01—Abstract
Summary
Summary of the 10-K filed March 1, 2022. Cited figures are marked; the original filing is the authoritative source.
Vertiv Holdings Co (NYSE: VRT) reported full-year 2021 net sales of $4,998.1 milliona, up 14.4% from $4,370.6 million in 2020, driven by demand gains across all three segments, favorable foreign currency (+$82.5 million), and the November 1, 2021 acquisition of E&I Engineering (contributing $67.4 million of sales since close).
Gross margin compressed to 30.5% from 33.7% as commodity, logistics and supply chain costs rose faster than pricing, and SG&A rose 10% to $1,109.0 millionb, including $39.4 million of E&I acquisition costs and an $18.7 million litigation settlement. Net income swung to $119.6 million from a $327.3 million loss in 2020, but this was helped by a non-cash $59.2 million gain on the amended Tax Receivable Agreement and a $61.9 million warrant fair-value charge, so operating profit ($259.9 million, up 21.7%) is the cleaner indicator of underlying performance. Backlog rose sharply to approximately $3,191.0 million at December 31, 2021, up from $1,844.8 million a year earlier, with management attributing much of the increase to customers placing orders early amid supply constraints.
Cash from operations was roughly flat at $210.9 millionc, while capital expenditures and the E&I purchase ($1,163.7 million in cash) were funded largely by an $850.0 million 4.125% Senior Secured Notes offering due 2028 and a term loan refinancing. Total debt stood at about $3.0 billion against $439.1 million of cash, and the company describes its ABL revolver as having $435.6 million of availability. Management reported that previously disclosed material weaknesses were remediated as of year-end 2021, with Ernst & Young issuing an unqualified opinion on internal controls (excluding E&I, which represented 28.7% of total assets).
For investors, the key considerations are sustained demand in data center and communications end markets, the margin pressure from inflation in materials, freight and labor that management expects to persist through 2022, execution risk on integrating E&I, and the $100 milliond TRA repurchase payments due June and September 2022 that will eliminate the remaining TRA obligation to the Vertiv Stockholder. The Vertiv Stockholder, which owns about 10% of Class A shares, retains meaningful influence over governance.
02—Key points
Key Highlights
- Net sales grew 14.4% to $4,998.1 million in 2021, led by Asia Pacific (+17.6%) and EMEA (+25.0%), with the E&I acquisition adding $67.4 million since its November 1, 2021 close.
- Gross margin fell to 30.5% from 33.7% as material, freight and labor inflation outpaced price increases; management expects inflationary pressure to continue through 2022.
- Operating profit rose 21.7% to $259.9 million, while reported net income of $119.6 million was flattered by a $59.2 million non-cash gain on the Tax Receivable Agreement and partly offset by a $61.9 million warrant fair-value loss.
- Backlog increased to approximately $3,191.0 million from $1,844.8 million, with a large share of the increase reflecting customer orders placed in advance amid supply constraints.
- The E&I acquisition for $1,163.7 million in cash plus $601.1 million in stock was funded by an $850.0 million 4.125% Senior Secured Notes issuance due 2028 and refinanced term loan terms.
- Total debt was roughly $3.0 billion at year-end, with $439.1 million of cash and $435.6 million of ABL revolver availability; a 100 bp rate increase would raise annual net interest expense by about $12.0 million.
- Previously reported material weaknesses in IT general controls and deficiency aggregation were remediated, and Ernst & Young issued an unqualified internal control opinion (E&I excluded from management's assessment).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2021, Vertiv Holdings kept $0.02.
- Revenue$5.00B100.0%
- Cost of revenue−$3.48B69.5%
- Gross profit$1.52B30.5%
- Operating costs−$1.26B25.3%
- Operating income$259.9M5.2%
- Interest, other & tax−$140.3M2.8%
- Net income$119.6M2.4%
04—Financials
Financial Highlights
Figures from 10-KFY2021filed March 1, 2022Financial Statements
FY2021 against FY2020
| Line item | FY2021FY2020 | Change |
|---|---|---|
| Revenue | $5.00B$4.37B | +14.4% |
| Cost of Revenue | $3.48B$2.90B | +20.0% |
| Gross Profit | $1.52B$1.47B | +3.3% |
| R&D Expenses | $266.40M$228.60M | +16.5% |
| SG&A Expenses | $1.11B$1.01B | +10.0% |
| Operating Income | $259.90M$213.50M | +21.7% |
| Interest Expense | $90.60M$150.40M | −39.8% |
| Net Income | $119.60M-$327.30M | +136.5% |
| EPS (Basic) | $0.34$-1.07 | +131.8% |
| EPS (Diluted) | $0.33$-1.07 | +130.8% |
| Shares Outstanding (Basic) | 355.54M307.08M | +15.8% |
| Shares Outstanding (Diluted) | 360.14M307.08M | +17.3% |
05—Questions
Frequently Asked Questions
Why did net income increase so much in 2021 when margins declined?
Net income rose to $119.6 million from a $327.3 million loss, but the improvement is largely non-operating. In 2020 the company recorded a $174.0 million loss on debt extinguishment and a $143.7 million warrant fair-value charge, versus $0.4 million and $61.9 million respectively in 2021. The 2021 result also includes a $59.2 million gain from amending the Tax Receivable Agreement. Operating profit, the better measure of core performance, grew 21.7% to $259.9 million even as gross margin contracted.
What is the outlook for margins and costs in 2022?
Management stated that material, freight and labor cost increases, along with critical part shortages and premium freight, are expected to continue throughout 2022. The company says it has taken steps to improve forecasting of inflation and pass costs through to customers, but acknowledges that pricing actions may lag cost increases, particularly given the large backlog priced before inflation. Margin recovery therefore depends on the pace of price realization and supply chain normalization, which the filing does not quantify.
How much of the backlog is expected to convert to revenue, and how reliable is it?
Approximately $3,191.0 million of backlog was reported at December 31, 2021, and the vast majority is described as firm and expected to ship within one year. However, customers may in some circumstances reduce or defer firm orders, usually with penalties, and management stated it does not believe backlog is necessarily indicative of future revenue. Part of the 2021 increase reflects customers ordering early to secure supply, which may not translate into equivalent future sales.
What are the company's remaining obligations under the Tax Receivable Agreement?
On December 31, 2021, Vertiv replaced its remaining TRA obligations with a fixed $100 million cash payment in two equal installments due June 15, 2022 and September 15, 2022. The agreement terminates after the second payment. If a change of control occurs before then, or if the company materially breaches the repurchase agreement, the unpaid amounts accelerate. The $59.2 million gain reflects the difference between the previously accrued liability and this settlement amount.
Who controls the company and what governance influence do they have?
The Vertiv Stockholder (VPE Holdings LLC) held about 10% of Class A common stock as of February 22, 2022, after earlier secondary sales. Under the Stockholders Agreement it may nominate up to two directors at its current ownership level, and the company's charter opts out of Delaware's Section 203 business combination restrictions, so it could transfer its shares without board approval. The filing notes its interests may diverge from those of other shareholders and that it may pursue competing investments.
06—Continue