Vertiv Holdings Co — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Vertiv provides critical digital infrastructure products and services for data centers, communications networks, and commercial and industrial markets. The February 2020 business combination was accounted for as a reverse recapitalization; prior-period share and per-share data were recast.
Financial performance and liquidity
- Q3 revenue: $1,162.0 million, up 8.5% year over year. Product sales were $891.1 million and service sales were $270.9 million. Growth reflected recovery from COVID-19 disruption and double-digit growth in Asia Pacific and EMEA; Americas sales declined 2.5%.
- Q3 profitability: Gross profit was $413.0 million, with a 35.5% gross margin versus 32.8% a year earlier. EBIT was $35.1 million versus $60.4 million. Net loss was $15.8 million, or $0.05 per share, compared with a $13.7 million loss, or $0.12 per share. Higher restructuring and other deductions offset gross-margin improvement and lower interest expense.
- Nine-month results: Revenue was $3,064.9 million, down 6.0%; gross profit was $1,046.3 million, with a 34.1% margin versus 32.7%. EBIT was a loss of $80.6 million versus income of $158.2 million, and net loss was $258.5 million versus $106.9 million. Results included a $174.0 million debt-extinguishment loss and $73.0 million of restructuring costs.
- Cash flow: Nine-month operating cash flow was positive $14.4 million versus an outflow of $58.1 million, attributed primarily to lower cash interest and favorable trade working capital. Investing cash outflow was $26.2 million, including $21.3 million of capital expenditures. Cash and cash equivalents at quarter-end were $324.3 million.
- Debt and liquidity: Long-term debt, net of current portion, was $2,234.8 million; current debt and short-term borrowings totaled $41.1 million. The company reported $333.5 million of ABL availability after letters of credit and borrowing-base limits. Current assets were $2,251.1 million and current liabilities $1,601.6 million.
- Equity: Total equity was $371.7 million at September 30, versus a $704.8 million deficit at December 31, 2019, reflecting the business combination and related share issuances.
Material changes and management commentary
- Q3 growth was led by Asia Pacific revenue up 17.3% and EMEA up 24.4%; Americas revenue declined 2.5%. EMEA recorded a $4.7 million segment EBIT loss, while Americas EBIT rose to $103.3 million and Asia Pacific EBIT was $40.7 million.
- For the nine-month period, Americas revenue fell 11.5%, Asia Pacific rose 2.2%, and EMEA fell 3.4%. Management cited COVID-19 effects, project timing, and foreign exchange as factors in the period’s lower revenue.
- March refinancing replaced prior higher-cost debt with a new $2.2 billion seven-year term loan and extended the $455 million ABL facility to 2025. The term-loan rate was 3.16% at quarter-end; interest-rate swaps were intended to reduce rate volatility. The refinancing and debt repayments reduced interest expense, but generated the $174.0 million extinguishment loss.
- A multi-year restructuring program began in Q3, covering workforce reductions and footprint optimization. The filing estimates approximately $100 million in total charges and targets $85 million of annualized run-rate savings by 2023. It expects approximately $5 million of additional charges in Q4 2020 and $25 million in 2021 and thereafter.
- Management stated that operating cash flow, debt arrangements, and ABL availability should provide adequate liquidity for the next 12 months, while cautioning that COVID-19 could materially adversely affect results, cash flows, and liquidity for at least the duration of 2020. No specific revenue or earnings guidance is provided.
Risks, contingencies, and unusual items
- COVID-19: Potential continuing effects include supply-chain and workforce disruption, customer delays, weaker economic activity, and reduced access to financing. The company also warned that adverse changes in assumptions could trigger future goodwill or intangible-asset impairment tests.
- Internal controls: Disclosure controls were not effective at September 30, 2020 due to material weaknesses involving IT general controls and the design and operation of financial-reporting controls. No material misstatement was identified for the quarter; remediation was ongoing, with a planned Oracle system go-live in 2021.
- Tax receivable agreement: The company recorded a $147.1 million fair-value liability and estimated approximately $191.5 million of total undiscounted payments. The agreement generally transfers 65% of specified realized or deemed tax savings to the former stockholder; acceleration under certain events could adversely affect liquidity.
- Legal matters: A $96.6 million accrual for the BladeRoom judgment is offset by a $96.6 million indemnification receivable from Emerson; the matter was under appeal. A separate Energy Labs earn-out dispute has $2.8 million accrued; the potential additional exposure could be up to $31.7 million, plus costs and legal fees.
- Other notable items: Q3 included $71.7 million in restructuring costs and a $9.4 million product-line impairment. A $12.3 million ERP-related write-off was recorded in Q2. The company announced its first annual dividend, $0.01 per share, payable in December 2020.
Key facts investors should verify
- Whether revenue growth and margin gains continue after the Q3 recovery, especially in the Americas and EMEA.
- Actual restructuring charges, timing of the program, and delivery of the $85 million annualized savings target.
- Cash generation, ABL availability, debt service, and the effect of COVID-19 and working-capital needs on liquidity.
- Progress remediating material weaknesses and whether controls are tested and deemed effective.
- Potential cash obligations under the tax receivable agreement and outcomes of the BladeRoom appeal and Energy Labs dispute.