Vertiv Holdings Co (VRT) FY 2021 MD&A

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation

Unless the context otherwise indicates or requires, references to (1) “the Company,” “Vertiv,” “we,” “us” and “our” refer to Vertiv Holdings Co, a Delaware corporation, and its consolidated subsidiaries ; and (2) “GSAH” refers to GS Acquisition Holdings Corp prior to the Business Combination. In addition, dollar amounts are stated in millions, except for per share amounts. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this Annual Report.

Overview

We are a global leader in the design, manufacturing and servicing of critical digital infrastructure technology that powers, cools, deploys, secures and maintains electronics that process, store and transmit data. We provide this technology to data centers, communication networks and commercial & industrial environments worldwide. We aim to help create a world where critical technologies always work, and where we empower the vital applications of the digital world.

Key Developments

Below is a summary of selected key operational developments affecting our business in 2021:

•All public warrants previously outstanding were exercised or redeemed as of January 19, 2021, generating $156.5 of cash in December 2020 and $107.5 in January 2021.

•In March 2021, we, through our subsidiary Vertiv Group Corporation, a Delaware corporation (the “Borrower”) amended our existing Term Loan Credit Agreement with Citibank, N.A., to, among other things, reduce the interest rate margin for the Borrower’s outstanding term loans under the Term Loan Credit Agreement by 0.25%, to 2.75% in respect of term loans bearing interest based on the LIBOR rate and to 1.75% in respect of term loans bearing interest based on a base rate defined in the Term Loan Credit Agreement.

•On November 1, 2021, we, along with certain of our domestic and international subsidiaries, acquired E&I Engineering Ireland Limited, a private company limited by shares incorporated in Ireland, and Powerbar Gulf LLC – Foreign Direct Investment, a non-freezone limited liability company incorporated and registered in Ras Al Khaimah Economic Zone-Government of Ras Al Khaimah, (the “E&I Acquisition"), for an aggregate purchase price of $1,775.7 in upfront consideration plus an additional $200.0 in cash, with the additional consideration subject to achieving certain future profit milestones. The gross consideration of $1,775.7, consisted of $1,163.7 in cash, approximately $601.1 of Vertiv common stock, equating to 23.1 million shares of Vertiv common stock, $7.4 of contingent consideration and $3.5 of other adjustments.

•In conjunction with the E&I Acquisition, on October 22, 2021, we completed an offering of $850.0 aggregate principal amount Senior Secured Notes due 2028 in a private placement at par, which bear interest at 4.125% per annum and mature on November 15, 2028.

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Outlook and Trends

Below is a summary of trends and events that are currently affecting, or may in the future affect, our business, operations and short-term outlook:

•COVID-19 Pandemic: Unprecedented measures have been taken by governments and businesses to address the COVID-19 pandemic. These measures have included periodic shelter-in-place orders, restrictions on travel and business operations, temporary closures of businesses, quarantines, and attempts to institute various regulatory requirements. As a result of this pandemic, global economic activity has been significantly impacted, causing volatility and disruption in global financial markets. These responsive measures taken by many countries have affected, and could in the future materially impact, the Company’s business, results of operations, financial condition and stock price.

•The extent of the continuing impact of the COVID-19 pandemic on the Company’s operational and financial performance is uncertain and will depend on many factors outside the Company’s control, including, without limitation, the extent, timing and duration of the pandemic; the availability, distribution and effectiveness of vaccines; the imposition of protective public safety measures; and the impact of the pandemic on the global economy and demand for products. Refer to Part I, Item 1A of this Form 10-K under the heading “Risk Factors,” for more information. The Company continues to monitor the situation and will take further actions as may be required by federal, state, or local governmental authorities, or that we determine are in the best interests of our associates, customers, and shareholders.

•Supply Chain Constraints and Cost Increases: During 2021, aspects of the Company’s business continued to be affected by the COVID-19 pandemic as well as increased costs for materials, freight and labor. Despite strong market demand, supply chain challenges continued, with critical part shortages driving the need for additional spot buys at increased costs, and costs associated with premium freight to meet customer commitments. These issues were exacerbated by failure to accurately forecast increases in costs due to inflation and translate such increases into changes in the prices we charge our customers. Additionally, logistical issues have significantly delayed the receipt of materials and, in some cases, the Company cannot procure critical parts at any price, creating production and delivery challenges pressuring the top and bottom line. The Company has taken actions to improve our ability to forecast inflationary headwinds and reflect anticipated cost increases in our prices and will continue to take actions to address shortages and inflationary pressures, which are expected to continue throughout 2022.

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RESULTS OF OPERATIONS

Year ended December 31, 2021 compared to year ended December 31, 2020

Net Sales

Net sales were $4,998.1 in 2021, an increase of $627.5, or 14.4%, compared with $4,370.6 in 2020. The increase in sales was primarily driven by demand gains across each of the Company's product and service offerings, positive impacts from foreign currency of $82.5, E&I sales of $67.4 and the impact of global economic recovery from the COVID-19 pandemic. By offering, critical infrastructure & solutions sales increased $465.8 including the positive impacts from E&I sales of $67.4 and foreign currency of $50.7. Services & spares sales increased $121.6, including the positive impacts from foreign currency of $20.1. Integrated rack solutions sales increased $40.1 including the positive impacts from foreign currency of $11.7.

Excluding intercompany sales, net sales were $2,187.4 in the Americas, $1,609.0 in Asia Pacific and $1,201.7 in EMEA. Movements in net sales by segment and offering are each detailed in the Business Segments section below.

Cost of Sales

Cost of sales were $3,475.4 in 2021, an increase of $578.5, or 20.0% compared to 2020. The increase in cost of sales was primarily due to the flow-through impact of higher net sales volume and increased commodity and logistic costs. Gross profit was $1,522.7 in 2021, or 30.5% of sales, compared to $1,473.7, or 33.7% of sales in 2020.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (SG&A) were $1,109.0 in 2021, an increase of $100.6 compared to 2020. SG&A as a percentage of sales were 22.2% in 2021 compared with 23.1% in 2020. The increase in SG&A was primarily driven by $39.4 merger and acquisition costs associated with the acquisition and integration of E&I, $18.7 related to litigation settlement costs, one time fixed cost reduction actions undertaken in 2020 in response to the COVID-19 pandemic, including discretionary spending cuts, that resulted in approximately $30.0 of cost savings, which were offset by one-time transaction related bonuses in 2020.

Other Operating Expenses

Other operating expenses include amortization of intangibles, restructuring costs, foreign currency (gain) loss, and other operating expense (income). Other expenses were $153.8 for 2021, which was a $98.0 decrease from 2020. The decrease was primarily due to a decrease in restructuring costs of $72.5, change in foreign currency (gain) loss of $22.8, and a decrease in asset impairment of $13.0.

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Loss on Extinguishment of debt

Loss on extinguishment of debt was $0.4 in 2021, which was a $173.6 decrease from the 2020 loss that resulted from the repayment of indebtedness from the Business Combination and the subsequent refinancing transactions.

Gain on Tax Receivable Agreement

The gain on tax receivable agreement is related to the $59.2 gain associated with the amended Tax Receivable Agreement signed December 31, 2021. Refer to "Note 12 – Financial Instruments and Risk Management” to the consolidated financial statements for additional information.

Change in Fair Value of Warrant Liabilities

Change in Fair Value of Warrant Liabilities represents the mark-to-market fair value adjustments to the outstanding warrants issued in connection with the IPO of GSAH. The change in fair value of the outstanding warrants liability during 2021 and 2020 resulted in a loss of $61.9 and $143.7, respectively. The change in fair value of stock warrants was the result of changes in market prices and other observable inputs deriving the value of the financial instruments.

Interest expense

Interest expense, net, was $90.6 in 2021 compared to $150.4 in 2020. The $59.8 decrease was primarily due to a $25.4 reduction in interest expense resulting from the repayment of indebtedness in 2020, a $26.2 decrease related to lower interest rates secured through the debt refinancing, as described in "Note 6 - Debt" to the consolidated financial statements, a $16.8 decrease in accretion expense associated with the Tax Receivable Agreement, and partially offset by a $4.2 increase due to net settlement payments on the Company's interest rate swaps.

Income Taxes

Income tax expense was $46.6 in 2021 compared to $72.7 in 2020. The effective rate in 2021 was primarily influenced by the mix of income between our U.S. and non-U.S. operations, net of changes in valuation allowances and uncertain tax positions, and reflects the impact of non-deductible changes in fair value of the warrant liabilities, as well as a discrete tax adjustment related to legislative changes enacted in the period. The effective tax rate includes the benefit of certain internal reorganizations and tax elections outside the U.S. In 2020, income tax expense was primarily influenced by the mix of income between our U.S. and non-U.S. operations, net of changes in valuation allowances and uncertain tax positions, and discrete tax benefits related to a change in our indefinite reinvestment liability caused by legislative changes and movement in foreign currencies.

The tax expense in 2021 was $26.1 lower than 2020 primarily due to the change in mix of income, non-U.S. tax elections and changes in valuation allowances in the U.S.

Business Segments

The following are business segment results for the years ended December 31, 2021 and 2020. Segment profitability is defined as operating profit (loss). Segment margin represents segment operating profit (loss) expressed as a percentage of segment net sales. For reconciliations of segment net sales and earnings to the Company’s consolidated results, see "Note 14 — Segment Information", of the Company's condensed consolidated financial statements. Segment net sales are presented excluding intercompany sales.

Americas

Americas net sales of $2,187.4 in 2021 increased $146.8, or 7.2% from 2020. By product offering, net sales increased in critical infrastructure & solutions by $115.4 driven by strong growth in Thermal, DC Power Custom Solutions offerings and E&I sales of $21.7. Service & spares increased by $42.5 due to improved customer site availability, and integrated rack solutions decreased by a $11.1 primarily driven by supply chain constraints. Additionally, Americas net sales were positively impacted by foreign currency of approximately $3.9.

Operating profit (loss) in 2021 was $441.2, a decrease of $55.8 compared with 2020. Margin declined primarily due to increased commodity and logistic costs, supply chain constraints, and partially offset by decreased year over year restructuring charges of $11.5.

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Asia Pacific

Asia Pacific net sales of $1,609.0 in 2021 increased $240.6, or 17.6% from 2020. Sales increases were primarily due to strong growth in large projects such as data centers, 5G projects, and wind power. Additionally, sales improved in part due to the global recovery from COVID-19 in telecom, channel and services. By product offering, net sales improved in all offering categories, including increases in critical infrastructure & solutions, service & spares, and integrated rack solutions of $141.0, $55.2 and $44.4, respectively. Additionally, Asia Pacific net sales were positively impacted by foreign currency of approximately $61.5.

Operating profit (loss) in 2021 was $253.4, an increase of $56.3 compared with 2020. Margin improvements were driven by fixed cost volume leveraging on higher sales, decreased year over year restructuring charges of $7.3, partially offset by the absence of COVID-19 related government subsidies received in 2020 and increased commodity and logistic costs, and supply chain constraints.

Europe, Middle East & Africa

EMEA net sales of $1,201.7 in 2021 increased $240.1, or 25.0% from 2020. Sales increases were primarily due to deployment of large colocation data centers, the global recovery from COVID-19, and E&I sales of $45.7. By offering, net sales improved in all offering categories, including increases in critical infrastructure & solutions, service & spares, and integrated rack solutions of $209.4, $23.9, and $6.8 respectively. Additionally, EMEA net sales were positively impacted by foreign currency of approximately $17.1.

Operating profit (loss) in 2021 was $217.6, an increase of $112.1 compared with 2020. Margin improved primarily due to decreased year over year restructuring charges of $49.8, fixed cost volume leveraging on higher sales, improved operational productivity and new product introductions, partially offset by increased commodity and logistic costs, and supply chain constraints.

Corporate and Other

Corporate and other costs include costs associated with our headquarters located in Columbus, Ohio, as well as centralized global functions including Finance, Treasury, Risk Management, Strategy & Marketing, IT, Legal, and global product platform development and offering management. Corporate and other costs were $504.8 and $431.4 in 2021 and 2020, respectively. Corporate and other costs increased $73.4 compared with 2020 primarily due to $39.4 related to merger and acquisition costs associated with the acquisition of E&I and integration, approximately a $37.8 increase in costs related to research and development, $18.7 in legal settlement costs, and $8.7 of impairment costs related to the sale of a heavy industrial business, partially offset by decreased year over year restructuring charges of $3.9.

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Capital Resources and Liquidity

Our primary future cash needs relate to working capital, operating activities, capital spending, strategic investments and debt service. On March 10, 2021, we, through our subsidiary Vertiv Group Corporation, a Delaware corporation (the “Borrower”) and an indirect wholly owned subsidiary of Vertiv Holdings Co, Vertiv Intermediate Holding II Corporation, a Delaware corporation (“Holdings”) and the direct parent of Vertiv Group, and certain direct and indirect subsidiaries of the Borrower entered into an Amendment No. 1 to Term Loan Credit Agreement (the "Term Loan Amendment") with Citibank, N.A., as administrative agent (in such capacity, the “Term Agent”), and the lenders party thereto, which amended the Term Loan Credit Agreement, dated as of March 2, 2020 (as so amended the “Term Loan Credit Agreement”), by and among Holdings, the Borrower, the Term Agent and the lenders from time to time party thereto, to, among other things, reduce the interest rate margin for the Borrower’s outstanding term loans under the Term Loan Credit Agreement by 0.25%, to 2.75% in respect of term loans bearing interest based on the LIBOR rate and to 1.75% in respect of term loans bearing interest based on a base rate defined in the Term Loan Credit Agreement. The maturity date for such term loans remains March 2, 2027, and all other material provisions of the original Term Loan Credit Agreement remain materially unchanged.

On October 22, 2021, Vertiv Group Corporation (the “Issuer”), completed its offering (the “Offering”) of $850.0 aggregate principal amount of its Senior Secured Notes due 2028 (the “Notes”) in a private placement at par. The Notes will bear interest at 4.125% per annum and mature on November 15, 2028. The Company incurred $13.8 of debt issuance costs that were capitalized as part of the Notes.

We believe that net cash provided by operating activities, augmented by our long-term debt arrangements discussed below and ABL Revolving Credit Facility, will provide adequate near-term liquidity for the next 12 months of independent operations, as well as the resources necessary to invest for growth in existing businesses and manage our capital structure on a short- and long-term basis. We may also from time to time opportunistically access the capital markets and financing markets to optimize our capital structure subject to prevailing markets conditions. Access to capital and the availability of financing on acceptable terms in the future will be affected by many factors, including our credit rating, economic conditions, and the overall liquidity of capital markets. There can be no assurance that we will continue to have access to the capital markets and financing markets on acceptable terms.

At December 31, 2021, we had $439.1 in cash and cash equivalents, which includes amounts held outside of the U.S., primarily in Europe and Asia. Non-U.S. cash is generally available for repatriation without legal restrictions, subject to certain taxes, mainly withholding taxes. We are not asserting indefinite reinvestment of cash or outside basis for our non-U.S. subsidiaries due to the outstanding debt obligations in instances where alternative repatriation options other than dividends are not available. Our ABL Revolving Credit Facility provides for up to $455.0 of revolving borrowings, with separate sublimits for letters of credit, swingline borrowings and borrowings made to certain non-U.S. subsidiaries, and an uncommitted accordion of up to $145.0. At December 31, 2021, Vertiv Group and certain other subsidiaries of the Company had $435.6 of availability (subject to customary borrowing base and other conditions) under the ABL Revolving Credit Facility, net of letters of credit outstanding in the aggregate principal amount of $19.4, and taking into account the borrowing base limitations set forth in the ABL Revolving Credit Facility.

Long-Term Debt Obligations

See "Note 6 — Debt" of the consolidated financial statements of the long-term debt arrangements issued by the Company with certain of our subsidiaries named as guarantors or co-borrowers.

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Summary Statement of Cash Flows

Year ended December 31, 2021 compared to year ended December 31, 2020

Net Cash provided by Operating Activities

Net cash provided by operating activities was $210.9 in 2021, a $2.0 increase in cash generation compared to 2020. The increase in cash generation was primarily driven by lower cash interest as a result of our overall reduction in long-term debt and our first quarter 2021 debt refinancing as well as lower transformation-related spending.

Net Cash used for Investing Activities

Net cash used for investing activities was $1,216.8 in 2021 compared to net cash used for investing activities of $45.7 in 2020. The higher use of cash over the comparable period was primarily the result of the E&I Acquisition for $1,163.7, increased capital expenditures, and slightly offset by $21.7 in proceeds from the sale of a heavy industrial UPS business.

Net Cash provided by Financing Activities

Net cash provided by financing activities was $914.9 in 2021 compared to $140.7 in 2020. The increase in cash generation was primarily the result of the issuance of the Notes due 2028 of $850.0, slightly offset by a decrease in exercise of Public Warrants of $49.0, and employee taxes paid from shares withheld of $7.3. In 2021, borrowings on the Term Loan Facility of $2,189.0, net of original discount, and proceeds from the reverse recapitalization of $1,832.5 were offset by the repayment of the Prior Term Loan Facility and Prior Notes as well as a payment made to Platinum Equity Advisors, LLC ("Advisors") in connection with the closing of the merger with GSAH.

Critical Accounting Estimates

The Company's discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments related to these assets, liabilities, revenues and expenses. We believe these estimates to be reasonable under the circumstances. Management bases its estimates and judgments on historical experience, expected future outcomes, and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

The Company believes that the following accounting estimates are critical to our financial results:

Business Combinations

The Company allocates the purchase price of acquired companies to tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The amount of purchase price which is in excess of the fair values of assets acquired and liabilities assumed is recognized as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies and are inherently uncertain. The following are critical estimates in valuing intangible assets we have acquired or may acquire in the future and include but are not limited to:

•forecasted earnings before interest, taxes, and amortization;

•forecasted revenue;

•customer attrition rates;

•royalty rates; and

•discount rates.

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Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Different assumptions may result in materially different values for assets acquired and liabilities assumed, which may impact the Company's financial position and future results of operations.

Long-lived assets

Goodwill

The Company accounts for goodwill and other intangible assets acquired in a business combination in conformity with current accounting guidance which does not allow for goodwill and indefinite-lived intangible assets to be amortized.

The Company reviews goodwill for impairment annually in the fourth quarter or when events and circumstances indicate an impairment may have occurred. The Company tests goodwill for impairment by comparing the estimated fair value of the reporting units to the related carrying value. If the fair value of the reporting unit is lower than its carrying amount, goodwill is written down for the amount by which the carrying amount exceeds fair value. However, the loss recognized cannot exceed the carrying amount of goodwill. Reporting units are defined as either operating segments or one level below the operating segments for which discrete financial information is available and reviewed by the business management. The Company’s four reporting units are comprised of the Americas; Greater China; Australia & New Zealand, South East Asia and India (ASI); and EMEA reporting units.

The Company makes various estimates and assumptions in determining the estimated fair value of each reporting unit using a combination of discounted cash flow models and valuations based on earnings multiples for guideline public companies and transactions in each reporting unit’s industry peer group, when externally quoted market prices are not readily available. Discounted cash flow models are highly reliant on various assumptions, including projected business results, long-term growth factors and discount rate. Management judgement is involved in estimating these variables, and they include inherent uncertainties since they are forecasting future events. The Company performs sensitivity analyses by using a range of inputs to confirm the reasonableness of the long-term growth rate and discount rate estimates. Additionally, the Company compares the indicated equity value to the Company’s market capitalization and evaluates the resulting implied control premium/discount to determine if the estimated enterprise value is reasonable compared to external market indicators.

The Company performed its annual goodwill impairment using the quantitative approach in the fourth quarter and concluded there was no impairment as of that date. The impairment test concluded that the Americas; Greater China; Australia & New Zealand, South East Asia and India (ASI); and EMEA reporting units had fair values significantly in excess of their respective carrying amounts. The Company compared the total fair values of the reporting units to the Company’s market capitalization, to determine if the fair values are reasonable compared to external market indicators. The Company believes its use of significant assumptions within its valuation models are reasonable estimates of likely future events. Subsequent to this annual impairment test, no additional indications of an impairment were identified.

Significant assumptions inherent in the valuation methodologies include estimates of future projected business results (principally revenue and EBITDA), long-term growth rates, and the discount rate. The Company performed sensitivity analyses by using a range of inputs to confirm the reasonableness of long-term growth rate and discount rate estimates. Significant assumptions utilized in the impairment analysis performed during the fourth quarter of 2021 included the weighted-average cost of capital, ranging between 10.5% and 12.0%, and terminal growth rates of 3.0%.

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Tangible assets

The Company reviews property, plant and equipment asset groups for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company monitors these changes and events on at least a quarterly basis. Examples of events or changes in circumstances could include, but are not limited to, a prolonged economic downturn, current period operating or cash flow losses combined with a history of losses or a forecast of continuing losses associated with the use of an asset group, or a current expectation that an asset group will be sold or disposed of before the end of its previously estimated useful life. Recoverability is based upon projections of anticipated future undiscounted cash flows associated with the use and eventual disposal of the property, plant and equipment asset groups, as well as specific appraisals in certain instances. Reviews occur at the lowest level for which identifiable cash flows are largely independent of cash flows associated with other property, plant and equipment asset groups. If the future undiscounted cash flows result in a value that is less than the carrying value, then the long-lived asset is considered impaired and a loss is recognized based on the amount by which the carrying amount exceeds the estimated fair value. Various factors that the Company uses in determining the impact of these assessments include the expected useful lives of long-lived assets and the ability to realize any undiscounted cash flows in excess of the carrying amounts of such asset groups, and are affected primarily by changes in the expected use of the assets, changes in technology or development of alternative assets, changes in economic conditions, changes in operating performance and changes in expected future cash flows. Because judgment is involved in determining the fair value of property, plant and equipment asset groups, there is risk that the carrying value of these assets may require adjustment in future periods.

Finite-lived intangible assets

Finite-lived intangible assets principally consist of certain customer relationships, developed technology, capitalized software and trademarks. These intangible assets are amortized on a straight-line basis over their estimated useful lives. The cost of customer relationships is amortized principally over 10 to 13 years, developed technology over 5 to 10 years, capitalized software over 5 years, and trademarks over 5 to 10 years. The Company reviews finite-lived intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. The Company monitors these changes and events on at least a quarterly basis.

Amortization expense recognized on finite-lived intangible assets was $157.9 for 2021, $142.8 for 2020, and $145.8 for 2019.

Other indefinite-lived intangible assets

Other indefinite-lived intangible assets include certain trademarks. The Company reviews these intangible assets for possible impairment annually in the fourth quarter or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. If the carrying value of an individual indefinite-lived intangible asset exceeds its fair value, the asset is written down to its fair value and the amount of the write down is the impairment charge. Similar to its annual assessment for goodwill, the Company performs a quantitative test for impairment.

When a quantitative analysis is performed, the Company tests these assets using a “relief-from-royalty” valuation method to determine the fair value. Significant assumptions inherent in the valuation methodologies include, but are not limited to, future projected business results, growth rates, the discount rate for a market participant, and royalty rates.

In conjunction with the annual assessment of indefinite-lived intangible assets, the Company’s quantitative approach model did not indicate any impairment, as each indefinite-lived intangible asset’s fair value exceeded their carrying values.

The Company’s assessment of an impairment on any of these assets classified currently as having indefinite lives, including goodwill, could change in future periods if significant events happen and/or circumstances change that effect the previously mentioned assumptions. Significant assumptions inherent in the valuation methodologies include, but are not limited to, such estimates as future projected business results, growth rates, the weighted average cost of capital for a market participant, and royalty and discount rates. For further information, see "Note 5 – Goodwill and Other Intangibles” of Notes to Consolidated Financial Statements.

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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. 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.

Public and Private Placement Warrants

As part of GSAH's IPO on June 12, 2018, warrants were issued that entitled the holder to purchase one share of Class A common stock at an exercise price of $11.50 per share (the “Public Warrants”). In addition, as part of a simultaneous private placement, additional warrants, exercisable for 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”).

9,387,093 Public Warrants and 10,533,333 Private Placement Warrants remained outstanding as of December 31, 2020. On January 19, 2021, the Company redeemed the outstanding Public Warrants in full and the Public Warrants and attached units were subsequently delisted from NYSE.

The Private Placement Warrants are exercisable on a cashless basis, at the holder’s option, and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by us and exercisable by such holders on the same basis as the Public Warrant. As of December 31, 2021, 10,533,333 Private Placement Warrants remain outstanding.

We evaluated the Public and Private Placement Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, and concluded that they do not meet the criteria to be classified in stockholders’ equity. Specifically, the SEC Statement focused in part on provisions in warrant agreements that provide for potential changes to the settlement amounts dependent upon the characteristics of the warrant holder and because the holder of a warrant is not an input into the pricing of a fixed-for-fixed option on equity shares, such provision would preclude the warrant from being classified in equity and thus the warrant should be classified as a liability. Since the Public and Private Placement Warrants meet the definition of a derivative under ASC 815, we recorded these Warrants as liabilities on the balance sheet at fair value, with subsequent changes in their respective fair values recognized in the consolidated statement of earnings (loss) and consolidated statements of comprehensive income (loss) at each reporting date. Because the Public Warrants were publicly traded and thus had an observable market price, fair value adjustments were determined by utilizing the market prices whereas the Private Placement Warrants were valued using a Black-Sholes-Merton pricing model as described in "Note 12 - Financial Instruments and Risk Management", to the consolidated financial statements. The changes in the fair value of the Warrants may be material to our future operating results.

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Income Taxes

The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Judgment in the forecasting of taxable income using historical and projected future operating results is required in determining the Company’s provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable, and deferred taxes. Under U.S. GAAP, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax loss and credit carryforwards. The effect on deferred taxes of changes in tax rates is recognized in the period in which the enactment date occurs. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized. Deferred taxes are not provided on the unremitted earnings of subsidiaries outside of the United States when it is expected that these earnings are indefinitely reinvested. In the event that the actual outcome of future tax consequences differs from the Company’s estimates and assumptions due to changes or future events such as tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans, the resulting change to the provision for income taxes could have a material effect on the Consolidated Statements of Earnings (Loss) and Consolidated Balance Sheets.

The recoverability of deferred tax assets and the recognition and measurement of uncertain tax positions are subject to various assumptions and judgment by Vertiv. If actual results differ from the estimates made by Vertiv in establishing or maintaining valuation allowances against deferred tax assets, the resulting change in the valuation allowance would generally impact earnings. Additionally, the positions taken with regard to tax contingencies may be subject to audit and review by tax authorities, which may result in future taxes, interest and penalties. Positive and negative evidence is considered in determining the need for a valuation allowance against deferred tax assets, which includes such evidence as historical earnings, projected future earnings, tax planning strategies and expected timing of reversal of existing temporary differences.

In determining the recoverability of deferred tax assets Vertiv gives consideration to all available positive and negative evidence including reversals of deferred tax liabilities, projected future income, tax planning strategies and recent trends in financial results. Vertiv attaches the most weight to historical earnings as they are more objectively verifiable compared to forecasts. In evaluating the objective evidence that historical results provide, Vertiv generally considers three years of cumulative income or loss at the jurisdictional taxpayer level as an important factor.