Vertiv Holdings Co — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This filing reports annual results; the supplied text does not provide a clear standalone fourth-quarter financial summary. Figures are in U.S. dollars, millions except per-share amounts.
Business context
Vertiv designs, manufactures and services critical digital infrastructure for data centers, communication networks, and commercial and industrial customers. Its offerings include power and thermal management, integrated rack systems, modular solutions, software and lifecycle services. Operations are reported across the Americas, Asia Pacific, and EMEA.
Key financial metrics
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $4,998.1 | $4,370.6 |
| Gross profit / gross margin | $1,522.7 / 30.5% | $1,473.7 / 33.7% |
| Operating profit / operating margin | $259.9 / 5.2% | $213.5 / 4.9% |
| Net income (loss) | $119.6 | $(327.3) |
| Diluted earnings (loss) per share | $0.33 | $(1.07) |
| Cash from operating activities | $210.9 | $208.9 |
| Capital expenditures | $73.4 | $44.4 |
| Cash and cash equivalents at year-end | $439.1 | $534.6 |
| Long-term debt, net of current portion | $2,950.5 | $2,130.5 |
Revenue increased 14.4%, driven by demand across offerings, economic recovery, favorable foreign exchange and $67.4 of E&I sales included after its November acquisition. Cost of sales increased 20.0%, faster than revenue, and gross margin fell 3.2 percentage points, principally amid higher commodity, freight and other supply-chain costs. Operating profit increased 21.7%; operating margin improved modestly.
Net income included a $59.2 gain from amending the Tax Receivable Agreement (TRA) and a $61.9 loss from changes in the fair value of warrant liabilities. FY2020 included a $174.0 debt-extinguishment loss and a $143.7 warrant-liability loss. These items affect year-over-year comparability.
Operating cash flow was nearly flat year over year. Working capital used $132.8 of cash, including increases in receivables and inventory. Investing cash outflow was $1,216.8, primarily reflecting $1,163.7 paid for E&I, net of cash acquired. Financing cash inflow was $914.9, including issuance of $850.0 of notes. Cash declined by $95.5 during the year. The filing does not label free cash flow as a metric.
At year-end, debt included $2,161.7 under the term loan due 2027 and $850.0 of 4.125% secured notes due 2028; the ABL facility had no borrowings and $435.6 of availability, subject to borrowing-base and other conditions. Cash plus reported ABL availability provided liquidity, while debt service, working-capital needs and the $100.0 TRA settlement remain relevant. Management stated it expected operating cash flow and available debt facilities to meet near-term liquidity needs for the next 12 months.
Material changes and notable transactions
- Backlog rose to $3,191.0 from $1,844.8, an increase of about $1.35 billion. Vertiv attributed the rise to strong demand and customers ordering earlier amid supply constraints; orders may be canceled or deferred, and backlog is not a reliable revenue forecast.
- On November 1, 2021, Vertiv acquired E&I for gross consideration of $1,775.7, including $1,163.7 cash, about $601.1 in stock, and contingent consideration. Up to an additional $200.0 cash may be payable if specified 2022 EBITDA targets are met. E&I contributed $67.4 in post-acquisition sales and a $10.0 operating loss in 2021. Purchase accounting remained preliminary.
- The acquisition added $850.0 of secured notes due 2028. In March 2021, Vertiv also reduced the term-loan interest-rate margin by 0.25 percentage points; the loan matures in 2027.
- Segment sales rose in all regions: Americas 7.2%, Asia Pacific 17.6%, and EMEA 25.0%. Americas operating profit declined 11.2%, with margin falling to 20.2% from 24.4%; Asia Pacific and EMEA operating profit increased, with margins improving to 15.7% and 18.1%, respectively.
- Vertiv replaced remaining TRA obligations with a fixed $100.0 payment in two installments due by June 15 and September 15, 2022. The filing recognized a $59.2 gain on the amendment.
Outlook, commentary and risks
- Management said material, freight and labor inflation and supply-chain constraints were expected to continue throughout 2022. The filing describes pricing and sourcing actions but gives no quantitative 2022 revenue, earnings or margin guidance.
- Risks include shortages and delayed components, premium freight and labor costs, and a lag between price increases and their effect on results because of the large backlog. These pressures could weigh on margins and fulfillment.
- Demand depends on customers’ investment in data centers and communications infrastructure. Long sales cycles, large customer orders, order cancellations or deferrals, competition and fixed-price project commitments can make results variable.
- COVID-19-related disruption, foreign exchange movements, interest rates and the transition away from LIBOR may affect operations, costs, debt expense and cash flows. A 100-basis-point interest-rate change was estimated to alter annual net interest expense by about $12.0 after swaps at year-end.
- Legal matters include an Energy Labs settlement for $21.5, with $18.7 recorded in SG&A in 2021, and a settled SVO arbitration. The Bladeroom judgment was vacated and remanded for a new trial; Vertiv reversed its prior $96.2 accrual and related indemnification receivable. Management said no other known contingent liabilities were expected to be material, while noting litigation outcomes are uncertain.
- Previously identified internal-control material weaknesses were reported remediated, and management and the auditor concluded controls were effective at December 31, 2021. The assessment excluded E&I, which represented 28.7% of assets and 1.3% of sales at or for year-end 2021.
Most important facts for investors to verify
- Whether backlog converts to revenue on schedule and at acceptable margins, and how much is delayed, rescheduled or canceled.
- Whether pricing actions offset ongoing material, freight and labor inflation, and whether gross margin stabilizes after its 2021 decline.
- E&I integration, preliminary purchase-price allocation, expected synergies, contingent consideration and any additional earnout payment.
- Cash generation and working-capital requirements relative to debt service, the $100.0 TRA installments and other liquidity needs.
- Developments in the SVO and Bladeroom matters, and the scope and effectiveness of controls as E&I is integrated.