Vertiv Holdings Co — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. Amounts are in millions of U.S. dollars unless stated otherwise. Although the request references Q4, this is an annual filing; quarterly figures below are identified separately. Vertiv designs, manufactures and services critical digital infrastructure for data centers, communication networks, and commercial and industrial markets. The business combination with GS Acquisition Holdings closed on February 7, 2020, so the year includes a major change in capital structure and public-company status.
Financial performance and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $4,370.6 | $4,431.2 |
| Gross profit / margin | $1,473.7 / 33.7% | $1,453.0 / 32.8% |
| SG&A / percentage of revenue | $1,008.4 / 23.1% | $1,100.8 / 24.8% |
| EBIT | $39.5 | $206.1 |
| Net loss | $(183.6) | $(140.8) |
| Operating cash flow | $208.9 | $57.5 |
| Cash and cash equivalents at year-end | $534.6 | $223.5 |
Revenue declined 1.4%, primarily reflecting COVID-19 impacts. Gross margin improved 0.9 percentage points, while SG&A fell on cost controls and reduced discretionary spending. EBIT and net loss worsened, principally due to a $174.0 debt-extinguishment loss and higher restructuring, impairment and foreign-exchange costs. Net interest expense declined to $150.4 from $310.4 following debt reduction and refinancing; income tax expense increased to $72.7 from $36.5.
Operating cash flow improved by $151.4, attributed mainly to lower cash interest and transformation spending. Investing cash outflow was $45.7, including $44.4 of capital expenditures and $8.3 of capitalized software investment. Financing cash flow was $140.7, including $156.5 from warrant exercises, partly offset by net ABL repayments. Cash-flow statement ending cash, including restricted cash, was $542.6.
At year-end, senior secured term-loan principal was $2,183.5; the balance-sheet carrying amount of long-term debt, net of current portion, was $2,130.5. The term loan matures in 2027 and bore 3.15% interest at year-end; swaps hedged $1,200.0 of floating-rate exposure. The ABL facility had no borrowings outstanding and $434.2 of availability, subject to borrowing-base conditions. Management stated it expected operating cash flow and available facilities to meet near-term liquidity needs.
FY2020 quarterly net sales were $1,305.5 in Q4 versus $1,171.5 in Q4 2019; quarterly net income was $74.9 versus a $33.9 net loss. FY2020 Q4 results followed losses in Q1 and Q3 and income in Q2.
Material changes and business trends
- Regional sales were mixed: Americas fell 8.5% to $2,040.6; Asia Pacific rose 7.1% to $1,368.4; and EMEA rose 4.1% to $961.6. Segment EBIT increased in all three regions, with the strongest margin improvement in EMEA.
- Backlog increased to $1,844.8 from $1,401.2. Most was described as firm and expected to ship within a year, but orders may be canceled or rescheduled and backlog is not necessarily predictive of revenue.
- The March 2020 refinancing replaced prior debt with a $2,200.0 seven-year term loan and extended the $455.0 ABL facility to 2025. The company recorded $99.0 of deferred financing-fee write-offs and a $75.0 early redemption premium.
- Product and service revenue categories were strategically realigned during 2020; comparative category data were adjusted. The filing reports total revenue comparably.
Outlook, risks and unusual items
- Management said COVID-19 adversely affected 2020 operations and results and could continue to materially adversely affect the business, cash flows and liquidity for at least the duration of 2021. The filing gives no quantified earnings or revenue guidance.
- A multi-year restructuring program began in Q3 2020. Management targets $85.0 in annualized run-rate savings by 2023; total expected program charges are approximately $95.0, including $73.9 recorded in 2020.
- Two material weaknesses in internal control over financial reporting remained unremediated at year-end: IT access/change-management controls and aggregation of control deficiencies. Management found no resulting material misstatement, but concluded controls were ineffective; the auditor issued an adverse opinion on ICFR while giving an unqualified opinion on the financial statements.
- The Tax Receivable Agreement entitles the former Vertiv owner to 65% of specified tax savings over 12 years. The recorded fair-value liability was $155.6; estimated undiscounted payments were approximately $191.5. Acceleration under specified circumstances could materially affect liquidity.
- Contingencies include a $96.6 accrued Bladeroom judgment, offset by a $96.6 indemnification receivable from Emerson while an appeal is pending. A separate Energy Labs earn-out dispute had $2.8 accrued; the company stated a loss of up to $31.7 above that accrual was possible, plus costs and legal fees.
- Other key risks include substantial debt and restrictive covenants, variable-rate and LIBOR-transition exposure, supply-chain and customer-order volatility, foreign exchange, COVID-19 disruption, potential goodwill/intangible impairment, and legal, product-liability and environmental claims.
Investor verification priorities
- Review remediation progress and subsequent auditor conclusions on the two material weaknesses in financial reporting controls.
- Assess term-loan debt service, covenant and refinancing headroom, interest-rate hedges, and ABL availability conditions.
- Track realization of restructuring savings against the expected charges and timeline, and assess the continuing effects of COVID-19.
- Monitor backlog conversion, cancellations and regional demand, particularly the contrasting Americas decline and Asia Pacific growth.
- Review Tax Receivable Agreement valuation, payment timing and acceleration provisions, and the outcomes of the Bladeroom appeal and Energy Labs dispute.