APi Group Corp 8-K, filed Sep 13, 2021
APi Group Corp (APG)
About this 8-K
APi Group Corp filed this 8-K on September 13, 2021.
Items reported
- Item 8.01: Other events
- Item 9.01: Financial statements and exhibits
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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| Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
| 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 13(a) of the Exchange Act. ☐
| Item 8.01 | Other Events. |
As previously disclosed in the Current Report on Form 8-K filed with the Securities and Exchange Commission on July 30, 2021 (the “Prior 8-K”) by APi Group Corporation (the “Company”), the Company entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Carrier Global Corporation (“Carrier”), Carrier Investments UK Limited (“Seller”) and Chubb Limited (“Chubb”) pursuant to which the Company has agreed to acquire, and Seller has agreed to sell, the Chubb fire and security business (the “Business”), through the acquisition of Chubb for a purchase price of $3,100,000,000 (the “Acquisition”).
Consummation of the Acquisition remains subject to the satisfaction or waiver of certain customary closing conditions specified in the Purchase Agreement and as described in the Prior 8-K. If the Acquisition is consummated, we will be required to disclose information regarding the consummation of the Acquisition in a Current Report on Form 8-K as required by Item 2.01. This Current Report on Form 8-K is being filed to provide certain carve-out financial statements of the Business and to provide unaudited pro forma financial information of the Company and the Business giving effect to the Acquisition.
| Item 9.01 | Financial Statements and Exhibits. |
(a) Financial Statements of Businesses Acquired.*
The audited combined carve-out financial statements of the Business as of and for the years ended December 31, 2020 and 2019, the notes related thereto and the related Report of Independent Auditors, issued by PricewaterhouseCoopers LLP, dated June 30, 2021, are attached as Exhibit 99.1 and incorporated herein by reference.
The unaudited condensed combined carve-out financial statements of the Business as of and for the six months ended June 30, 2021 and 2020, and the notes related thereto, are attached hereto as Exhibit 99.2 and incorporated herein by reference.
* — Note: The Business has not yet been acquired. Financial statements are being provided pursuant to Rule 3-05 of Regulation S-X because the Acquisition constitutes a probable significant acquisition.
(b) Pro forma financial information.
The unaudited pro forma condensed combined balance sheet as of June 30, 2021, and the pro forma condensed combined statements of operations for the six months ended June 30, 2021 and the year ended December 31, 2020, and the notes related thereto, that give effect to the Acquisition of the Business are attached hereto as Exhibit 99.3 and incorporated herein by reference.
(d) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| API GROUP CORPORATION | ||
| By: | /s/ Andrea Fike | |
| Name: | Andrea Fike | |
| Title: | Senior Vice President, General Counsel and Secretary |
Date: September 13, 2021
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-256049 and 333-256050) and in the Registration Statements on Form S-8 (Nos. 333-238890, 333-238891 and 333-254675) of APi Group Corporation of our report dated June 30, 2021 relating to the financial statements of Chubb Fire & Security Group, which appears in this Current Report on Form 8-K.
/s/ PricewaterhouseCoopers LLP
Hallandale Beach, Florida
September 13, 2021
Exhibit 99.1
COMBINED FINANCIAL STATEMENTS
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
As of and for the Years Ended December 31, 2020 and 2019
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Combined Financial Statements
As of and for the Years Ended December 31, 2020 and 2019
Contents
| Report of Independent Auditors |
1 | |||
| Combined Statements of Operations |
2 | |||
| Combined Statements of Comprehensive Income |
3 | |||
| Combined Balance Sheets |
4 | |||
| Combined Statements of Changes in Net Investment |
5 | |||
| Combined Statements of Cash Flows |
6 | |||
| Notes to Combined Financial Statements |
7 |
Report of Independent Auditors
To Management and the Board of Directors of Carrier Global Corporation
We have audited the accompanying combined financial statements of Chubb Fire & Security Group (A Business of Carrier Global Corporation), which comprise the combined balance sheets as of December 31, 2020 and 2019, and the related combined statements of operations, of comprehensive income, of changes in net investment and of cash flows for the years then ended.
Management’s Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of the combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of combined financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the Company’s preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of Chubb Fire & Security Group (A Business of Carrier Global Corporation) as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
/s/ PricewaterhouseCoopers LLP
Hallandale Beach, Florida
June 30, 2021
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Combined Statements of Operations
(In Thousands of Dollars)
| For the Year Ended December 31, |
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| 2020 | 2019 | |||||||
| Net sales |
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| Product sales |
$ | 695,430 | $ | 807,786 | ||||
| Service sales |
1,252,223 | 1,323,370 | ||||||
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| 1,947,653 | 2,131,156 | |||||||
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| Costs and expenses |
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| Cost of products sold |
566,612 | 653,710 | ||||||
| Cost of services sold |
788,193 | 840,741 | ||||||
| Research and development |
118 | 85 | ||||||
| Selling, general and administrative |
546,853 | 532,226 | ||||||
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| 1,901,776 | 2,026,762 | |||||||
| Other income, net |
8,103 | 5,724 | ||||||
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| Operating profit |
53,980 | 110,118 | ||||||
| Non-service pension benefit |
68,790 | 75,645 | ||||||
| Interest income, net |
30,796 | 48,073 | ||||||
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| Income from operations before income taxes |
153,566 | 233,836 | ||||||
| Income tax expense |
106,307 | 56,702 | ||||||
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| Net income from operations |
47,259 | 177,134 | ||||||
| Less: Non-controlling interest in subsidiaries’ (loss) from operations |
(620 | ) | (96 | ) | ||||
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| Net income attributable to Chubb Fire & Security Group |
$ | 47,879 | $ | 177,230 | ||||
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The accompanying notes are an integral part of the Combined Financial Statements.
2
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Combined Statements of Comprehensive Income
(In Thousands of Dollars)
| For the Year Ended December 31, |
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| 2020 | 2019 | |||||||
| Net income attributable to Chubb Fire & Security Group |
$ | 47,879 | $ | 177,230 | ||||
| Other comprehensive income (loss), net of tax: |
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| Foreign currency translation adjustments arising during period |
116,171 | 24,385 | ||||||
| Pension and postretirement benefit plans: |
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| Net actuarial (loss) arising during period |
(84,465 | ) | (55,943 | ) | ||||
| Amortization of actuarial loss and prior service cost |
8,587 | 2,549 | ||||||
| Prior service credit arising during period |
524 | 826 | ||||||
| Other |
(24,327 | ) | (4,721 | ) | ||||
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| (99,681 | ) | (57,289 | ) | |||||
| Tax benefit |
23,964 | 9,921 | ||||||
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| (75,717 | ) | (47,368 | ) | |||||
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| Other comprehensive income (loss), net of tax |
40,454 | (22,983 | ) | |||||
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| Comprehensive income |
88,333 | 154,247 | ||||||
| Less: Comprehensive (loss) income attributable to non-controlling interests |
(18 | ) | 312 | |||||
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| Comprehensive income attributable to Chubb Fire & Security Group |
$ | 88,351 | $ | 153,935 | ||||
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The accompanying notes are an integral part of the Combined Financial Statements.
3
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Combined Balance Sheets
(In Thousands of Dollars)
| As of December 31, | ||||||||
| 2020 | 2019 | |||||||
| Assets |
||||||||
| Cash and cash equivalents |
$ | 33,076 | $ | 41,550 | ||||
| Accounts receivable (net of allowance for expected credit loss of $15,619 and $10,802) |
509,162 | 451,183 | ||||||
| Contract assets, current |
173,261 | 177,962 | ||||||
| Inventories, net |
69,485 | 69,389 | ||||||
| Other assets, current |
28,589 | 31,367 | ||||||
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| Total current assets |
813,573 | 771,451 | ||||||
| Future income tax benefits |
9,787 | 10,414 | ||||||
| Fixed assets, net |
71,603 | 74,334 | ||||||
| Operating lease right-of-use assets |
155,542 | 182,753 | ||||||
| Intangible assets, net |
585,860 | 573,894 | ||||||
| Goodwill |
932,863 | 875,435 | ||||||
| Pension and postretirement assets |
513,544 | 473,070 | ||||||
| Other assets |
14,927 | 12,190 | ||||||
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| Total assets |
$ | 3,097,699 | $ | 2,973,541 | ||||
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| Liabilities and Carrier Net Investment |
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| Accounts payable |
$ | 198,275 | $ | 198,029 | ||||
| Accrued salaries, wages and employee benefits |
129,797 | 110,672 | ||||||
| Accrued liabilities |
181,823 | 169,409 | ||||||
| Contract liabilities, current |
174,622 | 161,806 | ||||||
| Current portion of long-term debt |
465 | 526 | ||||||
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| Total current liabilities |
684,982 | 640,442 | ||||||
| Pension and post retirement obligations |
99,750 | 92,348 | ||||||
| Future income tax obligations |
220,679 | 140,683 | ||||||
| Operating lease liabilities |
115,850 | 138,535 | ||||||
| Other long-term liabilities |
23,858 | 31,022 | ||||||
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| Total liabilities |
1,145,119 | 1,043,030 | ||||||
| Commitments and contingent liabilities (Note 18) |
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| Carrier Net Investment: |
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| Carrier Net Investment |
2,911,353 | 2,924,357 | ||||||
| Accumulated other comprehensive (loss) |
(964,918 | ) | (1,005,372 | ) | ||||
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| Total Carrier Net Investment |
1,946,435 | 1,918,985 | ||||||
| Non-controlling interest |
6,145 | 11,526 | ||||||
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| Total Carrier Net Investment and non-controlling interests |
1,952,580 | 1,930,511 | ||||||
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| Total liabilities and Carrier Net Investment and non-controlling interest |
$ | 3,097,699 | $ | 2,973,541 | ||||
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The accompanying notes are an integral part of the Combined Financial Statements.
4
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Combined Statements of Changes in Net Investment
(In Thousands of Dollars)
| Carrier Net Investment |
Accumulated Other Comprehensive Income (Loss) |
Total Carrier Net Investment |
Non-controlling Interest |
Total Carrier Net Investment and Non-controlling interest |
||||||||||||||||
| Balance as of January 1, 2019 |
$ | 2,887,077 | $ | (982,389 | ) | $ | 1,904,688 | $ | 11,305 | $ | 1,915,993 | |||||||||
| Net income (loss) attributable to Chubb Fire & Security Group |
177,230 | — | 177,230 | (96 | ) | 177,134 | ||||||||||||||
| Other comprehensive (loss) income, net of tax |
— | (22,983 | ) | (22,983 | ) | 312 | (22,671 | ) | ||||||||||||
| Capital contribution to non-controlling interest |
— | — | — | 5 | 5 | |||||||||||||||
| Net transfers (to) Parent |
(139,950 | ) | — | (139,950 | ) | — | (139,950 | ) | ||||||||||||
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| Balance as of December 31, 2019 |
2,924,357 | (1,005,372 | ) | 1,918,985 | 11,526 | 1,930,511 | ||||||||||||||
| Net income (loss) attributable to Chubb Fire & Security Group |
47,879 | — | 47,879 | (620 | ) | 47,259 | ||||||||||||||
| Other comprehensive income (loss), net of tax |
— | 40,454 | 40,454 | (18 | ) | 40,436 | ||||||||||||||
| Net transfers (to) Parent |
(60,883 | ) | — | (60,883 | ) | — | (60,883 | ) | ||||||||||||
| Dividends attributable to non-controlling interest |
— | — | — | (4,743 | ) | (4,743 | ) | |||||||||||||
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| Balance as of December 31, 2020 |
$ | 2,911,353 | $ | (964,918 | ) | $ | 1,946,435 | $ | 6,145 | $ | 1,952,580 | |||||||||
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The accompanying notes are an integral part of the Combined Financial Statements.
5
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Combined Statements of Cash Flows
(In Thousands of Dollars)
| For the Year Ended December 31, |
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| 2020 | 2019 | |||||||
| Operating activities |
||||||||
| Net income attributable to Chubb Fire & Security Group |
$ | 47,879 | $ | 177,230 | ||||
| Noncontrolling interest |
(620 | ) | (96 | ) | ||||
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| Net income |
47,259 | 177,134 | ||||||
| Adjustments to reconcile net income from operations to net cash flows provided by operating activities: |
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| Depreciation and amortization |
38,904 | 43,521 | ||||||
| Stock-based compensation cost |
(6,036 | ) | (5,932 | ) | ||||
| Provision for deferred income taxes |
84,336 | 17,444 | ||||||
| Net change in pension balances |
(59,653 | ) | (49,693 | ) | ||||
| Other non-cash items |
12,707 | 5,478 | ||||||
| Change in: |
||||||||
| Accounts receivable, net |
(45,323 | ) | 2,985 | |||||
| Contract assets, current |
13,562 | (7,777 | ) | |||||
| Inventories, net |
3,190 | (2,248 | ) | |||||
| Other assets, current |
4,267 | (9,177 | ) | |||||
| Accounts payable and accrued liabilities |
19,156 | 5,358 | ||||||
| Contract liabilities, current |
3,899 | 3,095 | ||||||
| Defined benefit plan contributions |
(27,024 | ) | (26,012 | ) | ||||
| Other operating activities, net |
(28,790 | ) | (3,928 | ) | ||||
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| Net cash flows provided by operating activities |
60,454 | 150,248 | ||||||
| Investing activities |
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| Capital expenditures |
(10,762 | ) | (10,339 | ) | ||||
| Proceeds from sale of fixed assets |
793 | 462 | ||||||
| Other investing activities, net |
(602 | ) | (3,212 | ) | ||||
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| Net cash flows used in investing activities |
(10,571 | ) | (13,089 | ) | ||||
| Financing activities |
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| Net transfers (to) Parent |
(54,846 | ) | (134,052 | ) | ||||
| Other financing activities, net |
(4,788 | ) | 769 | |||||
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| Net cash flows used in financing activities |
(59,634 | ) | (133,283 | ) | ||||
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| Effect of foreign exchange rates on cash and cash equivalents |
1,277 | 639 | ||||||
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| Net (decrease) increase in cash and cash equivalents |
(8,474 | ) | 4,515 | |||||
| Cash and cash equivalents, beginning of year |
41,550 | 37,035 | ||||||
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| Cash and cash equivalents, end of year |
$ | 33,076 | $ | 41,550 | ||||
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| Supplemental information |
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| Interest paid – related party |
$ | 3,953 | $ | 5,652 | ||||
| Income taxes paid – related party |
— | 5,333 | ||||||
| Income taxes paid, net of refunds |
$ | 40,596 | $ | 31,233 | ||||
The accompanying notes are an integral part of the Combined Financial Statements.
6
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements
(In Thousands of Dollars)
1. Description of the Business
Chubb Fire & Security Group (“Chubb F&S”, “the “Business”, “we”, “us”, or “our”), a business of Carrier Global Corporation (“Carrier” or the “Parent”), is a global provider of fire safety and electronic security services with end-to-end capabilities in system sales, design, installation, service and monitoring. The Business has a presence in 17 different countries including over 225 branch locations and 21 physical monitoring centers. The Business’ most significant operations are in Australia, Canada, France, Hong Kong, the Netherlands and United Kingdom (“UK”). The Business manages its operations as a single segment for the purposes of assessing performance and making operating decisions.
The Business offers the following primary products and services to customers:
| 1. | Installation, which includes fire installation (detection and alarm, fire suppression and firefighting equipment) and security installation (access control, intruder alarm, closed circuit television and integrated solutions). |
| 2. | Service, which includes fire service and maintenance, electronic security and maintenance services and other maintenance services, including “do and charge”, retrofits and upgrades. |
| 3. | Monitoring, which includes video surveillance, alarm verification, alarm notification and personal emergency response systems. |
The Separation and the Distribution
On November 26, 2018, United Technologies Corporation, since renamed Raytheon Technologies Corporation (“UTC”), announced its intention to spin off Carrier into a separate, publicly traded company (the “Separation”). On April 3, 2020, UTC completed the Separation through a pro rata distribution of all the outstanding common shares of the common stock of Carrier to UTC shareowners (the “Distribution”). As a result of the Separation and the Distribution, Carrier became an independent public company.
Impact of the COVID-19 Pandemic
COVID-19 surfaced in late 2019 and has spread throughout the world. In March 2020, COVID-19 was declared a pandemic by the World Health Organization. The pandemic has negatively affected the global economy, disrupted global supply chains and financial markets, resulted in significant travel restrictions, mandated facility closures and resulted in shelter-in-place orders.
7
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
The Business has taken and continues to take all prudent measures to protect the health and safety of our employees. In particular, we have implemented work-from-home requirements (where practical), social distancing and deep cleaning protocols at all our facilities as well as travel restrictions, among other measures, which comply with applicable government regulations and guidance. We have also taken appropriate measures to work with our customers to minimize potential disruptions and to support the communities that we serve to address the challenges posed by the pandemic.
The full extent of the impact of COVID-19 on our operational and financial performance will depend on future developments, including the duration and spread of the pandemic as well as any worsening or additional outbreaks of the pandemic, related containment and mitigation actions taken by governments to prevent disease spread and the rollout of vaccines in countries in which the Business operates, including the effectiveness of such vaccines in preventing COVID-19 and the time it takes to vaccinate a sufficient percentage of global populations. The extent of the pandemic’s impact on the Business will also depend upon our employees’ ability to work safely in our facilities and customer sites and to be granted access to vaccines (including the time it takes for our employees to be vaccinated), our customers’ ability to continue to operate or to receive our products, our suppliers’ ability to continue to supply us with products, and the level of activity and demand for the ultimate products and services of our customers or their customers.
In early 2020, we temporarily closed or reduced activity at our locations throughout the countries in which the Business operates for safety reasons and in response to lower demand for our services. Our operations have since resumed, measures have been enacted to scale capacity to demand and the Business continues to actively take steps to mitigate supply chain risk. We continue to apply appropriate safety measures and have not experienced any significant disruptions to our operations. We also initiated return-to-work protocols at our facilities where employees were previously working remotely.
We took preemptive actions in 2020 to preserve our liquidity and manage our cash flows to ensure we met our liquidity needs. Such actions included, but were not limited to, reducing our discretionary spending, our capital investments and general and administrative costs by implementing pay freezes and cuts, employee furloughs and the suspension of non-critical hiring and participating in global COVID-19 relief measures.
2. Basis of Presentation
The Business has historically operated as a part of UTC’s Carrier segment prior to the Separation and the Distribution, and Carrier’s Fire & Security segment subsequent to the Separation and the Distribution; consequently, stand-alone financial statements have not historically been prepared for the Business. The accompanying Combined Financial Statements have been prepared from the Parent’s historical accounting records and are presented on a stand-alone basis as if the Business’ operations had been conducted independently from the Parent. These Combined Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
8
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
The Combined Statements of Operations include all revenues and costs directly attributable to the Business, including costs for facilities, functions and services used by the Business. Costs for certain functions and services performed by centralized UTC and Carrier organizations are directly charged to the Business based on specific identification when possible or reasonable allocation methods such as net sales, headcount, usage or other allocation methods. The results of operations include allocations of costs for administrative functions and services performed on behalf of the Business by centralized groups within UTC and Carrier (see Note 5 – Related Parties for a description of the allocation methodologies). All charges and allocations for facilities, functions and services performed by UTC and Carrier organizations have been deemed settled in cash by the Business to UTC and Carrier in the period in which the cost was recorded in the Combined Statements of Operations. As more fully described in Note 16 – Income Taxes, current and deferred income taxes have been determined based on the stand-alone results of the Business. However, because the Business filed as part of UTC and Carrier’s tax group in certain jurisdictions, the Business’ actual tax balances may differ from that reported. The Business’ portion of income taxes for certain jurisdictions are deemed to have been settled in the period the related tax expense was recorded.
Carrier uses a centralized approach to cash management and financing its operations, as did UTC prior to the Separation and the Distribution. Accordingly, none of the cash, third-party debt or related interest expense of UTC or Carrier has been allocated to the Business in the Combined Financial Statements. However, cash balances primarily associated with certain foreign entities that did not participate in UTC or Carrier’s cash management program have been included in the Combined Financial Statements. Transactions between UTC, Carrier and the Business are deemed to have been settled immediately through Carrier Net Investment. Other transactions, which have historically been cash-settled, are reflected in the Combined Balance Sheets within Accounts receivable, net and Accounts payable. The net effect of the deemed settled transactions is reflected in the Combined Statements of Cash Flows as Net transfers to Parent within financing activities and in the Combined Balance Sheets as Carrier Net Investment.
All intracompany accounts and transactions within the Business have been eliminated in the preparation of the Combined Financial Statements. The Combined Financial Statements of the Business include assets and liabilities that have been determined to be specifically identifiable or otherwise attributable to the Business.
9
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
All of the allocations and estimates in the Combined Financial Statements are based on assumptions that management believes are reasonable. However, the Combined Financial Statements included herein may not be indicative of the financial position, results of operations and cash flows of the Business in the future, or if the Business had been a separate, stand-alone entity during the years presented.
The non-controlling interest represents the non-controlling investors’ interests in the results of subsidiaries that the Business controls and combines.
3. Summary of Significant Accounting Policies
Principles of Combination
The Combined Financial Statements have been prepared on a stand-alone basis and include the accounts of Chubb F&S and its wholly-owned subsidiaries as well as entities in which Chubb F&S has a controlling financial interest.
Use of Estimates
The preparation of the Combined Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. In addition, estimates and assumptions may impact the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, demand deposits and short-term cash investments that are highly liquid in nature and have original maturities of three months or less. The Business participated in UTC and Carrier’s centralized cash management and financing programs (see Note 5 – Related Parties for additional information). The cash reflected on the Combined Balance Sheets represents cash on hand at certain foreign entities that do not participate in the centralized cash management program and are specifically identifiable to the Business.
Accounts Receivable
Accounts receivable consist of billed amounts to customers that have not been paid.
10
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Receivables are recognized net of an allowance for credit losses. The Business is exposed to credit losses primarily through the sales of products and services to commercial customers, which are recorded as trade receivables. The Business evaluates a customer’s ability to pay by assessing creditworthiness, historical experience and current and projected economic and market conditions. The Business determines credit ratings for each customer in our portfolio based upon public information and information obtained directly from our customers. The Business evaluates the reasonableness of the allowance for credit losses on a quarterly basis or when events and circumstances warrant. In addition to credit quality indicators, factors considered in our evaluation of collectability include the underlying value of any collateral or security interests, past due balances, historical losses and existing economic conditions including country and political risk. In certain circumstances, the Business may require collateral or prepayment to mitigate credit risk. We determine receivables are impaired when, based on historical experience, current information and events and a reasonable forecast period, the Business may be unable to collect amounts due according to the contractual terms of an agreement. Estimated credit losses are written off in the period in which an accounts receivable is determined to be no longer collectible.
Contract Assets and Liabilities
Contract assets and liabilities represent the difference in the timing of revenue recognition from receipt of cash from our customers. Contract assets (unbilled receivables) reflect revenue recognized and performance obligations satisfied in advance of customer billing. Performance obligations partially satisfied in advance of customer billings are included in Contract assets.
Contract liabilities relate to payments received in advance of the satisfaction of performance obligations under a contract. The Business receives payments from customers based on contractual terms. See Note 4 – Revenue Recognition for additional information.
Inventories
Inventories are stated at the lower of cost or estimated realizable value and are based on first-in, first-out (“FIFO”) methods. The Business forecasts future customer demand and production requirements and analyzes historical usage rates for our products to estimate excess and obsolete inventory reserves.
Fair Value of Financial Instruments
The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:
| • | Level I – Quoted prices for identical instruments in active markets. |
11
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
| • | Level II – Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable. |
| • | Level III – Instruments whose significant value drivers are unobservable. |
The carrying amount of accounts receivables, accounts payable and accrued liabilities approximates fair value due to the short maturity (less than one year) of the instruments.
Goodwill and Intangible Assets
Goodwill represents costs in excess of fair values assigned to the underlying net assets of acquired businesses. Goodwill and intangible assets deemed to have indefinite lives are not amortized.
Intangible assets consist of trademarks, patents, service portfolios, monitoring lines and customer relationships and are recognized at fair value in acquisition accounting and then amortized to cost of sales and selling, general and administrative expenses.
Goodwill and indefinite-lived intangibles are tested annually for impairment, or when a triggering event occurs that indicates the fair value of a reporting unit or asset may have decreased below the carrying value in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350: Intangibles – Goodwill and Other. The impairment assessment compares the estimated fair value of each reporting unit or indefinite-lived trademark to its associated carrying value. If the carrying value of the reporting unit or trademark exceeds its estimated fair value, then the Business records an impairment based on the difference between fair value and carrying value.
The Business performed the most recent annual impairment assessment of goodwill and indefinite-lived trademarks as of December 31, 2020 and determined that no significant adjustments to the carrying value of goodwill or indefinite lived intangible assets were necessary. For our goodwill impairment analysis, the Business utilizes a discounted cash flow method under the income approach to estimate the fair value of the Business. The discounted cash flow method relies on estimates of future cash flows and expressly addressed factors such as timing, growth and margins, with consideration given to forecasting risk. The Business developed these assumptions based on market and geographic risks unique to the Business. The significant assumptions inherent in estimating the fair values include estimated future annual net cash flows for the Business (based on projected net sales, projected operating margins, working capital and capital expenditures), income tax rates, long-term growth rates and discount rates. For our indefinite-lived assets, fair value is determined on a relief from royalty methodology, which is based on the implied royalty paid, at an appropriate discount rate, to license the use of an asset rather than owning an asset. Additionally, as part of our annual impairment testing in 2020, the Business considered the impact of the adverse effects of COVID-19 on the global economy and on our business.
12
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Useful lives of finite-lived intangible assets are estimated based upon the nature of the intangible asset. These intangible assets are amortized based on the pattern in which the economic benefits of the intangible assets are consumed. If a pattern of economic benefit cannot be reliably determined or if straight-line amortization approximates the pattern of economic benefit, a straight-line amortization method may be used.
Leases
We account for leases in accordance with ASC Topic 842: Leases, which requires a lessee to utilize the right-of-use model and to record a right-of-use asset and a lease liability on the Combined Balance Sheet for all leases with terms longer than 12 months. Leases are classified as either financing or operating, with classification affecting the pattern of expense recognition in the Combined Statement of Operations. In addition, a lessor is required to classify leases as either sales-type, financing or operating. A lease will be treated as a sale if it transfers all the risks and rewards, as well as control of the underlying asset, to the lessee. If risks and rewards are conveyed without the transfer of control, the lease is treated as financing. If the lessor does not convey risk and rewards or control, the lease is treated as operating.
The Business enters into operating and finance leases for the use of real estate space, vehicles, information technology equipment and certain other equipment. The Business determines if an arrangement contains a lease at the inception of an agreement. Operating leases are included in Operating lease right-of-use assets, Accrued liabilities and Operating lease liabilities in our Combined Balance Sheet. Finance leases are primarily included in Other long-term liabilities in our Combined Balance Sheet.
Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments over the lease term. Lease right-of-use assets and liabilities at commencement are initially measured at the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate, consistent with that of Carrier, based on the information available at commencement date in determining the present value of lease payments, and use the implicit rate when readily determinable. The Business determines the incremental borrowing rate based on market sources including relevant industry data. Our lease right-of-use assets include any lease prepayment and exclude lease incentives. Our leases generally have remaining lease terms of 1 to 20 years, some of which include options to extend. For the majority of our leases with options to extend, those options are up to 5 years with the ability to terminate the lease within 1 to 5 years of inception. The exercise of lease renewal options is at our sole discretion and our lease right-of-use assets and liabilities reflect only the options the Business are reasonably certain that will be exercised. Operating lease expense is recognized on a straight-line basis over the lease term.
13
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Other Long-Lived Assets
The Business evaluates the potential impairment of other long-lived assets whenever events or changes in circumstances indicate that the related carrying amounts of a long-lived asset or asset group may not be recoverable. The carrying value of a long-lived asset or asset group is considered impaired when the projected future undiscounted cash flows to be generated from the asset or asset group over its remaining depreciable life are less than its current carrying value. The Business measures impairment based on the amount by which the carrying value exceeds the estimated fair value of the long-lived asset or asset group. There were no significant impairments of long-lived assets for the years ended December 31, 2020 or 2019.
Income Taxes
Income taxes as presented herein, attribute current and deferred income taxes of UTC and Carrier, prior to and subsequent to the Separation and the Distribution, respectively, to the Business’ stand-alone financial statements in a manner that is systematic, rational and consistent with the asset and liability method prescribed by ASC 740: Income Taxes. Accordingly, the Business’ income tax provision was prepared following the separate return method. The separate return method applies ASC 740 to the stand-alone financial statements of each member of the consolidated group as if the group members were separate taxpayers. As a result, actual transactions included in the consolidated financial statements of UTC and Carrier may not be included in the separate Combined Financial Statements of the Business. Similarly, the tax treatment of certain items reflected in the Combined Financial Statements of the Business may not be reflected in the consolidated financial statements and tax returns of UTC and Carrier. Therefore, such items as net operating losses, credit carryforwards and valuation allowances may exist in the stand-alone financial statements that may or may not exist in UTC’s and Carrier’s consolidated financial statements. As such, the income taxes of the Business as presented in the Combined Financial Statements may not be indicative of the income taxes that the Business will generate in the future.
Current obligations for taxes in jurisdictions where the Business files a combined tax return with the Parent are deemed settled with the Parent.
14
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
In the ordinary course of business there is inherent uncertainty in quantifying the Business’ income tax positions. The Business assessed its income tax positions and recorded tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, the Business has recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the Combined Financial Statements. Where applicable, associated interest expense has also been recognized. The Business recognizes accrued interest related to unrecognized tax benefits in interest expense. Penalties, if incurred, would be recognized as a component of income tax expense.
Revenue Recognition
The Business accounts for revenue in accordance with FASB ASC Topic 606: Revenue from Contracts with Customers. Under Topic 606, a performance obligation is a promise in a contract to transfer a distinct good or service to a customer. Some of our contracts with customers contain a single performance obligation, while others contain multiple performance obligations most commonly when a contract spans multiple phases of a product life cycle such as installation, maintenance and support. A contract’s transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. When there are multiple performance obligations within a contract, the Business allocates the transaction price to each performance obligation based on our relative stand-alone selling price.
The Business considers the contractual consideration payable by the customer and assesses variable consideration that may affect the total transaction price, including contractual discounts, price concessions, contract incentive payments, estimates of award fees and other sources of variable consideration, when determining the transaction price of each contract. The Business includes variable consideration in the estimated transaction price when there is a basis to reasonably estimate the amount. These estimates are based on historical experience, anticipated performance and management’s judgment. The Business also considers whether the contracts provide customers with significant financing. Generally, contracts do not contain significant financing.
Point-in-time revenue recognition. Performance obligations are satisfied as of a point in time for alarm and fire detection and suppression equipment only contracts. Revenue is recognized when control of the product transfers to the customer, generally upon product shipment.
Over-time revenue recognition. Performance obligations are satisfied over-time if the customer receives the benefits as the Business performs work. The Business recognizes revenue on an over- time basis on installation and service contracts. For over-time performance obligations requiring the installation of equipment, revenue is recognized using costs incurred to date relative to total estimated costs at completion to measure progress. Incurred costs represent work performed, which correspond with and best depict transfer of control to the customer. Contract costs include labor, materials and subcontractors’ costs, or other direct costs, and where applicable, indirect costs.
15
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Contract modifications that are for goods or services that are not distinct are accounted for as part of an existing contract. If the goods or services are considered distinct, then a contract modification would be accounted for prospectively or as part of a new contract. The Business reviews cost estimates on significant contracts on at least a quarterly basis, and for other contracts, no less frequently than annually or when circumstances change and warrant a modification to a previous estimate. The Business records changes in contract estimates using the cumulative catch-up method. There were no material changes in contract estimates during the periods presented in the Combined Financial Statements.
For product maintenance and extended warranty aftermarket contracts, sales are recognized primarily on a straight-line basis.
Loss provisions on contracts are recognized to the extent that estimated contract costs exceed the estimated consideration under the contractual arrangement. For new commitments, the Business generally records loss provisions at the earlier of contract announcement or contract signing except for certain requirements contracts under which losses are recorded upon receipt of the purchase order which obligates us to perform. For existing commitments, anticipated losses on contracts are recognized in the period in which losses become evident.
Self-Insurance
Carrier maintains self-insurance retentions for a number of risks, including but not limited to, workers’ compensation, general liability, automobile liability, property and employee-related healthcare benefits. Carrier has obtained insurance coverage for amounts exceeding individual and aggregate loss limits. The Business accrues for known future claims and incurred but not reported losses. See Note 18 – Commitments and Contingent Liabilities for additional information.
Environmental
Environmental investigatory, remediation, operating and maintenance costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. The most likely cost to be incurred is accrued based on an evaluation of currently available facts with respect to each individual site, including existing technology, current laws and regulations and prior remediation experience. Where no amount within a range of estimates is more likely, the minimum is accrued. For sites with multiple responsible parties, the Business considers its likely proportionate share of the anticipated remediation costs and the ability of the other parties to fulfill their obligations in establishing a provision for those costs. Accrued environmental liabilities are not reduced by potential insurance reimbursements. See Note 18 – Commitments and Contingent Liabilities for additional information.
16
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Asset Retirement Obligations
The Business records the fair value of legal obligations associated with the retirement of tangible long-lived assets in the period in which it is determined to exist, if a reasonable estimate of fair value can be made. Upon initial recognition of a liability, the Business capitalizes the cost of the asset retirement obligation by increasing the carrying amount of the related long-lived asset. Over time, the liability is increased for changes in its present value and the capitalized cost is depreciated over the useful life of the related asset. As of December 31, 2020 and 2019, the outstanding liability for asset retirement obligations was $12,369 and $12,772, respectively, of which $231 and $86 is included in Accrued liabilities, and $12,138 and $12,686 is included in Other long-term liabilities in the accompanying Combined Balance Sheets.
Foreign Exchange
The Business operates in many different currencies and, accordingly, is subject to the inherent risk associated with foreign exchange rate movements. The financial position and results of operations of substantially all the Business are measured using the local currency as the functional currency. Foreign currency denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing at the respective balance sheet dates, and income and expense items are translated at the average exchange rates during the respective periods. The aggregate effects of translating foreign currency denominated balance sheets are deferred as a separate component of Carrier Net Investment.
Pension and Postretirement Obligations
Guidance under FASB ASC Topic 715: Compensation – Retirement Benefits requires balance sheet recognition of the overfunded or underfunded status of pension and postretirement benefit plans. Under this guidance, actuarial gains and losses, prior service costs or credits, and any remaining transition assets or obligations that have not been recognized under previous accounting standards must be recognized in other comprehensive income, net of tax effects, until they are amortized as a component of net periodic benefit cost. Pension and post-retirement obligation balances and related costs reflected within the Combined Financial Statements include costs directly attributable to plans dedicated to the Business.
17
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Carrier Net Investment
Carrier’s net investment in the Business is presented as “Carrier Net Investment” on the Combined Balance Sheets. The Combined Statements of Changes in Net Investment include net cash transfers and other property transfers between Carrier and the Business as well as related party receivables and payables between the Business and other Carrier and UTC affiliates that were settled on a current basis. Carrier and UTC performed cash management and other treasury-related functions on a centralized basis for nearly all of its legal entities, which includes the Business and, consequently, the net cash generated by the Business was transferred to Carrier and UTC through the intercompany accounts.
Recent Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) requiring recognition of operating leases as right-of-use assets and lease liabilities on the balance sheet and disclosure of key information about leasing arrangements. The Business adopted ASU 2016-02 and its related amendments (collectively, the “New Lease Accounting Standard”) effective January 1, 2019, and elected the modified retrospective approach in which results for periods before 2019 were not adjusted for the new standard and the cumulative effect of the change in accounting was recognized through Carrier Net Investment at the date of adoption. The Business has elected certain of the practical expedients available under the New Lease Accounting Standard including the practical expedient which allows prospective transition to the New Lease Accounting Standard on January 1, 2019. Under the transition practical expedient, the Business did not reassess lease classification, embedded leases or initial direct costs. The Business has applied the practical expedient for short-term leases, whereby a lease right-of-use asset and liability is not recognized, and the expense is recognized on a straight-line basis over the lease term. In addition, the Business has lease agreements with lease and non-lease components, for which the Business has elected the practical expedients to combine these components for certain equipment leases. Additionally, for certain equipment leases, the Business applies a portfolio approach to effectively account for the operating lease right-of-use assets and liabilities. The adoption of the New Lease Accounting Standard did not have a material effect on our Combined Statement of Operations or Combined Statement of Cash Flows. Upon adoption, the Business recorded an $195,733 right-of-use asset and a $196,499 lease liability. The adoption of the New Lease Accounting Standard did not have a material impact on Carrier Net Investment. See Note 17 – Leases for further information.
18
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU and its related amendments (collectively, the “Credit Loss Standard”) modified the credit loss model to utilize an expected loss methodology in place of an incurred loss methodology for financial instruments, including trade receivables, contract assets, long term receivables and off-balance sheet credit exposures. The Credit Loss Standard requires consideration of a broader range of information to estimate expected credit losses, including historical information, current conditions and a reasonable forecast period. This ASU requires that the statement of operations reflect the measurement of credit losses for newly recognized financial assets as well as an expected increase or decrease of expected credit losses that have taken place during the period, which may result in earlier recognition. The Business adopted the Credit Loss Standard effective January 1, 2020, utilizing a modified retrospective approach and its adoption did not have a material impact on the Combined Financial Statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This ASU simplifies how an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Under this ASU, a goodwill impairment is calculated as the difference between the carrying amount of a reporting unit and its fair value, not to exceed the carrying amount of the goodwill allocated to a reporting unit. Additionally, this ASU requires the same impairment testing methodology for all reporting units, even those with a zero or negative carrying amount, and requires an entity to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount. The Business adopted this ASU effective January 1, 2020 and its adoption did not have a material impact on the Combined Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes the disclosure requirements for the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The Business adopted this ASU on January 1, 2020. The adoption of this standard did not have a material impact on the Combined Financial Statements.
In August 2018, the FASB issued ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Subtopic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans. The new standard includes updates to the disclosure requirements for defined benefit plans including several additions, deletions and modifications to the disclosure requirements. The Business adopted this ASU on December 31, 2020. The adoption of this standard did not have a material impact on the Combined Financial Statements.
19
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update remove certain exceptions allowed by Topic 740 including exceptions to the incremental approach for intra-period tax allocation when there is a loss from continuing operations and income or gain from other items, the requirement to recognize a deferred tax liability for equity method investments when a foreign subsidiary becomes an equity method investment, the ability not to recognize a deferred tax liability for a foreign subsidiary when a foreign equity method investment becomes a subsidiary and the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year. There are also additional areas of guidance in regard to franchise and other taxes partially based on income and the interim recognition of enactment of tax laws and rate changes. The provisions of this ASU are effective for years beginning after December 15, 2020, with early adoption permitted. The Business intends to apply ASU 2019-12 in the first quarter of 2021 and does not anticipate that the adoption will have a material impact on the Business’ Combined Financial Statements upon adoption.
4. Revenue Recognition
Total contract assets and liabilities are as follows:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Contract assets, current |
$ | 173,261 | $ | 177,962 | ||||
| Contract assets, non-current (included within Other assets) |
— | — | ||||||
|
|
|
|
|
|||||
| Total contract assets |
$ | 173,261 | $ | 177,962 | ||||
|
|
|
|
|
|||||
| Contract liabilities, current |
$ | (174,622 | ) | $ | (161,806 | ) | ||
| Contract liabilities, non-current (included within Other long-term liabilities) |
— | — | ||||||
|
|
|
|
|
|||||
| Total contract liabilities |
(174,622 | ) | (161,806 | ) | ||||
|
|
|
|
|
|||||
| Net contract assets |
$ | (1,361 | ) | $ | 16,156 | |||
|
|
|
|
|
|||||
Contract assets decreased $4,701 for the year ended December 31, 2020, primarily due to the timing of billings on customer contracts and contract completions. Contract liabilities decreased $12,816 for the year ended December 31, 2020, primarily due to customer billings in excess of revenue earned.
For the years ended December 31, 2020 and 2019, the Business recognized revenue of $122,781 and $123,431, respectively, that was related to contract liabilities as of January 1, 2020 and 2019, respectively.
There were no individually significant customers with sales exceeding 10% of total sales for the years ended December 31, 2020 and 2019.
20
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Remaining Performance Obligations (“RPO”)
As of December 31, 2020, our total RPO was approximately $708,515 compared with $659,068 as of December 31, 2019. Of the total RPO as of December 31, 2020, the Business expects that approximately 80% will be recognized as sales over the following 12 months.
5. Related Parties
Historically, the Business has been managed and operated in the normal course of business with other affiliates of UTC and Carrier, prior to and subsequent to the Separation and the Distribution, respectively. Accordingly, certain shared costs have been allocated to the Business and reflected as expenses in the Combined Financial Statements.
Related Party Purchases and Sales
During the historical periods presented, the Business sold products and services to UTC, Carrier and their non-Chubb F&S businesses. Sales in the Combined Statements of Operations include sales to affiliates of UTC and Carrier of $1,547 and $3,397 for the years ended December 31, 2020 and 2019, respectively. Cost of goods sold in the Combined Statements of Operations includes purchases from affiliates of UTC and Carrier of $62,114 and $71,962 for the years ended December 31, 2020 and 2019, respectively. Sales and Purchases are only considered related party if they were made to UTC and Carrier affiliates prior to the Separation and the Distribution and to Carrier affiliates subsequent to the Separation and the Distribution.
Allocated Centralized Costs
UTC and Carrier incurred significant corporate costs for services provided to the Business as well as other UTC and Carrier businesses. These services include treasury, tax, accounting, human resources, audit, legal, purchasing, information technology and other such services. The costs associated with these services generally include all payroll and benefit costs, as well as overhead costs related to the support functions. UTC and Carrier also allocated costs associated with corporate insurance coverage and medical, pension, post-retirement and other health plan costs for employees participating in UTC and Carrier sponsored plans. Allocations are based on a number of utilization measures including headcount, proportionate usage and relative net sales. All such amounts have been deemed to have been incurred and settled by the Business in the period in which the costs were recorded.
The allocated functional service expenses and general corporate expenses for the years ended December 31, 2020 and 2019 were $47,069 and $32,618, respectively, and are included in Selling, general and administrative in the Combined Statements of Operations.
21
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
In the opinion of management of the Parent and the Business, the expense and cost allocations have been determined on a basis considered to be a reasonable reflection of the utilization of services provided or the benefit received by the Business during 2020 and 2019. The amounts that would have been, or will be incurred, on a stand-alone basis could differ from the amounts allocated due to economies of scale, difference in management judgment, a requirement for more or fewer employees or other factors. Management does not believe, however, that it is practicable to estimate what these expenses would have been had the Business operated as an independent entity, including any expenses associated with obtaining any of these services from unaffiliated entities. In addition, the future results of operations, financial position and cash flows could differ materially from the historical results presented herein.
Cash Management and Financing
The Business participated in UTC and Carrier’s centralized cash management and financing programs prior to and subsequent to the Separation and the Distribution, respectively. Disbursements are made through centralized accounts payable systems which were operated by UTC and Carrier. Cash receipts are transferred to centralized accounts, which were also maintained by UTC and Carrier. As cash was received and disbursed by UTC and Carrier, it is accounted for by the Business through Carrier Net Investment. All short and long-term debt were financed by UTC and Carrier, and financing decisions for wholly and majority owned subsidiaries were determined by UTC and Carrier Treasury. See Note 2 – Basis of Presentation for additional information. The Business’ cash that is not included in the centralized cash management and financing programs is classified as Cash and cash equivalents on the Combined Balance Sheet.
Accounts Receivable and Payable
Certain related party transactions between the Business and Parent have been included within Carrier Net Investment in the Combined Balance Sheets in the historical periods presented when the related party transactions are not settled in cash. The Carrier Net Investment includes related party receivables due from Carrier and its affiliates of $204,841 and $208,385 as of December 31, 2020 and 2019, respectively. The Carrier Net Investment includes related party payables due to Carrier and its affiliates of $183,257 and $178,132 as of December 31, 2020 and 2019, respectively. The interest income and expense related to the activity with Carrier that was included in the Business’ results is presented on a net basis in the Combined Statements of Operations. Interest income on the activity with Parent was $33,785 and $53,382 for the years ended December 31, 2020 and 2019, respectively. Interest expense on the activity with Parent was $3,328 and $5,063 for the years ended December 31, 2020 and 2019, respectively. The total effect of the settlement of these related party transactions is reflected as a financing activity in the Combined Statements of Cash Flows.
22
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Additionally, certain transactions between the Business and certain non-Chubb F&S businesses are cash-settled on a current basis and, therefore, are reflected in the Combined Balance Sheets. Accounts receivable includes $627 and $306 at December 31, 2020 and 2019, respectively, and Accounts payable includes $13,161 and $14,596 at December 31, 2020 and 2019, respectively, related to such transactions.
6. Accounts Receivable, Net
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Trade receivables |
$ | 513,094 | $ | 449,477 | ||||
| Miscellaneous receivables |
11,687 | 12,508 | ||||||
|
|
|
|
|
|||||
| Total receivables |
524,781 | 461,985 | ||||||
|
|
|
|
|
|||||
| Less: allowance for expected credit losses |
(15,619 | ) | (10,802 | ) | ||||
|
|
|
|
|
|||||
| Accounts receivable, net |
$ | 509,162 | $ | 451,183 | ||||
|
|
|
|
|
|||||
Accounts receivable are carried at amounts that approximate fair value. Bad debt expense was $10,095 and $5,452 for the years ended December 31, 2020 and 2019, respectively.
The changes in the allowance for expected credit losses related to Accounts receivable, net are as follows:
| (Dollars in Thousands) | ||||
| Balance as of January 1, 2019 |
$ | 22,261 | ||
| Provision charged to income |
5,452 | |||
| Accounts charged off, net of recoveries |
(8,971 | ) | ||
| Other |
(7,940 | ) | ||
|
|
|
|||
| Balance as of December 31, 2019 |
10,802 | |||
| Provision charged to income |
10,095 | |||
| Accounts charged off, net of recoveries |
(3,036 | ) | ||
| Other |
(2,242 | ) | ||
|
|
|
|||
| Balance as of December 31, 2020 |
$ | 15,619 | ||
|
|
|
|||
7. Inventories, Net
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Raw materials |
$ | 636 | $ | 694 | ||||
|
Work-in-process |
81 | 85 | ||||||
| Finished goods |
68,768 | 68,610 | ||||||
|
|
|
|
|
|||||
| Inventories, net |
$ | 69,485 | $ | 69,389 | ||||
|
|
|
|
|
|||||
23
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Raw materials, work-in-process and finished goods are net of valuation reserves of $12,792 and $11,298 as of December 31, 2020 and 2019, respectively.
8. Fixed Assets, Net
Fixed assets are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives.
| (Dollars in Thousands) | Estimated Useful Lives |
2020 | 2019 | |||||||||
| Land |
$ | 5,336 | $ | 4,138 | ||||||||
| Buildings and improvements |
40 | 84,247 | 85,199 | |||||||||
| Machinery, tools and equipment |
3–10 | 193,829 | 183,984 | |||||||||
| Rental assets |
3–10 | 59,931 | 59,220 | |||||||||
| Assets under construction |
655 | 3,865 | ||||||||||
|
|
|
|
|
|||||||||
| Fixed assets, gross |
343,998 | 336,406 | ||||||||||
|
|
|
|
|
|||||||||
| Less: accumulated depreciation |
(272,395 | ) | (262,072 | ) | ||||||||
|
|
|
|
|
|||||||||
| Fixed assets, net |
$ | 71,603 | $ | 74,334 | ||||||||
|
|
|
|
|
|||||||||
Depreciation expense was $16,493 and $18,187 for the years ended December 31, 2020 and 2019, respectively.
9. Business Acquisitions, Dispositions, Goodwill and Intangible Assets
Business Acquisitions and Dispositions
There were no significant acquisitions or divestitures of combined businesses for the years ended December 31, 2020 and 2019.
24
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Goodwill
The changes in the carrying amount of goodwill are as follows:
| (Dollars in Thousands) | Carrying Amount(1) |
|||
| Balance as of January 1, 2019 |
$ | 872,301 | ||
| Foreign currency translation and other |
3,134 | |||
|
|
|
|||
| Balance as of December 31, 2019 |
875,435 | |||
| Foreign currency translation and other |
57,428 | |||
|
|
|
|||
| Balance as of December 31, 2020 |
$ | 932,863 | ||
|
|
|
|||
| (1) | Prior to January 1, 2019, the Business has recognized impairment charges of $1,841,661; there were no impairment charges for the years ended December 31, 2019 or 2020. |
Intangible Assets, Net
Identifiable intangible assets are comprised of the following:
| 2020 |
2019 | |||||||||||||||||
| (Dollars in Thousands) | Useful Lives |
Gross Amount |
Accumulated Amortization |
Gross Amount |
Accumulated Amortization |
|||||||||||||
| Amortized: |
||||||||||||||||||
| Customer relationships |
1 to 30 | $ | 669,240 | $ | (625,633 | ) | $ | 629,674 | $ | (573,509 | ) | |||||||
| Patents and trademarks |
5 to 30 | 69,524 | (47,792 | ) | 65,060 | (42,776 | ) | |||||||||||
| Monitoring lines |
7 to 10 | 71,512 | (59,364 | ) | 68,357 | (52,309 | ) | |||||||||||
| Service portfolios and other |
1 to 23 | 20,511 | (18,780 | ) | 19,203 | (17,172 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| 830,787 | (751,569 | ) | 782,294 | (685,766 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Unamortized: |
||||||||||||||||||
| Trademarks and other |
506,642 | — | 477,366 | — | ||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
| Total intangibles |
$ | 1,337,429 | $ | (751,569 | ) | $ | 1,259,660 | $ | (685,766 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||||
25
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Amortization of intangible assets was $22,411 and $25,334 for the years ended December 31, 2020 and 2019, respectively. The estimated future amortization of intangible assets is as follows:
| (Dollars in Thousands) | 2021 | 2022 | 2023 | 2024 | 2025 | |||||||||||||||
| Future amortization |
$ | 20,421 | $ | 14,051 | $ | 11,461 | $ | 8,301 | $ | 5,943 | ||||||||||
10. Accrued Liabilities
Accrued liabilities as of December 31, 2020 and 2019 are as follows:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Accrued taxes |
$ | 42,522 | $ | 45,152 | ||||
| Restructuring |
16,829 | 14,958 | ||||||
| Accrued legal and environmental reserves |
7,071 | 1,171 | ||||||
| Operating lease liabilities |
39,855 | 44,849 | ||||||
| Other |
75,546 | 63,279 | ||||||
|
|
|
|
|
|||||
| Total accrued liabilities |
$ | 181,823 | $ | 169,409 | ||||
|
|
|
|
|
|||||
11. Employee Benefit Plans
Employee Savings Plans
The Business sponsors various employee savings plans. Contributions to employer sponsored defined contribution plans were $10,191 and $10,122 for 2020 and 2019, respectively.
26
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Pension Plans
The Business sponsors both funded and unfunded foreign defined benefit pension plans that cover a large number of the Business’ employees. The largest plans are closed to new participants. The plans use a December 31 measurement date consistent with the Business’ fiscal year.
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Change in Benefit Obligation |
||||||||
| Beginning balance |
$ | 2,033,112 | $ | 1,836,517 | ||||
| Service cost |
10,270 | 12,574 | ||||||
| Interest cost |
35,176 | 45,435 | ||||||
| Actuarial loss |
176,965 | 238,973 | ||||||
| Benefits paid |
(102,502 | ) | (108,139 | ) | ||||
| Net settlement, curtailment and special termination benefits |
(4,700 | ) | (24,856 | ) | ||||
| Other |
115,670 | 32,608 | ||||||
|
|
|
|
|
|||||
| Ending balance |
$ | 2,263,991 | $ | 2,033,112 | ||||
|
|
|
|
|
|||||
| Change in Plan Assets |
||||||||
| Beginning balance |
$ | 2,426,238 | $ | 2,180,531 | ||||
| Actual return on plan assets |
206,740 | 289,436 | ||||||
| Employer contributions |
27,024 | 26,012 | ||||||
| Benefits paid |
(102,502 | ) | (108,139 | ) | ||||
| Settlements |
(4,700 | ) | (6,164 | ) | ||||
| Other |
144,850 | 44,562 | ||||||
|
|
|
|
|
|||||
| Ending balance |
$ | 2,697,650 | $ | 2,426,238 | ||||
|
|
|
|
|
|||||
| Funded Status |
||||||||
| Fair value of plan assets |
$ | 2,697,650 | $ | 2,426,238 | ||||
| Benefit obligations |
(2,263,991 | ) | (2,033,112 | ) | ||||
|
|
|
|
|
|||||
| Funded status of plan |
$ | 433,659 | $ | 393,126 | ||||
|
|
|
|
|
|||||
| Amounts recognized in the Combined Balance Sheet consist of |
||||||||
| Non-current assets |
$ | 509,640 | $ | 470,864 | ||||
| Current liability |
(1,097 | ) | (1,685 | ) | ||||
| Non-current liability |
(74,884 | ) | (76,053 | ) | ||||
|
|
|
|
|
|||||
| Net amount recognized |
$ | 433,659 | $ | 393,126 | ||||
|
|
|
|
|
|||||
| Amounts recognized in Accumulated Other Comprehensive Loss consist of |
||||||||
| Net actuarial loss |
$ | 432,737 | $ | 339,762 | ||||
| Prior service cost |
9,670 | 3,552 | ||||||
|
|
|
|
|
|||||
| Net amount recognized |
$ | 442,407 | $ | 343,314 | ||||
|
|
|
|
|
|||||
27
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
The amounts included in “Other” in the above table primarily reflects the impact of foreign exchange translation, primarily for plans in the UK, Canada and Germany.
The Business made $27,024 and $26,012 of cash contributions to the foreign defined benefit pension plans in 2020 and 2019, respectively.
Information for pension plans with accumulated benefit obligations in excess of plan assets:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Projected benefit obligation (“PBO”) |
$ | 134,249 | $ | 125,974 | ||||
| Accumulated benefit obligation |
$ | 119,750 | $ | 111,591 | ||||
| Fair value of plan assets |
$ | 62,987 | $ | 55,640 | ||||
Information for pension plans with projected benefit obligations in excess of plan assets:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Projected benefit obligation |
$ | 165,330 | $ | 255,566 | ||||
| Accumulated benefit obligation |
$ | 144,344 | $ | 225,091 | ||||
| Fair value of plan assets |
$ | 89,349 | $ | 177,828 | ||||
The accumulated benefit obligation for all defined benefit pension plans was $2,236,010 and $2,002,636 at December 31, 2020 and 2019, respectively.
The components of the net periodic pension benefit for the defined benefit pension plan are as follows:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Service costs |
$ | 10,270 | $ | 12,574 | ||||
| Interest cost |
35,176 | 45,435 | ||||||
| Expected return on plan assets |
(113,913 | ) | (124,593 | ) | ||||
| Amortization of prior service credit |
(48 | ) | (38 | ) | ||||
| Recognized actuarial net loss |
8,635 | 2,642 | ||||||
| Net settlement, curtailment and special termination benefits loss |
524 | 826 | ||||||
|
|
|
|
|
|||||
| Net periodic pension benefit |
$ | (59,356 | ) | $ | (63,154 | ) | ||
|
|
|
|
|
|||||
28
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Other changes in plan assets and benefit obligations recognized in other comprehensive (income) loss are as follows:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Current year actuarial loss |
$ | 84,138 | $ | 55,438 | ||||
| Amortization of actuarial loss |
(8,635 | ) | (2,642 | ) | ||||
| Amortization of prior service cost |
48 | 38 | ||||||
| Net settlement and curtailment gain |
(524 | ) | (826 | ) | ||||
| Other |
24,316 | 4,733 | ||||||
|
|
|
|
|
|||||
| Total recognized in other comprehensive loss |
$ | 99,343 | $ | 56,741 | ||||
|
|
|
|
|
|||||
| Net recognized in net periodic pension benefit and other comprehensive loss |
$ | 39,987 | $ | (6,413 | ) | |||
|
|
|
|
|
|||||
The amount included in “Other” in the above table primarily reflects the impact of foreign exchange translation, primarily for plans in the UK.
Major assumptions used in determining the benefit obligation and net cost for pension plans are presented in the following table as weighted averages:
| Benefit Obligation | Net Cost | |||||||||||||||
| 2020 | 2019(2) | 2020 | 2019(2) | |||||||||||||
| Discount rate: |
||||||||||||||||
| PBO |
1.5 | % | 2.1 | % | 2.1 | % | 3.0 | % | ||||||||
| Interest cost(1) |
— | — | 2.1 | % | 3.0 | % | ||||||||||
| Service cost(1) |
— | — | 2.1 | % | 3.0 | % | ||||||||||
| Salary scale |
2.5 | % | 2.7 | % | 2.7 | % | 2.6 | % | ||||||||
| Expected return on plan assets |
— | — | 5.0 | % | 5.6 | % | ||||||||||
| (1) | The 2020 and 2019 discount rates used to measure the service cost and interest cost applies to the Business’ significant plans. The PBO discount rate is used for the service cost and interest cost measurements for non-significant plans. |
| (2) | Assumptions prior to 2020 include assumptions used for the UTC plan which included the Business’ employees. |
The weighted-average discount rates used to measure pension benefit obligations and net costs are set by reference to specific analyses using each plan’s specific cash flows and are then compared to high-quality bond indices for reasonableness. For those significant plans, the Business utilizes a full yield curve approach in the estimation of the service cost and interest cost components by applying the specific spot rates along the yield curve used in determination of the benefit obligation to the relevant projected cash flows.
29
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
In determining the expected return on plan assets, the Business considers the relative weighting of plan assets, the historical performance of total plan assets and individual asset classes, and economic and other indicators of future performance. In addition, the Business may consult with and consider the opinions of financial and other professionals in developing appropriate capital market assumptions. Return projections are also validated using a simulation model that incorporates yield curves, credit spreads and risk premiums to project long-term prospective returns.
The plans’ investment management objectives include providing the liquidity and asset levels needed to meet current and future benefit payments, while maintaining a prudent degree of portfolio diversification considering interest rate risk and market volatility. Globally, investment strategies target a weighted-average mix of approximately 40% of growth seeking assets and 60% of income generating and hedging assets using a wide diversification of asset types, fund strategies and investment managers. The growth seeking allocation consists of global public equities in developed and emerging countries, real estate and multi-asset class strategies. The real estate strategy is principally concentrated in directly held UK core investments. Within the income generating assets, the fixed income portfolio consists of mainly government and broadly diversified high-quality corporate bonds.
The plans seek to reduce the plans’ interest rate risk and have incorporated liability hedging programs that include the adoption of a risk reduction objective as part of the long-term investment strategy. Under this objective the income generating and hedging assets typically increase as funded status improves. The hedging programs incorporate a range of assets and investment tools, each with various interest rate sensitivities. As a result of the improved funded status of the plans due to favorable asset returns and funding of the plans, the income generating and hedging assets increased in recent years. As a result of the shift in the target asset mix to higher income generating and hedging assets and lower growth seeking assets, the Business will reduce the expected return on plan assets assumption for 2021.
30
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
The fair values of pension plan assets by asset category are as follows:
| (Dollars in Thousands) | Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Not Subject to Levelling |
Total | |||||||||||||||
| Asset Category |
||||||||||||||||||||
| Public Equities: |
||||||||||||||||||||
| Global Equities |
$ | — | $ | 23,407 | $ | — | $ | 65,054 | $ | 88,461 | ||||||||||
| Global Equity Funds at net asset value(8) |
— | — | — | 523,828 | 523,828 | |||||||||||||||
| Fixed Income Securities: |
— | — | — | — | — | |||||||||||||||
| Governments |
— | 1,261,138 | — | — | 1,261,138 | |||||||||||||||
| Corporate Bonds |
— | 5,434 | — | 40,674 | 46,108 | |||||||||||||||
| Fixed Income Securities(8) |
— | — | — | 715,302 | 715,302 | |||||||||||||||
| Real Estate(4)(8) |
— | 951 | — | 11,284 | 12,235 | |||||||||||||||
| Other(5)(8)(9) |
— | (430,044 | ) | — | 406,734 | (23,310 | ) | |||||||||||||
| Cash & Cash Equivalents(6)(8) |
— | 28,356 | — | 12,980 | 41,336 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Subtotal |
$ | — | $ | 889,242 | $ | — | $ | 1,775,856 | 2,665,098 | |||||||||||
| Other Assets & Liabilities(7) |
32,552 | |||||||||||||||||||
|
|
|
|||||||||||||||||||
| Total at December 31, 2020 |
$ | 2,697,650 | ||||||||||||||||||
|
|
|
|||||||||||||||||||
| Public Equities |
||||||||||||||||||||
| Global Equities |
$ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||
| Global Equity Commingled Funds(1) |
— | 102,479 | — | — | 102,479 | |||||||||||||||
| Enhanced Global Equities(2) |
— | — | — | — | — | |||||||||||||||
| Global Equity Funds at net asset value(8) |
— | — | — | 819,816 | 819,816 | |||||||||||||||
| Private Equities(3)(8) |
— | — | — | — | — | |||||||||||||||
| Fixed income securities: |
— | — | — | — | — | |||||||||||||||
| Governments |
— | 22,647 | — | — | 22,647 | |||||||||||||||
| Corporate Bonds |
— | 45,618 | — | — | 45,618 | |||||||||||||||
| Fixed Income Securities(8) |
— | 1,367 | — | 1,374,873 | 1,376,240 | |||||||||||||||
| Real Estate(4)(8) |
— | 1,758 | — | 5,418 | 7,176 | |||||||||||||||
| Other(5)(8) |
— | 13,286 | — | — | 13,286 | |||||||||||||||
| Cash & Cash equivalents(6)(8) |
— | 1,033 | — | 38,194 | 39,227 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Subtotal |
$ | — | $ | 188,188 | $ | — | $ | 2,238,301 | 2,426,489 | |||||||||||
| Other Assets & Liabilities(7) |
(251 | ) | ||||||||||||||||||
|
|
|
|||||||||||||||||||
| Total at December 31, 2019 |
$ | 2,426,238 | ||||||||||||||||||
|
|
|
|||||||||||||||||||
| (1) | Represents commingled funds that invest primarily in common stocks. |
| (2) | Represents enhanced equity separate account and commingled fund portfolios. A portion of the portfolio may include long-short market neutral and relative value strategies that invest in publicly traded, equity and fixed income securities, as well as derivatives of equity and fixed income securities and foreign currency. |
| (3) | Represents limited partner investments with general partners that primarily invest in debt and equity. |
| (4) | Represents investments in real estate, including commingled funds and directly held properties. |
| (5) | Represents insurance contracts and global balanced risk commingled funds consisting mainly of equity, bonds and some commodities. |
| (6) | Represents short-term commercial paper, bonds and other cash or cash-like instruments. |
| (7) | Represents trust receivables and payables that are not leveled. |
| (8) | In accordance with ASU 2015-07, Fair Value Measurement (Topic 820), certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented for the total pension plan assets. |
| (9) | Includes fixed income repurchase agreements entered into for purposes of pension asset and liability matching. |
31
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Derivatives in the plan are primarily used to manage risk and gain asset class exposure while still maintaining liquidity. Derivative instruments mainly consist of equity futures, interest rate futures, interest rate swaps and currency forward contracts.
The plans review assets at least quarterly to ensure they are within the targeted asset allocation ranges and, if necessary, asset balances are adjusted back within target allocations. The plans generally employ a broadly diversified investment manager structure that includes diversification by active and passive management, style, capitalization, country, sector, industry and number of investment managers.
Quoted market prices are used to value investments when available. Investments in securities traded on exchanges, including listed futures and options, are valued at the last reported sale prices on the last business day of the year or, if not available, the last reported bid prices. Fixed income securities are primarily measured using a market approach pricing methodology, where observable prices are obtained by market transactions involving identical or comparable securities of issuers with similar credit ratings. Mortgages have been valued on the basis of their future principal and interest payments discounted at prevailing interest rates for similar investments. Investment contracts are valued at fair value by discounting the related cash flows based on current yields of similar instruments with comparable durations. Real estate investments are valued on a quarterly basis using discounted cash flow models which consider long-term lease estimates, future rental receipts and estimated residual values. Valuation estimates are supplemented by third-party appraisals on an annual basis.
Over-the-counter securities and government obligations are valued at the bid prices or the average of the bid and ask prices on the last business day of the year from published sources or, if not available, from other sources considered reliable, generally broker quotes. Temporary cash investments are stated at cost, which approximates fair value.
The Business expects to make total contributions of approximately $24,211 to the global defined benefit pension plans in 2021. Contributions do not reflect benefits to be paid directly from corporate assets.
Benefit payments, including amounts to be paid from corporate assets, and reflecting expected future service, as appropriate, are expected to be paid as follows: $87,317 in 2021, $88,228 in 2022, $88,806 in 2023, $90,394 in 2024, $90,614 in 2025, and $456,115 from 2026 through 2030.
32
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Post-retirement Benefit Plans
The Business sponsors a postretirement benefit plan that provides life benefits to eligible retirees. The postretirement plan is unfunded. The benefit obligation was $4,675 and $4,043 at December 31, 2020 and 2019, respectively. The net periodic cost was $175 and $111 for 2020 and 2019, respectively.
The PBO discount rate was 2.8% and 3% at December 31, 2020 and 2019, respectively. The Net Cost discount rate was 3% and 3.6% for 2020 and 2019, respectively.
Benefit payments, including amounts to be paid from corporate assets, and reflecting expected future service, as appropriate, are expected to be paid as follows: $40 in 2021, $45 in 2022, $52 in 2023, $57 in 2024, $64 in 2025, and $428 from 2026 through 2030.
Multiemployer Benefit Plans
The Business contributes to various foreign multiemployer defined benefit pension plans. The risks of participating in these multiemployer plans are different from single-employer plans in that assets contributed are pooled and may be used to provide benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. Lastly, if the Business chooses to stop participating in some of the multiemployer plans, the Business may be required to pay those plans a withdrawal liability based on the underfunded status of the plan.
The Business’ participation in these plans for the annual periods ended December 31 is outlined in the table below. The most recent zone status available in 2020 and 2019 is for the plan’s year-end at December 31, 2020, and December 31, 2019, respectively. The zone status is based on information that the Business received from the plan’s annual report. The Business’ significant plan is in the green zone which represents a plan that is at least 80% funded and does not require a financial improvement plan (“FIP”) or a rehabilitation plan (“RP”).
33
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
| (Dollars in Thousands) | Zone Status |
FIP/RP Status |
Contributions | Expiration Date of Collective- Bargaining Agreement |
||||||||||||||||||||||||||||
| Pension Fund |
EIN/Pension Plan Number |
2020 | 2019 | Pending/ Implemented |
2020 | 2019 | Surcharge Imposed |
|||||||||||||||||||||||||
| Metal and technology industry pension plan |
N/A | Green | Green | No | $ | 5,377 | $ | 5,516 | No | |
May 31, 2021 |
| ||||||||||||||||||||
| Other funds |
468 | 477 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||||||||
| Total |
$ | 5,845 | $ | 5,993 | ||||||||||||||||||||||||||||
|
|
|
|
|
|||||||||||||||||||||||||||||
12. Stock-Based Compensation Plans
Prior to the Separation and the Distribution, the Business participated in UTC’s long-term incentive plan (“LTIP”) which authorized various types of market and performance based incentive awards including stock options, stock appreciation rights, performance share units and restricted stock units, which were granted to eligible officers and employees of the Business. All awards granted under the UTC LTIP related to UTC common shares. For all periods prior to the Separation and the Distribution, stock-based compensation expense was allocated to the Business from UTC based upon direct employee headcount.
As a result of the Separation and the Distribution, outstanding and vested awards granted to Carrier employees under UTC’s LTIP were converted into Carrier stock-based awards. Unvested awards held by Carrier employees and former employees were converted to Carrier stock-based awards.
Subsequent to the Separation and the Distribution the Business participates in Carriers LTIP. Under Carrier’s LTIP, the exercise price of awards is set on the grant date and, on a per share basis, may not be less than the fair market value of Carrier’s common stock on that date. Stock appreciation rights and stock options have a term of ten years and a three-year vesting period, subject to limited exceptions. In the event of retirement, stock appreciation rights, stock options and restricted stock units held for more than one year may vest and become exercisable (if applicable), subject to certain terms and conditions. Performance share units vest based on performance relative to pre-established metrics and generally have a minimum three-year vesting period. In the event of retirement, performance share units held for more than one year remain eligible to vest based on actual performance relative to pre-established metrics.
The Business measures the cost of all stock-based compensation, including stock options, at fair value on the grant date net of expected forfeitures and amortize the cost over the award’s vesting period.
34
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
For the years ended December 31, 2020 and 2019, $6,036 and $5,932 of stock-based compensation cost was recognized in Selling, general and administrative expenses respectively, of which $1,480 and $1,916 related to compensation costs for direct employees of the Business, and $4,556 and $4,016 related to compensation costs allocated from UTC and Carrier, prior to and subsequent to the Separation and the Distribution, respectively.
13. Other Long-Term Liabilities
Other long-term liabilities as of December 31, 2020 and 2019 are as follows:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Environmental reserves |
$ | 3,781 | $ | 9,614 | ||||
| Acquisition related costs |
6,695 | 6,707 | ||||||
| Asset retirement obligations |
12,138 | 12,686 | ||||||
| Other |
1,244 | 2,015 | ||||||
|
|
|
|
|
|||||
| Total other long-term liabilities |
$ | 23,858 | $ | 31,022 | ||||
|
|
|
|
|
|||||
14. Accumulated Other Comprehensive (Loss)
A summary of the changes in each component of accumulated other comprehensive (loss), net of tax for the years ended December 31, 2020 and 2019 is provided below:
| (Dollars in Thousands) | Foreign Currency Translation |
Defined Benefit Pension and Postretirement Plans |
Accumulated Other Comprehensive Income (Loss) |
|||||||||
| Balance at January 1, 2019 |
$ | (748,149 | ) | $ | (234,240 | ) | $ | (982,389 | ) | |||
| Other comprehensive income (loss) before reclassifications, net |
24,385 | (59,838 | ) | (35,453 | ) | |||||||
| Amounts reclassified, pre-tax |
— | 2,549 | 2,549 | |||||||||
| Tax benefit reclassified |
— | 9,921 | 9,921 | |||||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2019 |
(723,764 | ) | (281,608 | ) | (1,005,372 | ) | ||||||
| Other comprehensive income (loss) before reclassifications, net |
116,171 | (108,268 | ) | 7,903 | ||||||||
| Amounts reclassified, pre-tax |
— | 8,587 | 8,587 | |||||||||
| Tax benefit reclassified |
— | 23,964 | 23,964 | |||||||||
|
|
|
|
|
|
|
|||||||
| Balance at December 31, 2020 |
$ | (607,593 | ) | $ | (357,325 | ) | $ | (964,918 | ) | |||
|
|
|
|
|
|
|
|||||||
35
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Amounts reclassified related to defined benefit pension and postretirement plans include amortization of prior service costs and actuarial net losses recognized during each period presented. These costs are recorded as components of net periodic pension cost for each period presented. See Note 11 – Employee Benefit Plans for additional details.
15. Restructuring Costs
During 2020 and 2019, the Business recorded net pre-tax restructuring costs on the Combined Statements of Operations as follows:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Cost of sales |
$ | 4,525 | $ | 3,598 | ||||
| Selling, general and administrative |
14,538 | 16,756 | ||||||
|
|
|
|
|
|||||
| Total restructuring costs |
$ | 19,063 | $ | 20,354 | ||||
|
|
|
|
|
|||||
Charges primarily related to new and ongoing actions initiated in 2020 and 2019. Substantially all activities related to employee severance and benefits.
2020 Actions
During 2020, the Business recorded net pre-tax restructuring costs totaling $18,946 for restructuring actions initiated in 2020, consisting of $4,733 in Cost of sales and $14,213 in Selling, general and administrative expenses. The 2020 actions relate to ongoing cost reduction efforts including workforce reductions and consolidation of field operations. The Business is targeting to complete the majority of the actions in 2021.
2019 Actions
During 2020, the Business recorded net pre-tax restructuring costs totaling $1,260 for restructuring actions initiated in 2019, consisting of $(63) in Cost of sales and $1,323 in Selling, general and administrative expenses. The 2019 actions relate to ongoing cost reduction efforts including workforce reductions and consolidation of field operations.
2018 and Prior Actions
For the year ended December 31, 2020, the Business recorded net pre-tax restructuring costs totaling $(1,143) for restructuring actions initiated in 2018 and prior. As of December 31, 2020 and 2019, the Business had approximately $1,156 and $7,346, respectively, of accrual balances remaining related to 2018 and prior actions.
36
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
The following table summarizes the Business’ restructuring reserve balances, including annual charges and utilization for all actions:
| (Dollars in Thousands) | 2020 Actions |
2019 Actions |
2018 & Prior Actions |
Total | ||||||||||||
| Restructuring accruals at January 1, 2019 |
$ | — | $ | — | $ | 19,009 | $ | 19,009 | ||||||||
| Net pre-tax restructuring costs |
— | 16,918 | 3,436 | 20,354 | ||||||||||||
| Utilization and foreign exchange |
— | (9,306 | ) | (15,099 | ) | (24,405 | ) | |||||||||
| Restructuring accruals at December 31, 2019 |
— | 7,612 | 7,346 | 14,958 | ||||||||||||
| Net pre-tax restructuring costs |
18,946 | 1,260 | (1,143 | ) | 19,063 | |||||||||||
| Utilization and foreign exchange |
(5,212 | ) | (6,933 | ) | (5,047 | ) | (17,192 | ) | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
| Restructuring accruals at December 31, 2020 |
$ | 13,734 | $ | 1,939 | $ | 1,156 | $ | 16,829 | ||||||||
|
|
|
|
|
|
|
|
|
|||||||||
Restructuring accruals are reported on the Business’ Combined Balance Sheets in Accrued liabilities.
16. Income Taxes
Income Before Income Taxes
The sources of income from continuing operations before income taxes are:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| United Kingdom |
$ | 87,173 | $ | 109,523 | ||||
| Foreign |
66,393 | 124,313 | ||||||
|
|
|
|
|
|||||
| $ | 153,566 | $ | 233,836 | |||||
|
|
|
|
|
|||||
37
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Provision for Income Taxes
The income tax expense for the years ended December 31, 2020 and 2019 consisted of the following components:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Current: |
||||||||
| United Kingdom |
$ | — | $ | — | ||||
| Foreign |
21,971 | 39,258 | ||||||
|
|
|
|
|
|||||
| 21,971 | 39,258 | |||||||
|
|
|
|
|
|||||
| Future: |
||||||||
| United Kingdom |
89,221 | 18,351 | ||||||
| Foreign |
(4,885 | ) | (907 | ) | ||||
|
|
|
|
|
|||||
| 84,336 | 17,444 | |||||||
|
|
|
|
|
|||||
| Income tax expense |
$ | 106,307 | $ | 56,702 | ||||
|
|
|
|
|
|||||
Reconciliation of Effective Income Tax Rate
Differences between effective income tax rates and the statutory United Kingdom income tax rate are as follows:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Statutory U.K. income tax rate |
19.0 | % | 19.0 | % | ||||
| Tax on international activities |
2.9 | 4.8 | ||||||
| APB 23 / Other Taxes |
8.2 | 0.0 | ||||||
| Valuation Allowance |
31.7 | 0.0 | ||||||
| Tax Rate Change |
7.4 | 0.5 | ||||||
|
|
|
|
|
|||||
| Effective income tax rate |
69.2 | % | 24.3 | % | ||||
|
|
|
|
|
|||||
The effective tax rate for the year ended December 31, 2020 reflects a net tax cost of $48,640 and $12,428 related to valuation allowances on tax loss and credit carryforwards in the United Kingdom and the tax cost associated with a decision to no longer permanently reinvest certain pre-2018 unremitted non-U.S. earnings, respectively.
The UK corporate tax rate was scheduled to decrease from 19% to 17% effective April 1, 2020. On July 22, 2020, the UK enacted legislation repealing the decrease to 17% retroactively to April 1, 2020. The current tax rate used for the year ended December 31, 2020 is 19% and the tax rate used for closing deferred tax balances is 19%. However, as of June 10, 2021, the UK tax rate will increase to 25% effective April 1, 2023. This subsequent event has not been reflected in the income tax accounts herein, which are based on tax laws effective as of December 31, 2020.
38
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Deferred Tax Assets and Liabilities
Future income taxes represent the tax effects of transactions which are reported in different periods for tax and financial reporting purposes. These amounts consist of the tax effects of temporary differences between the tax and financial reporting balance sheets and tax carryforwards. Future income tax benefits and payables within the same tax paying component of a particular jurisdiction are offset for presentation in the Combined Balance Sheets.
The tax effects of temporary differences and tax carryforwards which gave rise to future income tax benefits and payables at December 31, 2020 and 2019 are as follows:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Future income tax benefits: |
||||||||
| Bad debts reserve |
$ | 2,679 | $ | 2,077 | ||||
| EPA provisions |
2,389 | 2,746 | ||||||
| Excess tax depreciation |
4,584 | 3,827 | ||||||
| Other items, net |
2,538 | 6,210 | ||||||
| Restructuring provisions |
3,789 | 3,418 | ||||||
| Lease liabilities |
38,502 | 44,151 | ||||||
| Tax loss carryforwards |
62,116 | 51,402 | ||||||
| Tax credit carryforwards |
41,926 | 40,676 | ||||||
| Valuation allowances |
(98,328 | ) | (39,632 | ) | ||||
|
|
|
|
|
|||||
| $ | 60,195 | $ | 114,875 | |||||
|
|
|
|
|
|||||
| Future income taxes payable: |
||||||||
| Goodwill and intangibles |
$ | (158,776 | ) | $ | (148,361 | ) | ||
| Insurance and employee benefits |
(58,254 | ) | (50,990 | ) | ||||
| Outside Basis Differences |
(14,478 | ) | (459 | ) | ||||
| Right of use assets |
(38,473 | ) | (43,980 | ) | ||||
|
|
|
|
|
|||||
| $ | (269,981 | ) | $ | (243,790 | ) | |||
|
|
|
|
|
|||||
Valuation allowances have been established primarily for certain tax credit carryforwards and tax loss carryforwards as well as certain foreign temporary differences to reduce the future income tax benefits to expected realizable amounts.
39
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Tax Credit and Loss Carryforwards
At December 31, 2020, tax credit carryforwards and tax loss carryforwards were as follows:
| (Dollars in Thousands) | Tax Credit Carryforwards |
Tax Loss Carryforwards |
||||||
| Expiration period: |
||||||||
| 2021-2025 |
$ | — | $ | 3,996 | ||||
| 2026-2030 |
— | 5,512 | ||||||
| 2031-2040 |
— | — | ||||||
| Indefinite |
41,926 | 293,932 | ||||||
|
|
|
|
|
|||||
| Total |
$ | 41,926 | $ | 303,440 | ||||
|
|
|
|
|
|||||
The Business assesses the realizability of our deferred tax assets on a quarterly basis through an analysis of potential sources of future taxable income, including prior year taxable income that is potentially available to absorb a carryback of tax losses, reversals of existing taxable temporary differences, tax planning strategies and forecasts of taxable income. The Business considers all negative and positive evidence, including the weight of the evidence, to determine if valuation allowances against deferred tax assets are required. The Business maintains valuation allowances against certain deferred tax assets.
40
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Unrecognized Tax Benefits
At December 31, 2020, the Business had gross tax-effected unrecognized tax benefits of $15,016, all of which, if recognized, would impact the effective tax rate. A reconciliation of the beginning and ending amounts of unrecognized tax benefits and interest expense related to unrecognized tax benefits for the years ended December 31, 2020 and 2019 is as follows:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Balance at January 1, |
$ | 14,286 | $ | 14,374 | ||||
| Additions for tax positions related to the current year |
— | — | ||||||
| Additions for tax positions of prior years |
948 | 87 | ||||||
| Reductions for tax positions of prior years |
(218 | ) | (175 | ) | ||||
| Settlements |
— | — | ||||||
|
|
|
|
|
|||||
| Balance at December 31, |
$ | 15,016 | $ | 14,286 | ||||
|
|
|
|
|
|||||
| Gross interest expense related to unrecognized tax benefits |
$ | 7 | $ | 11 | ||||
| Total accrued interest balance at December 31, |
$ | 270 | $ | 253 | ||||
The Business operates globally and, as a result, Chubb F&S or one or more of its subsidiaries files income tax returns in various jurisdictions. In the normal course of business Chubb F&S is subject to examination by taxing authorities throughout the world. With few exceptions, the Business is no longer subject to income tax examinations for years before 2012.
In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. The Business assesses our income tax positions and record tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. It is reasonably possible that a net reduction of unrecognized tax benefits totaling $3,625 will occur over the next 12 months as a result of additional worldwide uncertain tax positions, the revaluation of current uncertain tax positions arising from developments in examinations, in appeals, or in the courts, or the closure of tax statutes.
41
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
17. Leases
Operating lease expense for the years ended December 31, 2020 and 2019 was $49,078 and $53,499, respectively.
Supplemental cash flow information related to operating leases was as follows:
| (Dollars in Thousands) | 2020 | 2019 | ||||||
| Operating cash flows for measurement of operating lease liabilities |
$ | 49,905 | $ | 54,588 | ||||
| Operating lease right-of-use assets obtained in exchange for operating lease obligations |
$ | 45,784 | $ | 37,238 | ||||
Operating lease right-of-use assets and liabilities are reflected on our Combined Balance Sheet as follows:
| (Dollars in Thousands Except Lease Term and Discount Rate) | 2020 | 2019 | ||||||
| Operating lease right-of-use assets |
$ | 155,542 | $ | 182,753 | ||||
|
|
|
|
|
|||||
| Accrued liabilities |
$ | (39,855 | ) | $ | (44,849 | ) | ||
| Operating lease liabilities |
(115,850 | ) | (138,535 | ) | ||||
|
|
|
|
|
|||||
| Total operating lease liabilities |
$ | (155,705 | ) | $ | (183,384 | ) | ||
|
|
|
|
|
|||||
Supplemental balance sheet information related to operating leases was as follows:
| 2020 | 2019 | |||||||
| Weighted-Average Remaining Lease Term (in years) |
6.1 | 5.8 | ||||||
| Weighted-Average Discount Rate |
3.3 | % | 3.3 | % | ||||
42
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Undiscounted maturities of operating lease liabilities, including options to extend lease terms that are reasonably certain of being exercised, as of December 31, 2020 are as follows:
| (Dollars in Thousands) | ||||
| 2021 |
$ | 43,056 | ||
| 2022 |
36,052 | |||
| 2023 |
27,536 | |||
| 2024 |
16,919 | |||
| 2025 |
11,051 | |||
| Thereafter |
38,682 | |||
|
|
|
|||
| Total undiscounted lease payments |
173,296 | |||
| Less: imputed interest |
(17,591 | ) | ||
|
|
|
|||
| Total discounted lease payments |
$ | 155,705 | ||
|
|
|
|||
18. Commitments and Contingent Liabilities
The Business is unable to predict the final outcome of the following matters based on the information currently available except as otherwise noted. However, the Business does not believe that the resolution of any of these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
Environmental
The Business’ operations are subject to environmental regulation by various authorities. We have accrued for the costs of environmental remediation activities, including but not limited to, investigatory, remediation, operating and maintenance costs and performance guarantees, and we periodically reassess these amounts. Management believes that the likelihood of incurring losses materially in excess of the amounts accrued is remote. As of December 31, 2020 and 2019, the outstanding liability for environmental obligations was $10,433 and $9,968, respectively, of which $6,652 and $354 is included in Accrued Liabilities and $3,781 and $9,614 is included in Other Long-term Liabilities in the accompanying Combined Balance Sheets.
43
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
Legal Proceedings
Aqueous Film Forming Foam Litigation.
Carrier entities and many other parties have been named as defendants in numerous putative class actions and other lawsuits, alleging that the historic use of Aqueous Film Forming Foam (“AFFF”) caused personal injuries and property damage. Additionally, several state, municipal and water utility plaintiffs have commenced litigation against the same defendants to recover remediation costs related to historic use of AFFF. In December 2018, the U.S. Judicial Panel on Multidistrict Litigation (“MDL”) transferred and consolidated all the AFFF cases pending in the federal courts to the U.S. District Court for the District of South Carolina for pre-trial proceedings. As of May 31, 2021, there are approximately 1,200 cases pending in the MDL. One Chubb F&S entity, Chubb Fire, Ltd., a Carrier subsidiary, is currently named as a defendant in over 600 of those cases. Based upon information available at this time, we believe that Chubb Fire, Ltd. is not a proper party to this litigation as it was not engaged in AFFF manufacture or sale in the U.S. Further, at this time, given the factual, scientific and legal issues to be resolved relating to these claims, Carrier is unable to assess the probability of liability or reasonably estimate the damages, if any, to be allocated to Carrier, if one or more plaintiffs were to prevail in these cases and there can be no assurance that any such future exposure will not be material in any period.
Self-insurance
Liabilities related to self-insured risks were $7,465 and $6,573 as of December 31, 2020 and 2019, respectively, which are classified as Accrued liabilities in the accompanying Combined Balance Sheets.
Guarantees
The Business has commitments and performance guarantees under service, installation, and maintenance contracts. Liabilities recorded on the Combined Balance Sheet related to these guarantees were not significant during the historical periods presented.
The Business also has obligations arising from sales of certain businesses and assets, including those from representations and warranties and related indemnities for, among other matters, environmental, health and safety (including asbestos-related), tax and employment matters. The maximum potential payment related to these obligations is not a specified amount, as a number of the obligations do not contain financial caps.
Other
The Business also has other commitments and contingent liabilities related to legal proceedings and other matters arising out of the normal course of business. The Business accrues contingencies based upon a range of possible outcomes. If no amount within this range is a better estimate than any other, then the Business accrues the minimum amount.
The Business is also subject to a number of routine lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the ordinary course of business. Management does not believe that these matters will have a material adverse effect upon the Business’ competitive position, results of operations, cash flows or financial condition.
44
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Combined Financial Statements (continued)
(In Thousands of Dollars)
19. Subsequent Events
The Business evaluated events and transactions occurring subsequent to December 31, 2020 through June 30, 2021, the date the Combined Financial Statements were available to be issued and concluded that there were no subsequent events that required recognition or disclosure.
45
Exhibit 99.2
UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
As of and for the Six Months Ended June 30, 2021 and June 30, 2020
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Condensed Combined Financial Statements
Six Months Ended June 30, 2021
Contents
| Contents |
1 | |||
| Condensed Combined Statements of Operations (Unaudited) |
2 | |||
| Condensed Combined Statements of Comprehensive Income (Loss) (Unaudited) |
3 | |||
| Condensed Combined Balance Sheets (Unaudited) |
4 | |||
| Condensed Combined Statements of Changes in Net Investment (Unaudited) |
5 | |||
| Condensed Combined Statements of Cash Flows (Unaudited) |
6 | |||
| Notes to Condensed Combined Financial Statements (Unaudited) |
7 |
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Condensed Combined Statements of Operations
(Unaudited)
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| (Dollars in Thousands) | 2021 | 2020 | ||||||
| Net sales |
||||||||
| Product sales |
$ | 412,792 | $ | 310,156 | ||||
| Service sales |
689,212 | 573,409 | ||||||
|
|
|
|
|
|||||
| 1,102,004 | 883,565 | |||||||
|
|
|
|
|
|||||
| Costs and expenses |
||||||||
| Cost of products sold |
336,579 | 253,285 | ||||||
| Cost of services sold |
434,683 | 366,922 | ||||||
| Research and development |
77 | 61 | ||||||
| Selling, general and administrative |
282,024 | 258,527 | ||||||
|
|
|
|
|
|||||
| 1,053,363 | 878,795 | |||||||
| Other income, net |
3,190 | 1,789 | ||||||
|
|
|
|
|
|||||
| Operating profit |
51,831 | 6,559 | ||||||
| Non-service pension benefit |
39,859 | 33,619 | ||||||
| Interest income, net |
13,344 | 17,081 | ||||||
|
|
|
|
|
|||||
| Income from operations before income taxes |
105,034 | 57,259 | ||||||
| Income tax expense |
63,528 | 73,214 | ||||||
|
|
|
|
|
|||||
| Net income (loss) from operations |
41,506 | (15,955 | ) | |||||
| Less: Non-controlling interest in subsidiaries’ (loss) income from operations |
(1,443 | ) | 7 | |||||
|
|
|
|
|
|||||
| Net income (loss) attributable to Chubb Fire & Security Group |
$ | 42,949 | $ | (15,962 | ) | |||
|
|
|
|
|
|||||
The accompanying notes are an integral part of the Unaudited Condensed Combined Financial Statements.
2
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Condensed Combined Statements of Comprehensive Income (Loss)
(Unaudited)
| For the Six Months Ended | ||||||||
| June 30, | ||||||||
| (Dollars in Thousands) | 2021 | 2020 | ||||||
| Net income (loss) attributable to Chubb Fire & Security Group |
$ | 42,949 | $ | (15,962 | ) | |||
| Other comprehensive income (loss), net of tax: |
||||||||
| Foreign currency translation adjustments arising during period |
1,669 | (72,328 | ) | |||||
| Pension and postretirement benefit plan adjustments |
6,759 | 3,746 | ||||||
|
|
|
|
|
|||||
| Other comprehensive income (loss), net of tax |
8,428 | (68,582 | ) | |||||
|
|
|
|
|
|||||
| Comprehensive income (loss) |
51,377 | (84,544 | ) | |||||
| Less: Comprehensive (loss) attributable to non-controlling interests |
(173 | ) | (320 | ) | ||||
|
|
|
|
|
|||||
| Comprehensive income (loss) attributable to Chubb Fire & Security Group |
$ | 51,550 | $ | (84,224 | ) | |||
|
|
|
|
|
|||||
The accompanying notes are an integral part of the Unaudited Condensed Combined Financial Statements.
3
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Condensed Combined Balance Sheets
(Unaudited)
| As of | ||||||||
| (Dollars in Thousands) | June 30, 2021 |
December 31, 2020 |
||||||
| Assets |
||||||||
| Cash and cash equivalents |
$ | 43,200 | $ | 33,076 | ||||
| Accounts receivable (net of allowance for expected credit loss of $17,054 and $15,619) |
440,485 | 509,162 | ||||||
| Contract assets, current |
197,332 | 173,261 | ||||||
| Inventories, net |
68,397 | 69,485 | ||||||
| Other assets, current |
30,389 | 28,589 | ||||||
|
|
|
|
|
|||||
| Total current assets |
779,803 | 813,573 | ||||||
| Future income tax benefits |
9,741 | 9,787 | ||||||
| Fixed assets, net |
68,947 | 71,603 | ||||||
| Operating lease right-of-use assets |
167,659 | 155,542 | ||||||
| Intangible assets, net |
567,159 | 585,860 | ||||||
| Goodwill |
920,134 | 932,863 | ||||||
| Pension and postretirement assets |
603,080 | 513,544 | ||||||
| Other assets |
14,287 | 14,927 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 3,130,810 | $ | 3,097,699 | ||||
|
|
|
|
|
|||||
| Liabilities and Carrier Net Investment |
||||||||
| Accounts payable |
$ | 198,904 | $ | 198,275 | ||||
| Accrued salaries, wages and employee benefits |
120,033 | 129,797 | ||||||
| Accrued liabilities |
171,840 | 181,823 | ||||||
| Contract liabilities, current |
174,409 | 174,622 | ||||||
| Current portion of long-term debt |
240 | 465 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
665,426 | 684,982 | ||||||
| Pension and post retirement obligations |
90,826 | 99,750 | ||||||
| Future income tax obligations |
280,693 | 220,679 | ||||||
| Operating lease liabilities |
124,395 | 115,850 | ||||||
| Other long-term liabilities |
23,197 | 23,858 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
1,184,537 | 1,145,119 | ||||||
| Commitments and contingent liabilities (Note 13) |
||||||||
| Carrier Net Investment |
||||||||
| Carrier Net Investment |
2,898,236 | 2,911,353 | ||||||
| Accumulated other comprehensive (loss) |
(956,490 | ) | (964,918 | ) | ||||
|
|
|
|
|
|||||
| Total Carrier Net Investment |
1,941,746 | 1,946,435 | ||||||
| Non-controlling interest |
4,527 | 6,145 | ||||||
|
|
|
|
|
|||||
| Total Carrier Net Investment and non-controlling interests |
1,946,273 | 1,952,580 | ||||||
|
|
|
|
|
|||||
| Total liabilities and Carrier Net Investment and non-controlling interest |
$ | 3,130,810 | $ | 3,097,699 | ||||
|
|
|
|
|
|||||
The accompanying notes are an integral part of the Unaudited Condensed Combined Financial Statements.
4
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Condensed Combined Statements of Changes in Net Investment
(Unaudited)
| (Dollars in Thousands) | Carrier Net Investment |
Accumulated Other Comprehensive Income (Loss) |
Total Carrier Net Investment |
Non- controlling Interest |
Total Carrier Net Investment and Non- controlling interest |
|||||||||||||||
| Balance as of January 1, 2020 |
$ | 2,924,357 | $ | (1,005,372 | ) | $ | 1,918,985 | $ | 11,526 | $ | 1,930,511 | |||||||||
| Net income (loss) attributable to Chubb Fire & Security Group |
(15,962 | ) | — | (15,962 | ) | 7 | (15,955 | ) | ||||||||||||
| Other comprehensive (loss) income, net of tax |
— | (68,582 | ) | (68,582 | ) | (320 | ) | (68,902 | ) | |||||||||||
| Net transfers (to) Parent |
(13,655 | ) | — | (13,655 | ) | — | (13,655 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance as of June 30, 2020 |
$ | 2,894,740 | $ | (1,073,954 | ) | $ | 1,820,786 | $ | 11,213 | $ | 1,831,999 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Carrier Net Investment |
Accumulated Other Comprehensive Income (Loss) |
Total Carrier Net Investment |
Non- controlling Interest |
Total Carrier Net Investment and Non- controlling interest |
||||||||||||||||
| Balance as of January 1, 2021 |
$ | 2,911,353 | $ | (964,918 | ) | $ | 1,946,435 | $ | 6,145 | $ | 1,952,580 | |||||||||
| Net income (loss) attributable to Chubb Fire & Security Group |
42,949 | — | 42,949 | (1,443 | ) | 41,506 | ||||||||||||||
| Other comprehensive income (loss), net of tax Net transfers (to) Parent |
|
— (56,066 |
) |
|
8,428 — |
|
|
8,428 (56,066 |
) |
|
(173 — |
)
|
|
8,255 (56,066 |
) | |||||
| Dividends attributable to non-controlling interest |
— | — | — | (2 | ) | (2 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Balance as of June 30, 2021 |
$ | 2,898,236 | $ | (956,490 | ) | $ | 1,941,746 | $ | 4,527 | $ | 1,946,273 | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
The accompanying notes are an integral part of the Unaudited Condensed Combined Financial Statements.
5
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Condensed Combined Statements of Cash Flows
(Unaudited)
| For the Six Months Ended | ||||||||
| (Dollars in Thousands) | June 30, | |||||||
| 2021 | 2020 | |||||||
| Operating activities |
||||||||
| Net income (loss) attributable to Chubb Fire & Security Group |
$ | 42,949 | $ | (15,962 | ) | |||
| Noncontrolling interest |
(1,443 | ) | 7 | |||||
|
|
|
|
|
|||||
| Net income (loss) |
41,506 | (15,955 | ) | |||||
| Adjustments to reconcile net income from operations to net cash flows provided by operating activities: |
||||||||
| Depreciation and amortization |
18,061 | 18,924 | ||||||
| Stock-based compensation cost |
3,145 | 3,542 | ||||||
| Provision for deferred income taxes |
52,735 | 59,182 | ||||||
| Net change in pension balances |
(39,345 | ) | (47,599 | ) | ||||
| Other non-cash items |
5,784 | 5,330 | ||||||
| Change in: |
||||||||
| Accounts receivable, net |
61,556 | 51,385 | ||||||
| Contract assets, current |
(25,639 | ) | (7,104 | ) | ||||
| Inventories, net |
(445 | ) | (3,435 | ) | ||||
| Other assets, current |
(2,187 | ) | (1,395 | ) | ||||
| Accounts payable and accrued liabilities |
(18,223 | ) | (26,747 | ) | ||||
| Contract liabilities, current |
1,727 | 9,781 | ||||||
| Defined benefit plan contributions |
(24,492 | ) | (23,720 | ) | ||||
| Other operating activities, net |
854 | 5,357 | ||||||
|
|
|
|
|
|||||
| Net cash flows provided by operating activities |
75,037 | 27,546 | ||||||
| Investing activities |
||||||||
| Capital expenditures |
(4,436 | ) | (4,654 | ) | ||||
| Proceeds from sale of fixed assets |
65 | 301 | ||||||
| Other investing activities, net |
(60 | ) | (489 | ) | ||||
|
|
|
|
|
|||||
| Net cash flows used in investing activities |
(4,431 | ) | (4,842 | ) | ||||
| Financing activities |
||||||||
| Net transfers (to) Parent |
(59,211 | ) | (17,197 | ) | ||||
| Other financing activities, net |
(24 | ) | (41 | ) | ||||
|
|
|
|
|
|||||
| Net cash flows used in financing activities |
(59,235 | ) | (17,238 | ) | ||||
|
|
|
|
|
|||||
| Effect of foreign exchange rates on cash and cash equivalents |
(1,247 | ) | (569 | ) | ||||
|
|
|
|
|
|||||
| Net increase in cash and cash equivalents |
10,124 | 4,897 | ||||||
| Cash and cash equivalents, beginning of period |
33,076 | 41,550 | ||||||
|
|
|
|
|
|||||
| Cash and cash equivalents, end of period |
$ | 43,200 | $ | 46,447 | ||||
|
|
|
|
|
|||||
The accompanying notes are an integral part of the Unaudited Condensed Combined Financial Statements.
6
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements
(Unaudited)
(In Thousands of Dollars)
1. Description of the Business
Chubb Fire & Security Group (“Chubb F&S”, the “Business”, “we”, “us”, or “our”), a business of Carrier Global Corporation (“Carrier” or the “Parent”), is a global provider of fire safety and electronic security services with end-to-end capabilities in system sales, design, installation, service and monitoring. The Business has a presence in 17 different countries including over 225 branch locations and 21 physical monitoring centers. The Business’s most significant operations are in Australia, Canada, France, Hong Kong, the Netherlands and United Kingdom (“UK”). The Business manages its operations as a single segment for the purposes of assessing performance and making operating decisions.
The Business offers the following primary products and services to customers:
| 1. | Installation, which includes fire installation (detection and alarm, fire suppression and firefighting equipment) and security installation (access control, intruder alarm, closed circuit television and integrated solutions). |
| 2. | Service, which includes fire service and maintenance, electronic security and maintenance services and other maintenance services, including “do and charge”, retrofits and upgrades. |
| 3. | Monitoring, which includes video surveillance, alarm verification, alarm notification and personal emergency response systems. |
The Separation and the Distribution
On November 26, 2018, United Technologies Corporation, since renamed Raytheon Technologies Corporation (“UTC”), announced its intention to spin off Carrier into a separate, publicly traded company (the “Separation”). On April 3, 2020, UTC completed the Separation through a pro rata distribution of all the outstanding common shares of the common stock of Carrier to UTC shareowners (the “Distribution”). As a result of the Separation and the Distribution, Carrier became an independent public company.
7
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
Sale of Chubb Fire & Security Group
On July 26, 2021, Carrier entered into an agreement to sell Chubb Fire & Security Group to APi Group Corporation (“APi”) for an enterprise value of $3.1 billion (the “Agreement”). The purchase price is subject to working capital and other adjustments as provided in the Agreement. This transaction is expected to close around year-end 2021, subject to regulatory approvals, required works council consultation in France and customary closing conditions. In conjunction with the Agreement, Carrier has agreed to provide APi, and APi has agreed to provide Carrier, certain transitional services for varying periods after the closing.
Impact of the COVID-19 Pandemic
In early 2020, the World Health Organization declared the outbreak of a respiratory disease known as COVID-19 as a global pandemic. In response, many countries implemented containment and mitigation measures to combat the outbreak, which severely restricted the level of economic activity and caused a significant contraction in the global economy. As a result, the Business temporarily closed or reduced production at manufacturing facilities across the globe to ensure employee safety and instructed non-essential employees to work from home. In addition, the Business took several preemptive actions during 2020 to manage liquidity as demand for its products decreased. Despite the adverse impacts of the pandemic on the Business’s results beginning in the first quarter of 2020, manufacturing operations resumed and several restorative actions were completed during 2020, including the reinstatement of annual merit-based salary increases and continued investment to support the Business’s core strategy.
The Business continues to focus its efforts on preserving the health and safety of its employees and customers as well as maintaining the continuity of its operations. In addition, the Business continues to actively monitor its liquidity position and working capital needs and believes that its overall capital resources and liquidity position are adequate. The preparation of financial statements requires management to use judgments in making estimates and assumptions based on the relevant information available at the end of each period, which can have a significant effect on reported amounts. However, due to significant uncertainty surrounding the pandemic, management’s judgments could change. While the Business’s results of operations, cash flows and financial condition could be negatively impacted, the extent of any continuing impact cannot be estimated with certainty at this time.
8
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
2. Basis of Presentation
The Business has historically operated as a part of UTC’s Carrier segment prior to the Separation and the Distribution, and Carrier’s Fire & Security segment subsequent to the Separation and the Distribution; consequently, stand-alone financial statements have not historically been prepared for the Business. The accompanying Unaudited Condensed Combined Financial Statements have been prepared from the Parent’s historical accounting records and are presented on a stand-alone basis as if the Business’s operations had been conducted independently from the Parent. These Unaudited Condensed Combined Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The Unaudited Condensed Combined Statements of Operations include all revenues and costs directly attributable to the Business, including costs for facilities, functions and services used by the Business. Costs for certain functions and services performed by centralized UTC and Carrier organizations are directly charged to the Business based on specific identification when possible or reasonable allocation methods such as net sales, headcount, usage, or other allocation methods. The results of operations include allocations of costs for administrative functions and services performed on behalf of the Business by centralized groups within UTC and Carrier (see Note 4 – Related Parties for a description of the allocation methodologies). All charges and allocations for facilities, functions and services performed by UTC and Carrier organizations have been deemed settled in cash by the Business to UTC and Carrier in the period in which the cost was recorded in the Unaudited Condensed Combined Statements of Operations. Current and deferred income taxes have been determined based on the stand-alone results of the Business. However, because the Business filed as part of UTC and Carrier’s tax group in certain jurisdictions, the Business’s actual tax balances may differ from that reported. The Business’s portion of income taxes for certain jurisdictions are deemed to have been settled in the period the related tax expense was recorded.
Carrier uses a centralized approach to cash management and financing its operations, as did UTC prior to the Separation and the Distribution. Accordingly, none of the cash, third-party debt or related interest expense of UTC or Carrier has been allocated to the Business in the Unaudited Condensed Combined Financial Statements. However, cash balances primarily associated with certain foreign entities that did not participate in UTC or Carrier’s cash management program have been included in the Unaudited Condensed Combined Financial Statements. Transactions between UTC, Carrier and the Business are deemed to have been settled immediately through Carrier Net Investment. Other transactions, which have historically been cash-settled, are reflected in the Unaudited Condensed Combined Balance Sheets within Accounts receivable, net and Accounts payable. The net effect of the deemed settled transactions is reflected in the Unaudited Condensed Combined Statements of Cash Flows as Net transfers to Parent within financing activities and in the Unaudited Condensed Combined Balance Sheets as Carrier Net Investment.
9
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
All intracompany accounts and transactions within the Business have been eliminated in the preparation of the Unaudited Condensed Combined Financial Statements. The Unaudited Condensed Combined Financial Statements of the Business include assets and liabilities that have been determined to be specifically identifiable or otherwise attributable to the Business.
All of the allocations and estimates in the Unaudited Condensed Combined Financial Statements are based on assumptions that management believes are reasonable. However, the Unaudited Condensed Combined Financial Statements included herein may not be indicative of the financial position, results of operations and cash flows of the Business in the future, or if the Business had been a separate, stand-alone entity during the years presented.
The non-controlling interest represents the non-controlling investors’ interests in the results of subsidiaries that the Business controls and combines.
Recently Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board issued Accounting Standard Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”) which simplifies certain aspects of income tax accounting guidance in Accounting Standards Codification 740, Income Taxes (“ASC 740”) reducing the complexity of its application while maintaining or improving the usefulness of the information required to be reported. This ASU eliminates certain exceptions from ASC 740 including: intra-period tax allocation, deferred tax liabilities related to outside basis differences and year-to-date loss in interim periods, among others. ASU 2019-12 was effective for periods beginning after December 15, 2020, including interim periods therein with early adoption permitted. The Business adopted this ASU on January 1, 2021 with no material impact on the Unaudited Condensed Combined Financial Statements.
3. Revenue Recognition
The Business recognizes revenue when control of a good or service promised in a contract (i.e., performance obligation) is transferred to a customer. Control is obtained when a customer has the ability to direct the use of and obtain substantially all of the remaining benefit from that good or service. A significant portion of the Business’s performance obligations are recognized at a point-in-time when control of the product transfers to the customer, which is generally at the time of shipment. The remaining portion of the Business’s performance obligations are recognized over time as the customer simultaneously obtains control as the Business performs work under a contract, or if the product being produced for the customer has no alternative use and the Business has a contractual right to payment.
10
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
Total contract assets and liabilities are as follows:
| June 30, | December 31, | |||||||
| (Dollars in Thousands) | 2021 | 2020 | ||||||
| Contract assets, current |
$ | 197,332 | $ | 173,261 | ||||
| Contract assets, non-current (included within Other assets) |
— | — | ||||||
|
|
|
|
|
|||||
| Total contract assets |
$ | 197,332 | $ | 173,261 | ||||
|
|
|
|
|
|||||
| Contract liabilities, current |
$ | (174,409 | ) | $ | (174,622 | ) | ||
| Contract liabilities, non-current (included within Other long-term liabilities) |
— | — | ||||||
|
|
|
|
|
|||||
| Total contract liabilities |
(174,409 | ) | (174,622 | ) | ||||
|
|
|
|
|
|||||
| Net contract assets (liabilities) |
$ | 22,923 | $ | (1,361 | ) | |||
|
|
|
|
|
|||||
The timing of revenue recognition, billings and cash collections results in contract assets and contract liabilities. Contract assets relate to the conditional right to consideration for any completed performance under a contract when costs are incurred in excess of billings under the percentage-of-completion methodology. Contract liabilities relate to payments received in advance of performance under the contract or when the Business has a right to consideration that is conditioned upon transfer of a good or service to the customer. Contract liabilities are recognized as revenue as (or when) the Business performs under the contract. The Business recognized revenue of $102,938 during the six months ended June 30, 2021 that related to contract liabilities as of January 1, 2021.
There were no individually significant customers with sales exceeding 10% of total sales for the six months ended June 30, 2021 or June 30, 2020.
Remaining Performance Obligations (“RPO”)
As of June 30, 2021, our total RPO was approximately $750,315 compared with $708,515 as of December 31, 2020. Of the total RPO as of June 30, 2021, the Business expects that approximately 76% will be recognized as sales over the following 12 months.
4. Related Parties
Historically, the Business has been managed and operated in the normal course of business with other affiliates of UTC and Carrier, prior to and subsequent to the Separation and the Distribution, respectively. Accordingly, certain shared costs have been allocated to the Business and reflected as expenses in the Unaudited Condensed Combined Financial Statements.
11
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
Related Party Purchases and Sales
During the historical periods presented, the Business sold products and services to UTC, Carrier and their non-Chubb F&S businesses. Sales in the Unaudited Condensed Combined Statements of Operations include sales to affiliates of UTC and Carrier of $899 and $926 for the six months ended June 30, 2021 and 2020, respectively. Cost of goods sold in the Unaudited Condensed Combined Statements of Operations includes purchases from affiliates of UTC and Carrier of $37,678 and $28,338 for the six months ended June 30, 2021 and 2020, respectively. Sales and Purchases are only considered related party if they were made to UTC and Carrier affiliates prior to the Separation and the Distribution and to Carrier affiliates subsequent to the Separation and the Distribution.
Allocated Centralized Costs
UTC and Carrier incurred significant corporate costs for services provided to the Business as well as other UTC and Carrier businesses. These services include treasury, tax, accounting, human resources, audit, legal, purchasing, information technology and other such services. The costs associated with these services generally include all payroll and benefit costs, as well as overhead costs related to the support functions. UTC and Carrier also allocated costs associated with corporate insurance coverage and medical, pension, post-retirement and other health plan costs for employees participating in UTC and Carrier sponsored plans. Allocations are based on a number of utilization measures including headcount, proportionate usage and relative net sales. All such amounts have been deemed to have been incurred and settled by the Business in the period in which the costs were recorded.
The allocated functional service expenses and general corporate expenses for the six months ended June 30, 2021 and 2020 were $27,972 and $19,706, respectively, and are included in Selling, general and administrative in the Unaudited Condensed Combined Statements of Operations.
In the opinion of management of the Parent and the Business, the expense and cost allocations have been determined on a basis considered to be a reasonable reflection of the utilization of services provided or the benefit received by the Business during the six months ended June 30, 2021 and 2020. The amounts that would have been, or will be incurred, on a stand-alone basis could differ from the amounts allocated due to economies of scale, difference in management judgment, a requirement for more or fewer employees or other factors. Management does not believe, however, that it is practicable to estimate what these expenses would have been had the
12
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
Business operated as an independent entity, including any expenses associated with obtaining any of these services from unaffiliated entities. In addition, the future results of operations, financial position and cash flows could differ materially from the historical results presented herein.
Cash Management and Financing
The Business participated in UTC and Carrier’s centralized cash management and financing programs prior to and subsequent to the Separation and the Distribution, respectively. Disbursements are made through centralized accounts payable systems which were operated by UTC and Carrier. Cash receipts are transferred to centralized accounts, which were also maintained by UTC and Carrier. As cash was received and disbursed by UTC and Carrier, it is accounted for by the Business through Carrier Net Investment. All short and long-term debt were financed by UTC and Carrier, and financing decisions for wholly and majority owned subsidiaries were determined by UTC and Carrier Treasury. See Note 2 – Basis of Presentation for additional information. The Business’s cash that is not included in the centralized cash management and financing programs is classified as Cash and cash equivalents on the Unaudited Condensed Combined Balance Sheet.
Accounts Receivable and Payable
Certain related party transactions between the Business and Parent have been included within Carrier Net Investment in the Unaudited Condensed Combined Balance Sheets in the historical periods presented when the related party transactions are not settled in cash. The Carrier Net Investment includes related party receivables due from Carrier and its affiliates of $171,717 and $204,841 as of June 30, 2021 and December 31, 2020, respectively. The Carrier Net Investment includes related party payables due to Carrier and its affiliates of $177,020 and $183,257 as of June 30, 2021 and December 31, 2020, respectively.
The interest income and expense related to the activity with Carrier that was included in the Business’s results is presented on a net basis in the Unaudited Condensed Combined Statements of Operations. Interest income on the activity with Parent was $14,649 and $7,964 for the six months ended June 30, 2021 and June 30, 2020, respectively. Interest expense on the activity with Parent was $1,319 and $1,769 for the six months ended June 30, 2021 and June 30, 2020, respectively. The total effect of the settlement of these related party transactions is reflected as a financing activity in the Unaudited Condensed Combined Statements of Cash Flows.
Additionally, certain transactions between the Business and certain non-Chubb F&S businesses are cash-settled on a current basis and, therefore, are reflected in the Unaudited Condensed
13
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
Combined Balance Sheets. Accounts receivable includes $1,176 and $627 at June 30, 2021 and December 31, 2020, respectively, and Accounts payable includes $13,126 and $13,161 at June 30, 2021 and December 31, 2020, respectively, related to such transactions.
5. Inventories, Net
| June 30, | December 31, | |||||||
| (Dollars in Thousands) | 2021 | 2020 | ||||||
| Raw materials |
$ | 609 | $ | 636 | ||||
|
Work-in-process |
54 | 81 | ||||||
| Finished goods |
67,734 | 68,768 | ||||||
|
|
|
|
|
|||||
| Inventories, net |
$ | 68,397 | $ | 69,485 | ||||
|
|
|
|
|
|||||
Raw materials, work-in-process and finished goods are net of valuation reserves of $13,177 and $12,792 as of June 30, 2021 and December 31, 2020, respectively.
6. Business Acquisitions, Dispositions, Goodwill and Intangible Assets
Business Acquisitions and Dispositions
There were no significant acquisitions or divestitures of combined businesses during the six months ended June 30, 2021 or 2020.
Goodwill
The changes in the carrying amount of goodwill are as follows:
| (Dollars in Thousands) | Carrying Amount(1) |
|||
| Balance as of December 31, 2020 |
$ | 932,863 | ||
| Foreign currency translation and other |
(12,729 | ) | ||
|
|
|
|||
| Balance as of June 30, 2021 |
$ | 920,134 | ||
|
|
|
|||
| (1) | Prior to January 1, 2019, the Business has recognized impairment charges of $1,841,661; subsequent to this impairment, there have been no further impairment charges to date. |
14
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
Intangible Assets, Net
Identifiable intangible assets are comprised of the following:
| June 30, 2021 | December 31, 2020 | |||||||||||||||||||
| (Dollars in Thousands) | Useful Lives |
Gross Amount |
Accumulated Amortization |
Gross Amount |
Accumulated Amortization |
|||||||||||||||
| Amortized: |
||||||||||||||||||||
| Customer relationships |
1 to 30 | $ | 660,759 | $ | (624,409 | ) | $ | 669,240 | $ | (625,633 | ) | |||||||||
| Patents and trademarks |
5 to 30 | 68,425 | (48,201 | ) | 69,524 | (47,792 | ) | |||||||||||||
| Monitoring lines |
7 to 10 | 71,291 | (61,258 | ) | 71,512 | (59,364 | ) | |||||||||||||
| Service portfolios and other |
1 to 23 | 20,178 | (18,723 | ) | 20,511 | (18,780 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| 820,653 | (752,591 | ) | 830,787 | (751,569 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Unamortized: |
||||||||||||||||||||
| Trademarks and other |
499,097 | — | 506,642 | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total intangibles |
$ | 1,319,750 | $ | (752,591 | ) | $ | 1,337,429 | $ | (751,569 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|||||||||||||
Amortization of intangible assets was $10,436 and $10,956 for the six months ended June 30, 2021 and June 30, 2020, respectively.
7. Accrued Liabilities
Accrued liabilities as of June 30, 2021 and December 31, 2020 are as follows:
| (Dollars in Thousands) | June 30, 2021 |
December 31, 2020 |
||||||
| Accrued taxes |
$ | 31,022 | $ | 42,522 | ||||
| Restructuring |
18,344 | 16,829 | ||||||
| Accrued legal and environmental reserves |
6,592 | 7,071 | ||||||
| Operating lease liabilities |
44,619 | 39,855 | ||||||
| Other |
71,263 | 75,546 | ||||||
|
|
|
|
|
|||||
| Total accrued liabilities |
$ | 171,840 | $ | 181,823 | ||||
|
|
|
|
|
|||||
15
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
8. Employee Benefit Plans
The Business sponsors both funded international defined benefit and defined contribution plans as well as other post-retirement benefit plans. In addition, the Business contributes to various international multi-employer defined benefit pension and other post-retirement benefit plans.
Contributions to the plans were as follows:
| For the Six Month Ended June 30, |
||||||||
| (Dollars in Thousands) | 2021 | 2020 | ||||||
| Defined benefit plans |
$ | 24,492 | $ | 23,720 | ||||
| Defined contribution plans |
6,076 | 4,901 | ||||||
| Multi-employer pension plans |
4,363 | 2,916 | ||||||
|
|
|
|
|
|||||
| Total Contributions |
$ | 34,931 | $ | 31,537 | ||||
|
|
|
|
|
|||||
The following table illustrates the components of net periodic pension benefits for the defined benefit pension and post-retirement benefit plans:
| For the Six Month Ended June 30, |
||||||||
| (Dollars in Thousands) | 2021 | 2020 | ||||||
| Service cost |
$ | 3,784 | $ | 5,779 | ||||
| Interest cost |
12,198 | 17,481 | ||||||
| Expected return on plan assets |
(60,358 | ) | (56,481 | ) | ||||
| Amortization of prior service credit |
(26 | ) | (17 | ) | ||||
| Recognized actuarial net loss |
8,465 | 4,201 | ||||||
| Net settlement, curtailment and special termination benefit loss |
— | 479 | ||||||
|
|
|
|
|
|||||
| Net periodic pension (benefit) |
$ | (35,937 | ) | $ | (28,558 | ) | ||
|
|
|
|
|
|||||
9. Stock-Based Compensation Plans
Prior to the Separation and the Distribution, the Business participated in UTC’s long-term incentive plan (“LTIP”) which authorized various types of market and performance based incentive awards including stock options, stock appreciation rights, performance share units and restricted stock units, which were granted to eligible officers and employees of the Business. All awards granted under the UTC LTIP related to UTC common shares. For all periods prior to the Separation and the Distribution, stock-based compensation expense was allocated to the Business from UTC based upon direct employee headcount.
16
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
As a result of the Separation and the Distribution, outstanding and vested awards granted to Carrier employees under UTC’s LTIP were converted into Carrier stock-based awards. Unvested awards held by Carrier employees and former employees were converted to Carrier stock-based awards.
Subsequent to the Separation and the Distribution the Business participates in Carrier’s LTIP. Under Carrier’s LTIP, the exercise price of awards is set on the grant date and, on a per share basis, may not be less than the fair market value of Carrier’s common stock on that date. Stock appreciation rights and stock options have a term of ten years and a three-year vesting period, subject to limited exceptions. In the event of retirement, stock appreciation rights, stock options and restricted stock units held for more than one year may vest and become exercisable (if applicable), subject to certain terms and conditions. Performance share units vest based on performance relative to pre-established metrics and generally have a minimum three-year vesting period. In the event of retirement, performance share units held for more than one year remain eligible to vest based on actual performance relative to pre-established metrics.
The Business measures the cost of all stock-based compensation, including stock options, at fair value on the grant date net of expected forfeitures and amortizes the cost over the award’s vesting period.
For the six months ended June 30, 2021 and June 30, 2020, $3,145 and $3,542 of stock-based compensation cost was recognized in Selling, general and administrative expenses respectively, of which $694 and $1,269 related to compensation costs for direct employees of the Business, and $2,452 and $2,273 related to compensation costs allocated from UTC and Carrier, prior to and subsequent to the Separation and the Distribution, respectively.
17
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
10. Accumulated Other Comprehensive (Loss)
A summary of the changes in each component of accumulated other comprehensive (loss), net of tax for the six months ended June 30, 2021 and June 30, 2020 is provided below:
| (Dollars in Thousands) | Foreign Currency Translation |
Defined Benefit Pension and Postretirement Plans |
Accumulated Other Comprehensive Income (Loss) |
|||||||||
| Balance at January 1, 2020 |
$ | (723,764 | ) | $ | (281,608 | ) | $ | (1,005,372 | ) | |||
| Other comprehensive income (loss) before reclassifications, net |
(72,328 | ) | — | (72,328 | ) | |||||||
| Amounts reclassified, pre-tax |
— | 4,663 | 4,663 | |||||||||
| Tax benefit reclassified |
— | (917 | ) | (917 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at June 30, 2020 |
$ | (796,092 | ) | $ | (277,862 | ) | $ | (1,073,954 | ) | |||
|
|
|
|
|
|
|
|||||||
| (Dollars in Thousands) | Foreign Currency Translation |
Defined Benefit Pension and Postretirement Plans |
Accumulated Other Comprehensive Income (Loss) |
|||||||||
| Balance at January 1, 2021 |
$ | (607,593 | ) | $ | (357,325 | ) | $ | (964,918 | ) | |||
| Other comprehensive income (loss) before reclassifications, net |
1,669 | — | 1,669 | |||||||||
| Amounts reclassified, pre-tax |
— | 8,439 | 8,439 | |||||||||
| Tax benefit reclassified |
— | (1,680 | ) | (1,680 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance at June 30, 2021 |
$ | (605,924 | ) | $ | (350,566 | ) | $ | (956,490 | ) | |||
|
|
|
|
|
|
|
|||||||
Amounts reclassified related to defined benefit pension and postretirement plans include amortization of prior service costs and actuarial net losses recognized during each period presented. These costs are recorded as components of net periodic pension cost for each period presented.
18
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
11. Restructuring Costs
The Business recorded net pre-tax restructuring costs on the Unaudited Condensed Combined Statements of Operations as follows:
| For the Six Month Ended June 30, |
||||||||
| (Dollars in Thousands) | 2021 | 2020 | ||||||
| Cost of sales |
$ | 8,180 | $ | 423 | ||||
| Selling, general and administrative |
6,241 | 5,339 | ||||||
|
|
|
|
|
|||||
| Total restructuring costs |
$ | 14,421 | $ | 5,762 | ||||
|
|
|
|
|
|||||
Charges primarily related to new and ongoing actions initiated in 2021 and 2020. Substantially all activities related to employee severance and benefits.
The following table summarizes the reserves and charges related to restructuring actions:
| For the Six Month Ended June 30, |
||||||||
| (Dollars in Thousands) | 2021 | 2020 | ||||||
| Balance as of January 1, |
$ | 16,829 | $ | 14,958 | ||||
| Net pre-tax restructuring costs |
14,421 | 5,762 | ||||||
| Utilization and foreign exchange |
(12,905 | ) | (8,021 | ) | ||||
|
|
|
|
|
|||||
| Balance as of June 30, |
$ | 18,345 | $ | 12,699 | ||||
|
|
|
|
|
|||||
During the six months ended June 30, 2021, charges associated with restructuring initiatives related to cost reduction efforts. Amounts recognized primarily related to severance due to workforce reductions and exit costs due to the consolidation of field operations. As of June 30, 2021, the Business had $18,345 accrued for costs associated with its announced restructuring initiatives, all of which is expected to be paid within one year.
12. Income Taxes
The Business accounts for income tax expense in accordance with ASC 740, which requires that an estimate of the annual effective income tax rate for the full year to be applied to the respective interim period, taking into account year-to-date amounts and projected results for the full year.
19
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
The effective tax rate for the six months ended June 30, 2021 was 60.5% compared with 127.9% for the six months ended June 30, 2020. The year-over-year decrease is primarily due to the absence of a prior year charge of $48,640 related to a valuation allowance recorded against a United Kingdom tax loss and credit carryforward and a $12,311 charge resulting from a decision to no longer permanently reinvest certain pre-2018 unremitted non-U.S. earnings. The six months ended June 30, 2021 included a $40,417 deferred tax charge as a result of the enacted tax rate increase from 19% to 25% in the United Kingdom.
The Business assesses the realizability of its deferred tax assets on a quarterly basis through an analysis of potential sources of future taxable income, including prior year taxable income that may be available to absorb a carryback of tax losses, reversals of existing taxable temporary differences, tax planning strategies and forecasts of taxable income. The Business considers all negative and positive evidence, including the weight of the evidence, to determine whether valuation allowances against deferred tax assets are required. The Business maintains valuation allowances against certain deferred tax assets.
The Business operates globally and, as a result, Chubb F&S or one or more of its subsidiaries files income tax returns in various jurisdictions. In the normal course of business Chubb F&S is subject to examination by taxing authorities throughout the world. With few exceptions, the Business is no longer subject to income tax examinations for years before 2012.
In the ordinary course of business, there is inherent uncertainty in quantifying the Business’s income tax positions. The Business assesses its income tax positions and records tax benefits for all years subject to examination based upon management’s evaluation of the facts, circumstances and information available at the reporting date. It is reasonably possible that a net reduction of unrecognized tax benefits totaling $3,625 will occur over the next 12 months as a result of additional worldwide uncertain tax positions, the revaluation of current uncertain tax positions arising from developments in examinations, in appeals, or in the courts, or the closure of tax statutes.
13. Commitments and Contingent Liabilities
The Business is unable to predict the final outcome of the following matters based on the information currently available except as otherwise noted. However, the Business does not believe that the resolution of any of these matters will have a material adverse effect upon our competitive position, results of operations, cash flows or financial condition.
20
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
Environmental
The Business’s operations are subject to environmental regulation by various authorities. We have accrued for the costs of environmental remediation activities, including but not limited to, investigatory, remediation, operating and maintenance costs and performance guarantees, and we periodically reassess these amounts. Management believes that the likelihood of incurring losses materially in excess of the amounts accrued is remote. As of June 30, 2021 and December 31, 2020, the outstanding liability for environmental obligations was $10,120 and $10,433, respectively, of which $6,410 and $6,652 is included in Accrued Liabilities and $3,710 and $3,781 is included in Other Long-term Liabilities in the accompanying Unaudited Condensed Combined Balance Sheets.
Legal Proceedings
Aqueous Film Forming Foam Litigation.
Carrier entities and many other parties have been named as defendants in numerous putative class actions and other lawsuits, alleging that the historic use of Aqueous Film Forming Foam (“AFFF”) caused personal injuries and property damage. Additionally, several state, municipal and water utility plaintiffs have commenced litigation against the same defendants to recover remediation costs related to historic use of AFFF. In December 2018, the U.S. Judicial Panel on Multidistrict Litigation (“MDL”) transferred and consolidated all the AFFF cases pending in the federal courts to the U.S. District Court for the District of South Carolina for pre-trial proceedings. As of August 1, 2021, there are approximately 1,448 cases pending in the MDL. One Chubb F&S entity, Chubb Fire, Ltd., a Carrier subsidiary, is currently named as a defendant in over 800 of those cases. Based upon information available at this time, we believe that Chubb Fire, Ltd. is not a proper party to this litigation as it was not engaged in AFFF manufacture or sale in the U.S. Further, at this time, given the factual, scientific and legal issues to be resolved relating to these claims, Carrier is unable to assess the probability of liability or reasonably estimate the damages, if any, to be allocated to Carrier, if one or more plaintiffs were to prevail in these cases and there can be no assurance that any such future exposure will not be material in any period.
Self-insurance
Liabilities related to self-insured risks were $7,385 and $7,465 as of June 30, 2021 and December 31, 2020, respectively, which are classified as Accrued liabilities in the accompanying Unaudited Condensed Combined Balance Sheets.
21
Chubb Fire & Security Group
(A Business of Carrier Global Corporation)
Notes to Condensed Combined Financial Statements (continued)
(Unaudited)
(In Thousands of Dollars)
Guarantees
The Business has commitments and performance guarantees under service, installation, and maintenance contracts. Liabilities recorded on the Unaudited Condensed Combined Balance Sheet related to these guarantees were not significant during the historical periods presented.
The Business also has obligations arising from sales of certain businesses and assets, including those from representations and warranties and related indemnities for, among other matters, environmental, health and safety (including asbestos-related), tax and employment matters. The maximum potential payment related to these obligations is not a specified amount, as a number of the obligations do not contain financial caps.
Other
The Business also has other commitments and contingent liabilities related to legal proceedings and other matters arising out of the normal course of business. The Business accrues contingencies based upon a range of possible outcomes. If no amount within this range is a better estimate than any other, then the Business accrues the minimum amount.
The Business is also subject to a number of routine lawsuits, investigations and claims (some of which involve substantial amounts) arising out of the ordinary course of business. Management does not believe that these matters will have a material adverse effect upon the Business’s competitive position, results of operations, cash flows or financial condition.
14. Subsequent Events
The Business evaluated events and transactions occurring subsequent to June 30, 2021 until September 8, 2021, the date the Unaudited Condensed Combined Financial Statements were available to be issued and concluded that there were no subsequent events that required recognition or disclosure other than the anticipated sale of Chubb F&S to APi as previously disclosed in Note 1.
22
Exhibit 99.3
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined financial statements of APi Group (“APi” or “acquirer”) and Chubb Limited’s (“Chubb”) fire and security business (the “Chubb Business”) present the combination of the financial information of APi and the Chubb Business adjusted to give effect to APi’s planned acquisition of Chubb (the “Chubb Acquisition”) and related financing transactions assuming that the Chubb Acquisition will be completed. The following unaudited pro forma condensed combined financial information has been prepared in accordance with Article 11 of Regulation S-X, Pro Forma Financial Information, as amended by the final rule, Release No. 33-10786 “Amendments to Financial Disclosures about Acquired and Disposed Businesses”, which is herein referred to as Article 11, and are being provided pursuant to Rule 3-05 of Regulation S-X because the Chubb Acquisition constitutes a probable significant acquisition that has not yet been consummated.
Release No. 33-10786 replaces the existing pro forma adjustment criteria with simplified requirements to depict the accounting for the transaction (“Transaction Accounting Adjustments”) and the option to present the reasonably estimable synergies and other transaction effects that have occurred or are reasonably expected to occur (“Management’s Adjustments”). APi has elected not to present Management’s Adjustments and has only presented Transaction Accounting Adjustments in the following unaudited pro forma condensed combined financial information.
The unaudited pro forma condensed combined balance sheet as of June 30, 2021 combines the historical balance sheets of APi and the Chubb Business on a pro forma basis as if the Chubb Acquisition and related transactions had been consummated on June 30, 2021. The unaudited pro forma condensed combined statements of operations for the six months ended June 30, 2021 and 2020 and the year ended December 31, 2020 combine the historical statements of operations of APi and the Chubb Business on a pro forma basis as if the Chubb Acquisition and related transactions had been consummated on January 1, 2020, the beginning of the earliest period presented.
The Chubb Acquisition and related financing transactions are summarized below:
| • | APi to acquire Chubb for total enterprise value of $3.1 billion, which is comprised of $2.9 billion in cash and approximately $200 million of assumed liabilities, and other adjustments. The cash consideration for the Chubb Acquisition is expected to be funded through a combination of cash on hand, the Private Placement and new debt issuances (each described below). |
| • | Pursuant to the Security Purchase Agreements (“Financing SPAs”) entered into with funds affiliated with The Blackstone Group Inc. (the “Blackstone SPA”) and funds affiliated with Viking Global Investors (the “Viking SPA”), the investors agreed to provide a total of $800 million in perpetual convertible preferred equity financing to be used to finance the Chubb Acquisition. |
| • | APi has obtained financing commitments aggregating $1.8 billion in the form of a term loan of $1,400 million and senior unsecured notes of $400 million to be used to finance the Chubb Acquisition. |
The pro forma adjustments and allocation of purchase price are preliminary, 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, including preliminary work performed by independent valuation specialists.
As of the date of the Current Report on Form 8-K to which the following unaudited pro forma condensed combined financial statements are filed as an exhibit (the “Form 8-K”), and given that the Chubb Acquisition has not been completed, APi has not completed the detailed valuation analysis necessary to arrive at final estimates of the fair market value of the assets of the Chubb Business to be acquired and the liabilities to be assumed and the related allocations of purchase price, nor has it identified all adjustments necessary to conform Chubb’s accounting policies to APi’s accounting policies. Based on the information currently available, APi has made certain adjustments to the historical book values of the assets and liabilities of the Chubb Business to reflect preliminary estimates of fair values necessary to prepare the unaudited pro forma condensed combined financial information, with the excess of the purchase price over the adjusted historical net assets of the Chubb Business recorded as goodwill. Actual results may differ from unaudited pro forma condensed combined financial information provided herein once the Chubb Acquisition is completed and APi has determined the final purchase price for Chubb, has completed the valuation analysis necessary to finalize the required purchase price allocations and has identified any additional conforming accounting policy changes for Chubb. There can be no assurance that such finalization will not result in material changes.
Assumptions and estimates underlying the unaudited pro forma adjustments set forth in the unaudited pro forma condensed combined financial statements are described in the accompanying notes. The unaudited pro forma adjustments represent management’s estimates based on information available as of the date of these unaudited pro forma condensed combined financial statements and are subject to change as additional information becomes available and analyses are performed. The unaudited pro forma condensed combined financial statements should be read in conjunction with APi’s historical consolidated financial statements contained in its Annual Report on Form 10-K and Quarterly Report on Form 10-Q filed with the SEC and the historical combined carve-out financial statements of the Chubb Business and accompanying notes filed as exhibits to the Form 8-K.
The estimated income tax rate applied to the pro forma adjustments is 26%. The estimated pro forma blended statutory rate, and all other tax amounts are stated at their historical amounts as the combined company’s overall effective tax rate has not yet been determined.
The following unaudited pro forma condensed combined financial statements are provided for illustrative purposes only and are based on available information and assumptions that APi believes are reasonable. They do not purport to represent what the actual consolidated results of
operations or the consolidated financial position of APi would have been had the Chubb Acquisition and related financing transactions occurred on the dates indicated, or on any other date, nor are they necessarily indicative of APi’s future consolidated results of operations or consolidated financial position after the Chubb Acquisition and related financing transactions. APi’s actual financial position and results of operations after the Chubb 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 APi and the Chubb Business following the date of the unaudited pro forma condensed combined financial statements.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 2021
(in millions, except per share amounts)
| APi | Chubb Business |
Reclassification Adjustments |
Pro Forma Adjustments |
Pro Forma Combined |
||||||||||||||||||
| Assets |
||||||||||||||||||||||
| Current assets: |
||||||||||||||||||||||
| Cash and cash equivalents |
$ | 686 | $ | 43 | $ | — | $ | (391 | ) | [A] | $ | 338 | ||||||||||
| Accounts receivable, net |
664 | 441 | — | — | 1,105 | |||||||||||||||||
| Inventories |
69 | 68 | — | 16 | [B] | 153 | ||||||||||||||||
| Contract assets |
184 | 197 | — | — | 381 | |||||||||||||||||
| Prepaid expenses and other current assets |
82 | 31 | — | — | 113 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total current assets |
1,685 | 780 | — | (375 | ) | 2,090 | ||||||||||||||||
| Property and equipment, net |
348 | 69 | — | 18 | [C] | 435 | ||||||||||||||||
| Operating lease right of use assets |
105 | 168 | — | — | 273 | |||||||||||||||||
| Goodwill |
1,079 | 920 | — | 716 | [D] | 2,715 | ||||||||||||||||
| Intangible assets, net |
912 | 567 | — | 407 | [E] | 1,886 | ||||||||||||||||
| Deferred tax assets |
87 | 10 | — | — | [F] | 97 | ||||||||||||||||
| Pension and postretirement assets |
— | 603 | — | — | [G] | 603 | ||||||||||||||||
| Other assets |
27 | 14 | — | — | 41 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total assets |
$ | 4,243 | $ | 3,131 | $ | — | $ | 766 | $ | 8,140 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Liabilities and Shareholders’ Equity |
||||||||||||||||||||||
| Current liabilities: |
||||||||||||||||||||||
| Short-term and current portion of long-term debt |
13 | — | — | 244 | [H] | 257 | ||||||||||||||||
| Accounts payable |
180 | 199 | — | — | 379 | |||||||||||||||||
| Contingent consideration and compensation liabilities |
25 | — | — | — | 25 | |||||||||||||||||
| Accrued salaries and wages |
151 | 120 | — | — | 271 | |||||||||||||||||
| Other accrued liabilities |
100 | 172 | (40 | ) | — | 232 | ||||||||||||||||
| Contract liabilities |
232 | 174 | — | — | 406 | |||||||||||||||||
| Operating and finance leases |
29 | — | 40 | — | 69 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total current liabilities |
730 | 665 | — | 244 | 1,639 | |||||||||||||||||
| Long-term debt, less current portion |
1,457 | — | — | 1,511 | [H] | 2,968 | ||||||||||||||||
| Contingent consideration and compensation liabilities |
2 | — | — | — | 2 | |||||||||||||||||
| Operating and finance leases |
81 | 124 | — | — | 205 | |||||||||||||||||
| Deferred tax liabilities |
46 | 281 | — | 188 | [F] | 515 | ||||||||||||||||
| Pension and post retirement obligations |
— | 91 | — | — | [G] | 91 | ||||||||||||||||
| Other noncurrent liabilities |
99 | 24 | — | — | 123 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total liabilities |
$ | 2,415 | $ | 1,185 | $ | — | $ | 1,943 | $ | 5,543 | ||||||||||||
| Shareholders’ equity: |
||||||||||||||||||||||
| Preferred stock, $0.0001 par value, 7 authorized shares; 4 shares issued and outstanding at June 30, 2021 |
— | — | — | 800 | 800 | |||||||||||||||||
| Common shares; $0.0001 par value, 500 authorized shares, 201 shares issued at June 30, 2021 |
— | — | — | — | — | |||||||||||||||||
| Carrier Net Investment |
— | 2,898 | — | (2,898 | ) | [I] | — | |||||||||||||||
| Additional paid-in capital |
2,105 | — | — | — | 2,105 | |||||||||||||||||
| Accumulated deficit |
(271 | ) | — | — | (35 | ) | [F][N][R] | (306 | ) | |||||||||||||
| Non-controlling interest |
— | 4 | — | — | 4 | |||||||||||||||||
| Accumulated other comprehensive income (loss) |
(6 | ) | (956 | ) | — | 956 | [I] | (6 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total shareholders’ equity |
$ | 1,828 | $ | 1,946 | $ | — | $ | (1,177 | ) | $ | 2,597 | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Total liabilities and shareholders’ equity |
$ | 4,243 | $ | 3,131 | $ | — | $ | 766 | $ | 8,140 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2020
(in millions, except per share amounts)
| API | Chubb Business |
Reclassification Adjustments |
Pro Forma Adjustments |
Pro Forma Combined |
||||||||||||||||||
| Net revenues |
$ | 3,587 | $ | 1,948 | $ | — | $ | — | $ | 5,535 | ||||||||||||
| Cost of revenues |
2,831 | 1,355 | — | 71 | [J],[K],[L] | 4,257 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Gross profit |
756 | 593 | — | (71 | ) | 1,278 | ||||||||||||||||
| Selling, general, and administrative expenses |
725 | 547 | (9 | ) | 149 | [L],[M],[R] | (1,412 | ) | ||||||||||||||
| Impairment of goodwill, intangible, and other assets |
197 | — | — | — | 197 | |||||||||||||||||
| Other (income) expense, net |
— | (8 | ) | 8 | — | — | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Operating income (loss) |
(166 | ) | 54 | 1 | (220 | ) | (331 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Interest income (expense), net |
(52 | ) | 31 | — | (99 | ) | [N] | (120 | ) | |||||||||||||
| Non-service pension benefit |
— | 69 | — | 9 | [O] | 78 | ||||||||||||||||
| Investment income (expense) and other, net |
34 | — | (1 | ) | — | 33 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Other income (expense) |
(18 | ) | 100 | (1 | ) | (90 | ) | (9 | ) | |||||||||||||
| Income (loss) before income taxes |
(184 | ) | 154 | — | (310 | ) | (340 | ) | ||||||||||||||
| Income tax provision (benefit) |
(31 | ) | 106 | — | (81 | ) | [P] | (6 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss), including noncontrolling interests |
$ | (153 | ) | $ | 48 | $ | — | $ | (229 | ) | $ | (334 | ) | |||||||||
| Less net income (loss) attributable to noncontrolling interests |
— | — | — | — | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) attributable to the Company |
$ | (153 | ) | $ | 48 | $ | — | $ | (229 | ) | $ | (334 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Accrued stock dividend on preferred stock |
(222 | ) | — | — | (44 | ) | [Q] | (266 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) attributable to common shares |
$ | (375 | ) | $ | 48 | $ | — | $ | (273 | ) | $ | (600 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Earnings (loss) per share: |
||||||||||||||||||||||
| Basic |
$ | (2.21 | ) | $ | (3.55 | ) | ||||||||||||||||
| Diluted |
$ | (2.21 | ) | $ | (3.55 | ) | ||||||||||||||||
| Weighted average shares outstanding: |
||||||||||||||||||||||
| Basic |
169 | 169 | ||||||||||||||||||||
| Diluted |
169 | 169 | ||||||||||||||||||||
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2021
(in millions, except per share amounts)
| API | Chubb Business |
Reclassification Adjustments |
Pro Forma Adjustments |
Pro Forma Combined |
||||||||||||||||||
| Net revenues |
$ | 1,781 | $ | 1,102 | $ | — | $ | — | $ | 2,883 | ||||||||||||
| Cost of revenues |
1,368 | 771 | — | (8 | ) | [J],[K],[L] | 2,131 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Gross profit |
413 | 331 | — | 8 | 752 | |||||||||||||||||
| Selling, general, and administrative expenses |
368 | 282 | (3 | ) | 53 | [L],[M],[R] | 700 | |||||||||||||||
| Impairment of goodwill, intangible, and other assets |
— | — | — | — | — | |||||||||||||||||
| Other (income) expense, net |
— | (3 | ) | 3 | — | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Income (loss) from operations |
45 | 52 | — | (45 | ) | 52 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Interest income (expense),net |
(29 | ) | 13 | — | (42 | ) | [N] | (58 | ) | |||||||||||||
| Non-service pension benefit |
— | 40 | — | 8 | [O] | 48 | ||||||||||||||||
| Loss on extinguishment of debt |
(9 | ) | — | — | — | |||||||||||||||||
| Investment income and other, net |
9 | — | — | — | 9 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Other income (expense) |
(29 | ) | 53 | — | (34 | ) | (1 | ) | ||||||||||||||
| Income (loss) before income taxes |
16 | 105 | — | (79 | ) | 42 | ||||||||||||||||
| Income tax provision (benefit) |
3 | 63 | — | (21 | ) | [P] | 45 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss), including noncontrolling interests |
$ | 13 | $ | 42 | $ | — | $ | (58 | ) | $ | (3 | ) | ||||||||||
| Less net income (loss) attributable to noncontrolling interests |
— | (1 | ) | — | — | (1 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) attributable to the Company |
$ | 13 | $ | 43 | $ | — | $ | (58 | ) | $ | (2 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Accrued stock dividend on preferred stock |
— | — | — | (22 | ) | [Q] | (22 | ) | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Net income (loss) attributable to common shares |
$ | 13 | $ | 43 | $ | — | $ | (80 | ) | $ | (24 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
| Earnings (loss) per share: |
||||||||||||||||||||||
| Basic |
$ | 0.06 | $ | (0.12 | ) | |||||||||||||||||
| Diluted |
$ | 0.06 | $ | (0.12 | ) | |||||||||||||||||
| Weighted average shares outstanding: |
||||||||||||||||||||||
| Basic |
197 | 197 | ||||||||||||||||||||
| Diluted |
202 | 202 | ||||||||||||||||||||
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2020
(in millions, except per share amounts)
| API | Chubb Business |
Reclassification Adjustments |
Pro Forma Adjustments |
Pro Forma Combined |
||||||||||||||||||||
| Net revenues |
$ | 1,747 | $ | 884 | $ | — | $ | — | $ | 2,631 | ||||||||||||||
| Total cost of revenues |
1,411 | 620 | — | 44 | [J],[K],[L] | 2,075 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Gross profit |
336 | 264 | — | (44 | ) | 556 | ||||||||||||||||||
| Selling, general, and administrative expenses |
335 | 259 | (2 | ) | 96 | [L],[M],[R] | 688 | |||||||||||||||||
| Impairment of goodwill, intangible, and other assets |
208 | — | — | — | 208 | |||||||||||||||||||
| Other (income) expense, net |
— | (2 | ) | 2 | — | — | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Income (loss) from operations |
(207 | ) | 7 | — | (140 | ) | (340 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Interest income (expense) |
(28 | ) | 17 | — | (46 | ) | [N] | (57 | ) | |||||||||||||||
| Non-service pension benefit |
— | 33 | — | 4 | [O] | 37 | ||||||||||||||||||
| Loss on extinguishment of debt |
14 | — | — | — | 14 | |||||||||||||||||||
| Investment income and other, net |
— | — | — | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Other income (expense) |
(14 | ) | 50 | — | (42 | ) | (6 | ) | ||||||||||||||||
| Income (loss) before income taxes |
(221 | ) | 57 | — | (182 | ) | (346 | ) | ||||||||||||||||
| Income tax provision (benefit) |
(63 | ) | 73 | — | (48 | ) | [P] | (38 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income (loss), including noncontrolling interests |
$ | (158 | ) | $ | (16 | ) | $ | — | $ | (134 | ) | $ | (308 | ) | ||||||||||
| Less net income (loss) attributable to noncontrolling interests |
— | — | — | — | — | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income (loss) attributable to the Company |
$ | (158 | ) | $ | (16 | ) | $ | — | $ | (134 | ) | $ | (308 | ) | ||||||||||
| Accrued stock dividend on preferred stock |
— | — | — | (22 | ) | [Q] | (22 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Net income (loss) attributable to common shares |
$ | (158 | ) | $ | (16 | ) | $ | — | $ | (156 | ) | $ | (330 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
| Earnings (loss) per share: |
||||||||||||||||||||||||
| Basic |
$ | (0.93 | ) | $ | (1.94 | ) | ||||||||||||||||||
| Diluted |
$ | (0.93 | ) | $ | (1.94 | ) | ||||||||||||||||||
| Weighted average shares outstanding: |
||||||||||||||||||||||||
| Basic |
170 | 170 | ||||||||||||||||||||||
| Diluted |
170 | 170 | ||||||||||||||||||||||
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(in millions, except share and per share amounts or otherwise noted)
Note 1. Description of the Transaction
Chubb Acquisition Overview
On July 26, 2021, APi Group Corporation (“APi”) entered into a Stock Purchase Agreement (the “Purchase Agreement”) with Carrier Global Corporation (“Carrier”), Carrier Investments UK Limited (“Seller”) and Chubb Limited (“Chubb”), to acquire the Chubb fire and security business (the “Chubb Business”), through the acquisition of Chubb for an enterprise value of $3.1 billion, which is comprised of $2.9 billion in cash and approximately $200 million of assumed liabilities, and other adjustments (the “Chubb Acquisition”). This amount is subject to increase or decrease based on the amount of net debt and working capital of the Chubb Business as of the closing of the Chubb Acquisition. The Chubb Business is a global fire safety and security provider, offering customers complete and reliable services from design and installation to monitoring and ongoing maintenance. The cash consideration for the Chubb Acquisition is expected to be funded through a combination of cash on hand, the Private Placement and new debt issuances (each described below).
The unaudited pro forma condensed combined financial statements are being provided pursuant to Rule 3-05 of Regulation S-K because the Chubb Acquisition constitutes a probable significant acquisition that has not yet been consummated.
Private Placement
On July 26, 2021, APi entered into (i) a Securities Purchase Agreement with BTO Juno Holdings L.P. and Blackstone Tactical Opportunities Fund – FD L.P. (together the “Blackstone Purchasers”), each an investment vehicle of funds affiliated with The Blackstone Group Inc. (the “Blackstone SPA”), to sell 600,000 shares of APi’s Series B Perpetual Convertible Preferred Stock, par value $0.0001 per share (the “Series B Preferred Stock”), at a price of $1,000 per share for an aggregate purchase price of $600 million (the “Blackstone Private Placement”) and (ii) a Securities Purchase Agreement with Viking Global Equities Master Ltd. and Viking Global Equities II LP (together the “Viking Purchasers”, and together with the Blackstone Purchasers, the “Purchasers”) (the “Viking SPA” and together with the Blackstone SPA, the “Financing SPAs”), to sell 200,000 shares of the Series B Preferred Stock at a price of $1,000 per share for an aggregate purchase price of $200 million (the “Viking Private Placement” and together with the Blackstone Private Placement, the “Private Placement”). APi intends to use the net proceeds from the Private Placement to fund a portion of the consideration for the Chubb Acquisition.
The Series B Preferred Stock will accrue dividends on the initial liquidation preference of the Series B Preferred Stock at the rate of 5.5% per annum, payable in cash or in certain circumstances, in kind using APi’s common stock.
New Debt Issuances
APi has obtained financing commitments aggregating $1.8 billion in the form of a new term loan of $1,400 million and senior unsecured notes of $400 million to be used to finance the Chubb Acquisition.
Note 2. Basis of Pro Forma Presentation
The unaudited pro forma condensed combined financial statements are derived from the historical consolidated financial statements of APi and the historical combined carve-out financial statements of the Chubb Business. The unaudited pro forma condensed combined financial statements are prepared as a business combination using the acquisition method, and APi has been treated as the acquirer for accounting purposes. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2020 and the six month periods ended June 30, 2021 and 2020, have been prepared as if the Chubb Acquisition had been completed on January 1, 2020, and the unaudited pro forma condensed combined balance sheet was prepared as if the Chubb Acquisition had been completed on June 30, 2021.
The Chubb Acquisition will be 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. APi has been treated as the acquirer for financial reporting purposes. Accordingly, the purchase consideration allocated to the Chubb Business’s assets and liabilities for preparation of these pro forma financial statement is based upon their estimated preliminary fair values assuming the Chubb Acquisition was completed as of June 30, 2021. The amount of the purchase consideration that was in excess of the estimated preliminary fair values of the Chubb Business’s net assets and liabilities at June 30, 2021 is recorded as goodwill in the pro forma condensed combined balance sheet.
As of the date of the Current Report on Form 8-K to which these unaudited pro forma condensed combined financial statements are filed as an exhibit (the “Form 8-K”), and given that the Chubb Acquisition has not been completed, APi has not performed the detailed valuation studies necessary to arrive at the final estimates of the fair value of the Chubb Business’s assets to be acquired, the liabilities to be assumed and the related allocations of purchase price. As indicated in Note 5 to these unaudited pro forma condensed combined financial statements, APi has made certain adjustments to the historical book values of the assets and liabilities of the Chubb Business to reflect preliminary estimates of fair value necessary to prepare the unaudited pro forma condensed combined financial statements, with the excess of the purchase price over the adjusted historical net assets of the Chubb Business, recorded as goodwill. Actual results may differ from these unaudited pro forma condensed combined financial statements once the Chubb Acquisition is completed and APi has determined the final purchase price for Chubb and has
completed the valuation studies necessary to finalize the required purchase price allocations and identified any additional conforming accounting policy changes for Chubb. There can be no assurance that such finalization will not result in material changes. The preliminary unaudited pro forma purchase price allocation has been made solely for preparing these unaudited pro forma condensed combined financial statements.
These unaudited pro forma condensed combined financial statements are presented for illustrative purposes only and do not give effect to any cost savings from operating efficiencies, revenue synergies, differences in stand-alone costs or carve out allocations for the Chubb Business or costs for the integration of APi and the Chubb Business’s operations. These unaudited pro forma condensed combined financial statements do not purport to represent what the actual consolidated results of operations of APi would have been had the Chubb Acquisition been completed on the dates assumed, nor are they necessarily indicative of future consolidated results of operations or consolidated financial position. Any transaction, separation or integration costs will be expensed in the appropriate accounting periods after completion of the Chubb Acquisition.
Note 3. Accounting Policies
As part of preparing these unaudited pro forma condensed combined financial statements, APi conducted an initial review of the accounting policies of Chubb to determine if differences in accounting policies require reclassification of results of operations or reclassification of assets or liabilities to conform to APi’s accounting policies and classifications. During the preparation of these unaudited pro forma condensed combined financial statements, APi did not become aware of any material differences between accounting policies of APi and Chubb except for certain reclassifications necessary to conform Chubb’s classification to APi’s financial statement presentation. The reclassifications made in the preparation of the unaudited pro forma condensed combined financial statements are presented in Note 5.
The pro forma financial data may not reflect all reclassifications necessary to conform APi’s presentation to that of Chubb due to limitations on the availability of information as of the date of this current report. At completion of the Chubb Acquisition, APi will further review Chubb’s accounting policies. As a result of that review, APi may identify differences between the accounting policies of the two companies that, when conformed, could have a material impact on the combined financial statements.
Note 4. Preliminary Purchase Consideration and Purchase Price Allocation
Under the acquisition method of accounting, the identifiable assets acquired and liabilities assumed are recorded at the acquisition date fair values. The purchase price allocation is preliminary and based on estimates of the fair value as of June 30, 2021. Upon final completion of the fair value assessment, the ultimate purchase price may differ from the preliminary assessment outlined above. Any changes to the initial estimates of the fair value of the assets and liabilities will be allocated to residual goodwill.
The table below represents a preliminary allocation of the estimated total consideration to the Chubb Business’s assets and liabilities in the Chubb Acquisition based on APi’s preliminary estimate of their respective fair values (in millions):
| Preliminary Purchase Price Allocation |
||||
| Initial purchase consideration |
$ | 3,100 | ||
| Less: Estimated assumed liabilities |
(200 | ) | ||
|
|
|
|||
| Preliminary net purchase consideration |
$ | 2,900 | ||
|
|
|
|||
| Less: Carrying value of Chubb net assets acquired |
(459 | ) | ||
| Less: Fair value of other intangible assets |
(974 | ) | ||
| Less: Increase in fair value of inventory |
(16 | ) | ||
| Less: Increase in fair value of property and equipment, net |
(18 | ) | ||
|
|
|
|||
| Residual goodwill |
$ | 1,433 | ||
|
|
|
|||
| Reconciliation of Carrying Value of Net Assets Acquired |
||||
| Carrying value of Chubb at June 30, 2021 |
$ | 1,946 | ||
| Less: Historical goodwill |
(920 | ) | ||
| Less: Historical intangible assets |
(567 | ) | ||
|
|
|
|||
| Total Carrying value of net assets acquired |
$ | 459 | ||
|
|
|
The preliminary unaudited pro forma purchase price allocation has been made solely for the purposes of preparing these unaudited pro forma condensed combined financial statements. APi estimated the fair value of Chubb’s assets and liabilities based on discussions with Chubb’s management, due diligence review in connection with the Chubb Acquisition, and other information available to APi. The analysis was performed at an aggregate level and was based on estimates that are reflective of market participant assumptions.
The final total consideration and amounts allocated to the Chubb Business’s assets and liabilities could differ materially from the preliminary amounts presented in these unaudited pro forma condensed combined financial statements. A decrease in the fair value of the Chubb Business’s assets or an increase in the fair value of the Chubb Business’s liabilities from the preliminary valuations presented would result in a dollar-for-dollar corresponding increase in the amount of goodwill that will result from the Chubb Acquisition. In addition, if the value of the property and equipment and identifiable intangible assets is higher than the amounts included in these unaudited pro forma condensed combined financial statements, it may result in higher depreciation and amortization expense than is presented in the unaudited pro forma condensed combined statements of operations. Any such increases could be material, and could result in APi’s actual future financial condition and results of operations differing materially from those presented in the unaudited pro forma condensed combined financial statements.
Note 5. Adjustments to Unaudited Pro Forma Condensed Combined Financial Statements
Reclassifications
The following items are presented as reclassifications in the unaudited pro forma condensed combined financial statements for purposes of conforming Chubb’s classification of certain assets, liabilities, income and expenses to APi’s presentation for the combined presentation:
Unaudited Pro Forma Condensed Combined Balance Sheet
| • | $40 million reclassification from other accrued liabilities to operating and finance leases. In the Chubb presentation, current lease liability was presented within other accrued liabilities. |
Unaudited Pro Forma Condensed Combined Statements of Operations
| • | $8 million, $3 million, and $2 million of other income for the year ended December 31, 2020 and the six month periods ended June 30, 2021 and 2020, respectively, have been reclassified from other (income) expense, net, within operating income in the Chubb Business’s historical statements of operations to selling, general and administrative costs and other income (expense), net, below operating income to conform with APi’s historical presentation. |
Adjustments to Unaudited Pro Forma Condensed Combined Balance Sheet
The adjustments included in the unaudited pro forma condensed combined balance sheet are as follows:
(A) Cash and Cash Equivalents
The unaudited pro forma adjustment as indicated below to record the proceeds from issuance of Series B Preferred Stock as per the Financing SPAs; proceeds from new debt financing, net of debt issuance costs, and cash payments to Chubb’s stockholders and transaction costs (in millions).
| Cash proceeds from issuance of Series B Preferred Stock |
$ | 800 | ||
| Proceeds from additional indebtedness |
1,800 | |||
|
|
|
|||
| Total sources of cash |
2,600 | |||
|
|
|
|||
| Cash paid to Chubb stock holders |
(2,900 | ) | ||
| Cash paid for debt issuance and financing fees |
(48 | ) | ||
| Cash paid for transaction costs |
(43 | ) | ||
|
|
|
|||
| Pro forma adjustment |
$ | (391 | ) | |
|
|
|
To finance the Chubb Acquisition, APi has obtained financing commitments aggregating $2.6 billion. The commitments include a term loan of $1,400 million and senior unsecured notes of $400 million. APi has also entered into the Financing SPAs to issue an aggregate of 800,000 shares of Series B Preferred Stock, at a price of $1,000 per share for an aggregate purchase price of $800 million.
(B) Inventory
The unaudited pro forma adjustment of $16 million represents the step-up of the Chubb Business’s acquired historical inventory balance to the preliminary estimated fair value of approximately $86 million as of June 30, 2021.
At the effective time of the Chubb Acquisition, inventory is required to be measured at fair value. The Chubb Business’s inventory consists primarily of raw materials and finished goods. For purposes of the unaudited pro forma condensed combined financial statements, the preliminary fair value of the Chubb Business’s inventory has been determined based on currently available information and certain assumptions, and may be different from the final estimate of fair value, and the difference could be material. Raw materials were valued based on the Chubb Business’s current net book values which are believed to approximate fair value. Finished goods were fair valued using the Chubb Business’s historical margins.
(C) Property and equipment
The unaudited pro forma adjustment to property and equipment represents an $18 million increase to the Chubb Business’s acquired property and equipment required to adjust the Chubb Business’s property and equipment to fair value, representing an estimated fair value increase of 25%. As of the effective time of the Chubb Acquisition, the Chubb Business’s property and equipment are required to be measured
at fair value. APi considered its experience with its other acquisitions in the industry in estimating the fair value of Chubb’s property and equipment. APi does not have sufficient information at this time as to the specific types, nature, age, condition or location of property, plant and equipment to perform a complete valuation, so it is possible that the fair value of the Chubb Business’s property and equipment could differ materially from the amount included in these unaudited pro forma condensed combined financial statements. Management estimated the new weighted-average remaining useful life of property and equipment to be 4 years.
(D) Goodwill
The unaudited pro forma adjustment to goodwill reflects adjustments to eliminate the Chubb Business’s historical goodwill and record the preliminary estimate of goodwill resulting from the Chubb Acquisition. Goodwill resulting from the acquisition reflects the preliminary estimate of the excess of the total purchase consideration to be paid by APi over the fair value of the Chubb Business’s identifiable assets and liabilities (See Note 4 above) (in millions):
| Total purchase consideration |
$ | 2,900 | ||
| Less: Fair value of the Chubb Business identifiable net assets and liabilities |
(1,463 | ) | ||
| Plus: Tax impact of pro forma adjustments |
199 | |||
|
|
|
|||
| Residual goodwill |
$ | 1,552 | ||
| Less: Chubb Business historical goodwill |
(920 | ) | ||
|
|
|
|||
| Pro forma adjustment |
$ | 716 | ||
|
|
|
(E) Identifiable Intangible Assets
The unaudited pro forma adjustment reflects the step-up to the preliminary estimated fair value of the Chubb Business’s identifiable intangible assets from the respective carrying values reported by Chubb as of June 30, 2021. The preliminary fair values of the intangible assets retained include the following (in millions):
| Estimated Fair Value |
Estimated Weighted- Average Useful Life |
|||||||
| Customer relationships |
$ | 740 | 8 | |||||
| Patent and trademarks |
160 | 15 | ||||||
| Backlog |
74 | 1 | ||||||
|
|
|
|||||||
| Chubb Business pro forma identifiable intangible assets |
$ | 974 | ||||||
| Less: Chubb Business’s historical intangible assets |
(567 | ) | ||||||
|
|
|
|||||||
| Pro forma adjustment |
$ | 407 | ||||||
|
|
|
|||||||
As of the effective time of the Chubb Acquisition, identifiable intangible assets are required to be measured at fair value, and these assets could include assets that are not intended to be used or sold or that are intended to be used in a manner other than their highest and best use. With respect to the intangible assets associated with the Chubb Acquisition, the Chubb Business owns the rights to a number of trade names and trademarks. Based on internal assessments as well as discussions with the Chubb Business’s management, APi has identified the following significant intangible assets: trademarks, customer relationships, patents and others. For purposes of these unaudited pro forma condensed combined financial statements, the fair value and weighted-average useful lives of these intangible assets have been estimated primarily based on APi’s recent historical acquisitions of life safety businesses and other available public information and APi’s financial due diligence review of the Chubb Business.
(F) Deferred tax assets and liabilities
The unaudited pro forma adjustment to deferred income tax liabilities is calculated as follows (in millions):
| Net impact to deferred tax liabilities associated with Chubb’s inventory, tangible and identifiable intangible assets |
$ | 115 | ||
| Net impact to deferred tax liabilities associated with the fair value adjustment to Chubb’s pension and post-retirement liabilities |
84 | |||
| Tax benefit on $43 million of Chubb Acquisition transaction costs |
(11 | ) | ||
|
|
|
|||
| Pro forma adjustment |
$ | 188 | ||
|
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|
The unaudited pro forma adjustment reflects the change in net deferred income tax liabilities arising from the fair value adjustments to Chubb Business’s assets and liabilities. Deferred income tax adjustments arising from fair value adjustments have been estimated at the combined statutory U.S. federal and state tax rate of 26%.
(G) Pension assets and liabilities
The historical Chubb Business pension and post-retirement assets and liabilities acquired are estimated to approximate fair value as APi has not yet performed an actuarial valuation on all to-be-acquired pension and post-retirement plans. Estimated fair values may differ materially than those presented herein due to a number of factors including, but not limited to, changes in discount rates, pension plan asset values at the time of the closing of the Chubb Acquisition and return on asset assumptions. The condensed combined pro forma balance sheet eliminates the deferred actuarial gain and losses and prior unrecognized service costs within Accumulated Other Comprehensive Income(“AOCI”) for all pension and post-retirement plans.
(H) Debt
The unaudited pro forma adjustments relate to APi’s new debt financing for its borrowings pursuant to a term loan and senior unsecured notes of $1.4 billion and $400 million, respectively. The unaudited pro forma adjustments are classified between short-term debt, current portion of long-term debt and long-term debt as follows (in millions):
| Total debt issued in Chubb Acquisition |
Short term and current portion of long term debt |
Long-term debt, less current portion |
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| APi borrowing pursuant to new term loan facility (due 2028) |
$ | 1,400 | $ | 200 | $ | 1,200 | ||||||
| APi borrowing pursuant to senior unsecured notes (due 2029) |
400 | 50 | 350 | |||||||||
| Less: Debt discount (deferred financing costs)(1) |
(45 | ) | (6 | ) | (39 | ) | ||||||
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| Pro forma adjustment |
$ | 1,755 | $ | 244 | $ | 1,511 | ||||||
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| (1) | Excludes $3 million of bridge fees expensed in interest expense (refer to (N) below for details of interest expense). |
(I) Shareholder’s equity and related accounts
The unaudited pro forma adjustment related to the elimination of the Chubb Business’s historical shareholders’ equity accounts and the after tax impact of the $43 million in transaction fees (refer to (R) below for further discussion of the adjustment to the unaudited pro forma condensed combined statement of operations for non-recurring transaction costs).
Adjustments to Unaudited Pro Forma Condensed Combined Statement of Operations
(J) Inventory step up turn
The pro forma adjustment to reflect the adjustment to cost of revenue based on the elimination of profit in the acquired Chubb Business’s inventory step-up to fair value. The pro forma adjustments of $16 million for year ended December 31, 2020 and six months ended June 30, 2020 are based on estimates from the Chubb Business’s historical financial statements which indicate its inventory turns more than twice per year. See (B) for further discussion on inventory valuation.
(K) Backlog intangible amortization
The pro forma adjustment of $73 million for the acquired backlog intangible asset (refer to (E) above for backlog intangible) related to the Chubb Business’s contracts with its customers to be performed subsequent to the Chubb Acquisition date. The amortization period for the backlog intangible asset is estimated to one year; therefore, the pro forma adjustments to cost of revenues for the year ended December 31, 2020 and the six months ended June 30, 2020, are estimated to be $73 million and $37 million, respectively.
(L) Intangible amortization expense
The pro forma adjustments to SG&A expenses related to intangible asset amortization expense based on the estimated fair value of acquired intangible assets excluding the backlog intangible asset, (refer to (E) above for customer relationships, patents and trademarks intangible fair values), for all the pro forma periods presented is outlined in the following tables (in millions):
| For Year Ended December 31, 2020 | ||||||||||||
| Historical Amortization |
Preliminary Estimated Amortization |
Pro Forma Adjustment |
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| Amortization in SG&A expense of the Chubb Business |
$ | — | $ | 103 | $ | 103 | ||||||
| Amortization in cost of revenues of the Chubb Business |
22 | — | (22 | ) | ||||||||
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| Total amortization expense |
$ | 22 | $ | 103 | $ | 81 | ||||||
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| For Six Months Ended June 30, 2021 | ||||||||||||
| Historical Amortization |
Preliminary Estimated Amortization |
Pro Forma Adjustment |
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| Amortization in SG&A expense of the Chubb Business |
$ | — | $ | 52 | $ | 52 | ||||||
| Amortization in cost of revenues of the Chubb Business |
10 | — | (10 | ) | ||||||||
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| Total amortization expense |
$ | 10 | $ | 52 | $ | 42 | ||||||
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| For Six Months Ended June 30, 2020 | ||||||||||||
| Historical Amortization |
Preliminary Estimated Amortization |
Pro Forma Adjustment |
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| Amortization in SG&A expense of the Chubb Business |
$ | — | $ | 52 | $ | 52 | ||||||
| Amortization in cost of revenues of the Chubb Business |
11 | — | (11 | ) | ||||||||
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| Total amortization expense |
$ | 11 | $ | 52 | $ | 41 | ||||||
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The pro forma adjustment to amortization expense represents the estimated additional amortization expense associated with the estimated fair values of the acquired Chubb Business’s amortizable intangible assets using the intangible assets’ preliminary estimated weighted-average useful lives. The estimation of preliminary weighted-average useful lives and fair values of the acquired Chubb Business’s intangible assets are described in (E) above.
(M) Depreciation expense
The pro forma adjustments to depreciation expense reflecting the change in the preliminary estimated fair value of acquired Chubb Business’s property and equipment presented for all the pro forma periods is calculated as follows (in millions):
| For Year Ended December 31, 2020 | ||||||||||||
| Historical Depreciation |
Preliminary Estimated Depreciation |
Pro Forma Adjustment |
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| Depreciation in SG&A expense of the Chubb Business |
$ | 10 | $ | 13 | $ | 3 | ||||||
| Depreciation in cost of revenues of the Chubb Business |
7 | 10 | 3 | |||||||||
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| Total |
$ | 17 | $ | 23 | $ | 6 | ||||||
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| For Six Months Ended June 30, 2021 | ||||||||||||
| Historical Depreciation |
Preliminary Estimated Depreciation |
Pro Forma Adjustment |
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| Depreciation in SG&A expense of the Chubb Business |
$ | 5 | $ | 6 | $ | 1 | ||||||
| Depreciation in cost of revenues of the Chubb Business |
3 | 5 | 2 | |||||||||
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| Total |
$ | 8 | $ | 11 | $ | 3 | ||||||
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| For Six Months Ended June 30, 2020 | ||||||||||||
| Historical Depreciation |
Preliminary Estimated Depreciation |
Pro Forma Adjustment |
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| Depreciation in SG&A expense of the Chubb Business |
$ | 5 | $ | 6 | $ | 1 | ||||||
| Depreciation in cost of revenues of the Chubb Business |
3 | 5 | 2 | |||||||||
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| Total |
$ | 8 | $ | 11 | $ | 3 | ||||||
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The pro forma adjustment to depreciation expense represents increased depreciation expense associated with the $18 million pro forma adjustment to increase the Chubb Business’s’s property and equipment to its preliminary estimated fair value. The preliminary estimated weighted-average depreciable lives and fair values of the acquired the Chubb Business’s property and equipment (refer to (F) above for property and equipment fair values).
(N) Interest expense
The pro forma adjustment represents the estimated increased interest expense associated with the additional indebtedness to be incurred by APi to finance the Chubb Acquisition and presented for all the pro forma periods as follows (in millions):
| For Year Ended December 31, 2020 |
For Six Months Ended June 30, 2021 |
For Six Months Ended June 30, 2020 |
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| APi’s historical interest expense |
$ | 52 | $ | 29 | $ | 28 | ||||||
| Interest expense on Chubb Acquisition indebtedness(1) |
65 | 29 | 29 | |||||||||
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| Pro forma combined interest expense |
117 | 58 | 57 | |||||||||
| Less: Historical combined interest expense |
(21 | ) | (16 | ) | (11 | ) | ||||||
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| Pro forma adjustment |
$ | 96 | $ | 42 | $ | 46 | ||||||
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| (1) | Interest expense for the year ended December 31, 2020 and the six months ended June 30, 2020, includes $3 million of bridge fees. A 0.125% in the interest rate on the Chubb Acquisition indebtedness would change annual interest expense by $2 million. |
(O) Non-service pension benefit
The pro forma adjustments represent the impact of eliminating the deferred actuarial gains and losses and prior unrecognized service costs within AOCI and their related amortization in order to estimate the pro forma non-service pension benefit for all pension and post-retirement plans.
(P) Income tax expense (benefit)
The pro forma income tax effects related to all the pro forma adjustments are calculated using an estimated pro forma combined blended U.S. federal and state statutory tax rate of 26% and are calculated for all pro forma periods presented as follows (in millions):
| For Year Ended December 31, 2020 |
For Six Months Ended June 30, 2021 |
For Six Months Ended June 30, 2020 |
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| Pro forma adjustments to Income(loss) before taxes |
$ | (310 | ) | $ | (79 | ) | $ | (182 | ) | |||
| Statutory tax rate |
26 | % | 26 | % | 26 | % | ||||||
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| Pro forma adjustment |
$ | (81 | ) | $ | (21 | ) | $ | (48 | ) | |||
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(Q) Accrued stock dividend on Series B Preferred Stock
The pro forma adjustment to accrued dividend represents accrued dividends on newly issued Series B Preferred Stock is calculated as follows (in millions):
| For Year Ended December 31, 2020 |
For Six Months Ended June 30, 2021 |
For Six Months Ended June 30, 2021 |
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| Newly issued Series B Preferred Stock |
$ | 800 | $ | 800 | $ | 800 | ||||||
| Interest rate |
5.5 | % | 5.5 | % | 5.5 | % | ||||||
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| Pro forma adjustment |
$ | 44 | $ | 22 | $ | 22 | ||||||
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The above adjustment reflects the accrual of dividends on such Series B Preferred Stock issued as part of the Financing SPAs entered into to finance the Chubb Acquisition. Refer to (A) above for further details on the Series B Preferred Stock. APi has the option to pay these dividends in cash or shares, and it is management’s intent to pay these dividends in shares of APi common stock.
(R) Adjustment for non-recurring transaction costs
Total estimated non-recurring acquisition-related transaction costs to be incurred by APi and the Chubb Business are estimated to be approximately $43 million to complete the Chubb Acquisition. These costs primarily relate to professional fees associated with regulatory filings and the Chubb Acquisition activities. The unaudited pro forma condensed combined statements of operations for the year ended December 31, 2020 and six months ending June 30, 2020 have been adjusted to increase SG&A expenses for these estimated non-recurring costs.