Vertiv Holdings Co (VRT) FY 2022 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Unless the context otherwise indicates or requires, references to (1) “the Company,” “Vertiv,” “we,” “us” and “our” refer to Vertiv Holdings Co, a Delaware corporation, and its consolidated subsidiaries; and (2) “GSAH” refers to GS Acquisition Holdings Corp 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 Consolidated Financial Statements and the notes thereto included elsewhere in this Annual Report.

We have omitted the discussion on our results of operations for the year ended December 31, 2020 which discussion was previously included in Item 7 of our 2021 Annual Report on Form 10-K, filed with the SEC on March 1, 2022.

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 & 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.

Key Developments

Below is a summary of selected key operational developments affecting our business in 2022:

•Succession Planning: Following our announcement on October 3, 2022, our Chief Executive Officer, Rob Johnson, retired on December 31, 2022 for health reasons. Giordano Albertazzi assumed the role of Chief Operating Officer on October 3, 2022 in addition to his role as President, Americas, and then the role of Chief Executive Officer on January 1, 2023.

•Board of Directors: In 2022, the Board of Directors increased the authorized number of directors on the Board from nine to eleven and appointed two new directors Jakki Hausler and Joseph J. DeAngelo. Mr. Albertazzi assumed Mr. Johnson's position on our Board on January 1, 2023.

•Facility Expansion: In 2022, we opened a new thermal plant in Monterrey, Mexico. We believe the additional capacity of the Monterrey facility will help to meet the increased demand and backlog in the thermal business.

•Price Realization: In 2022, we successfully delivered $365.0 of price realization actions.

•TRA settlement: On December 31, 2021, the Company and the Vertiv Stockholder agreed to amend and supplement the tax receivable agreement entered into by the Company and the Vertiv Stockholder on February 7, 2020, (the “Tax Receivable Agreement”) to replace the Company’s remaining payment obligations under the Tax Receivable Agreement with an obligation to pay $100.0. We satisfied this obligation as of November 30, 2022 and as of December 31, 2022, we no longer have any obligation under the Tax Receivable agreement.

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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: Over the past three years, 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 was 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, our business, results of operations, financial condition and stock price. The extent of the continuing impact of the COVID-19 pandemic on our operational and financial performance is uncertain and will depend on many factors outside our control, including, without limitation, the extent, timing and duration of new variants of the COVID-19 virus and their impact on the global economy and demand for products. Refer to Part I, Item 1A of this Annual Report under the heading “Risk Factors,” for more information. We continue 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 stockholders. At the outset of the COVID-19 pandemic, we responded swiftly in support of our people, our clients and our communities. As we continue to monitor the evolving situation, we have taken steps to cause our U.S. locations to return to a full-time in-person workplace environment, which has required adjustment by employees and has indirectly caused attrition. We recognize the benefits to our customers, associates, and stockholders of having in-person full-time interaction, and we are working to balance those benefits with the ongoing concerns relating to the COVID-19 pandemic, macroeconomic conditions, and continued competition for talent.

•Supply Chain Constraints and Cost Increases: Aspects of our business continue to be affected by the COVID-19 pandemic as well as increasing costs for materials, freight and labor. Despite continued strong market demand, we expect that supply chain challenges and inflationary pressures will continue into 2023, with critical part shortages driving the need for additional spot buys at increased costs, and increased costs associated with premium freight to meet customer commitments. Additionally, logistical issues have significantly delayed the receipt of materials and, in some cases, we cannot procure critical parts at any price, creating production and delivery challenges pressuring the top and bottom line. We continue 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. Based on full year 2022, we anticipate continued pricing realization into 2023 as a result of the pricing actions that we undertook in 2021, the year ended 2022, and which we plan to continue to take into 2023.

•Inventory Build: During 2022, we saw an increase in inventory build in order to support upcoming customer demand and large projects in addition to working through our significant backlog. We have launched several working capital initiatives and as a result expect to optimize our inventory levels in 2023.

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RESULTS OF OPERATIONS

Year ended December 31, 2022 compared to year ended December 31, 2021

Net Sales

Net sales were $5,691.5 in 2022, an increase of $693.4, or 13.9%, compared with $4,998.1 in 2021. The increase in sales is primarily due to higher sales volumes and E&I sales of $359.2 in the first ten months of 2022, which were partially offset by the negative impacts from foreign currency of $251.8, and lower sales from the divested heavy industrial UPS business in 2021 of $76.4. By product offering, critical infrastructure & solutions sales increased $574.9, including the negative impacts from foreign currency of $158.5. Services & spares sales increased $41.9, including the negative impacts from foreign currency of $62.9. Integrated rack solutions sales increased $76.6, including the negative impacts from foreign currency of $30.4.

Excluding intercompany sales, net sales were $2,728.6 in the Americas, $1,601.3 in Asia Pacific and $1,361.6 in Europe, Middle East & Africa. Movements in net sales by segment and offering are each detailed in the Business Segments section below.

Cost of Sales

Cost of sales were $4,075.4 in 2022, an increase of $600.0, or 17.3% compared to 2021. The increase in cost of sales was primarily driven by the impact of higher volumes, E&I costs of $265.4, increased commodity and logistic costs, and supply chain constraints. Gross profit was $1,616.1 in 2022, or 28.4% of sales, compared to $1,522.7, or 30.5% of sales in 2021.

Selling, General and Administrative Expenses

Selling, general and administrative expenses (or “SG&A”) were $1,178.3 in 2022, an increase of $69.3 compared to 2021. SG&A as a percentage of sales were 20.7% in 2022 compared with 22.2% in 2021. The increase in SG&A was primarily driven by $45.6 of E&I costs in the first ten months of 2022, $29.8 of higher commissions as a result of increased order volume, $25.9 of higher compensation due to increased bonus, higher long-term incentive, and one-time employee separation costs, $9.6 of increased research and development spend, $1.9 of increased investment in IT, which was partially offset by a decrease in mergers and acquisition costs of $39.4 and $18.7 related to litigation settlement costs in 2021.

Other Operating Expenses

The remaining other operating expenses include amortization of intangibles, restructuring costs, foreign currency (gain) loss, and other operating expense (income). These remaining other expenses were $214.4 for 2022, which was a $60.6 increase from 2021. The increase was primarily due to an increase in amortization of intangibles of $71.5 associated with the acquisition of E&I on November 1, 2021, offset by a decrease in asset impairment of $8.7, and a change in foreign currency (gain) loss of $0.5.

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Loss on Extinguishment of Debt

Loss on extinguishment of debt was $0.4 in 2021 related to lender fees associated with the amendment to our Term Loan due 2027. This was not repeated in 2022.

Gain on Tax Receivable Agreement

The gain on the Tax Receivable Agreement is related to the $59.2 gain in 2021 associated with the amended Tax Receivable Agreement signed December 31, 2021. Refer to “Note 10 – Related Party Transactions” to the Consolidated Financial Statements for additional information.

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 initial public offering of our predecessor, GSAH. The change in fair value of the outstanding warrants liability during 2022 and 2021 resulted in a gain of $90.9 and a loss of $61.9, 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 $147.3 in 2022 compared to $90.6 in 2021. The $56.7 increase was primarily due to a $37.2 increase due to the Term Loan due 2027, a $30.2 increase related to the Senior Secured Notes due 2028, which were not outstanding for all of 2021, and a $7.5 increase due to borrowings throughout 2022 on our ABL Revolving Credit Facility, due 2025, partially offset by a $13.0 decrease due to net settlement payments on our interest rate swaps as described in “Note 12 — Financial Instruments and Risk Management” to the Consolidated Financial Statements, and a $4.5 decrease in accretion expense associated with the Tax Receivable Agreement. As interest rates increase, our interest expense will increase, although the effect will be mitigated by our interest rate swaps.

Income Taxes

Income tax expense was $90.4 in 2022 compared to $46.6 in 2021. The effective rate in 2022 was primarily influenced by the mix of income between our U.S. and non-U.S. operations, net of changes in valuation allowances and uncertain tax positions, and reflects the impact of non-deductible changes in fair value of the warrant liabilities, as well as a discrete tax adjustment related to legislative changes enacted in the period. In 2021, income tax expense was primarily influenced by the mix of income between our U.S. and non-U.S. operations, net of changes in valuation allowances and uncertain tax positions, and discrete tax benefits related to a change in our indefinite reinvestment liability caused by legislative changes and movement in foreign currencies.

The tax expense in 2022 was $43.8 higher than 2021 primarily due to the change in mix of income, non-U.S. tax elections and changes in valuation allowances in the U.S. and a discrete tax adjustment related to legislative changes enacted in the period.

Business Segments

The following are business segment results for the years ended December 31, 2022 and 2021. 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 our consolidated results, see “Note 14 — Segment Information”, of our Consolidated Financial Statements. Segment net sales are presented excluding intercompany sales.

Americas

Americas net sales of $2,728.6 in 2022 increased $541.2, or 24.7% from 2021. The increase in sales was primarily driven by higher sales volumes compared to prior year and an increase of $122.3 due to E&I sales in the first ten months of 2022. By product offering, net sales increased in critical infrastructure & solutions by $418.8 driven mostly due to increases in the thermal product lines and $122.3 related to the incremental E&I sales in 2022. Integrated rack solutions increased by a $72.9 primarily due to higher volume. Service & spares increased by $49.5 due to improved customer site availability. Additionally, Americas net sales were negatively impacted by foreign currency of approximately $6.3.

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Operating profit (loss) in 2022 was $426.1, a decrease of $15.1 compared with 2021. Margin declined primarily due to increased commodity and logistic costs exceeding price realization.

Asia Pacific

Asia Pacific net sales of $1,601.3 in 2022 decreased $7.7, or 0.5% from 2021. Sales decreases were primarily driven by the negative impact of foreign currency of approximately $79.8 which were partially offset by the impact of stronger sales, particularly in India. By product offering, net sales improved in service & spares by $20.2. Critical infrastructure & solutions and integrated rack solutions decreased by $22.4 and $5.5, respectively.

Operating profit (loss) in 2022 was $274.4, an increase of $21.0 compared with 2021. Margin increased primarily due to price realization exceeding increased commodity and logistics costs.

Europe, Middle East & Africa

Europe, Middle East & Africa net sales of $1,361.6 in 2022 increased $159.9, or 13.3% from 2021. Sales increases were primarily due to deployment of large colocation data centers, the global recovery from COVID-19, and an increase in E&I sales of $236.9. Europe, Middle East & Africa net sales were negatively impacted by foreign currency of approximately $165.7. By offering, net sales improved in critical infrastructure & solutions and integrated rack solutions of $178.5 and $9.2 respectively, and service & spares decreased by $27.8.

Operating profit (loss) in 2022 was $234.6, an increase of $17.0 compared with 2021. Margin declined primarily due to increased commodity and logistic costs exceeding price realization.

Corporate and Other

Corporate and other costs include costs associated with our headquarters located in Westerville, 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 $495.9 and $508.0 in 2022 and 2021, respectively. Corporate and other costs decreased $12.1 compared with 2021 primarily due to a decrease in one-time merger and acquisition costs of $39.4 related to the acquisition of E&I and integration in 2021, $8.7 of impairment costs related to the sale of a heavy industrial business in 2021, and decreased year over year restructuring charges of $1.6, partially offset by a $15.6 increase in costs related to research and development and $18.7 in legal settlement costs.

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Capital Resources and Liquidity

Our primary future cash needs relate to working capital, operating activities, capital spending, strategic investments and debt service.

Capital Expenditures: Our capital expenditures are primarily related to the maintenance of our long-term assets, as well as the investment in projects that support growth and innovation to further our enterprise strategy. Our capital expenditures (including capitalized software) were approximately $100.0 in 2022. We expect to have capital expenditures (including capitalized software) of approximately $150 in 2023.

We have additional obligations as part of our ordinary course of business, beyond those committed for capital expenditures, which consist of debt obligations, lease obligations and other financial instruments. Refer to “Note 6 — Debt”, “Note 7 — Leases”, and “Note 17 — Commitments and Contingencies” of the accompanying consolidated financial statements for more information. In addition, we have certain tax positions that are further discussed in “Note 9 — Income Taxes” of the consolidated financial statements. We do not have any guarantees or other off-balance sheet financing arrangements, including variable interest entities, which could materially impact our financial condition or liquidity.

We, through our subsidiaries, are party to certain indebtedness arrangements, including the Senior Secured Notes, due 2028, with an outstanding principal amount of $850.0 as of December 31, 2022 (the “Notes”), the Term Loan, due 2027, with an outstanding principal amount of $2,139.8, as of December 31, 2022 (the “Term Loan”), and the ABL Revolving Credit Facility, due 2025, providing up to $570.0 of revolving borrowings, and for which $235.0 was outstanding as of December 31, 2022 (the “ABL Revolving Credit Facility” and collectively with the Term Loan, the “Senior Secured Credit Facilities”). See “Note 6 — Debt” of the consolidated financial statements for more detailed discussion of the material terms of the Notes and the Senior Secured Credit Facilities.

On September 20, 2022, our subsidiary, Vertiv Group Corporation (“Borrower”) and certain of its subsidiaries entered into the Sixth Amendment and the Seventh Amendment to the ABL Revolving Credit Facility. Among other modifications, the Sixth Amendment converted the interest rate benchmark for currently outstanding and future revolving loans under the facility from LIBOR to Secured Overnight Financing Rate ("SOFR"), with a 10 basis points credit spread adjustment for all available tenors, EURIBOR, and SONIA, as applicable. Under the Seventh Amendment, the U.S. revolving loan commitments with the U.S. tranche was increased by $115 to a total loan commitment of $570 under the ABL Revolving Credit Facility. All other material provisions of the ABL Revolving Credit Facility were unchanged, including the March 2, 2025 maturity date.

At December 31, 2022, we had $260.6 in cash and cash equivalents, which includes amounts held outside of the U.S., primarily in Europe and Asia. 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 $570.0 of revolving borrowings, with separate sublimits for letters of credit and swingline borrowings and an uncommitted accordion of up to $30.0. At December 31, 2022, Vertiv had $317.4 of availability (subject to customary borrowing base and other conditions) under the ABL Revolving Credit Facility, net of letters of credit outstanding in the aggregate principal amount of $17.1, and taking into account the borrowing base limitations set forth in the ABL Revolving Credit Facility.

We believe our current cash and cash equivalent levels, augmented by 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.

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Summary Statement of Cash Flows

Year ended December 31, 2022 compared to year ended December 31, 2021

Net Cash provided by (used for) Operating Activities

Net cash used for operating activities was $152.8 in 2022, a $363.7 decrease in cash generation compared to 2021. Net income from operations of $76.6 included $235.1 of net non-cash expense items, consisting of a gain on the change in fair value of warrant liabilities of $90.9 and deferred taxes of $8.6, offset by depreciation and amortization of $302.4, non-cash stock-based compensation expense of $24.7 and amortization of debt discount and issuance costs of $7.5. Trade working capital used $449.2 in comparison to $132.8 in 2021, primarily as a result of increased accounts receivable associated with higher sales volume, inventory build to support forecasted sales and to meet customer demand, and a $8.7 payment related to a litigation settlement. Refer to “ Note 17 - Commitments and Contingencies” in our Consolidated Financial Statements for additional information on the litigation settlement payment which was part of the overall $21.5 payment made on January 12, 2022.

Net Cash provided by (used for) Investing Activities

Net cash used for investing activities was $112.1 in 2022 compared to net cash used for investing activities of $1,216.8 in 2021. The lower use of cash over the comparable period was primarily the result of the E&I Acquisition for $1,163.7 in 2021, slightly offset by increased capital expenditures, and $21.7 in proceeds from the sale of a heavy industrial UPS business in 2021.

Net Cash provided by (used for) Financing Activities

Net cash provided by financing activities was $100.2 in 2022 compared to $914.9 in 2021. The decrease was driven by the lack of proceeds received in 2021 of $107.5 from the exercise of public warrants, incurring $850.0 of new indebtedness from the issuance of the Notes due 2028 in 2021, along with the $100.0 payment on the tax receivable agreement in 2022. The factors leading to the decrease in net cash provided by financing activities were partially offset by the net borrowings of $235.0 in 2022 under the ABL Revolving Credit Facility.

Critical Accounting Estimates

Our discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgments related to these assets, liabilities, revenues and expenses. We believe these estimates to be reasonable under the circumstances. Management bases its estimates and judgments on historical experience, expected future outcomes, and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

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We believe that the following accounting estimates are critical to our financial results:

Business Combinations

We allocate the purchase price of acquired companies to tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the acquisition date. The amount of purchase price which is in excess of the fair values of assets acquired and liabilities assumed is recognized as goodwill. The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets. Although we believe the assumptions and estimates we have made are reasonable, they are based in part on historical experience, market conditions and information obtained from management of the acquired companies, and are inherently uncertain. The following are critical estimates in valuing intangible assets we have acquired or may acquire in the future and include but are not limited to:

•forecasted earnings before interest, taxes, and amortization;

•forecasted revenue;

•customer attrition rates;

•royalty rates; and

•discount rates.

Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results. Different assumptions may result in materially different values for assets acquired and liabilities assumed, which may impact our financial position and future results of operations.

Long-lived assets

Goodwill

We account for goodwill and other intangible assets acquired in a business combination in conformity with current accounting guidance, which does not allow for goodwill and indefinite-lived intangible assets to be amortized.

We review goodwill for impairment annually in the fourth quarter or when events and circumstances indicate an impairment may have occurred. We test goodwill for impairment by comparing the estimated fair value of the reporting units to the related carrying value. If the fair value of the reporting unit is lower than its carrying amount, goodwill is written down for the amount by which the carrying amount exceeds fair value. However, the loss recognized cannot exceed the carrying amount of goodwill. Reporting units are defined as either operating segments or one level below the operating segments for which discrete financial information is available and reviewed by the business management. The Company’s four reporting units are comprised of the Americas; Greater China; Australia & New Zealand, South East Asia and India (ASI); and Europe, Middle East & Africa reporting units. For segment reporting Greater China and ASI are aggregated into one reportable business segment, refer to “Note 14 — Segment Reporting” of the accompanying consolidated financial statements for more information.

We considered the overall macroeconomic conditions and performed a quantitative impairment test for all of our reporting units with goodwill during the fourth quarter of 2022. The discounted cash flow approach, the comparable public company approach and the comparable acquisition approach were used to estimate the fair value of each reporting unit using a weighting of 40%, 40% and 20%, respectively. The discounted cash flow model requires several estimates and assumptions including future sales growth, earnings before interest, taxes, depreciation, and amortization (or “EBITDA”) margins, capital expenditures, a discount rate and a terminal revenue growth rate (the revenue growth rate for the period beyond the years forecasted by the reporting units) for each reporting unit. The comparable public company and comparable acquisition approaches require several assumptions including EBITDA multiples for comparable companies and transactions that operate in the same markets as our reporting units.

Discounted cash flow models are highly reliant on various assumptions, including projected business results, long-term growth factors and discount rate. Management judgement is involved in estimating these variables, and they include inherent uncertainties since they are forecasting future events. We perform sensitivity analyses by using a range of inputs to confirm the reasonableness of the long-term growth rate and discount rate estimates. Additionally, we compare the indicated equity value to our market capitalization and evaluate the resulting implied control premium/discount to determine if the estimated enterprise value is reasonable compared to external market indicators.

We performed our annual goodwill impairment using the quantitative approach in the fourth quarter. The estimated fair value of each reporting unit was in excess of each of its respective carrying value, which resulted in a conclusion that no impairment existed as of December 31, 2022. We compared the total fair values of the reporting units to our market capitalization, to determine if the fair values are reasonable compared to external market indicators. We believe that our

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use of significant assumptions, within our valuation models are reasonable estimates of likely future events. Subsequent to this annual impairment test, no additional indications of an impairment were identified.

Significant assumptions inherent in the valuation methodologies include estimates of future projected business results (principally revenue and EBITDA), long-term growth rates, and the discount rate. We performed sensitivity analyses by using a range of inputs to confirm the reasonableness of long-term growth rate and discount rate estimates. Significant assumptions utilized in the impairment analysis performed during the fourth quarter of 2022 included the discount rate, ranging between 17.0% and 18.0%, and terminal growth rates of 3.0%.

Tangible assets

We review property, plant and equipment asset groups for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. We monitor these changes and events on at least a quarterly basis. Examples of events or changes in circumstances could include, but are not limited to, a prolonged economic downturn, current period operating or cash flow losses combined with a history of losses or a forecast of continuing losses associated with the use of an asset group, or a current expectation that an asset group will be sold or disposed of before the end of its previously estimated useful life. Recoverability is based upon projections of anticipated future undiscounted cash flows associated with the use and eventual disposal of the property, plant and equipment asset groups, as well as specific appraisals in certain instances. Reviews occur at the lowest level for which identifiable cash flows are largely independent of cash flows associated with other property, plant and equipment asset groups. If the future undiscounted cash flows result in a value that is less than the carrying value, then the long-lived asset is considered impaired and a loss is recognized based on the amount by which the carrying amount exceeds the estimated fair value. Various factors that we use in determining the impact of these assessments include the expected useful lives of long-lived assets and the ability to realize any undiscounted cash flows in excess of the carrying amounts of such asset groups, and are affected primarily by changes in the expected use of the assets, changes in technology or development of alternative assets, changes in economic conditions, changes in operating performance and changes in expected future cash flows. Because judgment is involved in determining the fair value of property, plant and equipment asset groups, there is risk that the carrying value of these assets may require adjustment in future periods.

Revenue recognition

We recognize revenue from the sale of manufactured products and services when control of promised goods or services are transferred to customers in an amount that reflects the consideration that we expect to be entitled to in exchange for those goods or services. Control is transferred when the customer has the ability to direct the use of and obtain benefits from the goods or services. The majority of our sales agreements contain performance obligations satisfied at a point in time when control is transferred to the customer. Sales for service contracts, including installation, inventory with no alternative use and an enforceable right of payment upon customer termination and other discrete services, generally are recognized over time as the services are provided. Payments received in advance for service arrangements are recorded as deferred revenue and recognized in net sales when the revenue recognition criteria are met. Unbilled revenue is recorded when performance obligations have been satisfied, but we do not have present right to payment.

For agreements with multiple performance obligations, judgment is required to determine whether performance obligations specified in these agreements are distinct and should be accounted for as separate revenue transactions for recognition purposes. In these types of agreements we allocate sales price to each distinct obligation on a relative stand-alone selling price basis. The majority of revenue from arrangements with multiple performance obligations is recognized when tangible products are delivered, with smaller portions for associated installation and commissioning recognized shortly thereafter. Generally, contract duration is short term, and cancellation, termination or refund provisions apply only in the event of contract breach. These provisions have historically not been invoked.

Payment terms vary by the type and location of the customer and the products or services offered. Revenue from our sales have not been adjusted for the effects of a financing component as we expect that the period between when we transfer control of the product and when we receive payment to be one year or less. Sales, value add, and other taxes collected concurrent with revenue are excluded from sales. We record amounts billed to customers for shipping and handling in a sales transaction as revenue. Shipping and handling costs are treated as fulfillment costs and are included in costs of sales.

Private Placement Warrants

As of December 31, 2022, 10,533,333 Private Placement Warrants remain outstanding. The Private Placement Warrants are exercisable on a cashless basis, at the holder’s option, and are non-redeemable so long as they are held by the initial purchasers or their permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasers or their permitted transferees, the Private Placement Warrants will be redeemable by us and exercisable by such holders.

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We evaluated the Private Placement Warrants under ASC 815-40, Derivatives and Hedging—Contracts in Entity’s Own Equity, and concluded that they do not meet the criteria to be classified in stockholders’ equity. Specifically, the SEC release describing SPAC warrant treatment focused in part on provisions in warrant agreements that provide for potential changes to the settlement amounts dependent upon the characteristics of the warrant holder and because the holder of a warrant is not an input into the pricing of a fixed-for-fixed option on equity shares, such provision would preclude the warrant from being classified in equity and thus the warrant should be classified as a liability. Since the Private Placement Warrants meet the definition of a derivative under ASC 815, we recorded these Warrants as liabilities on the balance sheet at fair value, with subsequent changes in their respective fair values recognized in the consolidated statement of earnings (loss) at each reporting date. The Private Placement Warrants are valued using a Black-Sholes-Merton pricing model as described in “Note 12 — Financial Instruments and Risk Management”, to the Consolidated Financial Statements. The changes in the fair value of the Warrants may be material to our future operating results.

Income Taxes

We are subject to income taxes in the United States and numerous foreign jurisdictions. Judgment in the forecasting of taxable income using historical and projected future operating results is required in determining our provision for income taxes and the related assets and liabilities. The provision for income taxes includes income taxes paid, currently payable or receivable, and deferred taxes. Under U.S. GAAP, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using enacted tax rates and laws that are expected to be in effect when the differences reverse. Deferred tax assets are also recognized for the estimated future effects of tax loss and credit carryforwards. The effect on deferred taxes of changes in tax rates is recognized in the period in which the enactment date occurs. Valuation allowances are established when necessary on a jurisdictional basis to reduce deferred tax assets to the amounts expected to be realized. Deferred taxes are not provided on the unremitted earnings of subsidiaries outside of the United States when it is expected that these earnings are indefinitely reinvested. In the event that the actual outcome of future tax consequences differs from our estimates and assumptions due to changes or future events such as tax legislation, geographic mix of earnings, completion of tax audits or earnings repatriation plans, the resulting change to the provision for income taxes could have a material effect on the Consolidated Statements of Earnings (Loss) and Consolidated Balance Sheets.

The recoverability of deferred tax assets and the recognition and measurement of uncertain tax positions are subject to our various assumptions and judgment. If actual results differ from our estimates made in establishing or maintaining valuation allowances against deferred tax assets, the resulting change in the valuation allowance would generally impact earnings. Additionally, the positions taken with regard to tax contingencies may be subject to audit and review by tax authorities, which may result in future taxes, interest and penalties. Positive and negative evidence is considered in determining the need for a valuation allowance against deferred tax assets, which includes such evidence as historical earnings, projected future earnings, tax planning strategies and expected timing of reversal of existing temporary differences.

In determining the recoverability of deferred tax assets, we give consideration to all available positive and negative evidence including reversals of deferred tax liabilities, projected future income, tax planning strategies and recent trends in financial results. We attach the most weight to historical earnings as they are more objectively verifiable compared to forecasts. In evaluating the objective evidence that historical results provide, we generally considers three years of cumulative income or loss at the jurisdictional taxpayer level as an important factor.