Business context and reporting period
Vertiv Holdings Co designs, manufactures and services critical digital infrastructure for data centers, communications networks, and commercial and industrial customers. This Form 10-K covers the fiscal year ended December 31, 2022; the supplied filing text does not provide standalone fourth-quarter results.
Revenue is reported across the Americas, Asia Pacific, and Europe, Middle East & Africa (EMEA). The November 2021 E&I acquisition, which expanded Vertiv’s switchgear, busway and modular-power offerings, contributed for all of 2022 but only November and December of 2021.
Financial performance and liquidity
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Net sales | $5,691.5 million | $4,998.1 million | +13.9% |
| Gross profit / margin | $1,616.1 million / 28.4% | $1,522.7 million / 30.5% | Margin down 2.1 percentage points |
| Operating profit / margin | $223.4 million / 3.9% | $259.9 million / 5.2% | Profit down 14.0% |
| Net income | $76.6 million | $119.6 million | Down 36.0% |
| Operating cash flow | $(152.8) million | $210.9 million | Down $363.7 million |
| Capital expenditures, including capitalized software | $111.0 million | $84.6 million | Increased |
Revenue growth primarily reflected higher volume and $359.2 million of E&I sales in the first ten months of 2022, partly offset by $251.8 million of unfavorable foreign-currency effects and the absence of $76.4 million of sales from a divested heavy-industrial UPS business. Cost of sales rose 17.3%, faster than sales, amid higher volume, E&I costs, commodity and logistics inflation, and supply constraints. SG&A declined as a share of sales to 20.7% from 22.2%.
Net interest expense increased to $147.3 million from $90.6 million, reflecting higher rates and a full-year effect from the 2028 notes. A $90.9 million warrant-liability fair-value gain benefited reported 2022 net income; the filing’s diluted EPS calculation adjusts for that gain and reports diluted loss per share of $0.04, versus diluted earnings per share of $0.33 in 2021. Basic EPS was $0.20 versus $0.34.
Operating cash flow was pressured by a $449.2 million use of operating working capital, principally higher receivables and inventory. Cash and cash equivalents were $260.6 million at year-end, versus $439.1 million a year earlier. Year-end debt principal was $3,224.8 million: $2,139.8 million on the term loan, $850.0 million of 2028 notes, and $235.0 million drawn on the ABL facility. A further $317.4 million of ABL availability was reported, subject to borrowing-base and other conditions. Management said cash and facility availability should provide adequate near-term liquidity for the next 12 months.
Segment revenue and operating profit were: Americas $2,728.6 million and $426.1 million; Asia Pacific $1,601.3 million and $274.4 million; EMEA $1,361.6 million and $234.6 million. Americas sales increased 24.7%, but operating profit fell 3.4%; Asia Pacific sales were nearly flat while profit rose 8.3%; EMEA sales rose 13.3% and profit rose 7.8%.
Material changes versus the prior comparable period
- Backlog increased to $4,754.4 million from $3,191.0 million, with most considered firm and expected to ship within one year. Vertiv cautioned that backlog is not necessarily indicative of future revenue and may be canceled or rescheduled.
- Cash from operations swung from $210.9 million provided to $152.8 million used, as working-capital investment rose substantially.
- Year-end inventory increased to $822.0 million from $616.3 million; accounts receivable increased to $1,888.8 million from $1,536.4 million.
- Net debt increased alongside the $235.0 million ABL draw; the term loan’s reported rate rose to 6.89% from 2.84%.
- The $100.0 million Tax Receivable Agreement settlement was paid in 2022, terminating the agreement and ending further payment obligations.
Outlook, management commentary, risks and unusual items
- Vertiv expects 2023 capital expenditures, including capitalized software, of approximately $150 million. It anticipates continued pricing realization in 2023 and stated that working-capital initiatives are intended to optimize inventory levels.
- Management expects supply-chain constraints and inflation in materials, freight and labor to continue into 2023. Shortages, premium freight and delayed materials could constrain production and pressure sales and earnings; pricing actions may take time to flow through the substantial backlog.
- Vertiv reported delivering $365.0 million of price realization actions in 2022. Price realization did not fully offset increased commodity and logistics costs in the Americas and EMEA, while it exceeded those costs in Asia Pacific.
- CEO Rob Johnson retired effective December 31, 2022; Giordano Albertazzi became CEO on January 1, 2023. The company also reported employee attrition associated in part with returning U.S. locations to full-time in-person work.
- A putative securities class action alleges that certain statements about inflation, supply-chain pressures and pricing were misleading. Vertiv says it believes it has meritorious defenses but cannot predict the outcome or potential cost.
- Other notable exposures include foreign-exchange and interest-rate movements, commodity prices, customer concentration and order volatility, cybersecurity, acquisition integration, environmental liabilities, and debt covenants. Goodwill and net intangible assets totaled $3,100.8 million, about 44% of assets; the annual impairment test found no impairment, though EMEA goodwill valuation was identified as a critical audit matter.
- Management and the auditor reported effective internal control over financial reporting at December 31, 2022; the auditor issued unqualified opinions on the financial statements and internal controls.
Important facts for investors to verify
- Review the full audited statements and notes for debt terms, interest-rate hedges, covenant headroom and the maturity profile, particularly the 2027 term-loan maturity.
- Assess whether cash conversion improves as receivables and inventory are worked down, and whether projected 2023 pricing offsets ongoing supply, freight and labor costs.
- Examine backlog quality, cancellation or deferral provisions, delivery timing, and the extent to which historic order pricing may delay margin recovery.
- Track the securities litigation, any subsequent developments, and the potential financial exposure; the filing does not provide a clear estimate of ultimate cost.
- Evaluate the sensitivity of goodwill and intangible-asset valuations to operating assumptions, especially for EMEA, and monitor future impairment disclosures.
- Consider dilution from outstanding warrants and equity awards. After year-end, 5,266,666 private warrants were exercised cashlessly for 1,368,194 shares.