Unless the context otherwise indicates or requires, references to (1) "the Company," "we," "us" and "our" refer toVertiv Holdings Co , aDelaware corporation, and its consolidated subsidiaries following the business combination; and (2) "Holdings" refers toVertiv Holdings, LLC and its subsidiaries prior to the business combination. In addition, dollar amounts are stated in millions, except for per share amounts. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year endedDecember 31, 2021 .
Cautionary Note Regarding Forward-looking Statements
This Quarterly Report on Form 10-Q, and other statements that Vertiv may make, may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, with respect to Vertiv's future financial or business performance, strategies or expectations, and as such are not historical facts. This includes, without limitation, statements regarding the financial position, capital structure, indebtedness, business strategy and plans and objectives of Vertiv management for future operations. These statements constitute projections, forecasts and forward-looking statements, and are not guarantees of performance. Vertiv cautions that forward-looking statements are subject to numerous assumptions, risks and uncertainties, which change over time. Such statements can be identified by the fact that they do not relate strictly to historical or current facts. When used in this Quarterly Report on Form 10-Q, words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "possible," "potential," "predict," "project," "should," "strive," "would" and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement is not forward-looking. The forward-looking statements contained or incorporated by reference in this Quarterly Report on Form 10-Q are based on current expectations and beliefs concerning future developments and their potential effects on Vertiv. There can be no assurance that future developments affecting Vertiv will be those that Vertiv has anticipated. Vertiv undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond Vertiv's control) or other assumptions that may cause actual results or performance to be materially different from those expressed or implied by these forward-looking statements. Should one or more of these risks or uncertainties materialize, or should any of the assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. Vertiv has previously disclosed risk factors in itsSecurities and Exchange Commission ("SEC") reports, including those set forth in its Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSEC . These risk factors and those identified elsewhere in this Quarterly Report on Form 10-Q, among others, could cause actual results to differ materially from historical performance and include, but are not limited to: risks relating to the continued growth of Vertiv's customers' markets; disruption of Vertiv's customers' orders or Vertiv's customers' markets; less favorable contractual terms with large customers; risks associated with governmental contracts; failure to mitigate risks associated with long-term fixed price contracts; competition in the infrastructure technologies industry; failure to obtain performance and other guarantees from financial institutions; failure to realize sales expected from Vertiv's backlog of orders and contracts; failure to properly manage Vertiv's supply chain or difficulties with third-party manufacturers; our ability to forecast changes in prices, including due to inflation in material, freight and/or labor costs, and timely implement measures necessary to mitigate the impacts of any such changes; risks associated with our significant backlog, including that the impacts of any measures taken to mitigate inflation will not be reflected in our financial statements immediately; failure to meet or anticipate technology changes; risks associated with information technology disruption or security; risks associated with the implementation and enhancement of information systems; failure to realize the expected benefit from any rationalization, restructuring and improvement efforts; Vertiv's ability to realize cost savings in connection with Vertiv's restructuring program; disruption of, or changes in, Vertiv's independent sales representatives, distributors and original equipment manufacturers; changes to tax law; ongoing tax audits; costs or liabilities associated with product liability; the global scope of Vertiv's operations; risks associated with Vertiv's sales and operations in emerging markets; risks associated with future legislation and regulation of Vertiv's customers' markets both inthe United States and abroad; Vertiv's ability to comply with various laws and regulations and the costs associated with legal compliance; adverse outcomes to any legal claims and proceedings filed by or against Vertiv; risks associated with current or potential litigation or claims against Vertiv; Vertiv's ability to protect or enforce its proprietary rights on which its business depends; third party intellectual property infringement claims; liabilities associated with environmental, health and safety matters, including risks associated with the COVID-19 pandemic; failure to realize the value of goodwill and intangible assets; exposure to fluctuations in foreign currency exchange rates; failure to maintain internal controls over financial reporting; the unpredictability of Vertiv's future operational results, including the ability to grow and manage growth profitably; potential net losses in future periods; Vertiv's level of indebtedness and the ability to incur additional indebtedness; Vertiv's ability to comply with the covenants 20
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and restrictions contained in our credit agreements, including restrictive covenants that restrict operational flexibility; Vertiv's ability to comply with the covenants and restrictions contained in our credit agreements that is not fully within our control; Vertiv's ability to access funding through capital markets; the Vertiv Stockholder's significant ownership and influence over the Company; risks associated with Vertiv's obligations to pay the Vertiv Stockholder portions of the tax benefits relating to pre-business combination tax assets and attributes; resales of Vertiv's securities may cause volatility in the market price of our securities; Vertiv's organizational documents contain provisions that may discourage unsolicited takeover proposals; Vertiv's certificate of incorporation includes a forum selection clause, which could discourage or limit stockholders' ability to make a claim against it; the ability of Vertiv's subsidiaries to pay dividends; volatility in Vertiv's stock price due to various market and operational factors; risks associated with the failure of industry analysts to provide coverage of Vertiv's business or securities; the ability of Vertiv to grow and manage growth profitably, maintain relationships with customers and suppliers and retain its management and key employees; factors relating to the business, operations and financial performance of Vertiv and its subsidiaries, including: global economic weakness and uncertainty; Vertiv's ability to attract, train and retain key members of its leadership team and other qualified personnel; the adequacy of Vertiv's insurance coverage; a failure to benefit from future acquisitions; risks associated with Vertiv's limited history of operating as an independent company; and other risks and uncertainties indicated in Vertiv'sSEC reports or documents filed or to be filed with theSEC by Vertiv. Forward-looking statements included in this Quarterly Report on Form 10-Q speak only as of the date of this Quarterly Report on Form 10-Q or any earlier date specified for such statements. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be filed with theSEC by Vertiv required under applicable securities laws. All subsequent written or oral forward-looking statements attributable to the Company or persons acting on the Company's behalf may be qualified in their entirety by this Cautionary Note Regarding Forward-Looking Statements. 21
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Overview
We are a global leader in the design, manufacturing and servicing of critical digital infrastructure technology that powers, cools, deploys, secures and maintains electronics that process, store and transmit data. We provide this technology to data centers, communication networks and commercial and industrial environments worldwide. We aim to help create a world where critical technologies always work, and where we empower the vital applications of the digital world. Outlook and Trends
Below is a summary of trends and events that are currently affecting, or may in the future affect, our business, operations and short-term outlook:
•COVID-19 Pandemic: Unprecedented measures have been taken by governments and businesses to address the COVID-19 pandemic. These measures have included periodic shelter-in-place orders, restrictions on travel and business operations, temporary closures of businesses, quarantines, and attempts to institute various regulatory requirements. As a result of this pandemic, global economic activity has been significantly impacted, causing volatility and disruption in global financial markets. These responsive measures taken by many countries have affected, and could in the future materially impact, the Company's business, results of operations, financial condition and stock price. •The extent of the continuing impact of the COVID-19 pandemic on the Company's operational and financial performance is uncertain and will depend on many factors outside the Company's control, including, without limitation, the extent, timing and duration of the pandemic; the availability, distribution and effectiveness of vaccines; the imposition of protective public safety measures; and the impact of the pandemic on the global economy and demand for products. Refer to Part I, Item 1A of Form 10-K for the year endedDecember 31, 2021 filed with theSEC under the heading "Risk Factors," for more information. The Company continues to monitor the situation and will take further actions as may be required by federal, state, or local governmental authorities, or that we determine are in the best interests of our associates, customers, and shareholders. •Supply Chain Constraints and Cost Increases: During 2022, aspects of the Company's business continue to be affected by the COVID-19 pandemic as well as increased costs for materials, freight and labor. Despite continued strong market demand, we expect that supply chain challenges and inflationary pressures will continue throughout 2022, with critical part shortages driving the need for additional spot buys at increased costs, and costs associated with premium freight to meet customer commitments. Additionally, logistical issues have significantly delayed the receipt of materials and, in some cases, the Company cannot procure critical parts at any price, creating production and delivery challenges pressuring the top and bottom line. The Company continues to take actions to improve our ability to forecast inflationary headwinds and reflect anticipated cost increases in our prices and will continue to take actions to address shortages and inflationary pressures, which are expected to continue, and may increase, throughout 2022. Based on first quarter results, we anticipate continued pricing realization in the remainder of 2022, even within the current more inflationary environment, as a result of the pricing actions undertaken by the Company in the fourth quarter of 2021 and which we have and will continue to take throughout 2022. 22
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RESULTS OF OPERATIONS
Comparison of the Three Months EndedMarch 31, 2022 and Three Months EndedMarch 31, 2021 Three months Three months ended March 31, ended March 31, (Dollars in millions) 2022 2021 $ Change % Change Net sales$ 1,156.4 $ 1,098.4 $ 58.0 5.3 % Cost of sales 852.8 740.4 112.4 15.2 Gross profit 303.6 358.0 (54.4) (15.2) Selling, general and administrative expenses 292.2 250.1 42.1 16.8 Amortization of intangibles 57.7 31.8 25.9 81.4 Restructuring costs 0.8 2.0 (1.2) (60.0) Foreign currency (gain) loss, net (1.3) (6.9) (5.6) (81.2) Other operating expense (income) (0.6) 1.2 (1.8) (150.0) Operating profit (loss) (45.2) 79.8 (125.0) (156.6) Interest expense, net 29.3 24.1 5.2 21.6 Loss on extinguishment of debt - 0.4 (0.4) (100.0) Change in fair value of warrant liabilities (94.9) 13.6 (108.5) (797.8) Income tax expense 11.9 10.0 1.9 19.0 Net income (loss) $ 8.5 $ 31.7$ (23.2) (73.2) % Net Sales Net sales were$1,156.4 in the first three months of 2022, an increase of$58.0 , or 5.3%, compared with$1,098.4 in the first three months of 2021. The increase in sales was primarily driven by E&I sales of$87.5 , partially offset offset by the negative impacts from foreign currency of$18.3 , and lower sales from a divested business of$15.9 . The impact of higher selling prices was offset by lower volumes due to on-going supply chain constraints. By product offering, critical infrastructure & solutions sales increased$37.0 , which included negative impacts from foreign currency of$2.4 . Services & spares sales increased$12.4 , which included negative impacts from foreign currency of$8.3 . Integrated rack solutions sales increased$8.6 , which included the negative impacts from foreign currency of$7.6 . Excluding intercompany sales, net sales were$535.1 in theAmericas ,$332.8 inAsia Pacific and$288.5 in EMEA. Movements in net sales by segment and offering are each detailed in the Business Segments section below.
Cost of Sales
Cost of sales were$852.8 in the first three months of 2022, an increase of$112.4 , or 15.2% compared to the first three months of 2021. The increase in cost of sales was primarily driven by E&I of$65.8 and increased commodity and logistic costs, and supply chain constraints, partially offset by the impact of lower volumes and fixed cost investments. Gross profit was$303.6 in the first three months of 2022, or 26.3% of sales, compared to$358.0 , or 32.6% of sales, in the first three months of 2021.
Selling, General and Administrative Expenses
Selling, general and administrative expenses (SG&A) were$292.2 in the first three months of 2022, an increase of$42.1 compared to the first three months of 2021. SG&A as a percentage of sales was 25.3% for the three months endedMarch 31, 2022 compared with 22.8% in the three months endedMarch 31, 2021 . The increase in SG&A was primarily driven by E&I costs of$12.5 , increased research and development spend of$7.4 , higher commissions of$7.5 as a result of higher order volume, and increased employee compensation costs.
Other Operating Expenses
Other operating expenses include amortization of intangibles, restructuring costs, foreign currency (gain) loss, and other operating expense (income). Other expenses were$56.6 for the first three months of 2022, which was a$28.5 increase from the first three months of 2021. The increase was primarily due to an increase in amortization of intangibles of$25.9 associated with the acquisition of E&I onNovember 1, 2021 . 23
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Loss on Extinguishment of Debt
Loss on extinguishment of debt was
Change in Fair Value of Warrant Liabilities
Change in fair value of warrant liabilities represents the mark-to-market fair value adjustments to the outstanding warrants issued in connection with the IPO of our predecessor,GS Acquisition Holdings Corp. The change in fair value of the outstanding warrants liability during the first three months of 2022 and 2021 resulted in a gain of$94.9 and a loss of$13.6 , respectively. The change in fair value of stock warrants was the result of changes in market prices and other observable inputs deriving the value of the financial instruments.
Interest Expense
Interest expense, net, was$29.3 in the first three months of 2022 compared to$24.1 in the first three months of 2021. The$5.2 increase was primarily due to a$9.4 increase related to the Senior Secured Notes due 2028, slightly offset by a$1.8 decrease in accretion expense associated with the Tax Receivable Agreement, and$1.3 decrease as a result of the term loan refinancing in the first three months of 2021. Income Taxes Income tax expense was$11.9 in the first three months of 2022 compared to$10.0 in the first three months of 2021. The effective rate in the first three months of 2022 was primarily influenced by the mix of income between ourU.S. and non-U.S. operations, net of changes in valuation allowances which is offset by non-taxable changes in fair value of the warrant liabilities. In the first three months of 2021, income tax expense was primarily influenced by the mix of income between ourU.S. and non-U.S. operations, and reflects the negative impact of GILTI which is partially offset by changes in valuation allowance in theU.S.
The tax expense in the first three months of 2022 was
Business Segments
The following is detail of business segment results for the three months endedMarch 31, 2022 . Segment profitability is defined as operating profit (loss). Segment margin represents segment operating profit (loss) expressed as a percentage of segment net sales. For reconciliations of segment net sales and earnings to the Company's consolidated results, see "Note 13 - Segment Information", of the Company's condensed consolidated financial statements. Segment net sales are presented excluding intercompany sales.Americas Three Months Ended Three Months Ended (Dollars in millions) March 31, 2022 March 31, 2021 $ Change % Change Net sales $ 535.1 $ 501.5$ 33.6 6.7 % Operating profit (loss) 57.9 126.4 (68.5) (54.2) % Margin 10.8 % 25.2 %Americas net sales of$535.1 in the first three months of 2022 increased$33.6 , or 6.7% from the first three months of 2021. The increase in sales was primarily driven by E&I sales of$17.1 and higher selling prices with volumes relatively flat with prior year. By product offering, net sales increased in critical infrastructure & solutions by$15.1 mostly due to E&I sales. Service & spares increased by$10.5 due to improved customer site availability. Integrated rack solutions increased by$8.0 primarily due to higher rack power distribution unit sales.Americas net sales were negatively impacted by foreign currency of approximately$0.1 . Operating profit (loss) in the first three months of 2022 was$57.9 , a decrease of$68.5 compared with the first three months of 2021. Margin declined primarily due to increased commodity and logistic costs exceeding price realization. 24
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Table of contentsAsia Pacific Three Months Ended Three Months Ended (Dollars in millions) March 31, 2022 March 31, 2021 $ Change % Change Net sales $ 332.8 $ 357.4$ (24.6) (6.9) % Operating profit (loss) 41.5 53.1 (11.6) (21.8) % Margin 12.5 % 14.9 %Asia Pacific net sales were$332.8 in the first three months of 2022, a decrease of$24.6 , or 6.9% from the first three months of 2021. Sales decreases were primarily due to lower volumes driven by supply chain constraints and customer site access as a result of COVID-19, particularly inChina , and the expiration of governmental subsidies in ourWind Power business, partially offset by stronger sales elsewhere in the region, particularly inIndia . By product offering, net sales weakened in critical infrastructure & solutions and integrated rack solutions of$32.5 and$1.2 , respectively, and slightly offset by$9.1 of improvements in service & spares. Additionally,Asia Pacific net sales were negatively impacted by foreign currency of approximately$0.6 . Operating profit (loss) in the first three months of 2022 was$41.5 , a decrease of$11.6 compared with the first three months of 2021. Margin declined primarily due to volume deleveraging, primarily inGreater China , and unfavorable mix, primarily inSouth East Asia . The impact of increased commodity and logistics costs was offset by price realization.
Three Months Ended Three Months Ended (Dollars in millions) March 31, 2022 March 31, 2021 $ Change % Change Net sales $ 288.5 $ 239.5$ 49.0 20.5 % Operating profit (loss) 33.2 33.4 (0.2) (0.6) % Margin 11.5 % 13.9 % EMEA net sales were$288.5 in the first three months of 2022, an increase of$49.0 , or 20.5% from the first three months of 2021. Sales increases were primarily due to E&I sales of$70.4 and higher selling prices, partially offset by$15.9 of the divested heavy industrialUPS business. By offering, net sales improved in critical infrastructure & solutions by$54.4 of which$70.4 related to E&I sales, improvements in integrated rack solutions of$1.8 , and slightly offset by a$7.2 decrease in service & spares. Additionally,Europe ,Middle East &Africa net sales were negatively impacted by foreign currency of approximately$17.6 . Operating profit (loss) in the first three months of 2022 was$33.2 , a decrease of$0.2 compared with the first three months of 2021. Margin declined primarily due to increased commodity and logistic costs exceeding price realization.
Vertiv Corporate and Other
Corporate and other costs include costs associated with our headquarters located inColumbus, Ohio , as well as centralized global functions including Finance,Treasury , Risk Management, Strategy & Marketing, IT, Legal, and global product platform development and offering management. Corporate and other costs were$120.1 and$101.3 in the first three months of 2022 and 2021, respectively. Corporate and other costs increased$18.8 compared with the first three months of 2021 primarily due to$10.2 increased research and development costs and E&I integration costs.
Capital Resources and Liquidity
Our primary future cash needs relate to working capital, operating activities, capital spending, strategic investments and debt service. As previously disclosed in the Company's 2021 Annual Report, onOctober 22, 2021 ,Vertiv Group Corporation (the "Vertiv Group "), completed its offering (the "Offering") of$850.0 aggregate principal amount of its Senior Secured Notes due 2028 (the "Notes") in a private placement at par. The Notes will bear interest at 4.125% per annum and mature onNovember 15, 2028 . We believe that net cash provided by operating activities, augmented by long-term debt arrangements and the ABL Revolving Credit Facility, will provide adequate near-term liquidity for the next 12 months of independent operations, as well as the resources necessary to invest for growth in existing businesses and manage our capital structure on a short- and long-term basis. We expect to continue to opportunistically access the capital and financing markets from time to time. Access to capital and the availability of financing on acceptable terms in the future will be affected by many factors, including our credit rating, economic conditions, and the overall liquidity of capital markets. There can be no assurance that we will continue to have access to the capital and financing markets on acceptable terms. 25
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AtMarch 31, 2022 , we had$288.5 in cash and cash equivalents, which includes amounts held outside of theU.S. , primarily inEurope andAsia . Non-U.S. cash is generally available for repatriation without legal restrictions, subject to certain taxes, mainly withholding taxes. We are not asserting indefinite reinvestment of cash or outside basis for our non-U.S. subsidiaries due to the outstanding debt obligations in instances where alternative repatriation options other than dividends are not available. Our ABL Revolving Credit Facility provides for up to$455.0 of revolving borrowings, with separate sublimits for letters of credit and swingline borrowings and an uncommitted accordion of up to$145.0 . AtMarch 31, 2022 ,Vertiv Group and certain other subsidiaries of the Company had$432.2 of availability under the ABL Revolving Credit Facility, net of letters of credit outstanding in the aggregate principal amount of$19.1 , and taking into account the borrowing base limitations set forth in the ABL Revolving Credit Facility.
Long-Term Debt Obligations
There is a discussion in "Note 6 - Debt" in Part I. Item I. of this Form 10-Q contains further details of the long-term debt arrangements reflected in our consolidated financial statements, which debt was issued by the Company and certain of our subsidiaries as borrowers, co-borrowers or guarantors.
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