filings.toolsItem 8. Financial Statements and Supplementary Data
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Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of Vertiv Holdings Co
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Vertiv Holdings Co (the Company) as of December 31, 2020 and 2019, the related consolidated statements of earnings (loss), comprehensive income (loss), equity (deficit), and cash flows for each of the three years in the period ended December 31, 2020, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material aspects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020 in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 1, 2021 expressed an adverse opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Impairment Analysis of Goodwill of the Europe, Middle East & Africa Reporting Unit
| Description of the Matter | At December 31, 2020, the Company’s goodwill was $607.2 million, and included $197.4 million related to the Europe, Middle East & Africa (EMEA) reporting unit. As disclosed in Notes 1 and 4 to the consolidated financial statements, goodwill is tested for impairment annually in the fourth quarter and whenever events or circumstances indicate a reporting unit's fair value may be less than its carrying value. The Company estimates the fair value of a reporting unit using a combination of market-based valuation methodologies and the income approach using discounted cash flows. Auditing management’s annual goodwill impairment assessments for the EMEA reporting unit was complex and highly judgmental due to the significant estimation required to determine the fair value of the reporting unit. In particular, the fair value estimate was sensitive to changes in significant assumptions, such as revenue growth rates, the terminal revenue growth rate, EBITDA margin, the discount rate, and market multiples which are affected by expectations about future market or economic conditions. | ||||
| How We Addressed the Matter in Our Audit | To test the estimated fair value of the Company’s EMEA reporting unit, we performed audit procedures that included, among others, evaluating valuation methodologies and testing the significant assumptions discussed above used by the Company in its analysis. We involved our internal valuation specialist to assist in the evaluation of the valuation methodologies and testing certain significant assumptions, including the discount rate and market multiples. We compared the significant assumptions used by management to current industry and economic trends, recent historical performance and other factors. We assessed the historical accuracy of management’s estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the reporting unit that would result from changes in the assumptions. We also tested the underlying data used by the Company in its analysis for completeness and accuracy. | ||||
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2016.
Grandview Heights, Ohio
March 1, 2021
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
VERTIV HOLDINGS CO
(Dollars in millions except for per share data)
| December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||||||||||
| Net sales | ||||||||||||||||||||
| Net sales - products | $ | 3,308.8 | $ | 3,356.1 | $ | 3,230.3 | ||||||||||||||
| Net sales - services | 1,061.8 | 1,075.1 | 1,055.3 | |||||||||||||||||
| Net sales | 4,370.6 | 4,431.2 | 4,285.6 | |||||||||||||||||
| Costs and expenses | ||||||||||||||||||||
| Cost of sales - products | 2,290.5 | 2,349.2 | 2,274.5 | |||||||||||||||||
| Cost of sales - services | 606.4 | 629.0 | 590.7 | |||||||||||||||||
| Cost of sales | 2,896.9 | 2,978.2 | 2,865.2 | |||||||||||||||||
| Selling, general and administrative expenses | 1,008.4 | 1,100.8 | 1,223.8 | |||||||||||||||||
| Loss on extinguishment of debt | 174.0 | — | — | |||||||||||||||||
| Other deductions, net | 251.8 | 146.1 | 178.8 | |||||||||||||||||
| Interest expense, net | 150.4 | 310.4 | 288.8 | |||||||||||||||||
| Income (loss) from Continuing Operations before income taxes | (110.9) | (104.3) | (271.0) | |||||||||||||||||
| Income tax expense | 72.7 | 36.5 | 49.9 | |||||||||||||||||
| Income (loss) from Continuing Operations | (183.6) | (140.8) | (320.9) | |||||||||||||||||
| Earnings (loss) from Discontinued Operations - net of income taxes | — | — | 6.9 | |||||||||||||||||
| Net income (loss) | $ | (183.6) | $ | (140.8) | $ | (314.0) | ||||||||||||||
| Earnings (loss) per share: | ||||||||||||||||||||
| Basic and diluted | $ | (0.60) | $ | (1.19) | $ | (2.65) | ||||||||||||||
| Weighted-average shares outstanding | ||||||||||||||||||||
| Basic and diluted | 307,076,397 | 118,261,955 | 118,261,955 |
See accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
VERTIV HOLDINGS CO
(Dollars in millions)
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Net income (loss) | $ | (183.6) | $ | (140.8) | $ | (314.0) | |||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||
| Foreign currency translation | 72.0 | (10.3) | (90.6) | ||||||||||||||
| Interest rate swaps | (32.8) | — | — | ||||||||||||||
| Tax receivable agreement | (0.9) | — | — | ||||||||||||||
| Pension | (4.9) | (13.4) | (1.1) | ||||||||||||||
| Comprehensive income (loss) | $ | (150.2) | $ | (164.5) | $ | (405.7) | |||||||||||
See accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
VERTIV HOLDINGS CO
(Dollars in millions)
| December 31, 2020 | December 31, 2019 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 534.6 | $ | 223.5 | |||||||
| Accounts receivable, less allowances of $22.3 and $19.9, respectively | 1,354.4 | 1,212.2 | |||||||||
| Inventories | 446.6 | 401.0 | |||||||||
| Other current assets | 183.2 | 180.7 | |||||||||
| Total current assets | 2,518.8 | 2,017.4 | |||||||||
| Property, plant and equipment, net | 427.6 | 428.2 | |||||||||
| Other assets: | |||||||||||
| Goodwill | 607.2 | 605.8 | |||||||||
| Other intangible assets, net | 1,302.5 | 1,441.6 | |||||||||
| Deferred income taxes | 20.9 | 9.0 | |||||||||
| Other | 196.8 | 155.4 | |||||||||
| Total other assets | 2,127.4 | 2,211.8 | |||||||||
| Total assets | $ | 5,073.8 | $ | 4,657.4 | |||||||
| LIABILITIES AND EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of long-term debt and short-term borrowings | $ | 22.0 | $ | — | |||||||
| Accounts payable | 730.5 | 636.8 | |||||||||
| Accrued expenses and other liabilities | 901.8 | 867.7 | |||||||||
| Income taxes | 18.8 | 15.2 | |||||||||
| Total current liabilities | 1,673.1 | 1,519.7 | |||||||||
| Long-term debt, net | 2,130.5 | 3,467.3 | |||||||||
| Deferred income taxes | 116.5 | 124.7 | |||||||||
| Other long-term liabilities | 485.4 | 250.5 | |||||||||
| Total liabilities | 4,405.5 | 5,362.2 | |||||||||
| Equity | |||||||||||
| Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding | — | — | |||||||||
| Common stock, $0.0001 par value, 700,000,000 shares authorized, 342,024,612 and 118,261,955 shares issued and outstanding at December 31, 2020 and December 31, 2019, respectively | — | — | |||||||||
| Additional paid-in capital | 1,804.3 | 277.7 | |||||||||
| Accumulated deficit | (1,187.5) | (1,000.6) | |||||||||
| Accumulated other comprehensive (loss) income | 51.5 | 18.1 | |||||||||
| Total equity (deficit) | 668.3 | (704.8) | |||||||||
| Total liabilities and equity | $ | 5,073.8 | $ | 4,657.4 |
See accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOW
VERTIV HOLDINGS CO
(Dollars in millions
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Cash flows from operating activities: | |||||||||||||||||
| Net loss | $ | (183.6) | $ | (140.8) | $ | (314.0) | |||||||||||
| Adjustments to reconcile net loss to net cash used for operating activities: | |||||||||||||||||
| Depreciation | 60.3 | 57.1 | 60.4 | ||||||||||||||
| Amortization | 142.8 | 145.8 | 156.6 | ||||||||||||||
| Deferred income taxes | (1.4) | (13.8) | (40.3) | ||||||||||||||
| Amortization of debt discount and issuance costs | 10.5 | 27.9 | 25.5 | ||||||||||||||
| Gain on sale of business | — | — | (6.9) | ||||||||||||||
| Loss on extinguishment of debt | 174.0 | — | — | ||||||||||||||
| Asset impairments | 21.0 | — | — | ||||||||||||||
| Stock-based compensation | 13.0 | — | — | ||||||||||||||
| Changes in tax receivable agreement | 21.3 | — | — | ||||||||||||||
| Changes in operating working capital | (60.8) | (36.4) | (110.0) | ||||||||||||||
| Other | 11.8 | 17.7 | 6.8 | ||||||||||||||
| Net cash provided by (used for) operating activities | 208.9 | 57.5 | (221.9) | ||||||||||||||
| Cash flows from investing activities: | |||||||||||||||||
| Capital expenditures | (44.4) | (47.6) | (64.6) | ||||||||||||||
| Investments in capitalized software | (8.3) | (22.7) | (41.2) | ||||||||||||||
| Proceeds from disposition of property, plant and equipment | 7.0 | 5.0 | 18.0 | ||||||||||||||
| Acquisition of Business, net of cash acquired | — | — | (124.3) | ||||||||||||||
| Proceeds from sale of Business | — | — | 4.4 | ||||||||||||||
| Net cash provided by (used for) investing activities | (45.7) | (65.3) | (207.7) | ||||||||||||||
| Cash flows from financing activities: | |||||||||||||||||
| Borrowings from ABL revolving credit facility | 324.2 | 491.8 | 565.1 | ||||||||||||||
| Repayments of ABL revolving credit facility | (470.5) | (591.2) | (320.0) | ||||||||||||||
| Proceeds from short-term borrowings | 22.0 | — | — | ||||||||||||||
| Repayment of short-term borrowings | (23.2) | — | — | ||||||||||||||
| Proceeds from the issuance of 10.00% Notes | — | 114.2 | — | ||||||||||||||
| Borrowing on Term Loan, net of discount | 2,189.0 | — | — | ||||||||||||||
| Repayment on Term Loan | (16.5) | — | — | ||||||||||||||
| Repayment on Prior Term Loan | (2,070.0) | — | — | ||||||||||||||
| Repayment of Prior Notes | (1,370.0) | — | — | ||||||||||||||
| Payment of redemption premiums | (75.0) | — | — | ||||||||||||||
| Payment of debt issuance costs | (11.2) | — | — | ||||||||||||||
| Proceeds from reverse recapitalization, net | 1,832.5 | — | — | ||||||||||||||
| Payment to Vertiv Stockholder | (341.6) | — | — | ||||||||||||||
| Dividend Payment | (3.3) | — | — | ||||||||||||||
| Proceeds from the exercise of warrants | 156.5 | — | — | ||||||||||||||
| Other financing | (2.2) | — | — | ||||||||||||||
| Net cash provided by (used for) financing activities | 140.7 | 14.8 | 245.1 | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | 5.0 | 1.4 | 11.6 | ||||||||||||||
| Increase (decrease) in cash, cash equivalents and restricted cash | 308.9 | 8.4 | (172.9) | ||||||||||||||
| Beginning cash, cash equivalents and restricted cash | 233.7 | 225.3 | 398.2 | ||||||||||||||
| Ending cash, cash equivalents and restricted cash | $ | 542.6 | $ | 233.7 | $ | 225.3 | |||||||||||
| Changes in operating working capital | |||||||||||||||||
| Accounts receivable | $ | (114.8) | $ | 39.8 | $ | (139.6) | |||||||||||
| Inventories | (38.5) | 85.5 | (73.7) | ||||||||||||||
| Other current assets | 7.8 | (41.6) | (66.5) | ||||||||||||||
| Accounts payable | 78.2 | (140.8) | 101.9 | ||||||||||||||
| Accrued expenses and other liabilities | 13.3 | 34.8 | 50.2 | ||||||||||||||
| Income taxes | (6.8) | (14.1) | 17.7 | ||||||||||||||
| Total changes in operating working capital | $ | (60.8) | $ | (36.4) | $ | (110.0) | |||||||||||
| Supplemental Disclosures | |||||||||||||||||
| Cash paid during the year for interest | $ | 190.7 | $ | 271.5 | $ | 259.6 | |||||||||||
| Cash paid during the year for income tax, net | 64.7 | 48.7 | 58.0 | ||||||||||||||
| Property and equipment acquired during the year for capital lease obligations | 5.4 | 1.8 | 4.2 |
See accompanying Notes to the Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF 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, 2017, as originally reported | 1,000,000 | $ | — | $ | 277.7 | $ | (540.8) | $ | 133.5 | $ | (129.6) | |||||||||||||||||||||||||||||||||
| Conversion of units of share capital | 117,261,955 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2017, as recasted (1) | 118,261,955 | $ | — | $ | 277.7 | $ | (540.8) | $ | 133.5 | $ | (129.6) | |||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (314.0) | — | (314.0) | ||||||||||||||||||||||||||||||||||||||
| ASC 606 cumulative adjustment | — | — | — | (5.0) | — | (5.0) | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | (91.7) | (91.7) | ||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2018, as recasted (1) | 118,261,955 | $ | — | $ | 277.7 | $ | (859.8) | $ | 41.8 | $ | (540.3) | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2018, as originally reported | 1,000,000 | $ | — | $ | 277.7 | $ | (859.8) | $ | 41.8 | $ | (540.3) | |||||||||||||||||||||||||||||||||
| Conversion of units of share capital | 117,261,955 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2018, as recasted (1) | 118,261,955 | — | 277.7 | (859.8) | 41.8 | (540.3) | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (140.8) | — | (140.8) | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | (23.7) | (23.7) | ||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019, as recasted (1) | 118,261,955 | $ | — | $ | 277.7 | $ | (1,000.6) | $ | 18.1 | $ | (704.8) | |||||||||||||||||||||||||||||||||
| Balance at December 31, 2019, as originally reported | 1,000,000 | $ | — | $ | 277.7 | $ | (1,000.6) | $ | 18.1 | $ | (704.8) | |||||||||||||||||||||||||||||||||
| Conversion of units of share capital | 117,261,955 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019, as recasted (1) | 118,261,955 | — | 277.7 | (1,000.6) | 18.1 | (704.8) | ||||||||||||||||||||||||||||||||||||||
| Tax Receivable Agreement | — | — | (133.4) | — | — | (133.4) | ||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | (183.6) | — | (183.6) | ||||||||||||||||||||||||||||||||||||||
| Stock issuance | 123,900,000 | — | 1,195.1 | — | — | 1,195.1 | ||||||||||||||||||||||||||||||||||||||
| Merger recapitalization | 86,249,750 | — | 295.8 | — | — | 295.8 | ||||||||||||||||||||||||||||||||||||||
| Exercise of warrants | 13,612,907 | — | 156.5 | — | — | 156.5 | ||||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | 13.0 | — | — | 13.0 | ||||||||||||||||||||||||||||||||||||||
| Dividend payment | — | — | — | (3.3) | — | (3.3) | ||||||||||||||||||||||||||||||||||||||
| Other merger adjustment | — | — | (0.4) | — | — | (0.4) | ||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | 33.4 | 33.4 | ||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 342,024,612 | $ | — | $ | 1,804.3 | $ | (1,187.5) | $ | 51.5 | $ | 668.3 |
(1)The shares and earnings per share available to holders of the Company’s common shares, 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).
See accompanying Notes to Consolidated Financial Statement
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Vertiv Holdings Co ("Holdings Co", and together with its majority-owned subsidiaries, “Vertiv”, "we", "our", or "the Company"), formerly known as GS Acquisition Holdings Corp ("GSAH"), provides mission-critical infrastructure technologies and life cycle services for data centers, communication networks, and commercial and industrial environments. Vertiv’s offerings include power conditioning and uninterruptible power systems, thermal management, integrated data center control devices, software, monitoring, and service. Vertiv manages and reports results of operations for three business segments: Americas; Asia Pacific; and Europe, Middle East & Africa ("EMEA").
Vertiv Holdings Co was originally incorporated in Delaware on April 25, 2016 as a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination with one or more businesses. On June 12, 2018, GSAH consummated its initial public offering (the “IPO”) of 69,000,000 units, including 9,000,000 units issued pursuant to the exercise by the underwriters of their option to purchase additional units in full, at a price of $10.00 per unit, generating proceeds to GSAH of $690.0 before underwriting discounts and expenses. Simultaneously with the closing of the IPO, GSAH closed the private placement of an aggregate of 10,533,333 warrants, each exercisable to purchase one share of Class A common stock at an exercise price of $11.50 per share (the “private placement warrants” and, together with the public warrants, the “warrants”), initially issued to GS DC Sponsor I LLC, a Delaware limited liability company, at a price of $1.50 per private placement warrant, generating proceeds of $15.8.
On February 7, 2020 (the “Closing Date”), Vertiv Holdings Co consummated its previously announced business combination pursuant to that certain Agreement and Plan of Merger, dated as of December 10, 2019 (the “Merger Agreement”), by and among GSAH, Vertiv Holdings, LLC, a Delaware limited liability company (“Vertiv Holdings”), VPE Holdings, LLC, a Delaware limited liability company (the “Vertiv Stockholder”), Crew Merger Sub I LLC, a Delaware limited liability company and a direct, wholly-owned subsidiary of GSAH (“First Merger Sub”), and Crew Merger Sub II LLC, a Delaware limited liability company and a direct, wholly-owned subsidiary of GSAH (“Second Merger Sub”). As contemplated by the Merger Agreement, (1) First Merger Sub merged with and into Vertiv Holdings, with Vertiv Holdings continuing as the surviving entity (the “First Merger”) and (2) immediately following the First Merger and as part of the same overall transaction as the First Merger, Vertiv Holdings merged with and into Second Merger Sub, with Second Merger Sub continuing as the surviving entity and renamed “Vertiv Holdings, LLC” (collectively with the First Merger and the other transactions contemplated by the Merger Agreement, the “Business Combination”).
The aggregate merger consideration paid by GSAH in connection with the consummation of the Business Combination was approximately $1,526.2 (the “Merger Consideration”). The Merger Consideration was paid in a combination of cash and stock. The amount of cash consideration paid to the Vertiv Stockholder upon the consummation of the Business Combination was $341.6. The remainder of the consideration paid to the Vertiv Stockholder upon the consummation of the Business Combination was stock consideration (“Stock Consideration”), consisting of 118,261,955 newly-issued shares of our Class A common stock (the “Stock Consideration Shares”), which shares were valued at $10.00 per share for purposes of determining the aggregate number of shares of our Class A common stock payable to the Vertiv Stockholder as part of the Merger Consideration. In addition, the Vertiv Stockholder is entitled to receive additional future cash consideration with respect to the Business Combination in the form of amounts payable under a Tax Receivable Agreement, dated as of the Closing Date, by and between the Company and the Vertiv Stockholder (the “Tax Receivable Agreement”). See Note 11 – “Financial Instruments and Risk Management” to the consolidated financial statements for additional information
Concurrently with the execution of the Merger Agreement, Vertiv Holdings Co entered into subscription agreements with certain investors and executive officers ("PIPE Investors"). The PIPE Investors subscribed for 123,900,000 shares of Class A common stock for an aggregate purchase price equal to $1,239.0 (the "PIPE Investment"). The Company used $1,464.0 of the proceeds from the Business Combination to pay down its existing debt. Acquisition-related transaction costs and related charges are not included as a component of consideration transferred but were charged against the proceeds from the PIPE Investment and the trust account.
In connection with the Business Combination, GS Acquisition Holdings Corp changed its name to Vertiv Holdings Co and changed the trading symbols for its units, each unit representing one share of Class A common stock and one-third of one redeemable warrant to acquire one share of Class A common stock, that were issued in the IPO (less the number of units that have been separated into the underlying shares of Class A common stock and underlying warrants (the “public warrants”) upon the request of the holder thereof) (the “units”). Class A common stock and public warrants on the NYSE were changed from “GSAH.U,” “GSAH” and “GSAH WS,” to “VERT.U,” “VRT” and “VRT WS,” respectively. As a result of
the Business Combination, Vertiv Holdings Co became the owner, directly or indirectly, of all of the assets of Vertiv and its subsidiaries, and the Vertiv Stockholder holds a portion of the Company’s Class A common stock.
The Business Combination was accounted for as a reverse recapitalization, with no goodwill or other intangible assets recorded, in accordance with US GAAP. This determination was primarily based on post Business Combination relative voting rights, composition of the governing board, management, and intent of the Business Combination. Under this method of accounting, GSAH was treated as the “acquired” company for financial reporting purposes. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Vertiv issuing stock for the net assets of GSAH, which primarily consisted of cash held in its trust account, accompanied by a recapitalization. The net assets of the Company were stated at historical cost, with no goodwill or other intangible assets recorded. Reported amounts from operations included herein prior to the Business Combination are those of Vertiv.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its subsidiaries in which it has a controlling interest. All intercompany accounts and transactions have been eliminated in consolidation. Certain prior year amounts have been reclassed to conform with current year presentation. The Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses as well as related disclosures. On an ongoing basis, the company evaluates its estimates and assumptions based on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions 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.
Revenue recognition
The Company recognizes revenue from the sale of manufactured products and services when control of promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. The majority of the Company’s sales agreements contain performance obligations satisfied at a point in time when control is transferred to the customer. Sales for service contracts, including installation, inventory with no alternative use and an enforceable right of payment upon customer termination and other discrete services, generally are recognized over time as the services are provided. Payments received in advance for service arrangements are recorded as deferred revenue and recognized in net sales when the revenue recognition criteria are met. Contract liabilities are recorded when customers remit contractual cash payments in advance of the Company satisfying performance obligations under contractual arrangements. Unbilled revenue is recorded when performance obligations have been satisfied, but the Company does not have present right to payment.
For agreements with multiple performance obligations, judgment is required to determine whether performance obligations specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes. In these types of agreements we allocate sales price to each distinct obligation on a relative stand-alone selling price basis. The majority of revenue from arrangements with multiple performance obligations is recognized when tangible products are delivered, with smaller portions for associated installation and commissioning recognized shortly thereafter. Generally, contract duration is short term, and cancellation, termination or refund provisions apply only in the event of contract breach. These provisions have historically not been invoked.
Payment terms vary by the type and location of the customer and the products or services offered. Revenue from our sales have not been adjusted for the effects of a financing component as we expect that the period between when we transfer control of the product and when we receive payment to be one year or less. Sales, value add, and other taxes collected concurrent with revenue are excluded from sales. The Company records amounts billed to customers for shipping and handling in a sales transaction as revenue. Shipping and handling costs are treated as fulfillment costs and are included in costs of sales.
The Company records reductions to sales for prompt payment discounts, customer and distributor incentives including rebates, and returns at the time of the initial sale. Rebates are estimated based on sales terms, historical experience, trend analysis, and projected market conditions in the various markets served. Returns are estimated at the time of the sale primarily based on historical experience and recorded gross on the consolidated balance sheet.
Sales commissions are expensed when the amortization period is less than a year and are generally not capitalized as they are typically earned at the completion of the contract when the customer is invoiced or when the customer pays
Vertiv. We typically offer warranties that are consistent with standard warranties in the jurisdictions where we sell our goods and services. Our warranties are generally assurance type warranties for which we promise that our goods and services meet contract specifications. In limited circumstances, we sell warranties that extend the warranty coverage beyond the standard coverage offered on specific products. Sales for these separately-priced warranties are recorded based on their stand-alone selling price and are recognized as revenue over the length of the warranty period.
Foreign Currency Translation
The functional currency for substantially all of the Company’s non-U.S. subsidiaries is the local currency. Adjustments resulting from translating local currency financial statements into U.S. dollars are reflected in accumulated other comprehensive income (loss). Transactions denominated in currencies other than the subsidiaries’ functional currencies are subject to changes in exchange rates with resulting gains/losses recorded in net earnings (loss).
Cash and Cash Equivalents
Cash and cash equivalents are reflected on the consolidated balance sheets and consist of highly liquid investments with original maturities of three months or less.
The following table provides a reconciliation of the amount of cash, cash equivalents and restricted cash reported within the consolidated balance sheets. Restricted cash represents amounts held in an escrow account related to payment of specific tax indemnities.
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Cash and cash equivalents | $ | 534.6 | $ | 223.5 | $ | 215.1 | |||||||||||
| Restricted cash included in other current assets | 8.0 | 10.2 | 10.2 | ||||||||||||||
| Total cash, cash equivalents, and restricted cash | $ | 542.6 | $ | 233.7 | $ | 225.3 |
Accounts Receivable and Allowance for Doubtful Accounts
The Company’s accounts receivable are derived from customers located in the U.S. and numerous foreign jurisdictions. The Company performs ongoing credit evaluations of its customers’ financial condition and generally requires no collateral from its customers. The Company establishes an allowance for uncollectible accounts receivable based on historical experience and any specific customer collection issues that the Company has identified. Write-offs are recorded against the allowance for doubtful accounts when all reasonable efforts for collection have been exhausted.
Inventories
Inventories are stated at the lower of cost, using the first-in, first-out method, or net realizable value and the majority is valued based on standard costs. The remainder is valued based on average actual costs. Standard costs are revised at the beginning of each fiscal year. The impact from annually resetting standards, as well as operating variances incurred throughout the year, are allocated to inventories and recognized in cost of sales as product is sold.
The following are the components of inventory:
| December 31, 2020 | December 31, 2019 | ||||||||||
| Inventories | |||||||||||
| Finished products | $ | 201.0 | $ | 180.2 | |||||||
| Raw materials | 155.7 | 162.6 | |||||||||
| Work in process | 89.9 | 58.2 | |||||||||
| Total inventories | $ | 446.6 | $ | 401.0 |
Fair Value Measurement
Accounting Standards Codification (“ASC”) 820, Fair Value Measurement, establishes a formal hierarchy and framework for measuring certain financial statement items at fair value, and requires disclosures about fair value measurements and the reliability of valuation inputs. Under ASC 820, measurement assumes the transaction to sell an asset or transfer a liability occurs in the principal or at least the most advantageous market for that asset or liability. Within the hierarchy, Level 1 instruments use observable market prices for the identical item in active markets and have the most reliable valuations. Level 2 instruments are valued through broker/dealer quotation or through market-observable inputs for similar items in active markets, including forward and spot prices, interest rates and volatilities. Level 3 instruments are valued using inputs not observable in an active market, such as company-developed future cash flow estimates, and are considered the least reliable. The carrying value approximates fair value for cash and cash equivalents, accounts receivable and accounts payable because of the relatively short-term maturity of these instruments.
Debt Issuance Costs, Premiums and Discounts
Debt issuance costs, premiums and discounts are amortized into interest expense over the terms of the related loan agreements using the effective interest method or other methods which approximate the effective interest method. Debt issuance costs related to a recognized debt liability are presented on the balance sheets as a direct deduction from the carrying amount of that debt liability, consistent with discounts.
Property, Plant and Equipment and Definite Lived Intangible Assets
The Company records investments in land, buildings, and machinery and equipment at cost, which includes the then fair values of assets acquired in business combinations. Depreciation is computed principally using the straight-line method over estimated service lives, which are 30 to 40 years for buildings and 10 to 12 years for machinery and equipment. The Company’s definite lived identifiable intangible assets that are subject to amortization are amortized on a straight-line basis over their estimated useful lives. Definite lived identifiable intangibles consist of intellectual property such as patented and unpatented technology and trademarks, customer relationships and capitalized software. Definite lived identifiable intangible assets are also subject to evaluation for potential impairment if events or circumstances indicate the carrying value may not be recoverable. Long-lived tangible and intangible assets are reviewed for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. Impairment losses are recognized based on estimated fair values if the sum of expected future undiscounted cash flows of the related assets is less than the carrying values.
Following are the components of property, plant and equipment:
| December 31, 2020 | December 31, 2019 | ||||||||||
| Property, plant and equipment, net | |||||||||||
| Machinery and equipment | $ | 322.4 | $ | 280.7 | |||||||
| Buildings | 255.5 | 243.2 | |||||||||
| Land | 47.4 | 46.7 | |||||||||
| Construction in progress | 23.1 | 21.9 | |||||||||
| Property, plant and equipment, at cost | 648.4 | 592.5 | |||||||||
| Less: Accumulated depreciation | (220.8) | (164.3) | |||||||||
| Property, plant and equipment, net | $ | 427.6 | $ | 428.2 |
Goodwill and Other Indefinite Lived Intangible Assets
Assets and liabilities acquired in business combinations are accounted for using the acquisition method and recorded at their respective fair values. Goodwill represents the excess of consideration paid over the net assets acquired and is assigned to the reporting unit that acquires the business. A reporting unit is an operating segment as defined in ASC 280, Segment Reporting, or a business one level below an operating segment if discrete financial information for that business is prepared and regularly reviewed by segment management. The Company conducts annual impairment tests of goodwill in the fourth quarter or more frequently if events or circumstances indicate a reporting unit’s fair value may be less than its carrying value. If an initial assessment indicates it is more likely than not goodwill may be impaired, it is evaluated by comparing the reporting unit’s estimated fair value to its carrying value. If its carrying value exceeds its estimated fair value, goodwill impairment is recognized to the extent that recorded goodwill exceeds the fair value of goodwill. Estimated fair values of the reporting unit are Level 3 measures and are developed under an income approach that discounts estimated future cash flows using risk-adjusted interest rates and also the market approach.
Indefinite lived intangible assets consist of certain trademarks which are also evaluated annually for impairment or upon the occurrence of a triggering event. Impairment is determined to exist when the fair value is less than the carrying value of the assets being tested.
Product Warranties
Warranties generally extend for one to two years from the date of sale. Provisions for warranty are determined primarily based on historical warranty cost as a percentage of sales, adjusted for specific issues that may arise.
Product warranty expense is approximately one percent of sales and the product warranty accrual is reflected in accrued expenses in the consolidated balance sheets.
The change in product warranty accrual is as follows:
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Beginning balance | $ | 43.3 | $ | 44.9 | $ | 40.0 | |||||||||||
| Provision charge to expense | 27.8 | 48.7 | 41.0 | ||||||||||||||
| Paid/utilized | (34.6) | (50.3) | (36.1) | ||||||||||||||
| Ending balance | $ | 36.5 | $ | 43.3 | $ | 44.9 |
Derivative Instruments and Hedging Activities
In the normal course of business, the Company is exposed to changes in foreign currency exchange rates and commodity prices due to its worldwide presence and business profile. The Company’s foreign currency exposures relate to transactions denominated in currencies that differ from the functional currencies of its subsidiaries. Primary commodity exposures are price fluctuations on forecasted purchases of copper and aluminum and related products. As part of the Company’s risk management strategy, derivative instruments are selectively used in an effort to minimize the impact of these exposures. All derivatives are associated with specific underlying exposures and the Company does not hold derivatives for trading or speculative purposes. The duration of hedge positions is less than one year.
All derivatives are accounted for under ASC 815, Derivatives and Hedging, and recognized at fair value. For derivatives hedging variability in future cash flows, the effective portion of any gain or loss is deferred in equity and recognized when the underlying transaction impacts earnings. For derivatives hedging the fair value of existing assets or liabilities, both the gain or loss on the derivative and the offsetting loss or gain on the hedged item are recognized in earnings each period. To the extent that any hedge is not fully effective at offsetting changes in the underlying hedged item, there could be a net earnings impact. The Company also uses derivatives to hedge economic exposures that do not receive deferral accounting under ASC 815. The underlying exposures for these hedges relate primarily to the revaluation of certain foreign-currency denominated assets and liabilities. Gains or losses from the ineffective portion of any hedge, as well as any gains or losses on derivative instruments not designated as hedges, are recognized in the consolidated statements of earnings (loss) immediately.
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. The Company uses interest rate swaps to manage the interest rate mix of our total debt portfolio and related overall cost of borrowing. At December 31, 2020 interest rate swap agreements designated as cash flow hedges effectively swapped an initial amount of $1,200.0 of LIBOR based floating rate debt for fixed rate debt. See Note 11 – “Financial instruments and Risk Management” for additional information.
As of December 31, 2020, 2019, and 2018 no outstanding currency and commodity hedges received deferral accounting treatment. Accordingly, the Company recognized mark-to-market gains/(losses) of $0.9, $(0.4), and $1.2, during the years ended December 31, 2020, 2019, and 2018 respectively, within other deductions, net in the consolidated statements of earnings (loss). The fair values of the outstanding hedge instruments were measured using valuations based upon quoted prices for similar assets and liabilities in active markets (Level 2) and are valued by reference to similar financial instruments, adjusted for terms specific to the contracts.
Income Taxes
The provision for income taxes is determined using the asset and liability approach of ASC 740 by jurisdiction on a legal entity by legal entity basis. Under this approach, deferred taxes represent the future tax consequences expected to occur when the reported amounts of assets and liabilities are recovered or paid. Deferred taxes result from differences between the financial and tax basis of the Company’s assets and liabilities and are measured using enacted rates in effect for the year in which the temporary differences are expected to be recovered or settled. The impact of a change in income tax rates on deferred tax assets and liabilities is recognized in earnings in the period that includes the enactment date.
Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized. The tax carryforwards reflected in the Company’s consolidated financial statements have been determined using the separate return method. The tax carryforwards include net operating losses and tax credits.
The Company’s extensive operations and the complexity of global tax regulations require assessments of uncertainties in estimating the taxes the Company will ultimately pay. The Company recognizes liabilities for anticipated tax audit uncertainties in the U.S. and other tax jurisdictions based on its estimate of whether, and the extent to which, additional taxes will be due.
ASC 740-30-25-18 provides guidance that U.S. companies do not need to recognize tax effects on outside basis differences that are indefinitely reinvested. As of December 31, 2020 and 2019, the Company has provided for U.S. federal income taxes, foreign withholding and other taxes on outside basis differences in certain foreign subsidiaries that are not indefinitely reinvested. Certain earnings in certain foreign affiliates are indefinitely reinvested, but determining the impact of such amounts was not practicable.
Commitments and Contingencies
Certain conditions may exist as of the date of the financial statements which may result in a loss to the Company, but will only be resolved when one or more future events occur or fail to occur. Such liabilities for loss contingencies arising from claims, assessments, litigation, fines, penalties, and other sources are recorded when the Company assesses that it is probable that a future liability has been incurred and the amount can be reasonably estimated. Recoveries of costs from third parties, which the Company assesses as being probable of realization, are recorded to the extent of related contingent liabilities accrued. Legal costs incurred in connection with matters relating to contingencies are expensed in the period incurred. The Company records gain contingencies when realized.
Recently Adopted Accounting Pronouncements
Effective January 1, 2020 we adopted the Financial Accounting Standards Board Accounting Standards Update (“ASU”) 2018-15, Intangibles — Goodwill and Other — Internal-Use Software (Subtopic 350-40), which aligns the requirements for capitalizing implementation costs incurred in a service contract hosting arrangement with those of developing or obtaining internal-use software. The guidance was adopted prospectively to all implementation costs incurred after the date of adoption, which are now recorded in other assets in the current year compared to intangible assets in the prior year on the consolidated balance sheets and payments are recorded in cash flows from operating activities in the current year compared to investing activities in the prior year on the consolidated statement of cash flows.
Effective January 1, 2020, we adopted ASU 2016-13 — Financial Instruments — Credit Losses (Topic 326), a new standard to replace the incurred loss impairment methodology under current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The adoption of the standard did not have a significant impact on the consolidated financial statements.
Dividends
On October 28, 2020, Vertiv announced that the Board of Directors declared the Company’s first-ever annual dividend of $0.01 per share. The dividend was payable to the Company’s shareholders of record, including holders of record of the Company’s units, as of December 2, 2020, and $3.3 was paid on December 17, 2020.
(2) REVENUE
The Company recognizes revenue from the sale of manufactured products and services when control of promised goods or services are transferred to customers in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
Disaggregation of Revenues
Beginning in the second quarter of 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 years ended December 31, 2019 and 2018 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.
Critical infrastructure & solutions
We identify delivery of products as performance obligations within the critical infrastructure & solutions offering. Such products include AC and DC power management, thermal management, integrated modular solutions, as well as hardware for managing IT equipment. We generally satisfy these performance obligations and recognize revenue for these products at a point in time when control has transferred to the customer. The transfer of control generally occurs when the product has been shipped or delivery has occurred, depending on shipping terms.
For customized products that the customer controls at the customer’s site while we build and customize the product, we recognize revenue over time because the customer obtains control of the asset as it is built. For these products, we use an input method to recognize revenue based on costs incurred relative to total estimated project costs as this represents the most faithful measure of the goods transferred to the customer.
Services & spares
Services include preventative maintenance, acceptance testing, engineering and consulting, performance assessments, remote monitoring, training, spare parts, and digital critical infrastructure software. Services are generally recognized as the services are provided, or straight-line for stand-ready contracts, because the customer simultaneously receives and consumes the benefit as we perform the services. We recognize revenue for software applications at a point in time upon transfer of the software and monitoring services are recognized over time.
Integrated rack solutions
Performance obligations within integrated rack solutions include the delivery of racks, rack power, rack power distribution, rack thermal systems, and configurable integrated solutions. For these performance obligations, we recognize revenue at a point in time based on when transfer of control occurs.
Disaggregation of Revenues
The following table disaggregates our revenue by product and service offering and timing of transfer of control:
| Year Ended December 31, 2020 | |||||||||||||||||||||||
| Americas | Asia Pacific | Europe, Middle East, & Africa | Total | ||||||||||||||||||||
| Sales by Product and Service Offering: | |||||||||||||||||||||||
| Critical infrastructure & solutions | $ | 1,074.2 | $ | 853.8 | $ | 529.7 | $ | 2,457.7 | |||||||||||||||
| Services & spares | 662.6 | 371.1 | 291.1 | 1,324.8 | |||||||||||||||||||
| Integrated rack solutions | 303.8 | 143.5 | 140.8 | 588.1 | |||||||||||||||||||
| Total | $ | 2,040.6 | $ | 1,368.4 | $ | 961.6 | $ | 4,370.6 | |||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||
| Products and services transferred at a point in time | $ | 1,418.9 | $ | 1,078.5 | $ | 751.9 | $ | 3,249.3 | |||||||||||||||
| Products and services transferred over time | 621.7 | 289.9 | 209.7 | 1,121.3 | |||||||||||||||||||
| Total | $ | 2,040.6 | $ | 1,368.4 | $ | 961.6 | $ | 4,370.6 |
| Year Ended December 31, 2019 | |||||||||||||||||||||||
| Americas | Asia Pacific | Europe, Middle East, & Africa | Total | ||||||||||||||||||||
| Sales by Product and Service Offering: (1) | |||||||||||||||||||||||
| Critical infrastructure & solutions | $ | 1,225.6 | $ | 755.5 | $ | 486.4 | $ | 2,467.5 | |||||||||||||||
| Services & spares | 689.8 | 361.1 | 287.2 | 1,338.1 | |||||||||||||||||||
| Integrated rack solutions | 313.7 | 161.4 | 150.5 | 625.6 | |||||||||||||||||||
| Total | $ | 2,229.1 | $ | 1,278.0 | $ | 924.1 | $ | 4,431.2 | |||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||
| Products and services transferred at a point in time | $ | 1,592.4 | $ | 1,007.1 | $ | 748.9 | $ | 3,348.4 | |||||||||||||||
| Products and services transferred over time | 636.7 | 270.9 | 175.2 | 1,082.8 | |||||||||||||||||||
| Total | $ | 2,229.1 | $ | 1,278.0 | $ | 924.1 | $ | 4,431.2 |
(1)Comparative results for Critical infrastructure & solutions, Services & spares and Integrated rack solutions for the year ended December 31, 2019 have been adjusted by $(165.1), $39.2, and $125.9, respectively, to reflect the strategic realignment described above.
| Year Ended December 31, 2018 | |||||||||||||||||||||||
| Americas | Asia Pacific | Europe, Middle East, & Africa | Total | ||||||||||||||||||||
| Sales by Product and Service Offering: (2) | |||||||||||||||||||||||
| Critical infrastructure & solutions | $ | 1,118.8 | $ | 729.1 | $ | 453.2 | $ | 2,301.1 | |||||||||||||||
| Services & spares | 689.9 | 344.2 | 271.2 | 1,305.3 | |||||||||||||||||||
| Integrated rack solutions | 337.0 | 170.9 | 171.3 | 679.2 | |||||||||||||||||||
| Total | $ | 2,145.7 | $ | 1,244.2 | $ | 895.7 | $ | 4,285.6 | |||||||||||||||
| Timing of revenue recognition: | |||||||||||||||||||||||
| Products and services transferred at a point in time | $ | 1,530.6 | $ | 973.5 | $ | 701.8 | $ | 3,205.9 | |||||||||||||||
| Products and services transferred over time | 615.1 | 270.7 | 193.9 | 1,079.7 | |||||||||||||||||||
| Total | $ | 2,145.7 | $ | 1,244.2 | $ | 895.7 | $ | 4,285.6 |
(2)Comparative results for Critical infrastructure & solutions, Services & spares and Integrated rack solutions for the year ended December 31, 2018 have been adjusted by $(150.7), $29.2, and $121.5, respectively, to reflect the strategic realignment described above.
The opening and closing balances of our current and long-term contract liabilities and current and long-term deferred revenue are as follows:
| Balances at December 31, 2020 | Balances at December 31, 2019 | ||||||||||
| Deferred revenue - current (1) | $ | 199.6 | $ | 160.9 | |||||||
| Deferred revenue - noncurrent (2) | 38.8 | 41.3 | |||||||||
| Other contract liabilities - current (1) | 36.1 | 39.8 |
(1) Current deferred revenue and contract liabilities are included within accrued expenses.
(2) Noncurrent deferred revenue is recorded within other long-term liabilities.
Noncurrent deferred revenue consists primarily of maintenance, extended warranty and other service contracts. We expect to recognize revenue of $19.6, $10.9 and $8.3 in the years ending December 31, 2022, 2023, and thereafter, respectively.
(3) 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 lease and contract termination costs of moving fixed assets, employee training, relocation, and facility costs. These costs are recorded in other deductions, net in the consolidated statements of earnings (loss).
2020 Actions
During the quarter ended September 30, 2020, Vertiv approved a multi-year restructuring program to align our cost structure to support our margin expansion targets. The program includes workforce reductions and footprint optimization across all segments. Restructuring charges incurred under this program were $71.1 in 2020, which primarily consisted of severance related to workforce reductions. Total restructuring expenses were $73.9 for the year ended December 31, 2020. The Company expects to recognize additional restructuring expenses of approximately $13.0 in 2021 and $7.0 thereafter, primarily comprised of plant closing and other costs, resulting in total estimated charges of approximately $95.0 for the entire program.
2019 and 2018 Actions
Restructuring expenses were $20.7 and $46.2 for the years ended December 31, 2019 and 2018, respectively. These changes primarily consisted of severance related to workforce reductions and plant closing and other costs.
The change in liability for the restructuring costs for the year ended December 31, 2020 follows:
| 2019 | Paid/ Utilized | Expense | 2020 | ||||||||||||||||||||
| Severance and benefits | $ | 21.6 | $ | (23.2) | $ | 70.5 | $ | 68.9 | |||||||||||||||
| Plant closing and other | 0.6 | (3.6) | 3.4 | 0.4 | |||||||||||||||||||
| Total | $ | 22.2 | $ | (26.8) | $ | 73.9 | $ | 69.3 |
The change in the liability for restructuring costs for the year ended December 31, 2019 follows:
| 2018 | Paid/ Utilized | Expense | 2019 | ||||||||||||||||||||
| Severance and benefits | $ | 24.6 | $ | (21.6) | $ | 18.6 | $ | 21.6 | |||||||||||||||
| Plant closing and other | 1.2 | (2.7) | 2.1 | 0.6 | |||||||||||||||||||
| Total | $ | 25.8 | $ | (24.3) | $ | 20.7 | $ | 22.2 |
The change in the liability for restructuring costs for the year ended December 31, 2018 follows:
| 2017 | Paid/ Utilized | Expense | 2018 | ||||||||||||||||||||
| Severance and benefits | $ | 20.1 | $ | (28.7) | $ | 33.2 | $ | 24.6 | |||||||||||||||
| Plant closing and other | 8.2 | (20.0) | 13.0 | 1.2 | |||||||||||||||||||
| Total | $ | 28.3 | $ | (48.7) | $ | 46.2 | $ | 25.8 |
Restructuring expense by business segment follows:
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Americas | $ | 15.5 | $ | 5.3 | $ | 13.7 | |||||||||||
| Asia Pacific | 10.4 | 3.9 | 8.3 | ||||||||||||||
| Europe, Middle East & Africa | 42.7 | 11.1 | 19.0 | ||||||||||||||
| Corporate | 5.3 | 0.4 | 5.2 | ||||||||||||||
| Total | $ | 73.9 | $ | 20.7 | $ | 46.2 |
(4) GOODWILL AND OTHER INTANGIBLES
The change in the carrying value of goodwill by segment follows:
| Americas | Asia Pacific | Europe, Middle East & Africa | Total | |||||||||||||||||||||||
| Balance, December 31, 2018 | $ | 396.5 | $ | 50.9 | $ | 186.6 | $ | 634.0 | ||||||||||||||||||
| Foreign currency translation and other | (25.0) | (0.6) | (2.6) | (28.2) | ||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 371.5 | $ | 50.3 | $ | 184.0 | $ | 605.8 | ||||||||||||||||||
| Foreign currency translation and other | $ | (12.3) | $ | 0.3 | $ | 13.4 | $ | 1.4 | ||||||||||||||||||
| Balance, December 31, 2020 | $ | 359.2 | $ | 50.6 | $ | 197.4 | $ | 607.2 |
The gross carrying amount and accumulated amortization of identifiable intangible assets by major class follow:
| As of December 31, 2020 | Gross | Accumulated Amortization | Net | |||||||||||||||||
| Customer relationships | $ | 1,114.3 | $ | (362.5) | $ | 751.8 | ||||||||||||||
| Developed technology | 330.0 | (144.8) | 185.2 | |||||||||||||||||
| Capitalized software | 94.2 | (44.3) | 49.9 | |||||||||||||||||
| Trademarks | 39.0 | (19.3) | 19.7 | |||||||||||||||||
| Total finite-lived identifiable intangible assets | $ | 1,577.5 | $ | (570.9) | $ | 1,006.6 | ||||||||||||||
| Indefinite-lived trademarks | 295.9 | — | 295.9 | |||||||||||||||||
| Total intangible assets | $ | 1,873.4 | $ | (570.9) | $ | 1,302.5 | ||||||||||||||
| As of December 31, 2019 | Gross | Accumulated Amortization | Net | |||||||||||||||||
| Customer relationships | $ | 1,099.2 | $ | (268.2) | $ | 831.0 | ||||||||||||||
| Developed technology | 328.2 | (105.4) | 222.8 | |||||||||||||||||
| Capitalized software | 103.3 | (35.8) | 67.5 | |||||||||||||||||
| Trademarks | 38.6 | (12.4) | 26.2 | |||||||||||||||||
| Favorable operating leases | 2.1 | (2.1) | — | |||||||||||||||||
| Total finite-lived identifiable intangible assets | $ | 1,571.4 | $ | (423.9) | $ | 1,147.5 | ||||||||||||||
| Indefinite-lived trademarks | 294.1 | — | 294.1 | |||||||||||||||||
| Total intangible assets | $ | 1,865.5 | $ | (423.9) | $ | 1,441.6 |
Total intangible asset amortization expense for the years ended December 31, 2020, 2019 and 2018, was $142.8, $145.8, $156.6, respectively.
Based on intangible asset balances as of December 31, 2020, expected amortization expense is as follows:
| 2021 | 2022 | 2023 | 2024 | 2025 | ||||||||||
| $ | 139.3 | $ | 135.9 | $ | 131.2 | $ | 131.0 | $ | 131.0 |
During the year ended December 31, 2020, management changed its strategy on the ERP platform that was being implemented in the Americas segment. As a result, the Company recognized a write-off of approximately $12.3, consisting primarily of capitalized software costs, which is recorded as a corporate expense, within other deductions, net in the consolidated statement of earnings (loss).
During the year ended December 31, 2020, in connection with the restructuring program, management determined a certain product line in the Americas segment to be non-core to the business. As a result, the Company recognized an impairment charge of $8.7, consisting primarily of developed technology and trademarks, which is recorded within other deductions, net in the consolidated statement of earnings (loss).
The Company considered the overall macroeconomic conditions as a result of the COVID-19 pandemic and the uncertainty surrounding the global economy and performed a quantitative impairment test for all of its reporting units with goodwill during the fourth quarter of 2020. The discounted cash flow approach, the comparable public company approach and the comparable acquisition approach were used to estimate the fair value of each reporting unit using a weighting of 40%, 40% and 20%, respectively. The discounted cash flow model requires several assumptions including future sales growth, EBITDA (earnings before interest, taxes, depreciation, and amortization) margins, capital expenditures, a discount rate and a terminal revenue growth rate (the revenue growth rate for the period beyond the years forecasted by the reporting units) for each reporting unit. The comparable public company and comparable acquisition approaches require several assumptions including EBITDA (earnings before interest, taxes, depreciation and amortization) multiples for comparable companies and transactions that operate in the same markets as the Company’s reporting units. The estimated fair value of all reporting units was in excess of its respective carrying value, which resulted in a conclusion that no impairment existed.
The present uncertainty surrounding the global economy due to the COVID-19 pandemic increases the likelihood that adverse changes in key assumptions used to determine the fair value of reporting units like sales estimates, cost factors, discount rates and stock price could result in interim quantitative goodwill impairment tests and non-cash goodwill impairments in future periods.
In view of the COVID-19 pandemic the Company also performed a quantitative impairment test for indefinite-lived tradename intangible assets and concluded that it was not more likely than not the fair value of such tradename assets were below its carrying value. However, uncertainty surrounding the impact of the COVID-19 pandemic increases the likelihood that adverse changes in key assumptions used to determine the fair value of indefinite-lived intangibles like sales estimates or discount rates could result in interim quantitative tradename impairments tests and non-cash tradename impairments in future periods. Additionally, uncertainty around the current macroeconomic environment could result in changes to the Company’s marketing and branding strategy which also could impact the carrying value or estimated useful lives of the Company’s tradenames.
(5) DEBT
Long-term debt consists of the following as of December 31, 2020 and 2019:
| December 31, 2020 | December 31, 2019 | ||||||||||
| Term Loan due 2027 | $ | 2,183.5 | $ | — | |||||||
| ABL Revolving Credit Facility | — | 145.2 | |||||||||
| Term Loan due 2023 | — | 2,070.0 | |||||||||
| 9.25% Notes due 2024 | — | 750.0 | |||||||||
| 12.00%/13.00% Senior PIK Toggle Notes due 2022 | — | 500.0 | |||||||||
| 10.00% Notes due 2024 | — | 120.0 | |||||||||
| Unamortized discount and issuance costs | (31.0) | (117.9) | |||||||||
| 2,152.5 | 3,467.3 | ||||||||||
| Less: Current Portion | (22.0) | — | |||||||||
| Total long-term debt, net of current portion | $ | 2,130.5 | $ | 3,467.3 |
Contractual maturities of the Company’s debt obligations as of December 31, 2020 are shown below:
| Term Loan | |||||||||||||||||||||||
| 2021 | $ | 22.0 | |||||||||||||||||||||
| 2022 | 22.0 | ||||||||||||||||||||||
| 2023 | 22.0 | ||||||||||||||||||||||
| 2024 | 22.0 | ||||||||||||||||||||||
| 2025 | 22.0 | ||||||||||||||||||||||
| Thereafter | 2,073.5 | ||||||||||||||||||||||
| Total | $ | 2,183.5 |
On March 2, 2020, we completed a refinancing by entering into (i) Amendment No. 5 to the Prior-Asset Based Revolving Credit Agreement (as defined herein), by and among, inter alia, Vertiv Group Corporation, a Delaware corporation (“Vertiv Group” or 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, certain direct and indirect subsidiaries of Vertiv Group, as co-borrowers and guarantors thereunder, various financial institutions from time to time party thereto, as lenders, JPMorgan Chase Bank, N.A., as administrative agent (in such capacity, the “ABL Agent”), and certain other institutions as collateral agents and letter of credit issuers (the “ABL Amendment” and, the Prior Asset-Based Revolving Credit Agreement as amended by the ABL Amendment, the “ABL Revolving Credit Facility”), which ABL Amendment extended the maturity of, and made certain other modifications to, the Prior Asset-Based Revolving Credit Agreement and (ii) a new Term Loan Credit Agreement, by and among, inter alia, Holdings, Vertiv Group, as borrower, various financial institutions from time to time party thereto (the “Term Lenders”), and Citibank, N.A., as administrative agent (in such capacity, the “Term Agent”) (the “Term Loan Credit Agreement”), which Term Loan Credit Agreement provided for a $2,200.0 senior secured term loan, the proceeds of which were used, together with certain borrowings under the ABL Revolving Credit Facility, to repay or redeem, as applicable, in full certain existing indebtedness and to pay certain fees and expenses as further set forth below. The refinancing transactions have resulted in a reduction of our debt service requirements going forward and an extension of the maturity profile of our indebtedness.
On the Closing Date and prior to the completion of the refinancing transactions, Vertiv used a portion of the proceeds from the Business Combination, including the PIPE Investment, to repay $176.0 of the outstanding indebtedness under the Prior Asset-Based Revolving Credit Agreement and approximately $1,285.9 of the outstanding indebtedness under the Prior Term Loan Facility (as defined herein).
In connection with the repayment from the Business Combination and the subsequent refinancing transactions, we recognized a $99.0 write-off of deferred financing fees and a $75.0 early redemption premium on Prior Notes (as defined herein). The write-off and early redemption premium are recorded in Loss on extinguishment of debt in the consolidated statement of earnings (loss).
Term Loan due 2027
Pursuant to the Term Loan Credit Agreement, the Term Lenders made $2,200.0 in senior secured term loans (the “Term Loan”) to the Borrower. The proceeds of the Term Loan, together with certain borrowings under the ABL Revolving Credit Facility, were used to repay or redeem in full the outstanding indebtedness (the “Refinancing”) of the Borrower and of Vertiv Intermediate Holding Corporation, a Delaware corporation (“Holdco”) and an indirect parent of the Borrower, under the Prior Term Loan Facility and the Prior Notes (as defined herein) and to pay fees and expenses in connection with (a) entry into the Term Loan Credit Agreement, (b) entry into the ABL Amendment and (c) such repayments and redemptions.
Subject to certain conditions and without consent of the then-existing Term Lenders (but subject to the receipt of commitments), the Borrower may incur additional loans under the Term Loan Credit Agreement (as an increase to the Term Loan or as one or more new tranches of term loans) (“Incremental Term Loans”) in an aggregate principal amount of up to the sum of (a) the greater of $325.0 and 60.0% of Consolidated EBITDA (as defined in the Term Loan Credit Agreement), plus (b) an amount equal to all voluntary prepayments, repurchases and redemptions of pari passu term loans borrowed under the Term Loan Credit Agreement and of certain other pari passu indebtedness incurred outside the Term Loan Credit Agreement utilizing capacity that would otherwise be available for Incremental Term Loans, plus (c) an unlimited amount, so long as on a pro forma basis after giving effect thereto, (i) with respect to indebtedness secured by the Collateral (as defined below) on a pari passu basis with the Term Loan, the Consolidated First Lien Net Leverage Ratio (as defined in the Term Loan Credit Agreement) would not exceed 3.75:1.00 and (ii) with respect to indebtedness incurred outside of the Term Loan Credit Agreement and secured by the Collateral on a junior basis with the Term Loan or that is unsecured, the Consolidated Total Net Leverage Ratio (as defined in the Term Loan Credit Agreement) would not exceed either (A) 5.25:1.00 or (B) if such indebtedness is incurred in connection with a permitted acquisition or other permitted investment, the Consolidated Total Net Leverage Ratio in effect immediately prior to the consummation of such transaction (the amounts referred to in clauses (a), (b) and (c), collectively, the “Incremental Amount”). Subject to certain conditions, the Borrower may incur additional indebtedness outside of the Term Loan Credit Agreement using the then-available Incremental Amount in lieu of Incremental Term Loans.
The Term Loan amortizes in equal quarterly installments in an amount equal to 1.00% per annum of the initial principal amount, which amortization payments commenced on June 30, 2020. The interest rate applicable to the Term Loan is, at the Borrower’s option, either (a) the base rate (which is the highest of (i) the prime rate of Citibank, N.A. on such day, (ii) the greater of the then-current (A) federal funds rate set by the Federal Reserve Bank of New York and (B) rate comprised of both overnight federal funds and overnight LIBOR, in each case, plus 0.50%, (iii) LIBOR for a one month interest period, plus 1.00% and (iv) 1.00%), plus 2.00% or (b) one-, two-, three- or six-month LIBOR or, if agreed by all Term Lenders, 12-month LIBOR or, if agreed to by the Term Agent, any shorter period (selected at the option of the Borrower), plus 3.00%. Additionally, concurrent with entering into the Term Loan Credit Agreement, Vertiv Group entered into interest rate swap agreements with an initial notional amount of $1,200.0, which will reduce to $1,000.0 in 2021 and remain at $1,000.0 until the maturity of the Term Loan Credit Agreement in 2027. The swap transactions exchange floating rate interest payments for fixed rate interest payments on the notional amount to reduce interest rate volatility. The borrowing rate of the Term Loan as of December 31, 2020 was 3.15%.
The Borrower may voluntarily prepay the Term Loan, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty. The Borrower is required to repay the Term Loan with 50% of Excess Cash Flow (as defined in the Term Loan Credit Agreement), 100% of the net cash proceeds of certain asset sales and casualty and condemnation events and the incurrence of certain other indebtedness, in each case, subject to certain step-downs, reinvestment rights, thresholds and other exceptions. Any Term Loan prepaid or repaid may not be re-borrowed. Unless accelerated subject to the terms of the Term Loan Credit Agreement, any amounts not otherwise prepaid or repaid shall mature on the seven year anniversary of entry into the Term Loan Credit Agreement.
The Borrower’s obligations under the Term Loan Credit Agreement are guaranteed by Holdings and all of the Borrower’s direct and indirect wholly-owned U.S. subsidiaries (subject to certain permitted exceptions) (collectively, the “Guarantors”). Subject to certain exceptions, the obligations of the Borrower and the Guarantors under the Term Loan Credit Agreement and related documents are secured by a lien on substantially all of the assets of the Borrower and the Guarantors (the “Collateral”).
The Term Loan Credit Agreement contains customary representations and warranties, affirmative, reporting and negative covenants, and events of default. The negative covenants include, among other things, restrictions on the ability of Holdings, the Borrower and its restricted subsidiaries to grant liens or security interests on assets, undertake mergers and consolidations, sell or otherwise transfer assets, pay dividends or make other distributions and restricted payments, incur indebtedness, make acquisitions, loans, advances or other investments, optionally prepay or modify terms of certain junior
indebtedness, enter into transactions with affiliates or change lines of business, in each case, subject to certain thresholds and exceptions.
ABL Revolving Credit Facility
The ABL Amendment extended the maturity of, and made certain other modifications to, the Revolving Credit Agreement, dated as of November 30, 2016 (as amended, restated, supplemented or otherwise modified from time to time prior to March 2, 2020, the “Prior Asset-Based Revolving Credit Agreement”), by and among Holdings, the Borrower, certain subsidiaries of the Borrower, as co-borrowers (the "Co-Borrowers"), various financial institutions from time to time party thereto, as lenders (after giving effect to the ABL Amendment, the “ABL Lenders”), the ABL Agent and certain other institutions from time to time party thereto as collateral agents and letter of credit issuers. The ABL Revolving Credit Facility is available to the Borrower and the Co-Borrowers and provides for revolving loans in various currencies and under U.S. and foreign subfacilities, in an aggregate amount up to $455.0 with a letter of credit subfacility of $200.0 and a swingline subfacility of $75.0, in each case, subject to various borrowing bases. Borrowings under the ABL Revolving Credit Facility are limited by borrowing base calculations based on the sum of specified percentages of eligible accounts receivable, certain eligible inventory and certain unrestricted cash, minus the amount of any applicable reserves. Borrowings under the ABL Revolving Credit Facility were used on March 2, 2020, together with the proceeds of the Term Loan, to consummate the Refinancing and for working capital purposes. Going forward, borrowings under the ABL Revolving Credit Facility may be used for working capital and general corporate purposes.
Subject to certain conditions and without the consent of the then-existing ABL Lenders (but subject to the receipt of commitments), commitments under the ABL Revolving Credit Facility may be increased to up to $600.0.
The interest rate applicable to loans denominated in U.S. dollars under the ABL Revolving Credit Facility is, at the Borrower’s option, either (a) the base rate (which is the highest of (i) the prime rate of JPMorgan Chase Bank, N.A. on such date, (ii) the greater of the then-current (A) federal funds rate set by the Federal Reserve Bank of New York and (B) rate comprised of both overnight federal and overnight LIBOR, in each case, plus 0.50%, (iii) LIBOR for a one month interest period, plus 1.00% and (iv) 1.00%), plus an applicable margin (the “Base Rate Margin”) ranging from 0.25% to 0.75%, depending on average excess availability or (b) one-, two-, three- or six-month LIBOR or, if available to all ABL Lenders, 12-month LIBOR or any shorter period (selected at the option of the Borrower), plus an applicable margin (the “LIBOR Margin” and collectively, with the Base Rate Margin, the “Applicable Margins”) ranging from 1.25% to 1.75%, depending on average excess availability. Certain “FILO” denominated loans have margins equal to the Applicable Margins, plus an additional 1.00%. Loans denominated in currencies other than U.S. dollars are subject to customary interest rate conventions and indexes, but in each case, with the same Applicable Margins. In addition, the following fees are applicable under the ABL Revolving Credit Facility: (a) an unused line fee of 0.25% per annum on the unused portion of the commitments under the ABL Revolving Credit Facility, (b) letter of credit participation fees on the aggregate stated amount of each letter of credit equal to the LIBOR Margin and (c) certain other customary fees and expenses of the lenders, letter of credit issuers and agents thereunder.
The Borrower and Co-Borrowers may voluntarily repay loans under the ABL Revolving Credit Facility, in whole or in part, subject to minimum amounts, with prior notice but without premium or penalty. The Borrower and Co-Borrowers are required to make prepayments under the ABL Revolving Credit Facility at any time when, and to the extent that, the aggregate amount of outstanding loans and letters of credit under the ABL Revolving Credit Facility exceeds the lesser of the then-applicable aggregate commitments and the then-applicable borrowing base. Subject to the satisfaction of certain customary conditions and the then-applicable borrowing base, any amounts repaid may be re-borrowed. Unless terminated subject to the terms of the ABL Revolving Credit Facility, all commitments under the ABL Revolving Credit Facility shall terminate, and any loans outstanding thereunder shall mature, on the fifth year anniversary of entry into the ABL Amendment.
The Borrower’s and Co-Borrowers’ obligations under the ABL Revolving Credit Facility are guaranteed by the Guarantors (including certain Co-Borrowers as to the obligations of other Co-Borrowers) and, subject to certain exclusions, certain non-U.S. restricted subsidiaries of the Borrower (the “Foreign Guarantors”). No Foreign Guarantor guarantees the obligations of the Borrower or any Co-Borrower that is a U.S. subsidiary of the Borrower. Subject to certain exceptions, the obligations of the Borrower, Co-Borrowers, Guarantors and Foreign Guarantors under the ABL Revolving Credit Facility and related documents are secured by a lien on the Collateral and, subject to certain exceptions and exclusions, certain assets of the Co-Borrowers that are non-U.S. subsidiaries of the Borrower and certain assets of the Foreign Guarantors (collectively, the “Foreign Collateral”). None of the Foreign Collateral secures the obligations of the Borrower or any Co-Borrower that is a U.S. subsidiary of the Borrower.
The ABL Revolving Credit Facility contains customary representations and warranties, affirmative, reporting (including as to borrowing base-related matters) and negative covenants, and events of default. The negative covenants include, among other things, restrictions on the ability of the Holdings, the Borrower, the Co-Borrowers and the restricted subsidiaries of the Borrower to grant liens or security interests on assets, undertake mergers and consolidations, sell or otherwise transfer assets, pay dividends or make other distributions and restricted payments, incur indebtedness, make acquisitions, loans, advances or other investments, optionally prepay or modify terms of certain junior indebtedness, enter into transactions with affiliates or change lines of business, in each case, subject to certain thresholds and exceptions. In addition, ABL Revolving Credit Facility requires the maintenance of a minimum Consolidated Fixed Charge Coverage Ratio (as defined in the ABL Revolving Credit Facility) on any date when Global Availability (as defined in the ABL Revolving Credit Facility) is less than the greater of (a) 10.0% of the aggregate commitments and (b) $30.0 of at least 1.00 to 1.00, tested for the four fiscal quarter period ended on the last day of the most recently ended fiscal quarter for which financials have been delivered, and at the end of each succeeding fiscal quarter thereafter until the date on which Global Availability has exceeded the greater of (a) 10.0% of the aggregate commitments and (b) $30.0 for 30 consecutive calendar days.
At December 31, 2020, Vertiv Group and the Co-Borrowers had $434.2 of availability under the ABL Revolving Credit Facility (subject to customary borrowing base and other 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 $20.8, and taking into account the borrowing base limitations set forth in the ABL Revolving Credit Facility. At December 31, 2020, there were no borrowings outstanding under the ABL Revolving Credit Facility.
Prior Term Loan Facility
On November 30, 2016, Vertiv Group and Holdings entered into a term loan credit agreement with various financial institutions from time to time party thereto as lenders and JPMorgan Chase Bank, N.A., as administrative agent (as amended from time to time prior to March 2, 2020, the “Prior Term Loan Facility”). The Prior Term Loan Facility initially provided for a $2,320.0 senior secured term loan. On December 22, 2017, Vertiv Group obtained an additional $325.0 incremental term loan under the Prior Term Loan Facility. After accounting for prepayments and amortization, at December 31, 2019, the principal balance of the outstanding term loans was $2,070.0.
On March 2, 2020, the Prior Term Loan Facility was fully repaid as noted above.
Redemption of Prior Notes
On January 31, 2020, Vertiv commenced a process to refinance or otherwise modify its indebtedness. In connection with these refinancing transactions, Vertiv called all of Holdco's $500.0 of 12.00%/13.00% Senior PIK Toggle Notes due 2022 (the “2022 Senior Notes”), Vertiv Group’s $750.0 of 9.250% Senior Notes due 2024 (“2024 Senior Notes”) and Vertiv Group’s $120.0 of 10.00% Senior Secured Second Lien Notes due 2024 (the “2024 Senior Secured Notes” and, collectively with the 2022 Senior Notes and 2024 Senior Notes, our “Prior Notes”) for conditional redemption on March 2, 2020, in accordance with the respective indentures. A total of $0.5 principal amount of 2024 Senior Notes had been previously tendered pursuant to the change of control offer made in connection with the Business Combination and were repurchased on February 7, 2020. The remaining balance of the Prior Notes was redeemed in full on March 2, 2020.
(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 are immaterial to our consolidated financial statements.
The Company determines if an arrangement is an operating lease at inception. Leases with an initial term of 12 months or less are not recorded on the balance sheet. All other operating leases are recorded on the balance sheet with a corresponding operating lease asset, net, representing the right to use the underlying asset for the lease term and the operating lease liabilities representing the obligation to make lease payments arising from the lease. The Company's lease agreements do not contain any material residual value guarantees or restrictive covenants.
Operating lease assets and operating lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term and include options to extend or terminate the lease when they are reasonably certain to be exercised. The present value of lease payments is determined primarily using the incremental borrowing
rate, adjusted for lease term and foreign currency, based on the information available at lease commencement date. Lease agreements with lease and non-lease components are generally accounted for as a single lease component. The Company’s operating lease expense is recognized on a straight-line basis over the lease term.
Operating lease expense is as follows:
| Year ended December 31, 2020 | Year ended December 31, 2019 | ||||||||||
| Operating lease cost | $ | 53.3 | $ | 49.7 | |||||||
| Short-term and variable lease cost | 25.3 | 31.6 | |||||||||
| Total lease cost | $ | 78.6 | $ | 81.3 |
Supplemental cash flow information related to operating leases is as follows:
| Year ended December 31, 2020 | Year ended December 31, 2019 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash outflows - payments on operating leases | $ | 53.3 | $ | 51.7 | |||||||
| Right-of-use assets obtained in exchange for new lease obligations: | |||||||||||
| Operating leases | $ | 65.1 | $ | 157.0 |
Supplemental balance sheet information related to operating leases is as follows:
| Financial statement line item | December 31, 2020 | December 31, 2019 | ||||||||||||
| Operating lease right-of-use assets | Other assets | $ | 145.8 | $ | 110.4 | |||||||||
| Operating lease liabilities | Accrued expenses and other liabilities | 42.3 | 35.0 | |||||||||||
| Operating lease liabilities | Other long-term liabilities | 107.3 | 78.2 | |||||||||||
| Total lease liabilities | $ | 149.6 | $ | 113.2 |
Weighted average remaining lease terms and discount rates for operating leases are as follows:
| December 31, 2020 | December 31, 2019 | ||||||||||
| Weighted Average Remaining Lease Term | 4.5 years | 4.5 years | |||||||||
| Weighted Average Discount Rate | 5.8 | % | 7.3 | % | |||||||
Maturities of lease liabilities at December 31, 2020 are as follows:
| December 31, 2020 | |||||||||||
| Operating Leases | |||||||||||
| 2021 | $ | 51.0 | |||||||||
| 2022 | 41.4 | ||||||||||
| 2023 | 33.4 | ||||||||||
| 2024 | 20.9 | ||||||||||
| 2025 | 10.4 | ||||||||||
| Thereafter | 17.2 | ||||||||||
| Total Lease Payments | 174.3 | ||||||||||
| Less: Imputed Interest | (24.7) | ||||||||||
| Present value of lease liabilities | $ | 149.6 |
(7) PENSION PLANS
Most of the Company’s employees participate in defined contribution plans, including 401(k), profit sharing, and other savings plans that provide retirement benefits.
Certain U.S. and non-U.S. employees participate in Company specific or statutorily required defined benefit plans. In general, the Company’s policy is to fund these plans based on legal requirements, required benefit payments, and other factors.
Net periodic pension expense and projected benefit obligations for the Company's U.S defined benefit plans are not material for disclosure. Total defined contribution plan expense for the Company's U.S plans was $7.3, $13.5, and $12.8 for the years ended December 31, 2020, 2019, and 2018, respectively.
Retirement plan expense for our Non-U.S. plans includes the following components:
| Non-U.S. Plans | |||||||||||||||||
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Company defined benefit plans: | |||||||||||||||||
| Service cost | $ | 3.1 | $ | 2.4 | $ | 2.6 | |||||||||||
| Interest cost | 2.1 | 2.4 | 2.3 | ||||||||||||||
| Expected return on plan assets | (0.8) | (0.9) | (0.7) | ||||||||||||||
| Net amortization | 0.4 | — | — | ||||||||||||||
| Net periodic pension expense | 4.8 | 3.9 | 4.2 | ||||||||||||||
| Curtailment | — | — | (1.3) | ||||||||||||||
| Defined contribution plans | 2.1 | 2.8 | 3.7 | ||||||||||||||
| Total | $ | 6.9 | $ | 6.7 | $ | 6.6 |
Details of the changes in the actuarial present value of the projected benefit obligation and the fair value of plan assets for our Non-U.S. defined benefit pension plans follow:
| Non-U.S. Plans | |||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||
| Projected benefit obligation, beginning | $ | 90.6 | $ | 75.5 | |||||||
| Service cost | 3.1 | 2.4 | |||||||||
| Interest cost | 2.1 | 2.4 | |||||||||
| Actuarial loss | 3.5 | 13.4 | |||||||||
| Benefits paid | (2.8) | (2.4) | |||||||||
| Participant contributions | 0.3 | 0.3 | |||||||||
| Settlements | (0.5) | — | |||||||||
| Curtailments | — | — | |||||||||
| Foreign currency translation and other | 7.2 | (1.0) | |||||||||
| Projected benefit obligation, ending | $ | 103.5 | $ | 90.6 | |||||||
| Fair value of plan assets, beginning | 14.9 | 13.7 | |||||||||
| Actual return on plan assets | 1.2 | 1.0 | |||||||||
| Employer contributions | 2.6 | 2.4 | |||||||||
| Participants' contributions | 0.3 | 0.3 | |||||||||
| Benefits paid | (2.7) | (2.4) | |||||||||
| Settlements | (0.5) | — | |||||||||
| Foreign currency translation and other | (0.3) | (0.1) | |||||||||
| Fair value of plan assets, ending | $ | 15.5 | $ | 14.9 | |||||||
| Net amount recognized in the balance sheet | $ | (88.0) | $ | (75.7) | |||||||
| Amounts recognized in the balance sheet: | |||||||||||
| Noncurrent asset | $ | 0.4 | $ | 0.5 | |||||||
| Current liability | (2.3) | (2.2) | |||||||||
| Noncurrent liability | (86.1) | (74.0) | |||||||||
| Net amount recognized in the balance sheet | $ | (88.0) | $ | (75.7) | |||||||
| Pretax accumulated other comprehensive (income) loss | $ | 19.1 | $ | 15.0 |
As of December 31, 2020, U.S. plans were underfunded by $0.9 and non-U.S. plans were underfunded by $88.0. The U.S. funded status includes unfunded plans totaling $0.9 and the non-U.S. status includes unfunded plans totaling $88.3.
As of the plans' December 31, 2020 and 2019 measurement dates, the total accumulated benefit obligation was $92.4 and $81.4, respectively. Also, as of the respective measurement dates, the total projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for retirement plans with accumulated benefit obligations in excess of plan assets were as follows:
| December 31, 2020 | December 31, 2019 | ||||||||||
| Projected benefit obligation | $ | 96.8 | $ | 83.7 | |||||||
| Accumulated benefit obligation | 87.1 | 75.5 | |||||||||
| Fair value of plan assets | 9.6 | 8.2 |
Future benefit payments by U.S. plans are estimated to be $0.1 in 2021, $0.1 in 2022, $0.1 in 2023, $0.1 in 2024, $0.1 in 2025 and $0.3 in total over the five years 2026 through 2030. Based on foreign currency exchange rates as of December 31, 2020, future benefit payments by non-U.S. plans are estimated to be $3.1 in 2021, $3.4 in 2022, $3.4 in 2023, $3.8 in 2024, $3.9 in 2025, and $25.3 in total over the five years 2026 through 2030. The Company expects to contribute approximately $0.3 to its retirement plans in 2021. Company defined benefit pension plan expense for 2021 is expected to be approximately $5.4, versus $4.9 in 2020.
The weighted-average assumptions used in the valuation of pension benefits are as follows:
| U.S. Plans | Non-U.S. Plans | ||||||||||||||||||||||
| December 31, 2020 | December 31, 2019 | December 31, 2020 | December 31, 2019 | ||||||||||||||||||||
| Net pension expense | |||||||||||||||||||||||
| Discount rate | 2.95 | % | 4.30 | % | 2.51 | % | 3.24 | % | |||||||||||||||
| Expected return on plan assets | — | % | — | % | 6.10 | % | 6.59 | % | |||||||||||||||
| Rate of compensation increase | — | % | — | % | 3.46 | % | 3.36 | % | |||||||||||||||
| Benefit obligations | |||||||||||||||||||||||
| Discount rate | 2.15 | % | 2.95 | % | 2.04 | % | 2.51 | % | |||||||||||||||
| Rate of compensation increase | — | % | — | % | 3.41 | % | 3.46 | % |
Actuarial developed yield curves are used to determine discount rates. The expected return on plan assets assumption is determined by reviewing the investment returns of the plans for the past 10 years plus longer-term historical returns of an asset mix approximating the Company's asset allocation targets, and periodically comparing these returns to expectations of investment advisors and actuaries to determine whether long-term future returns are expected to differ significantly from the past.
The Company's Non-U.S. Plan asset allocations at December 31, 2020 and December 31, 2019 follow:
| Non-U.S. Plans | |||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||
| Equity securities | — | % | — | % | |||||||
| Debt securities | 20 | % | 28 | % | |||||||
| Insurance arrangements | 62 | % | 53 | % | |||||||
| Cash | — | % | — | % | |||||||
| Other | 18 | % | 19 | % | |||||||
| Total | 100 | % | 100 | % |
The Company did not have any U.S Plan assets at December 31, 2020.
The primary objective for the investment of plan assets is to secure participant retirement benefits while earning a reasonable rate of return. Plan assets are invested consistent with the principles of prudence and diversification with a long-term investment horizon. The strategy for plan assets is to minimize concentrations of risk by investing primarily in companies in a diversified mix of industries worldwide, while targeting neutrality in exposure to market capitalization levels, growth versus value profile, global versus regional markets, fund types and fund managers.
The approach for debt securities emphasizes investment-grade corporate and government debt with maturities matching a portion of the longer duration pension liabilities. Leveraging techniques are not used and the use of derivatives in any fund is limited and inconsequential.
The fair values of defined benefit plan assets, organized by asset class and by the fair value hierarchy of ASC 820 as outlined in Note 1 follow:
| Level 1 | Level 2 | Level 3 | Total | Percentage | |||||||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||||||||
| Equity securities | $ | — | $ | — | $ | — | $ | — | — | % | |||||||||||||||||||
| Debt securities | — | 3.1 | — | 3.1 | 20 | % | |||||||||||||||||||||||
| Insurance arrangements | — | — | 9.6 | 9.6 | 62 | % | |||||||||||||||||||||||
| Cash | — | — | — | — | — | % | |||||||||||||||||||||||
| Other | — | 0.3 | 2.5 | 2.8 | 18 | % | |||||||||||||||||||||||
| Total | $ | — | $ | 3.4 | $ | 12.1 | $ | 15.5 | 100 | % | |||||||||||||||||||
| December 31, 2019 | |||||||||||||||||||||||||||||
| Equity securities | $ | — | $ | — | $ | — | $ | — | — | % | |||||||||||||||||||
| Debt securities | — | 4.1 | — | 4.1 | 28 | % | |||||||||||||||||||||||
| Insurance arrangements | — | — | 7.8 | 7.8 | 53 | % | |||||||||||||||||||||||
| Cash | — | — | — | — | — | % | |||||||||||||||||||||||
| Other | 0.5 | — | 2.4 | 2.9 | 19 | % | |||||||||||||||||||||||
| Total | $ | 0.5 | $ | 4.1 | $ | 10.2 | $ | 14.8 | 100 | % |
Asset Classes
Global equities reflects companies domiciled in the U.S., including multi-national companies, as well as companies domiciled in developed nations outside the U.S. Corporate and government bonds represents investment-grade debt of issuers primarily outside the U.S. and insurance arrangements typically ensure no market losses or provide for a small minimum return guarantee and are primarily invested in bonds by the insurer. Other includes cash and general funds that invest primarily in equities, bank deposits and bonds with a guaranteed rate of return.
Fair Value Hierarchy Categories
Valuations of Level 1 assets for all classes are based on quoted closing market prices from the principal exchanges where the individual securities are traded. Cash is valued at cost, which approximates fair value. Equity securities categorized as Level 2 assets are primarily non-exchange traded commingled or collective funds where the underlying securities have observable prices available from active markets. Valuation is based on the net asset value of fund units held as derived from the fair value of the underlying assets. Debt securities categorized as Level 2 assets are generally valued based on independent broker/dealer bids or by comparison to other debt securities having similar durations, yields and credit ratings. Other Level 2 assets are valued based on a net asset value of fund units held, which is derived from either market-observed pricing for the underlying assets or broker/dealer quotation. U.S. equity securities classified as Level 3 are fund investments in private companies. Valuation techniques and inputs for these assets include discounted cash flow analysis, earnings multiple approaches, recent transactions, transfer restrictions, prevailing discount rates, volatilities, credit ratings and other factors. In the other class, interests in mixed assets funds are Level 2, and non-U.S. general fund investments and insurance arrangements are Level 3.
Details of the changes in value for Level 3 assets are as follows:
| Year Ended | |||||||||||||||||
| December 31, 2020 | December 31, 2019 | ||||||||||||||||
| Level 3, beginning | $ | 10.2 | $ | 9.0 | |||||||||||||
| Gains (losses) on assets held | 1.7 | 0.7 | |||||||||||||||
| Purchases, sales and settlements, net | 0.2 | 0.5 | |||||||||||||||
| Level 3, ending | $ | 12.1 | $ | 10.2 |
(8) INCOME TAXES
The effective tax rate for continuing operations was (65.6)%, (35.0)%, and (18.4)%, for the years ended December 31, 2020, 2019, and 2018, respectively. The effective rate in the each period was primarily influenced by the mix of income between our U.S. and non-U.S. operations, favorable tax rates and incentives in non-U.S. jurisdictions, taxes accrued on unremitted earnings, withholding taxes on cross-border payments, changes in valuation allowance for U.S. federal and state purposes, the GILTI provisions of the Tax Cuts and Jobs Act (“the Act”), and additional reserves for uncertain tax positions.
During the quarter ended December 31, 2018, we completed the accounting for the tax effects of the Act. As a result, we recorded a tax benefit of $14.1 for the year ended December 31, 2018 to adjust provisional amounts recorded as of December 31, 2017 related to the tax effects of the Act which are included as a component of income tax expense from continuing operations. The estimate included a one-time transition tax on the mandatory deemed repatriation of foreign earnings, and which was adjusted by $15.9 from $28.0 to $12.1. This adjustment was based on a decrease in cumulative foreign earnings from $180.4 to $78.2. In addition, the provisional amount related to the remeasurement of certain deferred tax assets and liabilities resulted in additional expense of $1.4 while the change in valuation allowance resulted in additional expense of $0.4.
The global intangible low-taxed income ("GILTI") provisions of the Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company has made the policy election to record any liability associated with GILTI in the period in which it is incurred.
Earnings (loss) before income taxes from continuing operations consists of the following:
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| United States | $ | (229.5) | $ | (201.1) | $ | (351.4) | |||||||||||
| Non-U.S. (1) | 118.6 | 96.8 | 80.4 | ||||||||||||||
| Total loss before income taxes | $ | (110.9) | $ | (104.3) | $ | (271.0) |
(1)Certain of the Company's Non-U.S. entities generate significant losses for which a valuation allowance is provided for and accordingly do not create a tax benefit.
The principal components of income tax expense (benefit) from continuing operations consists of the following:
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 0.1 | $ | — | $ | — | |||||||||||
| State and local | 0.6 | (1.4) | 6.0 | ||||||||||||||
| Non-U.S. | 73.4 | 51.0 | 83.8 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 2.3 | (0.4) | (8.4) | ||||||||||||||
| State and local | 2.9 | (1.8) | (2.7) | ||||||||||||||
| Non-U.S. | (6.6) | (10.9) | (28.8) | ||||||||||||||
| Income tax expense (benefit) | $ | 72.7 | $ | 36.5 | $ | 49.9 |
Reconciliation of U.S. federal statutory taxes to the Company’s total income tax expense (benefit) from continuing operations consists of the following:
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Taxes at U.S. statutory rate (21%) | $ | (23.3) | $ | (21.9) | $ | (56.9) | |||||||||||
| State and local taxes, net of federal tax benefit | (4.9) | (4.0) | (6.0) | ||||||||||||||
| Non-U.S. rate differential | 4.6 | 4.3 | 4.2 | ||||||||||||||
| Non-U.S. tax holidays | (9.2) | (4.6) | (1.8) | ||||||||||||||
| Uncertain tax positions | 16.4 | 16.0 | 21.5 | ||||||||||||||
| Tax Cuts and Jobs Act of 2017 | — | — | (14.1) | ||||||||||||||
| Global intangible low-tax income inclusion | 15.4 | 13.8 | 4.2 | ||||||||||||||
| Change in valuation allowances | 82.1 | 17.0 | 104.7 | ||||||||||||||
| Taxes on undistributed foreign earnings and withholding/ dividend taxes | 9.8 | 8.5 | (2.3) | ||||||||||||||
| U.S. implications of non-U.S. earnings | (2.6) | (1.8) | 12.3 | ||||||||||||||
| R&D deduction/ credit | (7.9) | (2.2) | (11.8) | ||||||||||||||
| Non-taxable settlement of contingent consideration | — | — | (3.2) | ||||||||||||||
| Other permanent differences | 4.9 | 6.7 | 10.5 | ||||||||||||||
| Impact of rate changes in non-U.S. jurisdictions | (2.6) | 4.8 | (1.3) | ||||||||||||||
| Outside basis difference on divestiture | — | — | (6.6) | ||||||||||||||
| Impact of transaction costs | (4.8) | — | — | ||||||||||||||
| Other (1) | (5.2) | (0.1) | (3.5) | ||||||||||||||
| Total income tax expense (benefit) | $ | 72.7 | $ | 36.5 | $ | 49.9 |
(1)Represents several adjustments, none of which are significant for separate disclosure.
The Company has tax holiday agreements in place in China, which are scheduled to expire between 2021 and 2022. It is the Company's intention to reapply for these holidays as they expire. We anticipate that we will continue to qualify for these holidays, but we will assess based on business conditions at the time of renewal.
As of December 31, 2020 and December 31, 2019 the Company has recognized a $38.0 and $45.1 deferred income tax liability for non-U.S. income taxes and foreign withholding taxes on outside basis differences for certain foreign subsidiaries with earnings that are not indefinitely reinvested. Certain earnings of certain foreign affiliates continue to be indefinitely reinvested, but determining the impact was not practicable.
The principal items that gave rise to deferred income tax assets and liabilities follow:
| December 31, 2020 | December 31, 2019 | ||||||||||||||||
| Deferred tax assets | |||||||||||||||||
| Net operating losses and capital losses | $ | 156.0 | $ | 131.7 | |||||||||||||
| Accrued liabilities | 44.9 | 30.0 | |||||||||||||||
| Employee compensation and benefits | 10.1 | 13.7 | |||||||||||||||
| Pensions | 14.8 | 13.3 | |||||||||||||||
| Business interest deduction limitation | 80.7 | 98.9 | |||||||||||||||
| Inventory | 21.8 | 20.4 | |||||||||||||||
| R&D credit carryforward | 8.8 | 6.6 | |||||||||||||||
| Lease liability | 13.7 | 19.8 | |||||||||||||||
| Bad debts | 7.5 | 6.3 | |||||||||||||||
| Foreign tax credit carryforward | 7.6 | — | |||||||||||||||
| Other | 0.4 | 0.3 | |||||||||||||||
| Total deferred tax assets, before valuation allowances | $ | 366.3 | $ | 341.0 | |||||||||||||
| Valuation allowances | $ | (274.7) | $ | (205.7) | |||||||||||||
| Deferred tax assets, net of valuation allowances | $ | 91.6 | $ | 135.3 | |||||||||||||
| Deferred tax liabilities | |||||||||||||||||
| Intangibles & Goodwill | (95.5) | (106.9) | |||||||||||||||
| Undistributed foreign earnings | (38.0) | (45.1) | |||||||||||||||
| Property, plant & equipment | (30.6) | (31.2) | |||||||||||||||
| Debt issuance costs | (3.2) | (46.1) | |||||||||||||||
| Lease Right of Use Asset | (12.1) | (18.8) | |||||||||||||||
| Other | (7.8) | (2.9) | |||||||||||||||
| Total deferred tax liabilities | $ | (187.2) | $ | (251.0) | |||||||||||||
| Net deferred income tax liabilities | $ | (95.6) | $ | (115.7) |
At December 31, 2020, the Company had federal net operating losses of $318.8, expiring at various times starting in 2036 with some losses having an unlimited carryforward period. At December 31, 2020, the gross amount of the Company’s state net operating losses was $594.9, expiring at various times between 2021 and 2040. At December 31, 2020, the Company had other federal tax credit carryforwards expiring between 2030 and 2040.
The use of certain US tax attributes as of December 31, 2020 is subject to an annual limitation due to the change in ownership of our stock in February 2020 as described in Note 1. At this time, the tax attributes subject to the annual limitation have a valuation allowance recorded against them and therefore this annual limitation will not have a material impact on the Company. There can be no assurance that trading in our shares will not affect another change in ownership under the Internal Revenue Code which could impose an additional limit on the use of our tax attributes.
At December 31, 2020, the Company’s foreign net operating losses that are available to offset future taxable income were $281.9. These foreign loss carryforwards will expire at various times beginning in 2021 with some losses having an unlimited carryforward period.
At December 31, 2020, the Company’s foreign capital loss carryforwards were $71.2. The majority of foreign capital loss carryforwards will expire in 2024 with the remaining having an unlimited carryforward period.
Pursuant to the terms of the separation, Emerson agreed to indemnify the Company for all U.S. federal, state or local income taxes, as well as non-U.S. income taxes, that are attributable to any period prior to the separation. An indemnification receivable of $15.7 has been recorded in noncurrent other assets for the uncertain tax positions related to periods prior to the separation. The impact on the Company’s tax expense for changes in uncertain tax positions for periods prior to the separation (discussed below) will be offset by the Emerson indemnification, resulting in no net effect on the Company’s net income.
Following are changes in unrecognized tax benefits before considering recoverability of cross-jurisdictional tax credits (federal, state, and non-U.S.) and temporary differences. The amount of unrecognized tax benefits is not expected to significantly increase or decrease within the next 12 months.
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Beginning balance | $ | 52.6 | $ | 38.4 | $ | 22.0 | |||||||||||
| Additions for the current year tax positions | 13.2 | 10.2 | 11.6 | ||||||||||||||
| Additions for prior year tax positions | 8.1 | 5.5 | 9.6 | ||||||||||||||
| Reductions for prior year tax positions | (1.5) | (1.0) | (4.8) | ||||||||||||||
| Reductions for settlements with tax authorities | — | — | — | ||||||||||||||
| Reductions for expirations of statute of limitations | (2.4) | (0.5) | — | ||||||||||||||
| Ending balance | $ | 70.0 | $ | 52.6 | $ | 38.4 |
The total amount of net unrecognized tax benefits that would affect income tax expense, if recognized in the Consolidated Financial Statements, is $56.4. In addition, an adjustment of $15.7 would result to other expense for reversal of the indemnification receivable. The Company accrues interest and penalties related to income taxes in income tax expense. As of December 31, 2020, 2019, and 2018, total accrued interest and penalties were $12.4, $7.1, and $6.2, respectively.
Eligible domestic subsidiaries file a consolidated U.S. Federal income tax return. Examinations by the U.S. Internal Revenue Service are complete through 2013. The status of state and non-U.S. tax examinations varies due to the numerous legal entities and jurisdictions in which the Company operates. As noted above, pursuant to the terms of the separation, Emerson will indemnify the Company for any tax assessments for periods prior to the separation.
(9) OTHER FINANCIAL INFORMATION
Items reported in earnings include the following:
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Research and development expense | $ | 228.6 | $ | 229.4 | $ | 198.3 | |||||||||||
| Depreciation expense | 60.3 | 57.1 | 60.4 | ||||||||||||||
| Rent expense | 78.6 | 81.4 | 80.4 | ||||||||||||||
| Advertising expense | 28.3 | 30.3 | 35.2 |
Items reported in accrued expenses and other liabilities include the following:
| December 31, 2020 | December 31, 2019 | ||||||||||
| Deferred revenue | $ | 199.6 | $ | 160.9 | |||||||
| Accrued payroll and other employee compensation | 138.5 | 145.4 | |||||||||
| Litigation reserve (see Note 19) | 96.6 | 92.9 | |||||||||
| Restructuring (see Note 3) | 69.3 | 22.2 | |||||||||
| Operating lease liabilities (see Note 6) | 42.3 | 35.0 | |||||||||
| Contract liabilities | 36.1 | 39.8 | |||||||||
| Product warranty (see Note 1) | 36.5 | 43.3 | |||||||||
| Other | 282.9 | 328.2 | |||||||||
| Total | $ | 901.8 | $ | 867.7 |
The change in the sales returns and allowances and allowance for doubtful accounts is as follows:
| Year Ended | |||||||||||||||||
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Beginning balance | $ | 52.0 | $ | 36.0 | $ | 28.3 | |||||||||||
| Provision charged to expense | 47.5 | 59.6 | 55.3 | ||||||||||||||
| Deductions | (44.0) | (43.6) | (47.6) | ||||||||||||||
| Ending balance | $ | 55.5 | $ | 52.0 | $ | 36.0 |
The change in inventory obsolescence is as follows:
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Beginning balance | $ | 59.7 | $ | 30.6 | $ | 15.3 | |||||||||||
| Provision charged to expense | 23.4 | 21.3 | 20.9 | ||||||||||||||
| Write-offs and other | (19.0) | 7.8 | (5.6) | ||||||||||||||
| Ending balance | $ | 64.1 | $ | 59.7 | $ | 30.6 |
The change in the income tax valuation allowance is as follows:
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Beginning balance | $ | 205.7 | $ | 208.0 | $ | 108.5 | |||||||||||
| Additions charged to expense | 82.1 | 17.0 | 105.1 | ||||||||||||||
| Reductions charged to other accounts | (13.1) | (19.3) | (5.6) | ||||||||||||||
| Ending balance | $ | 274.7 | $ | 205.7 | $ | 208.0 |
(10) 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 year ended December 31, 2020, the Company recorded $0.5 in charges related to the CASA. This agreement was terminated on February 7,2020.
During the year ended December 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.
Transactions with Affiliates of Advisors
The Company also purchased and sold goods in the ordinary course of business with affiliates of Advisors. For the year ended December 31, 2020, 2019, and 2018 purchases were $64.3, $65.0, and $56.5, respectively.
Tax Receivable Agreement
On the Closing Date of the Business Combination, the Company entered into a Tax Receivable Agreement with Advisors. See Note 11 — Financial Instruments and Risk Management for additional information.
Changes to Capital
On August 17, 2020, the Company completed an underwritten secondary public offering of 23,000,000 shares of Class A common stock by VPE Holdings, LLC, the selling stockholder and an affiliate of Platinum Equity, LLC, pursuant to a registration statement filed with the Securities and Exchange Commission (File No. 333-236334), at a public offering price of $15.25 per share . The Offering involved the exercise in full by the underwriters of their option to purchase 3,000,000 additional shares of Class A common stock in the Offering. The Company did not sell any shares of Class A common stock in the Offering and did not receive any proceeds from the Offering.
On November 17, 2020, the Company completed an underwritten secondary public offering of 18,000,000 shares of Class A common stock by VPE Holdings, LLC, the selling stockholder and an affiliate of Platinum Equity, LLC, pursuant to a registration statement filed with the Securities and Exchange Commission (File No. 333-236334), at a public offering price of $16.75 per share. The Company did not sell any shares of Class A common stock in the Offering and did not receive any proceeds from the Offering.
Independent Contractor Agreement
On January 1, 2021, Vertiv Corporation entered into an Independent Contractor Agreement with International Transformation Partners, LLC, an entity affiliated with Andrew Cole, the Company’s former Chief Organizational Development and Human Resources Officer, for advisory and executive mentorship services. Compensation under the
agreement is $250,000 per year, the term of the agreement is one year, and the agreement contains standard contractual terms.
(11) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In accordance with ASC 820, the Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Observable inputs are from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. These tiers include the following:
Level 1 — inputs include observable unadjusted quoted prices in active markets for identical assets or liabilities
Level 2 — inputs include other than quoted prices in active markets that are either directly or indirectly observable
Level 3 — inputs include unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions
In determining fair value, the Company uses various valuation techniques and prioritizes the use of observable inputs. The availability of observable inputs varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded and other characteristics particular to the instrument. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants and the valuation does not require significant management judgment. For other financial instruments, pricing inputs are less observable in the marketplace and may require management judgment.
Recurring fair value measurements
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:
| Total | Quoted prices in active markets for identical assets (Level 1) | Other observable inputs (Level 2) | Unobservable inputs (Level 3) | ||||||||||||||||||||
| December 31, 2020 | |||||||||||||||||||||||
| Tax Receivable Agreement | 155.6 | — | — | 155.6 | |||||||||||||||||||
| Interest rate swaps | 32.8 | — | 32.8 | — |
Tax receivable agreement — value 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 December 31, 2020, we utilized a discount rate of 3.4%. 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 $10.0 at December 31, 2020. Significant changes in unobservable inputs could result in material changes to the tax receivable liability.
Interest rate swaps — 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.
Details of the changes in value for the Tax receivable agreement are as follows:
| Beginning liability balance, January 1, 2020 | $ | — | |||||||||
| Tax receivable agreement, initially recorded | 133.4 | ||||||||||
| Change in fair value | 22.2 | ||||||||||
| Ending liability balance, December 31, 2020 | $ | 155.6 |
Tax receivable agreement
On the Closing Date, the Company entered into the Tax Receivable Agreement, which generally provides for the payment by us to the Vertiv Stockholder of 65% of the cash tax savings in U.S. federal, state, local and certain foreign taxes, that we actually realize (or are deemed to realize) in periods after the closing of the Business Combination as a result of (i) increases in the tax basis of certain intangible assets of Vertiv resulting from certain pre-Business Combination acquisitions, (ii) certain U.S. federal income tax credits for increasing research activities (so-called “R&D credits”) and (iii) tax deductions in respect of certain Business Combination expenses. We expect to retain the benefit of the remaining 35% of these cash tax savings.
For purposes of the Tax Receivable Agreement, the applicable tax savings will generally be computed by comparing our actual tax liability for a given taxable year to the amount of such taxes that we would have been required to pay in such taxable year without the tax basis in certain intangible assets, the U.S. federal income tax R&D credits and the tax deductions for certain Business Combination expenses described above. Except as described below, the term of the Tax Receivable Agreement will continue for twelve taxable years following the closing of the Business Combination. However, the payments described in (i) and (ii) above will generally be deferred until the close of our third taxable year following the closing of the Business Combination. The payments described in (iii) above will generally be deferred until the close of our fourth taxable year following the closing of the Business Combination and then payable ratably over the following three taxable year periods regardless of whether we actually realize such tax benefits. Payments under the Tax Receivable Agreement are not conditioned on the Vertiv Stockholder’s continued ownership of our stock.
Under certain circumstances (including a material breach of our obligations, certain actions or transactions constituting a change of control, a divestiture of certain assets, upon the end of the term of the Tax Receivable Agreement or, after three years, at our option), payments under the Tax Receivable Agreement will be accelerated and become immediately due in a lump sum. In such case, the payments due upon acceleration would be based on the present value of our anticipated future tax savings using certain valuation assumptions, including that we will generate sufficient taxable income to fully utilize the applicable tax assets and attributes covered under the Tax Receivable Agreement (or, in the case of a divestiture of certain assets, the applicable tax attributes relating to such assets). Consequently, it is possible in these circumstances that the actual cash tax savings realized by us may be significantly less than the corresponding Tax Receivable Agreement payments we are required to make at the time of acceleration. Furthermore, the acceleration of our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity.
The Tax Receivable Agreement provides for the payment by us to the Vertiv Stockholder of 65% of the cash tax savings realized (or deemed realized) over a twelve-year period after the closing of the Business Combination as described above. In the twelfth year of the Tax Receivable Agreement, an additional payment will be made to the Vertiv Stockholder based on 65% of the remaining tax benefits that have not been realized. The timing of expected future payments under the Tax Receivable Agreement are dependent upon various factors, including the existing tax bases at the time of the Business Combination, the realization of tax benefits, and changes in tax laws. However, as the Company is obligated to settle the remaining tax benefits after 12 years, the Company has concluded that the liability should be measured at fair value and recorded within other long-term liabilities in the consolidated balance sheet at December 31, 2020. The Company has estimated total payments of approximately $191.5 on an undiscounted basis. The fair value of the estimated liability as of the closing date of $133.4 has been included as an adjustment to additional paid in capital. Subsequent measurements are recorded in interest expense, net and accumulated other comprehensive income, 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 other comprehensive income. These estimates and assumptions are subject to change, which may materially affect the measurement of the liability.
We have recorded $21.3 in Interest expense, net for the year ended December 31, 2020, in the consolidated statement of earnings (loss) and an unrealized (loss) gain of $(0.9) in Accumulated other comprehensive income, related to the change in fair value of the tax receivable liability from the Closing Date to December 31, 2020.
Interest rate risk management
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 income, 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.
The Company uses interest rate swaps to manage the interest rate mix of our total debt portfolio and related overall cost of borrowing. At December 31, 2020 interest rate swap agreements designated as cash flow hedges effectively swapped an initial amount of $1,200.0 of LIBOR based floating rate debt for fixed rate debt. Our interest rate swaps mature in March 2027. The fair value of interest rates swaps was an unrealized loss of $32.8, of which $10.3 was recorded in Accrued expenses and other liabilities and $22.6 in Other long-term liabilities and the related unrealized loss in Accumulated other comprehensive income, on the balance sheet at December 31, 2020. The Company recognized $6.4 in earnings for the year ended December 31, 2020. At December 31, 2020, the Company expects that approximately $10.3 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.
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 December 31, 2020 and December 31, 2019.
| December 31, 2020 (1) | December 31, 2019 | ||||||||||||||||||||||
| Fair Value | Par Value (2) | Fair Value | Par Value (2) | ||||||||||||||||||||
| Term Loan due 2027 | $ | 2,169.9 | $ | 2,183.5 | $ | — | $ | — | |||||||||||||||
| ABL Revolving Credit Facility due 2025 | — | — | 145.2 | 145.2 | |||||||||||||||||||
| Term Loan due 2023 | — | — | 2,064.8 | 2,070.0 | |||||||||||||||||||
| 9.25% Notes due 2024 | — | — | 805.3 | 750.0 | |||||||||||||||||||
| 12.00%/13.00% Senior PIK Toggle Notes due 2022 | — | — | 517.5 | 500.0 | |||||||||||||||||||
| 10.00% Notes due 2024 | — | — | 127.5 | 120.0 | |||||||||||||||||||
(1)On March 2, 2020, certain subsidiaries of Vertiv Holdings Co entered into a Term Loan Credit Agreement with various financial institutions for $2,200.0 of senior secured term loans. The proceeds of the Term Loan were used to repay or redeem in full certain outstanding indebtedness and pay certain fees and expenses. See Note 5, Debt for additional information.
(2)See Note 5 — Debt for additional information
(12) OTHER DEDUCTIONS, NET
Other deductions, net are summarized as follows:
| December 31, 2020 | December 31, 2019 | December 31, 2018 | |||||||||||||||
| Amortization of intangibles (excluding software) | $ | 128.7 | $ | 129.2 | $ | 146.2 | |||||||||||
| Restructuring costs (see Note 3) | 73.9 | 20.7 | 46.2 | ||||||||||||||
| Foreign currency (gain) loss, net | 26.0 | (1.5) | (5.4) | ||||||||||||||
| Asset Impairments (see Note 4) | 21.0 | — | — | ||||||||||||||
| Contingent consideration | — | — | (10.0) | ||||||||||||||
| Other, net | 2.2 | (2.3) | 1.8 | ||||||||||||||
| Total | $ | 251.8 | $ | 146.1 | $ | 178.8 |
(13) ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Activity in accumulated other comprehensive income (loss) is as follows:
| December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||||||||||
| Foreign currency translation, beginning | $ | 32.9 | $ | 43.2 | $ | 133.8 | ||||||||||||||
| Other comprehensive income (loss) | 72.0 | (10.3) | (90.6) | |||||||||||||||||
| Foreign currency translation, ending | 104.9 | 32.9 | 43.2 | |||||||||||||||||
| Interest rate swaps, beginning | — | — | — | |||||||||||||||||
| Unrealized losses deferred during the period | (32.8) | — | — | |||||||||||||||||
| Interest rate swaps, ending | (32.8) | — | — | |||||||||||||||||
| Pension, beginning | (14.8) | (1.4) | (0.3) | |||||||||||||||||
| Actuarial gain (loss) deferred during the period, net of income taxes | (4.9) | (13.4) | (1.1) | |||||||||||||||||
| Pension, ending | (19.7) | (14.8) | (1.4) | |||||||||||||||||
| Tax receivable agreement, beginning | — | — | — | |||||||||||||||||
| Unrealized gain (loss) during the period (1) | (0.9) | — | — | |||||||||||||||||
| Tax receivable agreement, ending | (0.9) | — | — | |||||||||||||||||
| Accumulated other comprehensive income (loss) | $ | 51.5 | $ | 18.1 | $ | 41.8 |
(1)The fair value movement on the Tax Receivable Agreement attributable to our own credit risk spread is recorded in other comprehensive (loss) income.
(14) SEGMENT INFORMATION
The primary measure used for assessing segment performance and making operating decisions is earnings before interest and income taxes.
The segment performance measure excludes corporate and other costs which consist of headquarters management costs, stock-based compensation, interest expense, other incentive compensation, global digital costs, and costs that support global product platform development and offering management. Intersegment selling prices approximate market prices. Summarized information about the Company’s results of operations by business 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 and solutions** includes AC and DC power management, thermal management, and integrated modular solutions.
-
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 and 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 China, India and the rest of Asia. 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.
Business Segments
| Sales | December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||||||
| Americas | $ | 2,055.1 | $ | 2,251.4 | $ | 2,175.6 | |||||||||||
| Asia Pacific | 1,431.4 | 1,378.0 | 1,346.9 | ||||||||||||||
| Europe, Middle East & Africa | 1,009.7 | 976.0 | 938.0 | ||||||||||||||
| 4,496.2 | 4,605.4 | 4,460.5 | |||||||||||||||
| Eliminations | (125.6) | (174.2) | (174.9) | ||||||||||||||
| Total | $ | 4,370.6 | $ | 4,431.2 | $ | 4,285.6 |
| Earnings (loss) from Continuing Operations before income taxes | December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||||||
| Americas | $ | 396.8 | $ | 358.1 | $ | 301.0 | |||||||||||
| Asia Pacific | 168.3 | 152.5 | 136.6 | ||||||||||||||
| Europe, Middle East & Africa | 90.5 | 64.8 | 29.8 | ||||||||||||||
| 655.6 | 575.4 | 467.4 | |||||||||||||||
| Corporate and other (1) | (616.1) | (369.3) | (449.6) | ||||||||||||||
| Interest expense, net | (150.4) | (310.4) | (288.8) | ||||||||||||||
| Total | $ | (110.9) | $ | (104.3) | $ | (271.0) |
(1)Corporate and other includes a loss on extinguishment of debt of $174.0 for the year ended December 31, 2020. See Note 5 - Debt for additional information.
| Total Assets | December 31, 2020 | December 31, 2019 | |||||||||
| Americas | $ | 2,165.8 | $ | 2,296.4 | |||||||
| Asia Pacific | 1,289.1 | 1,152.2 | |||||||||
| Europe, Middle East & Africa | 1,070.0 | 947.5 | |||||||||
| 4,524.9 | 4,396.1 | ||||||||||
| Corporate and other | 548.9 | 261.3 | |||||||||
| Total | $ | 5,073.8 | $ | 4,657.4 |
| Intersegment sales | December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||||||
| Americas | $ | 14.5 | $ | 22.3 | $ | 29.9 | |||||||||||
| Asia Pacific | 63.0 | 100.0 | 102.7 | ||||||||||||||
| Europe, Middle East & Africa | 48.1 | 51.9 | 42.3 | ||||||||||||||
| Total | $ | 125.6 | $ | 174.2 | $ | 174.9 |
| Depreciation and Amortization | December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||||||
| Americas | $ | 118.4 | $ | 122.2 | $ | 130.7 | |||||||||||
| Asia Pacific | 35.5 | 35.4 | 37.8 | ||||||||||||||
| Europe, Middle East & Africa | 24.8 | 24.0 | 35.8 | ||||||||||||||
| Corporate and other | 24.4 | 21.3 | 12.7 | ||||||||||||||
| Total | $ | 203.1 | $ | 202.9 | $ | 217.0 |
| Capital Expenditures | December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||||||
| Americas | $ | 15.0 | $ | 23.5 | $ | 23.6 | |||||||||||
| Asia Pacific | 13.8 | 11.3 | 14.5 | ||||||||||||||
| Europe, Middle East & Africa | 12.4 | 10.0 | 21.7 | ||||||||||||||
| Corporate and other | 3.2 | 2.8 | 4.8 | ||||||||||||||
| Total | $ | 44.4 | $ | 47.6 | $ | 64.6 |
| Sales by Destination | December 31, 2020 | December 31, 2019 | December 31, 2018 | ||||||||||||||
| United States and Canada | $ | 1,858.1 | $ | 2,017.4 | $ | 1,942.3 | |||||||||||
| Europe | 777.0 | 763.9 | 740.8 | ||||||||||||||
| Asia | 1,366.1 | 1,285.6 | 1,264.9 | ||||||||||||||
| Latin America | 180.6 | 213.0 | 195.9 | ||||||||||||||
| Middle East/Africa | 188.8 | 151.3 | 141.7 | ||||||||||||||
| Total | $ | 4,370.6 | $ | 4,431.2 | $ | 4,285.6 |
Sales in the U.S. were $1,762.4, $1,892.4, and $1,831.1 for the years ended December 31, 2020, 2019, and 2018, respectively, while sales in China were $778.5, $669.2, and $644.5, respectively.
| Sales by Products and Services Offering | December 31, 2020 | December 31, 2019 (1) | December 31, 2018 (1) | ||||||||||||||
| Critical infrastructure & solutions | $ | 2,457.7 | $ | 2,467.5 | $ | 2,301.1 | |||||||||||
| Service & spares | 1,324.8 | 1,338.1 | 1,305.3 | ||||||||||||||
| Integrated rack solutions | 588.1 | 625.6 | 679.2 | ||||||||||||||
| Total | $ | 4,370.6 | $ | 4,431.2 | $ | 4,285.6 |
(1)Beginning in the second quarter of 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 Critical infrastructure & solutions, Services & spares and Integrated rack solutions for the year ended December 31, 2019 have been adjusted by $(165.1), $39.2, and $125.9, respectively, to reflect this modification. Comparative results for Critical infrastructure & solutions, Services & spares and Integrated rack solutions for the year ended December 31, 2018 have been adjusted by $(150.7), $29.2, and $121.5, respectively, to reflect this modification.
(15) STOCK-BASED COMPENSATION PLANS
Our stock incentive plan permits the granting of incentive stock options or nonqualified stock options; stock appreciation rights; performance awards, which may be cash-or share-based; restricted stock units; restricted stock; and other stock-based awards. We measure and record compensation expense based on the fair value of the Company's common stock on the date of grant for restricted stock and restricted stock units (RSUs) and the grant date fair value, determined utilizing the Black-Scholes formula, for stock options. We record compensation cost for service-based awards, including graded-vesting awards, on a straight-line basis over the entire vesting period, or for retirement eligible employees over the requisite service period. We account for the forfeiture of awards as they occur.
There were no equity compensation plans authorized by GSAH as of December 31, 2019. In connection with the Business Combination, GSAH’s Board adopted the Vertiv Holdings Co 2020 Stock Incentive Plan, the “2020 Plan”, on December 9, 2019 which was approved by GSAH’s stockholders on February 6, 2020, immediately preceding the Business Combination. Under the 2020 Plan, a total aggregate of 33.5 million share awards issuable were authorized and reserved for issuance for the purpose of better motivating our employees, consultants and directors to achieve superior performance measured by both our key financial and operating metrics as well as relative stock price appreciation. The 2020 Plan is administered by the Compensation Committee of our Board and permits the granting of incentive stock options or nonqualified stock options; stock appreciation rights; performance awards, which may be cash-or share-based; restricted stock units; restricted stock; and other stock-based awards. Beginning with the first business day of each calendar year beginning in 2021, the number of shares will increase by the least of (a) 10.5 million shares, (b) 3% of the number of shares outstanding as of the last day of the immediately preceding calendar year, or (c) a lesser number of shares determined by the Compensation Committee.
Stock options
Stock options are generally granted to certain employees and directors to purchase common shares at an exercise price equal to the market price of the Company's stock at the date of the grant. Option awards generally vest 25% per year over 4 years of continuous service and have 10-year contractual terms.
The Company uses a Black-Scholes option pricing model to estimate the fair value of stock options. The principal significant assumptions utilized in valuing stock options include the expected stock price volatility (based on the most recent historical period equal to the expected life of the option); the expected option life (an estimate based on historical experience); the expected dividend yield; and the risk-free interest rate (an estimate based on the yield of United States Treasury zero coupon with a maturity equal to the expected life of the option). Because the Company only recently
became publicly traded, we do not have sufficient historical information on which to base expected volatility. As such, our volatility assumption is based on the historical and implied volatility of similar public companies, which were identified considering factors such as industry, stage of life cycle, size, and financial leverage. Because the Company does not have a history of granting stock options, we do not have historical option exercise experience upon which we can estimate the expected term. As such, we estimate the expected term using the average of the vesting period and the contractual period of the award. A summary of the weighted average assumptions used in determining the fair value of stock options follows:
| Year ended December 31, 2020 | |||||
| Expected volatility | 27 | % | |||
| Expected option life in years | 6.25 | ||||
| Expected dividend yield | 0.08 | % | |||
| Risk-free interest rate | 1.17 | % | |||
| Weighted-average fair value of stock options | $ | 3.82 |
A summary of stock option activity follows:
| Options | Weighted-average exercise price per option | Weighted-average remaining contractual life in years | Aggregate intrinsic value (1) | ||||||||||||||||||||
| Outstanding at January 1, 2020 | — | $ | — | — | $ | — | |||||||||||||||||
| Granted | 7,431,872 | 11.91 | 8.83 | — | |||||||||||||||||||
| Exercised | — | — | — | — | |||||||||||||||||||
| Forfeited and canceled | (318,843) | 11.80 | — | — | |||||||||||||||||||
| Outstanding at December 31, 2020 | 7,113,029 | 11.91 | 8.83 | $ | 48.1 |
(1)The aggregate intrinsic value in the table above represents the difference between the Company's most recent valuation and the exercise price of each in-the-money option on the last day of the period presented.
For the year ended December 31, 2020, total compensation expense relating to stock options was $5.6. At December 31, 2020, all options remain unvested. As of December 31, 2020, there was $21.6 of total unrecognized compensation cost related to unvested options. That cost is expected to be recognized over a weighted-average period of 3.19 years.
Restricted stock units
RSUs have been issued to certain employees and directors as of December 31, 2020 and entitle the holder to receive one common share for each RSU upon vesting. RSU shares are accounted for at fair value based upon the closing stock price on the date of grant. The corresponding expense is amortized over the vesting period, generally over four years. A summary of the RSU activity through December 31, 2020 follows:
| Restricted stock units | Weighted-average fair value per unit | ||||||||||
| Outstanding at January 1, 2020 | — | $ | — | ||||||||
| Granted | 4,103,932 | 12.12 | |||||||||
| Exercised | — | — | |||||||||
| Forfeited and canceled | (60,586) | 8.50 | |||||||||
| Outstanding at December 31, 2020 | 4,043,346 | 12.17 |
For the year ended December 31, 2020, total compensation expense relating to RSUs was $7.4. At December 31, 2020, all RSUs remain unvested. As of December 31, 2020, there was $41.8 of total unrecognized compensation cost related to unvested RSUs. That cost is expected to be recognized over a weighted-average period of 3.45 years.
(16) EARNINGS (LOSS) PER SHARE
Basic earnings per common 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 common 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 years ended December 31, 2020, 2019, and 2018 are as follows (in millions, except per share and per share amounts):
| Year ended December 31, 2020 | Year ended December 31, 2019 | Year ended December 31, 2018 | ||||||||||||||||||
| Net income (loss) | $ | (183.6) | $ | (140.8) | $ | (314.0) | ||||||||||||||
| Weighted-average number of common shares outstanding - basic | 307,076,397 | 118,261,955 | 118,261,955 | |||||||||||||||||
| Dilutive effect of equity-based compensation and warrants | — | — | — | |||||||||||||||||
| Weighted-average number of common shares outstanding - diluted | 307,076,397 | 118,261,955 | 118,261,955 | |||||||||||||||||
| Net income per share | ||||||||||||||||||||
| Basic | $ | (0.60) | $ | (1.19) | $ | (2.65) | ||||||||||||||
| Diluted | (0.60) | (1.19) | (2.65) |
(1)The Business Combination was accounted for as a reverse capitalization in accordance with U.S. GAAP. See Note 1 "Description of the Business". Accordingly, weighted-average shares outstanding for purposes of the earnings per share calculation have been retroactively restated as shares reflecting the exchange ratio established in the Business Combination (1.0 Vertiv Holdings share to 118.261955 Vertiv Holdings Co shares).
Stock awards and warrants were outstanding during the year ended December 31, 2020, but were not included in the computation of diluted earnings per common share because the effect would be anti-dilutive. The number of shares used in the calculation of diluted earnings per share did not include 11.2 million shares for the year ended December 31, 2020.
On December 17, 2020, the Company announced its plans to redeem for cash all of its outstanding public warrants to purchase shares of Vertiv's Class A common shares. During Q4 2020, $156.5 of cash was generated from the exercise of 13.6 million public warrants.
Subsequent to December 31, 2020, 9.3 million public warrants were exercised which generated cash proceeds of $107.5 in connection with Vertiv's notice of redemption to redeem for cash all of its outstanding public warrants to purchase shares of Class A common stock. Public warrants that remained exercised at 5 p.m. New York City time on January 18, 2021 were no longer exercisable, and the registered holders of such unexercised public warrants are entitled to receive the redemption price of $0.01 per warrant.
(17) 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 has submitted an appeal, and in connection with the appeal has 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 $96.6 in accrued expenses, the full amount of the judgment, and recorded an offsetting indemnification receivable of $96.6 in other current assets related to this matter.
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 December 31, 2020 and December 31, 2019, the Company had accrued $2.8 in accrued expenses. Discovery is underway and a trial has been scheduled for September 2021. While Vertiv believes it has meritorious defenses against the assertions of the selling shareholders of Energy Labs, Vertiv is unable at this time to predict the outcome of this dispute. If Vertiv is unsuccessful, the ultimate resolution of this dispute could result in a loss of up to $31.7 in excess of the $2.8 accrued as well as costs and legal fees.
At December 31, 2020, 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.
(18) QUARTERLY FINANCIAL INFORMATION (unaudited)
Select quarterly financial information is presented in the tables below for the quarterly periods (in millions, except per share amounts):
| 2020 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||||
| Net sales | ||||||||||||||||||||||||||
| Net sales - products | $ | 647.2 | $ | 750.2 | $ | 891.1 | $ | 1,020.1 | ||||||||||||||||||
| Net sales - services | 250.1 | 255.5 | 270.9 | 285.4 | ||||||||||||||||||||||
| Net sales | 897.3 | 1,005.7 | 1,162.0 | 1,305.5 | ||||||||||||||||||||||
| Costs and expenses | ||||||||||||||||||||||||||
| Cost of sales - products | 463.2 | 515.3 | 596.7 | 715.1 | ||||||||||||||||||||||
| Cost of sales - services | 147.1 | 144.0 | 152.3 | 163.2 | ||||||||||||||||||||||
| Cost of sales | 610.3 | 659.3 | 749.0 | 878.3 | ||||||||||||||||||||||
| Selling, general and administrative expenses | 264.8 | 226.3 | 251.7 | 265.5 | ||||||||||||||||||||||
| Loss on extinguishment of debt | 174.0 | — | — | — | ||||||||||||||||||||||
| Other deductions, net | 34.4 | 49.5 | 126.2 | 41.6 | ||||||||||||||||||||||
| Interest expense, net | 68.9 | 30.1 | 26.4 | 25.0 | ||||||||||||||||||||||
| Earnings (loss) before income taxes | (255.1) | 40.5 | 8.7 | 95.1 | ||||||||||||||||||||||
| Income tax expense | 13.8 | 14.3 | 24.5 | 20.2 | ||||||||||||||||||||||
| Net earnings (loss) | $ | (268.9) | $ | 26.2 | $ | (15.8) | $ | 74.9 | ||||||||||||||||||
| Earnings (loss) per share: | ||||||||||||||||||||||||||
| Basic | $ | (1.12) | $ | 0.08 | $ | (0.05) | $ | 0.23 | ||||||||||||||||||
| Diluted | $ | (1.12) | $ | 0.08 | $ | (0.05) | $ | 0.22 | ||||||||||||||||||
| Weighted-average shares outstanding | ||||||||||||||||||||||||||
| Basic | 240,656,864 | 328,411,705 | 328,411,705 | 330,335,268 | ||||||||||||||||||||||
| Diluted | 240,656,864 | 331,136,080 | 328,411,705 | 345,136,798 |
| 2019 | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | ||||||||||||||||||||||
| Net sales | ||||||||||||||||||||||||||
| Net sales - products | $ | 813.3 | $ | 865.3 | $ | 799.4 | $ | 878.1 | ||||||||||||||||||
| Net sales - services | 241.5 | 268.8 | 271.3 | 293.4 | ||||||||||||||||||||||
| Net sales | 1,054.8 | 1,134.1 | 1,070.7 | 1,171.5 | ||||||||||||||||||||||
| Costs and expenses | ||||||||||||||||||||||||||
| Cost of sales - products | 566.2 | 613.6 | 561.4 | 607.9 | ||||||||||||||||||||||
| Cost of sales - services | 141.4 | 153.3 | 158.0 | 176.4 | ||||||||||||||||||||||
| Cost of sales | 707.6 | 766.9 | 719.4 | 784.3 | ||||||||||||||||||||||
| Selling, general and administrative expenses | 286.4 | 263.3 | 259.3 | 291.8 | ||||||||||||||||||||||
| Loss on extinguishment of debt | — | — | — | — | ||||||||||||||||||||||
| Other deductions, net | 38.8 | 28.1 | 31.6 | 47.5 | ||||||||||||||||||||||
| Interest expense, net | 77.8 | 78.7 | 77.7 | 76.2 | ||||||||||||||||||||||
| Earnings (loss) before income taxes | (55.8) | (2.9) | (17.3) | (28.3) | ||||||||||||||||||||||
| Income tax expense (benefit) | 18.5 | 16.0 | (3.6) | 5.6 | ||||||||||||||||||||||
| Net earnings (loss) | $ | (74.3) | $ | (18.9) | $ | (13.7) | $ | (33.9) | ||||||||||||||||||
| Earnings (loss) per share: | ||||||||||||||||||||||||||
| Basic and diluted | $ | (0.63) | $ | (0.16) | $ | (0.12) | $ | (0.29) | ||||||||||||||||||
| Weighted-average shares outstanding | ||||||||||||||||||||||||||
| Basic and diluted | 118,261,955 | 118,261,955 | 118,261,955 | 118,261,955 |
Previous: Item 16. Form 10-K Summary