Vertiv Holdings Co — Q1 2020 10-Q
Business context and reporting period. Covers the three months ended March 31, 2020, compared with Q1 2019. Vertiv provides critical infrastructure products and services for data centers, communications networks, and commercial and industrial markets. The February 7, 2020 business combination with GSAH was accounted for as a reverse recapitalization; prior-period operating results are Vertiv’s.
Key financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $897.3 million | $1,054.8 million |
| Gross profit / margin | $287.0 million / 32.0% | $347.2 million / 32.9% |
| SG&A | $264.8 million | $286.4 million |
| Loss on extinguishment of debt | $174.0 million | — |
| Interest expense, net | $68.9 million | $77.8 million |
| Net loss | $268.9 million | $74.3 million |
| Loss per share, basic and diluted | $1.12 | $0.63 |
| Cash used in operating activities | $194.7 million | $33.7 million |
At March 31, 2020, cash and cash equivalents were $293.2 million; total current assets were $2,065.7 million and current liabilities $1,378.2 million. Debt was $2,475.3 million in principal, comprising a $2,200.0 million term loan and $275.3 million of ABL borrowings; reported debt, net of discount and current portion, was $2,441.1 million. ABL availability was $157.3 million, net of letters of credit and borrowing-base limits. Total equity was $331.9 million, versus a $704.8 million deficit at December 31, 2019.
Material changes versus Q1 2019
- Sales declined $157.5 million, or 14.9%. Management attributed approximately $80 million of the decline to COVID-19; project timing and unfavorable foreign currency also reduced sales.
- Product sales fell to $647.2 million from $813.3 million, while service sales increased to $250.1 million from $241.5 million. Gross margin declined 0.9 percentage points.
- Each region reported lower sales and segment earnings: Americas sales fell 15.8%, Asia Pacific 13.6%, and EMEA 14.4%. Segment margins also declined in all three regions.
- Net loss widened substantially, primarily reflecting the $174.0 million debt-extinguishment charge and lower sales. The debt refinancing also reduced interest expense compared with the prior year.
- Operating cash outflow increased by $161.0 million, reflecting working-capital use, seasonal inventory build, higher net loss, bonus payments, and transaction costs.
- Financing activities provided $279.3 million, including reverse-recapitalization proceeds and refinancing activity. Cash increased $69.7 million during the quarter.
Outlook, risks, and unusual items
- COVID-19: Management said the pandemic was expected to adversely affect the business, results, financial condition, cash flows, and liquidity for at least the duration of 2020; the full impact could not be predicted. The filing cites potential supply-chain, workforce, customer-demand, and financing-market disruptions.
- Debt refinancing: In March, Vertiv replaced prior debt with a seven-year $2.2 billion term loan and extended the $455 million ABL facility to March 2025. The term loan’s reported weighted-average borrowing rate was 4.58%; swaps hedge $1.2 billion initially, stepping down to $1.0 billion in 2021. Management said refinancing reduced debt-service requirements and extended maturities.
- Liquidity outlook: Management believed operating cash flow, debt arrangements, and ABL capacity would provide adequate near-term liquidity for the next 12 months, while warning that future capital-market access on acceptable terms was not assured.
- Other expected costs: Full-year 2020 restructuring expense was estimated at approximately $8.1 million. Following a post-quarter ERP strategy change, the company expected a possible approximately $15 million capitalized-software write-off in Q2 2020.
- Tax Receivable Agreement: Vertiv generally owes the former stockholder 65% of certain realized or deemed tax savings. The recorded fair-value liability was $116.5 million; estimated undiscounted payments were approximately $191.5 million. Certain events can accelerate payments and could pressure liquidity.
- Contingencies: A $92.9 million litigation accrual for the BladeRoom matter was matched by an indemnification receivable; the appeal was ongoing. A separate Energy Labs earn-out dispute could result in up to $31.7 million of additional loss beyond the $2.8 million accrued, plus costs and legal fees.
- Controls: Management concluded disclosure controls were ineffective because of material weaknesses involving IT general controls and aggregation of control deficiencies. No resulting financial-statement misstatement was identified for the quarter. Remediation was underway; the weaknesses were not yet considered remediated.
- The filing provides no specific sales or earnings guidance for the remainder of 2020.
Important facts for investors to verify
- How COVID-19, project timing, and foreign-exchange movements affect subsequent-quarter sales, margins, and cash flow.
- Whether working-capital outflows ease and whether cash and ABL availability remain adequate against debt service and other obligations.
- Debt terms, covenant headroom, and the interest-rate-hedging profile following the refinancing.
- Progress and testing of internal-control remediation, including the planned Oracle implementation.
- Resolution and potential cash impact of the BladeRoom and Energy Labs matters, and the timing and terms of Tax Receivable Agreement payments.
- Whether the expected Q2 software write-off and restructuring costs occur at the estimated levels.