Vertiv Holdings Co — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022, compared with Q1 2021. Vertiv provides critical infrastructure products and services for data centers, communications networks, and commercial and industrial markets. Amounts below are in millions of dollars unless noted.
Financial results and position
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Net sales | $1,156.4 | $1,098.4; up 5.3% |
| Gross profit / margin | $303.6 / 26.3% | $358.0 / 32.6% |
| Operating profit (loss) | $(45.2) | $79.8 |
| Net income | $8.5 | $31.7 |
| EPS | Basic $0.02; diluted $(0.23) | Basic and diluted $0.09 |
| Operating cash flow | $(132.2) | $60.7 |
| Cash and cash equivalents at quarter-end | $288.5 | $439.1 at Dec. 31, 2021 |
- Revenue growth included $87.5 of E&I acquisition sales, partly offset by foreign currency impacts and sales from a divested business. Higher prices were offset by lower volumes amid supply constraints.
- Costs of sales rose 15.2%, faster than revenue, reflecting E&I, commodity and logistics costs, and supply-chain constraints. SG&A increased 16.8% to $292.2; amortization increased $25.9, primarily from E&I-related intangibles.
- The reported $8.5 net income included a $94.9 gain from the change in fair value of warrant liabilities. The filing reports diluted EPS of $(0.23), reflecting the warrant gain’s exclusion from the diluted EPS numerator; basic EPS was $0.02.
- Operating cash use included a $116.1 working-capital outflow, primarily inventory build, and a $8.7 litigation-settlement-related payment noted in the cash-flow discussion. Investing cash use was $18.2, including $15.1 of capital expenditures.
- Long-term debt, net of current portion, was $2,946.3; debt included a $2,156.2 term loan due 2027 and $850.0 of 4.125% secured notes due 2028. No ABL balance was outstanding; reported ABL availability was $432.2, net of letters of credit and subject to borrowing-base limits.
Material changes and segment performance
- Americas sales rose 6.7% to $535.1, while operating margin fell to 10.8% from 25.2%, mainly because commodity and logistics inflation exceeded price realization.
- Asia Pacific sales declined 6.9% to $332.8 and margin fell to 12.5% from 14.9%, reflecting supply constraints, COVID-related access issues in China, lower volume, and unfavorable mix.
- EMEA sales increased 20.5% to $288.5, substantially reflecting E&I sales; margin decreased to 11.5% from 13.9%, with cost inflation exceeding price realization.
- Cash and cash equivalents fell $150.6 from year-end. Inventory increased to $774.5 from $616.3, a significant working-capital use.
Outlook, risks, and unusual items
- The filing gives no quantified full-year financial guidance. Management expected supply-chain challenges and inflation in materials, freight, and labor to continue throughout 2022, potentially increasing, with shortages causing production and delivery pressure.
- Management expected continued pricing realization during the remainder of 2022 from prior and ongoing pricing actions, while noting that cost increases and supply disruptions could pressure sales and margins.
- The company cited continuing COVID-19 uncertainty, particularly impacts on supply chains, operations, and demand. Other disclosed risks include inflation forecasting and mitigation, backlog conversion, foreign exchange, indebtedness and covenant compliance, and litigation.
- A securities class action filed March 24, 2022 alleges that Vertiv failed to disclose supply-chain and inflation challenges in certain 2021 filings. The company said it believes it has defenses but cannot predict the outcome or costs.
- The E&I acquisition contributed $87.5 in Q1 sales and an operating loss of $16.8. Acquisition-related amortization and integration costs also affected results. A separate $21.5 Energy Labs earn-out dispute settlement was paid in January 2022.
Important facts for investors to verify
- How much of revenue growth and future performance depends on E&I, and whether its reported operating loss and integration costs improve.
- Whether pricing gains catch up with material, freight, labor, and expedited-purchasing costs, and whether supply constraints ease.
- Inventory levels, working-capital cash use, and the company’s capacity to convert backlog into sales and cash.
- The reconciliation and cash timing of the litigation-settlement payment described in the cash-flow discussion against the $21.5 Energy Labs settlement disclosed in the notes.
- Progress and potential costs of the securities class action, along with debt service, ABL availability, and covenant headroom.