Vertiv Holdings Co 10-Q for FY2021 Q3
Vertiv Holdings Co (VRT)
10-Q
2021-11-01
For: 2021-09-30
View Original
Added on
April 02, 2026
About this 10-Q
Vertiv Holdings Co filed this 10-Q on November 1, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.23B
- up 5.8% from $1.16B a year earlier
- Net income
- $56.2M
- compared with a net loss of $103.5M a year earlier
- Diluted EPS
- $0.15
- compared with -$0.32 a year earlier
| UNITED STATES | ||||||||||||||
| SECURITIES AND EXCHANGE COMMISSION | ||||||||||||||
| Washington, D. C. 20549 | ||||||||||||||
FORM | ||||||||||||||
For the Quarterly period ended | ||||||||||||||
| or | ||||||||||||||
| For the transition period from __to__ | ||||||||||||||
Commission File No. | ||||||||||||||
| (Exact name of registrant as specified in its charter) | ||||||||||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S Employer Identification No.) | |||||||||||||
| (Address of principal executive offices including zip code) | ||||||||||||||
| (Registrant's telephone number, including area code) | ||||||||||||||
| Securities registered pursuant to Section 12(b) of the Act: | ||||||||||||||
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in 12b-2 of the Exchange Act).
Yes ☐ No ☒
As of October 29, 2021, there were 352,591,505 shares of our Class A common stock, par value $0.0001, issued and outstanding.
| TABLE OF CONTENTS | |||||||||||||||||
| Page | |||||||||||||||||
1
Part I. Financial Information
ITEM 1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
VERTIV HOLDINGS CO
(Dollars in millions except for per share data)
| Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | ||||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Net sales - products | $ | $ | $ | $ | |||||||||||||||||||
| Net sales - services | |||||||||||||||||||||||
| Net sales | |||||||||||||||||||||||
| Costs and expenses | |||||||||||||||||||||||
| Cost of sales - products | |||||||||||||||||||||||
| Cost of sales - services | |||||||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Operating expenses | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Amortization of intangibles | |||||||||||||||||||||||
| Restructuring costs | ( | ( | |||||||||||||||||||||
| Foreign currency (gain) loss, net | |||||||||||||||||||||||
| Asset impairments | |||||||||||||||||||||||
| Other operating expense (income) | |||||||||||||||||||||||
| Operating profit (loss) | |||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Loss on extinguishment of debt | |||||||||||||||||||||||
| Change in fair value of warrant liabilities | ( | ||||||||||||||||||||||
| Income (loss) before income taxes | ( | ( | |||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Earnings (loss) per share: | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Weighted-average shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
2
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
VERTIV HOLDINGS CO
(Dollars in millions)
| Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | ||||||||||||||||||||
| Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||||||||
| Foreign currency translation | ( | ( | |||||||||||||||||||||
| Interest rate swaps | ( | ( | |||||||||||||||||||||
| Tax receivable agreement | ( | ( | |||||||||||||||||||||
| Pension | ( | ( | |||||||||||||||||||||
| Other comprehensive income (loss), net of tax | ( | ( | ( | ||||||||||||||||||||
| Comprehensive income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
3
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
VERTIV HOLDINGS CO
(Dollars in millions)
| September 30, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, less allowances of $ | |||||||||||
| Inventories | |||||||||||
| Other current assets | |||||||||||
| Total current assets | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Other assets: | |||||||||||
| Goodwill | |||||||||||
| Other intangible assets, net | |||||||||||
| Deferred income taxes | |||||||||||
| Other | |||||||||||
| Total other assets | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt | $ | $ | |||||||||
| Current portion of warrant liabilities | |||||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other liabilities | |||||||||||
| Income taxes | |||||||||||
| Total current liabilities | |||||||||||
| Long-term debt, net | |||||||||||
| Deferred income taxes | |||||||||||
| Warrant liabilities | |||||||||||
| Other long-term liabilities | |||||||||||
| Total liabilities | |||||||||||
| Equity | |||||||||||
Preferred stock, $ | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive (loss) income | |||||||||||
| Total equity | |||||||||||
| Total liabilities and equity | $ | $ | |||||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
VERTIV HOLDINGS CO
(Dollars in millions)
| Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash used for operating activities: | |||||||||||
| Depreciation | |||||||||||
| Amortization | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Amortization of debt discount and issuance costs | |||||||||||
| Loss on extinguishment of debt | |||||||||||
| Change in fair value of warrant liabilities | |||||||||||
| Asset impairment | |||||||||||
| Changes in operating working capital | ( | ( | |||||||||
| Stock based compensation | |||||||||||
| Changes in tax receivable agreement | |||||||||||
| Other | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Investments in capitalized software | ( | ( | |||||||||
| Proceeds from disposition of property, plant and equipment | |||||||||||
| Net cash used for investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings from ABL revolving credit facility | |||||||||||
| Repayments of ABL revolving credit facility | ( | ||||||||||
| Proceeds from short-term borrowings | |||||||||||
| Repayment of short-term borrowings | ( | ||||||||||
| Borrowing on Term Loan, net of discount | |||||||||||
| Repayment on Term Loan | ( | ( | |||||||||
| Repayment on Prior Term Loan | ( | ||||||||||
| Repayment of Prior Notes | ( | ||||||||||
| Payment of redemption premiums | ( | ||||||||||
| Payment of debt issuance costs | ( | ||||||||||
| Proceeds from reverse recapitalization, net | |||||||||||
| Payment to Vertiv Stockholder | ( | ||||||||||
| Proceeds from the exercise of warrants | |||||||||||
| Exercise of employee stock options | |||||||||||
| Employee taxes paid from shares withheld | ( | ||||||||||
| Other financing | ( | ||||||||||
| Net cash provided by financing activities | |||||||||||
| Effect of exchange rate changes on cash and cash equivalents | ( | ( | |||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | |||||||||||
| Beginning cash, cash equivalents and restricted cash | |||||||||||
| Ending cash, cash equivalents and restricted cash | $ | $ | |||||||||
| Changes in operating working capital | |||||||||||
| Accounts receivable | $ | ( | $ | ( | |||||||
| Inventories | ( | ( | |||||||||
| Other current assets | |||||||||||
| Accounts payable | |||||||||||
| Accrued expenses and other liabilities | ( | ||||||||||
| Income taxes | ( | ||||||||||
| Total changes in operating working capital | $ | ( | $ | ( | |||||||
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
VERTIV HOLDINGS CO
(Dollars in millions)
| Share Capital | ||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Additional Paid in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019, as originally reported | $ | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||||||||||
| Conversion of units of share capital | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019, as recasted (1) | ( | ( | ||||||||||||||||||||||||||||||||||||||||||
| Tax Receivable Agreement | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Stock issuance | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Merger recapitalization (2) | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2020 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Other merger adjustment | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Other merger adjustment | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2020 | $ | $ | $ | ( | $ | ( | $ | |||||||||||||||||||||||||||||||||||||
Balance at December 31, 2020 | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Exercise of employee stock options | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Employee 401K match with Vertiv stock | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Exercise of warrants (3) | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2021 | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Exercise of employee stock options | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Stock comp activity, net of withholdings for tax (4) | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Employee 401K match with Vertiv stock | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2021 | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Exercise of employee stock options | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Stock comp activity, net of withholdings for tax (5) | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Employee 401K match with Vertiv stock | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income (loss), net of tax | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||||||||
Balance at September 30, 2021 | $ | $ | $ | ( | $ | $ | ||||||||||||||||||||||||||||||||||||||
(1)The shares and earnings per share available to holders of the Company’s capital stock, prior to the business combination, have been recasted as shares reflecting the exchange ratio established in the business combination (1.0 Vertiv Holdings share to 118.261955 Vertiv Holdings Co shares).
(2)The merger recapitalization includes the fair value of $116.3 of Public Warrants and Private Placement Warrants as of February 7, 2020.
(3)The exercise of warrants includes $107.5 of cash received during the three months ended March 31, 2021 for the exercise of Public Warrants.
(4)Net stock compensation activity includes 906,197 vested shares offset by 320,058 shares withheld for taxes valued at $7.0 and stock-based compensation of $6.2 .
(5)Net stock compensation activity includes 29,605 vested shares offset by 2,536 shares withheld for taxes valued at $0.2 and stock-based compensation of $5.7 .
See accompanying Notes to Unaudited Condensed Consolidated Financial Statements
6
Vertiv Holdings Co
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars in millions, except as otherwise specified and per share amounts)
(1) DESCRIPTION OF BUSINESS
(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 United States of America 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 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 includes the reclassification of intangible amortization expense, restructuring costs and net foreign currency (gain) loss into separate components within operating expenses to conform to the current period presentation. In addition certain prior period amounts have been reclassed to conform with current year presentation.
The preparation of financial statements in conformity with GAAP in the United States 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, our sales channels, supply chain, manufacturing operations, workforce, or other key aspects of our 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/A filed with the SEC on April 30, 2021 (the "2020 Form 10-K/A").
Held for Sale
(3) REVENUE
7
Disaggregation of Revenues
Beginning in 2020, sales were moved within product and service offering categories to reflect a strategic realignment within the Company's matrix organizational structure. Comparative results for the three and nine months ended September 30, 2020 have been adjusted to reflect this modification. Additionally, product and service offering category names were revised as follows: Services & software solutions changed to Service & spares, and I.T. edge & infrastructure changed to Integrated rack solutions. There was no change in the description of the Critical infrastructure & solutions offering.
The following table disaggregates our revenue by business segment, product and service offering and timing of transfer of control:
| Three Months Ended September 30, 2021 | |||||||||||||||||||||||
| Americas | Asia Pacific | Europe, Middle East, & Africa | Total | ||||||||||||||||||||
| Sales by Product and Service Offering: | |||||||||||||||||||||||
| Critical infrastructure & solutions | $ | $ | $ | $ | |||||||||||||||||||
| Services & spares | |||||||||||||||||||||||
| Integrated rack solutions | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||
| Products and services transferred at a point in time | $ | $ | $ | $ | |||||||||||||||||||
| Products and services transferred over time | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Three Months Ended September 30, 2020 | |||||||||||||||||||||||
| Americas | Asia Pacific | Europe, Middle East, & Africa | Total | ||||||||||||||||||||
Sales by Product and Service Offering: (1) | |||||||||||||||||||||||
| Critical infrastructure & solutions | $ | $ | $ | $ | |||||||||||||||||||
| Services & spares | |||||||||||||||||||||||
| Integrated rack solutions | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||
| Products and services transferred at a point in time | $ | $ | $ | $ | |||||||||||||||||||
| Products and services transferred over time | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
(1)Comparative results for Critical infrastructure & solutions, Services & spares and Integrated rack solutions for the three months ended September 30, 2020 have been adjusted by $5.8 , $0.9 , and $(6.7 ), respectively, to reflect the strategic realignment described above.
| Nine Months Ended September 30, 2021 | |||||||||||||||||||||||
| Americas | Asia Pacific | Europe, Middle East, & Africa | Total | ||||||||||||||||||||
| Sales by Product and Service Offering: | |||||||||||||||||||||||
| Critical infrastructure & solutions | $ | $ | $ | $ | |||||||||||||||||||
| Services & spares | |||||||||||||||||||||||
| Integrated rack solutions | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||
| Products and services transferred at a point in time | $ | $ | $ | $ | |||||||||||||||||||
| Products and services transferred over time | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
8
| Nine Months Ended September 30, 2020 | |||||||||||||||||||||||
| Americas | Asia Pacific | Europe, Middle East, & Africa | Total | ||||||||||||||||||||
Sales by Product and Service Offering: (1) | |||||||||||||||||||||||
| Critical infrastructure & solutions | $ | $ | $ | $ | |||||||||||||||||||
| Services & spares | |||||||||||||||||||||||
| Integrated rack solutions | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||
| Products and services transferred at a point in time | $ | $ | $ | $ | |||||||||||||||||||
| Products and services transferred over time | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
(1)Comparative results for Critical infrastructure & solutions, Services & spares and Integrated rack solutions for the nine months ended September 30, 2020 have been adjusted by $15.6 , $5.6 , and $(21.3 ), respectively, to reflect the strategic realignment described above.
The opening and closing balances of our current and long-term contract assets and current and long-term deferred revenue were as follows:
Balances at September 30, 2021 | Balances at December 31, 2020 | ||||||||||
Deferred revenue - current (1) | $ | $ | |||||||||
Deferred revenue - noncurrent (2) | |||||||||||
Other contract liabilities - current (1) | |||||||||||
(1) Current deferred revenue and contract liabilities are included within accrued expenses and other liabilities.
(2) Noncurrent deferred revenue is recorded within other long-term liabilities.
(4) 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:
| Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | ||||||||||||||||||||
| Americas | $ | $ | $ | $ | |||||||||||||||||||
| Asia Pacific | |||||||||||||||||||||||
Europe, Middle East & Africa(1) | ( | ( | |||||||||||||||||||||
| Corporate | |||||||||||||||||||||||
| Total | $ | ( | $ | $ | ( | $ | |||||||||||||||||
The change in the liability for the restructuring of operations during the nine months ended September 30, 2021 were as follows:
| December 31, 2020 | Expense | Paid/Utilized | September 30, 2021 | ||||||||||||||||||||
| Severance and benefits | $ | $ | ( | $ | ( | $ | |||||||||||||||||
| Plant closing and other | ( | ||||||||||||||||||||||
| Total | $ | $ | ( | $ | ( | $ | |||||||||||||||||
9
The change in the liability for the restructuring of operations during the nine months ended September 30, 2020 were as follows:
| December 31, 2019 | Expense | Paid/Utilized | September 30, 2020 | ||||||||||||||||||||
| Severance and benefits | $ | $ | $ | ( | $ | ||||||||||||||||||
| Plant closing and other | ( | ||||||||||||||||||||||
| Total | $ | $ | $ | ( | $ | ||||||||||||||||||
(5) DEBT
Long-term debt, net, consisted of the following as of September 30, 2021 and December 31, 2020:
| September 30, 2021 | December 31, 2020 | ||||||||||
Term Loan due 2027 at | $ | $ | |||||||||
| Unamortized discount and issuance costs | ( | ( | |||||||||
| Less: Current Portion | ( | ( | |||||||||
| Total long-term debt, net of current portion | $ | $ | |||||||||
| Term Loan | |||||||||||||||||
| Remainder of 2021 | $ | ||||||||||||||||
| 2022 | |||||||||||||||||
| 2023 | |||||||||||||||||
| 2024 | |||||||||||||||||
| 2025 | |||||||||||||||||
| 2026 | |||||||||||||||||
| Thereafter | |||||||||||||||||
| Total | $ | ||||||||||||||||
Amendment to the Term Loan due 2027
On March 10, 2021, Vertiv Group Corporation, a Delaware corporation and an indirect wholly owned subsidiary of the Company ("Vertiv Group" or the "Borrower"), Vertiv Intermediate Holding II Corporation, a Delaware corporation and the direct parent of Vertiv Group ("Holdings"), and certain direct and indirect subsidiaries of the Borrower, as guarantors, entered into an Amendment No. 1 to Term Loan Credit Agreement (the "Term Loan Amendment" and, the Original Term Loan Credit Agreement as amended by the Term Loan Amendment, the "Credit Agreement") with Citibank, N.A., as administrative agent (in such capacity, the “Term Agent”) and various financial institutions from time to time party thereto ("Term Lenders"), which Term Loan Amendment made certain modifications to the Term Loan Credit Agreement entered into by Borrower and the other parties on March 2, 2020 (the "Original Term Loan Credit Agreement"), including reducing the interest rate margins.
Pursuant to the Term Loan Amendment, among other modifications, the interest rate margin for the Borrower’s outstanding term loans under the Credit Agreement was reduced by 0.25 %, to 2.75 % in respect of term loans bearing interest based on the LIBOR rate and to 1.75 % in respect of term loans bearing interest based on a base rate defined in the Credit Agreement. The Company recognized a loss on the extinguishment of debt of $0.4 related to the Amendment for the nine months ended September 30, 2021.
The maturity date for such term loans remains March 2, 2027, and all other material provisions of the Credit Agreement remain materially unchanged.
ABL Revolving Credit Facility
At September 30, 2021, Vertiv Group as the Borrower and certain subsidiaries of the Borrower as co-borrowers (the "Co-Borrowers") had $435.2 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 $19.8 , and taking into account the borrowing base limitations set forth in the ABL Revolving Credit Facility. At September 30, 2021, there was no borrowing balance on the ABL Revolving Credit Facility.
10
(6) 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. Terms and conditions to extend or terminate are recognized as part of the right-of-use assets and lease liabilities where prescribed by the guidance. The majority of our leases are operating leases. Finance leases, which are recorded in "Property, Plant, and Equipment", are immaterial to our 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:
| Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | ||||||||||||||||||||
| Operating lease cost | $ | $ | $ | $ | |||||||||||||||||||
| Short-term and variable lease cost | |||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | |||||||||||||||||||
| Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash outflows - Payments on operating leases | $ | $ | |||||||||
| Right-of-use assets obtained in exchange for new lease obligations: | |||||||||||
| Operating leases | $ | $ | |||||||||
| Financial statement line item | September 30, 2021 | December 31, 2020 | ||||||||||||
| Operating lease right-of-use assets | $ | $ | ||||||||||||
| Operating lease liabilities | ||||||||||||||
| Operating lease liabilities | ||||||||||||||
| Total lease liabilities | $ | $ | ||||||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Weighted Average Remaining Lease Term | |||||||||||
| Weighted Average Discount Rate | % | % | |||||||||
Maturities of lease liabilities are as follows:
| September 30, 2021 | December 31, 2020 | ||||||||||||||||
| Operating Leases | |||||||||||||||||
| 2021 | $ | $ | |||||||||||||||
| 2022 | |||||||||||||||||
| 2023 | |||||||||||||||||
| 2024 | |||||||||||||||||
| 2025 | |||||||||||||||||
| Thereafter | |||||||||||||||||
| Total Lease Payments | |||||||||||||||||
| Less: Imputed Interest | ( | ( | |||||||||||||||
| Present value of lease liabilities | $ | $ | |||||||||||||||
11
(7) INCOME TAXES
The Company's effective tax rate was 38.8 %, 32.5 %, (31.0 )% and (16.7 )% for the three and nine months ended September 30, 2021 and 2020, respectively. The effective rates in the current three and nine month periods are influenced by the mix of income between our U.S. and non-U.S. operations, net of changes in valuation allowances, and reflect the impact of non-taxable/non-deductible changes in fair value of the warrant liabilities, as well as a discrete tax adjustment related to legislative changes enacted in the second quarter. The effective tax rate in the nine months ended September 30, 2021 includes the benefit of certain internal reorganizations and tax elections outside the U.S. recognized in the second quarter. The effective rates for the comparative three and nine month periods were primarily influenced by the mix of income between our U.S. and non-U.S. operations, net of changes in valuation allowances. The prior periods also reflect a discrete tax benefit related to a change in our indefinite reinvestment liability caused by legislative changes enacted during the periods and movement in foreign currencies.
The Company has provided for 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 September 30, 2021, the Company has certain earnings of certain foreign affiliates that continue to be indefinitely reinvested, but it was not practicable to determine the impact.
(8) RELATED PARTY TRANSACTIONS
Services Agreement
The Company received certain corporate and advisory services from Platinum Equity Advisors, LLC ("Advisors"), and affiliates of Advisors. These services were provided pursuant to a corporate advisory services agreement (the "CASA") between Advisors and the Company. During the three months ended March 31, 2020, the Company recorded $0.5 in charges related to the CASA. This agreement was terminated on February 7, 2020.
During the three months ended March 31, 2020, the Company recorded $25.0 in charges relating to services performed in connection with the business combination. These charges were recorded as a reduction of the cash acquired from GSAH within additional paid-in capital.
During the three months ended March 31, 2020, the Company recorded $5.5 of cash related to a true-up of merger consideration in connection with the business combination.
Transactions with Affiliates of Advisors
The Company also purchased and sold goods in the ordinary course of business with affiliates of Advisors. For the three and nine months ended September 30, 2021 and 2020 purchases were $24.8 , $64.9 , $17.0 and $40.3 , respectively. For the three and nine months ended September 30, 2021 sales were $45.8 and $45.9 , respectively. Accounts payable to affiliates of Advisors were $2.6 as of September 30, 2021. Accounts receivable from affiliates of Advisors were $31.9 as of September 30, 2021. There were an insignificant amount of sales, accounts receivable, and accounts payable in 2020 with affiliates of Advisors.
Tax Receivable Agreement
See Note 10 — Financial Instruments and Risk Management for additional information.
12
(9) OTHER FINANCIAL INFORMATION
| September 30, 2021 | December 31, 2020 | ||||||||||
| Reconciliation of cash, cash equivalents, and restricted cash | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash included in other current assets | |||||||||||
| Total cash, cash equivalents, and restricted cash | $ | $ | |||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Inventories | |||||||||||
| Finished products | $ | $ | |||||||||
| Raw materials | |||||||||||
| Work in process | |||||||||||
| Total inventories | $ | $ | |||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Property, plant and equipment, net | |||||||||||
| Machinery and equipment | $ | $ | |||||||||
| Buildings | |||||||||||
| Land | |||||||||||
| Construction in progress | |||||||||||
| Property, plant and equipment, at cost | |||||||||||
| Less: Accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
| September 30, 2021 | December 31, 2020 | ||||||||||
| Accrued expenses and other liabilities | |||||||||||
| Deferred revenue | $ | $ | |||||||||
| Accrued payroll and other employee compensation | |||||||||||
Litigation reserve (see note 14) | |||||||||||
Contract liabilities (see note 3) | |||||||||||
| Operating lease liabilities | |||||||||||
| Product warranty | |||||||||||
Restructuring (see note 4) | |||||||||||
| Other | |||||||||||
| Total | $ | $ | |||||||||
| 2021 | 2020 | ||||||||||
| Change in product warranty accrual | |||||||||||
| Beginning balance, January 1 | $ | $ | |||||||||
| Provision charge to expense | |||||||||||
| Paid/utilized | ( | ( | |||||||||
Ending balance, September 30, | $ | $ | |||||||||
(10) 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
13
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
We elected to apply fair value option accounting to the Tax Receivable Agreement. A summary of the Company's financial instruments recognized at fair value, and the fair value measurements used, follows:
| Balance Sheet Location | Total | Quoted prices in active markets for identical assets (Level 1) | Other observable inputs (Level 2) | Unobservable inputs (Level 3) | ||||||||||||||||||||||
September 30, 2021 | ||||||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Interest rate swaps | Other noncurrent assets | $ | $ | $ | $ | |||||||||||||||||||||
| Total assets | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Interest rate swaps | Accrued expenses and other liabilities | $ | $ | $ | $ | |||||||||||||||||||||
| Tax Receivable Agreement | Other long-term liabilities | |||||||||||||||||||||||||
| Private warrants | Warrant liabilities | |||||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
| Balance Sheet Location | Total | Quoted prices in active markets for identical assets (Level 1) | Other observable inputs (Level 2) | Unobservable inputs (Level 3) | ||||||||||||||||||||||
December 31, 2020 | ||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Tax Receivable Agreement | Other long-term liabilities | $ | $ | $ | $ | |||||||||||||||||||||
| Interest rate swaps | Accrued expenses and other liabilities | |||||||||||||||||||||||||
| Interest rate swaps | Other long-term liabilities | |||||||||||||||||||||||||
| Public warrants | Current portion of warrant liabilities | |||||||||||||||||||||||||
| Private warrants | Warrant liabilities | |||||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
Tax Receivable Agreement — The Company has estimated total payments of approximately $191.5 on an undiscounted basis. The initial fair value of the estimated liability resulting from the business combination of $133.4 was included as an adjustment to Additional paid in capital. Subsequent measurements are recorded in "Interest expense, net" in the Unaudited Condensed Consolidated Statements of Earnings (Loss) and "Accumulated other comprehensive income" in the Unaudited Condensed Consolidated Balance Sheets, as appropriate based on the passage of time, change in risk-free rate and implied credit spread. Cash flows of the Tax Receivable Agreement are discounted at an appropriate rate for the applicable duration of the instrument adjusted for our own credit spread. The fair value movement on the tax receivable agreement attributable to our own credit risk spread is recorded in "Accumulated other comprehensive income" in the Unaudited Condensed Consolidated Balance Sheets. These estimates and assumptions are subject to change, which may materially affect the measurement of the liability.
14
We recorded $1.6 , $3.3 , $2.7 and $18.8 of accretion expense in "Interest expense, net" for the three and nine months ended September 30, 2021 and 2020, respectively, in the Unaudited Condensed Consolidated Statement of Earnings (Loss). An unrealized gain (loss) of $2.2 , $(3.1 ), $(11.1 ) and $5.1 was recorded in "Accumulated other comprehensive income" in the Unaudited Condensed Consolidated Balance Sheets, related to the change in fair value of the tax receivable liability for the three and nine months ended September 30, 2021 and 2020, respectively.
The value of the Tax Receivable Agreement is determined using Level 3 inputs. The measurement is calculated using unobservable inputs based on the Company’s own assumptions including the timing and amount of future taxable income and realizability of tax attributes. When valuing the tax receivable liability at September 30, 2021, we utilized a discount rate of 3.1 %. The discount rate was determined based on the risk-free rate and Vertiv's implied credit spread. A one percentage point change in the discount rate would result in a change in value of approximately $11.0 at September 30, 2021. Significant changes in unobservable inputs could result in material changes to the tax receivable liability.
Details of the changes in value for the Tax Receivable Agreement are as follows:
| 2021 | 2020 | ||||||||||||||||
| Beginning liability balance, January 1 | $ | $ | |||||||||||||||
| Tax receivable agreement, initially recorded | |||||||||||||||||
| Change in fair value | |||||||||||||||||
Ending liability balance, September 30, | $ | $ | |||||||||||||||
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 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 earnings, depending on the nature and effectiveness of the offset.
Concurrent with the refinancing on March 2, 2020, the Company designated certain interest rate swaps with an initial notional amount of $1,200.0 as cash flow hedges effectively swapping such amount in LIBOR based floating rate debt for fixed rate debt.
The Company uses interest rate swaps to manage the interest rate mix of our total debt portfolio and related overall cost of borrowing. At September 30, 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. Our interest rate swaps mature in March 2027. As of September 30, 2021 the fair value of interest rate swaps was $4.8 and was recorded in "Accumulated other comprehensive (loss) income" on the Unaudited Condensed Consolidated Balance Sheets. The total fair value at September 30, 2021 consisted of $10.2 current portion recorded in "Accrued expenses and other liabilities" in the Unaudited Condensed Consolidated Balance Sheets and a $5.4 non-current portion recorded in "Other assets". The Company recognized $2.7 , $7.9 , $2.9 and $3.4 in earnings for the three and nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021, the Company expects that approximately $10.2 of pre-tax net losses 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 — During the three months ended September 30, 2021, the Company designated certain intercompany debt to hedge a portion of its investment in foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges were insignificant and are included in "Foreign currency translation" in the Unaudited Condensed Consolidated Statement of Other comprehensive income (loss). As of September 30, 2021, approximately $50 of the Company's intercompany debt were designated to hedge investments in certain foreign subsidiaries and affiliates.
Public warrants — as the Company's Public warrants were traded in active markets, their value was derived using quoted market prices and are classified as Level 1 financial instruments.
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.
15
The significant assumptions which the Company used in the model are:
| Warrant valuation inputs | September 30, 2021 | December 31, 2020 | ||||||||||||
| Stock price | $ | $ | ||||||||||||
| Strike price | $ | $ | ||||||||||||
| Remaining life | ||||||||||||||
| Volatility | % | % | ||||||||||||
Interest rate (1) | % | % | ||||||||||||
Dividend yield (2) | % | % | ||||||||||||
(1) Interest rate determined from a constant maturity treasury yield
(2) September 30, 2021 and December 31, 2020 dividend yield assumes $0.01
Foreign currency exchange rate risk management
We conduct business in several major international currencies and are, therefore, subject to risks associated with changing foreign currency exchange rates. We enter into various contracts that change in value as foreign currency exchange rates change to manage this exposure. Such contracts limit exposure to both favorable and unfavorable currency exchange rate fluctuations.
Other fair value measurements
We determine 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 September 30, 2021 and December 31, 2020.
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Fair Value | Par Value (1) | Fair Value | Par Value (1) | ||||||||||||||||||||
| Term Loan due 2027 | $ | $ | $ | $ | |||||||||||||||||||
(1)See Note 5 — Debt for additional information
(11) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity in accumulated other comprehensive income (loss) is as follows:
| Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | ||||||||||||||||||||
| Foreign currency translation, beginning | $ | $ | ( | $ | $ | ||||||||||||||||||
| Other comprehensive income (loss) | ( | ( | |||||||||||||||||||||
| Foreign currency translation, ending | |||||||||||||||||||||||
| Interest rate swaps, beginning | ( | ( | ( | ||||||||||||||||||||
Unrealized gain (loss) deferred during the period (1) | ( | ( | |||||||||||||||||||||
| Interest rate swaps, ending | ( | ( | ( | ( | |||||||||||||||||||
| Pension, beginning | ( | ( | ( | ( | |||||||||||||||||||
| Actuarial gains (losses) recognized during the period, net of income taxes | ( | ( | |||||||||||||||||||||
| Pension, ending | ( | ( | ( | ( | |||||||||||||||||||
| Tax receivable agreement, beginning | ( | ( | |||||||||||||||||||||
Unrealized gain (loss) during the period (2) | ( | ( | |||||||||||||||||||||
| Tax receivable agreement, ending | ( | ( | |||||||||||||||||||||
| Accumulated other comprehensive income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||
(1)During the three and nine months ended September 30, 2021 and 2020, $2.7 , $7.9 , $2.9 and $3.4 , respectively, was reclassified into earnings.
(2)The fair value movement on the Tax Receivable Agreement attributable to our own credit risk spread is recorded in other comprehensive (loss) income.
16
(12) SEGMENT INFORMATION
Beginning in 2021, the primary income measure used for assessing segment performance and making operating decisions is operating profit (loss). Segment performance is assessed exclusive of Corporate and other costs, foreign currency gain (loss), and amortization of intangibles. Corporate and other costs primarily include headquarters management costs, stock-based compensation, other incentive compensation, global IT costs, change in warrant liabilities, asset impairments, and costs that support 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 (CODM), which includes determining resource allocation methodologies used for reportable segments. During 2021, we reorganized our internal reporting and realigned our operating segment structure to how our CODM, our Chief Executive Officer, now allocates resources and makes decisions. The changes resulted in the identification of two new operating segments, 1) Greater China and 2) Australia & New Zealand, South East Asia and India (ASI) which previously were reported as our legacy Asia Pacific operating segment. Given the similarities of economic characteristics and other qualitative factors, we aggregate these operating segments, such that our reportable segments are unchanged.
In conjunction with the realignment, the Company concluded the new operating segments also comprised reporting units and the company tested goodwill for impairment for each reporting unit both immediately before and immediately after the business realignment. The Company allocated goodwill to the two new reporting units based on their relative fair value. The goodwill impairment tests under both the legacy and new reporting unit structures concluded that no impairment existed as of the date of the change.
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, and configurable integrated solutions; and hardware for managing I.T. 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 North Asia and ASI. 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.
| Sales | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||||||||||||||
| Americas | $ | $ | $ | $ | |||||||||||||||||||
| Asia Pacific | |||||||||||||||||||||||
| Europe, Middle East & Africa | |||||||||||||||||||||||
| Eliminations | ( | ( | ( | ( | |||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
17
Intersegment sales (1) | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||||||||||||||
| Americas | $ | $ | $ | $ | |||||||||||||||||||
| Asia Pacific | |||||||||||||||||||||||
| Europe, Middle East & Africa | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
(1)Intersegment selling prices approximate market prices.
Operating profit (loss) (1) | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | |||||||||||||||||||
| Americas | $ | $ | $ | $ | |||||||||||||||||||
| Asia Pacific | |||||||||||||||||||||||
| Europe, Middle East & Africa | |||||||||||||||||||||||
| Total reportable segments | |||||||||||||||||||||||
| Foreign currency gain (loss) | ( | ( | ( | ( | |||||||||||||||||||
| Corporate and other | ( | ( | ( | ( | |||||||||||||||||||
| Total corporate, other and eliminations | ( | ( | ( | ( | |||||||||||||||||||
| Amortization of intangibles | ( | ( | ( | ( | |||||||||||||||||||
| Operating profit (loss) | $ | $ | $ | $ | |||||||||||||||||||
(1)Beginning in the first quarter of 2021, operating profit (loss) is the primary income measure used for assessing segment performance and making operating decisions. Comparative results for the three and nine months ended September 30, 2020 have been presented in conformity with the updated format.
(13) EARNINGS (LOSS) PER SHARE
Basic earnings per ordinary share is computed by dividing net earnings attributable to holders of the Company's Class A common shares by the weighted average number of common shares outstanding during the period. Diluted earnings per ordinary share is computed by dividing net earnings attributable to holders of the Company's Class A common shares 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 securities or instruments, if the impact is dilutive.
The details of the earnings per share calculations for the three and nine months ended September 30, 2021 and 2020 are as follows (in millions, except per share and per share amounts):
| Three months ended September 30, 2021 | Three months ended September 30, 2020 | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | ||||||||||||||||||||
| Net income (loss) attributable to common shareholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Weighted-average number of ordinary shares outstanding - basic | |||||||||||||||||||||||
| Dilutive effect of equity-based compensation and warrants | |||||||||||||||||||||||
| Weighted-average number of ordinary shares outstanding - diluted | |||||||||||||||||||||||
| Net income per share attributable to common shareholders | |||||||||||||||||||||||
| Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||
| Diluted | ( | ( | |||||||||||||||||||||
The dilutive effect of stock awards and warrants was 10.7 million and 4.5 million shares during the three and nine months ended September 30, 2021, respectively. Additional stock awards and warrants were also outstanding during the three and nine months ended September 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 stock awards represented 1.8 million shares for the three months ended September 30, 2021. Such anti-dilutive stock awards and warrants represented 2.1 million and 5.7 million shares for the nine months ended September 30, 2021, respectively.
18
(14) 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 May 10, 2018, the jury in the case of Bladeroom Group Limited, et al. v. Facebook, Inc., Emerson Electric Co., Emerson Network Power Solutions, Inc. (now known as Vertiv Solutions, Inc.) and Liebert Corporation returned a verdict in favor of the plaintiff in the amount of $30.0 . The jury found the defendants breached a confidentiality agreement with Bladeroom, were unjustly enriched by such breach, improperly disclosed or used certain of the plaintiff’s trade secrets and the misappropriation of such trade secrets was willful and malicious. On March 11, 2019, the court entered orders in the case affirming the original award of $30.0 and imposing an additional award for punitive damages of $30.0 as well as attorney fees and interest. Under the terms of the purchase agreement with Emerson, the Company is indemnified for damages arising out of or relating to this case, including the above amounts. On August 12, 2019, judgment was entered, confirming the award entered on March 11, 2019. Emerson submitted an appeal, and in connection with the appeal submitted a surety bond underwritten by a third-party insurance company in the amount of $120.1 . As of December 31, 2020, the Company had accrued $96.2 in accrued expenses, the full amount of the judgment, and recorded an offsetting indemnification receivable of $96.2 in other current assets related to this matter.
On August 30, 2021, the appellate court entered a judgment that the district court erred in its prior rulings and vacated the district court's judgment and post-verdict orders on appeal and remanded the case back to the district court for a new trial; and further vacated orders related to attorneys' and expert witness' fees. As a result of the appellate court’s ruling, the Company reversed the prior accrual of $96.2 in accrued expenses for the full amount of the judgment, and reversed the associated indemnification receivable as of September 30, 2021. On September 27, 2021 Bladeroom filed a petition requesting a rehearing en banc with the 9th Circuit.
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 outcomes was zero to $34.5 . On June 4, 2019, Vertiv notified the selling shareholders 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 shareholders. On September 6, 2019, the selling shareholders of Energy Labs notified Vertiv of their dispute regarding the contingent consideration due to them. The selling shareholders assert that the applicable 2018 operating results were exceeded and that Vertiv owes $34.5 in earn-out, the highest amount of earn-out possible under the agreement. As of September 30, 2021 and December 31, 2020, the Company had accrued $2.8 31.7 in excess of the $2.8
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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. The second phase of the arbitration is expected to commence in the fourth quarter of 2021. As of September 30, 2021, SVO has amended its damages claim to approximately $75.0 . While Vertiv believes its claims are meritorious and defenses against certain assertions of SVO, Vertiv is unable at this time to predict the outcome of this dispute. Vertiv also has both a right to appeal the ultimate arbitration ruling and claims for indemnification against third parties and insurers for part or all of any judgment that may ultimately be entered against it.
At September 30, 2021, there were no known contingent liabilities (including guarantees, taxes and other claims) that management believes will be material in relation to the Company’s consolidated financial statements, nor were there any material commitments outside the normal course of business other than those described above.
(15) SUBSEQUENT EVENTS
Acquisition
On September 8, 2021, Vertiv Holdings Ireland DAC, a private company limited by shares incorporated in Ireland (the "Irish buyer"), Vertiv International Holding Corporation, an Ohio corporation (the “US Buyer” and together with the Irish Buyer, the “Buyers” and each a “Buyer”) and the Company entered into a sale and purchase agreement (the "Acquisition Agreement") to acquire the shares of E+I Engineering Ireland Limited, a private company limited by shares incorporated in Ireland, and Powerbar Gulf LLC - Foreign Direct Investment, a non-freezone limited liability company incorporated and registered in Ras Al Khaimah Economic Zone-Government of Ras Al Khaimah ("E+I"). Under the terms of the Acquisition Agreement, E+I will receive upfront consideration of approximately $1.8 billion, consisting of $1.2 billion in cash and approximately $630.0 of Vertiv common stock, issued at the volume-weighted average closing price per share over the 60-day trading period ended September 7, 2021, and equating to 23.1 million shares of Vertiv common stock. Vertiv will pay $100.0 of additional cash consideration if E+I achieves EBITDA of $146.0 in 2022 and an incremental $100.0 cash consideration if E+I achieves EBITDA of $156.0 or higher in 2022. The Acquisition closed on November 1, 2021.
E+I was founded in 1986 and is a leading independent provider of switchgear, busway and modular power units serving data center and C&I customers in Europe. The combination is expected to broaden our power infrastructure portfolio, expand our services opportunities by providing additional upfront project start-up and ongoing maintenance services, enable us to offer complete integrated power and modular solutions, help Vertiv continue its participation with Hyperscale cloud providers and expand its existing relationships as well as gain new customers with enhanced offerings and ultimately, offer customers more flexible and scalable power deployment options.
In conjunction with the acquisition mentioned above, the Company, through a wholly owned subsidiary, issued $850.0 of Senior Secured Notes as of October 22, 2021.
Senior Secured Notes due 2028
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise indicates or requires, references to (1) “the Company,” “we,” “us” and “our” refer to Vertiv Holdings Co, a Delaware corporation, and its consolidated subsidiaries following the business combination; (2) “GSAH” refers to GS Acquisition Holdings Corp prior to the business combination; and (3) “Holdings” refers to Vertiv Holdings, LLC and its subsidiaries prior to the business combination. In addition, dollar amounts are stated in millions, except for per share amounts. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K/A filed April 30, 2021 for the year ended December 31, 2020.
Cautionary Note Regarding Forward-looking Statements
This Quarterly Report on Form 10-Q, and other statements that Vertiv may make, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, with respect to Vertiv’s future financial or business performance, strategies or expectations, and as such are not historical facts. This includes, without limitation, statements regarding the financial position, capital structure, indebtedness, business strategy and plans and objectives of Vertiv management for future operations. These statements constitute projections, forecasts and forward-looking statements, and are not guarantees of performance. Vertiv cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this Quarterly Report on Form 10-Q, words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “strive,” “would” and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking.
The forward-looking statements contained or incorporated by reference in this Quarterly Report on Form 10-Q are based on current expectations and beliefs concerning future developments and their potential effects on Vertiv. There can be no assurance that future developments affecting Vertiv will be those that Vertiv has anticipated. Vertiv undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond Vertiv’s control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. Vertiv has previously disclosed risk factors in its Securities and Exchange Commission (“SEC”) reports, including those set forth in its Annual
Report on Form 10 K/A for the year ended December 31, 2020 filed with the SEC on April 30, 2021. These risk factors and those identified elsewhere in this Quarterly Report on Form 10-Q, among others, could cause actual results to differ materially from historical performance and include, but are not limited to: competition, the ability of Vertiv to grow and manage growth profitably, maintain relationships with customers and suppliers and retain its management and key employees; and factors relating to the business, operations and financial performance of Vertiv and its subsidiaries, including: global economic weakness and uncertainty; risks relating to the continued growth of Vertiv’s customers’ markets; failure to meet or anticipate technology changes; the unpredictability of Vertiv’s future operational results, including the ability to grow and manage growth profitably; disruption of Vertiv’s customers’ orders or Vertiv’s customers’ markets; less favorable contractual terms with large customers; risks associated with governmental contracts; failure to mitigate risks associated with long-term fixed price contracts; risks associated with information technology disruption or security; risks associated with the implementation and enhancement of information systems; failure to properly manage Vertiv’s supply chain or difficulties with third-party manufacturers; competition in the infrastructure technologies industry; failure to realize the expected benefit from any rationalization, restructuring and improvement efforts; disruption of, or changes in, Vertiv’s independent sales representatives, distributors and original equipment manufacturers; failure to obtain performance and other guarantees from financial institutions; failure to realize sales expected from Vertiv’s backlog of orders and contracts; changes to tax law; ongoing tax audits; risks associated with future legislation and regulation of Vertiv’s customers’ markets both in the United States and abroad; costs or liabilities associated with product liability; Vertiv’s ability to attract, train and retain key members of its leadership team and other qualified personnel; the adequacy of Vertiv’s insurance coverage; a failure to benefit from future acquisitions; failure to realize the value of goodwill and intangible assets; the global scope of the Vertiv’s operations; risks associated with Vertiv’s sales and operations in emerging markets; exposure to fluctuations in foreign currency exchange rates; Vertiv’s ability to comply with various laws and regulations and the costs associated with legal compliance; adverse outcomes to any legal claims and proceedings filed by or against Vertiv; Vertiv’s ability to protect or enforce its proprietary rights on which its business depends; third party intellectual property infringement claims; liabilities associated with environmental, health and safety matters,
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including risks associated with the COVID-19 pandemic; risks associated with litigation or claims against Vertiv; Vertiv's ability to realize cost savings in connection with Vertiv's restructuring program; risks associated with Vertiv’s limited history of operating as an independent company; potential net losses in future periods; failure to remediate internal controls over financial reporting; the Company’s level of indebtedness and the ability to incur additional indebtedness; Vertiv's ability to comply with the covenants and restrictions contained in our credit agreements, including restrictive covenants that restrict operational flexibility; Vertiv's ability to comply with the covenants and restrictions contained in our credit agreements is not fully within our control; the Company’s ability to access funding through capital markets; the Vertiv Stockholder’s significant ownership and influence over the Company; risks associated with Vertiv's obligations to pay the Vertiv Stockholder portions of the tax benefits relating to pre-business combination tax assets and attributes; resales of Vertiv's securities may cause volatility in the market price of our securities; Vertiv's Organizational Documents contain provisions that may discourage unsolicited takeover proposals; Vertiv's Certificate of Incorporation includes a forum selection clause, which could discourage or limit stockholders’ ability to make a claim against it ; the ability of Vertiv's subsidiaries to pay dividends; volatility in Vertiv's stock price due to various market and operational factors; Vertiv's ability to maintain its listing on the NYSE and comply with listing requirements; risks associated with the failure of industry analysts to provide coverage of Vertiv's business or securities; and other risks and uncertainties indicated in Vertiv’s SEC reports or documents filed or to be filed with the SEC by Vertiv.
Forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report on Form 10-Q or any earlier date specified for such statements. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be filed with the SEC by Vertiv required under applicable securities laws. All subsequent written or oral forward-looking statements attributable to the Company or persons acting on the Company’s behalf may be qualified in their entirety by this Cautionary Note Regarding Forward-Looking Statements.
Overview
We are a global leader in the design, manufacturing and servicing of critical digital infrastructure technology that powers, cools, deploys, secures and maintains electronics that process, store and transmit data. We provide this technology to data centers, communication networks and commercial and industrial environments worldwide. We aim to help create a world where critical technologies always work, and where we empower the vital applications of the digital world.
Key Developments and Trends
Below is a summary of selected key developments affecting our business in the nine months ended September 30, 2021:
•On December 17, 2020, the Company announced its plans to redeem for cash all of its outstanding public warrants to purchase shares of our Class A common stock. In December 2020, $156.5 of cash was generated from the exercise of 13.6 million public warrants. In January 2021, 9.3 million public warrants were exercised generating cash proceeds of $107.5. Public warrants that remained unexercised as of 5 p.m. New York City time on January 19, 2021 were no longer exercisable, and the registered holders of such unexercised public warrants became entitled to receive the redemption price of $0.01 per warrant. All public warrants were exercised or redeemed as of January 22, 2021.
•On March 10, 2021, Vertiv Group Corporation, a Delaware corporation (the “Borrower”) and an indirect wholly owned subsidiary of Vertiv Holdings Co, Vertiv Intermediate Holding II Corporation, a Delaware corporation (“Holdings”) and the direct parent of Vertiv Group, and certain direct and indirect subsidiaries of the Borrower entered into an Amendment No. 1 to Term Loan Credit Agreement (the "Term Loan Amendment") with Citibank, N.A., as administrative agent (in such capacity, the “Term Agent”), and the lenders party thereto, which amended the Term Loan Credit Agreement, dated as of March 2, 2020 (as so amended the “Term Loan Credit Agreement”), by and among Holdings, the Borrower, the Term Agent and the lenders from time to time party thereto, to, among other things, reduce the interest rate margin for the Borrower’s outstanding term loans under the Term Loan Credit Agreement by 0.25%, to 2.75% in respect of term loans bearing interest based on the LIBOR rate and to 1.75% in respect of term loans bearing interest based on a base rate defined in the Term Loan Credit Agreement. The maturity date for such term loans remains March 2, 2027, and all other material provisions of the original Term Loan Credit Agreement remain materially unchanged.
•As previously disclosed in our 2020 Annual report on Form 10-K/A as filed on April 30, 2021, we restated the Company’s previously issued consolidated financial statements as of and for the year ended December 31, 2020, as well each of the quarters within 2020 to make the necessary accounting corrections related to warrant accounting.
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•On September 8, 2021, Vertiv Holdings Ireland DAC, a private company limited by shares incorporated in Ireland (the “Irish Buyer”), Vertiv International Holding Corporation, an Ohio corporation (the “US Buyer” and together with the Irish Buyer, the “Buyers” and each a “Buyer”) and the Company entered into a sale and purchase agreement (the “Acquisition Agreement”), to acquire shares of E+I Engineering Ireland Limited, a private company limited by shares incorporated in Ireland, and Powerbar Gulf LLC – Foreign Direct Investment, a non-freezone limited liability company incorporated and registered in Ras Al Khaimah Economic Zone-Government of Ras Al Khaimah, from the parties set forth in the Acquisition Agreement (the “Acquisition").
•The aggregate purchase price payable by the Buyers is approximately $1.8 billion in upfront consideration plus an additional potential $200.0 in cash, with the additional consideration subject to achieving certain future profit milestones. The upfront consideration consists of $1.2 billion in cash and shares of the Company’s common stock valued at approximately $630.0. The Acquisition closed on November 1, 2021.
•In conjunction with the Acquisition, on October 22, 2021, Vertiv Group Corporation (the “Issuer”), completed its offering (the “Offering”) of $850.0 aggregate principal amount of its Senior Secured Notes due 2028 (the “Notes”) in a private placement at par. The Notes will bear interest at 4.125% per annum and mature on November 15, 2028.
•Unprecedented measures have been taken by governments and businesses to address the COVID-19 pandemic. These measures have included shelter-in-place orders, restrictions on travel and business operations, temporary closures of businesses, and quarantines. As a result of this pandemic, global economic activity has been curtailed, causing significant volatility and disruption in global financial markets. These responsive measures taken by many countries have affected and could in the future materially impact the Company’s business, results of operations, financial condition and stock price.
•During the third quarter of 2021, aspects of the Company’s business continued to be affected by the COVID-19 pandemic. Despite strong market demand, supply chain challenges continued, with critical part shortages driving the need for additional spot buys at increased costs. Additionally, logistical issues have significantly delayed the receipt of materials and, in some cases, the Company cannot procure critical parts at any price, creating production and delivery challenges pressuring the top-line. The Company continues to take actions to address these challenges, which are expected to continue through the first half of 2022.
•The extent of the continuing impact of the COVID-19 pandemic on the Company’s operational and financial performance is uncertain and will depend on many factors outside the Company’s control, including, without limitation, the extent, timing and duration of the pandemic; the availability, distribution and effectiveness of vaccines; the imposition of protective public safety measures; and the impact of the pandemic on the global economy and demand for products. Refer to Part I, Item 1A of the 2020 Form 10-K under the heading “Risk Factors,” for more information. The Company continues to monitor the situation and will take further actions as may be required by federal, state, or local governmental authorities, or that we determine are in the best interests of our associates, customers, and shareholders.
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RESULTS OF OPERATIONS
Comparison of the Three Months Ended September 30, 2021 and Three Months Ended September 30, 2020
| (Dollars in millions) | Three months ended September 30, 2021 | Three months ended September 30, 2020 | $ Change | % Change | |||||||||||||||||||||||||
| Net sales | $ | 1,228.9 | $ | 1,162.0 | $ | 66.9 | 5.8 | % | |||||||||||||||||||||
| Cost of sales | 847.2 | 749.0 | 98.2 | 13.1 | % | ||||||||||||||||||||||||
| Gross profit | 381.7 | 413.0 | (31.3) | (7.6) | % | ||||||||||||||||||||||||
| Selling, general and administrative expenses | 257.8 | 251.7 | 6.1 | (2.4) | % | ||||||||||||||||||||||||
| Amortization of intangibles | 31.6 | 32.5 | (0.9) | 2.8 | % | ||||||||||||||||||||||||
| Restructuring costs | (3.8) | 71.7 | (75.5) | 105.3 | % | ||||||||||||||||||||||||
| Foreign currency (gain) loss, net | 4.9 | 11.7 | (6.8) | 58.1 | % | ||||||||||||||||||||||||
| Asset impairments | 8.7 | 9.4 | (0.7) | 7.4 | % | ||||||||||||||||||||||||
| Other operating expense (income) | 0.7 | 0.9 | (0.2) | 22.2 | % | ||||||||||||||||||||||||
| Operating profit (loss) | 81.8 | 35.1 | 46.7 | (133.0) | % | ||||||||||||||||||||||||
| Interest expense, net | 22.4 | 26.4 | (4.0) | 15.2 | % | ||||||||||||||||||||||||
| Change in fair value of warrant liabilities | (32.5) | 87.7 | (120.2) | 137.1 | % | ||||||||||||||||||||||||
| Income tax expense | 35.7 | 24.5 | 11.2 | (45.7) | % | ||||||||||||||||||||||||
| Net income (loss) | $ | 56.2 | $ | (103.5) | $ | 159.7 | 154.3 | % | |||||||||||||||||||||
Net Sales
Net sales were $1,228.9 in the third quarter of 2021, an increase of $66.9, or 5.8%, compared with $1,162.0 in the third quarter of 2020. The increase in sales was primarily driven by recovery from the COVID-19 pandemic and positive impacts from foreign currency of $21.0. By offering, critical infrastructure & solutions sales increased $49.8 including the positive impacts from foreign currency of $13.8. Services & spares sales increased $24.4, including positive impacts from foreign currency of $4.7. Integrated rack solutions sales decreased $7.3 offset by the positive impacts from foreign currency of $2.5.
Excluding intercompany sales, net sales were $537.2 in the Americas, $394.6 in Asia Pacific and $297.1 in EMEA. Movements in net sales by segment and offering are each detailed in the Business Segments section below.
Cost of Sales
Cost of sales were $847.2 in the third quarter of 2021, an increase of $98.2, or 13.1% compared to the third quarter of 2020. The increase in cost of sales was primarily due to the flow-through impact of higher net sales volume and increased commodity and logistic costs. Gross profit was $381.7 in the third quarter of 2021, or 31.1% of sales, compared to $413.0, or 35.5% of sales in the third quarter of 2020.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were $257.8 in the third quarter of 2021, an increase of $6.1 compared to the third quarter of 2020. SG&A as a percentage of sales were 21.0% in the third quarter of 2021 compared with 21.7% in the third quarter of 2020. The increase in SG&A was primarily driven by prior year fixed cost reduction actions in the response to the COVID-19 pandemic, which did not recur in 2021.
Other Operating Expense
Other operating expenses includes amortization of intangibles, restructuring costs, foreign currency (gain) loss, asset impairments, and other operating expense (income). Other operating expenses were $42.1 for the third quarter of 2021, which was an $84.1 decrease from the third quarter of 2020. The decrease was primarily due to a decrease in restructuring costs of $75.5 and the change in foreign currency loss of $6.8.
Change in Fair Value of Warrant Liabilities
Change in Fair Value of Warrant Liabilities represents the mark-to-market fair value adjustments to the outstanding warrants issued in connection with the initial public offering ("IPO") of GSAH. The change in fair value of the outstanding warrants during the third quarter of 2021 and 2020 resulted in a gain $32.5 and a loss of $87.7, respectively. The change in fair value of stock warrants is the result of changes in market prices and other observable inputs deriving the value of the financial instruments.
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Interest Expense
Interest expense, net, was $22.4 in the third quarter of 2021 compared to $26.4 in the third quarter of 2020. The $4.0 decrease is primarily driven by a $2.3 decrease related to the lower interest rates secured in the amendment to the Term Loan due 2027 during the first quarter of 2021, a $1.1 decrease in accretion expense associated with the Tax Receivable Agreement, and a $0.4 decrease due to net settlement payments on the Company's interest rate swaps as described in Note 10 to the unaudited condensed consolidated financial statements.
Income Taxes
Income tax expense was $35.7 in the third quarter of 2021 versus $24.5 in the third quarter of 2020. The effective rate in the three months ended September 30, 2021 was primarily influenced by the mix of income between our U.S. and non-U.S. operations, net of valuation allowances, and reflects the impact of non-taxable changes in fair value of the warrant liabilities. For the three months ended September 30, 2020, income tax expense was primarily influenced by the mix of income between our U.S. and non-U.S. operations, net of changes in valuation allowances, and discrete tax benefits related to a change in our indefinite reinvestment liability caused by legislative changes and movement in foreign currencies.
Tax expense in the third quarter of 2021 was $11.2 higher than the third quarter of 2020 primarily due to improved performance as well as the change in the mix of income.
Business Segments
The following is detail of business segment results for the three months ended September 30, 2021. Segment profitability is defined as operating profit (loss). Segment margin represents segment operating profit (loss) expressed as a percentage of segment net sales. For reconciliations of segment net sales and earnings to the Company’s consolidated results, see Note 12 — Segment Information, of the Company's condensed consolidated financial statements. Segment net sales are presented excluding intercompany sales.
Americas
| (Dollars in millions) | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | $ Change | % Change | |||||||||||||||||||||||||
| Net sales | $ | 537.2 | $ | 532.0 | $ | 5.2 | 1.0 | % | |||||||||||||||||||||
| Operating profit (loss) | 113.4 | 133.1 | (19.7) | (14.8) | % | ||||||||||||||||||||||||
| Margin | 21.1 | % | 25.0 | % | |||||||||||||||||||||||||
Americas net sales of $537.2 in the third quarter of 2021 increased $5.2, or 1.0% from the third quarter of 2020. By product offering, net sales increased in critical infrastructure & solutions by $13.2 driven by strong growth in Thermal, AC Power, and Custom Solutions offerings, service & spares increased by $11.9 due to improved customer site availability, and partially offset by a $19.9 decrease in integrated rack solutions primarily due to supply chain constraints. Additionally, Americas net sales were positively impacted by foreign currency of approximately $2.3.
Operating profit (loss) in the third quarter of 2021 was $113.4, a decrease of $19.7 compared with the third quarter of 2020. Margin decreased primarily due to increased commodity and logistic costs and supply chain constraints, partially offset by decreased year over year restructuring charges of $13.4.
Asia Pacific
| (Dollars in millions) | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | $ Change | % Change | |||||||||||||||||||||||||
| Net sales | $ | 394.6 | $ | 379.6 | $ | 15.0 | 4.0 | % | |||||||||||||||||||||
| Operating profit (loss) | 69.4 | 53.6 | 15.8 | 29.5 | % | ||||||||||||||||||||||||
| Margin | 17.6 | % | 14.1 | % | |||||||||||||||||||||||||
Asia Pacific net sales were $394.6 in the third quarter of 2021, an increase of $15.0, or 4.0% from the third quarter of 2020. Sales increases were primarily due to growth in Thermal, AC Power and Rack UPS. By product offering, net sales improved in integrated rack solutions and service & spares by $11.0 and $9.6, respectively, and decreased by $5.6 in critical infrastructure & solutions. Additionally, Asia Pacific net sales were positively impacted by foreign currency of approximately $16.6.
Operating profit (loss) in the third quarter of 2021 was $69.4, an increase of $15.8 compared with the third quarter of 2020. Margin increased primarily due to decreased year over year restructuring charges of $10.6 and fixed cost improvement, partially offset by increased commodity, logistic costs and supply chain constraints.
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Europe, Middle East & Africa
| (Dollars in millions) | Three Months Ended September 30, 2021 | Three Months Ended September 30, 2020 | $ Change | % Change | ||||||||||||||||||||||
| Net sales | $ | 297.1 | $ | 250.4 | $ | 46.7 | 18.7 | % | ||||||||||||||||||
| Operating profit (loss) | 59.0 | 0.9 | 58.1 | n/m | ||||||||||||||||||||||
| Margin | 19.9 | % | 0.4 | % | ||||||||||||||||||||||
EMEA net sales were $297.1 in the third quarter of 2021, an increase of $46.7, or 18.7% from the third quarter of 2020. Sales increased primarily due to deployment of large colocation data centers, strong execution on backlog, and continued focus on service deliveries. By product offering, net sales improved in all product offering categories including increases in critical infrastructure & solutions, service & spares, and integrated rack solutions by $42.2, $2.9, and $1.6, respectively. Additionally, EMEA net sales were positively impacted by foreign currency of approximately $2.1.
Operating profit (loss) in the third quarter of 2021 was $59.0, an increase of $58.1 compared with the third quarter of 2020. Margin improved primarily due to decreased year over year restructuring charges of $45.5, fixed cost volume leveraging on higher sales, improved operational productivity and new product introductions, partially offset by increased commodity, logistic costs and supply chain constraints.
Vertiv Corporate and Other
Corporate and other costs include costs associated with our headquarters located in Columbus, Ohio, as well as centralized global functions including Finance, Treasury, Risk Management, Strategy & Marketing, IT, Legal, and global product platform development and offering management. Corporate and other costs were $123.5 and $108.3 in the third quarter of 2021 and 2020, respectively. Corporate and other costs increased $15.2 compared with the third quarter of 2020 primarily due to $9.0 of costs related to merger and acquisition costs, a $14.0 increase in costs related to research and development and growth initiatives, partially offset by decreased year over year restructuring charges of $6.0.
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Comparison of the Nine Months Ended September 30, 2021 and Nine Months Ended September 30, 2020
| (Dollars in millions) | Nine months ended September 30, 2021 | Nine months ended September 30, 2020 | $ Change | % Change | |||||||||||||||||||||||||
| Net sales | $ | 3,587.6 | $ | 3,065.0 | $ | 522.6 | 17.1 | % | |||||||||||||||||||||
| Cost of sales | 2,438.6 | 2,018.6 | 420.0 | 20.8 | % | ||||||||||||||||||||||||
| Gross profit | 1,149.0 | 1,046.4 | 102.6 | 9.8 | % | ||||||||||||||||||||||||
| Selling, general and administrative expenses | 779.6 | 742.8 | 36.8 | (5.0) | % | ||||||||||||||||||||||||
| Amortization of intangibles | 95.3 | 97.1 | (1.8) | 1.9 | % | ||||||||||||||||||||||||
| Restructuring costs | (0.7) | 73.0 | (73.7) | 101.0 | % | ||||||||||||||||||||||||
| Foreign currency (gain) loss, net | 2.1 | 16.3 | (14.2) | 87.1 | % | ||||||||||||||||||||||||
| Asset impairments | 8.7 | 21.7 | (13.0) | 59.9 | % | ||||||||||||||||||||||||
| Other operating expense (income) | 0.2 | 2.0 | (1.8) | 90.0 | % | ||||||||||||||||||||||||
| Operating profit (loss) | 263.8 | 93.5 | 170.3 | (182.1) | % | ||||||||||||||||||||||||
| Interest expense, net | 66.5 | 125.4 | (58.9) | 47.0 | % | ||||||||||||||||||||||||
| Loss on extinguishment of debt | 0.4 | 174.0 | (173.6) | 99.8 | % | ||||||||||||||||||||||||
| Change in fair value of warrant liabilities | 52.3 | 109.3 | (57.0) | 52.2 | % | ||||||||||||||||||||||||
| Income tax expense | 47.0 | 52.6 | (5.6) | 10.6 | % | ||||||||||||||||||||||||
| Net income (loss) | $ | 97.6 | $ | (367.8) | $ | 465.4 | 126.5 | % | |||||||||||||||||||||
Net Sales
Net sales were $3,587.6 in the first nine months of 2021, an increase of $522.6, or 17.1%, compared with $3,065.0 in the first nine months of 2020. The increase in sales was primarily driven by demand gains across each of the Company's product and service offerings, positive impacts from foreign currency of $96.5 and recovery from the COVID-19 pandemic. By product offering, critical infrastructure & solutions sales increased $398.8, which included positive impacts from foreign currency of $58.6. Services & spares sales increased $89.8, which included negative impacts from foreign currency of $24.4. Integrated rack solutions sales increased $34.0, which included the negative impacts from foreign currency of $13.5.
Excluding intercompany sales, net sales were $1,603.6 in the Americas, $1,149.9 in Asia Pacific and $834.1 in EMEA. Movements in net sales by segment and offering are each detailed in the Business Segments section below.
Cost of Sales
Cost of sales were $2,438.6 in the first nine months of 2021, an increase of $420.0, or 20.8% compared to the first nine months of 2020. The increase in cost of sales was primarily due to the flow-through impact of higher net sales volume increased commodity and logistic costs, and supply chain constraints. Gross profit was $1,149.0 in the first nine months of 2021, or 32.0% of sales, compared to $1,046.4, or 34.1% of sales, in the first nine months of 2020.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were $779.6 in the first nine months of 2021, an increase of $36.8 compared to the first nine months of 2020. SG&A as a percentage of sales was 21.7% for the nine months ended September 30, 2021 compared with 24.2% in the nine months ended September 30, 2020. The increase in SG&A was primarily driven by prior year fixed cost reduction actions in the response to the COVID-19 pandemic, including discretionary spending cuts, that resulted in approximately $30.0 of one-time cost savings during 2020 that were not replicated in 2021. These cost saving were offset by one-time transaction related bonuses in 2020.
Other Operating Expenses
Other operating expenses include amortization of intangibles, restructuring costs, foreign currency (gain) loss, and other operating expense (income). Other expenses were $105.6 for the first nine months of 2021, which was a $104.5 decrease from the first nine months of 2020. The decrease was primarily due to a decrease in restructuring costs of $73.7, change in foreign currency (gain) loss of $14.2, and a decrease in asset impairment of $13.0.
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Loss on Extinguishment of Debt
Loss on extinguishment of debt was $0.4 in the first nine months of 2021 and related to lender fees associated with the Term Loan Amendment. This was a $173.6 decrease from the first nine months of 2020 loss that resulted from the repayment of indebtedness from the business combination and the subsequent refinancing transactions.
Change in Fair Value of Warrant Liabilities
Change in Fair Value of Warrant Liabilities represents the mark-to-market fair value adjustments to the outstanding warrants issued in connection with the IPO of GSAH. The change in fair value of the outstanding warrants liability during the first nine months of 2021 and 2020 resulted in a loss of $52.3 and $109.3, respectively. The change in fair value of stock warrants was the result of changes in market prices and other observable inputs deriving the value of the financial instruments.
Interest Expense
Interest expense, net, was $66.5 in the first nine months of 2021 compared to $125.4 in the first nine months of 2020. The $58.9 decrease was primarily due to a $25.4 reduction in interest expense resulting from the repayment of indebtedness in the first half of 2020, a $20.4 decrease related to lower interest rates secured through the debt refinancing, as described in Note 5 to the unaudited condensed consolidated financial statements, a $15.5 decrease in accretion expense associated with the Tax Receivable Agreement, and partially offset by a $4.5 increase due to net settlement payments on the Company's interest rate swaps.
Income Taxes
Income tax expense was $47.0 in the first nine months of 2021 compared to $52.6 in the first nine months of 2020. The effective rate in the first nine months of 2021 was primarily influenced by the mix of income between our U.S. and non-U.S. operations, net of changes in valuation allowances, and reflects the benefit of 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 period. The effective tax rate includes the benefit of certain internal reorganizations and tax elections outside the U.S. In the first nine months of 2020, income tax expense was primarily influenced by the mix of income between our U.S. and non-U.S. operations, net of changes in valuation allowances, and discrete tax benefits related to a change in our indefinite reinvestment liability caused by legislative changes and movement in foreign currencies.
The tax expense in the first nine months of 2021 was $5.6 lower than the first nine months of 2020 primarily due to the change in mix of income, non-U.S. tax elections and changes in valuation allowances in the U.S.
Business Segments
The following is detail of business segment results for the nine months ended September 30, 2021. Segment profitability is defined as operating profit (loss). Segment margin represents segment operating profit (loss) expressed as a percentage of segment net sales. For reconciliations of segment net sales and earnings to the Company’s consolidated results, see Note 12 — Segment Information, of the Company's condensed consolidated financial statements. Segment net sales are presented excluding intercompany sales.
Americas
| (Dollars in millions) | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | $ Change | % Change | |||||||||||||||||||||||||
| Net sales | $ | 1,603.6 | $ | 1,483.3 | $ | 120.3 | 8.1 | % | |||||||||||||||||||||
| Operating profit (loss) | 368.4 | 354.6 | 13.8 | 3.9 | % | ||||||||||||||||||||||||
| Margin | 23.0 | % | 23.9 | % | |||||||||||||||||||||||||
Americas net sales of $1,603.6 in the first nine months of 2021 increased $120.3, or 8.1% from the first nine months of 2020. By product offering, net sales increased in critical infrastructure & solutions by $107.3 driven by strong growth in Thermal, AC Power and Custom Solutions offerings. Service & spares increased by $22.4 due to improved customer site availability, partially offset by a $9.4 decrease in integrated rack solutions primarily due to supply chain constraints. Americas net sales were positively impacted by foreign currency of approximately $6.6.
Operating profit (loss) in the first nine months of 2021 was $368.4, an increase of $13.8 compared with the first nine months of 2020. Margin improved primarily due to fixed cost volume leveraging on higher sales and fixed cost management, decreased year over year restructuring charges of $12.4, partially offset by increased commodity, logistic costs, and supply chain constraints.
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Asia Pacific
| (Dollars in millions) | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | $ Change | % Change | |||||||||||||||||||||||||
| Net sales | $ | 1,149.9 | $ | 926.4 | $ | 223.5 | 24.1 | % | |||||||||||||||||||||
| Operating profit (loss) | 185.3 | 130.6 | 54.7 | 41.9 | % | ||||||||||||||||||||||||
| Margin | 16.1 | % | 14.1 | % | |||||||||||||||||||||||||
Asia Pacific net sales were $1,149.9 in the first nine months of 2021, an increase of $223.5, or 24.1% from the first nine months of 2020. Sales increases were primarily due to strong growth in large projects such as data centers, 5G projects, and wind power. Additionally sales improved in part due to a recovery from COVID-19 in telecom, channel and services. By product offering, net sales improved in all offering categories, including increases in critical infrastructure & solutions, integrated rack solutions and service & spares of $140.4, $37.8 and $45.3, respectively. Additionally, Asia Pacific net sales were positively impacted by foreign currency of approximately $56.2.
Operating profit (loss) in the first nine months of 2021 was $185.3, an increase of $54.7 compared with the first nine months of 2020. Margin improvements were driven by fixed cost volume leveraging on higher sales, decreased year over year restructuring charges of $7.4, partially offset by the absence of related government subsidies experienced in 2020 and increased commodity, logistic costs, and supply chain constraints.
Europe, Middle East & Africa
| (Dollars in millions) | Nine Months Ended September 30, 2021 | Nine Months Ended September 30, 2020 | $ Change | % Change | ||||||||||||||||||||||
| Net sales | $ | 834.1 | $ | 655.3 | $ | 178.8 | 27.3 | % | ||||||||||||||||||
| Operating profit (loss) | 154.8 | 49.2 | 105.6 | 214.6 | % | |||||||||||||||||||||
| Margin | 18.6 | % | 7.5 | % | ||||||||||||||||||||||
EMEA net sales were $834.1 in the first nine months of 2021, an increase of $178.8, or 27.3% from the first nine months of 2020. Sales increases were primarily due to deployment of large colocation data centers and recovery from COVID-19. By offering, net sales improved in all offering categories, including increases in critical infrastructure & solutions, service & spares, and integrated rack solutions of $151.1, $22.1, and $5.6 respectively. Additionally, Europe, Middle East & Africa net sales were positively impacted by foreign currency of approximately $33.7.
Operating profit (loss) in the first nine months of 2021 was $154.8, an increase of $105.6 compared with the first nine months of 2020. Margin improved primarily due to decreased year over year restructuring charges of $49.0, fixed cost volume leveraging on higher sales, improved operational productivity and new product introductions, partially offset by increased commodity, logistic costs and supply chain constraints.
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Vertiv Corporate and Other
Corporate and other costs include costs associated with our headquarters located in Columbus, Ohio, as well as centralized global functions including Finance, Treasury, Risk Management, Strategy & Marketing, IT, Legal, and global product platform development and offering management. Corporate and other costs were $347.3 and $327.5 in the first nine months of 2021 and 2020, respectively. Corporate and other costs increased $19.8 compared with the first nine months of 2020 primarily due to an approximately $25.0 increase in costs related to research and development, $9.0 of costs related to merger and acquisition costs and growth initiatives, partially offset by decreased year over year restructuring charges of $4.9.
Capital Resources and Liquidity
Our primary future cash needs relate to working capital, operating activities, capital spending, strategic investments and debt service. As previously disclosed in the Company's 2020 Annual Report, in connection with the consummation of the business combination which resulted in the IPO of Vertiv Holdings Co. on February 7, 2020, the Company used $1,464.0 of the proceeds to pay down its existing debt. On March 2, 2020, Vertiv announced the closing of a new seven-year $2,200.0 term loan, the proceeds of which were used to repay in full its previous term loan and redeem in full its high-yield bonds, including its prior notes. On March 10, 2021, we amended our Term Loan Credit Agreement whereby the interest rate margin for our outstanding term loans under the Credit Agreement was reduced by 0.25% to 2.75%. The maturity date for such term loan remains March 2, 2027, and all other material provisions of the Credit Agreement remain materially unchanged. Additionally, Holdings, Vertiv Group and certain of its subsidiaries closed an amendment on their $455.0 ABL Revolving Credit Facility which extended the maturity to March 2, 2025.
In addition to the cash inflow generated from the closing of the merger with GSAH, we believe that net cash provided by operating activities, augmented by long-term debt arrangements and the ABL Revolving Credit Facility, will provide adequate near-term liquidity for the next 12 months of independent operations, as well as the resources necessary to invest for growth in existing businesses and manage our capital structure on a short- and long-term basis. We expect to continue to opportunistically access the capital and financing markets from time to time. Access to capital and the availability of financing on acceptable terms in the future will be affected by many factors, including our credit rating, economic conditions, and the overall liquidity of capital markets. There can be no assurance that we will continue to have access to the capital and financing markets on acceptable terms.
At September 30, 2021, we had $743.6 in cash and cash equivalents, which includes amounts held outside of the U.S., primarily in Europe and Asia. Non-U.S. cash is generally available for repatriation without legal restrictions, subject to certain taxes, mainly withholding taxes. We are not asserting indefinite reinvestment of cash or outside basis for our non-U.S. subsidiaries due to the outstanding debt obligations in instances where alternative repatriation options other than dividends are not available. Our ABL Revolving Credit Facility provides for up to $455.0 of revolving borrowings, with separate sublimits for letters of credit and swingline borrowings and an uncommitted accordion of up to $145.0. At September 30, 2021, Vertiv Group and certain other subsidiaries of the Company had $435.2 of availability under the ABL Revolving Credit Facility, net of letters of credit outstanding in the aggregate principal amount of $19.8, and taking into account the borrowing base limitations set forth in the ABL Revolving Credit Facility.
On October 22, 2021, Vertiv Group Corporation (the “Issuer”), completed its offering (the “Offering”) of $850.0 aggregate principal amount of its Senior Secured Notes due 2028 (the “Notes”) in a private placement at par. The Notes will bear interest at 4.125% per annum and mature on November 15, 2028.
Long-Term Debt Obligations
There is a discussion in Note 5 — Debt of the consolidated financial statements of the long-term debt arrangements issued by the Company with certain of our subsidiaries named as guarantors or co-borrowers.
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Summary Statement of Cash Flows
Nine Months Ended September 30, 2021 and 2020
| (Dollars in millions) | 2021 | 2020 | $ Change | % Change | ||||||||||||||||||||||
| Net cash provided by (used for) operating activities | $ | 174.4 | $ | 14.4 | $ | 160.0 | 1,111.1 | % | ||||||||||||||||||
| Net cash used for investing activities | (46.7) | (26.2) | (20.5) | 78.2 | ||||||||||||||||||||||
| Net cash provided by financing activities | 86.5 | 112.3 | (25.8) | (23.0) | ||||||||||||||||||||||
| Capital expenditures | (43.3) | (21.3) | (22.0) | 103.3 | ||||||||||||||||||||||
| Investments in capitalized software | (9.5) | (4.9) | (4.6) | 93.9 | ||||||||||||||||||||||
Net Cash provided by (used for) Operating Activities
Net cash provided by operating activities was $174.4 in the first nine months of 2021, a $160.0 increase in cash generation compared to the first nine months of 2020. The increase in cash generation was primarily driven by higher sales and operating profit, lower cash paid for interest expense as a result of debt pay down and refinancing, reduced one-time costs associated with the special purpose acquisition company ("SPAC") transactions in the first nine months of 2020 and partially offset by decreased available cash due to trade working capital.
Net Cash used for Investing Activities.
Net cash used for investing activities was $46.7 in the first nine months of 2021 compared to net cash used for investing activities of $26.2 in the first nine months of 2020. The increased use of cash over the comparable period was primarily the result of increased capital expenditures.
Net Cash provided by Financing Activities
Net cash provided by financing activities was $86.5 in the first nine months of 2021 compared to $112.3 in the first nine months of 2020. The decrease in cash generation was primarily the result of many non-recurring financing activities in the first quarter of 2020, including proceeds from the business combination (as mentioned above) of $1,827.0 partially offset by payments to the Vertiv Stockholder of $341.6 and repayments of Prior Notes of $1,370.0. Additionally, there were net borrowings on the ABL Revolving Credit Facility and Term Loan of $46.3 and $108.0, respectively, in the first nine months of 2020 whereas, in the first nine months of 2021, the financial activity was driven by proceeds from the exercise of public warrants totaling $107.5.
Critical Accounting Policies and Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed financial statements, and income and expenses during the periods reported. Actual results could materially differ from those estimates. The preceding discussion and analysis of our consolidated results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The 2020 financial statements, as restated as part of our Form 10-K/A filed on April 30, 2021, includes additional information about us, our operations, our financial condition, our critical accounting policies and accounting estimates, and should be read in conjunction with this Quarterly Report on Form 10-Q. Our significant accounting policies are described in Note 1 - Summary of Significant Accounting Policies of our 2020 Annual Report on Form 10-K/A.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
On a regular basis, Vertiv monitors third-party depository institutions that hold its cash and short-term investments, primarily for safety of principal and secondarily for maximizing yield on those funds. The Company diversifies its cash and short-term investments among counterparties to minimize exposure to any one of these entities. Vertiv also monitors the creditworthiness of its customers and suppliers to mitigate any adverse impact.
Vertiv uses derivative instruments to manage exposure to volatility in interest rates on certain debt instruments. Derivative financial instruments used by the Company are straightforward and non-leveraged. The counterparties to these instruments are financial institutions with strong credit ratings. Vertiv maintains control over the size of positions entered into with any one counterparty and regularly monitors the credit rating of these institutions. See Note 10 to the Unaudited Consolidated Financial Statements for additional information about hedges and derivative financial instruments.
31
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as "controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms." Our disclosure controls and procedures are designed to ensure that material information relating to us and our consolidated subsidiaries is accumulated and communicated to our management, including our President and Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding our required disclosures.
Our management, with the participation of our President and Chief Executive Officer and our Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures as of September 30, 2021 (the end of the period covered by this Quarterly Report on Form 10-Q). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2021, because of material weaknesses in internal control over financial reporting described below.
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2021 based on criteria established in the Internal Control-Integrated Framework in 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
Management has identified material weaknesses in controls related to (a) not fully designing, implementing and monitoring general information technology controls in the areas of user access and program change-management for systems supporting all of the Company’s internal control processes; and (b) the aggregation of open control deficiencies across the Company’s financial reporting processes because the controls were not fully designed and operating effectively.
Notwithstanding the identified material weaknesses, management has concluded that the consolidated financial statements included in this quarterly report on Form 10-Q present fairly, in all material respects, the Company's financial position, results of operations and cash flows for the periods disclosed in conformity with U.S. generally accepted accounting principles (U.S. GAAP).
Remediation Plan
We currently are implementing a number of actions, as described below, to remediate the material weaknesses described in this Item 4. Company management is committed to ensuring that our internal controls over financial reporting are designed and operating effectively.
General Information Technology Controls (GITCs)
We continue to make progress in advancing foundational elements of our GITCs. These elements are providing value as we are leveraging them in the design of our future state processes and controls within Oracle, which is expected to go-live for a majority of our business in 2021. Our remediation plan includes, but is not limited to:
•Implementing new, relevant IT systems;
•Implementing improved IT change management policies and procedures, control activities, and tools to ensure changes affecting financial IT applications are identified, authorized, tested, and implemented appropriately;
•Implementing improved processes for requesting, authorizing, and reviewing user access to key systems which impact our financial reporting, including identifying access to roles where manual business process controls may be required;
•Implementing appropriate segregation of duties in relevant systems that impact internal control over financial reporting;
•Increasing resources dedicated to monitoring GITCs to ensure compliance with policies and procedures; and
32
•Implementing additional training to ensure a clear understanding of risk assessment and monitoring activities related to automated processes and IT systems and GITCs.
Financial Reporting
We continue to make progress on our automated and manual business process controls, including reports generated from these IT systems, that are dependent upon the completeness and accuracy of information from the affected GITC material weakness. These elements are providing value as we are leveraging them in the design of our future state processes and controls within Oracle, which is expected to go-live in 2021. Our remediation plan includes, but is not limited to:
•Frequent communications between our Audit Committee and management regarding our financial reporting and internal control environment;
•Expanded Business Unit Finance, Accounting and Reporting and Information Technology teams through the addition of experienced and qualified resources;
•We will improve the process and controls in the determination of the appropriate accounting and classification of our financial instruments and key agreements;
•Delivery of additional internal controls training, as well as policy and control standardization where possible;
•Re-designed internal controls processes as part of our Sarbanes-Oxley program to drive accountability and efficiency;
•Instituted monthly review of financial statements disaggregated by key business units, and functional areas to evaluate results, observe adherence to policies and agree on necessary actions;
•Engaged outside resources to assist with the design and implementation of a risk-based internal controls plan, enhance process documentation, provide company-wide training, and help with management's self-assessment and testing of internal controls.
When fully implemented and operational, we believe the controls we have designed or plan to design will remediate the control deficiencies that have led to the material weaknesses we have identified and strengthen our internal controls over financial reporting.
The material weakness will not be considered remediated until the applicable controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
Changes in Internal Control over Financial Reporting
We have undertaken strategic remediation actions, as discussed above, to address the material weaknesses in our internal controls over financial reporting. These remediation actions continued throughout the quarter ended September 30, 2021 but have not materially affected our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information required by this item is set forth in Note 14 “Commitments, Contingencies and Guarantees” to the Company’s condensed consolidated financial statements included in Part I Item 1 “Financial Statements”, which is incorporated by reference herein.
ITEM 1A. RISK FACTORS
Item 1A. Risk Factors.
The Company's risk factors, as of September 30, 2021, have not materially changed from those described in Part 1, Item 1A of our Annual Report on Form 10-K/A for the fiscal year ended December 31, 2020 filed on April 30, 2021.
33
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
A) Recent Sales of Unregistered Securities
None.
B) Use of Proceeds from our Initial Public Offering of Common Stock
None.
C) Repurchases of Shares or of Company Equity Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
34
ITEM 6. EXHIBITS
| EXHIBIT INDEX | ||||||||||||||
| Exhibit No. | Description | |||||||||||||
| 2.1 | ||||||||||||||
| 4.1 | ||||||||||||||
| 4.2 | ||||||||||||||
| 31.1 | ||||||||||||||
| 31.2 | ||||||||||||||
| 32.1 | ||||||||||||||
| 32.2 | ||||||||||||||
| 101.INS | The following financial statements from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL: (i) Consolidated Statements of Cash Flows, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Balance Sheets, and (v) Notes to Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | |||||||||||||
| 101.SCH | Inline XBRL Taxonomy Extension Schema (filed herewith) | |||||||||||||
| 101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase (filed herewith) | |||||||||||||
| 101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase (filed herewith) | |||||||||||||
| 101.LAB | Inline XBRL Taxonomy Extension Label Linkbase (filed herewith) | |||||||||||||
| 101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase (filed herewith) | |||||||||||||
| 104 | Cover page from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL (and contained in Exhibit 101) | |||||||||||||
35
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 1, 2021 | Vertiv Holdings Co | ||||
| /s/ Rob Johnson | |||||
| Name: Rob Johnson | |||||
| Title: Chief Executive Officer | |||||
| /s/ David Fallon | |||||
| Name: David Fallon | |||||
| Title: Chief Financial Officer | |||||
36
EXHIBIT 31.1
CERTIFICATION PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, Rob Johnson, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Vertiv Holdings Co;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 1, 2021 | Vertiv Holdings Co | ||||
| /s/ Rob Johnson | |||||
| Name: Rob Johnson | |||||
| Title: Chief Executive Officer | |||||
EXHIBIT 31.2
CERTIFICATION PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002
I, David Fallon, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Vertiv Holdings Co;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: November 1, 2021 | Vertiv Holdings Co | ||||
| /s/ David Fallon | |||||
| Name: David Fallon | |||||
| Title: Chief Financial Officer | |||||
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Vertiv Holdings Co (the Company) on Form 10-Q for the period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Rob Johnson, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 1, 2021 | Vertiv Holdings Co | ||||
| /s/ Rob Johnson | |||||
| Name: Rob Johnson | |||||
| Title: Chief Executive Officer | |||||
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Vertiv Holdings Co (the Company) on Form 10-Q for the period ended September 30, 2021 as filed with the Securities and Exchange Commission on the date hereof (the Report), I, David Fallon, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 1, 2021 | Vertiv Holdings Co | ||||
| /s/ David Fallon | |||||
| Name: David Fallon | |||||
| Title: Chief Financial Officer | |||||