deficiencies in our internal control over financial reporting have been identified which constitute material weaknesses relating to inadequate design and implementation of:

 

   

information technology general controls that prevent the information systems from providing complete and accurate information consistent with financial reporting objectives and current needs;

 

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internal controls over the preparation of the financial statements, including the insufficient review and oversight over financial reporting, journal entries along with related file documentation;

 

   

internal controls to identify and manage segregation of certain accounting duties;

 

   

internal controls over estimated costs of completion on contracts where revenue is recognized over time; and

 

   

management review controls over projected financial information used in fair value financial models used for purchase accounting and intangible asset valuations.

Under standards established by the United States Public Company Accounting Oversight Board, a material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis.

Management is in the process of developing a remediation plan. 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 will monitor the effectiveness of our remediation plans and will make changes management determines to be appropriate.

If we are unable to assert that our internal control over financial reporting is effective, or when required in the future, if our independent registered public accounting firm is unable to express an unqualified opinion as to the effectiveness of our internal control over financial reporting, investors may lose confidence in the accuracy and completeness of our financial reports, the market price of our common stock could be adversely affected and we could become subject to litigation or investigations by the stock exchange on which our securities are listed, the SEC or other regulatory authorities, which could require additional financial and management resources.

Earnings for future periods may be impacted by impairment charges for goodwill and intangible assets.

We carry a significant amount of goodwill and identifiable intangible assets on our consolidated balance sheets. Goodwill is the excess of purchase price over the fair value of the net assets of acquired businesses. We assess goodwill and indefinite-lived intangible assets for impairment each year, or more frequently if circumstances suggest an impairment may have occurred. We have determined in the past and may again determine in the future that a significant impairment has occurred in the value of our goodwill. Additionally, we have a significant amount of identifiable intangible assets and fixed assets that could also be subject to impairment. If we determine that a significant impairment has occurred in the value of our unamortized intangible assets or fixed assets, we could be required to write off a portion of our assets, which could adversely affect our consolidated financial condition or our reported results of operations.

Our use of revenue recognition over time could result in a reduction or reversal of previously recorded revenue or profits.

A material portion of our revenue is recognized over time by measuring progress toward complete satisfaction of performance obligations in the proportion that our actual costs bear to our estimated contract costs at completion. The earnings or losses recognized on individual contracts are based on estimates of contract revenue, costs and profitability. We review our estimates of contract revenue, costs and profitability on an ongoing basis. Prior to contract completion, we may adjust our estimates on one or more occasions as a result of change orders to the original contract, collection disputes with the customer on amounts invoiced or claims against the customer for increased costs incurred by us due to customer induced delays and other factors. Contract losses are recognized in the fiscal period when the loss is determined. Contract profit estimates are also adjusted in the fiscal period in which it is determined that an adjustment is required. As a result of the requirements of over time revenue recognition, the possibility exists, for example, that we could have estimated and reported a profit on a contract over several periods and later determined, usually near contract completion, that all or a portion of such previously estimated and reported profits were overstated. If this occurs, the full aggregate amount of the overstatement will be reported for the period in which such determination is made, thereby eliminating all or a portion of any profits from other contracts that would have otherwise been reported in such period or even resulting in a loss being reported for such

 

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period. On a historical basis, we believe that we have made reasonably reliable estimates of the progress towards completion on our long-term contracts. However, given the uncertainties associated with these types of contracts, it is possible for actual costs to vary from estimates previously made, which may result in reductions or reversals of previously recorded revenue and profits.

We may incur substantial additional indebtedness, which could further exacerbate the risks that we may face.

Subject to the restrictions in the agreements that govern the Credit Agreement, we may incur substantial additional indebtedness (including secured indebtedness) in the future. These restrictions are subject to waiver and a number of significant qualifications and exceptions, and indebtedness incurred in compliance with these restrictions could be substantial.

Any material increase in our level of indebtedness will have several important effects on our future operations, including, without limitation:

 

   

we would have additional cash requirements in order to support the payment of interest on our outstanding indebtedness;

 

   

increases in our outstanding indebtedness and leverage would increase its vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressure; and

 

   

depending on the levels of our outstanding indebtedness, our ability to obtain additional financing for working capital, capital expenditures and general corporate purposes could be limited.

An increase in interest rates would increase the interest costs on our Credit Facilities and on our floating rate indebtedness and could impact adversely our ability to refinance existing indebtedness or to sell assets.

Interest payments for borrowings under the Credit Facilities are based on floating rates. As a result, an increase in interest rates will reduce our cash flow available for other corporate purposes.

Rising interest rates also could limit our ability to refinance existing indebtedness when it matures and increase interest costs on any indebtedness that is refinanced. We have and may continue to enter into agreements such as floating-to-fixed interest rate swaps, caps, floors and other hedging contracts in order to fully or partially hedge against the cash flow effects of changes in interest rates for floating rate debt. For example, effective October 1, 2019, we entered into an interest rate swap on a portion of our Term Loan, which swapped a portion of the principal amount which was accruing interest at a rate based on LIBOR for a fixed rate. However, we may not maintain interest rate swaps with respect to all of our floating rate indebtedness, and any swaps we enter into may not fully mitigate our interest rate risk. In addition, these agreements expose us to the risk that other parties to the agreements will not perform or that the agreements will be unenforceable.

Discontinuation, reform or replacement of LIBOR and other benchmark rates, or uncertainty related to the potential for any of the foregoing, may adversely affect our business.

Interest payments for borrowings under the Credit Facilities are based on floating rates which at times references a LIBOR rate. It is expected that a transition away from the widespread use of LIBOR to alternative rates will occur over the course of the next few years. The U.K. Financial Conduct Authority announced in 2017 that it intends to phase out LIBOR by the end of 2021. In addition, other regulators have suggested reforming or replacing other benchmark rates. The discontinuation, reform or replacement of LIBOR or any other benchmark rates may have an unpredictable impact on contractual mechanics in the credit markets or cause disruption to the broader financial markets. Uncertainty as to the nature of such potential discontinuation, reform or replacement may negatively impact interest expense related to borrowings under our Credit Facilities, including the Term Loan and the interest rate swap we entered into with respect thereto. We may in the future pursue amendments to our Credit Facilities to provide for a transition mechanism or other reference rate in anticipation of LIBOR’s discontinuation, but we may not be able to reach agreement with its lenders on any such amendments. Further, certain of our current debt instruments limit the amount of indebtedness we and our subsidiaries may incur. As a result, additional financing to replace our LIBOR-based indebtedness may be unavailable, available on less favorable terms or restricted by the terms of our outstanding indebtedness.

 

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Risks Relating to Our Common Stock

There is currently no public trading market for our common stock and an active trading market for our common stock may not develop.

Other than limited trading on the OTC Market Group’s Pink marketplace, there is currently no public or other market for shares of our common stock. Although our ordinary shares were initially listed for trading on the LSE, trading of our ordinary shares was suspended upon announcement of our agreement to acquire APi Group. We do not currently anticipate that trading of our ordinary shares on the LSE will resume. Although we expect that listing on the NYSE will occur in connection with the Domestication, there is no guarantee that we will effect or maintain that listing or a listing on any other exchange.

Even if following the Domestication our common stock becomes listed on the NYSE, we cannot predict the extent to which investor interest in APG will lead to the development of an active trading market on the NYSE or how liquid that market might become. An active public market for our common stock may not develop or be sustained. If an active public market does not develop or is not sustained, it may be difficult for you to sell your shares of common stock at a price that is attractive to you, or at all.

We have numerous equity instruments outstanding that would require us to issue additional shares of common stock. Therefore, you may experience significant dilution of your ownership interests and the future issuance of additional shares of our common stock, or the anticipation of such issuances, could have an adverse effect on our stock price.

We currently have outstanding numerous equity instruments outstanding that would require us to issue additional shares of common stock for no or a fixed amount of additional consideration. Specifically, as of March 31, 2020 we had outstanding the following:

 

   

4,000,000 Founder Preferred Shares, which will be convertible into shares of our ordinary shares (or common stock following the Domestication), on a one-for-one basis, at any time at the option of the holder;

 

   

64,546,077 warrants, which are exercisable for 21,515,359 ordinary shares (or common stock following the Domestication) at any time at the option of the holder at a price of $11.50 per whole share;

 

   

162,500 options which are exercisable to purchase ordinary shares (or common stock following the Domestication) on a one-for-one basis, at any time at the option of the holder at an exercise price of $11.50 per share; and

 

   

1,441,546 unvested restricted stock units which vest and settle into ordinary shares (or common stock following the Domestication), on a one-for-one basis, based on the vesting schedule applicable to the restricted stock unit awards.

We also had 15,558,454 ordinary shares available under the APi Group Corporation 2019 Equity Incentive Plan as of that date. In addition, we will be obligated to pay dividends on our 4,000,000 outstanding Founder Preferred Shares (or the Series A Preferred Stock into which they will be converted in the Domestication) based on the market price of our common stock if such market price exceeds certain trading price minimums. These dividends are payable in cash or shares of our common stock, at our sole option (which we intend to settle in shares). The issuance of ordinary shares pursuant to the terms of the Founder Preferred Shares will reduce (by the applicable proportion) the percentage shareholdings of those shareholders holding ordinary shares prior to such issuance which may reduce your net return on your investment in our ordinary shares (or common stock following the Domestication). We may also issue additional shares of our common stock or other securities that are convertible

 

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into or exercisable for our common stock in connection with future acquisitions, future issuances of our securities for capital raising purposes or for other business purposes. Future sales by us of substantial amounts of our common stock, or the perception that sales could occur, could have a material adverse effect on the price of our common stock.

Our stock price may be volatile after the listing on the NYSE and, as a result, you could lose a significant portion or all of your investment.

The market price of our common stock on the NYSE may fluctuate after listing as a result of several factors, including the following:

 

   

our operating and financial performance and prospects;

 

   

variations in our quarterly operating results or those of other companies in our industries;

 

   

volatility in our industries, the industries of our customers and suppliers and the securities markets;

 

   

risks relating to our businesses and industries, including those discussed above;

 

   

strategic actions by us or our competitors;

 

   

damage to our reputation, including as a result of issues relating to the quality or safety of the services we provide and systems we install;

 

   

actual or expected changes in our growth rates or our competitors’ growth rates;

 

   

investor perception of us, the industries in which we operate, the investment opportunity associated with the common stock and our future performance;

 

   

addition to or departure of our executive officers;

 

   

changes in financial estimates or publication of research reports by analysts regarding our common stock, other comparable companies or our industries generally, or termination of coverage of our common stock by analysts;

 

   

our failure to meet estimates or forecasts made by analysts, if any;

 

   

trading volume of our ordinary shares;

 

   

future sales of our common stock by us or our shareholders;

 

   

economic, legal and regulatory factors unrelated to our performance;

 

   

adverse or new pending litigation against us; or

 

   

the release or expiration of lock-up or other transfer restrictions on our outstanding common stock.

Furthermore, the stock markets often experience significant price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. These fluctuations often have been unrelated or disproportionate to the operating performance of those companies. These broad market and industry fluctuations, as well as general economic, political and market conditions such as recessions or interest rate changes may cause the market price of our common stock to decline.

 

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We may issue preferred stock in the future, and the terms of the preferred stock may reduce the value of our common stock.

Under the terms of APG Delaware’s new certificate of incorporation which will be in effect upon the effectiveness of the Domestication, our Board of Directors will be authorized to create and issue one or more additional series of preferred stock, and, with respect to each series, to determine number of shares constituting the series and the designations and the powers, preferences and rights, and the qualifications, limitations and restrictions thereof, which may include dividend rights, conversion or exchange rights, voting rights, redemption rights and terms and liquidation preferences, without stockholder approval. If we create and issue one or more additional series of preferred stock, it could affect your rights or reduce the value of our outstanding common stock. Our Board of Directors could, without stockholder approval, issue preferred stock with voting and other rights that could adversely affect the voting power of the holders of our common stock and which could have certain anti-takeover effects.

If securities or industry analysts either do not publish research about us, or publish inaccurate or unfavorable research about us, our businesses could be adversely impacted or, if such analysts change their recommendations regarding our common stock adversely, our stock price or trading volume could decline.

The trading market for our common stock will be influenced in part by the research and reports that securities or industry analysts may publish about us, our businesses, our market, or our competitors. If one or more of the analysts initiate research with an unfavorable rating or downgrade our common stock, provide more favorable recommendations about our competitors, or publish inaccurate or unfavorable research about our businesses, the trading price of our common stock would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.

We cannot assure you that we will declare dividends or have the available cash to make dividend payments.

To the extent we intend to pay dividends on our common stock, we will pay such dividends at such times (if any) and in such amounts (if any) as the Board determines appropriate and in accordance with applicable law. Payments of such dividends will be dependent on the availability of any dividends or other distributions from APi Group and its subsidiaries to us. We can therefore give no assurance that we will be able to pay dividends going forward or as to the amount of such dividends, if any.

We operate as a holding company and our principal source of operating cash will be income received from our subsidiaries.

We have a holding company structure and do not have any material assets or operations other than ownership of equity interests of our subsidiaries. Our operations are conducted almost entirely through our subsidiaries, and our ability to generate cash to meet our obligations or to pay dividends is highly dependent on the earnings of, and receipt of funds from, our subsidiaries through dividends or intercompany loans. As a result, we are dependent on the income generated by our subsidiaries to meet our expenses and operating cash requirements. The amount of distributions and dividends, if any, which may be paid from APi Group and its subsidiaries to us will depend on many factors, including APi Group’s results of operations and consolidated financial condition, limits on dividends under applicable law, its constitutional documents, documents governing any indebtedness of APG or APi Group, and other factors which may be outside of our control. If our subsidiaries are unable to generate sufficient cash flow, we may be unable to pay its expenses or make distributions and dividends on the ordinary shares.

Risks Relating to Taxation

Our change in classification to a U.S. domestic corporation for U.S. federal income tax purposes may result in adverse tax consequences for you.

APG BVI believes that at the time of the APi Acquisition, APG BVI became a U.S. domestic corporation for U.S. federal income tax purposes as a result of an inversion transaction. See the description of the inversion

 

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transaction in “Material U.S. Federal Income Tax Consequences—Inversion.” If you are a U.S. Holder (as defined in “Material U.S. Federal Income Tax Consequences” below) of APG ordinary shares, you may be subject to U.S. federal income tax as a result of APG becoming a U.S. domestic corporation for U.S. federal income tax purposes. If you are a non-U.S. Holder (as defined in “Material U.S. Federal Income Tax Consequences”) of APG ordinary shares or warrants, you may become subject to withholding tax on any dividends paid on the ordinary shares of APG BVI or the common stock of APG Delaware subsequent to APG becoming a U.S. domestic corporation for U.S. federal income tax purposes.

If you are a U.S. Holder who owns (directly, indirectly, or constructively) APG ordinary shares with a fair market value of $50,000 or more, but less than 10% of the total combined voting power of all classes of our shares entitled to vote (and less than 10% of the total value of all classes of our shares) at the time APG became taxable as a U.S. domestic corporation, you must generally recognize gain (but not loss) with respect to such APG ordinary shares, even if you continue to hold your stock and have not received any cash as a result of the APi Acquisition or Domestication. As an alternative to recognizing gain, however, such U.S. holder may elect to include in income the “all earnings and profits amount,” as the term is defined in Treasury Regulation Section 1.367(b)-2(d), attributable to its APG ordinary shares.

If a U.S. Holder owns (directly, indirectly, or constructively) APG ordinary shares representing 10% or more of the total combined voting power of all classes of our shares entitled or 10% or more of the total value of all classes of our shares at the time APG became taxable as a U.S. domestic corporation, such U.S. Holder will be required to include in income the “all earnings and profits amount” attributable to its APG ordinary shares. Complex attribution rules apply in determining whether a U.S. Holder owns 10% or more (by vote or value) of our shares for U.S. federal tax purposes.

If APG is a passive foreign investment company (“PFIC”) at any time during a U.S. Holder’s holding period of APG ordinary shares, such U.S. Holder may be required to recognize gain in connection with APG becoming a U.S. domestic corporation for U.S. federal income tax purposes and be subject to complex rules applicable to a shareholder of a PFIC. APG believes that it has been a PFIC since its inception. The determination of whether a non-U.S. corporation is a PFIC is primarily factual and there is little administrative or judicial authority on which to rely to make a determination.

EACH U.S. HOLDER IS STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR.

For a more detailed description of the material U.S. federal income tax consequences associated with the Domestication, please read “Material U.S. Federal Income Tax Consequences” starting on page 121 of this prospectus. WE STRONGLY URGE YOU TO CONSULT WITH YOUR OWN TAX ADVISOR.

Upon effectiveness of the Domestication, the rights of holders of APG Delaware common stock arising under the DGCL as well as our new organizational documents will differ from and may be less favorable to the rights of holders of APG ordinary shares arising under the BVI Companies Act as well as our current memorandum and articles of association.

Upon effectiveness of the Domestication, the rights of holders of APG Delaware common stock will arise under our new certificate of incorporation and bylaws as well as the DGCL. Those new organizational documents and the DGCL contain provisions that differ in some respects from those in our current memorandum and articles of association and the BVI Companies Act and, therefore, some rights of holders of APG Delaware common stock could differ from the rights that holders of APG ordinary shares currently possess. For instance, while class actions are generally not available to shareholders under the BVI Companies Act, such actions are generally available under the DGCL. This change could increase the likelihood that APG Delaware becomes involved in costly litigation, which could have a material adverse effect on APG Delaware. In addition, there are differences between the new organizational documents of APG Delaware and the current constitutional documents of APG BVI. For a more detailed description of the rights of holders of APG Delaware common stock and how they may differ from the rights of holders of APG ordinary shares, please see “Description of Capital Stock; Comparison of Rights.” The forms of the new certificate of incorporation and bylaws of APG Delaware are attached as Appendix B and Appendix C, respectively, to this prospectus and we urge you to read them.

 

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Delaware law and APG Delaware’s new organizational documents contain certain provisions, including anti-takeover provisions, that limit the ability of stockholders to take certain actions and could delay or discourage takeover attempts that stockholders may consider favorable.

APG Delaware’s new certificate of incorporation and bylaws that will be in effect upon the effectiveness of the Domestication, and the DGCL, contain provisions that could have the effect of rendering more difficult, delaying, or preventing an acquisition deemed undesirable by APG Delaware’s board of directors and therefore depress the trading price of APG Delaware common stock. These provisions could also make it difficult for stockholders to take certain actions, including electing directors who are not nominated by the current members of our board of directors or taking other corporate actions, including effecting changes in our management. Among other things, APG’s new organizational documents include provisions regarding:

 

   

the ability of the APG Delaware board of directors to issue shares of preferred stock, including “blank check” preferred stock and to determine the price and other terms of those shares, including preferences and voting rights, without stockholder approval, which could be used to significantly dilute the ownership of a hostile acquirer;

 

   

the limitation of the liability of, and the indemnification of, APG Delaware’s directors and officers;

 

   

a prohibition on stockholder action by written consent, which forces stockholder action to be taken at an annual or special meeting of stockholders and could delay the ability of stockholders to force consideration of a stockholder proposal or to take action, including the removal of directors;

 

   

the requirement that a special meeting of stockholders may be called only by a majority of the entire APG Delaware board of directors or APG Delaware’s chief executive officer, which could delay the ability of stockholders to force consideration of a proposal or to take action, including the removal of directors;

 

   

controlling the procedures for the conduct and scheduling of board of directors and stockholder meetings;

 

   

the ability of the APG Delaware board of directors to amend the bylaws, which may allow APG Delaware’s board of directors to take additional actions to prevent an unsolicited takeover and inhibit the ability of an acquirer to amend the bylaws to facilitate an unsolicited takeover attempt; and

 

   

advance notice procedures with which stockholders must comply to nominate candidates to the APG Delaware board of directors or to propose matters to be acted upon at a stockholders’ meeting, which could preclude stockholders from bringing matters before annual or special meetings of stockholders and delay changes in the APG Delaware board of directors and also may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of APG Delaware.

These provisions, alone or together, could delay or prevent hostile takeovers and changes in control or changes in the APG Delaware board of directors or management. In addition, Section 203 of the DGCL restricts certain “business combinations” with “interested stockholders” for three years following the date that a person becomes an interested stockholder unless: (1) the “business combination” or the transaction which caused the person or entity to become an interested stockholder is approved by the Board of Directors prior to such business combination or transactions; (2) upon the completion of the transaction in which the person or entity becomes an “interested stockholder,” such interested stockholder holds at least 85% of the voting stock of APG Delaware not including (x) shares held by officers and directors and (y) shares held by employee benefit plans under certain circumstances; or (3) at or after the person or entity becomes an “interested stockholder,” the “business combination” is approved by the Board of Directors and holders of at least 66 2/3% of the outstanding voting stock, excluding shares held by such interested stockholder. A Delaware corporation may elect not to be governed by Section 203. APG Delaware has not made such an election.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of December 31, 2019.

You should read this table in conjunction with “Selected Consolidated Financial Information”, “APG Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited and unaudited financial statements and related notes included elsewhere in this prospectus.

 

(in millions, except per share data)

   As of December 31, 2019  

Debt:

  

Credit Facilities(1)

     1,200  

Other Indebtedness

     32  
  

 

 

 

Total debt

   $ 1,232  

Stockholders’ equity:

  

Ordinary shares (no par value)(2)

     —    

Preferred shares (no par value)(3)

     —    

Additional paid in capital

     1,885  

Retained deficit

     (131

Accumulated other comprehensive loss

     3  
  

 

 

 

Total shareholders’ equity

   $ 1,757  
  

 

 

 

Total capitalization

   $         2,989  
  

 

 

 

 

(1)

As of December 31, 2019, there was $1.2 billion of indebtedness outstanding under the term loan facility and no indebtedness outstanding under the revolving credit facility, both of which we obtained in connection with the APi Acquisition. See “APG Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Credit Facilities.”

(2)

Does not include (i) 4,000,000 shares issuable upon the conversion of the Founder Preferred Shares, (ii) 21,515,359 shares issuable upon the exercise of the APG warrants, (iii) 162,500 shares issuable upon the exercise of the outstanding non-executive director options, (iv) 929,266 unvested restricted stock units which vest and settle into ordinary shares on a one-for-one basis or (v) shares issuable as dividends pursuant to the terms of our Founder Preferred Shares.

(3)

In connection with the Domestication, the 4,000,000 outstanding Founder Preferred Shares will be converted into 4,000,000 shares of Series A Preferred Stock which, as of October 1, 2019, entitle the holder to receive an annual dividend payable in cash or stock at our option based on the market price of APG Delaware common stock if such market price exceeds certain trading price minimums. See “Description of Capital Stock; Comparison of Rights—Shares Reserved for Future Issuances.”

 

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MARKET AND DIVIDEND INFORMATION

Ordinary Shares

Our ordinary shares are listed for trading on the LSE under the symbol “JTWO”. Our shares began trading on the LSE on October 10, 2017 and were suspended from trading on September 3, 2019 due to the announcement of the then-pending APi Acquisition. Our ordinary shares are currently quoted on the OTC Market Group’s Pink marketplace under the symbol “JJAQF.”

In connection with the initial public offering on October 10, 2017, we issued 121,032,500 of our ordinary shares. As of March 31, 2020, we had 169,294,244 ordinary shares outstanding and 18 record holders of our ordinary shares. We have not declared or paid any dividends on our ordinary shares in the past two fiscal years, and have no current plans to pay dividends on our ordinary shares. In connection with the Domestication, we intend to list our common stock on the NYSE under the ticker symbol “APG”.

Warrants

Our warrants are listed for trading on the LSE under the symbol “JTOW”. Our warrants began trading on the LSE on October 10, 2017 and were suspended from trading on September 3, 2019 due to the announcement of the then-pending APi Acquisition.

On October 5, 2017, an aggregate of 125,032,500 warrants were issued (with each three warrants entitling the holder to subscribe for one ordinary share) pursuant to a warrant instrument executed by J2, and were exercisable to purchase an aggregate of 41,677,500 APG ordinary shares. On October 1, 2019, we completed the Warrant Financing, in which an aggregate of 60,486,423 warrants were exercised at a reduced exercise price of $10.25 for an aggregate of 20,162,141 ordinary shares.

As of March 31, 2020, there were 64,546,077 warrants outstanding exercisable for approximately 21,515,359 ordinary shares. As of March 31, 2020, we had one record holder of our warrants.

 

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THE DOMESTICATION

General

APG will effect the Domestication by filing with the Secretary of State of the State of Delaware a certificate of corporate domestication and a certificate of incorporation of APG Delaware, and by filing with the British Virgin Islands Registrar of Corporate Affairs a notice of continuance out of the British Virgin Islands and certified copies of the certificates filed in Delaware. The Domestication and the certificate of incorporation of APG Delaware were approved by our Board of Directors, and no action of our shareholders is required to effect the Domestication. Under Delaware law, the Domestication is deemed effective upon the filing of the certificate of corporate domestication and the certificate of incorporation with the Secretary of State of the State of Delaware. In addition, APG must file with the British Virgin Islands Registrar of Corporate Affairs a notice of continuance out of the British Virgin Islands and if the British Virgin Islands Registrar of Corporate Affairs is satisfied that the requirements of the BVI Companies Act have been satisfied with respect to the Domestication, it will issue a certificate of discontinuance and, at that time, we shall cease to be registered as a company in the British Virgin Islands and will continue as the same legal entity incorporated in Delaware. We intend to file the certificate of continuance with the British Virgin Islands Registrar of Corporate Affairs on the day certified copies of the certificates are issued by the Secretary of State of the State of Delaware. APG BVI has not received, and is not required by British Virgin Islands law to receive, approval of a plan of arrangement in the British Virgin Islands, and no plan of arrangement is contemplated.

In connection with the Domestication, APG Delaware’s Board of Directors will adopt bylaws, which, together with the new certificate of incorporation filed with the Secretary of State of the State of Delaware, will be the organizational documents of APG Delaware from and after the Domestication.

Background and Reasons for the Domestication

Our Board of Directors approved the domestication of APG from the British Virgin Islands to the State of Delaware in connection with the registration of the shares of common stock of APG Delaware with the SEC. Our Board of Directors believes that there are significant advantages to us that will arise as a result of a change of our domicile to Delaware and that any direct benefit that the DGCL provides to a corporation also indirectly benefits its stockholders, who are the owners of the corporation. Our Board of Directors further believes that there are several reasons why the Domestication is in the best interests of Company and its shareholders. As explained in more detail below, these reasons can be summarized as follows:

 

   

Prominence, Predictability, and Flexibility of Delaware Law. For many years Delaware has followed a policy of encouraging incorporation in its state and, in furtherance of that policy, has been a leader in adopting, construing, and implementing comprehensive, flexible corporate laws responsive to the legal and business needs of corporations organized under its laws. Many corporations have chosen Delaware initially as a state of incorporation or have subsequently changed corporate domicile to Delaware. Because of Delaware’s prominence as the state of incorporation for many major corporations, both the legislature and courts in Delaware have demonstrated the ability and a willingness to act quickly and effectively to meet changing business needs. The DGCL is frequently revised and updated to accommodate changing legal and business needs and is more comprehensive, widely used and interpreted than other state corporate laws. This favorable corporate and regulatory environment is attractive to businesses such as ours.

 

   

Well-Established Principles of Corporate Governance. There is substantial judicial precedent in the Delaware courts as to the legal principles applicable to measures that may be taken by a corporation and to the conduct of a company’s board of directors, such as under the business judgment rule and other standards. Because the judicial system is based largely on legal precedents, the abundance of Delaware case law provides clarity and predictability to many areas of corporate law. We believe, such clarity would be advantageous to APG Delaware, our Board of Directors and management to make corporate decisions and take corporate actions with greater assurance as to the validity and consequences of those decisions and actions. Further, investors and securities professionals are generally more familiar with Delaware corporations, and the laws

 

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governing such corporations, increasing their level of comfort with Delaware corporations relative to other jurisdictions. The Delaware courts have developed considerable expertise in dealing with corporate issues, and a substantial body of case law has developed construing Delaware law and establishing public policies with respect to corporate legal affairs. Moreover, Delaware’s vast body of law on the fiduciary duties of directors provides appropriate protection for APG Delaware’s stockholders from possible abuses by directors and officers.

 

   

Increased Ability to Attract and Retain Qualified Directors. The Domestication from the British Virgin Islands to Delaware is attractive to directors, officers, and stockholders alike. Our reincorporation in Delaware may make APG Delaware more attractive to future candidates for our Board of Directors, because many such candidates are already familiar with Delaware corporate law from their past business experience. To date, we have not experienced difficulty in retaining directors or officers, but directors of public companies are exposed to significant potential liability. Thus, candidates’ familiarity and comfort with Delaware laws—especially those relating to director indemnification (as discussed below)—draw such qualified candidates to Delaware corporations. Our Board of Directors therefore believes that providing the benefits afforded directors by Delaware law will enable APG Delaware to compete more effectively with other public companies in the recruitment of talented and experienced directors and officers. Moreover, Delaware’s vast body of law on the fiduciary duties of directors provides appropriate protection for our stockholders from possible abuses by directors and officers. The frequency of claims and litigation pursued against directors and officers has greatly expanded the risks facing directors and officers of corporations in carrying out their respective duties. The amount of time and money required to respond to such claims and to defend such litigation can be substantial. While both British Virgin Islands and Delaware law permit a corporation to include a provision in its governing documents to reduce or eliminate the monetary liability of directors for breaches of fiduciary duty in certain circumstances, we believe that, in general, Delaware law is more developed and provides more guidance than British Virgin Islands law on matters regarding a company’s ability to limit director liability. As a result, we believe that the corporate environment afforded by Delaware will enable the surviving corporation to compete more effectively with other public companies in attracting and retaining new directors.

Effects of the Domestication

The BVI Companies Act permits a British Virgin Islands company to discontinue from the British Virgin Islands and continue in an appointed jurisdiction (which includes Delaware) as if it had been incorporated under the laws of that other jurisdiction. The BVI Companies Act and our memorandum and articles of association authorize our Board of Directors to continue APG BVI in a jurisdiction outside of the British Virgin Islands (in this case, Delaware) without a shareholder vote. Consequently, we are not asking for your vote or soliciting proxies with respect to the Domestication. The BVI Companies Act does not provide shareholders with statutory rights of appraisal in relation to a discontinuance under the BVI Companies Act.

Section 388 of the DGCL provides that an entity organized in a country outside the United States may become domesticated as a corporation in Delaware by the filing with the Secretary of State of the State of Delaware of a certificate of incorporation and a certificate of corporate domestication stating, among other things, that the domestication has been approved as provided in the document, instrument or other writing, as the case may be, governing the internal offers of the non-United States entity and the conduct of its business or applicable non-Delaware law, as appropriate. Section 388 of the DGCL provides that prior to the filing of a certificate of corporate domestication with the Secretary of State of the State of Delaware, the domestication and the certificate of incorporation to be filed with the Secretary of State of the State of Delaware must be approved in the manner provided for by the document, instrument, agreement or other writing, as the case may be, governing the internal affairs of the non-United States entity and the conduct of its business or by applicable non-Delaware law, as appropriate. Section 388 of the DGCL does not provide any other approval requirements for a domestication. The DGCL does not provide stockholders with statutory rights of appraisal in connection with a domestication under Section 388 of the DGCL.

 

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Under Section 184 of the BVI Companies Act, APG BVI will cease to be a company incorporated under the BVI Companies Act and will continue as the same legal entity incorporated under the laws of Delaware. Similarly, Section 388 of the DGCL provides that, upon domesticating in Delaware:

 

   

APG Delaware will be deemed to be the same entity as APG BVI, and the domestication will constitute a continuation of the existence of APG BVI in the form of APG Delaware;

 

   

all rights, privileges and powers, as well as all property, of APG BVI will remain vested in APG Delaware;

 

   

all debts, liabilities and duties of APG BVI will remain attached to APG Delaware and may be enforced against APG Delaware to the same extent as if originally incurred by it; and

 

   

unless otherwise agreed to or otherwise required under applicable British Virgin Islands law, the domestication will not be deemed a dissolution of APG BVI.

No Change in Business, Locations, Fiscal Year or Employee Plans

The Domestication will effect a change in our jurisdiction of incorporation, and other changes of a legal nature, including changes in our organizational documents, which are described in this prospectus. Because there is no change in our legal entity, the business, assets and liabilities of APG and its subsidiaries on a consolidated basis, as well as our principal locations and fiscal year, will be the same upon effectiveness of the Domestication as they are prior to the Domestication.

Upon effectiveness of the Domestication, all of our obligations will continue as outstanding and enforceable obligations of APG Delaware.

All APG BVI employee benefit plans and agreements will be continued by APG Delaware.

Our Management and Our Board of Directors

Our executive officers will be the executive officers of APG Delaware immediately following the effectiveness of the Domestication. Our current executive officers are Russell Becker, President and Chief Executive Officer, Thomas Lydon, Chief Financial Officer, Julius Chepey, Chief Information Officer, Andrea Fike, General Counsel and Secretary, Paul Grunau, Chief Learning Officer and Mark Polovitz, Vice President and Controller.

Our directors before the effectiveness of the Domestication will be the directors of APG Delaware immediately following the effectiveness of the Domestication. The composition of our Board of Directors changed upon the consummation of the APi Acquisition. Our current directors are Sir Martin E. Franklin, James E. Lillie, Ian G. H. Ashken, Russell Becker, Anthony E. Malkin, Thomas V. Milroy, Lord Paul Myners, Cyrus D. Walker and Carrie A. Wheeler. Mr. Franklin and Mr. Lillie are our Co-Chairmen. Upon the consummation of the APi Acquisition, Rory Cullinan, Jean-Marc Huët and Brian Kaufmann stepped down from our Board of Directors and Messrs. Ashken, Becker, Malkin and Walker and Ms. Wheeler joined our Board of Directors. See “Management and Corporate Governance—Board of Directors.”

Domestication Share Conversion

In connection with the Domestication, our currently issued and outstanding ordinary shares will automatically convert, on a one-for-one basis, into shares of APG Delaware common stock. Consequently, at the Effective Time, each holder of an APG ordinary share will instead hold a share of APG Delaware common stock representing the same proportional equity interest in APG Delaware as that shareholder held in APG BVI immediately prior to the Effective Time. The number of shares of APG Delaware common stock outstanding immediately after the Effective Time will be the same as the number of ordinary shares of APG BVI outstanding immediately prior to the Effective Time.

 

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It is not necessary for shareholders of APG BVI to exchange their existing share certificates for share certificates of APG Delaware in connection with the Domestication. A shareholder who currently holds any of our share certificates will receive a new stock certificate upon request pursuant to Section 158 of the DGCL or upon any future transaction in APG Delaware common stock that requires the transfer agent to issue stock certificates in exchange for existing share certificates. Until surrendered and exchanged, each certificate evidencing APG ordinary shares will be deemed for all purposes of the Company to evidence the identical number of shares of APG Delaware common stock.

Similarly, outstanding options and warrants to acquire, and restricted stock units that settle into, APG ordinary shares will be converted into options or warrants to acquire, or restricted stock units that settle into, shares of APG Delaware common stock. APG Delaware will not issue new options or warrants to acquire, or restricted stock units that settle into, APG Delaware common stock until such future transaction that requires the issuance of options or warrants to acquire, or restricted stock units that settle into, APG Delaware common stock in exchange for existing options or warrants to acquire, or restricted stock units that settle into, APG ordinary shares. After the effectiveness of the Domestication and until surrendered and exchanged, each option or warrant to acquire, or restricted stock unit that settles into, a portion of APG ordinary shares will be deemed for all purposes of the Company to evidence an option or warrant to acquire, or restricted stock unit that settles into, the identical portion of shares of APG Delaware common stock.

Comparison of Shareholder Rights

The Domestication will change our jurisdiction of incorporation from the British Virgin Islands to the State of Delaware. While we are currently governed by the BVI Companies Act, upon Domestication, we will be governed by the DGCL. There are differences between British Virgin Islands corporate law and Delaware corporate law. In addition, in connection with the Domestication, we will be governed by a newly adopted certificate of incorporation and bylaws, which are different from our current organizational documents. For a more detailed description of how the new organizational documents and Delaware law may differ from our current organizational documents and British Virgin Islands law, please see “Description of Capital Stock; Comparison of Rights—Comparison of Rights” below. Our business, assets and liabilities on a consolidated basis, as well as our executive officers, principal business locations and fiscal year, will not change as a result of the Domestication.

The most significant differences between our current organizational documents and British Virgin Islands law and the new organizational documents and Delaware law are as follows:

 

   

Delaware law requires that all amendments to the certificate of incorporation of APG Delaware (other than a certificate of designation setting forth a copy of the resolution of the APG Delaware Board of Directors fixing the designations and the powers, preferences and rights, if any, and the qualifications, limitations and restrictions, if any, of the shares of one or more new series of preferred stock of APG Delaware or a change in APG Delaware’s name) must be approved by the Board of Directors and by the stockholders, while amendments to the Amended and Restated Memorandum and Articles of Association of APG BVI may be made solely by resolutions of the directors (in limited circumstances) or by the holders of ordinary shares;

 

   

Delaware law prohibits the repurchase of shares of APG Delaware when it is or would be rendered insolvent by such repurchase, while there are no such limitations in the BVI Companies Act;

 

   

The APG Delaware certificate of incorporation will prohibit the common stockholders of APG Delaware from acting by written consent, while the APG BVI Amended and Restated Memorandum and Articles of Association permit shareholder action by written consent;

 

   

The APG Delaware bylaws will not permit the stockholders of APG Delaware to call meetings of stockholders under any circumstances, while the shareholders holding 30% of the voting rights in respect of the matter for which the meeting is called may require the directors to call a meeting of shareholders of APG BVI;

 

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Under Delaware law, only the stockholders may remove directors, while under British Virgin Islands law and the APG BVI Amended and Restated Memorandum and Articles of Association, a majority of the directors may remove a fellow director;

 

   

Under the APG Delaware certificate of incorporation and bylaws, subject to the rights of any series of preferred stock, vacancies and unfilled directorships will be filled solely by the remaining directors, while under the APG BVI Amended and Restated Memorandum and Articles of Association vacancies may be filled by either the directors or the shareholders;

 

   

Under Delaware law, directors may not act by proxy, while under British Virgin Islands law, directors may appoint another director or person to vote in his or her place, exercise his or her other rights as director, and perform his or her duties as director;

 

   

Under Delaware law, a sale of all or substantially all of the assets of APG Delaware requires stockholder approval, while the APG BVI Amended and Restated Memorandum and Articles of Association eliminate the shareholder vote otherwise required by the British Virgin Islands laws for a sale of more than 50% of the assets of APG BVI; and

 

   

Under Delaware law, “business combinations” with “interested stockholders” are prohibited for a certain period of time absent certain requirements, while British Virgin Islands law provides no similar prohibition.

No Vote or Dissenters’ Rights of Appraisal in the Domestication

Under the BVI Companies Act and our memorandum and articles of association, shareholder approval of the Domestication is not required, and our shareholders do not have statutory rights of appraisal or any other appraisal rights of their shares as a result of the Domestication. Nor does Delaware law provide for any such rights. We are not asking you for a proxy and you are requested not to send us a proxy. No shareholder vote or action is required to effect the Domestication.

 

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SELECTED CONSOLIDATED FINANCIAL INFORMATION

The following tables present selected historical consolidated financial data as of the dates and for each of the periods indicated.

The selected historical consolidated financial data for the Successor was derived from our audited consolidated financial statements included in this prospectus.

The selected historical consolidated financial data for the Predecessor for the period from January 1, 2019 to September 30, 2019 and as of and for each of the years ended December 31, 2018 and December 31, 2017 was derived from the audited consolidated financial statements of the Predecessor included in this prospectus.

The selected historical consolidated financial data for the Predecessor as of and for each of the two years ended December 31, 2016 and 2015 was derived from the Predecessor’s financial statements that are not included in this prospectus. The Predecessor consolidated financial statements as of and for each of the two years ended December 31, 2016 and 2015 were audited under U.S. accounting principles and standards applicable to private companies as promulgated by the AICPA.

Except as otherwise indicated, all of the selected consolidated financial information of the Predecessor and the Successor included in the following tables was prepared in accordance with GAAP.

The selected historical consolidated financial data included below is not necessarily indicative of future results and should be read in conjunction with “APG Management’s Discussion and Analysis of Financial Condition and Results of Operations” as well as our and APi Group’s consolidated audited financial statements and notes thereto contained in this prospectus.

 

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Successor

 

($ in millions except per share data)

   As of and
for
the Year Ended
December 31,
2019
     As of and
for the
Year
Ended
December 31, 2018
     Period
From
Inception
September 18,
2017) to
December 31,
2017
 

Statement of Operations data:

        

Net revenues

   $ 985      $ —        $ —    

Cost of revenues

     787        —          —    
  

 

 

    

 

 

    

 

 

 

Gross profit

     198        —          —    

Selling, general and administrative expenses

     359        3        1  
  

 

 

    

 

 

    

 

 

 

Operating loss

     (161      (3      (1

Interest expense, net

     15        —          —    

Investment income and other, net

     (25      (23      (3

Income tax provision

     2        —          —    
  

 

 

    

 

 

    

 

 

 

Net income (loss)

   $ (153    $ 20      $ 2  
  

 

 

    

 

 

    

 

 

 

Balance Sheet data:

        

Total assets

   $ 4,011      $ 1,250      $ 1,230  

Total shareholders’ equity

   $ 1,757      $ 1,250      $ 1,230  

Predecessor

 

     Period From
January 1,
2019 to
September 30,
    As of and for the Year Ended December 31  

($ in millions)

   2019     2018     2017     2016(1)     2015(1)  

Statement of Operations data:

          

Net revenues

   $ 3,107     $ 3,728     $ 3,046     $ 2,608     $ 2,449  

Cost of revenues

     2,503       2,941       2,382       2,004       1,906  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     604       787       664       604       543  

Selling, general and administrative expenses

     490       625       511       498       431  

Impairment of goodwill, intangibles, and long-lived assets

     12       —         30       —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     102       162       123       106       112  

Interest expense, net

     20       22       8       5       3  

Investment income and other, net

     (11     (6     (5     (12     (3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other expense (income), net

     9       16       3       (7     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     93       146       120       113       112  

Income tax provision

     7       10       8       9       6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Predecessor

   $ 86     $ 136     $ 112     $ 104     $ 106  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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     Period From
January 1,
2019 to
September 30,
     As of and for the Year Ended December 31  

($ in millions)

   2019      2018      2017      2016(1)      2015(1)  

Balance Sheet data:

              

Total assets

     N/A      $ 2,041      $ 1,516      $ 1,423      $ 1,074  

Total long-term debt, less current portion

     N/A        305        126        138        1  

Total stockholders’ equity

     N/A        633        582        526        505  

 

(1)

The Predecessor consolidated financial statements as of and for each of the two years ended December 31, 2016 and 2015 were audited under U.S. accounting principles and standards applicable to private companies as promulgated by the AICPA.

 

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APG MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following is a discussion of APG’s financial condition and results of operations for the years ended December 31, 2019, 2018 and 2017 which for 2019, includes the results of operations for APi Group for the period following the APi Acquisition (October 1, 2019 through December 31, 2019). This discussion should be read in conjunction with “Prospectus Summary—Summary Consolidated Financial Information,” “Selected Consolidated Financial Information” and APG’s historical audited consolidated financial statements included elsewhere in this prospectus.

We have also included a supplemental discussion of the results of operations of APG and APi Group on a combined basis for the year ended December 31, 2019 compared to the results of operations of APi Group for the year ended December 31, 2018. This supplemental discussion does not include historical financial information of APG prior to the APi Acquisition as these historical amounts have been determined not to be meaningful to investors. Prior to the APi Acquisition, APG held the proceeds from its initial public offering until a business combination occurred, at which time such funds were then used to fund the APi Acquisition. Until the closing of the APi Acquisition, APG’s operations, other than investment income from the initial public offering proceeds and transaction expenses, were nominal. The 2019 combined financial information is considered non-GAAP financial information as the companies were not combined, for GAAP purposes, until October 1, 2019, the closing date of the APi Acquisition. Management believes combining the results of operations for the periods presented is useful in understanding the overall operating performance of the combined business during the year ended December 31, 2019.

The combined unaudited supplemental information is not pro forma financial information as required by Regulation S-X of the Securities Act nor is it necessarily a reflection of future performance of the combined business. For a discussion of our unaudited pro forma condensed combined financial information, see “Unaudited Pro Forma Condensed Combined Financial Statements” included elsewhere in this prospectus.

Additionally, we have also included a discussion of the results of operations and financial condition of APi Group for the nine months ended September 30, 2019 and the twelve months ended December 31, 2018 and 2017. This discussion should be read in conjunction with “Prospectus Summary—Summary Consolidated Financial Information,” “Selected Consolidated Financial Information” and APi Group’s historical audited consolidated financial statements included elsewhere in this prospectus.

Some of the information contained in this discussion and analysis or set forth elsewhere in this prospectus, including information with respect to our plans and strategy for our business and related financing, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the “Risk Factors” section of this prospectus, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

We were incorporated with limited liability under the laws of the British Virgin Islands under the BVI Companies Act on September 18, 2017 under the name J2 Acquisition Limited. We were formed for the purpose of acquiring a target company or business. On October 10, 2017, we raised gross proceeds of approximately $1.25 billion in connection with our initial public offering in the United Kingdom and our ordinary shares and warrants were listed on the London Stock Exchange (LSE).

On October 1, 2019, we completed our acquisition of APi Group and changed our name to APi Group Corporation in connection with the APi Acquisition. With over 90 years of history and more than 40 businesses operating from over 200 locations, APi Group is a market leading provider of commercial safety services, specialty services and industrial services operating primarily in the United States, as well as in Canada and the United Kingdom with approximately $4.1 billion in total combined net revenue in 2019, including $985 million of net revenue for the Successor, and $3.1 billion of revenue for the Predecessor, and approximately $3.7 billion in consolidated net revenue in 2018. APi Group provides a variety of specialty contracting services, including engineering and design, fabrication, installation, inspection, maintenance, service and repair, and retrofitting and upgrading. We offer comprehensive and diverse solutions on a broad geographic scale. We have a strong base of diverse, long-standing customer relationships in each of the industries we serve. We also have an experienced management team and a strong leadership development culture.

 

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We operate our business under three primary operating segments which are also our reportable segments:

 

   

Safety Services – A leading provider of safety services in North America, focusing on end-to-end integrated occupancy systems (fire protection solutions, HVAC and entry systems), including design, installation, inspection and service of these integrated systems. This segment also provides mission critical services, including life safety, emergency communication systems and specialized mechanical services. The work performed within this segment spans across industries and facilities and includes commercial, industrial, residential, medical and special-hazard settings.

 

   

Specialty Services – A leading provider of diversified, single-source infrastructure and specialty contractor solutions, focusing on infrastructure services and specialized industrial plant solutions, including maintenance and repair of water, sewer and telecom infrastructure. The customers in this segment vary from public and private utility, communications, industrial plants and governmental agencies throughout the United States.

 

   

Industrial Services – A leading provider of a variety of specialty contracting services to the energy industry focused on transmission and distribution. This segment’s services include oil and gas pipeline infrastructure, access and road construction, supporting facilities, and performing ongoing integrity management and maintenance.

We focus on recurring revenue and repeat business from our diversified long-standing customers across a variety of end markets, which provides us with stable cash flows and a platform for organic growth. Maintenance and service revenues are predictable through contractual arrangements with typical terms ranging from days to three years, with the majority having durations of less than six months, and are often recurring due to consistent renewal rates and long-standing customer relationships.

We intend to domesticate into Delaware from the British Virgin Islands. In connection with the Domestication, we intend to list our common stock on the NYSE. It is currently anticipated that the listing of our ordinary shares and warrants on the LSE will be cancelled at or around the time the listing on the NYSE is achieved. Our listing on the LSE will remain suspended until such cancellation takes effect.

Prior to the APi Acquisition, we had no revenue or other operations other than the active solicitation of a target business with which to complete a business combination. We generated small amounts of non-operating income in the form of unrealized and realized gains on marketable securities and interest income on cash and cash equivalents. During that time, we had losses as a result of administrative costs and diligence costs related to actively soliciting target businesses, including transaction, financing and diligence costs related to the APi Acquisition and the Credit Facilities (as discussed below). We relied upon the proceeds from the initial public offering to fund our limited acquisition-related operations prior to the closing of the APi Acquisition.

Credit Facilities

In connection with the closing of the APi Acquisition, on October 1, 2019, we entered into a Credit Agreement by and among APi Group DE, Inc., our wholly-owned subsidiary, as borrower (the “Borrower”), APG, as a guarantor, the subsidiary guarantors from time to time party thereto, the lenders from time to time party thereto, and Citibank, N.A., as administrative agent and as collateral agent (the “Credit Agreement”), pursuant to which we incurred a $1.2 billion seven-year senior secured term loan (the “Term Loan”) under the senior secured term loan facility (the “Term Loan Facility”), which was used to fund a part of the cash portion of the purchase price in the APi Acquisition. The Credit Agreement also provides for a $300 million five-year senior secured revolving credit facility (the “Revolving Credit Facility,” and together with the Term Loan Facility, the “Credit Facilities”). See “Liquidity and Capital Resources—Credit Facilities” for more information regarding the Credit Facilities.

Initial Public Offering and Warrant Financing

In connection with the initial public offering on October 10, 2017, we issued 121,000,000 of our ordinary shares, no par value, for gross proceeds of $1.21 billion. In addition, on October 10, 2017, we issued an aggregate of 32,500 ordinary shares to our non-founder directors for $10.00 per share in lieu of their first year cash director fees. Each APG ordinary share has voting rights and winding-up rights.

In connection with the October 10, 2017 initial public offering and listing on the LSE, Mariposa Acquisition IV, LLC (the “Founder Entity”) purchased 4,000,000 preferred shares, no par value, for $40 million (the “Founder Preferred Shares”). Beginning in 2019, if the average stock price of our ordinary shares exceeds $11.50 per share for any ten (10) consecutive trading days of the calendar year, the holder of Founder Preferred Shares will receive a dividend in the form of APG ordinary

 

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shares or cash, at our sole option (which we intend to settle in shares). The first annual dividend amount will be equal to 20% of the appreciation, if any, of the average market price per share of APG ordinary shares for the last ten (10) trading days of the calendar year (the “Dividend Price”) over the Company’s initial offering price of $10.00 per share, multiplied by 141,194,638 shares (the “Annual Dividend Amount”). In subsequent years, the Annual Dividend Amount will be calculated based on the appreciated stock price compared to the highest Dividend Price previously used in calculating the Annual Dividend Amount. In the event the Company is liquidated, an Annual Dividend Amount shall be payable for the shortened Dividend Year. Subsequent to the liquidation, the holders of Founder Preferred Shares shall have the right to a pro rata share (together with holders of the ordinary shares) in the distribution of the surplus assets of the Company. Dividends are paid for the term the Founder Preferred Shares are outstanding. The Founder Preferred Shares will be automatically converted into APG ordinary shares on a one-for-one basis upon the last day of the seventh full financial year following the APi Acquisition, being December 31, 2026. Each Founder Preferred Share is convertible into one APG ordinary share at the option of the holder and votes with the APG ordinary shares as a single class.

Each of the 4,000,000 Founder Preferred Shares, 121,000,000 APG ordinary shares issued in connection with the initial public offering and the 32,500 APG ordinary shares issued to the non-founder directors, was issued with an APG warrant (125,032,500 warrants in aggregate), entitling the holder of each APG warrant to purchase 1/3 of an APG ordinary share with a strike price of $11.50 per whole APG ordinary share. Each APG warrant is exercisable until three (3) years from the date of the APi Acquisition, unless mandatorily redeemed by us. The APG warrants are mandatorily redeemable by us at a price of $0.01 per warrant should the average market price of an APG ordinary share exceed $18.00 for ten (10) consecutive trading days. On October 1, 2019, we completed the Warrant Financing, in which an aggregate of 60,486,423 warrants were exercised at a reduced exercise price of $10.25 for an aggregate of 20,162,141 ordinary shares. As of December 31, 2019, there were 64,546,077 warrants outstanding exercisable for approximately 21,515,359 ordinary shares. See Note 17 – “Shareholders’ Equity” to the consolidated financial statements.

Certain Factors and Trends Affecting APG’s Results of Operations

Summary of Principal Acquisitions

Predecessor 2018

APi Group completed the following principal acquisitions in 2018:

 

   

In February 2018, APi Group acquired a Minnesota-based specialty services provider with annual revenues of approximately $295 million for cash consideration of approximately $126 million, net of cash acquired. This business provides installation, maintenance and repair services for infrastructure in the communication, power distribution, gas distribution and alternative energy markets throughout the U.S. and is included in the Specialty Services segment since the date of acquisition.

 

   

In January 2018, APi Group acquired an Ohio-based specialty services provider with annual revenues of approximately $60 million for cash consideration of approximately $92 million, net of cash acquired. This business provides pipeline construction services, including natural gas distribution, midstream, transmission and related facility services throughout the Midwest and Eastern U.S. and is included in the Specialty Services segment since the date of acquisition.

 

   

In January 2018, APi Group acquired a Texas-based safety services provider with annual revenues of approximately $56 million for cash consideration of approximately $43 million, net of cash acquired. This business provides contracting, design and installation services related to automatic fire protection systems throughout the Midwest and Southern U.S. and is included in the Safety Services segment since the date of acquisition.

Predecessor 2017

APi Group completed the following principal acquisition in 2017:

 

   

In February 2017, APi Group acquired a Minnesota-based industrial services provider with annual revenues of approximately $68 million for cash consideration of approximately $53 million, net of cash acquired. This business provides heavy highway contracting services in northern Minnesota and Wisconsin and is included in the Specialty Services segment since the date of acquisition.

 

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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, including: (i) changes to customers’ capital spending plans; (ii) mergers and acquisitions among the customers we serve; (iii) new or changing regulatory requirements or other governmental policy changes or uncertainty; (iv) economic, market or political developments; (v) changes in technology, tax and other incentives; and (v) access to capital for customers in the industries we serve. Availability of transportation and transmission capacity and fluctuations in market prices for oil, gas 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, can result, and has resulted, in lower bids and lower profit on the services we provide. In the face of increased pricing pressure or other market developments, we strive to maintain our profit margins through productivity improvements, cost reduction programs and business streamlining efforts. 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.

We are currently monitoring the potential short- and long-term impacts of COVID-19, a global pandemic that has caused a significant slowdown in the global economy beginning in March 2020. Our revenue and earnings could be adversely affected by the impact of the COVID-19 pandemic on (1) our operations, including loss of our workforce, cancellation or delays in current and future projects, and limited supplies; (2) our customers’ and vendors’ businesses; and (3) general global economic conditions. If the COVID-19 pandemic were to require us to discontinue operations, or to cause shortages of our workforce or third-party contractors, it could result in cancellations or deferrals of project work, which could lead to a decline in revenue and an increase in costs. In addition, the pandemic may impact the availability of the commodities, supplies and materials needed for projects. Furthermore, the pandemic may impact the cash flows and creditworthiness of our customers, which could impact their ability to pay us for work performed on existing projects.

In addition, our results of operations may be materially affected by conditions in the credit and financial markets. Global credit and financial markets have experienced extreme volatility and disruptions as a result of the COVID-19 pandemic including diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that deterioration in credit and financial markets and confidence in economic conditions will not occur or be sustained as a result of the COVID-19 pandemic. Our general business strategy may be adversely affected by any such economic downturn, volatile business environment or continued unpredictable and unstable market conditions. If the current equity and credit markets deteriorate, or do not improve, it may make any necessary debt or equity financing more difficult, more costly, and more dilutive. Failure by us or our customers to secure any necessary financing in a timely manner and on favorable terms could have a material adverse effect on our growth strategy, financial performance and stock price and could require us to delay or abandon current or expected projects.

The full extent to which the COVID-19 pandemic impacts our business, markets, supply chain, customers and workforce will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the pandemic and the actions to treat or contain it or to otherwise limit its impact, among others.

Effect of Seasonality and Cyclical Nature of Business

Our revenue and results of operations can be subject to seasonal and other variations. These variations are influenced by weather, customer spending patterns, bidding seasons, project schedules, holidays and timing, in particular, for large, non-recurring projects. Typically, our revenue is lowest at the beginning of the year and during the winter months in North America during the first quarter because cold, snowy or wet conditions cause project delays. Revenue is generally higher during the summer and fall months during the third and fourth quarters, due to increased demand for our services when favorable weather conditions exist in many of the regions in which we operate. Continued cold and wet weather can often affect second quarter productivity. In the fourth quarter, many projects tend to be completed by customers seeking to spend their capital budgets before the end of the year, which generally has a positive effect on our revenue. However, the holiday season and inclement weather can cause delays, which can reduce revenue and increase costs on affected projects.

Additionally, the industries we serve can be cyclical. Fluctuations in end-user demand within those industries, 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 construction and installation projects, can create fluctuations in revenue.

 

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Income Taxes

Historically, APi Group has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code for federal tax purposes. As a result, APi Group’s income has not been subject to U.S. federal income taxes or state income taxes in those states where the S Corporation status is recognized. No provision or liability for federal or state income tax has been provided in its consolidated financial statements except for those taxing jurisdictions where the S Corporation status is not recognized. The provision for income tax in APi Group’s historical periods consists of these taxes. However, in prior periods, APi Group made significant distributions to its shareholders based on its S Corporation earnings. These distributions will no longer be necessary.

In connection with the APi Acquisition, APi Group’s S Corporation status was terminated and APG will be treated as a C Corporation under Subchapter C of the Internal Revenue Code and will be part of the consolidated tax group of the Company. The Company’s domestication and the revocation of APi Group’s S Corporation election will have a material impact on our consolidated results of operations, financial condition and cash flows. Our effective income tax rate for 2019 and future periods will increase as compared to prior periods and our net income will decrease in 2019 and future periods relative to prior periods since we will be subject to both federal and state taxes on APi Group’s earnings.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years that those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. A valuation allowance is provided when, in management’s judgment, it is more likely than not that some portion or all of the deferred tax asset will not be realized. We have reflected the necessary deferred tax assets and liabilities in the accompanying consolidated balance sheets. We believe the future tax deductions will be realized principally through future taxable income, future reversals of existing taxable temporary differences, and carryback to taxable income in prior years.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely to be realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. We also record interest and penalties related to unrecognized tax benefits within income tax expense.

Description of Key Line Items

Net Revenues

Revenue is generated from the sale of various types of construction services, fabrication and distribution. We derive revenue primarily from construction 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 materials pricing. Revenue for fixed price agreements is 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.

Revenue from time and material construction contracts is recognized as the services are provided. Revenue earned is based on total contract costs incurred plus an agreed-upon markup. Revenue for these cost-plus contracts is recognized over time on an input basis as labor hours are incurred, materials are utilized, and services are performed. Revenue from wholesale or retail unit sales is 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.

 

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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

Selling, general and administrative expenses consist primarily of personnel, facility leases, advertising and marketing expenses, administrative expenses associated with accounting, finance, legal, information systems, leadership development, human resources and risk management and overhead associated with these functions. 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 expense consists primarily of compensation and associated costs for executive management, finance, legal, information systems, leadership development and other administrative personnel, facility leases, 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.

Impairment of Goodwill, Intangibles and Long-Lived Assets

We do not amortize goodwill or other identifiable indefinite-lived intangible assets; rather, goodwill and other intangible assets with indefinite lives are tested for impairment annually, or more frequently as events and circumstances change. Expenses for impairment charges related to the write-down of goodwill balances and identifiable intangible assets balances are recorded to the extent their carrying values exceed their estimated fair values. Expenses for impairment charges related to the write-down of other long-lived assets (which includes amortizable intangibles) are recorded when triggering events indicate their carrying values may exceed their estimated fair values.

Results of Operations

Successor

The following is a discussion of APG’s financial condition and results of operations for the years ended December 31, 2019 and December 31, 2018 and for the period from September 18, 2017 (our inception) to December 31, 2017. We were formed on September 18, 2017 and had no operations until we acquired APi Group on October 1, 2019.

The following financial information has been extracted from the audited consolidated financial statements of APG included in this prospectus.

 

     Year Ended
December 31,
2019
    Year Ended
December 31,
2018
    Period From
Inception
September 18,
2017 through
December 31,
2017
    2019 v 2018
Change
    2018 v Period
from Inception
September 18,
2017 through
December 31, 2017
Change
 

($ in millions)

  $     %     $     %  

Statement of Operations data:

              

Net revenues

   $ 985     $ —       $ —       $ 985       NM     $ —         NM  

Cost of revenues

     787       —         —         787       NM       —         NM  
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Gross profit

     198       —         —         198       NM       —         NM  

Selling, general and administrative expenses

     359       3       1       356       NM       2       NM  
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Operating income (loss)

     (161     (3     (1     (158     NM       (2     NM  

Interest expense, net

     15       —         —         15       NM       —         NM  

Other income (expense), net

     —         —         —        
—  
 
    NM       —         NM  

Investment and other expense (income), net

     (25     (23     (3     (2     9     (20     NM  
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Income (loss) before income taxes

     (151     20       2       (171     NM       18       NM  

Income tax provision

     2       —         —         2       NM       —         NM  
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net income (loss)

   $ (153   $ 20     $ 2     $ (173     NM     $ 18       NM  
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

NM = Not meaningful

 

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Our activity from inception to the closing of the APi Acquisition and the Credit Facilities on October 1, 2019 was the preparation for the acquisition of a target company. Since the initial public offering, our activity has been limited to the evaluation of business combination candidates. We did not generate any operating revenues until the closing of the APi Acquisition. During the period from inception until the APi Acquisition, we generated investment income from investment of our cash on hand in treasury securities.

Year Ended December 31, 2019

APG’s results of operations for the year ended December 31, 2019 includes the results of operations of APi Group from October 1, 2019 (the date of the APi Acquisition) through December 31, 2019. As a result, for the year ended December 31, 2019, the changes in our results of operations, including consolidated and segment operating results discussed below, for the year ended December 31, 2019 compared to prior year in all cases were a result of the APi Acquisition. See “Year Ended December 31, 2019 (Combined) compared to the Year Ended December 31, 2018 (Predecessor)” in the “Combined Company” section below for a discussion of changes to the underlying business on a comparative basis.

Year Ended December 31, 2018

For the year ended December 31, 2018, our general and administrative expenses increased to $3 million from $1 million for the period from inception to December 31, 2017, due primarily to full year of activity and also to the inclusion of certain expenses incurred in reviewing acquisition opportunities. Our investment income increased from $3 million for the period from inception to December 31, 2017 to $23 million for the year ended December 31, 2018 due to the inclusion of activity for a full year to increased rates of investment return on treasury security investments during the year ended December 31, 2018. Interest income was not material in either period presented.

Combined Company

The following is a discussion of the combined results of operations of APG and APi Group for the year ended December 31, 2019, compared to the results of operations of APi Group for the year ended December 31, 2018. The combined company results do not include historical financial information of APG prior to January 1, 2019 as these historical amounts have been determined not to be material to investors. As APG’s historical financial information prior to January 1, 2019 is excluded from the presented financial information, the financial results of the combined company are largely consistent with the results of operations of APi Group, except for the impact of the APi Acquisition on certain financial statement line items. The combined results of operations of APG and APi Group for the year ended December 31, 2019 are considered non-GAAP financial information as the companies were not combined, for GAAP purposes, until October 1, 2019, the closing date of the APi Acquisition. Management believes that providing the results of operations of the combined company for the periods presented is useful to investors when evaluating the overall operating performance of the business during the year ended December 31, 2019.

The combined supplemental information is not pro forma financial information as required by Regulation S-X of the Securities Act nor is it necessarily a reflection of future performance of the combined business. For a discussion of our unaudited pro forma condensed combined financial information, see “Unaudited Pro Forma Condensed Combined Financial Statements” included elsewhere in this prospectus.

 

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Year Ended December 31, 2019 (Combined) compared to the Year Ended December 31, 2018 (Predecessor)

 

     Year Ended
December 31,
2019
(Successor)
    January 1, 2019
Through
September 30,
2019
  (Predecessor)  
                      January 1, 2019
Through
Sept 30, 2019
v 2018
 
                         
    Years Ended     Combined 2019
v 2018
 
    December 31,
2019
(Combined)
    December 31,
2018
(Predecessor)
 
    Change     Change  

($ in millions)

  $     %     $     %  

Net revenues

   $ 985     $ 3,107     $ 4,092     $ 3,728     $ 364       9.8   $ (621     (16.7 )% 

Cost of revenues

     787       2,503       3,290       2,941       349       11.9     (438     (14.9 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Gross profit

     198       604       802       787       15       1.9     (183     (23.3 )% 

Selling, general, and administrative expenses

     359       490       849       625       224       35.8     (135     (21.6 )% 

Impairment of goodwill, intangibles and long-lived assets

     —         12       12       —         12       NM       12       NM  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Operating income (loss)

     (161     102       (59     162       (221     (136.4 )%      (60     (37.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Interest expense, net

     15       20       35       22       13       59.1     (2     (9.1 )% 

Investment income and other, net

     (25     (11     (36     (6     (30     NM       (5     83.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Other expense (income), net

     (10     9       (1     16       (17     (106.3 )%      (7     (43.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Income (loss) before income tax provision

     (151     93       (58     146       (204     (139.7 )%      (53     (36.3 )% 

Income tax provision

     2       7       9       10       (1     (10.0 )%      (3     (30.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net income (loss)

   $ (153 )      $ 86     $ (67   $ 136     $ (203     (149.3 )%    $ (50     (36.8 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

NM = Not meaningful

Combined Net revenues

Combined net revenues for 2019 were $4.1 billion compared to $3.7 billion for 2018, an increase of $364 million or 9.8%. The increase in combined net revenues was largely attributable to an overall increase in demand for our services across each of our segments in addition to $36 million from a full year of results from our acquisitions consummated during 2018 in the Specialty Services and Safety Services segments.

Combined Cost of revenues and Gross profit

The following table presents cost of revenues, gross profit (net revenues less cost of revenues), and gross profit margin (gross profit as a percentage of net revenues) for APG and APi Group on a combined basis for the year ended December 31, 2019 and for APi Group for the year ended December 31, 2018:

 

     For the Years Ended December 31,        
     2019
(Combined)
    2018
(Predecessor)
    Change  

($ in millions)

  $      %  

Cost of revenues

   $ 3,290     $ 2,941     $ 349        11.9

Gross profit

     802       787       15        1.9

Gross profit margin

     19.6     21.1     

Our combined gross profit for the year ended December 31, 2019 was $802 million, a $15 million, or 1.9%, increase compared to gross profit of $787 million for the year ended December 31, 2018. The combined gross profit increase from 2018 to 2019 was primarily attributable to increased revenue partially offset by a less favorable contract mix with a greater percentage of our sales in 2019 coming from our lowest margin business, industrial services and an additional $22 million in cost of revenues from the amortization of backlog assets. This resulted in a slightly lower combined profit margin of 19.6% in 2019 versus 21.1% for 2018.

 

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Combined Operating expenses

The following table presents operating expenses and operating margin (operating income as a percentage of net revenues) for APG and APi Group on a combined basis for the year ended December 31, 2019 and for APi Group for the year ended December 31, 2018:

 

     For the Years Ended December 31,     Change  
     2019
(Combined)
    2018
(Predecessor)
 

($ in millions)

  $      %  

Selling, general and administrative expenses

   $ 849     $ 625     $ 224        35.8

Impairment of goodwill, intangibles and long-lived assets

     12       —         12        NM  
  

 

 

   

 

 

   

 

 

    

Total operating expenses

   $ 861     $ 625     $ 236        37.8
  

 

 

   

 

 

   

 

 

    

Operating expenses as a percentage of net revenue

     21.0     16.8     

Operating margin

     (1.4 )%      4.3     

Our combined operating expenses for the year ended December 31, 2019 were $861 million, a $236 million increase compared to operating expenses of $625 million for the year ended December 31, 2018. Combined operating expenses as a percentage of net revenues were 21.0% for 2019 as compared to operating expenses of 16.8% for 2018. The increase in combined selling, general and administration expense is primarily attributable to the APi Acquisition which resulted from non-recurring expenses comprised of share-based compensation expense ($155 million related to our Founder Preferred Shares incurred as a result of the APi Acquisition and $35 million of Predecessor options), APi Acquisition transaction costs ($23 million), and other transformation costs ($17 million). Combined amortization expenses in 2019 also increased $28 million over the prior year as a result of the APi Acquisition and the step up in fair values for intangible assets. Impairment charges in 2019 were related to the impairment of goodwill in our Infrastructure/Utility reporting unit within the Specialty Services segment related to impairment indicators that were identified prior to the APi Acquisition. These impairment charges were incurred by the Predecessor.

Combined Operating income and EBITDA

 

     Operating Income and EBITDA  
     Year Ended
December 31,

2019
(Successor)
    January 1, 2019
Through
September 30,

2019
(Predecessor)
     Years Ended December 31,      Combined 2019
v 2018
    January 1, 2019
through

Sept 30, 2019
v 2018
 
     2019
(Combined)
    2018
(Predecessor)
     Change     Change  

($ in millions)

   $     %     $     %  

Operating income (loss)

   $ (161   $ 102      $ (59   $ 162      $ (221     (136.4 )%    $ (60     (37.0 )% 

EBITDA

     (67 )        191        124       277        (153     (55.2 )%      (86     (31.0 )% 

Combined operating income (loss) as a percentage of net revenues decreased to approximately (1.6)% in 2019 from 4.3% in 2018. The decrease was primarily attributable to increased expenses related to the APi Acquisition resulting from various non-recurring expenses comprised of share-based compensation expense ($155 million related to our Founder Preferred Shares incurred as a result of the APi Acquisition and $35 million of Predecessor options), APi Acquisition transaction costs ($23 million) and other transformation costs ($17 million). EBITDA as a percentage of net revenues decreased from 7.4% in 2018 to 3.0% in 2019. The decrease was primarily driven by the increased operating expenses discussed above, partially offset by an increase of $38 in combined depreciation and amortization expenses in 2019 over the prior year due to the increased in fair value of property and equipment and intangible assets as a result of the APi Acquisition.

Combined Interest expense, net

Combined interest expense was $35 million for the year ended December 31, 2019 compared to $22 million in the prior year. The $13 million increase in interest expense was primarily due to an increase in average outstanding borrowings and higher average borrowing costs related to the APi Acquisition in which APi Group’s previous existing unsecured financing agreement, consisting of a $330 million term loan and a $500 million revolving credit facility, was settled and replaced at the closing of the APi Acquisition by our Credit Facilities that include the issuance of a $1.2 billion Term Loan.

Combined Investment income and other, net

Combined investment and other income increased to $36 million for the year ended December 31, 2019 compared to $6 million for the prior year period. The $30 million increase in investment and other income was primarily driven by investment returns on APG’s investments in treasury securities until we liquidated them to partially fund the APi Acquisition.

 

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Reconciliation of GAAP to Non-GAAP Financial Measures (Unaudited)

We supplement our reporting of consolidated financial information determined in accordance with U.S. GAAP with certain non-U.S. GAAP financial measures, including earnings before interest, taxes, depreciation and amortization (“EBITDA”) and combined 2019 financial information, which combines the results of the Predecessor for the Predecessor 2019 Period and the Successor for the Successor 2019 period as the companies were not combined, for GAAP purposes, until the closing of the APi Acquisition on October 1, 2019. Management believes these non-U.S. GAAP measures provide meaningful information and help investors understand our financial results and assess our prospects for future performance. We use EBITDA to evaluate our performance, both internally and as compared with our peers, because it excludes certain items that may not be indicative of our core operating results. In addition, we believe combining the results of operations and financial condition for the 2019 fiscal year is useful in understanding the overall operating performance of the combined business during the year ended December 31, 2019 as compared to the performance in the prior year period.

The following table presents a reconciliation of net income (loss) to EBITDA for the periods indicated. For a discussion and presentation of the U.S. GAAP results of the Predecessor for the Predecessor 2019 Period and the Successor for the Successor 2019 period, see “Results of Operations.”

 

     Year Ended
December 31,
2019
(Successor)
    January 1, 2019
Through

September 30,
2019
(Predecessor)
    

 

Years Ended

 

($ in millions)

   December 31,
2019
(Combined)
     December 31,
2018
(Predecessor)
 

Reported net income (loss)

   $ (153   $ 86      $ (67    $ 136  

Adjustments to reconcile net income (loss) to EBITDA:

            

Interest expense, net

     15       20        35        22  

Income tax provision

     2       7        9        10  

Depreciation

     18       52        70        60  

Amortization

     51       26        77        49  
  

 

 

   

 

 

    

 

 

    

 

 

 

EBITDA

   $ (67 )        $ 191      $ 124      $ 277  
  

 

 

   

 

 

    

 

 

    

 

 

 

Operating Segment Results 2019 (Combined) versus 2018 (Predecessor)

 

     Net Revenues  
     Year Ended
December 31,

2019
(Successor)
    January 1, 2019
Through
September 30,

2019
(Predecessor)
    Years Ended December 31,     Combined 2019
v 2018
    January 1, 2019
through
to Sept 30, 2019
v 2018
 
    2019
(Combined)
    2018
(Predecessor)
    Change     Change  

($ in millions)

  $      %     $     %  

Safety Services

   $ 435     $ 1,342     $ 1,777     $ 1,705     $ 72        4.2   $ (363     (21.3 )% 

Specialty Services

     386       1,107       1,493       1,359       134        9.9     (252     (18.5 )% 

Industrial Services

     167       670       837       723       114        15.8     (53     (7.3 )% 

Corporate and Eliminations

     (3     (12     (15     (59     44        (74.6 )%      47       (79.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   
   $ 985       $ 3,107     $ 4,092     $ 3,728     $ 364        9.8   $ (621     (16.7 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

      

 

 

   

 

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     Operating Income (loss)  
     Year Ended
December 31,
2019
(Successor)
                            January 1, 2019
through
to Sept 30, 2019
v 2018
 
    January 1, 2019
Through
September 30,
2019
(Predecessor)
                         
                Combined 2019
v 2018
 
    Years Ended December 31,  
    2019
(Combined)
    2018
(Predecessor)
    Change     Change  

($ in millions)

  $     %     $     %  

Safety Services

   $ 34     $ 161     $ 195     $ 178     $ 17       9.6   $ (17     (9.6 )% 

Specialty Services

     19       60       79       57       22       38.6     3       5.3

Industrial Services

     (5     —         (5     13       (18     (138.5 )%      (13     (100.0 )% 

Corporate and Eliminations

     (209     (119     (328     (86     (242     281.4     (33     38.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   
   $ (161 )      $ 102     $ (59   $ 162     $ (221     (136.4 )%    $ (60     (37.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   
     EBITDA  
     Year Ended
December 31,
2019
(Successor)
                            January 1, 2019
through
Sept 30, 2019
v 2018
 
    January 1, 2019
Through
September 30,
2019
(Predecessor)
                         
                Combined 2019
v 2018
 
    Years Ended December 31,  
    2019
(Combined)
    2018
(Predecessor)
    Change     Change  

($ in millions)

  $     %     $     %  

Safety Services

   $ 59     $ 170     $ 229     $ 197     $ 32       16.2   $ (27     (13.7 )% 

Specialty Services

     50       111       161       125       36       28.8     (14     (11.2 )% 

Industrial Services

     9       21       30       37       (7     (18.9 )%      (16     (43.2 )% 

Corporate and Eliminations

     (185     (111     (296     (82     (214     261.0     (29     35.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   
   $ (67 )      $ 191     $ 124     $ 277     $ (153     (55.2 )%    $ (86     (31.0 )% 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

The following discussion breaks down the net revenues and operating income by operating segment of APG and APi Group on a combined basis for the year ended December 31, 2019 compared to the year ended December 31, 2018 for APi Group.

Safety Services

Combined segment net revenues increased by $72 million, or 4.2%, in 2019 primarily driven by organic revenue growth due to an increased demand for our services from the segment’s base business.

Combined segment operating income as a percentage of net revenues for 2019 and 2018 was approximately 11.0% and 10.4%, respectively. The increase was primarily driven by improved project margins by continued focus on services that drive higher profitability growth. Combined segment EBITDA as a percentage of net revenues for 2019 and 2018 increased to 12.9% from 11.6%, respectively, driven by the aforementioned improved project margins as well as a $15 million increase in depreciation and amortization.

Specialty Services

Combined segment net revenues increased for 2019 by $134 million, or 9.9%. This was primarily driven by the benefit of full year of results in 2019 from acquisitions completed in 2018, resulting in a $36 million increase in addition to improved demand for our infrastructure/utility service offerings.

Combined segment operating income as a percentage of net revenues increased to approximately 5.3% in 2019 from 4.2% in 2018. The increase was primarily driven by higher gross margins related to increased labor productivity and improved contract mix. Combined segment EBITDA as a percentage of net revenues for 2019 and 2018 increased to 10.8% from 9.2%, respectively, as a result of increased labor productivity and improved contract mix as well as an $7 million increase in depreciation and amortization.

Industrial Services

Combined segment net revenues for 2019 increased by $114 million, or 15.8%, primarily due to our increased volume of projects as a result of higher customer demand for our transmission services.

 

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Combined segment operating income (loss) as a percentage of net revenues for 2019 and 2018 was approximately (0.6)% and 1.8%, respectively. The decrease was primarily driven by productivity decreases due to jobsite conditions which was also the driver of the decrease in combined segment EBITDA as a percentage of net revenues from 5.1% to 3.6%.

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, and our access to our Revolving Credit Facility. We believe that these sources will be sufficient to fund our liquidity requirements for at least the next twelve months. As of December 31, 2019, we had $491 million of total liquidity, comprising $256 million in cash and cash equivalents and $235 million ($300 million less outstanding letters of credit of approximately $65 million) of available borrowings under our Revolving Credit Facility. We also expect to continue to raise cash through equity and debt offerings when capital market conditions are favorable and other sources of liquidity are not sufficient. Our principal liquidity requirements have been, and we expect will be, any contingent 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. Our combined capital expenditures were approximately $64 million in 2019, $53 million of which was incurred by APi Group during the Predecessor 2019 period.

Prior to the APi Acquisition, our sources of cash were primarily the net proceeds of our initial public offering and cash proceeds from the early exercise of the APG Warrants in connection with the Warrant Financing. We used this cash to fund ongoing costs and expenses, the costs and expenses incurred in connection with seeking to identify and effect our initial acquisition, and to fund the APi Acquisition.

Credit Facilities

Our Credit Agreement provides for (1) a term loan facility, pursuant to which we incurred a $1.2 billion Term Loan, which we used to fund a part of the cash portion of the purchase price in the APi Acquisition and (2) a $300 million Revolving Credit Facility of which up to $150 million can be used for the issuance of letters of credit. As of December 31, 2019, we had $1.2 billion of indebtedness outstanding under the Term Loan, no amounts outstanding under the $300 million Revolving Credit Facility. As of December 31, 2019, $235 million was available after giving effect to $65 million of outstanding letters of credit, which reduce availability.

The interest rate applicable to the Term Loan is, at our option, either (1) a base rate plus an applicable margin equal to 1.50% or (2) a Eurocurrency rate (adjusted for statutory reserves) plus an applicable margin equal to 2.50%. At the option of the Borrower, the interest period for a Term Loan that is a Eurocurrency rate loan may be one, two, three or six months (or twelve months or any other period agreed with the applicable lenders under the Term Loan). Interest on the Term Loan is payable (1) with respect to a Eurocurrency rate loan, at the end of each interest period except that, if the interest period exceeds three months, interest is payable every three months and (2) with respect to a base rate loan, on the last business day of each March, June, September and December. As of December 31, 2019, the Term Loan was bearing interest at 4.30% per annum. Principal payments on the Term Loan will commence with the first quarter ending on March 31, 2020 and 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 Term Loan. The Term Loan matures on October 1, 2026. We may prepay the Term Loan in whole or in part at any time without penalty, except that any prepayment in connection with a repricing transaction within six months of October 1, 2019 will be subject to 1.00% prepayment premium. Additionally, subject to certain exceptions, the Term Loan Facility may be subject to mandatory prepayments using (i) proceeds from non-ordinary course asset dispositions, (ii) proceeds from certain incurrences of debt or (iii) commencing in 2020, a portion of our annual excess cash flows based upon certain leverage ratios. Effective October 1, 2019, we entered into a $720 million of notional value 5-year interest rate swap, exchanging one-month LIBOR for a fixed rate of 1.62% per annum. Accordingly, our fixed interest rate per annum on the swapped $720 million of Term Debt is 4.12%.

The interest rate applicable to borrowings under the Revolving Credit Facility is, at our option, either (1) a base rate plus an applicable margin equal to 1.25% or (2) a Eurocurrency rate (adjusted for statutory reserves) plus an applicable margin equal to 2.25%. The unused portion of the Revolving Credit Facility is subject to a commitment fee of 0.375% or 0.50% based on our first lien net leverage ratio. Funds available under the Revolving Credit Facility were used, in part, to finance the APi Acquisition and fees and expenses for certain transactions related thereto, and may be used for general corporate purposes. The Revolving Credit Facility matures on October 1, 2024.

 

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The Credit Agreement also provides for incremental facilities or loans pursuant to which the Borrower may request one or more new tranches of term loans, an increase in the principal amount of any term loan, one or more new tranches of revolving loan commitments and/or an increase in any tranche of revolving loan commitments up to an unlimited amount based upon certain financial covenants and leverage ratios and subject to compliance with customary conditions set forth in the Credit Agreement including compliance, on a pro forma basis, with the financial covenants and ratios set forth therein and, with respect to any additional term loan incurred no later than twelve months after October 1, 2019, which is secured on a pari passu basis with existing term loans and has a yield exceeding the applicable rate then in effect for any existing term loan by more than 50 basis points, an increase in the margin on existing term loans to the extent required by the terms of the Credit Agreement. Upon the Borrower’s request, each lender may decide whether to participate in any incremental facility or loan. The creation or provision of an incremental facility or loan does not require the consent of any existing lender other than any existing lender providing all or part of such incremental facility or loan.

The obligations under the Credit Agreement are guaranteed, jointly and severally, by APG and substantially all of the Borrower’s material direct and indirect U.S. and Canadian subsidiaries (the “Guarantors”). In connection with the Credit Agreement, the Borrower and the Guarantors entered into a pledge and security agreement pursuant to which obligations under the Credit Agreement are secured by a first-priority security interest in substantially all of the assets of the Borrower and the Guarantors, whether existing at the time of entry into such agreement or acquired in the future, including mortgages on material real property and the pledge by the Borrower and the Guarantors generally of 100% of the capital stock and other equity interests in their respective domestic subsidiaries and 65% of the capital stock and other equity interests in their respective first tier non-domestic subsidiaries, in each case subject to certain exceptions.

The Credit Agreement contains customary representations and warranties, and affirmative and negative covenants, including limitations on additional indebtedness, dividends and other distributions, entry into new lines of business, use of loan proceeds, capital expenditures, restricted payments, restrictions on liens on assets, transactions with affiliates and dispositions. To the extent total outstanding borrowings under the Revolving Credit Facility (excluding undrawn letters of credit up to $40 million) is greater than 30% of the total commitment amount of the Revolving Credit Facility, APG’s first lien net leverage ratio shall not exceed (i) 4.50 to 1.00 for each fiscal quarter ending in 2020, (ii) 4.00 to 1.00 for each fiscal quarter ending in 2021 and (iii) 3.75 to 1.00 for each fiscal quarter ending thereafter. Our net leverage lien ratio as of December 31, 2019 was 2.42:1.

In addition, the Credit Agreement contains customary provisions relating to events of default that include, among others, non-payment of principal, interest or fees, breach of covenants, inaccuracy of representations and warranties, failure to make payment on, or defaults with respect to, certain other indebtedness having an aggregate principal amount in excess of $75 million, bankruptcy and insolvency events, judgments in excess of $75 million or that could reasonably be expected to have a material adverse effect, change of control and certain events relating to ERISA plans. Upon the occurrence of an event of default, and after the expiration of any applicable grace period, payment of any outstanding loans under the Credit Agreement may be accelerated and the lenders could foreclose on their security interests in the assets of the Borrower and the Guarantors.

One of APi Group’s Canadian subsidiaries had a $20 million unsecured line of credit agreement with a variable interest rate based upon the prime rate. APi Group had no amounts outstanding under the line of credit at December 31, 2019.

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, and market conditions. Given the uncertainties regarding the COVID-19 global pandemic and its potential unforeseen impacts, in late March 2020, we drew down $200 million under our Revolving Credit Facility. We were in compliance with all covenants contained in the Credit Agreement as of December 31, 2019 and were in compliance after giving effect to the draw-down of the Revolving Credit Facility in March 2020.

Predecessor

On January 30, 2018, APi Group entered into an unsecured financing agreement consisting of a $330 million term loan and a $500 million revolving credit facility (together, the “APi Group Facility”). The agreement governing the APi Group Facility contained certain restrictive and financial covenants, including requirements for a fixed-charge coverage ratio and total leverage ratio. APi Group was in compliance with all of its debt covenants as of December 31, 2018. In connection with the APi Acquisition, on October 1, 2019, the entire principal amount of the term loan and the principal amount outstanding under the revolving credit facility were repaid and the APi Group Facility was terminated.

 

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The term loan and the revolving credit facility under the APi Group Facility had a maturity date of January 30, 2023. The revolving credit facility permitted APi Group to borrow funds at a variety of interest rate terms, some of which were adjusted based on APi Group’s leverage ratios. The facility also provided for the issuance of up to $150 million of letters of credit, so long as there was a sufficient amount available for borrowing under the facility. At December 31, 2018, APi Group had $261 million outstanding under the revolving credit facility under the APi Group Facility, with a weighted-average interest rate of at 3.92% per annum. $177 million was available after giving effect to $62 million of outstanding letters of credit, which reduced availability. At December 31, 2018, APi Group had $318 million outstanding under the term loan which with a weighted-average interest rate of 3.78% per annum.

In addition, one of APi Group’s subsidiaries had outstanding letters of credit of $19 million at December 31, 2017, which have now been terminated.

One of APi Group’s Canadian subsidiaries had a $20 million unsecured line of credit agreement with a variable interest rate based upon the prime rate. APi Group had $1 million outstanding under the line of credit at December 31, 2018.

Cash Flows

Successor

The following table summarizes net cash flows with respect to APG’s operating, investing and financing activities for the periods indicated:

 

     Year Ended December 31,  

($ in millions)

   2019
(Successor)
     2018
(Successor)
     2017
(Successor)
 

Net cash provided by operating activities

   $ 150      $ 21      $ —    

Net cash provided by (used in) investing activities

     (1,728      397        (1,208

Net cash provided by financing activities

     1,398        —          1,227  

Effect of foreign currency exchange rate on cash and cash equivalents

     (1      —          —    
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (181    $ 418      $ 19  
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at the end of the period

   $ 256      $ 437      $ 19  

Cash flows for the years ended December 31, 2019 and 2018

Cash flow information for the year ended December 31, 2019 includes cash flows of APi Group from and after the closing of the APi Acquisition (October 1, 2019). The changes in cash flows in 2019 from 2018 relate primarily to the funding of the APi Acquisition and its inclusion in our operations subsequent to the closing of the APi Acquisition.

Cash flows for the years ended December 31, 2018 and 2017

Net cash provided by operating activities for the periods ended December 31, 2018 and 2017 included primarily investment income and certain cash administrative expenses. The only operating activities related during the periods ended December 31, 2018 to the administration of the company and the investment of the cash on hand.

Net cash provided by (used in) investing activities consisted of investments in treasury bills during the periods ended December 31, 2018 and 2017 offset by maturities of treasury bill investments during the year ended December 31, 2018.

Net cash provided by financing activities during the period from inception to December 31, 2017 consisted of the proceeds from the initial public offering offset by costs associated with the offering.

 

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Combined Company

The following is a discussion of the combined cash flow information for APG and APi Group for the year ended December 31, 2019, compared to the cash flow information for APi Group for the year ended December 31, 2018. The combined company cash flows do not include historical cash flow information of APG prior to the APi Acquisition as these historical amounts have been determined not to be material to investors. As APG’s historical cash flow information prior to the APi Acquisition is excluded from the presented information, the cash flows of the combined company are largely consistent with those of APi Group, except for the impact of the APi Acquisition on certain line items. The combined cash flow information for APG and APi Group for the year ended December 31, 2019 is considered non-GAAP financial information as the companies were not combined, for GAAP purposes, until October 1, 2019, the closing date of the APi Acquisition. Management believes that providing the cash flow information for the combined company for the periods presented is useful to investors when evaluating the overall performance of the business during the year ended December 31, 2019.

The combined cash flow information is not pro forma financial information as required by Regulation S-X of the Securities Act nor is it necessarily a reflection of future performance of the combined business. For a discussion of our unaudited pro forma condensed combined financial information, see “Unaudited Pro Forma Condensed Combined Financial Statements” included elsewhere in this prospectus.

 

     Year Ended
December 31,
2019
(Successor)
    Period from
January 1, 2019
through

September 30,
2019
(Predecessor)
   

 

Years Ended

 

($ in millions)

  December 31,
2019
(Combined)
    December 31,
2018
(Predecessor)
    December 31,
2017
(Predecessor)
 

Net cash provided by operating activities

   $ 150     $ 145     $ 295     $ 112     $ 118  

Net cash used in investing activities

     (1,728     (51     (1,779     (300     (56

Net cash provided by (used in) financing activities

     1,398       (10     1,388       203       (106

Effect of foreign currency exchange rate on cash and cash equivalents

     (1     —         (1     (2     3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ (181 )          $ 84     $ (97   $ 13     $ (41
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at the end of the period

   $ 256     $ 138       $ 54     $ 41  

Combined Net Cash provided by Operating Activities

Combined Net cash provided by operating activities was $295 million in 2019. The increase in cash flows from operating activities in 2019 compared to 2018 was primarily driven by changes in working capital levels related to the APi Acquisition.

Combined Net cash provided by operating activities for 2018 was $112 million compared to $118 million for 2017. The reduction in cash flows from operating activities was primarily due to organic revenue growth which resulted in increased working capital levels, as well as incremental increase in working capital needs for business acquired in 2018 and increased interest payments ($16 million) from higher debt levels.

Combined Net Cash Used in Investing Activities

Combined Net cash used in investing activities was $1.8 billion in 2019 compared to net cash used in investing activities of $300 million in 2018. The increase in cash used in investing activities was attributed to payments of cash consideration in connection with the APi Acquisition. This was offset by proceeds from the sale of marketable securities as we used deposited amounts to complete the APi Acquisition.

Combined Net cash used in investing activities was $300 million for 2018 compared to net cash used in investing activities of $56 million for 2017. The increase in cash used in investing activities was attributed primarily to increased payments for acquisitions of businesses ($171 million) and increased capital expenditures ($35 million).

 

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Combined Net Cash Provided by (Used in) Financing Activities

Combined Net cash provided by financing activities was $1.4 billion for 2019 compared to net cash provided by financing activities of $203 million in 2018. The increase in cash provided by financing activities was primarily due to our entering a $1.2 billion term loan facility as part of the APi Acquisition.

Net cash provided by financing activities for 2018 was $203 million compared to net cash used in financing activities of $106 million in 2017. The increase in cash provided by financing activities was primarily due to APi Group’s issuance of a $330 million term loan, offset by repayments of debts.

Contractual Obligations and Commitments

The following is a summary of material contractual obligations and other commercial commitments as of December 31, 2019 during the periods indicated below (in millions):

 

     Payments Due by Period  

Contractual Obligations

   Total      Less Than
1 Year
     1–3 Years      3–5 Years      After
5 Years
 

Term loan, revolving credit facility, and other notes payable (1)

   $ 1,214      $ 19      $ 31      $ 24      $ 1,140  

Finance lease obligations (2)

     18        1        17        —          —    

Operating leases (3)

     104        26        34        19        25  

Other long-term obligations, including current portion (4)

     8        1        3        2        2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations (5)

   $ 1,344      $ 47      $ 85      $ 45      $ 1,167  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Amounts represent contractual obligations based on the earliest date that the obligation may become due, excluding interest, based on borrowings outstanding as of December 31, 2019. For further information relating to these obligations, see Note 12 – “Debt” to the consolidated financial statements. The estimated future interest payment obligations on borrowings outstanding, as of December 31, 2019, excluding the impacts of any interest rate cash flow hedges, was approximately $53 million, $155 million, $100 million, and $25 million for the period of less than 1 year, 1-3 years, 3-5 years, and after 5 years, respectively.

(2)

Amounts represent contractual minimum lease obligations on capital leases as of December 31, 2019, excluding imputed interest. For further information relating to these obligations, see Note 11 – “Leases” to the consolidated financial statements. The estimated imputed interest on finance lease obligations outstanding as of December 31, 2019 was approximately $0 million, $1 million, $0 million, and $0 million for the period of less than 1 year, 1-3 years, 3-5 years, and after 5 years, respectively.

(3)

Amounts represent contractual minimum lease obligations on operating leases as of December 31, 2019, excluding imputed interest. For further information regarding these obligations, see Note 11 – “Leases” to the audited consolidated financial statements. The estimated imputed interest on operating lease obligations outstanding as of December 31, 2019 was approximately $3 million, $4 million, $2 million, and $3 million for the period of less than 1 year, 1-3 years, 3-5 years, and after 5 years, respectively.

(4)

Amounts primarily represent obligations for asbestos claims as of December 31, 2019, excluding interest. The estimated interest on other long-term obligations outstanding as of December 31, 2019 was approximately $0 million, $1 million, $0 million, and $0 million for the period of less than 1 year, 1-3 years, 3-5 years, and after 5 years, respectively.

(5)

Total does not include contractual obligations reported on the December 31, 2019 balance sheet as current liabilities, except for current portion of long-term debt, short-term debt.

Off-Balance Sheet Financing Arrangements

We have no obligations, assets or liabilities which would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debt or commitments of other entities, or entered into any non-financial agreement involving assets.

 

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Recently Issued Accounting Pronouncements

We review new accounting standards to determine the expected impact, if any, of the adoption of such standards will have on our financial position and/or results of operations. See Note 3 – “Recent accounting pronouncements” in the notes to our consolidated financial statements for further information regarding new accounting standards, including the anticipated dates of adoption and the effects on our consolidated financial position, results of operations or liquidity.

Critical Accounting Policies

The preparation of financial statements and related disclosures in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the consolidated financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following as our critical accounting policies:

Revenue Recognition from Contracts with Customers

We adopted ASC 606 under the modified retrospective method as of January 1, 2018. ASC 606 aligns revenue recognition with the timing of when promised goods or services are transferred to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This core principle is achieved through the application of the following five step model: (1) identify the contract with a customer, (2) identify the performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to performance obligations in the contract, and (5) recognize revenue as performance obligations are satisfied.

We recognize revenue at the time the related performance obligation is satisfied by transferring a promised good or service to our customers. A good or service is considered to be transferred when the customer obtains control. We can transfer control of a good or service and satisfy our performance obligations either over time or at a point in time. We transfer control of a good or service over time and, therefore, satisfy a performance obligation and recognize revenue over time, if one of the following three criteria are met: (a) the customer simultaneously receives and consumes the benefits provided as we perform, (b) our performance creates or enhances an asset that the customer controls as the asset is created or enhanced, or (c) our performance does not create an asset with an alternative use to them, and we have an enforceable right to payment for performance completed to date.

For our performance obligations satisfied over time, we recognize revenue by measuring the progress toward complete satisfaction of that performance obligation. The selection of the method to measure progress towards completion can be either an input or output method and requires judgment based on the nature of the goods or services to be provided.

For our construction contracts, revenue is generally recognized over time as our performance creates or enhances an asset that the customer controls as it is created or enhanced. Our fixed price construction projects generally use a cost-to-cost input method to measure progress towards completion of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on our contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. 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 sales. Labor costs are considered to be incurred as the work is performed. Subcontractor labor is recognized as work is performed.

Revenue from time and material construction contracts is recognized as the services are provided and is equal to the sum of the contract costs incurred plus an agreed upon markup. Revenue earned from distribution contracts is recognized upon shipment or performance of the service.

We have a right to payment for performance completed to date at any time throughout our performance of a contract, including in the event of a cancellation, and as such, revenue is recognized over time. These performance obligations use the cost-to-cost input method to measure our progress towards complete satisfaction of the performance obligation as we believe it best depicts the transfer of control to the customer which occurs as we incur costs on the contracts.

Due to uncertainties inherent in the estimation process, it is possible that estimates of costs to complete a performance obligation will be revised from time to time on an on-going basis. For those performance obligations for which revenue is recognized using a cost-to-cost input method, changes in total estimated costs, and related progress towards complete satisfaction of the performance obligation, are recognized on a cumulative catch-up basis in the period in which the revisions to the estimates are made. When the current estimate of total costs for a performance obligation indicate a loss, a provision for the entire estimated loss on the unsatisfied performance obligation is made in the period in which the loss becomes evident.

 

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The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from our long-term construction projects when revenues recognized under the cost-to-cost measure of progress exceed amounts invoiced to our customers. Such amounts are recoverable from our customers based upon various measures of performance, including achievement of certain milestones, completion of specified units or completion of a contract. In addition, many of our time and materials arrangements, as well as our contracts to perform turnaround services within the Specialty Services segment, are billed in arrears pursuant to contract terms that are standard within the industry, and resulting in contract assets and/or unbilled receivables being recorded, as revenue is recognized in advance of billings. Contract assets are generally classified as current within the consolidated balance sheets. As of December 31, 2019 and 2018, no contract assets included unbilled revenues for unapproved change orders.

Contract liabilities from our long-term construction contracts arise when amounts invoiced to their customers exceed revenues recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from our customers on certain contracts. Contract liabilities decrease as we recognize revenue from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when they expect to recognize such revenue. The long-term portion of contract liabilities is included in other long-term obligations in the consolidated balance sheets.

Business Combinations

The determination of the fair value of net assets acquired in a business combination and estimates of acquisition-related contingent consideration requires estimates and judgments of future cash flow expectations for the acquired business and the related identifiable tangible and intangible assets. Fair values of net assets acquired are calculated using standard valuation techniques. Fair values of contingent consideration liabilities are estimated using an income approach such as discounted cash flows or option pricing models. We allocate purchase consideration to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The excess of the fair value of purchase consideration over the fair values of these identifiable assets and liabilities is recorded as goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions consistent with those of a market participant, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, future expected cash flows from backlog, customer relationships, and trade names; and discount rates. In estimating the future cash flows, management considers demand, competition and other economic factors. Management’s estimates are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates, which could result in impairment charges in the future.

Due to the time required to obtain the necessary data for each acquisition, U.S. GAAP provides a “measurement period” of up to one year from the date of acquisition in which to finalize these fair value determinations. During the measurement period, preliminary fair value estimates may be revised if new information is obtained about the facts and circumstances existing as of the date of acquisition, or based on the final net assets and working capital of the acquired business, as prescribed in the applicable purchase agreement. Such adjustments may result in the recognition, or adjust the fair values, of acquisition-related assets and liabilities and/or consideration paid, and the related depreciation and amortization expense, which are referred to as “measurement period adjustments.”

Significant changes in the assumptions or estimates used in the underlying valuations, including the expected profitability or cash flows of an acquired business, could materially affect our operating results in the period such changes are recognized.

Insurance Liabilities

We use high retention insurance programs to manage our risk for health, workers’ compensation, general liability and auto insurance. Accrued liabilities include our best estimates of amounts expected to be incurred for these losses. The estimates are based on claim reports provided by the insurance carrier and actuarial analyses provided by third-party actuarial specialists, and management’s best estimates including the maximum premium for a policy period. The amounts the Company will ultimately incur could differ in the near term from the estimated amounts accrued. At December 31, 2019 (Successor) and December 31, 2018 (Predecessor), the Company had accrued $53 million and $57 million, respectively, relating to workers’ compensation, general and automobile claims, with $33 million and $38 million, respectively, included in other noncurrent liabilities. The Company recorded a receivable from the insurance carriers of $7 million and $10 million

 

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at December 31, 2019 (Successor) and December 31, 2018 (Predecessor), respectively, to offset the liabilities due above the Company’s deductible, which, under contract, are payable by the insurance carrier. The Company has outstanding letters of credit as collateral totaling approximately $65 million and $61 million at December 31, 2019 (Successor) and December 31, 2018 (Predecessor), respectively. The Company had $4 million accrued within accrued salaries and wages relating to outstanding health insurance claims at December 31, 2019 (Successor) and December 31, 2018 (Predecessor).

The Periodic Assessment of Potential Impairment of Goodwill

Goodwill represents the excess of cost over the fair market value of net tangible and identifiable intangible assets of acquired businesses and is stated at cost. Goodwill is not amortized but instead is annually tested for impairment, or more frequently if events or circumstances indicate that the carrying amount of goodwill may be impaired. Our annual impairment testing date is October 1. On October 1, 2019 as a result of the APi Acquisition, all of our net tangible and identified intangible assets were measured at a preliminary estimated fair value and the resulting preliminary goodwill reflects the excess of cost over the fair value of net tangible and identifiable intangible assets acquired. As of December 31, 2019, preliminary goodwill of $980 million is subject to annual impairment testing.

Goodwill is required to be measured annually for impairment at the reporting unit level, which represents the operating segment level or one level below the operating segment level for which discrete financial information is available.

As part of the APi Acquisition which occurred on October 1, 2019, we used discounted cash flow projections and related assumptions for sales growth, operating margins and discount rate in determining the fair value of APi Group. Goodwill was calculated as the excess of cost over the fair value of net identifiable assets at the APi Acquisition date. As the APi Acquisition aligns with our annual goodwill testing date, we determined that the preliminary fair values identified in purchase accounting approximate carrying value of each reporting unit.

On an annual basis, we use a qualitative approach to test goodwill for impairment by first assessing qualitative factors to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. The qualitative approach, which was only applied to a portion of our reporting units in 2018 and 2017, assesses various factors including, in part, the macroeconomic environment, industry and market specific conditions, financial performance, operating costs and cost impacts, as well as issues or events specific to the reporting unit. If necessary, the next step in the goodwill impairment test involves comparing the fair value of each of the reporting units to the carrying value of those reporting units. If the carrying value of a reporting unit exceeds the fair value of the reporting unit, an impairment loss would be recognized (not to exceed the carrying amount of goodwill).

Both qualitative and quantitative goodwill impairment testing requires significant use of judgment and assumptions, including the identification of reporting units; the assignment of assets and liabilities to reporting units; and the estimation of future cash flows, business growth rates, terminal values, discount rates, market multiples and total enterprise value. We use various valuation approaches, such as the income approach and market approach. The income approach used is the discounted cash flow methodology and is based on multi-year cash flow projections. The cash flows projected are analyzed on a “debt-free” basis (before cash payments to equity and interest-bearing debt investors) in order to develop an enterprise value from operations for the reporting unit. A provision is also made, based on these projections, for the value of the reporting unit at the end of the forecast period, or terminal value. The present value of the finite-period cash flows and the terminal value are determined using a selected discount rate. The market approach involves estimating value based on the trading multiples for comparable public companies and recent transactions involving similar companies to the reporting unit. Multiples are determined through an analysis of certain publicly traded companies that are selected based on operational and economic similarity with the business operations of the reporting unit and through an analysis of guideline transactions involving similar companies to the reporting unit. A comparative analysis between the reporting unit and the public companies and guideline transactions forms the basis for the selection of appropriate risk-adjusted multiples. The comparative analysis incorporates both quantitative and qualitative risk factors which relate to, among other things, the nature of the industry in which the reporting unit and other comparable companies are engaged.

In 2019, APi Group concluded it had a triggering event requiring assessment of goodwill impairment within the Infrastructure/Utility reporting unit within the Specialty Services segment. As a result, APi Group performed an interim impairment test and recorded a goodwill impairment charge of $12 million within impairment of goodwill, intangibles and long-lived assets on the consolidated statement of operations for the period from January 1, 2019 through September 30, 2019. The impairment was measured using the income and market approach, consistent with methods APi Group employs to perform its annual goodwill impairment test.

 

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In 2017, as a result of APi Group’s annual impairment testing, a goodwill impairment was identified within the Civil reporting unit within the Industrial Services segment. The goodwill impairment charge of $17 million was recorded within impairment of goodwill, intangibles and long-lived assets on the consolidated statement of operations for the year ended December 31, 2017.

Some of the inherent estimates and assumptions used in determining fair value of the reporting units are outside the control of management, including interest rates, cost of capital, tax rates, credit ratings, labor inflation, industry growth, and market capitalization. Given the uncertainties regarding the COVID-19 global pandemic and its potential financial impact on our business and our market capitalization which occurred subsequent to our annual impairment testing date and our year end December 31, 2019, there can be no assurance that our estimates and assumptions for purposes of the goodwill asset impairment testing performed during the fourth quarter of 2019 will prove to be accurate predictions of the future.

While we believe we have made reasonable estimates and assumptions to calculate the fair values of the reporting units, it is possible changes could occur. If in future years, the reporting unit’s actual results are not consistent with the estimates and assumptions used to calculate fair value, we may be required to recognize material impairments to goodwill. We will continue to monitor the impact of the COVID-19 pandemic and any changes to our reporting units for other signs of impairment. We may be required to perform additional impairment testing based on changes in the economic environment, disruptions to our business, significant declines in operating results of our reporting units, sustained deterioration of our market capitalization, and other factors, which could result in impairment charges in the future. Although management cannot predict when changes in macroeconomic conditions will occur, if there is significant deterioration from levels at year end in the construction industry, market prices for oil and gas and other fuel sources, or our market capitalization, it is reasonably likely we will be required to record material impairment charges in the future.

The Periodic Assessment of Potential Impairment of Indefinite-Lived Intangible Assets

We periodically review the carrying amount of our long-lived asset groups when events or changes in circumstances such as asset utilization, physical change, legal factors, or other matters indicate the carrying value may not be recoverable. If facts or circumstances support the possibility of impairment, we will compare the carrying value of the asset or asset group with the undiscounted future cash flows related to the asset or asset group. If the carrying value of the asset or asset group is greater than the undiscounted cash flows, the resulting impairment will be determined as the difference between the carrying value and the fair value, where fair value is determined for the carrying amount of the specific asset groups based on discounted future cash flows or appraisal of the asset groups.

In 2017, APi Group concluded it had a triggering event requiring assessment of impairment for certain intangible assets in the Industrial Services segment. As a result, APi Group reviewed the intangible assets for impairment and recorded a $7 million impairment charge within impairment of goodwill, intangibles and long-lived assets on the consolidated statement of operations for the year ending December 31, 2017. The impairment was measured under the market approach utilizing an appraisal to determine fair values of the impaired assets. This method is consistent with the methods APi Group employed in prior periods to value other intangible assets.

Additionally, in 2017, management concluded it had a triggering event requiring assessment of impairment for certain long-lived assets in the Specialty Services segment because of a material change in the Western North Dakota market. As a result, APi Group reviewed the long-lived assets for impairment and recorded a $6 million impairment charge within impairment of goodwill, intangibles and long-lived assets on the consolidated statement of operations for the year ending December 31, 2017. The impairment was measured under the market approach utilizing an appraisal to determine fair values of the impaired assets. This method is consistent with the methods APi Group employed in prior periods to value other long-lived assets. The inputs utilized in the analyses are classified as Level 3 inputs within the fair value hierarchy, as defined in ASC Topic 820.

Qualitative and Quantitative Disclosures about Market Risk

Interest Rate Risk

As of December 31, 2019, our variable interest rate debt was primarily related to our $1.2 billion senior secured loan in addition to a $300 million senior secured revolving credit facility. As of December 31, 2019, excluding letters of credit outstanding of $65 million, we had no amounts of outstanding revolving loans and our term loan balance was $1.2 billion with a weighted-average interest rate of 4.40%. A 100-basis point increase in the applicable interest rates under our credit facilities would have increased our interest expense by approximately $3 million for the year ended December 31, 2019.

 

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Foreign Currency Risk

Our foreign operations are primarily in Canada and the United Kingdom. Revenue generated from foreign operations represented approximately 7% of our consolidated revenue for the year ended December 31, 2019 (Successor). Revenue and expense related to our foreign operations are, for the most part, denominated in the functional currency of the foreign operation, which minimizes the impact that 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 in 2019. Translation gains or losses, which are recorded in accumulated other comprehensive income (loss) on the consolidated balance sheet, result from translation of the assets and liabilities of APi Group’s foreign subsidiaries into U.S. dollars. Foreign currency translation losses (gains) totaled approximately $3 million, $3 million, ($11) million and $8 for the year ended December 31, 2019 (Successor), the period from January 1, 2019 through September 30, 2019, and the years ended December 31, 2018 and 2017 (Predecessor), respectively.

Our exposure to fluctuations in foreign currency exchange rates could increase in the future if we continue to expand our operations outside of the United States. We seek to manage foreign currency exposure by minimizing our consolidated net asset and liability positions in currencies other than the functional currency, which exposure was not significant to our consolidated financial position as of December 31, 2019.

Other Market Risk

We are also exposed to construction market risk and its 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 that management will be able to reasonably identify all risks with respect to the collectability of these assets. See also “Revenue Recognition from Contracts with Customers” under Critical Accounting Policies within this section of Management’s Discussion and Analysis of Financial Condition and Results of Operations.

In addition, we are exposed to market risk of fluctuations in certain commodity prices of materials, such as copper and steel, which are 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. 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, 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.

 

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Predecessor Results of Operation

The following discussion relates to the results of operations of APi Group for the period from January 1, 2019 through September 30, 2019 and the years ended December 31, 2018 and 2017:

 

     January 1, 2019
Through
September 30,
2019

(Predecessor)
    Year Ended
December 31,
2018

(Predecessor)
    Year Ended
December 31,
2017

(Predecessor)
    January 1, 2019
through
Sept 30, 2019
v 2018
Change
    2018 v 2017
Change
 

($ in millions)

  $     %     $     %  

Net revenues

   $ 3,107     $ 3,728     $ 3,046     $ (621     (16.7 )%    $ 682       22.4

Cost of revenues

     2,503       2,941       2,382       (438     (14.9 )%      559       23.5
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Gross profit

     604       787       664       (183     (23.3 )%      123       18.5

Selling, general, and administrative expenses

     490       625       511       (135     (21.6 )%      114       22.3

Impairment of goodwill, intangibles and long-lived assets

     12       —         30       12       NM       (30     NM  
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Operating income (loss)

     102       162       123       (60     (37.0 )%      39       31.7
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Interest expense, net

     20       22       8       (2     (9.1 )%      14       175.0

Other expense (income), net

     (11     (6     (5     (5     83.3     (1     NM  
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Other expense, net

     9       16       3       (7     (43.8 )%      13       433.3
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Income before income tax provision

     93       146       120       (53     (36.3 )%      26       21.7

Income tax provision

     7       10       8       (3     (30.0 )%      2       25.0
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

Net income

   $ 86     $ 136     $ 112     $ (50     (36.8 )%    $ 24       21.4
  

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

NM = Not meaningful

Period from January 1, 2019 through September 30, 2019 compared to the Year Ended December 31, 2018

APi Group’s results of operations, as well as operating segment results, for the period from January 1, 2019 through September 30, 2019 declined as compared to the results of operation for the twelve months ended December 31, 2018 given the three fewer months in 2019.

Year Ended December 31, 2018 compared to the Year Ended December 31, 2017

Net revenues

Net revenues for 2018 were $3.7 billion compared to $3.0 billion for 2017, an increase of $682 million or 22.4%. The increase in net revenues was largely attributable to acquisitions consummated during 2018 ($371 million) in the Safety Services and Specialty Services segments as well as increases in organic growth from the Industrial Services segment due to the market recovery in the oil and gas industry. This was partially offset by decreases in net revenues in the Specialty Services segment due to timing and completion of large projects in 2017.

Cost of revenues and Gross profit

The following table presents cost of revenues, gross profit (net revenues less cost of revenues), and gross profit margin (gross profit as a percentage of net revenues) for the years ended December 31, 2018 and 2017:

 

     For the Years Ended December 31,               
     2018
(Predecessor)
    2017
(Predecessor)
    Change  

($ in millions)

  $      %  

Cost of revenues

   $ 2,941     $ 2,382     $ 559        23.5

Gross profit

     787       664       123        18.5

Gross profit margin

     21.1     21.8     

APi Group’s gross profit for the year ended December 31, 2018 was $787 million, a $123 million, or 18.5%, increase compared to gross profit of $664 million for the year ended December 31, 2017. The gross profit increase from 2017 to 2018 was primarily attributable to increased revenue. Of the $123 million increase, $50 million was attributable to incremental margin from companies acquired in 2018. APi Group’s gross profit margin was 21.1% and 21.8% for 2018 and 2017, respectively. The decrease in gross profit margin is primarily attributable to a change in the mix of revenue. Specifically, the Industrial Services segment is APi Group’s lowest gross profit margin business and it experienced a higher proportion of revenue growth in 2018 that negatively impacted consolidated gross margins.

 

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Operating expenses

The following table presents operating expenses and operating margin (operating income as a percentage of net revenues) for the years ended December 31, 2018 and 2017:

 

     For the Years Ended December 31,               
     2018
(Predecessor)
    2017
(Predecessor)
    Change  

($ in millions)

  $      %  

Selling, general and administrative expenses

   $ 625     $ 511     $ 114        22.3

Impairment of goodwill, intangibles, and long-lived assets

     —         30       (30      NM  
  

 

 

   

 

 

   

 

 

    

Total operating expenses

   $ 625     $ 541     $ 84        15.5
  

 

 

   

 

 

   

 

 

    

Operating expenses as a percentage of revenue

     16.8     17.8     

Operating margin

     4.3     4.0     

NM = Not meaningful

APi Group’s operating expenses for the year ended December 31, 2018 were $625 million, a $84 million increase compared to operating expenses of $541 million for the year ended December 31, 2017. Operating expenses as a percentage of revenues were 16.8% and 17.8% for 2018 and 2017, respectively. The increase in selling, general and administration expense is attributable to companies acquired in 2018 and 2017 ($32 million), including incremental increases in contingent consideration expense. In addition to the impact of acquisitions, selling general and administrative expenses increased due to increases in employee compensation as well as other selling general and administrative expenses such as information technology, consulting and other professional fees. Amortization expenses in 2018 increased $18 million over the prior year as a result of the acquisitions during the year. Impairment charges in 2017 were primarily related to the impairment of goodwill ($17 million) and intangible assets ($7 million) in APi Group’s Civil reporting unit within the Industrial Services segment. Operating expenses as a percent of revenue decreased for the year ended December 31, 2018 primarily due to leverage of APi Group’s scalable overhead structure.

Operating income and EBITDA

 

     Operating Income and EBITDA  
     Years Ended December 31  

($ in millions)

   2018
(Predecessor)
     2017
(Predecessor)
     Increase
(Decrease)
     %
Change
 

Operating income

   $ 162      $ 123      $ 39        31.7

EBITDA

     277        197        80        40.6

Operating income as a percentage of net revenues remained consistent between 2018 and 2017 at 4.3% and 4.0%, respectively. EBITDA as a percentage of net revenues increased from 6.5% in 2017 to 7.4% in 2018. The increase was driven by increases in depreciation and amortization expenses in 2018 which increased approximately $40 million over the prior year as a result of acquisitions.

Interest expense, net

Interest expense was $22 million and $8 million for 2018 and 2017, respectively. The increase in interest expense was primarily due to an increase in average outstanding borrowings of $187 million and higher average borrowing costs primarily related to APi Group’s 2018 acquisitions for which APi Group entered into an unsecured financing agreement consisting of a $330 million term loan and a $500 million revolving credit facility. The increase was further driven by a higher United States dollar LIBOR rate, impacting rates paid on variable rate debt.

Reconciliation of GAAP to Non-GAAP Financial Measures (Unaudited)

The following table presents a reconciliation of net income (loss) to EBITDA for the periods indicated. For a discussion and presentation of the U.S. GAAP results of the Predecessor for the Predecessor 2019 Period and the Successor for the Successor 2019 period, see “Results of Operations.”

 

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     Years Ended  

($ in millions)

   December 31,
2018
(Predecessor)
     December 31,
2017
(Predecessor)
 

Reported net income (loss)

   $ 136      $ 112  

Adjustments to reconcile net income (loss) to EBITDA:

     

Interest expense, net

     22        8  

Foreign & state income taxes

     10        8  

Depreciation

     60        38  

Amortization

     49        31  
  

 

 

    

 

 

 

EBITDA

   $ 277      $ 197  
  

 

 

    

 

 

 

Operating Segment Results 2018 versus 2017

 

     Net Revenues  
     Years Ended December 31  

($ in millions)

   2018
(Predecessor)
     2017
(Predecessor)
     Increase
(Decrease)
     %
Change
 

Safety Services

   $ 1,705      $ 1,601      $ 104        6.5

Specialty Services

     1,359        1,063        296        27.8

Industrial Services

     723        439        284        64.7

Corporate and Eliminations

     (59      (57      (2      3.5
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,728      $ 3,046      $ 682        22.4
  

 

 

    

 

 

    

 

 

    

 

 

 
     Operating Income  
     Years Ended December 31,  
     2018      2017      Increase      %  

($ in millions)

   (Predecessor)      (Predecessor)      (Decrease)      Change  

Safety Services

   $ 178      $ 151      $ 27        17.9

Specialty Services

     57        61        (4      (6.6 )% 

Industrial Services

     13        —          13        NM  

Corporate and Eliminations

     (86      (89      3        (3.4 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 162      $ 123      $ 39        31.7
  

 

 

    

 

 

    

 

 

    

 

 

 
     EBITDA  
     Years Ended December 31  

($ in millions)

   2018
(Predecessor)
     2017
(Predecessor)
     Increase
(Decrease)
     %
Change
 

Safety Services

   $ 197      $ 165      $ 32        19.4

Specialty Services

     125        95        30        31.6

Industrial Services

     37        26        11        42.3

Corporate and Eliminations

     (82      (89      7        (7.9 )% 
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 277      $ 197      $ 80        40.6
  

 

 

    

 

 

    

 

 

    

 

 

 

NM = Not meaningful

The following discussion breaks down APi Group’s net revenues and operating income by operating segment for the year ended December 31, 2018 compared to the year ended December 31, 2017.

Safety Services

Segment net revenues increased by $104 million, or 6.5%, in 2018 primarily due to the acquisition of an automatic fire protection systems business ($56 million) as well as continued organic revenue growth from the segment’s base business.

Segment operating income as a percentage of net revenues for 2018 and 2017 was approximately 10.4% and 9.4%, respectively. The increase was primarily driven by improved project margins by APi Group’s continued focus on growing recurring revenue.

 

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Segment EBITDA as a percentage of net revenues increased from 10.3% to 11.6% in 2017 and 2018, respectively, driven by continued focus on improved project margins as well as an increase of $7 million amortization as a result of a 2018 acquisition of a safety services business.

Specialty Services

Segment net revenues increased for 2018 by $296 million, or 27.8%. The increase was primarily due to the acquisitions of a pipeline services business and a business specializing in infrastructure installation and maintenance in 2018 (collectively contributing $315 million in net revenue), partially offset by a decrease due to the timing and the completion of large projects in 2017.

Segment operating income as a percentage of net revenues declined to approximately 4.2% in 2018 from 5.7% in 2017. The decrease was primarily driven by lower gross margins related to lower labor productivity, as well as increased amortization and earnout expense of $23 million in connection with 2018 acquisitions.

Segment EBITDA as a percentage of net revenue increased a percentage of net revenues from 8.9% in 2017 to 9.2% in 2018. This differs from the decrease in segment operating income as a result of a $29 million increase in depreciation and amortization expense related to two specialty services acquisitions completed in early 2018.

Industrial Services

Segment net revenues for 2018 increased by $284 million, or 64.7%, primarily due to APi Group’s increased volume of projects dues to higher demand of customers program spending.

Segment operating income as a percentage of net revenues for 2018 and 2017 was approximately 1.8% and 0.0%, respectively. The increase was primarily driven by the absence of $30 million of goodwill, intangible assets and long-lived asset impairment charges incurred in 2017 within the Civil reporting unit.

Segment EBITDA as a percentage of net revenue decreased from 5.9% in 2017 to 5.1% in 2018 as a result of the decrease in depreciation and amortization as a percentage of net revenues from 2017 to 2018.

Predecessor Cash Flows

The following table summarizes net cash flows with respect to APi Group’s operating, investing and financing activities for the period from January 1, 2019 through September 30, 2019 and the years ended December 31, 2018 and 2017:

 

     January 1, 2019
through
September 30,
2019
(Predecessor)
               
               
     Years Ended December 31,  
     2018      2017  

($ in millions)

   (Predecessor)      (Predecessor)  

Net cash provided by operating activities

   $ 145      $ 112      $ 118  

Net cash used in investing activities

     (51      (300      (56

Net cash provided (used in) by financing activities

     (10      203        (106

Effect of foreign currency exchange rate on cash and cash equivalents

     —          (2      3  
  

 

 

    

 

 

    

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 84      $ 13      $ (41
  

 

 

    

 

 

    

 

 

 

Cash and cash equivalents at the end of the period

   $ 138      $ 54      $ 41  

Cash flows for the period from January 1, 2019 through September 30, 2019 compared to the year ended December 31, 2018

Cash flow information for the period from January 1, 2019 through September 30, 2019 reflect the cash flows for the nine months prior to the APi Acquisition. As a result, the cash flows are not comparable to 2018 full year results.

 

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Cash flows for the years ended December 31, 2018 and 2017

Net Cash provided by Operating Activities

Net cash provided by operating activities for 2018 was $112 million compared to $118 million for 2017. The reduction in cash flows from operating activities was primarily due to organic revenue growth which resulted in increased working capital levels, as well as incremental increase in working capital needs for business acquired in 2018 and increased interest payments ($16 million) from higher debt levels.

Net Cash Used in Investing Activities

Net cash used in investing activities was $300 million for 2018 compared to net cash used in investing activities of $56 million for 2017. The increase in cash used in investing activities was attributed primarily to increased payments for acquisitions of businesses ($171 million) and increased capital expenditures ($35 million).

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities for 2018 was $203 million compared to net cash used in financing activities of $106 million in 2017. The increase in cash provided by financing activities was primarily due to APi Group’s issuance of a $330 million term loan, offset by repayments of debts.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

The unaudited pro forma condensed combined financial information for the year ended December 31, 2019 gives effect to our acquisition of APi Group on October 1, 2019 (the “Acquisition”).

The pro forma information is preliminary, is being furnished solely for informational purposes and is not necessarily indicative of the combined results of operations that might have been achieved for the period indicated, nor is it necessarily indicative of the future results of the combined company. Income taxes do not reflect the amounts that would have resulted had APG and APi Group filed consolidated income tax returns during the periods presented.

The unaudited condensed combined financial information gives effect to events that are directly attributable to the Acquisition, factually supportable and, with respect to the unaudited pro forma condensed combined statements of operations, expected to have a continuing impact on the combined company. The unaudited pro forma condensed combined statement of operations also does not include any material nonrecurring charges that might arise as a result of the Acquisition.

The pro forma adjustments and allocation of purchase price are preliminary and are based on management’s current estimates of the fair value of the assets to be acquired and liabilities to be assumed and are based on all available information. The areas of the purchase price allocation that are not yet finalized are primarily related to the valuation of: (i) property and equipment; (ii) intangible assets; (iii) lease-related assets and liabilities; (iv) indemnification assets; and (v) pre-acquisition commitments and contingencies. Additionally, the purchase price allocation is provisional for income tax-related matters and a final determination of deferred purchase consideration. Management’s estimates of the fair values reflected in the unaudited pro forma condensed combined financial statements are subject to change and may differ materially from actual adjustments, which will be based on the final determination of fair values and useful lives.

A final determination of fair value will be determined by management after giving consideration to relevant information. Any final adjustments may change the allocation of purchase price and could affect the fair value assigned to the assets and liabilities and result in a change to the unaudited pro forma condensed combined financial statements presented herein. Amounts preliminarily allocated to and the estimated useful lives of intangible assets with indefinite and definite lives may change significantly, which could result in a material increase or decrease in amortization of definite lived intangible assets. Estimates related to the determination of fair value and useful lives of other assets acquired may also change, which could affect the fair value assigned to the other assets and result in a material increase or decrease in depreciation or amortization expense.

APG’s condensed consolidated balance sheet at December 31, 2019 included in this prospectus presents the balance sheet of the combined company and accordingly no unaudited pro forma condensed combined balance sheet is presented herein.

The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2019 is presented as if the Acquisition had been completed on January 1, 2019. The unaudited pro forma condensed combined statement of operations for the year ended December 31, 2019 combines the historical results of APG for the year ended December 31, 2019 and the historical results of APi Group for the period from January 1, 2019 to September 30, 2019.

The unaudited pro forma condensed combined statements of operations should be read in conjunction with the historical consolidated financial statements and accompanying notes included in this prospectus.

The estimated income tax rate applied to the pro forma adjustments is 31.0%, the expected statutory rate, and all other tax amounts are stated at their historical amounts.

The following unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and are based on available information and assumptions that APG believes are reasonable. They do not purport to represent what the actual consolidated results of operations or the consolidated financial position of APG would have been had the Acquisition occurred on the dates indicated, or on any other date, nor are they necessarily indicative of APG’s future consolidated results of operations or consolidated financial position after the Acquisition. APG’s actual consolidated financial position and consolidated results of operations after the Acquisition will differ, perhaps significantly, from the pro forma amounts reflected herein due to a variety of factors, including access to additional information, changes in value not currently identified and changes in operating results of APG and APi Group following the date of the unaudited pro forma condensed combined financial statements.

 

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UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS

For the Year Ended December 31, 2019

(in millions, except per share amounts)

 

     Successor
APG

(Year Ended
December 31,
2019) (a)
    Predecessor
APi Group
(Period Jan
1 – Sept 30,
2019) (a)
    Pro Forma
Adjustments
    Pro Forma
Combined
 

Net revenues

   $ 985     $ 3,107     $ —       $ 4,092  

Cost of revenues

     787       2,503       68 (b)(c)      3,358  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     198       604       (68     734  

Selling, general and administrative expenses

     359       490       (115 )(b)(c)(d)      734  

Impairment of goodwill, intangibles and long-lived assets

     —         12       —         12  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (161     102       47       (12

Nonoperating expenses:

        

Interest expense, net

     15       20       25 (e)(f)      60  

Other expense (income), net

     (25     (11     20 (f)      (16
  

 

 

   

 

 

   

 

 

   

 

 

 

Net nonoperating expense (income)

     (10     9       45       44  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     (151     93       2       (56

Income tax expense (benefit)

     2       7       (26 )(g)      (17
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (153   $ 86     $ 28     $ (39
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

        

Basic

   $ (1.15       NM     $ (0.23

Diluted

   $ (1.15       NM     $ (0.23

Weighted-average shares outstanding:

        

Basic

     133.1         36.4 (h)      169.5  

Diluted

     133.1         36.4 (h)      169.5  

NM = Not meaningful

 

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NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

Note 1. Description of the Transaction

The total consideration paid at closing for the Acquisition was approximately $2.9 billion, consisting of approximately $2.6 billion in cash and the issuance of 28,373,000 ordinary shares with a value of approximately $291 million to the sellers of APi Group. The Company funded the cash portion of the purchase price and related transaction expenses with a combination of cash on hand, a $1.2 billion term loan under a new term loan facility and approximately $207 million of proceeds from an early warrant exercise financing. In addition, the deferred consideration of also includes deferred payments of approximately $147 million. The Company expects to make payments of deferred consideration of $86 million in April 2020 and the remainder being paid through April 2021.

Note 2. Basis of Pro Forma Presentation

These unaudited pro forma condensed combined financial statements have been prepared in accordance with Article 11 of Regulation S-X and present the pro forma results of operations of the combined company based on the historical financial statements of APG and APi Group after giving effect to the Acquisition and financing arrangements expected to be entered into in connection with the Acquisition, including the repayment of certain APi Group debt and the other adjustments described in these notes.

The pro forma combined statement of operations for the year ended December 31, 2019 combines the audited historical consolidated statements of operations of APG (“Successor”) for the year ended December 31, 2019 (which include the results of APi Group form the period from the Acquisition on October 1, 2019 through December 31, 2019), and the audited historical consolidated statement of operations of APi Group (“Predecessor”) for the period from January 1, 2019 to September 30, 2019, giving effect to the Acquisition as if the Acquisition and the related expected debt financing had been consummated on January 1, 2019, the beginning of the period presented. With respect to the unaudited pro forma condensed combined statement of operations, the historical consolidated financial statements of APG and APi Group have been adjusted to give effect only to events that are expected to have a continuing impact on the results of APG following the completion of the Acquisition.

The Acquisition was accounted for under the acquisition method of accounting in accordance with FASB ASC 805, Business Combinations, using the fair value concepts defined in ASC 820, Fair Value Measurements and Disclosures. APG was considered the acquirer for financial reporting purposes. Accordingly, the Acquisition consideration allocated to APi Group’s assets and liabilities was based upon their estimated preliminary fair values at the effective time of the Acquisition. The amount of the Acquisition consideration that was in excess of the estimated preliminary fair values of APi Group’s assets and liabilities was recorded as goodwill in APG’s consolidated balance sheet after the completion of the Acquisition. As of the date of this prospectus, APG has not completed the detailed valuation work necessary to arrive at the required final determinations of the fair value of APi Group’s assets and liabilities and the related allocation of purchase price in the Acquisition. Accordingly, the unaudited pro forma purchase price allocation is preliminary and subject to further adjustments as additional information becomes available and as additional analyses are performed. The preliminary unaudited pro forma purchase price allocation has been made solely for the purpose of preparing these unaudited pro forma condensed combined financial statements.

Increases or decreases in the final fair values of relevant balance sheet amounts will result in adjustments to APG’s balance sheet and/or statement of operations until the purchase price allocation is finalized. There can be no assurance that such finalization will not result in material changes from the preliminary purchase price allocation included in the unaudited pro forma condensed combined statement of operations.

The unaudited pro forma condensed combined statement of operations does not reflect any potential divestitures that may be undertaken subsequent to the consummation of the Acquisition, or any cost savings, operating synergies or enhanced revenue opportunities that APG may achieve as a result of the Acquisition, the costs to integrate the operations of APG and APi Group, or the costs necessary to achieve such cost savings, operating synergies and enhanced revenues.

Note 3. Adjustments to Unaudited Pro Forma Condensed Combined Statement of Operations

The adjustments included in the unaudited pro forma condensed combined statement of operations are as follows:

(a) Statements of Operations

The statements of operations were derived from the audited statement of operations of the Predecessor for the period from January 1, 2019 to September 30, 2019 and the audited statement of operations of the Successor for the year ended December 31, 2019 (which include the results of APi Group form the period from the Acquisition on October 1, 2019 through December 31, 2019), included in this prospectus.

 

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(b) Amortization of Acquired Intangible Assets

The pro forma acquisition-related amortization expense represents additional amortization expense associated with the preliminary estimated fair value of APi Group’s amortizable trade names, customer relationships and backlog using the weighted-average useful lives as outlined in the following table (dollars in millions).

 

     Preliminary
Estimated
Fair Value
     Estimated
Weighted-
Average
Useful Lives
     Preliminary
Estimated
Annual
Amortization
 

Amortizable trade names

   $ 308        15 years      $ 21  

Customer relationships

     778        8 years        97  

Backlog

     112        1.25 years        89  
        

 

 

 

Total

         $ 207  
        

 

 

 

The unaudited pro forma adjustment for acquisition-related amortization expense is calculated as follows (in millions):

 

     Historical
Amortization
     Preliminary
Estimated

Annual
Amortization
     Pro Forma
Adjustment
 

Amortization in SG&A – Predecessor

   $ 26        

Amortization in SG&A –Successor

     29        
  

 

 

       

Amortization in SG&A

     55      $ 118        63  

Amortization in Cost of revenues - Successor

     22        89        67  
  

 

 

    

 

 

    

 

 

 

Total amortization expense

   $ 77      $ 207      $ 130  
  

 

 

    

 

 

    

 

 

 

(c) Depreciation Expense

The pro forma adjustment to depreciation expense represents increased depreciation expense associated with the increase APi Group’s property and equipment to its preliminary estimated fair value. The pro forma adjustment, weighted-average depreciable lives and allocation among cost of revenues and SG&A is set out in the following table (in millions):

 

     Preliminary
Estimated
Fair Value
     Estimated
Weighted-
Average
Depreciable
Lives
     Estimated
Annual
Depreciation
Expense
 

Land

   $ 18        N/A      $ —  

Buildings and improvements

     63        28 years        2  

Machinery and equipment

     340        5 years        69  
  

 

 

       

 

 

 

Total

   $ 421         $ 71  
  

 

 

       

 

 

 

Depreciation - Cost of revenues

         $ 55  

Depreciation - SG&A

         $ 16  

The unaudited pro forma adjustment for depreciation expense is calculated as follows (in millions):

 

     Predecessor
Historical

Depreciation
     Successor
Historical

Depreciation
     Total
Combined
Depreciation
 

Pro forma estimated annual depreciation

         $ 71  

Less: Historical depreciation

   $ 52      $ 18        (70
  

 

 

    

 

 

    

 

 

 

Pro forma adjustment

         $ 1  
        

 

 

 

Pro forma depreciation adjustment – Cost of revenues

         $ 1  

Pro forma depreciation adjustment – SG&A

         $ —    

 

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(d) Transaction and Other Nonrecurring Costs

The following represent material nonrecurring charges that are directly related to the Acquisition that are excluded from operating income in the unaudited pro forma condensed combined statement of operations (in millions):

 

     Transaction
Costs
and Other
Nonrecurring
Costs
 

Transaction costs in historical financial statements - Predecessor

   $ 5  

Transaction costs in historical financial statements - Successor

     18  

Acquisition-related share-based compensation - Founder Preferred Shares - Successor

     155  
  

 

 

 

Pro forma adjustment

   $ 178  
  

 

 

 

The acquisition-related share-based compensation for the Successor relates to the share-based compensation charge for the fair value of the Founder Preferred Shares annual dividend recognized upon consummation of the Acquisition as a one-time charge.

(e) Interest Expense

The unaudited pro forma adjustment to interest expense is calculated as follows (in millions):

 

     Year Ended
December 31, 2019
 

Pro forma interest expense for Predecessor period related to APG Credit Facility and Term Loan (1)

   $ 43  

Less: Interest expense related to Predecessor’s Credit Facility

     (19
  

 

 

 

Pro forma adjustment

   $ 24  
  

 

 

 

 

(1) 

Includes $1 million debt issue cost amortization and $1 million commitment fees on the unused portion of the Revolving Credit Facility.

The unaudited pro forma adjustment of $24 million for the year ended December 31, 2019 reflects an increase in interest expense primarily as a result of the additional pro forma interest expense of $43 million for the Predecessor period from January 1, 2019 to September 30, 2019 for a $1.2 billion of Term Loan and a $300 million Revolving Credit Facility issued in connection with the Acquisition. The Revolving Credit Facility, which (other than the issuance of standby letters of credit) was $20 million drawn on upon the closing of the Acquisition, contains a 0.5% commitment fee on the unused portion of the Revolving Credit Facility. As of the Acquisition closing date, the Term Loan’s interest rate was 4.29% based on the 1-month LIBOR rate plus the applicable margin of 250 basis points. These borrowings and available cash on hand were used to fund a portion of the cash consideration for the Acquisition at closing. The overall net increase in interest expense is primarily due to incremental borrowings required to finance a portion of the cash component of the total Acquisition consideration.

A 0.125% change in the interest rate on the Term Loan would change annual pro forma interest expense by approximately $1 million.

(f) Other Expense, Net and Other Items

The unaudited pro forma adjustment to interest income and other income related to eliminating APG’s investment earnings and interest income attributable to investments made prior to the Acquisition since these investments were liquidated and the resulting cash on hand was used to fund the Acquisition and therefore are being excluded from pro forma earnings before taxes in the unaudited pro forma condensed combined statement of operations consists of the following (in millions):

 

     Interest and
Other
Income
 

Interest income (being eliminated)

   $ 1  

Investment income (being eliminated)

     20  
  

 

 

 

Pro forma adjustment

   $ 21  
  

 

 

 

 

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(g) Income Tax Expense

To calculate the pro forma adjustment to income tax expense, a combined U.S. federal and state statutory tax rate of 31.0% has been applied to the pro forma adjustments for the year ended December 31, 2019.

(h) Weighted Average Shares Outstanding

The unaudited pro forma adjustment to shares outstanding used in the calculation of basic and diluted earnings per share are calculated as follows (shares in millions):

 

     Year Ended
December 31,
2019
 
     Basic      Diluted  

Issuance of APG ordinary shares in conjunction with APi Acquisition

     48.5        48.5  

Portion of the year (9 months) APG shares issued for APi Acquisition were not outstanding

     .75        .75  
  

 

 

    

 

 

 

Pro forma adjustment

     36.4        36.4  
  

 

 

    

 

 

 

APG issued 28.4 million shares to the Sellers of APi Group as part of the purchase price. Additionally, APG issued 20.1 shares in conjunction with the early exercise of warrants to fund a portion of the purchase price.

The unaudited pro forma weighted average number of basic shares outstanding is calculated by adding APG’s weighted average number of basic shares outstanding for the year ended December 31, 2019 and the number of APG ordinary shares issued to APi Group stockholders in the Acquisition for 9 months of the year those shares were not outstanding. Similarly, the unaudited pro forma weighted average number of diluted shares outstanding is calculated by adding APG’s weighted average number of diluted shares outstanding for the year ended December 31, 2019 and the number of shares of APG’s ordinary shares issued to APi Group stockholders in the Acquisition for 9 months of the year those shares were not outstanding.

 

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BUSINESS

History

We were incorporated on September 18, 2017 with limited liability under the laws of the British Virgin Islands under the BVI Companies Act under the name J2 Acquisition Limited. J2 was created for the purpose of acquiring a target company or business. On October 10, 2017, J2 raised gross proceeds of approximately $1.25 billion in connection with its initial public offering in the United Kingdom and its ordinary shares and warrants were listed on the LSE.

On October 1, 2019, we completed our acquisition of APi Group, a market leading provider of commercial safety solutions and industrial specialty services, and we changed our name to APi Group Corporation.

The consideration paid at closing for the APi Acquisition was approximately $2.9 billion, consisting of approximately $2.6 billion in cash and the issuance of 28,373,000 ordinary shares with a value of approximately $291 million to the Sellers. We funded the cash portion of the purchase price and related transaction expenses with a combination of cash on hand, a $1.2 billion term loan under the new term loan facility and approximately $207 million of proceeds from the Warrant Financing. In addition, we accrued deferred consideration of approximately $147 million primarily related to the step-up in the basis of the assets acquired for tax purposes which is expected to be paid between April 2020 and April 2021.

The issuance of ordinary shares as part of the consideration in the APi Acquisition was exempt from registration in reliance on Section 4(a)(2) of the Securities Act as they were issued in a transaction not involving a public offering to a limited number of sophisticated investors with knowledge and experience of financial and business matters related to an investment in the Company’s securities.

APi Group was founded in 1926 as a small insulation contracting and distribution company and has grown organically and through disciplined acquisitions to be an industry leader with more than 40 businesses operating from over 200 locations providing commercial safety services, specialty services and industrial services to diversified industries. For the year ended December 31, 2019, we generated approximately $4.1 billion in total combined net revenue, including $3.1 billion of net revenue of the Predecessor for the Predecessor 2019 Period and $985 million of net revenue of the Successor for the Successor 2019 Period.

Our Industry

The industries in which we operate are highly fragmented and comprised of national, regional and local companies that provide services to customers across various end markets and geographies. We believe the following industry trends are affecting, and will continue to affect, demand for our services.

Increased Regulation. According to the National Fire Prevention Association, in 2018, there were over 1.3 million reported fires resulting in 3,655 related civilian deaths, 15,200 related civilian injuries and $25.6 billion in related property damage. As a result, the life safety industry is highly regulated at the federal, state and local levels and continuous regulatory changes, including mandated building codes and inspections and maintenance requirements, continue to generate increasing demand for our services, often on a recurring basis. Specifically, the Uniform Building Codes written by the National Fire Protection Association, and the International Code Council regulate fire suppression and sprinkler systems. Among other things, these codes require testing, inspections, repair, maintenance and specific retrofits of building fire suppression and sprinkler systems which generates recurring revenue related to those services. As these associations and government agencies continue to adopt new, more stringent regulations, the demand for our services increases.

Additionally, the Tax Cuts and Jobs Act of 2017 provides federal tax incentives to businesses that install fire suppression and sprinkler systems in new buildings, upgrade existing systems or retrofit existing structures with systems.

Deferred Infrastructure Investment. Following several years of deferred investment, the aging U.S. infrastructure system requires significant maintenance, repair and retrofit services which has spurred demand in our industry. State and local municipalities have deferred infrastructure spending for many years which has resulted in the need to rebuild or retrofit a large portion of the U.S. infrastructure. One industry publication anticipates that up to an estimated $4 trillion will need to be invested in U.S. infrastructure by 2025. Additionally, the Fixing America’s Surface Transportation Act, enacted in December 2015, approved over $300 billion in spending through 2020 to repair U.S. road systems.

 

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Furthermore, demand for oil and gas pipeline infrastructure has grown significantly in recent years as technological advances and cost-effective production technologies have increased producible U.S. oil and natural gas reserves. According to the U.S. Energy Information Administration’s October 2019 Short-Term Energy Outlook report, the U.S. will produce an estimated average of 12.3 million barrels of crude oil per day in 2019 and will rise by 0.9 million barrels per day in 2020 to an annual average of 13.2 million barrels per day. This increase in oil production, along with strong demand and aging pipeline infrastructure, has led to capacity issues, whereby more pipeline infrastructure is required to move this increased level of production to market. These trends are expected to continue to drive demand for U.S. oil and gas production, thus creating expanded opportunities for new pipeline infrastructure and maintenance of existing pipeline infrastructure throughout North America.

Increased Non-Residential Construction. The demand for non-residential construction has led to an increased demand for specialty contracting services. Many of the non-residential end markets, including commercial markets such as lodging and retail, are benefitting from an increase in consumer income in the U.S. which has enabled additional discretionary spending. As a leading provider of specialty contracting services, we expect to benefit from this increased demand in non-residential construction. This demand for non-residential construction also necessitates the installation of life safety systems, thereby creating a growing base of non-residential buildings that require mandatory, recurring maintenance of existing life safety systems. We believe that we are well positioned as one of the largest providers of specialty contracting services and safety solutions to benefit from these significant and multiple non-residential construction opportunities.

Our Business

With over 90 years of history and more than 40 businesses operating from over 200 locations, we are a market leading provider of commercial safety solutions, specialty services and industrial solutions operating primarily in the United States, as well as in Canada and the United Kingdom with approximately $4.1 billion in total combined net revenue in 2019. We provide a variety of specialty contracting services, including engineering and design, fabrication, installation, inspection, maintenance, service and repair, and retrofitting and upgrading. We offer comprehensive and diverse solutions on a broad geographic scale. We have a strong base of diverse, long-standing customer relationships in each of the industries we serve. We also have an experienced management team and a strong leadership development culture.

We believe that our core strategies of driving organic growth and growth through accretive acquisitions, promoting sharing of best practices across all of our businesses and leveraging our scale and services offerings, place us in the position to capitalize on opportunities and trends in the industries we serve, grow our businesses and advance our position in each of our markets. We believe that our diverse customer base, regional approach to operating our businesses, specialty operations in niche markets, strong commitment to leadership development, long-standing customer relationships with a robust reputation in the industries we serve, and strong safety track record differentiates us from our competitors.

We have a disciplined acquisition platform which has historically provided strategic acquisitions that are integrated into our operations. Since 2005, we have completed more than 60 acquisitions. We target companies that align with our strategic priorities and demonstrate key value drivers such as culture, geography, end markets and client base, capabilities and leadership. Each of our businesses maintains its identity, reputation, customer relationships and culture following acquisition, and we invest heavily into cultivating leadership at each business. Our acquired businesses benefit from the resources of direct access to the APG network, which facilitates organizational sharing of knowledge and best practices, increases collaboration across our businesses and develops cross-brand solutions which foster enhanced experience, quality and efficiency.

We employ a regional operating model designed to improve speed and responsiveness to our customers across our businesses, empower leadership of our businesses to drive business performance and execute key decisions and foster cross-functional sharing of best practices. This structure promotes a business-owner mindset among our individual business leaders and combines the personal attention of a small-to-medium sized company with the strength and support of an industry leader. It also allows each of our businesses to remain highly focused on best positioning itself within the categories in which it competes and reinforces strong accountability for operational and financial performance.

 

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We operate our business under three primary operating segments which are also our reportable segments: Safety Services, Specialty Services and Industrial Services.

Safety Services

In our Safety Services business, we focus on providing a full suite of commercial industrial building and mechanical system solutions focused on occupancy systems and installation. The Safety Services segment focuses on end-to-end integrated mechanical systems (fire protection solutions, HVAC and entry systems), including design, installation, inspection, and service of integrated mechanical systems. Our businesses within this segment also provide mass notification and emergency communication systems. The work performed within this segment spans across industries and facilities and includes commercial, industrial, healthcare, education, retail, government, high tech and special-hazard settings. These systems typically have a finite lifecycle which, coupled with mandated inspection, provides us with predictable, recurring revenue stream opportunities.

We believe that we are the leading provider of fire protection and sprinkler system solutions in North America based on revenue, with well-established safety solutions companies located principally in the U.S. and Canada with operations in the United Kingdom. Our broad footprint, which is comprised of more than 150 branch offices across the U.S., allows us to execute multi-site roll-outs for national accounts which are serviced through a single point of contact, the APi National Service Group (“NSG”) team. As a nationwide service team providing 24-hour consistent and coordinated service to our customers, our NSG team allows us to enhance our understanding of our customers on a national scale, and build deeper relationships with them which positively contributes to our revenue and captures growth opportunities.

For the year ended December 31, 2019, the Safety Services segment generated combined net revenue of $1.8 billion, including $1.3 billion of net revenue of the Predecessor for the Predecessor 2019 Period and $435 million of net revenue of the Successor for the Successor 2019 Period. In addition, for the year ended December 31, 2019, the Safety Services segment generated combined segment EBITDA of $229 million, including $170 million of segment EBITDA of the Predecessor during the Predecessor 2019 Period and $59 million of segment EBITDA of the Successor during the Successor 2019 Period.

Specialty Services

In our Specialty Services business, we provide a variety of infrastructure services and specialized industrial plant solutions, which include installation, maintenance and repair of critical infrastructure such as underground electric, gas, water, sewer and telecommunications infrastructure. Our services include engineering and design, fabrication, installation, maintenance, service and repair, and retrofitting and upgrading. With infrastructure and specialty contracting companies throughout the U.S., we are a single-source provider encompassing a variety of facility life cycle solutions from initial project concept and design, through the start-up and construction phases to complex retrofits and upgrades. We serve customers in the public and private sectors, including utilities, communications, healthcare, education, manufacturing, industrial plants and government agencies from various facilities across North America. Our specialty infrastructure services include underground electrical, transmission line and fiber optic cable installation, natural gas line distribution services, road and bridge maintenance, water line and sewer installation, servicing and repair, solar farm preparation erection, groundwater remediation, waste control and environmental dredging, and demolition. We also provide specialty services, including electrical containment systems, insulation, refrigeration, heating, ventilation and other temperature control, specialty and industrial ductwork, as well as structural fabrication and erection and material and equipment distribution.

With the increasing complexity and demand associated with sophisticated engineering services, we leverage our scale, in-house engineering expertise and experience, and technological advances in design to provide differentiated, high value-add specialty services to our customers. This enables us to access larger, more complex design-build projects with greater margin opportunity.

The typical facility infrastructure life cycle ranges from 10 to 20 years. Our large installed base of infrastructure projects provides us with repeat revenue opportunity as well as recurring revenue from related non-discretionary maintenance and service spend. With our diversified revenue model, we are not dependent on new facility activity.

 

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For the year ended December 31, 2019, the Specialty Services segment generated combined net revenue of $1.5 billion, including $1.1 billion of net revenue of the Predecessor for the Predecessor 2019 Period and $386 million of net revenue of the Successor for the Successor 2019 Period. In addition, for the year ended December 31, 2019, the Specialty Services segment generated combined segment EBITDA of $161 million, including $111 million of segment EBITDA of the Predecessor during the Predecessor 2019 Period and $50 million of segment EBITDA of the Successor during the Successor 2019 Period.

Industrial Services

In our Industrial Services business, we are a regional transmission and distribution services contractor providing a variety of niche contracting services and solutions to the energy industry, including designing and building new, or retrofitting and upgrading existing, oil and gas pipeline infrastructure and supporting facilities, and performing ongoing integrity management and maintenance services. Our portfolio of niche industrial specialty services contractor businesses is strategically positioned geographically to address opportunities in active oil and gas basins. Our industrial solutions service lines include earthwork, installation and maintenance services. Our earthwork services include right-of-way clearing, restoration and maintenance and mat hauling. Our installation services encompass design and installation of energy pipeline transmission and distribution systems, gas compressors and construction of oil pumping stations and oil terminal facilities, and directional drilling. Our maintenance services include pipeline inspection and cleaning, maintenance and rehabilitation, compression and metering station inspection, quality assurance and control, leak repair and pipeline replacement.

We provide these critical transmission and distribution specialty services to energy companies, including those involved in the development, transportation, storage and processing of natural gas, oil and other related products, utilities, government agencies and other contractors. We believe that regulatory-mandated inspection and services requirements have been increasing, which we expect to provide us with recurring revenue opportunities for our maintenance services.

For the year ended December 31, 2019, the Industrial Services segment generated combined net revenue of $837 million, including $670 million of net revenue of the Predecessor for the Predecessor 2019 Period and $167 million of net revenue of the Successor for the Successor 2019 Period. In addition, for the year ended December 31, 2019, the Industrial Services segment generated combined segment EBITDA of $30 million, including $21 million of segment EBITDA of the Predecessor during the Predecessor 2019 Period and $9 million of segment EBITDA of the Successor during the Successor 2019 Period.

The combined financial information is considered non-GAAP financial information as it combines the results of the Predecessor for the Predecessor 2019 Period and the Successor for the Successor 2019 Period and the companies were not combined, for GAAP purposes, until the closing of the APi Acquisition on October 1, 2019. For a discussion regarding these non-GAAP results and a reconciliation of those results to the GAAP results, see “APG Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Our Competitive Strengths

We believe that the following are our key competitive strengths:

Leading Market Positions in Diverse Set of Niche Industries. We believe that we are one of the leaders in each of the niche industries we serve, including the industry leader in fire protection and sprinkler system solutions and among the top five specialty contractors in North America. We believe that our diverse and strong customer base in each of our end markets, regional approach to operating our businesses, operations in niche industries with strong cross-selling opportunities and recurring revenue potential, strong commitment to leadership development, long-standing customer relationships with a robust reputation in the industries we serve, and strong safety track record differentiates us from our competitors. As a result, we believe we have better access to new business opportunities, allowing us to maintain and advance our market share positions.

Attractive Industry Fundamentals. We believe that the industries in which we operate are subject to increasingly complex and evolving regulatory environments and have experienced pent-up demand resulting from years of deferred maintenance and retrofit investment. In addition, we believe that there is increasing demand for specialty contracting services and for inspection and maintenance services relating to aging energy infrastructure as customers try to prolong the useful lives of their pipelines and limit incidents. We believe these tailwinds present great opportunities for us to drive growth in our businesses and enhance our market share positions. We also believe that the diversity of the niche markets we serve and the regulatory-driven demand for our services will enable us to continue our growth throughout various economic cycles.

Repeat Revenue with Diverse, Strong Customer Base. We focus on repeat business with long-term, well-diversified customers across a variety of end markets, which we believe provides us with a stable cash flow profile and substantial runway for organic growth. Maintenance and service revenues are less cyclical, and are highly recurring due to consistent renewal rates and deep customer relationships. We have longstanding relationships with our diverse roster of repeat blue chip customers who are spread across a variety of end markets.

 

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Disciplined Acquisition Platform with History of Strategic Acquisitions. We have a disciplined acquisition platform through which we systematically target, execute and integrate strategic acquisitions. Since 2005, we have completed over 60 acquisitions. Through our selective approach, we identify and assess companies that align with our strategic priorities and demonstrate key value drivers such as culture, geography, end markets and client base, capabilities and leadership, opportunity to expand our service offering or geographic footprint, or provide a competitive opportunity such as new end markets or client base. Each of our businesses maintains its identity, reputation, customer relationships and culture following acquisition while benefiting from the resources of the APG network, which we believe is an important differentiator.

Differentiated Leadership Culture and Operating Model. We believe that one of our core pillars of success is our distinct leadership development culture predicated on Building Great LeadersTM, our cross-functional leadership development platform designed to enable independent company leadership, cultivate broad management skills, enhance organizational flexibility, and empower the next cohort of leaders across our businesses. This culture of investing in leadership development at all levels of the organization has created an empowered, entrepreneurial atmosphere which facilitates organizational sharing of knowledge and best practices and enables the development of cross-brand solutions and innovation. Moreover, we employ a decentralized operating model which improves speed and responsiveness to customers in industries with strict requirements. This also empowers the leaders of our businesses to drive business performance and execute key decisions, while highlighting the significant focus we place on ensuring members of our team receive continuous investment in their development.

Attractive Financial Performance and Strong Margin and Cash Flow Profile. We believe that, due to our differentiated operating model, diversified services offerings, historically strong organic growth and disciplined acquisition strategy, we have an attractive financial performance profile. In addition, we support margin growth by leveraging our scale to benefit from procurement savings resulting from enhanced purchasing power, serving higher-margin, niche industries, and requiring minimal ongoing maintenance capital expenditures (typically 2% of total net revenue). We also have significant recurring revenue, which supports our ability to generate strong operating cash flows.

Our Business Strategy

We intend to continue to grow our businesses, both organically and through acquisitions and advance our position in each of the markets we serve by pursuing the following integrated business strategies:

Drive Organic Growth. We believe that we can continue to grow our businesses organically and capture additional market share across each of our segments by focusing on growing maintenance and service revenues and maximizing cross-selling opportunities.

 

   

Grow Maintenance and Service Revenue. We believe that we can drive substantial organic growth by focusing on growing our maintenance and service revenue, which is a component of our business in each of our segments. We plan to capitalize on our broad base of installed projects, cross-selling opportunities with respect to new project installations, and customer relationships to continue to grow maintenance and service revenue.

 

   

Maximize Cross-Selling Opportunities. With over 40 businesses, a broad reach across a variety of different industries, geographies, and end markets and a culture of collaboration, we believe that we have significant cross-selling opportunities to service more of the project life cycle and, once a project is completed, to continue to grow attractive recurring revenue streams.

Accelerate Growth through Acquisitions. We have a well-established acquisition platform with a track record of executing accretive acquisitions through our selective approach to targeting and assessing potential acquisitions that align with our values and strategic priorities. We believe that the markets in which we operate are fragmented and lend themselves to continued opportunistic acquisitions. We have grown, and plan to continue to drive growth through, accretive acquisitions, targeting businesses in our existing segments and those complementary to our service offerings.

 

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Continue to Foster Leadership Development throughout All Levels of the Organization. We plan to continue to invest in and support our leadership development culture through our Building Great LeadersTM platform, which we believe will continue to empower the leaders across our businesses, drive business performance and create future cross-selling opportunities. Our programmatic training and development curriculum focuses on a range of topics from enhancing technical capabilities to developing soft skills, and decision-making training to enable independent company leadership. We believe that this culture will continue to support our decentralized operating model, which combines the personal attention of a small-to-medium sized company with the strength and support of an industry leader.

Leverage Our Scale and Services Portfolio. We believe that we can grow our businesses and increase our market position by leveraging our scale and broad portfolio of services offerings to capitalize on demand for single-source national providers. For example, we plan to focus on expanding national accounts and further developing an entity-wide purchasing program to realize the benefits from volume discounts and vendor pricing. In addition, we plan to leverage our industry-leading positions and the leadership across our businesses to capture growth opportunities across each of our segments.

Customers

We have long-standing relationships with many customers in each of the industries we serve. We serve customers in both the public and private sectors, including commercial, industrial, manufacturing, retail, education, healthcare, communications, utilities, energy, high tech and governmental markets. Our customers range from Fortune 500 companies with diverse, worldwide operations to single-location companies. We have low customer concentration with no single customer accounting for more than 5% of our total net revenue for 2019.

Our focus on providing high quality service promotes deep, long-term relationships with our customers which often results in continued opportunities for new business and a reliable source of recurring revenue for ongoing inspection, maintenance and monitoring services. We often provide services under master service and other service agreements, which can be multi-year agreements, subject to earlier termination. The remainder of our work is generated pursuant to contracts for specific projects or jobs that require shorter-term specialty contracting services.

Customers are billed with varying frequency, the timing of which is generally dependent upon advance billing terms, milestone billings based on completion of certain phases of the work, or when services are provided. Under the typical payment terms of master and other service agreements and contracts for specific projects, the customer makes progress payments based on quantifiable measures of performance as defined in the agreements. Some of our contracts include retainage provisions, under which a portion of the contract amount can be retained by the customer until final contract settlement.

Government Regulation and Environmental Matters

A significant portion of our business activities is subject to foreign, federal, state and local laws and regulations. These regulations are administered by various foreign, federal, state and local health and safety and environmental agencies and authorities, including OSHA of the U.S. Department of Labor and the EPA. Failure to comply with these laws and regulations may involve civil and criminal liability. From time to time, we are also subject to a wide range of reporting requirements, certifications and compliance as prescribed by various federal and state governmental agencies. Expenditures relating to such regulations are made in the normal course of our business and are neither material nor place us at any competitive disadvantage. We do not currently expect that compliance with such laws and regulations will require us to make material expenditures. We believe we have all required licenses to conduct our business activities and are in substantial compliance with applicable regulatory requirements. If we fail to comply with applicable regulations, we could be subject to substantial fines or revocation of our operating licenses.

 

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We are subject to various federal and state labor and employment laws and regulations, including the Fair Labor Standards Act, Equal Opportunity Employment Act and wage and hour laws, that govern minimum wage requirements, overtime, working conditions, mandatory benefits, health insurance and other employment-related matters. Additionally, a large portion of our business uses labor that is provided under collective bargaining agreements. As such, we are subject to federal laws and regulations related to unionized labor and collective bargaining, including the National Labor Relations Act.

We also are subject to various environmental laws and regulations that impose liability and cleanup responsibility for releases of hazardous substances into the environment. Under certain of these laws and regulations, liabilities can be imposed for cleanup of properties, regardless of whether we directly caused the contamination or violated any law at the time of discharge or disposal. The presence of contamination from such substances or wastes could interfere with ongoing operations or adversely affect our business. In addition, we could be held liable for significant penalties and damages under certain environmental laws and regulations. Our contracts with customers may also impose liabilities on us regarding environmental issues that arise through the performance of our services. From time to time, we may incur costs and obligations related to environmental compliance and/or remediation matters.

Competitive Environment

We operate in industries which are highly competitive and highly fragmented. There are relatively few barriers to entry in many of the