01—Abstract
Summary
Summary of the 10-K filed February 27, 2023. Cited figures are marked; the original filing is the authoritative source.
Vertiv Holdings Co (NYSE: VRT) reported full-year 2022 net sales of $5,691.5 milliona, up 13.9% from $4,998.1 million in 2021, driven by higher volumes, the November 2021 E&I acquisition, and price realization of $365.0 million, partially offset by a roughly $252 million foreign currency headwind.
Gross margin compressed to 28.4% from 30.5% as commodity, logistics, and supply chain costs outpaced pricing. Operating profit fell 14.0% to $223.4 millionb, and net income dropped 36.0% to $76.6 million. Diluted EPS was negative at $(0.04) because of a $90.9 million non-cash gain on warrant liabilities, which is excluded from underlying operating performance.
The more important investor concern is cash flow. Operating cash flow turned negative at $(152.8) million versus $210.9 millionc in 2021, driven by $449.2 million of working capital consumption from receivables growth and inventory build. Backlog rose to $4,754.4 million from $3,191.0 million, which supports revenue visibility but also reflects extended lead times and customer orders placed ahead of fulfillment capacity.
Management expects supply chain and inflationary pressures to persist into 2023 and plans working capital initiatives to reduce inventory. Balance sheet leverage is meaningful. Total debt principal was about $3.2 billiond at year-end, including a $2,139.8 million term loan, $850.0 million of 4.125% senior secured notes due 2028, and $235.0 million drawn on the ABL revolver.
Cash was $260.6 million. The company completed the Tax Receivable Agreement buyout ($100 million) in 2022, and it disclosed a securities class action filed in May 2022 tied to inflation and supply chain statements. Investors should weigh the strong demand and backlog from data center growth against margin pressure, negative operating cash flow, and rising interest expense of $147.3 million.
02—Key points
Key Highlights
- Net sales grew 13.9% to $5,691.5 million, with Americas up 24.7% and E&I contributing $359.2 million of sales in the first ten months of 2022.
- Gross margin contracted to 28.4% from 30.5%, as commodity and logistics cost inflation exceeded price realization.
- Operating cash flow was negative $(152.8) million, a $363.7 million swing from 2021, driven by $449.2 million of working capital investment.
- Backlog reached $4,754.4 million, up about 49% from $3,191.0 million, with $1.6 billion of the increase from orders placed ahead of fulfillment capacity.
- Net income fell 36.0% to $76.6 million; the $90.9 million warrant fair value gain flattered results, and diluted EPS was $(0.04).
- Total debt principal of about $3.2 billion and interest expense of $147.3 million (up 62.6%) increase sensitivity to rates, partially offset by $1.0 billion of interest rate swaps.
- Tax Receivable Agreement was fully terminated in November 2022 after $100 million in payments, and the Vertiv Stockholder holds about 10% of Class A shares, with significant governance influence.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2022, Vertiv Holdings kept $0.01.
- Revenue$5.69B100.0%
- Cost of revenue−$4.08B71.6%
- Gross profit$1.62B28.4%
- Operating costs−$1.39B24.5%
- Operating income$223.4M3.9%
- Interest, other & tax−$146.8M2.6%
- Net income$76.6M1.3%
Where FY2022 revenue went
$5.69B- Cost of revenue: $4.08B, 72% of revenue
- SG&A: $1.18B, 21% of revenue
- Net income: $76.6M, 1.3% of revenue
- R&D: $282.0M, 5.0% of revenue
- Interest, other & tax: $146.8M, 2.6% of revenue
Kept 1.3% as net incomeNet income $76.6M · 1.3%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2022filed February 27, 2023Financial Statements
FY2022 against FY2021
| Line item | FY2022FY2021 | Change |
|---|---|---|
| Revenue | $5.69B$5.00B | +13.9% |
| Cost of Revenue | $4.08B$3.48B | +17.3% |
| Gross Profit | $1.62B$1.52B | +6.1% |
| R&D Expenses | $282.00M$266.40M | +5.9% |
| SG&A Expenses | $1.18B$1.11B | +6.2% |
| Operating Income | $223.40M$259.90M | −14.0% |
| Interest Expense | $147.30M$90.60M | +62.6% |
| Net Income | $76.60M$119.60M | −36.0% |
| EPS (Basic) | $0.20$0.34 | −41.2% |
| EPS (Diluted) | $-0.04$0.33 | −112.1% |
| Shares Outstanding (Basic) | 376.73M355.54M | +6.0% |
| Shares Outstanding (Diluted) | 378.22M360.14M | +5.0% |
05—Questions
Frequently Asked Questions
Why did Vertiv report negative operating cash flow in 2022 despite growing sales and profit?
Operating cash flow was $(152.8) million because trade working capital consumed $449.2 million. Receivables rose $375.8 million with higher sales volume, and inventory increased $211.4 million to support forecast demand and the large backlog. Management has launched working capital initiatives and expects to optimize inventory levels in 2023, but the timing of cash recovery is uncertain.
How much of the 2022 earnings is driven by non-operating items?
A $90.9 million non-cash gain on the change in fair value of warrant liabilities boosted pre-tax income. Without it, pre-tax income would have been roughly $76 million rather than $167.0 million. The warrants are marked to market, so this gain can reverse in future periods based on Vertiv's stock price and warrant count, which increases earnings volatility.
What are the main risks to Vertiv's margins heading into 2023?
Management expects continued material, freight, and labor cost inflation, critical part shortages requiring costly spot buys, and premium freight. Gross margin already fell 2.1 percentage points in 2022. Price realization of $365.0 million helped, but the company notes that backlog priced at historical rates delays the flow-through of price increases, and some costs may not be recoverable from customers.
How leveraged is Vertiv and what debt risks should investors consider?
Debt principal was about $3.2 billion at December 31, 2022, against equity of $1.44 billion and cash of $260.6 million. The $2.14 billion term loan carries floating rates, hedged by $1.0 billion of swaps maturing in 2027, and the $235 million ABL revolver bore a 5.85% weighted rate. A 100 basis point rate increase would raise annual net interest expense by about $11 million. Covenants restrict dividends and additional borrowing, and the company is a holding company dependent on subsidiary distributions.
What is the securities litigation risk?
A putative securities class action (In re Vertiv Holdings Co Securities Litigation, filed May 2022 in the Southern District of New York) alleges that statements about inflation, supply chain, and pricing were misleading. The class covers purchasers between February 24, 2021 and February 22, 2022, and includes claims under the Securities Act tied to the November 2021 secondary offering. Management believes it has meritorious defenses but cannot predict the outcome or cost, so no loss accrual has been recorded.
06—Continue