Vertiv Holdings Co — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Vertiv provides critical power, thermal-management, monitoring, software and lifecycle services for data centers, communications networks, and commercial and industrial customers. Unless noted otherwise, financial figures are in millions of dollars.
Financial performance and liquidity
- Q3 revenue: $1,228.9, up 5.8% from $1,162.0. Product sales were $926.0 and service sales were $302.9.
- Q3 profitability: Gross profit was $381.7, or 31.1% of sales, versus $413.0, or 35.5%, a year earlier. Operating profit was $81.8 versus $35.1; net income was $56.2 versus a $103.5 loss. Diluted EPS was $0.15 versus a loss of $0.32 per share.
- Nine-month results: Revenue was $3,587.6, up 17.1%; gross profit was $1,149.0 (32.0% margin), versus $1,046.4 (34.1%). Operating profit was $263.8 versus $93.5; net income was $97.6 versus a $367.8 loss. Diluted EPS was $0.27 versus a loss of $1.23.
- Cash flow: Nine-month operating cash flow was $174.4 versus $14.4 a year earlier. Working capital used $160.0, including a $147.7 inventory increase. Capital expenditures were $43.3 and capitalized software investment was $9.5. Cash and cash equivalents were $743.6 at quarter-end, up from $534.6 at year-end 2020.
- Debt and liquidity: Long-term debt, net of current portion, was $2,118.4; the term loan’s stated principal was $2,167.1 and matures in 2027. No ABL revolver borrowings were outstanding; availability was $435.2 after letters of credit and borrowing-base limits. The term-loan margin was reduced by 0.25 percentage points in March 2021. Net debt based on reported cash and term-loan principal was approximately $1.42 billion.
Changes, drivers and management commentary
- Q3 revenue growth reflected recovery from COVID-19 and favorable foreign exchange of approximately $21.0. EMEA revenue rose 18.7% and Asia Pacific 4.0%; Americas revenue increased 1.0%.
- Despite higher sales, Q3 gross margin fell 4.4 percentage points. Management cited higher commodity and logistics costs and supply-chain constraints. Segment operating margin declined in the Americas, while Asia Pacific and EMEA margins improved, partly reflecting lower year-over-year restructuring charges.
- Nine-month operating cash flow improved alongside higher sales and operating profit, lower interest payments after debt refinancing, and fewer one-time SPAC-related costs, but was partly offset by working-capital use.
- Q3 net income included a $32.5 gain from the change in fair value of warrant liabilities, compared with an $87.7 loss a year earlier. Nine-month results included a $52.3 warrant-liability loss. These fair-value items make reported earnings less indicative of operating trends.
- Supply-chain shortages and logistics delays continued to constrain production and deliveries; management said the challenges were expected to continue through the first half of 2022. No specific company earnings or revenue guidance is provided in the supplied filing text.
Outlook, transactions and risks
- After quarter-end, Vertiv completed its acquisition of E+I on November 1, 2021. Upfront consideration was approximately $1.8 billion: $1.2 billion cash and about $630 million in stock. Up to a further $200 million cash is contingent on 2022 EBITDA targets. Vertiv also issued $850 million of 4.125% senior secured notes due 2028 on October 22, 2021, in connection with the acquisition.
- Management stated that operating cash flow, debt arrangements and the ABL facility should provide adequate liquidity for the next 12 months, while noting future capital-market access is not assured. COVID-19 effects, supply availability, customer demand, foreign exchange, execution of growth and restructuring plans, and indebtedness are among the disclosed risks.
- Internal controls: Management concluded disclosure controls were not effective at September 30, 2021 because of material weaknesses in IT general controls (including user access and program change management) and aggregation of control deficiencies. Remediation was underway; management said the weaknesses were not yet remediated. Management nevertheless concluded the interim financial statements fairly present the company’s position and results in all material respects.
- Contingencies: An appellate court vacated the Bladeroom judgment and ordered a new trial; the company reversed its $96.2 accrual and indemnification receivable, and a rehearing petition was pending. In the SVO arbitration, an interim ruling barred Vertiv from recovering about $9.0 and required disgorgement of $10.0 plus interest; SVO’s amended claim was approximately $75.0, with the final outcome uncertain. The Energy Labs earn-out dispute could result in up to $31.7 of loss beyond the $2.8 accrued.
- A heavy industrial UPS business in EMEA was classified as held for sale, with an $8.7 impairment recorded. Vertiv signed a sale agreement in October for approximately €20 million in cash proceeds.
Important facts for investors to verify
- Whether supply-chain and logistics constraints ease as expected, and how cost inflation and delivery delays affect margins, backlog conversion and cash flow.
- Acquisition funding, integration, dilution from approximately 23.1 million shares issued, and whether E+I meets the EBITDA milestones for contingent consideration.
- Progress and independent testing of remediation for the disclosed material weaknesses in internal controls.
- Developments and potential financial exposure in the SVO arbitration, Bladeroom retrial and Energy Labs earn-out dispute.
- Working-capital trends, particularly inventory growth, and liquidity and leverage after the acquisition and new notes issuance.