UNIVAR SOLUTIONS INC.
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is based on financial data derived from the financial
statements prepared in accordance with the United States ("US") generally
accepted accounting principles ("GAAP") and certain other financial data that is
prepared using non-GAAP measures. For a reconciliation of each non-GAAP
financial measure to its most comparable GAAP measure, see "Analysis of Segment
Results" within this Item and "Note 23: Segments" to our consolidated financial
statements in Item 8 of this Annual Report on Form 10-K. Refer to "Non-GAAP
Financial Measures" within this Item for more information about our use of
Non-GAAP financial measures.
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Our MD&A is provided in addition to the accompanying consolidated financial
statements and notes to assist readers in understanding our results of
operations, financial condition and cash flow. This section of this Annual
Report on Form 10-K discusses year-to-year comparisons between 2020 and 2019.
Discussions of year-to-year comparisons between 2019 and 2018 that are not
included in this Annual Report on Form 10-K can be found in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II, Item 7 of the Company's Annual Report on Form 10-K for the year ended
December 31, 2019 , filed on February 25, 2020 , which is incorporated herein by
reference.
Overview
Univar Solutions Inc. is a leading global chemical and ingredient distributor
and provider of value-added services to customers across a wide range of diverse
industries. We purchase chemicals from thousands of chemical producers worldwide
and warehouse, repackage, blend, dilute, transport and sell those chemicals to
more than 100,000 customer locations across approximately 125 countries.
Our operations are structured into four reportable segments that represent the
geographic areas under which we operate and manage our business. These segments
are Univar Solutions USA ("USA"), Univar Solutions Canada ("Canada"), Univar
Solutions Europe and the Middle East and Africa ("EMEA"), and Univar Solutions
Latin America ("LATAM"), which includes developing businesses in Latin America
(including Brazil and Mexico ) and the Asia-Pacific region . Prior to its renaming
in 2019, LATAM was previously referred to as "Rest of World."
Recent Developments and Items Impacting Comparability
On February 28, 2019 , we completed the acquisition of 100% of the equity
interest of Nexeo , a leading global chemicals and plastics distributor. The
acquisition expands and strengthens Univar Solutions' presence in North America
and provides expanded opportunities to create the largest North American sales
force in chemical and ingredients distribution and the broadest product
offering. On March 29, 2019 , the Company completed the sale of the Nexeo
plastics distribution business which is presented as a discontinued operation in
the Company's results of operations for the year ended December 31, 2019 .
On December 31, 2019 , we sold our Environmental Sciences business. The sale of
the business did not meet the criteria to be classified as a discontinued
operations in the Company's financial statements.
On September 1, 2020 , we sold our industrial spill and emergency response
businesses and on November 30, 2020 , we sold our Canadian Agriculture services
business. The sale of these businesses did not meet the criteria to be
classified as discontinued operations in the Company's financial statements.
On December 18, 2020 , we acquired a business of Techi Chem , a leading
distributor of specialty silicone solutions used primarily for coatings,
adhesives, sealants, and elastomers (CASE) market within the China marketplace.
At the beginning of the fourth quarter of 2020, the Company decided to wind down
its Canadian Agriculture wholesale distribution business, which was
operationally completed by December 31, 2020 when all of the inventory had been
sold.
Market Conditions and Outlook
We sell chemicals that are used in manufacturing processes and as components of
or ingredients in other products. Our sales are correlated with and affected by
fluctuations in the levels of industrial production, manufacturing output, and
general economic activity. The level of industrial production, which tends to
decline in the fourth quarter of each year, can impact our sales.
Certain of our end markets experience seasonal fluctuations, which also affect
our net sales and results of operations. For example, our sales to the
agricultural end market, particularly in Canada , tend to peak in the second
quarter in each year, depending in part on weather-related variations in demand
for agricultural chemicals. Sales to other end markets such as paints and
coatings may also be affected by changing seasonal weather conditions, the
construction industry and automotive production. Demand for our oil, gas and
mining products and services is affected by factors such as the level of
exploration, drilling, development and production activity of, and the
corresponding capital spending by, oil, gas and mining companies and oilfield
service providers, and trends in oil, gas and mineral prices.
COVID-19
We continue to monitor the current and expected future impact of the COVID-19
pandemic on our global business. The full financial impact of the COVID-19
pandemic on global economic conditions, as well as our business, remains unknown
at this time and will depend on the duration of government restrictions,
including travel restrictions, quarantines, shelter in place orders and
shutdowns, and the duration of the economic slowdown and nature and timing of a
recovery. Our top priority is the safety and health of employees, customers, and
suppliers. We activated a global, cross-functional response team, which is
closely monitoring the situation and implementing additional safety measures to
help ensure the well-being of the Company's employees, customers and suppliers,
minimize disruptions and provide for the safe and reliable supply of chemicals
and ingredients. The Company has implemented recommended policies and practices
to help protect our workforce so they can
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safely and effectively carry out their essential work. As government
restrictions are lifted or reinstated in the different jurisdictions where we
operate, we are implementing agile worksite plans that can adapt to changing
circumstances and help maximize the safety of our employees. As part of these
plans, employees who are reasonably able to work remotely are increasingly
utilizing a hybrid working model with some days being spent working from a
Company office and other days being spent working from a remote location, which
is often a person's home. The Company is following guidelines from global health
experts and has taken additional precautionary steps to help protect our
employees working in our distribution centers and other worksites.
As of the date of this filing, the Company's global distribution centers
continue to be operational and supplying products that help preserve essential
businesses and infrastructure. This includes providing products and services
that are essential for maintaining clean drinking water, waste water treatment
and home, industrial and health care facility sanitization and that are used in
the manufacturing of food and pharmaceuticals.
We are actively monitoring key product availability, remaining up to date with
the current status of our primary modes of transportation and staying up to date
with current port operating statuses. We continue to stay connected with our
customers to understand impacts on their operations, including whether
operations remain open with no change or reduced operations or if operations
have closed and whether closure is temporary or permanent. The primary impacts
of the COVID-19 pandemic and the current economic events on our end markets are
as follows:
Industrial Solutions (30%) - Full-year business impact was down high single
digits due largely to the shutdown in automotive at the start of the COVID-19
pandemic. Business performance suffered as well in industrial coatings and
related chemistries as capital investment was halted in key markets. Declines
were partially offset by the sale of cleaning related agents for household
cleaning and DIY products which provided a lift in the second half of the year
with net growth in the fourth quarter.
Consumer Solutions (20%) - Performance for the year exceeded prior year by
mid-single digits largely from pharmaceuticals. Demand for vitamins, supplements
and general pharmaceuticals were supported by product-line expansion and by
leveraging our unique position in selling key solvents within the industry.
Personal care was impacted by retail closures in the second quarter, but saw
double digit growth in the second half of the year. Similarly, food demand
declined due to systemic shutdowns in the food services industry, with some
offsets in the retail and prepared foods markets.
General Industrial (30%) - Business performance was down high single digits for
the year, largely due to COVID-19 related shutdowns. First quarter and fourth
quarter performance were flat to prior year, with the middle half of the year
down double digits. Chemical manufacturing saw a return to activity in the third
quarter while lumber, pulp & paper and transportation remained depressed. Water
related chemistries performed well as we strengthened our position in the
marketplace.
Services and Other Markets (12%) - The services business has exposure to the
energy, automotive and aerospace industries. Second half of the year performance
improved over the first half as industrial activity returned on a limited basis
leaving performance down mid-single digits for the year.
Refining & Chemical Processing (8%) - Volume and profitability were down double
digits for 2020, due to widespread reductions in oil and gas extraction and
processing. The upstream business stabilized during the year but is down double
digits for the year compared to prior year. Downstream and refining activity
showed improvement over the second half of the year.
The Company took steps to maintain sufficient cash and additional credit
availability in recognition of the increased risk and uncertainty related to the
COVID-19 pandemic and challenging macroeconomic headwinds during 2020. See
"Liquidity and Capital Resources" in Item 7 of this Annual Report on Form 10-K
for a discussion on our liquidity. In anticipation of ongoing challenges, the
Company carefully managed its working capital and realized cost reductions to
maintain financial health while continuing to help serve supplier and customer
needs. Cash outflows related to operating expenses decreased due to lower travel
and event costs, overtime and temporary labor, as well as hiring freezes,
elimination of certain workforce positions and delays of some discretionary
annual merit increases, temporary furloughs to match changes in demand in
certain locations and deferral of certain capital project spending. We will
continue to monitor customer activity and match our workforce with demand to the
extent possible, as we plan for these risks and uncertainties into the next
year.
On March 27, 2020 , the Coronavirus Aid, Relief and Economic Security Act ("CARES
Act") was signed into law and it provides for certain tax law changes. See
"Results of Operations" within Item 7 of this Annual Report on Form 10-K for
further information. See also, "Note 9: Income taxes" in Item 8 of this Annual
Report on Form 10-K where the impact of the law change, a benefit of $12.8
million , is included in the $69.3 million benefit from "Change in valuation
allowance, net."
The current business environment and quickly evolving market conditions require
significant management judgment to interpret and quantify the potential impact
on our assumptions about future operating cash flows. To the extent changes in
the
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current business environment impact our ability to achieve levels of forecasted
operating results and cash flows, if our stock price were to trade below book
value per share for an extended period of time and/or should other events occur
indicating the carrying value of our assets might be impaired, we may be
required to recognize impairment losses on goodwill, intangible and tangible
assets.
See "Risk Factors" in Part I, Item 1A of this Annual Report on Form 10-K for
further information of the possible impact of the COVID-19 pandemic on our
business.
Executive Summary
Management is focused, in the near and long term, on the following priorities:
•growth by improving margins through value-based pricing, mix enrichment,
divesting non-core chemical businesses and warehouse and logistics productivity;
•globalizing industrial and consumer solutions by delivering technical and
application development excellence through our global network of Solutions
Centers;
•growth by increasing share through sales force effectiveness while leveraging
scale and improving customer satisfaction;
•investing in, and continued advancement, of our digital capabilities, bringing
value to customers and suppliers as we work to attain our goal of being the
easiest to do business with;
•growing the market through new product authorizations and strategic partners;
•network optimization, as we progress with the integration of Nexeo , continuing
to realize synergy cost savings;
•continuing to successfully achieve important Systems Integration milestones;
•delivering on our commitment to focus on our core chemical and ingredient
businesses through strategic divestitures and acquisitions globally; and
•advancing our Streamline 2022 (S22) goals to reduce leverage below 3.0x by the
end of 2021 and improve Adjusted EBITDA Margins to 9% by the end of 2022.
Constant Currency
Currency impacts on consolidated and segment results have been derived by
translating current period financial results in local currency using the average
exchange rate for the prior period to which the financial information is being
compared. We believe providing constant currency information, which information
is considered non-GAAP, provides valuable supplemental information regarding our
results of operations, consistent with how we evaluate our performance. We
calculate constant currency by applying the foreign currency exchange rate from
the prior period to the local currency results for the current period.
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Results of Operations
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Year ended December 31, Favorable
(in millions) 2020 2019 (unfavorable) % Change
Net sales $ 8,265.0 100.0 % $ 9,286.9 100.0 % $ (1,021.9) (11.0) %
Cost of goods sold (exclusive of
depreciation) 6,262.8 75.8 % 7,146.1 76.9 % 883.3 (12.4) %
Operating expenses:
Outbound freight and handling 344.4 4.2 % 364.8 3.9 % 20.4 (5.6) %
Warehousing, selling and administrative 1,022.3 12.4 % 1,068.8 11.5 % 46.5 (4.4) %
Other operating expenses, net 90.2 1.1 % 298.2 3.2 % 208.0 (69.8) %
Depreciation 162.9 2.0 % 155.0 1.7 % (7.9) 5.1 %
Amortization 60.0 0.7 % 59.7 0.6 % (0.3) 0.5 %
Impairment charges 40.2 0.5 % 7.0 0.1 % (33.2) 474.3 %
Total operating expenses $ 1,720.0 20.8 % $ 1,953.5 21.0 % $ 233.5 (12.0) %
Operating income $ 282.2 3.4 % $ 187.3 2.0 % $ 94.9 50.7 %
Other (expense) income:
Interest income 2.1 - % 7.7 0.1 % (5.6) (72.7) %
Interest expense (114.5) (1.4) % (147.2) (1.6) % 32.7 (22.2) %
(Loss) gain on sale of business (50.6) (0.6) % 41.4 0.4 % (92.0) N/M
Loss on extinguishment of debt (1.8) - % (19.8) (0.2) % 18.0 (90.9) % Other expense, net (58.4) (0.7) % (70.5) (0.8) % 12.1 (17.2) % Total other expense$ (223.2) (2.7) %$ (188.4) (2.0) %$ (34.8) 18.5 % Income (loss) from continuing operations before income taxes 59.0 0.7 % (1.1) - % 60.1
N/M
Income tax expense from continuing operations 6.1 0.1 % 104.5 1.1 % 98.4 (94.2) % Net income (loss) from continuing operations$ 52.9 0.6 %$ (105.6) (1.1) %$ 158.5
N/M
Net (loss) income from discontinued operations - - % 5.4 0.1 % (5.4) (100.0) % Net income (loss)$ 52.9 0.6 %$ (100.2) (1.1) %$ 153.1 N/M Net sales Net sales were$8,265.0 million in the year endedDecember 31, 2020 , a decrease of$1,021.9 million , or 11.0%, from the year endedDecember 31, 2019 . Net sales decreased due to lower demand in the global industrial end markets, the Environmental Sciences divestiture and price deflation. The decrease was partially offset by higher demand for our products in certain essential end markets and theFebruary 2019 Nexeo acquisition in USA,Canada and LATAM segments. Refer to the "Analysis of Segment Results" for additional information. Gross profit (exclusive of depreciation) Gross profit (exclusive of depreciation) decreased$138.6 million , or 6.5%, to$2,002.2 million for the year endedDecember 31, 2020 . The decrease in gross profit (exclusive of depreciation) was attributable to lower sales volumes in USA,Canada and EMEA segments due to soft demand across most industrial end markets and the Environmental Sciences divestiture. The decrease was partially offset by favorable changes in product mix from essential end markets. Gross margin increased from 23.1% for the year endedDecember 31, 2019 to 24.2% for the year endedDecember 31, 2020 . Refer to the "Analysis of Segment Results" for additional information. Outbound freight and handling Outbound freight and handling expenses decreased$20.4 million , or 5.6%, to$344.4 million for the year endedDecember 31, 2020 , primarily due to lower sales volumes. On a constant currency basis, outbound freight and handling expenses decreased$19.5 million , or 5.3%. Refer to the "Analysis of Segment Results" for additional information. 28 -------------------------------------------------------------------------------- Table of Contents Warehousing, selling and administrative Warehousing, selling and administrative expenses decreased$46.5 million , or 4.4%, to$1,022.3 million for the year endedDecember 31, 2020 . On a constant currency basis, the$40.7 million decrease is primarily due to cost reduction measures across all of our segments. The decrease was partially offset by higher insurance and legal expenses and higher bad debt charges. Refer to the "Analysis of Segment Results" for additional information. Other operating expenses, net Other operating expenses, net decreased$208.0 million , or 69.8%, to$90.2 million for the year endedDecember 31, 2020 . The decrease was primarily due to lower acquisition and integration related expenses, the absence of the saccharin legal settlement, lower employee severance costs and stock-based compensation expense as well as the gain on sale of property, plant and equipment. Refer to "Note 6: Other operating expenses, net" in Item 8 of this Annual Report on Form 10-K for additional information. Depreciation and amortization Depreciation expense increased$7.9 million , or 5.1%, to$162.9 million for the year endedDecember 31, 2020 , primarily due to theFebruary 2019 Nexeo acquisition. Amortization expense increased$0.3 million , or 0.5%, to$60.0 million for the year endedDecember 31, 2020 , primarily attributable to theFebruary 2019 Nexeo acquisition. Impairment charges Impairment charges of$40.2 million were recorded in the year endedDecember 31, 2020 related to property, plant and equipment in connection with the Company's decision to cease further investment in, and seek to restructure or exit a contract related to, certain technology assets within the Other segment as well as intangibles and property, plant and equipment in connection with the sale of the industrial spill and emergency response businesses within theUSA segment and the announced closure of certain production facilities. Refer to "Note 16: Impairment charges" in Item 8 of this Annual Report on Form 10-K for additional information. Interest expense Interest expense decreased$32.7 million , or 22.2%, to$114.5 million for the year endedDecember 31, 2020 , primarily due to lower average outstanding borrowings as well as lower interest rates. Refer to "Note 18: Debt" in Item 8 of this Annual Report on Form 10-K for additional information. Loss (gain) on sale of business A loss of$50.6 million was recorded in the year endedDecember 31, 2020 related to the sale of the industrial spill and emergency response businesses as well as the Canadian Agriculture services business which were completed during 2020. The loss also related to a working capital adjustment on the sale of the Environmental Sciences business, which was completed onDecember 31, 2019 . A gain of$41.4 million was recorded in the year endedDecember 31, 2019 related to the sale of the Environmental Sciences business. Refer to "Note 4: Discontinued operations and dispositions" in Item 8 of this Annual Report on Form 10-K for additional information. Loss on extinguishment of debt Loss on extinguishment of debt of$1.8 million for the year endedDecember 31, 2020 was driven by the partial prepayment of the Term B-3 Loan due 2024. The prior year period included a$19.8 million loss which was due to the February andNovember 2019 debt refinancing and repayment activities. Other expense, net Other expense, net decreased$12.1 million , or 17.2%, to$58.4 million for the year endedDecember 31, 2020 . The change was primarily related to gains on undesignated foreign currency derivative instruments and foreign currency transactions as well as an increase in non-operating pension income. The change was partially offset by foreign currency denominated loans revaluation losses, losses on interest rate swaps and the increase in pension mark to market loss. Refer to "Note 8: Other expense, net" in Item 8 of this Annual Report on Form 10-K for additional information. Income tax expense from continuing operations Income tax expense was$6.1 million for the year endedDecember 31, 2020 , resulting in an effective income tax rate of 10.3%, compared to the US federal statutory rate of 21.0%. The Company's effective income tax rate for the year endedDecember 31, 2020 was lower than the US federal statutory rate of 21.0%, primarily due to 2019 return to provision adjustments and the release of valuation allowances on previously non-deductible interest impacted by the CARES Act, offset by US income tax on foreign earnings. 29 -------------------------------------------------------------------------------- Table of Contents Income tax expense was$104.5 million for the year endedDecember 31, 2019 , resulting in an effective income tax rate of (9500.0)%. The Company's effective income tax rate for the year endedDecember 31, 2019 was higher than the US federal statutory rate of 21.0%, primarily due to increased international tax impacts, including those related to US tax reform and transactions with foreign subsidiaries, tax gain in excess of book gain on the sale of the Environmental Sciences business and nondeductible expenses, including the Saccharin legal settlement, theNexeo shareholder settlement and state taxes. These increases to the effective income tax rate are partially offset by the release of valuation allowances on certain tax attributes. Net income from discontinued operations Net income from discontinued operations for 2019 represents one month of theNexeo plastics distribution business. Refer to "Note 4: Discontinued operations and dispositions" in Item 8 of this Annual Report on Form 10-K for additional information. Results of Reportable Business Segments The Company's operations are structured into four reportable segments that represent the geographic areas under which we operate and manage our business. Management believes Adjusted EBITDA is an important measure of operating performance, which is used as the primary basis for the chief operating decision maker to evaluate the performance of each of our reportable segments. We believe certain other financial measures that are not calculated in accordance with US GAAP provide relevant and meaningful information concerning the ongoing operating results of the Company. These financial measures include gross profit (exclusive of depreciation), adjusted gross profit (exclusive of depreciation), gross margin and adjusted gross margin. Such non-GAAP financial measures are used from time to time herein but should not be viewed as a substitute for GAAP measures of performance. See "Note 23: Segments" in Item 8 of this Annual Report on Form 10-K and "Analysis of Segment Results" within this Item for additional information. Analysis of Segment Results USA Year ended December 31, Favorable (in millions) 2020 2019 (unfavorable) % Change Net sales: External customers$ 5,006.2 $ 5,828.5 $ (822.3) (14.1) % Inter-segment 81.2 100.2 (19.0) (19.0) % Total net sales$ 5,087.4 $ 5,928.7 $ (841.3) (14.2) % Cost of goods sold (exclusive of depreciation) 3,829.1 4,550.9 721.8 (15.9) % Inventory step-up adjustment (1) - 5.3 (5.3) (100.0) % Outbound freight and handling 239.3 254.6 15.3 (6.0) % Warehousing, selling and administrative 625.8 673.8 48.0 (7.1) % Adjusted EBITDA$ 393.2 $ 454.7 $ (61.5) (13.5) % Year ended December 31, Favorable (in millions) 2020 2019 (unfavorable) % Change Gross profit (exclusive of depreciation): Net sales$ 5,087.4 $ 5,928.7 $ (841.3) (14.2) % Cost of goods sold (exclusive of depreciation) 3,829.1 4,550.9 721.8 (15.9) % Gross profit (exclusive of depreciation)$ 1,258.3 $ 1,377.8 $ (119.5) (8.7) % Inventory step-up adjustment (1) - 5.3 (5.3) (100.0) % Adjusted gross profit (exclusive of depreciation) (1)$ 1,258.3 $ 1,383.1 $ (124.8) (9.0) % (1)See definition of adjusted gross profit (exclusive of depreciation) at the end of this Item under "Non-GAAP Financial Measures." Adjusted gross profit (exclusive of depreciation) excludes the inventory fair value step-up adjustment resulting from ourFebruary 2019 Nexeo acquisition. External sales in theUSA segment were$5,006.2 million , a decrease of$822.3 million , or 14.1%, in the year endedDecember 31, 2020 . The decrease in external net sales was primarily related to lower energy and industrial end market demand, the Environmental Sciences divestiture and price deflation on certain products partially offset by higher demand for our products in certain essential end markets and theFebruary 2019 Nexeo acquisition. 30 -------------------------------------------------------------------------------- Table of Contents Gross profit (exclusive of depreciation) decreased$119.5 million , or 8.7%, to$1,258.3 million in the year endedDecember 31, 2020 , primarily due to lower sales volumes due to soft demand across most industrial and energy end markets and the Environmental Sciences divestiture. Gross margin increased from 23.6% for the year endedDecember 31, 2019 to 25.1% for the year endedDecember 31, 2020 . The increase was primarily related to favorable changes in product mix from essential end markets. Outbound freight and handling expenses decreased$15.3 million , or 6.0%, to$239.3 million in the year endedDecember 31, 2020 , primarily due to lower sales volumes. Warehousing, selling and administrative expenses decreased$48.0 million , or 7.1%, to$625.8 million in the year endedDecember 31, 2020 , primarily due to the Environmental Sciences divestiture and cost reduction measures partially offset by higher insurance and legal expenses. Warehousing, selling and administrative expenses as a percentage of external sales increased from 11.6% in the year endedDecember 31, 2019 to 12.5% in the year endedDecember 31, 2020 . Adjusted EBITDA decreased by$61.5 million , or 13.5%, to$393.2 million in the year endedDecember 31, 2020 primarily as a result of lower demand for chemicals in most industrial and energy end markets and the Environmental Sciences divestiture, partially offset by higher demand for our products in certain essential end markets. Adjusted EBITDA margin increased from 7.8% in the year endedDecember 31, 2019 to 7.9% in the year endedDecember 31, 2020 primarily as a result of higher gross margin, partially offset by increased warehousing, selling and administrative expenses as a percentage of sales. EMEA Year ended December 31, Favorable (in millions) 2020 2019 (unfavorable) % Change Net sales: External customers$ 1,697.1 $ 1,785.5 $ (88.4) (5.0) % Inter-segment 3.1 3.3 (0.2) (6.1) % Total net sales$ 1,700.2 $ 1,788.8 $ (88.6) (5.0) % Cost of goods sold (exclusive of depreciation) 1,274.4 1,363.9 89.5 (6.6) % Outbound freight and handling 56.5 59.1 2.6 (4.4) % Warehousing, selling and administrative 226.6 222.5 (4.1) 1.8 % Adjusted EBITDA$ 142.7 $ 143.3 $ (0.6) (0.4) % Year ended December 31, Favorable (in millions) 2020 2019 (unfavorable) % Change Gross profit (exclusive of depreciation): Net sales$ 1,700.2 $ 1,788.8 $ (88.6) (5.0) % Cost of goods sold (exclusive of depreciation) 1,274.4 1,363.9 89.5 (6.6) % Gross profit (exclusive of depreciation)$ 425.8 $ 424.9 $ 0.9 0.2 % External sales in the EMEA segment were$1,697.1 million , a decrease of$88.4 million , or 5.0%, in the year endedDecember 31, 2020 . On a constant currency basis, external sales decreased$99.8 million , or 5.6%, primarily due to lower sales volumes in most end markets, partially offset by strong demand for our products in certain essential end markets. Gross profit (exclusive of depreciation) increased$0.9 million , or 0.2%, to$425.8 million in the year endedDecember 31, 2020 . On a constant currency basis, gross profit (exclusive of depreciation) decreased$3.1 million , or 0.7% primarily due to increased market pressures in the pharmaceutical finished goods product line and lower sales volumes. Gross margin increased from 23.8% in the year endedDecember 31, 2019 to 25.1% in the year endedDecember 31, 2020 primarily due to the favorable changes in product mix, including higher demand in certain essential end markets. Outbound freight and handling expenses decreased$2.6 million , or 4.4%, to$56.5 million for the year endedDecember 31, 2020 , driven by lower sales volumes. Warehousing, selling and administrative expenses increased$4.1 million , or 1.8%, to$226.6 million in the year endedDecember 31, 2020 . On a constant currency basis, warehousing, selling and administrative expenses increased$1.1 million , or 0.5%, primarily due to higher variable compensation costs. As a percentage of external sales, warehousing, selling and administrative expenses increased from 12.5% in the year endedDecember 31, 2019 to 13.4% in the year endedDecember 31, 2020 . 31 -------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA decreased by$0.6 million , or 0.4%, to$142.7 million in the year endedDecember 31, 2020 . On a constant currency basis, Adjusted EBITDA decreased$0.6 million , or 0.4%, primarily due to increased market pressures in the pharmaceutical finished goods product line, partially offset by demand for our products in certain essential end markets. Adjusted EBITDA margin increased from 8.0% in the year endedDecember 31, 2019 to 8.4% in the year endedDecember 31, 2020 primarily as a result of higher gross margin.Canada Year ended December 31, Favorable (in millions) 2020 2019 (unfavorable) % Change Net sales: External customers$ 1,110.7 $ 1,217.8 $ (107.1) (8.8) % Inter-segment 2.5 6.2 (3.7) (59.7) % Total net sales$ 1,113.2 $ 1,224.0 $ (110.8) (9.1) % Cost of goods sold (exclusive of depreciation) 898.1 990.3 92.2 (9.3) % Outbound freight and handling 38.9 41.9 3.0 (7.2) % Warehousing, selling and administrative 86.5 91.6 5.1 (5.6) % Adjusted EBITDA$ 89.7 $ 100.2 $ (10.5) (10.5) % Year ended December 31, Favorable (in millions) 2020 2019 (unfavorable) % Change Gross profit (exclusive of depreciation): Net sales$ 1,113.2 $ 1,224.0 $ (110.8) (9.1) % Cost of goods sold (exclusive of depreciation) 898.1 990.3 92.2 (9.3) % Gross profit (exclusive of depreciation)$ 215.1 $ 233.7 $ (18.6) (8.0) % External sales in theCanada segment were$1,110.7 million , a decrease of$107.1 million , or 8.8%, in the year endedDecember 31, 2020 . On a constant currency basis, external sales decreased$95.3 million , or 7.8%, primarily related to the Environmental Sciences divestiture, lower demand fromCanada's energy sector and price deflation on certain products. The decrease was partially offset by higher demand for our products in certain essential end markets and theFebruary 2019 Nexeo acquisition. Gross profit (exclusive of depreciation) decreased$18.6 million , or 8.0%, to$215.1 million in the year endedDecember 31, 2020 . On a constant currency basis, gross profit (exclusive of depreciation) decreased$16.3 million , or 7.0%, primarily due to the Environmental Sciences divestiture, unfavorable changes in product mix resulting from the Canadian Agriculture wholesale distribution exit and lower demand fromCanada's energy sector, partially offset by favorable changes in product mix from essential end markets. Gross margin increased from 19.2% in the year endedDecember 31, 2019 to 19.4% in the year endedDecember 31, 2020 . Outbound freight and handling expenses decreased$3.0 million , or 7.2%, to$38.9 million in the year endedDecember 31, 2020 , primarily due to lower sales volumes. Warehousing, selling and administrative expenses decreased by$5.1 million , or 5.6%, to$86.5 million in the year endedDecember 31, 2020 . On a constant currency basis, warehousing, selling and administrative expenses decreased$4.1 million , or 4.5%, primarily due to cost reduction measures. Warehousing, selling and administrative expenses as a percentage of external sales increased from 7.5% in the year endedDecember 31, 2019 to 7.8% in the year endedDecember 31, 2020 . Adjusted EBITDA decreased by$10.5 million , or 10.5%, to$89.7 million in the year endedDecember 31, 2020 . On a constant currency basis, Adjusted EBITDA decreased$9.6 million , or 9.6%, primarily as a result of unfavorable changes in product mix resulting from the Canadian Agriculture wholesale distribution exit, lower demand fromCanada's energy sector and the Environmental Sciences divestiture, partially offset by favorable changes in product mix from essential end markets. Adjusted EBITDA margin decreased from 8.2% in the year endedDecember 31, 2019 to 8.1% in the year endedDecember 31, 2020 . 32 -------------------------------------------------------------------------------- Table of Contents LATAM Year ended December 31, Favorable (in millions) 2020 2019 (unfavorable) % Change Net sales: External customers$ 451.0 $ 455.1 $ (4.1) (0.9) % Total net sales (1)$ 451.0 $ 455.1 $ (4.1) (0.9) % Cost of goods sold (exclusive of depreciation) 348.0 350.7 2.7 (0.8) % Outbound freight and handling 9.7 9.2 (0.5) 5.4 % Warehousing, selling and administrative 50.6 50.8 0.2 (0.4) % Brazil VAT charge (recovery) (1) 0.3 (8.3) (8.6) (103.6) % Adjusted EBITDA (1)$ 43.0 $ 36.1 $ 6.9 19.1 % Year ended December 31, Favorable (in millions) 2020 2019 (unfavorable) % Change Gross profit (exclusive of depreciation): Net sales$ 451.0 $ 455.1 $ (4.1) (0.9) % Cost of goods sold (exclusive of depreciation) 348.0 350.7 2.7 (0.8) %
Gross profit (exclusive of depreciation) (1)
(1.3) %
Brazil VAT charge (recovery) (1) 0.4 (9.7) 10.1 (104.1) %
Adjusted gross profit (exclusive of depreciation)
8.7 9.2 %
(1)In 2020, net sales and gross profit (exclusive of depreciation) includes a
$0.4 million Brazil VAT charge. The charge of $0.3 million , net of associated
fees, is excluded from Adjusted EBITDA in 2020. In 2019, net sales and gross
profit (exclusive of depreciation) include a $9.7 million benefit related to a
Brazil VAT recovery. The benefit of $8.3 million , net of associated fees, is
excluded from Adjusted EBITDA in 2019. See "Note 21: Commitments and
contingencies" in Item 8 of this Annual Report on Form 10-K for further
information regarding the Brazil VAT recovery for the year ended December 31,
2020 .
External sales in the LATAM segment were $451.0 million , a decrease of $4.1
million , or 0.9%, in the year ended December 31, 2020 . On a constant currency
basis, external sales increased $58.5 million , or 12.9%, primarily due to higher
demand for our products in certain essential end markets, the February 2019
Nexeo acquisition and from contributions from the energy sector and Brazilian
agriculture sector.
Gross profit (exclusive of depreciation) decreased $1.4 million , or 1.3%, to
$103.0 million in the year ended December 31, 2020 . On a constant currency
basis, gross profit (exclusive of depreciation) increased $16.4 million , or
15.7%, due to favorable changes in product and end market mix. Including the
prior year Brazil VAT recovery, gross margin decreased from 22.9% for the year
ended December 31, 2019 to 22.8% for the year ended December 31, 2020 and
excluding the prior year Brazil VAT recovery, increased from 20.8% for the year
ended December 31, 2019 to 22.9% for the year ended December 31, 2020 .
Outbound freight and handling expenses increased $0.5 million , or 5.4%, to $9.7
million in the year ended December 31, 2020 , primarily due to higher sales
volumes.
Warehousing, selling and administrative expenses decreased $0.2 million , or
0.4%, to $50.6 million in the year ended December 31, 2020 . On constant currency
basis, warehousing, selling and administrative expenses increased $7.7 million ,
or 15.2%, primarily due to higher variable compensation costs and higher bad
debt charges. As a percentage of external sales, warehousing, selling and
administrative expenses remained flat at 11.2%.
Adjusted EBITDA increased by $6.9 million , or 19.1%, to $43.0 million in the
year ended December 31, 2020 . On a constant currency basis, Adjusted EBITDA
increased $15.1 million , or 41.8%, primarily due to increased gross profit
(exclusive of depreciation) due to higher demand for our products in certain
essential end markets, the energy sector and the Brazilian agriculture sector.
Adjusted EBITDA margin increased from 7.9% to 9.5% in the year ended
December 31, 2019 when compared to December 31, 2020 .
Liquidity and Capital Resources
The Company's primary source of liquidity is cash generated from its operations
and borrowings under our committed North American and European credit facilities
("facilities"). As of December 31, 2020 , liquidity for the Company was
approximately $855.0 million , comprised of $386.6 million of cash and cash
equivalents and $468.4 million available under our
33
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Table of Contents
credit facilities. These facilities are guaranteed by certain significant
subsidiaries and secured by such parties' eligible trade receivables and
inventory with the maximum borrowing capacity under these credit facilities of
$1.5 billion and €200 million. Significant reductions in the Company's trade
receivables and inventory would reduce our availability to access liquidity
under these facilities. The Company has no active financial maintenance
covenants in its credit agreements, however, there is a springing fixed charge
coverage ratio ("FCCR") under the revolving credit facilities of 1.0x,
applicable only if availability is less than or equal to 10% of the borrowing
capacity. If the FCCR was applicable, the calculation would have been 4.5x as of
December 31, 2020 .
The Company's primary liquidity and capital resource needs are to service its
debt and to finance operating expenses, working capital, capital expenditures,
other liabilities, costs of integration and general corporate purposes. The
majority of the Company's debt obligations mature in 2024 and beyond. Management
continues to balance its focus on sales and earnings growth with continuing
efforts in cost control and working capital management. In anticipation of
ongoing, challenging macroeconomic headwinds, including the impact of the
COVID-19 pandemic, the Company has been carefully managing its working capital
and implementing operating cost reductions to maintain our financial health
while continuing to help serve supplier and customer needs. The Company has
significant working capital needs, although the Company has implemented several
initiatives to improve its working capital and reduce the related financing
requirements. The nature of the Company's business, however, requires the
Company to maintain inventories that enable it to deliver products to fill
customer orders. As of December 31, 2020 , the Company maintained inventories of
$674.0 million , equivalent to approximately 38.3 days of sales.
Total debt as of December 31, 2020 was $2,642.7 million , consisting of senior
term loans, senior unsecured notes, asset backed loans, finance lease
obligations and short-term financing. The Company's access to debt capital
markets has historically provided the Company with sources of liquidity. We do
not anticipate having difficulty in obtaining financing from those markets in
the future with our history of favorable results in the debt capital markets and
strong relationships with global financial institutions. However, the COVID-19
pandemic has caused disruption in the capital markets and could make financing
more difficult and/or expensive to obtain in the short term. Additionally, our
ability to continue to access the debt capital markets with favorable interest
rates and other terms will depend, to a significant degree, on maintaining our
current ratings assigned by the credit rating agencies. The Company may from
time to time repurchase its debt or take other steps to reduce its debt or
interest cost. These actions may include open market repurchases, negotiated
repurchases or opportunistic refinancing of debt. The amount of debt, if any,
that may be repurchased or refinanced will depend on market conditions, trading
levels of our debt, our cash position, compliance with debt covenants and other
considerations. On January 7, 2020 , using the proceeds from the sale of the
Environmental Sciences business, the Company repaid $174.0 million of the Term
B-3 Loan due 2024. Refer to "Note 18: Debt" in Item 8 of this Annual Report on
Form 10-K for further information.
The Company's defined benefit pension plans had an underfunded status of $228.9
million and $234.4 million as of December 31, 2020 and 2019, respectively. Based
on current projections of minimum funding requirements, we expect to make cash
contributions of $19.1 million to our defined benefit pension plans in 2021. The
timing for any such requirement in future years is uncertain given the implicit
uncertainty regarding the future developments of the "Risk Factors" described in
Item 1A of this Annual Report on Form 10-K.
We expect our 2021 capital expenditures for maintenance, safety and cost
improvements and investments in our digital capabilities to be approximately
$120 million to $130 million . Interest payments for 2021 are expected to be $95
million to $105 million . We expect to fund our capital expenditures and our
interest payments with cash from operations or cash on hand.
We believe funds provided by our primary sources of liquidity will be adequate
to meet our liquidity, debt repayment obligations and capital resource needs for
at least the next 12 months under current operating conditions.
Cash Flows
The following table presents a summary of our cash flow activity:
Year ended December 31,
(in millions) 2020 2019 2018
Net cash provided by operating activities
$ 289.9 Net cash used by investing activities (41.3) (433.1)
(99.0)
Net cash (used) provided by financing activities (140.0) 295.2
(518.3)
Year EndedDecember 31, 2020 Compared to Year EndedDecember 31, 2019 Cash Provided by Operating Activities Cash provided by operating activities decreased$137.0 million to$226.9 million for the year endedDecember 31, 2020 from$363.9 million for the year endedDecember 31, 2019 . The decrease is primarily due to changes in trade working capital and prepaid expenses and other current assets, partially offset by the change in net income, exclusive of non-cash items. 34 -------------------------------------------------------------------------------- Table of Contents The change in net income, exclusive of non-cash items, provided net cash inflows of$186.8 million from$336.8 million and$150.0 million for the years endedDecember 31, 2020 and 2019. The change in trade working capital, which includes trade accounts receivable, net, inventories, and trade accounts payable, provided net cash outflows of$274.4 million when compared to the change in the prior year. Trade working capital provided cash outflows of$79.3 million for the year endedDecember 31, 2020 compared to cash inflows of$195.1 million for the year endedDecember 31, 2019 . Cash outflows from trade accounts receivable, net is attributable to an unfavorable change in timing of customer payments. Inventory cash inflows on a year-over-year basis are primarily related to reductions in theUSA segment inventories due to reduced sales volumes. The year-over-year cash outflows related to trade accounts payable are primarily attributable to decreased inventory purchases in the current year and the timing of vendor payments. The change in prepaid expenses and other current assets provided cash outflows of$53.1 million , primarily due to payment timing differences. Cash Used by Investing Activities Cash used by investing activities decreased$391.8 million to$41.3 million for the year endedDecember 31, 2020 from$433.1 million for the year endedDecember 31, 2019 . The decrease is primarily related to the acquisition of theNexeo business in 2019, net of the proceeds received for the sale and dispositions ofNexeo Plastics and the Environmental Sciences business. Refer to "Note 3: Business combinations" and "Note 4: Discontinued operations and dispositions" in Item 8 of this Annual Report on Form 10-K for additional information related to the Company's acquisitions and dispositions. Cash (Used) Provided by Financing Activities Cash (used) provided by financing activities decreased$435.2 million to cash used of$140.0 million for the year endedDecember 31, 2020 from cash provided of$295.2 million for the year endedDecember 31, 2019 . The decrease in financing cash flows is primarily due to the prior year increase in debt used to finance theFebruary 2019 Nexeo acquisition. The decrease was partially offset by cash inflows attributable to lower repayments of long-term debt during the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . Refer to "Note 18: Debt" in Item 8 of this Annual Report on Form 10-K for additional information related to the Company's debt. Contractual Obligations and Commitments Our contractual obligations and commitments as ofDecember 31, 2020 are as follows: Payment Due by Period (in millions) Total 2021 2022 - 2023 2024 - 2025 Thereafter Short-term financing (1)$ 2.1 $ 2.1 $ - $ - $ - Finance leases(2) 109.8 28.8 41.4 24.5 15.1 Long-term debt, including current maturities (1) 2,559.1 137.5 8.0 1,537.6 876.0 Interest (3) 402.7 95.9 172.4 82.7 51.7 Minimum operating lease payments(2) 198.3 50.8 69.4 31.1 47.0 Estimated environmental liability payments (4) 79.6 26.5 22.7 13.8 16.6 Other (5) 16.3 16.3 - - - Total (6)$ 3,367.9 $ 357.9 $ 313.9 $ 1,689.7 $ 1,006.4 (1)See "Note 18: Debt" in Item 8 of this Annual Report on Form 10-K for additional information. (2)See "Note 22: Leasing" in Item 8 of this Annual Report on Form 10-K for additional information. (3)Interest payments on debt are calculated for future periods using interest rates in effect as ofDecember 31, 2020 and obligations on that date. Projected interest payments include the related effects of interest rate swap agreements and cross currency swaps. Certain of these projected interest payments may differ in the future based on changes in floating interest rates, foreign currency fluctuations or other factors or events. (4)Included in the less than one year category is$10.8 million related to environmental liabilities for which the timing is uncertain. The timing of payments is unknown and could differ based on future events. For more information, see "Note 21: Commitments and contingencies" in Item 8 of this Annual Report on Form 10-K. (5)Commitments related to an acquisition, dispositions and other contractual obligations. (6)This table excludes our pension and postretirement medical benefit obligations. Based on current projections of minimum funding requirements, we expect to make cash contributions of$19.1 million to our defined benefit pension plans in the year endedDecember 31, 2021 . The timing for any such requirement in future years is uncertain given the implicit uncertainty regarding the future developments of factors described in "Risk Factors" in Item 1A of this Annual Report on Form 10-K and "Note 11: Employee benefit plans" in Item 8 of this Annual Report on Form 10-K. We expect that we will be able to fund our remaining obligations and commitments with cash flow from operations. To the extent we are unable to fund these obligations and commitments with cash flow from operations, we intend to fund these 35 -------------------------------------------------------------------------------- Table of Contents obligations and commitments with proceeds from available borrowing capacity under our ABL Facilities or under future financings. Off-Balance Sheet Arrangements With the exception of letters of credit, we had no material off-balance sheet arrangements as ofDecember 31, 2020 . Critical Accounting Estimates Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results may differ from these estimates under different assumptions or conditions. Our significant accounting policies are described in "Note 2: Significant accounting policies" in Item 8 of this Annual Report on Form 10-K. We consider an accounting estimate to be critical if that estimate requires that we make assumptions about matters that are highly uncertain at the time we make that estimate and if different estimates that we could reasonably have used or changes in accounting estimates that are reasonably likely to occur could materially affect our consolidated financial statements. Our critical accounting estimates are as follows: Goodwill We perform an annual impairment assessment of goodwill at the reporting unit level as ofOctober 1 of each year, or more frequently if indicators of potential impairment exist. The analysis may include both qualitative and quantitative factors to assess the likelihood of an impairment. The reporting unit's carrying value used in an impairment test represents the assignment of various assets and liabilities, excluding certain corporate assets and liabilities, such as cash, investments and debt. Qualitative factors include industry and market considerations, overall financial performance, and other relevant events and factors affecting the reporting unit. Additionally, as part of this assessment, we may perform a quantitative analysis to support the qualitative factors above by applying sensitivities to assumptions and inputs used in measuring a reporting unit's fair value. Our quantitative impairment test considers both the income approach and the market approach to estimate a reporting unit's fair value. Significant estimates include forecasted EBITDA, market segment growth rates, estimated costs, and discount rates based on a reporting unit's weighted average cost of capital ("WACC"). The use of different assumptions, estimates or judgments could significantly impact the estimated fair value of a reporting unit and therefore, impact the excess fair value above carrying value of the reporting unit. We test the reasonableness of the inputs and outcomes of our discounted cash flow analysis against available market data. In the current year, the fair value of theCanada reporting unit exceeded the carrying value by 10.7 percent. Key assumptions in our goodwill impairment test include a 9.5 percent estimated WACC for theCanada business and a residual growth rate of 2.5 percent. A 100 basis point change in the discount rate would not have reduced the fair value of theCanada reporting unit below its carrying value. A quantitative assessment was also performed on theUSA reporting unit due to the relative size of its carrying value and goodwill balance. The calculated fair value of theUSA reporting unit exceeded its carrying value by a significant margin. Through qualitative assessments performed on the EMEA, LATAM, and APAC reporting units, we concluded that it was more likely than not that each reporting unit's fair value exceeded its carrying value. As such, quantitative assessments were not performed for these reporting units. Business Combinations We allocate the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions based on their estimated fair values at the time of acquisition. This allocation involves a number of assumptions, estimates, and judgments in determining the fair value, as of the acquisition date, of the following: •intangible assets, including the valuation methodology, estimations of future cash flows, discount rates, recurring revenues attributed to customer relationships, and our assumed market segment share, as well as the estimated useful life of intangible assets; •deferred tax assets and liabilities, uncertain tax positions, and tax-related valuation allowances; •inventory; property, plant and equipment; pre-existing liabilities or legal claims; and •goodwill as measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. Our assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies. We allocate goodwill to the reporting units of the business that are expected to benefit from the business combination. 36 -------------------------------------------------------------------------------- Table of Contents Purchase Accounting for the Nexeo Solutions Acquisition We completed the acquisition of Nexeo Solutions in 2019 and finalized the purchase price allocation onMarch 30, 2020 . See "Note 3: Business combinations" in Item 8 of this Annual Report on Form 10-K for additional information. Determining the fair value of assets acquired and liabilities assumed requires management's judgment, and we utilized an independent valuation expert in the valuation of the tangible and intangible assets. Critical estimates used in valuing tangible and intangible assets include, but are not limited to, future expected cash flows, discount rates, market prices and asset lives. The valuation of customer relationships utilized an income approach, using an excess earnings methodology. Additionally, the total recurring revenue attributable to the customer relationship was based upon the relative split between specialty and commodity chemicals. Key assumptions used in the business enterprise valuation include the forecasted cash flows discounted using the WACC, which reflects the macroeconomic, industry and geographic factors of the risk of achieving the forecasted cash flows, and ranged from 10.5 percent to 19.0 percent, depending on the country. Environmental Liabilities We recognize environmental liabilities for probable and reasonably estimable losses associated with environmental remediation. The estimated environmental liability includes incremental direct costs of investigations, remediation efforts and post-remediation monitoring. The total environmental reserve atDecember 31, 2020 and 2019 was$79.6 million and$78.7 million , respectively. See "Note 21: Commitments and contingencies" in Item 8 of this Annual Report on Form 10-K. Our environmental reserves are subject to numerous uncertainties that affect our ability to estimate our costs, or our share of costs if multiple parties are responsible. These uncertainties involve the legal, regulatory and enforcement parameters governing environmental assessment and remediation, the nature and extent of contamination at these sites, the extent and cost of assessment and remediation efforts required, our insurance coverage for these sites and, in the case of sites with multiple responsible parties, the number and financial strength of those parties. In addition, our determination as to whether a loss is probable may change, particularly as new facts emerge as to the causes of contamination. We evaluate each environmental site as new information and facts become available and make adjustments to reserves based upon our assessment of these factors, using technical experts, legal counsel and other specialists. Defined Benefit Pension and Other Postretirement Obligations We sponsor defined benefit pension plans in the US and other countries. The accounting for these plans depends on assumptions made by management, which are used by actuaries we engage to calculate the projected and accumulated benefit obligations and the annual expense recognized for these plans. These assumptions include discount rates, expected return on assets, mortality and retirement rates and for certain plans, rates for compensation increases. Actual experience different from those estimated assumptions can result in the recognition of gains and losses in earnings as our accounting policy is to recognize changes in the fair value of plan assets and each plan's projected benefit obligation in the fourth quarter of each year (the "mark to market" adjustment), unless an earlier remeasurement is required. For the year endedDecember 31, 2020 and 2019, we recorded a mark to market loss of$52.6 million and$50.9 million , respectively. See "Note 11: Employee benefit plans" in Item 8 of this Annual Report on Form 10-K for additional information. Due to the phasing out of benefits under our postretirement plans, changes in assumptions have an immaterial effect on that obligation. A change in the assumed discount rate and return on plan assets rate would have the following effects: Increase (decrease) in 2021 Net 2020 Pension (in millions) Percentage Change Benefit Cost Benefit Obligation Discount rate 25 bps decrease$ (2.4) $ 55.9 Discount rate 25 bps increase 2.2 (52.7) Expected return on plan assets 100 bps decrease 10.8 N/A Expected return on plan assets 100 bps increase (10.8) N/A Income Taxes The Company is subject to income taxes in the jurisdictions in which it sells products and earn revenues. We record income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based on the future tax consequences to temporary differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply in the years in which the temporary differences are expected to be recovered or paid. A reduction of the carrying values of deferred tax assets by a valuation allowance is required if, based on the available evidence, it is more likely than not that such 37 -------------------------------------------------------------------------------- Table of Contents assets will not be realized. In evaluating the Company's ability to realize its deferred tax assets, in full or in part, the Company considered all available positive and negative evidence, including its past operating results, forecasted and appropriate character of future taxable income, the duration of statutory carryforward periods, our experience with operating loss and tax credit carryforwards not expiring unused and feasible tax strategies. The Company has a valuation allowance on certain deferred tax assets, primarily related to foreign tax credits, net operating loss carry forwards and deferred interest. Recently Issued Accounting Pronouncements See "Note 2: Significant accounting policies" in Item 8 of this Annual Report on Form 10-K. Non-GAAP Financial Measures We monitor the results of our reportable segments separately for the purposes of making decisions about resource allocation and performance assessment. We evaluate performance using Adjusted EBITDA. We define Adjusted EBITDA as consolidated net income (loss), plus the sum of net income from discontinued operations, net interest expense, income tax expense, depreciation, amortization, impairment charges, loss on extinguishment of debt, other operating expenses, net, and other expense, net (see "Note 6: Other operating expenses, net" and "Note 8: Other expense, net" in Item 8 of this Annual Report on Form 10-K for additional information). Adjusted EBITDA also includes an adjustment to remove a Brazil VAT charge for 2020 and in 2019, inventory step-up adjustment and Brazil VAT recovery. For a reconciliation of the non-GAAP financial measures to its most comparable GAAP measure, see below and "Analysis of Segment Results" within this Item and for a reconciliation of net (loss) income to Adjusted EBITDA, the most comparable measure calculated in accordance with GAAP, see "Note 23: Segments" to our consolidated financial statements in Item 8 of this Annual Report on Form 10-K. We believe that other financial measures that do not comply with US GAAP provide relevant and meaningful information concerning the ongoing operating results of the Company. These financial measures include gross profit (exclusive of depreciation), adjusted gross profit (exclusive of depreciation), gross margin, adjusted gross margin and Adjusted EBITDA margin. We define these financial measures as follows: •Gross profit (exclusive of depreciation): net sales less cost of goods sold (exclusive of depreciation); •Adjusted gross profit (exclusive of depreciation): net sales less cost of goods sold (exclusive of depreciation) plus inventory step-up adjustment andBrazil VAT recovery; •Gross margin: gross profit (exclusive of depreciation) divided by external sales on a segment level and by net sales on a consolidated level; •Adjusted gross margin: adjusted gross profit (exclusive of depreciation) divided by external sales on a segment level and by net sales on a consolidated level; and •Adjusted EBITDA margin: Adjusted EBITDA divided by external sales on a segment level and by net sales on a consolidated level. Management believes Adjusted EBITDA, Adjusted EBITDA margin, gross profit (exclusive of depreciation), adjusted gross profit (exclusive of depreciation), gross margin and adjusted gross margin are important measures in assessing operating performance. The non-GAAP financial measures are included as a complement to results provided in accordance with GAAP because management believes these non-GAAP financial measures help investors' ability to analyze underlying trends in the Company's business, evaluate its performance relative to other companies in its industry and provide useful information to both management and investors by excluding certain items that may not be indicative of the Company's core operating results. Additionally, the Company uses Adjusted EBITDA in setting performance incentive targets to align management compensation measurement with operational performance. Adjusted EBITDA, Adjusted EBITDA margin, gross profit (exclusive of depreciation), adjusted gross profit (exclusive of depreciation), gross margin and adjusted gross margin are not measures calculated in accordance with GAAP and should not be considered a substitute for net income or any other measure of financial performance presented in accordance with GAAP. Additionally, other companies may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure. 38 -------------------------------------------------------------------------------- Table of Contents The following is a quantitative reconciliation of Adjusted EBITDA to the most directly comparable GAAP financial performance measure, which is net (loss) income: Year ended December 31, (in millions) 2020 2019 2018 2017 2016 Net income (loss)$ 52.9 $ (100.2) $ 172.3 $ 119.8 $ (68.4) Net income from discontinued operations - (5.4) - - - Depreciation and amortization 222.9 214.7 179.5 200.4 237.9 Interest expense, net 112.4 139.5 132.4 148.0 159.9 Income tax expense (benefit) from continuing operations 6.1 104.5 49.9 49.0 (11.2) EBITDA$ 394.3 $ 353.1 $ 534.1 $ 517.2 $ 318.2 Acquisition and integration related expenses 62.4 152.1 22.0 3.1 5.5 Saccharin legal settlement - 62.5 - - - Loss (gain) on sale of business, property, plant and equipment and other assets (1) 26.9 (51.3) 2.0 (11.3) (0.7) Pension mark to market loss (2) 52.8 50.4 34.2 3.8 68.6 Pension curtailment and settlement gains (2) (0.6) (1.3) - (9.7) (1.3) Non-operating retirement benefits (2) (8.5) (2.2) (11.0) (9.9) (15.3) Restructuring, employee severance and other facility closure costs (3) 31.4 40.9 21.2 13.6 8.0 Stock-based compensation expense 14.5 25.1 20.7 19.7 10.4 Loss (gain) on undesignated derivative contracts (6) 4.8 26.7 (1.1) 1.9 (8.3) Loss on extinguishment of debt and debt refinancing costs (4) 1.9 21.0 0.1 9.1 - Brazil VAT charge (recovery) 0.3 (8.3) - - - Foreign currency losses (gains) (6) 6.8 (7.4) 7.5 22.5 14.3 Impairment charges (5) 40.2 7.0 - - 133.9 Inventory step-up adjustment - 5.3 - - - Fair value adjustment for warrants 0.8 7.0 - - - Other operating and non-operating expenses (3)(6) 7.8 23.6 10.7 10.4 8.7 Business transformation costs - - - 23.4 5.4 Adjusted EBITDA$ 635.8 $ 704.2 $ 640.4 $ 593.8 $ 547.4 (1)Refer to the consolidated statement of operations and "Note 6: Other operating expenses, net" in Item 8 of this Annual Report on Form 10-K for more information. (2)Represents charges or gains recorded for both the defined benefit pension and other postretirement benefit plans (the "Plans"). The Plans' mark to market loss is measured and recognized in its entirety within the statement of operations annually onDecember 31 and results from changes in actuarial assumptions and plan experience between the prior and current measurement dates, as well as the difference between the expected return on plan assets and the actual return on plan assets. For 2020, the pension mark to market loss of$52.8 million reflects a measurement loss of$139.7 million resulting from changes since the prior measurement date in actuarial assumptions and plan experience, offset by the difference between the expected and actual return on plan assets of$86.9 million attributable to the performance of plan assets during 2020. See "Note 11: Employee benefit plans" in Item 8 of this Annual Report on Form 10-K for additional information on pension mark to market loss, pension curtailment and settlement gains and non-operating retirement benefits. (3)Refer to "Note 6: Other operating expenses, net" in Item 8 of this Annual Report on Form 10-K for more information. (4)Refer to the consolidated statement of operations and "Note 8: Other expense, net" in Item 8 of this Annual Report on Form 10-K for more information. (5)The 2016 impairment charges primarily related to the impairment of intangible assets and property, plant and equipment. See "Note 16: Impairment charges" in Item 8 on this Annual Report on Form 10-K for further information regarding the year endedDecember 31, 2020 . (6)Refer to "Note 8: Other expense, net" in Item 8 of this Annual Report on Form 10-K for more information.
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