Vertiv Holdings Co — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Vertiv supplies mission-critical power, thermal management, rack and related services for data centers, communication networks, and commercial and industrial customers. Figures below are in millions of dollars except per-share data.
Financial performance
- Q2 revenue: $1,734.1, up 23.9% year over year. Product sales were $1,360.4 and services sales were $373.7. Management attributed growth mainly to higher volume and $125.0 of price realization, partly offset by $17.8 of unfavorable foreign currency effects.
- Q2 profitability: Gross profit was $594.0, or 34.3% of sales, versus $371.5, or 26.5%, a year earlier. Operating profit was $205.8 versus $26.2; net income was $83.2 versus $20.3. Diluted EPS was $0.22 versus $0.05.
- Six-month results: Revenue was $3,255.2, up 27.4%; gross profit was $1,089.5, or 33.5% of sales, versus 26.4%. Operating profit was $336.1 versus an operating loss of $19.0; net income was $133.5 versus $28.8. Diluted EPS was $0.35; the prior-year six-month diluted loss per share was $0.28.
- Segment trends, Q2: Americas revenue rose 48.2% to $959.4 and operating profit increased to $239.8. EMEA revenue rose 9.8% to $378.9 and operating profit to $100.6. Asia Pacific revenue fell 2.8% to $395.8 and operating profit to $62.6, with foreign exchange a significant headwind.
- Cash flow: First-half operating cash flow was $295.6, compared with cash use of $337.9 a year earlier. Working capital used $35.5, versus $377.8 in the prior period. Investing activities used $43.7; financing activities used $243.9, primarily reflecting net ABL repayments. Capital expenditures and capitalized software totaled $56.1.
- Liquidity and debt: June 30 cash and cash equivalents were $274.9. No ABL borrowings were outstanding, and reported ABL availability was $550.5, net of letters of credit and subject to borrowing-base limits. Debt included a $2,128.9 Term Loan due 2027 and $850.0 of 4.125% Senior Secured Notes due 2028; reported long-term debt, net of current portion, was $2,927.4. The Term Loan rate was 7.94% at quarter-end.
Material changes and unusual items
- Q2 gross margin expanded 7.8 percentage points year over year; management said pricing more than offset inflation. SG&A rose in dollars but declined to 18.9% of sales from 20.6%.
- Q2 interest expense increased to $46.9 from $33.4, primarily due to the Term Loan. The quarter included a $46.0 loss from the fair-value remeasurement of private warrant liabilities, compared with a $38.9 gain in Q2 2022. This noncash mark-to-market item affected reported earnings; first-half warrant remeasurement was a $41.8 loss versus a $133.8 gain a year earlier.
- Restructuring costs were $9.1 in Q2 and $22.2 for the first half, versus $0.8 and $1.6 in the comparable prior-year periods. The company reported a $31.2 current restructuring liability at June 30.
- During the first half, Vertiv reduced its ABL balance from $235.0 at year-end 2022 to zero at June 30. The Term Loan and interest-rate swaps transitioned from LIBOR to SOFR effective July 1 and July 2, 2023, respectively.
Outlook, risks and contingencies
- Management expects continued strong market demand, but also expects some supply-chain challenges and materials inflation to persist through 2023. Spot buys and premium freight had declined substantially from the second half of 2022; pricing realization is expected to continue.
- Vertiv expects customer orders to normalize as lead times improve and aims to optimize inventory during 2023. The filing does not provide a clear full-year revenue or earnings guidance figure. It anticipates approximately $150 of 2023 capital expenditures, including capitalized software, and approximately $60 of lease payments.
- Management believes cash and ABL availability will provide adequate liquidity for the next 12 months, while noting that future capital-market access and financing terms are not assured. Higher interest rates could increase borrowing costs, although swaps are intended to mitigate some exposure.
- A putative securities class action and a shareholder derivative lawsuit allege misleading statements concerning inflation, supply-chain pressures and pricing. The company says it believes it has meritorious defenses but cannot predict outcomes or potential costs. A previously disclosed SVO dispute was settled; payment was anticipated in Q3 2023. Separately, a Delaware court validated the company’s charter and relevant shares in April 2023.
- Management cautions that economic uncertainty, customer demand and order normalization, inflation, supply-chain execution, backlog conversion, foreign exchange, litigation and leverage could affect results. It states that interim results are not necessarily indicative of full-year performance.
Important facts for investors to verify
- Whether revenue growth, price realization and margin expansion continue as orders normalize and inflationary costs evolve.
- Whether Asia Pacific performance improves and how foreign exchange affects segment results.
- Working-capital and inventory trends, including whether operating cash generation is sustained.
- Term Loan interest costs after the SOFR transition, hedge coverage and remaining ABL availability.
- Developments and any financial exposure from the securities and derivative lawsuits, and confirmation of the SVO settlement payment.