Vertiv Holdings Co — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Vertiv supplies mission-critical infrastructure products and services to data centers, communications networks, and commercial and industrial customers. The filing is unaudited.
Financial results
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $1,399.4 million | $1,260.3 million | $2,555.8 million | $2,358.7 million |
| Gross profit / margin | $371.5 million / 26.5% | $409.3 million / 32.5% | $675.1 million / 26.4% | $767.3 million / 32.5% |
| Operating profit (loss) | $26.2 million | $102.2 million | $(19.0) million | $182.0 million |
| Net income | $20.3 million | $9.7 million | $28.8 million | $41.4 million |
| Diluted EPS | $0.05 | $0.03 | $(0.28) | $0.12 |
| Operating cash flow | Not separately stated | Not separately stated | $(337.9) million | $120.0 million |
Q2 product sales were $1,055.0 million and service sales were $344.4 million. Sales rose 11.0% in Q2 and 8.4% in the first half. Management attributed growth principally to E&I acquisition contributions and higher volumes, partly offset by foreign exchange and the divestiture of a heavy industrial UPS business. Q2 reported net income included a $38.9 million gain from revaluing warrant liabilities; first-half results included a $133.8 million gain. The warrant-related adjustment also significantly affected first-half diluted EPS.
Liquidity, debt and cash flow
- At June 30, cash and cash equivalents were $194.4 million; cash, cash equivalents and restricted cash totaled $205.3 million.
- Total debt carrying value, including current debt, was approximately $3,139.3 million; the balance sheet also included $17.9 million of short-term borrowings. Cash flow from operations was negative in the first half, primarily reflecting $377.8 million of working-capital use, including higher receivables and inventory.
- The ABL facility had $175.0 million outstanding and $262.3 million of availability, net of letters of credit and subject to borrowing-base limits. Management said cash and available financing should provide adequate liquidity for the next 12 months.
- First-half investing cash outflow was $49.9 million, including $38.2 million of capital expenditures. Financing cash inflow was $153.5 million, including ABL borrowings.
Material changes and operating trends
- Sales growth did not translate into stronger operating results: Q2 gross margin fell to 26.5% from 32.5%, and operating profit declined to $26.2 million from $102.2 million. First-half operating results shifted to a loss.
- Management cited inflation in materials, freight and labor, supply shortages, premium freight and other logistics costs as pressures on margins. Pricing actions were underway, but in the first half higher costs exceeded price realization in the Americas and EMEA.
- Q2 segment sales increased in the Americas and EMEA; Asia Pacific grew modestly. First-half Asia Pacific sales declined 2.0%, with supply constraints and COVID-related site access issues in China among the factors cited. Americas segment margin declined to 12.7% in Q2 from 22.8%.
- E&I, acquired in November 2021, contributed $114.2 million of Q2 sales and $201.7 million for the first half. Its reported operating losses were $6.8 million and $23.6 million, respectively. Acquisition-related amortization increased by $23.9 million in Q2 and $49.8 million in the first half versus prior-year periods.
- Foreign-currency translation reduced first-half other comprehensive income by $186.2 million. The balance sheet reflected lower cash and higher debt than at December 31, 2021.
Outlook, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management expected supply-chain constraints and inflationary pressures to continue, potentially increase, through 2022, while anticipating continued pricing realization from prior and planned pricing actions. It also expected inventory to remain elevated to support demand, large projects and backlog. Management cautioned that results remain exposed to COVID-19 and macroeconomic uncertainty, cost and logistics pressures, foreign exchange, interest rates, and the ability to fulfill backlog.
The company reported a pending putative securities class action alleging misleading statements about inflation, supply-chain pressures and pricing. It said it believes it has meritorious defenses but cannot predict the outcome or costs. The filing also describes a $100 million amended tax receivable agreement payment obligation: $12.5 million was paid in June, with $12.5 million due by September 15 and $75 million by November 15, 2022. Acceleration upon a change of control or certain breaches could adversely affect liquidity. Management stated that other known contingent liabilities were not expected to be material, while noting litigation outcomes are inherently uncertain.
Important facts for investors to verify
- Whether pricing and cost actions can restore gross and segment margins as supply constraints and inflation persist.
- Whether working-capital needs, particularly receivables and inventory, moderate enough to improve cash generation.
- How E&I performs, including its operating losses, integration progress and acquisition-related amortization.
- Debt service, variable-rate exposure and ABL availability; the filing says swaps mitigate, but do not eliminate, interest-rate effects.
- Developments in the securities litigation and completion of the remaining tax receivable agreement payments.