Business context and reporting period
Vertiv Holdings Co provides critical digital infrastructure products and lifecycle services for data centers, communications networks, and commercial and industrial markets. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2020. The company completed its business combination on February 7, 2020; it was accounted for as a reverse recapitalization, so comparative operating results are those of Vertiv before the transaction.
Financial results and liquidity
Amounts are in millions of dollars, except per-share data. Quarter comparisons are year over year; balance-sheet comparisons are to December 31, 2019.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $1,005.7 | $1,134.1 | $1,903.0 | $2,188.9 |
| Gross profit / margin | $346.4 / 34.4% | $367.2 / 32.4% | $633.4 / 33.3% | $714.3 / 32.6% |
| EBIT | $70.6 | $75.8 | $(115.6) | $97.6 |
| Net income (loss) | $26.2 | $(18.9) | $(242.7) | $(93.3) |
| Basic and diluted EPS | $0.08 | $(0.16) | $(0.85) | $(0.79) |
- Q2 sales fell 11.3%; product sales were $750.2 and service sales $255.5. Gross margin improved to 34.4% from 32.4%, while SG&A was $226.3, or 22.5% of sales, versus $263.3, or 23.2%.
- Q2 net income improved despite lower sales, supported by lower net interest expense ($30.1 versus $78.7) and cost reductions. The six-month net loss includes a $174.0 debt-extinguishment charge.
- Six-month operating cash flow was negative $121.7, compared with negative $81.6; investing cash flow was negative $19.4, compared with negative $28.6. Financing cash flow was positive $293.5, principally reflecting the merger and refinancing. Capital expenditures were $13.2.
- Cash and cash equivalents were $369.7 at June 30, 2020, versus $223.5 at year-end 2019. Total current assets were $2,203.2 and current liabilities $1,440.5.
- Balance-sheet debt comprised $2,409.0 of long-term debt and $42.2 of current debt and short-term borrowings. ABL availability was $164.9, net of letters of credit and borrowing-base limitations.
- Total equity was $350.9, compared with a $704.8 deficit at year-end, reflecting the business combination and share issuance. Shares outstanding were 328.4 million at June 30, versus 118.3 million at December 31, 2019.
Material changes versus the prior comparable period
- Q2 revenue declined $128.4, primarily due to COVID-19-related volume effects, project timing, and foreign currency. Americas sales fell 15.7%, EMEA fell 15.9%, and Asia Pacific was nearly flat.
- Q2 gross margin increased 2.0 percentage points, reflecting productivity, pricing, and favorable mix. Americas and EMEA segment margins improved; Asia Pacific margin declined.
- First-half revenue fell 13.1%. Gross margin rose 0.7 percentage points, but SG&A as a share of sales increased to 25.8% from 25.1%.
- On March 2, 2020, Vertiv refinanced prior debt with a $2.2 billion seven-year term loan and amended its $455 million ABL facility, extending the latter’s maturity to 2025. The refinancing reduced borrowing costs and extended maturities, but generated $174.0 of reported extinguishment costs.
Outlook, commentary, risks, and unusual items
- Management said COVID-19 adversely affected sales channels, supply chain, manufacturing, workforce, and results, and could materially affect business, cash flows, financial condition, and liquidity for at least the remainder of 2020. The duration and severity were uncertain; no specific full-year revenue or earnings guidance was provided.
- Management anticipated announcing restructuring actions in Q3 to reduce fixed costs by $50–$70 million, plus potential variable-cost benefits. Estimated cash costs, including capital, were also $50–$70 million, with spending likely beginning in Q4 2020 and continuing through 2021. Separately, expected full-year 2020 restructuring expense was approximately $8 million, subject to reassessment.
- Management believed operating cash flow, cash, and credit facilities would provide adequate near-term liquidity for the next 12 months, while noting that future financing access depends on market and company conditions.
- The company wrote off $12.3 of capitalized software after changing its Americas ERP strategy. Goodwill and indefinite-lived trademarks were not deemed impaired at quarter-end, but management warned that economic uncertainty could lead to future impairment tests and charges.
- The company reported ineffective disclosure controls and material weaknesses in IT general controls and aggregation of control deficiencies. No material misstatement was identified for the quarter; remediation was underway, including controls work tied to an Oracle system expected to go live in 2021.
- The Bladeroom matter had a $96.5 accrued liability and an equal indemnification receivable, with an appeal pending. In a separate Energy Labs earn-out dispute, $2.8 was accrued; a further loss of up to $31.7, plus costs and legal fees, was possible if the company is unsuccessful.
- The tax receivable agreement requires payment to the former Vertiv stockholder of 65% of specified realized or deemed tax savings. Its recorded fair value was $133.3; estimated undiscounted payments were approximately $191.5. Certain events can accelerate payments and adversely affect liquidity.
Important facts for investors to verify
- Whether sales and operating performance recover as COVID-19 disruptions and delayed projects evolve, particularly in the Americas and EMEA.
- Whether management delivers the proposed $50–$70 million fixed-cost reductions and how the associated cash costs and timing develop.
- Debt, cash and ABL availability, including covenant headroom, interest-rate exposure, and required debt service.
- Progress in remediating the disclosed material weaknesses and the effectiveness of controls after implementation.
- Developments in the Bladeroom appeal and Energy Labs earn-out dispute, and the timing and ultimate cost of tax receivable agreement payments.
- Potential future goodwill or trademark impairment charges and the financial impact of the ERP strategy change.