Vertiv Holdings Co — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Amounts are in USD millions except per-share data. Vertiv supplies critical power, thermal-management, monitoring and service solutions for data centers, communications networks, and commercial and industrial customers.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $1,260.3 | $1,005.7 | $2,358.7 | $1,903.0 |
| Gross profit / margin | $409.3 / 32.5% | $346.4 / 34.4% | $767.3 / 32.5% | $633.4 / 33.3% |
| Operating profit | $102.2 | $70.6 | $182.0 | $58.4 |
| Net income (loss) | $9.7 | $(56.0) | $41.4 | $(264.3) |
| Diluted EPS | $0.03 | $(0.17) | $0.12 | $(0.93) |
- Revenue: Q2 sales rose 25.3%; first-half sales rose 23.9%. Management attributed growth to stronger demand across offerings, recovery from COVID-19 impacts, and favorable foreign exchange ($49.5 in Q2; $75.4 in the first half).
- Margins and costs: Q2 gross margin contracted 1.9 percentage points, as higher commodity and logistics costs and supply-chain constraints more than offset volume growth. SG&A was $271.7, or 21.6% of sales, versus $226.3, or 22.5%, a year earlier. The prior-year quarter benefited from about $30.0 of temporary cost savings.
- Segments: Q2 sales and operating margins were Americas $564.9 and 22.8% (prior-year margin 26.8%); Asia Pacific $398.0 and 15.8% (17.4%); EMEA $297.4 and 21.0% (13.9%). EMEA operating profit increased substantially with higher sales, productivity and new products; Americas and Asia Pacific margins were pressured by costs and prior-year COVID-related savings or subsidies not recurring.
- Cash flow: First-half operating cash flow was $120.0, versus cash use of $121.7 in 2020. Investing cash use was $35.8, including $30.4 of capital expenditures; financing provided $91.7, mainly from $107.5 of warrant exercises. Cash, cash equivalents and restricted cash ended at $716.8, including $708.8 of cash and equivalents.
- Debt and liquidity: Term-loan carrying value was $2,144.6, including current maturities; cash and equivalents were $708.8. The $2.2 billion term loan matures in March 2027. A March 2021 amendment reduced the interest margin by 0.25 percentage points. The company reported $434.9 of ABL availability, net of letters of credit, and no ABL borrowings. Management stated available resources should cover near-term needs for the next 12 months; access to future financing is not assured.
Material changes, outlook and notable items
- Net income improved from a prior-year loss, alongside higher operating profit and lower interest expense. First-half 2020 results included a $174.0 debt-extinguishment loss; first-half 2021 included a $0.4 amendment-related loss.
- Warrant-liability fair-value changes were a significant earnings item: expense of $71.2 in Q2 2021 versus $82.2 in Q2 2020, and $84.8 in the first half versus $21.6. These noncash remeasurement amounts are added back in the cash-flow reconciliation. They also affect tax expense because the changes are non-deductible.
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management cited demand growth, large data-center projects and COVID-19 recovery, while noting uncertainty from the pandemic, commodity and logistics inflation, and supply constraints.
- Controls and prior reporting: Management concluded disclosure controls were not effective at June 30, 2021 because of material weaknesses in IT access and change-management controls and in aggregation of financial-reporting control deficiencies. Remediation was ongoing. The company also stated it had restated 2020 financial statements for warrant-accounting corrections; management nevertheless said these interim statements fairly present the reported periods under U.S. GAAP.
- Contingencies: A $96.2 litigation accrual for the BladeRoom matter is offset by a $96.2 indemnification receivable from Emerson. In a separate Energy Labs earn-out dispute, $2.8 was accrued; the company said a loss of up to $31.7 beyond that accrual, plus costs and legal fees, was possible if it lost.
- The Tax Receivable Agreement liability was $162.5 at June 30; estimated undiscounted payments were approximately $191.5. Its valuation uses significant unobservable assumptions and is sensitive to the discount rate.
Key facts investors should verify
- Whether sales growth can be sustained and margins recover as commodity, logistics and supply-chain pressures evolve.
- How much reported earnings are affected by noncash warrant remeasurement, taxes and other unusual or nonrecurring items.
- Progress and testing of remediation for the disclosed material weaknesses, and whether controls become effective.
- Cash conversion, inventory and working-capital trends, capital spending, and term-loan and ABL capacity.
- Developments in the Energy Labs litigation and the collectability and continued coverage of the BladeRoom indemnification receivable.