Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in millions, except per share amounts)
(1) DESCRIPTION OF BUSINESS
Vertiv Holdings Co (“Holdings Co”, and together with its majority-owned subsidiaries, “Vertiv”, “we”, “our”, or “the Company”), formerly known as GS Acquisition Holdings Corp, provides mission-critical infrastructure technologies and life cycle services for data centers, communication networks, and commercial and industrial environments. Vertiv’s offerings include AC and DC power management products, thermal management products, integrated rack systems, modular solutions, management systems for monitoring and controlling digital infrastructure, and service. Vertiv manages and reports results of operations for three reportable segments: Americas; Asia Pacific; and Europe, Middle East & Africa.
(2) BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the U.S. and the rules and regulations of the Securities and Exchange Commission (“SEC”) and include the accounts of the Company and its subsidiaries in which the Company has a controlling interest. These unaudited condensed consolidated interim financial statements do not include all of the information and footnotes required for complete financial statements. In management’s opinion, these financial statements reflect all adjustments of a normal, recurring nature necessary for a fair presentation of the results for the interim periods presented.
The presentation of certain prior period amounts have been reclassed to conform with current year presentation. For the three and six months ended June 30, 2021, $49.9 and $90.2 of net sales and $32.8 and $62.6 of cost of sales from products were reclassified to services, respectively.
The preparation of financial statements in conformity with GAAP requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual amounts could differ from the estimates. On an ongoing basis, management reviews its estimates based on currently available information. Changes in facts and circumstances may result in revised estimates. Results for these interim periods are not necessarily indicative of results to be expected for the full year due to, among other reasons, the continued uncertainty of general economic conditions due to the COVID-19 pandemic that has impacted, and may continue to impact, the Company's sales channels, supply chain, manufacturing operations, workforce, or other key aspects of the Company's operations.
The notes included herein should be read in conjunction with the Company's audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on March 1, 2022.
(3) ACQUISITION
On November 1, 2021, the Company, through its wholly-owned subsidiaries Vertiv Holdings Ireland DAC, a private company limited by shares incorporated in Ireland and Vertiv International Holding Corporation, an Ohio corporation acquired the shares of E&I Engineering Ireland Limited, a private company limited by shares incorporated in Ireland, and its affiliate Powerbar Gulf LLC (“E&I”).
As of June 30, 2022 in conjunction with the E&I acquisition, the value of the contingent earnout is zero based on E&I's projected future results. For the three and six months ended June 30, 2022 the decrease in the fair value of contingent consideration of $(2.2) and $(3.7), respectively, is included within “Other operating expense (income)” on the Unaudited Condensed Consolidated Statements of Earnings (Loss).
During the measurement period there was one change to the purchase price allocation. The measurement period adjustment did not have a material impact on the Unaudited Condensed Consolidated Statements of Earnings (Loss). The measurement period adjustment was related to a final working capital adjustment to the purchase price. The following is the preliminary purchase price allocation of assets acquired and liabilities assumed as of the acquisition date and related adjustments thereafter:
| | | | | | | | | | | | | | | | | | | | |
| | Preliminary Allocation | | Adjustments | | Adjusted Preliminary Allocation |
| Accounts receivable | | $ | 87.7 | | | $ | — | | | $ | 87.7 | |
| Inventories | | 50.1 | | | — | | | 50.1 | |
| Other current assets | | 15.7 | | | — | | | 15.7 | |
| Property, plant and equipment | | 87.1 | | | — | | | 87.1 | |
| Goodwill | | 748.2 | | | 5.0 | | | 753.2 | |
| Other intangible assets | | 1,004.2 | | | — | | | 1,004.2 | |
| Other assets | | 10.4 | | | — | | | 10.4 | |
| Accounts payable | | 33.9 | | | — | | | 33.9 | |
| Accrued expenses and other liabilities | | 50.0 | | | — | | | 50.0 | |
| Deferred income taxes | | 129.8 | | | — | | | 129.8 | |
| Other long-term liabilities | | 24.3 | | | — | | | 24.3 | |
| Net assets acquired and liabilities assumed | | $ | 1,765.4 | | | $ | 5.0 | | | $ | 1,770.4 | |
Goodwill was calculated as the difference between the acquisition date fair value of the consideration transferred and the fair value of net assets recognized for E&I, and represents the future economic benefits, including synergies, and assembled workforce, that are expected to be achieved as a result of the consummation of the acquisition of E&I. The goodwill arising from the acquisition is not expected to be deductible for tax purposes. The adjusted preliminary goodwill allocation of $277.0 and $476.2 is allocated to the Americas and the Europe, Middle East & Africa segments, respectively.
The following table represents the definite lived intangible assets acquired, the preliminary fair values and respective useful lives as of the acquisition date:
| | | | | | | | | | | | | | |
| | Useful Life | | Preliminary Fair Value |
| Customer relationships | | 15 to 16 years | | $ | 731.6 | |
| Developed technology | | 13 years | | 180.7 | |
| Trademarks | | 15 to 16 years | | 52.3 | |
| Backlog | | 1 year | | 39.6 | |
| Total intangible assets | | | | $ | 1,004.2 | |
The Company used the multi-period excess earnings method to value the customer relationship intangible assets and the relief from royalty method to value the developed technology intangible assets. The significant assumptions used to estimate the fair value of customer relationships included forecasted earnings before interest, taxes, and amortization, customer attrition rates and a discount rate. The significant assumptions used to estimate the fair value of developed technology included the forecasted revenues, royalty rates and a discount rate. These significant assumptions are forward-looking and could be affected by future economic and market conditions. The estimated weighted-average useful life was 14.2 years for finite lived intangible assets.
For the three and six months ended June 30, 2022, E&I net sales were $114.2 and $201.7, respectively, which are included in “Net sales” and operating losses of $6.8 and $23.6, respectively, are included in “Income (loss) before income taxes, net” on the Unaudited Condensed Consolidated Statement of Earnings (Loss).
Pro Forma Financial Information
In accordance with ASC 805 Business Combinations, the following unaudited pro forma results of operations for the three and six months ended June 30, 2021 assumes the E&I business combination was completed on January 1, 2020. The following pro forma results include adjustments to reflect acquisition related costs, additional interest expense and amortization of debt issuance costs, accounting policies applied to E&I after the business combination, amortization of intangibles associated with the business combination and the effects of adjustments made to the carrying value of certain assets.
| | | | | | | | | | | | | | |
| Unaudited proforma information | | Three months ended June 30, 2021 | | Six months ended June 30, 2021 |
| Net sales | | $ | 1,369.4 | | | $ | 2,562.2 | |
| Net income (loss) | | (4.8) | | | 19.1 | |
The unaudited pro forma results contain adjustments to give effect to pro forma events that are directly attributable to the business combination, factually supportable, and expected to have a continuing impact on the combined results. Pro forma data may not be indicative of the results that would have been obtained had the business combination occurred at the beginning of the periods presented, nor is it intended to be a projection of future results. Additionally, the pro forma financial information does not reflect the costs which the Company has incurred or may incur to integrate the acquired business.
(4) REVENUE
The Company recognizes revenue from the sale of manufactured products and services when control of promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
Disaggregation of Revenues
The following table disaggregates revenue by business segment, product and service offering and timing of transfer of control:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2022 |
| Americas | | Asia Pacific | | Europe, Middle East, & Africa | | Total |
| Sales by Product and Service Offering: | | | | | | | |
| Critical infrastructure & solutions | $ | 368.9 | | | $ | 243.0 | | | $ | 234.8 | | | $ | 846.7 | |
| Services & spares | 187.6 | | | 112.9 | | | 68.7 | | | 369.2 | |
| Integrated rack solutions | 90.7 | | | 51.3 | | | 41.5 | | | 183.5 | |
| Total | $ | 647.2 | | | $ | 407.2 | | | $ | 345.0 | | | $ | 1,399.4 | |
| | | | | | | |
| Timing of revenue recognition: | | | | | | | |
| Products and services transferred at a point in time | $ | 452.4 | | | $ | 328.5 | | | $ | 247.7 | | | $ | 1,028.6 | |
| Products and services transferred over time | 194.8 | | | 78.7 | | | 97.3 | | | 370.8 | |
| Total | $ | 647.2 | | | $ | 407.2 | | | $ | 345.0 | | | $ | 1,399.4 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2021 |
| Americas | | Asia Pacific | | Europe, Middle East, & Africa | | Total |
| Sales by Product and Service Offering: | | | | | | | |
| Critical infrastructure & solutions | $ | 305.3 | | | $ | 239.8 | | | $ | 181.7 | | | $ | 726.8 | |
| Services & spares | 179.6 | | | 106.3 | | | 77.3 | | | 363.2 | |
| Integrated rack solutions | 80.0 | | | 51.9 | | | 38.4 | | | 170.3 | |
| Total | $ | 564.9 | | | $ | 398.0 | | | $ | 297.4 | | | $ | 1,260.3 | |
| | | | | | | |
| Timing of revenue recognition: | | | | | | | |
| Products and services transferred at a point in time | $ | 403.1 | | | $ | 315.8 | | | $ | 248.3 | | | $ | 967.2 | |
| Products and services transferred over time | 161.8 | | | 82.2 | | | 49.1 | | | 293.1 | |
| Total | $ | 564.9 | | | $ | 398.0 | | | $ | 297.4 | | | $ | 1,260.3 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2022 |
| Americas | | Asia Pacific | | Europe, Middle East, & Africa | | Total |
| Sales by Product and Service Offering: | | | | | | | |
| Critical infrastructure & solutions | $ | 663.2 | | | $ | 426.8 | | | $ | 421.6 | | | $ | 1,511.6 | |
| Services & spares | 352.3 | | | 217.5 | | | 133.6 | | | 703.4 | |
| Integrated rack solutions | 166.8 | | | 95.7 | | | 78.3 | | | 340.8 | |
| Total | $ | 1,182.3 | | | $ | 740.0 | | | $ | 633.5 | | | $ | 2,555.8 | |
| | | | | | | |
| Timing of revenue recognition: | | | | | | | |
| Products and services transferred at a point in time | $ | 830.5 | | | $ | 584.9 | | | $ | 452.7 | | | $ | 1,868.1 | |
| Products and services transferred over time | 351.8 | | | 155.1 | | | 180.8 | | | 687.7 | |
| Total | $ | 1,182.3 | | | $ | 740.0 | | | $ | 633.5 | | | $ | 2,555.8 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2021 |
| Americas | | Asia Pacific | | Europe, Middle East, & Africa | | Total |
| Sales by Product and Service Offering: | | | | | | | |
| Critical infrastructure & solutions | $ | 584.8 | | | $ | 455.8 | | | $ | 314.1 | | | $ | 1,354.7 | |
| Services & spares | 333.7 | | | 201.8 | | | 149.4 | | | 684.9 | |
| Integrated rack solutions | 147.9 | | | 97.8 | | | 73.4 | | | 319.1 | |
| Total | $ | 1,066.4 | | | $ | 755.4 | | | $ | 536.9 | | | $ | 2,358.7 | |
| | | | | | | |
| Timing of revenue recognition: | | | | | | | |
| Products and services transferred at a point in time | $ | 763.6 | | | $ | 597.4 | | | $ | 443.3 | | | $ | 1,804.3 | |
| Products and services transferred over time | 302.8 | | | 158.0 | | | 93.6 | | | 554.4 | |
| Total | $ | 1,066.4 | | | $ | 755.4 | | | $ | 536.9 | | | $ | 2,358.7 | |
The opening and closing balances of current and long-term contract assets and current and long-term deferred revenue as of June 30, 2022 and December 31, 2021 were as follows:
| | | | | | | | | | | |
| Balances at June 30, 2022 | | Balances at December 31, 2021 |
| | | |
Deferred revenue - current (1) | $ | 281.4 | | | $ | 238.9 | |
Deferred revenue - noncurrent (2) | 47.1 | | | 59.9 | |
Other contract liabilities - current (1) | 49.2 | | | 52.1 | |
(1) Current deferred revenue and contract liabilities are included within “Accrued expenses and other liabilities” on the Unaudited Condensed Consolidated Balance Sheets.
(2) Noncurrent deferred revenue is recorded within “Other long-term liabilities” on the Unaudited Condensed Consolidated Balance Sheets.
Deferred revenue - noncurrent consists primarily of maintenance, extended warranty and other service contracts. The Company expects to recognize revenue of $19.9, $16.5 and $10.7 in the next 13 to 24 months, the next 25 to 36 months, and thereafter, respectively.
(5) RESTRUCTURING COSTS
Restructuring costs include expenses associated with the Company's efforts to continually improve operational efficiency and reposition its assets to remain competitive on a worldwide basis. Plant closing and other costs include costs of moving fixed assets, employee training, relocation, and facility costs.
Restructuring costs by business segment were as follows:
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| Three months ended June 30, 2022 | | Three months ended June 30, 2021 | | Six months ended June 30, 2022 | | Six months ended June 30, 2021 |
| Americas | $ | 0.5 | | | $ | 1.4 | | | $ | 1.0 | | | $ | 2.1 | |
| Asia Pacific | — | | | 3.2 | | | — | | | 3.4 | |
| Europe, Middle East & Africa | 0.3 | | | (3.8) | | | 0.7 | | | (2.7) | |
| Corporate | — | | | 0.3 | | | (0.1) | | | 0.3 | |
| Total | $ | 0.8 | | | $ | 1.1 | | | $ | 1.6 | | | $ | 3.1 | |
The change in the liability for the restructuring of operations during the six months ended June 30, 2022 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | Expense | | Paid/Utilized | | June 30, 2022 |
| Severance and benefits | $ | 33.8 | | | $ | 0.1 | | | $ | (13.5) | | | $ | 20.4 | |
| Plant closing and other | 0.2 | | | 1.5 | | | (1.5) | | | 0.2 | |
| Total | $ | 34.0 | | | $ | 1.6 | | | $ | (15.0) | | | $ | 20.6 | |
The change in the liability for the restructuring of operations during the six months ended June 30, 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 | | Expense | | Paid/Utilized | | June 30, 2021 |
| Severance and benefits | $ | 68.9 | | | $ | (0.4) | | | $ | (15.8) | | | $ | 52.7 | |
| Plant closing and other | 0.4 | | | 3.5 | | | (3.6) | | | 0.3 | |
| Total | $ | 69.3 | | | $ | 3.1 | | | $ | (19.4) | | | $ | 53.0 | |
(6) DEBT
Long-term debt, net, consisted of the following as of June 30, 2022 and December 31, 2021:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Term Loan due 2027 at 3.87% and 2.84% at June 30, 2022 and December 31, 2021, respectively | $ | 2,150.7 | | | $ | 2,161.7 | |
Senior Secured Notes due 2028 at 4.125% at both June 30, 2022 and December 31, 2021 | 850.0 | | | 850.0 | |
ABL Revolving Credit Facility | 175.0 | | | — | |
| Unamortized discount and issuance costs | (36.4) | | | (39.4) | |
| 3,139.3 | | | 2,972.3 | |
| Less: Current Portion | (21.8) | | | (21.8) | |
| Total long-term debt, net of current portion | $ | 3,117.5 | | | $ | 2,950.5 | |
ABL Revolving Credit Facility
At June 30, 2022, Vertiv Group Corporation (a wholly-owned subsidiary of the Company), as the “Borrower,” and certain subsidiaries of the Borrower as co-borrowers (the “Co-Borrowers”), had $262.3 of availability under the Asset Based Revolving Credit Facility (the “ABL Revolving Credit Facility“) (subject to customary conditions, and subject to separate sublimits for letters of credit, swingline borrowings and borrowings made to certain non-U.S. Co-Borrowers), net of letters of credit outstanding in the aggregate principal amount of $17.7, and taking into account the borrowing base limitations set forth in the ABL Revolving Credit Facility. At June 30, 2022, there was a $175.0 balance on the ABL Revolving Credit Facility with a weighted-average borrowing rate of 2.44%. At December 31, 2021, there was no borrowing balance on the ABL Revolving Credit Facility.
Short-Term Borrowings
As of June 30, 2022, we had short-term borrowings of $17.9 with a borrowing rate of 3.7% included in “Accrued expenses and other liabilities” on the Unaudited Condensed Consolidated Balance Sheets.
(7) LEASES
The Company leases office space, warehouses, vehicles, and equipment. Leases have remaining lease terms of 1 year to 20 years, some of which have renewal and termination options. Termination options are exercisable at the Company's option. Lease terms used to recognize right-of-use assets and lease liabilities include periods covered by options to extend the lease where the Company is reasonably certain to exercise that option and periods covered by an option to terminate the lease if the Company is reasonably certain not to exercise that option. The majority of the Company's leases are operating leases. Finance leases, which are recorded in “Property, plant, and equipment, net,” are immaterial to the Company's Unaudited Condensed Consolidated Financial Statements.
Operating lease expenses are recorded in “Cost of sales” and “Selling, general and administrative expenses” on the Unaudited Condensed Consolidated Statements of Earnings (Loss). Refer to the below table for a summary of these lease expenses:
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| Three months ended June 30, 2022 | | Three months ended June 30, 2021 | | Six months ended June 30, 2022 | | Six months ended June 30, 2021 |
| Operating lease cost | $ | 14.3 | | | $ | 14.9 | | | $ | 28.3 | | | $ | 28.6 | |
| Short-term and variable lease cost | 5.5 | | | 5.3 | | | 12.3 | | | 10.5 | |
| Total lease cost | $ | 19.8 | | | $ | 20.2 | | | $ | 40.6 | | | $ | 39.1 | |
Supplemental cash flow information related to operating leases is as follows:
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| Six months ended June 30, 2022 | | Six months ended June 30, 2021 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | |
| Operating cash outflows - Payments on operating leases | $ | 28.2 | | | $ | 27.9 | |
| Right-of-use assets obtained in exchange for new lease obligations: | | | |
| | | |
| | | |
| Operating leases | $ | 29.1 | | | $ | 45.4 | |
| | | |
Supplemental balance sheet information related to operating leases is as follows:
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| Financial statement line item | June 30, 2022 | | December 31, 2021 |
| | | | |
| Operating lease right-of-use assets | Other assets | $ | 153.1 | | | $ | 152.9 | |
| | | | |
| | | | |
| | | | |
| Operating lease liabilities | Accrued expenses and other liabilities | $ | 41.7 | | | $ | 42.1 | |
| | | | |
| Operating lease liabilities | Other long-term liabilities | 112.7 | | | 113.6 | |
| | | | |
| Total lease liabilities | | $ | 154.4 | | | $ | 155.7 | |
Weighted-average remaining lease terms and discount rates for operating leases are as follows:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Weighted-average remaining lease term | 5.8 years | | 5.5 years |
| | | |
| | | |
| Weighted-average discount rate | 5.2 | % | | 5.2 | % |
| | | |
Maturities of lease liabilities are as follows:
| | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 | | |
| Operating Leases | | |
| 2022 | $ | 26.1 | | | $ | 50.5 | | | |
| 2023 | 46.0 | | | 41.5 | | | |
| 2024 | 34.5 | | | 30.0 | | | |
| 2025 | 22.4 | | | 18.7 | | | |
| 2026 | 13.5 | | | 10.3 | | | |
| Thereafter | 42.6 | | | 32.3 | | | |
| Total Lease Payments | 185.1 | | | 183.3 | | | |
| Less: Imputed Interest | (30.7) | | | (27.6) | | | |
| Present value of lease liabilities | $ | 154.4 | | | $ | 155.7 | | | |
(8) INCOME TAXES
The Company's effective tax rate was 36.0%, 44.7%, 11.8%, and 21.4% for the three and six months ended June 30, 2022 and 2021, respectively. The effective tax rate in the three and six months ended June 30, 2022 is primarily influenced by the mix of income between the Company's U.S. and non-U.S. operations, net of changes in valuation allowances offset by the positive impact of non-taxable changes in fair value of the warrant liabilities. The effective rates for the comparative three and six month period were primarily influenced by the mix of income between the Company's U.S. and non-U.S. operations, net of changes in valuation allowances, and reflect the negative impact of non-deductible changes in fair value of the warrant liabilities as well as a discrete tax adjustment related to legislative changes enacted in the comparative period.
The Company provided U.S. federal income taxes and foreign withholding taxes on all temporary differences attributed to basis differences in foreign subsidiaries that are not considered indefinitely reinvested. As of June 30, 2022, the Company has certain earnings of certain foreign affiliates that continue to be indefinitely reinvested, but it was not practicable to estimate the associated deferred tax liability, due to interaction with other tax laws and regulations in the year of inclusion.
(9) RELATED PARTY TRANSACTIONS
Transactions with Affiliates of Advisors
The Company purchased and sold goods in the ordinary course of business with affiliates of Platinum Equity Advisors, LLC. For the three and six months ended June 30, 2022 and 2021 purchases were $34.4, $69.3, $19.1 and $33.7, respectively. For the three and six months ended June 30, 2022 sales were $19.7 and $51.1, respectively, and were insignificant for the three and six months ended June 30, 2021. Accounts payable were $1.7 and $3.9 as of June 30, 2022 and December 31, 2021, respectively. Accounts receivable were $27.0 and $42.9 as of June 30, 2022 and December 31, 2021, respectively.
Tax Receivable Agreement
On December 31, 2021, the Company and an affiliate of Platinum Equity Advisors (the "Vertiv Stockholder") agreed to amend and supplement the tax receivable agreement entered into by the Company and the Vertiv Stockholder on February 7, 2020, (the “Tax Receivable Agreement”) to replace the Company’s remaining payment obligations under the Tax Receivable Agreement with an obligation to pay $100 in cash in two equal installments. The first installment payment was scheduled to be on or before June 15, 2022 and the second payment was scheduled to be due on or before September 15, 2022. On June 15, 2022, the Company and the Vertiv Stockholder agreed to further amend the payment schedule under the Tax Receivable Agreement into three installment payments, wherein the first installment payment of $12.5 became due and was paid on June 15, 2022, the second installment of $12.5 will be due on or before September 15, 2022, and the third installment of $75 will be due on or before November 15, 2022. Upon receipt of the third installment payment, the Tax Receivable Agreement will terminate and the Company will not be required to make any further payments to the Vertiv Stockholder under the Tax Receivable Agreement.
For the three and six months ended June 30, 2021 the Company recorded $(0.1) and $1.6, respectively, of accretion expense in “Interest expense, net” in the Unaudited Condensed Consolidated Statement of Earnings (Loss). For the three and six months ended June 30, 2021, an unrealized gain (loss) of $(9.4) and $(5.3) was recorded in “Other comprehensive income (loss), net” in the Unaudited Condensed Consolidated Comprehensive Income (Loss), related to the change in fair value of the tax receivable liability.
(10) OTHER FINANCIAL INFORMATION
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Reconciliation of cash, cash equivalents, and restricted cash | | | |
| Cash and cash equivalents | $ | 194.4 | | | $ | 439.1 | |
| Restricted cash included in other current assets | 10.9 | | | 8.0 | |
| Total cash, cash equivalents, and restricted cash | $ | 205.3 | | | $ | 447.1 | |
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Inventories | | | |
| Finished products | $ | 276.3 | | | $ | 236.5 | |
| Raw materials | 354.5 | | | 274.8 | |
| Work in process | 163.8 | | | 105.0 | |
| Total inventories | $ | 794.6 | | | $ | 616.3 | |
| | | |
| June 30, 2022 | | December 31, 2021 |
| Property, plant and equipment, net | | | |
| Machinery and equipment | $ | 381.9 | | | $ | 373.6 | |
| Buildings | 295.7 | | | 304.8 | |
| Land | 43.2 | | | 42.1 | |
| Construction in progress | 43.8 | | | 34.8 | |
| Property, plant and equipment, at cost | 764.6 | | | 755.3 | |
| Less: Accumulated depreciation | (290.8) | | | (266.0) | |
| Property, plant and equipment, net | $ | 473.8 | | | $ | 489.3 | |
| | | |
| June 30, 2022 | | December 31, 2021 |
| Accrued expenses and other liabilities | | | |
| Deferred revenue | $ | 281.4 | | | $ | 238.9 | |
| Accrued payroll and other employee compensation | 107.0 | | | 125.8 | |
Restructuring (see Note 5) | 20.6 | | | 34.0 | |
| Operating lease liabilities (see Note 7) | 41.7 | | | 42.1 | |
| Product warranty | 26.3 | | | 30.0 | |
Contract liabilities (see Note 4) | 49.2 | | | 52.1 | |
Tax Receivable Agreement (see Note 9) | 87.5 | | | 100.0 | |
| Other | 303.0 | | | 330.5 | |
| Total | $ | 916.7 | | | $ | 953.4 | |
| | | | | | | | | | | |
| Six months ended June 30, 2022 | | Six months ended June 30, 2021 |
| Change in product warranty accrual | | | |
| Balance at the beginning of the period | $ | 30.0 | | | $ | 36.5 | |
| Provision charge to expense | 5.8 | | | 11.3 | |
| Paid/utilized | (9.5) | | | (11.9) | |
| Balance at the end of the period | $ | 26.3 | | | $ | 35.9 | |
(11) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In accordance with ASC 820, the Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Observable inputs are from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. These tiers include the following:
Level 1 — inputs include observable unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 — inputs include other than quoted prices in active markets that are either directly or indirectly observable
Level 3 — inputs include unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions
In determining fair value, the Company uses various valuation techniques and prioritizes the use of observable inputs. The availability of observable inputs varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the instrument. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management judgment. For other financial instruments, pricing inputs are less observable in the marketplace and may require management judgment.
Recurring fair value measurements
A summary of the Company's financial instruments recognized at fair value, and the fair value measurements used are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of June 30, 2022 |
| Balance Sheet Location | Total | | Quoted prices in active markets for identical assets (Level 1) | | Other observable inputs (Level 2) | | Unobservable inputs (Level 3) |
| Assets: | | | | | | | | |
| Interest rate swaps | Other current assets | $ | 18.3 | | | $ | — | | | $ | 18.3 | | | $ | — | |
| Interest rate swaps | Other noncurrent assets | 66.6 | | | — | | | 66.6 | | | — | |
| Total assets | | $ | 84.9 | | | $ | — | | | $ | 84.9 | | | $ | — | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| | | | | | | | |
| Private warrants | Warrant liabilities | $ | 15.8 | | | $ | — | | | $ | 15.8 | | | $ | — | |
| Total liabilities | | $ | 15.8 | | | $ | — | | | $ | 15.8 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of December 31, 2021 |
| Balance Sheet Location | Total | | Quoted prices in active markets for identical assets (Level 1) | | Other observable inputs (Level 2) | | Unobservable inputs (Level 3) |
| Assets: | | | | | | | | |
| Interest rate swaps | Other noncurrent assets | $ | 16.1 | | | $ | — | | | $ | 16.1 | | | $ | — | |
| Total assets | | $ | 16.1 | | | $ | — | | | $ | 16.1 | | | $ | — | |
| | | | | | | | |
| Liabilities: | | | | | | | | |
| Interest rate swaps | Accrued expenses and other liabilities | $ | 7.4 | | | $ | — | | | $ | 7.4 | | | $ | — | |
| Contingent consideration | Accrued expenses and other liabilities | 3.7 | | | — | | | — | | | 3.7 | |
| Private warrants | Warrant liabilities | 149.6 | | | — | | | 149.6 | | | — | |
| Total liabilities | | $ | 160.7 | | | $ | — | | | $ | 157.0 | | | $ | 3.7 | |
Interest rate swaps — From time to time the Company may enter into derivative financial instruments designed to hedge the variability in interest expense on floating rate debt. Derivatives are recognized as assets or liabilities in the Unaudited Condensed Consolidated Balance Sheets at their fair value. When the derivative instrument qualifies as a cash flow hedge, changes in the fair value are deferred through other comprehensive income, depending on the nature and effectiveness of the offset.
The Company uses interest rate swaps to manage the interest rate mix of the Company's total debt portfolio and related overall cost of borrowing. At June 30, 2022 and December 31, 2021, interest rate swap agreements designated as cash flow hedges effectively swapped a notional amount of $1,000.0 of LIBOR based floating rate debt for fixed rate debt. The Company's interest rate swaps mature in March 2027. The Company recognized $1.7, $4.3, $2.6, and $5.3 of expense within “Other operating expense (income)” on the Unaudited Condensed Consolidated Statements of Earnings (Loss) for the three and six months ended June 30, 2022 and 2021, respectively.
At June 30, 2022, the Company expects that approximately $18.3 of pre-tax net gains on cash flow hedges will be reclassified from accumulated other comprehensive income (loss) into earnings during the next twelve months.
The interest rate swaps are valued using the LIBOR yield curves at the reporting date. Counterparties to these contracts are highly rated financial institutions. The fair values of the Company’s interest rate swaps are adjusted for nonperformance risk and creditworthiness of the counterparty through the Company’s credit valuation adjustment (“CVA”). The CVA is calculated at the counterparty level utilizing the fair value exposure at each payment date and applying a weighted probability of the appropriate survival and marginal default percentages.
Net investment hedge — From time to time the Company designates certain intercompany debt to hedge a portion of its investment in foreign subsidiaries and affiliates. The net impact of translation adjustments from these hedges was $6.8 for both the three and six months ended June 30, 2022 and are included in “Foreign currency translation” in the Unaudited Condensed Consolidated Statement of Other Comprehensive Income (Loss). As of June 30, 2022, approximately $227.5 of the Company's intercompany debt was designated to hedge investments in certain foreign subsidiaries and affiliates.
Private warrants — the fair value of the private warrants is considered a Level 2 valuation and is determined using the Black-Sholes-Merton valuation model.
The significant assumptions which the Company used in the model are:
| | | | | | | | | | | | | | |
| Warrant valuation inputs | | June 30, 2022 | | December 31, 2021 |
| Stock price | | $ | 8.22 | | | $ | 24.97 | |
| Strike price | | $ | 11.50 | | | $ | 11.50 | |
| Remaining life | | 2.60 | | 3.10 |
| Volatility | | 43.0 | % | | 34.2 | % |
Interest rate (1) | | 2.96 | % | | 0.98 | % |
Dividend yield (2) | | 0.12 | % | | 0.04 | % |
(1) Interest rate determined from a constant maturity treasury yield.
(2) June 30, 2022 and December 31, 2021 dividend yield assumes $0.01 per share per annum.
Other fair value measurements
The Company determines the fair value of debt using Level 2 inputs based on quoted market prices. The following table presents the estimated fair value and carrying value of long-term debt, including the current portion of long-term debt as of June 30, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
| | Fair Value | | Par Value (1) | | Fair Value | | Par Value (1) |
| Term Loan due 2027 | $ | 1,989.4 | | | $ | 2,150.7 | | | $ | 2,148.2 | | | $ | 2,161.7 | |
| Senior Secured Notes due 2028 | 697.0 | | | 850.0 | | | 853.2 | | | 850.0 | |
| ABL Revolving Credit Facility due 2025 | 175.0 | | | 175.0 | | | — | | | — | |
| | | | | | | |
(1)See “Note 6 — Debt” for additional information.
(12) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity in accumulated other comprehensive income (loss) is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2022 | | Three months ended June 30, 2021 | | Six months ended June 30, 2022 | | Six months ended June 30, 2021 |
| Foreign currency translation, beginning | $ | 3.5 | | | $ | 68.8 | | | $ | 39.8 | | | $ | 104.9 | |
| Other comprehensive income (loss) | (149.9) | | | 20.2 | | | (186.2) | | | (15.9) | |
| Foreign currency translation, ending | (146.4) | | | 89.0 | | | (146.4) | | | 89.0 | |
| Interest rate swaps, beginning | 62.9 | | | 1.1 | | | 8.7 | | | (32.8) | |
Unrealized gain (loss) deferred during the period (1) | 22.0 | | | (8.6) | | | 76.2 | | | 25.3 | |
| Interest rate swaps, ending | 84.9 | | | (7.5) | | | 84.9 | | | (7.5) | |
| Pension, beginning | (12.8) | | | (20.5) | | | (12.9) | | | (19.7) | |
| Actuarial gain (losses) recognized during the period, net of income taxes | — | | | 0.2 | | | 0.1 | | | (0.6) | |
| Pension, ending | (12.8) | | | (20.3) | | | (12.8) | | | (20.3) | |
| Tax Receivable Agreement, beginning | — | | | 3.2 | | | — | | | (0.9) | |
Unrealized gain (loss) during the period (2) | — | | | (9.4) | | | — | | | (5.3) | |
| Tax Receivable Agreement, ending | — | | | (6.2) | | | — | | | (6.2) | |
| Accumulated other comprehensive income (loss) | $ | (74.3) | | | $ | 55.0 | | | $ | (74.3) | | | $ | 55.0 | |
(1)During the three and six months ended June 30, 2022 and 2021, $1.7, $4.3, $2.6 and $5.3, respectively, was reclassified into earnings.
(2)The fair value movement on the Tax Receivable Agreement attributable to the Company's own credit risk spread was recorded in “Other comprehensive income (loss)” prior to amending the Tax Receivable Agreement.
(13) SEGMENT INFORMATION
Operating profit (loss) is the primary income measure the Company uses to assess segment performance and make operating decisions. Segment performance is assessed exclusive of Corporate and other costs, foreign currency gain (loss), and amortization of intangibles. Corporate and other costs primarily include stock-based compensation, other incentive compensation, change in fair value of warrant liabilities, asset impairments, and costs that support centralized global functions including Finance, Treasury, Risk Management, Strategy & Marketing, IT, Legal, and global product platform development and offering management.
Vertiv determines its reportable segments based on how operations are managed internally for the products and services sold to customers, including how the results are reviewed by the chief operating decision maker, which includes determining resource allocation methodologies used for reportable segments.
Summarized information about the Company’s results of operations by reportable segment and product and service offering follows:
Americas includes products and services sold for applications within the data center, communication networks and commercial/industrial markets in North America and Latin America. This segment’s principal product and service offerings include:
•Critical infrastructure & solutions includes AC and DC power management, thermal management, and modular hyperscale type data center sites.
•Integrated rack solutions includes racks, rack power, rack power distribution, rack thermal systems, configurable integrated solutions; and hardware for managing IT equipment.
•Services & spares includes preventative maintenance, acceptance testing, engineering and consulting, performance assessments, remote monitoring, training, spare parts, and digital critical infrastructure software.
Asia Pacific includes products and services sold for applications within the data center, communication networks and commercial/industrial markets throughout Greater China, Australia & New Zealand, South East Asia, and India. Products and services offered are similar to the Americas segment.
Europe, Middle East & Africa includes products and services sold for applications within the data center, communication networks and commercial/industrial markets in Europe, Middle East & Africa. Products and services offered are similar to the Americas segment.
Reportable Segments | | | | | | | | | | | | | | | | | | | | | | | |
| Sales | Three months ended June 30, 2022 | | Three months ended June 30, 2021 | | Six months ended June 30, 2022 | | Six months ended June 30, 2021 |
| Americas | $ | 654.3 | | | $ | 568.2 | | | $ | 1,203.3 | | | $ | 1,074.1 | |
| Asia Pacific | 436.6 | | | 416.3 | | | 790.4 | | | 793.9 | |
| Europe, Middle East & Africa | 397.6 | | | 310.2 | | | 715.6 | | | 560.6 | |
| 1,488.5 | | | 1,294.7 | | | 2,709.3 | | | 2,428.6 | |
| Eliminations | (89.1) | | | (34.4) | | | (153.5) | | | (69.9) | |
| Total | $ | 1,399.4 | | | $ | 1,260.3 | | | $ | 2,555.8 | | | $ | 2,358.7 | |
| | | | | | | | | | | | | | | | | | | | | | | |
Intersegment sales (1) | Three months ended June 30, 2022 | | Three months ended June 30, 2021 | | Six months ended June 30, 2022 | | Six months ended June 30, 2021 |
| Americas | $ | 7.1 | | | $ | 3.3 | | | $ | 21.0 | | | $ | 7.7 | |
| Asia Pacific | 29.4 | | | 18.3 | | | 50.4 | | | 38.5 | |
| Europe, Middle East & Africa | 52.6 | | | 12.8 | | | 82.1 | | | 23.7 | |
| Total | $ | 89.1 | | | $ | 34.4 | | | $ | 153.5 | | | $ | 69.9 | |
(1)Intersegment selling prices approximate market prices.
| | | | | | | | | | | | | | | | | | | | | | | |
| Operating profit (loss) | Three months ended June 30, 2022 | | Three months ended June 30, 2021 | | Six months ended June 30, 2022 | | Six months ended June 30, 2021 |
| Americas | $ | 82.5 | | | $ | 128.6 | | | $ | 140.4 | | | $ | 255.0 | |
| Asia Pacific | 68.5 | | | 62.8 | | | 110.0 | | | 115.9 | |
| Europe, Middle East & Africa | 61.8 | | | 62.4 | | | 95.0 | | | 95.8 | |
| Total reportable segments | 212.8 | | | 253.8 | | | 345.4 | | | 466.7 | |
| Foreign currency gain (loss) | (2.9) | | | (4.1) | | | (1.6) | | | 2.8 | |
| Corporate and other | (127.9) | | | (115.6) | | | (249.3) | | | (223.8) | |
| Total corporate, other and eliminations | (130.8) | | | (119.7) | | | (250.9) | | | (221.0) | |
| Amortization of intangibles | (55.8) | | | (31.9) | | | (113.5) | | | (63.7) | |
| Operating profit (loss) | $ | 26.2 | | | $ | 102.2 | | | $ | (19.0) | | | $ | 182.0 | |
(14) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed by dividing net income (loss) adjusted for the gain on fair value of warrant liability, if the warrants are in-the-money and the impact is dilutive, by the weighted-average number of common shares outstanding during the period increased by the number of additional shares that would have been outstanding related to potentially dilutive equity-based compensation and warrants.
The details of the earnings per share calculations for the three and six months ended June 30, 2022 and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(In millions, except share and per share amounts) | Three months ended June 30, 2022 | | Three months ended June 30, 2021 | | Six months ended June 30, 2022 | | Six months ended June 30, 2021 |
| Basic earnings (loss) per share computation: | | | | | | | |
| Net income (loss) | $ | 20.3 | | | $ | 9.7 | | | $ | 28.8 | | | $ | 41.4 | |
| Weighted-average number of shares outstanding - basic | 376,594,660 | | | 352,199,184 | | | 376,285,196 | | | 350,908,612 | |
| Basic earnings per share | 0.05 | | | 0.03 | | | $ | 0.08 | | | $ | 0.12 | |
| | | | | | | |
| Diluted earnings (loss) per share computation: | | | | | | | |
| Net income (loss) | 20.3 | | | $ | 9.7 | | | $ | 28.8 | | | $ | 41.4 | |
Gain on fair value of warrant liabilities(1) | — | | | — | | | (133.8) | | | — | |
| Net income (loss) adjusted for the gain on fair value of warrant liabilities | $ | 20.3 | | | $ | 9.7 | | | $ | (105.0) | | | $ | 41.4 | |
| | | | | | | |
| Weighted-average number of shares outstanding - basic | 376,594,660 | | | 352,199,184 | | | 376,285,196 | | | 350,908,612 | |
| Dilutive effect of private warrants | — | | | — | | | 2,208,018 | | | — | |
| Dilutive effect of equity-based compensation | 663,194 | | | 4,453,627 | | | — | | | 3,975,257 | |
| Weighted-average number of shares outstanding - diluted | 377,257,854 | | | 356,652,811 | | | 378,493,214 | | | 354,883,869 | |
| Diluted earnings (loss) per share | 0.05 | | | 0.03 | | | $ | (0.28) | | | $ | 0.12 | |
(1)For the three months ended June 30, 2022, the warrants were out of the money and therefore the net income is not adjusted for the gain on fair value of warrant liabilities to calculate diluted earnings (loss) per share.
The dilutive effect of private warrants was 2.2 million during the six months ended June 30, 2022. Additional equity-based compensation awards and warrants were also outstanding during the three and six months ended June 30, 2022, but were not included in the computation of diluted earnings (loss) per share because the effect would be anti-dilutive. Such anti-dilutive equity-based compensation awards represent 20.3 million and 11.1 million shares for the three and six months ended June 30, 2022, respectively.
The dilutive effect of equity-based compensation awards was 4.5 million and 4.0 million during the three and six months ended June 30, 2021, respectively. Additional equity-based compensation awards and warrants were also outstanding during the three and six months ended June 30, 2021, but were not included in the computation of diluted earnings per common share because the effect would be anti-dilutive. Such anti-dilutive equity-based compensation awards and warrants represented 0.5 million and 5.5 million shares for the three months ended June 30, 2021, and 1.0 million and 6.5 million shares for the six months ended June 30, 2021, respectively.
(15) COMMITMENTS AND CONTINGENCIES
The Company is a party to a number of pending legal proceedings and claims, including those involving general and product liability and other matters. The Company accrues for such liabilities when it is probable that future costs will be incurred and such costs can be reasonably estimated. Accruals are based on developments to date; management’s estimates of the outcomes of these matters; the Company’s experience in contesting, litigating and settling similar matters; and any related insurance coverage. While the Company believes that a material adverse impact is unlikely, given the inherent uncertainty of litigation, a future development in these matters could have a material adverse impact on the Company. The Company is unable to estimate any additional loss or range of loss that may result from the ultimate resolution of these matters, other than those described below.
On December 28, 2017, Vertiv acquired Energy Labs, Inc. (“Energy Labs”). The purchase agreement contained a provision for contingent consideration in the form of an earn-out payment based on the achievement of 2018 operating results. The range of payment outcomes was zero to $34.5. On June 4, 2019, Vertiv notified the selling stockholders of Energy Labs of Vertiv’s determination that the applicable 2018 operating results had not been achieved and that no contingent consideration was due to the selling stockholders. On September 6, 2019, the selling stockholders of Energy Labs notified Vertiv of their dispute regarding the contingent consideration allegedly due to them. The selling stockholders asserted that the applicable 2018 operating results were exceeded and that Vertiv owed $34.5 in earn-out, the highest amount of earn-out possible under the agreement. On December 21, 2021, the parties agreed to a settlement term sheet, which includes, among other terms, the following: the Company agreed to pay $21.5 to the selling stockholders of Energy Labs; a full and complete mutual waiver, release and discharge of all claims and liabilities; and a dismissal of the pending lawsuit. The parties executed a Settlement Agreement on December 30, 2021 consistent with the aforementioned terms. On January 12, 2022, the Company paid the agreed upon settlement of $21.5.
On August 3, 2021, an American Arbitration Association arbitration hearing commenced with respect to a 2018 claim filed by Vertiv against SVO Building One, LLC (“SVO”) alleging damages of approximately $12.0 with respect to (i) unremitted payment for work and materials in connection with, the design, engineering, procurement, installation, construction, and commissioning of a data center located in Sacramento, California and (ii) damages and injunctive relief relating to SVO’s unauthorized use of Vertiv’s intellectual property and work product. SVO filed a counterclaim in 2018 alleging damages of approximately $18.0 relating to (i) allegations that Vertiv was not a duly licensed contractor at all times during the project in violation of California’s contractor license regulations, (ii) breach of warranty, and (iii) gross negligence. On September 3, 2021, the arbitrator issued an interim phase one ruling finding (1) that Vertiv was in violation of California contractor license regulations and was barred from recovery of approximately $9.0 for work performed and equipment delivered in connection with the project, as well as requiring disgorgement plus interest of $10.0, (2) SVO was not in violation of California’s contractor license regulations, and (3) Vertiv and SVO agreed to a traditional baseball arbitration provision under the terms and conditions for the project, wherein each party is required to submit a proposed final award to the arbitrator for consideration, and the arbitrator is required to select one of the proposed awards submitted by the parties as the final award in the arbitration and is prohibited from issuing an alternative award. On December 31, 2021, the parties entered into a settlement agreement on ordinary and customary terms, settling all of the disputes between them. As of June 30, 2022 and December 31, 2021 the settlement was recorded in “Accrued expenses and other liabilities” on the Unaudited Condensed Consolidated Balance Sheet.
On March 24, 2022, a putative securities class action, Kirk Vinings v. Vertiv Holdings Co, 22-cv-2416, was filed against Vertiv, Rob Johnson, and David Fallon in the Southern District of New York. The plaintiff asserted claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and SEC Rule 10b-5 on behalf of a putative class of all persons and entities that purchased or otherwise acquired Vertiv securities between April 28, 2021 and February 23, 2022, relating to certain disclosures contained in filings made by the Company with the SEC during 2021. On May 13, 2022, the plaintiff voluntarily dismissed his lawsuit.
On May 3, 2022, a related putative securities class action, In re Vertiv Holdings Co Securities Litigation, 22-cv-3572, was filed against Vertiv, certain of the Company’s officers and directors, and other defendants in the Southern District of New York. The complaint alleges that certain of the Company’s public statements were materially false and/or misleading with respect to inflationary and supply chain pressures and pricing issues, and asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Sections 11, 12(a)(2), and 15 of the Securities Act of 1933, as amended. These claims are asserted on behalf of a putative class of all persons and entities that (i) purchased Vertiv securities between February 24, 2021 and February 23, 2022; and/or (ii) purchased Vertiv securities in or traceable to the November 4, 2021 secondary public offering by a selling stockholder pursuant to a resale registration statement. While the Company believes it has meritorious defenses against the plaintiff’s claims, the Company is unable at this time to predict the outcome of this dispute or the amount of any cost associated with its resolution.
At June 30, 2022, other than as described above, there were no known contingent liabilities (including guarantees, taxes and other claims) that management believes will be material in relation to the Company’s Unaudited Condensed Consolidated Financial Statements, nor were there any material commitments outside the normal course of business.