01—Abstract
Summary
Summary of the 10-K filed March 1, 2021. Cited figures are marked; the original filing is the authoritative source.
Vertiv Holdings Co (NYSE: VRT) filed its first 10-K as a public company covering fiscal 2020, following its February 7, 2020 business combination with GS Acquisition Holdings Corp (a SPAC).
Net sales declined 1.4% to $4,370.6 milliona from $4,431.2 million, driven by COVID-19 impacts, with gross margin improving to 33.7% from 32.8% and SG&A falling 8.4% to $1,008.4 million. Reported results were a net loss of $183.6 million, which was wider than 2019's $140.8 million, largely because of a $174.0 million loss on debt extinguishment, $251.8 million in other deductions (including $73.9 million of restructuring charges), and $150.4 million of net interest expense. Operating cash flow improved sharply to $208.9 million from $57.5 million, and year-end cash was $534.6 million.
The most important investor caveat is controls. Management and Ernst & Young both concluded internal control over financial reporting was not effective at December 31, 2020, citing two material weaknesses in general IT controls and in the aggregation of open control deficiencies. Disclosure controls were also deemed not effective.
Vertiv also ceased to be an emerging growth company as of December 31, 2020, which brings additional compliance costs and auditor-related disclosure obligations. Balance-sheet and capital-structure items warrant attention as well: total debt was about $2.15 billionb after the March 2020 refinancing into a $2.2 billion term loan due 2027, and the Tax Receivable Agreement liability is $155.6 million on a fair-value basis, with about $191.5 million of undiscounted expected payments to the Vertiv Stockholder (Platinum Equity affiliate, which holds about 22% of Class A shares). Backlog grew 31.6% to $1,844.8 million, which supports the outlook for 2021 revenue, although management notes backlog is not a reliable predictor of future revenue.
Results were pressured by COVID-19, but the Asia Pacific segment grew 7.1% and EMEA grew 4.1%, offsetting a sharp 8.5% decline in Americas. Management has also launched an $85 millionc annualized cost-reduction program through 2023.
02—Key points
Key Highlights
- FY2020 net sales of $4,370.6M (down 1.4% YoY); gross margin expanded 90 bps to 33.7%, and SG&A fell 8.4% to $1,008.4M.
- Net loss widened to $183.6M from $140.8M, driven by a $174.0M loss on debt extinguishment, $251.8M of other deductions (including $73.9M restructuring), and $150.4M net interest expense.
- Two material weaknesses (IT general controls and aggregation of control deficiencies) led to an adverse ICFR opinion from E&Y; disclosure controls were also not effective.
- Operating cash flow of $208.9M (up from $57.5M), with year-end cash of $534.6M and undrawn ABL capacity of $434.2M.
- Debt of about $2.15B after the March 2020 refinancing: a $2.2B seven-year term loan at LIBOR+3.00%, with $1.2B of swaps in place, and the ABL maturity extended to 2025.
- Backlog up 31.6% to $1,844.8M; segment results were mixed, with Americas sales down 8.5% while Asia Pacific (+7.1%) and EMEA (+4.1%) grew.
- Tax Receivable Agreement liability of $155.6M (fair value) with about $191.5M of undiscounted payments to the Vertiv Stockholder; the company no longer qualifies as an emerging growth company.
03—One dollar
Follow one dollar
For each $1.00 of revenue in FY2020, Vertiv Holdings lost $0.07.
- Revenue$4.37B100.0%
- Cost of revenue−$2.90B66.3%
- Gross profit$1.47B33.7%
- Operating costs−$1.26B28.8%
- Operating income$213.5M4.9%
- Interest, other & tax−$540.8M12.4%
- Net income−$327.3M7.5%
Where FY2020 revenue went
$4.37B- Cost of revenue: $2.90B, 66% of revenue
- SG&A: $1.01B, 23% of revenue
- Operating income: $213.5M, 4.9% of revenue
- R&D: $228.6M, 5.2% of revenue
- Other operating costs: $23.2M, 0.5% of revenue
Kept 4.9% as operating incomeOperating income $213.5M · 4.9%Other operating costs $23.2M · 0.5%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2020filed March 1, 2021Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $4.37B$4.43B | −1.4% |
| Cost of Revenue | $2.90B$2.98B | −2.7% |
| Gross Profit | $1.47B$1.45B | +1.4% |
| R&D Expenses | $228.60M$229.40M | −0.3% |
| SG&A Expenses | $1.01B$1.10B | −8.4% |
| Operating Income | $213.50M$206.10M | +3.6% |
| Interest Expense | $150.40M$310.40M | −51.5% |
| Net Income | -$327.30M-$140.80M | −132.5% |
| EPS (Basic) | $-1.07$-1.19 | +10.1% |
| EPS (Diluted) | $-1.07$-1.19 | +10.1% |
| Shares Outstanding (Basic) | 307.08M118.26M | +159.7% |
| Shares Outstanding (Diluted) | 307.08M118.26M | +159.7% |
05—Questions
Frequently Asked Questions
Is Vertiv's internal control over financial reporting effective?
No. Management and Ernst & Young concluded that ICFR was not effective as of December 31, 2020, because of two material weaknesses: (a) inadequate design, implementation and monitoring of general IT controls over user access and program change management, and (b) the aggregation of open control deficiencies across financial reporting processes. The company says these did not result in identified misstatements, and remediation (including the planned Oracle system go-live in 2021) is ongoing, with no firm timeline.
Why did the net loss widen even though sales were roughly flat?
Several one-time or non-operating items drove the loss. The $174.0M loss on extinguishment of debt came from the refinancing and redemption of prior notes. Other deductions rose $105.7M to $251.8M, mainly from restructuring charges, asset impairments and foreign currency losses. Net interest expense fell $160M to $150.4M, which partly offset these items, but the income tax expense rose to $72.7M.
What is the Tax Receivable Agreement and how material is it?
Under the TRA, Vertiv pays the Vertiv Stockholder (an affiliate of Platinum Equity) 65% of cash tax savings from certain tax basis step-ups, R&D credits and transaction deductions over roughly 12 years. The liability is carried at fair value of $155.6M, and undiscounted expected payments total about $191.5M. Payments are not returned if tax authorities later challenge positions, and acceleration on a change of control could create a significant liquidity strain.
How is the debt structure and liquidity position?
Total long-term debt is about $2.15B, mostly a $2.18B senior secured term loan due 2027 priced at LIBOR+3.00% (3.15% at year-end), with $1.0–1.2B of interest rate swaps fixing the rate at roughly 4.1% all-in. The $455M ABL revolver had $434.2M of availability at year-end and matures in March 2025. Management believes operating cash flow and these facilities provide adequate liquidity for the next 12 months, but the covenants restrict dividends, acquisitions and additional indebtedness.
Which segments drove performance in 2020?
Americas (47% of sales) saw sales fall 8.5% to $2,040.6M, though segment margin improved to 19.4% through contribution-margin gains and fixed-cost management. Asia Pacific grew 7.1% to $1,368.4M on China data center, 5G and wind power demand, with margin at 12.3%. EMEA rose 4.1% to $961.6M on colocation demand, with margin improving to 9.4%. Corporate costs were $616.1M, including the debt extinguishment loss.
06—Continue