Vertiv Holdings Co — Q1 2021 Form 10-Q Summary
Reporting period: Three months ended March 31, 2021. The unaudited statements are presented against Q1 2020, which was restated for warrant-accounting corrections. Vertiv provides critical infrastructure products and services for data centers, communication networks, and commercial and industrial environments.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change / note |
|---|---|---|---|
| Net sales | $1,098.4 million | $897.3 million | Up 22.4% |
| Gross profit / margin | $358.0 million / 32.6% | $287.0 million / 32.0% | Margin up 0.6 percentage points |
| Operating profit (loss) | $79.8 million | $(12.2) million | Improved $92.0 million |
| Net income (loss) | $31.7 million | $(208.3) million | EPS: $0.09 basic and diluted, versus $(0.87) |
| Cash from operations | $60.7 million | $(194.7) million | Improved $255.4 million |
| Cash and cash equivalents | $677.2 million | $534.6 million at Dec. 31, 2020 | Quarter-end cash, excluding restricted cash |
| Debt | $2,148.9 million term loan before current portion; $2,126.9 million long-term, net | $2,152.5 million term loan before current portion | No ABL borrowings; $433.9 million ABL availability |
Interest expense, net, was $24.1 million, down from $68.9 million. Q1 2021 included a $13.6 million expense from changes in warrant-liability fair value; Q1 2020 included a $174.0 million debt-extinguishment loss. Capital expenditures were $16.8 million. Operating cash flow included a $44.6 million use of cash from changes in operating working capital.
Business trends and changes versus the prior period
- Revenue growth reflected recovery from COVID-19 disruption in Asia Pacific and higher demand for critical infrastructure and solutions. By offering, critical infrastructure and solutions sales rose to $627.9 million from $461.5 million; services and spares rose to $321.8 million from $306.3 million; integrated rack solutions rose to $148.7 million from $129.5 million.
- Asia Pacific sales increased 59.6% to $357.4 million, with segment operating margin of 14.9%, versus 9.3%. Americas sales rose 7.5% to $501.5 million and margin improved to 25.2% from 19.6%. EMEA sales rose 15.9% to $239.5 million and margin improved to 13.9% from 10.1%.
- Consolidated SG&A declined to $250.1 million from $264.8 million; SG&A as a share of sales fell to 22.8% from 29.5%. Management attributed the decrease to cost controls and lower transaction-related bonuses in the prior-year period.
- The March 2021 term-loan amendment reduced the LIBOR-based interest margin by 0.25 percentage points to 2.75%; maturity remains March 2, 2027. The reported borrowing rate at March 31 was 2.87%.
- Q1 2021 financing cash flow included $107.5 million from public warrant exercises. Public warrants were exercised or redeemed by January 22, 2021.
Outlook, risks, contingencies, and unusual items
- No numerical revenue or earnings guidance is provided. Management said cash from operations, cash balances, term debt and ABL availability should provide adequate liquidity for the next 12 months, while noting that future access to financing on acceptable terms is not assured.
- Management cited continued COVID-19 uncertainty and potential effects on sales channels, supply chains, manufacturing and the workforce. Other stated risks include customer and supplier relationships, competition, growth execution, foreign exchange, cybersecurity and IT disruption, debt and covenant constraints, and the ability to realize restructuring savings.
- The company reported material weaknesses in internal control over financial reporting: deficiencies in IT access and change-management controls, and deficiencies in the design and operation of controls across financial-reporting processes. Disclosure controls were therefore not effective as of March 31, 2021. Management said the financial statements nevertheless fairly present the company’s results and described remediation efforts, including planned Oracle-system implementation. Remediation was not yet complete.
- The 2020 financial statements, including Q1 2020 comparative figures, were restated for warrant-accounting corrections. The filing states the Q1 2020 restatement decreased net loss by $60.6 million, increased warrant liabilities by $55.7 million and decreased additional paid-in capital by $116.3 million.
- In the Bladeroom litigation, Vertiv accrued $96.1 million and recorded an equal indemnification receivable from Emerson; the appeal was pending. In a separate Energy Labs earn-out dispute, $2.8 million was accrued and the filing says a loss of up to $31.7 million above that accrual, plus costs and legal fees, was possible if Vertiv lost.
- The Tax Receivable Agreement liability was $153.3 million. It generally requires payment to the former Vertiv stockholder of 65% of specified realized or deemed-realized tax savings; certain events can accelerate payments and negatively affect liquidity.
Important facts for investors to verify
- Progress and independent testing of remediation for the disclosed material weaknesses, and whether future filings report effective controls.
- Whether revenue growth and segment-margin gains persist, especially in Asia Pacific, and how COVID-19, supply conditions and foreign exchange affect results.
- Cash conversion and working-capital requirements, alongside the company’s ability to service approximately $2.15 billion of term debt and maintain ABL availability.
- Developments in the Bladeroom appeal and Energy Labs earn-out litigation, including indemnification recovery and any changes to accruals.
- Subsequent accounting disclosures related to the warrant restatement and the potential timing and amount of Tax Receivable Agreement payments.