Business context and period
Vertiv Holdings Co designs, manufactures and services critical digital infrastructure for data centers, communication networks, and commercial and industrial markets. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2022. Vertiv reports three segments: Americas, Asia Pacific, and Europe, Middle East & Africa (EMEA). Comparisons below are year over year unless noted. E&I, acquired November 1, 2021, contributed to 2022 results but was not in the comparable 2021 period.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,481.1 million | $1,228.9 million | $4,036.9 million | $3,587.6 million |
| Gross profit; gross margin | $429.3 million; 29.0% | $381.7 million; 31.1% | $1,104.4 million; 27.4% | $1,149.0 million; 32.0% |
| Operating profit; operating margin | $80.0 million; 5.4% | $81.8 million; 6.7% | $61.0 million; 1.5% | $263.8 million; 7.4% |
| Net income | $21.2 million | $56.2 million | $50.0 million | $97.6 million |
| Basic / diluted EPS | $0.06 / $0.06 | $0.16 / $0.15 | $0.13 / $(0.20) | $0.28 / $0.27 |
| Operating cash flow | Not separately presented | Not separately presented | $(333.5) million | $174.4 million |
At September 30, 2022, cash and cash equivalents were $258.0 million ($268.7 million including restricted cash). Total current assets were $2,973.8 million and current liabilities were $1,838.4 million. Debt was $3,245.6 million, including the current portion; the company also reported $16.8 million of short-term borrowings within accrued liabilities. The ABL facility had $280.0 million drawn and $273.1 million available, net of letters of credit and borrowing-base limits.
Material changes versus prior comparable periods
- Q3 sales grew 20.5%; nine-month sales grew 12.5%. Management attributed growth to E&I, higher volumes and demand, partly offset by foreign-exchange impacts and the divested heavy industrial UPS business. For the nine months, foreign currency reduced sales by $162.2 million and the divestiture reduced sales by $57.2 million.
- Profitability weakened despite sales growth. Gross margin fell 2.1 percentage points in Q3 and 4.6 points for the nine months, as cost of sales rose faster than revenue amid commodity, logistics and supply-chain costs. Nine-month operating profit declined 76.9%.
- Q3 net income declined to $21.2 million from $56.2 million. Nine-month net income fell to $50.0 million from $97.6 million, while interest expense increased to $101.5 million from $66.5 million for the nine months.
- Nine-month operating cash flow deteriorated by $507.9 million to an outflow of $333.5 million. Operating working capital used $448.0 million, primarily reflecting higher receivables and inventory build, compared with $160.0 million used in the prior period.
- Cash declined from $439.1 million at December 31, 2021 to $258.0 million at September 30, 2022. Net debt under the ABL revolving facility was $280.0 million at quarter-end; there was no ABL balance at year-end 2021.
- Foreign-currency translation reduced nine-month other comprehensive income by $332.3 million. Accumulated other comprehensive loss was $189.4 million at quarter-end, versus income of $35.6 million at year-end 2021.
Outlook, commentary, risks and unusual items
- Management said supply constraints and inflationary pressures were expected to continue through the remainder of 2022 and into 2023, with shortages, spot purchasing and premium freight creating production, delivery and margin pressure. It expected continued pricing realization from prior and planned price actions. The filing provides no quantified earnings or revenue guidance.
- Management expected inventory build to continue to support customer demand and the significant backlog. It cited the opening of a new thermal plant in Monterrey, Mexico, to add capacity.
- The company stated that cash, debt arrangements and ABL availability were expected to provide adequate near-term liquidity for the next 12 months, while noting future financing access depends on market and company conditions.
- Q3 included a $9.8 million loss from the change in fair value of warrant liabilities, compared with a $32.5 million gain in Q3 2021. For the nine months, the company recorded a $124.0 million warrant-liability gain. This noncash valuation item contributed to the unusual negative diluted EPS of $(0.20) despite positive net income and basic EPS of $0.13.
- E&I contributed $115.2 million of Q3 sales and had a $3.7 million operating loss; for the nine months it contributed $316.9 million of sales and had a $27.3 million operating loss. Acquisition-related intangible amortization increased by $72.4 million for the nine months.
- Interest-rate exposure remains relevant: the term loan’s stated rate was 5.30% at quarter-end, and management said higher rates could increase interest expense, partly mitigated by swaps. The ABL was amended to transition its benchmark from LIBOR to applicable replacement rates and increased U.S. commitments to $570 million.
- A putative securities class action alleges misleading statements concerning inflation, supply-chain pressures and pricing. Vertiv says it believes it has meritorious defenses but cannot predict the outcome or potential cost. The filing also describes other resolved or accrued disputes and says other material contingent liabilities were not known.
- CEO Rob Johnson announced his retirement effective December 31, 2022; Giordano Albertazzi was named to succeed him effective January 1, 2023. The filing identifies executive succession and retention as risks.
Important facts for investors to verify
- Whether price increases and improved supply availability can offset inflation, logistics costs and delivery constraints, and whether backlog converts to revenue and cash.
- Working-capital trends, especially receivables and inventory, and the timing of a return to positive operating cash flow.
- Debt balances, borrowing costs, ABL availability and covenant compliance as interest rates and financing conditions change.
- The composition of reported earnings and EPS, including warrant fair-value effects and acquisition-related amortization; diluted EPS was negative for the nine-month period despite positive net income.
- Progress and potential exposure in the securities litigation, and execution of the CEO transition.
- The remaining $75 million Tax Receivable Agreement installment, due on or before November 30, 2022; the agreement was to terminate after payment.